Letter To The Shareholders
A Periodic Update – May 9, 2012
We recently reported our first quarter results and I want to provide a brief update to you. Let me start by saying that the results were in line with what we expected for the quarter – both from a revenue and loss perspective. This is the natural result of our shift in strategy to focus on higher-margin direct product sales.
Due to the nature of these new technologies and materials, our sales cycle can be longer than a simple ‘off the shelf’ purchase. During the sales process, we often go through minor production changes and possible design modifications, lengthening the sales cycle timeline. Our budgets and forecasts call for minimal revenues from direct sales during the first two quarters of 2012, with volume picking up in the third and fourth quarters.
Product Sales: I am extremely encouraged by the sales results we are seeing. Those of you that listened to the recent RedChip presentation (which is available for replay on our website) will know that I mentioned some of our progress. In the thermal management area, we started our direct sales program in January and since then we have been in contact with over 150 companies with samples going to over 40 companies. Some of these samples have been through multiple iterations, and we expect to begin receiving orders by the end of the second quarter. One example of a potential application is from a major international defense contractor that would use our thermal management material in a circuit board. A success like this would result in annual volumes of several hundred thousand dollars per year. This is just one example of the many potential applications that we are dealing with in the thermal management area.
In the composites area, we have similar statistics of potential customers contacted, and samples provided. We are initially focusing on sporting good applications, since we already have a product in the market with Yonex, but are also exploring many other markets. We issued a press release earlier this week about CNTstix™, our new CNT-enhanced structural adhesive, and are very optimistic about its sales, as well as our other composite products.
We will bring in additional resources during the year to support our sales efforts and to meet our projections. Our multiyear projections for product sales are based on a methodical increase in sales, and sales resources, and we are on track to achieve those.
Royalty Revenues: Our royalty revenues from Yonex are up. If the first quarter was annualized, it would result in an increase of approximately 50 percent over 2011. We are looking for increases in future quarters, and expect a minimum 50 percent increase in Yonex royalties over the 2011 annual numbers. Royalty revenues in the second quarter are expected to be substantially higher because it will include the remainder of the YHCC upfront payment. We expect YHCC product royalties to begin in the third quarter.
Research Revenues: Our research revenues were lower during the first quarter, but should increase gradually throughout the year. As we have seen historically, our research revenues have peaks and valleys from quarter to quarter, as some projects end and others start. In the first quarter of 2012, our research revenues were down, but two new Phase II SBIR contracts were received in the first quarter and we are anticipating a new private contract in the second quarter. As we move to more product sales, research revenue, as a percentage, will become a less important component of total revenue.
The Future: We are very excited about the future. While our direct sales efforts are ramping up, we continue to pursue opportunities that will allow us to reap more rewards from our other market-changing innovations. We have several initiatives in progress that we expect to bear fruit in the coming months and years that are an investment in the future. We are excited about these initiatives and as things are finalized and will certainly share details with you. Over the last couple of years, we have focused on developing and refining our strategy and getting the fundamentals in place as a base for growth. We believe we are on the right track and are looking forward to successful implementation and execution of our strategy.
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.