Nanoco Group plc (NNOCF) Q4 2023 Earnings Call Transcript

Nanoco Group plc (OTCPK:NNOCF) Q4 2023 Earnings Conference Call October 24, 2023 4:30 AM ET

Company Participants

Brian Tenner – Chief Executive Officer

Nigel Pickett – Chief Technology Officer and Co-Founder

Liam Gray – Chief Financial Officer and Company Secretary

Operator

Good morning, and welcome to the Nanoco Group plc Investor Presentation. [Operator Instructions]

I’d now like to hand over to Brian Tenner, CEO. Good morning, sir.

Brian Tenner

Thanks, Alessandro, and welcome, everybody, to this follow-on presentation. We’ll be using the same slide deck that we used in our preliminary results, original presentation last week, but we will go through at a greater pace to allow us to answer questions on this call. The original recording of the preliminary results is available on our website, if anyone wants to listen to that more fully.

Today, joining me on the call, I have Dr. Nigel Pickett, our CTO and Co-Founder of Nanoco, and I’m also joined by Liam Gray, our CFO and Company Secretary.

I’ll start with the highlights of the year just past. I’m on Slide 4 here. We achieved all development milestones for all of our customers on every single project and technical project that we undertook during FY ’23. The biggest output from that is that two sensing materials are now in final validation with our European customer.

During the year, we also settled the litigation with Samsung, and we netted $90 million for Nanoco. And that $90 million allows a number of things. Firstly, it allows us to make a return of capital in the first quarter of calendar year ’24, so before the end of March ’24. That net funding also creates a secure financial underpin for our commercial business, which puts us in a much stronger footing than we have been for the last, well, 20 years actually, and allows us to plan for the future and make some investments in the business.

Lastly, but by no means least, we’ve also made initial contact with other potential infringers of our IP, and there’ll be more on that later.

So in summary, we’ve done a lot in FY ’23, but there is still a lot to do.

Now, I go over two pages. I’ll say a little bit about the sensing market and the opportunities there. Again, I’ll do this faster to save us time. The key slide on here — or the key message on here is in the top right that the current market for cameras and images, you can see roughly a total $400 million there in 2022, is expected to grow to $3.5 billion by 2028. And the single biggest driver in there actually is growth in cameras, and that is through the forecast adoption of SWIR technology, SWIR is short-wave infrared technology, in 2026 in mobile phones. And you can see that, that camera figure of $2.9 billion in 2028, 70% of that comes from consumer mobile devices.

It is worth emphasizing, though, that, that is a forecast, and it does need the mobile phone companies to adopt SWIR technology in 2026. So again, our view and certainly of independent market forecasters is that mobile phones will adopt SWIR technology and that quantum dots are the best place technology for that breakthrough adoption.

Go over the page. What is it the QDs, quantum dots, bring to the sensing market? Well, they increase the efficiency of current silicon sensors to 60%. They also expand significantly the wavelength a long way out into short-wave infrared that silicon actually can see. Today, silicon effectively becomes blind around 1,000 nanometers, whereas — 1,400, 1,500 nanometers quantum dots can allow silicon to see. And those wavelengths are much better for high safety.

Quantum dots can also be tuned to gap, if you like, in background radiation from sunlight. And it’s by targeting those gaps, you can get a much clearer signal and picture in your imager or in your camera. Short-wave infrared also needs less laser part, which is a great selling point for mobile devices. And last and again, but no means least, quantum dots on silicon sensors are priced for consumer applications. If you consider that the alternative InGaAs technology can cost $10,000 for one sensor, you realize very, very quickly that, that is not going to end up in a consumer device or a household device, whereas QD silicon sensors can be up to 1,000 times cheaper than that.

And then finally, in terms of what Nanoco differentiates or brings to the party in terms of QD solutions, we already have multiple validated materials. We also already have multiple tunable wavelengths of material, and we also have a wide range of proof-of-concept materials. Our platform technology, i.e., those quantum dots, it can be tuned for different wavelengths, different applications, different environments, is protected by our now validated IP. And very importantly, for large players in electronics supply chain, Nanoco already has high volume capacity in place in the facility just over my shoulder. And lastly, our quality control systems already operate to the exacting standards of consumer electronics.

Go over the page to Slide number 8, just a quick explanation of how Nanoco accesses our markets and our customer ecosystem. And today, we have two very large anchor customers, and we are looking to add to that during the coming year. The European customer has more than 200,000 customers of their own and clearly has the potential to make high-volume demand on the Nanoco. And by high-volume demand, what I mean is hundreds of millions of sensor units.

Again, just to explain, low volume for us would be something measured in millions of units. So, whether that was a headset, an industrial control system, those sorts of things. Mid volume would be tens of millions of units, so smartwatches and those are typically sold in tens of millions of units. And high volume, which is hundreds of millions of units, which, again, typically is mobile phone handsets.

So, the European customer has the potential to get to high volume, but we’ve said now for some time on the number of times that we expect the first order — first commercial order to be for low volumes, i.e., measured in millions of units, not tens or hundreds of millions of units.

Our Asian customer is almost the same size as the European customer. They’ve got more than 50,000 customers. And again, the potential from them is for mid volume type orders. However, we also know that our Asian customer is active with the other major player in QD CMOS sensors, referred to here as QD Player 2. And that company, themselves, then have more than 200,000 customers and has the potential for high volume demand.

And so, the summary here is the two major players in QD CMOS sensors, Nanoco already is effectively directly or indirectly active with both. And as I said earlier, we already have significant installed production capacity so that we can very quickly move to high-volume demand when it arises.

