Nanotech Announces Fourth Quarter and Fiscal 2015 Year End Results

December 17, 2015

A Successful Year and Positioned For Growth

 

VANCOUVER, British Columbia – December 17, 2015 – Nanotech Security Corp. (TSXV: NTS) (OTCQX: NTSFF), (“Nanotech” or the “Company”) today released its financial results for the fourth quarter and year ended September 30, 2015.

Strategic Highlights from 2015

  • Revenue increased to $5.2 million a 131% increase over 2014. Security Features contributed revenues of $3.1 million.
  • Gross margin improved to 43% up from 34% in the same period last year. The improvement reflects the increased mix of higher margin Security Features revenue.
  • Signed two banknote security feature development contracts. The contracts are with top ten issuing authorities to develop unique optically-variable security features for incorporation into future banknotes.
  • Strategic meetings with large international banknote issuing authority. The Company has been approached by a large international banknote issuing authority to deliver a large volume of Optical Thin Film (“OTF”), and partner with our KolourOptik™ technology. Management continues to devote a significant amount of time and resources in advancing these opportunities.
  • Private Placement. The Company completed a non-brokered private placement financing of $2.6 million in equity units at $1.00 each.
  • Signed an amending agreement related to the 2014 Fortress Optical purchase agreement. The amendment provides that 1.5 million of the 3.0 million shares held in escrow, pending certain sales milestones were released from escrow and the remaining 1.5 million shares were returned to the treasury. The overall effect of the amendment resulted in a gain of $1.5 million and cancellation of 1.5 million shares.
  • Demonstrated KolourOptik™ security feature on metal coins. The Company successfully applied nanotechnology images to metal coins in a production environment at an issuing mint.
  • Granted five new patents expanding the growing IP portfolio. Three patents relate to the Company’s next generation nanotechnology authentication features, and two provide increased protection for OTF.

 

Recent Developments

  • Signed a Memorandum of Understanding (“MOU”) with Hueck Folien, a European manufacturer to supply optical thin film to the banknote market. The MOU contemplates an operational agreement to collaborate in the volume production of a colour shifting security feature in optical thin film. The OTF product is anticipated to initially be used in banknotes as threads and then expand into other markets in the future.

Doug Blakeway, Nanotech’s Chairman and CEO commented, “In terms of revenue and interest in our products, 2015 was a record year for the Company. Issuing authorities and some consumer goods companies are approaching us with increased interest and positive feedback about our security features. This and our recent MOU with Hueck Folien positions us extremely well for 2016.”

 

Selected 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     Years ended  
  September 30, $ % September 30, $ %
  2015 2014 Change Change 2015 2014 Change Change

 

Revenue

 

$    728,322

 

$ 498,474

 

$ 229,848

 

46%

 

$ 5,152,762

 

$ 2,229,494

 

$ 2,923,268

 

131%

 

Gross profit

 

286,501

 

178,446

 

108,055

 

61%

 

2,231,075

 

752,062

 

1,479,013

 

197%

Gross profit % 39% 36%     43% 34%    
Net earnings (loss) (1,565,398) 2,283,853 (3,849,251) (169%) (4,670,833) (383,107) (4,287,726) 1,119%
Net earnings (loss) per share                
                 Basic (0.03) 0.06   (155%) (0.09) (0.01)   774%
                 Diluted (0.03) 0.05   (160%) (0.09) (0.01)   774%
Weighted average number of common shares                
                 Basic 51,392,145 40,973,318     49,404,777 39,383,910    
                 Diluted 51,392,145 49,619,017     49,404,777 39,383,910    
Net cash used in operating activities

 

(581,917)

 

(857,128)

 

275,211

 

(32%)

 

(3,392,453)

 

(2,779,922)

 

(612,531)

 

22%

      $ %
  September 30, 2015 September 30, 2014 Change Change
Total assets $  27,783,859 $ 29,749,852 $  (1,965,993) (7%)
Total long term liabilities 3,126,363 6,100,000 (2,973,637) (49%)
Total equity 22,924,873 22,027,680 897,193 4%

 

Revenues for the year ended September 30, 2015 increased by $2.9 million or 131% to $5.2 million compared to $2.2 million in 2014. The increased revenues was largely attributed to revenue generated by the new Security Features business unit which delivered revenue of $3.1 million compared to $80,000 in 2014, primarily from the delivery of OTF and development contracts.

 

Although the revenue for the year more than doubled, the OTF production during the second half of the year was affected by a large international customer that reviewed its product specification and entered into discussions with the Company for increased colour-shifting OTF volumes. The customer requested Nanotech sub-contract volume production through a partner relationship. On November 17, 2015 the Company announced the signing of a Memorandum of Understanding which contemplates an operational agreement to collaborate in the production of volume colour shifting OTF. These discussions have continued to delay internal production and the shipment of a partially produced order from the first half of the year. The product is expected to ship and production to resume in 2016. The Surveillance business unit experienced a decline in revenues over 2014, due largely to a delay in orders and softness in the surveillance marketplace.

 

Gross margin for the year ended September 30, 2015 increased by $1.5 million or 197% to $2.2 million compared to $750,000 last year. The increase in gross margin compared to the same period last year, reflected the new revenue from the higher margin Security Features business unit. Overall gross margin percentage was 43% for the year ended September 30, 2015, an improvement from 34% in the same period last year.

 

The net loss for the year was $4.7 million compared to $380,000 during the same period last year. The increase largely reflects higher depreciation and amortization of $920,000 in the current year, a one-time deferred income tax recovery of $3.9 million recorded in the prior year, partially offset by a gain on the revaluation and settlement of contingent shares of $1.5 million during the current year.

 

The Company ended the year withapproximately$3.0millionincashandcashequivalents,downfrom$4.0 million at September 30, 2014. Management has reviewed its projected fundingrequirements and expects that through the generation and collection of revenues and/or being able to raiseadditional financing,thattheCompanywillmaintainsufficientliquidity.

 

Outlook

As we complete the first quarter of 2016, we are pleased to report that the September 2014 acquisition has positively impacted our Security Features business. As a result, Nanotech has gained access to an exclusive customer channel, and our OTF operation continues to pursue a number of international orders. To date, over $1.0 million in test products have been successfully delivered. Additionally, management recently signed an MOU with a European manufacturer to create co-production capacity to successfully position the Company for larger production capacity 2016 in anticipation of larger international orders.

 

Management’s outlook for 2016 is positive for the aggregate business level although bottom line performance is not yet visible. We anticipate that demand for our Security Features will continue to grow, and we expect to achieve significant progress in the development of our customer channels and commercialization of our KolourOptik technology. Although increased OTF production is not planned until February, revenues and cash flow are expected to build through the second half of the year as we expect to see a higher level of business.

 

Management believes 2016 will be another record year for Nanotech, with our goal being to again double our annual revenues. Achieving these results is not certain and involves known and unknown risks that may cause actual results to differ materially from this goal. These risk and uncertainties include, among other things, risks related to: uncertainty of amount and timing of purchase orders, the ability to complete a definitive agreement with the planned European co-production partner, market acceptance of KolourOptik and our ability to maintain sufficient liquidity through September 30, 2016 to facilitate any business ramp-up. These and other risk factors are further discussed under the “Business Risks and Uncertainties” segment of the MD&A.

 

Nanotech Security Corp.

Consolidated Statements of Operations and Comprehensive Loss

(In Canadian dollars)

  Three months ended Years ended
  September 30, September 30,
  2015 2014 2015 2014
         
Revenue $    728,322 $    498,474 $  5,152,762 $  2,229,494
Cost of sales 441,821 320,028 2,921,687 1,477,432
Gross profit 286,501 178,446 2,231,075 752,062
Expenses
Research and development 635,336 654,000 3,346,064 2,092,012
General and administration 824,331 1,212,234 3,267,175 2,445,432
Sales and marketing 473,716 98,991 1,884,113 664,003
  1,933,383 1,965,225 8,497,352 5,201,447
Loss before other expenses (income) and income taxes (1,646,882) (1,786,779) (6,266,277) (4,449,385)
Other expenses (income)
Foreign exchange gain (114,347) (101,283) (274,539) (84,490)
Finance expense (income) 32,863 3,101 129,095 (493)
Gain on revaluation and settlement of contingent shares (71,155) (1,450,000) (80,000)
   Gain on sale of fixed asset (8,845) (8,845)
  (81,484) (178,182) (1,595,444) (173,828)
Loss before income taxes (1,565,398) (1,608,597) (4,670,833) (4,275,557)
Income tax recovery      3,892,450 3,892,450
Net income (loss) (1,565,398) 2,283,853 (4,670,833) (383,107)
         
Other comprehensive income (loss):
Items that may be subsequently reclassified to earnings:
Unrealized foreign exchange gain (loss)
on translation of foreign operation (48,376) 75,726 (124,615) (42,920)
Total comprehensive loss for the period $(1,613,774) $ 2,359,579 $ (4,795,448) $ (426,027)
 
Loss per share:        
Basic $    (0.03) $  0.06 $  (0.09) $   (0.01)
Diluted $    (0.03) $  0.05 $  (0.09) $   (0.01)
Weighted average number of common shares:
Basic 51,392,145 40,973,318 49,404,777 39,383,910
Diluted 51,392,145 49,619,017 49,404,777 39,383,910

 

 

Nanotech Security Corp.
Consolidated Statements of Financial Position
as at September 30, 2015 and 2014
(In Canadian dollars)
  September 30, September 30,
  2015 2014

 

Assets

Current assets:
Cash and cash equivalents $    3,021,928 $    3,964,645
Accounts receivable 879,266 526,410
Inventory 770,342 598,526
Prepaid expenses and other assets 76,840 188,858
  4,748,376 5,278,439
Property, plant and equipment 18,921,396 18,995,321
Intangible assets 2,725,629 4,087,634
Goodwill 1,388,458 1,388,458
  $ 27,783,859 $ 29,749,852

 

