16/8/19

Amended Appendix 4E

Well! An interesting preliminary FY19 report from ANO to say the least!

At first glance it is a disappointing miss on guidance only provided 31 May (and re-iterated 12 July after the period end), but digging deeper the result is quite strong with the severe share price reaction likely attributed to the enigmatic communication from management. While I agree communication is best described as amateur, I don't question the integrity of ANO's management and may write a straw about them in the future as I feel those who are new the stock don't appreciate the position the business was in when Lev and Geoff assumed control.

Looking at the result closer, revenue of $12.26m was a miss to original forecast of $12.60m. However, the breakdown shows Zinclear revenue came in at $11.06m compared to $10.50m guidance while Alusion revenue of $1.20m missed guidance of $2.10m. That is a substantial miss to guidance, but the future of ANO is the Zinclear product, and the beat in that product vastly outweighs the miss in Alusion in my opinion.

However, while Zinclear is the growth engine for ANO in the future, Alusion still remains a very profitable product in the present with my estimate from backworking past results of 80%+ gross margins. This meant that NPBT of $3.38m missed guidance of $4.10m. Without further commentary from management it is difficult to asses whether the miss on Alusion guidance was simply deferred to FY20 or if Merck are winding back their orders which were expected. Given the forecast from management in the investor presentation is for only $2m in Alusion revenue in FY20 it suggests that the expected growth is not materialising.

That is disappointing, but again it is easily overshadowed by the growth of Zinclear. Management have forecast Zinclear revenue of $28m, or accelerating growth to 150%. PBT margin in FY19 was 28% (up from 17% in FY18) and will expand strongly again with the forecast revenue growth. I will update my valuation straw in the near future but my expectation for $8-10m NPAT looks like an easily achievable target.

The other main negative of the report was the poor operating cash performance. Operating cash of $262k meant the business ended the period with $353k cash in the bank. While the operating cash result is not good, it is entirely attributable to a sharp increase in inventories and prepayments for supplies to service the explosive growth expected. However the low cash balance does raise the spectre of a capital raising to manage working capital through this period. While I won't discount the possibility, I would prefer management to use a working capital facility to manage this period of growth. It is worth noting that we are now ~6 weeks past the 30 June date of the balance sheet without a capital raise, suggesting the working capital issues may have passed. Also, the graph on the first page of the presentation shows no further major capex plans until 4Q20.

Finally, the last question which may not be answered until the final audited annual report is how the ~$500k bonus paid to Geoff to compensate the execution of his options has been accounted. If it has been expensed through the P&L (which I suspect is the case given it was a cash bonus) it has created a one-off impact to this result which will need to be adjusted to determine underlying margins to apply to the forecast revenue.

6/8/19 ANO Update

ANO management announced yesterday that 1Q20 sales to date are up 400% on 1Q19. Obviously there is not much information to really go on here, but as a point of reference, 1H19 revenue was $5.3m. At roughly $900k a month, this update suggests they have orders for $4.5m assuming no big lumpiness or seasonality in the quarter/half.

ANO did roughly $1.2m NPAT in 1H19 on that revenue but I expect further benefits of scale as the business grows. It is likely ANO will recognise $1.5m+ NPAT for the first month of FY20 when the sales orders are executed. I have forecast the business doing $8-10m NPAT for FY20 for a $5 PT, but early signs are that forecast could easily beaten if growth continues at this pace.

Also, management announced they have signed a new Italian distributor, which is important news given the company has yet to really crack the European market despite it being the largest cosmetics market in the world. Current orders are showing 145% growth on last year, but this could also explode if they can gain traction.

30/01/19 Appendix 4D/Investor Presentation

ANO released their 1H19 report with updated investor presentation. Some key notes:

NPAT of $1.74m ahead of $1.6m guidance provided only weeks earlier. With R&D incentive and 2H growth, FY19 NPAT should be $4-4.5m.

Revenue guidance for FY19 of $10.6m looks very conservative given 1H revenue of $5.3m, no 2H growth factored in.

Zinclear manufacturing capacity will be 2000 tonnes p.a. by the end of the year after the capex expansion program undertaken. No comment on current usage other than 2000 tonnes will be "well in excess" of current orders.

$900k rise in operating costs forecast due to increased employee costs with Perth now running 24/7 with night shifts to accomodate demand and Brisbane looking to employ 9 new staff. Despite this, wages as a % of revenue will fall 213bps because revenue is growing so strongly.

US contract manufacturing will be up and running from May with new equipment ordered and installed. This will lead to further gains in cost ratios.

Revenue growth was stellar in all regions, with Australia up 24%, US/Canada up 158%, Europe up 40% and Rest of World up 392%. While RoW is off a low base, US/Canada was previously 33% of sales and is now 45%.

