Nanoco Group plc announces preliminary results for year ended 31 July 2011

Date Announced: 20 Oct 2011 Nanoco Group plc(AIM: NANO), a world leader in the development and manufacture of cadmium-free quantum dots, is pleased to announce its preliminary results for the year ended 31 July 2011. Highlights· Follow-on product development agreement, worth US$800,000, signed with major Japanese LCD TV manufacturer for cadmium-free quantum dots (CFQD™) for LED backlighting· Phase 1 of Tokyo Electron solar cell program completed and phase 2 development agreement signed· Joint development agreement signed with world leading lighting company to produce high quality CFQD™-LED general lighting system· Runcorn quantum dot production facility designed, built and commissioned on time and on budget· 1kg red CFQD™ produced at Runcorn and shipped to Japanese LED customer, triggering US$2m payment· Cash, cash equivalents and deposits of £17.10 million at 31 July 2011 (31 July 2010: £5.68 million)Dr Peter Rowley, Nanoco's Chairman, commented: "During the year we made major steps in the development and commercialisation of our technology. We built and commissioned our first manufacturing plant, made significant progress in our commercial contracts and strengthened our balance sheet for the next stage in our development. "Our momentum has continued in the current year and we look forward to achieving further technical and commercial progress in the months ahead."About Nanoco Group plcNanoco is a world leader in the development and manufacture of commercial quantities of cadmium-free quantum dots for use in multiple applications including lighting, solar cells and biological imaging. Nanoco's quantum dots, which are free of heavy metals and comply with RoHS legislation, can be combined into a wide range of materials including liquids, polymers and glass. Nanoco forms strategic partnerships with major end users across a range of applications.Nanoco was founded in 2001 and is based in Manchester, UK. Nanoco began trading on the AIM market of the London Stock Exchange in May 2009 under the ticker symbol NANO.++++++++++++++++++++++++++++++++++++ Chairman's StatementI am delighted to report on Nanoco's second full year as a publicly quoted company. It was a year of excellent progress in which we continued to make the transition from a research-based company to a high-tech manufacturing business capable of producing large batches of cadmium-free quantum dots (CFQD™).We commissioned our first production lines in January 2011 in Runcorn, giving us the capacity to produce around 25kg of CFQD™ annually and marking an important step in our multi-stage plan to build substantial manufacturing capacity. In April 2011, we announced the production of a 1kg batch of red CFQD™ for a major Japanese corporation, marking a key milestone for the Runcorn plant. Manufacturing quantum dots on this scale is a major technical achievement and a world-first, underlining the scalability of Nanoco's technology and the expertise of our technical and production teams. Not only is the scale of manufacture a world-first but our quantum dots are free of cadmium or other toxic metals, making them ideally suited to use in consumer electronics and other products where health, safety and environmental considerations are paramount.We have progressed plans for further expanding capacity following a successful £15 million fundraising in January 2011. We are currently finalising the detailed design of the Kilo Lab plant, with the start of construction timed to reflect the increase in demand when commercial production ramps-up. If demand ramps up more quickly we can expand capacity on the existing production line to 40kg a year and add further lines at relatively short notice.During the year we have made good progress with our commercial collaborations in light-emitting diode (LED) backlighting for liquid crystal display (LCD) TVs and in solar power, receiving significant stage payments for achieving various technical and performance milestones. We continue to believe the first commercial product to come to market will be backlit CFQD™ TVs. Based on our current analysis we believe that shipments of materials will commence during the 2012/13 financial year. In August, shortly after the period end, we signed a new joint development agreement (JDA) with one of the world's largest lighting companies with the objective of incorporating red CFQD™ into LED lights for commercial, residential and other uses. We also successfully exceeded the Phase 1 targets of our solar program with Tokyo Electron and signed a Phase 2 JDA to further progress our joint development of an efficient, low cost, printable solar cell. We now have an increasing diversity of commercial collaborations working in three key areas: LED backlighting