From its humble beginnings in a research laboratory at Simon Fraser University, a nanotechnology for securitization, authentication and branding has sprouted into the makings of publicly-listed company, Nanotech Security (CVE:NTS), which has the potential to make rapid strides in a $2.5 billion market. The technology addresses a core global issue: 10 per cent of the world's goods are counterfeit, affecting the global economy to the tune of $650 billion in losses per year.
As entrepreneur-in-residence at Simon Fraser in British Columbia, chief executive of Nanotech, Doug Blakeway, was presented the technology, and following a long and iterative process, decided he wanted in on the action. "We negotiated a contract with the University for licensing, and eventually for all of the technology, which was folded into a private company in September 2009," says Blakeway, who has 40 years experience in governing high tech security companies, in an interview with Proactive Investors.
The technology platform, which is based on the effects of a Blue Morpho butterfly's wings, is such that a shimmering iridescence colour is created through the reflection and fragmentation of light waves, off of a matrix of nano-sized holes. The company's technology, known as KolourOptik, uses patented algorithms coupled with electron and ion beam technology to drill hundreds of millions of nano-holes, smaller than wavelengths of light, into a number of different materials to produce highly secure anti-counterfeiting images, which the company says trump any others that can be produced using traditional technologies such as holograms and colour shifting inks.
With this, the Canadian junior tech company has created the world’s first re-combined master wafer, which was used in the first roll-to-roll commercial printing and embedding manufacturing process of KolourOptik nanostructures. KolourOptik images can be applied to virtually any surface, much beyond what existing technology supports, highlights Blakeway. It also turns “on” and “off” and creates unique optical light signatures for enhanced security.
Nanotech just added, as its chief commercial officer, Frenny Bawa, who is known for her background at BlackBerry for developing a global footprint and growing markets in Asia and the Middle East. Bawa, who was also recognized by Forbes India as one of the top 10 most powerful women in business in 2011, is leading the team that will take Nanotech’s technology to market and execute on strategies to penetrate three key markets the company is eyeing.
One of the three areas the company is focused on is banknotes and coins. According to the CEO, there are 140 billion bank notes and 40 billion coins produced every year. The banknote market currently makes up 14 per cent of the $2.5 billion per year hologram market. "What's unique about our technology is that it can be directly applied virtually to any surface, and can be embedded directly onto a coin giving it a vibrant colour signature, without any inks, dies or pigments – it is a completely green technology at no additional cost.”
Another market which Nanotech is targeting is secure documents, which can include anything from drivers’ licenses to work visas and passports. "We are working to replace holograms that are outdated. As the market demands more complex holograms for authentication with more features, they get thicker, bigger in size and harder to apply. They are also more expensive to produce, while KolourOptik completely transcends these issues.”
"Our technology can go directly on the surface, and has very high resolution. It is extremely bright when you see it, with much sharper definition," says Blakeway.
Imagine, he says, a present day pixel broken down into many smaller pixels, giving thousands of times more detail.
The third area that Nanotech is looking to dig its teeth into is the consumer luxury product market, where high profile names like Louis Vuitton and Prada want to protect their brands and guard against counterfeiting. "They are less concerned about the impact of counterfeits to their sales but very concerned about protecting their brand," explains Blakeway. The nano-optic technology can also be used for tech products like inkjet cartridges, opening up a rather large market, with 1.3 billion legitimate ink cartridges shipped in 2012 and an estimated $3 billion in counterfeit toner and inkjet cartridges sold in the same year, according to HP.
KolourOptik’s vibrant colours, “intense high definition images”, and distinct “on” and “off” feature allow for instant detection at a distance, says the CEO, and allows people to distinguish whether an article is genuine or not. “We have all seen that image of a NIKE golf ball nearing the edge of the cup with the close up of their logo. Now imagine that golf ball with a logo rolling across the green and flashing “on” and “on”. That we believe is a true mark of an authentication tool,” the chief executive describes.
"It's virtually impossible to duplicate, as processes are eliminated as you make the finished product," he says.
"Additionally, if you try to reverse engineer the technology, you would need complex (patented) algorithms as well as very sophisticated and expensive high-tech machines, a class 100 clean room and the people trained to operate them."
Despite the technology to make the master wafer being complex, the production process to integrate it is “seamless”, Blakeway says.
The images can easily be produced by applying existing production infrastructure and processes with a roll-to-roll or embedding equipment infrastructure. This effectively removes cost barriers transitioning from hologram technology.
“We have already invested in the technology which enables the development of the complex master wafer and have ensured that the mass production is simple – this is a critical success factor.”
The company, which is just starting to commercialize the technology, expects to accrue two revenue streams. The first is from the development of the design and manufacture of master wafer(s) and the second is from licensing and royalties. The pricing will depend on the specific requirements and complexity of the customers’ authentication needs.
Blakeway explains that the company’s business model will result in 70 per cent of the revenues accruing from licensing/royalties, with the rest from professional services related to the development of master wafers, providing for rapid scalability and margin expansion.
Nanotech is targeting 60 per cent EBITDA within 3-5 years. Blakeway expects that expenses will not track correspondingly with revenue increases, but rather rise at a 15 percent to 20 percent ratio to revenues.
Currently, the company’s sales team is small, but the CEO is confident that its channel distribution strategy will allow it to achieve revenue objectives and scale to commensurate with the growth of the company.
“With KolourOptik, our value proposition is a substantially more effective branding and authentication solution with the ability to use established production processes. Effectively, this results in total lower costs for our customers.”
Consumer goods and government ID documents currently take up the bulk of the $2.5 billion hologram market, at 54.7 per cent and 25.4 per cent, respectively. This is followed by bank notes and tax stamps. “It’s a huge market and we have a much better mouse-trap with very attractive pricing – we believe this is a recipe for us to effectively disrupt the existing hologram market.”
The company expects that it will break even in 2014 shortly after its commercial launch. Blakeway explains that though contracts from bank notes and coins will have long sales cycles, with a three to four year development curve, the lifespan of the solutions that Nanotech hopes to provide could be 20 years. In this industry, the CEO expects the uptake by one Central Bank will compel others to follow suit quickly.
Investors are clearly buying into the company’s potential, betting on the likelihood that it will succeed in disrupting the giant hologram market. Indeed, its stock has surged more than 20 per cent so far this year, compared with a 24.2 per cent decline for the S&P/TSX Venture Composite Index. Nanotech Security’s shares are currently sitting at 90 cents, giving it a market cap of some $27 million.