Nanoco Regulatory News (NANO)

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NANOCO GROUP PLC

("Nanoco" or "the Company")

Preliminary results for the year ended 31 July 2013

Nanoco Group plc (AIM: 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 2013.

Highlights

· Worldwide licensing agreement signed in January 2013 with The Dow Chemical Company ("Dow") for exclusive rights to manufacture and market Nanoco cadmium-free quantum dots for the display industry

· Follow-on development agreement signed with Osram in LED general lighting

· Follow-on development agreement signed with Tokyo Electron in solar power

· Encouraging progress from a joint research programme with University College London on the use of Nanoco cadmium-free quantum dots in cancer imaging

· Production scale-up continued with doubling of Semi-Tech capacity at Runcorn and Dow to build manufacturing capacity in Asia

· Cash, cash equivalents, deposits and short term investments of £9.94 million at the period end (31 July 2012: £15.47 million)

Commenting on the results, Anthony Clinch, Nanoco's Chairman, said:

"Our partnership with Dow for the mass manufacture of Nanoco quantum dots to supply the display market is proceeding well and continues to be a major focus for the business. Additionally, the Company's development agreements with Osram and Tokyo Electron are progressing well.

"We look forward to building on a year of solid progress in the commercialisation of our technology and view the future with confidence."

For further information please contact:

Notes for editors:

About Nanoco Group plc

Nanoco is a world leader in the development and production of cadmium-free quantum dots for use in multiple applications including LCD displays, lighting and solar cells. In the display market, it has an exclusive manufacturing and marketing licensing agreement with The Dow Chemical Company.

Nanoco was founded in 2001 and is headquartered in Manchester, UK. It has production facilities in Runcorn, UK, and business development offices in the USA, Japan, Korea and Taiwan. Its technology is protected worldwide by a large and growing patent estate.

Nanoco began trading on the AIM market of the London Stock Exchange in May 2009 under the ticker symbol NANO. For further information please visit: www.nanocogroup.com.

Chairman's and Chief Executive Officer's Joint Review

Overview

The year to 31 July 2013 was another exciting period in the development of Nanoco. It was a period during which the Company made major progress in the commercialisation of its cadmium-free quantum dot ("CFQD™") technology. This progress was evident across all aspects of the business but particularly in the initial three key applications of our technology - backlighting of LCD displays, LED general lighting and solar power.

Our manufacturing strategy evolved significantly during the year. In a major strategic and commercial development, we signed an exclusive worldwide licensing agreement with The Dow Chemical Company ("Dow") for the manufacture, sale and marketing of Nanoco quantum dots for use in electronic displays. This agreement, which came in response to the very substantial quantities of quantum dots that are expected to be needed by the LCD display industry, represents a major endorsement of Nanoco's technology, its scalability and commercial potential in LCD displays. Dow has advised Nanoco that it remains confident that commercial production of Nanoco quantum dots will commence during the first half of 2014.

Whilst we have chosen the licensing route to deliver CFQD™s on the scale and timelines required by the display industry we have also continued to develop our own production facilities at Runcorn, Cheshire, to meet demand for larger quantities of test materials from customers and potential customers. We have recently increased manufacturing capacity at Runcorn and retain the flexibility to manufacture quantum dots ourselves.

Our commercial contracts in LCD displays, LED general lighting and solar power progressed well during the year. In October 2012 we signed a follow-on joint development agreement with Osram, one of the world's largest lighting companies, and in November we signed a further agreement with Tokyo Electron for the on-going development of a printable, nanomaterial-based solar film.

We continued in discussions throughout the year with multiple potential customers in our key target markets of Korea, USA, Japan, China and Taiwan. The focus of many of these discussions was on the supply of Nanoco quantum dots manufactured by Dow for the LCD display industry. We are pleased with the progress being made in our partnership with Dow and are confident that working with our licensee will accelerate the uptake of our technology in the display industry.

During the year we set up a US subsidiary to better serve the strategic relationships, customers, potential customers and investors all based there. As previously advised Michael Edelman, the Company's CEO, has now relocated to the USA and is sharing his time between North America, Europe and Asia.

Nanoco currently has three full-time staff in the USA and has opened a small office in Boston, MA. In total, the Nanoco team, most of whom are based in Manchester, UK, had grown to 98 people at the year end, compared with 69 people a year earlier, with most of the increase being technical and scientific staff.

