Nanotech Announces First Quarter Fiscal 2020 Results

VANCOUVER, British Columbia – February 13, 2020 – 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 three months ended December 31, 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

Product Revenue

  • Eight customer product orders delivered in the quarter, compared to fourteen in the full year ended 2019 and two in the full year ended 2018.
  • Product revenue increased to $243,389, compared to $53,463 during the same period last year.

Contract Services Revenue

  • Awarded an additional purchase order that will be recognized in the second half of the year; on an annual basis, management expects modest growth over the prior year.
  • Contract services revenue decreased to $1,226,537, compared to $1,478,210 during the same period last year.

Other Financial Information

  • Gross margin for the quarter improved to 79% versus 76% in the same period of fiscal 2019.
  • Cash and short-term investments were $9.5 million at quarter end with no debt.

“I’m pleased to report that we saw a significant increase in product orders shipped during the quarter.  Although we are only twelve months into our commercialization strategy to develop and deliver market focused products, we are seeing encouraging signs from both the brand protection and banknote markets,” said Nanotech’s President and CEO Troy Bullock. “Looking ahead to the rest of the year, we plan to continue to increase our sales and marketing efforts to broaden our geographic reach into Europe, release new products, and develop and leverage partner relationships.  While it may take some time for these efforts to generate meaningful sales, we are seeing growth in our sales pipeline and our technology continues to generate interest from potential customers in our key markets.”

Strategic Update

In 2020, the Company is pursuing revenue growth by focusing on product sales opportunities in both the brand protection market and in the government and banknote market. To achieve these goals, management previously established the following targets for fiscal 2020:

  • Develop strategic sales relationships. Expand the Company’s sales reach by partnering with more established OEMs in both the government and banknote market and in the brand protection market to promote Nanotech’s products to their existing customer bases.

The Company made significant progress in strengthening our sales partnerships.  In the brand protection market, management has partnered with two United States channel partners who have recently begun marketing our LiveOptikTM products.  In the government and banknote market, management has begun discussions with several OEM’s to design a marketing housenote to enable the OEM’s to begin marketing our KolourOptik® products later this year.

  • Develop strategic manufacturing and product partnerships. Partner with select manufacturers that have a proven track record of excellence to reduce the manufacturing risk associated with scaling product sales and to expand the Company’s product lines.

The Company has broadened its manufacturing partnerships to include a large OEM partner to produce LiveOptik products for the brand protection market.  Nanotech’s product offering has expanded to include foils, labels, QR codes, and track and trace capability as a result of its manufacturing partnerships.  Outsourcing LiveOptik manufacturing also enables the company to focus on its core capabilities in technology development.

In the government and banknote market, management is in the process of qualifying a world class OEM manufacturing partner for its KolourDepth products.  Management expects to have this finalized within six months, which will enable the Company to deliver on large volume banknote opportunities.

  • Revenue diversification. Increase product revenue by generating sales of nano-optic products, expanding product lines and by pursuing further growth opportunities for LumaChromeTM colour-shifting film.

In the first quarter of fiscal 2020, Nanotech recorded product revenue from eight delivered customer orders, compared to only two in the first quarter of fiscal 2019. These orders were predominantly for LumaChrome and included film for one new banknote and one new government ID application. In addition, the Company worked with several partners to qualify its LumaChrome product on four new banknote opportunities.

In the brand protection market, the Company delivered its first LiveOptik sale in the licensing vertical to the World Baseball Softball Confederation and worked with a partner to deliver film for a new commercial application. Although these initial orders are small, they have opportunities to be recurring and to grow in the future.

The Company continues to make further investments in its sales and marketing team and initiatives to expand Nanotech’s market reach. During the first quarter of fiscal 2020, these investments included rebranding the Company and its products, launching a new website, and increasing sales activity around several key customers. Management expects to add to the sales and marketing teams in the coming quarters to increase Nanotech’s sales reach in the brand protection market and to enhance product management.

