Nanoco — Progress in both organic and non-organic activity

Revenues rose by £0.4m year-on-year in FY22 to £2.5m. This reflected higher levels of development activity related to nanomaterials for sensing applications, specifically infra-red materials for enhancing the sensitivity of silicon sensors. The significant majority of these revenues relate to the company’s work with ST. The current work package is focused on the scale-up and final validation of two materials, thus laying further foundations for commercial shipments to be enabled. The work package also includes development work on a third material. The company also reports promising progress with its Asian chemicals customer, although this work is at an earlier stage.

Adjusted EBITDA losses narrowed from £2.9m to £2.3m (or from £2.8m to £2.1m if we add back accruals on National Insurance for share based payments) as a result of: (1) higher revenues; (2) headcount reduction during H121 when the business was restructured around its core competencies of R&D, scale up and production; (3) lower patent maintenance costs following the decision to focus on protecting the IP most likely to generate a return in the short to medium term; and (4) general cost control. The cost reduction programme, which includes consolidating all activities at the Runcorn site, has cut the average monthly cash burn from £0.4m in FY21 to under £0.2m.

Year-end net cash (excluding £0.17m IFRS 16 lease liabilities) increased to £2.8m from £0.3m a year ago. There was minimal investment in tangible or intangible assets (£0.14m) assets. Following a placing and subscription in June at 37p/share raising £5.4m (net), which was significantly oversubscribed, gross cash at the end of the financial year was £6.8m. Management estimates that the fund-raising has extended the cash runway for nanomaterial development and scale-up activities into CY25, which is beyond the point when it expects organic activities to be self-financing.

We made minor adjustments to our FY23 estimates in September following management’s statement that a sequence of purchase orders from several existing customers for development work and validation materials meant that FY23 revenues were likely to be 20% higher than FY22, rather than at a similar level. We have not changed them subsequently. These estimates do not model any potential revenues associated with commercial production of nano-materials for sensing or other applications.

Under an agreement signed in May 2020, ST is committed to taking a specified minimum volume of nanomaterials from Nanoco if the enhanced sensors gain market traction and commercial volumes are required. These materials would be produced at the existing facility in Runcorn. We will therefore review our estimates when there is better visibility of ST’s requirements. The potential impact on FY23 revenues will depend on when any potential production ramp-up begins and on the initial use case. Nanoco’s sensing materials are being incorporated into sensing chips that may be used in many applications. Deployment by a major mobile phone company in a key handset model could potentially generate c £15–20m annual revenues for Nanoco, while deployment in a more niche application, such as virtual reality (VR) glasses, would generate lower revenues, but is likely to catalyse take-up by other customers. In the longer term, should Nanoco’s material be widely deployed in multiple handset models or other high-volume devices, we note that the existing production capacity in Runcorn could generate sensing application revenues of £100m/year working 24/7.

Nanoco is working on sensing materials for five different customers. As the FY22 revenue split (see above) shows, ST is by far the most significant customer and is likely to remain so in the immediate future because the fifth work package from this customer extends a year from May 2022 and delivers a monthly revenue run rate equivalent to that delivered in H122 (ie £1.8m for a 12-month period). Nanoco has received additional purchase orders for development and validation materials from ST since the fifth work package was announced in May. Nanoco is supplying nanomaterials to ST so its partner can manufacture sensing devices for its end-customers to try out in complete electronic devices.

In September 2022, Nanoco announced that it had received an additional development work package and orders for materials from a major Asian chemical company and work for other customers. As with ST, Nanoco is supplying nanomaterials to the Asian customer so it can manufacture sensing devices for its end-customers to try out in complete electronic devices.

Interestingly, the company is now experiencing growing expressions of interest in its display materials. This resurgence has, in part, been triggered by the validation of Nanoco IP by the US Patent Trial and Appeal Board (PTAB). Equally, the adoption of Restriction of Hazardous Substances (RoHS) type legislation in a number of geographies and a broader focus on environmental issues are also driving interest in Nanoco’s cadmium-free quantum dots (QDs).

Nanoco has now restarted small-scale sampling activity for potential customers and is engaged in technical and commercial propositions with a number of customers. The company is also reviewing non-Samsung QD TVs/displays to gauge whether Nanoco’s IP is being infringed.

While it is early days yet, the market opportunity is significant. Market analysts are still forecasting significant uptake of QD televisions, with TDS estimating that QD television shipments will grow from under 50m in 2022 to over 200m by 2030. Samsung’s share of the market has now dropped below 90%, opening up the market for independent suppliers.

Nanoco and Samsung initially worked together to develop cadmium-free QDs based on Nanoco’s IP. However, in 2015 Samsung ended the collaboration and launched its QD-based televisions without entering into a supply or licensing agreement with Nanoco. As a consequence of that, Nanoco initiated a patent infringement against Samsung in February 2020. The lawsuit alleges that Samsung wilfully infringed the patents relating to Nanoco’s unique synthesis and resin capabilities for QDs. Nanoco is seeking a permanent injunction from further acts of infringement and unspecified but significant monetary damages. The litigation activity involves two parallel processes: a trial in a Texas court and a review by the US PTAB (see Exhibit 2).

In May 2022 the US PTAB determined in favour of Nanoco in respect of all 47 claims in the five patents. This means that the trial will focus on infringement and damages, with validity effectively a settled matter. This focus was reinforced in August when a judge rejected Samsung’s motion to change the definition of a technical term in the case, in effect upholding the decision made regarding technical definitions during the Markman hearing in March 2021. The court hearing will last for one week, at the end of which the outcome will be announced, provided that there has been no pre-agreed settlement. The court hearing was originally scheduled to start on 12 September 2022 but was rescheduled to 3 October 2022 because the court had scheduled a number of trials on the September date on the basis that the majority of cases settle before trial. The trial was not held in October for the same reason and has not been rescheduled yet.

In its interim statement, Nanoco noted that, if the trial verdict is favourable, it was likely to commence further litigation in territories where it has registered its patents and where the legal process is faster than the United States and, importantly, where injunctions are more commonly granted. (Injunctions are rare in the United States unless an infringer is a direct competitor.) While this could potentially result in payouts to Nanoco while the outcome of the US trial is still being appealed, it is more likely in management’s opinion to lead to additional pressure on Samsung to come to the negotiating table with a meaningful settlement offer covering all global markets. In August Nanoco filed a lawsuit against Samsung in Germany based on a sister patent to one of the patents in the US litigation, because Germany is one of the largest European markets for the sale of high-end televisions. The funder for the US litigation has agreed an expanded budget on similar commercial terms as the existing funding. The group is actively reviewing options for similar litigation in other territories where its technology has been patented and Samsung is believed to have made significant sales.