Nanoco's business is built on robust intellectual property and we continued to reinforce our patent estate during the year. Our patents are in four key areas: our proprietary process for the mass production of cadmium-free quantum dots; cadmium-free quantum dot materials; surface chemistry; and applications/devices incorporating our materials.

Commercial applications - displays

The particular appeal of quantum dots to the LCD display industry is because of their potential to offer the LCD industry the improved colour performance exhibited by next-generation display technology of organic light-emitting diodes (OLED). The key commercial advantage of quantum dots is that they offer the prospect of a cost-effective, drop-in solution for the LCD display industry, allowing display makers to manufacture quantum dot LCD displays on existing production lines utilising existing supply chains, in which they have invested billions of dollars.

In our preliminary results issued a year ago we highlighted a trend in which the emerging technical approach for combining our cadmium-free quantum dots into LCD displays is by incorporating them into a film, which would be inserted in front of the display's LED backlighting unit. This delivery medium requires more quantum dots than if the dots were incorporated into individual LEDs. Accordingly we determined that the licensing route was the fastest way of delivering the likely quantities required to the market. We therefore decided to seek a strategic relationship with a global organisation with manufacturing and marketing expertise in the consumer electronics sector.

On 23 January 2013 we were delighted to announce a worldwide licensing agreement with Dow. Operationally we are working with Dow's Electronic Materials' business. Dow is an ideal partner for Nanoco in that it has major manufacturing and scale-up experience, customer relationships and a manufacturing footprint in Asia, where much of the optoelectronics industry is based.

Under the terms of the licensing agreement, Dow has exclusive worldwide rights for the sale, marketing and manufacture of Nanoco's cadmium-free quantum dots for use in electronic displays including LCD TVs, computer screens, tablets and smartphones.

As announced on 27 September 2013, Dow and Nanoco took the opportunity to amend the agreement to the benefit of both parties. Financial details and other specifics were not disclosed but the amendments included the waiving of a requirement for Nanoco to contribute capital expenditure to the production plant Dow is preparing to build in Asia. In return, the royalty rate that Nanoco would receive from Dow's sale of quantum dots has been adjusted but continues to acknowledge the proprietary value of Nanoco's technology. The agreement does not include specifics about the anticipated price and volume of quantum dots as these are a function of commercial negotiations with customers. Dow and Nanoco have committed additional resources to accelerate commercialisation and Dow has advised Nanoco that it expects to begin full production under the licensing agreement in the first half of 2014.

Since the licensing agreement was initially signed in January, Dow has made significant progress in preparation for the construction of the first large-scale cadmium-free quantum dot manufacturing lines at Dow's existing facilities in Asia. Dow has also been very active in marketing Nanoco's technology to potential customers and we look forward to the first commercial contracts being signed.

Commercial applications - general lighting

LEDs have key advantages over traditional lighting including long service life, reduced power consumption, compact size and shock resistance but the adoption of LEDs in home and office environments has been slowed by, amongst other issues, the current colour performance of LEDs. Nanoco's quantum dots, when combined with a blue LED, have been shown to overcome this limitation, creating a major and exciting opportunity for the Company.

Current methods for producing white light from a blue LED tend to be weak in red wavelengths, creating the two problems that the light lacks warmth and fails to show true colours. Nanoco's quantum dots can transform blue LEDs so that they produce warm white light with a high colour rendering index, thereby showing true colours. In addition, as Nanoco quantum dots are tunable to any specific wavelength, any shade of light can be produced.

Nanoco signed its first joint development agreement in general lighting in August 2011 with Osram, one of the world's largest lighting companies. The development work has progressed well and Osram has shown that Nanoco quantum dots can give the desired warmth of light without compromising on brightness. Osram is now working on the best solution for integrating the quantum dots with the LEDs to create a high quality, competitively priced product for the general lighting market.

Nanoco is also working with a number of other lighting companies in Asia, the USA and Europe.

Commercial applications - solar

Nanoco has developed a solar ink from cadmium-free nanomaterials. This ink 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. The intention is that the ink will be used by the solar industry to produce low cost, high efficiency solar panels.