While focusing on early reference account sales in the brand protection market, the Company continues to derive most of its revenue from contract services to develop a novel banknote security feature for a G10 central bank.  Contract services awarded for fiscal 2020 indicate modest revenue growth compared to fiscal 2019, with some additional opportunities for further awards and revenue growth in fiscal 2020.  While the Company does not have visibility on if or when Nanotech’s feature might be integrated into the customer’s banknotes, management continues to be pleased with the progress of this project.

In the near-term, management expects that Adjusted EBITDA losses will continue as the Company continues to invest in sales and marketing activities to drive future revenue growth. In addition, quarterly results may vary significantly depending on the timing of new product orders and recurring LumaChrome orders which typically affect our third and fourth quarters.  With a strong balance sheet, including $9.5 million in cash and short-term investments and no debt, the Company is well positioned to continue to pursue its product-based sales and marketing strategies in 2020.

Conference Call Details

Date & Time: Thursday, February 13, 2020 – 5:00 P.M. Eastern
Dial-in number: Toll Free:

Toll/International:

1-800-239-9838

1-323-794-2551

Conference ID:  1663399
Taped replay: Toll free (Canada and US):

Alternate number:

Replay pin number:

Replay start:

Replay expiry:

1-844-512-2921

1-412-317-6671

1663399

Thursday February 13, 2020, 8:00 PM Eastern

Friday March 13, 2020, 11:59 PM Eastern

Webcast: http://public.viavid.com/index.php?id=137930

 

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

December 31

2019 2018(1) %

Change

Contract services $ 1,226,537 $ 1,478,210 (17%)
Products and services 243,389 53,463 355%
Revenue 1,469,926 1,531,673 (4%)
Gross margin 1,164,117 1,170,125 (1%)
Gross margin % 79% 76%
Adjusted EBITDA(2) (260,463) 117,631 (321%)
Net loss (782,490) (1,131,910) (31%)
Loss per share

Basic and diluted

(0.01) (0.02)
Weighted average number of common shares
Basic and diluted 69,200,125 68,771,501

(1) Results for the three months ended December 31, 2018 have been adjusted to reflect the full retrospective application of IFRS 15, which was adopted October 1, 2018. For further information, see note 2(a) of the condensed interim financial statements for the three months ended December 31, 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: December 31, September 30, %
  2019 2019 Change
Cash, cash equivalents and short-term investments  

$    9,493,031

 

$  10,289,264

(8%)
     
Total assets $  28,695,873 $  28,523,244 1%
Total liabilities 2,609,868 1,791,610 46%
Total equity 26,086,005 26,731,634 (2%)

Financial Statements and Management’s Discussion and Analysis

This news release should be read in conjunction with the Company’s condensed interim financial statements and related notes, and management’s discussion and analysis for the three months ended December 31, 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, and restructuring costs. 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

December 31

  2019 2018
 
Net loss $      (782,490) $ (1,131,910)
Finance income (33,445) (52,373)
Foreign exchange (gain) loss 22,643 (47,144)
Depreciation and amortization 395,968 385,369
Share-based compensation 136,861 147,989
Restructuring costs 815,700
Adjusted EBITDA $      (260,463) $     117,631

 

Nanotech Security Corp.
Condensed Interim Statements of Operations and Comprehensive Loss
(Unaudited)
Three months ended December 31, 2019 and 2108
(In Canadian dollars)
  2019 2018(1)
Revenue $   1,469,926 $    1,531,673
Cost of sales 305,809 361,548
1,164,117 1,170,125
Expenses
Research and development 401,932 336,111
General and administration 590,420 537,567
Sales and marketing 586,050 444,714
Depreciation and amortization 370,489 370,759
Restructuring costs 815,700
1,948,891 2,504,851
Loss from operations before other (income) expenses (784,774) (1,334,726)
Other (income) expenses
Foreign exchange (gain) loss 22,643 (47,144)
Finance income (33,445) (52,373)
Tenant income (44,432) (59,178)
Steam (income) expense 52,950 (44,121)
(2,284) (202,816)
Net loss and total comprehensive loss $    (782,490) $ (1,131,910)
Basic and diluted loss per share:
Net loss $          (0.01) $         (0.02)
Weighted average number of common shares
Basic and diluted 69,200,125 68,771,501
(1) Results for the three months ended December 31, 2018 have been adjusted to reflect the full retrospective application of IFRS 15, which was adopted October 1, 2018. For further information, see note 2(a) of the condensed interim financial statements for the three months ended December 31, 2019.

