Letter To The Shareholders
A Periodic Report - January 2007
I do my own writing, this is not crafted by a PR professional, and I have to admit it is my fifth attempt to convey my findings of my first six weeks as CEO. I tried writing about financial results, prospect status, legal positioning, etc. These all ended up on the floor because I realized I really had to start with my feelings about the company.
NPI has confused and disappointed me for years. I have been an investor, made and lost some money and always generally held on because it looked like the turning point was at hand. As time went by and NPI entered and exited businesses, I came to realize that I had lost touch with the business model, so I sold my stock. Then, because I knew some NPI investors and continued to hear the story, I became as much afraid that I was going to miss the upside as I was ever afraid of losing my investment on the downside!
A dilemma for sure, but it led me to this position and into a significant, for me, ownership position in the stock, along with the option holdings granted by the company.
Ultimately, the reason we invest is to make money through stock price appreciation. Basic economics tells us that stock prices are set by investor expectations coupled with supply and demand. One of the purposes of this letter is to set realistic expectations.
Our 2006 performance did not include a single dollar of the royalty income where we receive ongoing value for our intellectual property resulting from our licensees' sale of products to their customers. This performance is not acceptable when you remember our core business strategy is to generate long-term, repeatable, dependable, significant revenue from licensing the use of our extensive intellectual property portfolio.
I do not want to appear overly negative, 2006 had many bright spots. Revenue will be reported as more than double 2005 and many great staff additions and fledgling customer and prospect relationships have been added to the mix. However, 2006 belongs to the past, both in time and management teams. The obvious question is "What direction am I going to lead the company for 2007 and beyond?".
To clarify our business strategy, NPI is an intellectual property licensing company. We expect to generate significant, predictable, repeatable long-term revenue through licensing access to our intellectual property for use in our customers' end products. We do not expect to manufacture products or sell to end users.
We are investing in enhancing our intellectual property in the following related fields:
- Electron emission from carbon nanotubes
- Functionalized nanomaterials
- Sensors
- Nanoelectronics
- Other, endless possibilities seem to exist, but we do not want to be a hunter blindly firing into a flock of birds, and hitting none. We have chosen the areas where we have experience and results and we are going to focus exclusively on them.
The elusive goal of repeatable revenue from our IP is getting closer all the time, but we are not there yet. Each of our IP value lines follow a similar path, a conceptual view with the relative progress in each is:
| IP | Concept | Lab Demonstrations | Pilot Evaluation | Initial License Revenue | Significant Revenue |
|---|---|---|---|---|---|
|
What does this mean in dollar terms? The realities are that I do not see any significant royalties until the third or fourth quarter of 2007 (except perhaps related to litigation settlement). A slow process to be sure, but one with lasting value as we expect the royalties to be ongoing and the related costs to be very low.
Despite the royalty revenue stream timing, the financial results for 2007 do not have to be a repeat of 2006. This is not a business I want to cost reduce to profitability, the future value of our ongoing research is too high. However, I recognize that the only way to break the cycle of losses causing us to raise money, sell new stock and therefore eliminate the demand element from the stock price, etc. is through profitability. To focus on the goal of reducing our ongoing cash needs, we have incentivised the whole management team, none more heavily than me, towards seeking projects and research partners who are willing to fund the stages of research leading up-to a licensing decision. We no longer work for free, our intellectual property portfolio has value and our future partners have to be willing to pay for our assistance to adapt it to their needs.
To summarize the strategy:
- Focus on the four identified areas.
- Improve margins on funded development projects.
- A focus on Goal 2 helps drive the company towards cash flow and ultimately income break even for our core research efforts.
- Achievement of Goal 3 stops the unlimited supply of stock problem and allows the market forces of supply and demand to start to work.
- If we achieve Goal 4, and capture the holy grail of repeatable royalty income all the factors will be in place for long term stock appreciation.
Five cornerstones, simple to state, easy to remember, hard to achieve. My compensation is directly tied to these goals in the company option plan and aligned 100% with yours with shares I have purchased in the last few weeks.
Our progress towards objectives has been significant. The "committed" revenue (that which is represented by signed development agreements) is already approximately twice that of 2006 year end numbers. We have handshake agreements for an additional $1.0 million and have no reason to think that our success in pursuit of future government contracts will be significantly different than our recent outstanding successes.
Is the sum of these sufficient to get us to cash flow breakeven and ultimately profitability? Not yet, but we are headed in the right direction and I am still hopeful for 2007. Our cash position is adequate for our immediate needs which frees management's time to focus on the core business.