In December 2012, we were delighted to sign a further joint development agreement with Tokyo Electron, the major Japanese equipment supplier, for the on-going development of a bespoke photovoltaic film. Nanoco has been working with Tokyo Electron since June 2010.Development work has focused on steadily increasing the efficiency of the electrical conversion of the film, which is now between 12% and 13% and is moving towards the target of 15%. It is the intention to achieve this level of efficiency during the current phase of work, which runs to September 2014.

Other commercial applications

We have been careful to focus on our three core areas but with the imminent commercialisation of our quantum dots in the display industry we remain alert to new opportunities where our technology could have significant commercial application.

We are increasingly interested in the potential of our quantum dots in bio-imaging and will evaluate the scale of the market opportunity in this high value sector.

A joint research programme, being carried out between Nanoco and University College London using our quantum dots for the in-vivo imaging of cancer, has made encouraging progress in the imaging of lymph node cancer.

Production scale-up

During the year we progressed plans to double capacity at our production facility at The Heath Business and Technical Park in Runcorn, where we now have four fully commissioned Semi-Tech lines focused on producing large sample quantities for the display industry. The capital expenditure to double capacity was approximately £1.25 million.

These Semi-Tech lines will be used for our development work and to fulfil orders for larger quantities of sample materials from customers and potential customers.

Whilst we have planning permission to build Kilo Lab lines, which represent the next stage of production scale-up, we do not currently need to begin construction because Dow is developing manufacturing capacity in Asia based on our Kilo Lab designs. Nanoco's engineering resource is currently focused on preparing for Dow's manufacturing facility.

People

After seven years as Nanoco's Chairman, Peter Rowley stepped down from the role in April 2013 to become a Non-executive Director. Anthony Clinch, who became a Non-executive Director of the Company in March 2010, was appointed Chairman. We are tremendously grateful for Peter's contribution as Chairman and are delighted that Nanoco will continue to benefit from his experience and wise counsel.

By the year-end the Nanoco team had grown to 98 people (year-end 2012: 69 people), most of whom are highly qualified scientists based at our Manchester head office. An increasing number of employees are based at our Runcorn production facility and we now also have business development executives in the USA, Japan, Korea, China and Taiwan.

We would like to offer our sincere thanks to all at Nanoco for their enthusiasm and commitment throughout the year.

Financial results

Our revenues in the year to 31 July 2013 were £3.93 million (2012: £2.95 million). Our loss before tax was £5.04 million (2012: loss of £4.35 million). This increase in the loss before tax primarily reflected the costs of additional technical staff and associated operating costs necessary for accelerating the process for completing the CFQD™ display application. Cash and short-term investments and deposits at the year-end were £9.94 million (31 July 2012: £15.47 million).

Outlook

Our partnership with Dow for the mass manufacture of Nanoco quantum dots to supply the display market is proceeding well and continues to be a major focus for the business. Additionally, the Company's development agreements with Osram and Tokyo Electron are progressing well.

We look forward to building on a year of solid progress in the commercialisation of our technology and view the future with confidence.

Financial Review

Results

Revenue for the year increased by £980,000 to £3,928,000 (2012: £2,948,000). Included within revenue is US$1,000,000 (£634,000) from The Dow Chemical Company ("Dow"), earned under a licence agreement which was signed in January 2013. The majority of the rest of the Group's revenue is earned primarily through joint development agreements ("JDAs"), with revenue being recognised as agreed performance milestones are achieved. The year on year increase in JDA revenue reflects the phasing of milestones relating to the respective development programmes. Almost all JDA revenues in both the current and prior year were denominated in US Dollars and mostly originated from customers in the Far East.

Cost of sales, which includes all the raw material costs, consumable items and sub-contract testing and analysis, associated with developing and testing product formulations for JDA and non-JDA customers, increased by £128,000 to £1,293,000 (2012: £1,165,000). This increase reflected the incremental costs associated with the on-going development of cadmium-free quantum dots ("CFQD™") to meet specific customer milestones as well as the production of customer samples.

Total payroll costs (before the charge for share-based payments) increased by £661,000 to £3,466,000 (2012: £2,805,000) and average staffing numbers increased by 16 heads from an average of 64 heads in 2012 to an average of 80 heads in 2013. The majority of the increases in staffing were technical roles associated with the on-going joint development programmes. Total research and development spend, which primarily includes the employment costs of technical staff, increased by £1,181,000 to £4,068,000 (2012: £2,887,000).

