Nanotech Announces Second Quarter Fiscal 2020 Results

 

VANCOUVER, British Columbia – May 7, 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 and six months ended March 31, 2020. 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.

Highlights

Product Revenue

  • Four customer product orders delivered in the quarter, bringing the year to date total to twelve (compared to fourteen in the full year ended 2019 and two in the full year ended 2018).
  • Product revenue increased to $123,009 and $366,398 for the three and six months ended March 31, 2020, respectively, compared to $115,793 and $169,256 during the same period last year.

Contract Services Revenue

  • On an annual basis, management expects modest growth over the prior year with some opportunities for additional business and revenue growth in the second half of 2020.
  • Contract services revenue decreased to $1,261,507 and $2,488,044 for the three and six months ended March 31, 2020, respectively, compared to $1,478,210 and $2,956,420 during the same period last year.

COVID-19 Update

  • Fully operational in Thurso, Quebec production facility and Burnaby, BC office and laboratories, with appropriate health and safety measures implemented.
  • Contract services are not currently expected to be impacted by COVID-19. Product revenue for the second half of fiscal 2020 will be impacted based on the timing of receipt of purchase orders.
  • Nanotech remains well-positioned with cash and short-term investments of $9.2 million at quarter end with no debt.

“While we don’t yet know how far-reaching the pandemic’s impact on Nanotech could be, we are fortunate to be fully operational at this time with stable contract services revenue for fiscal 2020 and a solid cash position,” said Nanotech’s President and CEO Troy Bullock. “We continue to focus on our strategic initiatives, including our marketing and OEM partnership strategies, and are confident that Nanotech will be in an even stronger position coming out of this pandemic. We remain enthusiastic about the business fundamentals and the long-term market opportunities for our products.”

Strategic Update

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

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

In the first half of fiscal 2020, Nanotech recorded product revenue from twelve delivered customer orders, compared to fourteen for the full year 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 become recurring orders and

to grow in the future. During the second quarter of 2020, the Company also filled a LiveOptik product order for approximately 7.0 million labels in a confidential brand protection application.

  • Develop strategic sales relationships. Expand the Company’s sales reach by partnering with more established OEMs to promote Nanotech’s products to their existing customer bases.

The Company has made significant progress in strengthening its sales partnerships. In the brand protection market, management partnered with two United States channel partners who are now marketing Nanotech’s LiveOptik™ products. In the government and banknote market, management is working with a key OEM partner to design a marketing housenote to enable this partner to begin marketing 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 partnered with a large OEM partner to produce LiveOptik products for the brand protection market. Nanotech’s products have 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 the next six months, enabling the Company to deliver on large volume banknote opportunities.

Outlook

Management’s commercialization strategy has shown great progress as the Company continues to expand its product lines for both the government and banknote and brand protection markets. In the government and banknote market there is serious interest in Nanotech’s KolourOptik and LumaChrome OTF products, and the development contract is progressing well. The Company entered the brand protection market approximately one year ago and has already gained strong reference customer wins and built a solid pipeline of opportunities. The overall growth in product revenue demonstrates that although the commercialization strategy is in in the early stages it is gaining traction.

Although the COVID-19 pandemic has not significantly impacted Nanotech’s ability to deliver to customers, the sales team is seeing a general slowdown in access to customers and a tendency for customers to defer ordering decisions. As a result, management estimates approximately $2.0 million in opportunities from the pipeline has been deferred to fiscal 2021. However, due to the success of Nanotech’s commercialization strategy in the first half of 2020 and projected growth in contract services revenue in the second half of 2020, even during this unprecedented pandemic, management is still anticipating annual revenue growth in the 10% to 20% range.

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

In the near-term, management expects that Adjusted EBITDA losses will continue as the Company continues to invest in marketing and product development activities to drive future revenue growth. Quarterly results may vary significantly depending on the timing of new product orders and recurring LumaChrome orders. With a strong balance sheet, including $9.2 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, May 07, 2020 – 5:00 PM Eastern
Dial-in number: Toll Free:

Toll/International:

1-800-263-0877

1-646-828-8143

Conference ID: 7782339
Taped replay: Toll free (Canada and US):

Alternate number:

Replay pin number:

Replay start:

Replay expiry:

1-844-512-2921

1-412-317-6671

7782339

Thursday, May 07, 2020, 8:00 PM Eastern

Sunday, June 07, 2020, 11:59 PM Eastern

Webcast: http://public.viavid.com/index.php?id=139351

 

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

March 31

Six months ended

March 31

2020 2019(1) %

Change

2020 2019(1) %

Change

Contract services   $ 1,261,507   $ 1,478,210    (15%) $ 2,488,045 $ 2,956,420 (16%)
Products and services 123,009 115,793 6% 366,397 169,256 116%
Revenue 1,384,516 1,594,003 (13%) 2,854,442 3,125,676 (9%)
Gross margin 1,133,106 1,276,652 (11%) 2,297,223 2,446,777 (6%)
Gross margin% 82% 80% 80% 78%
Adjusted EBITDA(2) (576,484) 45,027 (1,380%) (836,947) 162,658 (615%)
Net loss (973,333) (477,006) 104% (1,755,823) (1,608,916) 9%
Loss per share

Basic and diluted

(0.01) (0.01) (0.03) (0.02)
Weighted average number of common shares  

 

Basic and diluted 69,200,125 68,898,584 69,200,125 68,834,344

 

(1) Results for the three and six months ended March 31, 2019 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 and six months ended March 31, 2020.