When I talk with investors, they always want to know the answers to very detailed questions about our revenue opportunities. I want to reiterate a position stated in the past by Dan Burck. We work in the area of future, emerging technologies. We are frequently under non-disclosure agreements. As much as we want to, we cannot release all the details of projects and partners' names. We do understand our obligation to report significant events. All this leads to the watered down vague releases. Please believe me: we would rather have it the other way. We win the same way you do.
With the above in mind, I want to comment on some existing relationships.
- Kelman - we have received no revenue from Kelman in the past and over the last six weeks, we have become aware of a divergence between their needs, the sensor product line we were developing and our view of the size of the potential market they served. All of the research we have done on the sensor line was funded by us; when Kelman was asked to fund a portion of the continued development, they declined. We are, therefore, seeking other prospects for the hydrogen sensor technology. We own 100% of the intellectual property developed during this project.
- Conspicuous by its absence is any mention of next generation memory chips in our product line. We have no current effort supporting this development. It is not in our focus, and has not been an element of our past or 2007 projected revenue.
- Sporting goods manufacturer - progress in integrating the nanomaterials we developed in the Phase I of this project is continuing and on schedule in the Phase II we announced last month.
- Da Ling - progress with this partner is to the point where they have to make a substantial financial commitment and they are in the evaluation and approval stage. We are unable to control the business case approval process. We are sure of the technology, but the ball is with them.
- Our sale of the Electronic Billboard Technology's intellectual property portfolio to Novus Partners, LLC has joined our revenue prospects with theirs - we are making no on-going investment in this market area and we are focusing none of our limited management attention in this direction.
We do expect that they will be successful in their business model, however, we do not run their business, cannot directly force them to pursue infringers or to pay us a share of license fees for the use of the IP that they have not yet earned from their customers.
I believe 2007 Novus royalty revenue is likely, however, we have not included it in our internal budgets because of this lack of certainty and control.
- Mitsui continues to move towards an agreement and a recent meeting in Austin resolved most of the remaining business issues.
- Shimane Masuda Electronics (SME) is continuing its efforts to move from the pilot stage to commercial product.
No discussion of the state of the business would be complete without mentioning litigation, particularly in light of today's press releases. However, it should come as no surprise that progress comes at a snail's pace. This is the real world, not a one hour TV drama. The respective management teams are not in adjoining conference rooms passing proposals back and forth. At this stage, any communication is via each party's very capable law firm.
I know this may be a shock to those who envision an on-going intense negotiation, but the facts are what they are. If management were to spend the daily energy reacting to the rumors built upon rumors that seem to spring from investors minds via the bulletin boards, we would not have time to run the business. We believe our position is strong in each case; we believe we will prevail in a settlement or trial, and either could lead to a welcomed addition to our reserves. However, the value is in our broad base of IP. I believe, we are at the forefront of technology that will change many products and generate a revenue stream that will continue long after the dollar impact of these suits are booked and spent.
I have covered a lot of ground. In my opinion, the company has never had more opportunities available to it, or a higher probability of success.
I cannot change 10+ years of history and I will not even try to put a "spin" on it. All I can say is that I will work hard to fix things I do not like, try to insure we get compensated fairly for what we do, and assemble a team capable of delivering results.
Doug Baker will continue as CFO. I do not think enough of us have a perspective on how hard his job is in today's environment. Doug has a wealth of knowledge about our business and has been invaluable in bringing me up to speed. Zvi Yaniv, of course, continues as the heart and soul of NPI. His brilliance is industry recognized and his work ethic and drive is without question. We are all lucky to have him working with us.
There will be minor organization changes, mostly transparent to outsiders. I do intend to bolster our proposal writing and sales efforts. I have also retained Bill Spina, who has worked with the company in the past, to assist in keeping NPI's name in the forefront of the press and investment community.
I have spoken with many of you and hosted some of you at meetings. I hope to do more of that in the coming months. For those who cannot dedicate the time to one-on-one communication, you can expect updates like this quarterly and I expect we will communicate via conference calls when we have concrete news about progress on the legal front or very significant business announcements.
If it isn't already evident, I am happy to be here and look forward to your support as we grow this company.
SAFE HARBOR STATEMENT
This press release contains forward-looking statements that involve risks and uncertainties concerning Nano-Proprietary’s business, products, and financial results. Actual results may differ materially from the results predicted. More information about potential risk factors that could affect our business, products, and financial results are included in Nano-Proprietary’s annual report on Form 10-K for the fiscal year ended December 31, 2005, and in reports subsequently filed by Nano-Proprietary with the Securities and Exchange Commission ("SEC"). All documents are available through the SEC's Electronic Data Gathering Analysis and Retrieval System (EDGAR). Nano-Proprietary hereby disclaims any obligation to publicly update the information provided above, including forward-looking statements, to reflect subsequent events or circumstances.