Nanoco Group Plc (OTCPK:NNOCF) Six Months Results Ended January 31, 2018 April 10, 2018 3:30 AM ET
Michael Edelman - CEO
David Blain - CFO
Dan Ridsdale - Edison Investment Research
Luke Holbrook - Stifel
Welcome everybody to Nanoco's Half Year Results. For those of you listening online, on the webcast, welcome. Thank you for joining us. Really excited and encouraged by the progress we've made over the last six months. Huge amount of momentum, game changing contract with a large U.S. corporation which we'll talk more about and that's in the field of nanomaterials, increasing number of display products now moving through to volume mass production with our leading Taiwanese display customers. In medical devices, contract with CareWear, a U.S. corporation which is now entering the market in the professional sports market, Horticultural Lighting and Life Sciences making really good progress.
Technology continues to grow, now 600 patents and patent applications, as you know it's the lifeblood of Nanoco. Our balance sheet strengthened placing at the end of last year. A lot of work on costs throughout the year and took our costs down in 2017, but the moment and what is really pleasing to me about these results is from the beginning when I first started with Nanoco in 2004 we always talked about this vision of taking this nanoparticle, these nano-particles, these quantum dots and having them utilized in multiple high-value large end-use markets, that's now starting to come through and we're really now starting to prove that. So it's not just display, it's not just lighting, but you have his whole new sector of nano-particles opening it up in a very, very big way.
So looking and just to remind you, looking a little bit at Nanoco as a whole we're a pioneer in quantum dots and nano-particles in general. Platform technology with many large end-use markets, multiple sources of revenue, large patent portfolio, R&D in Manchester, manufacturing in Runcorn about 30 miles away. We finished the year with 77 people. We're now growing again. So the momentum after a challenging year in 2017 where we worked hard to constrain and cut costs we've really turned the corner. Contracts have been signed. Cash is now coming in and we're moving and we're moving across multiple areas, not only display, lighting, this new nano-materials area, life science, all making tremendous progress.
So if we look again and just going through the strengths a leader in nano-materials and the ability to mass-produce, what we really have and this is down to our people heavily science and technology oriented very geeky company, 15 nationalities of the 80 people, I think 50 are PhD's. So it's a really impressive growth.
So starting a little bit and talking about nano-materials, we started to highlight this six months ago and signpost that this was an area that we were focused on. We've been focused on for the lifetime of Nanoco because our quantum dot is a nano-material but we've now carved this out into its own sector.
And what we're doing, now the macro trend here is a move away from what is called brute force manipulation of silicon, traditional semiconductors using very, very expensive manufacturing technology, billion-dollar fabs to more elegance trend of getting functionality or increased functionality into single particles and that's what we're all about, whether it's a fluorescent quantum dot which is a semiconductor in which you put energy and you get a lot of bright light out which is controlled, whether it's in this case here, the infrared material, where we're working well out into the infrared range of the spectrum absorbing, admitting infrared light for advanced devices and electronics we have this capability to design and develop these complex materials.
We have the ability to scale them up and we have the ability to scale them up and we have the ability to volume produce. That's what we're doing here and that's why this large U.S. Corporation has signed up with Nanoco. A lot of the materials that we developed for our solar program are very, very relevant here, those nano-particles and if you remember in the past we've talked about six based systems and we're focusing on a range of electronics mainly in sensor type applications where you look at machine-machine interaction, you look at human machine interaction and all you have to do is look around us and you'll see a lot of increasing use of autonomous vehicles and ways that we interact with our devices, our electronics, how do we do that? What are these sensors doing?
And it is becoming more and more pervasive in today's society with today's products and more and more important, and we're really excited about this area. We're excited about the explosive growth in this area and we're investing heavily and working with some great partners. And the contract that was signed in February is really a part and really demonstrates the skill that we have here.