Then go over the page, just a little bit of a reminder on background for the display market and quantum dots in display. If you look at the top right chart there, the gray part of that graph is flat panel TVs today that do not make use of quantum dots. So basically, not relevant for Nanoco. What is relevant is the blue wedge and the slightly pinky wedge. The pink wedge is Samsung QD TVs and the blue wedge is QD TVs made by other companies of whom there are around 10 or so. You can see on that blue band, if you look at the 2023 point that it’s a very, very small volume today. And the truth is the majority of that volume is actually cadmium-based TVs. However, what is interesting is that it is expected to grow significantly over time so that by 2030, the total of all QD TVs is expected to be around a third of the market.

Importantly, today, if you look at the images on the bottom right, specifically the smartwatches, the mobile device and the headset, there’s a lot of interest growing in micro LEDs, i.e., small screens and applying quantum dots to those. Micro LEDs for large screen TVs are still unbelievably expensive. Samsung have launched something like a 100-inch TV that is $150,000. So, you can’t expect many of those to be sold. But yes, growing interest for micro LED technology in quantum dots in those smaller devices.

We’ve explained before some of the benefits of quantum dots, whether it’s the color, whether it’s the clarity of the colors, the range of colors and the fact that it can exist within the existing supply chain, certainly for film technology. Also, as everyone will be familiar with our quantum dots are cadmium-free. And actually, the same materials with tweaking can be applied either to film or micro LED devices. And critically, our IP is already validated for mass production. That’s the result of the PTAB decision around our technology during the Samsung litigation and then the settlement and license agreement that Samsung took out.

I’ll now hand you over to Nigel, who will quickly take you through our technology update and our technology roadmap. Nigel?

Nigel Pickett

Thank you, Brian.

Just explaining how we work the technology cycles, as you say, with materials, and this is just a slide showing you how we go from initially, you could call it kind of development stage. This is where we identify a new material. And why we need a new material? Because it works better in the device. It makes the device quicker. There’s even some kind of environmental kind of impact if it’s better for the environment or it’s kind of cheaper to produce or a combination of those kind of aspects.

Once we’ve identified that, we then make the material and do some kind of proof of concept that actually works. So, after that step, we move to what we call the optimization phase, and this is where we optimize the properties. So it’s really a display. We optimize the optical properties. If it’s for a sensor, we optimize the electronic properties and its absorptive properties. And for both of those, we optimize the synthesis process.

Once we’ve done that, we then go into what we call a scale-up phase, and this is where why we scale, say, from 1 gram to 10 grams, and then 10 grams to 100 gram and then kilos without losing any of these kind of optimization properties that we’ve managed to achieve.

Once you’ve done that, you then go into what we call a validation stage. And this is where the same material for each customer might be slightly different, because each customer has certain different requirements to get the material, the quantum dots, into their existing or new devices without changing their existing process very much and also about changing what we’ve done on the making materials better.

You then go to kind of a product stage. This is whereby the whole process is locked down. So, even if one of your scientists come to you and say we’ve made some improvements, you can’t put it into that round of the cycle. As I said, the process is completely locked down and you work with your customer to get some kind of validation and then them actually deciding to take up that technology. This process can take for about four years up to about eight years, depending on the customer and what you’re trying to make.

If you go over to the next slide, this shows the actual materials that we’re working on. You can see we’ve worked on material quantum dots of lead sulphide and where we are, you see a timeline. We’ve completely validated those materials, a number of different wavelengths. Each wavelength is an actual different material, has different properties. As you said, you don’t wait until the end of the whole cycle for one material to start the cycle of the next material.

So, you can see we’ve been working on indium arsenide. Why would you want to make that? As we say, it works better, has a much better spectral range, and it also doesn’t actually contain lead. And then we’re also working on material, again, called indium antimonide, again, because it’s got even better properties, and we’ve started working on that one as well. Nice thing about the indium arsenide and antimonide, these are what’s known as [indiscernible] materials. And actually, the only way to really make large quantities of material is using some variation of our seeding process. So we think, we believe, we’ve got very good protection for making these materials on large scale.

If you go over to the next slide. Again, this is what I was saying about materials and why we were making different materials because they have better properties. You can see you get more green ticks as you go down the table, so things like the indium antimonide, indium arsenide, the wavelength range is much broader and also they have what’s known as better electrical mobility. This means they can cycle the light into electricity, into a signal much quicker, and you can start using them for things like dynamic purposes, videos, et cetera, and things like that. And again, you can see, on the far right, we’ve actually established a synthesis method for all of these processes.

If you go over to the next slide, so this just shows you where we are again with these materials in this development cycle. You can see there’s a number of red arrows where I think you’ve seen something similar in our presentation previously. You can see some of these materials now dropping down the table, kind of cascading down the table as they go from all the way from just a concept through to development and finally, down to production.

If we go on to the next slide, and then just a brief mention about where we are with the display dots or CFQDs. We’re working very hard on these. And as Brian said, we believe there’s going to be take up — more take-up of the cadmium-free quantum dots. Over to the left is conventional kind of television with Samsung you kind of use and then it’s moved to what’s a slightly different format, whereby you have a blue OLED and this is like Samsung TVs, as you say, with dot in, and then it’s moved into what’s known as micro LEDs. There becomes more competition, you could say, if you go over to the right, but we believe and we have a lot of interest in using our dots in the micro LEDs as Brian said in small devices, things like smartwatches or even mobile phones. So, we’re kind of excited to see this technology being used. And again, we are continuing to pursue others that we believe may be using our intellectual property.

I think those are my slides. So, I’ll hand back over to Brian.

Brian Tenner

Thanks very much, Nigel.

And if we now turn to Slide 17, just a little bit of a refresher on what we’re doing, some of the parameters and what is needed for the effective monetization of the group’s IP. And fundamentally, we actually need two ingredients to be able to generate that big green circle of value. The two ingredients that you need to have if you’re going to generate value is, one, is a commanding IP portfolio, i.e., a portfolio that people should be scared of basically because it is dominant. It is very clear, it’s been validated, et cetera, et cetera. However, you also need a valuable addressable market. Bluntly, you can have the best IP in the world. If no one’s actually selling any products using that IP, then you can’t actually claim significant losses because there’s no value to address. So, those are the two things you need. If you’ve got both of those or you can create both of those, then you can generate value from your IP.

