Nanoco — Litigation settlement concluded

Nanoco Group (LSE: NANO)

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Research: TMT

Nanoco — Litigation settlement concluded

Nanoco Group has signed the final agreements to settle the litigation with Samsung on a no-fault basis for the alleged infringement of the group’s intellectual property (IP), with Samsung paying Nanoco $150m (£125m) in cash. Nanoco’s H123 performance relating to the organic activities was slightly ahead of management’s expectations. We have revised our estimates to reflect both the settlement, which includes £3.0m in licence revenues recognisable in H223 and takes the group from negative to positive EBITDA for FY23, and the H123 trading update.

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Nanoco Group

Litigation settlement concluded

Litigation settlement and trading update

Tech hardware and equipment

8 February 2023

Price

27p

Market cap

£87m

£/US$1.20

Net cash (£m) at end July 2022 (excluding lease liabilities)

2.8

Shares in issue

322.4m

Free float

85.2%

Code

NANO

Primary exchange

LSE

Secondary exchange

OTC (NNOCF)

Share price performance

%

1m

3m

12m

Abs

(51.6)

(25.0)

42.3

Rel (local)

(52.7)

(30.5)

39.9

52-week high/low

56p

17p

Business description

Nanoco Group is a global leader in developing and manufacturing cadmium-free quantum dots and other nanomaterials, with c 560 patents. Focus applications are advanced electronics, displays, bio-imaging and horticulture.

Next event

H123 results

28 March 2023

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Nanoco Group is a research client of Edison Investment Research Limited

Nanoco Group has signed the final agreements to settle the litigation with Samsung on a no-fault basis for the alleged infringement of the group's intellectual property (IP), with Samsung paying Nanoco $150m (£125m) in cash. Nanoco’s H123 performance relating to the organic activities was slightly ahead of management’s expectations. We have revised our estimates to reflect both the settlement, which includes £3.0m in licence revenues recognisable in H223 and takes the group from negative to positive EBITDA for FY23, and the H123 trading update.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

07//20

3.9

(2.9)

(4.9)

(1.4)

0.0

N/A

07/21

2.1

(2.8)

(4.7)

(1.3)

0.0

N/A

07/22

2.5

(2.1)

(4.6)

(1.3)

0.0

N/A

07/23e**

6.0

1.0

(0.3)

0.05

0.0

540

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding revenues from production orders and including £3.0m in licence revenues relating to the settlement with Samsung.

$150m (£125m) cash settlement agreed

The settlement ends all global litigation with Samsung, including the lawsuits in China and Germany. After deducting litigation costs, Nanoco will retain over $90m (£75m) net proceeds. The settlement will be paid in two equal tranches, one receivable by 5 March 2023 and the second by 3 February 2024. Nanoco intends to return a ‘material’ proportion of the proceeds to shareholders once the second payment has been received. Importantly, Nanoco retains full freedom to operate in all markets, territories, products and material types.

Sensing material scale-up on track

Nanoco’s H123 trading update notes that the organic business has delivered successfully on the technical milestones for the European electronics and Asian chemical customers and supported an increase in demand for volumes of development materials. Revenue remains comfortably in line with management’s expectations, while close control of costs combined with foreign exchange (fx) tailwinds means that the FY23 adjusted EBITDA loss from the organic business is expected to be narrower than management’s previous expectations. Net cash consumption during H123 was £0.8m, giving a cash balance of £6.0m at the period end, also comfortably in line with management’s expectations.

Valuation: Primary value from settlement

Ahead of any of the customer programmes definitely moving to commercial production, much of Nanoco’s value lies in the settlement from Samsung, which has now completed. We will explore the value inherent in the organic business when there is better visibility of production revenues. Meanwhile, we note that deployment of its sensing materials by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues for Nanoco, while the existing production capacity in Runcorn could generate sensing application revenues of £100m/year working 24/7.

