Anoto Group

Quarterly Report • Apr 30, 2018

QUARTERLY REPORT Q1/ 2018

© 2018 ANOTO

Anoto Group AB is a global leader in digital writing and drawing solutions, having historically used its proprietary technology to develop smartpens and the related software. These smartpens enrich the daily lives of millions of people around the world. Now Anoto is also using its pattern, optics, and image-processing expertise to bridge between the analogue and digital domains through an initiative known as Anoto DNA (ADNA). ADNA makes it possible to uniquely and unobtrusively mark physical objects and then easily identify those individual objects using ubiquitous mobile devices such as phones and tablets. ADNA is enabling exciting possibilities for product innovation, marketing insights, and supplychain control. Anoto is traded on the Small Cap list of Nasdaq Stockholm under ANOT.

This report was published on April 30, 2018 at 08:45 CET

For more information: www.anoto.com

REPORT JANUARY – MARCH 2018

• Net Sales in this quarter was MSEK 28 (46) and Operating Profit amounted to MSEK 1 (-32).
• The decline in Net Sales is primarily attributable to Forms customers timing their pen orders to coincide with the availability of enterprise quantities of the new Anoto pen (AP-701). In addition, Anoto's pricing policy change in the Forms business has also contributed to this deferral of revenue. The new model lowers upfront hardware costs and establishes recurring revenue streams associated with hardware, software, and Anoto's proprietary microdot pattern.
• This pricing model transition required us to turn down numerous renewal requests based on the old pricing scheme with an unavoidable impact on revenue but the Group expects a substantial increase in revenue in coming quarters with lift provided by rapid adoption of the new pen and broad acceptance of the strategically sound new pricing policy.
• While year-over-year Net Sales for the period decreased by MSEK 18, the Group made an Operating Profit of MSEK 1 (-32) due to higher gross margins and lower operating costs.
• Gross margin in the period increased to 61% (35%) as a result of better margins in the Notetaking business and licensing revenue growing to 43% (7%) of the overall mix.
• Overhead costs in the period were MSEK 16, significantly down from the prior year (MSEK 48), due to the restructuring and cost-reduction efforts across all operations.

revenue streams associated with hardware, software, and Anoto's proprietary microdot		deferral of revenue. The new model lowers upfront hardware costs and establishes recurring
This pricing model transition required us to turn down numerous renewal requests based on the old pricing scheme with an unavoidable impact on revenue but the Group expects a substantial increase in revenue in coming quarters with lift provided by rapid adoption of the new pen and broad acceptance of the strategically sound new pricing policy.
While year-over-year Net Sales for the period decreased by MSEK 18, the Group made an Operating Profit of MSEK 1 (-32) due to higher gross margins and lower operating costs.
Gross margin in the period increased to 61% (35%) as a result of better margins in the Notetaking business and licensing revenue growing to 43% (7%) of the overall mix.
Overhead costs in the period were MSEK 16, significantly down from the prior year (MSEK 48), due to the restructuring and cost-reduction efforts across all operations.
Key ratios	2018	2017	2017
Net sales, MSEK*	Jan-Mar 28	Jan-Mar 46	Jan-Dec 173
Gross profit/loss*	17	16	71
Gross margin, %	61%	35%	41%
Operating profit/loss, MSEK	1	-32	-37
Operating margin, %	5%	Neg	Neg
EBITDA, MSEK	2	-28	-21
Profit/loss for the period, MSEK*	6	-37	-53
Earnings per share
before and after dilution, SEK*	0.06	-0.34	-0.49
Cash flow for the period, MSEK Cash at end of period, MSEK	-17 15	0 6	26 32

CEO COMMENTS

Q1 2018 results are significant in two aspects. One, it marks the fourth straight quarter of operational profit. Q4 2017 showed losses but it was due to the intangible asset amortization related to the Livescribe acquisition. Operationally, this quarter is the close of one full year of operational profit starting in Q2 of 2017. Second, our efforts to boost software and pattern licensing revenue paid off as our gross margin exceeded 61% for the quarter. The 61% gross margin delivered this period demonstrates that Anoto's transition from a hardware company to a solutions company is now a market reality. The combination of increasing recurring revenue from hardware, software, and pattern licensing and dramatically reduced operating costs gives us the enduring strength to drive the kind of growth that aligns with our strategic vision.

