I wouldn’t bet the farm on any company that’s yet to make a profit, but there’s a small place in my portfolio for promising early-stage growth propositions such as Nanoco Group (LSE: NANO). The firm describes itself as a “world leader” in the development and manufacture of cadmium-free quantum dots and other specific nanomaterials.
Nano-materials are very small with dimensions typically in the range 1 – 100 nanometres, and used for optical and electrical applications. Quantum dots, meanwhile, are a subclass of nano-material with size-dependent optical and electronic properties. Nanoco makes them for use in displays, lighting and biological imaging because they can be tuned to emit light at different wavelengths across the visible and infrared spectrum.
A long haul in research and development
The company has been around since 2001, suggesting that research and development activity has also been going on a long time. But the fruit of its labour is “a world-class, patent-protected IP portfolio generated both by its own innovation engine, as well as through acquisition.” It also has non-exclusive manufacturing and marketing licensing agreements in the area of display products with The Dow Chemical Company, Merck KGaA of Germany and Wah Hong Industrial Corporation of Taiwan.
Revenues capable of generating profits remain elusive, although today’s full-year results show some progress with the figures. Revenue more than doubled to £3.5m compared to the year before, and billings increased to £6.5m, compared to £1.1m the prior year. There was still a loss after tax of £6m in the period, albeit down from more than £9m last year. The directors said that £1.5m was saved on costs and they have contingency plans to reduce costs further and save cash if there are further delays to commercial revenue streams. Right now, they think commercial revenues will crank up in the first half of 2020.
No-one knows if sufficient cash from operations will roll in before the money in the bank runs out. The company raised a net £7.9m from the stock market in November 2017 and said its cash position stands close to £10m, which it thinks will last until operational cash inflows pick up in 2020. If the income is not as high as expected, or if more delays materialise, I think we should expect another fund-raising event down the road.
On the cusp of commercialisation?
Yet, I find it reassuring that other stakeholders have some skin in the game. In the area of nano-materials for the electronics industry, an undisclosed US company bunged Nanoco £2.6m in milestone payments and fees relating to material development and supply agreements. The US company also made an advance payment of £2.9m, discounted against future product sales so that Nanoco can develop new manufacturing facilities in Runcorn.
Chairman Dr Christopher Richards said in the report said that “some potentially very attractive” commercial opportunities have emerged in the short term. He said the firm is “actively engaged in potentially transformative technological and commercial activities.”
Although the long-term outlook appears to be positive, the directors are preparing for the possibility of delays in the commercialising process, which sounds like a pragmatic tactic. The share price has been weak, but I think Nanoco is one to keep a close eye on because it could be on the cusp of a commercial breakthrough. We’ll find out more over the next year or so.