Nanoco Group Plc (OTC:NNOCF) Interim Results for Six Months Ended 31 January 2017 Earnings Conference Call April 4, 2017 5:00 AM ET
Michael Edelman – Chief Executive Officer
David Blain – Chief Financial Officer
Charles Hall – Peel Hunt
Ken Rumph – Jefferies
Okay, welcome everybody to Nanoco’s Interim Presentation. We’re being webcast live today, so welcome to all folks listening. Thank you for taking the time, those in the U.S., thanks for getting up at 5:00 a.m. or before.
We’ll dive right in. Starting with the highlights, it’s been a very busy six months. As we stated in the highlights, we expect first commercial orders to come in this half. Like everyone who follows Nanoco were disappointed that we were unable to announce an order today. But the company is in a really strong position opposite where we are with orders following on from a very successful consumer electronics show in early January where we tribute Nanoco for the first time with partners Hisense, TPV and TCL, three of the largest Chinese manufacturers, the interest is continued to built.
And today, we are sitting on 14 very specific programs with 9 OEMs, 9 display manufacturers. So the business has been closer than it’s ever been. We’ve worked hard over the period to continue to build a very robust supply chain both internally and with our external licensees and manufacturing partners. We reported in the period that we’ve had a 10x increase in production capacity with minimal capital. We’ll talk more and dive more into how we’re able to do that at Runcorn.
Merck is going exceedingly well and we’re largely complete with the technology transfer. Dow is progressing very well towards commercialization. The plant is up and running and they’re moving and pleased to report they’re moving. Important to note and worth pointing out that in the statements, the words that you read are Dow and Merck’s words. These statements that we put in are worked on put together by their corporate by our teams which are conservative.
So these are not just Nanoco words, but this is what Dow is saying to you and what Merck is saying to you and the messages that they’re giving. IP, our patent portfolio continues to grow in some 550 patent and patent applications. It’s the lifeblood of the company and it helps drive our value and enables us to do licensing deals that we’ve been doing. Cash is always a key concern and has been for the whole lifetime of Nanoco. We reported £8.3 million at the end of the period. We have an additional £1.9 million coming in R&D tax refund, so £10.2 million. During the period, we made some cost reductions and took cost out of the business. So we feel comfortable that we have enough headroom to take us through to commercialization.
Turning to the next slide, really just a reminder for those of you who know us well for those who are new to the story, Nanoco is a pioneer in CAD-free quantum dots. Scaling those up, we work through multiple markets in the near-term, very focused on display, working with partners, talked about Dow and Merck and we’ll talk more about Wah Hong and that display industry is what’s ramping up quickly.
Moving specifically into the display business, if we look at what we’ve been doing over all these years and you know the major building blocks of taking a new technology from innovation through to a product that you can buy in the High Street, it’s a really big deal. It’s graft. It’s hard work. And we start with innovating and coming up with this new technology, proving it out as you say there who cares, who’s really interested, who’s willing to start buying and paying for this technology. And over the years, Nanoco has had roughly US$30 million of NRE based funding from the largest companies in the world, who do care and who are paying and working with us to get our material specked into their systems.
Once you prove that people want it, you then have to industrialize. You have to scale it up. You have to make sure that you can make it in a manner that allows TVs to be introduced and those TV is not costing millions of dollars per TV, but costing something that we all can buy and we’ve proven that and our industrial partners have proven that then building a supply chain. The display market is over US$100 billion. It’s an unrelenting supply chain that grinds costs out of it. It’s not easy to play there. And in order for you in order for Nanoco to supply its materials to get those orders, we are heavily scrutinized, we’re heavily audited and that process takes time.
It takes time for our partners Dow and Merck to go through the same process. When Samsung or Hisense put a TV into the market, they need to be reassured that they’re going to get the same quality and material time after time. And that is going to last for 50,000 hours of continuous on which is over six years. So they need to be sure and that’s what we’ve built. We then move through to formal technical approval, so this is actually adjusting the product to suit each individual, TV manufacture in this case, color points and that’s a continuous iterative process of changing what we call the white point, the mix of red and green materials to match their color filters and the whole system needs so that system is fully optimized. And as that system gets optimized and as we’re audited then we get in the position where we can actually get orders.
