2023-10-17 15:35:24 ET
Nanoco Group plc (NNOCF)
Q4 2023 Earnings Conference Call
October 17, 2023, 05:00 AM ET
Company Participants
Brian Tenner - CEO
Nigel Pickett - CTO and Co-Founder
Liam Gray - CFO
Conference Call Participants
Presentation
Operator
Good morning, and welcome to Nanoco's Preliminary Results. Please note that you can submit written questions for the presentation by using the webcast Q&A function.
I'd now like to hand over to CEO, Brian Tenner. Please go ahead, sir.
Brian Tenner
Thanks, George, and good morning, everybody, and welcome to Nanoco's preliminary for financial year 2023. My name is Brian Tenner, I'm the CEO of Nanoco and with me this morning, I have Dr. Nigel Pickett, our CTO and Co-Founder of Nanoco, and also Liam Gray, our Chief Financial Officer.
So if we immediately flip over to Slide 4, I'll just take you through the highlights of the last financial year. Importantly, we achieved all of our development milestones for all of our customers, particularly our two key customers in the various work programs that we're doing for them.
That's the lifeblood of the company, because it allows products to move through their development cycle towards the ultimate goal of commercial production. As a result of the large contract with the European customer, we now have two sensing materials that are in final validation with the customer, and we understand that they are also testing those materials with their customer.
We hope to have news on that in the near future. And everyone will be aware that during the year, we brought the Samsung litigation process to a successful conclusion and netted $90 million for Nanoco. That $90 million is allowing us to make the significant return of capital in the first quarter of 2024 that we've already announced following -- or once we receive the second tranche of the litigation proceeds from Samsung.
That $90 million is also putting Nanoco in its most secure financial position that it's ever been since we were founded back in 2001, and it's also allowing us to make some modest but important strategic investments in the business and our capabilities. And last, but by no means least, as we indicated over the last six to nine months, we've continued our work on identifying and engaging with potential IP infringers, and we're now in contact with a number of companies who are potentially infringing our IP with a view to either putting in place supply agreements or potentially new license agreements. So in summary, the last year, we've done an awful lot, but we still have a lot to do. If we can now flip over two pages, I'll take you through markets and opportunities review.
And so starting on Slide 6. I'm starting here with the sensing market rather than the display market. If you look at the slide on the top left, that is forecast published by Yole it's talking about the total CMOS image sensor market. And that's forecast to get to $30 billion by 2030, and that's for the whole device. Then look at the bottom left, and we've talked about these before, so I won't go into them in any detail, but there is a very, very wide range of applications for infrared sensing, whether that's at near infrared, so up to around 900 maybe 1,000 nanometers or shortwave infrared, which goes past 1,000 nanometers and as high up as 2,000 before you get into the next range. If you look at the top right, this is the area that we are specifically interested in inside CIS.
So you've got that $30 billion total CIS market. But inside that, Nanoco, we're specifically focused on opportunities in cameras and also in imagers. And again, this is a forecast that's provided by Yole and you can see that it's got a very, very significant growth forecast in there between 2022 and 2028. And the biggest single assumption in there is that mobile phones high-volume, mass market mobile phones adopt SWIR technology sometime in calendar year 2026. And that underpins around 70% of those forecast sales then of cameras and imagers in 2028.
It's fair to say that this does still require mobile phones to actually adopt this technology. It would be a breakthrough adoption. But most of the market research says that quantum dots are extremely well positioned to be the technology that enables mobile applications to adopt SWIR technology.
And now move over the page, Slide 7. So a simple question, well, why use quantum dots? I'll focus on the solutions on the right-hand side. Quantum dots significantly increase the efficiency of a CMOS sensor or a silicon sensor from around 6% or 7% all the way up to 60%. So basically, the amount of signal that you can actually effectively process is multiplied almost by a factor of 10.
The second thing that quantum dots do because they can be tuned to different wavelengths, you can expand the range that silicon actually can see much further into shortwave infrared, as I was mentioning, whether that's up to 1,100, 1,200, 1,300, 1,400, 1,500, 1,600 and higher wavelengths. And those wavelengths are important because the further you go out, the greater the increase in eye safety, and it operates almost on a log scale.
So rather than having staring at the sun, bright sunlight at around 600, 700 nanometers, I did 1,500 nanometers, you wouldn't even know and your eyes would be not impacted at all by that wavelengths of electromagnetic radiation. Because the quantum dots can also be tuned, you can actually target the gaps in the normal spectra of sunlight.
If you look at a long-range spectra of sunlight, you'll see that has got very, very distinct gaps in the wavelengths. If you target those gaps with the quantum dots and your sensor, then you're not having to fight against the background noise created by sunlight. And SWIR, our shortwave infrared also needs less laser power, which is really, really good for mobile devices, less important on a static device in a building or on a large piece of equipment.
But really important for smaller mobile devices with their much smaller batteries. And last, but absolutely by no means least, QD enhanced CMOS sensors are up to 1,000x cheaper than the equivalent performing sensor today, which is an InGaAs sensor, indium gallium arsenide. Those are today found in military applications and also I've said before, running around on the surface of Mars, whereas those InGaAs sensors it's virtually impossible to imagine they can ever get to a price point where they would be a viable addition to a consumer device, whereas QD CMOS sensors up to 1,000x cheaper are absolutely priced for mass market adoption and consumer devices.
In terms of Nanoco's differentiation then on all of this, we've already got validated materials and materials that are going through final validation with our customer. We've got already multiple tunable wavelengths of materials and a wide range of materials, as you say, later, we've already passed their proof of concepts and are now being customized for individual customer applications or optimized for those applications.
