SOURCE: Nanotech Security Corp.

Nanotech Security Corp.

May 29, 2017 16:12 ET

Nanotech Security Announces Second Quarter Fiscal 2017 Results

Paid Development Revenues Begin to Have a Financial Impact

VANCOUVER, BC--(Marketwired - May 29, 2017) - Nanotech Security Corp. (TSX VENTURE: NTS) (OTCQX: NTSFF), ("Nanotech" or the "Company") today released its financial results for the three and six months ended March 31, 2017. Unless otherwise stated, all dollar amounts are expressed in Canadian dollars.

Highlights during the Second Quarter

  • Revenue up 86% to $1,763,600 compared to the same period last year. Optics contributed revenues of $1,418,644, largely from paid development contracts and Tactical delivered $344,956, reflecting slightly improved equipment sales.
  • Gross margin was 60% up from 52% in the same period last year. Gross margins continue to reflect strong margins in the Optics division.
  • Cash balance of $1,391,514 at end of the quarter. Cash used in operations, excluding working capital, amounted to $579,030, an improvement from $1,436,779 in the same period last year.
  • Paid development contracts are progressing well. The Company currently derives the vast majority of its Optics segment revenue from paid authentication development projects with major issuing authorities. These paid development activities incorporate both nano-optic and optical thin film ("OTF") technologies and are focused on developing authentication features for future banknotes. All projects are progressing well, and the Company sees these projects as a significant growth area for the business.

Recent Developments

  • Signed development contract for up to $30.0 million. The Company has been awarded a development contract with an issuing authority to develop unique authentication features based on Nanotech's core technologies for use on future banknotes. The contract provides government budgetary approval for up to $30.0 million over a period of not more than five years. Under the terms of the contract, the Company can apply to the issuing authority to draw upon the budget on a periodic basis. The contract is anticipated to have gross margins consistent with past development contracts, and it is anticipated that this contract will be a significant contributor to the toward Company's ultimate goal of becoming profitable.
  • Asian banknote opportunity. The Company continues to work with its Asian customer to fine-tune the product specifications to ensure our OTF accurately matches, integrates, and qualifies with their current supply needs. Management expects to be able to demonstrate our ability to produce OTF that meets the customer expectations later in 2017. Overall, management remains optimistic that there is strong customer demand for our OTF and that our production partner will fulfill these requirements and deliver later in the year.
  • Completed a $13.3 million financing. Subsequent to the quarter end, on May 18, 2017 the Company completed a bought deal private placement with a syndicate of underwriters, whereby a total of 11,586,870 common shares of the Company have been issued and sold, at a price of $1.15, for total gross proceeds of $13,324,900.

Doug Blakeway, Nanotech's Chairman and CEO, commented, "Our paid development revenue is very strategic as we continue to expand both our revenue base but also position us to provide security features on future banknotes. We continue to be optimistic that our production partner Hueck Folien will be able to begin delivering OTF to our Asian customer later this year." He further stated, "The completion of this recent financing will enable us to begin to increase capacity and make some strategic investments to enable future growth."

Select Financial Information

All results are reported in Canadian dollars and are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

  Three months ended March 31,  Six months ended March 31,  
     $  %     $  %  
  2017  2016  Change  Change  2017  2016  Change  Change  
Revenue $ 1,763,600  $ 948,220  $ 815,380  86 %$ 2,670,613  $ 2,457,460  $ 213,153  9 %
Gross profit 1,050,812  493,002  557,810  113 %1,682,088  1,241,422  440,666  35 %
Gross profit % 60 %52 %      63 %51 %      
Net loss (1,694,890 )(2,450,010 )755,120  (31 %)(3,548,170 )(4,196,345 )648,175  (15 %)
Net loss per share                         
 Basic and diluted (0.03)(0.05)    (0.07)(0.08)    
Weighted average number of common shares                          
 Basic and diluted 54,122,396 53,399,510     53,995,433 53,411,940     
Net cash used in operating activities (1,051,843 )(697,840 )(354,003 )51 %(2,041,077 )(1,885,416 )(155,661 )8 %
      $ %
  March 31, 2017 September 30, 2016 Change Change
Total assets $ 22,173,876 $ 24,511,586 $ (2,337,710) (10%)
Total liabilities 8,576,818 8,089,503 487,315 6%
Total equity 13,597,058 16,422,083 (2,825,025) (17%)

