Q2 2020 Nanotech Security Corp Earnings Call

May 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Nanotech Security Corp earnings conference call or presentation Thursday, May 7, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Monika Russell

Nanotech Security Corp. - CFO & Corporate Secretary

* Troy Bullock

Nanotech Security Corp. - President, CEO & Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining us to discuss Nanotech Security Corp.'s second quarter results for fiscal year 2020. On the call today, we have Troy Bullock, Nanotech's President and CEO; and Monika Russell; Nanotech's CFO. Please be advised that this call is being recorded. (Operator Instructions) I will now turn the call over to Monika Russell. Please go ahead.

--------------------------------------------------------------------------------

Monika Russell, Nanotech Security Corp. - CFO & Corporate Secretary [2]

--------------------------------------------------------------------------------

Good afternoon, and thank you for attending our second quarter of fiscal 2020 conference call. Troy Bullock will begin the call today with an overview of our operational highlights and our goals for fiscal 2020. I will then provide a detailed review of our financial performance for the quarter. Following the financial review, Troy will provide an outlook and discussion of our expectations for fiscal 2020 that we detailed earlier. Following the formal presentation, we will be pleased to take presentations -- or sorry, take questions.

Before we talk about results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from [those expressed] or implied in our forward-looking statements, including our assessments of the potential impact of COVID-19. For caveats about the forward-looking statements and risk factors, please see our MD&A for the year ended September 30, 2019, which can be found on our company profile at sedar.com.

Also, as part of the company's business involves dealing with security features for banknotes, you will appreciate that we are quite limited in our ability to provide details about specific customers and prospects. That said, we will do our best to provide investors with general feedback we are receiving from customers and the industry and new opportunities that we are pursuing as well as give some general parameters on how development contracts are progressing.

I will now pass the call over to Troy for an overview of our second quarter and fiscal 2020. Troy?

--------------------------------------------------------------------------------

Troy Bullock, Nanotech Security Corp. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Monika, and good afternoon, everyone. We hope that you and your families are safe, and appreciate that you've taken the time to join us today.

Before we start, I would like to highlight that we recently had an AGM. And at that time, I provided a detailed update of the business, our products, our go-to-market strategy and a financial update. I would recommend investors who have not seen this presentation to view it for a detailed discussion about Nanotech and our long-term strategy. The presentation can be found on our website in the Investor Relations section. Alternatively, you can also e-mail Sean Peasgood, whose contact information can be found at the bottom of our news release, and he can make sure you get a copy.

First, I want to start by saying that, during the COVID-19 pandemic, we are fortunate to be fully operational with stable contract service revenue for fiscal 2020 and a solid cash position. Our operations are fully up and running, and we have put in place measures to operate in a safe and responsible way for our employees. This has allowed us to continue to execute upon our strategy to transition Nanotech from a research-and-development company to a diversified product-based company. Although we have seen some $2 million in product order delays due to the current pandemic, we are still anticipating seeing revenue growth this year between 10% and 20%. I'll provide more color on that later in the call.

Story continues

In Q2, we continued to see growth in the product sales from our -- from the prior year, while contract services declined slightly from the prior year mostly due to timing issues. We ended the quarter with a strong balance sheet with $9.2 million in cash and no debt, and we are well positioned to execute on our growth plans.

I'll leave the financial details to Monica, but let me update everyone on the progress we have made against the strategic initiatives and targets we launched for fiscal 2020. One of our priorities that we established for the year was to diversify revenue by increasing sales in nano-optic products, expanding product lines and pursuing further growth opportunities for LumaChrome color-shifting film. During the first half of fiscal 2020, we recorded product revenue from 12 delivered customer orders compared to 14 for all of 2019. These orders were predominantly for LumaChrome and included film for one new banknote and one new government ID application. In addition, the company worked with several partners to qualify its LumaChrome product for 4 new banknote opportunities.

In the brand protection market, we also delivered our first live optic sale in the licensing vertical to the World Baseball Softball Confederation. We also worked with a partner to deliver film for new commercial applications. Although these initial orders are small, they are great reference accounts and have the opportunity to become recurring larger orders in the future.

