Nanoco

Progress against stated objectives during FY21

Nanoco 18 November 2021 Update
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Nanoco Group

Progress against stated objectives during FY21

FY21 results

Tech hardware & equipment

Price

24.6p

Market cap

£75m

Net cash (£m) at end July 2021 (including loan notes but excluding £0.7m lease liabilities)

0.3

Shares in issue

305.7m

Free float

70%

Code

NANO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.3

34.2

149.2

Rel (local)

14.1

32.8

114.9

52-week high/low

29.85p

8.77p

Business description

Nanoco Group is a global leader in the development and manufacture of cadmium-free quantum dots (QD) and other nanomaterials. Its platform includes c 560 patents and specialist manufacturing lines. Focus applications are advanced electronics, displays, bio-imaging and horticulture.

Next event

AGM

30 November 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

During FY21 Nanoco extended its product and customer portfolio of nanomaterials for use in infrared sensing applications to five customers and eight different materials. It also made good progress in its legal action against Samsung for wilful infringement of its IP, with a positive outcome of the claim construction (Markman) hearing. Importantly, the programme restructuring the business around its core competencies of R&D, scale up and production supports a cash runway for nanomaterial development and scale-up activities into calendar H222. We reinstate our FY22 estimates in line with management’s guidance on cash costs.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

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)

(1.39)

0.00

N/A

07/21e

2.1

(2.9)

(4.7)

(1.30)

0.00

N/A

07/22e

2.0

(3.1)

(4.9)

(1.42)

0.00

N/A

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

Cost savings mitigate impact of lower revenue

FY21 revenue totalled £2.1m, of which £1.6m was attributable to a major European customer. This was substantially lower than the £3.9m achieved in FY20, which benefited from £2.5m of revenues attributable to the final phase of the joint programme with the major US customer. Nevertheless, EBITDA losses were stable at £2.9m because of the substantial cost savings resulting from the restructuring programme. Free cash outflow totalled £3.7m, which was partly offset by the non-dilutive subscription for loan notes in July raising £3.0m (net).

Cash runway extended into calendar H222

Since gross monthly cash costs have been cut to c £0.4m, and cash at the end of FY21 was £3.8m, management estimates that the loan notes have extended the cash runway for organic business activities into calendar H222, at which point there should be good visibility of potential production orders. The initial result of the Patent Trial and Appeal Board (PTAB) and the verdict from the re-scheduled trial in the patent litigation against Samsung are both expected during calendar 2022, so the cash runway maintains both potential sources of value for shareholders.

Valuation: Resolution of patent infringement is key

The ongoing development and optimisation programmes confirm that there remains significant potential for generating revenues from the supply of nanomaterials for sensing applications. However, ahead of these definitely moving to commercial production, we believe that Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung. Although the value of a potential payout has not been disclosed, we calculate that lost revenue in the United States attributable to the patent infringement to date could be in the region of $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.

FY21 results show the benefits of restructuring

EBITDA losses stable despite reduction in revenues

FY21 revenue totalled £2.1m, slightly ahead of our £1.9m estimate. £1.6m was attributable to the major European customer. This was substantially lower than the £3.9m achieved in FY20, which benefited from £2.5m of revenues attributable to the final phase of the joint programme with the major US customer. Nevertheless, EBITDA losses were stable at £2.9m (slightly higher than our £2.6m estimate) because of the substantial cost savings resulting from a programme restructuring the business around its core competencies of R&D, scale up and production. For example, payroll costs were cut from £4.5m in FY20 to £3.3m in FY21.

Cash outflow reduced

Free cash outflow totalled £3.7m compared with £4.2m in FY20. The outflow was primarily attributable to operating losses and a £0.8m drop in payables as well as a £0.5m reduction in deferred revenue, both related to lower levels of activity. Management does not expect this adverse working capital movement to be repeated in FY22. Similarly to FY20, investment in tangible assets during FY21 was minimal, while investment in patents declined by £0.2m year-on-year to £0.4m as the group focused on protecting the IP most likely to generate a return in the short-to-medium term. The R&D tax credit of £0.9m was £0.2m less than the prior year, reflecting a more highly focused approach to R&D. The cash outflow was partly offset by the non-dilutive subscription for loan notes in July by major shareholders that raised £3.0m (net).