Rental and property running costs increased by £257,000, being the full year effect of the new 12,500 square feet laboratory and office lease that commenced from March 2012 as well as the additional costs associated with doubling the Semi-Tech laboratory space at Runcorn, from June 2013. Both expansions have provided the business with additional space and facilities to help accelerate the process for commercialising Nanoco's CFQD™ materials for display applications. The Kilo Lab design was completed during the year with costs charged totalling £125,000 (2012: £460,000). This design will be used by Dow for their planned CFQD™ production facility in Asia under the terms of the licence agreement.

After deducting operating costs the adjusted operating loss* for the year ending 31 July 2013 was £4,452,000 (2012: adjusted operating loss* of £4,294,000).

The Group aims to incentivise and retain key staff through the use of equity-settled share awards. The IFRS2 (share-based payment) charge in respect of share schemes totalled £870,000 (2012: £365,000). This increase in the charge is a result of both an increase in the number of options awarded in the year, which totalled 8,260,000 (2012: 4,820,000), as well as an increase in the average fair value of the options granted (60.8 pence compared with 50.3 pence in 2012). The total number of share options in issue as at 31 July 2013 were 13.1 million (31 July 2012: 8.7 million). Of these, 0.7 million (2012: 2.3 million) have met their performance criteria and are therefore capable of being exercised. During the year 2.8 million options were exercised and 1.1 million options lapsed or were forfeited. In addition to the options, a further 0.9 million (31 July 2012: 4.2 million) of shares are jointly owned by the Group's Employee Benefit Trust ("EBT") and certain senior management through a Jointly Owned Agreement ("JOA"). Under the JOA the employee beneficiaries have the option to acquire the trustee's shares at an agreed option price subject to meeting certain performance criteria. At 31 July 2013, 0.5 million of JOA shares had met their performance criteria and were capable of being acquired from the trustees. During the year 3.4 million JOA shares were exercised. Details on the various share schemes are provided in note 19 to the accounts.

With interest income (net of interest payments) of £280,000 (2012: £309,000), a decrease of £29,000, the loss before tax was £5,042,000 (2012: loss of £4,350,000).

Taxation

The tax credit for the year is £920,000 (2012: £710,000). The R&D tax credit to be claimed, in respect of R&D spend, is £870,000 (2012: £654,000). There was no deferred tax credit or charge (2012: nil). There was also a £50,000 credit in respect of the prior year R&D tax claim (2012: £56,000 credit).

Adjusted basic loss per share* was 1.58 pence (2012: adjusted loss* of 1.62 pence). Basic loss per share was 2.00 pence (2012: loss of 1.80 pence).

No dividend has been proposed (2012: nil).

Cash flow and balance sheet

During the year cash, cash equivalents, deposits and short-term investments reduced by £5,530,000 to £9,944,000 (2012: £15,474,000).

Cash flow was affected by a reduction in advanced revenues received during the year of £1,823,000 (2012: an increase of £1,216,000). This arose primarily due to a number of large joint development milestone payments that were received towards the end of the prior year but which were largely recognised as revenue in 2013 as the milestones were achieved.

The Group doubled the laboratory space in Runcorn in order to increase the quantity and size of test samples and this accounted for the majority of the capital spend in the year, which totalled £1,775,000 (2012: £292,000). Expenditure incurred in registering patents totalled £340,000 (2012: £336,000) during the year. Capitalised patent spend is amortised over ten years in line with the 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 12 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 23 to the financial statements.

Credit risk

The Group only trades with recognised, creditworthy third parties. Receivable balances are monitored on an on-going basis and any late payments are promptly investigated to ensure that the Group's exposure to bad debts is not significant.

Foreign exchange management

The Group invoices most of its revenues in US Dollars. The Group is therefore exposed to movements in the US Dollar 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 2013 (2012: none).

At the year end the Group had a net liability position of £8,000 (2012: net asset £450,000) in US Dollar cash, debtor, less creditor balances. The Group's net profit and its equity are exposed to movements in the value of Sterling relative to the US Dollar. The indicative impact of movements in the Sterling exchange rate on profits and equity based on the re-translation of the closing balance sheet are summarised in note 23 to the financial statements and were negligible based on the year-end position. As US Dollar revenues increase so the exposure of the Group's profit and loss and equity to movements in the Sterling/US Dollar exchange rate will increase as well.

