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NANOCO GROUP PLC — Earnings Release 2016
Oct 11, 2016
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Earnings Release
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RNS Number : 1972M
Nanoco Group PLC
11 October 2016
| For immediate release | 11 October 2016 |
NANOCO GROUP PLC
("Nanoco" or the "Company")
Preliminary Results for the year ended 31 July 2016
Nanoco Group plc (LSE: NANO), a world leader in the development and manufacture of cadmium-free quantum dots and other nanomaterials, is pleased to announce its preliminary results for the year ended 31 July 2016.
Highlights
· Transformed business model which should accelerate the commercialisation of our technology
· Sample requests have increased over the past few months for Dow's TREVISTA™ cadmium-free quantum dots and are being fulfilled exclusively from Dow's dedicated Cheonan plant
· Merck licence agreement signed in July 2016
· Well advanced in transferring our technology to Merck and we expect them to be running initial manufacturing trials in the near future
· Wah Hong licence agreement signed in July 2016; sampling to customers is under way
· Significant increase in manufacturing capacity following process improvements and efficiencies developed during the year, together with moving to shift work post year end
· IP portfolio has grown to 467 patents and patents pending at year end
· Future opportunities if life science continues to emerge
· Revenue for the year was £0.47 million (2015: £2.03 million) and the loss after tax was £10.61 million (2015: £8.97 million). Billings in July 2016 which are deferred into future years amounted to £1.18 million.
· Cash and cash on deposit at 31 July 2016 was £14.51 million (2015: £24.31 million)
Dr Christopher Richards, Nanoco's Chairman, said: "I am encouraged that the significant progress made during the year, especially in new licensing agreements and manufacturing improvements, have put the Group in a strong position for rapid revenue growth. Combined with our solid cash position, we look forward to the future with confidence."
Analyst meeting and webcast details
A meeting for analysts will be held at 10am this morning, 11 October 2016, at the offices of Buchanan, 107 Cheapside, London EC2V 6DN. For further details, please contact Buchanan on 020 7466 5000.
To listen to a webcast of the analyst briefing, please log on to the following web address approximately 5 minutes before 10.00am on 11 October 2016: http://vm.buchanan.uk.com/2016/nanoco111016/registration.htm.
A recording of the webcast will be made available at Nanoco's website, www.nanocogroup.com.
This announcement contains inside information.
For further information, please contact:
| Nanoco | Tel: +44 (0) 161 603 7900 |
| Michael Edelman, Chief Executive Officer | |
| David Blain, Chief Financial Officer | |
| Caroline Watson, Investor Relations Manager | Tel: + 44 (0) 7799 897357 |
| [email protected] | |
| Peel Hunt | Tel: +44 (0) 20 7418 8900 |
| Adrian Trimmings | |
| George Sellar | |
| Buchanan | Tel: +44 (0) 20 7466 5000 |
| Mark Court / Sophie Cowles / Stephanie Watson |
Notes for editors:
About Nanoco Group plc
Nanoco is a world leader in the development and production of cadmium-free quantum dots and other nanomaterials for use in multiple applications including LCD displays, lighting, solar cells and bio-imaging. In the display market, Nanoco has a non-exclusive manufacturing and marketing licensing agreements with The Dow Chemical Company, Merck KGaA and Taiwan's Wah Hong Industrial Corporation. Nanoco also has a strategy of direct sales in display and in its other target markets, including lighting.
Nanoco was founded in 2001 and is headquartered in Manchester, UK. It has production facilities in Runcorn, UK, and a US subsidiary, Nanoco Inc, based in Concord, MA. Nanoco also has business development executives in Japan, Korea and Taiwan. Its technology is protected worldwide by a large and growing patent estate.
Nanoco is listed on the main market of the London Stock Exchange and trades under the ticker symbol NANO. For further information please visit: www.nanocogroup.com.
Chairman's Statement
Introduction
It is a pleasure to be introducing Nanoco's results for the year to 31 July 2016 and to be issuing my first Chairman's statement since my appointment in May this year. I joined Nanoco as a Non-executive Director last November and, after almost a year at the Group, I continue to be impressed by the huge potential of Nanoco's technology and by the skill and dedication of the Group's management and employees.
Substantial progress has been made in the year under review and I am very encouraged by the momentum currently in the business.
At the AGM in December 2015 our CEO, Dr Michael Edelman, said that 2016 would be a landmark year for the Group. Events have proven him to be correct, with a number of important commercial, technological and organisational milestones achieved.
The strategic shift announced in March this year to a non-exclusive approach to out-licensing in the display sector has transformed the Group's ability to commercialise its technology in display. Since the announcement of this new strategy, the Group has signed non-exclusive deals with Taiwan-headquartered Wah Hong Industrial Corporation ("Wah Hong") and with Germany's Merck KGaA ("Merck"). These deals, together with the revised agreement with The Dow Chemical Company ("Dow"), put Nanoco in an excellent position to accelerate the commercialisation of its technology in display.
It is pleasing to report that major technological progress was made with the Group's manufacturing processes during the year, resulting in significant increases in yields and efficiency. As well as enabling our commercial partners to become more competitive these breakthroughs mean that Nanoco's own manufacturing capacity is becoming increasingly important to the Group. This both accelerates sales and allows the Group to capture more margin without significant capital expenditure.
While our focus in 2016 has been on the display market, Nanoco's technology has several important applications beyond that sector. Important progress was made during 2016 in the Group's three other target markets: general lighting, life sciences and solar energy.
Key to the long-term success of Nanoco is maintaining and enhancing our global lead in cadmium-free quantum dot technology through our proprietary CFQD® technology. Great progress has been made under the leadership of our Chief Technical Officer, Nigel Pickett, the scientific inventor of our core technology, together with his outstanding team of scientists. Our intellectual property ("IP") portfolio continues to grow and to strengthen our leadership position.
Our organisation has continued to develop during the year as we prepare to accelerate the commercialisation of our technology and to deliver product to customers worldwide. The Group had grown to 129 employees at the year end (31 July 2015: 109); the increase mainly reflects increased staff in manufacturing and supply chain. Whilst display was our primary focus during the year, we also built out our divisional structure during the year with the formation of a Life Sciences Division to pursue the significant opportunities for our technology in the medical devices and medical diagnostics markets.
Financial performance
Revenues in the year to 31 July 2016 were £0.47 million (2015: £2.03 million) and the loss before tax was £12.60 million (2015: loss before tax of £10.88 million). The revenues include the first two quarters (six months) of royalty payments from Dow.
The Group continued to exercise careful cost control during the year and its balance sheet remains strong. Cash, cash equivalents and deposits at the year end were £14.51 million (31 July 2015: £24.31 million; 31 January 2016: £18.27 million). No dividend is proposed for the year (2015: none).
Governance and Board
The Board recognises the value of meeting the highest standards of corporate governance. The Board will continue to strive to achieve such standards for the benefit of all stakeholders.
During the year, Dr Peter Rowley retired as a Non-executive Director after ten years of valuable service to the Group. Peter was instrumental to the early development of Nanoco, first as Chairman and latterly as a Non-executive Director. Anthony ("Tony") Clinch stepped down as Chairman in May this year, having served six years on the Board, the first three of which were as a Non-executive Director. Tony led Nanoco through some important milestones, including the transition to a non-exclusive strategy in display. On behalf of the Board, I would like to thank Peter and Tony for their major contributions to Nanoco's development over the years.
It is the intention of Gordon Hall to stand down from the Board on 31 January 2017, after nine years of service. We have initiated the process of identifying a successor for Gordon and will make announcements in due course.
As reported in our 2015 Annual Report, David Blain was appointed Chief Financial Officer on 3 August 2015. I joined as a Non-executive Director on 11 November 2015, becoming Senior Independent Director on 2 December 2015. Following my appointment as Chairman on 18 May 2016, Brendan Cummins was appointed Senior Independent Director, as announced on 26 July 2016.
Employees and shareholders
On behalf of the Board, I would like to thank all of Nanoco's employees for their achievements during the year and for their commitment to the Group. Nanoco benefits from an exceptional team, with members from many countries around the world; the Board is enormously appreciative of their contributions.
I would also like to thank our shareholders for their continuing support and I look forward to meeting as many as possible at our AGM to be held on 15 December 2016. During the year, we strengthened our engagement with shareholders and potential shareholders through the appointment of Caroline Watson as Investor Relations Manager. We also appointed an investor relations agency in the USA with the objective of gaining traction with investors in North America.
Outlook
I am encouraged that the significant progress made during the year, especially in new licensing agreements and manufacturing improvements, have put the Group in a strong position for rapid revenue growth. Combined with our solid cash position, we look forward to the future with confidence.
Dr Christopher Richards
Chairman
11 October 2016
Chief Executive Officer's Review
Overview
During the year, we continued to drive the commercialisation of Nanoco's cadmium-free quantum dot technology and to deliver our strategy for the roll-out of our technology in multiple end-use markets.
Key strategic developments during the year included the new licensing strategy in the display sector and the step-change enhancement of our production processes. The new licensing strategy has given us greater control and is allowing us to increase the pace of commercialisation in display.
The improvements to our production processes have dramatically increased the quality and the yield of our cadmium-free quantum dots. One effect of this is to substantially increase production capacity at our Runcorn, UK, facility without significant capital expenditure or the building of new production lines. Nanoco now has the capacity to be a commercial supplier of cadmium-free quantum dots for display and other applications, considerably advancing the Group's manufacturing strategy.
In the near term, it is expected that there will be three manufacturing plants worldwide: Dow's mass production plant in South Korea; our plant in Runcorn; and an anticipated mass production plant to be built by Merck. These plants will drive the market penetration of our technology in display.
Our improved manufacturing processes have been transferred to Dow for use at its mass production plant and will also be available to new licensees such as Merck.
The transition at Runcorn from a pilot plant to a commercial manufacturing operation has required the operational management of the plant to evolve considerably. Our objective is to establish a world class plant, safely and reliably manufacturing high quality cadmium-free quantum dots to meet the needs of customers. To achieve this objective, we have focused on best practice, robust systems and processes. Our recent, successful move to shiftwork at the plant was an important milestone at the plant.
The organisational development of the Group, into a world class entity capable of delivering product efficiently to a global customer base, has extended across the entire business. For example, we have been upgrading our financial systems, working aggressively toward ISO quality registration and improving our supply chain operations and human resources.
Innovation is at the core of Nanoco's research and development activities. We continue to improve our world leading CFQD® quantum dots and their utility in our chosen areas of business. Each strategic business area in which the Group operates has seen substantial progress whether it be in enhanced optical performance for displays or cancer imaging.
The Group places much emphasis on protecting its intellectual property by applying for patents. Nanoco currently has a patent portfolio consisting of 476 patent and patent applications covering the materials themselves, our unique seeding process for manufacturing the quantum dots, techniques for incorporating the quantum dots into devices and devices themselves. In addition to developing our intellectual property portfolio organically the Group continues to look for strategic opportunities to acquire patents which enhance Nanoco's technology strength.