Outlook: Two complementary routes to create shareholder value

Cash runway extends into calendar H222

Since gross monthly cash costs have been cut to c £0.4m, and cash at the end of FY21 was £3.8m, management estimates that the loan notes have extended the cash runway for organic business activities into calendar H222, at which point there should be good visibility of potential production orders. The initial result of the PTAB and the verdict from the re-scheduled trial in the patent litigation against Samsung are both expected during calendar 2022, so the cash runway maintains both potential sources of value for shareholders. The cash runway would potentially be extended by each new business win. If none of the development programmes currently underway start to scale up during FY22, management has the option to remove the group’s R&D, production and scale-up capabilities, in effect becoming a shell company focused on pursuing the lawsuit against Samsung. The cash runway extends into mid-calendar 2023 in this scenario.

Modifications to estimates

We adjust our FY22 estimates to reflect the recent guidance on gross monthly cash costs. Our revenue estimate has not been changed. It is supported by the recent announcement of a third package of work from a major European customer, who we have previously inferred is ST Microelectronics, to demonstrate how to scale-up production of a longer wavelength material for enhancing the sensitivity of silicon sensors. Our estimate also assumes that the first phase of the programme to develop a potential new nanomaterial for the Asian chemical company completes successfully in calendar Q421 and is followed by two further phases extending to the end of FY22.

Exhibit 1: Estimate revisions

Year end July

FY21

FY22e

(£m)

Actual

New

Old

% change

Revenues

2.1

2.0

2.0

0.0%

Gross profit

1.9

1.8

1.7

3.7%

EBITDA

(2.8)

(3.1)

(2.2)

39.9%

Normalised PBT

(4.7)

(4.9)

(3.6)

38.7%

Normalised net income

(4.0)

(4.3)

(3.0)

46.6%

Normalised diluted EPS (p)

(1.3)

(1.4)

(1.0)

46.6%

Net debt/(cash)

(0.3)

2.4

0.2

N/M

Source: Company accounts, Edison Investment Research

Broadening customer and product portfolio

Nanoco has progressed from the situation in FY18 where it was working on a single product for the major US customer to one where it has five customers, which include ST Microelectronics and the new major Asian chemical company announced in July 2021, and eight distinct materials (see Exhibit 2). Two of these customers have the scale to require sufficient output to take the group to break-even, which is achievable at c £6m annual revenues. The existing production capacity in Runcorn can output nanomaterials for sensing applications worth £100m per year. We note that whether any of these projects proceeds to commercialisation depends not only on Nanoco demonstrating it can make the nanomaterial in volume but also on whether the OEMs supplied by ST Microelectronics and the Asian chemical company decide to deploy QD-enhanced silicon sensors in their devices.

Exhibit 2: Sensing portfolio

Source: Nanoco Group

The most advanced of the customer programmes are the two with ST Microelectronics (Customer 1). If the ongoing programme to demonstrate how to scale-up production of the longer wavelength material is successful, this could lead to volume production in calendar 2023. The shorter wavelength material for ST Microelectronics was worked on as part of the earlier programme with the major US customer and could potentially transition to volume production fairly swiftly if required as the methodology for manufacturing this material in volume is already proven. The expanded range of market leading materials will support more stable revenue growth over the medium term. Our July update provides details of the range of applications which these sensing materials may be used for.

Nanoco continues to pursue opportunities for its cadmium-free QDs for displays, where it is working on some small-scale development programmes, life sciences and horticultural applications. Please refer to our July update and our thematic note on QDs for more information.

