Alex Cutulenco Zecotek Photonics Inc. · PDF fileZecotek Photonics Inc. is a developer of...

Equity ResearchIndustrial Technology | Canadian Small Cap

June 2, 2016

Alex [email protected]

Price Performance - 52 weeks

Market Data (TSXV:ZMS)Price (June 1, 2016 close) $0.2952 Week Range $0.23 - $0.61Market Cap (mm) $34.5Shares Outstanding (basic, mm) 119.1Free Float 90%Average Daily Volume (3 months) 160,609

Total Debt (mm) $0.0Cash & Short-Term Investments (mm) $0.3Total Assets (mm) $0.7

Headquarters British Columbia, Canada

Top ShareholdersDr. A. Faouzi Zerrouk 10.0%Erich Sager 0.2%BlackRock Institutional Trust 0.1%

All figures in CAD unless otherwise stated.Source: Thomson Reuters (06/01/2016)

Zecotek Photonics Inc.(TSXV:ZMS | Frankfurt:W1I.F | OTCPK:ZMSPF)

Leading Manufacturer of Medical Imaging Technology: Initiating Coverage at Outperform

Company Description Zecotek Photonics Inc. is a developer of proprietary parts (scintillation crystals, photo detectors, and other) used within medical imaging systems, such as the Positron Emission Tomography (PET) system. Beginning its research in 2004, the company has recently transitioned into a revenue-generating company, attempting to commercialize over 50 patented and patent-pending photonic technologies directly and through strategic partnerships with Hamamatsu (Japan), CERN (Switzerland), Beijing OptoElectronics (China), NuCare Medical Systems (South Korea), the University of Washington (United States), and National NanoFab Center (South Korea).

Investment Highlights• Zecotek is transitioning from a Research and Development company to a

revenue-generating company. A recent order from a large Chinese OEM is a key milestone for Zecotek, as it enters a market that is experiencing radical healthcare reforms, and a shift towards higher-quality medical units. This entry poses a near-term revenue generating opportunity of 200 LFS based PET scanners over the next 5 years (a revenue opportunity of roughly $100 million).

• PET scanners have superior advantages to other forms of medical imaging, in that it provides early detection of cancerous cellular growth and staging. The company’s line of LFS crystals (used within PET scanners) are the best in the industry, and have been adopted as the standard by research facilities at CERN, and by OEMs in China.

• Zecotek is led by Dr. A. Faouzi Zerrouk and a team of 12 MA/PhD engineers. With 12+ years of Research and Development, Zecotek has invested over $35 million in technology used for medical imaging, and has been awarded with 55 patents, as well as highly-respectable working relationships with the world’s leading organizations, such as the European Organization for Nuclear Research (CERN) in Switzerland and Hamamatsu Photonics of Japan.

Financial AnalysisWith $1.7 million in revenues over the last 12 months and a backlog of $2 million, Zecotek is finally commercializing its business. Recently issued relationships with Chinese OEM partners give the company great room for growth and scale over the next 1-5 years, considering China will likely experience increased demand for radiation medical imaging equipment. With gross margins of roughly 35-40% at scale, and burn rates of $1 - $1.5 million / quarter, we are forecasting profitable operations by H2/2017.

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- June 2, 2016

Table of Contents

Investment Thesis ................................................................................................................................................. 3Tremendous Industry Expertise Creates a Great Competitive Advantage ........................................................................................... 3

Large Patent Portfolio Creates Another Huge Competitive Advantage ............................................................................................... 3

Stamp of Approval from the Loudest of Voices: CERN ...................................................................................................................... 3

Zecotek’s LFS Crystals are Accepted as the Industry Standard within China ..................................................................................... 4

Inflection Point: Transition from an R&D Company, to a Revenue-Generating Company ................................................................ 4

Catalysts ................................................................................................................................................................ 4Additional Orders from Chinese OEMs ................................................................................................................................................ 4

Mass Production of MAPD Photo Detectors ........................................................................................................................................ 5

Philips Orders ........................................................................................................................................................................................ 5

Integration of value-added IDM Module .............................................................................................................................................. 5

The Company ........................................................................................................................................................ 6Imaging Products .................................................................................................................................................................................. 7

LFS Crystals .................................................................................................................................................................................... 8

MAPD/MAPT Photo Detectors ........................................................................................................................................................ 9

Established Relationships ................................................................................................................................................................... 10

Upside: 3D Technologies .................................................................................................................................................................... 10

The Industry: Medical Imaging ........................................................................................................................ 11Transition in Medical Imaging Technologies ..................................................................................................................................... 11

Healthcare Reform in China Lead to Increased Investment into New Technology ............................................................................ 11

United States as a Case Study for Future PET Scanner Needs .......................................................................................................... 12

Factors Constraining PET Growth ..................................................................................................................................................... 13

Financial Analysis, Forecasts & Valuation ....................................................................................................... 14Revenues, Back-log and Profitability ................................................................................................................................................. 14

Revenue Catalysts push Forecasted 2017 Revenues to $5MM ...................................................................................................... 14

Balance Sheet should be better understood by investors ................................................................................................................... 16

Risks ..................................................................................................................................................................... 17Prolonged sales periods may hurt the share price in the short term .................................................................................................... 17

Higher profitability will arise with scale ............................................................................................................................................. 17