Commercial applications - display
When we signed our worldwide licensing deal with Dow in January 2013, the agreement gave Dow exclusive rights to manufacture and market Nanoco CFQD® cadmium-free quantum dots in the display sector. The licensing agreement included an option to renegotiate some of the terms, including the opportunity to transition from an exclusive to a non-exclusive agreement.
As announced on 31 March 2016, the Group mutually agreed with Dow to amend the exclusivity of the licensing agreement such that it is now non-exclusive. In return, Nanoco receives a lower royalty rate from Dow on Dow's sales of cadmium-free quantum dot products and the Group will not receive earn-out income from Dow. We saw this new agreement as an ideal outcome for both parties. For our part, we were confident of signing further non-exclusive agreements in the display sector to create the potential for multiple royalty streams for the Group in addition to retaining the option to sell our own manufactured product.
We see considerable benefits to a non-exclusive strategy including multiple manufacturing facilities coming on stream and the speed with which products with Nanoco cadmium-free quantum dots will penetrate end-use markets. In addition, the new strategy gives us the opportunity to target niche or specific display segments directly.
Dow remains committed to commercialising our technology, which it is marketing under the TREVISTA™ brand name. Dow has received increased sample requests over the past few months for TREVISTA™ cadmium-free quantum dots, which are being fulfilled exclusively from Dow's Cheonan facility. In parallel, the application of Nanoco's improved manufacturing processes to Dow continues to progress.
Having taken the decision to adopt a non-exclusive strategy we were pleased with the speed at which we were able to sign two new licensing agreements in the display sector, one with the Taiwanese company Wah Hong and one with Merck. We are and will continue to evaluate other display industry opportunities for our technology in the LCD marketplace.
Our confidence is underpinned by a very positive market backdrop for our technology in the display industry, underlined by DisplaySearch's forecast that 18.7 million quantum dot TVs will be shipped in 2019.
We announced on 1 August 2016, the worldwide material supply and licensing agreement with Merck, a leading German technology business and the manufacturer of approximately 60 per cent of the world's liquid crystals used in LCDs.
Under this agreement, Merck will build its own large-scale manufacturing plant to supply Nanoco cadmium-free quantum dots to the display market. Ahead of Merck's own production capacity coming on stream, it will begin sales with product purchased and supplied from Nanoco's Runcorn plant. We are pleased by the rapid progress Merck is making in establishing their own CFQD® quantum dot business. Nanoco is well advanced in transferring the Group's technology to Merck and we expect them to be running initial manufacturing trials on their pilot manufacturing plants in the near future.
On 22 July 2016, we announced a material supply and licence agreement with Wah Hong, a leading Taiwanese manufacturer and supplier of optical films. Under the terms of this agreement, Nanoco will supply cadmium-free quantum dot resin to Wah Hong, which will process the resin and then market it to its customer base. Wah Hong has moved quickly to optimise their production lines in Taiwan to efficiently convert CFQD® quantum dot resin produced by Nanoco's Runcorn production facility into final product. In parallel Nanoco and Wah Hong have been actively engaged with the large display manufacturers across, China, Taiwan and Japan who are currently sampling Wah Hong produced product.
These three agreements - with Dow, Merck and Wah Hong - put the Group in a very strong position to commercialise its technology in the display industry. We are continuing to discuss further licensing opportunities for our technology.
Commercial applications - general lighting
Nanoco cadmium-free quantum dots have the ability to tune the colour of light emitted by LEDs such that any particular shade of light can be produced by tailoring the wavelength. This ability to fine-tune the colour of light has very broad applications, such as the use of LEDs in homes and offices and in specific, niche applications where a particular wavelength of light is required.
Nanoco's commercial strategy in lighting is to work with licensing and marketing partners and also to develop products ourselves. The Group is currently working with a number of lighting companies in the USA and Europe on niche lighting applications.
We have been working under joint development agreements ("JDAs") with OSRAM, one of the world's largest lighting companies, since August 2011. In October last year we announced a further JDA with OSRAM in connection with the development of a near-chip lighting solution. Under the JDA we have been working on encapsulating our quantum dots to optimise them for the operating conditions associated with LEDs.
The Group's Lighting division showcased a number of product lines in November 2015 at LuxLive, an international trade show held in London, where there was considerable interest in Nanoco's technology, primarily because of its ability to create true-to-life colour. The product lines included units for high end lighting applications in retail and architectural settings and also utilising our deep red CFQD® quantum dot film for horticultural applications.
We are currently focusing our development work in two areas: horticultural lighting to enhance seed germination and seedling growth, and a cosmetic facial mask for skin health.
Commercial applications - life sciences
During the first half of the year we formed a Life sciences division to address the substantial opportunity for the Group's cadmium-free quantum dot technology in the healthcare sector. Owing to Nanoco's quantum dots being free of cadmium, they can be used in the human body in, for example, cancer diagnoses and surgical imaging.
The Life Sciences Division is under the leadership of Dr Imad Nassani, who joined Nanoco in 2009 and is one of the pioneers of the use of quantum dots in life sciences. We now have a business plan for the division, which initially focuses on illumination of cancerous tumours to facilitate their surgical removal and then, with further development, cancer diagnoses.
During the year, Nanoco continued its long-standing work with University College London on the in vivo imaging of cancer in which the fluorescence of Nanoco's VIVO DOTS™ cadmium-free quantum dots is being used to pinpoint malignant lymph nodes to guide surgeons in the removal of cancerous tissue.
Commercial applications - solar
Nanoco's solar ink, developed from cadmium-free nanomaterials, has been designed to maximise the absorption of solar energy and to have physical characteristics such that it can be printed by low cost methods and annealed into a photovoltaic film ("PV"). The technology is based on copper, indium, gallium, selenium ("CIGS") materials, whereas the current thin-film solar market is dominated by cadmium-containing solar panels.
Development work on our CIGS materials has been focused on increasing the efficiency of the conversion of light into electricity and we have now reached a conversion rate of 17%, which we believe is close to the efficiency level required to form the basis for low cost, printable solar panels. We believe that we could achieve a highly competitive cost performance of less than 0.33$/W.
Development work to scale up the CIGS PV technology from small lab-sized cells to larger area cells is ongoing. As part of this scale-up, Nanoco is working with Loughborough University's Centre for Renewable Energy Systems Technology ("CREST"), a major UK centre of photovoltaic research, under a grant-funded project to optimise the architecture of the mini-modules.
The Group's priority in solar is to identify a suitable partner to assist in the commercial scale-up.
Restriction of the use of Hazardous Substances ("RoHS")
The European Commission (the Commission") has been conducting a lengthy and ongoing review of the future of cadmium-based quantum dots. Countries including the UK and Sweden believe that cadmium-containing quantum dots should be banned owing to the danger that cadmium presents to human and environmental health. In May 2015, Members of the European Parliament voted overwhelmingly, by 618 votes to 33 votes, to ban cadmium-containing quantum dots.
The Commission's response to the MEPs' vote was to commission a second report by the consultancy firm, the Oeko-Institut, which had authored an earlier report on quantum dots in 2014. The second report was published in June 2016 and it recommended that cadmium-containing quantum dots should be banned in lighting applications but allowed in displays for a three-year period.
The Oeko-Institut's recommendation is not legally binding but forms part of an ongoing review by the European Commission, Member States and the European Parliament. Whilst these deliberations continue, and irrespective of European legislation, display makers worldwide are choosing cadmium-free quantum dots so that their end products are sustainable.
Conclusion
The year to 31 July 2016 was a year of transformation at Nanoco. The decision to adopt a non-exclusive licensing strategy in display has broadened and accelerated the commercialisation of our technology in display. We begin the current year with considerable excitement. During the year ahead we intend to continue to roll out our technology in display whilst also advancing our other target markets.
Michael Edelman
Chief Executive Officer
11 October 2016
Financial Review
Results
Revenue for the year was £474,000 (2015: £2,029,000) and the loss before tax was £12,600,000 (2015: £10,881,000). As has historically been the case, the timing of revenue receipts in the form of milestone and joint development payments from strategic partners continued to be the major determinant of the results of the business.
During the year, two significant licences were signed which generated invoices for upfront payments of £1.2m. This revenue is expected to be recognised as follows:
| Year ending 31 July | £'m |
| 2016 | Nil |
| 2017 | 0.5 |
| 2018 to 2023 | 0.7 |
| Total | 1.2 |
Management had expected to be able recognise this revenue immediately on raising the invoice but this treatment was changed as part of year end processes due to the terms of the agreement differing from previous agreements and therefore requiring different treatment. The above amounts are included in trade receivables and deferred revenue at 31 July 2016.
The timing of revenue recognition of upfront licence fees is dependent upon the nature of each contract. One of the agreements signed in July 2016 is for a seven-year period and the upfront licence fee, which has been settled in August 2016, is to be recognised as revenue evenly over the seven-year duration of the agreement. Future milestone payments received under this agreement are subject to performance conditions and at this stage the likelihood of this cannot be determined with reasonable certainty. Thus, any future milestone payments will be recognised as revenue once the milestone has been achieved. The other upfront payment will be recognised as revenue in the year ending 31 July 2017.
The impact of this is as follows:
| £'000 | |
| Value of sales invoices ("billings") raised during the year | 1,912 |
| Movement in deferred grant income from last year end to this year | 25 |
| Less revenue deferred to future years | (1,179) |
| Revenue and other operating income per consolidated statement of comprehensive income | 758 |
The generation of cash for the Group is important and as a result the level of billings is considered a key performance indicator.
Revenues from sale of products and services rendered accounted for 67.1% (2015: 39.3%) with the balance of revenues being royalty and licence income. Revenues from sale of products was £204,000 (2015: £445,000).
Revenue from royalties and licences and revenue from the rendering of services which comprise payments from customers to gain preferential treatment in terms of supply or pricing do not have an associated cost of sale.
The increase in research and development expenditure of £415,000 to £5,995,000 (2015: £5,580,000) comprises an increase in R&D labour costs associated with the trialling of production scale-up, partially offset by a small decrease in utility costs. Labour costs represent 76.6% (2015: 74.4%) of total R&D costs with the balance of costs comprising materials and utility costs.
Total payroll costs (before the charge for share-based payments) increased by £908,000 to £6,531,000 (2015: £5,623,000). The increase in payroll costs is attributable to an 18.3% increase in staff numbers compared to 2015 largely due to expanding our supply chain and manufacturing capabilities.
The increase in administrative costs of £237,000 to £7,367,000 reflects increased employee costs (£468,000), increased professional fees related to intellectual property (£205,000) and other matters (£256,000) offset by reductions in depreciation (£115,000), share based payment charges (£349,000) and no repeat of the admission to Main Market fees incurred in 2015 of £926,000.
Non-GAAP measures
The non-GAAP measures of adjusted operating loss and LBITDA are provided to show the operating loss and loss before interest and tax, before including non-cash charges and large non-recurring items, in order to give a clearer understanding of the loss for the year that reflects cash outflow from the business.
The adjusted operating loss* for the year ending 31 July 2016 was £12,511,000 (2015: £9,452,000).