‘Markman’ judgement is favourable for Nanoco

Nanoco made good progress in its legal action against Samsung for wilful infringement of its IP, with a positive outcome of the claim construction (Markman) hearing in March 2021. This established the court’s interpretation of five key words or terms used in the patents that Nanoco alleges Samsung has infringed. The judge rejected four of the five constructions proposed by Samsung and rejected one of the constructions proposed by Nanoco. In four of the five patents in the case, Nanoco's constructions were upheld and in the fifth patent Nanoco and Samsung each had one construction upheld.

The next stage, which management expects to complete by May 2022, is for the US PTAB to review the validity of the five patents under dispute in a formal inter partes review (IPR). The court trial, which will last for only one week, has been postponed until after the validity of the patents has been established, enabling Nanoco to focus on the issues of infringement and damages during the trial. Management expects that the trial will take place around October 2022. The company has a litigation funding agreement with a very large, undisclosed US litigation finance specialist with extensive experience in financing technology based IP patent litigation matters. This means that Nanoco is able to actively progress the lawsuit without adversely affecting its cash runway.

Exhibit 3: Samsung litigation timeline

Source: Nanoco Group

Valuation

While the ongoing development and optimisation programmes confirm that there remains significant potential for generating revenues from the supply of nanomaterials for sensing applications, ahead of these definitely moving to commercial production, we believe that Nanoco’s value lies in a satisfactory resolution of the patent infringement dispute with Samsung. While the outcome of this litigation is by no means certain, we note that the large US litigation finance specialist funding the costs of the litigation undertook detailed due diligence before agreeing to provide finance. The lawyers, who working on the case on a discounted fee basis, also carried out due diligence.

Nanoco estimates that between April 2015 and the present Samsung has sold more than 14 million TVs deploying QDs based on Nanoco IP in the United States, which represents around one-third of its global sales. While Nanoco has not revealed its estimates of the potential payout if the litigation is successful, it has disclosed three possible damages models for calculating the value of the lost revenue to Nanoco. Top end: damages based on the premise that Samsung’s QD TV market in the US is wholly enabled by Nanoco’s QD technology, so the value of the lost revenue would be derived from the total value of that market. Mid: damages based on the premise that the QD-enabled display is a high proportion of the additional value of a QD-enhanced TV compared with a standard TV. Low end: damages based on the value only of the QD film in the displays. Further options exist.

Applying the low-end valuation model, we assume the QD enhanced TVs had an average sales price of US$2,200–2,500 compared with the average price of a top of the range TV without QDs of c US$1,000. Had the alleged patent infringement not taken place, we believe that the volumes of QDs Samsung required would have been higher than Nanoco could have produced in Runcorn, so it would have licensed its technology to partners, primarily Dow Chemical, and would have received significant royalties. If we assume that the cost of the QDs in each TV is equivalent to 10% of the uplift in price between QD and non-QD TV displays, and that Nanoco would have received a 12% royalty (as per our May 2017 initiation note) on these QDs, this represents US$14.4–18.0 in lost revenue per TV display or US$200–250m between April 2015 and the present in the United States alone.

Any damages awarded may also make an additional allowance for future sales of infringing TVs and a possible uplift of up to three times for wilfulness. While the ongoing litigation only covers the United States, we understand that Samsung would also be likely to seek a global negotiated settlement covering sales in other territories. Nanoco would retain 50–80% of the award, depending on its magnitude, and would have to pay UK corporation tax on the amount received, which could be offset against £36m losses.

Exhibit 4: Financial summary

£m

2019

2020

2021

2022e

Year end 31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

restated

Revenue

 

 

7.1

3.9

2.1

2.0

Cost of Sales

(0.7)

(0.3)

(0.2)

(0.2)

Gross Profit

6.5

3.5

1.9

1.8

EBITDA

 

 

(3.8)

(2.9)

(2.9)

(3.1)

Operating profit (before amort. and except).

