Nanoco Regulatory News (NANO)

Analysts are invited to attend a briefing to be held at 10am this morning, 17 October 2011, at Buchanan Communications, 107 Cheapside, London EC2V 6DN

NANOCO GROUP PLC

("Nanoco" or "the Company")

Preliminary Results for the year ended 31 July 2011

Nanoco Group plc(AIM: NANO), a world leader in the development and manufacture of cadmium-free quantum dots, is pleased to announce its preliminary results for the year ended 31 July 2011.

Highlights

·; Follow-on product development agreement, worth US$800,000, signed with major Japanese LCD TV manufacturer for cadmium-free quantum dots (CFQD™) for LED backlighting

·; Phase 1 of Tokyo Electron solar cell program completed and phase 2 development agreement signed

·; Joint development agreement signed with world leading lighting company to produce high quality CFQD™-LED general lighting system

·; Runcorn quantum dot production facility designed, built and commissioned on time and on budget

·; 1kg red CFQD™ produced at Runcorn and shipped to Japanese LED customer, triggering US$2m payment

·; Cash, cash equivalents and deposits of £17.10 million at 31 July 2011 (31 July 2010: £5.68 million)

Dr Peter Rowley, Nanoco's Chairman, commented: "During the year we made major steps in the development and commercialisation of our technology. We built and commissioned our first manufacturing plant, made significant progress in our commercial contracts and strengthened our balance sheet for the next stage in our development.

"Our momentum has continued in the current year and we look forward to achieving further technical and commercial progress in the months ahead."

For further information please contact:

Notes for editors:

About Nanoco Group plc

Nanoco is a world leader in the development and manufacture of commercial quantities of cadmium-free quantum dots for use in multiple applications including lighting, solar cells and biological imaging. Nanoco's quantum dots, which are free of heavy metals and comply with RoHS legislation, can be combined into a wide range of materials including liquids, polymers and glass. Nanoco forms strategic partnerships with major end users across a range of applications.

Nanoco was founded in 2001 and is based in Manchester, UK. Nanoco began trading on the AIM market of the London Stock Exchange in May 2009 under the ticker symbol NANO.

For further information, please visit www.nanocotechnologies.com

Chairman's Statement

I am delighted to report on Nanoco's second full year as a publicly quoted company.

It was a year of excellent progress in which we continued to make the transition from a research-based company to a high-tech manufacturing business capable of producing large batches of cadmium-free quantum dots (CFQD™).

We commissioned our first production lines in January 2011 in Runcorn, giving us the capacity to produce around 25kg of CFQD™ annually and marking an important step in our multi-stage plan to build substantial manufacturing capacity.

In April 2011, we announced the production of a 1kg batch of red CFQD™ for a major Japanese corporation, marking a key milestone for the Runcorn plant. Manufacturing quantum dots on this scale is a major technical achievement and a world-first, underlining the scalability of Nanoco's technology and the expertise of our technical and production teams. Not only is the scale of manufacture a world-first but our quantum dots are free of cadmium or other toxic metals, making them ideally suited to use in consumer electronics and other products where health, safety and environmental considerations are paramount.

We have progressed plans for further expanding capacity following a successful £15 million fundraising in January 2011. We are currently finalising the detailed design of the Kilo Lab plant, with the start of construction timed to reflect the increase in demand when commercial production ramps-up. If demand ramps up more quickly we can expand capacity on the existing production line to 40kg a year and add further lines at relatively short notice.

During the year we have made good progress with our commercial collaborations in light-emitting diode (LED) backlighting for liquid crystal display (LCD) TVs and in solar power, receiving significant stage payments for achieving various technical and performance milestones. We continue to believe the first commercial product to come to market will be backlit CFQD™ TVs. Based on our current analysis we believe that shipments of materials will commence during the 2012/13 financial year. In August, shortly after the period end, we signed a new joint development agreement (JDA) with one of the world's largest lighting companies with the objective of incorporating red CFQD™ into LED lights for commercial, residential and other uses. We also successfully exceeded the Phase 1 targets of our solar program with Tokyo Electron and signed a Phase 2 JDA to further progress our joint development of an efficient, low cost, printable solar cell.

We now have an increasing diversity of commercial collaborations working in three key areas: LED backlighting for TVs, solid state LED lighting and solar power.