 

 

Nanotech Security Corp.
Condensed Interim Statements of Financial Position
(Unaudited)
(In Canadian dollars)
  December 31,

2019

September 30,

2019

     
Assets
Current assets:
Cash and cash equivalents $   1,918,518 $   2,752,002
Short-term investments 7,574,513 7,537,262
Accounts receivable 774,603 503,660
Inventory 189,398 237,264
Prepaid expenses and other assets 350,221 419,753
  10,807,253 11,449,941
 
Property, plant and equipment 15,496,636 15,684,845
Goodwill 1,388,458 1,388,458
Right-of-use asset 1,003,526
  $ 28,695,873 $ 28,523,244
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities $   1,030,684 $   1,232,159
Deposit 530,368 543,368
Current portion of lease liability 154,978
  1,716,030 1,775,527
 
Non-current liabilities:
Tenant inducement 16,083
Lease liability 893,838
  2,609,868 1,791,610
Shareholders’ equity
Share capital 62,355,479 62,355,479
Contributed surplus 3,267,713 3,130,852
Deficit (39,537,187) (38,754,697)
  26,086,005 26,731,634
  $ 28,695,873 $ 28,523,244

 

Nanotech Security Corp.
Condensed Interim Statements of Cash Flow
(Unaudited)
Three months ended December 31, 2019 and 2018
(In Canadian dollars)
2019 2018
Cash flows provided by (used in):
Operating activities:
Net loss from continuing operations $    (782,490) $ (1,131,910)
Items not involving cash:
Depreciation and amortization 395,968 385,369
Share-based compensation 136,861 147,989
Unrealized foreign exchange gain (24,478) (33,061)
Finance income (33,445) (52,373)
Other (581) (5,714)
Non-cash working capital changes (318,823) 1,939,532
Interest paid on lease liability (11,051)
Interest received 78,476 43,815
(559,563) 1,293,647
Net cash used in discontinued operations (52)
Cash provided by (used in) operating activities (559,563) 1,293,595
Investing activities:
Purchase of property and equipment (188,055) (25,540)
Net acquisition of short-term investments (70,650) (24,936)
Cash used in investing activities (258,705) (50,476)
Financing activities:
    Repayment of lease liability (34,730)
Cash used in financing activities (34,730)
Effect of foreign exchange on cash and cash equivalents 19,514 27,591
Increase (decrease) in cash and cash equivalents (833,484) 1,270,710
Cash and cash equivalents, beginning of period 2,752,002 2,014,764
Cash and cash equivalents, end of period $   1,918,518 $   3,285,474

 

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 in development until profitability is eventually realized. The principal risks related to these forward-looking statements are the loss of a key customer, that the Company’s products receive market acceptance, and 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’s discussion and analysis and the notes to the audited consolidated financial statements for the year ended September 30, 2019, 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

With billions of security features in circulation, Nanotech’s products include secure and memorable security labels, stripes, patches, and colour-shifting films for currency authentication and brand protection.

KolourOptik® is a patented technology that is exclusive to the government and banknote market and combines sub-wavelength nanostructures and microstructures to create modern overt security features with a unique and customizable visual effect. KolourOptik pure plasmonic colour pixels produce full colour, 3D depth, and movement used in security stripes and threads that are nearly impossible to replicate.  At less than 5 microns thick, KolourOptik products seamlessly integrate into banknotes and other secure government documents.

LiveOptik™ is a patented technology that utilizes innovative nano-optics one tenth the size of traditional holographic structures to create next generation overt security features customized to our customers’ unique requirements. LiveOptik delivers multi-colour, 3D depth, movement, and image switches for secure brand protection stripes, threads, and labels that are nearly impossible to replicate.

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.

Nanotech Security Corp.: Investor Relations:
Kelley Ryshak Sean Peasgood
info@nanosecurity.ca sean@SophicCapital.com
+1.604.678.5775 +1.647.699.9845

 

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