And as we said before, we’re now in the closest position. We would have loved to have had orders today, but we’re in active negotiations with a number of very interested parties. So our global partnerships, our partners are progressing well. We’ve been working with Dow for a long time for four years. The nature of that relationship changed a year ago when we took them from exclusive to non-exclusive, which then opened up the opportunity to move to start working with other partners. Dow’s facility in Chonan is now up and running and they’re now commercializing that technology as they mentioned in the highlight.
Wah Hong has been a terrific partner for us. The model is we make the materials and Runcorn sell that material to Wah Hong and converted into a component, which then gets sold on to the display maker. Pleased to report that they’re investing heavily in this technology. They have a second-line going in now. And they’re confident of being able to supply up to 100-inch films starting second calendar quarter. So basically now May, they’ll start delivering very large films.
And then Merck progressing well, technology has been transferred for the dots. They’ve successfully manufactured dots in Darmstadt, Germany. On small scale, they’re trying to figure out where the best location is in the meantime between now and when they start manufacturing will be supplying them out of Runcorn and they are currently buying material from us. So this global supply chain, which is really important what Nanoco has been doing? Since, we changed the strategy from exclusive with Dow to non-exclusive is really working to build the ecosystem for our technology into display industry where we work with Dow and Merck, who will be manufacturing our materials.
So Nanoco, Dow and Merck manufacturing quantum dots, put it into resin then feeding multiple film coders across the world, who’ll be converting those into components and those multiple film coders supplying the OEMs. And the way the industry works is specific TV manufacturers have film component manufacturers who they work with. It tents all be tied in together.
So directly with material that’s made out of Runcorn, we supply Wah Hong. They’re working sort of with nine specific OEMs across Taiwan and China on 14 programs. Dow is actively working with their own film coders and are now commercializing down that route as is Merck working with a separate group of film coders. So said you have this global supply chain, which is giving choice to the OEMs. Now that’s important because again these are very big expensive programs and no one in the industry likes to single source.
So the display companies now have multiple ways of obtaining Nanoco technology and that’s been really important. And this has been a very transformative move for Nanoco moving from exclusive to non-exclusive and really building this ecosystem the supply chain.
Diving a little bit further into the economics of how the money will start to stock up with Dow, it’s now all about royalties. So as Dow sell material, we take a royalty to remind you that’s paid quarterly in arrears 45 days after the quarter end. Merck we’ve had initial payment, there are some substantial milestone payments to come in based on Merck receiving orders. We then take a royalty off their sales. Their sales will only come if they have product, they’ve spent a lot of time in the market understanding where the demand is and are excited about the demand. But they can’t progress the orders until they have the material they can supply. And that’s where we come in and our Runcorn facility comes in helping them in terms of selling them material which they can then blend into resin systems and sell on to the film coders.
Wah Hong there was initial payment. We supply them with quantum dots in resin, we get paid for that. They then convert that into a component so that component we take a royalty off that component in addition. There are two milestones left to pay, those milestones are based on Wah Hong hitting certain sales targets.
CES was the first time – this CES 2017 was the first time that Nanoco exhibited. And it was very, very successful. We were there for the third time, we had the three manufacturers TCL, Hisense, TPV-Philips all displaying prototype TVs at the show. And you know talking publicly about them bringing people by and showing people the TVs. So it was successful not only from an industry perspective but from a media perspective, from an investor perspective in those three areas. And really helped drive our programs forward not only with these three but others and really a very, very high level of interest in what we’re doing cadmium-free quantum dots for this display. Samsung continues to be the big driver of the technology and promoting it. They’ve moved from their SUHD brand, they are now calling everything of QLED and if you’re at CES you would have seen QLED everywhere.
Looking towards Runcorn and diving a little bit more into Runcorn, we’ve increased capacity growth by a factor of 10 can now produce 500 kilos per annum of our current operation there. This was done with virtually no capital. And this is really credit to the team the innovation team, our R&D team and our scale up and production teams back in the Northwest of England, who have figured out way through formulation change and optimization of the process how to get more out of our existing equipment. And that’s found money for us. I mean all of a sudden Runcorn goes from a basically large lab to a meaningful productive facility where as the orders come in, we can start to gain real revenue.