Our technology has a myriad of potential applications, highlighted by recent approaches we've received from companies wishing to incorporate CFQD™ into their products. Whilst we continue to evaluate new applications, we are focused on getting the first products to market.

Nanoco's core asset is its world-class patent-protected technology. We have continued to strengthen our intellectual property (IP) position throughout the year. Over the past 12 months Nanoco has had eight new patents granted and 79 patent applications filed.

Financials

Our revenues in the year to 31 July 2011 were £2.64 million (2010: £2.94 million). Our loss before tax was £3.22 million (2010: loss of £1.37 million), primarily reflecting the costs associated with setting up the Runcorn manufacturing facilities and commissioning the plant to produce the first kilo of red CFQD™. Cash and short term investments and deposits at the year-end were £17.10 million (31 July 2010: £5.68 million).

People

In August 2010, we were delighted to welcome Colin White as our Chief Financial Officer. By the year end, the Nanoco team had grown to 63 people, compared with 49 people a year earlier. The increase reflects the transition to a growing manufacturing business and includes roles in systems, processes and sales in addition to production and technical product development.

I would like to offer my sincere thanks to all at Nanoco for their dedication and commitment throughout the year and to all our commercial partners and other stakeholders.

Outlook

The rapid progress the Company has made in the past year has continued into the current year. All of our commercial relationships are developing well as is the industrialisation of our technology, with commercial production projected to commence during the 2012/13 financial year. We look forward to continued progress and view the future with confidence.

Peter Rowley

Non-Executive Chairman

14 October 2011

CEO's Review of Operations

During the year to 31 July 2011 we made substantial progress in all of the key areas of our business, particularly in manufacturing scale-up, in commercial agreements, in intellectual property (IP) protection and in building our company infrastructure.

The commissioning of our production facility in Runcorn in January 2011 was a major achievement and demonstrated our commitment to transitioning from a research-based company to a high-tech manufacturer. We were particularly pleased with the speed with which we were able to locate a site and then procure, build and commission the production facility, which was completed by the end of January 2011 at a capital cost of £1.3 million. This was followed by the production of 1kg of red CFQD™, which we shipped in March 2011. The two Semi-Tech production lines have the capacity to produce a total of around 25kg a year of CFQD™.

The success of the Semi-Tech lines demonstrates the scalability of our technology to produce large quantities of CFQD™. Manufacturing in-house is central to our business strategy. It ensures that our customers are guaranteed product, produced to the highest quality standards, which meets the most demanding technical specifications. A tremendous amount of work has been carried out on upgrading the Company's internal systems to ensure that we are able to supply our large multinational customers in a timely and professional manner.

Our people are the Company's strongest asset. Our total staff numbers were 63 at the year end, reflecting the increased activity across our business. We currently have seven staff located full-time in Runcorn, and three others whose time is divided between Runcorn and our Manchester headquarters.

Soon after commissioning the Runcorn facility, we successfully raised £15 million (before expenses) through a placing of shares to new and existing investors. The funds were raised to invest in further developing the business. The funds will be used for the next stage of manufacturing scale-up; for new product development; for business development; and for strengthening patent portfolio management and protection.

The next stage in manufacturing scale-up is the installation of Kilo Lab lines, which would increase our total production capacity to around 150kg annually. So far we have spent around £200,000 on planning and design work but will begin construction only when we have the appropriate visibility in our order books. If demand ramps up more quickly we can expand capacity on the existing production line to 40kg and add further lines at relatively short notice.

The Company has continued to invest heavily in its technology base during the year. We now employ around 31 scientists with PhDs and 17 with degrees. These scientists come from 11 countries worldwide. A measure of our technology advancement is the number of patents granted and filed by the Company over the year: a total of eight new patents were granted and 79 patent applications were filed. Earlier this month, we took the opportunity to further expand our patent estate by acquiring patents from Evident Technologies Inc., a US nanotechnology company. The patents, which largely relate to the surface chemistry of quantum dots and their use in applications, extend the reach of our cadmium-free technology.

Business development has been an important focus for us during the year. To date, the great majority of Nanoco's commercial relationships have centred on Japan, which has a leadership position in the world's optoelectronics industry. But we have started to diversify geographically and are now active in Japan, Korea, Taiwan and the USA. We look forward to signing our first development agreement in Korea.