So, turning to the first of those fundamentals, the commanding patent and portfolio. This is the position for Nanoco today. During the Samsung litigation process, the U.S. patent office, the Patent Trial and Appeal Board, validated all five patents that we had brought into that litigation. Each of those patents and each of the claims survived multiple different challenges. And given that there were 47 claims in total and each one was challenged in as many as eight or nine or 10 different ways, you can see there’s a huge challenge brought against all of those claims, and they survive them all.

In terms of the patents that we’ve then kept inside Nanoco, as we’ve previously announced, we have kept four of the five validated patents. What’s more importantly is the four of the patents that we kept actually mean that we retained 46 of the 47 claims. So, we saw one patent or one of the 47 claims, and that was a patent that we weren’t actually using in the business. So, validated patents and they’re retained in the Nanoco with the relevant claims.

It’s also worth noting that when we were evaluating the litigation against Samsung, we had a longer list of patents that were relevant to the case, and we think may well have been infringed as well. However, as I’ve explained a number of times before, given that in a trial of five days in the United States, you cannot possibly get through 47 claims, four patents, never mind 10 or 12 patents.

And actually, as a matter of record, for the final trial or the planned trial, we were only going to be taking two patents into that trial. So, there are other patents that were relevant to the litigation that were not deployed in the litigation and those are still in our portfolio. When the annual report is published in a couple of weeks, you’ll see there’s a graph in there that then shows them and their remaining lives.

Then in terms of remaining patent lives, because again, if your patents are going to expire in the next week, and you haven’t already started litigating, you may have issues. You can look backwards six years once that patent expires, but of course, that will then take you back into the question of valuable addressable market.

So, in terms of patent lives, just so folk are aware, the four trial patents that we kept in Nanoco with their lives at the longstop date go out to 2028. So that’s another five years or so. The other relevant patents that we did not use in the trial, but were actually relevant to the same technology, actually go out to 2033. And then we’ve got the rest of our portfolio, many of which go out further than that.

And last, and again, by no means least, the fact that Samsung actually felt the need to settle with Nanoco is a clear sign to the market that they had concerns about our portfolio. And the fact or the size of the settlement, the $150 million is also a clear sign to the market that this is a commanding patent portfolio. So that’s the first fundamental, where we think we’re in very good shape.

The second fundamental that you need to know is the valuable addressable market. If you look at that red dot, I’ve repeated here on this slide, the graph that I showed you earlier, just about demand in display markets, that red dots sitting over 2023. And the truth is, today, the impacted market is relatively or very low value. So, it’s shallow because the majority of those TVs that contain quantum dots today are actually still got cadmium in them. Now the fact that it’s going to grow over time, and if you look at 2028, 2030, the fact that we’ve got patent lives that are going out to 2028 or 2033 means that we’re not too concerned about the fact that the market today is small. It will become more attractive. So, the opportunity for Nanoco to leverage its IP will grow over time.

If we go over the page, the fact that the market is going to grow over time has not held us back from actually examining potential infringers today. That chart on the right-hand side was put together by the Nanoco team using both our internal expertise and also our retained advisers. As we’ve said before, we do not think anyone can make cadmium-free quantum dots at a commercial scale without infringing our IP. We’ve already carried out a number of analyses of different devices, and there is more ongoing, and I’ll talk about that in a second.

But what we’ve put on this chart is on the X axis, you have the probability of companies breaching our IP either today or in the near future because of their publicly stated aims with respect to cadmium-free QDs. And also on the Y axis, you then have the value to pursue today. I should point out that Samsung and one of its customers are on here. So, from our point of view, they’re already dealt with in the license that we have in place.

And I should also point out that there are a number of quantum dots companies on here. Again, as I’ve explained before, there is no point suing or litigating against the quantum dot company, certainly not if you’re trying to get money because they are often small, purely funded and often — or always use a — or create a very small part of the value chain. So, if you think of suing someone who makes quantum dots in TV or someone who makes the TV, there’s a lot more value in the TV than there is in the quantum dots. So, that gave us a pointer on who we thought was infringing and who would be worth looking at in the short to medium term.

If you go over the page then on Slide 21, ignoring Samsung and its customer from the previous slide, what we have here is there are 16 companies worth looking at. They’re referred to here on the left-hand column as suspects. We’ve actually torn down eight devices sold by those companies. And many of them will have many different devices. So, we’ve just taken one from each. So whether it’s a 42-, 55- or 65-inch TV. You can see in the third column there, three-quarters of all those devices that we toured down actually contain toxic cadmium, which from a Nanoco perspective means that they are likely not to be infringing our IP. It’s not impossible. But today, it’s likely that they’re not.

One of the TVs, despite what it says on the box about containing quantum dot technology or quantum technology, quantum dot color, et cetera, actually doesn’t contain any quantum dots. So, of the eight, there was one device available in commercial retail stores today that actually contains cadmium-free quantum. I should emphasize that does not guarantee or prove infringement, but it is a very strong clue particularly given our belief that you can’t make cadmium-free quantum dots at scale without infringing our IP. And then, the last column on there, you can see that there are eight more companies devices to tear down, and we’ll be addressing those as we move through this current financial year.

If now I go over the page then, so summarizing where we are on monetizing our IP. I think it’s pretty clear that we do have a commanding IP portfolio. So the first fundamental, without which you can’t get to the market, is very firmly in place. The valuable addressable market, as I’ve shown, it will grow over time, whether it’s in display or in those small devices using micro LEDs.