Funding risk

The Group had £9.94 million of cash funding available at the year end. Management has prepared forecasts for the period to 31 December 2014 that assume that Dow receives a customer commitment, commissions its production facility and is able to start shipping CFQD™ material in the first half of 2014. However in the event that there were delays in a customer commitment or in the commissioning of Dow's new production facility or no customer commitment is achieved, the Group would either find cost or capital savings or would raise equity finance. The Board is confident that in the event that they choose to raise further finance this would be achievable based on the strength of the share price and previous experience in raising equity finance, but acknowledge that this would be dependent on market conditions.

Colin White

Chief Financial Officer

11 October 2013

* adjusted figures are stated before the share-based payment charge

Consolidated Statement of Comprehensive Income

For the year ended 31 July 2013

The loss for the year arises from the Group's continuing operations and is attributable to the equity holders of the parent.

There were no other items of comprehensive income for the year (2012: £nil) and therefore the loss for the year is also the total comprehensive loss for the year.

The basic and diluted loss per share are the same as the effect of share options is anti-dilutive.

The notes below form an integral part of these financial statements.

Consolidated Statement of Changes in Equity

For the year ended 31 July 2013

Company Statement of Changes in Equity

For the year ended 31 July 2013

Statements of Financial Position

At 31 July 2013

Approved by the Board and authorised for issue on 11 October 2013.

The notes below form an integral part of these financial statements.

Colin White

Director

11 October 2013

Cash Flow Statements

For the year ended 31 July 2013

Notes to the Financial Statements

For the year ended 31 July 2013

1. Reporting entity

Nanoco Group PLC ("the Company") is an AIM listed company incorporated and domiciled in the UK.

These Group financial statements 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 2013.

The preliminary results including these financial statements of Nanoco Group PLC and its subsidiaries (the "Group") for the year ended 31 July 2013 were authorised for issue by the Board of Directors on 11 October 2013 and the Statement of Financial Position was signed on the Board's behalf by Mr Colin White.

These financial statements 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 2013 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 significant accounting policies adopted by the Group are set out in note 3.

2. Basis of preparation

(a) Statement of compliance

The Group's financial statements have been 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 2013.

(b) Basis of measurement

The parent company and Group financial statements have been prepared on the historical cost basis except for all derivative contracts being carried at their fair value.

The methods used to measure fair values of assets and liabilities are discussed in the respective notes in note 3 below.

(c) Going concern

The Group's financial position is discussed in the Financial Review along with details of its cash flow and liquidity. Note 23 to the financial statements sets out the Group's financial risks and the management of those risks.

Risks considered by the directors to be key to their consideration of going concern are the risks relating to customer commitments and commissioning of production facilities detailed in the Joint Review and Financial Review.

The Group had £9.94 million of cash funding available at the year end. Management has prepared forecasts for the period to 31 December 2014 that assume that Dow receives a customer commitment, commissions its production facility and is able to start shipping CFQD™ material in the first half of 2014. However in the event that there were delays in customer commitment or in the commissioning of Dow's new production facility or no customer commitment is achieved, the Group would either find cost or capital savings or would raise equity finance. The Board is confident that in the event that they choose to raise further finance this would be achievable based on the strength of the share price and previous experience in raising equity finance but acknowledge that this would be dependent on market conditions.

On this basis, having made appropriate enquiries the directors have a reasonable expectation that the Group has adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements

 (d) Functional and presentational currency

These financial statements are presented in pounds sterling, which is the Company's functional currency. 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.

The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below.

· 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; judgement regarding when and if performance conditions will be met; and the estimation of the number of awards that will ultimately vest. 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 the future volatility of the future share price factor.

· 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. The carrying value of the unrecognised tax losses at 31 July 2013 was £2,391,000 (2012: £2,004,000). The value of the tax asset (net of the net deferred tax liability) not recognised at the year-end is £2,171,000 (2012: £1,751,000).

Further information on critical judgements made in applying accounting policies, including details of significant methods and assumptions used, is included in note 3 and also in notes 8, income tax, and 19, share-based payments.

· 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.

· 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.

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.