REVIEW OF KEY MARKETS

LED Backlighting

We made significant progress during the year with our supply and licence agreement with a major Japanese corporation. In December 2010, we received a US$500,000 milestone payment after bespoke red CFQD™ met performance criteria including a performance life of at least 50,000 hours.

This was followed in April by a US$2 million milestone payment for the production of 1kg of red CFQD™ at our Runcorn facility. This kilogramme marked the first time that quantum dots had been manufactured on this scale, and was a major achievement for Nanoco. A kilogramme of quantum dots will make of the order of 50,000 backlight units for LCD TVs, depending on the TV size.

We are now focusing on achieving the remaining milestones for green CFQD™, which are part of the same agreement. Our customer is currently testing the green lifetime against the 50,000 hour requirement. Once achieved, a payment of US$1 million will be made to Nanoco and pave the way for the production of the 1kg of green, which triggers a further US$2 million payment.

In April this year we received a US$800,000 upfront payment for signing a product development agreement with a major Japanese company, whose products include LCD TVs. This agreement, which followed an 18 month JDA, is focused on the final steps in combining CFQD™ into an LCD TV for commercial launch. We are currently refining the CFQD™ so as to meet the technical specification for the customer's TV, as part of the iterative design and development process between Nanoco and our customer. The TV incorporating the CFQD™ in the LED backlight unit will benefit from the superior colour performance of CFQD™ and is expected to generate cost savings through a reduction in LED chip complexity. Much effort by Nanoco and our customer is currently being put into engineering the CFQD™ onto the next generation backlight systems. We continue to be unclear as to the precise timing of commercial launch for these products, which is controlled by our customer, however we believe that shipments of materials will commence during the 2012/13 financial year.

LED Lighting

Our most recent JDA was signed in August 2011 with one of the world's largest lighting companies. It marks our first agreement focused solely on general lighting and it was signed with a large Western company. The objective of the JDA is to incorporate CFQD™ into the lighting company's LEDs to create LED lighting systems with the superior performance characteristics required for widespread residential and commercial use.

This is an exciting opportunity, exploiting the ability of Nanoco's CFQD™ to transform the blue light from an LED into white light with a high colour rendering index. Current methods for producing white light from a blue LED tend to be weak in the red wavelengths, giving the two problems that the light lacks warmth and fails to show true colours. CFQD™ can overcome these problems, unlocking the many advantages of LEDs including reduced power consumption, long service life and compact size.

Solar

Our solar energy JDA with Tokyo Electron, a major Japanese equipment supplier, has also progressed extremely well. In November 2010, we received a milestone payment for successfully developing a nanomaterial solar ink, which can be printed to form a thin film through techniques developed by Tokyo Electron. This thin film is the active solar absorber area which is incorporated into a material stack to create a low cost solar cell. We successfully exceeded all the Phase 1 JDA targets which led to both companies signing a Phase 2 agreement in September of this year. This second phase will generate significant milestone payments to Nanoco and is expected to last for 12 months. It will focus on continuing to increase the solar cell performance, process-ability and cost reduction.

Our solar ink is based on nanoparticles that have been developed and manufactured by the Company to maximise their effectiveness in absorbing solar energy. These nanoparticles are printed using low cost methods and then annealed into a solar active film layer.

The solar market is huge and growing. We are pleased to be working in partnership with Tokyo Electron to optimise the technology and eventually bring it to market.

Other Applications

There are many applications for Nanoco's CFQD™. We continue in discussions with potential partners across a range of applications and have been approached by an increasing number of companies interested in including CFQD™ in their products.

One such application is the work the Company is currently doing with University College London, on using CFQD™ for in-vivo imaging of cancer.

Summary

The year to 31 July 2011 was one of real momentum in our business. We made major steps forward in the development of our technology and intellectual property, we built and commissioned our first manufacturing plant, we made significant progress in our commercial contracts and we strengthened our balance sheet for the next stage in our development. The Company also broadened its commercial relationships to include LED general lighting in addition to LCD backlighting and solar energy. All of our commercial relationships are progressing well.

We successfully expanded our activities in our key markets of Japan, Korea, Taiwan and the USA and expect further positive news from these territories going forward.

