Nanoco Group plc (LON:NANO), a world leader in the development and manufacture of cadmium-free quantum dots and other specific nanomaterials emanating from its technology platform, has announced its unaudited Preliminary Results for the year ended 31 July 2022.
Operational Summary – long term commercial visibility being generated
· Significant contract extension with European electronics customer to deliver materials validated for commercial production in the short term
· Continuing development work with major Asian chemicals customer
· Increasing customer engagements for CFQD materials for display applications
· Consolidating all operations into Runcorn to deliver long term cash savings (net £0.7m p.a.)
Samsung Litigation – strengthened belief and confidence in our case
· Patent Trial and Appeal Board (‘PTAB’) confirmed validity of all 5 patents and 47 associated claims in the litigation against Samsung – firmly underpinning our unique leading edge IP
· Jury trial in Texas expected in the short term
· Filed additional lawsuit seeking injunction against Samsung in Germany
· Goal remains delivering fair value for global nature and remaining lives of our patents while acknowledging the remaining risks
Financial Summary – traded ahead of earlier expectations with enhanced and extended funding
· Revenue increased 19% to £2.5m (FY21: £2.1m) on increased activity levels
· Improved Adjusted LBITDA of £2.1m (FY21: £2.8m LBITDA) from revenue growth and savings
· Equity fundraising extended cash runway to CY 2025, beyond expected breakeven point
· Cash of £6.8 million at year end with average net monthly burn rate now under £0.2m
Brian Tenner, Nanoco’s CEO, commented on the results:
“We have consistently delivered on all of our target milestones throughout the Period. The full year contract with the European electronics customer covers product validation and new material development. This is a clear sign of their commitment to commercialising infra-red sensors using Nanoco’s quantum dots. We maintain our goal of being ready in H1 FY23 for potential commercial production orders in the short term.
“Interest has been re-energised in our CFQDs for use in displays. This reflects the gradually increasing number of panel makers seeking cadmium free solutions and also reflects the strong underpinning of Nanoco’s IP provided by the PTAB decisions earlier this year.
“We are consolidating our core R&D and scale up capabilities in our Runcorn production facility to deliver sustainable net savings of around £0.7m p.a. The over-subscribed equity fund raise significantly extended the cash runway beyond when we expect to be self-financing. This has also allowed targeted strategic investments in new equipment and additional personnel as we increase our overall activity levels across the business, including new R&D staff to support new materials for other quantum applications.
“We are also pleased with the developments in our litigation against Samsung during the Period. The progress vindicates and enhances our confidence in the merits of our case. We won all five of the inter partes reviews at PTAB. At the pre-trial conference, the motions that are important to Nanoco were resolved in our favour. We have been able to narrow our focus ahead of the short one week trial onto those claims that Nanoco considers to be the strongest and most clearly infringed. We patiently await a confirmed date for that trial.
“The whole Nanoco team has worked hard to deliver significant progress on a number of fronts during the year. We have increased the potential to create significant shareholder value in our organic activities and the Samsung litigation in the short to medium term. We will be working hard to continue these trends, particularly with confidence in the visibility of commercial production orders and an initial outcome to the trial in Texas during H1 FY23. The Board therefore has growing confidence in the strength of the investment proposition and value inherent in the business.”
Chairman’s statement
Steady delivery of critical, value enhancing milestones
Summary
• Major contract extension agreed with important European customer, underpinning scale-up and final production validation.
• Development agreement progressing with a major Asian chemical company that supplies global electronics markets.
• Continued expansion of our range of different materials, customer engagements, and applications for sensing materials.
• Growing expressions of interest in display materials following validation of Nanoco IP by PTAB and global RoHS developments.
• Confidence in the merits of our case against Samsung for the wilful infringement of the Group’s IP in the USA further reinforced by PTAB decision to confirm validity of all our patents; currently awaiting a firm trial date.
• Operations transferred successfully from Manchester to Runcorn delivering net £0.7 million annualised savings from CY23.
• Over-subscribed equity issue of £5.4 million (net) secured cash runway to CY25 – beyond the point when the Group expects to be self-financing in its organic operations.
Strategy and business activity
This calendar year was always going to be a critical year for Nanoco. Our challenge was to deliver key value inflection milestones, in both the organic business and in the IP litigation against Samsung. By the end of the financial year we had successfully delivered in both areas.
