Nanoco Group — Non-dilutive debt extends organic cash runway

Nanoco Group (LSE: NANO)

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Research: TMT

Nanoco Group — Non-dilutive debt extends organic cash runway

Nanoco has announced the details of the non-dilutive loan note facility of £3.15m (gross) being provided by major shareholders. This facility supports the cash runway for organic business activities past calendar H222, at which point there should be good visibility of potential production orders. The initial IPR judgement and verdict from the trial in the patent litigation against Samsung are both expected during calendar 2022, so the loan notes preserve both potential sources of value for shareholders.

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Nanoco Group

Non-dilutive debt extends organic cash runway

Non-dilutive loan note subscription

Tech hardware & equipment

21 July 2021

Price

20.2p

Market cap

£62m

Net cash (£m) at end January 2021 (excluding £0.5m convertible loan and £0.9m IFRS 16 lease liabilities)

2.9

Shares in issue

305.7m

Free float

70.0%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(16.5)

(25.7)

14.8

Rel (local)

(15.1)

(26.0)

1.0

52-week high/low

30p

9p

Business description

Nanoco is a global leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials. Its platform includes c 740 patents and specialist manufacturing lines. Focus applications are advanced electronics sensing, displays and bio-imaging.

Next event

FY21 results

October 2021

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco has announced the details of the non-dilutive loan note facility of £3.15m (gross) being provided by major shareholders. This facility supports the cash runway for organic business activities past calendar H222, at which point there should be good visibility of potential production orders. The initial IPR judgement and verdict from the trial in the patent litigation against Samsung are both expected during calendar 2022, so the loan notes preserve both potential sources of value for shareholders.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(x)

P/E
(x)

07/19

7.1

(3.8)

(5.0)

(1.34)

0.00

N/A

07/20

3.9

(2.9)

(4.9)

(1.38)

0.00

N/A

07/21e

1.9

(2.6)

(3.9)

(0.99)

0.00

N/A

07/22e

2.0

(2.2)

(3.6)

(0.97)

0.00

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Patent litigation timescale extended

Nanoco has successfully petitioned the judge in Texas to delay the court trial until after the US Patent Trial and Appeal Board has completed inter partes reviews (IPRs) of the five patents in the case, which examine the validity of the patents themselves. As discussed in our June flash note, the change in sequence improves the likelihood of a positive outcome for Nanoco, but potentially extends the timescales for receiving the initial IPR judgement and trial verdict by around six months to late calendar 2022.

Non-dilutive loan resolves FY22 funding gap

Since the loan note agreement is structured (see below) so that Nanoco does not make cash interest payments, our P&L estimates are not affected. While our previous estimates identified a small funding gap of £0.2m, our revised model shows cash of £1.9m at end FY22. The loan notes fall due in July 2024, potentially giving Nanoco time either to repay them using cash from commercial production income or from the litigation settlement. Management believes that the cost of servicing the potential premium for winning the litigation would not materially affect the economic impact of the award for shareholders.

Valuation: Resolution of patent infringement is key

We are encouraged that Nanoco has expanded its product and customer portfolio of nano-materials for use in infrared-sensing applications from a single customer and one material development programme in 2018 to five customers and eight different materials. Nevertheless, ahead of any of these definitely moving to commercial production, we believe Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung. Although the value of the potential payout has not been disclosed, we calculate that lost revenue in the US attributable to the patent infringement to date could be in the region of US$200–250m or more. Any damages awarded could also make an additional allowance for future sales of infringing TVs and a possible uplift for wilfulness. Samsung would also be likely to seek a global negotiated settlement covering sales in other territories.

Details of non-dilutive subscription

Nanoco has completed a non-dilutive subscription for 4.5m loan notes by its major shareholders Lombard Odier Asset Management and ORA Capital, which is associated with Richard Griffiths. The loan notes are unsecured, have a nominal value of £1 each and are repayable three years from completion, which is expected to take place prior to end July 2021. Rather than paying interest directly to the loan note holders, which would adversely affect cash consumption, Nanoco is issuing the loan notes at a subscription price of 70p, which represents a discount to the nominal value of £1 equivalent to 12% annual interest. Nanoco may redeem the notes at any time prior to their maturity at 80% of nominal value during the first year of the term; 90% at any time in year two, and 100% at any time in year three. In the event of a successful outcome to the litigation with Samsung or a change of control of Nanoco, the note holders will also be entitled to a success bonus of 105% of the nominal value of the notes in addition to a repayment of the loan notes themselves. Management does not believe that affordability would be an issue in either scenario. The subscription will raise £3.15m gross and is subject to an arrangement fee of 1.4% of the nominal amount.

Management is confident that it will win the litigation against Samsung and will be able to repay the loan notes either from the settlement proceeds or from commercial revenue production if the lawsuit has not been settled by the time the loan notes fall due. Management observes that the success bonus potentially payable on the loan notes will not materially alter the economic impact on Nanoco of any litigation award and that it still expects the group will retain around 50% of a modest award from the litigation, rising to around 80% of a more substantial award.