Foreign currency risk .......................................................................................................................................................................... 17

Conclusion ........................................................................................................................................................... 17Appendix A: Recent News ................................................................................................................................. 18Appendix B: Management & Board of Directors ............................................................................................ 19Appendix C: Background info on Medical Imaging Tech. ............................................................................ 20

Investment Thesis

Tremendous Industry Expertise Creates a Great Competitive Advantage The company is led by Dr. A. Faouzi Zerrouk, a businessman, physician, and professor. His long list of career accomplishments include: receiving his PhD in Theoretical Physics; holding research and faculty positions for 6+ years (within Oxford England, Russia and Siberia); establishing commercially driven private R&D labs; working closely with the Ministry of Science and Technology during the transition period to the Russian Federation; coordinating many government projects in joint relations between Russia and countries such as China, Germany, USA, Malaysia, and Saudi Arabia; as well as operating as Chairman and CEO of various companies in Europe and Asia.

Zecotek employs 12 engineers with Masters/PhD backgrounds in applied physics, nuclear research, imaging technologies, radiology, and other highly-technical areas. The group of engineers come from diverse geographic backgrounds, including Switzerland, Russia, Singapore and others.

Large Patent Portfolio Creates Another Huge Competitive Advantage With 12+ years of Research and Development, Zecotek has invested over $35 million in technology used for medical imaging, high-energy physics and other large-market industries. The company’s innovation has been awarded with 55 patents, as well as highly-respectable working relationships with world-leading organizations, such as the European Organization for Nuclear Research CERN in Switzerland and Hamamatsu Photonics of Japan.

Stamp of Approval from the Loudest of Voices: CERN “Our tests show that Zecotek`s LFS scintillation crystals have a faster coincidence time resolution for high-resolution PET scanners, which improves the image quality and results in shorter scanning times,” said Dr. Crispin Williams, INFN physicist working at CERN. “By using an LFS based array configuration we gain both performance and cost effectiveness. We are very pleased with the results obtained using Zecotek’s LFS crystals, which we have selected for our present work and continuing well into the future.”

The European Organization for Nuclear Research (commonly referred to as CERN - French derived name: “Conseil Européen pour la Recherche Nucléaire”) is an organization founded in 1954 and currently funded by 21 countries. It is an organization of physicians and engineers researching the fundamental structure of the universe, by using “the world’s largest and most complex scientific instruments to study the basic constituents of matter.”

If you have not heard of CERN before, we encourage you to watch this video and understand just how technologically important, and respectable this organization is. If Sheldon Cooper wasn’t a TV personality, then he would be working at CERN.

- June 2, 2016


https://www.youtube.com/watch?v=3wtUr3iVVIw

Zecotek’s LFS Crystals are Accepted as the Industry Standard within China March 2016: A major medical OEM based in China has selected Zecotek’s patented lutetium fine silicate (LFS) scintillation crystals for a new line of high resolution positron emission tomography (PET) medical imaging devices. It is anticipated that the first high resolution PET medical imaging device using Zecotek’s LFS crystals will be installed in a Shanghai hospital in July 2016.

Inflection Point: Transition from an R&D Company, to a Revenue-Generating Company The company generated $1.13 million in revenues over the last 12 months (LTM), a 435% growth from the previous LTM period. Zecotek made $700k in revenue from the last reported quarter alone. With a current backlog of $2 million, as well as likely follow-on orders from Chinese OEMs, CERN, and Philips, we believe that 2016 will be a transitional year for ZMS from a research-focused company to a multi-million dollar revenue-generating company.

- June 2, 2016


Catalysts

Additional Orders from Chinese OEMsZecotek announced in March 2016, that “one of the top two” medical OEMs in China has chosen to use Zecotek’s LFS scintillation crystals. The crystals will be installed in a PET medical imaging device in Shanghai by July 2016.

The deal gets interesting as soon as the first unit is delivered. If the unit is successfully dispatched in the clinic by July, then the relationship between the OEM and Zecotek calls for a follow-on contractual agreement. Although the full terms are not fully known, it is expected that the OEM will build another 200 LFS based PET scanners deployed across China over the next 5 years.

The relationship with this OEM is not exclusive, and it is worth pointing out that other Chinese OEMs are currently searching for similar scintillation crystals for their production. The PET market in China is nascent in comparison with North America, and is projected to grow from 1 unit per 100 million people, to 1 unit per 10 million people by 2020.

This relationship effectively builds a monopoly for Zecotek as the first supplier of highly-specialized scintillation crystals for mass Chinese production. When the market picks up, Zecotek’s expertise within the field will make them likely manufacturer candidates.

Q3/2016

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Mass Production of MAPD Photo DetectorsZecotek has developed a new compact and cost-effective photo-detector, the Micro-pixel Avalanche Photo Diodes/Transistor (MAPD/T), for low light detection that will phase out the bulky and expensive PMT’s (photo multiplier tubes) presently used in different imaging applications, such as PET, Gamma cameras and high-energy nuclear physics.

Given the limitations of PMT’s, and the inherent advantages of solid-state photo detectors, manufacturers of PET systems are now attempting to move to silicon based, solid-state analogues. Given this, Zecotek will begin large-scale production of MAPD/T units in July, with unit sales expected to commence in Q1/2017.