for TVs, solid state LED lighting and solar power. Our technology has a myriad of potential applications, highlighted by recent approaches we've received from companies wishing to incorporate CFQD™ into their products. Whilst we continue to evaluate new applications, we are focused on getting the first products to market. Nanoco's core asset is its world-class patent-protected technology. We have continued to strengthen our intellectual property (IP) position throughout the year. Over the past 12 months Nanoco has had eight new patents granted and 79 patent applications filed. Financials Our revenues in the year to 31 July 2011 were £2.64 million (2010: £2.94 million). Our loss before tax was £3.22 million (2010: loss of £1.37 million), primarily reflecting the costs associated with setting up the Runcorn manufacturing facilities and commissioning the plant to produce the first kilo of red CFQD™. Cash and short term investments and deposits at the year-end were £17.10 million (31 July 2010: £5.68 million). PeopleIn August 2010, we were delighted to welcome Colin White as our Chief Financial Officer. By the year end, the Nanoco team had grown to 63 people, compared with 49 people a year earlier. The increase reflects the transition to a growing manufacturing business and includes roles in systems, processes and sales in addition to production and technical product development. I would like to offer my sincere thanks to all at Nanoco for their dedication and commitment throughout the year and to all our commercial partners and other stakeholders.Outlook The rapid progress the Company has made in the past year has continued into the current year. All of our commercial relationships are developing well as is the industrialisation of our technology, with commercial production projected to commence during the 2012/13 financial year. We look forward to continued progress and view the future with confidence. Peter RowleyNon-Executive Chairman14 October 2011++++++++++++++++++++++++++++++++++++ CEO's Review of OperationsDuring the year to 31 July 2011 we made substantial progress in all of the key areas of our business, particularly in manufacturing scale-up, in commercial agreements, in intellectual property (IP) protection and in building our company infrastructure.The commissioning of our production facility in Runcorn in January 2011 was a major achievement and demonstrated our commitment to transitioning from a research-based company to a high-tech manufacturer. We were particularly pleased with the speed with which we were able to locate a site and then procure, build and commission the production facility, which was completed by the end of January 2011 at a capital cost of £1.3 million. This was followed by the production of 1kg of red CFQD™, which we shipped in March 2011. The two Semi-Tech production lines have the capacity to produce a total of around 25kg a year of CFQD™. The success of the Semi-Tech lines demonstrates the scalability of our technology to produce large quantities of CFQD™. Manufacturing in-house is central to our business strategy. It ensures that our customers are guaranteed product, produced to the highest quality standards, which meets the most demanding technical specifications. A tremendous amount of work has been carried out on upgrading the Company's internal systems to ensure that we are able to supply our large multinational customers in a timely and professional manner. Our people are the Company's strongest asset. Our total staff numbers were 63 at the year end, reflecting the increased activity across our business. We currently have seven staff located full-time in Runcorn, and three others whose time is divided between Runcorn and our Manchester headquarters.Soon after commissioning the Runcorn facility, we successfully raised £15 million (before expenses) through a placing of shares to new and existing investors. The funds were raised to invest in further developing the business. The funds will be used for the next stage of manufacturing scale-up; for new product development; for business development; and for strengthening patent portfolio management and protection. The next stage in manufacturing scale-up is the installation of Kilo Lab lines, which would increase our total production capacity to around 150kg annually. So far we have spent around £200,000 on planning and design work but will begin construction only when we have the appropriate visibility in our order books. If demand ramps up more quickly we can expand capacity on the existing production line to 40kg and add further lines at relatively short notice. The Company has continued to invest heavily in its technology base during the year. We now employ around 31 scientists with PhDs and 17 with degrees. These scientists come from 11 countries