Letter To The Shareholders
A Periodic Report - October 2009
It has been a little over three months since my last update and almost five months since I started guiding the company as CEO. It has been a busy period and I would like to thank our longstanding shareholders for their continuing support and welcome new shareholders. Since we have a wide shareholder base and the company has changed substantially over the years, I think it is important to start off with a brief history and an explanation of how our company evolved to where we are today so that everyone has a common understanding.
For much of the Company's 20 year history, we were focused on display applications. In late 2005, as part of our strategic planning process, we decided to diversify to avoid being entirely dependent on one "make or break" application. Using the knowledge we accumulated over the years working on display applications, we branched out into five areas of nanotechnology. Those areas are Nanomaterials, Nanoelectronics, Sensors, Nanoecology, and Electron Emission.
We then began seeking funding for research projects in these specific areas that would utilize our skills and help us develop intellectual property. The intention of our research projects is to help our partners solve specific technical impasses in areas with significant market potential and generate licensable IP in the area. In late 2005, we began our collaboration with a Japanese sporting goods company in the field of carbon nanotube reinforced epoxies. In early 2006 we obtained funding for our Photoscrub® project. In 2006, we also began working with a Japanese chemical company in the field of inkjettable copper inks. In addition to funding from corporate partners, throughout 2006 and 2007, we received many government contracts related to our five areas of nanotechnology interest, in particular in the areas of sensors and nanoelectronics.
During this period, our revenue grew from about half a million to $4.0 million as shown in the table below and we saw a significant increase in IP licensing fees and royalties
| $(000) | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|
| Research Revenue | 600 | 1,050 | 4,000 | 3,425 |
| License Fees and Royalties | - | 75 | - | 575 |
| Total Revenue | 600 | 1,125 | 4,000 | 4,000 |
This trend continues in 2009. By year end, our revenue for 2009 will exceed 2008 by a significant amount. Our current research backlog, meaning signed contracts in hand, is strong at approximately $3.0 million. In addition, we have over $4.0 million in submitted R&D proposals, with more to be submitted in October that will bring the total to over $5.0 million. While a proposal does not automatically turn into an awarded contract, we have an excellent track record with our proposals and we expect a significant portion of these to ultimately turn into revenue for us.
When deciding whether to submit proposals, we evaluate the commercial potential of the proposed technology and how it relates to or can extend our core competencies. Almost all of our research contracts involve a significant partner/subcontractor that will be capable of manufacturing any product that could result from the project. Over the past couple of years, we have partnered on government contracts with Northrop Grumman, Boeing, Goodrich Sensor Systems, Sionex, the National Renewable Energy Laboratory, and others. Government research contracts enable us to develop intellectual property for innovative and truly inventive unproven technologies at a relatively low cost. In addition, often the relationships we develop with our subcontractors/partners lead to new opportunities for us. The successful completion of the project can lead to licensing opportunities, regardless of whether the particular governmental agency is interested in pursuing the technology at the end of the project, or not.
Of course research revenue, government or otherwise, can only take us so far. To achieve profitability, we need license agreements and royalties creating numerous revenue streams. The past year has been significant for us, since we have begun to realize the benefits from our expanded strategy. Since October 1, 2008, we have:
- Signed a license agreement with our sporting goods partner.
- Introduced our CarbAl™ heat transfer material.
- Won the IDTechEx Printed Electronics for our inkjettable copper ink.
- Signed a license agreement with our chemical company partner.
- Won the 2009 R&D 100 Award for the CarbAl™ material.
The license agreements provide us the obvious benefit of upfront payments and future royalties, while the awards are a further validation of the technology and products that we have been able to develop. So where does that leave us today? The answer is probably in the best position that we have ever been in when considering the broad scope of opportunities in front of us combined with the underlying revenue base and backlog to support our operations. What is different about now compared with three, five, or seven years ago? We now have tangible results and items that we can provide as samples to people. We are not just selling a concept or idea, but rather something that can be backed up with data and product deliverables. This can be seen in each of our five divisions.
Nanomaterials
We probably have more research activity and customer interest here than in any other area - both with our CNT composite material, and with the CarbAl™ material.
Composites - This is an excellent example of our strategy at work. We started in October 2005 with our sporting goods partner to develop an improved material by introducing carbon nanotubes into their epoxy. The culmination of our three year effort was a license in October 2008 for them to use the material in the frames of their tennis and badminton racquets. We were able to lower the weight of the prototype racquet by over 10%, keeping the same mechanical properties, while introducing less than 2% carbon nanotubes into the base material of the racquet. We anticipate that our partner will be introducing a product in 2010. To digress slightly, while we are working with a partner, there is agreement between us not to work with others on the same project concept. Once the license was concluded and our sporting goods partner decided what they wanted to license, that freed us up to work with others. There are a huge number of potential applications where a composite material that is lighter, yet stronger, is needed. As a result we are sampling our material for use by racquet manufacturers outside of Asia, golf shaft manufacturers, a large CNT manufacturer interested in manufacturing the material, and many others for a variety of applications. Some of these may result in a development agreement, or a combination development agreement/license. Any development agreement should be relatively short term, since the project would involve tailoring a material to a particular application, rather than a "start from scratch" project.
CarbAl™ material - Our carbon based nanocomposite is a superior thermal management material that far exceeds the capabilities of conventional materials. As a result we are actively working with many potential customers for a wide range of possible applications including semiconductors, electronics, and solar applications. This also is a product that can be currently produced by our strategic partner. We are providing samples and have some initial development projects related to CarbAl™ material in process. We expect additional projects, and like with our CNT composites, development projects should be relatively short term and involve integrating an existing material into existing products - not a "start from scratch" development program.