Philips OrdersA two-year patent case lawsuit filed by Zecotek against Saint Gobain was finally settled in December 2014. Zecotek alleges that Saint-Gobain’s LYSO crystals infringe Zecotek’s patent (which covers the substances and chemical formulations used to grow lutetium fine silicate scintillation or LFS crystals), and that used those crystals in its PET scanner devices.

A settlement was reached with Philips. The December 2014 news release ended with a statement by Dr. A.F. Zerrouk - “Zecotek and Philips have identified areas of cooperation in the field of medical imaging” … and ... “We look forward to establishing a meaningful business relationship with Philips.” Although no orders by Philips were placed since then, we believe that Philips has a strong demand for at least 200 units over the next 5 years.

Integration of value-added IDM ModuleZecotek is the only company with possession of all three of the key elements necessary for PET/MRI scanner construction, the scintillation crystals, photo detectors, and electronic components. These pieces placed together in a module is what Zecotek has developed, and coined as the IDM module. The module is analogous with Lego blocks being used to build a PET system. The benefit is being able to easily replace and modify certain parts within a medical-imaging device. Module sales are expected to commence in late 2017/early 2018.

- June 2, 2016


Figure 1: Typical IDM Module

Source: Company Presentation

The Company

Zecotek Photonics Inc. (TSXV:ZMS; Frankfurt:W1I.F; OTCPK:ZMSPF) ) is a company developing high-performance scintillation crystals, photo detectors, positron emission tomography scanning technologies, and other products for applications in medical, high-tech and industrial sectors. Founded in 2004, Zecotek operates three divisions with labs located in Canada, Korea, Russia, Singapore and U.S.A. The management team is focused on commercializing over 50 patented and patent-pending photonic technologies directly and through strategic partnerships.

- June 2, 2016

Figure 2: Historic Price Performance (4 years)

Source: Ubika Research, Sedar Filings


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1. February 2012: Zecotek Files Patent Lawsuit Against Saint-Gobain Corporation and Philips

2. March 2013: CERN confirms discovery of the Higgs Boson particle

3. May 2013: CERN announces partnership with Zecotek, in testing the company’s LFS crystals for experiments in the Large Hadron Collider (LHC)

4. July 2013: Zecotek signs a Joint Collaboration and Commercialization agreement with Hamamatsu of Japan

5. February 2014: Zecotek Named to the TSX Venture Top 50 List of Companies

6. February 2014: Zecotek announces plans to develop 3D Printer; share price at all-time high

7. December 2014: Zecotek Settles Lawsuit Against Philips and Saint Gobain

8. October 2015: First Order for LFS crystals from China for $500,000

9. December 2015: LFS order from US

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Imaging ProductsThrough years of research and testing, Zecotek became predominantly good at developing technologies used in nuclear imaging. These technologies have thus far constituted scintillation crystals, photo detectors and electronic components – the necessary component parts used within high performance medical imaging systems, such as PET scanners.

- June 2, 2016

Figure 3: Positron Emission Tomography (PET) Imaging System

Source: Ubika Research


Scintillation Crystal Arrays(on the surface)

Photo Detectors(structure)

Electronic Components(inside)

LFS CrystalsLutetium Fine Silicate (LFS) crystals are Zecotek’s proprietary photonics technology, which is the most commercially promising line to the company’s business in the short-medium term. To better understand this product, think of the crystals as necessary input material that make a PET scanner. In fact, crystals are a major component that may constitute up to one third (33%) of the underlying machine cost. At an average cost of $1.5 million / PET imaging system, you can see why this business will be very lucrative for ZMS.


- June 2, 2016

Figure 4: Zecotek’s Lutetium Fine Silicate (LFS) Crystals

Source: Company Website

Crystal production is a very technical job, requiring the right formulation, timing, and level of expertise. Apart from just making the crystals, the scrutiny of crystal quality is another challenge facing industry players. Crystals, like a computer’s hardware, have varying qualities that make one crystal better than another. These qualities are: density, decay constant, maximum emission, light yield and energy resolution.

LFS vs. Other Scintillators CrystalsZecotek’s scientists have pioneered research in high-performance scintillation detectors and maintain a comprehensive research program, which has resulted in its proprietary LFS crystals – a bright and fast scintillation material for use in medical imaging systems, experiments of high-energy physics, and other industrial applications.

Zecotek’s line of scintillators feature extremely high light output (80-85% on the TI:NaI scale) and record-fast decay constant, the highest performance yet demonstrated among the class of scintillators.

Figure 5: Scintillator Crystals - performance matrix

Source: Ubika Research, Company Reports

Other Applications Homeland Security: At the beginning of April 2016, Zecotek received orders for its LFS crystals for use in the homeland security and radiation safety markets. Due to the nature of the company’s scintillation crystals and detectors, Zecotek is able to detect small amounts of radiation, and therefore, is an ideal tool within the radiation safety market. The LFS crystals will be tested in devices used in homeland security and border protection and safety.

High Energy Physics: Zecotek has been working closely with the European Organization for Nuclear Research (CERN) on their work with the Large Hadron Collider (LHC) (see below) and other medical imaging apparatus. Given the large financial backing of the organization from 21 countries, Zecotek should be receiving sizable monetary payments for their future work together.