During the second quarter of 2020, the company also delivered a live optic product order for approximately 7 million labels in a confidential brand protection application. While I'm pleased with our progress to-date, unfortunately, I'm expecting that our product sales for the second half of 2020 will be negatively affected by the COVID-19 as a number of opportunities have been pushed into fiscal 2021. In the meantime, we continue to believe that diversification is a key long-term strategic initiative for the company, and there are several actions that we will take to enhance our ability to scale up. These include investing in our technology, investing in our product development and investing in our marketing activities.

Another key initiative was to develop strategic sales relationships with established OEMs to expand our sales reach. I'm pleased to report we have now -- have 2 American channel partners that are marketing nano-optics live optic brand protection products in the United States. In the banknote market, we're partnering with a key OEM to design a color optic security feature that they can use to manufacture a marketing housenote that they will begin marketing to their customers later this year. You may have also seen our recent announcement where our color optic technology platform has been nominated as a finalist in the IACA 2020 Excellence in Currency Technical Awards in the category of Best New Currency Innovation. This is something we're very proud of.

A third initiative was to develop a strategic manufacturing and product partnership with select manufacturers that have proven track record of excellence. Nanotech has partnered with a large OEM to produce live optic products for the brand protection market. And as a result of our manufacturing partnerships, our products have expanded to include foils, labels, QR codes, and the track and trace capability. Outsourcing live optic manufacturing also enables us to focus on our core competency, which is the technology development portion.

Further, as part of the key initiative, management is in the process of qualifying a world-class OEM manufacturing partner for our color depth products in the banknote and government market. We expect to finalize this partnership within the next 6 months, enabling the company to deliver on large-volume banknote opportunities. Given the progress we have made against this key initiative, we are on track to reduce manufacturing risks associated with scaling of product sales while expanding our product lines.

This concludes my initial comments on the operational highlights of the second quarter of fiscal 2020. I'll now pass the call back to Monika to discuss the detailed financial results. Monika?

--------------------------------------------------------------------------------

Monika Russell, Nanotech Security Corp. - CFO & Corporate Secretary [4]

--------------------------------------------------------------------------------

Thank you, Troy. Before I begin, I would like to mention that all the dollar amounts I refer to are in Canadian dollars unless otherwise stated. For the quarter ended March 31, 2020, product revenue rose 6% year-over-year from $116,000 in the prior year to $123,000 in the current quarter. Contract services revenue fell 15% year-over-year from $1.5 million in the prior year to $1.3 million in the second quarter of fiscal 2020. As a result, total revenue fell from $1.6 million in the second quarter of fiscal 2019 to $1.4 million in the second quarter of fiscal 2020, a 13% year-over-year decline. I would like to note that, in the second half of this year, we are expecting that we will see year-over-year growth in contract services revenue for overall revenue growth of 10% to 20% on an annual basis.

Gross margin improved to 82% versus 80% in the prior year. This increase was primarily due to higher margins on contract services during the current quarter. Second quarter operating costs were $2.2 million versus $1.9 million in the year ago quarter. We invested more in sales and marketing activities as well as R&D during the second quarter of fiscal 2020, which largely accounted for the increase in our operating costs.

Adjusted EBITDA loss of $576,000 was down from last year's $45,000 adjusted EBITDA gain. The decline in adjusted EBITDA was due to lower revenue in combination with increased operating costs. Net loss for the second quarter of 2020 was $973,000 compared to $477,000 in the year ago period and was mostly due to the higher loss from operations that we incurred because of lower revenues and higher operating expenses.

Moving on to our year-to-date results. Revenue for the 6 months ended March 31, 2020, was $2.5 million, down 15% from 2019. This year-over-year decrease was primarily due to the timing and scope of development contracts, partially offset by an increase in product revenue. As I mentioned earlier, in the second half of this year, we are anticipating year-over-year growth in contract services revenue, resulting in revenue growth on an annual basis.