Nanoelectronics
As with our sporting goods partner in nanomaterials, we have a significant partner in nanoelectronics with our chemical company partner. We began a project with this partner in early 2006 to develop a conductive inkjettable copper ink. This project culminated in an exclusive license agreement for copper inks and pastes in July 2009. During the course of this project, we have expanded into many related areas and have developed a concept that we call Technical Ink Printing Solution (TIPS). As part of this concept, we have developed relationships with nanoparticle suppliers, equipment manufacturers and others, in full cooperation with our licensee. We are also working with companies that have potential applications for a conductive copper ink and intend to obtain development contracts to help those companies apply the inks to their applications. When our chemical company partner is ready to sell the inks, we intend to be involved in the supply chain of nanoparticles, help the users transfer the inkjettable process and the inks to their manufacturing lines, and aid these companies with equipment purchases needed for their production lines.
We have also developed many other metallic inks beyond the copper inks that are licensed to our chemical company partner. We have a Phase II grant with the U.S. Department of Energy for the development of metallic inks (Aluminum, Nickel, etc.) for use in solar technology.
We are also now selling nanoparticles, utilizing production capabilities of a partner in China. While the quantities are small, our goal is to facilitate development of nanoparticle applications and identify potential candidates for research contracts where we could use our knowledge of nanoparticles to help the purchaser solve problems. We also have obtained funding from the BIRD Foundation in conjunction with NanoReady, a nanoparticle supplier based in Israel, to develop improved manufacturing processes for nanoparticles.
Sensors
We started our work in the sensor area by addressing a need for a hydrogen sensor for use in power transformers. Working with our partner, we have developed a hydrogen sensor based on palladium nanoparticles. We have licensed this product to our partner and expect that they will incorporate it in a product to be introduced in the first quarter of 2010.
We are also gaining tremendous expertise in the sensor field, with major support from the U.S. Government and industrial entities. We have developed sensors for numerous analytes other than hydrogen.
We have also done some initial work to apply our accumulated knowledge in sensor technology to breath analysis applications in the medical field. We have developed partnerships and are currently seeking funding to develop this technology.
Nanoecology
The main activity here is our Photoscrub® project with the U.S. Army. Photoscrub® involves the inactivation and decomposition of biothreats and pathogen microorganisms. We successfully completed a Phase I contract with the Army in early 2008 and after a long delay related to issuance of the Phase II contract began Phase II in the 2nd quarter 2009. We are now about a third of the way through that contract which ends in late 2010.
We are in the very early stages of exploring other potential nanoecology applications, but none have yet reached the revenue producing stage.
Electron Emission
This is the division where we are spending the smallest amount of actual research time and effort right now. Display applications represent the largest potential application, but there are also X-ray and other applications.
We have a dominant IP position in display applications using electron emissions from carbon nanotubes, or other forms of carbon. These applications could include a CNT TV, or the use of CNTs for backlighting or other specialty lighting applications. Unfortunately, in the current economic environment, there seems to be very little interest at the large display companies in introducing new technologies. As late as August 2008, we were having substantive discussions related to a license for backlighting applications. However, when the worldwide economic downturn hit in September 2008, the discussions stopped abruptly.
The most important patents that we have in this area are the Raman patent and the Keesmann patent. Given its longer life and broader geographic coverage, we consider the Raman patent to be the most valuable electron emission patent that we have. We continually monitor activity in this area, but at the present time we are unaware of anyone selling a product that would violate either of these patents. Frequently there are articles about companies developing display or X-ray applications that would require a license to one of these patents and we make contact with these companies. However, generally no one wants to sign a license involving any sort of upfront payment until they have a product ready to sell - especially if it is a long term development project.
We are working on some smaller electron emission activities such as ion sources or neutron generators. These applications have the potential to generate license revenue, but on a much smaller scale than the display applications. Revenue from these applications, however, would still be significant to us.
As you can see, we have a lot of activity going on and we expect to continue making significant progress in all areas. Our losses are narrowing and we will actually be close to breakeven for the quarter ended September 30, 2009. Our cash balance at September 30, 2009 is higher than the cash balance at June 30, 2009 and we continue to maintain cash balances that, when combined with normal revenue, keep us with about a three month cash cushion. While pessimists may point to our liquidity and distinct licensing events that create peaks and valleys in our revenue stream, optimists note the power of licenses and that a few agreements and widening the sources of our revenue streams can lead to profitability and generate earnings per share. We expect 2010 to be our break-out year.
We are also in the initial stages of aligning our business to bring us closer to the markets, products, and customers of our strategic partners. This entails exploring the establishment of specific business units for certain high potential products. These business units may be separate entities owned by APNT, our strategic partners, and other strategic investors. The goal, in addition to receiving license revenues from the entity, would be to allow us greater control of product introduction and commercialization, accelerate the payment of running royalties by accelerating product introduction, and allow us to participate further in the value created by the manufacture and sale of the product.
We are planning a shareholder meeting in the next few months but have not yet finalized the details. We will provide more information as it becomes available. We are also developing plans to expand our investor relations effort to improve investor awareness of our activities.
As I mentioned in my last letter, we are updating our website. We are planning to unveil the new site by mid-October. I think you will find the new website a dramatic improvement over our current site. We also have plans for additional upgrades to the new site that we will work in over time to continue to add information. Please feel free to send your comments or suggestions on the new site after it is up and running.
In conclusion, as the world approaches the end of one of the most economically tumultuous years in recent history, we have not only held our ground, but have improved our earnings and earning potential and strengthened the Company. I am proud to be at the helm of APNT as we continue down the path to profitability.
Sincerely,
Doug Baker
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, 2008, 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 on our website, at www.appliednanotech.net. We hereby disclaim any obligation to publicly update the information provided above, including forward-looking statements, to reflect subsequent events or circumstances.