This momentum has continued into the current year, which has started well. We look forward to making further technical and commercial progress in the months ahead, building on our position as a high-tech manufacturer with unique IP.

Michael Edelman

Chief Executive Officer

14 October 2011

Financial review

Results

Revenue decreased by £295,000 to £2,642,000 (2010: £2,937,000). The Company's revenue is earned primarily through joint development agreements and a material supply and licence agreement, with revenue being recognised as agreed performance milestones are achieved. The year on year reduction in revenue reflects the phasing of milestone payments on the material supply and licence agreement, which had generated higher income in 2010 and a normal level of revenue recognition in 2011. All revenues earned were denominated in US Dollars and mostly originated from customers in the Far East.

Costs of sales, which includes raw material costs, consumable items and sub-contract testing and analysis, increased by £590,000 to £1,085,000 (2010: £495,000). This increase reflected, in particular, the incremental costs associated with setting up and trialling the scale-up laboratory and manufacturing facility at Runcorn. Material and sub-contract spend associated with the various joint development programmes also increased; a consequence of the magnitude of work performed in achieving the various programme milestones.

Total staffing costs increased by £471,000 to £2,564,000 (2010: £2,093,000) and average staffing numbers increased by 17 heads from an average of 39 heads in 2010 to 56 in 2011. During the year seven (2010: four) new roles were created in support of the work associated with developing the scale-up laboratory and establishing the new manufacturing facility at Runcorn. The majority of the other increases in staffing were technical roles associated with the on-going joint development programmes. Total research and development spend, which primarily includes the employment costs of technical staff, increased by £731,000 to £2,581,000 (2010: £1,850,000). Investment in the new manufacturing facility at Runcorn was also the primary driver behind the increase in the level of depreciation by £306,000 to £734,000 (2010: £428,000).

After deducting operating costs the adjusted (before share-based payment charge) operating loss for the year ending 31 July 2011 was £3,232,000 (2010: adjusted operating loss of £1,262,000).

The Company aims to incentivise and retain key staff through the use of equity-settled share awards. The IFRS2 (share-based payment) charge in respect of share schemes totalled £153,000 (2010: £166,000). The total number of share options in issue as at 31 July 2011 were 7.1m (31 July 2010: 11.0m). In addition a further 4.2m (31 July 2010: 3.8m) of shares are jointly owned by the Company's Employee Benefit Trust ("EBT") and certain senior management through a Jointly Owned Agreement ("JOE"). Under the JOE the employee beneficiaries have the option to acquire the trustees' share at an agreed option price subject to meeting certain performance criteria. Share options and JOE shares that had been issued under the Nanoco Tech share incentive plan (prior to the reverse take-over in 2009), and which totalled 12.2m share options and JOE shares, are now capable of being exercised until 31 August 2016. During the year 4.5m of these options were exercised. Details on the various share schemes are provided in note 19 to the financial statements.

Interest income increased by £112,000 to £180,000 (2010: £68,000), benefiting from the increase in cash following the receipt of the proceeds from the Placing, in February 2011.

The loss before tax was £3,215,000 (2010: loss of £1,371,000).

Taxation

The tax credit for the year is £723,000 (2010: £288,000). The R&D tax credit to be claimed in respect of 2010/11 R&D spend is £600,000 (2010: £433,000). There was a deferred tax credit of £129,000 (2010: £129,000 deferred tax charge). This credit is a result of the un-provided tax losses which more than offset the deferred tax liability for accelerated capital allowances. There was also a small charge in respect of the prior year R&D tax credit of £6,000 (2010: £16,000).

Earnings per share

Adjusted (before share-based payment charge) basic loss per share was (1.22) pence (2010: adjusted loss of (0.51) pence). Basic loss per share was (1.30) pence (2010: loss of (0.60) pence).

No dividend has been proposed (2010: nil) in order to retain cash within the business to fund future investment.

Cash flow and balance sheet

During the year cash, cash equivalents, deposits and short term investments increased by £11,417,000 from £5,682,000 at 31 July 2010 to £17,099,000 at 31 July 2011.

The Company raised net proceeds of £14,344,000 (net of expenses) from a Placing of 16.7 million new shares which were admitted to the AIM listing on 3 February 2011. A further £300,000 was raised from the exercise of options during the year.