Having done the tear downs, having looked at that heat map, we have now already started engaging with potential infringers. So, we haven’t just left the analysis or the heat map sitting on shelf or in filing cabinets, we’re now engaging with potential infringers. Given that our aspiration is to be a production company, that initial engagement is, I would call it, commercial in nature, that we’re looking for either supply agreements or development agreements. And if those aren’t available, then we’ll move on to a licensing basis. Because again investors will understand that if someone buys your product, it comes with a built-in license. You don’t typically sell products and get a license fee on top of that.

And I should emphasize this engagement could be a relatively lengthy process. And that’s why we’re saying expectations for some kind of outcome by the end of calendar year ’24, so 15 months from today, seems to be a reasonable target. Also, if commercial discussion and licensing options fail, then we obviously have the fallback and retain our advisers to pursue litigation.

And lastly, because the retained proceeds from the $90 million, we do have the option to self-fund litigation. If we thought it was going to be extremely expensive again, then we could, for a lower return, have a much lower risk by put that funding with a third party. But today, we do have that option and the activities that we’re doing today, we are self-funding.

So that’s it, where we are in monetizing our IP, and now I’ll hand over to Liam, who’ll quickly take you through the financial position.

Liam Gray

Thank you, Brian.

This first slide shows our financial highlights at the year ended July 31, 2023. So, revenue was up 128% on the prior year, moving from £2.5 million to £5.6 million, and this increase was primarily driven by the IP license contributing £3 million of revenue. This increase in revenue has a direct impact on our adjusted EBITDA, which has reduced to £0.4 million compared to £2.3 million in the prior year.

Our cash cost base has increased on the prior year, and sits just above £6 million. We have invested in our capabilities in H2 FY ’23 and increased our footprint at our offices and labs at Runcorn, increased our headcounts and brought new equipment. Like most companies, there are some general inflationary increases.

Our year-end cash was £8.2 million, and that 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, our year-end cash, in addition to the cash due to be received in February ’24, means our cash runs are longer concern, and our commercial prospects are full underpinned by the litigation proceeds.

Moving on to the next slide. This is a summary of the income statements, and I’ll just run through this quickly, so we’ve got more time for Q&A. So, the revenue growth has flowed through to gross profit, which is up £3.3 million on the prior year. As mentioned before, our costs have increased slightly on the prior year, which gets us down to an EBITDA of £0.4 million compared to £2.3 million in the prior year.

And moving down the table, there are a number of significant adjusted items in the year and we’ll look at these on the next slide. Financing costs amount to £5.4 million, and these include contingent interest on our loan notes, which we paid during the financial year. On tax, we have utilized some of our accumulated losses to reduce the tax in the year, and we’ve also recognized the fair tax asset period. We do continue to have unutilized losses to carry forward against future profits as well. So compared to a loss after tax in the prior year of £4.7 million, we have generated profits of £11.1 million in FY ’23.

As I mentioned, I’ll quickly cover the adjusted items incurred in the period, which gets us down from our adjusted EBITDA of £0.4 million to operating profit of £15 million. So, we have the sale of the IP, which netted £68.7 million, and then the litigation-related cost of £49.3 million, offset that in the financial year. They were recognized in full during the period. The general meeting cost £0.5 million in broker adviser and legal fees. And then, we also have a foreign exchange loss this year of £1.7 million related to the USD balances on the balance sheet, which will translate at the year-end with the relevant exchange rate. It’s important to note on this, we have recently announced that we have hedged the second tranche. So there’s no more future risk of volatility around the cash receipt in February ’24. And then, we have our share-based payments value, which is in line with the prior year. And depreciation and amortization are lower than prior year due to the lower impairment charge in IP.

So, I’ll just skip the “movement in cash” slide and go on to the final summary — financial summary. So, looking at FY ’24, we expect our services and material revenue to be in line with FY ’23. However, our licensing income would double to £6 million, reflecting the full year’s recognition of the IP license agreements. Our cash cost base is around £6 million following the investments in additional space and headcount to improve our capabilities, and this investment will allow us to provide a more tailored customer solution and accelerate our own product development.

And 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 in the year, which we historically not done to try and preserve cash. And again, as mentioned, we have a firm intention to return £33 million to £40 million of the proceeds from tranche 2, which will be in Q1 of calendar 2024.

And with that, I’ll pass it back to Brian to summarize.

Brian Tenner

Thanks, Liam.

So, this last slide, Slide number 30, just in terms of outlook for the year ahead. As we announced in our prelims, we are negotiating two longer and deeper collaborations with our two key customers, and we would expect to conclude those negotiations in the next month or so. We’re also currently negotiating the production contract terms for that first production order that we’re expecting before the end of this financial year. And that then leads on to that expectation of a low volume production order before the end of December 2023.

Using our retained proceeds, both current and those after February ’24, the second tranche payment, we’re currently expanding our footprint in Runcorn to give us both a device capability to 200-millimeter wafer size, which will allow us to actually demonstrate fully functioning sensor devices to our customers rather than simply demonstrating here some nano materials and what they can do.

We’re also, as we announced in the summer, comfortably through an NED recruitment process. We will be hosting a number of candidates here at Runcorn side over the next few weeks. And again, we hope to announce a new Non-Executive Director by the end of this calendar year. That new NED, we’ve targeted a deep knowledge in commercialization of new technology and consumer electronics, whether that’s in business development, supply chain or operations. And the candidates that we’re hosting in Runcorn have got incredibly impressive CVs given their very strong backgrounds in consumer electronics and semiconductor industries.

And lastly, as Liam referred to, we will be making a return of capital to shareholders during the first quarter of calendar year 2024.

So, in terms of outlook, and as said at the start, a lot has been achieved, and there’s still lots to do, but you can see that these outlook and these impending events are a big part of that and lots to do.

Thanks very much. I’ll hand you over to Alessandro briefly, just before we take questions.

