Mr. Doug Blakeway reports
NANOTECH ANNOUNCES FOURTH QUARTER AND FISCAL 2016 YEAR END RESULTS
Nanotech Security Corp. has released its financial results for the fourth quarter and year ended Sept. 30, 2016.
Financial highlights from 2016:
- Revenue for the full year amounted to $5.1-million, consistent with the prior year. The optics business segment contributed revenues of $2.9-million compared with $3.1-million in the prior year. Two thousand sixteen revenues were negatively impacted by the corporate focus on integrating a new outsourcing production partner.
- Gross margin improved to 55 per cent from 43 per cent in the same period last year. The improvement reflects the increased mix of higher-margin development contract revenue.
- Cash used in operations increased to $3.9-million from $3.4-million in the prior year. The increase in cash used was to support sales and marketing activities in the banknote market.
- Cash balance of $3.3-million compared with $3.0-million in the prior year. The company raised $4.2-million in unsecured senior debentures convertible into common shares at a price of $1.25. The debentures bear interest at 12 per cent, come due May 31, 2018, and will finance operations and working capital.
Strategic highlights from 2016:
- To supply security feature for major new banknote. In May, 2016, the company completed the supplier acceptance process with an Asian issuing authority and had commenced production and delivery of colour-shifting optical thin film (OTF) through its manufacturing partner, Hueck Folien GmbH. To date, the company has continued to work with its Asian customer to finalize the product specifications and integrate the company's OTF into the Asian customer's own production facility. The customer continues to scrutinize and review initial deliveries as it works to ensure the product is seamlessly integrated into its production facility. Continued progress has been made over the past few months, and all parties are optimistic that volume production will commence in the near term. Although there have been unforeseen delays, Nanotech's management remains confident that once production resumes, the company will be well positioned to deliver throughout the life of this banknote.
- Paid development contracts are progressing well. The company currently derives the vast majority of its optics segment revenue from development contracts with major issuing authorities. These contracts incorporate both nano-optic and OTF technologies and are focused on developing security features for future banknotes. All the projects in 2016 have progressed, and management has already begun working with these issuing authorities to expand the scope of these activities as the company moves closer to final selection for a future banknote.
- Provided technology to authenticate tickets at UEFA Euro 2016 football championship. Nanotech's nano-optic technology was chosen for admission tickets due to its intense high-definition (iHD) full-colour-imaging capabilities and anti-counterfeiting security features -- replacing older hologram technology used at past events.
Doug Blakeway, Nanotech's chairman and chief executive officer, commented: "Two thousand sixteen has been another successful year for the company. We have now secured customer relationships with several of the world's largest banknote-issuing authorities and are well positioned to develop significant business with each of them in the years ahead. Although we did not anticipate the OTF production delays with our Asian customer, we continue to make progress. All parties remain confident we will be successful, and once the production resumes, the company will be well positioned to deliver throughout the life of this banknote."
Selected financial information
All results are reported in dollars and are prepared in accordance with international financial reporting standards, as issued by the International Accounting Standards Board (IASB).
FINANCIAL HIGHLIGHTS
Three months ended Years ended
Sept. 30, Sept. 30,
2016 2015 2016 2015
Revenue $ 1,510,744 $ 728,322 $ 5,126,109 $ 5,152,762
Gross profit 1,036,989 286,501 2,822,122 2,231,075
Gross profit % 69% 39% 55% 43%
Net earnings (loss) (1,676,026) (1,565,398) (7,992,602) (4,670,833)
Net earnings (loss)
per share
Basic (0.03) (0.03) (0.15) (0.09)
Diluted (0.03) (0.03) (0.15) (0.09)
Revenue
Revenues for the year ended Sept. 30, 2016, were $5.1-million, consistent with $5.2-million in the prior year. The optics segment revenue was down $209,000 compared with last year primarily due to OTF production delays with a large Asian issuing authority. This revenue reduction was partially offset by increased customer development work performed during the year.
During the year, internal OTF product Clion was negatively impacted as the company focused its development team on integrating its colour-shifting OTF technology into an Austrian third party manufacturer, Hueck, to enable Nanotech to deliver significant volume to a large Asian issuing authority. The company has signed a supply and collaboration agreement with Hueck that licenses Hueck to manufacture one-metre-wide colour-shifting OTF exclusively for Nanotech.
This integration has continued to consume internal resources in bringing the new manufacturing facility on-line. In May, 2016, the company completed the supplier acceptance process with the Asian issuing authority and had commenced production and delivery of colour-shifting OTF through its manufacturing partner Hueck. To date, the company continues to work with its Asian customer to finalize the product specifications and integrate the OTF into the Asian customer's own production facility. Initial deliveries continue to be scrutinized and reviewed by the customer as it works to ensure they are seamlessly integrated into its production facility. Continued progress has been made over the past few months, and all parties are optimistic that volume production will commence in the near term. Although there have been unforeseen delays, management is still confident that once production resumes, the company will be well positioned to deliver throughout the life of this banknote.