Purchases of capital equipment in the year, primarily in connection with equipment for the new Runcorn facility, totalled £1,605,000 (2010: £615,000). Expenditure incurred in registering patents totalled £299,000 (2010: £300,000) during the year. This is capitalised and amortised over ten years in line with the Company's accounting policy.

At the year-end current liabilities included £719,000 (2010: £539,000) of deferred income which is recognised in the Income Statement, as revenue, as performance milestones are achieved.

Treasury activities and policies

The Group carries a significant cash sum which is managed prudently. In order to minimise risk to the Group's capital the funds are invested across a number of financial institutions which have investment grade credit ratings. The deposits range from instant access to twelve month term deposits and are regularly reviewed by the Board. Cash forecasts are updated monthly to ensure that there is sufficient cash available for foreseeable requirements.

Credit risk

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

Foreign exchange management

The Company invoices most of its revenues in US Dollars. The Company is therefore exposed to movements in the US Dollar relative to Sterling. The Company enters into forward currency contracts to fix the exchange rate on invoiced or confirmed foreign currency receipts. The Company does not take out forward contracts against uncertain or forecast income. There were no open forward contracts as at 31 July 2011.

At the year end the Group had a net liability of £11,000 (2010: net asset £1,176,000) in US Dollar cash, debtor, less creditor balances. The Group's net profit and its equity are exposed to movements in the value of Sterling relative to the US Dollar. The indicative impact of movements in the Sterling exchange rate on profits and equity based on the re-translation of the closing balance sheet are summarised in note 24 to the Financial Statements. Based on the balances at the year end, a 10% strengthening in Sterling against the US Dollar would increase Group pre-tax profit and equity by £1,000 (2010: reduce profits and equity by £107,000) and a 10% strengthening in the US Dollar relative to Sterling would reduce pre-tax profit and equity by £1,000 (2010: increase profits and equity by £130,000). As US Dollar income increases so the exposure of the Group's Income Statement and equity to movements in the Sterling/US Dollar exchange rate will increase as well.

Colin White

Chief Financial Officer

14 October 2011

The loss for the year arises from the Group's continuing operations.

There were no other items of comprehensive income for the year (2010: £nil) and therefore the loss for the year is also the total comprehensive loss for the year.

The notes form an integral part of these financial statements.

Notes to the Financial Statements

For the year ending 31 July 2011

1. Authorisation of financial statements and statement of compliance with IFRS

The financial statements of Nanoco Group PLC and its subsidiaries (the "Group") for the year ended 31 July 2011 were authorised for issue by the Board of Directors on 14 October 2011 and the Statement of Financial Position was signed on the board's behalf by Mr Colin White.

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

The Company'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 2011.

The financial statements do not constitute statutory financial statements within the meaning of section 435 of the Companies Act 2006. A copy of the financial statements for the year ended 31 July 2011 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 principal accounting policies adopted by the Group are set out in note 2.

2. Accounting policies

Basis of preparation

These financial statements have been prepared in accordance with IFRS and IFRIC interpretations as they apply to the financial statements of the Group for the year ended 31 July 2011 and applied in accordance with the Companies Act 2006.

The accounting policies adopted are consistent with those of the previous financial year except as described below.

The following new and amended IFRS and IFRIC interpretations were mandatory as of 1 August 2010 unless otherwise stated.

·; Improvements to IFRS's (issued April 2009)

·; Improvements to IFRS's (issued May 2010)

·; Amendment to IFRS 2, Group cash-settled share-based payment transactions, effective 1 January 2010

·; Amendments to IFRS 1, limited exemption from comparative IFRS 7 disclosures

·; IFRIC 19, extinguishing financial liabilities with equity instruments

For each of the new or amended IFRS and IFRIC interpretations adopted in the period the impact on the financial statements or performance of the Group is described below:

Improvements to IFRSs (issued April 2009 and in May 2010)

In April 2009 and May 2010 the Board issued further omnibus amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each amendment. The adoption of the amendments resulted in no significant changes to the financial statements or performance of the Group.

Amendment to IFRS 2 Share-based payment: Group cash-settled share-based payment transactions

This amendment did not have an impact on the financial position or performance of the Group.