worldwide. A measure of our technology advancement is the number of patents granted and filed by the Company over the year: a total of eight new patents were granted and 79 patent applications were filed. Earlier this month, we took the opportunity to further expand our patent estate by acquiring patents from Evident Technologies Inc., a US nanotechnology company. The patents, which largely relate to the surface chemistry of quantum dots and their use in applications, extend the reach of our cadmium-free technology.Business development has been an important focus for us during the year. To date, the great majority of Nanoco's commercial relationships have centred on Japan, which has a leadership position in the world's optoelectronics industry. But we have started to diversify geographically and are now active in Japan, Korea, Taiwan and the USA. We look forward to signing our first development agreement in Korea.REVIEW OF KEY MARKETSLED BacklightingWe made significant progress during the year with our supply and licence agreement with a major Japanese corporation. In December 2010, we received a US$500,000 milestone payment after bespoke red CFQD™ met performance criteria including a performance life of at least 50,000 hours. This was followed in April by a US$2 million milestone payment for the production of 1kg of red CFQD™ at our Runcorn facility. This kilogramme marked the first time that quantum dots had been manufactured on this scale, and was a major achievement for Nanoco. A kilogramme of quantum dots will make of the order of 50,000 backlight units for LCD TVs, depending on the TV size.We are now focusing on achieving the remaining milestones for green CFQD™, which are part of the same agreement. Our customer is currently testing the green lifetime against the 50,000 hour requirement. Once achieved, a payment of US$1 million will be made to Nanoco and pave the way for the production of the 1kg of green, which triggers a further US$2 million payment. In April this year we received a US$800,000 upfront payment for signing a product development agreement with a major Japanese company, whose products include LCD TVs. This agreement, which followed an 18 month JDA, is focused on the final steps in combining CFQD™ into an LCD TV for commercial launch. We are currently refining the CFQD™ so as to meet the technical specification for the customer's TV, as part of the iterative design and development process between Nanoco and our customer. The TV incorporating the CFQD™ in the LED backlight unit will benefit from the superior colour performance of CFQD™ and is expected to generate cost savings through a reduction in LED chip complexity. Much effort by Nanoco and our customer is currently being put into engineering the CFQD™ onto the next generation backlight systems. We continue to be unclear as to the precise timing of commercial launch for these products, which is controlled by our customer, however we believe that shipments of materials will commence during the 2012/13 financial year.LED LightingOur most recent JDA was signed in August 2011 with one of the world's largest lighting companies. It marks our first agreement focused solely on general lighting and it was signed with a large Western company. The objective of the JDA is to incorporate CFQD™ into the lighting company's LEDs to create LED lighting systems with the superior performance characteristics required for widespread residential and commercial use.This is an exciting opportunity, exploiting the ability of Nanoco's CFQD™ to transform the blue light from an LED into white light with a high colour rendering index. Current methods for producing white light from a blue LED tend to be weak in the red wavelengths, giving the two problems that the light lacks warmth and fails to show true colours. CFQD™ can overcome these problems, unlocking the many advantages of LEDs including reduced power consumption, long service life and compact size.SolarOur solar energy JDA with Tokyo Electron, a major Japanese equipment supplier, has also progressed extremely well. In November 2010, we received a milestone payment for successfully developing a nanomaterial solar ink, which can be printed to form a thin film through techniques developed by Tokyo Electron. This thin film is the active solar absorber area which is incorporated into a material stack to create a low cost solar cell. We successfully exceeded all the Phase 1 JDA targets which led to both companies signing a Phase 2 agreement in September of this year. This second phase will generate significant milestone payments to Nanoco and is expected to last for 12 months. It will focus on continuing to increase the solar cell performance, process-ability and cost reduction. Our solar ink is based on nanoparticles that have been developed and manufactured by the Company to maximise their effectiveness in absorbing solar energy. These nanoparticles are printed using low cost methods and then annealed into a solar active film layer. The solar market is huge and growing. We are pleased to be working in partnership with Tokyo Electron to optimise the technology and eventually bring it to market. Other ApplicationsThere are many applications for Nanoco's CFQD™. We continue in discussions with potential partners across a range of applications and have been approached by an increasing number of companies interested in including CFQD™ in their products.One such application is the work the Company is currently doing with University College London, on using CFQD™ for in-vivo imaging of cancer. SummaryThe year to 31 July 2011 was one of real momentum in our business. We made major steps forward in the development of our technology and intellectual property, we built and commissioned our first manufacturing plant, we made significant progress in our commercial contracts and we strengthened our balance sheet for the next stage in our development. The Company also broadened its commercial relationships to include LED general lighting in addition to LCD backlighting and solar energy. All of our commercial relationships are progressing well.We successfully expanded our activities in our key markets of Japan, Korea, Taiwan and the USA and expect further positive news from these territories going forward.This momentum has continued into the current year, which has started well. We look forward to making further technical and commercial progress in the months ahead, building on our position as a high-tech manufacturer with unique IP.Michael EdelmanChief Executive Officer14 October 2011++++++++++++++++++++++++++++++++++++ Financial review ResultsRevenue decreased by £295,000 to £2,642,000 (2010: £2,937,000). The Company's revenue is earned primarily through joint development agreements and a material supply and licence agreement, with revenue being recognised as agreed performance milestones are achieved. The year on year reduction in revenue reflects the phasing of milestone payments on the material supply and licence agreement, which had generated higher income in 2010 and a normal level of revenue recognition in 2011. All revenues earned were denominated in US Dollars and mostly originated from customers in the Far East.Costs of sales, which includes raw material costs, consumable items and sub-contract testing and analysis, increased by £590,000 to £1,085,000 (2010: £495,000). This increase reflected, in particular, the incremental costs associated with setting up and trialling the scale-up laboratory and manufacturing facility at Runcorn. Material and sub-contract spend associated with the various joint development programmes also increased; a consequence of the magnitude of work performed in achieving the various programme milestones.Total staffing costs increased by £471,000 to £2,564,000 (2010: £2,093,000) and average staffing numbers increased by 17 heads from an average of 39 heads in 2010 to 56 in 2011. During the year seven (2010: four) new roles were created in support of the work associated with developing the scale-up laboratory and establishing the new manufacturing facility at Runcorn. The majority of the other increases in staffing were technical roles associated with the on-going joint development programmes. Total research and development spend, which primarily includes the employment costs of technical staff, increased by £731,000 to £2,581,000 (2010: £1,850,000). Investment in the new manufacturing facility at Runcorn was also the primary driver behind the increase in the level of depreciation by £306,000 to £734,000 (2010: £428,000).After deducting operating costs the adjusted (before share-based payment charge) operating loss for the year ending 31 July 2011 was £3,232,000 (2010: adjusted operating loss of £1,262,000).The Company aims to incentivise and retain key staff through the use of equity-settled share awards. The IFRS2 (share-based payment) charge in respect of share schemes totalled £153,000 (2010: £166,000). The total number of share options in issue as at 31 July 2011 were 7.1m (31 July 2010: 11.0m). In addition a further 4.2m (31 July 2010: 3.8m) of shares are jointly owned by the Company's Employee Benefit Trust ("EBT") and certain senior management through a Jointly Owned Agreement ("JOE"). Under the JOE the employee beneficiaries have the option to acquire the trustees' share at an agreed option price subject to meeting certain performance criteria. Share options and JOE shares that had been issued under the Nanoco Tech share incentive plan (prior to the reverse take-over in 2009), and which totalled 12.2m share options and JOE shares, are now capable