Just to give you a little flavor for the history of Runcorn and what you know on our productive capacity, we’re currently have about 0.5 million square meters of film, it’s about a gram of quantum dots per square meter, a square meter is somewhere between a 55-inch and 60-inch TV to remind you. And that’s working as we currently work, we move to a 24-hour, seven day a week shift pattern and we effectively double our current capacity and then with some minor spend we can double again. So we have the capacity at Runcorn without any major investment, which is important because we have these nine OEMs, 14 programs that all going to be supplied through Wah Hong and that material is coming out of Runcorn.
Looking at the market, the market continues to grow its large displays are the dominant technology which is the on the left hand chart the blue bar, you can see those moving to large number of units by 2021. The growing sector which six months ago was not really a sector, we’ll talk about that in a second as high-end monitors for gamers. And that’s becoming a much more important area or it’s a new area that’s expanded market.
The slide on the right or the graph on the right shows how these quantum dots for our materials are being integrated into TVs and the predominant integration that that is film, sheets of film being cut up and applied into the TV. If we look at size not surprisingly on the left the dominant size is 55-inch, 60-inch TVs which if you go to the shops, you’ll see. On the right talks through the domination of cad-free and Samsung is all cad-free. Samsung is producing in-house and looking if they follow their normal pattern, Samsung will need a second supplier because those is very traditional for them, critical raw materials are always made in-house through their Hansol or Cheil Industries and they have multiple suppliers who come in with that.
Nanoco and our technology are the only commercial cad-free suppliers in the market today. All other competitors are cadmium despite what you might hear and read. The monitor space really is jumped up a gear and at CES earlier this year Samsung launched these high-end gaming monitors in a big way. And all the monitor companies across the world are now taking notice and launching more actively working on programs. And initially starting on as high-end large monitors 27-inch being the smallest but moving up to 43-inch type monitors for gamers.
And quantum dots not only provide a very vivid color but give very rapid response times. So the way that we’re able to develop color means that you get no comet trails. When you have fast moving objects which if you’re playing videogames is important. And you’re going to see this sector now start to move and where the things start in high end, they start to disseminate over time and democratize down into mid-range.
Looking at some of the other markets, lighting we continue to focus on horticultural lighting using the same supply chain that we use in the display space, same integration method. And this is basically tuning wavelengths of light to enable plants to grow more effectively faster with less energy. We are honored at CES earlier this year to win an innovation award for these lighting systems and we’re now working with a number of players to commercialize the technology.
Life Sciences is an area that we’re also very excited about, we’ve been working in close collaboration for a while with the University College London who’ve been doing all the in vivo testing work, toxicology work. And we’re very focused here on cancer imaging, diagnostics and therapeutics. And this is an area that is becoming increasingly or will become increasingly important to us it’s hugely valuable and there’s we are seeing a lot of interest in what we’ve been doing. We have a small team of people working on this it’s – and they’ve been very effective and with the partners and with the cancer surgeons, we’ve been partnered with. We’re very, very excited about where this is going.
Is the technology is working, we from an imaging perspective the competitive dye which is ICG, indocyanine green, blue green dye. We give a much improved image of the tumor and it’s very basic form where it’s injected into a tumor, the quantum dot sits in the tumor for a lot longer than the dye which washes away very quickly. We sit there for longer and gives very, very good demarcation between good and bad tissue, which enables the surgeon to get much better outcomes for their patient much cleaner cuts and they are ensure they are able to cut and clear away the bad tissue. It then gets more sophisticated where we start bolting on the monoclonal antibodies, which enable us to inject into the body and specifically target cancers like pancreatic cancer for early diagnosis.
Today there is no diagnosis for pancreatic cancer. So this is a big deal. Program is being grant funded it’s fully funded today and will continue to be grant funded for the near-term. Solar the work has been focused on continuing to developing the efficiency, scaling that technology up from lab size and the key here is finding an industrialization partner, Nanoco is not able to industrialize this technology on its own. We need a partner who will help do that.
Great, and then I’ll hand over to David Blain, our Chief Financial Officer who will take you through the numbers.