Amendments to IFRS 1, limited exemption from comparative IFRS 7 disclosures

This amendment did not have any impact on the financial position or performance of the Group.

IFRIC 19, extinguishing financial liabilities with equity instruments

This amendment did not have any impact on the financial position or performance of the Group.

The accounting policies which follow set out those policies which apply in preparing the financial statements for the year.

The financial statements are prepared under the historical cost convention, except where otherwise stated.

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 2011 was a profit of £130,000 (2010: profit of £68,000).

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

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

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than half of the voting rights. The existence and effects of potential voting rights are considered when assessing whether the Group controls the entity. 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 before 31 July 2011. 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 Income Statement.

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. All financial statements are made up to 31 July 2011.

Foreign currency translation

Items included in the financial statements of each entity are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Sterling, being the Group's presentational currency.

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 Statement of Financial Position date. All differences are taken to the Income Statement.

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.

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.

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 from development programmes are recognised as development work is performed during the contractual term, as measured by performance milestones. Revenue is not recognised where there is uncertainty regarding the achievement of such milestones.

Royalties are recognised when goods are supplied by customers under licence agreements. Royalties received in advance under material supply and licence agreements are recognised as revenue when goods are supplied or 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.

Interest income

Interest income is recognised as interest accrues using the effective interest rate method.

Research and development

Research costs are charged against the Income Statement as they are incurred. Certain development costs will 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 are reviewed for impairment at each Statement of Financial Position date. Other development costs are charged against income as incurred since the criteria for their recognition as an asset are not met.

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.

The costs of an internally generated intangible asset comprise all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Directly attributable costs include employee costs incurred on technical development, testing and certification, materials consumed and any relevant third party cost. The costs of internally generated developments are recognised as intangible assets and are subsequently measured in the same way as externally acquired intangible assets. However, until completion of the development project, the assets are subject to impairment testing only.

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 and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each Statement of Financial Position 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.

No development costs to date have been capitalised as intangible assets.

Leases

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 Income Statement on a straight-line basis over the expected lease term.

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 Income Statement, 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.

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 Income Statement. The Group determines the classification of its financial assets and liabilities at initial recognition and re-evaluates this designation at each financial year end.

At the year end, the Group had no financial assets or liabilities designated as at fair value through the Income Statement (2010: £nil).

Derecognition of financial assets and liabilities

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

Taxation

Current income tax

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 Statement of Financial Position date.

Deferred income tax

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 Statement of Financial Position 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.

Investments in subsidiaries

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

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 cost 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 income statement in the period of derecognition.

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 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

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 Income Statement in those expense categories consistent with the function of the impaired assets.

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 Income Statement unless the asset is carried at 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.

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.

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 Income Statement within administrative expenses.

When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables.

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 deferred and recognised in the Income Statement 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.

Cash, cash equivalents and short term investments

Cash and cash equivalents comprise cash at hand and deposits with an original term of not greater than three months. Short term investments comprise deposits with an original term of greater than three months, but no greater than twelve months.

Trade and other payables

Trade and other payables are not interest bearing and areinitially recognised at fair value. They are subsequently measured at amortised cost using the effective interest rate method.

Borrowings

Borrowings are recognised when the Group becomes party to the 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 Statement of Financial Position date.

Share capital

Proceeds on issue of shares are included in shareholders' equity, net of transaction costs. The carrying amount is not remeasured in subsequent years.

Shares held by 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.

Share-based payments

The Company undertakes equity settled share-based payment transactions with certain employees.

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 the Binomial model. Where options include a range of target share prices a Monte-Carlo simulation model has been used.

At each Statement of Financial Position 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 Statement of Financial Position date is recognised in the Income Statement, 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 as "share-based payment reserve".

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.

Accounting standards and interpretations not applied

At the date of authorisation of these financial statements, the following Standards and Interpretations relevant to the operations of the Group that have not been applied in these financial statements were in issue but not yet effective or endorsed (unless otherwise stated).

The effective dates stated here are those given in the original IASB standards and interpretations. As the Group prepares its financial statements in accordance with IFRS, the application of new standards and interpretations will be subject to their having been endorsed for use in the EU via the EU Endorsement mechanism. In the majority of cases this will result in an effective date consistent with that given in the original standard or interpretation but the need for endorsement restricts the Group's discretion to early adopt standards.