Moving on to display, just to remind you some of the quirkier benefits of quantum dots for our academy and free quantum dots on display, as TVs get better, we're the color aspect, so we help enhance the color with a wide color gamut and these, the technology is starting on the very high end, high resolution TVs. Initially this is LCD TV but high color, or wide color gamut, high brightness. Samsung has lead the way, others are following and our lead customer here is Taiwanese-based AUO and you can see a couple of pictures on the screen of AUOs TVs that they initially launched at Touch Taiwan late last year and again showed at CES earlier this year.
Now AUO is a top-5 panel maker. They don't sell under their own brand but they sell to brands like to sell to brands that you will know and make about 35 million TVs a year. They are one of the leading monitor producers. I believe they produce about 70% of Dell's monitors, Dell sells about 60 million monitors a year of which we can say 70% is produced by AUO.
So our focus has been very much on Taiwan. We have a wide growing pipeline here. We expect first products in the market this year. So there are a number of programs moving through. Dow and Merck, continues to make progress. We see Dow in the market. Merck we’ve completed technology transfer. They are very focused on next-generation color filter technology which we will talk about. The model, the multichannel strategy in display is what we describe as a hybrid model, a hybrid being that we manufacture market and sell quantum dots ourselves manufactured up in Runcorn. We sell those through our own channels to [indiscernible] in Taiwan who coat, cut film, supply into the Taiwanese market.
We also license our technology to Dow and Merck who are supplying into other markets. You can see at the bottom slide Innolux and AUO are the two big Taiwanese panel makers in what is part of the Foxconn Hon Hai group and AUO. With AUO, so number with both, number of programs coming through. We work with all the names on the screen which generates a healthy pipeline. We know and you know as investors that the length of time that it takes to get these products into the market has taken longer than we expected to realize them.
This has been a learning for us and what we're seeing is, once we sign the NDA we understand those factors are longer to process of us tuning the quantum dots to the OEM's TV. So we can optimize the backlight with the front color filters to get the best TV performance and that - it will be a process takes time. Not only does it take time, but we're often shooting at a target which is moving because with new TVs the OEMs are often changing their specification, changing the requirements, so then we go back and after we formulate the red and green ratios to meet their specification.
So this is a process when we changed from our direct licensing model to this hybrid model in 2016 we had to learn this. And it has as you all know has taken time. Once we get locked into a design win, from design win to scale up manufacturing we think based on what we know today it takes about 12 months. But we have – if we look at AUO, we have eight programs that are now moving through to full commercialization. So we'll see those products in the market.
Those were starting with monitors, so typically high-end monitors for the gaming industry. Of course since when does a monitor become a TV? Some of these monitors are 65 inches, so for us it's area that matters, that looks a little bit like a TV. But this has taken time, it's now coming to fruition. We're manufacturing and were – the product and we're shipping and we're scaling up the product and we're shipping. So it's finally there.
If we look at the display technology pipeline today we're working on film which is the way we integrate the quantum dots, we take the red and green, we put them in a resin, we then laminate just to remind you we don’t coat that resin onto one sheet of plastic laminate, a second sheet of plastic on top to give you an optical backlight film which is then cut to the size of the TV. That will move to next-generation color filters where manufacturers today, Merck and Dow are very involved in changing the current color filter technology from a passive filtration to direct and missive filters. So the QD is red and green are printed in the front end of the TV you excite with a blue light and that blue light could be blue LED or it could be an OLED blue backlight and you have front emitting QDs.
So what's interesting here is whether you are using color or if you are using quantum dot color filters, if you're using quantum dot color filter in conjunction with blue OLED or you are using QDs in conjunction with blue micro-LEDs. Micro-LEDs is a trend. For a lot of folks working on micro-LEDs one of the challenges is picking place. So if the red-green-blue, how do they get those pixels oriented in the right way? A simple solution is you just have to move micro-LEDs, red and green on top and very, very active in that area, in Manchester ourselves and directly with partners, partners who are working on incorporating our materials into various photoresist resin systems to get the patterns down on the front point of the TV as well as people focusing on inkjet printer.
