Description

Nanoco is an overlooked small-cap UK stock with a market cap of £60m, with a strong case of patent infringement against Samsung and a conservative payout of ~£100-150m net proceeds to equity holders (£165-240m high case).

Company Overview

Nanoco Group specialises in the design and manufacturer of quantum dots for vibrant screens, in particular cadmium-free (heavy metal free) quantum dots. Quantum dots (“QDs”) are nanocrystals that enhance brightness and colour on LCD screens. The company holds a total of ~770 patents with applications in a variety of industries, including electronics, displays, lighting, and bio-imaging.

The company was founded in 2001 and with production facilities in Manchester (UK) and is listed on the London Stock Exchange.

The company currently has a market cap of £60m and £4.5m of interest-free debt (issued at a discount, maturing 2024), with £3.8m of balance sheet cash.

Background to Litigation

Nanoco has been a pioneer in the QD space and worked alongside Samsung for several years, going all the way back to 2007. Nanoco was the first player with the ability to manufacture QDs on a commercial scale, and introduced Samsung to QDs and the ability to scale up production of the materials.

In 2012-2013, Nanoco signed a deal with Samsung to license Nanoco’s IP to manufacture large quantities of QDs to supply Samsung. However, Samsung abruptly ended the collaboration and began to manufacture QD TVs directly with no licensing or commercial agreements offered to Nanoco, using what Nanoco alleges is their technology.

On Feb 2020, Nanoco filed a patent infringement lawsuit against Samsung in the Eastern District Court of Texas – which is a known patent holder friendly jurisdiction. The lawsuit accuses Samsung of breaching five patents relating to Nanoco’s “unique synthesis and resin capabilities for quantum dots”, alleging that Samsung wilfully infringed on the patents. Nanoco is seeking an injunction from further infringement acts and significant monetary damages. The company has engaged leading IP law firm Mintz to represent their case.

The list of Samsung products that Nanoco alleges to have been based on its technology includes the Q900 QLED Smart 8K UHD TV, the Q60R QLED 4K UHD TV, the Q70R QLED 4K UHD TV and the Q60T QLED 4K HDR TV.

Samsung has a long history of patent infringements, with a few examples being Acorn Technologies ($25m award for infringing 4 semiconductor patents), Solas OLED ($63m award for infringing 2 patents for OLED displays), and of course Apple ($539m award for copying smartphone features).

Samsung has had a very weak defence in response to the infringed patents, essentially claiming that they were able to figure out on their own how to produce the cadmium-free QDs on a commercial scale through reading research papers and textbooks. In the expert interviews that have been released over the past year,  Samsung has been unable to provide a rational explanation of how they were able to come up with the technology themselves. (see depositions of Dr. Moungie Bawendi, Dr Brandi Corsair, and Mark Green which are available online) 

Nanoco has secured litigation funding from a large (undisclosed) US litigation funding specialist with extensive experience in financing IP litigation matters – removing Nanoco’s cash flow risk from the lawsuit. Litigation funders conduct extensive due diligence ahead of signing an agreement to fund a case, which provides indication that Nanoco has a strong chance to win the case against Samsung.

Case Details and Expected Timeline

Nanoco has five patents and 47 claims across those patents against Samsung. To win the lawsuit, Nanoco only needs 1 of the claims to have been infringed. 

On Mar-21 there was a “Markman” hearing where the court was asked to interpret the meanings of various words or terms used in the patents that Nanoco alleges Samsung has infringed. In May-20 the Court issued its final report of the Markman hearing, and rejected 4 of 5 constructions proposed by Samsung and rejecting one of the construction proposed by Nanoco – a very positive result for the company!

The case is currently being reviewed by the PTAB (Patent Trial and Appeal Board), who has one question to answer – are the patents and claims in them valid – and if so, they will be taken into the court process to review whether Samsung infringed them. Nanoco needs to win both the PTAB and the trial itself for at least one of the claims to have a successful outcome.

Samsung had applied to the PTAB for an Inter Parties Reviews (IPRs) of the five disputed patents. IPRs are a standard procedure in IP litigations and design the validity of the patents. The evidential burden for an IPR to be passed in relatively low and Samsung merely needs to claim that there is a reasonable likelihood that they would prevail with respect to 1 of the claims challenged in the petition. If this occurs, all the claims will then be subject to the IPR process. The IPR process is expected to take up to 12 months with a PTAB decision is expected in May 2022 with the trial likely to commence in 2H 2022.