Our second generation of materials and third, in particular, actually all rest on our IP protected platform technology and around our first-generation sensing materials, we also have significant amount of new high and trade secrets and business knowledge. A really important thing is that we already have high volume capacity in place.
It's actually a frightening prospect for a very, very large customer to start dealing with a small supplier if they're worried that, that supplier cannot step up production to meet the demands of the very large customer because we already have that production capacity in place, that's another barrier to entry, if you like, removed for Nanoco and also in place for other small potential competitors. And last and again, but no means least, we already operate our quality control processes and the product that rolls off our production lines already makes the exacting standards of consumer electronics and every time.
Now go over the page to Slide 8. I'll just quickly explain how Nanoco is actually approaching the sensing market and also our customers' ecosystems. You can see Nanoco at the top there. On the left-hand side, we've got our relationship with our European customer. It's public knowledge. They've got over 200,000 customers of their own.
They, for us, are a very high-volume potential customer. And though as we've said previously, the first commercial production order, we are expecting it to be a low volume order. I'll just take a second there to explain in simple terms what we mean or what the difference between low volume, mid-volume and high volume, and it is relatively simplistic. High-volume application, you should be thinking mobile phone handsets and mass market mobile phones. So hundreds of millions of units, i.e.
center units per year. At the low end, low volume instead of measuring it in hundreds of millions of units, you're just measuring it in millions of units and whether that's an industrial application, a medical application, a quality control application, a headset it's those sorts of thing. Mid-volume, that would be tens of millions of units, ones that come to mind immediately would be smart watches, which do tend to sell tens of millions a year. So that's the context of low, mid and high. So that's the attractive opportunities and market reach we've got through the European customer.
In terms of the Asian customer, they are one step removed from the OEMs and the end users. They have around 50,000 or over 50,000 customers. And again, for us, they're mid-volume potential. Key thing about the Asian customer is that we are confident that they're actually -- one of their relationships is with the only other major sensor player who's dealing with quantum dots on CMOS technology.
Again, that QD player two on the right-hand side, more than 200,000 customers and again, very, very high volume potential. So the message here is that actually the two major sensor companies in the world who are looking at this technology, Nanoco's either directly engaged or indirectly engaged with both of them.
Now I go over the page to Slide 9. I'll say a little bit about the display market and our materials there. And the chart on the top right will be very familiar to investors. What it shows is the expected evolution of the flat panel TV market.
over the next seven or eight years. The gray box at the bottom is the non-quantum dot TV market. The blue wedge and the sort of pinky move wedge on top those are QD TVs. The pinky move wedge is the forecast for Samsung QD TVs where obviously, they've already paid their $150 million for a license to our technology. So the key thing for management and investors to focus on is that blue wedge in the middle.
That's quantum dot containing TVs from other manufacturers. As we've said before, Samsung share of the market is now below 90%. And importantly, you can see from the pictures on the bottom right, that a number of companies that are looking at deploying quantum dots on to micro OLEDs.
In the first instance, this would be for small screens, the energy usage, it causes less stress for the quantum dots and it's a much more viable solution. And we're already actively engaged with potential customers looking at the deployment of quantum dots into those sorts of small devices, whether it's a smart watch or phone, you can see the headset on the surgeon there.
And quantum dots for LED TVs, it's further away, as I mentioned, because of the energy issue. But Nigel will talk about that a little bit more later on. We've already emphasized the advantages that quantum dots bring to display, whether it's in terms of the quality of the color and the narrow bandwidth and the clarity of the color that you're getting and also the fact that certainly for the film-based system, quantum dots integrate with the existing supply chain.
Once again, in terms of what Nanoco bring to the party that's different, and what our quantum dots are obviously cadmium-free, whereas a lot of the TVs today in that blue wedge on that graph, they actually contain cadmium and -- we've also got the enhanced color and efficiency compared to LCDs. And actually, something that's very important for us is that our cadmium-free quantum dots can be applied both to the film generation of displays, but also to the micro LED displays that I was mentioning earlier.
And again, one last point goes without saying, but the successful validation of our IP in the U.S. patent office during the Samsung litigation process obviously shows that we already have our IP validated for mass production, whereas we know a number of our competitors are still embroiled in lawsuits actually between each other on who's got valid IP and who doesn't. And that's it on display. So it's behind sensing for us. We've already explained most of our efforts in the last few years have been focused around sensing, but display is not dead, and there is definitely renewed interest, particularly around micro LED.
And with that, I'll hand you over to Nigel, who's going to take you through a technology update and road map for the business. Nigel?
Nigel Pickett
Thanks very much.
If you go to Slide 11, it basically shows the kind of typical materials development cycle. So these can take between five and eight years to come all the way through to, say, a product. And the way it works is you kind of identify material that's going to have some kind of advantage, which we talk about in a second. You then go ahead and try and make that material, if you can make that material, you then do some kind of proof of concept to show that it does actually work in the devices you're trying to get it into.
You then go to the next step of what we call the optimization step and this is trying to optimize the material. So if it's for a display, you'll optimize its kind of optical properties, if it's for a sensor you optimize its absorption properties, along with its electronic properties. Both of these would optimize synthesis process as well, make it more efficient.
Once you've done that, you're going to some kind of scale up phase and this is taking say, from 1 gram to 10 grams and 10 grams to 100 grams and then on to the kilogram quantities without losing any of those optimized properties I just spoke about. Once you've gone to that stage or past that stage and then really start to engage with each customer to get it into what we call a validation stage.