We have reduced short-term creditors at end-FY21 by £1.0m to bring it in line with H121 levels. Following this adjustment and the receipt of the loan notes, our revised estimates show gross cash of £1.9m at end-FY22. The loan notes therefore extend the organic cash runway past calendar H222, at which point there will be good visibility of potential production orders for calendar 2023 from the European electronics company, which we have previously inferred is STMicroelectronics following ST’s presentation at the Society for Information Display’s symposium earlier this year. There should also be visibility at this point of whether the newer programme with the significant Asian chemical company announced earlier this month is continuing with the next stages of development required before moving to commercial production. We believe that if either of these programmes is successful, Nanoco will either become cash-generative quickly and be able to repay the loan notes from operating cash flow or would be well-placed to raise finance through the issue of equity, if required.


Exhibit 1: Financial summary

£m

2019

2020

2021e

2022e

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

7.1

3.9

1.9

2.0

Cost of Sales

(0.7)

(0.3)

(0.2)

(0.3)

Gross Profit

6.5

3.5

1.7

1.7

EBITDA

 

 

(3.8)

(2.9)

(2.6)

(2.2)

Operating profit (before amort. and except).

 

 

(5.0)

(4.8)

(3.8)

(3.5)

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.3)

(0.7)

0.0

0.0

Share-based payments

(0.2)

(0.4)

(0.6)

(0.6)

Reported operating profit

(5.5)

(5.9)

(4.4)

(4.1)

Net Interest

(0.0)

(0.1)

(0.1)

(0.1)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(5.0)

(4.9)

(3.9)

(3.6)

Profit Before Tax (reported)

 

 

(5.5)

(6.0)

(4.5)

(4.1)

Reported tax

1.2

0.9

0.9

0.6

Profit After Tax (norm)

(3.9)

(4.0)

(3.0)

(3.0)

Profit After Tax (reported)

(4.4)

(5.1)

(3.6)

(3.5)

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(3.9)

(4.0)

(3.0)

(3.0)

Net income (reported)

(4.4)

(5.1)

(3.6)

(3.5)

Average Number of Shares Outstanding (m)

286

287

306

306

EPS - normalised (p)

 

 

(1.34)

(1.38)

(0.99)

(0.97)

EPS - diluted normalised (p)

 

 

(1.34)

(1.38)

(0.99)

(0.97)

EPS - basic reported (p)

 

 

(1.52)

(1.76)

(1.18)

(1.16)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

4.6

4.6

4.1

3.6

Intangible Assets

3.9

3.7

3.5

3.3

Tangible Assets

0.7

0.9

0.5

0.3

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

9.5

7.2

6.7

4.2

Stocks

0.2

0.1

0.1

0.2

Debtors

1.1

1.0

1.0

1.1

Cash & cash equivalents

7.0

5.2

4.6

1.9

Other

1.1

0.9

0.9

0.9

Current Liabilities

 

 

(4.8)

(3.4)

(2.4)

(2.4)

Creditors

(2.6)

(2.1)

(1.1)

(1.2)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

0.0

(0.6)

(0.6)

(0.6)

Short term bank debt

0.0

0.0

0.0

0.0

Other

(2.3)

(0.6)

(0.6)

(0.6)

Long Term Liabilities

 

 

(0.8)

(1.3)

(4.2)

(4.1)

Long term financial leases

0.0

(0.5)

(0.3)

(0.2)

Long term bank debt

0.0

0.0

(3.1)

(3.1)

Other long-term liabilities

(0.8)

(0.7)

(0.7)

(0.7)

Net Assets

 

 

8.5

7.2

4.2

1.3

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

8.5

7.2

4.2

1.3

CASH FLOW

Op Cash Flow before WC and tax

(3.8)

(2.9)

(2.6)

(2.2)

Working capital

1.8

(1.5)

(1.0)

(0.1)

Exceptional & other

0.0

(0.2)

0.0

0.0

Tax

1.4

1.1

0.9

0.6

Operating cash flow

 

 

(0.6)

(3.5)

(2.7)

(1.7)

Capex

(3.1)

(0.7)

(0.7)

(0.8)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

(0.0)

(0.1)

(0.1)

(0.1)

Equity financing

0.0

3.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

(0.2)

(0.1)

Net Cash Flow

(3.7)

(1.1)

(3.7)

(2.7)

Opening net debt/(cash) - excluding finance leases

 

 

(10.7)

(7.0)

(5.2)

(1.5)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

(0.8)

0.0

0.0

Closing net debt/(cash)

 

 

(7.0)

(5.2)

(1.5)

1.2

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Nanoco Group and prepared and issued by Edison, in consideration of a fee payable by Nanoco Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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