The significant contract extension with our important European electronics customer underpins final product validation in the sensor market. It also provides new material research service income in advance of potential commercial production orders. We aim to have validated our materials and to have visibility of commercial production from the customer around the end of H1 FY23.
We have continued to build on our success in expanding our range of nanomaterials for use in sensing applications and to grow the number of active engagements with customers. This incremental approach to business development ensures that we balance the Company’s financial resources against the need to continue to expand our product and customer reach.
Commercial success with materials in production will be the ultimate test for the success or failure of the business in the medium to long term. In the background, a small subset of the Nanoco team has driven the Samsung litigation forward enabling the commercial team to focus fully on the organic business.
Business performance
The organic business has enjoyed a number of notable successes during the year. A new one-year contract with our important European electronics customer creates a much more stable planning and operating environment for the Nanoco team. We expect to continue the expansion of our portfolio of materials and customers focused around infra-red sensing as we expand our IP in this area. We are also starting to see additional inbound enquiries for our display materials as markets take notice of our IP victories at PTAB.
The operations team completed a number of important change projects during the year, not least of which were the exits from the first and ground floors of our Manchester facility. We expect a number of operational benefits from having the whole team in one location as we look forward to visibility of our first commercial production orders around the end of H1 FY23. The operational benefits will be supplemented by just under £0.7 million of net annualised cash savings once the exits are complete towards the end of CY22.
The successful and significantly over-subscribed fundraise of £5.4 million (net) in June 2022 creates a solid foundation for the business by extending our cash runway out to CY25. This is expected to be beyond the resolution of any PTAB appeals and also potentially beyond the point when we expect the organic business to become self-financing.
No dividend is proposed for the year (2021: none).
Samsung litigation
It was extremely gratifying earlier in the year when the Patent Trial and Appeal Board (“PTAB”) emphatically rejected all of Samsung’s objections to the 47 claims in the five patents in the case. This is a clear vindication of the quality, strength and value of Nanoco’s IP portfolio, which is now attracting new commercial interest from other market participants.
At the time of writing, we are still awaiting a firm date for the Jury trial in Texas. It is important to emphasise that Samsung is likely to appeal any verdict that favours Nanoco in this trial. As a result, we do not expect a conclusion of the US litigation until the appeals process is exhausted, which could take some years. Samsung has already lodged notices that it intends to appeal all of the PTAB findings, a process which is to be resolved over the next twelve to eighteen months.
So, even if we are successful at trial there will still be much work to be done before this matter is finally settled. Our resolve remains strong to achieve fair value in this matter for all of our stakeholders, whether through negotiated settlement or final enforced judicial outcome.
We have also recently taken steps to defend our IP in Germany, a major market for Samsung. Other venues for litigation are also being evaluated. The costs of the legal process in Germany are lower than the US, the speed of resolution is faster, and, importantly, injunctions preventing the sale of infringing units are more commonly granted. Our third party funding partner continues to support all aspects of these lawsuits, including the appeals processes.
Finally, the Board continues to review options for litigation against other potentially infringing entities, including third parties who may be purchasing infringing display units from Samsung.
Governance and Board
This has been another busy year for the Board, with active engagement from all members. Close monitoring of the IP litigation, as well the operational aspects of the business, has kept Board members busy. We have also pursued continuous improvement in our governance processes.
Non-Executive Director salary deferrals remained in place throughout the year as the Board continued to show leadership on cash and cost control. Following the improved outlook for the organic business and the successful fundraise in June 2022, it was decided to cease the 35% deferral of NED salaries with effect from 1 July 2022.
During the year, we benefited from the services of Henry Turcan as a Non-Executive Director, representing our largest shareholder, Lombard Odier Asset Management (“LOAM”). His contribution and perspectives on the capital markets in particular were immediately valuable. After the year end, with the business on a much more secure financial and commercial footing, Henry stepped down from the Board and LOAM has chosen not to nominate a replacement NED at this time.
Employees and shareholders
Our staff responded admirably to the welcome challenges of an increasing workload across all aspects of the business. We continue our efforts to provide staff with a supportive working environment and have made special provision during the relocation from Manchester to Runcorn. We are pleased that the vast majority of staff agreed to make the transition from Manchester to Runcorn. We have moved swiftly to ensure that the business is staffed appropriately in the run-up to potential commercial production orders in the near term.