 

 

(5.0)

(4.8)

(4.6)

(4.4)

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)

(0.4)

(0.7)

Reported operating profit

(5.5)

(5.9)

(5.0)

(5.1)

Net Interest

(0.0)

(0.1)

(0.1)

(0.5)

Profit Before Tax (norm)

 

 

(5.0)

(4.9)

(4.7)

(4.9)

Profit Before Tax (reported)

 

 

(5.5)

(6.0)

(5.1)

(5.6)

Reported tax

1.2

0.9

0.7

0.6

Profit After Tax (norm)

(3.9)

(4.0)

(4.0)

(4.3)

Profit After Tax (reported)

(4.4)

(5.1)

(4.4)

(5.0)

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(3.9)

(4.0)

(4.0)

(4.3)

Net income (reported)

(4.4)

(5.1)

(4.4)

(5.0)

Average Number of Shares Outstanding (m)

286

287

306

306

EPS - normalised (p)

 

 

(1.34)

(1.39)

(1.30)

(1.42)

EPS - diluted normalised (p)

 

 

(1.34)

(1.39)

(1.30)

(1.42)

EPS - basic reported (p)

 

 

(1.52)

(1.77)

(1.44)

(1.65)

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

5.6

4.6

3.4

3.0

Intangible Assets

3.9

3.7

2.9

2.6

Tangible Assets

1.7

0.9

0.5

0.4

Investments & other

0.0

0.0

0.0

0.0

Current Assets

 

 

9.5

7.2

5.8

2.6

Stocks

0.2

0.1

0.1

0.1

Debtors

1.1

1.0

1.2

0.7

Cash & cash equivalents

7.0

5.2

3.8

1.0

Other

1.1

0.9

0.7

0.7

Current Liabilities

 

 

(5.0)

(3.6)

(2.4)

(2.2)

Creditors

(2.6)

(2.3)

(1.6)

(1.5)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

(0.7)

(0.6)

(0.5)

(0.5)

Short term bank debt

0.0

0.0

0.0

0.0

Other

(1.6)

(0.6)

(0.3)

(0.3)

Long Term Liabilities

 

 

(1.8)

(1.3)

(3.8)

(4.3)

Long term financial leases

(1.0)

(0.5)

(0.1)

(0.6)

Loan notes

(0.4)

(0.5)

(3.5)

(3.5)

Other long term liabilities

(0.4)

(0.2)

(0.1)

(0.1)

Net Assets

 

 

8.3

7.0

3.1

(1.0)

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

8.3

7.0

3.1

(1.0)

CASH FLOW

Op Cash Flow before WC and tax

(3.8)

(3.0)

(2.8)

(3.1)

Working capital

1.8

(1.4)

(1.4)

0.3

Exceptional & other

(0.0)

(0.8)

(0.1)

0.0

Tax

1.4

1.1

0.9

0.7

Operating cash flow

 

 

(0.6)

(4.1)

(3.5)

(2.1)

Capex

(3.1)

(0.7)

(0.3)

(0.4)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Net interest

0.0

0.0

(0.0)

(0.1)

Equity financing

0.0

3.2

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

(0.8)

2.3

0.0

Net Cash Flow

(3.7)

(2.4)

(1.5)

(2.6)

Opening net debt/(cash) - excluding finance leases

 

 

(10.3)

(6.6)

(4.7)

(0.3)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.6

(3.0)

0.0

Closing net debt/(cash)

 

 

(6.6)

(4.7)

(0.3)

2.4

Source: Company accounts, Edison Investment Research


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This report has been commissioned by Nanoco and prepared and issued by Edison, in consideration of a fee payable by Nanoco. Edison Investment Research standard fees are £60,000 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).

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This report has been commissioned by Nanoco and prepared and issued by Edison, in consideration of a fee payable by Nanoco. Edison Investment Research standard fees are £60,000 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).

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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.

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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.

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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

95 Pitt Street, Sydney

NSW 2000, Australia

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