All right. Thanks, Michael. Good morning, everyone. As Michael said so I’d like to take us through the review of the financials. Just again, just to summarize the business model – summarize business model where we get our revenues from license fees, royalties, sale of materials and joint development and grant income. The key numbers in the period, revenues are £0.8 million. Loss before depreciation amortization is £5.9 million very much in line with the previous year, as Michael said earlier, cash at the end of January of £8.3 million.
All of the results for the first half are in line with our expectations. We have reduced our expectations for the full year. In December we made some changes to personnel, reduced the number of staff, annualized saving of £1.1 million of payroll costs that will come into effect from February onwards, and obviously there will be a knock on impact into whether overheads as well as our savings in travel costs and other overheads. So we believe that the cash plus the R&D tax credit that we have in June gives us sufficient headroom to get us into commercial sales, but we have done detailed contingency planning so we know what to do and should that not materialize.
KPIs that we use in the business liquidity obviously cash very important to fund the business. Revenue is a stabilized measure of our sales and our income. Billings is a very important KPI for us because that is the cost generation, that’s the invoices that have raised, obviously R&D spend as we go forward need to keep innovating, keep improving our products. And then IP portfolio very important for us to keep increasing essentially the crown jewels of the business.
A brief review of those KPIs. Cash has fallen compared to the previous year, very much in line with our expectations. Total revenues and grant income up compared to the previous year, reflecting material sales and deferred revenues coming through. Billings again increased than the previous year. R&D small fall compared to previous year, but very much in line and quite a strong increase in our patent portfolio over the year.
On the billing side we can see there the orange block in 2017 showing that the material sales [indiscernible]. Table on the right you can see how the revenues and fed revenues going to be released to P&L over the years, essentially they were hung up for the payment being spread over seven years, and the revenue and other income in different places in the statements, but coming to the £0.8 million that we talk about.
This sort of reconciles the movements in the last from 2016 up to 2017. Key change is you can see the deferred revenue coming through and also we have an increase, an overall increasing overheads in the period, bringing us to a loss for the year of £5.4 million.
The changes in those overheads; depreciation is fallen as our asset base becomes heavily depreciated. We have increases in share-based payments charge which is a non-cash item increases now soft cost overall. In terms of the cash moving from £14.5 million of July to £8.3 million that we have now key changes in the period, the receipt of those receivables that we had at the end of July which essentially with the new upfront license fees that we have from Wah Hong and from Merck. And a reduction in payables obviously reducing the cash was an exercise of share options during a period generating £0.5 million of cash. It’s quite an investment in CapEx which is essentially on the patent side and the intangibles. There was a small investment in tangible assets giving a total of £0.8 million.
So the cash out outlook; so just to summarize where we are at the moment we’ve got cash at the end of January of £8.3 million and R&D tax credit in June of £1.9 million. We expect commercial sales to commence in the second half. We’ve done the cost reduction program in December saving £1.1 million of payroll costs that will kick in from February onwards. We’ve done a lot of work of sensitivity analysis looking at our cash flow focus going forward. We looked at the worst case scenario, so if we achieve no sales whatsoever, then our cash will be exhausted in the first quarter of calendar year 2018. So that shows the emphasis, the importance of us moving into commercial sales.
In the worst case scenario, we’ve worked out exactly what we would do. We would have a significant reduction in our manufacturing capability, but focus on licensing activities so exploiting our IP portfolio. We could still subcontract the manufacture of our product, so we got to buy from Dow, from Merck or other subcontractors. And the key thing about this is that all of these cost savings, any changes that we want to do in the business are under our control. So we’re committed to take action if that worst case happens. But we certainly believe that we will be getting commercial sales in the second half and we do not expect this to occur, but we know what we would do in that circumstance.
And with that, I’ll hand it back to Michael.
Thanks David. Thank you. Following on from David I’m really just summarizing as David said we expect commercial sales in the second half. We’re disappointed that we couldn’t announce them now but the company has never been in closer. We’ve taken decisive actions on cost control and we have plans in place if there are any further delays, but we believe we have sufficient cash with the £10.2 million current cost base to see us through to commercialization, nine display companies, 14 specific programs, so the company’s never been closer.