Consolidated revenues for the three months ended March 31, 2017 increased by $815,380 or 86% to $1,763,600 compared to $948,220 in the same period last year. Optics revenue increased by $773,695 or 120% to $1,418,644 compared to $644,949 last year primarily due to increased revenue from paid development contracts. Tactical's revenue increased by $41,685 or 14% to $344,956 compared to $303,271 in the previous year due to slightly higher equipment sales.

Customer paid development revenues continue to grow, and the projects are progressing well, as we continue to advance our optic based technologies into the development of new security features for future banknotes. The Company also continues to make progress with a specific Asian customer to finalize the product specifications and integrate our OTF into the customer's production facility. Management continues to expect our production partner to demonstrate their ability to produce OTF that meets the customer expectation later in 2017. In addition, management is beginning to see new OTF opportunities and is working with several new partners to expand our customer base to provide further growth.

Consolidated revenues for the six months ended March 31, 2017 increased by $213,153 or 9% to $2,670,613 compared to $2,457,460 in the same period last year. Optics revenue increased by $898,699 or 74% to $2,113,115 compared to $1,214,416 last year primarily due to increased revenue from paid development contracts. Tactical's revenue was lower by $685,546 which is a result of a large delivery of surveillance vans in the first quarter of the previous year which did not occur in the current year. The Tactical division will continue to have fluctuations in their quarterly revenue as it is highly dependent on the timing of surveillance van and product deliveries.

Gross margin for the three months ended March 31, 2017 increased by $557,810 or 113% to $1,050,812 compared to $493,002 in the same period last year. Overall, the gross margin percentage improved to 60% for the three months ended March 31, 2017, an increase from 52% in the same period last year. The increased gross margins reflect the new high margin development revenue and the continued overall strong margins in the Optics division.

Gross margin for the six months ended March 31, 2017 increased by $440,666 or 35% to $1,682,088 compared to $1,241,422 in the same period last year. Overall, the gross margin percentage improved to 63% for the six months ended March 31, 2017, an increase from 51% in the same period last year. The increased gross margins continue to reflect strong margins in the Optics division.

Research and development expenditures for the three months ended March 31, 2017 decreased by $206,609 or 31% to $460,580 compared to $667,189 in the same period last year due to a larger portion of salaries and other expenses being allocated to cost of sales as a result of increased development revenue.

Research and development expenditures for the six months ended March 31, 2017 decreased by $319,725 or 26% to $905,661 compared to $1,225,386 in the same period last year due to a larger portion of salaries and other expenses being allocated to cost of sales as a result of increased development contracts.

General and administration expenditures for the three months ended March 31, 2017 were $759,919, an increase of $81,526 or 12% compared to $678,393 in the same period last year which reflects an increase in stock based compensation and higher utilities costs at our Thurso production facility.

General and administration expenditures for the six months ended March 31, 2017 were $1,416,496, an increase of $90,414 or 7% compared to $1,326,082 in the same period last year which again reflects an increase in stock based compensation and higher utilities costs at our Thurso production facility.

Sales and marketing expenditures for the three months ended March 31, 2017 were $577,906, a decrease of $75,199 or 12% compared to $653,105 in the same period last year. The decrease mainly relates to a reduction in travel and marketing expenses in the Optics division along with lower sales salaries in the Tactical division.

