An anonymous director reports

NANOTECH ANNOUNCES STRONG FOURTH QUARTER AND FISCAL 2017 YEAR-END RESULTS

Nanotech Security Corp. has released its financial results for the fourth quarter and year ended Sept. 30, 2017. Unless otherwise stated, all dollar amounts are expressed in Canadian dollars.

Highlights from 2017 continuing operations:

• Revenue increased 154 per cent to $7.3-million compared with the same period last year. Paid development contracts and optical thin film deliveries from the company's Thurso facility accounted for the year-over-year revenue growth.
• Gross margins improved to 81 per cent, up from 69 per cent in the same period last year. Gross margins continue to reflect strong margins from both development contracts and OTF deliveries.
• Annual adjusted earnings before interest, taxes, depreciation and amortization reached $1.2-million. Strong revenues and gross margins resulted in Nanotech achieving its first full year of positive adjusted EBITDA, a notable milestone and improvement from the $3.6-million negative adjusted EBITDA reported for the same period last year.
• Successfully closed $13.3-million private bought deal financing. On May 18, 2017, the company closed a $13.3-million financing. Part of the proceeds were used to repay $1.4-million of convertible debentures and retire a $3-million secured note.
• Cash balance of $10.9-million at quarter-end. The company finished the year with a strong cash position and no debt or warrants outstanding.

Recent developments

Divestiture of non-core business. On Sept. 21, 2017, company directors decided that selling the company's subsidiary, Tactical Technologies Inc., was in the company's long-term interest. The company is actively pursuing potential purchasers and has engaged a business broker to pursue interested third parties. At Sept. 30, 2017, Tactical was classified as a separate disposal group held for sale and as a discontinued operation. Accordingly, the company's comparative consolidated statements of operation have been restated to exclude the discontinued operations. The company has restructured Tactical's operations and it currently operates with five employees with a limited cash burn. At Sept. 30, 2017, Tactical had $216,225 in assets held for sale and $200,226 in liabilities. It is expected that Tactical will either be sold or wound down over the next six months.

Paid development contracts are progressing well. The company currently derives a significant portion of its revenue from paid development projects with major issuing authorities. During the year, the company announced a development contract for up to $30-million over a period of up to five years. These development activities incorporate both nano-optic and OTF technologies and are focused on developing authentication features for future banknotes. All projects are progressing well and the company continues to see development revenue as a significant growth area for the business.

Tax stamps and commercial markets. The company's nano-optic images have now become qualified with a customer in India that is currently supplying several billion holographic tax stamps to the Indian government. Management is working with this customer to transition the government from traditional holographic images to licensing Nanotech nano-optic images.

Commercial applications

The Indian market has presented several other long-term opportunities beyond tax stamps. The company is working with the same tax stamp partner to pursue the broader foil packaging market. Outside of India, the company is pursuing opportunities in the luxury brand, cosmetics and pharmaceutical markets.

Thurso OTF opportunities

The company continues to deliver OTF from its Thurso facility. The company also sees new opportunities to potentially work on new denominations within its existing customer base.

Asian OTF opportunities

The company continues to work with its European production partner Hueck Folien to become qualified to deliver volume OTF to a specific Asian customer. Over all, management remains optimistic that there is strong customer demand for OTF and that over time the company's production partner, Hueck Folien will be successful in demonstrating its ability to produce colour-shifting OTF. At this point in time, management cannot specify when or if volume shipments will commence to this customer.

Doug Blakeway, Nanotech's chairman and chief executive officer, commented: "Fiscal year 2017 was, by all accounts, a tremendous year for Nanotech Security. Growing our revenues by 154 per cent and achieving $1.2-million of positive adjusted EBITDA far exceeds our goals for the year. With over $10.9-million in cash and no debt, the company is well positioned to continue our growth in 2018."

Select financial information

All results are reported in Canadian dollars and are prepared in accordance with international financial reporting standards.

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 strong margins and established customer base. With the recent signing of the $30-million 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 nano-optic and OTF opportunities in the years ahead.