Following a number of challenging years, we are pleased that we have been able to award a Company-wide pay rise for the first time since August 2019, whilst enhancing the overall Nanoco reward package to retain and motivate our high calibre team.
The Board is very grateful for the hard work of our staff, who have brought us to this exciting point in our evolution. Capturing the short-term opportunities we see in front of us will secure not just the Company’s future but also the futures of our dedicated Nanoco team, whilst becoming a significant success story for the north west of England.
I would also like to thank our shareholders for their continuing support. The successful fundraise emphasises the strength of backing from existing and new shareholders. We hope to repay that support with significant growth in shareholder value in the short term that then endures for the long term.
I look forward to engaging with as many shareholders as possible at our AGM to be held on 20 December 2022.
Outlook
We continue to develop our product offering and to deliver technical milestones for our significant customers, as we move towards commercial production in the short term. This is a critical milestone in our aim to become a self-financing organic business with a broad range of diversified customers and products.
We expect that our confidence in the merits of our case against Samsung for infringement of our IP will be vindicated when the trial takes place in Texas in the near term. While undoubtedly there will be appeals and further delaying tactics deployed by Samsung, we will be able to manage those with full confidence and from a position of strength without ruling out our willingness to entertain a fair value early settlement proposal from Samsung.
Our focus remains to build a self-sustaining organic business as the best way to deliver enduring shareholder value. We will also work to protect and realise any value that is delivered by a trial verdict, and to ensure that it reflects not just the USA and the past, but the rest of the world and the future lives of our patents. Achieving both goals will deliver the Nanoco for which we have been striving for many years and a significant increase in value for all stakeholders.
Dr Christopher Richards
Chairman
20 October 2022
Chief Executive Officer’s statement
Strong delivery of commercial, technical, operational and litigation milestones
“Extending our cash runway beyond expected key litigation milestones and potential production order visibility in H1 FY23 was an important step. Both the organic business and the litigation create potentially transformative changes in shareholder value in the short to medium term.”
This year has been all about delivery. We have delivered or exceeded almost all of the targets we set at the start of the year. We outperformed our revenue target for the year while doubling the size of our opening order book for the coming FY23. We delivered all of the challenging technical milestones set by our customers for our high performing nanomaterials. We have almost completed the consolidation of our Manchester R&D and scale up activities into our Runcorn facility. This was accomplished despite a lower headcount that required us to call up all of our bench strength to ensure customer service was maintained while we made operational changes to the business. These changes will bring long-term operational benefits as well as welcome financial savings of around £0.7 million (net) per annum from January 2023.
Last, but not least, we have moved confidently through the various stages of the litigation against Samsung and cleared each of the hurdles in front of us. The trial in Texas is anticipated soon and we expect to build on all of the successful steps taken so far to deliver a favourable outcome. Our team of witnesses, experts and advisers remain ready for a trial at short notice.
Given Samsung’s appeals in the IPRs and the expected appeal of any verdict favourable to Nanoco, the litigation is still very likely to have a long way to go. With a favourable outcome to the trial, we will be able to approach the next steps from a position of strength. Further facts, background information and possible forward timelines can be found in the Annual Report and Accounts when it is published.
The year finished with a significantly over-subscribed equity issue and we took advantage of that appetite for investment by issuing the maximum 5% equity allowed under our AGM resolutions. Net proceeds of £5.4 million, combined with modest revenue growth in FY23 and a low volume use case for commercial production orders in H2 FY23, will fund the Group beyond the point at which we expect the organic business to be self-financing.
Business performance
Electronics
We continued our on-time delivery of all development milestones for our major European electronics customer. The new full year contract that runs until the end of April 2023 covers the scale up and final validation of two of our materials and also adds a third novel material set to our R&D efforts. While at a less advanced stage and at a smaller scale, promising progress continues to be made with our major Asian chemical company customer. That relationship has the potential to equal in scale the revenue generation we earn today from the European customer. Both the European and Asian customers participate in very large global markets wherein final customer adoption of QD sensing technology would lead to significant revenue for Nanoco. We also continued to seek out new customer relationships throughout the year with encouraging initial progress.
Success with sensing materials allowed us to turn an opening order book of just under £1.0 million into a full year revenue figure almost two and a half times higher at £2.5 million, alongside delivering a closing order book double the opening position. This larger closing order book gives a robust underpin to revenue expectations for FY23.
