Nano Magic Inc. - Annual Report: 2005 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ý
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Annual
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
for the fiscal year ended
December
31, 2005; or
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¨
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Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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COMMISSION
FILE NO. 1-11602
NANO-PROPRIETARY,
INC.
(Exact
name of registrant as specified in its charter)
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TEXAS
(State
of Incorporation)
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76-0273345
(IRS
Employer Identification Number)
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3006
Longhorn Boulevard, Suite 107, Austin, Texas 78758
(Address
of principal executive office, including Zip Code)
Registrant's
telephone number, including area code: (512)
339-5020
Securities
registered pursuant to Section 12(b) of the Exchange Act:
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Title
of each class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.001 par value
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OTC
Bulletin Board
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Securities
registered pursuant to Section 12(g) of the Exchange Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer as defined
in
Rule 405 of the Securities Act. Yes ¨
No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨
No þ
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
past 12 months (or for such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days.
Yes þ
No ¨
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form and will not be contained, to
the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Act.
Large
Accelerated Filer ¨
Accelerated Filer þ
Non-Accelerated Filer ¨
The
aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the average of the closing bid and asked price of the
Common Stock on the OTC Bulletin Board system on June 30, 2005 of $2.20, was
approximately $216 million.
As
of
February 24, 2006, the registrant had 100,496,440 shares of Common Stock issued
and outstanding.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
Yes ¨
No þ
Documents
Incorporated by Reference
No
documents are incorporated by reference into this annual report on Form
10-K
TABLE
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Important
Information Concerning Forward-Looking Statements
Our
disclosure and analysis in this report contains some forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future
events. They use words such as “anticipate”, “believe”, “expect”, “estimate”,
“project”, “intend”, “plan”, and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance.
In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies
such
as legal proceedings, and financial results. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public.
Any
or
all of our forward-looking statements in this report and in any other public
statements we make may turn out to be wrong. They can be affected by inaccurate
assumptions we might make, or by known or unknown risks or uncertainties. Many
factors mentioned in the risk factors are important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.
We
undertake no obligation to publicly update any forward-looking statements,
whether as the result of new information, future events, or otherwise. You
are
advised, however, to consult any further disclosures we make on related subjects
in our 10-Q, 8-K, and 10-K reports to the SEC. Also note that we include a
cautionary discussion of risks, uncertainties, and possibly inaccurate
assumptions relevant to our business. These are factors that we think could
cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here could also adversely affect
us.
PART
I.
When
used
in this document, the words “anticipate”, “believe”, “expect”, “estimate”,
“project”, “intend”, “plan”, and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, projected, intended, or planned. For additional discussion of such
risks, uncertainties, and assumptions, see “Important Information Concerning
Forward-Looking Statements” and “Risk Factors” included at the beginning of this
report.
Item
1. Business.
DESCRIPTION
OF BUSINESS
General
Nano-Proprietary,
Inc. is engaged in the development of proof of concepts of products and
materials, and the performance of services based principally on novel
applications of carbon nanotube technology, as well as other nanotechnology
areas based on intellectual property and expertise that we have developed over
the years. We were incorporated in Texas in 1987 and completed our initial
public offering in 1993. Our initial focus was on a next generation display
technology called field emission display (“FED”). The majority of our research
over the years has been related to FED technology, and we have accumulated
significant intellectual property in this area. FED technology has evolved
significantly over the life of the company, and we have been at the forefront
of
that evolution, accumulating intellectual property at each step of the way.
We
believe our FED intellectual property will be required by any entity that
develops a display using this technology. As discussed in greater detail under
the heading “Display activities”, our FED technology includes both carbon
nanotube based field emission displays and thin-film based field emission
technology, such as the technology recently introduced by Canon and Toshiba
referred to as SED.
While
focusing primarily on FED technology, over the years we have performed research
in many other areas. Much of this research was an outgrowth of our work in
the
FED area. This research was in other display technologies, used processes
learned while we were working with FED technology, used raw materials used
in
our FED research, or capitalized on other unique capabilities within our
organization. As a result we have developed significant intellectual property
in
the area of sensor technology and other areas beyond the FED technology. At
present, we have over 250 total patents, including 116 issued, 99 pending,
and
26 provisional.
Research
and Development
As
a
result of our focus on developing and protecting our intellectual property,
we
spend significant amounts on research and development. We spent $2,525,292,
$2,611,583, and $1,861,660 on research and development in the years ended
December 31, 2005, 2004, and 2003, respectively. This represents approximately
48%, 52%, and 38% of our total operating costs and expenses in 2005, 2004,
and
2003, respectively. We expect to continue to invest heavily in research and
development and expect our research and development costs for 2006 to be in
excess of 50% of our operating costs.
Business
Segments
Our
operations currently consist of three reportable business segments.
Applied
Nanotech, Inc.
ANI is
the main focus of our current efforts. It was incorporated in January 1997
and
is developing our proprietary carbon nanotube and related technology.