The Group financial statements are presented in sterling and all values are rounded to the nearest thousand pounds except where otherwise indicated.

(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 to govern the financial and operating policies. All Nanoco Group PLC's subsidiaries are 100% owned. Subsidiaries are fully consolidated from the date control passes.

The purchase 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 (ie, discount on acquisition) is recognised directly in the Consolidated Statement of Comprehensive Income.

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 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 and individual project development programmes, 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 where 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 or when contractual rights for the customer to recoup such payments have lapsed.

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 in the Consolidated Statement of Comprehensive Income in line with the terms of the underlying grant agreement.

Government grants relating to capital expenditure are deducted in arriving at the carrying amount of the asset.

(f) Research and development

Research costs are charged in the Consolidated Statement of Comprehensive Income as they are incurred. Development costs could be capitalised as intangible assets when it is probable that future economic benefits will flow to the Company. 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.

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.

(g) 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.

(h) 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, changes in the fair value of financial assets at fair value through the Consolidated Statement of Comprehensive Income, impairment losses recognised on financial assets and losses on hedging instruments that are recognised in the Consolidated Statement of Comprehensive Income. All borrowing costs are recognised using the effective interest method.

(i) 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 nor 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 substantially enacted by the 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 or economic benefits in the future is uncertain.

(j) Tangible fixed assets

Tangible fixed 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 de-recognised 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 de-recognition of the asset is included in the Consolidated Statement of Comprehensive Income in the period of de-recognition.

(k) 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

(l) 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 to sell, an appropriate valuation model is used, these calculations 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 re-valued 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.

(m) Investments in subsidiaries

Investments in subsidiaries are stated in the Company Statement of Financial Position at cost less provision for any impairment.

(n) 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.

(o) 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 uncollectible, it is written off against the allowance account for trade receivables.

(p) 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.

(q) 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. 

(r) Borrowings

Borrowings are recognised when the Group becomes party to related contracts and are measured initially at fair value, net of directly attributable transaction costs incurred. After initial recognition, borrowings are stated at amortised cost.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.

Costs of borrowing funds are expensed in the period in which they occur.

(s) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The expense relating to any provision is presented in the Consolidated Statement of Comprehensive Income, net of any expected reimbursement, but only where recoverability of such reimbursement is virtually certain.

Provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risk specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

(t) Financial assets and liabilities

Financial assets and liabilities are recognised when the Group becomes party to the contracts that give rise to them and are classified as financial assets at fair value through the Consolidated Statement of Comprehensive Income. The Group determines the classification of its financial assets and liabilities at initial recognition and re-evaluates this designation at each financial year end.

A financial asset or liability is generally de-recognised when the contract that gives rise to it is settled, sold, cancelled or expires.

At the year end, the Group had no financial assets or liabilities designated at fair value through the Consolidated Statement of Comprehensive Income (2012: £nil).

(u) 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.

(v) Shares held by the Employee Benefit Trust

The Employee Benefit Trust is consolidated in the financial statements and the shares are reported as treasury shares in the Group's Statement 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. The Employee Benefit Trust is treated similarly in the financial statements of the parent company.

(w) 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.

(x) 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.

(y) New standards and interpretations not yet adopted

The following new and amended IFRS, IAS and IFRIC interpretations were mandatory for accounting periods ending 31 July 2013 and thereafter, but have no material effect on the Group's financial statements.

· IAS 12 Income Taxes (Amendment) - Deferred Taxes: Recovery of Underlying Assets

A number of new standards, amendments to standards and interpretations are effective for annual periods ending 31 July 2014 or thereafter and have not been applied in preparing these consolidated financial statements and those that are relevant to the Group are summarised below. None of these is expected to have a significant effect on the consolidated financial statements of the Group.

The following standards and interpretations have an effective date after the date of these financial statements:

4. Segmental information

Operating segments

At 31 July 2013 the Group operated as one segment, being the provision of high performance nano- particles for research and development purposes. This is the level at which operating results are reviewed by the chief operating decision maker (i. the CEO) 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.

Included within rendering of services is revenue from two material customers amounting to £1,573,000 (2012: one material customer amounting to £937,000) and included within royalties and licences is revenue from two material customers amounting to £1,702,000 (2012: one material customer amounting to £1,257,000).