Our offering of nanomaterials for use in sensing applications has moved from a single customer/single product in early 2018 to a position today where we are engaged with seven customers and are working with twelve distinct materials/wavelength combinations. Additionally, a number of materials are progressing as they move from development towards final validation – the last step before commercial production orders are placed.
The mega-trends seen in electronics, automation, automotive and the Internet of Things more generally continue to be very favourable, supporting our strategy of adding our nanomaterials to silicon-based sensors to significantly enhance their performance and overcome a number of current challenges faced by those devices.
Given the scale of these sectors and the other market participants, we will typically be part of an extensive supply chain. This does mean that we are subject to events and decisions outside of our control – as happened with the US customer in 2019 – but it also means the potential is very high to deliver significant value if our materials make it into commercial production.
As previously announced, already published customer product launch plans suggest we should have good visibility of potential commercial production around the end of calendar year 2022, though, as always, the final decision to adopt the technology lies with the customers of our customer and this cannot be taken for granted. Our task is to ensure that our materials consistently perform as required by our customer so that we are scaled up and ready for those potential production orders.
Our small scale allows us to be much more agile and responsive to our customers’ needs than many other players in electronics supply chains. The in-depth nature of our technological insight also means that we do tend to “punch above our weight” in terms of direct engagement even with very large end customers and their technology teams. Conversely, our small scale does present challenges for customers in terms of supply chain risks and we therefore work proactively to agree commercial solutions to the issue of supply chain security.
Display (CFQD® quantum dots)
Display remains an important target market for Nanoco. We have maintained our focus on our “dot only” strategy where we aim to provide the highest performing CFQD® quantum dots.
Activity and inbound enquiries about display materials have begun to grow again during the year. We believe this reflects a combination of our success with our patents at PTAB, the continued reduction in Samsung’s market share in QD TV markets and associated entrance of new participants, and the increasing profile of Restriction of Hazardous Substances (“RoHS”) and equivalent regulations around the world that limit the use of cadmium thus playing to our cadmium free offering. We have also seen increasing interest in the use of quantum dots in LEDs for both lighting and display applications.
We continue to seek out new relationships and a number of these are moving forward at a small scale, having delivered a number of small material samples to new customers during the year.
We are still awaiting the EU legislation to implement the final decision to end the RoHS cadmium exemption for film-based displays. This will provide fresh impetus to display panel manufacturers to embrace the benefits of our CFQD® quantum dots. We note that a number of OEMs are investigating environmentally friendly options rather than waiting for the EU legislation. European markets currently have sales of cadmium-based QD televisions and a move to cadmium-free solutions will provide a helpful tailwind.
We retain our core capabilities to deliver display R&D services, scale up and commercial production of material from our Runcorn facility. We are therefore well positioned to take advantage of any broadening in the adoption of non-toxic quantum dots by global display manufacturers when the opportunity arises.
A successful verdict in the litigation with Samsung will also positively affect our ability to derive income from our capabilities in display, whether in production, further robust defence of our existing IP portfolio, or the future licensing of our technology.
We will continue to adopt a dual approach to commercial exploitation of our display materials. We are still ready to license our technology to different channel partners but also retain our own manufacturing capability.
Life Sciences
In November 2020, the Life Sciences team secured a grant from Innovate UK, the UK’s innovation agency, for a life sciences project to develop a quantum dot testing kit for the accurate and rapid visual detection of Covid-19. This project builds on Nanoco’s existing capabilities in utilising quantum dots conjugated with antibodies as a diagnostic tool in the detection of cancer (VIVODOTS® nanoparticles). The project specifically focuses on antibodies for Covid-19.
However, as is the case with our other materials, our goal is to create a platform technology that is applicable to other pathogens and potential future variants of Covid-19. The project therefore remains relevant despite many other tests now being available on the market for Covid-19.
The project completed successfully and on time in May 2022 with a working prototype. We also had time to assess the test against other pathogens, clearly demonstrating the multiple use cases for our VIVODOTS®. We have now stood the team down following the move to Runcorn and our residual efforts relate to identifying potential exploitation avenues for the technology. Further progress and any value implications are likely to require the engagement of a partner organisation specialising in this field.