- June 2, 2016

Figure 6: Large Hadron Collider (LHC) in Switzerland

Source: European Organization for Nuclear Research (CERN)


Although no numeric values were disclosed in the closing of these deals, we foresee likely future reorders by the two counterparties. We would also like to stress how important these deals are in establishing the true value of the company’s scintillation crystals. Having various industry verticals for resale is important for the company’s revenue diversification, as it hedges industry specific risk factors.

MAPD/MAPT Photo DetectorsThe Micro-pixel Avalanche Photo Diodes (MAPD) are compact and cost-effective photo detector for low light detection. Zecotek has built these in an effort to phase out the bulky and expensive PMT’s (photo multiplier tubes) presently used in different imaging applications such as PET, Gamma cameras and high-energy nuclear physics.

Figure 7: Zecotek’s MAPD Photo Detectors

Source: Company Website

- June 2, 2016


The MAPD photo detectors detect very small signals and can be readily used for photon counting. They feature extremely high gain typical of PMTs (~10^5) with the advantage of low operating voltage (-70V compared to – 1000 V for PMT). The all solid-state design makes MAPD detectors compact and insensitive to high magnetic fields.

Zecotek’s detectors dramatically improve linearity and allow very tight timing resolution by providing fast pulse rise time and low jitter. Currently, the company has been subject to supplying Hamamatsu with only their LFS crystals, which were then combined with Hamamatsu’s line of photo detectors. However, the company is trying to command a larger chunk of the components market with the start of MAPD mass production in July 2016.

Established RelationshipsOver the company’s existence, a great deal of partnerships/relationships have been built which include CERN, Hamamatsu, Beijing OptoElectronics, the University of Washington and others. These partners are an integral component to the company’s success, and present a huge competitive advantage over current rivals and/or potential new entrants.

Figure 8: Zecotek’s Partners

Source: Respective Organizations’ Websites

The company’s crystal manufacturing partner is based in Beijing. We believe that this relationship is hugely beneficial for Zecotek in its effort of supplying the Chinese economy with medical imaging technology due to the Government of China’s goal of localizing technological production and innovation. The plan is called “Made in China 2025”, and considering this points raised above, the LFS crystals seem to be the logical choice of product for the Chinese PET industry.

Upside: 3D TechnologiesApart from medical imaging technologies, Zecotek has developed a suite of commercial 3D Screens, which do not require the viewer to wear glasses or use complicated head tracking systems. The screens offer innovative features such as full-HD capability and multiple viewing angles (multiple viewers can experience their own unique viewing perspective).

Zecotek has not commercialized this technology yet, and is currently only seen as the blue sky opportunity. We will await to see the company’s progress with this technology, and will make respective updates to this report when more viability is given.

The Industry: Medical Imaging

Transition in Medical Imaging Technologies Medical imaging technologies have come a long way. Since early days of X-ray discoveries in the late 1800s, to discoveries of medically injecting radioactive tracers into humans for use in medical scanning. We encourage you to read Appendix C for a brief history of medical imaging devices. However, long story short, medical imaging devices based on Positron Emission Tomography (PET) have displayed superior advantages in medical diagnosis, as compared to alternative imaging methods.

Primarily, the growth in PET scanners developed due to its highly sought after features within disease diagnostics. A PET scan’s main advantage is to be able to diagnose potentially cancerous cells at an early stage. This early detection prompts more timely treatment and improves the probability of successful treatment outcomes. Additionally, PET scans aid doctors in understanding staging (cancerous cell progression) and monitoring bodily responses to treatment/therapy.

A 2010 study from the Vancouver General Hospital showed that PET changed intended treatment plans in 50% of cases.

PET imaging is continuing to evolve as clinical research uncovers that it can be used to diagnose disease more accurately and efficiently than other imaging modalities. In 2015, it is estimated that over 1.7 million clinical PET and PET/CT patient scans will be performed in ~2,380 U.S hospital and non-hospital locations in the United States. This represents an annual increase of 6% when compared to 2014 PET scans.

On the other hand, IMV’s 2015 CT Market Outlook Report estimates that 78.7 million CT procedures were performed in the U.S. in 2015, which is 3% lower than the procedures performed in 2014.

Healthcare Reform in China Lead to Increased Investment into New TechnologyChina continues to experience rapid economic growth, a growing middle class and an aging population. These factors have placed pressure on the Chinese government to increase investment in medical diagnostics, including imaging in hospitals and medical centers around the country.

Health-care spending in China is increasing rapidly. The country’s annual expenditure is projected to grow at an average rate of 12% a year between 2014-2018, reaching $892 billion by 2018 (as according to the consultancy Deloitte). Spending will be driven primarily by consumers’ rapidly-increasing incomes and the government’s public health care reforms. Main areas of focus will be put towards improvements in infrastructure, the broadening of insurance coverage, and significant support for healthcare innovation.

Despite the growth figures, China’s health-care spending, at an estimated 5.4% of GDP, is still much lower as compared to Organisation for Economic Co-operation and Development (OECD) countries. The country has a large health care demand gap due to an aging population, growing urbanization, and the advancement of universal health care insurance. This is a positive catalyst for medical devices/technologies wishing to enter the state.