Accordingly, our research is focused in the broad area of carbon nanotube
technology and its application to the display, electronics, sensor, medical,
x-ray, and other industries. Our development plans for this technology are
discussed
later in this report.
Electronic
Billboard Technology, Inc.
EBT was
incorporated in January 1997 and initially focused on developing sun-readable
display products for outdoor use. Its primary product initially was an
electronic billboard that would enable the outdoor advertising industry to
exploit the Internet and information revolution by placing ads at different
locations at different times. The focus of EBT was rapidly shifted to displays
for indoor use that could be used as part of an overall point of purchase
advertising program. We also developed a patented product called the E-Window™,
as well as patents surrounding the process of communicating with electronic
displays for the purpose of placing
advertisements. In 2002, we restructured EBT and stopped selling products
directly and instead limited ourselves to licensing our intellectual property.
We did this to focus on our business at ANI, which had higher potential in
the
short run and was less capital intensive. At the present time, we are pursuing
license agreements related to our intellectual property in this area, although
we are not currently spending money to further develop EBT’s
technology.
Other.
We also
incur general overhead to operate Nano-Proprietary that is not associated with
any specific
subsidiary
or
other segment. This overhead is the approximate cost of being a public company,
which is the amount in excess of that which might be incurred by a private
company performing these same activities. To the extent that EBT is basically
inactive, information relative to this segment is not that
meaningful.
Following
is a summary of revenues, net loss, and total assets for each segment for each
of the last three years.
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2005
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2004
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2003
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||||||||
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Revenues
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||||||||||
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ANI
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$
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565,660
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$
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382,522
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$
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773,959
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||||
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EBT
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$
|
—
|
$
|
—
|
$
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—
|
||||
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Other
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$
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—
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$
|
—
|
$
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—
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||||
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Total
Revenues
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$
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565,660
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$
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382,522
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773,959
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|||||
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Net
loss from continuing operations
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||||||||||
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ANI
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$
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(3,730,450
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)
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$
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(4,030,353
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)
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$
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(2,890,175
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)
|
|
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EBT
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$
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(3,734
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)
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$
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106,251
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$
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(361,784
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)
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||
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Other
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$
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(927,350
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)
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$
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(687,924
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)
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$
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(962,243
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)
|
|
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Total
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$
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(4,661,534
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)
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$
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(4,612,026
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)
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$
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(4,214,202
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)
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Assets
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||||||||||
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ANI
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$
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301,870
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$
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310,005
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$
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1,424,724
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||||
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EBT
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$
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—
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$
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—
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$
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527
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||||
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Other
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$
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886,111
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$
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834,363
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$
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2,358,766
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||||
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Total
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$
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1,187,981
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$
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1,144,368
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$
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3,784,017
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||||
Applied
Nanotech, Inc.
Overall
We
are
primarily a nanotechnology company. We are focusing our efforts on
research, proof of concept development for products, and licensing our
technology to others. ANI is developing world-class technologies that generally
fall into one of four markets or categories. These categories are display,
sensors, functional nanomaterials, and other specific electronic applications.
We intend to license our technology to others to allow them to manufacture
products using our technology. We have no plans to establish any manufacturing
facilities in the foreseeable future and manufacturing is not a part of our
core strategy. To the extent that we would need to develop manufacturing
capabilities, we intend to use manufacturing partnerships, joint ventures,
or
arrange to have products manufactured through contract
manufacturers.
Display
activities
Our
main
focus for virtually the entire life of Nano-Proprietary has been on Field
Emission Display (“FED”) technology. We have performed significant research and
accumulated significant intellectual property in this area. Field emission
display is a next generation display technology that is ideally suited for
use
in large flat screen televisions, with “large” being defined as 50-inch diagonal
or greater. TVs using FED technology are intended to compete with and improve
on
the plasma, projection, and CRT displays currently available in the large screen
TV market. FED technology can also be used for large outdoor electronic displays
in products such as roadside billboards, stadium displays, and other outdoor
electronic signs. We have developed an extensive patent portfolio covering
numerous aspects of FED technology.
Carbon-nanotube
based large area flat screen color field emission
displays.
Because
of cost advantages carbon nanotubes are currently the preferred method in the
display industry for construction of large area flat screen color TVs using
FED
technology. As
discussed in more detail in the Technology Agreements section below, we licensed
6 patents from Till Keesman in 2000. These patents are basic patents covering
the use of emissions from carbon nanotubes. The U.S. Patent (No.
RE38,223 E)
was
reissued in August 2003. This reissuance strengthened and reinforced the basic
nature of this patent. It is our belief that any company using a carbon
nanotubes in an emission mode, regardless of application, will be required
to
license this, and other patents from us. No companies have yet obtained the
right to use this patent from us. We have an equally significant patent that
we
refer to as the Raman Spectrum patent. This patent covers all carbon based
FEDs,
regardless of whether the emission is from carbon nanotubes, carbon films,
or
other forms of carbon.
