Mr. Doug Blakeway reports

NANOTECH ANNOUNCES STRONG FIRST QUARTER FISCAL 2018 RESULTS

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

Highlights during the first quarter:

• Revenue increased 222 per cent to $2.2-million compared with the same period last year. Paid development contracts continued to drive the period-over-period revenue growth.
• Gross margins were 75 per cent, down from 83 per cent in the same period last year. Gross margins continue to reflect strong margins from development contracts and were slightly impacted by lower margin revenue from the Thurso operations.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) reached $460,000. The company recorded its third consecutive quarter of positive adjusted EBITDA, a notable improvement from the $556,000 negative adjusted EBITDA reported for the same period last year.
• The company achieved positive net income of $96,000. Strong revenues and gross margins resulted in positive net income, a significant change from the net loss of $1.9-million reported for the same period last year.
• Cash balance was $10.9-million at quarter-end. The company finished the quarter with a strong cash position and no debt or warrants outstanding.

Recent developments:

• Paid development contracts are progressing well. The company currently derives a significant portion of its revenue from paid authentication development projects with major issuing authorities. During 2017, the company announced a development contract for up to $30.0-million over a period of up to five years. These 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 continues to seek additional development contract revenue as a growth area for the business.
• Tax stamps and commercial markets: Management continues to work with this Indian customer to transition the government from traditional holographic images to licensing Nanotech's 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. The Thurso operation also participates in researching OTF and production applications for development contracts.
• 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, 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.
• 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. The company has restructured Tactical's operations, and it currently operates with four employees with a limited cash burn. At Dec. 31, 2017, Tactical had $260,000 in assets held for sale and $339,000 in liabilities. It is expected that Tactical will either be sold or wound down over the next few months.

Doug Blakeway, Nanotech's chairman and chief executive officer, commented: "Our continued revenue growth has led to our third consecutive quarter of positive adjusted EBITDA. This growth has enabled us to maintain a strong cash position of $10.9-million, which allows us to continue to pursue further growth in markets outside of banknotes. With the recent strengthening of our balance sheet, increased development contract revenue and advancing customer relationships, we are very well positioned to continue our growth."

Select financial information

All results are prepared in accordance with international financial reporting standards as issued by the International Accounting Standards Board.

                     FINANCIAL HIGHLIGHTS

                                         Three months ended Dec. 31,  
                                           2017                2016

Revenue                            $  2,233,227          $  694,471
Gross margin                          1,669,376             578,002
Gross margin %                               75%                 83%
Adjusted EBITDA (1)                     459,645            (555,581)
Net income (loss)                        95,820          (1,853,280)
Earnings (loss) per share
Basic and diluted                          0.00               (0.03)

Revenue

Consolidated revenues for the three months ended Dec. 31, 2017, increased by $1,538,756 or 222 per cent to $2,233,227 compared with $694,471 in the same period last year. Revenue growth was primarily due to increased revenue from paid development contracts and from increased revenues from the company's Thurso operations.

During the year ended Sept. 30, 2017, the company disclosed a development contract for up to $30.0-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.

Gross margin

Gross margin for the three months ended Dec. 31, 2017, increased by $1,091,374 or 189 per cent to $1,669,376 compared with $578,002 in the same period last year. Over all, the gross margin percentage was 75 per cent for the three months ended Dec. 31, 2017, down from 83 per cent in the same period last year. This decrease reflects increased labour and materials costs in the development contracts and lower margins on Thurso operation revenues.

Operating costs

Research and development expenditures for the three months ended Dec. 31, 2017, decreased by $28,809 or 8 per cent to $346,187 compared with $374,996 in the same period last year. A larger portion of salaries and other expenses were allocated to cost of sales in 2017 as a result of increased development project activities, offset by increased patent work and overall higher salary costs related to additional technical staff, who were hired in the second quarter of 2017.

General and administration expenditures for the three months ended Dec. 31, 2017, were $541,619, consistent with $542,701 in the same period last year.

Sales and marketing expenditures for the three months ended Dec. 31, 2017, were $456,750, an increase of $31,246 or 7 per cent compared with $425,504 in the same period last year. The increase mainly relates to an increase in travel and marketing expenses.

Depreciation and amortization expenditures for the three months ended Dec. 31, 2017, were $310,043, compared with $720,837 in the same period last year, reflecting the company's declining balance depreciation policy and the intangible assets being completely amortized as at Sept. 30, 2017.

Other income for the three months ended Dec. 31, 2017, was $81,043, an increase of $267,768 compared with other expenses of $186,725 in the same period last year. The increase is primarily due to the repayment of the convertible debentures and long-term debt during 2017, which reduced interest expense by $232,606 in the current quarter compared with 2016, in combination with an increase in cash on hand, which generated interest income of $36,150 in the current quarter.