Loss before interest, tax, amortisation and share-based payment charges ("LBITDA") was as follows:
| 2016 £'000 |
2015 £'000 |
|
| Operating loss | (12,781) | (10,997) |
| Share-based payment charge | 270 | 619 |
| Costs associated with the move to the Main Market | - | 926 |
| Adjusted operating loss* | (12,511) | (9,452) |
| Depreciation | 991 | 1,106 |
| Amortisation | 298 | 269 |
| Costs associated with the move to the Main Market | - | (926) |
| LBITDA | (11,222) | (9,003) |
* Adjusted basic loss per share was 4.36 pence (2015: 3.36 pence) as shown in note 10. Basic loss per share was 4.47 pence (2015: loss of 4.05 pence). No dividend has been proposed (2015: £nil).
The increase of £2,219,000 in LBITDA compared to 2015 is a result of the lower revenue leading to a fall in gross profit of £1,416,000, an increase in other operating income of £284,000 and an increase in R&D and administrative costs of £1,087,000 (excluding the items added back in the above table).
With interest income (net of interest payments) of £181,000 (2015: £116,000), an increase of £65,000, the loss before tax was £12,600,000 (2015: loss of £10,881,000).
The tax credit for the year is £1,993,000 (2015: £1,906,000). The tax credit to be claimed, in respect of R&D spend, is £1,970,000 (2015: £1,800,000). There was also a £30,000 credit in respect of the prior year R&D tax claim (2015: £113,000 credit). Overseas corporation tax in respect of the US subsidiary, Nanoco US Inc., was £7,000 during the year (2015: £7,000). There was no deferred tax credit or charge (2015: £nil).
Cash flow and balance sheet
During the year cash, cash equivalents, deposits and short-term investments decreased by £9,800,000 to £14,511,000 (2015: £24,311,000).
The Group reduced its capital spend in the year to a total of £189,000 (2015: £385,000). Expenditure incurred in registering patents totalled £900,000 (2015: £533,000) during the year reflecting the Group's continued focus on developing and registering intellectual property. Capitalised patent spend is amortised over ten years in line with the established Group's accounting policy.
Treasury activities and policies
The Group manages its cash deposits prudently and invests its funds across a number of financial institutions which have investment grade credit ratings. The deposits range from instant access to six-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. More details on the Group's treasury policies are provided in note 25 to the financial statements.
Credit risk
The Group only trades with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis and any late payments are promptly investigated to ensure that the Group's exposure to bad debts is not significant.
Foreign exchange management
The Group invoices most of its revenues in US Dollars and Euros. The Group is therefore exposed to movements in those currencies relative to Sterling. The Group uses forward currency contracts to fix the exchange rate on invoiced or confirmed foreign currency receipts. The Group does not take out forward contracts against uncertain or forecast income. There were no open forward contracts as at 31 July 2016 (2015: none). 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 25 to the financial statements and were based on the year-end position.
Forward-looking statements
The foregoing disclosures contain certain forward-looking statements. Although the Board believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will arise. Because the expectations are subject to risks and uncertainties, actual results may vary significantly from those expressed or implied by the forward-looking statements based upon a number of factors. Such forward-looking statements include the statements under "Outlook", prospects and the commercial success of our CFQD® applications and other existing or future revenue-generating sources, risks related to the Group's ability or that of its sub-contractors and partners to manufacture products on a large scale or at all, risks related to the Group's and its marketing partners' ability to market products on a large scale or expand market share in the face of changes in customer requirements, competition and regulatory and technological change, risks related to the ownership and use of intellectual property, and risks related to the Group's ability to manage growth. Nanoco undertakes no obligation to revise or update any forward-looking statement to reflect events or circumstances after the date of the Annual Report.
Summary
The Group is well positioned to exploit the exciting opportunities ahead.
David Blain
Chief Financial Officer
11 October 2016
Consolidated statement of comprehensive income
for the year ended 31 July 2016
| 2016 | 2015 | ||
| Notes | £'000 | £'000 | |
| Revenue | 4 | 474 | 2,029 |
| Cost of sales | (177) | (316) | |
| Gross profit | 297 | 1,713 | |
| Other operating income | 5 | 284 | - |
| Operating expenses | |||
| Research and development expenses | (5,995) | (5,580) | |
| Administrative expenses | (7,367) | (7,130) | |
| Operating loss | 6 | (12,781) | (10,997) |
| - before share-based payments and the costs of the move to the Main Market | (12,511) | (9,452) | |
| - cost of admission to the Main Market | - | (926) | |
| - share-based payments | 21 | (270) | (619) |
| Finance income | 8 | 193 | 119 |
| Finance expense | 8 | (12) | (3) |
| Loss on ordinary activities before taxation | (12,600) | (10,881) | |
| Taxation | 9 | 1,993 | 1,906 |
| Loss on ordinary activities after taxation for the year and total comprehensive loss for the year | (10,607) | (8,975) | |
| Loss per share | |||
| Basic and diluted loss for the year | 10 | (4.47)p | (4.05)p |
The loss for the current and preceding year arises from the Group's continuing operations and is attributable to the equity holders of the Parent.
The basic and diluted loss per share are the same as the effect of share options is anti-dilutive.
The notes form an integral part of these preliminary results.
Consolidated statement of changes in equity
for the year ended 31 July 2016
| Issued | Share-based | ||||
| equity | payment | Merger | Revenue | ||
| capital | reserve | reserve | reserve | Total | |
| Group | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 31 July 2014 | 37,791 | 1,826 | (1,242) | (21,482) | 16,893 |
| Loss for the year and total comprehensive loss for the year | - | - | - | (8,975) | (8,975) |
| Issue of share capital | 20,826 | - | - | - | 20,826 |
| Expenses of placing | (560) | - | - | - | (560) |
| Issue of shares by EBT | - | - | - | 297 | 297 |
| Share-based payments | - | 619 | - | - | 619 |
| At 31 July 2015 | 58,057 | 2,445 | (1,242) | (30,160) | 29,100 |
| Loss for the year and total comprehensive loss for the year | - | - | - | (10,607) | (10,607) |
| Share-based payments | - | 270 | - | - | 270 |
| At 31 July 2016 | 58,057 | 2,715 | (1,242) | (40,767) | 18,763 |
Company statement of changes in equity
for the year ended 31 July 2016
| Issued | Share-based | Capital | |||
| equity | payment | redemption | Revenue | ||
| capital | reserve | reserve | reserve | Total | |
| Company | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 31 July 2014 | 115,659 | 1,826 | 4,402 | (25,671) | 96,216 |
| Profit for the year and total comprehensive profit for the year | - | - | - | 82 | 82 |
| Issue of share capital | 20,826 | - | - | - | 20,826 |
| Expenses of placing | (560) | - | - | - | (560) |
| Issue of shares by EBT | - | - | - | 297 | 297 |
| Share-based payments | - | 619 | - | - | 619 |
| At 31 July 2015 | 135,925 | 2,445 | 4,402 | (25,292) | 117,480 |
| Profit for the year and total comprehensive profit for the year | - | - | - | 167 | 167 |
| Share-based payments | - | 270 | - | - | 270 |
| At 31 July 2016 | 135,925 | 2,715 | 4,402 | (25,125) | 117,917 |
Statements of financial position
at 31 July 2016
Registered no. 05067291
| 31 July | 31 July | 31 July | 31 July | ||
| 2016 | 2016 | 2015 | 2015 | ||
| Group | Company | Group | Company | ||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| Assets | |||||
| Non-current assets | |||||
| Tangible fixed assets | 11 | 1,260 | - | 2,062 | - |
| Intangible assets | 12 | 2,423 | - | 1,821 | - |
| Investment in subsidiaries | 13 | - | 66,322 | - | 66,052 |
| 3,683 | 66,322 | 3,883 | 66,052 | ||
| Current assets | |||||
| Inventories | 14 | 208 | - | 208 | - |
| Trade and other receivables | 15 | 2,045 | 42,988 | 902 | 31,866 |
| Income tax asset | 9 | 1,970 | - | 1,800 | - |
| Short-term investments and cash on deposit | 16 | 5,000 | 5,000 | 20,000 | 20,000 |
| Cash and cash equivalents | 16 | 9,511 | 4,057 | 4,311 | 12 |
| 18,734 | 52,045 | 27,221 | 51,878 | ||
| Total assets | 22,417 | 118,367 | 31,104 | 117,930 | |
| Liabilities | |||||
| Current liabilities | |||||
| Trade and other payables | 17 | 2,443 | - | 1,909 | - |
| Financial liabilities | 18 | 32 | - | 63 | - |
| Deferred revenue | 19 | 531 | - | - | - |
| 3,006 | - | 1,972 | - | ||
| Non-current liabilities | |||||
| Financial liabilities | 18 | - | - | 32 | - |
| Other payables | 17 | - | 450 | - | 450 |
| Deferred revenue | 19 | 648 | - | - | - |
| 648 | 450 | 32 | 450 | ||
| Total liabilities | 3,654 | 450 | 2,004 | 450 | |
| Net assets | 18,763 | 117,917 | 29,100 | 117,480 | |
| Capital and reserves | |||||
| Issued equity capital | 20 | 58,057 | 135,925 | 58,057 | 135,925 |
| Share-based payment reserve | 21 | 2,715 | 2,715 | 2,445 | 2,445 |
| Merger reserve | 22 | (1,242) | - | (1,242) | - |
| Capital redemption reserve | 22 | - | 4,402 | - | 4,402 |
| Retained earnings | 23 | (40,767) | (25,125) | (30,160) | (25,292) |
| Total equity | 18,763 | 117,917 | 29,100 | 117,480 |
Approved by the Board and authorised for issue on 11 October 2016.
Dr Michael Edelman
Director
11 October 2016
Cash flow statements
For the year ended 31 July 2016
| 31 July | 31 July | 31 July | 31 July | ||
| 2016 | 2016 | 2015 | 2015 | ||
| Group | Company | Group | Company | ||
| Notes | £'000 | £'000 | £'000 | £'000 | |
| (Loss)/profit before tax | (12,600) | 167 | (10,881) | 82 | |
| Adjustments for: | |||||
| Net finance income | 8 | (181) | (167) | (116) | (58) |
| Depreciation of tangible fixed assets | 11 | 991 | - | 1,106 | - |
| Amortisation of intangible assets | 12 | 298 | - | 269 | - |
| Share-based payments | 21 | 270 | - | 619 | - |
| Changes in working capital: | |||||
| Increase in inventories | - | - | (74) | - | |
| Increase in trade and other receivables | (1,143) | - | (250) | (24) | |
| Increase in trade and other payables | 503 | - | 580 | - | |
| Increase/(decrease) in deferred revenue | 19 | 1,179 | - | (119) | - |
| Cash outflow from operating activities | (10,683) | - | (8,866) | - | |
| Research and development tax credit received | 1,830 | - | 1,323 | - | |
| Overseas corporation tax paid | (7) | - | (7) | - | |
| Net cash outflow from operating activities | (8,860) | - | (7,550) | - | |
| Cash flow from investing activities | |||||
| Purchases of tangible fixed assets | 11 | (189) | - | (385) | - |
| Purchases of intangible fixed assets | 12 | (900) | - | (533) | - |
| Cash advance to subsidiary | 15 | - | (11,153) | - | (4,323) |
| Increase in cash placed on deposit | 16 | - | - | (20,000) | (20,000) |
| Decrease in cash placed on deposit | 16 | 15,000 | 15,000 | 5,791 | - |
| Interest received | 224 | 198 | 100 | 39 | |
| Net cash inflow/(outflow) from investing activities | 14,135 | 4,045 | (15,027) | (24,284) | |
| Cash flow from financing activities | |||||
| Proceeds from issues of ordinary share capital | - | - | 21,123 | 21,123 | |
| Expenses on issue of shares | 20 | - | - | (560) | (560) |
| Interest paid | (12) | - | (3) | - | |
| Loan repayment | 18 | (63) | - | (63) | - |
| Net cash (outflow)/inflow from financing activities | (75) | - | 20,497 | 20,563 | |
| Increase/(decrease) in cash and cash equivalents | 5,200 | 4,045 | (2,080) | (3,721) | |
| Cash and cash equivalents at the start of the year | 4,311 | 12 | 6,391 | 3,733 | |
| Cash and cash equivalents at the end of the year | 9,511 | 4,057 | 4,311 | 12 | |
| Monies placed on deposit at the end of the year | 5,000 | 5,000 | 20,000 | 20,000 | |
| Cash, cash equivalents and deposits at the end of the year | 16 | 14,511 | 9,057 | 24,311 | 20,012 |
Notes to the preliminary results
1. Reporting entity
Nanoco Group plc (the "Company") is on the premium list of the London Stock Exchange and is incorporated and domiciled in the UK.