Sales and marketing expenditures for the six months ended March 31, 2017 were $1,050,809, a decrease of $151,072 or 13% compared to $1,201,881 in the same period last year. The decrease again mainly relates to a reduction in travel and marketing expenses in the Optics division along with lower sales salaries in the Tactical division.

Depreciation and amortization expenditures for the three months ended March 31, 2017 were $696,359, compared to $771,081 in the same period last year, reflecting declining balance depreciation and fewer fixed asset additions in the current period.

Depreciation and amortization expenditures for the six months ended March 31, 2017 were $1,420,393, compared to $1,541,238 in the same period last year, again reflecting declining balance depreciation and fewer fixed asset additions in the current period.

Other expenses for the three months ended March 31, 2017 were $250,938 an increase of $77,694 compared to $173,244 in the same period last year. The increase mainly relates to the interest on the convertible debentures, offset by reduced foreign exchange loss in the current period.

Other expenses for the six months ended March 31, 2017 were $436,899 an increase of $293,719 compared to $143,180 in the same period last year. The increase mainly relates to the interest on the convertible debentures and foreign exchange gain in the current period.

The net loss for the three months ended March 31, 2017 was $1,694,890 compared to $2,450,010 during the same period last year. The decrease in net loss reflects an increase in revenues, reduced expenses and higher margins.

The net loss for the six months ended March 31, 2017 was $3,548,170 compared to $4,196,345 during the same period last year. The decrease in net loss also reflects an increase in revenues, reduced expenses and higher margins.

The Company ended the quarter with $1,391,514 in cash and cash equivalents, down from $3,312,691 at September 30, 2016. Subsequent to the quarter end, on May 18, 2017, the Company has completed a bought deal private placement with a syndicate of underwriters whereby a total of 11,586,870 common shares of the Company have been issued and sold, at a price per share of $1.15, for total gross proceeds of $13,324,900. Management has reviewed its projected funding requirements and expects that, through the generation and collection of revenues and/or raising additional financing, the Company will maintain sufficient liquidity.

ADDITIONAL INFORMATION

Outlook

Nanotech is a leader in next-generation anti-counterfeiting products. These products have brand protection and enhancement applications across a wide range of markets including banknotes, secure government documents, commercial branding, and the pharmaceutical industry. Nanotech is initially focusing its efforts on the banknote market due to its high margins and established customer base. Management continues to believe that the Company is well positioned to supply its Asian customer, however the additional time required for product acceptance and integration into their production processes has taken longer than anticipated. With the recent signing of the $30 million paid development contract, the Company is focusing on further developing business with its established customer base and as a result, is well positioned to expand its authentication development contract revenue and other Optic and OTF opportunities in the years ahead.

In 2017, management has established a goal to double its revenue and make significant progress towards becoming cash flow positive. Achieving these results is not certain and involves known and unknown risks that may cause actual results to differ materially from this goal. These risks and uncertainties include, among other things, risks related to: uncertainty of amount and timing of purchase orders, the ability of Hueck Folien to successfully deliver to our Asian customer, our ability to expand our Optics development revenue and our ability to maintain sufficient liquidity through March 31, 2018 to facilitate any business ramp-up. These and other risk factors are further discussed under the "Business Risks and Uncertainties" segment of the September 30, 2016 MD&A.

Nanotech Security Corp.  
Condensed Consolidated Statements of Operations and Comprehensive Loss  
(Unaudited)  
   
Three and six months ended March 31, 2017 and 2016  
(In Canadian dollars)  
  Three months ended  Six months ended  
  March 31,  March 31,  
  2017  2016  2017  2016  
              
Revenue $ 1,763,600  $ 948,220  $ 2,670,613  $ 2,457,460  
Cost of sales 712,788  455,218  988,525  1,216,038  
Gross profit 1,050,812  493,002  1,682,088  1,241,422  
              