Other
companies are developing large area color TVs that may be, in part, based on
our
carbon nanotube based field emission technology. Companies including Samsung,
Dupont, Noritake, and Motorola all have made public announcements related to
the
development of large area carbon nanotube based field emission displays, or
manufacturing processes for such displays. To the extent that these companies,
or any other companies, bring a TV to market using carbon nanotube based field
emission display technology, they would be required to license one or more
of
our patents.
We
have
also developed our own proofs of concepts of carbon nanotube based field
emission display TVs. We currently have both a 14-inch monochrome and a 14-inch
color proof of concept that we built internally. We have also developed a
25-inch color prototype in conjunction with a consortium of Japanese component
manufacturers. Each member of the consortium contributed its own particular
expertise to the prototype at its own expense. The purpose of the 25-inch color
prototype was to demonstrate that scalability is not an issue with the carbon
nanotube-based field emission display. It was built to specifications enabling
it to be expanded to a 60-inch display; however, it was built at 25 inches
due
to cost considerations. We completed the 25-inch color prototype in the fall
of
2005, and it is our goal to start a pilot line with a major manufacturer and
license the technology. This manufacturer could be one that has done extensive
work on its own related to carbon nanotube based field emission displays, or
one
that perceives itself as behind the curve in this area and would use this as
an
opportunity to catch up to others in the area. Other members of the consortium
would have the opportunity to become equipment suppliers, component
manufacturers, or manufacturers of carbon nanotube based TVs.
Other
large area flat screen color field emission displays.
Canon,
Inc. and Toshiba have jointly developed a large area flat screen color TV based
on our FED technology. Canon and Toshiba have announced that they have formed
a
joint venture to manufacture components for this TV, have constructed a
manufacturing line, demonstrated this product at the January 2006 consumer
electronics show in Las Vegas, and announced that they would have product
available in the fall of 2006.
We
signed a non-exclusive license with Canon in 1999 that covered substantially
all
of our field emission patents, but excluded the basic carbon nanotube patent
and
specific applications for the other field emission display patents including,
but not limited to, large area color displays. Toshiba and the joint venture
formed by Canon and Toshiba have no licenses from us. It is our belief that
all
entities involved will require licenses from us in order to manufacture and
sell
large area flat screen color TVs using this FED technology. The license
agreement with Canon is currently the subject of litigation. See Item 3 of
this
Annual Report on Form10-K for further information on this
litigation.
HyFED™
- We
have developed a new display technology that we call the HyFED™. We expect the
HyFED™ to be phased in as an improvement to the way our FED technology will be
used in the large area color displays previously described. HyFED™ combines what
we believe to be the best properties of CRTs and our field emission technology.
We expect the HyFED™ to significantly cut the cost of the drivers used in a
field emission display. In January 1999, we formed an International Development
Team to develop the first HyFED™ based on our FED technology. The International
Development Team was composed of six organizations - four from Japan, one from
Europe, and ourselves. The International Development Team completed a working
four-inch monochrome prototype of the HyFED™ in January 2000. The team was
expanded and developed a prototype with an active gray scale. Each member of
the
team was focused on the development of a specific portion of the prototype
and
members funded their own portion of the work. Work on the HyFED™ has been frozen
until our basic FED technology is being used in the production of large area
color TVs. These team members will be given the first opportunity to license
the
HyFED™ technology. We expect to license our HyFED™ technology in the future,
although there is no assurance that this will occur.
Backlights
for displays. Our
carbon nanotube technology is ideally suited to be developed as a backlight
for
other types of displays, such as LCDs and we have performed some initial
research in this area. Many other significant companies have also performed
research in this area. Successful development of a backlight device using carbon
nanotubes will require a license to our intellectual property.
PETS
for medium resolution large area electronic billboards-
The
PET, or Picture Element Tube, is a basic display device that could be used
in
many display applications in addition to electronic billboards. The carbon
nanotube field emission technology provides several advantages over the existing
technologies used in these areas. It generally has a higher image quality,
better sunlight readability, lower cost, lower energy usage, improved viewing
angle and excellent video capabilities. We do not intend to manufacture these
PETs ourselves, but rather license other manufacturers to produce them. We
have
currently licensed a previous version of field emission display technology
that
is not based on carbon nanotubes to a large Japanese display manufacturer that
is now working internally to complete development of the product.
Licensing
agreements. We
have
an extensive patent portfolio that we have developed and acquired over the
years. Licensing of this technology to major companies is a critical part of
our
overall strategic plan and critical to achieving profitability in the short
run.
We currently have two license agreements related to our FED technology. In
March
1999, we signed our first significant license agreement with Canon, Inc. In
exchange for a one-time, up-front payment of approximately $5.6 million, Canon
was granted a non-exclusive right to use a portion of our FED
technology,
but
excluding the basic carbon nanotube patent and specific applications for other
field emission display patents including, but not limited to, large area color
displays.
In 2002,
we signed another license agreement with a large Japanese display manufacturer.