These preliminary results consolidate those of the Company and its subsidiaries (together referred to as the "Group" and individually as "Group entities") for the year ended 31 July 2016.
The preliminary results of Nanoco Group plc and its subsidiaries (the "Group") for the year ended 31 July 2016 were authorised for issue by the Board of Directors on 11 October 2016 and the statements of financial position were signed on the Board's behalf by Dr Michael Edelman.
The preliminary results do not constitute statutory financial statements within the meaning of section 435 of the Companies Act 2006. A copy of the statutory financial statements for the year ended 31 July 2016 has not been delivered to the Registrar of Companies. The Auditors' opinion on those financial statements was unqualified, did not draw attention to any matters by way of an emphasis of matter paragraph, and it contained no statement under section 498(2) or section 498(3) of the Companies Act 2006.
The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company's income statement. The Parent Company's result for the period ended 31 July 2016 was a profit of £167,000 (2015: £82,000). There were no other recognised gains or losses in either the current or prior year.
The significant accounting policies adopted by the Group are set out in note 3.
2. Basis of preparation
(a) Statement of compliance
The preliminary results are derived from the Group's financial statements which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") and International Financial Reporting Committee ("IFRIC") interpretations as they apply to the financial statements of the Group for the period ended 31 July 2016.
(b) Basis of measurement
The Parent Company and Group financial statements have been prepared on the historical cost basis. The methods used to measure fair values of assets and liabilities are discussed in the respective notes in note [3] below.
(c) Going concern
In assessing whether the going concern basis is an appropriate basis for preparing the 2016 Annual Report, the Directors have utilised its detailed forecasts which take into account its current and expected business activities, its cash balance of £14.5 million as shown in its balance sheet at 31 July 2016, the principal risks and uncertainties the Group faces and other factors impacting the Group's future performance.
The key assumptions underpinning the assessment during the period cover the following areas:
· commercialisation of CFQD products through existing contractual arrangements;
· ability to manufacture and supply sufficient CFQD products to meet partner demand; and
· continued investment in research and development.
The principal, plausible downside stress tests in accordance with the Group's principal risk and uncertainties are:
· a significant reduction in projected CFQD sales volumes due to either a reduction in demand from the Group's partners or an inability to supply;
· Lower selling prices and higher manufacturing costs;
· can our direct partner produce final products that meets our quality standards;
· can our direct partner generate sufficient demand at attractive price levels to generate sufficient operating margins for the Group and achieve targets for future milestone payments;
· how long will it take our licence partners to contract new customers and supply product in volume to generate royalty income and achieve targets for milestone payments;
· likelihood of new inventions making CFQD products obsolete; and
· higher investment in research and development.
Various sensitivity analyses have been performed to reflect possible downside scenarios as referred to above. In the worst case scenario whereby the Group achieves no revenues for the twelve months following the date of this Annual Report, the Company and the Group have sufficient resources to continue in operational existence for the foreseeable future. In order to provide sufficient headroom the directors have identified variable cost savings associated with the reduction in revenues and have the ability to identify further cost savings if necessary.
At the time of approving the financial statements the Directors have a reasonable expectation that the Company and the
Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the 2016 Annual Report.
(d) Functional and presentational currency
These financial statements are presented in Pounds Sterling, which is the presentational currency of the Group and the functional currency of the Company. All financial information presented has been rounded to the nearest thousand.
(e) Use of estimates and judgements
The preparation of financial statements requires management to make estimates and judgements that affect the amounts reported for assets and liabilities as at the reporting date and the amounts reported for revenues and expenses during the year. The nature of estimation means that actual amounts could differ from those estimates. Estimates and judgements used in the preparation of the financial statements are continually reviewed and revised as necessary. While every effort is made to ensure that such estimates and judgements are reasonable, by their nature they are uncertain and, as such, changes in estimates and judgements may have a material impact on the financial statements.
In the process of applying the Group's accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated financial statements.
Equity-settled share-based payments
The determination of share-based payment costs requires: the selection of an appropriate valuation method; consideration as to the inputs necessary for the valuation model chosen and; judgement regarding when and if performance conditions will be met. Inputs required for this arise from judgements relating to the future volatility of the share price of Nanoco and comparable companies, the Company's expected dividend yields, risk-free interest rates and expected lives of the options. The Directors draw on a variety of sources to aid in the determination of the appropriate data to use in such calculations. The share-based payment expense is most sensitive to vesting assumptions and to the future volatility of the future share price factor. Further information is included in note 3.
Intellectual property and tangible fixed assets
Management judgement is required to determine the carrying value of these assets. As the Group has not, to date, made a profit the carrying value of these assets may need to be impaired. Management has concluded that as all assets are currently in use and all registered intellectually property is capable of generating future revenue no impairment is required at this juncture. Judgements are based on the information available at each reporting date, which includes the progress with testing and certification and progress on, for example, establishment of commercial arrangements with third parties. Management has adopted the prudent approach of amortising patent registration costs over a ten-year period, which is substantially shorter than the life of the patent. For external patents acquired the same rule is adopted unless the remaining life of the patent is shorter, in which event the cost of acquisition is amortised over the remaining life of the patent.
Taxation
Management judgement is required to determine the amount of tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with an assessment of the effect of future tax planning strategies. Further information is included in note 9.
Research and development
Careful judgement by the Directors is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any product development is uncertain until such time as technical viability has been proven and commercial supply agreements are likely to be achieved. Judgements are based on the information available at each reporting date which includes the progress with testing and certification and progress on, for example, establishment of commercial arrangements with third parties. In addition, all internal activities related to research and development of new products are continuously monitored by the Directors. Further information is included in note 3.
Revenue recognition
Judgements are required as to whether and when contractual milestones have been achieved and in turn the period over which development revenue should be recognised. Management judgements are similarly required to determine whether services or rights under licence agreements have been delivered so as to enable licence revenue to be recognised. Further information is included in note 3.
Outlook
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are those relating to the estimation of the number of share options that will ultimately vest (note 21). The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
3. Significant accounting policies
The accounting policies set out below are consistent with those of the previous financial year and are applied consistently by Group entities.
(a) Basis of consolidation
The Group financial statements consolidate the financial statements of Nanoco Group plc and the entities it controls (its subsidiaries) drawn up to 31 July each year.
Subsidiaries are all entities over which the Group has the power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee), exposure, or rights, to variable returns from its involvement with the investee and ability to use its power over the investee to affect its returns. All Nanoco Group plc's subsidiaries are 100% owned. Subsidiaries are fully consolidated from the date control passes.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The costs of an acquisition are measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are initially measured at fair value at acquisition date irrespective of the extent of any minority interest. The difference between the cost of acquisition of shares in subsidiaries and the fair value of the identifiable net assets acquired is capitalised as goodwill and reviewed annually for impairment. Any deficiency in the cost of acquisition below the fair value of identifiable net assets acquired (i.e. discount on acquisition) is recognised directly in the consolidated statement of comprehensive income.
In the consolidated financial statements, income and cash flow statement items for Group entities with a functional currency other than Sterling are translated into Sterling at monthly average exchange rates, which approximate to the actual rates, for the relevant accounting periods.
All intra-group transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Subsidiaries' accounting policies are amended where necessary to ensure consistency with the policies adopted by the Group.
(b) Foreign currency transactions
Transactions in foreign currencies are initially recorded in the functional currency by applying the spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies (including those of the Group's US subsidiary) are retranslated at the functional currency rate of exchange ruling at the reporting date. All differences are taken to the consolidated statement of comprehensive income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
(c) Segmental reporting
An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. As at the reporting date the Company operated with only a single segment.
(d) Revenue recognition
Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable for the sale of goods or services, excluding discounts, rebates, VAT and other sales taxes or duties.
The Group's revenues to date comprise amounts earned under joint development agreements, individual project development programmes and material supply and licence agreements and revenue from the sale of quantum dot products.
Revenues received in advance of work performed from development programmes are recognised on a straight-line basis over the period that the development work is being performed as measured by contractual milestones. Revenue is not recognised where there is uncertainty regarding the achievement of such milestones and where either revenue has not been paid or the customer has the right to recoup advance payments.
Contractual payments received from licence agreements are recognised as revenue when goods, services or rights and entitlements are supplied. Upfront licence fees, where control over the intellectual property has been retained by the Group, are taken to income on a straight-line basis over the initial period of the contract in accordance with the continuing obligations under the contract.
Revenue from the sale of products is recognised at the point of transfer of risks and rewards of ownership, which is generally on shipment of product.
(e) Government grants
Government grants are recognised when it is reasonable to expect that the grants will be received and that all related conditions are met, usually on submission of a valid claim for payment.
Government grants of a revenue nature are recognised as other operating income (2015: rendering of services) in the consolidated statement of comprehensive income.
Government grants relating to capital expenditure are deducted in arriving at the carrying amount of the asset.
(f) Cost of sales
Cost of sales comprises the labour, materials and power costs incurred in the generation of revenue from products sold.
Revenue from royalties and licences and revenue from the rendering of services, which comprise payments from customers to gain preferential treatment in terms of supply or pricing, do not have an associated cost of sale.
(g) Operating loss
Operating losses are stated after research and development and administration expenses but before finance charges and taxation.
(h) Research and development
Research costs are charged in the consolidated statement of comprehensive income as they are incurred. Development costs will be capitalised as intangible assets when it is probable that future economic benefits will flow to the Group. Such intangible assets will be amortised on a straight-line basis from the point at which the assets are ready for use over the period of the expected benefit, and will be reviewed for impairment at each reporting date based on the circumstances at the reporting date.