The supply chain, the infrastructure has been built and is building. We have our own infrastructure at Runcorn that’s been ISO certified. We have the volumes ready to go. You also have our partners building with Dow now, commercial and Merck working to come on stream. The other businesses, life sciences, lighting in particular have made really exciting progress and are becoming increasingly interested. And we’re really very optimistic about where we’re going with more short-term opportunities in the display field with these 14 programs, which will start to come.
Thank you, I’m now happy to take questions; just point order because the webcast if you can wait for the microphone before you ask your question. Thanks.
Q – Charles Hall
Charles Hall from Peel Hunt. Michael, you could you just run through where the current cash cost is per month? And if you did need to take further action where that could go to? And also when any future R&D tax credits are likely to come through Quantum they’ll be?
Sure. So current cash cost is running monthly spend, so total operating spends moving between £750 and £800 a month, taking down from about £1.1 million. That could move with the plans David talked to around £0.5 million a month, so another £250,000 to £300,000 potentially to come up. We have – in terms of the second part of the question which was the next R&D tax refund of another roughly £1.9 million would come in January-February 2018, so that’s an addition to the £1.9 million coming in now, so £3.8 million additional cash.
The costs of taking the cash cost down to the £500,000 say, those should be pretty limited?
Yes, minimal, about roughly a month of payroll costs.
Hi. Could I – firstly the Dow’s sales of their film associate HAAS I think it was called.
That’s exactly HAAS. Yes.
Does that affect Cheonan that was coater that they were using or one of them or just how does that affect things? Sorry, Ken Rumph from Jefferies.
Ken Rumph, no affect. So Dow had – what Ken is asking about Dow had a joint venture with SK Corporation a film coater called Dow SKC-HAAS. And over the years they’ve been on off, on off with Dow. It’s always been a fairly interesting relationship. Dow sold that – their portion of that joint venture to SK Corporation recently and they are not the main coater that Dow has been working with.
Okay. Two other questions; one on Dow. So there’s another payment for Q1 June middle of this month I guess – middle of next month, middle of May, 45 days after that quarter.
When do you get notified kind of what check is in the post for that?
Any day now, till the end of March – end of March, we would know by the end of April recently.
And then that will be paid in the middle of May.
Okay. And finally regarding the nine OEMs, the 14 projects, can you say anything about the sort of range of scale or any sort of planned production or product launch dates that are encompassed within that group? It’s obviously there would be range, but –?
Difficult because this is out of our control and there are a number of shows coming up, which you can look to, there’s a show in Taiwan, you have EFA in Germany at the end of the summer but early September. And that’s reasonable place to be looking.
How quickly you able to scale up the Runcorn plant, because obviously the intention was that you get to be supplying while hangout Runcorn now it could be that you are also supplying Merck for the period before they have a facility. And if all just did build would you actually be able to satisfy those orders.
It’s a great question. So we currently said have the capacity about 40, 45 kilos a month, to double that we need to bring on some additional personnel to run 24/7, so additional shifts. So it’s the time it takes to recruit and train, which typically from experience about a three months program.
And further on from that taking it up to doubling again, yes.
Taking it double – bit longer you’re probably in additional six months, because you’re – there’s some additional recruitment that needs to be brought in ordered and purchased.
I’m just going back to the cost reductions and then took staff numbers down by 20 or so. And what sort of areas will you reducing people and has that affected any of your programs that you’re working on have you had to cut back in places that reduces the opportunity.
We don’t believe so. I mean it was people cut across the range of the business. And we didn’t dramatically cut any of the opportunities, of course it hurts. To do that you never want to see people leaving the organization and it hasn’t effect, but the organization, we’ve begun to work in a much more flexible, much less siloed manner where we’re able to move people around for example people who are in our scale up facility in Manchester moving across and working in Runcorn on manufacturing. So as we need manufacturing we shift people back and forth.
And can you just comment on what morale is like obviously you had to be goes for redundancy program and you haven’t hit targets in terms of commercialization. How is that affected the mood of the team?