This license calls for royalties of 2% of the licensee’s sales of products using
our technology. The licensee will receive credit against royalties due under
the
agreement for $2 million of research funding that the licensee provided to
us
from 2001 to 2003. Accordingly, no royalties will be due under the agreement
until sales of the licensee’s products exceed $100 million. We expect to sign
multiple additional license agreements over the next few years, and we expect
that such license agreements will include both an up-front payment and a
continuing royalty stream based on the products sold by the
licensee.
Competition.
Because
of the strength of our intellectual property in the FED area, our competition
comes from other technologies, rather than other companies. Any company
developing a carbon nanotube based FED large area flat screen color TV will
be
required to license our patents. There are other companies attempting to develop
non-carbon nanotube based field emission display technologies. It is our opinion
that these technologies will not be as cost efficient or demonstrate as high
a
level of brightness as the field emission technology, whether carbon nanotube
based or the SED. However, even companies developing these non-carbon nanotube
based field emission displays will likely be required to license other portions
of our patent portfolio in order to bring a product to market.
In
the
large area flat screen color TV industry, the primary competition comes from
plasma panel displays, LCD displays, organic LED displays, and color picture
tubes. We believe our technology, when fully developed, will primarily compete
with plasma displays and LCD displays, and generally compares favorably visually
and technically with both types of displays. In addition, carbon nanotube based
field emission displays are expected to be less costly than plasma displays.
LCD
displays have quality issues related to the viewing angle and are generally
not
economical once the size exceeds 45 inches, and therefore are not considered
strong competition because our technology is targeted at displays greater than
50 inches. Several companies are currently developing backlights for LCDs using
carbon nanotubes. Successful development of a carbon nanotube backlight would
require a license to our intellectual property.
Sensors
Overview.
We
have
greatly expanded or work and intellectual property in the area of sensors,
including biosensors, hydrogen sensors, carbon monoxide sensors, and other
sensors. This is becoming an increasingly important part of our business and
we
expect it to become even more important in the future.
Biosensors.
Our
carbon nanotube technology is ideally suited for use in biosensors. Sensors
based on carbon nanotubes can be used to detect chemical, organic, or biological
warfare agents, as well as explosives, hydrogen, ammonia and numerous other
chemicals., We have developed several proof of concepts demonstrating the
viability of our sensor technology and are currently seeking development
partners to license the technology and integrate it into specific
products.
Hydrogen
sensors.
These
sensors are targeted for use in fuel cells for automobiles and for remote
monitoring of large power transformers. We currently have two agreements related
to our hydrogen sensors.
The
first
is a development, purchase, and license agreement with Kelman, Ltd., an
international company which operates primarily in the area of power products,
transformer services, and emission monitoring products. The agreement, signed
in
July 2005, gave the licensee the exclusive right for the use of the technology
for the measurement of hydrogen in power transformer products, if certain
minimum royalty payments are made. ANI
provided pre-production design, development, and engineering work. The licensee
will pay a royalty of 10% of the sales
of
the products containing the hydrogen sensors. In order to maintain its
exclusivity, Kelman must make cumulative minimum royalty payments of $1.0
million by June 30, 2006, $2.5 million by June 30, 2007, and $4.5 million by
June 30, 2008. Due to a redesign of the hydrogen sensor, the introduction of
Kelman’s product has been delayed beyond the date anticipated when the agreement
was signed. It is likely that the time period for the previously mentioned
minimum royalty payments will be extended by some amount of time.
We
also
have a research and development agreement with KRI, Inc, the research and
development subsidiary of Osaka Gas Co. Ltd., the second largest gas utility
company in Japan, to develop a hydrogen sensor for automotive fuel cell
applications. This contract is the result of a joint proposal submitted by
KRI
and ANI to NEDO, the New Energy Industrial Technology Development Organization
established by the Japanese Government in 1980. The initial phase of the project
was completed by the end of 2005, and we are currently seeking additional
funding in this area.
Carbon
Monoxide Sensors. We
have
developed a carbon monoxide sensor that is based on a “gated” metal oxide
approach that allows the sensor to operate without heating, as compared with
most carbon monoxide sensors that require heating to greater than 250 degrees
Celsius. Our carbon monoxide sensor was originally developed in connection
with
a SBIR phase I government contract with the Department of Defense. We expect
to
receive a SBIR phase II contract to continue development to of this sensor.
Our
approach to the carbon monoxide sensor allows the sensor to operate at low
power
with instant-on operation. The sensor will be specific to carbon monoxide with
no cross sensitivity to other gases and elements and is also easily portable
and
highly sensitive.
Other
sensors.
We have
also demonstrated that carbon nanotubes can be used to develop sensors for
chemical, organic, and biological warfare agents. We have also demonstrated
that
carbon nanotubes and other nanodetectors can be used for the remote detection
of
explosives, and sensors used in environmental monitoring, health care, the
food
industry, biotech-biopharma applications, genetic biosensors, and immunosensors.
We are currently seeking funding to take our research in this area to the next
level of development, which would include proofs of concept, and product
development. Ideally we would do this with a development partner that would
fund
the development and license the technology for manufacturing upon completion,
or
in conjunction with a development partner under a government funding program.
