Mr. Doug Blakeway reports

NANOTECH SECURITY ANNOUNCES FIRST QUARTER FISCAL 2017 RESULTS

Nanotech Security Corp. has released its financial results for the three months ended Dec. 31, 2016.

Highlights during the first quarter:

• Revenue of $907,013 down from $1.5-million in the same period last year. Optics contributed revenues of $694,471, largely from paid development contracts, and tactical delivered $212,542, reflecting slow sales during the quarter.
• Gross margin was 70 per cent up from 50 per cent in the same period last year. Gross margins continue to reflect strong margins in the optics division. The cash balance was $2.3-million at the end of the quarter.
• Cash used in operations, excluding working capital, amounted to $850,507, an improvement from $904,312 in the same period last year.
• Paid development contracts are progressing well. The company currently derives the vast majority of its optics segment revenue from paid authentication development projects with major issuing authorities. These paid development activities incorporate both nano-optic and optical thin film (OTF) technologies and are focused on developing authentication features for future banknotes. All projects are progressing well, and the company sees these projects as a significant growth area for the business.

Recent developments:

• Signed development contract for up to $30.0-million. Subsequent to the quarter-end, the company was awarded a development contract with an issuing authority to develop unique authentication features based on Nanotech's core technologies for use on future banknotes. The contract is for up to $30.0-million over a period of up to five years. With the addition of this contract, the total fiscal 2017 paid development commitments amount to over $6.5-million in revenue. Due to the confidential nature of the agreement, no further details have been disclosed.
• Asian banknote opportunity. The company continues to work with its Asian customer to fine-tune the product specifications to ensure its OTF accurately matches, integrates and qualifies with current supply needs. Management expects to be able to demonstrate the company's ability to produce OTF that meets the customer expectations later in 2017. Overall management remains optimistic that there is strong customer demand for the company's OTF and that the company's production partner will fulfill these requirements and deliver later in the year.
• Signed sales agreement with ZSST. The company has recently signed an agreement with Zhongchao Special Security Technology Company Ltd. (ZSST) to sell ZSST's award-winning ColorDance anti-counterfeiting technology outside of China to some of the most prominent issuing authorities in the world. ZSST specializes in the research and creation of preventing counterfeit of security documents and in high-value materials. ZSST is a subsidiary of the China Banknote Printing & Minting Corp. The ColorDance overt security feature produces a movement effect, which can be integrated as a windowed security thread or as a surface-applied feature to a banknote. The technology can also be combined with Nanotech's OTF technology to create a multifaceted security feature for banknotes and high-security documents. Nanotech is currently engaged with several of the world's top issuing authorities to incorporate their optics-based technologies into banknotes. The ColorDance security features add another innovative technology that makes Nanotech's existing portfolio of authentication features even more attractive to issuing authorities. This new collaboration enhances Nanotech's position in both the banknote and brand identification markets.

Doug Blakeway, Nanotech's chairman and chief executive officer, commented: "The recent paid authentication development contract award is significant as we continue to expand both our revenue base and customer confidence. We have secured customer relationships with several of the world's largest banknote-issuing authorities and are strategically situated to develop significant business with each of them in the years ahead. Although the OTF production delays with our Asian customer are stretching out longer than foreseen, we continue to make progress and recognize that in our industry this process takes considerable time. All parties remain confident that upon completion of the fine tuning of the OTF process by our production partner Hueck Folien, Nanotech will be well positioned to deliver OTF to meet our Asian customer's banknote needs."

Select 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
                                   Dec. 31, 
                              2016          2015

Revenue                  $ 907,013   $ 1,509,240
Gross profit               631,276       748,420
Gross profit %                  70%           50%
Net (loss)              (1,853,280)   (1,746,335)
Net (loss) per share,         
basic and diluted            (0.03)        (0.03)

Consolidated revenues for the three months ended Dec. 31, 2016, decreased by $602,227 or 40 per cent to $907,013 compared with $1,509,240 in the same period last year. Optics revenue was up $125,004 compared with last year primarily due to increased revenue from development contracts; however, tactical's revenue was lower by $727,231 because of lower surveillance van work.

Customer-paid development activities are progressing well, and the company continues to advance its nano-optic-based technologies into the development of new security features for banknotes. During the quarter, development revenue amounted to over $600,000, and it is anticipated to grow. In addition, the company had started on a new development project and has capitalized $117,018 in inventory at Dec. 31, 2016, although the company had not yet been formally awarded the contract at that time. Subsequent to the quarter-end, the company has finalized the agreement and will recognize revenue during the second quarter.

The company continues to work with its Asian customer to finalize the product specifications and integrate its OTF into the customer's production facility. Initial deliveries from the company's Austrian partner continue to be scrutinized and reviewed by the customer as it works to ensure they are seamlessly integrated into its production facility. Management expects the company's production partner to demonstrate its ability to produce OTF that meets the customer's expectation later in 2017.

Revenues from tactical for the three months ended Dec. 31, 2016, decreased to $212,542 from $939,773 in the same period last year. This decrease reflects the large delivery of surveillance vans in the first quarter of last year, which did not occur in the current quarter. The tactical division will continue to have fluctuations in its quarterly revenue as it is highly dependent on the timing of surveillance van and product deliveries.

