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2016-11-25

ANOTO GROUP AB: REPORT JANUARY – SEPTEMBER 2016

Anoto Group AB
Quarterly report

REPORT JANUARY – SEPTEMBER 2016

-- Large frame order for 120 000 pens received from TStudy, China, in August.
Minimum order value is 4 MUSD.
-- Net sales in the period amounted to MSEK 168 (138) and Net sales for the
quarter were MSEK 40 (55).
-- The Gross margin for the period was 34% (46%) and Gross margin for the
quarter was 31% (37%). Gross profit for the period was MSEK 56 (64) and
Gross profit for the quarter was MSEK 12 (20). The quarter was affected by
a one-time inventory adjustment of -3 MSEK.
-- The quarter has also been impacted with costs of 5 MSEK related to
cost-reduction activities. The related activities are expected to save
approx. 50 MSEK annually. Further to this, the quarter has been affected by
write-downs of 37.6 MSEK.
-- Earnings before depreciations and amortizations (EBITDA) for the period
were MSEK -148 (-59) and EBITDA for the quarter was MSEK -60 (-25).
-- The Result after tax for the period was MSEK -208 (-68) and the Result
after tax for the quarter was MSEK -106 (-30).
-- Earnings per share after dilution for the period were SEK -0.13 (-0.08) and
for the quarter SEK -0.05 (-0.03).
-- ABLE Investment Advisors Inc., a Korean company, has entered into an
agreement to invest 6 MUSD in Anoto, thereby replacing previous agreement
with SMark Inc. As per November 25, 1.5 MUSD of the total amount has been
received, with a further 3.0 MUSD secured through an issued guarantee from
a financial institution.
-- Cash flow during the period was MSEK -4 (3) and Cash flow for the quarter
was MSEK -34 (0). Cash flow from operating activities before changes in
working capital during the period was MSEK -158 (-49) and for the quarter
MSEK -70 (-24). Cash flow from financing activities during the period was
MSEK 150 (92) and for the quarter MSEK 20 (64).
-- At present, Anoto faces a challenging financing situation. For further
information, see “Risks and Uncertainties”.

Comments from the CEO

Presently, Anoto is undergoing a period of decisive transformation,
characterized by significant cost reduction efforts and refocusing on
profitability. In order to achieve profitability, Anoto has taken firm steps
to streamline costly development projects and create a small, efficient
organization, reducing headcounts and closing offices. Anoto is also
re-directing its strategy by reducing dependency on capital intensive hardware
business (digital pens and large screens) and instead focusing on a highly
profitable pattern-based technology business in the mobile and digital app
space.

As a result of such strategic changes, Anoto decided to proactively write-off
substantial charges of legacy projects in the third quarter of 2016.

To facilitate this transition, Anoto is leveraging its own proprietary
technologies and entering into new partnerships. On July 15, 2016, Anoto
entered into a strategic cooperation with Digiworks, a specialist in
pattern-based encoding and printing technology. The alliance will complement
Anoto’s own proprietary pattern IP and pattern generating technology to kick
start Anoto DNA business and to further expand Anoto’s reach into various Asian
markets.

The Anoto DNA business (ADNA) is built on Anoto’s exceptional ability to create
600 quintillion unique patterns (hence, DNA) which can be printed onto products
and devices. Each pattern has a unique ID and the possibility to add encodable
data. With the introduction of ADNA business, Anoto expands the use of its
proprietary pattern to ubiquitous mobile devices such as smartphones and
tablets.

Anoto DNA has multiple applications and uses, from counterfeit protection to
providing critical enabling technology to AR (Augmented Reality) advertising.
Anoto is currently talking to a number of multinational companies ranging from
consumer to industrial and service companies.

Having the Anoto DNA solution will also enable robust data-mining capabilities.
This solution allows manufacturers to apply near-invisible unique patterns to
their products, thereby enabling accurate item-level tracking and personalized
digital engagement.