We
most likely would have different development partners for different sensors
that
may be used in different industries.
Competition.
Our
competition in the sensor area will come from a variety of technologies and
companies depending on the purpose and use of the sensor. There are other
technologies used as sensors; however, we believe carbon nanotube based sensors
and other nanodetectors are more versatile, can sense a broader range of
materials, and are more selective (sensitive) in their sensor results. We
believe that selecting the right strategic partners for development of proof
of
concepts for our sensor technology is an important step in the market acceptance
of sensors using our technology.
Functional
Nanomaterials
We
are in
the advanced stages of research into nanomaterials using carbon nanotube
composites. We believe that some of the first widespread use of nanotechnology
by established companies will be in this area as they work to improve existing
products, materials, and processes. A significant opportunity exists in this
area for us to develop and license our technology. We are currently exploring
opportunities with several companies in this area.
Shimane
Institute of Technology.
We
recently completed
a research and development agreement with Shimane Institute for Industrial
Technology (SIIT) to develop a new aluminum alloy using carbon nanotubes that
has thermal conductivity 4-5 times greater than aluminum metal. SIIT is a
technology organization fully supported by the government of Shimane Prefecture,
Japan. We recently completed the first phase of the contract and are negotiating
a second phase of the project to continue development. Applications include
any
microelectronic device that generates heat, including circuit boards for
computers and high powered radar. These alloys can also improve the strength
of
the aluminum without adding weight.
Photoscrub™
Technology. We
developed a concept called Photoscrub™ which is based on an air purification
technology originally developed by one of our strategic partners, Andes Electric
Co., Ltd. The Photoscrub™ is a thin film coating on a flexible fiberglass cloth
that decomposes pollutants at the molecular level in liquids and gases. The
2006
Defense Appropriations Bill signed by President Bush in December 2005 included
$1 million in funding for ANI to improve the efficiency of the concept and
explore other air purification concepts.
Large
Sporting Goods Manufacturer. In
September 2005, we signed a development contract with a large sporting goods
manufacture to develop nanocomposites to be used in the manufacturer’s sporting
equipment. ANI will receive $240,000 for the initial phase of the project,
which
is expected to last approximately one year. The goal of the project is to
improve the existing base materials currently used by the contractor to make
the
equipment stronger, lighter, and more powerful.
Competition.
Since
this is a developing area of nanotechnology, there are not established
competitors. Our competition would come from companies working with other
materials. Since each project is unique, there are not necessarily established
competitors in the market.
Other
Electronic Applications
We
are
working in several other areas that have grown out of our basic work in the
FED
area. These technologies are related to previously discussed applications in
that they use common materials, such as carbon nanotubes, use similar processes,
capitalize on knowledge that we have gained in our research in other areas,
or
take advantage of unique capabilities of our technical staff. Following is
a
summary of some of these technology areas.
Cathodes.
We have
developed a carbon nanotube cold cathode electron source, which can be utilized
for many non-display related applications such as x-ray tubes, medical devices,
microelectronics, low-power thrusters, CRT electron guns, wireless
communications, and polluted air scrubbing. In previous years we sold cathodes
using this technology to Oxford Instruments for use in their portable Horizon
600 hand-held XRF Spectrometer, an X-ray device used for alloy sorting,
materials identification, and inorganic analysis. These cathodes use our
proprietary carbon nanotube technology, however Oxford Instruments claims that
they discontinued use of these cathodes in their product and moved to a
different technology.
Memory
Chips.
We have
a license option agreement with the University of Texas at Austin to further
the
development of a next generation memory chip using the university’s information
storage technology based on thin photo-conductive films. The ultimate goal
is to
make a low cost non-volatile memory device with increased capacity. We have
demonstrated an initial proof of concept of the technology and in the next
step
we will be designing, fabricating, and optimizing a 10,000-bit proof of concept
using this technology. We have had initial discussions with major chip
manufacturers regarding this technology, however additional development work
is
needed before these manufactures are willing to enter a license agreement.
We
retain our exclusive right to license this technology, including the right
to
sublicense, within certain pre-defined parameters through the end of
2006.
Shimane
Masuda Electronics.
We
completed a development project with Shimane Masuda Electronics (“SME”) in 2005.
Upon completion of this project we entered into an agreement with SME to
establish a joint pilot line for the development and production of carbon
nanotube electron emission based lighting devices. This pilot line will be
located in an SME facility, and SME will supply all necessary equipment and
personnel to develop, engineer, and operate the line. ANI will contribute
technical support, intellectual property, and know-how. The pilot period is
expected to be completed by June 30, 2006, and should SME decide to go into
volume production, they will license ANI’s technology for an upfront payment of
10 to 25 million yen (approximately $85,000 to $213,000 at current exchange
rates) and an ongoing royalty rate of 5% of all product sales using CNT electron
sources. SME’s territory will be limited under the license to products sold in
Asia.
Competition.