The criteria for recognising expenditure as an asset are:
· it is technically feasible to complete the product;
· management intends to complete the product and use or sell it;
· there is an ability to use or sell the product;
· it can be demonstrated how the product will generate probable future economic benefits;
· adequate technical, financial and other resources are available to complete the development, use and sale of the product; and
· expenditure attributable to the product can be reliably measured.
Development costs are currently charged against income as incurred since the criteria for their recognition as an asset are not met.
(i) Lease payments
Rentals payable under operating leases, which are leases where the lessor retains a significant proportion of the risks and rewards of the underlying asset, are charged in the consolidated statement of comprehensive income on a straight-line basis over the expected lease term.
Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.
(j) Finance income and expense
Finance income comprises interest income on funds invested and changes in the fair value of financial assets at fair value through the consolidated statement of comprehensive income. Interest income is recognised as interest accrues using the effective interest rate method.
Finance expense comprises interest expense on borrowings. All borrowing costs are recognised using the effective interest method.
(k) Income tax
Income tax expense comprises current and deferred tax. Income tax expense is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity or in other comprehensive income.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to, the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.
Deferred income tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements with the following exceptions:
· where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; and
· in respect of taxable temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets and liabilities are measured on an undiscounted basis using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date and which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which differences can be utilised. An asset is not recognised to the extent that the transfer of economic benefits in the future is uncertain.
Deferred income tax assets and liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxation authority and that authority permits the Group to make a single payment.
(l) Property, plant and equipment
Property, plant and equipment assets are recognised initially at cost. After initial recognition, these assets are carried at cost less any accumulated depreciation and any accumulated impairment losses. Cost comprises the aggregate amount paid and the fair value of any other consideration given to acquire the asset and includes costs directly attributable to making the asset capable of operating as intended.
Depreciation is computed by allocating the depreciable amount of an asset on a systematic basis over its useful life and is applied separately to each identifiable component.
The following bases and rates are used to depreciate classes of assets:
Laboratory infrastructure ̶ straight line over remainder of lease period
Fixtures and fittings ̶ straight line over five years
Office equipment ̶ straight line over three years
Plant and machinery ̶ straight line over five years
The carrying values of tangible fixed assets are reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable, and are written down immediately to their recoverable amount. Useful lives and residual values are reviewed annually and where adjustments are required these are made prospectively.
A tangible fixed asset item is derecognised on disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the derecognition of the asset is included in the consolidated statement of comprehensive income in the period of derecognition.
(m) Intangible assets
Intangible assets acquired either as part of a business combination or from contractual or other legal rights are recognised separately from goodwill provided they are separable and their fair value can be measured reliably. This includes the costs associated with acquiring and registering patents in respect of intellectual property rights.
Where intangible assets recognised have finite lives, after initial recognition their carrying value is amortised on a straight-line basis over those lives. The nature of those intangibles recognised and their estimated useful lives are as follows:
Patents ̶ straight line over ten years
(n) Impairment of assets
At each reporting date the Group reviews the carrying value of its plant, equipment and intangible assets to determine whether there is an indication that these assets have suffered an impairment loss. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an assessment of the asset's recoverable amount.
An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying value of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, an appropriate valuation model is used and these calculations are corroborated by valuation multiples or other available fair value indicators. Impairment losses on continuing operations are recognised in the consolidated statement of comprehensive income in those expense categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of comprehensive income unless the asset is carried at a revalued amount, in which case the reversal is treated as a valuation increase. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
The carrying values of plant, equipment and intangible assets as at the reporting date have not been subjected to impairment charges.
(o) Investments in subsidiaries
Investments in subsidiaries are stated in the Company statement of financial position at cost less provision for any impairment.
(p) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost based on latest contractual prices includes all costs incurred in bringing each product to its present location and condition. Net realisable value is based on estimated selling price less any further costs expected to be incurred to disposal. Provision is made for slow-moving or obsolete items.
(q) Financial instruments
Financial assets and financial liabilities are recognised when the Group becomes party to the contractual provisions of the relevant instrument and derecognises when it ceases to be party to such provisions. Such assets and liabilities are classified as current if they are expected to be realised or settled within twelve months after the balance sheet date. Financial assets and liabilities are initially recognised at fair value and subsequently measured at either fair value or amortised cost including directly attributable transaction costs.
The Group has the following categories of financial assets and liabilities:
Loans and receivables
i) Trade and other receivables
Trade receivables, which generally have 30 to 60-day terms, are recognised and carried at the lower of their original invoiced value and recoverable amount. The time value of money is not material.
Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Significant financial difficulties faced by the customer, probability that the customer will enter bankruptcy or financial reorganisation and default in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying value of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the consolidated statement of comprehensive income within administrative expenses.
When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables.
ii) Cash, cash equivalents and short-term investments
Cash and cash equivalents comprise cash at hand and deposits with maturities of three months or less. Short-term investments comprise deposits with maturities of more than three months, but no greater than twelve months.
Financial liabilities at amortised cost
i) Trade and other payables
Trade and other payables are non-interest bearing and are initially recognised at fair value. They are subsequently measured at amortised cost using the effective interest rate method.
ii) Loans
Obligations for loans and borrowings are measured initially at fair value and subsequently interest-bearing loans are measured at fair value.
(r) Share capital
Proceeds on issue of shares are included in shareholders' equity, net of transaction costs. The carrying amount is not re-measured in subsequent years.
(s) Shares held by the Employee Benefit Trust ("EBT")
The EBT is consolidated in the financial statements and the shares are reported as treasury shares in the Group's statements of financial position. Shares are treated as though they had been cancelled when calculating earnings per share until such time that the shares are exercised.
(t) Share-based payments
Equity-settled share-based payment transactions are measured with reference to the fair value at the date of grant, recognised on a straight-line basis over the vesting period, based on the Company's estimate of shares that will eventually vest. Fair value is measured using a suitable option pricing model.
At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management's best estimate of the achievement or otherwise of non-market conditions and the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous reporting date is recognised in the consolidated statement of comprehensive income, with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is recognised if this difference is negative.
Where awards are granted to the employees of the subsidiary company, the fair value of the awards at grant date is recorded in the Company's financial statements as an increase in the value of the investment with a corresponding increase in equity via the share-based payment reserve.
(u) Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Company in an independently administered fund. The amounts charged against profits represent the contributions payable to the scheme in respect of the accounting period.
(v) New accounting standards and interpretations
There were no new or amended IFRS, IAS and IFRIC interpretations which were mandatory for accounting periods ending 31 July 2016 and thereafter that were relevant to the Group.
A number of new standards, amendments to standards and interpretations are effective for annual periods ending 31 July 2017 or thereafter and have not been applied in preparing these consolidated financial statements and those that are relevant to the Group are summarised below. Other than the introduction of IFRS 16, none of these are expected to have a significant effect on the consolidated financial statements of the Group in the period of initial application. The Directors consider the adoption of IFRS 15 will not have a material effect on revenue recognised in earlier periods in view of the nature of existing licensing contracts. Management will, however, keep the situation under review and report any deviation from this position at each reporting period.
The following standards and interpretations have an effective date after the date of these financial statements and are relevant to the Group:
| Effective date | ||
| IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception - Amendments to IFRS 10, IFRS 12 and IAS 28 | 1 January 2016 | |
| IAS 1 Disclosure Initiative - Amendments to IAS 1 | 1 January 2016 | |
| IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38 | 1 January 2016 | |
| IAS 27 Equity Method in Separate Financial Statements - Amendments to IAS 27 |
1 January 2016 | |
| IAS 12 Recognition of Deferred Tax Assets for Unrelieved Losses - Amendments to IAS 12 | 1 January 2017 | |
| IAS 7 Disclosure Initiative - Amendments to IAS 7 | 1 January 2017 | |
| IFRS 15 Revenue from Contracts with Customers | 1 January 2018 | |
| IFRS 9 Financial Instruments (issued in 2013) | 1 January 2018 | |
| IFRS 16 Leases | 1 January 2019 | |
| Annual Improvements to IFRSs 2012 to 2014 Cycle | 1 January 2016 | |
4. Segmental information
Operating segments
At 31 July 2016 the Group operated as one segment, being the provision of high performance nanoparticles manufactured for sale and for research and development purposes. This is the level at which operating results are reviewed by the chief operating decision maker (i.e. the Chief Executive) to make decisions about resources, and for which financial information is available. All revenues have been generated from continuing operations and are from external customers.
| 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Analysis of revenue | ||
| Products sold | 204 | 445 |
| Rendering of services | 114 | 353 |
| Royalties and licences | 156 | 1,231 |
| 474 | 2,029 |
Included within rendering of services is revenue from one material customer amounting to £114,000 (2015: one material customer amounting to £106,000). All revenue from royalties and licences is from one material customer (2015: one material customer).
The Group operates in four main geographic areas, although all are managed in the UK. The Group's revenue per geographical segment based on the customer's location is as follows:
| 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Revenue | ||
| UK | 20 | 130 |
| Europe (excluding UK) | 42 | - |
| Asia | 135 | 395 |
| USA | 277 | 1,504 |
| 474 | 2,029 |
All the Group's assets are held in the UK and all of its capital expenditure arises in the UK.
5. Other operating income
| 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Government grants | 284 | - |
In the prior year income from government grants was not material and was reported within revenue for rendering of services and totalled £129,000.
6. Operating loss
| The Group | 31 July 2016 £'000 |
31 July 2015 £'000 |
| Operating loss is stated after charging/(crediting): | ||
| Depreciation of tangible fixed assets (see note 11) | 991 | 1,106 |
| Amortisation of intangible assets (see note 12) | 298 | 269 |
| Staff costs (see note 7) | 6,801 | 6,242 |
| Foreign exchange losses/(gains) | 4 | (27) |
| Research and development expense* | 5,995 | 5,580 |
| Operating lease rentals (see note 24): | ||
| Land and buildings | 723 | 684 |
| * Included within research and development expense are staff costs totalling £4,590,000 (2015: £4,150,000) also included in note 7. | ||
| Auditor's remuneration | ||
| Audit services: | ||
| - Fees payable to Company auditor for the audit of the Parent and the consolidated accounts | 20 | 17 |
| - Auditing the accounts of subsidiaries pursuant to legislation | 23 | 20 |
| Fees payable to Company auditor for other services: | ||
| - Services in connection with the review of interim results | 8 | - |
| - Services in connection with the Company's move to the Main Market | - | 173 |
| Total auditor's remuneration | 51 | 210 |
7. Staff costs
| 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Wages and salaries | 5,622 | 4,833 |
| Social security costs | 567 | 508 |
| Pension contributions | 342 | 282 |
| Share-based payments | 270 | 619 |
| 6,801 | 6,242 | |
| Directors' remuneration (including benefits in kind) included in the aggregate remuneration above comprised: | ||
| Emoluments for qualifying services | 1,227 | 1,012 |
Directors' emoluments (excluding social security costs and long-term incentives, but including benefits in kind) disclosed above include £349,000 paid to the highest paid Director (2015: £322,000).
Aggregate gains made by Directors during the year following the exercise of share options and jointly owned EBT shares were £nil (2015: £27,000).
Not included in the costs reported above are share awards to be made to Directors under the deferred bonus plan amounting to £166,000. The awards will be recognised in the income statement by way of a share-based payment charge over the deferral period as required by IFRS 2.