Revisions to estimates

Exhibit 1: Changes to estimates

Year end 31 July (£m)

FY22

FY23

Actual

New

Old

Change

Revenues

2.5

6.0

2.9

106.9%

Gross profit

2.0

5.4

2.3

132.3%

EBITDA

(2.1)

1.0

(2.2)

N/A

Normalised PBT

(4.6)

(0.3)

(3.5)

N/A

Normalised net income

(4.1)

0.2

(3.0)

N/A

Normalised diluted EPS (p)

(1.3)

0.05

(0.93)

N/A

Net debt/(cash)

(2.8)

(14.4)

(1.1)

1170.9%

Source: Company reports, Edison Investment Research

We make the following changes to our estimates, which exclude any potential production revenues:

We increase revenues from the organic activity by £0.1m and reduce operating costs by £0.1m to reflect commentary in the trading update. These may be subject to further change depending on fx movements. While the business is on track to deliver two fully validated production materials for use in infrared sensing applications in anticipation of receiving production orders later in CY23, we do not currently model any production revenues in FY23.

The settlement with Samsung is structured as two agreements: an IP licence agreement worth $65m (£54m), which encapsulates royalties that would have been paid in the past or the future, and an IP sales agreement worth $85m (£71m, see following bullet point). The income from the IP licence agreement will be accounted for in accordance with IFRS 15 and will be recognised over the average estimated remaining life of the existing entire IP portfolio (excluding the IP sold to Samsung), which is approximately nine years. This gives rise to a significant deferred income balance of c £54.0m and annual revenue of £6.0m until the deferred income has been recognised in full (ie c £3.0m in licence revenues for H223).

The IP sale agreement covers the sale of a number of non-core patents from Nanoco to Samsung, which does not include the patents scheduled to be presented in the trial. The sale is treated as a profit on disposal of intangible assets in line with IAS38 and is expected to generate a net profit on disposal of c £70.0m based on the $85m sale proceeds netted against the book value of the patents. We net this profit on disposal against the cost of the litigation (c £47.0m), which will be expensed in full in FY23, and treat it as an exceptional item. There will also be a one-off interest charge of c £4.7m linked to loan notes that were executed in July 2021, which is also netted off against the profit on disposal, giving a total exceptional profit of £18.3m.

Nanoco expects that the net cash tax payable in FY23 related to the settlement will be modest, primarily because at the end of FY22 the group had £40.5m of accumulated losses to offset against any potential future profits. We are not modelling this until management has more clarity on the impact of the settlement on the group’s eligibility for R&D tax and Patent Box credits.

The $150m (£125m) cash settlement is being paid in two equal tranches, the first to be paid by 5 March 2023 and the second by 3 February 2024, so we model a cash payment of £62.5m in FY23, which is netted off against the payment of litigation costs of £47.0m and the one-off interest charge to give £10.8m. Management has not disclosed what proportion of the settlement will be distributed to shareholders other than noting it will be ‘material’. Even excluding the proceeds from the settlement, management estimates that the cash runway is sufficient to fund nanomaterial development and scale-up into CY25, at which point it expects organic activities to be self-financing.

We note that Nanoco’s rights to its core IP have been fully validated by the legal process, indicating that, longer term, there is potential for further income from the display market. This may be in the form of successful litigation against other parties that Nanoco believes may have infringed its IP, or third parties purchasing cadmium-free quantum dots (CFQDs) from Nanoco or its potential licensees. We note that the level of enquiries regarding CFQDs has picked up since it has looked increasingly likely that Nanoco was going to win in its litigation case against Samsung, so much so that the company has begun to re-commission its CFQD dot facility in Runcorn to address demand for material for use in displays.

Exhibit 2: Financial summary

£m

2020

2021

2022

2023e

31-July

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

Revenue

 

 

3.9

2.1

2.5

6.0*

Cost of Sales

(0.3)

(0.2)

(0.4)

(0.6)

Gross Profit

3.5

1.9

2.0

5.4

EBITDA

 

 

(2.9)

(2.8)

(2.1)

1.0

Operating profit (before amort. and excepts.)