Expenses         
 Research and development 460,580  667,189  905,661  1,225,386  
 General and administration 759,919  678,393  1,416,496  1,326,082  
 Sales and marketing 577,906  653,105  1,050,809  1,201,881  
 Depreciation and amortization 696,359  771,081  1,420,393  1,541,238  
  2,494,764  2,769,768  4,793,359  5,294,587  
              
Loss before other expenses (1,443,952 )(2,276,766 )(3,111,271 )(4,053,165 )
              
Other expenses (income)         
 Foreign exchange (gain) loss 17,213  142,699  (27,181 )76,216  
 Finance expense 233,725  30,545  465,694  66,964  
 Gain on disposal of asset -  -  (1,614 )-  
  250,938  173,244  436,899  143,180  
              
Net loss (1,694,890 )(2,450,010 )(3,548,170 )(4,196,345 )
              
Other comprehensive loss:         
 Items that may be subsequently reclassified to earnings:         
  Unrealized foreign exchange gain (loss) on translation of foreign operation10,867 61,361 (14,102)33,247  
Total comprehensive loss for the period $ (1,684,023 )$ (2,388,649 )$ (3,562,272 )$ (4,163,098 )
              
Loss per share         
 Basic and diluted $ (0.03 )$ (0.05 )$ (0.07 )$ (0.08 )
              
Weighted average number of common shares         
 Basic and diluted 54,122,396  53,399,510  53,995,433  53,411,940  
Nanotech Security Corp.  
Condensed Consolidated Statements of Financial Position  
(Unaudited)  
   
(In Canadian dollars)  
  March 31,  September 30,  
  2017  2016  
        
Assets     
Current assets:     
 Cash and cash equivalents $ 1,391,514  $ 3,312,691  
 Accounts receivable 1,565,262  597,414  
 Inventory 395,032  385,753  
 Prepaid expenses and other assets 107,041  127,719  
   3,458,849  4,423,577  
         
 Property, plant and equipment 16,645,950  17,338,312  
 Intangible assets 680,619  1,361,239  
 Goodwill 1,388,458  1,388,458  
  $ 22,173,876  $ 24,511,586  
        
Liabilities and Shareholders' Equity     
Current liabilities:     
 Accounts payable and accrued liabilities $ 1,742,081  $ 1,395,568  
 Note payable 3,000,000  3,000,000  
  4,742,081  4,395,568  
        
Non-current liabilities:     
 Convertible debentures 3,749,729  3,595,142  
 Tenant inducement 85,008  98,793  
  8,576,818  8,089,503  
        
Shareholders' equity       
 Share capital 45,556,794  45,210,507  
 Share-based payment reserve 2,432,916  2,041,956  
 Equity component of convertible debentures 443,175  443,175  
 Deficit (34,667,215 )(31,119,045 )
 Accumulated other comprehensive loss (168,612 )(154,510 )
  13,597,058  16,422,083  
  $ 22,173,876  $ 24,511,586  
Nanotech Security Corp.  
Condensed Consolidated Statements of Cash Flows  
(Unaudited)  
   
Three and six months ended March 31, 2017 and 2016  
(in Canadian Dollars)  
  Three months ended  Six months ended  
  March 31,  March 31,  
  2017  2016  2017  2016  
              
Cash flows provided by (used in):             
Operating activities:          
 Net loss $(1,694,890 )$(2,450,010 )$(3,548,170 )$(4,196,345 )
 Items not involving cash:          
  Depreciation and amortization 733,893  774,574  1,463,594  1,548,069  
  Share-based compensation 310,296  245,549  514,247  320,970  
  Amortization of tenant inducement (6,892 )(6,892 )(13,785 )(13,785 )
  Gain on disposal of asset -  -  (1,614 )-  
  Accretion of convertible debentures 78,563  -  154,587  -  
 Non-cash working capital changes (472,813 )738,939  (609,936 )455,675  
Cash used in operating activities (1,051,843 )(697,840 )(2,041,077 )(1,885,416 )
              