Question-and-Answer Session

Operator

Perfect. Brian, Nigel, Liam, thank you very much for the presentation. [Operator Instructions] I’d like to remind you, the recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. As you can see we received a number of questions, both pre-submitted and throughout today’s live presentation. Liam, if I could just ask you to read out those questions and give them out to the team where appropriate, that would be great. And I’ll pick up at the end.

Liam Gray

Yes, sure, Brian is going to read through.

Brian Tenner

Okay. Thanks very much. Right. Question number one, there were other projects, medical horticulture, et cetera, how is that doing?

I think folk are aware that for a number of years, we’ve emphasized that with our constrained cash position, and we’ve had to focus our efforts on a much narrower range of opportunities. And it’s fair to say that last four years, sensing has taken the vast majority of our resources with only modest investments in display activities, particularly while we were pushing the litigation with Samsung.

I think folk will be aware also that it’s important for any business, particularly those who are effectively in start-up mode, who don’t yet have commercial production orders to actually focus on a small number of opportunities to maximize the chances of success and also to carefully manage your restricted funding. And part of the dot-only strategy that we implemented a few years ago has been to focus on our core strengths and those markets where the opportunities are large enough and short-term enough just to be worth pursuing with time, energy and money.

But specifically, on the markets that were mentioned in the question and a few others, in medical, we announced a year ago that our medical team had actually been stood down following the successful completion of a grant-funded project that was looking at using quantum dots as a testing kit for pathogens, including COVID-19. We also noted that at the same time, last year, that taking medical applications forward would require a specialist partner. We retain our IP. We retain some capability in that space, but it’s not something that we are actively pursuing. It would be reactive if someone came to us.

Horticulture and the applications here are very similar to those used in display, i.e., they’re using the emissive properties of quantum dots. We did carry out a number of different small-scale projects with different customers. And unfortunately, those customers decided not to pursue them further. But again, like medical, we retain the IP, we retain the materials. And we can react to inbound inquiries, but we’re not focusing our resources on either of those at the moment.

Similar answer if you think of lighting. Again, very similar materials to those used in display. But again, it’s something we’re not actively pursuing.

Last specific one to cover, solar applications. Again, investors, I’m sure will be aware that with the advent of cut price competition from China, that effectively destroyed Western company’s efforts on solar. And when you consider that China has got 80% of the market, you can see why that is so important. So, our materials and our efforts in solar were similarly impacted by the presence of Chinese manufacturers in the market. But again, we still own the IP, trade secrets and material recipes that we can deploy should a meaningful opportunity present itself.

So, we will — so I guess the question would be, do we expect to start funding those areas again with retained processes — or proceeds? I think the truth is, in the short term, the answer is no, we will not be putting significant funding or much funding at all into either of those four areas. And that’s not because they’re wholly unattractive. It’s because there is much more attractive opportunities in sensing and display. So that’s where we are on those projects, and that’s why we’re focusing our efforts on sensing and display.

And question number two, I’ll hand that over to Liam.

Liam Gray

Yes. The question is, we expect our order book to rise to deliver similar services and material revenue to that seen in FY ’23. License income will reflect the full year for litigation settlement. Can you please clarify exactly how much said license income will be, if it is equal to a full year of the litigation settlement in numbers, please?

Okay. So, as we’ve discussed in our prelims and as in the presentation, our services, materials sales in FY ’23 were £2.5 million, and we expect a similar sum in FY ’23 — sorry, in FY ’24. So, in our prelims in regards to license revenue, it discloses £3.1 million for FY ’23. Of that, £0.1 million related to historic receipts from Wah Hong. The balance of £3 million was from Samsung license and covered the second six months of FY ’23. So, the Wah Hong license expires in a few months, the expectation of license income in FY ’24 for the Samsung settlement is £6 million. So the £2.5 million plus £6 million will give a total expected revenue of around £8.5 million.

And with that, I’ll pass you back to Brian for the next question.

Brian Tenner

Okay. Next question was about an e-mail address for this meeting, which I think we’ve already dealt with. So, moving on question four, when are we expecting to see new orders following extended trials with potential customers?

As I said earlier, we do expect our first commercial production order before the end of December 2023. And we do expect that to be a low volume application. Again, low volume means measured in millions of sensor units per year. Our expectation is that with the technologies established in the end user ecosystem, we believe and our customers believe that more applications and more end customers will adopt the technology over the following years. And that will obviously have a positive impact on our revenue.

However, we can’t be sure when those end users will actually adopt either NIR or SWIR technology. However, and because our customers are major electronic supply chain customers, we’ve got a very strong route to market through their customers. And again, they have not got into this application or technology to be selling millions of units a year. Their industrial scale production sizes are the hundreds of millions of units.

So again, as I said earlier, market forecasts are expecting SWIR technology to be adopted in mobile phones in 2026, and that would meet our definition of a high-volume application. And as I’ve just said, that would also meet the aspirations of our current two key customers who got into this sector to be selling hundreds of millions of sensors, not millions of sensors.

And again, as we’ve said previously, if we were around 100 million sensor units per year, that could generate potentially £20 million of cash revenue a year, obviously, subject to price negotiations, given volumes, material costs, other costs at the time, two to three years from now. And at that level of revenue, we would be significantly cash generative.

Moving on to question five. That’s one for Liam.

Liam Gray

So, the question is, when will we receive a dividend payment resulting from the Samsung award? And approximately how much is it likely to be?

So, as we communicated, Samsung is due to pay the second tranche of settlement proceeds in February 2024. We intend commencing the return to shareholders shortly thereafter, so aiming for February and March 2024.

In regards to what form this may take, this may be a dividend, capital return, a share buyback or a tender offer. The Board is currently evaluating all the options and the planned method will be announced in early ’24.

On the amount, just to reiterate, the Board intends to return between £0.10 and £0.12 per share, which is the equivalent of £33 million to £40 million.