Numerous
other companies are working with other technologies with the goal of achieving
results similar to the goals of our technology. The ultimate success of products
using our technology will be dependent up on the results of our research
compared with results achieved by others.
EBT
Electronic
Display Products.
EBT was formed to develop sun-readable display products for outdoor use.
We quickly expanded our focus to large area displays for indoor use that would
compete with Plasma and could be used as part of an overall point of purchase
advertising program and developed a patented product called the E-Window™. We
restructured EBT, stopped selling products directly, and instead limited
ourselves to licensing our intellectual property. At the present time, we are
not developing the technology further, but are actively pursuing technology
licenses at EBT.
We
expect
that any license agreements would include both an upfront payment and ongoing
royalties based on product sales by the licensee. We expect that potential
licensees for the E-Window™ would market it, primarily to major retailers and to
either manufacture the product, or contract with others to manufacture the
product.
EBT
also
has acquired the right to certain patented Liquid Crystal Display (“LCD”)
technology that is ideal for use in outdoor electronic billboards. All research
and development related to this technology has been suspended until we procure
funding specifically to further develop this technology.
Communication
patents.
We have
applied for patents covering a system of selling advertising for electronic
displays over the internet and other digital networks. The first of the patents,
which was filed in April 2000 with a priority date of April 1999, was recently
allowed in February 2006. The allowed claims on this patent relate to methods,
systems and computer programs that facilitate displaying advertising information
on multiple indoor or outdoor electronic displays. We have also applied for
similar patents and have applications pending in Europe, Canada, Korea, and
Japan.
With
the
exponential growth that digital advertising is currently experiencing, we expect
these patents to have significant value, and we expect to generate significant
revenue in 2006 as a result of these patents. These patents apply to situations
where the placement of digital ads is remotely controlled using the internet
and
other digital networks. Examples of locations where these displays may be
located include high traffic locations such as airport or trains stations,
indoor and outdoor sports arenas, digital point of purchase and other
advertising in national, regional, and local retailers, as well as other high
traffic locations. We expect to generate revenue with these patents by licensing
them to others, or combining our resources with industry leaders to deploy
the
technology resulting from this intellectual property, or through some
combination of these two methods.
Competition Our
E- Window™
product is a unique patented product. It does, however, face competition from
a
variety of other indoor display products from a variety of sources. Our success
in this area will be dependent on the ability of licensees to successfully
market our products. Our communication patents are unique and any organization
involved in digital advertising using these methods will require a license.
Competition would come from more manual and less efficient methods of deploying
the advertising.
We
are
unaware of any other organizations that have developed an electronic billboard
using an LCD technology. However, we are not currently continuing development
of
this technology, and LCD technology is an existing technology used in many
applications. Competition from other manufacturers could develop at any time.
There are several other companies either producing or developing electronic
billboards using other technologies.
Technology
Agreements
Till
Keesman. We
have
licensed certain patents related to carbon nanotube technology from Till Keesman
(“the Keesman patents”). We licensed 6 patents in 2000 in exchange for a payment
of $250,000. Under the terms of the agreement, we are obligated to pay license
fees equal to 50% of any royalties received by the Company related to these
patents. We are allowed to offset certain expenses, up to a maximum of $50,000
per year, against payments due under this agreement. The agreement also contains
provisions related to minimum license fee payments. A total of $1,000,000 of
minimum payments has been made, with the last payment made in May 2004. No
future minimum payments are due and the minimum payments made to date can be
offset against future royalties due under the license agreement. Certain of
the
products that we are developing may, in part, be based on some of the patents
that we have licensed. These
patents cover areas using the emission from a carbon nanotube, such as displays.
There are other areas of carbon nanotube technology, such as biosensors, that
are not based on an emission from the carbon nanotube, and therefore would
not
require payment of a royalty under this license agreement.
MCC. We
acquired 62 patents and patent applications related to the carbon film based
field emission technology from MCC in 1998. We are obligated to pay MCC a
royalty of 2% of future commercial revenues related to these patents. We can,
however, offset certain pre-defined expenses against these royalty payments.
Based on the expenses incurred and cost of maintaining the patents, it is
considered remote that we will be required to pay MCC any royalties at any
time
in the future.
Intellectual
Property Rights
An
important part of our product development strategy is to seek, when appropriate,
protection for our products and proprietary technology through the use of
various United States and foreign patents. Our patent portfolio consists of
116
issued patents, 4 allowed patents, 99 patent applications pending before foreign
and United States Patent and Trademark Offices, 26 provisional patent
applications, and 4 published patents. We also have several unsubmitted patent
applications in process. The patents, allowances and applications relate to
the
carbon nanotube field emission technology and other technologies. In addition,
there are foreign counterparts to certain United States patents and
applications. We consider our patent portfolio to be extremely
valuable.