Gross margin for the year-to-date was 80% versus 78% in 2019 due to higher margins on contract services. Operating costs were $4.2 million for the year-to-date compared to $4.4 million in 2019. Excluding the restructuring costs incurred in 2019, operating costs increased in 2020 as a result of increased investments in sales and marketing and research and development.

Adjusted EBITDA loss for the year-to-date was $837,000 compared to positive adjusted EBITDA of $163,000 in the same period of 2019. The decrease from the prior period was primarily due to reduced revenue and increased operating expenses in the current period.

Net loss for the year-to-date was $1.8 million versus $1.6 million in 2019. Lower operating earnings in 2020 were offset by restructuring costs associated with the executive transition in 2019. We exited the quarter with cash and short-term investments of $9.2 million at quarter end, leaving us in a strong position to continue executing our business plan.

This concludes my comments on our financial results for the second quarter of 2020. I will now turn the call back to Troy to provide an outlook update. Troy?

--------------------------------------------------------------------------------

Troy Bullock, Nanotech Security Corp. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Monika. I would like to close by providing a little more detail on our outlook and how we see the rest of the year shaping up. So far, in the first 6 months of the year, the company has generated $2.9 million of revenue, which is slightly down from last year. That said, we are maintaining our guidance for the year to end up with growth between 10% and 20%, even with the delays we're seeing from the pandemic. This implies that revenue -- in the range of $7 million to $7.7 million for the year. Our ability in the second half -- sorry, our visibility in the second half for the year is good, given we expect additional revenues to come from expanding the scope of our contract services as well as product revenue from recurring LumaChrome orders. Much of this revenue is anticipated to be realized in the fourth quarter.

At the high end of our guidance, I am including some additional product sales orders that we are still pursuing but have not yet closed on. It is important to mention that, due to the pandemic, we believe that approximately $2 million of orders, which we were working on, have been pushed into fiscal 2021. While product revenue may decline year-over-year because of COVID-19, I'm pleased that we have still -- anticipate a growth year for the company in such a challenging environment.

I want to drive home our commercialization strategy has demonstrated good progress, and we continue to expand our product lines for both the government and banknote and brand protection markets. Our color optic and LumaChrome OTF products have significant interest in the government and banknote market. We've gained strong reference customer wins and a solid pipeline of opportunities in the brand protection market, a market we entered in only about a year ago. The overall growth in product revenue and number of orders demonstrates that, although -- because the commercialization strategy is in the early stages, it is working. We may have a temporary delay in results -- as the result of COVID-19, but some of the opportunities that we are now pushing out into 2021 are very promising.

As we wrap up, I'd like to summarize some of the reasons why we think Nanotech is well positioned for the future. We are targeting unique multibillion-dollar markets that have had little innovation and whose current solutions are becoming less effective each day. We've made significant investments in our technology, and we protected this investment with patents. Our vision is no longer research and development alone, but we also now have real customers using our products in our $30 million development contract -- and a strong balance sheet are key components to why we will not only survive in the current global environment but will also prosper.

This concludes our prepared remarks. I would like to now turn the call over to the operator for the question-and-answer session. Operator?

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) And there appears to be no further questions at this time. I will now turn the conference back over to Mr. Bullock for any additional or closing comments.

--------------------------------------------------------------------------------

Troy Bullock, Nanotech Security Corp. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Thank you. Well, I would like to thank everyone for joining our conference call for the second quarter of fiscal 2020. I realize these are challenging times, and I appreciate everybody for taking the time out of their busy days to attend this call with us. I wish everyone to please stay safe and healthy, and I look forward to updating you on our continued progress on our third quarter conference call in about 3 months. I'll now turn the call back over to the operator for the closing comments. Thank you, everybody.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Thank you, sir. This concludes Nanotech's second quarter conference call. A replay of this call will be up till Friday, June 7, 2020. Please refer to Nanotech's website for the replay details. Thank you, again, and have a wonderful evening.

Visit link:

Edited Transcript of NTS.V earnings conference call or presentation 7-May-20 9:00pm GMT - Yahoo Finance