Letter To The Shareholders
A Periodic Update - July 2010
Many exciting things are happening at Applied Nanotech and I want to provide you with an update. I am going to start with some general items, then go through the status and some of the developments related to specific technology platforms. Of course there is so much going on that I couldn’t begin to cover it all in this letter, so I am going to stick to some highlights. Finally, I plan to wrap up with some of our expectations for the future.
First, as you may have seen from our proxy filing, we have selected a date for this year’s shareholder meeting. It is Tuesday, October 5, 2010 at 10:00 am in Austin. Details of the exact location will be included in your proxy materials when you receive them in August. The meeting will be followed by an open house at our facility. We are proud of the progress that we have made over the last year and we urge you to attend so you can see some of our achievements firsthand and meet some of our talented scientists, staff, and Board Members in person. I look forward to seeing and interacting with many of you at the meeting and open house. I will also plan another letter prior to the meeting date to update you on developments prior to that time.
We are very excited to have once again won an R&D 100 award for our scientific achievements – this time for our Cu-i70 Conductive Copper Ink. Last year we won the award for our CarbAl™ heat transfer material. I will discuss the status of both of these technologies in greater detail later, but R&D 100 awards have an excellent track record of identifying revolutionary technologies early in their development process and we certainly think they have done so once again with these two products.
At the macro financial level, we continue to be heavily focused on reaching profitability for 2010. As mentioned in our recent press release, we received the final up-front portion of the license payment from Ishihara for our conductive copper inks and pastes. This will bring our revenue for the first six months of 2010 to close to $3 million. We are still in the process of closing our books as of June 30, 2010, but we will be profitable for the 2nd quarter and we expect to be profitable at the income from operations level for the entire six month year to date period. Some of the non-cash costs associated with our financing from earlier in the year likely will prevent us from reaching breakeven at the net income level for the total six month period ended June 30, 2010.
We have a strong cash position – over $2.1 million as of June 30, 2010, which is the highest cash level we have had at a quarterly filing date since March 2008. This cash, when combined with our known revenue sources will enable us to operate well into the 2nd quarter of 2011 - this before considering many of the fantastic opportunities in front of us. In addition, we have a strong revenue backlog and are well on our way to having enough revenue in the pipeline to reach the $6.0 to $6.5 million of revenue that we need to be profitable for the year. While not totally there yet, we still expect sufficient revenue in 2010 to reach at least breakeven. Of course, our goal is not simply to breakeven, but to be profitable. We currently are pursuing numerous opportunities that could put us well over the top and result in much more than nominal profits in 2010. Dr. Yaniv, I, and the rest of the team, are more excited with the size and breadth of opportunities in front us than we ever have been before.
Nanocomposites
Our activity continues to expand rapidly in our composites area. This is probably the most exciting and active area of our business right now. The project with our sporting goods partner in Japan to tailor our material for golf shafts is progressing nicely and we expect them to exercise their option to license the material for golf shafts, in addition to the license that they already signed for tennis and badminton racquets, when the project ends at the end of November. We have been informed by our partner that they are making plans to introduce a product and scale up to volume manufacturing. While we don’t yet know the timing of introduction of their product, we believe it is simply a matter of when, not if, it is introduced.
Our project with the U.S. Army to use our composite technology for ballistic protection is also moving forward quickly. We completed the initial phase of the project and have been awarded a second phase. That second phase has been expanded (financially) twice already and the results are very encouraging. Our subcontractor on this project is a company based in San Antonio that currently supplies material to the army. They are fabricating the epoxy fiberglass plates that we have developed together using our CNT composite technology and are a natural licensee upon successful completion of the project.
We have another potentially lucrative project related to our CNT nanocomposites that I mentioned as a possibility in my last shareholder letter that has now turned into reality. In May we started a small ($50,000) research project with a U.S. company to prove that our CNT composite technology would work with a family of resins called “vinyl esters”. Vinyl esters are widely used for industrial purposes in products like liners for storage tanks and industrial piping. Vinyl esters are a different family of resins than the resins we have used for our sporting goods and other nanocomposites applications. We strongly believe that we can achieve the same results with vinyl ester resins as we have with other resins – that being that the introduction of CNTs will reduce weight by 20% or more, while retaining the basic characteristics of the underlying resin. For sporting goods, the benefit of reduced weight results in improved performance. For industrial purposes that use large quantities of resins, the benefit is significantly reduced cost. This project is going well and we expect to complete it successfully in the third quarter.
Prior to actually starting the project, we had extensive meetings and communications with our customer and have negotiated a letter of intent with the rough framework of license terms based on the assumed successful completion of the research project. The reason we are excited is that this will be more than just a simple license. Our partner will establish a manufacturing facility in Austin and at least one other U.S. location and has been in contact with potential manufacturing partners in other areas of the world. This Austin manufacturing location will be invaluable to us in working with our other potential licensees. We expect a strong working relationship whereby we may receive research dollars to tailor materials for their customers and they receive manufacturing orders from some of our other licensees.