Geographical information

The Group operates in four main geographic areas, although all are managed in the UK. The Group's revenue per geographical segment is as follows:

All the Group's assets are held in the UK and all of its capital expenditure arises in the UK.

5. Operating loss

** Included within research and development expense are staff costs totalling £2,666,000 (2012: £1,808,000) also included in note 6.

6. Staff costs

Directors' emoluments (excluding social security costs, but including benefits in kind) disclosed above include £736,000 paid to the highest paid director (2012: £208,000).

Aggregate gains made by directors during the year following the exercise of share options and jointly owned EBT shares totalled £3,198,000 (2012: £692,000).

An analysis of the highest paid director's remuneration is included in the Directors' Remuneration Report.

The average number of employees during the year (including directors), was as follows:

7. Finance income and expense

Bank interest receivable includes £68,000 (2012: £28,000) which is receivable after the year end.

8. Income tax

The tax credit is made up as follows:

Reductions in the main rate of corporation tax from 23% to 21% from 1 April 2014 and to 20% from 1 April 2015 were substantively enacted on 3 July 2013. The changes in tax rate are not considered to have had a material impact.

The Group has accumulated losses available to carry forward against future trading profits. The estimated value of the deferred tax asset, measured at a standard rate of 20% (2012: 24%) is £2,391,000 (2012: £2,004,000).

The Group has a deferred tax asset being share-based payments, for which the tax, measured at a standard rate of 21% (2012: 24%) is £361,000 (2012: £204,000). Remaining tax losses have not been recognised as an asset as the transfer of economic benefits in the future is uncertain (2012: nil).

The Group also has a deferred tax liability being accelerated capital allowances, for which the tax, measured at a standard rate of 20% (2012: 24%) is £581,000 (2012: £457,000).

The net deferred tax liability of £220,000 (2012: £253,000) has not been recognised as the Group has accumulated losses available in excess of this value.

The remaining tax losses, after deducting the net deferred tax liability, have not been recognised as an asset as the transfer of economic benefits in the future is uncertain (2012: nil).

9. Earnings per share

Diluted loss per share has not been presented above as the effect of share options issued is anti-dilutive.

10. Tangible fixed assets

11. Intangible assets

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 is material to the business.

12. Investment in subsidiaries

By subsidiary

Loans to subsidiary undertakings carry no interest and are repayable on demand. Further information in relation to these loans is given in note 24.

With the exception of the companies noted 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.

13. Inventories

14. Trade and other receivables

The directors consider that the carrying amount of trade and other receivables approximates to their fair value.

Trade receivables are denominated in the following currency:

At 31 July the analysis of trade receivables that were past due but not impaired was as follows:

15. Cash, cash equivalents and deposits

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 2013 include deposits with original maturity of three months or less of £3,768,000 (2012: £3,464,000).

An analysis of cash, cash equivalents and deposits by denominated currency is given in note 23.

16. Trade and other payables

The directors consider that the carrying amount of trade and other payables approximates to their fair value.

17. Financial liabilities

The directors consider that the carrying amount of financial liabilities approximate to their fair value, in so far 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 and is repayable in quarterly instalments and will be fully repaid in 2017.

18. Issued equity capital

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 10 pence 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 Nanoco Group PLC 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

Options exercised include certain options which had an exercise price that was less than the nominal value of shares issued (see note 20).

On 19 March 2013 158,824 jointly owned shares were acquired from the EBT at an exercise price of 85.0 pence per share, with total proceeds of £135,000. During the year Dr Michael Edelman exercised and acquired from the EBT 3,229,162 of jointly owned EBT shares , for £nil consideration . The difference between the market value at the date of issue, on 7 April 2008, and the £nil consideration is treated as a benefit in kind.

19. Share-based payment reserve

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 £870,000 has been recognised in the Statement of Comprehensive Income for the year (2012: £365,000).

Share option schemes

The Group operates the following share option schemes all of which are operated as Enterprise Management Incentive ("EMI") schemes in so far 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 Tech Share Incentive Plan

Share options issued under the Nanoco Tech Share Incentive Plan had been issued to staff who were employed by Nanoco Tech Limited in the period from 1 September 2006 up to the date of the reverse take-over on 1 May 2009. These options were conditional on achievement of share price performance criteria and either a sale or listing of the Company. All of the relevant vesting conditions have been successfully met and options are capable of being exercised at any time from 1 August 2010 to 31 August 2016. Following the reverse take-over the number of share options in issue were increased in line with the terms of the reverse acquisition by a factor of 4.55 times and the exercise price decreased by 4.55 times. This was reflected as a reverse acquisition adjustment in the 2009 accounts.