A recently concluded agreement with Vodafone to provide Anoto's best-of-breed Forms solution to Welsh Ambulance Services Trust (WAST) evidences that major customers see fair value in the new Anoto model. This transaction delivers in excess of £1 million non-hardware revenue and is representative of the numerous enterprise opportunities actively being managed in the Anoto pipeline.

The shift to direct engagement with some of the largest companies in the world is starting to produce the anticipated results. The sales cycles are long but each global supply agreement established is a gateway to multiple significant transactions around the world providing recurring revenue and valuable intracompany advocacy.

The biggest problem area for Q1 results is revenue. It remains sluggish due mainly to two factors: 1) the Forms business is only doing deals with customers who agree to new software and pattern license fees, 2) growth in the Notetaking business is slower than anticipated due to a lack of marketing resources. However, management is fully aware of our need for growth and is doing everything to address these issues. Anoto presently has 36 major projects in various stages of maturation ranging from early exploration to final piloting. These projects are spread across 10 industries giving us the benefits of diversity which include stability and multiple spaces in which to enjoy the steepest segment of the adoption curve. In addition, Anoto recently re-established and expanded its European distribution channels for Livescribe products and we can already see signs of strength in this important region.

OUTLOOK AND FUTURE STRATEGY

The company is continuing its transition to software/applications driven business. Anoto has a great underlying technology, but lacks killer applications that enable users to take advantage of such great technology. Historically, Anoto relied on its partners to do the development of such applications and acquired them when they had software that Anoto wanted. XMS Penvision was such a case. Anoto still uses Anoto Live Forms which was created by XMS. Anoto also has software called ALE which was created by another Anoto partner, Develop IQ, which was also subsequently acquired.

This strategy, in my mind, is ineffective and flawed. The decision to buy such software was proof of Anoto's inability to create its own software and required a very detailed integration process which never happened. The software acquired was created by small system integrators for smaller customers. They fundamentally had a different customer profile than Anoto which deals with much bigger clients on a global scale.

Current management of Anoto found a cheaper and quicker way of building solutions. Anoto hired two key technical management team members; one in software and one in hardware. We have

decided to fundamentally move technical development, both hardware and software, to Korea and bolster the team in Korea. These experts bring a wealth of knowledge and talent to Anoto in the areas of software development, firmware, and hardware innovation.

Hojae Hwang, a renowned software architect, joined Anoto as Chief Technology Officer. Mr. Hwang will be responsible for overseeing all of Anoto's software development including mobile apps and SDKs. As Chief Technology Officer, Mr. Hwang is also responsible for extending the Anoto DNA technology and expanding Anoto's IP relating to pattern technology.

Steve Kim is joining as Chief Engineering & Manufacturing Officer. Mr. Kim will be responsible for all hardware development, manufacturing, and supply chain management. He has an impressive background in hardware development and is an expert in hardware system design and manufacturing. Mr. Kim brings significant relevant experience to Anoto having designed and developed a satellite radio, an image processing chip, a DNA detection kit, PDAs, and multimedia signal processors.

Anoto's Management Committee now consists of four members: CEO, Chief Strategy Officer, Chief Technology Officer, and Chief Engineering and Manufacturing Officer. The addition of software and hardware experts is in line with both Anoto's strategy to further upgrade the technological superiority of Anoto and its new focus: killer applications using Anoto pattern technology.

In terms of sales growth, we are continuing to develop clients who are large recurring customers. Working directly with large multinational companies is a long and arduous process. We have to patiently go through many pilot projects before the company finally decides to commercially deploy our technology. However, we firmly believe that many of our existing 36 projects in 10 industries across 5 continents will be translated to future revenue and we will not relax our efforts to further expand our customer base and geographic scope.