So further out is electroluminescence. There was a conference last month, QD Forum in San Diego, a lot of interest and a lot of folks working on direct injection of charge into the QDs to get them to emit light. So the first two applications, film and color filters, all photoluminescence where you turn them on by switching a blue or higher energy source light on and the dots absorb that light and reemit red and green.
With electroluminescence we inject charge and you switch them on and they emit light. So it's direct threat to OLED materials. And in this area we've got a strong partnership with U.S Japanese Corporation Kyulux we're a leader in fourth generation TADF OLED materials. And here we're using the hyper fluorescence of the TADF molecules so in fact we supercharge the QDs and that's proving very, very interesting, a lot of interest from major OEMs about that work.
Looking at the other markets, first horticulture lighting and this has been quietly growing over the time and this is a niche area for Nanoco and this to remind you is where we're tuning the lights to match the ideal growth requirements of different plants. As we've talked before you may not know plants hate green light, that's why they are green, they are reflecting the green light. They love blue, they love red and we can dial in those exact frequencies of blue and red that they want to grow more effectively.
A contract signed with STRI, the Sports Turf Research Institute. These folks are involved with turf, or growing grass in large stadia around the world. They've got the contracts of Qatar, of the Qatari World Cup and we're working with them and hope that our lights may be incorporated in some of the stadium in Qatar, because we're showing increased grass growth. And with football stadia they play frequently so they will trample, they may play two to three games. After they pay they reseed the pitch they rolled, large gantries of lights come out over the pitch and they rapidly try and grow grass and if we can help enhance that grass growth that's important.
We are also very involved with vertical farming, working with the largest UK grower on their first major vertical farm program. Vertical farms are a growing technology of the future. It's starting now but will take off in a big way and this is a totally enclosed warehouse environment, it could be an underground tube station where you control the light, you control the oxygen, the nitrogen, the carbon dioxide and you basically create an ideal growing environment for the plant.
And you can see on the bottom photo those are Nanoco lights running at the test rigs up in Cheshire and what we're finding is that when we are one head-to-head against the largest LED-based lighting competitor which is Phillips, we're winning hands down and by winning I mean the growth, the quality of the plant growth initial crop that they are working on is Cress in UK egg and Cress sandwiches are the most popular sandwiches, so cress is a big deal. So we're growing cress at 50% faster rate, less energy, and the grower can actually control the taste of cress.
So the concentration of flavor, so when their largest customer which is Green Corps buy that cress and incorporate into sandwiches they can use less cress, a farmer can sell that cress for more money, everybody is happy. But this is a macro trend. If you think about food in the world and what's going on with the population, these vertical farms are going to be built in or around large population areas where you can grow fresh food right next to where you use it. So if you go to Sainsbury's and Tesco's and you look, you know, your avocadoes in London are coming from Mexico you know that's sort of crazy.
So how do we grow next to where we want to use and if you think of the amount of the economic saving, the environmental saving for does this, and these factors are fantastic. I mean this cress factory humans will not touch this until it's packed. So the material is grown hydroponically. It's mechanically, robotically cut, it is absolutely cleaned so it doesn't need to be washed, so you don't get any floppy cress or floppy lettuce and so it doesn't need to be dry in a minute, packaged and sold on. And this is not only cress but all other varieties of plants. So we're starting here in the UK figuring out, understanding the market, understanding the business, and then we'll start to expand progressively over the next year or so.
CareWear is a U.S. Corporation focused on medical devices. Here they're using our - again it's wavelength, light tuning, they are using our QD film. So it is the same supply chain that we use for display when we use for lighting. They are taking film, they are incorporating it into a medical device which they then apply to your skin where you have a bruise and that light application on to the bruised area promotes blood flow and increases the speed of healing, so rapid healing of bruised areas.
They are starting with the U.S. professional sports mark and the trainers I think Chicago Cubs that have now signed up with them and they are moving across the professional market. This in the U.S. is certainly a well trodden path for launching products and probably I don’t know, big brand in the U.S. is a clothing company called Under Armour, some of you may know, but they started very small with the professional U.S. football market as selling tight fitting T-shirts under pads and now that’s taken off into a major clothing brand. So as I said it’s a well-trodden path. They are starting with the professional trainer market, sports market and then will move to the OTC over the counter market with this.
On Life Sciences, the main changes in this and the progress that we’ve made, we’re developing cancer imaging agents, diagnostic agents with partners, Cancer Research UK, University College London. The progress we’ve made over the six months is we are repeating our toxicology work. We have very favourable tox studies done at UCL and we’re repeating that with a contract research organization called Covance, one of the large global CROs under GMP, GLC practices to get formal stamp on that tox work. Initial studies have come back on the first AIMS which is checking for mutations of DNA and our materials were finding do not mutate DNA in any way which is first hurdle you go through. We don’t see, we think this is just going to be a repeat of the tests that we’ve already performed, but it gets a formal stamp before we can submit that research to the FDA.
We’re also working in close collaboration with MIT Sloan School of Business, so their Executive MBAs every year have to do a consulting program. We as Nanoco our life science business have been chosen as one of those programs. So they are in the process of working on a program on how to commercialize this technology and it’s exciting because the team that we have working is typically are people probably in their mid-40s and the team this number is of six, we have people Senior Director from Biogen, Senior Director from Becton Dickinson, Head of Clinical Research and Oncology, Johns Hopkins University; Senior Financial guy from John Hancock. So it's a real; it's a sort of a dream team of people who are taking this technology and figuring out okay, how do we commercialize it and working with us.
Now we’re among good names at MIT. I mean, the other programs are GE and that sort of companies of that stature. So this life sciences area is an area that we’ve been quietly focused on, we have very strong IP. We’re doing something unique. We’re not a life sciences company, we have this technology and we’re figuring out how we’re going to move it forward, how we’re going to monetize it and we’re very excited.
Nex-Gen 2D materials, lot of words on this slide. But what we’re really focused on here and at Nanoco is new generations and materials. Fifteen years ago we talked about quantum dots, were a new generation material. These 2D materials we’re working in collaboration with Nobel Laureate, Kostya Novoselov who won the Nobel prize for Graphene, he and Nigel Pickett our CTO are buddies working together in this class of materials.
New light emitting devices, logic gates, photovoltaics, photodetector, catalysts and what these materials are, if you take a spherical quantum dot and you smash it down, so it’s only one or two atoms stick, but infinite surface area, you think of what a wonderful platform for running catalysts on.
Now there is not a lot here, but if you think back to six months ago, this slide, we had on there a section called infrared materials and looked like a bunch of words and then in February of this year we signed a fairly significant contract and one of the attractions not fairly, but it’s a game changing contract for Nanoco.
One of the attractions for large corporations around the world to work with us is our ability to do this sort of work, next generation work, looking at materials in the next two, five, 10 years out what are the trends, what is going to happen and building an IP portfolio and our ability to do this is what generates and keeps us relevant and keeps our momentum.
On the operations side focus is heavily on execution. So at Runcorn, we are doubling the capacity at Runcorn to fulfil the nano-materials contract. So we’re - for those of you who have been to Runcorn, we have manufacturing facility for QDs for the fluorescent QDs, we are now building something of equal size for the nano-materials to support this new contract, that has been fully funded by the U.S. corporation that build-out, we have to start commercially supplying in January 2019, which means at the back end of this year we need to be approved, ready, scaled up. That factory will be built, completed late summer, everything is on track.
So at Runcorn our presence there is growing, we will have two facilities, one for fluorescent semiconductors which are handling display, lighting, life sciences and then you’re going to have a whole new factory dedicated to these nano-materials. ISO certified we worked really hard in reducing costs, taking cost out of the materials and we are really excited by the program that's going on at Runcorn.
Now, I will hand over to our CFO, David Blain who will take you through the numbers.
Thanks Michael. Good morning, everyone. I will start off with just a reminder of the sources of revenue. We had license fees, royalties, sale of materials and joint development and granting. The key highlights for the six months just ended in January. Revenue during the period was £300,000, continued investment in R&D of £1.9 million, loss after tax at £4.2 million, key numbers are cash figure £8.7 million at 31st of January. Not included in there is the R&D tax credit which will be receivable in the second half of £1.8 million. We also have some payments from our new U.S. partner who is also going to fund the CapEx that we are going to incur in Runcorn.
The movement in the loss compared to the last year in 2017 it was £5.4 million, the reduced revenues that we've had in this period increased the loss, key reason behind the increase in – sorry the decrease in revenue was in 2017 we had the full release of an upfront payment from one of our new licensees and that hasn’t repeated in 2018.
The key aspect to bring out from this slide is the reduction in R&D admin costs down £2.1 million in total which reflects the big reorganization within December of 2016 that is bearing fruit coming through and that will continue. As we grow our revenues with the new U.S. corporation we will continue to have a really tight control over our costs, it’s the key aspect of our business, managing the cash and keeping the cost as low as we can.
The reduction in revenue, sorry in costs are not going to affect on the R&D tax fruit that we will receive in the future, so I guess it’s lower by £300,000 in this half, that takes us to loss of 4.2 for the six months.
The key reduction during the period in the cost was in the staff costs, £1.2 million saving there, savings done on R&D materials just under £400,000 and I am not going to effective reduction staff costs, this meant other overheads came down by a further £400,000 taking this to £2 million in total.
Movement in cash during the period started off with £5.7 million at 1st of August, loss of £4.8 million before-tax then need to adjust for the non-cash items, so amortization, depreciation, share-based payments. The key expenditure during the period is on capital expenditure. A tiny fraction of that related to tangible fixed assets, the vast majority relating to our continued investment in IP as we continue to grow the portfolio obviously maintaining this as well.
In November we raised £8 million that took us to cash figure at the end of January of £8.7 million. But as I say that is still to be improved by the R&D tax really when it comes in and the other receivables from new U.S. Corporation. Okay.
Thank you, David. So really to summarize, it’s been a period of momentum. I mean we went through a tough 2017. We took our costs down. We took our medicine. We raised a bit of cash and as we came out of - as we moved into 2018, we now start to see the benefit of the work that we’ve been doing over the year with new contracts coming in, this large game changing contract with the U.S. Corporation, lighting contracts coming in, display programs moving through into mass volume production. And really proving out that this business is not a one-trip pony, that we really do have the capability of generating revenue from multiple end-use markets.
And that revenue generation it all comes down to our ability to develop and protect our technology and over time get that into the market to attract large corporations. But the opportunity, the opportunity just keeps growing. There is no question it’s taken longer to get into the market, but we now have that momentum and we now have those contracts and we are now moving.
And I stand here today really very energized, very excited and 2018, this calendar year for us is all about execution, it’s all about delivering on the contracts that we’ve signed. It’s about getting Runcorn up and running, getting these new factories running, delivering the products on time and specification and we’ve been rewarded from that. Thank you.
Now open up to Q&A and I will just ask in the room if you can just wait for the mike, so the folks on the webcast can hear your question.
Q - Dan Ridsdale
Dan Ridsdale from Edison. I'll start obviously by confidentiality views with your major partner, but obviously for a large electronics company to select a small company Nanoco is quite a significant step, can you talk through what it was in terms of your offering, your IP and so on that you think did the deal for Nanoco?
Sure. I think this is a company we’ve been working with for a long period of time, so they - we’re known to them. What they are trying to do is technically very difficult. There are number of corporations vying for this contract, but it was, it came down to technical capability and their confidence or their assurance that whoever signed the contract was going to be able to deliver a very complicated nano-particle to the very exact quality specifications that they need in a very aggressive timescale. And it was really our knowing us and then having the belief in our ability to technically deliver, so it’s very much around technology confidence.
And Michael, with the going on in the U.S. Corporation, could you just talk about periods of exclusivity on both sides? And also it’s a pretty rapid move from signing the agreement to actually delivering product, have you got visibility on end-market products that the sensors will be going into or is it that you’ve got to start delivering the technology and then the market will start to develop in due course?
So I think there are two parts to the question, second part was, do we have visibility on the volumes or on - we have visibility on contracted - we have contracted volumes. We don’t have visibility on where these products are going to be used in their product launch cycle, so that’s up to them, we know what we have to deliver and we’re part of a supply chain.
In terms of exclusivity, difficult to give any details on the contract, we do four materials this company does have an exclusive period.
And you’re obviously scaling up the Runcorn plant, but presumably it is the end-market size is considerably larger than you will be able to deliver if it grows as expected, how do you see this moving over the next three to five years in terms of supply chain?
Well, I would hope over the next three to five years that we do an excellent job. We’re very committed to outperform and doing a tremendous job on this contract, so we continue to share and expand as the market grows. So we have done the first of that and I would like to think we continue to grow with this, so future tells.
Luke Holbrook from Stifel. I just wondered if you could touch on the nature of the Solar IP that you decided to not sell on, how important that was for the nano-materials aspects of the business going forward and also on how much is not IP, but actually manufacturing know-how and whether you’ve taken any decisions to maybe not IP some of the processes to keep out the public demand?
So on the Solar IP, we spent best part of 10 years and a significant amount of money developing a lot of infrared nano-materials and that what we decided we announced that we were putting that solar business up for sale and looking to sell or monetize that IP. And what we’ve seen with these new applications and the new contract is that these materials are relevant and this IP is relevant. So we’ve taken those off the market and we’ve brought them back into business. We are not selling them and we feel that IP will be beneficial and useful. The second question, can you remind me what the second part of the question was…?
It’s more in the manufacturing know-how.
Know-how yes, sorry thank you. So over the course of our existence we decide we are always making a decision whether we patent something or a new invention do we reduce it to a patent or do we keep it as a trade secret and we have a large variety of both. So we don’t patent everything, there are things that we hold as trade secrets and that decision comes down to do we believe that the invention will be police-able? So if we believe that we can police it and we can see somebody using our invention, then we will file patents.
If we believe there is some process know-how, some magic sauce that we have in our plants that would be difficult to figure out if someone was borrowing our technology i.e. it’s behind a closed door in a factory then we just keep that as a trade secret.
The other thing is patents expire after 20 years, so your core bit of IP is after 20 years anyone can use it. I mean the example that's always given us the formula for Coco-Cola, where if they had patented it in 1910, everyone would know what the formula was, so that is a classic trade secret. Any other?
Just moving onto display, looking at the second generation, the filter technologies and then the third generation where do you feel you are competitively with those technologies? Do you get the sense that you are leading the pack there or is there a whole bunch of other players who are in the mix to secure that business once it does come to market?
I think on the QD side, we are really very well positioned, we are in good shape and on the materials side, probably leading the pack, but it’s not as simple as just the QD material because it’s a system integration, so it’s taking that material and figuring out how you integrate that into the TV. And there are two ways that I mentioned, one is you use traditional photoresist type resin systems where you’re mixing the quantum dots into a photoresist resin a process for etching and getting the patent done and the other is printing.
So we can’t do this on our own, we need to work with some of the leading photoresist companies or printing companies. We are fortunate in that two of our licensees, Dow and Merck lead in the photoresist field. I mean Dow and Dupont now that they are merged have almost £5 billion electronic materials business of which I think they are probably one of the global leaders on photoresist resin.
So those partnerships are in place, the discussions, we were already working closely together. And if I give Merck as a good example, Merck who don’t have their own QD production yet have been buying QDs from Nanoco, mixing those into photoresist resins and are already sampling OEMs with our dots into that new application and panels, displays have already been built with this technology.
So there are TVs already running TV sizes or monitor size already running with our materials in this color filter application. So we’re active with partners and likewise on the printing, so there are going to be two competing ways of getting these the quantum dots down onto substrate of photoresist printing. So we are working with one of the big probably the leading U.S. printing company in this area.
Sure. Anything other questions or comments? Great well, thank you all for your time.