Operations
We completed the exit from the first floor of our Manchester facility early in the second half of FY22. We then took the decision to exit the ground floor and co-locate our entire suite of operations into our Runcorn facility. The display facility in Runcorn has been taken out of mothball and now hosts the R&D teams as well as our production capability for CFQD® quantum dots. The co-location will create a number of operational and team benefits while also reducing our annualised installed cost base by around £0.7 million (net) once decommissioning and dilapidations are complete in Manchester towards the end of CY22.
Our resulting team now numbers approximately 36 operational staff. We have delivered a striking reduction in our installed cash cost base from over £12.0 million in FY19 to around £4.0 million for FY23 while retaining our core capabilities. We have achieved this by focusing on our “dot only” strategy that plays to our core quantum dot expertise.
We continue to cross train our flexible production team to be able to operate both facilities to maximise our capability while minimising costs in the short term, allowing us to maintain our significant production revenue-generating capacity. In FY23, following a successful pilot in FY22, we plan on rolling out initial LEAN Six Sigma training (“LEAN”) to every single member of staff whether in R&D, scale up or production. The behavioural and analytical benefits of LEAN will be a great boost for team performance.
Responding to Covid-19
We remain vigilant in the aftermath of the Covid-19 pandemic. We continue to emphasise good housekeeping practice such as hand hygiene and self-testing if symptoms occur followed by staying home if a test is positive. Many staff are able to work remotely if required to isolate and a number regular mix working from the labs and home with little impact on activity or effectiveness. We encourage staff to attend the office as much as possible as the working environment and relationships formed there are enhanced by this interaction.
Intellectual property
We continue to proactively manage our IP portfolio to maximise value and protect our core competencies. During the year, we focused the Group’s IP portfolio on to a core of 503 (2021: 559) patents and patent applications with the most promising commercial potential. This net reduction reflected 24 new applications and 80 that were eliminated in territories or potential applications no longer felt worthwhile.
We continue to preserve trade secrets and have targeted our financial resources on strategic areas such as infra-red sensing where there is a strong overlap with our core IP. These are also areas with clear future commercial opportunities and benefits to be had from holding high quality patents.
Environment/Restriction of Hazardous Substances (“RoHS”)
We reported last year that the European Commission (“EC”) had received recommendations that:
• the exemption to allow cadmium (>100ppm) in QD films for display is no longer justified and should be phased out by 31 October 2021; and
• a new exemption is granted to allow cadmium-based quantum dots applied directly onto LED chips for displays and high CRI lighting for a period of five years.
Progress in implementing legislation to enforce this recommendation has been slow. It therefore seems likely that European consumers will continue to be exposed for some time to the known hazards of cadmium in televisions that exceed the limits shown above. Ahead of nations passing the required legislation, a number of display manufacturers appear to be anticipating the changes and Nanoco has received inbound enquiries in this field.
People
Our employees continue to provide great service to our customers in delivering high quality materials on time and achieving often stretching milestones and deliverables. It is welcome that the vast majority of staff have embraced the move to the Runcorn facility.
Retaining and incentivising our highly skilled team are key to delivering organic value from the business. We were therefore pleased to be able to propose a very reasonable pay award for the coming year. We also undertook a review of comparative salaries against national benchmarks (excluding London). Following that exercise, we were also able to offer structural pay rises for almost a third of our highly skilled workforce to remove everyone from the lower decile of comparator pay. Our goal for staff (excluding Executives) is to be a median payer with upside potential from our annual performance linked bonus scheme and Company-wide participation in the same Long Term Incentive Plan that the Directors enjoy.
Finally, reflecting staff feedback on their preferred benefits in addition to basic salaries, we have now increased the Company pension contributions to our medium-term target of 7.5%, an increase of 1.5%. We will review other benefits options and further potential improvements to pension contributions as our financial situation improves and when the Company becomes self-financing in its organic operations.
Outlook
We have created strong foundations for the Group to rebuild our value proposition. We expect visibility of commercial production orders for sensing materials around the end of H1 FY23. We also expect to complete our preparations for production readiness in H1 FY23. In parallel we continue to expand our material offering to other customers and other materials in sensing markets.
We have also seen growing interest in CFQD® quantum dots for use in the display industry and are engaging cautiously with market players other than Samsung which already participate in or are seeking to enter the QD TV market. This extends to interest in Gen 2 QD displays as well as displays utilising LEDs.
The recent fundraise has allowed us to plan or make a small number of tactical new hires in the business. These new hires range from income-generating customer facing roles, to scale up and production readiness roles, as well as front line and back office support staff. These will allow us to gradually grow our top line revenue and also position us for commercial production orders.