Overall a very positive half for the business and despite the sharp run in share price I would struggle to label ANO expensive given it likely trades at around 20x FY19 earnings with explosive growth.

15/11/18

Capital Raising & Trading Results

ANO provided further details on their capital raising announced at the AGM, including a detailed breakdown of use of funds.

However, the highlight of this announcement was a small paragraph after the breakdown where management state:

"In the past two days we have seen a further uplift in future sales orders for January – June FY19, with one large customer ordering double their order, which is five times greater than their order for the corresponding January – June FY18. As a result, we will order additional equipment to be located at Rocklea to cater for continual growth in global sales of our products."

Chris Silvestro has provided a fantastic post on HotCopper explaining why he suspects the large customer is likely to be Merck doubling their order for the higher margin Alusion product:

https://hotcopper.com.au/posts/36529635/single

After digging through the evidence I believe he is right which would be an amazing development for ANO as Alusion's margin in the past has been over 80% (though now Merck are ordering large bulk orders the price may have come down).

If this is the case then FY19 NPAT could come in at $4-5m, well above my previous expectations.

31/05/19 Tax Losses to be Reinstated FY19

ANO management announced that their auditors have advised them that under accounting treatment they will re-instate their accumulated tax losses in FY19 based on reasonable expectations of profitability moving forward. While this is non-operating adjustment, it does allow ANO to pay fully franked dividends (an objective of the board) moving forward from FY20.

However the key piece of information in this update was FY19 NPAT guidance. Adjusting for the re-instatement of tax losses, operating NPAT will be $4.6m in FY19. This means that 4Q19 will contribute $1.2m NPAT, a slowdown from the $1.8m in 3Q19. It is also unclear whether this includes the R&D tax credit that was expected to be received.

UItimately, I expect that ANO management have been conservative with this guidance by simply maintaining their original $10.5m NPAT guidance from the 1H19 result and adjusting for the re-instatement of the tax losses. This gives them the flexibility to maintain the pipeline of good news they have been announcing to the ASX with a profit upgrade with another month to go in FY19.

Nonetheless I have maintained my price target at $5 until we get confirmation of the profit number and better guidance around growth.

14/5/19

ANO Powder Production at Capacity to August 2019

ANO confirmed that new sales momentum has continued into FY20 with current production now running at capacity to August 2019. Management have confirmed that orders have been placed to increase capacity 50% in November 2019, with preliminary investigations into increasing electricity supply if further capacity expansion is required.

No change to my valuation for ANO after this announcement, but it is pleasing to see that demand for powder continues to come in and meet the forecast increase in capacity.

8/11/18 Chairman's Address to Shareholders

ANO provided a significant company update at their AGM today.

First, after four months of trading in FY19, management confirmed unaudited profits of $850k putting them roughly on track for the $3m I have forecast.

Second, production capacity remains number one concern for management as they try to keep up with growing demand. New equipment has been purchased that will double Alusion production (with leased storage for 20T of finished product). New ovens have been shipped which will increase ZinClear production capacity 25% to 1000T a year.

Third, management gave an update on the consolidation of factories and offices, stating that compared to FY18 there will be a 30% reduction in occupancy costs despite an additional 300m2 of floorspace.

Fourth, OEM products are ramping up with the first ZinXation sunscreen due to be sold in December, with an anti-acne cream and whitening cream also lodging for TGA approval.

Fifth, there will be a small capital raising (~$2.5m) due to the "urgent need to increase capacity" because of the significant increases in sales. This is on top of the cash the company will generate, highlighting management's belief there is incremental growth they think they can capture quickly.

25/10/19 Investor Presentation

ANO provided an update at the AGM today with the cleanest information regarding FY19/FY20 sales orders and total production capacity.

FY20 revenue forecast has been maintained at $30m, however a simple calculation of sales orders to revenue shows how conservative this may be. FY19 saw 292T of sales orders which resulted in $12.3m revenue. The current forecast is for 1059T of sales orders, which applying the same sales orders to revenue ratio would result in revenue of approximately $44m.

While some of this could be explained by timing differences between sales orders and revenue and potentially a sharp drop in pricing, it is worth noting management were similarly conservative in FY19 with initial revenue guidance of $8.4m easily beaten ($12.3m).

26/4/19 Sales Upgrade

As previously forecast, ANO's conservative 2H19 revenue guidance has been upgraded roughly 20% from $10.5m to $12.6m. This has been largely driven by further ZinClear sales.

Management also provided an update on production, stating that new equipment has been tested and validated and will be on a 30T per week run-rate entering FY19. Further equipment has been ordered which will be operational in October and will take production to 40T per week.

Production is now well in excess of current demand (65T backlog) and positioned for future growth.