And I’ll pass it back to Brian for the next question.

Brian Tenner

Does the company have an interest in solar panels? And if not, please, could you explain why not?

I’ll just refer you back to the comment I made earlier about solar, and the fact that the macroeconomic environment for solar, again, the Internet is littered with references to German solar companies, Western European, Western companies basically being annihilated by the influx of low-cost Chinese solar panels. So that’s why we’re not currently actively pursuing solar today. If a Chinese company turned up on the price point was acceptable or any other company turned up in the price point was acceptable, we do have IP and experience in making those materials. So, we could go into that, but it’s not something we’re actively pursuing today.

Next question, are the two materials that have moved from development to optimization stage, those are the Asian customer?

That is not true. One of those materials is for the European customer and one is for the Asian customer.

Next question, could we expect to see more materials move from development to optimization during FY ’24?

Yes, it’s possible. Though, note, the timeline that Nigel set out earlier when he was going through the typical development cycle for materials, some of those individual stages can last one to two years. Further to that, with the European customer already having two materials at final validation stage and one new material and optimization. Also with the Asian customer having material and optimization, I think the real expected changes in this coming year is for the two materials in validation to move into production, as we said, expecting an order before the end of this calendar year. So, optimization does tend to last longer than a year and requires significant investment, both by a customer and Nanoco. New customers in sensing in FY ’24 are more likely to start with small-scale proofs of concept at the development stage. However, display could be faster.

Moving on to the next question. The proposed return of capital suggests the company does not see any rapid growth in the volume of quantum dots required over the next few years. Is this interpretation correct?

This interpretation is not correct. The return of capital does not imply no rapid growth in the volume of quantum dots over the next few years, and let me explain why. We’ve said that we expect first production order to be for a low volume for millions of units. Our installed production capacity today in the facility literally just 3 meters behind me, can already make enough material for over 100 million devices on a single shift, partly depends on the size of the sensor. But if those were smaller sensors, going into a watch or something like that, then you would be multiplying that 100 million devices.

Putting in full staff for a full single shift would be relatively inexpensive. We also, today, and going forward, have favorable working capital terms with our key customers and our suppliers. So, the simple message is a significant increase in sensing demand would not require significant investment in CapEx or OpEx or working capital.

In display, the position is similar, although here, the installed volume capacity is lower, being around 1 million 65-inch TVs or actually around 30 million smartphones or over 200 million smart watches. Again, staffing, working capital, capital expenditure in display would be very similar to what I just described for sensing, i.e., there is not a huge need for investment in those areas if significant demand came online.

So, just to emphasize, the return of capital reflects the residual funds after we considered the business need for funds. And that — those assumptions about the need for funds includes the assumption that we’re at mobile phone type levels of demand in 2026, i.e., 100 million-plus sensor units and us making the materials for those.

Next question, can you please talk about the benefits that QDs could bring to small-sized micro LED screens over other technologies? And why QDs may be beneficial here, but perhaps not in larger screen sizes?

Okay. In terms of the advantages of micro LEDs, you get a very high level of brightness. And they are very energy efficient because you’re not using a backlight. If you think of an entire TV is being lit up with a backlight, and all different — all of the colors are being activated and then on an LCD TV, you actually filter out the colors you don’t need, so there’s a lot of energy being wasted there.

The color gamut is superb. The durability of micro LEDs is really high. There’s no expectations of screen burn or pixel degradation, which you do get in other TVs. You’ve also got increased eye comfort, which is actually incredibly important if you think that these could be used in screens that are going in a headset that’s only 1 inch or 2 from your eye. And also these micro LEDs can be incredibly thin, so pushing beyond the 1 millimeter barrier.

In terms of what the issues with larger screen size, there’s a problem today. Certainly, we see a problem today, and most people researching QDs for use in larger screen sizes see this is that small screens typically use less energy, often they’re closer range. As I say, if you think of a headset, a smartwatch or mobile phone, it’s much closer to you. It isn’t using as much energy.

So, in a large TV, where there’s a lot more energy passing through the QDs, that causes a significantly higher level of stress for the QDs. And we believe that a significant amount of development work is needed to create stable cadmium-free TV — quantum dots for a large screen, i.e., TV application. So basically, today, quantum dots come in free — quantum dots are applicable to micro LEDs, but a lot of development work before they could be used in TVs.

Next question, would any selection of your materials for use in mobile phones be more likely to use your second-generation materials rather than first-generation materials?

Second-generation materials that we’re working on, as Nigel was explaining earlier, will have new and additional properties. They will almost certainly be faster than the first generation of materials, which, again, for sensors are very important. But importantly, they’ll also be more thermally stable.

Mobile phone application that needs higher speed in the application would prefer Generation 2 materials, but that will be the application, not the environment or the device, whereas automotive applications actually require higher thermal stability. So, automotive applications are unlikely to use the first-generation of materials. They’re much more interested in that second generation of materials.

So, we’re not aware of any performance restrictions for Generation 1 materials to be used in mobile phones, although today, some OEMs are trying to use — avoid the use of lead in devices, even if that is within prescribed safe limits. And our Generation 2 material is lead-free.

Next question, can you say a little more what a deeper collaboration with one or both of your main sensing customers might look like? Would it be working on an expanded number of materials with greater collaboration there?

So, what we mean by deeper with both parties means basically applying more resources and funds. That increases the speed of development, and it also increases the chance of success. It would normally be appropriate to go into that sort of relationship after you’ve done your proof of concept, because there’s a simple message in development stage or proof-of-concept stage that if you’re going to fail, you want to fail fast and cheap.

And I think a good example of that is, as we’ve said, with the Asian customer. In the last two years, we have completed almost six back-to-back or in-series projects. So, you clear hurdle one, then you commission another short-term project, clear hurdle two, et cetera, et cetera. Once you get to your proof of concept, that’s when it’s then worth and lower risk to apply more resources, more money, more time.