And each customer will have slightly different kind of criteria to incorporate the quantum dots into their existing device or process without changing their process too much and without changing what we've done before, and then you'll move on to what we call the product stage, and this is where you'll get locked down of what you've just done.
So if you make any improvements, you couple that improvements into the product, it's locked down and you kind of work with your customer and the customer's customer, which is sometimes the end user to validate it and hopefully to take up that technology.
So then if we move on to Slide 12, this is where we are on the sensor side of things with what I've just discussed basically. We have the initial products, which Brian has just spoken about, and you can see the time line, we believe we would have a product in the market very soon. But as I say, we have other materials coming behind then the indium arsenide, which we started less than the year after because we could see there are certain advantages and then we've been working on some other materials in this area, the indium antimonide because we believe that also has advantages. Why work on new materials? Because there's even some kind of technological advantage. They work better, they're faster, they absorb more light, they emit more light. Commercial advantages, they are cheaper and also, obviously, the environmental advantages, they're better for the environment. That's why we have this ongoing cycle of products.
If you move on to the next slide, Slide 13. This is just what I've just been saying here why we are making these new materials as I say, and some of the parameters that we think are very important for the sensor side of things, mainly things like electromobility, this kind of basically means these things can cycle through there in their process much faster, so you can start to say, capture video images, et cetera, et cetera. Also, as I say, the indium antimonide and arsenide don't have heavy metals in it, so they're not toxic.
They are more stable, we believe, because they've got kind of covalent bonding in them. And the nice thing is these materials, these three, five materials to make quantum dots of these materials you have to basically use our kind of patented seeded method if you want to make large volumes of high-quality material.
So we move on to Slide 14. This basically says where we are with these materials. We had a kind of table like the one on the bottom left before this time, we now have two new materials being past the proof-of-concept stage 2, other materials in the final validation stage.
Also it looks slightly different because there were a number of what we believe to be other opportunities, but looking at them in more detail, they wouldn't have really worked out on a commercial basis. So we've kind of thinned out those kind of opportunities. There weren't such opportunity, but the same.
Moving on to the last slide, just a few comments on the display side of the business. We're still working in this area. We believe if people want to adopt cadmium-free quantum dots like Samsung have in their displays, they need to use the seeding process to make large volumes of materials and a little bit of a road map of where the display industry is going. It's gone from conventional film, such as you get in some Samsung TVs to the, what they call QD OLED, whereby you have a blue OLED that excites the red and green quantum dots. And again, that's where they're using our quantum dots.
This is then moving over to the micro LEDs where we believe there's still a lot of opportunity for the cadmium-free quantum dots on devices such as watches and mobile phones. Going to more powerful devices, we're not sure how a quantum dots performed there and there's a lot of competition, but we still believe quantum dots have a bright future in the display industry. That's all I have to say at the moment on the kind of technology front. But just the last thing. We are also looking where else quantum dots can be used in other kind of technologies.
And we believe there's a number of exciting areas that started to work from using quantum dots. So thank you very much, Brian.
Brian Tenner
Okay. Cheers, Nigel.
I'm now going to move on to a few slides talking about I am -- our process and efforts to monetize our IP, starting with Slide 17. Just to remind people that there are two fundamentals that you need if you're ever going to have a chance of actually making any money out of your IP. The first thing is you need a commanding IP portfolio, and I'll say a bit more about both of these when we turn the pages.
But basically, your IP portfolio has to intimidate others because it's been -- it's strong because the coverage that it's got, because it's relevant. Because it's ideally being validated and tested through a litigation process. If you haven't got all of those, then people aren't going to be scared enough of you to actually feel the need to take out a license. The second thing that you actually need is you need a valuable addressable market. What that simply means is if no one's actually selling your A product with your technology in the market, there isn't an awful lot of license income that you can generate from that. What you need is that valuable addressable market, sometimes referred to as a deep impacted market. If you've got both of those, then you have got a big opportunity to create value.
If we go over the page to Slide 18, I'll deal with that first fundamental, the commanding patent portfolio. So in terms of validated patents, as many of you will be aware, the U.S. Patent Trial and Appeal Board validated all five patents that Nanoco initially filed at the start of our litigation with Samsung.
Those patents all survived multiple different challenges. If you look at the number of challenges, times the number of claims and the number of challenges against each claim, there were 300, 400, 500 individual challenges that were all leveled against our patents and are claimed. And they all survived. In terms of retained patents, we retained four of the five validated patents, but the critical thing to know is that we retained 46 of the 47 claims. So yes, we sold one of the patents.
It was a film patent, not in use in Nanoco and not used by us, and it was the patent that had the least favorable Markman outcome during the litigation process. So we still have those 46 out of 47 claims that were validated by the U.S. Patent Office. Now on top of that, again, folk may or may not know, but we made it clear that you could not bring too many patents into the litigation. And we actually had around another 50 patents that could have been used in the Samsung litigation but we didn't deploy a litigation because we took those five to start with because we thought they were most relevant and also we had to narrow down the number of patents that we were bringing to the claim.
So there are another 50 or so patents that could have been used in the Samsung litigation as well as the rest of our patent portfolio as well. In terms of patent lives, the four patents that we've retained from the litigation, the longest of those lasts until 2028. And those other relevant patents that I mentioned that could have been used in the case, their lives go out as far as 2033. Keep those dates in mind when we come on to a chart later on when we'll be talking about the value of the market.
And then lastly, in terms of commanding patent portfolio, the Samsung license in itself is clear evidence to other market participants that the settlement is a clear market sign that they felt they needed to pay something. And the size of the settlement at $150 million, I think you'll struggle to find any examples of them paying out that kind of money other than to the likes of an Apple or an Ericsson or one of the other global multibillion dollar companies.
All of that adds up to us saying, yes, Nanoco today also have a commanding patent portfolio. We'll now move to the second fundamental, the valuable addressable market. I've repeated in a larger scale here, the slide from the display slide earlier on.
What you can see is that blue wedge in the middle there. That's the piece of the market that Nanoco's IP is relevant for today. And the red dot is hovering over this year, 2023. The fact is today, the impacted market is currently shallow and -- or small. The vast majority of those QD TVs in that blue wedge today are still based on cadmium.
And disappointingly, some TV manufacturers are opting at the moment to stick with cadmium. However, if you look at the forward profile QD total share of the display market set to rise from around 6% today to around 34% by 2030. The number of non-Samsung and non-cadmium QD TVs forecast to rise from around 2 million units today to circa 70 million units.
So the main message here is that the value opportunity for Nanoco will grow over time. Now that doesn't mean we can't do anything today but it does mean the size of the issue or the concern for anyone you'd be talking to today, if they're only selling 50,000 units of some gaming headset or whatever it happens to be, unless they've got big plans for that to grow to millions of units, then they're not going to be particularly worried today.
But equally, if they do have plans to grow it, they may think it's worth getting in on the ground floor to get a license today. And I mentioned the length of the patent lives. I ask you to keep those in mind. Going out to 2028 and 2033, you can see that those patents last long enough to take a site into a period when the market actually is attractive. And given that when you raise an action, you can go backwards in time, six years, you can see that even if it was 2027, you'd be reaching back into 2021 when there was virtually no sales of non-Samsung, non-cadmium QD TVs.
If we go over the page then to Page 20. Again, we discussed this over the summer in a shareholder presentation. We don't believe that anyone else can make cadmium-free quantum dots at scale without using our IP. What we have on here each tick represents a company that we believe either today or through its own announcements in terms of what it's researching and what it intends doing is either already making cadmium-free quantum dots, whether for experimentation or to put into market devices. I should point out as well that this heat map, there are 19 companies on here.
Some of them are - three of them represent Samsung or Samsung's direct customers. So we ignore them going forward. But there are QD companies on here, including some small QD companies. And as we've explained before, given the place that QDs have in the value chain, making some numbers up. If in a $1,000 TV, there's $20 worth of quantum dots.
It's easy to see. You've got a lot more opportunity if you sue the person who makes the TV rather than the person who makes the actual quantum dots. And if you look around at our competitors and recent disposals of competitors and financial difficulties or indeed, competitors going bust litigating against the small purely funded QD company is almost pointless unless it's for tactical or strategic reasons.
So looking at the heat map, basically, what it's telling you is those companies on the top right are worth directly engaging with in the near term because they're either already got products in the market, and they themselves are large companies with the intention to significantly grow those markets or they've actually announced that they're going to get into those markets. On the vertical axis, everything below that line across the middle of it.
it's arguably too small to spend a lot of time and effort going after them today. And indeed, as I said, some of them are QD companies, so there would be very little benefit in going after them. But this gives you a pointer on where to go.
So if we then go over the page, we're now on Slide 21. What we've done is we've taken 16 of those companies of the 19. As I say, we've ignored Samsung, we've ignored it's one customer and its direct supplier Hansel. So there are 16 companies, if you like, mentioned on the heat map. Some of them have a whole range of devices and not just one device. But for each of them, where they claim to use quantum dot technology, we've acquired one of those devices. We've actually tore down eight of the 16.
And you can see the results of that on the chart on the bottom left. So the eight devices that are claiming quantum dot technology, six of them are cadmium-based quantum dots. So while that is not necessarily the absolute end of the road from Nanoco's point of view. You're all aware that we focus and our IP focuses much more closely on cadmium-free quantum dots. So you've got six of the TVs in the market today based on cadmium.
One of the devices that we actually tore down, believe it or not, it'd say is quantum dot technology on the box and it has no quantum dots in it. So that's marketing, tough for you. Or if it has got quantum dot, they're actually dead. And what I mean by dead is when you excite them with energy, they don't respond. So there's a device out there is to say that effectively doesn't have quantum dots in it.
One of the devices does have cadmium-free quantum dots in it. Now, that does not prove infringement. But given what we know about our IP and what we believe are about our IP, it is a very strong clue that they are likely to be infringing our IP. There are eight more devices that we will be -- that our teams will tear down over the coming year or so.
And if we then move over the page, then just to summarize where we are on monetizing our IP in display, yes, we do already have a commanding IP portfolio that valuable addressable market will grow over time. So the opportunity is there. We have already started engaging with two potential infringers and that will grow. However, you need to understand that this is a relatively lengthy process. A lot will depend on the reaction of the companies that we're engaging with.
Those are obviously going to be private commercial negotiations. Unlike the litigation, we won't be making announcements on court announcements, et cetera, et cetera. Litigation, obviously, is a fallback option for us if the commercial engagements either for licenses or supply agreements don't work. But again, to remind people, we are not an IP licensing company, we are a production company and we are aiming to get commercial agreements. If all that fails, we can fall back on litigation.
And because of the funding from the Samsung litigation, if we want, we can now self-fund that litigation, which would mean we would take all the costs on the risks. But if there was a successful outcome, we'd retain a higher proportion of any recovery. Alternatively, if we thought the litigation was going to be extremely expensive, we could again pursue third-party financing at much lower risk to Nanoco, but obviously then with a lower share of the return. Again, you will have seen with the Samsung litigation, we retained around 60% of the net proceeds, which again is much higher than the offering from most IP licensing companies out there where they will keep more than half for themselves.
And with that, I'll hand over to Liam to go through financials.
Liam Gray
Thank you, Brian.
Moving on to the first slide in this section, Slide 24, which shows the financial highlights for the year ended 31st July, 2023. So revenue is up on prior year by 128%, moving from £2.5 million to £5.6 million. This increase was primarily driven by the IP license, which contributed £3 million to revenue. Increase in revenues had a direct impact on our adjusted LBITDA, which has reduced to £0.4 million compared to £2.3 million in the prior year.
The cash cost base has reduced -- sorry, increase on the prior year and sits just over £6 million. As Brian mentioned, we have invested in our core capabilities in the second half of FY '23 and increased our footprint at our offices, labs at Runcorn, increased our headcount and brought in new equipment to improve our core capabilities and product offering unlike most companies there have been some inflationary increases as well.
Our year-end cash amounted to £8.2 million and includes a net £4.5 million from the first tranche of proceeds and litigation after paying all litigation-related costs. Excluding this, our net cash outflow for the year was £3.1 million. And finally, the year-end cash position. In addition to the cash due to be received in February '24, means our cash runway is no longer a concern, and our commercial prospects are fully underpinned by litigation proceeds.
Moving on to the next slide. This is our summary income statement comparing FY '23 to FY '22. So the revenue growth mentioned previously has flowed through gross profits, which is up £3.3 million on the prior year. R&D investments in line with the prior year.
And as mentioned previously, our cost base has increased, which results in adjusted LBITDA in the year of £0.4 million, compared to £2.3 million in the prior year. We moved down the table. There have been a significant number of adjustment items in the year, and we'll update on closely on the next slide.
Financing costs of net £5.4 million and these include the contingent interest on the loan notes, which is paid during the financial year. On tax, we have utilized some of our accumulated losses to reduce tax in the year, and both recognized deferred tax assets in the period of £2.6 million and we continue to have unutilized tax losses offset into future profits. So compared to a loss after tax in the prior year, £4.7 million, we have generated profits in the year of £11.1 million.
So moving on to the next slide, Slide 26. This highlights the adjusted items in the year, and we'll show you this is a bridge between adjusted LBITDA and the operating profit. So we start with that adjusted LBITDA of £0.4 million, then have the profits on the sale of the IP, which is net of £68.7 million and the litigation-related costs of £49.3 million, which were recognized in full in the financial year. The requisition general meeting cost £0.5 million in broker, Adviser and legal fees.
And this year, we've shown foreign exchange separately because it's quite significant, and this reflects the translation of the balance as denoted on the balance sheet. However, as announced recently, we have hedged second transit litigation proceeds to remove any future risk or volatility. And finally, share-based payments are in line with the prior year and depreciation and amortization are lower than prior year due to a lower impairment charge on IP. And this reconciles back to £15 million operating profits for the year.
Moving on to next slide. We reconcile our cash from the 1st of August '22, till date of July '23. We have proceeds from litigation of £9.2 million and then we paid the contingent interest of £4.7 million, which gets back to £4.5 million net from tranche one we referred to earlier. We then have our adjusted LBITDA of £0.4 million, and the R&D tax credit receipts in the year of £0.5 million was related to FY '22.
We have done out some upwards working capital movements, which is inclusive of the total and tax paid in Korea on the invoice written to the IP license. We then have some license payments for our premises of Runcorn, and we had some capital expenditure in the near year as we begin to invest in our equipment and capabilities.
This leads us to our closing cash balance of £8.2 million. And just to reiterate, this means our cash outflow during the year was £3.1 million.
Then moving on to next slide, Slide 28, just a financial summary. Going on ahead to FY '24, we expect our services and materials revenue to be in line with FY '23. However, the license income was doubled to £6 million, reflecting a full year's recognition of the IP license agreements. Our cash cost base is around £6 million following the investments in additional speeds and headcount to improve our capabilities, and this investment will also provide a more tailored customer solution and accelerate our product development.
And finally, on cash, we started the year with £8.2 million. Our net monthly cash burn is forecast to be around £0.3 million, and we also have a program of capital expenditure, which scenario we have historically neglected and put off to try and preserve cash. And finally, as has been mentioned, we have a firm intention to return the £33 million to £40 million of the proceeds from '22, which will be in Q1 of calendar year '24. And with that, I'll pass you back to Brian to summarize.
Brian Tenner
Okay. Thanks very much, Liam.
So if we turn over to Slide 30 for an outlook on what to expect and a summary of what we've achieved. And as you'll see in the preliminary announcement statement itself, we're currently in the middle of negotiating some new development contracts with two major customers for new materials. We're also currently negotiating the contract terms for that first production order that we're expecting before the end of this calendar year.
And just to emphasize, we do expect that first production order to be low volume. So back to that measured in millions of units or sensing units for our customer. We're also taking the opportunity to make modest investments using some of the retained proceeds as we flagged over the last six months or so. One of those things that we're investing is installing the capability and capacity to manufacture 200-millimeter wafers with electrodes deposited top and bottom so that when we're talking to new customers or potential new customers, we can actually say to them, this is what you get when you deploy a Nanoco material onto a silicon wafer, whereas at the moment, without that capability, we actually have to go to a customer and say, well, look, here's some material, can you take it and find out what it does on wafers.
Not only will this be a much more compelling proposition for customers, but it will also significantly accelerate our product development. So instead of waiting on two or three different steps in the supply chain to test materials, and how it performs, we'll be able to do our sales at a pilot line scale, which will give us the end-to-end understanding of the performance of our material which will, as I say, create faster feedback loops.
We announced previously that we were looking for a new nonexecutive and that process is significantly advanced. And we've had a fantastic short list, which was actually quite long. We had initial interviews with candidates and with very impressive backgrounds at some of the largest semiconductor and sensing companies in the world. And we're expecting to host four candidates actually in our Runcorn facility. So we're really spoiled for choice in terms of the quality of the candidates.
They also have significant experience of commercializing our technology, and in some cases, have also worked at our end of the telescope, i.e. the little guy trying to get in with the big guy and not just vice versa. And we're expecting to be able to make an announcement on that appointment before the end of this year.
And lastly, as Liam mentioned, because of the litigation outcome we will be in a position to make a major return of capital to shareholders in the first quarter of calendar year 2024. The form of that return, we said before, we will try to give shareholders the option on whether it ends up being treated as capital or income, but we will say more before the time about how that's actually planned and the actual timing for it.
So that's it for the summary. And one last line for me. As I said right at the very start, we've achieved an awful lot. If you look at where we were three years ago, even before the litigation started and where we are today, we're in a significantly improved position, particularly when you competitors, whether they've gone that store being sold as distressed asset sales. But there still is a lot to do.
We fairly meant a low volume production order. That will be our first ever production order. We obviously then need to grow that into more applications, larger orders, more customers, et cetera. So lots done, still lots to do. Thanks very much.
And I think we're now turning to questions. We've got them on a screen in front of us. I'll read them out as we've done in previous years. And if I can answer them, I will, otherwise, I'll hand them over to Nigel or Liam and failing that, we will take them away and provide written answers on our website as we're accustomed to doing.
Question-and-Answer Session
A - Brian Tenner
Just to clarify, the agreement with POE, it's not a license, it's a distribution agreement. And what it gives us in People's Republic of China is a partner who can actually coat quantum dots into a film and then sell those films into panel manufacturers. In terms of time frame, a lot of this will link back to that graph that we talked about twice during the presentation in terms of the -- when will those panel manufacturers drop cadmium and move to cadmium-free and equally those not using quantum dots when will they start using quantum dots.
So it will be a slow process, but it's important to have a partner in China, so close to so many of the major panel manufacturers. The next question was are Nanoco still working on using quantum dots in Life Sciences? If so, can you please provide more information on time scale and collaborations?
And the truth is the life sciences department was one of those areas that we closed down. If you remember, we were raising money every year, three or four years in a row. We've still got some of the IP. We've still got some of the capability. But frankly, to push that forward while also trying to keep sensing and display a life would have just been beyond us.
So that was shuttered. It could be brought back from the dead, but it's not a high priority for us. So I would expect to hear nothing on the life science application, particularly the injection of quantum dots into human beings. They may end up actually in wearable diagnostic devices, if you count that as life sciences for smart watches or whatever. And moving on, following certain allegations around the AGM, can the company confirm whether there was any internal or external investigation that exonerates all members of the Board from any regulatory issues?
We've said this two or three times. We took the allegations seriously. We did a thorough investigation and there's absolutely no merit whatsoever in any of the spurious allegations that were made against anyone in the company and in our opinion, anyone outside the company. So that's that one. Next one, the special dividend, the 10p to 12p would also mean that the share price would decline by this value on the ex-dividend.
This means the profit for shareholders would be gone as new investors can get in at a very little price? What are you doing to prevent this? It's quite an involved question. Obviously, where we are valued today, we're valued below cash. So I can see the logic if our share price was 16p today and we dividended 12p with the value of the company fall 4p which we have 50% discount to cash balance.
And equally in terms of new shareholders coming in on new equity, well there won't be any of that because we're now self-funded. We don't need to raise money. So ultimately, if someone in the market is prepared to sell shares at 4p a share and there's somebody who wants to buy it, there isn't anything we can do to prevent that. It's similar to today. And we think the company is significantly undervalued given where we are.
And if you compare it to before the lawsuit anyone even knew about it, we were valued at 20p. So yes, there are people selling shares at 16p today and I think that's slightly illogical, but I can't give people investment advice. But ultimately, the market will decide what shareholders are prepared to sell shares for. Moving on. Why is a material validation before end of financial year, July now being seen as later in the year?
Ultimately, that is outside of our control. As we've said, we finished all of the work that we had to do by the end of the contract with our European customer at the end of April. We're obviously still working with them. But it's them who has to validate this material in their production process. That's something they control and they have other demands on their time, et cetera.
But equally, it's a very complex process at their end of things. So we are ready to go with production orders when it comes, but that validation ultimately, inside the customer and indeed, inside their customers is something that's outside of our control.
Next question. Please, can you give some more details on customers other than the European and Asian customer? Why does the number of these customers fluctuate? These customers ended up placing commercial orders, would these be more likely to be low or medium volume orders than high volume?
So in terms of other customers, they spread the whole range. Some of them are relatively small. You therefore expect them to lead to low volume orders. And indeed, Nigel mentioned that we've thinned out some of the customers we were working with because actually, given our capacity and scale, you don't want to spend time and effort with someone who might be making 300 or 400 highly specialist devices a year. If H1 contains one sensor, you'd be measuring your revenue there in dollars, never mind hundreds of thousands of dollars.
But equally, we have customers that are equivalent in size and scale, if not bigger, than the European and Asian customer. And again, whether they're device customers and whether they are capital equipment customers, whether there are other material customers, the ecosystem is relatively small for the large players.
But once you go below that, there are a large number of smaller players. But then you've got to work out whether or not you want to spend your resources chasing an opportunity that at its peak might net you $0.5 million or something like that. Next question, you have a target of adding another major electronics customer by the end of FY '24.
Do you have one in mind? Or is that a vague ambition? We're working with a number and the commercial propositions and technical propositions. So we have -- it's not -- when I get off this call, we're going -- looking for someone to talk to. We're already talking and engaged and our technical teams are talking about potential programs of varying shapes and sizes.
And the fact that we've mentioned it. Specifically as a target. I think you'd think we were slightly foolish if we didn't have anyone in mind at all. And next question. We've spoken previously about the Asian customer potentially accelerating the development of its materials, that involved the expected production time line being brought forward.
That, I mentioned in the summary that we're actively talking with our two big customers about the next stages of development. The more you spend, the faster the development goes. The longer-term approach gram that you commit to, the faster the development goes. With the Asian customer in particular, we've not completed or we're in our sixth work at package. Some of those have been three months long, six months long.
That's what you do at a very early stage before you pass proof of concept. Once you pass proof of the concept, then you're more likely to be prepared to commit to longer-term programs and equally invest more money in it and all of which will accelerate things.
But as Nigel took you through, developing these materials because of their impact on the whole product life cycle and being designed into new devices with new software, new applications, et cetera. It is a long process. Even if we are fully validated customer materials today being shipped, another customer would actually then take some time to modify those materials for their process and device equally modifying their own production processes.
So there is no world in which someone turns up month later, two months later, you've got a new commercial production order. But yes, the simple answer is we would expect or we're hoping that the new contract that we're negotiating with the Asian customer will lead to an acceleration.
Next question. Will the $3.5 million tax bill due to Korea be split equally through the $75 million brought into the company or will the $3.5 million tax being levied against only the $40 million to shareholders?
So this tax has got nothing to do with any return to shareholders. This is withholding tax, the tax treaty between the U.K. and Korea, for license agreements has got a 10% withholding tax attached to. So on the first tranche of license proceeds, which was $32.5 million in February this year, 10% of that was withheld by the Korean tax authorities. Same will apply to their -- what we're getting in February '24.
However, it is fully tax deductible in the U.K. by the company against the company profits going forward. So this has no impact on shareholders that withholding tax. And has Brian Turner, I presume that's just lining misspell, got any response to the comments on the London Stock Exchange Forum? Shareholders have stated that is public knowledge, Brian Turner has got less than £200,000 of Nanoco shares in his own ownership at the present time, which is far below the 200% of the annual income the company has set and the remuneration policy currently as income exceeds £275,000 a year.
My pay, my shareholder is a matter of public record. It's in the annual report on accounts. I've invested a lot of personal money in the company over the last few years when all of our executives had a full year of 25% pay cuts, which was much longer and higher than most other companies.
And again, folk will be aware I actually deferred my pay rise on becoming CEO for two years, et cetera. So you can see the actual public position in last year's annual reporting accounts and you'll see their revised position in this year's annual reporting accounts. And obviously, it goes without saying when the share price falls, the value of everybody's holding, my own included, goes down. Next question, what do you expect the fall out of the Shoei acquisition of Nanosys to be for Nanoco? Very good question.
It's fascinating. Based on the public information that, that was an asset sale, given that we know again from public filings that Nanosys raised over $200 million in its history. The unfortunate thing is it looks like it's gone the way of QD vision and envisage, et cetera, got into financial trouble and typically asset sales, that's what it means. I think Nanosys had already announced they'd close done their production facility and outsourced all of that to Shoei. So yes, sad day for Nanosys, but it's good that a lot of their R&D guys and a number that the company have been retained by Shoei.
In terms of Shoei production going forward, they will see the same challenges if they want to play in cadmium-free quantum dot manufacture, then they will have the challenge of dealing with our IP. If they're -- again, Nanosys was widely known to be majority cadmium-based supplier of quantum dots. So if that's what Shoei have taken over, then that's less of an issue for us. But they're a midsized privately owned Japanese corporation. So we're aware of them and we do take them seriously.
Next one, as you move deeper to commercialization, where do you see as the business risks and what organizational changes have you made to drive sales execution? Thank you. Big business risks. So obviously, we've gone past the running out of money before we get commercialized and assuming that we do get that first commercial order before the end of this calendar year, then that's basically gone as a risk. The litigation risk, that's going as well.
Those were our significant risks. So we're sort of back to business as usual risks and the key business risk is will the markets evolve as they're forecast to evolve. So we'll we get that commercial order in the next few months. We expect, yes. Will that initial commercial application then expand to other customers, other applications.
And the big one which forecast out in 2026, will SWIR technology be adopted in mass market and premium mobile phones because that's what will drive you towards the hundreds of millions of units. In terms of organizational changes, we've kind of been living under a stone for the last three or four years when we were conserving cash, not really going to many conferences, not doing much proactive outreach. Now that we've got some retained funds from the Samsung litigation. Again, that's something that we're addressing. And indeed, Tier 3 of the opportunities that we're currently discussing specifically came from our senior executives actually attending some trade shows and the like.
We are looking at the timing for when we will have a more proactive business development function. But again, that's easier to do once you've actually got a product in our commercial production and in the market. And currently, myself, Nigel and a number of other commercially aware scientists are driving our business development engagement with the major OEMs that we deal with.
Next question, you have announced today that you expect first commercial order by the end of 2023, and have made it clear, it's a little volume order, what does a little volume order and revenue mean? Are we talking about a few hundred thousand pounds or a few million in revenue per year?
It's going to be at the lower end of that. I think we've said previously that, again, there's a lot of variables in this, but we've previously said that if we were running at around 100 million devices, then we would be generating around 20 million of revenue that it's not a direct scale down from that because the price obviously changes at lower volumes equally. There's a big dependency on the size of the sensor. Because if you think of a record or a 300-millimeter wafer, depending on the size of the sensor, dramatically changes the number of sensors you can get out of a wafer. So -- because we don't own the end application, we're not certain about that yet.
But it is going to be around where it's £200,000, £1 million. That's what a low volume order mainly. If middle volume was 10 million units, so the top end of single-digit millions and then would change. Next question. Okay, on Slide 27, you say the requisition general meeting cost £0.5 million.
Why was it so expensive? Is that a strategy you're purposely exploiting? I think it's unfathomable to have such high cost for a meeting relative to the business, other CapEx costs, also the £34 million to £40 million is intentionally vague. Can you give a more accurate amount for when the payment is going to be made in February date when the information date for February will be released? The £0.5 million, yes.
I mean our Chairman has made it abundantly clear that he thinks it was a preposterous waste of shareholder money. Unfortunately, given the number of legal letters and the nature of the accusations that were being made and the investigation that we said that we had to do earlier using external legal advisers, brokers are involved PR was informed, involved, et cetera.
I think you'll understand one of the downsides of a listed company is when you have meetings like that and the 6-month run-up to it, et cetera, that you incur a lot of costs. But given that the result of that was that the Board was overwhelmingly endorsed and that all of the proposed resolutions were voted down almost 10:1 ratio. That's what's the cost of the meeting, and that's the outcome that was generated.
£33 million to £40 million is intentionally vague and £33 million to £40 million is a range and saying a year in advance given that you don't know what position we're going to be in next February. And even today, there are still things that could change. So we're leaving it at £33 million to £40 million, it's roughly 10p to 12p. A more accurate amount will actually be announced when we're actually going to do the return of capital. The date for that is will depend on the actual mechanism for returning the capital.
So a capital route may take longer than a dividend route equally if we want to offer both. And equally, it may also require a shareholder circular. So all of that will be reviewed and announced in due course. But the proceeds are due to be received in February, and we've said whether it's in February or early March, depending on how long the logistics takes, that's when the return will actually be made. With regards to low volume for your customer being millions of units, how does that translate to Nanoco product, physical dots?
We wouldn't answer that question. And ultimately, we do not want people in the market, being able to divide one number by another and get a cost per sensor worked out that is obviously commercially sensitive. So -- the one thing we can say is that we do have the capacity in our Runcorn facility, running a single shift to be doing 100 million units and triple shifts closer to 500 million units. If it's a large sensor, smaller sensors, then the numbers get bigger. Can you discuss the competitive environment in sensing materials in a bit more dept since the competition here against cadmium-based peers?
Or are the differentiators, more about performance wavelengths and ability to produce?
So on sensing materials, there are organic sensors out there or sensors out there based on organic materials. However, I'll give you one very bold statistic. Their maximum efficiency at the moment in the market is around 40%. Quantum dots is around 60%. The cost of the quantum dot solution, we also believe, again, is a fraction of the organic material, both of which are obviously much, much cheaper than indium gallium arsenide.
So they -- the differentiator part of the question, it is about the performance of the material, it's also about the cost of the material. You also have the tunability of the material. And again, what the application is. Again, we're aware of some of the sensors out there using organic materials. They're touch sensors. So the fingerprint sensors, where it's obviously using near-infrared or shortwave infrared, then you're actually starting to extend out the range. So -- and the longer the wavelength, the further you can go, the further you can -- or the more obstructions you can go through, whether it's fog, rain, sand, whatever it happens to be.
But as I said earlier, at the moment, we're only aware of two major companies looking at the quantum dot option. It's also true that there are companies out there who are trying to get silicon to see further and indeed silicon. There are some ways to manipulate silicon, so that can have a slightly longer wavelengths, but you're talking about going from 900 to maybe 100, couple of hundred more.
You're not getting out to 1,400, 1,500. Also those changes to silicon, actually, then involve other process changes and other components being added, which, again, our research and estimates say that those alternatives coming via the silicon route can be four to five, maybe 10x more expensive than QD sensor or silicon with QDs attached to it.
So the competitive environment for sensing, we refer to as a blue ocean. Basically, there aren't a lot of competitors out there. That's the positive. But the downside is, as I said a couple of times, we're still waiting for the mass market adoption or a commercial application, a meaningful commercial application of quantum dots on CMOS sensors in the market. Contrast that with display and call it a red ocean, a lot more competitors out there, but actually in display, certainly on film, it's a proven technology and on small-scale devices.
We know there are proof-of-concept that have been manufactured and put on display because we're actually engaged with a number of manufacturers of those proof of concept, small-scale devices.
Are there any more questions? No?
Brian Tenner
Okay. So that's the end of the questions. I guess I've just got a final closing remark, just to remind people of what we've achieved. The last year, let's say, our Chairman made a very clear -- it was a very, very important year.
We've delivered all the technical milestones. Our R&D teams have done a fantastic job in delivering all of those. That's what it takes to get materials to a position where they can be scaled up for industrialization. We've now effectively passed over our materials for final validation to our customer.
We're now looking at the next generation of materials. We can also take those first-generation materials to other customers and we're already actively engaging with potential infringers of our IP, whether that's for new commercial supply agreements, development agreements, whatever it ends up being or just simply a vanilla license agreement.
And yes, as I said, the financial position, we're now in, we're able to make very strategic selective modest investments in our own capabilities, expanding those capabilities so that it's a more attractive propositions for our customers, but also allows us to make that significant planned return on capital in the first quarter of 2024.
Thanks very much.
For further details see:
Nanoco Group plc (NNOCF) Q4 2023 Earnings Call Transcript