Investing activities:             
 Purchase of property and equipment, net of disposal (73,946 )(40,435 )(88,565 )(208,869 )
Cash used in investing activities (73,946 )(40,435 )(88,565 )(208,869 )
              
Financing activities:             
 Issuance of shares for options exercised 200,000  180,000  223,000  180,000  
Cash provided by financing activities 200,000  180,000  223,000  180,000  
              
Effect of foreign exchange on cash and cash equivalents 11,162  63,683  (14,535 )34,097  
              
Decrease in cash and cash equivalents (914,627 )(494,592 )(1,921,177 )(1,880,188 )
              
Cash and cash equivalents, beginning of period 2,306,141  1,636,332  3,312,691  3,021,928  
Cash and cash equivalents, end of period $ 1,391,514  $ 1,141,740  $ 1,391,514  $ 1,141,740  
Conference Call Details:
DATE:  Monday, May 29, 2017  Time: 5:00 PM Eastern 
    Daylight Savings Time 
DIAL IN NUMBER:  Toll free (Canada and US): 1-800-967-7188   Alternate number: 
  Conference ID: 3639275  1-719-325-2138 
TAPED REPLAY:  Toll free (Canada and US): 1-844-512-2921   Alternate number: 
  Replay available until June 29, 2017   1-412-317-6671
  Replay Pin number: 3639275  Replay Pin number: 3639275 
WEBCAST:  http://public.viavid.com/index.php?id=124693
  

FORWARD-LOOKING STATEMENTS

The discussion and analysis in this news release contains forward-looking statements concerning anticipated developments in the Company's operations in future periods, the adequacy of Nanotech's financial resources, and the events or conditions that may occur in the future. Forward-looking statements are frequently, but not always, identified by words such as "expects", "anticipates", "believes", "intends", "estimates", "predicts", "potential", "targeted" "plans", "possible" and similar expressions, or statements that events, conditions, or results "will", "may", "could" or "should" occur or be achieved.

These forward-looking statements include, without limitation, statements about the Company's market opportunities, strategies, competition, and the Company's views that its optics based technologies will continue to show promise for large scale production. Other forward-looking statements imply that the Company will remain capable of being financed and/or will be able to partner development until profitability is eventually realized. The principal risks related to these forward-looking statements are that the Company's products receive market acceptance, that its intellectual property claims will be sufficiently broad or enforceable to provide the necessary protection or attract the necessary capital.

These forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made. Consequently, all forward-looking statements made in the discussion and analysis of the financial conditions and results of operations or the documents incorporated by reference, are qualified by this cautionary statement and there can be no certainty that actual results or developments the Company anticipates will be realized. For additional information with respect to certain of these risks or factors reference should be made to the "Business Risks and Uncertainties" section of the management discussion and analysis and notes to the consolidated financial statements for the year ended September 30, 2016, as well as with the Company's continuous disclosure materials filed from time to time with Canadian securities regulatory authorities, which are available online at www.sedar.com. Nanotech disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law. Caution needs to be used when taking forward-looking statements into account when evaluating the Company.

About Nanotech Security

Nanotech designs, manufactures and markets nano-optic OVDs and OTF products. These products have brand protection and enhancement applications across a wide range of markets including banknotes, secure government documents, commercial branding, and the pharmaceutical industry. The Company is initially focusing its efforts on the banknote market due to its high margins and its established customer base.

The Company's nano-optic technology employs arrays of billions of nano-indentations that are impressed or embossed onto a substrate material such as polymer, paper, metal, or fabric. By using sophisticated algorithms to direct an electron beam, the Company creates visual images with colour-shifting effects such as 3D, high-definition, and motion-impression, and can also display distinct colours including skin tones, white, and black, which are not possible using current holographic technology.

Additional information about Nanotech can be found at the Company's website www.nanosecurity.ca, the Canadian disclosure filings website www.sedar.com or the OTCMarkets disclosure filings website www.otcmarkets.com.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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