- June 2, 2016


- June 2, 2016


Figure 9: Healthcare Expenditure per Capita in 2012

Source: The World Bank, Ubika Research

Significant room for China to catch up in health care spending

United States as a Case Study for Future PET Scanner Needs There were three factors that constituted to the rapid growth in PET scanner adoption within the United States:

• The America’s Food and Drug Administration (FDA) determining that the most commonly used PET radiotracer was safe and effective in the late 1990s

• Set up of “PETNET”, a web of pharmacies around the country that could supply hospitals with radiotracers, eliminating the need for each hospital to make its own positron emitters in its own cyclotron

• Medicare beginning reimbursements for PET scans done on patients

Since then, the number of PET procedures and the sale of scanners began to take off. PET became an invaluable tool in oncology, often leading to more accurate cancer diagnoses, the detection of recurrent diseases and a better assessment of how patients respond to treatment.

In many industrialized countries, the advantages of this diagnostic approach in assessing initial tumor staging, detection of relapse, and response monitoring have been recognized, making adoption of this technology rapidly grow in the early 2000s.

- June 2, 2016


Figure 10: Approximately 2,000 PET Scanners Installed in the United States in 2009

Source: Journal of Nuclear Medicine Technology

As seen from the Figure above, by 2009, approximately 2,000 PET scanners were installed in the United States, while only 350 were installed in Europe (70 in Germany). Considering a population at the time of about 307 million in the United States and 830 million in Europe, there were about 6.5 scanners/million people in the United States and 0.4 scanners/million in Europe (1.2 scanners/million in Germany).

Apart from medical imaging industry specific factors driving PET adoption in the United States, the other (much larger) adoption catalyst was the overall prosperity of the US economy. The US GDP rose from $9 trillion in 1990 to $15 trillion in 2010, a CAGR of 2.5%. If you think that’s impressive, then compare it to China’s GDP CAGR of 9.5% over the last 10 years.

Factors Constraining PET Growth Although the medical imaging industry displays strong growth catalysts, we would like to note that there are also challenges with PET adoption:

1. Costs (high operational and capital costs; high costs of the radioactive component Fluorodeoxyglucose (FDG); concerns about spending scarce healthcare dollars)

2. Policy Framework (concerns about overuse of PET; regulation of FDG)

3. Education and Training (shortage of trained and educated personnel – physicians and radiologists)

Financial Analysis, Forecasts & Valuation

Revenues, Back-log and Profitability With $1.7 million in revenues over the last 12 months and a backlog of $2 million, Zecotek is finally commercializing its business. Top-line revenues in excess of one million have been tirelessly expected by ZMS investors ever since the Hamamatsu partnership was announced in July 2013. Needless to say, the company has finally achieved solid preliminary revenue traction and, in our opinion, is heading in a positive direction.

Revenue Catalysts push Forecasted 2017 Revenues to $5MM

China will be big for Zecotek in the coming years. With an initial order from a large Chinese OEM, we see this as an opportunity for market acceptance of Zecotek’s technology. As soon as the first PET imaging device using Zecotek’s crystals is installed in Shanghai (July 2016), follow-on orders and additional OEM partnerships should be just around the corner.

It was stated by management that the 1st Chinese OEM is projecting a demand of 200 LFS based PET scanners within the next 5 years. After doing some digging, we found Concord Medical Services Holdings Limited (CCM), which operates a network of 141 radiotherapy and diagnostic imaging centers in China. They claim to operate the largest network of centers, so we doubt that this is the Chinese manufacturer that Zecotek is involved with. However, this does provide us with potential product needs for this specific OEM if Zecotek engages them.

Based on this, we forecast that a contractual agreement with the OEM will be signed at the end of delivery (July/August) and initial orders of 10 LFS based PET scanner will be placed after a 6-month test phase of the 1st order. We estimate that the LFS components are priced at $450,000/PET scanner, resulting in $4.5 million in sales from this OEM partner for 2017 (recognized in H2/2017; Zecotek’s FYE is July 31st).

- June 2, 2016

Figure 11: Zecotek’s Revenues Show Steady Progression

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New product introduction – MAPD/MAPT – should provide additional upside. Zecotek has been constructing and back testing its proprietary photo detectors since 2012. The units are finally ready to be mass produced (on schedule for July 2016), and will be used to upsell with incoming LFS orders. The idea is that instead of controlling only 33% of the component parts in a PET system, Zecotek wishes to control all. The introduction of the proprietary photo detectors is the move in that strategic direction.

We believe that this new product vertical is a very good move by the company. Their strong customer/supplier relationships built through the LFS product line will be key advantage to a speedy go-to market strategy. The hurdle of trust and reputation will not need to be overcome with additional products due to its already established success with LFS crystals.

Zecotek’s technologies may be used in other industries/verticals. In the beginning of April 2016, the company announced the entry into radiation safety and homeland security markets. The company’s devices will be tested in border security, airports, government building, and other security-type applications. Zecotek’s superior LFS crystal properties are ideal at detecting small amounts of radiation. We can expect to see follow-on orders for LFS crystals from these parties after the testing stages.

Lastly, we still believe there will be a great opportunity from Philips. Although its settlement was finalized in December 2014, and no unit orders have been placed since then, we are still confident in its future working relationship. At this point we have no real timeframe for Philip’s demand needs, which makes forecasting difficult.