Adjusted EBITDA

Adjusted EBITDA for the three months ended Dec. 31, 2017, was $459,645, compared with negative $555,581 during the same period last year. The improvement reflects an increase in revenues and reduced expenses, offset by lower margins.

Net income

Net income for the three months ended Dec. 31, 2017, was $95,820 compared with a net loss of $1,853,280 during the same period last year. The increase in net income reflects an increase in revenues and reduced expenses, offset by lower margins.

Capital resources

The company's objectives when managing capital are to safeguard the ability to continue as a going concern, to provide adequate return to shareholders, to meet external capital requirements and to preserve financial flexibility to benefit from potential opportunities that may arise. The company's principal cash requirements are for operations, working capital and capital expenditures.

The company's officers are responsible for managing the company's capital and do so through quarterly meetings and regular review of financial information. The board of directors is responsible for overseeing this process. In managing its capital, the company considers changes in economic conditions, risks that impact consolidated operations and future significant capital investment opportunities. For the three months ended Dec. 31, 2017, there were no changes in the company's approach to capital management.

As at Dec. 31, 2017, cash and cash equivalents amounted to $10,898,913 compared with $10,883,919 as at Sept. 30, 2017.

The company had no lines of credit and no exposure to asset-backed commercial paper.

The company had commitments of $2,236,024 as of Dec. 31, 2017.

Management has reviewed its projected financing requirements and expects that, through the generation and collection of revenues, the company will maintain sufficient liquidity to meet its requirements through Dec. 31, 2018.

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 signing of the $30.0-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.

The company has now recorded its third consecutive quarter of positive adjusted EBITDA. For 2018, the company is well positioned financially to pursue opportunities in the banknote, tax stamp and commercial markets. In the company's business, there is an inherent variability in development contract revenue with government organizations. As a result, management has projected second quarter revenue of $1.9-million. With a strong balance sheet, including $10,898,913 in cash and no debt, management continues to be on track to deliver strong annual financial performance in line with its Sept. 30, 2017, guidance.

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, the loss of a key customer, risks related to uncertainty of amount and timing of purchase orders, the ability of Hueck Folien to deliver volume production, its ability to expand its development revenue, and its ability to maintain sufficient liquidity through Dec. 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, 2017, management's discussion and analysis.

                                                                      
    CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)     
 
                                                                       Three months ended Dec. 31, 
                                                                             2017            2016

Revenue                                                                $2,233,227        $694,471
Cost of sales                                                             563,851         116,469
                                                                        1,669,376         578,002
Expenses
Research and development                                                  346,187         374,996
General and administration                                                541,619         542,701
Sales and marketing                                                       456,750         425,504
Depreciation and amortization                                             310,043         720,837
                                                                        1,654,599       2,064,038
Income (loss) from continuing operations before other expenses             14,777      (1,486,036)
Other (income) expenses
Foreign exchange gain                                                     (47,001)        (44,394)
Finance (income) expense                                                  (34,042)        231,119
                                                                          (81,043)        186,725
Net income (loss) from continuing operations                               95,820      (1,672,761)
Net (loss) from discontinued operations                                         -        (180,519)
Net income (loss)                                                          95,820      (1,853,280)
Other comprehensive (loss)
Items that may be subsequently reclassified to earnings
Unrealized foreign exchange (loss)
on translation of foreign operation                                       (25,125)        (24,969)
Total comprehensive income (loss)                                          70,695      (1,878,249)
Basic and diluted earnings (loss) per share
Continuing operations                                                        0.00           (0.03)
Discontinued operations                                                      0.00            0.00
Net income (loss)                                                            0.00           (0.03)

Conference call details

Date:  Feb. 22, 2018

Time:  5 p.m. Eastern Time

Dial-in number:  Toll-free (Canada and United States): 1-800-263-0877

Conference ID:  1220038

Alternative number:  1-323-794-2094

Taped replay:  Toll-free (Canada and U.S.): 1-844-512-2921 (replay available until March 22, 2018)

Replay PIN:  1220038

Alternative number:  1-412-317-6671

Replay PIN:  1220038

About Nanotech Security Corp.

Nanotech designs, manufactures and markets nano-optic products that have brand protection and enhancement applications across a wide range of markets, including banknotes, tax stamps, secure government documents, commercial branding and the pharmaceutical industry.

The company's nano-optic technology employs arrays of billions of nano-indentations that are impressed or embossed onto a substrate material such as polymer, paper, metal or fabric. By using sophisticated algorithms to direct an electron beam, the company creates visual images with colour-shifting effects such as 3-D and perceived movement, and can also display high-definition colours, including skin tones, and whites and blacks, which are not possible using holographic technology.

We seek Safe Harbor.