Although the IPR process has delayed the timeline by ~1 year, it is beneficial to Nanoco for the below reasons:

• The IPRs will settle the majority of issues of patent validity and hence these matters will not have to be addressed in Court which will allow Nanoco to focus on the issues of infringement and damages

• Nanoco has more claims in this suit than could be argued in a trial. By going to trial after the IPRs, Nanoco will be able to bring to Court those claims already confirmed as valid by the PTAB

• With the passage of time, more infringing units of Samsung product will be sold, thereby increasing the baseline historical damages that result from a favourable trial verdict

Nanoco management remains very positive on the Samsung case and over the past two years have continually reiterated their confidence of a successful outcome.

Maintaining Liquidity

The company currently has a liquidity runway into 2023 with litigation proceeds fully funded. 

Nanoco continues to operate as a going concern and has put significant resources towards developing new nanomaterial revenue opportunities. The company retains the ability to deliver nanomaterials in commercial volumes, with their facility in Runcorn able to scale up production of nanomaterials worth £100m per annum. The company recently announced an agreement with ST Micro for the production of nanomaterials to be used in infra-red sensors and their next generation of organic LED quantum dots (OLED-QD) are currently being tested by Chinese and South Korean OEMs, with the potential for new contracts going into 2022. However, the key to the company’s transformative valuation remains the Samsung patent infringement lawsuit.

To fund organic growth opportunities for the company and to strengthen liquidity into 2023, the company issued £4.5m unsecured loan notes in Jul-21 (no interest paid, instead notes issued at a 70% discount resulting in £3.15m proceeds to Nanoco) backed by two of the major shareholders, Lombard Odier and Richard Griffiths who collectively own >35% of the company. Nanoco can redeem the facility at any time prior to their maturity at 80% of nominal value in Yr1; 90% in Yr2, and 100% in Yr3. If the litigation is successful, the loan notes are entitled to a success bonus of 105% of the nominal value of the notes.

While the majority of Nanoco’s patents are still in early development stage, since 2018 Nanoco has grown from having one customer and one material development programme to currently five customers and eight different materials. Potential applications include facial recognition, mobile phone augmented reality, machine vision, and autonomous vehicles machine vision and anti-collision. The company is targeting organic cash self-sufficiency (via commercial contracts) by 2022.

Estimated Damages

The company has not disclosed damages claim figures, but management had previously indicated that damages sought may be calculated on the number of Samsung TVs sold.  Samsung is estimated to have sold ~14m TVs in the US by the end of 2021 using Nanoco’s technology. The US market is Samsung’s largest market, accounting for ~1/3 of global sales. The Samsung TVs with quantum dots had significantly higher quality picture than its non QD offering, with QD TVs averaging $2,200-2,500 compared to a max price of $1,000 for non-QD TVs. Based on the uplift in price between QD and non-QD TV displays and factoring in the royalty Nanoco would have received, analysts have estimated damages/lost revenue to be $14-20 per applicable TV sold by Samsung – equating to ~$200-280m of lost revenue.

This amount is considered fairly conservative and excludes

• Any royalties that may be awarded to Nanoco for future TV sales

• Damages from non-US TV sales

• A multiplier (1.5-3x) applied to the damages should the infringement prove to be wilful

As per management guidance of the company retaining ~80% of larger rewards (post litigation funding and fees), this would result in $160-224m of proceeds to Nanoco, or ~£110-160m net equity proceeds (after paying down loan notes and loan notes bonus) vs. a current £60m market cap. Management has maintained that even in a conservative award scenario, the proceeds would be “multiples of current valuation”.

If a multiplier of 1.5x (standard multiplier for wilful infringement awards by Eastern District Court of Texas) is applied to the damages as a result of wilful infringement by Samsung, the gross award to Nanoco would range from ~$300-420m, resulting in ~£165-240m net proceeds to Samsung.

Catalyst

Announcement of PTAB results by May 2022, pressuring Samsung into a settlement with Nanoco. Alternatively awaiting a positive outcome of the trial in 2H 2022.