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

The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group.

3. Judgements and key sources of estimation uncertainty

The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported for assets and liabilities as at the Statement of Financial Position 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 assumptions 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 assumptions are reasonable, by their nature they are uncertain and, as such, changes in estimates and assumptions 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 estimation 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 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 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.

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 2011 was £1,691,000 (2010: £343,000). The value of tax asset (net of deferred tax liability) not recognised at the year-end is £1,190,000 (2010£ nil), as measured at a standard tax rate of 26% (2010: 27%).

4. Segmental information

Operating segments

At 31 July 2011 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.e. 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 £697,000 and £603,000 (2010: one material customer amounting to £839,000) and included within royalties and licences is revenue from one material customer amounting to £1,097,000 (2010: one material customer amounting to £1,586,000).

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 £1,695,000 (2010: £1,429,000).

6. Staff costs

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

Directors' emoluments (excluding social security costs) disclosed above include £164,000 paid to the highest paid Director (2010: £129,000).

7. Finance income/(cost)

Bank interest receivable includes £102,000 (2010: £Nil) which is receivable after the year end.

8. Taxation

The tax credit is made up as follows:

Deferred tax has been calculated at the rate of 26% being the rate which had been substantively enacted by law at the date of these accounts. The change in tax rate is 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 26% (2010: 27%) is £1,691,000 (2010 : £343,000).

The Group also has a deferred tax liability being accelerated capital allowances less the deferred tax on share based payments for which the tax, measured at a standard rate of 26% (2010: 27%) is £501,000 (2010: £472,000).

The excess of accumulated losses over deferred tax liability has not been recognised as an asset to the extent that the transfer of economic benefits in the future is uncertain (2010: recognised deferred tax liability £129,000).

The Chancellor has proposed changes to further reduce the main rate of corporation tax by one per cent per annum to 23 per cent by 1 April 2014, but these changes have not yet been substantively enacted and therefore are not included in the figures above. The overall effect of the further reduction from 26 per cent to 23 per cent, if these applied to the unprovided deferred tax asset of 31 July 2011, would be to further reduce the deferred tax asset by £138,000.

9. Earnings per share

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

Fixed asset additions for the year ending 31 July 2011 include £Nil (2010: £521,000) of equipment that was in the process of construction at 31 July 2011 and was paid for after the year end.

11. Intangible assets

12. Investment in subsidiaries

The impairment of the loan relates to the Company's investment in Nanoco Life Sciences Limited. The Directors have concluded that the investment's recoverable amount is £nil.

Loans to subsidiary undertakings carry no interest and are repayable on demand. Further information in relation to these loans is given in note 25.

The accounting for the reverse acquisition that took place in 2009 is described in note 23. The Treasury shares were initially written off at the time of the reverse acquisition and have subsequently been re-recognised.

*Share capital is owned by Nanoco Tech Limited. All other shareholdings are owned by Nanoco Group PLC.

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 currencies:

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 original 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 twelve months from the date of investment.

Cash and cash equivalents at 31 July 2011 include deposits with original maturity of 3 months or less of £4,962,000 (2010: £2,502,000).

An analysis of cash, cash equivalents and deposits by denominated currency is given in note 24.

16. Trade and other payables

Trade payables includes £Nil (2010 : £521,000) of equipment additions that were still in the process of construction at 31 July 2011 and for which payment was made after the year end.

Other payables includes £719,000 (31 July 2010 : £539,000) of deferred revenue.

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 other loan is unsecured, bears interest at 2 per cent. above base rate and is repayable in quarterly instalments.

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.

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 £211,000 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. The total aggregate discount to nominal value of all relevant options, including those not yet exercised, was £662,000. This treatment will be submitted for approval by the Company at the AGM in December 2011.

19. Share-based payments

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 Statement of Changes in Equity.

A charge of £153,000 has been recognised in the Income Statement for the year (2010: £166,000).

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, following a lock in period, 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 will 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 a Monte Carlo model, 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) To the extent that EPS is greater than the EPS minimum threshold but less than the EPS stretch award, the number of options that will become exercisable will be calculated pro-rata on a straight line basis.

