02:28:01 EDT Fri 29 Mar 2024
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Nanotech Security Corp
Symbol NTS
Shares Issued 54,514,285
Close 2017-05-29 C$ 1.25
Market Cap C$ 68,142,856
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Nanotech Security loses $1.69-million in fiscal Q2

2017-05-29 16:23 ET - News Release

Mr. Doug Blakeway reports

NANOTECH SECURITY ANNOUNCES SECOND QUARTER FISCAL 2017 RESULTS

Nanotech Security Corp. has released its financial results for the three and six months ended March 31, 2017.

Highlights during the second quarter:

  • Revenue was up 86 per cent to $1,763,600 compared with the same period last year. Optics contributed revenue of $1,418,644, largely from paid development contracts, and tactical delivered $344,956, reflecting slightly improved equipment sales.
  • Gross margin was 60 per cent, up from 52 per cent in the same period last year. Gross margins continue to reflect strong margins in the optics division.
  • Cash balance was $1,391,514 at end of the quarter. Cash used in operations, excluding working capital, amounted to $579,030, an improvement from $1,436,779 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-million: The company has been 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 provides government budgetary approval for up to $30-million over a period of not more than five years. Under the terms of the contract, the company can apply to the issuing authority to draw upon the budget on a periodic basis. The contract is anticipated to have gross margins consistent with past development contracts, and it is anticipated that this contract will be a significant contributor to the toward company's ultimate goal of becoming profitable.
  • 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 the 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. Over all, management remains optimistic that there is strong customer demand for the OTF, and that the company's production partner will fulfill these requirements and deliver later in the year.
  • Completed a $13.3-million financing: Subsequent to quarter-end, on May 18, 2017, the company completed a bought deal private placement with a syndicate of underwriters, whereby a total of 11,586,870 common shares of the company were issued and sold at a price of $1.15 for total gross proceeds of $13,324,900.

Doug Blakeway, Nanotech's chairman and chief executive officer, commented: "Our paid development revenue is very strategic as we continue to expand both our revenue base but also position us to provide security features on future banknotes. We continue to be optimistic that our production partner Hueck Folien will be able to begin delivering OTF to our Asian customer later this year. The completion of this recent financing will enable us to begin to increase capacity and make some strategic investments to enable future growth."

                                  SELECT FINANCIAL INFORMATION                                   

                                    Three months ended March 31        Six months ended March 31         
                                            2017           2016              2017           2016
    
Revenue                             $  1,763,600     $  948,220      $  2,670,613   $  2,457,460  
Gross profit                           1,050,812        493,002         1,682,088      1,241,422  
Gross profit (%)                             60%            52%               63%            51%                  
Net (loss)                            (1,694,890)    (2,450,010)       (3,548,170)    (4,196,345) 
Net (loss) per share                                                                  
-- basic and diluted                       (0.03)         (0.05)            (0.07)         (0.08)
Net cash used in 
operating activities                  (1,051,843)      (697,840)       (2,041,077)    (1,885,416)

Consolidated revenues for the three months ended March 31, 2017, increased by $815,380 or 86 per cent to $1,763,600 compared with $948,220 in the same period last year. Optics revenue increased by $773,695 or 120 per cent to $1,418,644 compared with $644,949 last year, primarily due to increased revenue from paid development contracts. Tactical's revenue increased by $41,685 or 14 per cent to $344,956 compared with $303,271 in the previous year, due to slightly higher equipment sales.

Customer paid development revenues continue to grow, and the projects are progressing well, as the company continues to advance its optic-based technologies into the development of new security features for future banknotes. The company also continues to make progress with a specific Asian customer to finalize the product specifications and integrate its OTF into the customer's production facility. Management continues to expect the company's production partner to demonstrate its ability to produce OTF that meets the customer expectation later in 2017. In addition, management is beginning to see new OTF opportunities and is working with several new partners to expand the company's customer base to provide further growth.

Consolidated revenues for the six months ended March 31, 2017, increased by $213,153 or 9 per cent to $2,670,613 compared with $2,457,460 in the same period last year. Optics revenue increased by $898,699 or 74 per cent to $2,113,115 compared with $1,214,416 last year, primarily due to increased revenue from paid development contracts. Tactical's revenue was lower by $685,546, which is a result of a large delivery of surveillance vans in the first quarter of the previous year, which did not occur in the current year. 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 March 31, 2017, increased by $557,810 or 113 per cent to $1,050,812 compared with $493,002 in the same period last year. Over all, the gross margin percentage improved to 60 per cent for the three months ended March 31, 2017, an increase from 52 per cent in the same period last year. The increased gross margins reflect the new high-margin development revenue and the continued overall strong margins in the optics division.

Gross margin for the six months ended March 31, 2017, increased by $440,666 or 35 per cent to $1,682,088 compared with $1,241,422 in the same period last year. Over all, the gross margin percentage improved to 63 per cent for the six months ended March 31, 2017, an increase from 51 per cent in the same period last year. The increased gross margins continue to reflect strong margins in the optics division.

Research and development expenditures for the three months ended March 31, 2017, decreased by $206,609 or 31 per cent to $460,580 compared with $667,189 in the same period last year, due to a larger portion of salaries and other expenses being allocated to cost of sales as a result of increased development revenue.