The cooperation between Anoto and Digiwork is reinforced by Anoto’s investment
of 2 MUSD in Digiwork’s parent, SMark Co., Ltd. SMark is a Korean listed
company on KOSDAQ Korea under “ticker” SMARK. Originally, the parties agreed
that SMark in turn would invest 5 MUSD in Anoto at a subscription price of USD
0.029185. However, due to recent KOSDAQ (Korea Stock Exchange) regulations
regarding cross-investments, SMark’s affiliate company, ABLE Investment
Advisors Inc (ABLE), will make the investment. The renegotiated agreement
reflects an investment of 6 MUSD at a subscription rate of USD 0.023135. As
per November 25, we have received approximately 1.5 MUSD from ABLE, with a
further 3.0 MUSD secured through an issued guarantee from a financial
institution. The remaining 1.5 MUSD is expected to arrive beginning of
December.

While the above partnerships and innovation are opening exciting new markets,
the acquisitions of Livescribe and Pen Generations ensure that Anoto retains a
relevant footprint in the digital pen business. In addition to providing a
diversification of the pen portfolio, these acquired companies also open up the
fast-growing pen markets in Asia and Latin America. Pen Generations has a
strong network of partnerships, especially in the Education sector in Asia,
while Livescribe provides a strengthened presence in the US retail market. As
previously communicated, Tstudy China has given Anoto a frame order of 120 000
pens to be delivered within one year – the value of this frame agreement can
vary substantially depending on the type of pen Tstudy chooses to buy, but an
absolute minimum would be around 4 MUSD annually. Overall, the pen pipeline is
very strong, with several large orders for 2017 already in place. As announced
on November 16, Anoto has received an 8.4 MUSD order for pens from India for
deliveries over three years.

Historically, Anoto has invested heavily in R&D, both in pen development
projects but also to develop capital intensive new businesses such as large
interactive screens. As a result, the company has made substantial losses –
losses which have been financed through share issues. Anoto has now decided to
focus on only four business areas, and going forward the company will
principally invest in one of these, namely Anoto DNA (ADNA).

Our costly pen developments projects, such as the pen delivery to a Japanese
insurance company and the HP Screen pen, are no longer putting any strain on
the Group’s liquidity. The Japanese pen project has been successfully completed
while the HP project is on hold while the commercial aspects are being
renegotiated. As for the own branded large screen display development project,
Anoto has chosen to discontinue this and will instead seek technology licensing
option to existing large display manufacturers.

In conclusion, Anoto is moving in a new strategic direction that innovatively
bridges the analogue – digital divide with hardware, software, patterns, and
data. This strategy is built around Anoto’s proprietary pens, microdot
patterns, real-time image processing, big data, and the optic capabilities of
mobile devices. It thereby leverages current strengths while delivering
dramatically expanded global market presence.

Anoto remains committed to a profitable future, and accordingly further
restructuring has been done during Q3. The latest restructuring effort, will
result in annual savings of approximately 50 MSEK, affecting 50 FTEs. Related
one-time costs amount to 5 MSEK and have been provided for in the Q3 numbers.
In total, restructuring programs implemented during 2016 are estimated to save
100 MSEK annually versus present cost levels.

To ensure adequate financing throughout the ongoing transformation period,
Anoto is presently negotiating a convertible bond offer of 5 MUSD of which
approximately 4 MUSD has already been committed. The Board’s opinion is that
this additional 5 MUSD gives the Group the required funds to address the future
business opportunities. The Board is working on various other alternatives to
secure the required cash in case the convertible bond private placement is not
fully placed.

OUTLOOK

Anoto expects to close both the next quarter and the full year of 2016 at a
loss. 2016 has been a challenging year notable for the tough decisions taken to
transform from a hardware-focused organization to one building for a profitable
future based on software, proprietary patterns, and robust image processing.
Challenges will certainly remain in 2017 but it is expected that the newly
efficient pen business will make strong contributions to the financial health
of the organization while the pattern-business develops in less predictable but
potentially more explosive ways. With costs lowered by 100 MSEK and this
exciting portfolio to support growth, Anoto anticipates substantial
improvements in its financial performance during 2017.

Joonhee Won
CEO, Anoto Group AB (publ)

Anoto Group AB discloses the information provided herein pursuant to the EU
Market Abuse Regulation and the Securities Markets Act. The information was
submitted for publication at 08.45 on November 25, 2016

Calendar 2016

Q4 report February 2017

For more information

Please contact:

Joonhee Won, CEO
Email: ir@anoto.com

Anoto Group AB (publ.), Corp. Id. No. 556532-3929
Mobilvägen 10
SE-223 62 Lund, Sweden
Phone: +46 46 540 12 00
www.anoto.com

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