(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: March 31, September 30, %
  2020 2019 Change
Cash, cash equivalents and short-term investments $    9,217,894 $  10,289,264 (10%)
     
Total assets $  28,071,891 $  28,523,244 (2%)
Total liabilities 2,852,980 1,791,610 59%
Total equity 28,071,891 28,523,244 (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 and six months ended March 31, 2020, 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, liquidity or cash flows. The Company’s method of calculating these measures may differ from methods used by other entities and accordingly Nanotech’s measures may not be comparable to similarly titled measures 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

March 31

Six months ended

March 31

  2020 2019 2020 2019
 
Net loss $        (973,333) $        (477,006) $     (1,755,823) $  (1,608,916)
Finance income (28,161) (48,592) (61,606) (100,965)
Foreign exchange (gain) loss (92,102) 16,806 (69,459) (30,338)
Depreciation and amortization 410,873 396,000 806,841 781,369
Share-based compensation 106,239 157,819 243,100 305,808
Restructuring costs 815,700
Adjusted EBITDA $      (576,484) $         45,027 $      (836,947) $     162,658

 

Nanotech Security Corp.
Condensed Interim Statements of Operations and Comprehensive Loss (Unaudited)
Three and six months ended March 31, 2020 and 2019 (In Canadian dollars)
Three months ended

March 31

Six months ended

March 31

2020 2019(1) 2020 2019(1)
Revenue $   1,384,516 $   1,594,003 $   2,854,442 $   3,125,676
Cost of sales 251,410 317,351 557,219 678,899
1,133,106 1,276,652 2,297,223 2,446,777
Expenses
Research and development 556,096 402,539 958,028 738,650
General and administration 606,950 587,183 1,197,370 1,124,750
Sales and marketing 651,693 528,830 1,237,743 973,544
Depreciation and amortization 402,512 385,535 773,001 756,294
Restructuring costs 815,700
2,217,251 1,904,087 4,166,142 4,408,938
Loss from operations before other (income) expenses (1,084,145) (627,435) (1,868,919) (1,962,161)
Other (income) expenses
Foreign exchange (gain) loss (92,102) 16,806 (69,459) (30,338)
Finance income (28,161) (48,592) (61,606) (100,965)
Tenant income (11,844) (66,904) (56,276) (126,082)
Steam (income) expense 21,295 (51,739) 74,245 (95,860)
(110,812) (150,429) (113,096) (353,245)
Net loss and total comprehensive loss $     (973,333) $     (477,006) $  (1,755,823) $  (1,608,916)
Basic and diluted loss per share:
Net loss $          (0.01) $          (0.01) $          (0.03) $          (0.02)
Weighted average number of common shares
Basic and diluted 69,200,125 68,898,584 69,200,125 68,834,344
 

(1) Results for the three and six months ended March 31, 2019 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 and six months ended March 31, 2020.

 

 

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

2020

September 30,

2019

     
Assets
Current assets:
Cash and cash equivalents $   1,605,411 $   2,752,002
Short-term investments 7,612,483 7,537,262
Accounts receivable 531,043 503,660
Inventory 159,253 237,264
Prepaid expenses and other assets 333,391 419,753
  10,241,581 11,449,941
 
Property, plant and equipment 15,485,367 15,684,845
Goodwill 1,388,458 1,388,458
Right-of-use asset 956,485
  $ 28,071,891 $ 28,523,244
 
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities $   1,142,905 $   1,232,159
Deposit 530,368 543,368
Deferred revenue 165,000
Current portion of lease liability 164,827
  2,003,100 1,775,527
 
Non-current liabilities:
Tenant inducement 16,083
Lease liability 849,880
  2,852,980 1,791,610
Shareholders’ equity
Share capital 62,355,479 62,355,479
Contributed surplus 3,373,952 3,130,852
Deficit (40,510,520) (38,754,697)
  25,218,911 26,731,634
  $ 28,071,891 $ 28,523,244

 

Nanotech Security Corp.
Condensed Interim Statements of Cash Flow
(Unaudited)
Three and six months ended March 31, 2020 and 2019
(In Canadian dollars)
Three months ended

March 31

Six months ended

March 31

2020 2019 2020 2019
Cash flows provided by (used in):
Operating activities:
Net loss $     (973,333) $     (477,006) $  (1,755,823) $  (1,608,916)
Items not involving cash:
Depreciation and amortization 410,873 396,000 806,841 781,369
Share-based compensation 106,239 250,019 243,100 398,008
Unrealized foreign exchange gain (loss) (11,491) 50,285 (35,969) 17,224
Finance income (28,161) (48,592) (61,606) (100,965)
Other (5,520) (11,651) (6,101) (17,365)
Non-cash working capital changes 478,714 (930,166) 159,891 1,009,366
Interest paid on lease liability (11,671) (22,722)
Interest received 7,382 16,003 85,858 59,818
(26,968) (755,108) (586,531) 538,539
Net cash used in discontinued operations (4,925) (4,977)
Cash provided by (used in) operating activities (26,968) (760,033) (586,531) 533,562
Investing activities:
Purchase of property and equipment (276,364) (22,366) (464,419) (47,906)
Net acquisition of short-term investments (3,239) (70,650) (28,175)
Cash used in investing activities (276,364) (25,605) (535,069) (76,081)
Financing activities:
Repayment of lease liability (34,109) (68,839)
Cash used in financing activities (34,109) (68,839)
Effect of foreign exchange on cash and cash equivalents 24,334 (49,461) 43,848 (21,870)
Increase (decrease) in cash and cash equivalents (313,107) (835,099) (1,146,591) 435,611
Cash and cash equivalents, beginning of period 1,918,518 3,285,474 2,752,002 2,014,764
Cash and cash equivalents, end of period $   1,605,411 $   2,450,375 $   1,605,411 $   2,450,375

 

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, the Company’s views that its optics-based technologies will continue to show promise for large-scale production and the potential impacts of the COVID-19 pandemic on the Company’s operations. 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, as well as risks relating to the COVID-19 pandemic.

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 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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