A deeper collaboration also involves sharing more information in a two-way flow. And that then increases the speed of feedback loops, which again can reduce the time to market, and that’s always a competitive advantage.

The specific question about an expanded range of materials with a customer, it doesn’t necessarily mean that. But what it can mean is that if you think that you’ve got a recipe to make a quantum dot, you can tweak that many, many different ways. So, while ultimately, the material basis is staying the same, the full bill of material may change as you add a little bit more salt, a little less salt or whatever it happens to be using a cooking metaphor. And again, the more tweaking, the more experimentation, the more reactions you can run, the greater your chance of success and the time line to find, if you like, the secret sauce, so to speak.

Next question, excuse me, with the license to Samsung that has been agreed over Nanoco’s patents, would this cover some of those sensing relevant patents? And would Samsung, therefore, have the ability to make sensing products that rest on some of Nanoco’s patents?

So again, just to clarify, as we said before, the Samsung license does always cover our core seeding methodology. And our Generation 2 sensing products, but not Generation 1, are made using that IP. However, and there is a very significant body of additional business know-how, recipes, trade secrets that are needed to be even able to consider making sensing materials. Furthermore, future sensing IP that is independent of our existing IP portfolio is not covered by the Samsung license.

That brings us to the end of the pre-submitted questions. Now, I’m going to start looking at the questions that are on the screen here. And I think I’m starting with the most recent one.

You talked several times about infringers, plural, but the chart shows only one infringer. Which one is correct?

I think you’re referring to two different charts. The first chart is the heat map. All 19 companies on there could be infringing our IP. The second chart where we’ve done tear downs on eight out of those 19 companies’ devices, and one of those who’s got cadmium-free quantum dots.

I did mention that we’re engaging with a number of potential infringers. One of those potential infringers doesn’t yet have a product on the market, but as said that they want to have a product on the market. So, both of the charts are correct at this point in time. As we do more teardowns, we may find more cadmium-free devices on the market.

But again, as I was saying earlier, the critical thing is that over time, the quantum dot share of the display market is expected to grow. And when it grows, there will be more devices coming on to the market. And with restrictions on cadmium increasing, we expect a greater proportion of new devices to be cadmium-free quantum dots. So that, again, will grow over time.

But at the moment, it is correct to say that we have identified outside of Samsung, one device with cadmium-free quantum dots and another group of companies who want to move into the cadmium-free quantum dot space.

Next one, bearing in mind final validation of the two sensing materials and final production with the customer was forecast to be received by July 2023, how confident are you that a commercial order will still be received by calendar year-end? And what underpins that confidence?

Ultimately, final validation is outside of Nanoco’s control. That is something that the customer needs to do. They have got parts of the process that — their own process that they need to modify. They need to change. They need to validate.

In terms of our confidence and why we’re confident we’re going to get an order before the end of the calendar year, the fact that, as we’ve announced that we are going through — that we’re currently negotiating the terms of supply for a commercial production order, that’s where the confidence comes from.

Next question. Thank you to everyone on Nanoco on great work getting to this point. Question, your patents on when they expire are confusing to a lay person. Could you give more detail on when patents for the seeding process expire, please? And how long this process is protected?

So, there are multiple patents covering the seeding process. Of the four that we’re going to — that we retain from the litigation, one of them last until 2028, so another five years. One of them expires, I think, in 2025 and then the other two are in between those dates. But as I mentioned, we also have some patents that were relevant to seeding, could have been used in the litigation. We chose not to because we had too many and some of their lives going to 2033.

Again, apologies, we haven’t got it in this slide deck, but there is a chart you’ll see in the annual report and accounts that actually sets out for our 370-odd patents, how many years of life each one of them has got left. And it also color differentiates the four that were in the litigation, and these are the ones that I’m mentioning.

And so, simple answer is 2028 for those in the trial; 2033, for some that we held back from the trial. The rest of the portfolio, a lot of it actually goes up longer than that.

And once our QD materials make it into consumer products, will you be doing teardowns of well-known products to check if they contain our dots and then inform the market of that? It would be really helpful for share price.

That’s assuming that our customer doesn’t tell us who the end customer is or if that end customer refuses to be named. Then in that case, yes, we will be scanning the market for devices that claim to have adopted SWIR quantum dot technology. And we’ll go and look at them and see whether or not they’re containing our materials. And if that’s how we learn it, which is a legitimate thing to be in the market, then yes, we would be able to tell the market that that’s what we have found.

Next one, excuse me if you’ve answered this in the past, but the settlement with Samsung, while significant for Nano, is a rounding error for Samsung. Why do you think Samsung insist as part of the settlement offer in splitting the payment up over such a long period of time? And why did Nanoco agreed to it?

So, I’ll repeat what I’ve said about that in the past. We — for whatever reason, I do not know why Samsung want to split it in two. However, from a Nanoco point of view, we did not need that cash immediately. So, given that it was something they wanted, and we were able to give that in exchange for some things that we wanted, whether they’re confidential terms inside that license agreement or whether it relates to the final value that they actually paid, et cetera, but there was no harm done to Nanoco by taking first part of the payment in February last year and the second — or March last year and the second payment in February ’24.

What form will the cash return take?

We’re evaluating that at the moment. We’ve looked across all of the different options. So that will include a special dividend, a share buyback, a B share, C share scheme, a tender offer. What we’re trying to do is make sure that as many shareholders as possible, if not all, have a choice on whether or not that return takes the form of capital or a dividend. And we’ll be saying more about that in January when we hope to be able to say what our intention is once the money actually arrives.

Thank you for the presentation. Are you able to provide an estimate of the total maximum annual sales value for Nanoco’s current production facilities?