Joonhee Won CEO, Anoto Group AB (publ)

ANOTO GROUP IN THE FIRST QUARTER 2018

ANOTO GROUP IN THE FIRST QUARTER 2018 Net Sales in the quarter amounted to MSEK 28 (46) and Operating Profit amounted to MSEK 1 (-32). The structural changes by restructuring and cost-reduction efforts are producing the desired cost savings; the Group has now managed and will continue to do quarterly overhead cost down to less than MSEK 20. The Group expects to further improve the financial performance through substantial sales growth with the new pen and the new pricing policy, improved gross margin from the increase in the proportion of recurring licensing revenue, and the cost management, going forward. 2018 2017 2017 Net sales per product group
MSEK Jan-Mar Jan-Mar Jan-Dec
Licenses and royalties 12 3 36
Digital Pens 15 33 132
Other 1 10 5 Total 28 46 173

The structural changes by restructuring and cost-reduction efforts are producing the desired cost savings; the Group has now managed and will continue to do quarterly overhead cost down to less than MSEK 20.
The Group expects to further improve the financial performance through substantial sales growth with the new pen and the new pricing policy, improved gross margin from the increase in the proportion of recurring licensing revenue, and the cost management, going forward.
Other Total	1 28	10 46		5 173
Quarterly Summary	2018 1Q	2017 4Q	2017 3Q	2017 2Q	2017 1Q
Net sales, MSEK*	28	26	49	46	68
Gross margin, %	61%	48%	43%	35%	34%
			-14	-48	-77
Operating costs, MSEK	-16	-29
Operating profit/loss, MSEK	1	-16	7	-32	-33
EBITDA, MSEK	2	-5	7	-27	-42
Profit/loss for the period, MSEK	6	-13	1	-37	-56
* Defined under IFRS

ACCOUNTING POLICIES

This interim report was prepared in accordance with IAS 34, Interim Financial Reporting and applicable parts of the Swedish Annual Accounts Act. Disclosures in accordance with IAS 34 are presented either in notes or elsewhere in the report. This interim report for the parent company was prepared in accordance with Swedish Annual Accounts Act chapter 9. For information about the accounting policies applied, refer to the 2017 annual report. The accounting policies applied and the judgments in the Interim Report are consistent with those applied in the Annual Report for 2017 except for disclosure of ESMA´s guidelines on alternative performance measures that is applied as of July 3, 2016 and implies disclosures related to financial measures not defined under IFRS.

No new or amended standards or interpretations have had an impact on the Group's financial position, results, cash flows or disclosures. The new and revised standards and interpretations that have been issued by the International Accounting Standards Board (IASB) and IFRS Interpretations Committee (IFRIC) but which only come into effect for financial years beginning on or after 1 January 2018 have not yet been applied by the Group.

Goodwill arising on consolidation was reviewed for impairment in Q4 2017. No further provision for impairment of Goodwill was considered necessary in Q4 2017 or Q1 2018.

INVESTMENTS

In Q1 2018 Anoto invested MSEK 1.0 in additional product development costs capitalised as intangible assets. This project has as its purpose to develop new pens and deliver a common future pen platform for the Group.

FINANCING

In this reporting quarter, Anoto converted MSEK 42.3 of bonds issued in the previous quarters and issued 10,587,820 new shares in Anoto Group AB.

RISK FACTORS AND UNCERTAINTIES

The management and the board are of the opinion that the cash flow will support the ongoing business for the next twelve months. The company may seek additional financing in case of new strategic projects.

SEGMENT REPORTING

Throughout last year, the Group has been reorganized to become a more unified global entity, and internal reporting does not yet include any reporting on segments. Internal reporting has been prepared for the group as a whole. The Group will prepare appropriate segmental reporting this year.

EMPLOYEES

As of March 31, 2018, Anoto Group had a total of 33 employees as compared to 35 at year-end 2017.

PARENT COMPANY

Anoto Group AB is a pure holding company that has a limited number of corporate functions.

SHARE DATA

The Anoto share is listed on the NASDAQ OMX Nordic Small Cap List in Stockholm. On October 4, 2017, Anoto has carried out a reverse split (1:30). The total number of shares at the end of the period was 112,654,950.

LEGAL ACTIVITIES

Anoto remains a defendant in a lawsuit filed by a technology company, APOLOGIC Information Applications, in the commercial court of St. Malo Commercial Court. Anoto believes that the claim by APOLOGIC, alleging breach of commercial contract, is wholly without merit and furthermore that the court lacks jurisdiction over Anoto. Anoto's attorneys are optimistic about Anoto's likelihood of prevailing.

● ● ●

CALENDAR 2018

Annual General Meeting – 15 May, 2018 Q2 Report – 31 July, 2018

Please visit www.anoto.com/investors for the latest investor calendar information.

FOR MORE INFORMATION

Please contact:

Joonhee Won, CEO Email: ir@anoto.com

Anoto Group AB (publ.), Corp. Id. No. 556532-3929 Flaggan 1165 116 74 Stockholm, Sweden www.anoto.com

This information is information that Anoto Group AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation and the Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above, at 08:45 CET on 30 April 2018.

FINANCIAL REPORTS

Condensed statement of comprehensive income

				QUARTERLY REPORT
FINANCIAL REPORTS
Condensed statement of comprehensive income
	2018	2017	2017
TSEK	Jan-Mar	Jan-Mar	Jan-Dec
Net sales Cost of goods and services sold	28,355 -10,977	45,791 -29,776	173,010 -102,088
Gross profit	17,378	16,015	70,922
Sales, administrative and R&D costs	-15,912	-47,718	-107,312
Other operating income/cost Operating profit/loss	-140 1,326	59 -31,644	-188 -36,578
Other financial items	4,743	-5,784	-19,623
Profit before taxes	6,069	-37,428	-56,201
Taxes	0	-37	3,257
Profit/loss for the period	6,069	-37,465	-52,944
Total Profit/loss for the period attributable to:
Shareholders of Anoto Group AB	6,058	-37,487	-52,809
Non controlling interest Total Profit/loss for the period	11 6,069	22 -37,465	-135 -52,944
Other comprehensive income
Translation differences for the period	243	9,791	9,316
Other comprehensive income for the period	243	9,791	9,316
Total comprehensive income for the period	6,312	-27,674	-43,628
Total comprehensive income for the period attributable to:
Shareholders of Anoto Group AB	6,301	-27,696	-43,493
Non controlling interest Total comprehensive income for the period	11 6,312	22 -27,674	-135 -43,628
Key ratios:
Gross margin	61.3%	35.0%	41.0%
Operating margin	4.7%	Neg	Neg
	0.06	-0.34	-0.49
Earnings per share before and after dilution

Condensed consolidated balance sheet

			QUARTERLY REPORT
Condensed consolidated balance sheet
TSEK	2018-3-31	2017-3-31	2017-12-31
Intangible fixed assets	256,237	236,754	255,282
Tangible assets	3,166	5,134	3,404
Financial fixed assets	18,331	18,738	18,318
Total fixed assets	277,734	260,626	277,003
Inventories	51,014	42,129	51,766
Accounts receivable	35,955	22,395	27,747
Other current assets	15,339	29,978	11,429
Total short-term receivables	51,294	52,373	39,176
Liquid assets, including current investments	14,609	5,923	31,664
Total current assets	116,918	100,425	122,606
Total assets	394,652	361,051	399,609
Equity attributable to shareholders of Anoto Group AB	324,885	184,321	276,284
Non controlling interest	-572	-426	-583
Total equity	324,313	183,895	275,701
Convertible debt	2,149	29,800	44,449
Long Term Provisions	3,293	11,955	3,289
Other long term liabilities	0	0	0
Total long-term liabilities	5,442	41,755	47,737
Short term provisions	242	0	242
Short term loans	8,993	27,424	11,309
Other current liabilities	55,663	107,977	64,621
Total current liabilities	64,898	135,401	76,171
	394,652	361,051	399,609

Consolidated changes in shareholders equity

								QUARTERLY REPORT
Consolidated changes in shareholders equity
		Ongoing	Other capital		Profit/loss for	Shareholders	Non-controlling	Total
TSEK	Share capital	share issue	contributed	Reserves	the year	equity	interest	equity
Opening balance 1 January 2017	46,817	24	1,117,530	-11,074	-940,039	213,258	-1,689	211,569
Profit/loss for the year					-52,809	-52,809	-135	-52,944
Other comprehensive income				9,316		9,316		9,316
Total comprehensive income	0	0	0	9,316	-52,809	-43,493	-135	-43,628
Prior year adjustment					-3,364	-3,364		-3,364
Ongoing acquisition of XMS 1)	57	-24	-1,274			-1,241	1,241	0
Conversion of debt - 8 May	4,415		25,385			29,800		29,800
Private placement - 8 May	4,250		39,673			43,923		43,923
Conversion of debt - 29 Sep.	4,000		22,000			26,000		26,000
Conversion of debt - 31 Oct.	1,701		9,699			11,400		11,400
Closing balance 31 December 2017	61,240	0	1,213,013	-1,758	-996,211	276,284	-583	275,701
Profit/loss for the year Other comprehensive income				243	6,058	6,058 243	11	6,069 243
Total comprehensive income	0	0	0	243	6,058	6,301	11	6,312
Conversion of debt - 16 Jan. Conversion of debt - 6 Mar.	308 4,800		1,692 27,200			2,000 32,000		2,000 32,000
Conversion of debt - 14 Mar.	1,245		7,055			8,300		8,300
						324,885	-572	324,313
Closing balance 31 March 2018	67,593	0	1,248,960	-1,515	-990,153

Consolidated Cash flow statement

Consolidated Cash flow statement
	2018	2017	2017
TSEK Profit/loss after financial items	Jan-Mar 6,069	Jan-Mar -37,468	Jan-Dec -56,201
Depreciation, amortisation	352	4,036	15,835
Other items not included in cash flow	-2,551	17,966	14,196
Items not included in cash flow	-2,199	22,002	30,031
Cash flow from operating activities
before changes in working capital	3,870	-15,466	-26,170
Change in operating receivables	-9,324	17,809	31,005
Change in inventory	752	7,349	-2,288
Change in operating liabilities	-8,954	-9,407	-47,741
Cash flow from operating activities	-13,656	285	-45,194
Intangible assets	-1,045		0 -38,965
Fixed assets	-24	-235	0
Disposal of associated company	0		0 0
Financial assets	-14	116	538
Cash flow from net capital expenditures	-1,083	-119	-38,427
Total cash flow before financing activities	-14,739	166	-83,621
New share issue	0		0 43,923
Convertible loan	0	1,800	74,449
Change in financial liabilities	-2,316	-1,596	-8,640
Cash flow from financing activities	-2,316	204	109,732
Cash flow for the period	-17,055	370	26,111
Liquid assets at the beginning of the period	31,664	5,553	5,553
Liquid assets at the end of the period	14,609	5,923	31,664

Key ratios

	2018	2017	2017
TSEK	Jan-Mar	Jan-Mar	Jan-Dec
Cash flow for the period	$-17.055$	370	26.111
Cashflow / share before and after dilution (SEK) 1	$-0.16$	0.00	0.29
Average number of shares before and after dilution	105,108,647	81,206,070	89,117,341

Number of shares	112,654,950	78,123,400	102,067,130
Shareholders' equity per share (kr)	2.88	2.36	2.71

			QUARTERLY REPORT
Parent company, summary of income statement
	2018	2017	2017
TSEK	Jan-Mar	Jan-Mar	Jan-Dec
Net sales	2,598	0	0
Gross profit	2,598	0	0
Administrative costs	-2,474	-1,949	-12,085
Operating profit	124	-1,949	-12,085
Profit/loss from shares in Group companies	0	0	-100
Financial items	884	113	-1,183
Profit for the period Parent company, balance sheet in summary	1,008	-1,836	-13,368
TSEK	2018-3-31	2017-3-31	2017-12-31
Intangible fixed assets Financial fixed assets	6,011 301,971	45 457,237	6,015 300,028
Total fixed assets	307,982	457,282	306,043
Other short-term receivables	279,424	203,412	270,788
Liquid assets, including current investments	4,754	2,721	13,911
Total current assets	284,178	206,133	284,699
Total assets	592,160	663,415	590,742

Parent company, summary of income statement

Parent company, balance sheet in summary

Parent company, balance sheet in summary TSEK	2018-3-31	2017-3-31	2017-12-31
Intangible fixed assets	6,011	45	6,015
Financial fixed assets	301,971	457,237	300,028
Total fixed assets	307,982	457,282	306,043
Other short-term receivables	279,424	203,412	270,788
Liquid assets, including current investments	4,754	2,721	13,911
Total current assets	284,178	206,133	284,699
Total assets	592,160	663,415	590,742
Equity	575,678	439,748	530,456
Other long term liabilities	2,353	155,928	2,353
Convertible Debt	2,149	29,800	44,449
Short term loans	0	14,004	0
Other current liabilities	11,980	23,935	13,484
Total liabilities and shareholders equity	592,160	663,415	590,742

