Letter To The Shareholders
A Periodic Update – June 19, 2012
As we approach the end of the second quarter, I wanted to share some more information about the evolution of our strategy and expand on some of the positive developments that have recently occurred.
As announced in our May 22, 2012 press release, we have formed a new subsidiary to focus on commercializing our sensor technologies. We’ve also hired an outstanding individual, Alan Jernigan as CEO of the subsidiary. In addition, we have identified an acquisition candidate for the subsidiary and signed a nonbinding letter of intent to acquire this company. This acquisition will bring a solid, growing revenue base and give us an entree into important markets for our sensor technologies. Currently we are conducting due diligence. I will provide more detail on each of those items, but first I want to address the vision of this subsidiary.
Our plan is to build a company that ultimately becomes a dominant provider of personal health monitors and diagnostic equipment based on breath analysis. While working toward this goal, we intend to commercialize our technology for industrial applications to generate revenue more quickly in the short run. At the same time we plan to develop product data, identify and implement manufacturing improvements and efficiencies, and generate an operating track record for the technology. Integrating our potential acquisition into the subsidiary allows us to accelerate our business plan and use the profits generated by this acquisition to help fund our ongoing development costs as we move toward medical applications.
I am sure everyone is familiar with our sensor technology, but over the past few years, we have built an extensive portfolio of intellectual property. In particular, our differential mobility sensing technology uses a proprietary nonradioactive source. It is highly effective at detecting and measuring various gases, agents, and volatile organic compounds at extremely low levels. We have proved that this technology can sense industrial gases and we are currently field testing it in agricultural applications. We have also identified other areas of potential application including environmental testing and monitoring, counterfeit substance and counterfeit products detection, biometric profiling, roadside substance abuse testing, and threat detection.
This technology is also ideally suited for use in the health care field where breath analysis can be used for non-invasive low cost testing and diagnosis. Initially we would target clinical applications and ultimately move into personal home health monitoring. In the medical area, we initially expect to screen and monitor specific disease states such as diabetes, cancer, infectious diseases, cardiovascular disease, and others. Ultimately we plan to have a wide range of monitoring systems designed to facilitate early detection of a broad spectrum of potential diseases.
Our new wholly owned subsidiary, named EZDiagnostiX, Inc. (“EZDX”), reflects our ultimate focus on diagnostic medical applications. We believe it is very important to create this subsidiary so that the commercialization efforts can be focused, separate from the research and development activities that are conducted at our Applied Nanotech, Inc. (“ANI”) subsidiary. EZDX will exclusively license the sensor technology and intellectual property (“ IP”) from ANI, and ANI will perform research activities for EZDX, as needed, under contract with EZDX.
Hiring a CEO for EZDX was a very important step for us in identifying a leader who could drive commercialization of our sensor technologies through direct sales, as opposed to licensing. Our exhaustive, global search led us to Alan Jernigan. Alan has an extensive background in medical diagnostics and during his career has helped grow product divisions from inception through product development and commercialization at a wide range of companies, both in terms of the size of company and type of products. Alan started his career, and spent eleven years, at the diagnostics division of Abbott Laboratories, where he ultimately became worldwide sales training manger for the division. He also spent time at Idexx, Igen, and at Thrombovision, where he was the first employee. In his last position, he served as chief commercialization officer at One Lambda, a privately held company with over 300 employees and sales in over 60 countries. Alan is in the process of relocating to Austin and everyone will have a chance to meet him at our next shareholders meeting or investor day.
The acquisition target that we have identified is also an ideal match for our sensor division. Under the terms of our non-disclosure agreement, we cannot disclose the name or much information until the transaction is completed. But as I mentioned, we signed a nonbinding letter of intent and are currently in the process of conducting due diligence. This company had sales of approximately $12.5 million last year and expects sales in the $15 - $20 million range this year. Privately held, the company has a worldwide sales force, manufacturing/assembly operations in three countries, and a strong engineering team. Its IP is very complimentary to ours and we believe that when combining our approaches, we can develop even more powerful sensors and IP. We expect this company to operate profitably from the time of acquisition and the unification of this company with EZDX will rapidly accelerate commercialization of our technologies and open new markets for them.
Our plan is to raise $20 - $30 million in this subsidiary while maintaining a substantial ownership position in the subsidiary, depending on the valuation achieved for EZDX. This capital infusion will provide EZDX with the funds it needs to complete the acquisition, commercialize the technology, and license the IP from ANI. The dilution resulting from less than 100% ownership of the subsidiary will be more than made up by the value created by the acquisition and ultimate commercialization of the technology. The license of the technology to EZDX by ANI will provide both an upfront payment and royalty stream to ANI. We are targeting revenues at EZDX of $80 million by 2015 and $360 million by 2018.
In addition to the funds raised through the subsidiary, we are also raising $2.0 million through convertible notes similar to the raise that we did in early 2010. The notes will be due in January 2014, bear interest at a rate of 8%, and are convertible at a price of $0.16 per share. We have received a total of $600,000 so far, and have commitments for additional amounts. We anticipate completing this raise by mid-July, if not sooner. We are raising this money to fund a refundable deposit pursuant to the letter of intent related to the potential acquisition to maintain exclusive negotiating rights, as well as to fund the costs of starting the new subsidiary, including due diligence costs, and increased working capital.
We believe the establishment of this subsidiary, including the acquisition, will help unlock the value of our intellectual property and accelerate our commercialization process. We chose to start this process with a subsidiary related to our sensor technology because of the versatility of the technology for many applications, ranging from near term industrial applications to the potentially explosive growth areas in medical diagnostics.
Our efforts over the past few months have been heavily focused on our sensor activities, but we are making progress in our other areas as well. I am not going to go into great detail at the present time, but will provide updates in the near future. We are continuing to make progress with our sales efforts in both the composites and thermal management areas. During the third quarter, once we have completed the acquisition, we expect to bring in additional high level management talent in the sales and marketing area to focus on our composites and thermal management activities. In the solar inks area, we have been in discussions related to a potential license/joint venture for the market areas not covered by the YHCC agreement. After evaluating this relationship, we have come to the conclusion that we will achieve better outcomes by pursuing customer opportunities directly.
In summary, we are very excited about our strategy and the progress we have made to date. We are focused on accelerating commercialization of our technologies and moving beyond the research stage. While we expect to maintain a nice mix of research revenues and product royalties from our licenses with Yonex, YHCC, and Ishihara, we see our real growth coming from direct involvement in the commercialization of our technologies through product sales.
I want to thank everyone for their patience during our transition period. I personally believe that from an opportunity standpoint, we are in the best shape ever and have the pieces in place to generate substantial revenue and profit growth. The foundation is being laid to build great businesses with a big future. Against that exciting backdrop, EZDX encapsulates what we are doing and the road ahead.
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, 2011, 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 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.