In 2017, management established goals to double its revenue and make significant progress toward becoming cash flow positive. Management is pleased that it has exceeded both goals for 2017 with revenue growth of 154 per cent and achieving positive adjusted EBITDA of $1,168,222 for the year. In addition, the company has developed many significant market opportunities in the banknote, tax stamp and commercial markets.

Looking ahead to 2018, the company is well positioned financially to pursue these opportunities. With a strong balance sheet including $10,883,919 in cash and no debt, management has established the following goals for 2018:

• Grow revenues by 20 per cent to 40 per cent (which excludes the potential Asian OTF order);
• Begin to collect licensing revenue from the tax stamp and commercial markets;
• Maintain a strong focus on earnings with a target of 15-per-cent to 20-per-cent adjusted EBITDA margin;
• Continue to pursue a volume OTF partnering opportunity with Hueck Folien for Asian banknotes;
• Invest in several key marketing hires to ensure internal resources are in place to develop the products, sales channels and marketing materials necessary to penetrate commercial markets;
• Continue to open new corporate development opportunities by partnering with established companies to enable Nanotech to enter new markets.

                                                                                            
                                      CONDENSED CONSOLIDATED STATEMENTS
                                    OF OPERATIONS AND COMPREHENSIVE LOSS                                              
                         
                                                                         Three months ended                  Year ended
                                                                                   Sept. 30,                   Sept. 30,
                                                                       2017            2016          2017          2016
                                                                                                                   
Revenue                                                          $2,661,660      $1,177,366    $7,343,791    $2,888,896
Cost of sales                                                       418,915         253,129     1,429,371       884,132
Gross profit                                                      2,242,745         924,237     5,914,420     2,004,764

Expenses
Research and development                                            296,124         468,533     1,475,437     1,996,715
General and administration                                          444,859         592,539     2,308,846     2,307,368
Sales and marketing                                                 595,165         515,631     2,043,514     2,078,612
Depreciation and amortization                                       678,313         714,131     2,755,882     3,010,263
                                                                  2,014,461       2,290,834     8,583,679     9,392,958

Income (loss) from continuing
operations before other expenses                                    228,284      (1,366,597)   (2,669,259)   (7,388,194)

Other expenses
Foreign exchange (gain) loss                                        112,974         (24,490)      169,815        78,793
Finance (income) expense                                            (11,273)        223,650     1,014,779       354,720
                                                                    101,701         199,160     1,184,594       433,513

Income (loss) from continuing operations before income taxes        126,583      (1,565,757)   (3,853,853)   (7,821,707)

Deferred income tax recovery                                              -               -             -       162,797
Net income (loss) from continuing operations                        126,583      (1,565,757)   (3,853,853)   (7,658,910)

(Loss) from discontinued operations                                (427,277)       (110,269)     (900,279)     (170,895)
Net (loss)                                                         (300,694)     (1,676,026)   (4,754,132)   (7,829,805)

Other comprehensive income (loss) 
Items that may be subsequently reclassified to earnings 
Unrealized foreign exchange gain (loss)
on translation of foreign operation                                  61,890         (14,258)       85,605        24,654
Total comprehensive (loss)                                         (238,804)     (1,690,284)   (4,668,527)   (7,805,151)

Basic earnings (loss) per share 
Continuing operations                                                 $0.00          $(0.03)       $(0.07)       $(0.14)
Discontinued operations                                                0.00            0.00         (0.01)        (0.01)
Net (loss)                                                             0.00           (0.03)        (0.08)        (0.15)

Diluted earnings (loss) per share 
Continuing operations                                                  0.00           (0.03)        (0.07)        (0.14)
Discontinued operations                                                0.00            0.00         (0.01)        (0.01)
Net (loss)                                                             0.00           (0.03)        (0.08)        (0.15)

Conference call details:

Date:  Thursday, Dec. 21, 2017

Time:  5 p.m. ET

Dial-in number:  Toll-free (Canada and U.S.): 1-866-548-4713

Conference ID:  2567584

Alternative number:   1-323-794-2093

Taped replay:  Toll-free (Canada and U.S.): 1-844-512-2921

Replay pin No.:  2567584 (replay available until Jan. 21, 2018)

Alternative number:   1-412-317-6671

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