(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.

- Grant in June 2011

Share options were granted to management on 2 June 2011 subject to performance conditions being achieved, based on sales targets for the financial year ended 31 July 2012. The exercise price was set at 79.25 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.

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

(1) To the extent that revenues are greater than the minimum threshold but less than the stretch award, the number of options that will become exercisable will be calculated pro-rata on a straight line basis.

- 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 are exercisable any time after the third anniversary of the award and prior to 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 also 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 ("JOE's"). Subject to meeting the performance criteria conditions set out in the JOE's 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.

Weighted average exercise price of options

The weighted average fair value of options granted during the year to 31 July 2011 was 89.0pence (2010 : 54.7pence). The range of exercise prices for options and jointly owned EBT shares outstanding at the end of the year was 3.5pence -100.75pence, (2010: 3.52pence - 87.5pence).

For the share options outstanding as at 31 July 2011, the weighted average remaining contractual life is 6.4 years (2010: 6.4 years).

The weighted average share price at the date of exercise for those share options exercised in the year ended 31 July 2011 was 100.9 pence (2010 : n/a).

The following table lists the inputs to the models used for the years ended 31 July 2011 and 31 July 2010

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.

21. Movement in revenue reserve and treasury shares

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 2011 4,238,486 shares in the Company were held by the EBT (2010: 3,759,251). In addition there are 12,222 (2010: 12,222) treasury shares not held by the EBT.

* Granted during the year 479,235 shares (2010: nil shares).

* Shares issued to EBT previously reported by Nanoco Tech Limited.

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. Acquisition of subsidiary undertaking in 2009

On 30 April 2009 the Company acquired 100% of the issued share capital of Nanoco Tech Limited ("Nanoco Tech") for consideration satisfied by the issue of 158,138,036 ordinary shares of 10 pence each. The directly attributable costs of the transaction amounted to £455,000.

The transaction has been accounted for as a reverse acquisition equity transaction as if Nanoco Tech Limited had issued new shares in exchange for Evolutec Group PLC's cash and other assets. The substance of the transaction is that of a share issue fund raising under which Nanoco Tech received cash and bank balances of £5,892,000 representing 98.9% of the value of the net assets of Evolutec Group PLC and the associated costs of the transaction have therefore been charged directly against equity share capital.

The fair value of the shares issued has been determined from the perspective of Nanoco Tech. The Directors of Nanoco Tech negotiated the acquisition terms on the basis that Nanoco Tech had a total fair value worth of £37.5 million and that its shareholders would be diluted to 14.1% in the enlarged Group. This gives an implied fair value of shares issued of £6,154,000 which is £195,000 higher than the value of the net assets deemed acquired.

The difference between the fair value of the transaction and the net assets acquired was recorded as a cost of reverse acquisition in the Income Statement.

The fair value of the assets deemed to have been acquired has been assessed as the book value on the acquisition date.

The results of Evolutec Group PLC have been included in the consolidated financial statements from 30 April 2009. Evolutec Group PLC and its subsidiary, Evolutec Limited, did not contribute any material revenues or profits /losses since the date of acquisition. If Evolutec Group PLC had been a member of the Group from 1 August 2008 it would have likewise not contributed any material revenues or profits/losses.

Evolutec Group PLC changed its name to Nanoco Group PLC on completion of the acquisition on 30 April 2009 and was re-admitted to AIM on 1 May 2009.

24. Financial instruments

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 £20,159,000 at 31 July 2011 (£7,854,000 at 31 July 2010).

The Company is not subject to externally imposed capital requirements.

Categorisation of financial instruments

*Excluding deferred revenue.

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 (note 17) are subject to interest at base rate plus 2%, however as the Group's cash deposits which attract interest at floating rates, are of a greater amount, any increase in base rate and thus interest payable would be 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 on-going 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 14, which was neither past due nor impaired.

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 has transactional as well as translational currency exposures. Such exposure arises from sales or purchases in currencies other than the functional currency.

The Company enters into forward currency contracts to fix the exchange rate on invoiced or confirmed foreign currency receipts. The Company does not take out forward contracts against uncertain or forecast revenues. There were no open forward contracts as at 31 July 2011.

The split of Group assets between Sterling and other currencies at the year end is analysed as follows: