Nanotech Announces Fiscal 2019 Fourth Quarter and Year-End Results

VANCOUVER, British Columbia – December 12, 2019 – Nanotech Security Corp. (TSXV: NTS) (OTCQX: NTSFF) (“Nanotech” or the “Company”), a leader in the development of secure and memorable nano-optic security features used in the government and banknote and brand protection markets, today released its financial results for the fourth quarter and year ended September 30, 2019. Management will host a conference call today at 5:00 pm Eastern (details below). Unless otherwise stated, all dollar amounts are expressed in Canadian dollars.

Financial Highlights

  • Revenue was $1.5 million and $6.4 million for the quarter and the year ended September 30, 2019, representing a decrease of 52% and 22% compared to the same periods last year.
  • Gross margin for the quarter was 77% versus 72% last quarter and 78% in the fourth quarter of 2018. Annual gross margin for 2019 was 76% versus 82% in 2018.
  • Adjusted EBITDA for the fourth quarter was negative $298,542 and negative $118,519 for the 2019 fiscal year.
  • Cash and short-term investments were $10.3 million at year end.

“In 2019 we achieved several significant strategic goals as we transitioned to a product-based strategy,” said President and CEO Troy Bullock. “We began building our sales team, developed new products that are gaining traction and expanded sales of our existing products, while continuing to advance the new banknote security feature for our contract services central bank customer. Looking ahead to 2020, we are poised for revenue growth while we continue to advance our growth and commercialization strategies.”

Report on 2019 Strategic Initiatives

In 2019, the Company shifted its focus to near-term revenue growth by commercializing its technology into products specifically designed for the banknote and secure document market and for the brand protection market. The Company expanded its sales and marketing team with the addition of experienced sales leaders to pursue near-term revenue opportunities in both of its key markets.

Banknote security feature market. The Company has two areas of focus in the banknote market:

  1. Advancement of contract services for a G10 central bank. The confidential customer, a central bank, confirmed in July that the security feature developed by Nanotech will advance to the next stage, which involves demonstrating that the security feature can be manufactured. While the Company does not currently have visibility on if or when Nanotech’s feature might be integrated into the customer’s banknotes, the Company has made major advancements in its development of a unique and novel security feature in 2019.
  2. Expansion of Nanotech’s security feature product line. The Company successfully pursued new sales opportunities for optical thin film (“OTF”) in the banknote and secure documents market. As announced on August 1, 2019 and September 10, 2019, the Company expanded its business with two long-term OTF customers in 2019. In addition, Nanotech developed KolourDepth™, a new banknote security feature using the Company’s nano-optic technology that was launched on October 1, 2019.

Brand protection market. The Company launched its first brand protection products, LiveLogo™ and LivePortrait™ in April and completed its first sale in the brand protection market this year. The sales team participated in targeted industry tradeshows and events to promote Nanotech’s brand protection product line. Nanotech’s products have garnered strong interest from the industry, with several opportunities added to the sales pipeline and the announcement of a multi-year brand protection contract subsequent to year end.

2020 Outlook

In 2020, the Company will pursue revenue growth by focusing on product sales opportunities with short sales cycles in both key markets. Management has set the following targets for 2020:

  • Develop strategic sales relationships. The Company will expand its sales reach by partnering with more established OEMs in both the banknote and brand protection market to promote Nanotech’s products to their existing customer bases.
  • Develop strategic manufacturing and product partnerships. Management plans to partner with select manufacturers who have a proven track record of excellence. These partnerships will reduce the manufacturing risk associated with scaling up product sales and will also allow the Company to expand its brand protection product line.
  • Revenue diversification. Management believes there are further growth opportunities for OTF and its KolourOptik®-based products are generating strong interest from banknote and brand protection customers. Management has set a strategic goal to increase product revenue in fiscal 2020. Contract services awarded for fiscal 2020 at $5.0 million are comparable to fiscal 2019, with some opportunities for additional awards and revenue growth in fiscal 2020.

The Company will continue to expand its product line and make further investments in its sales and marketing team and initiatives in order to expand Nanotech’s market reach. In the near-term, management expects that Adjusted EBITDA losses will persist as cost increases will outpace revenue growth in fiscal 2020. However, these additional expenditures are expected to support revenue growth beyond 2020.

With a strong balance sheet, including $10.3 million in cash and short-term investments and no debt, the Company is well positioned to continue to develop and pursue its product-based sales and marketing strategies in 2020.

Conference Call Details

Date & Time: Thursday, December 12, 2019 – 5:00 P.M. Eastern
Dial-in number: Toll Free:

Toll/International:

1-866-548-4713

1-323-794-2093

Conference ID:  2324198
Taped replay: Toll free (Canada and US):

Alternate number:

Replay pin number:

Replay start:

Replay expiry:

1-844-512-2921

1-412-317-6671

2324198

Thursday December 12, 2019, 8:00 PM Eastern

Sunday January 12, 2020, 11:59 PM Eastern

Webcast: http://public.viavid.com/index.php?id=137219

Equity Grants

The Board of Directors have approved for grant 1,479,000 stock options.  These options will be granted subsequent to the end of the Company’s trading blackout at market price, in accordance with TSXV Policy 1.1.  The options will be for five years and will bring the total options outstanding to 7.2% of outstanding shares.  The Company also granted 291,479 restricted share units, of which 147,984 are to officers.

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.

  Three months ended

September 30

Years ended

September 30

      %   %
  2019 2018 Change 2019 2018 Change
Revenue (1) $ 1,449,687 $ 3,000,839 (52%) $ 6,402,702 $ 8,247,414 (22%)
Gross margin 1,112,053 2,333,004 (52%) 4,890,837 6,737,313 (27%)
Gross margin % 77% 78%   76% 82%  
Adjusted EBITDA (2) (298,542) 1,305,841 (123%) (118,519) 1,998,785 (106%)
             
Net income (loss) (704,848) 770,086 (192%) (2,835,254) (46,266) 6,028%
Earnings (loss) per share

Basic and diluted

(0.01) 0.01   (0.04) 0.00  
Weighted average number
of common shares
           
Basic and Diluted 69,035,007 68,514,245   68,916,001 68,425,673  

(1) Revenue has been adjusted to reflect the reclassification of tenant and steam income from revenue to other income under the full retrospective application of IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”), which was adopted October 1, 2018. Quarterly revenue adjusted for these reclassifications can be found in the “Quarterly Results” section of management’s discussion and analysis for the year ended September 30, 2019. For further information, see note 4(b) of the consolidated financial statements for the year ended September 30, 2019.

(2) Adjusted EBITDA is a non-IFRS measure as described in the “Non-IFRS Financial Measures” section of this News Release.

Financial Position as at: September 30, September 30, %
  2019 2018 Change
Cash, cash equivalents and short-term investments $  10,289,264 $    9,613,621 7%
       
Total assets $  28,523,244 $  30,229,055 (6%)
Total liabilities 1,791,610 1,325,139 35%
Total equity 26,731,634 28,903,916 (8%)

Financial Statements and Management’s Discussion and Analysis

This news release should be read in conjunction with the Company’s consolidated financial statements and related notes, and management’s discussion and analysis for the year ended September 30, 2019, copies of which can be found at www.sedar.com.

Non-IFRS Financial Measures

In addition to results reported in accordance with IFRS, the Company discloses Adjusted EBITDA as a supplemental indicator of its financial performance.

The Company defines Adjusted EBITDA as net income (loss) excluding the impact of interest and financing costs (net of interest income), foreign exchange gain (loss), income taxes, depreciation and amortization, share-based compensation, restructuring costs, and net income (loss) from discontinued operations. The Company believes Adjusted EBITDA is a useful measure as it provides information to management about the operating and financial performance of the Company and its ability to generate operating cash flow to fund future working capital needs, as well as future growth. Adjusted EBITDA may also be used by investors and analysts for the purpose of valuing the Company.

Readers are cautioned that these non-IFRS definitions are not recognized measures under IFRS, do not have standardized meanings prescribed by IFRS, and should not be construed to be alternatives to net earnings determined in accordance with IFRS or as indicators of performance or liquidity or cash flows. The Company’s method of calculating these measures may differ from methods used by other entities or in other jurisdictions. The Company uses these measures because it believes they provide useful information to both management and investors with respect to the operating and financial performance of the Company.

  Three months ended
September 30
Years ended
September 30
  2019 2018 2019 2018
       
Net income (loss) $      (704,848) $     770,086 $  (2,835,254) $      (46,266)
Finance income (42,444) (41,484) (192,752) (121,878)
Foreign exchange (gain) loss (17,442) 5,270 (14,982) (250,023)
Depreciation and amortization 398,257 425,472 1,566,122 1,611,891
Share-based compensation 96,060 146,497 570,772 681,739
Restructuring costs (28,125) 787,575
Net loss from discontinued
operations
123,322
Adjusted EBITDA $      (298,542) $   1,305,841 $     (118,519) $  1,998,785