- June 2, 2016


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In terms of profitability, we are projecting the company to achieve 35% Gross Profit margins in 2016/2017, increasing to 40-45% thereafter due to scale.

Balance Sheet should be better understood by investors Zecotek has a negative working capital of roughly $7 million, with a book value of total assets worth $0.7 million. This obviously leads to a negative shareholders’ equity balance, and plenty of worried investors. However, investors should really take the time to understand Zecotek’s business and why its balance sheet is this way.

First and foremost, Zecotek’s greatest asset lies in its 50+ patent portfolio. Much like a technology company with great IP, Zecotek has taken more than a decade to produce its LFS crystals, MAPD photo detectors, and other technology. Unfortunately, these innovations are expensed each year under R&D, instead of being capitalized under intangible assets. Just to give some background, Zecotek has spent a total of $17.5 million in R&D over the last 10 years.

Another scary line item on the Balance Sheet is “Trade and other payables” of $4.7 million. Reading into this figure, it constitutes:

• Salaries and fees owed to consultants, directors and employees of $976,777• Government of Singapore and Government of Malaysia grants of $1,537,209 CAD,

which the company believed would not need to be repaid. However, the government of Singapore believed that certain local employment, expenditures and production conditions were not met, and have requested full repayment of the grant. Zecotek is currently battling this dispute.

• Other related party transactions constituting unpaid service/consulting fees to management

Apart from the request for repayment by the Government of Singapore, the trade and other payables are all related to unpaid inter-company fees, which do not have strict payment due dates with relaxed structures. Although this is a point of concern, we believe that this does not create a short-term liquidity threat for the company.

It is worth noting that there are 23.3 million warrants outstanding with a weighted average maturity of roughly a year (as of Jan. 31, 2016) and a weighted average exercise price of $0.51; as well as 10.7 million options outstanding with a weighted average maturity of two years (as of Jan. 31, 2016) and a weighted average exercise price of $0.64.

- June 2, 2016


Issues and Outstanding Common Shares: 119,093,866 As of February 10, 2016

Warrants OptionsExercise Price Expiry Exercise Price Expiry$0.50 3-Jun-16 472,222 $0.50 13-Nov-16 539,249$0.50 6-Nov-16 3,828,570 $0.50 28-Nov-16 347,063$0.50 12-Nov-16 4,228,570 $0.53 5-Nov-17 147,630$0.50 28-Nov-16 5,003,073 $0.53 15-Dec-17 215,880$0.53 5-Nov-17 2,432,673 $0.53 4-Feb-18 47,724$0.53 15-Dec-17 3,084,000$0.53 4-Feb-18 1,301,889

Common Shares Fully Diluted: 140,742,409

Figure 13: Zecotek’s Capitalization Table

Source: Ubika Research, Company Filings

Risks

Prolonged sales periods may hurt the share price in the short termAlthough we continue to see catalysts driving demand for advanced medical imaging systems in economically growing geographic regions such as China and some parts of Europe, the adherent risk involved with the timing of orders may hurt our projections, and the company’s concurrent share price in the short term.

Higher profitability will arise with scaleThe company is currently operating at a net loss, and such results may be expected to continue for the near term. Additionally, greater competition within the industry may put pressure on producers to lower prices in the medium-long term. There is no assurance that the company will ever generate any profits.

Foreign currency riskThe company generates revenue through various geographies, exposing itself to currency exchange rate fluctuations.

Conclusion

Zecotek Photonics Inc. is a developer of proprietary parts (crystals, photo detectors and other) used within medical imaging systems such as the positron emission tomography (PET) system. The company is currently entering an inflection point, as the transition from a Research and Development play into a commercialization story is beginning to bring investor interest to the stock.

With over 10+ years of research and 50+ patents filed/granted, Zecotek achieved $1.7 million in LTM revenues and has a backlog of another $2 million. The company recently extended its business roots into China with a contract signing coming from two separate OEM partners. This geographic opportunity alone could provide Zecotek with 200+ LFS unit orders over the next 5 years. It gives us great confidence that Zecotek has truly produced a unique and superior scintillation crystal, as it has not only been adopted in China, but has been used in testing staged at the research facilities of CERN. This is a huge competitive advantage, which is hard to deter by competition.

We believe that Zecotek has built an impressive business, and is now entering a truly exciting stage. We will continue to monitor the stock for additional revenue sources, at which point a valuation could be easier to assess. Investors should expect to see larger unit orders from China (Q4/2016 – FY/2017), potential unit orders from the relationship with Philips (FY/2017), additional opportunities within other business verticals such as homeland security (Q4/2016 – FY/2017), and business profitability by 2017 year end.

- June 2, 2016


Appendix A: Recent News

Increased Private Placement to $925,000 and Closed First Tranche of $678,000Company is raising financing at a price of $0.30 per unit, with each unit consists of one common share and one common share purchase warrant, with an exercise price of $0.43 and expiring on May 26, 2018.

Chinese OEM Receives First Order of Patented LFS CrystalsThe first condition of the company’s memorandum of understanding (see PR on March 23, 2016) with the Chinese client has been met.

Zecotek Reports $685,452 of LFS Scintillation Crystal Sales Revenue For Q3/2016Sales for the third quarter were $685,452, a ninefold increase from $70,149 posted in the same time period last year. Unaudited revenue for the nine months ending April 30, 2016 increased $1,288,725 to $1,532,406 from $243,680 in fiscal 2015.