As ever, the main unknown is the actual timing and size of the initial use case for sensing materials. However, the significant investment by our customers in Nanoco materials and their own production and marketing efforts, emphasise that it is more likely to be a question of “when” and not “if”. In any event, Nanoco has the flexibility, capability and capacity to meet small or large scale production orders in parallel with continued revenue generation from R&D services.
Most of our team is primarily focused on our organic business. However, a small group of staff is also focused on the Samsung litigation and realising value from our IP portfolio. It is likely that it will be some time before the financial benefits of any favourable verdict are enjoyed by Nanoco. However, we will continually seek to apply pressure to Samsung in various forms and jurisdictions with a view to settlement before the final exhaustion of every legal step. Our goal remains to deliver fair value that reflects the global nature and remaining lives of our patents while acknowledging there are risks for Nanoco in the continuing litigation, not least of which is the time value of money.
We continue to adopt a conservative stance with regards to future financial forecasts. We expect to achieve at least 20% revenue growth in FY23 based on a stronger opening order book, an increasing range of R&D services being offered to a broader base of customers, and an assumed low volume use case for commercial production orders commencing in H2 FY23. A larger or earlier use case for sensing materials would clearly improve the outlook. I remain confident that we can deliver value for all of our stakeholders in the short to medium term with the potential for additional transformative value in the Samsung litigation.
Brian Tenner
Chief Executive Officer
20 October 2022
Financial review
Creating a stable cost base from which to grow organically
Summary
• Revenue and other operating income increased by 24% to £2.8 million (2021: £2.3 million).
• Adjusted LBITDA has reduced to £2.1 million (2021: £2.8 million), reflecting the increase in revenue and operating income, and the continued focus on reducing the cost base.
• The consolidation of operations in Runcorn, and subsequent closure of the Manchester site, has further reduced our cash cost base.
• Cash remains a key focus – the fundraising completed in the year takes the cash runway out to CY25.
Revenue and other operating income increased by £0.5 million to £2.8 million (2021: £2.3 million). The increase is due to the ongoing contract with the European electronics customer and the grant for the development of a Covid-19 diagnostic testing kit, which was completed during the year.
Revenue from the sale of products and services rendered accounted for 96% (2021: 95%) of revenues with the balance being royalty and licence income. Revenue from services has increased from £1.3 million to £1.5 million due to the continued work with the European electronics customer. Revenue from the sale of development products was £0.8 million (2021: £0.7 million).
Billings have increased by £1.0 million to £2.7 million (2021: £1.7 million), which is in line with revenue.
Total operating expenses, excluding Share Based Payments (“SBP”) and associated costs, depreciation, amortisation and exceptional items, reduced in the year by £0.8 million to a total of £4.5 million (2021: £5.4 million). This reduction was primarily due to the fall in payroll costs to £2.6 million (2021: £3.3 million) and other cost savings identified.
During the prior year, our headcount was decreased from c.46 full time employees to c.39 employees. In the current year, this has fallen further to 36 employees. We have made these changes whilst retaining full operational and commercial viability.
In March 2022, we exited the first floor of our Manchester premises, and at year end, we were in the process of vacating the ground floor, with the lease set to expire in November 2022. The closure of the Manchester site, and consolidation into Runcorn, will save c. £0.7 million (net) per year.
During the year, we completed an over-subscribed fundraise, resulting in net proceeds of c. £5.4 million. This extended the Group’s cash runway to calendar year 2025, beyond the point when we expect the Group’s organic operations to be self-financing.
| Highlights | 2022£ million | 2021£ million | % change |
| Revenue | 2.5 | 2.1 | 18% |
| Other operating income | 0.4 | 0.2 | 97% |
| Adjusted operating loss | (4.2) | (4.6) | (10%) |
| Adjusted LBITDA | (2.1) | (2.8) | (26%) |
| Net loss | (4.7) | (4.4) | (7%) |
| Loss per share (p) | (1.52) | (1.44) | 6% |
| Billings | 2.7 | 1.7 | 55% |
| Cash and cash equivalents | 6.8 | 3.8 | 77% |
Non-GAAP measures
The non-GAAP measures of adjusted operating loss and adjusted loss before interest, tax, amortisation and share-based payment charges (“LBITDA”) are provided in order to give a clearer understanding of the underlying loss for the year that reflects cash outflow from the business. The calculation of both non-GAAP measures is shown in the table below:
| 2022£ million | 2021£ million | |
| Operating loss | (4.8) | (5.0) |
| Share Based Payments | 0.6 | 0.4 |
| Employers NI on SBP | 0.3 | 0.1 |
| Depreciation | 0.5 | 0.5 |
| Amortisation¹ | 1.3 | 1.2 |
| Adjusted LBITDA | (2.1) | (2.8) |
1 Includes impairment of intangible assets.
The loss before tax was £5.2 million (2021: £5.1 million), with the increase driven by non-cash SBP charges arising from the growth in the share price and a first full year of accrued interest on the loan notes issued in June 2021, offset by cost savings during the year.
Taxation
The tax credit for the year was £0.5 million (2021: £0.7 million). The tax credit to be claimed, in respect of R&D spend, is £0.5 million (2021: £0.7 million). Overseas corporation tax was £nil during the year (2021: £nil). There was no deferred tax credit or charge (2021: £nil).
In the financial year, the Company entered the patent box regime retrospectively, which should provide an advantageous tax rate of 10% on revenues or litigation proceeds arising from the Group’s IP portfolio. At the year end, the Company had £40.5 million of accumulated losses to offset against any potential future profits.
Cash flow and balance sheet
During the year cash, cash equivalents, deposits and short-term investments increased to £6.8 million (2021: £3.8 million). The net cash outflow, excluding the benefits of the equity fundraise of £5.4 million in June 2022 (net of costs), was £2.4 million (2021: £4.4 million outflow). The decrease in cash outflows reflects increased revenue, a reduction in the cost base and some favourable movements in working capital compared to FY21, with a reduction in deferred revenue year on year. Tax credits of £0.7 million (2021: £0.9 million) were received during the year.
Expenditure incurred in registering patents totalled £0.1 million (2021: £0.4 million), reflecting the Group’s continued focus on developing and registering intellectual property. Capitalised patent spend is amortised over ten years in line with the established Group accounting policy.
During the year, an impairment charge of £0.9m was posted against the net book value of the Group’s IP. This reflects the continued rationalisation of the patent portfolio to ensure the remaining patents are commercially viable in the short to medium term.
Treasury activities and policies
The Group manages its cash deposits prudently. Cash deposits are regularly reviewed by the Board and cash forecasts are updated monthly to ensure that there is sufficient cash available for foreseeable requirements.
More details on the Group’s treasury policies will be provided in the Annual Report and Accounts.
Credit risk
The Group only trades with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis and any late payments are promptly investigated to ensure that the Group’s exposure to bad debts is not significant.
Foreign exchange management
The Group invoices most of its revenues in US Dollars. The Group is therefore exposed to movements relative to Sterling. The Group will use forward currency contracts to fix the exchange rate on invoiced or confirmed foreign currency receipts should the amount become significant and more predictable.
There were no open forward contracts as at 31 July 2022 (2021: none). The Group’s net profit and equity are exposed to movements in the value of Sterling relative to the US Dollar. The indicative impact of movements in the Sterling exchange rate on profits and equity based on the retranslation of the closing balance sheet will be summarised in note 27 to the Annual Report and Accounts, based on the year-end position.
Brexit
The Board continues to monitor the ongoing developments. Currently, the majority of the Group’s revenues are for services delivered in the UK with minimal Brexit impact. Going forward, the Group expects a significant portion of its revenues from material sales to be from non-UK countries where the Government either already has or hopes to have in place equivalent trading arrangements as existed prior to Brexit.
Although there were some logistical challenges on trade with EU countries, this has largely been mitigated with little to no ongoing disruption.
Going concern
The equity fundraising in June 2022 raised £5.4 million net of costs. This extended the Group’s cash runway to 2025. The Directors have a reasonable expectation that the Group has access to adequate resources to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements and the Board concluded that it is appropriate to utilise the going concern assumption.
Covid-19 pandemic
The Group has completed detailed risk assessments and implemented the resulting action plans and Government guidance to create Covid-19 secure workplaces. We are able to meet customer needs while working in a safe fashion. We do not currently expect significant financial downsides though this is clearly dependent on changes in regulations and the scale of any further lockdowns, both in the UK and the wider world.