Liabilities and shareholders’ equity

Current liabilities:
Accounts payable and accrued liabilities $    1,732,623 $    1,597,172
Deferred revenue 25,000
  1,732,623 1,622,172
Long term liabilities:
Note payable 3,000,000 3,000,000
Tenant inducement 126,363
Contingent consideration shares 3,100,000
  4,858,986 7,722,172
Shareholders’ equity
Share capital 44,666,497 39,557,066
Share based payment reserve 1,726,780 1,143,570
Deficit (23,289,240) (18,618,407)
Accumulated other comprehensive loss (179,164) (54,549)
  22,924,873 22,027,680
  $ 27,783,859 $ 29,749,852

 

 

Nanotech Security Corp.
Consolidated Statements of Cash Flows
Years ended September 30, 2015 and 2014
(In Canadian dollars)
  Three months ended Year ended
  September 30, September 30,
  2015 2014 2015 2014

 

Operating activities:

Net income (loss) $ (1,565,398) $ 2,283,853 $ (4,670,833) $ (383,107)
Items not involving cash:
Depreciation and amortization 594,470 380,577 2,348,716 1,428,271
Deferred income taxes (3,892,450) (3,892,450)
Share based compensation 140,481 255,788 693,354 481,996
Amortization of tenant inducement (6,892) (11,487)
Gain on revaluation and settlement of contingent shares (80,000) (1,450,000) (80,000)
Gain on sale of asset (8,845)
Non-cash working capital changes 255,422 195,104 (302,203) (325,787)
Cash used in operating activities (581,917) (857,128) (3,392,453) (2,779,922)

 

Investing activities:

Acquisition of FOF, net of cash acquired (7,061,000) (7,061,000)
Purchase of property and equipment (246,146) (20,305) (912,493) (82,528)
Cash used in investing activities (246,146) (7,081,305) (912,493) (7,143,528)

 

Financing activities:

Proceeds of private placement, net of share issuance costs 2,613,312 9,366,072 2,613,312 9,366,072
Issuance of shares for options exercised 197,800
Issuance of shares for warrants exercised 185,625 735,975 213,750
Tenant inducement 137,850
Cash provided by financing activities 2,613,312 9,551,697 3,487,137 9,777,622

 

Effect of foreign exchange on cash and cash equivalents

 

(44,236)

 

(76,446)

 

(124,908)

 

(45,338)

 

Increase (decrease) in cash and cash equivalents

 

1,741,013

 

1,536,818

 

(942,717)

 

(191,166)

Cash and cash equivalents, beginning of period 1,280,915 2,427,827 3,964,645 4,155,811

 

Cash and cash equivalents, end of period

 

$ 3,021,928

 

$ 3,964,645

 

$ 3,021,928

 

$ 3,964,645

 

 

Conference Call Details:

 

DATE: Thursday December 17, 2015 Time:   5:30 PM Eastern Time
DIAL IN NUMBER: Toll free (Canada and US):  1-888-438-5535
Conference ID: 689341
Alternate number:  1-719-325-2215
TAPED REPLAY: Toll free (Canada and US):  1-877-870-5176 Alternate number:  1-858-384-5517
  Replay available until January 15, 2016 Replay Pin number:  689341

 

FORWARD-LOOKING STATEMENTS

The discussion and analysis in this news release contains forward-looking statements concerning anticipated developments in our operations in future periods, the adequacy of our 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 our market opportunities, strategies, competition, and the Company’s views that its nano-optical and optical thin film technologies will continue to show promise for mass production and commercial application. Other forward-looking statements imply that the Company will remain capable of being financed and/or will be able to partner development until commercial sales are eventually realized. The principal risks related to these forward-looking statements are that the Company’s intellectual property claims will not prove sufficiently broad or enforceable to provide the necessary commercial protection and to attract the necessary capital and/or that the Company’s products will not be able to displace entrenched hologram, metalized strip tagging, and other conventional anti-counterfeiting technologies sufficiently to allow for profitability.

 

Our 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 this 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 assurance that actual results or developments we anticipate 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 MD&A and notes to the consolidated financial statements for the year ended September 30, 2015, 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, rule or regulation. You should not place undue reliance on forward-looking statements.

 

About Nanotech Security

Through its Security Features and Surveillance divisions, Nanotech Security Corp. is becoming a leading innovator in the design and production of advanced security products and surveillance solutions for a number of years. The Company’s Security Features division produces intense, high definition optically-variable images and colour-shift optical thin films, which are ideal for authentication of currency, passports, and identification cards in addition to distinguishing branded goods from counterfeits. Activated by a simple tilt or rotation, with higher resolutions than the best LED-displays, Nanotech’s KolourOptik™ and Plasmogram™ optically-variable image products are nanotechnology-based product platforms originally inspired by the unique optical properties of the iridescent wings of the Blue Morpho butterfly. The Company’s Surveillance division designs, manufactures, and sells sophisticated surveillance and intelligence gathering communications and forensic equipment and conducts surveillance training for the law enforcement and intelligence community in the United States and Canada.

 

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.