The tactical segment's revenues were up $183,000 compared with last year, which was primarily due to an increase in the foreign exchange rate in the current year. During the year, tactical improved its revenue mix to include an increase in higher-margin surveillance vans, which was offset by a reduction in lower-margin product sales.
Gross margin
Gross margin dollars for the year ended Sept. 30, 2016, increased by $591,000 or 26 per cent to $2.8-million compared with $2.2-million last year. Over all, gross margin percentage reached 55 per cent for the year ended Sept. 30, 2016, an improvement from 43 per cent in the same period last year. The gross margins continue to reflect strong margins on the optic division's development contracts.
Research and development
Research and development expenditures increased by $1.2-million or 29 per cent to $5.4-million compared with $4.2-million last year. This is primarily a result of an increase in depreciation of $800,000, reflecting a 2015 revision of the company's depreciation policy. Research and development activity for the current year continued to focus on bringing the new Hueck production facility on-line, as well as developing new security features targeted for the banknote market.
General and administration
General and administration expenditures for the year ended Sept. 30, 2016, were $2.7-million, an increase of $200,000 compared with $2.5-million last year, which reflected higher office rent, property tax, salaries and overheads.
Sales and marketing
Sales and marketing expenditures for the year ended Sept. 30, 2016, were $2.4-million, an increase of $485,000 compared with $1.9-million last year due to increased sales and marketing activity relating to the optics business unit, including increased salaries, stock-based compensation and international travel.
Net loss
The net loss for the year was $7.8-million compared with $4.7-million during the same period last year. The increase largely reflects higher depreciation and amortization expense of $750,000, increased financing costs, sales and marketing costs, foreign exchange loss in the current year, and a gain on the revaluation and settlement of contingent shares of $1.5-million during the previous year.
The company ended the year with approximately $3.3-million in cash and cash equivalents, up from $3.0-million at Sept. 30, 2015. Management has reviewed its projected financing requirements and expects that through the generation and collection of revenues and/or being able to raise additional financing, the company will maintain sufficient liquidity.
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 as its established customer base. Management continues to believe that the company is well positioned to supply its Asian customer; however, product acceptance and integration into its production processes have taken longer than anticipated. Once production resumes, it is expected to ramp to supply this customer with significant colour-shifting OTF through the life of the banknote. The company is focusing on further developing business with its established customer base and, as a result, is well positioned to expand its development contract revenue in the years ahead.
Entering 2017, management has established a goal to double its revenue and make significant progress toward 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 to deliver to its Asian customer, its ability to expand its optics development revenue, and its ability to maintain sufficient liquidity through Sept. 30, 2017, to facilitate any business ramp-up. These and other risk factors are further discussed under the business risks and uncertainties segment of the Sept. 30, 2016, management's discussion and analysis.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three months ended Years ended
Sept. 30, Sept. 30,
2016 2015 2016 2015
Revenue $ 1,510,744 $ 728,322 $ 5,126,109 $ 5,152,762
Cost of sales 473,755 441,821 2,303,987 2,921,687
---------- ---------- ---------- ----------
Gross profit 1,036,989 286,501 2,822,122 2,231,075
Expenses
Research and
development 1,300,463 735,558 5,350,280 4,158,108
General and
administration 642,433 724,109 2,655,457 2,455,131
Sales and marketing 569,546 473,716 2,369,258 1,884,113
---------- ---------- ---------- ----------
2,512,442 1,933,383 10,374,995 8,497,352
(Loss) before other
expenses (income)
and income taxes (1,475,453) (1,646,882) (7,552,873) (6,266,277)
Other expenses
(income)
Foreign exchange
loss (gain) (24,490) (114,347) 78,793 (274,539)
Finance expense 225,063 32,863 360,936 129,095
Gain on revaluation
of contingent shares - - - (1,450,000)
---------- ---------- ---------- ----------
200,573 (81,484) 439,729 (1,595,444)
(Loss) before
income
taxes (1,676,026) (1,565,398) (7,992,602) (4,670,833)
Deferred income
tax recovery - - 162,797 -
---------- ---------- ---------- ----------
Net (loss) (1,676,026) (1,565,398) (7,829,805) (4,670,833)
---------- ---------- ---------- ----------
Other
comprehensive
income (loss)
Items that may be
subsequently
reclassified to
earnings
Unrealized foreign
exchange gain
(loss)
on translation of
foreign operation (14,258) (48,376) 24,654 (124,615)
---------- ---------- ---------- ----------
Total comprehensive
(loss) for the
period $(1,690,284) $(1,613,774) $(7,805,151) $(4,795,448)
---------- ---------- ---------- ----------
(Loss) per share,
basic and diluted $ (0.03) $ (0.03) $ (0.15) $ (0.09)
Conference call details:
Date: Dec. 19, 2016
Time: 5 p.m. Eastern Standard Time
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Conference ID: 5876803
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