Research and development expenditures for the six months ended March 31, 2017, decreased by $319,725 or 26 per cent to $905,661 compared with $1,225,386 in the same period last year, due to a larger portion of salaries and other expenses being allocated to cost of sales as a result of increased development contracts.

General and administration expenditures for the three months ended March 31, 2017, were $759,919, an increase of $81,526 or 12 per cent compared with $678,393 in the same period last year, which reflects an increase in stock-based compensation and higher utilities costs at the Thurso production facility.

General and administration expenditures for the six months ended March 31, 2017, were $1,416,496, an increase of $90,414 or 7 per cent compared with $1,326,082 in the same period last year, which again reflects an increase in stock-based compensation and higher utilities costs at the Thurso production facility.

Sales and marketing expenditures for the three months ended March 31, 2017, were $577,906, a decrease of $75,199 or 12 per cent compared with $653,105 in the same period last year. The decrease mainly relates to a reduction in travel and marketing expenses in the optics division along with lower sales salaries in the tactical division.

Sales and marketing expenditures for the six months ended March 31, 2017, were $1,050,809, a decrease of $151,072 or 13 per cent compared with $1,201,881 in the same period last year. The decrease again mainly relates to a reduction in travel and marketing expenses in the optics division along with lower sales salaries in the tactical division.

Depreciation and amortization expenditures for the three months ended March 31, 2017, were $696,359, compared with $771,081 in the same period last year, reflecting declining balance depreciation and fewer fixed asset additions in the current period.

Depreciation and amortization expenditures for the six months ended March 31, 2017, were $1,420,393, compared with $1,541,238 in the same period last year, again reflecting declining balance depreciation and fewer fixed asset additions in the current period.

Other expenses for the three months ended March 31, 2017, were $250,938, an increase of $77,694 compared with $173,244 in the same period last year. The increase mainly relates to the interest on the convertible debentures, offset by reduced foreign-exchange loss in the current period.

Other expenses for the six months ended March 31, 2017, were $436,899, an increase of $293,719 compared with $143,180 in the same period last year. The increase mainly relates to the interest on the convertible debentures and foreign-exchange gain in the current period.

The net loss for the three months ended March 31, 2017, was $1,694,890, compared with $2,450,010 during the same period last year. The decrease in net loss reflects an increase in revenues, reduced expenses and higher margins.

The net loss for the six months ended March 31, 2017, was $3,548,170, compared with $4,196,345 during the same period last year. The decrease in net loss also reflects an increase in revenues, reduced expenses and higher margins.

The company ended the quarter with $1,391,514 in cash and cash equivalents, down from $3,312,691 at Sept. 30, 2016. Subsequent to quarter-end, on May 18, 2017, the company completed a bought deal private placement with a syndicate of underwriters, whereby a total of 11,586,870 common shares of the company were issued and sold at a price per share of $1.15 for total gross proceeds of $13,324,900. 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.

Additional information

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 integration into the production processes has taken longer than anticipated. With the recent signing of the $30-million paid development contract, 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.

In 2017, management has established a goal to double its revenue and make significant progress towards 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 successfully deliver to the Asian customer, the company's ability to expand its optics development revenue, and the ability to maintain sufficient liquidity through March 31, 2018, 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, MD&A (management's discussion and analysis).

                                                                                                    
               CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS        
                                                                                                  
                                            Three months ended March 31       Six months ended March 31
                                                    2017           2016             2017           2016
                                                                                            
Revenue                                     $  1,763,600    $   948,220     $  2,670,613   $  2,457,460 
Cost of sales                                    712,788        455,218          988,525      1,216,038 
Gross profit                                   1,050,812        493,002        1,682,088      1,241,422
Expenses                                                                                    
Research and development                         460,580        667,189          905,661      1,225,386 
General and administration                       759,919        678,393        1,416,496      1,326,082 
Sales and marketing                              577,906        653,105        1,050,809      1,201,881 
Depreciation and amortization                    696,359        771,081        1,420,393      1,541,238
                                               ---------      ---------        ---------      ---------
                                               2,494,764      2,769,768        4,793,359      5,294,587 
                                               ---------      ---------        ---------      --------- 
(Loss) before other expenses                  (1,443,952)    (2,276,766)      (3,111,271)    (4,053,165)
Other expenses (income)                                                                 
Foreign-exchange (gain) loss                      17,213        142,699          (27,181)        76,216 
Finance expense                                  233,725         30,545          465,694         66,964 
Gain on disposal of asset                              -              -           (1,614)             - 
                                                 250,938        173,244          436,899        143,180
Net (loss)                                    (1,694,890)    (2,450,010)      (3,548,170)    (4,196,345)
Other comprehensive (loss)                                                                         
Unrealized foreign-exchange gain (loss)
on translation of foreign operation               10,867         61,361          (14,102)        33,247 
Total comprehensive (loss) for the period     (1,684,023)    (2,388,649)      (3,562,272     (4,163,098)
(Loss) per share -- basic and diluted              (0.03)         (0.05)           (0.07)         (0.08)
  

Conference call details

Date:  Monday, May 29, 2017

Time:  5 p.m. ET

Dial-in number:  1-800-967-7188 (toll-free Canada and United States)

Alternative number:  1-719-325-2138

Conference ID:  3639275

Taped replay:  1-844-512-2921 (toll-free Canada and United States); available until June 29, 2017

Replay PIN No.:  3639275

Alternative number:  1-412-317-6671

Replay PIN No.:  3639275

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