Macroeconomic factors
We continue to see inflationary pressures on raw materials. We attempt to mitigate these by reviewing suppliers and achieving volume breaks. In addition, with the ongoing cost of living crisis, we are cognisant of the impact on our staff, and have implemented a company-wide 6% inflationary wage increase from August 2022. We will continue to review market conditions and assess the impact on all stakeholders.
Summary
This year has been one of steady operational delivery and consolidation of our cost base. The closure of the Manchester site and relocation of operations to Runcorn, although producing some challenges, provides the Group with a central base from which to grow – one where R&D and production can operate in close proximity and improved collaboration.
Work has progressed very well with our customers, and we anticipate having visibility of commercial orders by the end of H1 FY23.
We are confident that the Group has a solid foundation from which to grow, to provide value to shareholders in the medium term.
Liam Gray
Chief Financial Officer
20 October 2022
Principal risks and uncertainties
In common with all businesses at Nanoco’s stage of development, the Group is exposed to a range of risks, some of which are not wholly within our control or capable of complete mitigation or protection through insurance.
Specifically, a number of the Group’s products and potential applications are at a research or development stage and hence it is not possible to be certain that a particular project or product will lead to a commercial application. Other products require further development work to confirm a commercially viable application.
Equally, a number of products are considered commercially viable but have yet to see demand for full scale production. It is also the case that the Group is often only one part of a long and complex supply chain for new product applications. The Group therefore has little visibility of demand other than from contracts already in place. There are therefore a range of risks that are associated with the different stages of product development as well as for the Group as a whole.
Principal overarching risk
The principal overarching strategic risk faced by the business is that the Group exhausts its available funding before achieving adequate levels of commercial revenues and cash flows to be self-funding.
This risk has been very significantly mitigated in the short term by the recent equity fund raise which has extended the Group’s organic cash runway to CY25. This date is beyond a number of key litigation milestones which could trigger a significant inflow of funds to the Group.
More importantly, it is also beyond the point when the Group aims to be self-funding in its organic business activities, subject to final adoption of the technology by our customers and their end customers. The Board now considers that a plausible downside scenario no longer includes the risk or need for a major restructuring in the short term. Instead, the plausible downside scenario is based on delays in customer orders and a slower ramp-up in demand once those orders begin.
Additional continuing principal risk in FY22 and FY23, first identified in FY20
In February 2020, the Group initiated litigation against Samsung for wilful infringement of its IP. In May 2022 the Patent Trial and Appeal Board (“PTAB”) confirmed the validity of all 47 of Nanoco’s claims in the five patents relevant to the lawsuit. The Company expects a jury trial in Texas to be held in Q4 CY22 or shortly after.
Samsung has lodged notices to appeal against the decision of the PTAB and is likely to appeal against any trial verdict that favours Nanoco once the judge’s final written decision is published. The Group therefore remains exposed to both positive and negative aspects of the litigation.
Successfully overcoming the appeals by Samsung will crystallise any contingent asset inherent in a favourable verdict, though the value of that contingent asset may change. Conversely, if Samsung is successful in its appeals, any contingent asset could become worthless.
Both outcomes will have significant implications for the value of the Group’s IP portfolio, for potential licensing or royalty income, and for the prospects regarding the sale of CFQD® quantum dots. The implications could be significantly adverse or favourable depending on the eventual resolution of the lawsuit.
The Board consider that the balance of risk and reward has swung in Nanoco’s favour but given the binary nature of a trial verdict and the likely appeals processes, it is, as yet, by no means certain that Nanoco will benefit from any contingent asset that arises from a potentially favourable verdict and damages award.
In either outcome (successful or unsuccessful), the Board will initiate a further review of the future strategy of the business.
Other principal risks
Other risks are those set out in the prior year’s Annual Report and an update on their status will be included in the Annual Report for the year ended 31 July 2022.
Directors’ responsibility statement
In accordance with the FCA’s Disclosure and Transparency Rules, the Directors listed on the Company’s website (www.nanocotechnologies.com/about-us/board-directors) confirm, to the best of their knowledge, that:
1. the unaudited Preliminary Results have been prepared in accordance with IFRS as adopted by the European Union and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company and the undertakings included in the consolidation taken as a whole; and
2. the foregoing reviews and statements, include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the Group.
By order of the Board
Brian Tenner
Chief Executive Officer, Nanoco Group
20 October 2022