The average number of employees during the year (including Directors) was as follows:
| Group | 31 July 2016 Number |
31 July 2015 Number |
| Directors | 9 | 8 |
| Laboratory and administrative staff | 120 | 101 |
| 129 | 109 |
8. Finance income and expense
| Group | 31 July 2016 £'000 |
31 July 2015 £'000 |
| Finance income | ||
| Bank interest receivable | 193 | 119 |
| Finance expense | ||
| Loan interest payable | (12) | (3) |
| 181 | 116 |
Bank interest receivable includes £12,000 (2015: £44,000), which is receivable after the year end.
9. Taxation
The tax credit is made up as follows:
| Group | 31 July 2016 £'000 |
31 July 2015 £'000 |
| Current income tax | ||
| Research and development income tax credit receivable | (1,970) | (1,800) |
| Adjustment in respect of prior years | (30) | (113) |
| Overseas corporation tax | 7 | 7 |
| (1,993) | (1,906) | |
| Deferred tax | ||
| Charge for the year | - | - |
| Total income tax credit | (1,993) | (1,906) |
The adjustments in respect of prior years relate to research and development income tax credits. The research and development income tax for the year ended 31 July 2015 was submitted in March 2016 and the repayment was received in April 2016. The income tax receivable shown in the statement of financial position is the R&D tax credit receivable reported above.
The tax assessed for the year varies from the standard rate of corporation tax as explained below:
| Group | 31 July 2016 £'000 |
31 July 2015 £'000 |
| Loss on ordinary activities before taxation | (12,600) | (10,881) |
| Tax at standard rate of 20% (2015: 20.67%) | (2,520) | (2,249) |
| Effects of: | ||
| Expenses not deductible for tax purposes | 243 | 194 |
| Additional reduction for research and development expenditure | (1,556) | (1,456) |
| Surrender of research and development relief for repayable tax credit | 2,758 | 2,609 |
| Research and development tax credit receivable | (1,970) | (1,800) |
| Share options exercised (CTA 2009 Pt 12 deduction) | - | (155) |
| Overseas corporation tax | 7 | 7 |
| Losses and share-based payment charges carried forward not recognised in deferred tax | 1,075 | 1,001 |
| Adjustment in respect of prior years | (30) | (113) |
| Changes in tax rate/other adjustments | - | 56 |
| Tax credit in income statement | (1,993) | (1,906) |
The Group has accumulated losses available to carry forward against future trading profits of £24.3 million (2015: £19.2 million).
Deferred tax liabilities/(assets) provided/recognised are as follows:
| 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Accelerated capital allowances | 189 | 336 |
| Share-based payments | (189) | (336) |
| Tax losses | - | - |
| - | - |
The Group also has deferred tax assets, measured at a standard rate of 20% (2015: 20%), in respect of share-based payments of £455,000 (2015: £247,000) and tax losses of £4,850,000 (2015: £3,842,000) which have not been recognised as an asset as it is not yet probable that future taxable profits will be available against which the assets can be utilised.
10. Earnings per share
| Group | 31 July 2016 £'000 |
31 July 2015 £'000 |
| Loss for the financial year attributable to equity shareholders | (10,607) | (8,975) |
| Cost of the move to the Main Market | - | 926 |
| Share-based payments | 270 | 619 |
| Loss for the financial year before the cost of the move to the Main Market and share-based payments | (10,337) | (7,430) |
| Weighted average number of shares | ||
| Ordinary shares in issue | 237,077,578 | 221,360,893 |
| Adjusted loss per share before the cost of the move to the Main Market and share-based payments (pence) | (4.36) | (3.36) |
| Basic loss per share (pence) | (4.47) | (4.05) |
Diluted loss per share has not been presented above as the effect of share options issued is anti-dilutive.
11. Property, plant and equipment
| Group | Laboratory infrastructure £'000 |
Office equipment, fixtures and fittings £'000 |
Plant and machinery £'000 |
Total £'000 |
| Cost | ||||
| At 1 August 2014 | 2,501 | 308 | 4,380 | 7,189 |
| Additions | 77 | 36 | 272 | 385 |
| Disposals | - | (114) | - | (114) |
| At 31 July 2015 | 2,578 | 230 | 4,652 | 7,460 |
| Additions | 67 | 26 | 96 | 189 |
| At 31 July 2016 | 2,645 | 256 | 4,748 | 7,649 |
| Depreciation | ||||
| At 1 August 2014 | 1,645 | 229 | 2,532 | 4,406 |
| Provided during the year | 362 | 46 | 698 | 1,106 |
| Eliminated on disposal | - | (114) | - | (114) |
| At 31 July 2015 | 2,007 | 161 | 3,230 | 5,398 |
| Provided during the year | 394 | 47 | 550 | 991 |
| At 31 July 2016 | 2,401 | 208 | 3,780 | 6,389 |
| Net book value | ||||
| At 31 July 2016 | 244 | 48 | 968 | 1,260 |
| At 31 July 2015 | 571 | 69 | 1,422 | 2,062 |
The aggregate original cost of tangible assets now fully depreciated but considered to be still in use is £3,301,000 (2015: £1,570,000).
12. Intangible assets
| Group | Patents £'000 |
| Cost | |
| At 1 August 2014 | 2,270 |
| Additions | 533 |
| At 31 July 2015 | 2,803 |
| Additions | 900 |
| At 31 July 2016 | 3,703 |
| Amortisation | |
| At 1 August 2014 | 713 |
| Provided during the year | 269 |
| At 31 July 2015 | 982 |
| Provided during the year | 298 |
| At 31 July 2016 | 1,280 |
| Net book value | |
| At 31 July 2016 | 2,423 |
| At 31 July 2015 | 1,821 |
Intangible assets are amortised on a straight-line basis over ten years. Amortisation provided during the period is recognised in administrative expenses. The Group does not believe that any of its patents in isolation are material to the business.
The aggregate original cost of intangible assets now fully depreciated but considered to be still in use is £154,000 (2015: £50,000).
13. Investment in subsidiaries
| Company | Shares £'000 |
Loans £'000 |
Loan impairment £'000 |
Total £'000 |
| At 1 August 2014 | 63,235 | 22,484 | (20,286) | 65,433 |
| Increase in respect of share-based payments | - | 619 | - | 619 |
| At 31 July 2015 | 63,235 | 23,103 | (20,286) | 66,052 |
| Increase in respect of share-based payments | - | 270 | - | 270 |
| At 31 July 2016 | 63,235 | 23,373 | (20,286) | 66,322 |
By subsidiary
| Nanoco Tech Limited | 63,235 | - | - | 63,235 |
| Nanoco Life Sciences Limited | - | 20,286 | (20,286) | - |
| Nanoco Technologies Limited | - | 3,087 | - | 3,087 |
| At 31 July 2016 | 63,235 | 23,373 | (20,286) | 66,322 |
Loans to subsidiary undertakings carry no interest and are repayable on demand. Further information in relation to these loans is given in note 26.
| Share of issued ordinary share capital | ||||
| Subsidiary undertakings | Country of incorporation | Principal activity | 31 July 2016 | 31 July 2015 |
| Nanoco Life Sciences Limited | England and Wales | Research and development | 100% | 100% |
| Nanoco Tech Limited | England and Wales | Holding company | 100% | 100% |
| Nanoco Technologies Limited* | England and Wales | Manufacture and development of nanoparticles | 100% | 100% |
| Nanoco US Inc. ** | USA | Management services | 100% | 100% |
With the exception of the two companies footnoted below all other shareholdings are owned by Nanoco Group plc.
* Share capital is owned by Nanoco Tech Limited.
** Nanoco US Inc. is a wholly owned subsidiary of Nanoco Tech Limited. It was formed in July 2013 primarily in order to provide the services of US-located staff to the rest of the Group.
14. Inventories
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| Raw materials, finished goods and consumables | 208 | - | 208 | - |
A total of £85,000 was included in cost of sales with respect to inventory during the year.
15. Trade and other receivables
| . | 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
| Trade receivables | 1,455 | - | 107 | - |
| Prepayments and accrued income | 422 | 12 | 430 | 43 |
| Inter-company short-term loan to subsidiary | - | 42,976 | - | 31,823 |
| Other receivables | 168 | - | 365 | - |
| 2,045 | 42,988 | 902 | 31,866 |
Trade receivables are non-interest bearing and are generally due and paid within 30 to 60 days. The Directors consider that the carrying amount of trade and other receivables approximates to their fair value and that no impairment is required at the reporting date. Therefore there is no provision for impairment at the balance sheet date (2015: same).
Trade receivables are denominated in the following currency:
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| US Dollars | 1,032 | - | 106 | - |
| Euros | 423 | - | - | - |
| Sterling | - | - | 1 | - |
| 1,455 | - | 107 | - |
At 31 July the analysis of trade receivables that were past due but not impaired was as follows:
| Not yet due £'000 |
Due but not impaired £'000 |
Past due but not impaired >90 days £'000 |
Past due but not impaired 120 to 150 days £'000 |
Total £'000 |
||
| 2016 | 1,374 | 30 | 8 | 43 | 1,455 | |
| 2015 | 18 | 89 | - | - | 107 |
16. Cash, cash equivalents and deposits
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| Short-term investments and cash on deposit | 5,000 | 5,000 | 20,000 | 20,000 |
| Cash and cash equivalents | 9,511 | 4,057 | 4,311 | 12 |
| 14,511 | 9,057 | 24,311 | 20,012 |
Under IAS 7, cash held on long-term deposits (being deposits with maturity of greater than three months and no more than twelve months) that cannot readily be converted into cash has been classified as a short-term investment. The maturity on this investment was less than twelve months at the reporting date.
Cash and cash equivalents at 31 July 2016 include deposits with original maturity of three months or less of £5,000,000 (2015: £4,311,000).
An analysis of cash, cash equivalents and deposits by denominated currency is given in note 25.
17. Trade and other payables
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| Current | ||||
| Trade payables | 1,093 | - | 862 | - |
| Other payables | 185 | - | 137 | - |
| Accruals | 1,165 | - | 910 | - |
| 2,443 | - | 1,909 | - | |
| Non-current | ||||
| Long-term loan from subsidiary | - | 450 | - | 450 |
| - | 450 | - | 450 |
The Directors consider that the carrying amount of trade and other payables approximates to their fair value. Interest is not charged on inter-company loans (2015: no interest). The average credit period taken is 45 days (2015: 45 days).
18. Financial liabilities
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| Other loan | ||||
| Current | 32 | - | 63 | - |
| Non-current | - | - | 32 | - |
| 32 | - | 95 | - |
The Directors consider that the carrying amount of financial liabilities approximates to their fair value, insofar as this is an arm's length transaction taken out at a market rate of interest.
The loan is unsecured, bears interest at 2% above base rate, is repayable in quarterly instalments and will be fully repaid in 2017.