of being exercised until 31 August 2016. During the year 4.5m of these options were exercised. Details on the various share schemes are provided in note 19 to the financial statements.Interest income increased by £112,000 to £180,000 (2010: £68,000), benefiting from the increase in cash following the receipt of the proceeds from the Placing, in February 2011.The loss before tax was £3,215,000 (2010: loss of £1,371,000).TaxationThe tax credit for the year is £723,000 (2010: £288,000). The R&D tax credit to be claimed in respect of 2010/11 R&D spend is £600,000 (2010: £433,000). There was a deferred tax credit of £129,000 (2010: £129,000 deferred tax charge). This credit is a result of the un-provided tax losses which more than offset the deferred tax liability for accelerated capital allowances. There was also a small charge in respect of the prior year R&D tax credit of £6,000 (2010: £16,000).Earnings per shareAdjusted (before share-based payment charge) basic loss per share was (1.22) pence (2010: adjusted loss of (0.51) pence). Basic loss per share was (1.30) pence (2010: loss of (0.60) pence). No dividend has been proposed (2010: nil) in order to retain cash within the business to fund future investment.Cash flow and balance sheetDuring the year cash, cash equivalents, deposits and short term investments increased by £11,417,000 from £5,682,000 at 31 July 2010 to £17,099,000 at 31 July 2011. The Company raised net proceeds of £14,344,000 (net of expenses) from a Placing of 16.7 million new shares which were admitted to the AIM listing on 3 February 2011. A further £300,000 was raised from the exercise of options during the year.Purchases of capital equipment in the year, primarily in connection with equipment for the new Runcorn facility, totalled £1,605,000 (2010: £615,000). Expenditure incurred in registering patents totalled £299,000 (2010: £300,000) during the year. This is capitalised and amortised over ten years in line with the Company's accounting policy. At the year-end current liabilities included £719,000 (2010: £539,000) of deferred income which is recognised in the Income Statement, as revenue, as performance milestones are achieved. Treasury activities and policiesThe Group carries a significant cash sum which is managed prudently. In order to minimise risk to the Group's capital the funds are invested across a number of financial institutions which have investment grade credit ratings. The deposits range from instant access to twelve month term deposits and are regularly reviewed by the Board. Cash forecasts are updated monthly to ensure that there is sufficient cash available for foreseeable requirements.Credit riskThe Company only trades with recognised, creditworthy third parties. Receivable balances are monitored on an on-going basis and any late payments are promptly investigated to ensure that the Group's exposure to bad debts is not significant.Foreign exchange managementThe Company invoices most of its revenues in US Dollars. The Company is therefore exposed to movements in the US Dollar relative to Sterling. The Company enters into forward currency contracts to fix the exchange rate on invoiced or confirmed foreign currency receipts. The Company does not take out forward contracts against uncertain or forecast income. There were no open forward contracts as at 31 July 2011.At the year end the Group had a net liability of £11,000 (2010: net asset £1,176,000) in US Dollar cash, debtor, less creditor balances. The Group's net profit and its equity are exposed to movements in the value of Sterling relative to the US Dollar. The indicative impact of movements in the Sterling exchange rate on profits and equity based on the re-translation of the closing balance sheet are summarised in note 24 to the Financial Statements. Based on the balances at the year end, a 10% strengthening in Sterling against the US Dollar would increase Group pre-tax profit and equity by £1,000 (2010: reduce profits and equity by £107,000) and a 10% strengthening in the US Dollar relative to Sterling would reduce pre-tax profit and equity by £1,000 (2010: increase profits and equity by £130,000). As US Dollar income increases so the exposure of the Group's Income Statement and equity to movements in the Sterling/US Dollar exchange rate will increase as well.Colin WhiteChief Financial Officer14 October 2011

Contact
Nanoco Group plc Tel: +44 (0) 161 603 7900 Michael Edelman, Chief Executive Officer Colin White, Chief Financial Officer Bank of America Merrill Lynch - Joint Broker Tel: + 44 (0) 20 7996 2490 Will Smith Canaccord Genuity - Nomad and Joint Broker Tel: +44 (0) 20 7050 6500 Simon Bridges Cameron Duncan Buchanan Communications Tel: +44 (0) 20 7466 5000 Mark Court / Christian Goodbody

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