Gross margin for the three months ended Dec. 31, 2016, decreased by $117,144 or 16 per cent to $631,276 compared with $748,420 in the same period last year. Over all, the gross margin percentage improved to 70 per cent for the three months ended Dec. 31, 2016, an increase from 50 per cent in the same period last year. The gross margins continue to reflect strong margins in the optics division.

Research and development expenditures for the three months ended Dec. 31, 2016, decreased by $113,116 or 20 per cent to $445,081 compared with $558,197 in the same period last year. During the quarter, $98,795 was capitalized to work-in-progress as the company began work on a development contract in advance of being formally awarded the contract. Subsequent to the quarter-end, the development contract was awarded, and the revenue and associated costs will be recognized in the second quarter.

General and administration expenditures for the three months ended Dec. 31, 2016, were $656,577, an increase of $8,888 or 1 per cent compared with $647,689 in the same period last year, which reflects consistent overhead costs over the two periods.

Sales and marketing expenditures for the three months ended Dec. 31, 2016, were $472,903, a decrease of $75,873 or 14 per cent compared with $548,776 in the same period last year. The decrease mainly relates to a reduction in travel-related costs in the optics division, along with lower salaries in the tactical division.

Depreciation and amortization expenditures for the three months ended Dec. 31, 2016, were $724,034, consistent with the $770,157 in the same period last year.

Other expenses for the three months ended Dec. 31, 2016, were $185,961, an increase of $216,025 compared with income of $30,064 in the same period last year. The increase mainly relates to the interest on the convertible debentures.

The net loss for the three months ended Dec. 31, 2016, was $1,853,280 compared with $1,746,335 during the same period last year. The increase in net loss reflects a decrease in revenues, which was partially offset by higher margins. Expenditures were comparable quarter over quarter apart from finance costs, which increased by $195,550 in the current quarter, reflecting the new convertible debentures.

The company ended the quarter with $2,306,141 in cash and cash equivalents, down from $3,312,691 at Sept. 30, 2016. Management has reviewed its projected financing requirements and expects that, through the generation and collection of revenues and/or raising 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 established customer base. Management continues to believe that the company is well positioned to supply its Asian customer; however, the additional time required for product acceptance and for integration into production processes has taken longer than anticipated. Upon completion of the fine tuning of the OTF process by the company's production partner, Hueck Folien, Nanotech will be well positioned to deliver OTF to meet its Asian customer's banknote needs. The company is focusing on further developing business with its established customer base and, as a result, is well positioned to expand its authentication development contract revenue and other optic and OTF opportunities in the years ahead.

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 Folien to deliver to the Asian customer, the company's ability to expand the optics development revenue, and the company's ability to maintain sufficient liquidity through Dec. 31, 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.

        CONDENSED CONSOLIDATED STATEMENTS OF 
         OPERATIONS AND COMPREHENSIVE LOSS 
  
                             Three months ended Dec. 31, 
                                 2016              2015

Revenue                      $907,013        $1,509,240
Cost of sales                 275,737           760,820
                           ----------        ----------
Gross profit                  631,276           748,420
Expenses        
Research and development      445,081           558,197
General and administration    656,577           647,689
Sales and marketing           472,903           548,776
Depreciation and 
amortization                  724,034           770,157
                           ----------        ----------
                            2,298,595         2,524,819
(Loss) before other 
expenses                   (1,667,319)       (1,776,399)
Other expenses (income)       
Foreign exchange gain         (44,394)          (66,483)
Finance expense               231,969            36,419
Gain on disposal of asset      (1,614)                -
                           ----------        ----------
                              185,961           (30,064)
                           ----------        ----------
Net (loss)                 (1,853,280)       (1,746,335)
                           ----------        ----------
Other comprehensive (loss)        
Items that may be 
subsequently reclassified 
to earnings       
Unrealized foreign 
exchange (loss)         
on translation of 
foreign operation             (24,969)          (28,114)
Total comprehensive 
(loss) for the period     $(1,878,249)      $(1,774,449)
                           ----------        ----------
(Loss) per share,       
basic and diluted              $(0.03)           $(0.03)
                           ----------        ----------

Conference call details:

Date:  March 1, 2017

Time:  5 p.m. Eastern Standard Time

Dial-in number:  toll-free (Canada and the United States): 1-888-452-4023

Conference ID:  9100016

Alternative number:  1-719-325-2354

Taped replay:  toll-free (Canada and the U.S.): 1-844-512-2921; replay available until April 1, 2017

Replay PIN:  9100016

Alternative number:  1-412-317-6671

Replay PIN:  9100016

About Nanotech Security Corp.

Nanotech designs, manufactures and markets nano-optic OVDs and OTF 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. The company is initially focusing its efforts on the banknote market due to its high margins and its established customer base.

The company's nano-optic technology employs arrays of billions of nanoindentations that are impressed or embossed onto a substrate material, such as polymer, paper, metal or fabric.

We seek Safe Harbor.