19. Deferred revenue
| 31 July 2016 Group £'000 |
31 July 2016 Company £'000 |
31 July 2015 Group £'000 |
31 July 2015 Company £'000 |
|
| Current | 531 | - | - | - |
| Non-current | 648 | - | - | - |
| 1,179 | - | - | - |
Deferred revenue arises under IFRS where upfront licence fees are accounted for on a straight-line basis over the initial term of the contract or where performance criteria have not been satisfied in the accounting period.
20. Issued equity capital
| Group | Number | Share capital £'000 |
Share premium £'000 |
Reverse acquisition reserve £'000 |
Total £'000 |
| Allotted, called up and fully paid ordinary shares of 10p | |||||
| At 31 July 2014 | 216,530,436 | 21,653 | 94,006 | (77,868) | 37,791 |
| Shares issued on exercise of options | 1,499,523 | 150 | 676 | - | 826 |
| Shares issued in placing | 19,047,619 | 1,905 | 18,095 | - | 20,000 |
| Expenses of placing | - | - | (560) | - | (560) |
| At 31 July 2015 and 31 July 2016 | 237,077,578 | 23,708 | 112,217 | (77,868) | 58,057 |
The Company raised gross proceeds of £20,000,000 from a placing on 1 May 2015 through the issue of 19,047,619 new ordinary shares at an issue price of 105 pence per share. Issue costs associated with the placing totalled £560,000.
The balances classified as share capital and share premium include the total net proceeds (nominal value and share premium respectively) on issue of the Company's equity share capital, comprising ordinary shares.
The retained loss and other equity balances recognised in the Group financial statements reflect the consolidated retained loss and other equity balances of Nanoco Tech Limited immediately before the business combination which was reported in the year ended 31 July 2009. The consolidated results for the period from 1 August 2008 to the date of the acquisition by the Company are those of Nanoco Tech Limited. However, the equity structure appearing in the Group financial statements reflects the equity structure of the legal parent, including the equity instruments issued under the share-for-share exchange to effect the transaction. The effect of using the equity structure of the legal parent gives rise to an adjustment to the Group's issued equity capital in the form of a reverse acquisition reserve.
Shares issued on exercise of options
No options were exercised this year. Last year the Company issued 1,499,523 shares which had an average exercise price of 55.1 pence.
| Company | Number | Share capital £'000 |
Share premium £'000 |
Total £'000 |
| Allotted, called up and fully paid ordinary shares of 10p | ||||
| At 31 July 2014 | 216,530,436 | 21,653 | 94,006 | 115,659 |
| Shares issued on exercise of options | 1,499,523 | 150 | 676 | 826 |
| Shares issued in placing | 19,047,619 | 1,905 | 18,095 | 20,000 |
| Expenses of placing | - | - | (560) | (560) |
| At 31 July 2015 and 31 July 2016 | 237,077,578 | 23,708 | 112,217 | 135,925 |
21. Share-based payment reserve
| Group and Company | £'000 |
| At 31 July 2014 | 1,826 |
| Share-based payments | 619 |
| At 31 July 2015 | 2,445 |
| Share-based payments | 270 |
| At 31 July 2016 | 2,715 |
The share-based payment reserve accumulates the corresponding credit entry in respect of share-based payment charges. Movements in the reserve are disclosed in the consolidated statement of changes in equity.
A charge of £270,000 has been recognised in the statement of comprehensive income for the year (2015: £619,000).
Share option schemes
The Group operates the following share option schemes, all of which are operated as Enterprise Management Incentive ("EMI") schemes insofar as the share options being issued meet the EMI criteria as defined by HM Revenue & Customs. Share options issued that do not meet EMI criteria are issued as unapproved share options, but are subject to the same exercise performance conditions.
Nanoco Group plc Long Term Incentive Plan ("LTIP")
Grant in November 2011
Share options were granted to staff and Executive Directors on 25 November 2011. The options granted to Executive Directors were subject to commercial targets being achieved. The exercise price was set at 50 pence, being the average closing share price on the day preceding the issue of the share options. The fair value benefit is measured using a binomial model, taking into account the terms and conditions upon which the share options were issued. Share options issued to staff vest over a three-year period from the date of grant but are not subject to performance conditions.
Grant in October 2012
Share options were granted to staff and Executive Directors on 22 October 2012. The options granted to Executive Directors were subject to commercial targets being achieved. The exercise price was set at 57 pence, being the average closing share price on the day preceding the issue of the share options. The fair value benefit is measured using a binomial model, taking into account the terms and conditions upon which the share options were issued. Share options issued to staff vest over a three-year period from the date of grant but are not subject to performance conditions.
Grant in May 2014
Share options were granted to certain staff on 23 May 2014. The exercise price was set at 89 pence, being the average closing share price on the day preceding the issue of the share options. The fair value benefit is measured using a binomial model, taking into account the terms and conditions upon which the share options were issued. The options vest at the end of three years from the date of grant and are exercisable until the tenth anniversary of the award. The awards are not subject to performance conditions. Exercise of the award is subject to the employee remaining a full-time member of staff at the point of exercise. No options were granted to Executive Directors.
Grant in October 2014
Share options were granted to an Executive Director on 14 October 2014. The exercise price was set at 10 pence, being the nominal value of the share. The fair value benefit is measured using a binomial model, taking into account the terms and conditions upon which the share options were issued. The options vest at the end of three years from the date of grant and are exercisable until the tenth anniversary of the award. The awards are subject to performance conditions which were amended during the year so as to be in line with the 2015 LTIP scheme. As a result of the modification, the fair value of the award was reduced. However, in accordance with IFRS 2 no change was made to the charge in the financial statements. Exercise of the award is subject to the employee remaining a full-time member of staff at the point of exercise.
Nanoco Group plc 2015 Long Term Incentive Plan ("LTIP")
Grant in December 2015
Following approval of the new scheme at the 2015 AGM, share options were granted to all four Executive Directors at nil cost. The fair value benefit is measured using a stochastic model, taking into account the terms and conditions upon which the share options were issued. The options vest at the end of the three-year performance period subject to meeting the performance criteria and are exercisable after a two-year holding period until the tenth anniversary of the award.
Grant in April 2016
Share options were granted to an employee on 12 April 2016 at nil cost. The fair value benefit is measured using a stochastic model, taking into account the terms and conditions upon which the share options were issued. The options vest at the end of a three-year performance period subject to meeting performance criteria and are exercisable until the tenth anniversary of the award.
Other awards
Share options are awarded to management and key staff as a mechanism for attracting and retaining key members of staff. The options are issued at either market price on the day preceding grant, or in the event of abnormal price movements, at an average market price for the week preceding grant date. On 14 October 2015, unapproved options were granted to a member of staff with an exercise price of 56.5 pence. These options vest over a three-year period from the date of grant with performance conditions and are exercisable until the tenth anniversary of the award. Exercise of the award is subject to the employee remaining a full-time member of staff at the point of exercise. The fair value benefit is measured using a binomial valuation model, taking into account the terms and conditions upon which the share options were issued.
Shares held in the Employee Benefit Trust ("EBT")
The Group operates a jointly owned EBT share scheme for senior management under which the trustee of the Group-sponsored EBT acquired shares in the Company jointly with a number of employees. The shares were acquired pursuant to certain conditions set out in jointly owned agreements ("JOA"). Subject to meeting the performance criteria conditions set out in the JOA, the employees are able to exercise an option to acquire the trustee's interests in the jointly owned EBT shares at the option price. The jointly owned EBT shares issued on 1 September 2006 had met the option conditions on 1 August 2010 and the option to gain sole ownership was exercised by the option holder on 2 August 2016.
The fair value benefit is measured using a binomial valuation model, taking into account the terms and conditions upon which the jointly owned shares were issued.
The following tables illustrate the number and weighted average exercise prices of, and movements in, share options and jointly owned EBT shares during the year.
| Group and Company | Share options Number |
EBT Number |
2016 total Number |
2015 total Number |
| Outstanding at 1 August | 12,004,233 | 530,089 | 12,534,322 | 14,224,256 |
| Granted during the year | 1,695,368 | - | 1,695,368 | 380,000 |
| Exercised during the year | - | - | - | (1,819,934) |
| Forfeited/cancelled | (221,668) | - | (221,668) | (250,000) |
| Outstanding at 31 July | 13,477,933 | 530,089 | 14,008,022 | 12,534,322 |
| Exercisable at 31 July | 10,998,565 | 530,089 | 11,528,654 | 9,251,989 |
Weighted average exercise price of options
| Group and Company | 2016 Pence |
2015 Pence |
| Outstanding at 1 August | 51.9 | 54.4 |
| Granted during the year | 5.0 | 10.0 |
| Exercised during the year | - | 61.7 |
| Forfeited/cancelled | 61.7 | 57.0 |
| Outstanding at 31 July | 48.9 | 51.9 |
The weighted average exercise price of options granted during the year to 31 July 2016 was 5 pence (2015: 10 pence). The range of exercise prices for options and jointly owned EBT shares outstanding at the end of the year was nil-110 pence (2015: nil-146 pence).
For the share options outstanding as at 31 July 2016, the weighted average remaining contractual life is 6.1 years (2015: 6.8 years).
No share options were exercised during the year. The weighted average share price at the date of exercise for those share options exercised during the year to 31 July 2015 was 109 pence.
The following table lists the inputs to the models used for the years ended 31 July 2016 and 31 July 2015.
| Performance-linked grants | Non-performance-linked grants | ||||
| Group and Company | 2016 | 2015 | 2016 | 2015 | |
| Expected volatility | 54% | 55% | n/a | n/a | |
| Risk-free interest rate | 0.85% | 1.78% | n/a | n/a | |
| Expected life of options (years average) | 3 | 3 | n/a | n/a | |
| Weighted average exercise price | 5.0p | 10.0p | n/a | n/a | |
| Weighted average share price at date of grant | 56.5p | 147.0p | n/a | n/a | |
| Model used | Stochastic | Binomial | n/a | n/a | |
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome.
Certain awards are subject to a holding period after vesting. A Finnerty model has been used to determine a discount for the lack of marketability of the shares.
22. Merger reserve and capital redemption reserve
Merger reserve
| Group | £'000 |
| At 31 July 2014, 31 July 2015 and 31 July 2016 | (1,242) |
The merger reserve arises under section 612 of the Companies Act 2006 on the shares issued by Nanoco Tech Limited to acquire Nanoco Technologies Limited as part of a simple Group reorganisation on 27 June 2007.
Capital redemption reserve
| Company | £'000 |
| At 31 July 2014, 31 July 2015 and 31 July 2016 | 4,402 |
The capital redemption reserve arises from the off-market purchase of deferred shares on 4 May 2005 and their subsequent cancellation.
23. Movement in revenue reserve and treasury shares
| The Group | Retained deficit £'000 |
Treasury shares £'000 |
Total revenue reserve £'000 |
| At 31 July 2014 | (21,088) | (394) | (21,482) |
| Issue of shares by the EBT | - | 297 | 297 |
| Loss for the year | (8,975) | - | (8,975) |
| At 31 July 2015 | (30,063) | (97) | (30,160) |
| Loss for the year | (10,607) | - | (10,607) |
| At 31 July 2016 | (40,670) | (97) | (40,767) |
No jointly owned EBT shares were granted during the year (2015: nil).