The
patenting of technology-related products and processes involves uncertain and
complex legal and factual questions. To date, no consistent policy has emerged
regarding the breadth of claims of such technology patents. Therefore, there
is
no assurance that our pending United States and foreign applications will issue,
or what scope of protection any issued patents will provide, or whether any
such
patents ultimately will be upheld as valid by a court of competent jurisdiction
in the event of a legal challenge. Interference proceedings, to determine
priority of invention, also could arise in any of our pending patent
applications. The costs of such proceedings would be significant and an
unfavorable outcome could result in the loss of rights to the invention at
issue
in the proceedings. If we fail to obtain patents for our technology, and are
required to rely on unpatented proprietary technology, there is no assurance
that we can protect our rights in such unpatented proprietary technology, or
that others will not independently develop substantially equivalent proprietary
products and techniques, or otherwise gain access to our proprietary
technology.
Competitors
have filed applications for, or have been issued patents, and may obtain
additional patents and proprietary rights relating to products or processes
used
in, necessary to, competitive with, or otherwise related to, our patents. The
scope and validity of these patents, the extent to which we may be required
to
obtain licenses under these patents, or under other proprietary rights and
the
cost and availability of licenses are unknown. This may limit our ability to
license our technology. Litigation concerning these or other patents could
be
protracted and expensive. If suit were brought against us for patent
infringement, a challenge in the suit by us as to the validity of the other
patent would have to overcome a legal presumption of validity. There can be
no
assurance that the validity of the patent would not be upheld by the court
or
that, in such event, a license of the patent to us would be available. Moreover,
even if a license were available, the payments that would be required are
unknown and could materially reduce the value of our interest in the
affected products. We do, however, consider our patents to be very strong and
defendable in any action that may be brought against us. A major law firm has
reviewed our patent portfolio and agreed to handle litigation related to certain
of our patents on a contingency basis.
We
also
rely upon unpatented trade secrets. No assurances can be given that others
will
not independently develop substantially equivalent proprietary information
and
techniques or otherwise gain access to our trade secrets or disclose such
technology or that we can meaningfully protect our rights to our unpatented
trade secrets.
We require
our employees, directors, consultants, outside scientific collaborators,
sponsored researchers, and other advisors to execute confidentiality agreements
upon the commencement of employment or consulting relationships with us. These
agreements provide that all confidential information developed or made known
to
the individual during the course of the relationship is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the
case
of employees, the agreements provide that all inventions conceived by the
individual shall be our exclusive property. There is no assurance, however,
that
these agreements will provide meaningful protection for our trade secrets in
the
event of unauthorized use or disclosure of such information.
Government
Regulation
Products
using our technology will be subject to extensive government regulation in
the
United States and in other countries. In order to produce and market existing
and proposed products using our technology, our licensees must satisfy mandatory
safety standards established by the U.S. Occupational Safety and Health
Administration ("OSHA"), pollution control standards established by the U.S.
Environmental Protection Agency ("EPA") and comparable state and foreign
regulatory agencies. We may also be subject to regulation under the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health ("CDRH") of the U.S. Food and Drug Administration. We do
not
believe that carbon nanotube field emission products will present any
significant occupational risks to the operators of such equipment. In
addition, the carbon nanotube field emission products are not expected to
produce significant hazardous or toxic waste that would require extraordinary
disposal procedures. Nevertheless, OSHA, the EPA, the CDRH and other
governmental agencies, both in the United States and in foreign countries,
may
adopt additional rules and regulations that may affect us and products using
our
technology. Additionally, our arrangements with our licensees and their
affiliates may subject products using our technology to export and import
control regulations of the U.S. and other countries. The cost of compliance
with
these regulations has not been significant in the past and is not expected
to be
material in the future.
A
portion
of our revenue has consisted of reimbursement of expenditures under U.S.
government contracts. We recognized $208,211 of revenue in 2005, $305,721 in
2004, and $339,790 in 2003 related to government contracts. These reimbursements
represent all or a portion of the costs associated with such contracts. As
of
December 31, 2005, we have three grants in process that have minor amounts
of
revenue yet to be recognized. We also have commitments for three additional
grants which, in total, will result in approximately $2.5 million of future
revenue. Government contracts are subject to delays and risk of cancellation.
Also, government contractors generally are subject to various kinds of audits
and investigations by government agencies. These audits and investigations
involve review of a contractor's performance on its contracts, as well as its
pricing practices, the costs it incurs and its compliance with all applicable
laws, regulations and standards. We are, and in the future expect to be, audited
by the government.
Employees
As
of
February 24, 2006 we had 29 full-time employees, including 4 executive officers.
Within the next twelve months, based on new government contracts that we have
received and expect to receive, we likely will hire two to four additional
employees to support our plans for increasing research levels. We are not
subject to any collective bargaining agreements and we consider our relations
with our employees to be good.
Available
Information
Our
website is http://www.nano-proprietary.com.
Our
periodic reports and all amendments to those reports required to be filed or
furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 are available free of charge through its website. During the period
covered by this report, the Company made its periodic reports on Form 10-K,
and
Form 10-Q and its current reports on Form 8-K and amendments to those documents
available on its website as soon as reasonably practicable after those reports
were filed with or furnished electronically to the Securities and Exchange
Commission. The Company will continue to make such reports and amendments to
those reports available on its website as soon as reasonably practicable after
those reports are filed with or furnished to the Securities and Exchange
Commission. Material contained on our website is not incorporated by reference
in this Annual Report on Form 10-K.