Probably the most important thing about this project is that the product can be brought to market very quickly. Our partner has a proven strong sales organization and history and is currently selling products to its customers that could incorporate this new composite material. We would expect them to be shipping product in the first quarter of 2011 and we expect to be collecting royalties during that same period. We believe the reduced cost resulting from our composite will induce industrial users to embrace the product quickly, as opposed to more “retail” oriented products where there are other considerations such as marketing cycles, color, sound, and other potential consumer factors.
In addition to these three significant projects in the nanocomposites area, we continue to work with many other potential licensees for other applications such as golf shafts, bicycles, automotive, wind turbine blades, etc. In fact, we have a project going with a large international company based in Europe that we believe will demonstrate that our CNT nanocomposite is superior to other nanocomposites on the market. One of the problems with nanocomposites, in general, is that improvements made to the base material often do not transfer to the final product. We have successfully transferred our CNT nanocomposites improvements to the final product with our sporting goods partner in Japan. We expect the results and data from the analysis of our nanocomposites, compared with selected other nanocomposites, to be available in the 3rd quarter as well and that it will open the door to many other potential licenses and applications.
Nano Thermal Management
Our work with CarbAl ™ continues to move positively forward. At least a dozen different companies are currently sampling our material for use in a variety of applications, including solar power, LED lighting and others. The LED lighting application is very interesting. LED lights on their own have the potential to cut the power consumption for outdoor lighting applications, such as street lights, by up to 60% and we are in discussions with a company that has manufactured the prototype of an outdoor LED light that is shown below.
Integration of our CarbAl™ technology can improve the efficiency of these LED lights, lower the overall weight, and increase lifetime and reliability of the unit. We are currently working with this manufacturer to demonstrate the improvements. The worldwide market for these LED light is potentially huge.
At the same time we are working with potential customers for CarbAl™, we are looking at opportunities to be actively involved in an entity that can manufacture CarbAl™ in the volumes required for the many large applications that we are pursuing. We have had discussions with several European and Asian companies and Dr. Yaniv’s recent trip to China for the Nanotech China trade show yielded several potential partners for both manufacturing and uses of CarbAl™. In keeping with our increased focus on commercialization of our technology, we are exchanging business plans and proposals with these potential partners and evaluating the potential for future strategic relationships or ventures. We believe the best way to maximize our financial return is a hybrid arrangement whereby by we both license the technology and share in the manufacturing profits.
Conductive Inks
As I mentioned earlier, we received the $1.0 million from Ishihara Chemical to complete the exclusive license for our conductive copper inks. Ishihara is readying their production facility and working with customers for an eventual product introduction. The fact that they are now allowing us to use their name is an extremely significant event that has happened just in the last week. The recent announcement about our R&D 100 award is the first time that they have allowed the use of their name, which is probably more significant to them than payment of the $1.0 million. Now that they are willing to go public with their involvement in the product, we likely will start to learn more information about their specific plans and intentions in the upcoming weeks. Introduction of this ink has wide ranging application in the printed circuit board industry, for flexible PCBs, LCD displays, RFID tags, and many other areas.
Our copper ink was developed with two intentions – first to replace silver ink, and second to open up new markets for conductive inks where silver inks are too expensive. We have also been working with many companies that have an interest in using copper inks, some of which fall into each of those two categories. This provides us the benefit of receiving research dollars in some cases and helps create customers for Ishihara when their product facility is ready. One very interesting application mentioned in the previous paragraph is for displays. Currently these applications use copper mesh that is plated on to flexible and/or glass substrates in a chessboard pattern as shown in the figure below. Printed copper inks can replace these costly current technologies and improve the quality and reliability at the same time. I am sure you can imagine from the picture how much simpler it would be to print this pattern.
Beyond the copper inks and pastes which have been exclusively licensed to Ishihara, we are working with other forms of conductive metallic inks, primarily nickel and aluminum for use in the solar cell industry under our contracts with the Department of Energy.
Sensors
We are also continuing our extensive work in the sensor area. Much of our effort in this area is currently directed toward our contract with the North East Gas Association to develop a mercaptan sensor. Our prototype unit has demonstrated the ability to measure gases in parts per trillion – not parts per billion, but parts per trillion. Measuring gases at this extremely high level of sensitivity opens up a world of new possibilities in many areas.
One of these areas involves the measurement of levels of certain gases in human breath and we are currently seeking research funding to modify/develop this sensor for this application. Changes in the level of certain gases in breath are often precursors to changes in an individual’s health and the ability monitor and maintain data on these levels could be an important tool in the early detection and prevention of certain diseases.
We have also received a small research contract from an international space agency to use this technology to detect certain gases in space.
Other
Of course we continue to work on other revenue generating projects, such as Photoscrub, and various CNT electron emission projects. These areas, while farther from product introduction, are well supported by research programs from various government agencies and we are pursuing technologies with future commercialization potential. Our success to date on the Photoscrub project has let the U.S. Army to request and fund a study to determine if the active decontamination agent in the Photoscrub unit can be used as a spray to be applied to the ballistic panels to provide combined ballistics and chemical/biological protection.
Technology commercialization units
In my last letter, I mentioned the establishment of internal business units as a prologue to venture formation for certain high potential products or technologies. We have established what we call Technology Commercialization Units (TCU). These TCUs are small cross functional teams designed to insure that we are focusing on and devoting adequate resources to our high potential technologies, with a particular emphasis on commercialization of the technology. We have formed four of these internal units around nanocomposites, CarbAl™, Technical Ink Printing Solutions, and Life Science Sensors.
An excellent example of one way we hoped this would work is the previously mentioned project in nanocomposites related to vinyl esters. We focused on an area with a high likelihood of quick commercialization and are well down the path of completion. In the end, we expect to have a close working strategic relationship with our partner in this area, beyond that of a simple licensee/licensor relationship. We are also making steady progress with our TCU related to CarbAl™. Our ultimate goal is to be part of establishing an entity with the necessary resources to license and commercialize our CarbAl™ technology. We are also making progress with our other two TCUs as described elsewhere in the letter.
We expect to form additional TCUs in the near future as we continue to focus on commercialization of our technologies. As our technologies continue to mature, these existing TCUs will continue to evolve. We have found them to be a very effective way to focus our resources.
Future Expectations
As mentioned, we are heavily focused on making 2010 a profitable year, however we realize that is only the first step. Our ultimate goal is to generate rapidly growing, consistent, repeatable, high margin revenues to generate increasing profits. While focusing on 2010 profitability, we are also laying a strong base for the future. Over the past couple of years we have established a strong recurring base of research revenues and received up front license payments from a few sources. Our next hurdle is to begin collecting royalty payments based on product shipments. Based on the status of our various projects and licenses, many of which have previously been covered in this letter, we expect to receive royalties based on product shipments from three to six sources in 2011. In addition, we expect to receive additional upfront payments for licenses in both 2010 and 2011. Our goal is a minimum 75% increase in revenues from 2010 to 2011, on top of the 50% plus increase from 2009 to 2010. We want to maintain our cash balance at least at its current level through the end of the year and increase it substantially next year.
Investor Relations
As I mentioned in my last letter, we have been working on an investor relations plan to increase investor awareness of our company. We believe that we now are at the point where we are firmly positioned for strong growth and want to get our message out more broadly. We are in the process of hiring an investor relations firm and plan to announce that shortly. Over the next couple of months, in coordination with this firm, we are going to be developing investor materials and beginning an outreach to new investors. By this fall, we expect to be meeting with investment funds that specialize in high potential technology companies. We were invited to, and attended, an investor conference in May, the MDB Capital Bright Lights Conference, that was focused on companies with disruptive and market changing intellectual property and we expect to attend similar conferences in the future.
The main question that I get is the question that we can’t answer – that question being some version of “Where is the stock price going?” The price of any stock is influenced by a variety of factors, including the number of buyers and sellers at any particular time. People sell their shares for a variety of reasons, many of which having nothing to do with the value of the stock. Of course investor relations activity can’t on its own affect our stock price, but those activities can help attract buyers to offset the effect of sellers. One thing you haven’t seen and will not see in the near future is any selling by management. With that background, we believe that the best way to set the stage for an increase in our stock price is to generate rapidly growing profits based on consistent, predictable revenues. That is our focus and we believe we are well on the way.
People often ask about the value of the awards we win. We believe that in many instances, they are precursors to future revenue increases. For example, the companies invited to the MDB Capital conference were those companies that scored the highest on their proprietary PatentVest system, which is designed to identify small public companies with extensive intellectual property. MDBs research has shown that the stock of companies with extensive IP, in general, out performs the stock of similar companies without the same level of IP. At the conference, we won the Astrum award for having the highest score in the industrial category. In addition, I previously mentioned the R&D 100 awards, which we have won each of the last two years. These awards have a track record of identifying successful products early. The validation provided by these awards becomes a valuable marketing tool for us, which in turn helps us reach our financial goals.
In closing, I want to thank everyone for the continued interest in the company, as well as their patience and support. As I mentioned earlier in the letter, we at the company are more excited about our prospects for the future than we ever have been. We still expect 2010 to be our best year ever and look forward to an even better 2011.
Sincerely,
Doug Baker
Chief Executive Officer
Safe Harbor Statement
This letter contains forward-looking statements that involve risks and uncertainties concerning our 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 our annual report on Form 10-K for the fiscal year ended December 31, 2009, and in reports subsequently filed by us with the Securities and Exchange Commission ("SEC"). All documents are available through the SEC's Electronic Data Gathering Analysis and Retrieval System (EDGAR) at www.sec.gov or from our website at . We hereby disclaim any obligation to publicly update the information provided above, including forward-looking statements, to reflect subsequent events or circumstances.