During the year, no jointly owned EBT shares were exercised (2015: 320,411) for an aggregate consideration of £nil (2015: £297,000).
Retained deficit represents the cumulative loss attributable to the equity holders of the Parent Company.
Treasury shares include the value of Nanoco Group plc shares issued as jointly owned equity shares and held by the Nanoco Group-sponsored EBT jointly with a number of the Group's employees. At 31 July 2016 530,089 shares in the Company were held by the EBT (2015: 530,089). In addition there are 12,222 (2015: 12,222) treasury shares not held by the EBT.
| Company | Retained deficit £'000 |
Treasury shares £'000 |
Total revenue reserve £'000 |
| At 31 July 2014 | (25,277) | (394) | (25,671) |
| Issue of shares by the EBT | - | 297 | 297 |
| Profit for the year | 82 | - | 82 |
| At 31 July 2015 | (25,195) | (97) | (25,292) |
| Profit for the year | 167 | - | 167 |
| At 31 July 2016 | (25,028) | (97) | (25,125) |
24. Commitments
Operating lease commitments
The Group leases premises under non-cancellable operating lease agreements. The future aggregate minimum lease and service charge payments under non-cancellable operating leases are as follows:
| 31 July 2016 Group £'000 |
31 July 2015 Group £'000 |
|
| Land and buildings: | ||
| Not later than one year | 594 | 723 |
| After one year but not more than five years | 1,551 | 1,752 |
| After five years | 226 | 614 |
| 2,371 | 3,089 |
25. Financial risk management
Overview
This note presents information about the Group's exposure to various kinds of financial risks, the Group's objectives, policies and processes for measuring and managing risk, and the Group's management of capital.
The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework. The Executive Directors report regularly to the Board on Group risk management.
Capital risk management
The Company reviews its forecast capital requirements on a half-yearly basis to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders.
The capital structure of the Group consists of equity attributable to equity holders of the Parent, comprising issued share capital, reserves and retained earnings as disclosed in notes 20 to 23 and in the Group statement of changes in equity. At 31 July 2016 total equity was £18,763,000 (2015: £29,100,000).
The Company is not subject to externally imposed capital requirements.
Liquidity risk
The Group's approach to managing liquidity is to ensure that, as far as possible, it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation.
The Group manages all of its external bank relationships centrally in accordance with defined treasury policies. The policies include the minimum acceptable credit rating of relationship banks and financial transaction authority limits. Any material change to the Group's principal banking facility requires Board approval. The Group seeks to mitigate the risk of bank failure by ensuring that it maintains relationships with a number of investment-grade banks.
At the reporting date the Group was cash positive with no outstanding borrowings, apart from a long-term loan which is being repaid on a quarterly basis in line with the terms of the loan agreement.
Categorisation of financial instruments
| Financial assets/(liabilities) | Loans and receivables £'000 |
Financial liabilities at amortised cost £'000 |
Group £'000 |
Loans and receivables Company £'000 |
| 31 July 2016 | ||||
| Trade receivables | 1,455 | - | 1,455 | - |
| Inter-company short-term loan to subsidiary | - | - | - | 42,976 |
| Short-term investments and cash on deposit | 5,000 | - | 5,000 | 5,000 |
| Trade and other payables | - | (2,443) | (2,443) | - |
| Inter-company long-term loan from subsidiary | - | - | - | (450) |
| Financial liabilities | - | (32) | (32) | - |
| 6,455 | (2,475) | 3,980 | 47,526 |
| Financial assets/(liabilities) | Loans and receivables £'000 |
Financial liabilities at amortised cost £'000 |
Group £'000 |
Loans and receivables Company £'000 |
| 31 July 2015 | ||||
| Trade receivables | 107 | - | 107 | - |
| Inter-company short-term loan to subsidiary | - | - | - | 31,823 |
| Short-term investments and cash on deposit | 20,000 | - | 20,000 | 20,000 |
| Trade and other payables | - | (1,909) | (1,909) | - |
| Inter-company long-term loan from subsidiary | - | - | - | (450) |
| Financial liabilities | - | (95) | (95) | - |
| 20,107 | (2,004) | 18,103 | 51,373 |
The values disclosed in the above table are carrying values. The Board considers that the carrying amount of financial assets and liabilities approximates to their fair value.
The main risks arising from the Group's financial instruments are credit risk and foreign currency risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below.
Other loans (see note 18) are subject to interest at base rate plus 2%; however, as the Group's cash deposits, which attract interest at rates set for the period of the respective deposit, are of a greater amount, any increase in base rate and thus interest payable is more than offset by higher interest income.
Credit risk
The Group's principal financial assets are cash, cash equivalents and deposits. The Group seeks to limit the level of credit risk on the cash balances by only depositing surplus liquid funds with multiple counterparty banks that have investment-grade credit ratings.
The Group trades only with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts is not significant. The Group's maximum exposure is the carrying amount as disclosed in note 15, which was neither past due nor impaired. All trade receivables are ultimately overseen by the Chief Financial Officer and are managed on a day-to-day basis by the UK credit control team. Credit limits are set as deemed appropriate for the customer.
The maximum exposure to credit risk in relation to cash, cash equivalents and deposits is the carrying value at the balance sheet date.
Foreign currency risk
The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the respective functional currency of the Company. These are primarily US Dollars ("USD") and Euros. Transactions outside of these currencies are limited.
Almost all of the Company's revenue is denominated in USD. The Group purchases some raw materials, certain services and some assets in USD which partly offsets its USD revenue, thereby reducing net foreign exchange exposure.
The Group may use forward exchange contracts as an economic hedge against currency risk, where cash flow can be judged with reasonable certainty. Foreign exchange swaps and options may be used to hedge foreign currency receipts in the event that the timing of the receipt is less certain. There were no open forward contracts as at 31 July 2016 or at 31 July 2015.
The split of Group assets between Sterling and other currencies at the year end is analysed as follows:
| 31 July 2016 | 31 July 2015 | ||||||||
| Group | GBP £'000 |
EUR £'000 |
USD £'000 |
Total £'000 |
GBP £'000 |
USD £'000 |
Total £'000 |
||
| Cash, cash equivalents and deposits | 14,477 | 5 | 29 | 14,511 | 24,271 | 40 | 24,311 | ||
| Trade receivables | - | 423 | 1,032 | 1,455 | 1 | 106 | 107 | ||
| Trade payables | (546) | (49) | (498) | (1,093) | (767) | (95) | (862) | ||
| 13,931 | 379 | 563 | 14,873 | 23,505 | 51 | 23,556 | |||
Sensitivity analysis to movement in exchange rates
The following table demonstrates the sensitivity to a reasonably possible change in the Sterling rate against other currencies used within the business, with all other variables held constant, of the Group's loss before tax (due to foreign exchange translation of monetary assets and liabilities) and the Group's equity.
| Increase/(decrease) | Impact on loss before tax and Group equity 2016 £'000 |
Impact on loss before tax and Group equity 2015 £'000 |
| 10% | (83) | (4) |
| 5% | (39) | (2) |
| (5)% | 35 | 3 |
| (10)% | 68 | 6 |
Interest rate risk
As the Group has no significant borrowings the risk is limited to the reduction of interest received on cash surpluses held at bank which receive a floating rate of interest. The principal impact to the Group is to interest-bearing cash and cash equivalent balances held, which are as set out below:
| 31 July 2016 | 31 July 2015 | |||||||
| Group | Fixed rate £'000 |
Floating rate £'000 |
Total £'000 |
Fixed rate £'000 |
Floating rate £'000 |
Total £'000 |
||
| Cash, cash equivalents and deposits | 5,000 | 9,511 | 14,511 | 20,000 | 4,311 | 24,311 | ||
| Company | ||||||||
| Cash, cash equivalents and deposits | 5,000 | 4,057 | 9,057 | 20,000 | 12 | 20,012 | ||
The exposure to interest rate movements is immaterial.
Maturity profile
Set out below is the maturity profile of the Group's financial liabilities at 31 July 2016 based on contractual undiscounted payments, including contractual interest.
| 2016 | Less than one year £'000 |
One to five years £'000 |
Greater than five years £'000 |
Total £'000 |
| Financial liabilities | ||||
| Trade and other payables | 2,443 | - | - | 2,443 |
| Other loans (including contractual interest) | 32 | - | - | 32 |
| 2,475 | - | - | 2,475 |
| 2015 | Less than one year £'000 |
One to five years £'000 |
Greater than five years £'000 |
Total £'000 |
| Financial liabilities | ||||
| Trade and other payables | 1,909 | - | - | 1,909 |
| Other loans (including contractual interest) | 65 | 33 | - | 98 |
| 1,974 | 33 | - | 2,007 |
Trade and other payables are due within three months.
The Directors consider that the carrying amount of the financial liabilities approximates to their fair value.
As all financial assets are expected to mature within the next twelve months, an aged analysis of financial assets has not been presented.
The Company's financial liability, a long-term loan from a subsidiary undertaking, is due after more than five years.
26. Related party transactions
The Group
There were no sales to, purchases from or, at the year end, balances with any related party.
The Company
The following table summarises inter-company balances at the year end between Nanoco Group plc and subsidiary entities:
| Notes | 31 July 2016 £'000 |
31 July 2015 £'000 |
|
| Long-term loans owed to Nanoco Group plc by | |||
| Nanoco Life Sciences Limited | 20,286 | 20,286 | |
| Nanoco Technologies Limited* | 3,087 | 2,817 | |
| 13 | 23,373 | 23,103 | |
| Less provision against debt owed by Nanoco Life Sciences Limited | 13 | (20,286) | (20,286) |
| 3,087 | 2,817 | ||
| Short-term loan owed to Nanoco Group plc by | |||
| Nanoco Technologies Limited** | 15 | 42,976 | 31,823 |
| Long-term loan owed by Nanoco Group plc to | |||
| Nanoco Tech Limited | 17 | (450) | (450) |
* The movement in the long-term loan due from Nanoco Technologies Limited relates to the recharge in respect of the expense for share-based payments for staff working for Nanoco Technologies Limited and is included in investments.
** The movement in the short-term loan due from Nanoco Technologies Limited relates to transfers of cash balances between the entities for the purposes of investing short-term funds and the funding of trading losses.
There are no formal terms of repayment in place for these loans and it has been confirmed by the Directors that the long-term loans will not be recalled within the next twelve months.
None of the loans are interest bearing.
27. Compensation of key management personnel (including Directors)
| 2016 £'000 |
2015 £'000 |
|
| Short-term employee benefits | 1,370 | 1,228 |
| Pension costs | 60 | 98 |
| Benefits in kind | - | 6 |
| Share-based payments | 190 | 405 |
| 1,620 | 1,737 |
The key management team comprises the Directors and two members of staff (2015: one) who are not Directors of the Company. The staff members of the team are the Supply Chain and Compliance director and the newly appointed Applications Development director.
28. Contingent liabilities
The Directors consider there are no contingent liabilities at the date of these financial statements (2015: £nil).
29. Post balance sheet events
On 4 August 2016 a former Director exercised options over 1,000,000 shares with an aggregate exercise price of £535,000.
This information is provided by RNS
The company news service from the London Stock Exchange
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