 

(4.8)

(4.6)

(4.2)

0.2

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.7)

0.0

0.0

0.0

Share-based payments

(0.4)

(0.4)

(0.6)

(0.7)

Reported operating profit

(5.9)

(5.0)

(4.8)

(0.5)

Net Interest

(0.1)

(0.1)

(0.5)

(0.5)

Exceptionals

0.0

0.0

0.0

18.3**

Profit Before Tax (norm)

 

 

(4.9)

(4.7)

(4.6)

(0.3)

Profit Before Tax (reported)

 

 

(6.0)

(5.1)

(5.2)

17.3

Reported tax

0.9

0.7

0.5

0.5***

Profit After Tax (norm)

(4.0)

(4.0)

(4.1)

0.2

Profit After Tax (reported)

(5.1)

(4.4)

(4.7)

17.8

Minority interests

0.0

0.0

0.0

0.0

Net income (normalised)

(4.0)

(4.0)

(4.1)

0.2

Net income (reported)

(5.1)

(4.4)

(4.7)

17.8

Average Number of Shares Outstanding (m)

287

306

308

322

EPS - normalised (p)

 

 

(1.39)

(1.30)

(1.32)

0.05

EPS - normalised fully diluted (p)

 

 

(1.39)

(1.30)

(1.32)

0.05

EPS - basic reported (p)

 

 

(1.77)

(1.44)

(1.52)

5.51

Dividend per share (p)

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

4.6

3.4

1.8

12.9

Intangible Assets

3.7

2.9

1.6

1.4

Tangible Assets

0.9

0.5

0.2

0.0

Deferred income

0.0

0.0

0.0

11.5

Current Assets

 

 

7.2

5.8

9.0

20.2

Stocks

0.1

0.1

0.2

0.1

Debtors

1.0

1.2

1.5

1.2

Cash & cash equivalents

5.2

3.8

6.8

18.3

Other

0.9

0.7

0.5

0.5

Current Liabilities

 

 

(3.6)

(2.4)

(2.4)

(2.3)

Creditors

(2.3)

(1.6)

(1.5)

(1.5)

Tax and social security

0.0

0.0

0.0

0.0

Short term financial leases

(0.6)

(0.5)

(0.2)

(0.2)

Short term bank debt

0.0

0.0

0.0

0.0

Other

(0.6)

(0.3)

(0.7)

(0.7)

Long Term Liabilities

 

 

(1.3)

(3.8)

(4.0)

(4.0)

Long term financial leases

(0.5)

(0.1)

(0.0)

(0.0)

Loan notes

(0.5)

(3.5)

(3.9)

(3.9)

Other long term liabilities

(0.2)

(0.1)

(0.1)

(0.1)

Net Assets

 

 

7.0

3.1

4.3

26.7

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

7.0

3.1

4.3

26.7

CASH FLOW

Operating Cash Flow

(3.0)

(2.8)

(2.3)

0.9

Working capital

(1.4)

(1.4)

0.1

0.3

Exceptional & other

(0.8)

(0.1)

(0.2)

0.0

Tax

1.1

0.9

0.7

0.0

Net Operating Cash Flow

 

 

(4.1)

(3.5)

(1.8)

1.2

Capex

(0.7)

(0.3)

(0.1)

(0.4)

Net cash from Samsung settlement

0.0

0.0

0.0

10.8

Net interest

0.0

(0.0)

(0.0)

(0.1)

Equity financing

3.2

0.0

5.4

0.0

Dividends

0.0

0.0

0.0

0.0

Other

(0.8)

2.3

(0.6)

0.0

Net Cash Flow

(2.4)

(1.5)

2.9

11.6

Opening net debt/(cash)

 

 

(6.6)

(4.7)

(0.3)

(2.8)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.6

(3.0)

(0.4)

0.0

Closing net debt/(cash) excluding finance leases

 

 

(4.7)

(0.3)

(2.8)

(14.4)

Source: Company reports, Edison Investment Research Note: *Including £3.0m licence revenue from Samsung. **£70.0m profit on disposal of IP netted against £47.0m litigation costs and £4.7m one-off finance charges. ***Company awaiting guidance from tax specialist on status of R&D and Patent Box credits.

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 £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 2023 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

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United Kingdom

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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.

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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

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 £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 2023 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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