Note 1 - Financial instruments

					QUARTERLY REPORT
Note 1 - Financial instruments
	Loans and	Available for sale	Other financial	Total book value	Total fair value
Group 31 March 2018	receivable	financial assets	liabilities
Investments				0	0
Long-term receivables	1,369			1,369	1,369
Accounts receivable	35,955			35,955	35,955
Other receivables				0	0
Cash	14,609			14,609	14,609
Long-term investments and securities		16,962		16,962	16,962
Assets	51,934	16,962	0	68,896	68,896
Borrowings			11,142	11,142	11,142
Accounts payable			30,045	30,045	30,045
Other liabilities			12,088	12,088	12,088
Liabilities	0	0	53,275	53,275	53,275
	Loans and	Available for sale	Other financial
Group 31 March 2017	receivable	financial assets	liabilities	Total book value	Total fair value
Investments				0	0
Long-term receivables	1,776			1,776	1,776
Accounts receivable	22,395			22,395	22,395
Other receivables				0	0
	5,923			5,923	5,923
Cash

Cash	14,609			14,609	14,609
Long-term investments and securities		16,962		16,962	16,962
Assets	51,934	16,962	0	68,896	68,896
Borrowings			11,142	11,142	11,142
Accounts payable			30,045	30,045	30,045
Other liabilities			12,088	12,088	12,088
	Loans and	Available for sale	Other financial
Group 31 March 2017	receivable	financial assets	liabilities
Investments				0	0
Long-term receivables	1,776			1,776	1,776
Accounts receivable	22,395			22,395	22,395
Other receivables				0	0
Cash	5,923			5,923	5,923
Long-term investments and securities				0	0
Assets	30,094	0	0	30,094	30,094
Borrowings			27,424	27,424	27,424
Accounts payable			49,280	49,280	49,280
Other liabilities			18,362	18,362	18,362
Liabilities	0	0	95,066	95,066	95,066
Disclosures on fair value classification
Level 1: According to listed prices on an active market for similar instruments
Level 2: According to directly or indirectly observable market data not included in level 1
Level 3: According to indata not observable on the market

Disclosures on fair value classification

Estimation of fair value

Accounts receivable and accounts payable

For accounts receivable and accounts payable with a remaining life of less than six months, recorded amount is deemed to reflect fair value. Accounts receivable and accounts payable with a due time over six months are discounted at the time of determining the fair value.

Financial assets that can be sold

Financial assets that can be sold are valued on the basis of level 1.

Borrowings

Borrowings are measured at amortized cost.

Alternative performance measures

Anoto Group presents certain financial measures in this interim report that are not defined under IFRS. Anoto Group belives that these measures provide useful supplemental information to investors and the group´s management as they allow evaluation of the company´s performance. Because not all companies calculate these financial measures similarly, these are not always comparable to measures used by other companies. These financial measures should not be considered a substitute for measures defined under IFRS.

Definitions of alternative measures used by Anoto Group that are not defined under IFRS are presented below.

GROSS MARGIN

OPERATING PROFIT/LOSS

OPERATING MARGIN

CASH FLOW PER SHARE

EQUITY /ASSETS RATIO

EBITDA

Gross profit as a percentage of net sales. Gross profit is defined as net sales less cost of goods sold.
OPERATING PROFIT/LOSS
Gross profit less costs for sales, administrative, R&D and other operating income/costs.
OPERATING MARGIN
Operating profit/loss as a percentage of net sales.
CASH FLOW PER SHARE
Cash flow for the year divided by the weighted average number of shares during the year.
EQUITY /ASSETS RATIO Equity attributable to shareholders of Anoto Group AB as a percentage of total assets.
EBITDA
Operating profit/loss before depreciation and amortisation.
EBITDA is considered to be a useful measure of the group´s performance because it approximates the underlying operating cash flow by elimination of depreciation and amortisation. A reconciliation from group operating profit/loss is set out below.
	2018	2017	2017
TSEK	Jan-Mar	Jan-Mar	Jan-Dec
Operating profit/loss	1,326	-31,644	-36,578
Depreciation and amortisation	352	4,036	15,835