There are a lot of variables in this. If you think of a 300-millimeter wafer, if you’ve got a 10×10 sensor, you might get 500 or 600 sensors out of that. If you’ve got a 2.5×2.5 sensor, then you’ll get maybe 4,500, 5,000 or more sensors out of that. But in simple terms, what we said in previous years is that, on the sensing side, working 24/7, we believe that our sensing facility could generate annual sales of around £100 million and that our display facility could generate annual sales of around £30 million.

And that — those are the kind of numbers what I was saying earlier. We do not need to invest capital today to expand our production facilities. Though if we had to, it would be relatively inexpensive to do so. But clearly, to get to those levels of sales, we would need to be in the multiple hundreds of millions. So, on more than one smartphone, one smartphone might get us to £20 million, £25 million of revenue. For TVs, whether that was 1 million TVs or 20 million, 30 million phones or maybe 100 million-plus smartwatches.

With the global uncertainty for security of supply, please clarify Nanoco’s strategy of resourcing and supply confidence for base materials necessarily underpin future order book.

We and our customers through electronic supply chain have multiple supply routes. So, whether that’s two or three or, in some cases, four different potential suppliers, where they’re very, very specialist suppliers or very specialist material, where actually, Nanoco and maybe one other customer might be the only customers in the world for those materials. We insist on a minimum of two sources of supply. And all of our sources of supply today are effectively coming from, what I would describe as, stable Western, far Eastern democracies. So, yes, security supply is a big deal for us and for our customers, and we spend a lot of time and effort on that, and that’s led by Liam and his team.

Next question, how do you consider a tender offer for shares? Is it possible if returning capital?

Yes, we have. That’s one of the options that we’ve been looking at. And yes, we will come to a final decision on that in January. As I mentioned, we want as many shareholders as possible, if not all shareholders to have a choice in terms of the form of the return, but we’ll confirm the actual technical route that we’re planning. Clearly, if someone would rather have income, we don’t want to force capital on them. If someone would rather have capital, we don’t want to force income on them.

And one last question, and this is just effectively allows me to recap. What are you spending the money on that you’re not returning to shareholders? Why are you keeping back £20 million or more?

I think over the summer and since then, we’ve set out a number of broad areas that we’re going to be spending that money on. Pretty simply, roughly £5 million is going to be used to pay off the group’s debt, our loan notes to three different parties, including the University of Manchester. We’re also going to use the retained funds to fund the commercial business through to our expected cash breakeven point in calendar year 2025.

Certainly, the current market conditions, in our view, internal to Nanoco and through our advisers is that Nanoco is unlikely to be able to go back to the market for additional funding. So, you can understand why we’re being cautious to make sure that we’ve got enough money retained to see us through to cash breakeven.

In terms of investments in our business, I’ve already mentioned, we are currently self-funding IP monetization. And if it gets incredibly expensive through litigation that we can look at litigation financing again. But again, that will — you’re playing off risk and reward there. But again, the 60% of our proceeds that we retained is much higher than most IP licensing companies will offer you if they were doing the service for you.

We’re also making some investments to self-finance and some R&D activities on additional material sets. We’re also investing to enhance our robustness as a potential supplier to some of the world’s largest electronics companies. Again, I think people should not underestimate how much of an issue it is for our customers of major players in electronic supply chains to know that you have multiple sources of raw materials that you have — that you are a robust supplier and can operate to the quality requirements of consumer electronics, which are incredibly demanding.

And lastly, on the investments in the commercial business, we are putting some capital in to create device capability. So, we’re extending our footprint in Runcorn here by around 50% to create a device facility and also a dedicated analytical lab. Both of those will support business development and also reduce the time to market with new materials.

As I mentioned earlier, our working capital needs are very modest for the business going forward, and we’ve got favorable working capital terms with our suppliers and our customers. And then the last use of funds, if you like, given what I said about our ability or lack of that ability to go back to the market for more funding, is that we are keeping a modest buffer for risk such as if there’s a delay or a slower ramp-up to high-volume production, if it went back a year from 2026 to 2027. But equally, I should say, if the business progress is faster, cash breakeven happens faster, then we will obviously have the option to return further sums to shareholders at some point in the future.

That’s it on the questions.

Operator

Perfect. Thank you very much. Thank you for being so generous for your time. I think you managed to address every question from the investors. And of course, the company will review all the questions submitted today and will publish those responses on the Investor Meet Company platform.

But just before redirecting investors to provide with their feedback, which is particularly important to the company, Brian, could I just ask you for a few closing comments.

Brian Tenner

Okay. Thanks very much, Alessandro. So just to recap, we feel like in the last three, four years from — since we started the Samsung litigation, we’ve come an awful long way with multiple materials and final validation, the expectation of an actual first-ever commercial production order before the end of this year. And you’ve heard the basis for that confidence that we’re actually negotiating the terms of that deliver. And so, we’re expecting that first low-volume production order before the end of this calendar year.

We’re able to start investing a little bit of money back into the business. I think Liam said during the prelims, expect us to spend around £1.5 million on capital this financial year. So, it’s not a huge amount of money, but it will make a huge difference in terms of our capability, our ability to demonstrate functioning devices to new potential customers and also the speed of our feedback loops.

We’re strengthening our Board with that new deeply experienced non-exec, again, aiming to announce that before the end of this calendar year. And as we said, major return on capital in the first quarter of next year, and you’ll hear more about that in January.

So, just a final comment. Yes, we’ve achieved a lot in the last few years, but there is still a lot to do as we move Nanoco forward to target that cash breakeven point and then to grow the business further to the sorts of revenue that this facility and our staff are capable of generating.

Thanks very much.

Operator

Perfect. And thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected and provide your feedback so that the management team can better understand your views and expectations. This is going to take a few moments to complete, but I’m sure will be greatly valued by the company.

On behalf of management team of Nanoco Group… [Ends Abruptly].