Nanoco Group PLC Long Term Incentive Plan ("LTIP")

- Grant in November 2009

Share options were granted to management and staff on 27 November 2009 under the terms of the Nanoco Group PLC long term incentive plan and would be exercisable subject to performance conditions being met based on: share price following publication of the 2012 results and EPS targets relating to financial year ending 31 July 2012. The exercise price was set at 40 pence for all staff apart from Michael Edelman and Nigel Pickett, for whom the exercise price was set at 78 pence. The average market price of the Company's shares on the date of issue of the LTIP award was 69 pence. The fair value benefit is measured using binomial and Monte Carlo models, taking into account the terms and conditions upon which the share options were issued.

The key performance target criteria governing the exercise of the share options are summarised as follows:

(1) The target has not been achieved and these have therefore lapsed.

(2) To the extent that the share price is greater than the minimum target but less than the stretch target, the number of options that will become exercisable will be calculated pro-rata on a straight line basis. The reference date for the share price is the date following the publication of the 2012 results. If the share price does not fall within the targets then these options will not be exercisable and will lapse. These targets were not achieved and therefore the options have lapsed.

- 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 revenue targets being achieved over a three year period from the date of grant. The exercise price was set at 50 pence, being the average closing share price on the day preceding 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 revenue targets being achieved over a three year period from the date of grant. The exercise price was set at 57 pence, being the average closing share price on the day preceding 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.

- 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. These options vest over a three year period from the date of grant 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 has 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 are capable of being exercised at any time until 31 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.

During the year, options over 3,387,986 shares, jointly owned by the EBT and which had been issued at their original market value of £603,000, were exercised for an aggregate consideration of £135,000; the balance of £468,000 is charged to the share-based payment reserve.

Weighted average exercise price of options

The weighted average fair value of options granted during the year to 31 July 2013 was 61pence (2012: 50 pence). The range of exercise prices for options and jointly owned EBT shares outstanding at the end of the year was nil -146 pence, (2012: nil - 100.75 pence).

For the share options outstanding as at 31 July 2013, the weighted average remaining contractual life is 8.5 years (2012: 7.2 years).

The weighted average share price at the date of exercise for those share options exercised in the year ended 31 July 2013 was 110 pence (2012: 50.2 pence).

The following table lists the inputs to the models used for the years ended 31 July 2013 and 31 July 2012

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.

No other features of options granted were incorporated into the measurement of fair value.

20. Merger reserve and capital redemption reserve

Merger reserve

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 re-organisation on 27 June 2007.

The capital redemption reserve arises from the off-market purchase of deferred shares on 4 May 2005 and their subsequent cancellation.

Certain share options exercised during the year had an exercise price less than nominal value. The aggregate discount to nominal value on these options of £96,000 (2012: £96,000) has been charged to the Company's capital redemption reserve and, on consolidation, to the Group's reverse acquisition reserve.

The discount arose as a result of the formula agreed, at the time of the acquisition of Nanoco Tech Limited by the Company on 1 May 2009, for converting share options in Nanoco Tech Limited into equivalent share options in the Company. This accounting treatment was authorised at the AGM held on 16 December 2011.

21. Movement in revenue reserve and treasury shares

No jointly owned EBT shares were granted during the year (2012: no shares).

During the year, options over 3,387,986 shares, jointly owned by the EBT and which had been issued at their original market value of £603,000, were exercised for an aggregate consideration of £135,000; the balance of £468,000 is charged to the share-based payment reserve.

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 Employee Benefit Trust ("EBT") jointly with a number of the Group's employees. At 31 July 2013 850,500 shares in the Company were held by the EBT (2012: 4,238,486). In addition there are 12,222 (2012: 12,222) treasury shares not held by the EBT.

22. 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:

23. 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 18, 20 and 21 and in the Group Statement of Changes in Equity. Total equity was £14,394,000 at 31 July 2013 (£16,932,000 at 31 July 2012).

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