CERN Orders LFS CrystalsThe PET program at CERN has selected and ordered its patented LFS scintillation crystals for its work on PET medical scanning devices. After a long testing process, Zecotek`s LFS scintillation crystals were chosen because they provide the best results for coincidence timing resolution.

First Patent Received for New LFS Crystal FormulationZecotek Imaging Systems Pte. Ltd., has been granted its first patent in a series of pending patents for its advanced formulation of its patented LFS scintillation crystals. The patent is for multi-doped lutetium oxide based scintillators having improved photonic properties.

Zecotek Enters Homeland Security and Radiation Safety MarketZecotec has received preliminary orders for its patented LFS scintillation crystals from major OEMs developing radiation monitoring and detection devices. The LFS crystals will be tested in devices used in homeland security, border protection and safety, and other.

Chinese OEM Adopts Zecotek’s LFS Scintillation CrystalA major medical OEM based in China has selected Zecotek’s patented LFS scintillation crystals for a new line of high resolution PET medical imaging devices. It is anticipated that the first high resolution PET medical imaging device using Zecotek’s LFS crystals will be installed in a Shanghai hospital in July 2016.

Zecotek Closes Second Tranche of $1.6 Million Private Placement The company sold an aggregate of 4,385,889 units at a price of $0.36 for total gross proceeds of $1,578,920. Each unit consists of one common share and one common share purchase warrant, with an exercise price of $0.53 and expiring on February 4, 2018.

Zecotek Enters New Market for LFS CrystalsCompany has received an order for its patented LFS scintillation crystals from a specialized medical imaging device manufacturer based in the United States.

- June 2, 2016


December 10, 2015

February 4, 2016

March 23, 2016

April 29, 2016

April 1, 2016

April 21, 2016

April 6, 2016

May 5, 2016

May 26, 2016

Appendix B: Management & Board of Directors

Dr. A. Faouzi Zerrouk – President, CEODr. Zerrouk is Chairman, President and CEO of Zecotek Photonics Inc. In 1989, he established the first foreign partnered, private, business oriented photonics research Lab in the Ex-Soviet Union (Novosibirsk, Siberia). He duplicated the same model in three prestigious research institutes in Moscow. Dr. Zerrouk acted as a technology transfer advisor, working closely with the Ministry of Science and Technology during the transition period to the Russian federation. He worked on Research and Development strategies for the new economy with prominent members of the Russian Academy of Science and coordinated many government projects in joint relations between Russia and countries like China, Germany, USA, Malaysia, and Saudi Arabia. Dr. Zerrouk was Chairman and CEO of various companies in Europe and Asia.

Michael Minder - CFO, Investor RelationsMr. Minder is a seasoned finance professional with over 15 years of international banking experience. He held senior leadership roles in Asset and Wealth Management for Credit Suisse Group in both Switzerland and North America, managing assets of high net worth accounts.

Azman Ariffin - Executive Vice-President, Operations and General ManagerMr. Azman holds a Master’s Degree in Engineering Business Management from Warwick University and has more than 25 years’ experience in the field of Manufacturing and Operations. Prior to joining Zecotek in 2006, he held a senior position in a Government Statutory Board.

Dr. Jalil Ali – Board MemberDr. Jalil Ali received his PhD in plasma physics from Universiti Teknologi Malaysia (UTM), Malaysia in 1990. At present, he is a Professor of Photonics at the Institute of Advanced Photonics Science, Nanotechnology Research Alliance and the Physics Department, UTM. From 1987-2010, he has held numerous faculty and research positions including the Dean/Director, Bureau of Innovation and Consultancy.

Erich Sager – Board MembeErich Sager is a current Board member of GreenValue SA. Mr. Sager served for several years on the Board of Directors of BioMarin Pharmaceutical Inc.and as Chairman of Raptor Pharmaceutical Inc. and as Chairman of LaMont Asset Management SA, a private investment management firm.

David Toyoda – Board Member Mr. David Toyoda graduated from the University of British Columbia with a Bachelor of Law degree and a Bachelor of Commerce degree with honors. Mr. Toyoda practices in the corporate and securities law area, focusing on companies that list on Canadian stock exchanges. Mr. Toyoda teaches in the areas of corporate governance and public financing at Simon Fraser University, Faculty of Business Administration and the TSX Venture Exchange.

- June 2, 2016


Appendix C: Background info on Medical Imaging Tech.

Brief History of Medical Imaging Radiology (1895): Discovery of X-raysMedical Imaging began after the discovery of x-rays in 1895 by Wilhelm Röntgen, a German professor of physics. X-rays were put to diagnostic use very early, before the dangers of ionizing radiation were discovered.

Contrast Agents (1906 – 1912): Injection of contrast agents into bodyThe application of pharmaceutical contrast agents was used to help visualize organs and blood vessels. The harmless contrast agents were administered orally or via vascular injection and allowed to visualize blood vessels, digestive and gastro-intestinal systems, bile ducts and gall bladder.

Nuclear Medicine (1950s): Injection of radiopharmaceuticals In nuclear medicine procedures, radionuclides are combined with pharmaceutical compounds, to form radiopharmaceuticals. Once these radiopharmaceuticals have been administered to the patient, they converge in specific organs or in cellular clusters that are more ‘active’ than others. This allows nuclear medicine to image the extent of a disease process in the body, based on the cellular function and physiology, rather than relying on physical changes in tissue anatomy. In nuclear medicine the recorded radiation is emitted from within the body rather than generated by an external source as is the case with X-rays. This emitted radiation is then registered by gamma cameras. In some diseases nuclear medicine studies can identify medical problems at an earlier stage than other diagnostic tests.

Ultrasound (1960s): Transmitting high-frequency sound waves into the bodyThe technique is similar to the echolocation used by bats, whales or dolphins. The ultrasound scanner transmits high-frequency sound waves into a body by use of a probe or transducer. The pulses or waves penetrate into the body and bounce off the organs. The return wave vibrates the transducer; the transducer turns the vibrations into electrical pulses that are sent to the ultrasonic scanner where they are transformed into an image. Ultrasound has become a very popular imaging technique, as it has no adverse bio-effects.

Computed Tomography - CT (1970s): Introduction to computer-processed X-raysThis technique uses computer-processed X-rays to produce tomographic slices of specific areas of the body. It provides a better insight into the pathogenesis of the body, thereby increasing the chances of recovery.

Magnetic Resonance Imaging – MRI (1971): Transmitting radio waves into the bodyIn 1971, it was showed that nuclear magnetic relaxation times of tissues and tumors differed, motivating scientists to use magnetic fields to study diseases. An MRI test uses a magnetic field and pulses of radio wave energy to make pictures of organs and structures inside the body.

With MRI, radio waves 10,000 - 30,000 times stronger than the magnetic field of the earth are sent through the body. This strong magnetic field causes miss-alignment of particles within the body. As these protons move back into their original positions, they send out radio waves of their own. The scanner picks up these signals and a computer turns them into a picture.

- June 2, 2016


Positron Emission Tomography – PET (1974): First PET camera built for human studiesA positron emission tomography (PET) scan is an imaging test that allows your doctor to check for diseases in your body. It is used to detect cancer, heart problems, brain disorders, and problems with the central nervous system.

PET Scanning works in 4 stages:

1. The Patient is injected with a small amount of radioactive “tracer”. Different tracer molecules build up in different types of tissue, so an appropriate tracer is chosen that accumulates in the area of interest.

2. An atom in the tracer molecule undergoes radioactive decay, and emits a positron. The positron soon encounters an electron, and the two particles annihilate each other, producing a pair of gamma rays, traveling in opposite directions.

3. The gamma rays are detected by a doughnut-shaped array of detectors that surround the patient. When two gamma rays are detected on opposite sides of the doughnut at the same time, they are assumed to be a pair.

4. By combining hundreds of thousands of observations of gamma-ray pairs, it is possible to construct an image showing the distribution of the radioactive tracer, and hence of the associated metabolic activity.

- June 2, 2016


Figure 13: PET Scanner - process


1

2

3 4

PET/CT Scanners (2001)PET scans are now often conducted with other types of scans, such as CT or MRI scans, analyzing both anatomy and function. Today nearly all PET scanners sold are combination devices.

PET, CT, MRI … what’s the differenceA CT scan (abbreviated Computerized Tomography; and also known as a CAT scan) and a PET scan are two different but related imaging techniques.

A CT scan provides information about the body’s anatomy, such as size, shape and location. It answers the question of “What does it look like?” For example, a CT scan is effective at discovering abnormal growths or tumors that could indicate mesothelioma. The scan uses x-rays, and provides doctors with a cross-section view of the body, so they can see the patient layer by layer, giving them information about the organs as well as the surrounding tissue.

A PET scan, on the other hand, gives us good information about the functioning parts of the body. So this answers the question of “How is it working?” It can be really effective at helping us understand staging because it gives us information about how the cancer is growing. It can also help us understand how effective a treatment is for a patient. During a PET scan, a radioactive substance is injected into the patient’s body. The substance has the ability to get absorbed by the particular organ or tissue being studied. The substance then zooms to the most energy consuming parts of the body. The scans develop ‘hot zones’ of blue and green, as well as red and orange, which are the most energy consuming areas. This is going to be the heart, the brain, as well as any areas where there’s rapid cellular growth, which could indicate cancer.

PET scan can measure blood flow, oxygen use, glucose metabolism (how your body uses sugar), and much more. A PET scan is an outpatient procedure (the patient does not have to stay in the hospital after the scan).

With the emergence of new drugs aimed at particular molecular targets, PET has taken on a new role. Many of the new targeted drugs, such as Gleevec or Sutent, were designed to stunt the growth of cancer cells—but changes in tumour size occur slowly, if at all. Only a PET scan could quickly show whether tumour cells were dying off and the drug was having the desired effect. “If we had relied on the conventional way of assessing drug response, with CT or MRI, we might not have considered that those drugs were working,” says Dr Van den Abbeele.

Depending on the radiotracer that is being used, PET can measure many different processes. That is why drug giants such as Pfizer and Merck are using PET in their drug-discovery and development programs, giving them metrics for early no-go decisions.

- June 2, 2016


- June 2, 2016


Figure 14: CT Scan Images

Figure 15: PET Scan Images

- June 2, 2016


Figure 16: Medical Imaging Devices - Comparables Table


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