4/4/19 Profit Update

ANO released an update stating that their unaudited NPAT for the March quarter was $1.8m, a tripling of profit from a year before and better than expected from the last investor presentation in February. Further to this, the backlog remains strong at 100T of customer orders ready to fill pending new production coming online.

Given the update in February was for the first two months of the quarter having NPAT "in excess of $1m", it suggests that month on month growth is still very strong (potentially something like $400k Jan, $600k Feb, $800k Mar = $1.8m). While extrapolating one months profit number can be dangerous, it isn't a stretch to think that ANO could be entering FY20 on a NPBT runrate of $10-12m (useing NPBT given current NPAT uses tax asset) meaning a multiple of 20-25x.

19/9/18 ANO Increased Production Capacity

ANO released an operational update. Management confirmed that US manufacturing is up and running, with equipment to further increase manufacturing capacity expected to be received in November.

However, the interesting part of the update was that forward sales for ZinClear has exceeded 50% growth on last year. In the last Investor Presentation ANO forecast 27% growth for ZinClear, potentially indicating some upside to forecasts.

3/8/18 Annual Report to shareholders

ANO released their annual report, with revenue up 40% to $6.6m and NPAT increasing 169% to $1.5m. Financials were in line with expectations, but management commentary gave us some interesting points:

Alusion sales are set to increase in FY19 as the relationship with Merck has been repaired. Merck are marketing two new products using Alusion, and the current agreement set to expire next year has been extended until 2022. Also, Merck requested ANO move to container shipping with higher quantities.

ZinClear growth also ready to explode. Management stated their FY19 goal is to ramp production to 800T which is faster than I expected. Despite Europe growing 100% in FY18, management focused on growing distribution there. Supply issues limited sales this year, which have now been resolved.

Cost savings are due to flow through very soon and be realised for majority of FY19. US manufacturing up and running which lowers costs and shores up supply. Australian manufacturing now consolidated into one factory. Management confirmed new equipment set to be installed by March 2019 to further ramp up US production.

Management stated that with new precursor supplier and consistent outsourced manufacturing, their product is not only better than competitors with independent testing but cheaper as well (and there is potential to lower the price further)

The chemist network is beginning to reap rewards with end-product formulations. The product that will contribute materially in the short term is ZinXation, ANO's proprietary sunscreen. Confirmed that the first order of ZinXation sunscreen has been received for 15,000 tubes. This manufacturing is being outsourced in NZ.

Management also confirmed that patents have been lodged to protect IP around graphite battery potential. Tests are due to be completed late this year on prototype products.

25/7/18 Appendix 4C - Quarterly

ANO reported their 4Q18 cash results. No real surprise, record cash receipts were muted by a large increase in product manufacturing costs. The audited results will clarify, but I believe we will see a large increase in inventories to accomodate.

2/7/18 Unexpected Delays

ANO announced that unfortunately they are still experiencing delays with the start of production in the US. Largely these delays have centred around equipment designed for Australian electrical standards not being certified to be used in the US and requiring modification. Obviously not great news, but operationally the business appears to be doing well.

Consolidation of the Australian manufacturing into one site is now complete with delays partly caused by "unexpected increases in sales" which is not a bad thing. Certificates and approvals now in place for operational efficiencies to be fully realised in FY19

Management provided unaudited guidance for FY18 of 35% revenue growth and $1.5m NPAT. Both figures were slightly above my expectations which is good but a strong FY19 to drive the share price is still predicated on full US production to meet the higher demand expected over the next few years.

Small business that manufactures nanoparticles, primarily zinc oxide (ZinClear) and titanium oxide (Alusion). Bull case centres around the potential of zinc oxide nanoparticles in sunscreen and general cosmetics as protection from both UV A and UV B rays. Zinc is the only natural substance that reflects both, with most sunscreens containing a mixture of chemicals to absorb the rays.

There is a growing consumer and regulatory campaign against chemical sunscreens as consumers prefer natural or organic products and environmental bodies argue that the chemicals used have negative side effects on marine life such as coral bleaching. While zinc has always been known as an alternative natural solution, in its pure form it doesn't absorb and remains opaque on the surface of the skin (think lifeguards or cricketers with zinc under their eyes or on their lips).

However Advanced Nanotek is one of a handful of companies worldwide producing zinc nanoparticles which achieve the full spectrum UV protection with the desired outcome of applying invisible on skin as the particles are smaller than the human eye see. While there were initially some fears that nanoparticles could cause harm if they were absorbed through the skin, all clinical testing so far has proven no known side effects. These fears are slowly being overcome, and consumers desire for a natural, organic product that applies transparent is taking over.

FY18 has been a transformational year for the business as they prepare to ride the large tailwind behind them. Manufacturing has now been outsourced to the US, new supplier agreements have locked in a more consistent, pharmaceutical grade product and the company has lodged for the IP of their own range of OEM cosmetics that can be white-labelled by customers.