The team I mean it’s always a hit when you go through any sort of redundancy problem that’s a program, that’s never great for morale, so we recognize that. I think everyone in the organization is very focused. Everyone is realizes what we have to do. They know there’s a job to be done. And they’re working to achieve that. So I think I would say there’s a QD determination is the probably the current feeling inside Nanoco.
Tweedledum and Tweedledee, Ken Rumph back from Jefferies. In the intangible purchases in the first half which is I include the Kodak deal that was.
Yes, it is. Yes. So we bought 35…
It didn’t turn out to be the tens of millions room…
But I said that before.
Yes, yes. There was – you had said that the edge and…
We got – it was a – the deal with Kodak was a good deal for Nanoco and it significantly strengthened our area in future display technology around electroluminescent quantum dots.
Okay. That actually was the thing I was going to go on to. I was going to sort of look beyond the short-term and the good news looking forward to in the second half to emissive electroluminescent quantum dots the sort of next generation. Do you want to say a little about that and what it will involve and lots more adults for TV for a start, but a little bit about what that might look like down the road?
Sure. And what we see is if we look at the road map the future quantum dot technologies in televisions probably three stages. The current stage which is fluorescent or emissive quantum dots, where you’re exciting the current red, greed dots with a blue light and they’re emitting red and green. So you get that red, green, blue combination, which is the technology currently being used. You then going to move to Phase 2, which is using quantum dots and new generations of color filters on LCD TVs. So this is where you’re actually replacing the current color filter formulations with the emissive quantum dots.
So you may have a just a blue LED backlights running through liquid crystal layer into a front emissive color filter layer. And the advantage there is increased enhance brightness, increased viewing angles, high response times. There’s a number of companies very excited and very involved with this technology. And you’d imagine the big electronic materials companies Merck and Dow be two of the leading ones very involved in this. And then the third generation of QD TVs is electroluminescent. So where you’re directly injecting electrons or plugging the quantum dots into the wall and there are emitting electricity in much like the current OLED TVs or the OLED – more or like the OLED displays that you get on a phone, because the current OLED LG TVs that you see really is just an OLED backlight going through a color filter, so it’s not using OLED and it’s a true sense.
The phones, the small screens are using directedness. And what folks like LG and Samsung and all the folks making TVs are excited about quantum dots for electroluminescent is the color purity of the quantum dots is far superior than current OLED materials. So they have the ability to dramatically increase the color triangle. And if you compare color triangles, so color gamut of then OLED TV versus QD TV, the physics of such a quantum dot TVs have inherently better color triangles than OLED TVs. And I know there’s a lot of buzz around OLED and people keep asking it’s going to be OLED versus quantum dot. I mean the reality is there are about 240 forty million LCD TVs sold last year and I’d be surprised if there were a million OLED TVs sold last year, so I just to put it in perspective.
And finally perhaps on milestones Wah Hong would be due to pay milestones based on certain levels of sales.
There are two milestones left to pay, one on a fairly low level sales and then the second one on further sales and that’s square meters of film. And then Merck have a couple milestones to pay based on them receiving orders.
Mike in terms of those the opportunity in monitors is nearer-term than you’ve previously thought, can you just sort of give us a feel as to why you think that’s happening and also as to whether there is a difference in the way you get paid there is the price point different is the royalty rate different.
So taking the second part, no difference in royalty rates. Price point I mean you’re looking monitors tend to be smaller. So typically a square meter of film will make 427 inch monitors plus or minus. The volumes today or in the near-term during the next 12 months the volumes will be smaller because it’s all – it’s a new sector that’s opening up, but will grow. If you look at some of the leading monitor suppliers in the world Dell sell about 80 million monitors a year, HP sell a lot of monitors, Asus, Acer, AOC, they all coming out of Taiwan, TPV Philips, and everybody is now driving at a high end gaming monitor and really driven. The catalyst was Samsung’s introduction of CS of the gaming monitor. That really got everybody excited. And I think there’s a big gaming convention in Los Angeles in the summer and there’s fair amount of activity ahead of that. There’s a question.
You said ICG, Michael if you valued your IP portfolio?
In a way our IP portfolio was valued every minute by investors and the stock exchange. We – you mean take in getting an independent valuation of – yes. No.
Great. If there no more questions, thank you all for coming. We’ll wrap up. Thanks.
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