Item
1A. Risk
Factors
Our
success is dependent on our principal technologies
Our
technologies, which include sensors, field emission displays, nano-electronics,
and functional nano-materials, are emerging technologies. Our financial
condition and prospects are dependent upon our licensing these technologies
to
others. Additional R&D needs to be conducted on many of our technologies
before others can produce products using this technology. Market acceptance
of
products using our technology will be dependent upon the acceptance within
the
industries of those products of the quality, reliability, performance,
efficiency, and breadth of application and cost-effectiveness of the products.
There can be no assurances that these products will be able to gain commercial
market acceptance.
Products
using our technology may not be accepted by the market
Since
our
inception, we have focused our product development and R&D efforts on
technologies that we believe will be a significant advancement over currently
available technologies. With any new technology, there is a risk that the market
may not appreciate the benefits or recognize the potential applications of
the
technology. Market acceptance of products using our technology will depend,
in
part, on our ability to convince potential customers of the advantages of such
products as compared to competitive products. It will also depend upon our
ability to train manufacturers and others to use our products.
Our
technology development is in its early stages and the outcome is
uncertain
Our
many
applications of nanotechnologies, and certain products that use these
technologies, will require significant additional development, engineering,
testing and investment prior to commercialization. We are exploring the use
of
our technology in several different types of products, in addition to the
cathodes that we have developed that currently use carbon nanotube technology.
We have developed proof of concepts of potential products based on carbon
nanotube technologies. In some cases, we are developing products jointly with
others based on our technology. Upon successful completion of the development
process, our development partners will be required to license our technology
to
produce and sell the products. Our development partners retain all rights to
any
intellectual property that they develop in the process.
If
any of
the potential products that are being developed using our technologies are
successfully developed, it may not be possible for potential licensees to
produce these products in significant quantities at a price that is competitive
with other similar products. At the present time, the only significant revenue
that we receive related to our technology is related to reimbursed research
expenditures, and development fees. These revenues are identified in our
quarterly filings on Form 10-Q and our annual filings on Form 10-K as revenues
of our Applied Nanotech, Inc. subsidiary in the related “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” sections. We also
anticipate receiving up-front license fees in 2006.
Our
development partners have certain rights to jointly developed property and
to
license our technology
We
have
committed to license our technology to our development partners upon completion
of certain development projects that are in process. The terms of any such
license have not yet been determined. One of our development partners, a large
Japanese display company, has paid us $2.0 million for research services and
has
the right to offset this payment against any future license fee payments due
as
a result of an existing license agreement that we have with this company. Our
development partners in the HYFED™ project also have rights to any jointly
developed property; however, any such jointly developed property would be based,
at least in part, on our underlying technology and would require our partners
to
enter into an agreement with us. See also “Our technology development is in
its early stages and the outcome is uncertain” above for further
discussion.
We
have limited resources and our focus on particular products may result in our
failure to capitalize on other opportunities
We
have
limited resources available to successfully develop and commercialize our
technology. As of February 24, 2006, we had 29 full-time employees. There is
a
wide array of potential applications for our technology and our limited
resources require us to focus on specific product areas, while ignoring
others.
We
may not be able to provide system integration
In
order
to prove that our technologies work and will produce a complete product, we
must
ordinarily integrate a number of highly technical and complicated subsystems
into a fully integrated prototype. There is no assurance that we will be able
to
successfully complete the development work on some of our proposed products
or
that there will ultimately be any market for those products.
Many
products that may be developed using our technology will have to be integrated
into end-user products by manufacturers of those products. Although we intend
to
develop products to be integrated into existing manufacturing capabilities,
manufacturers may be required to make modifications to, or expand their
manufacturing capabilities. Manufacturers may not elect to integrate products
using our technology into their end-user products, or they may not devote
adequate resources to modifying their manufacturing capabilities so that our
technologies can be successfully incorporated into their end-user products.
The
complexity of integration may delay the introduction of products using our
technology.
Rapid
technological changes could render our technology obsolete and we may not remain
competitive
The
display industry and other industries in which we compete are highly competitive
and are characterized by rapid technological change. Our existing and proposed
products will compete with other existing products and may compete against
other
developing technologies. Development by others of new or improved products,
processes or technologies may reduce the size of potential markets for our
products. There is no assurance that other products, processes or technologies
will not render our proposed products obsolete or less competitive. Many of
our
competitors have greater financial, managerial, distribution, and technical
resources than we do. We will be required to devote substantial financial
resources and effort to further R&D. There is no assurance that we will
successfully differentiate our technology from our competitors' technology,
or
that we will adapt to evolving markets and technologies, develop new
technologies, or achieve and maintain technological advantages.
We
have limited manufacturing capacity and experience
We
have
no established commercial manufacturing facilities in the areas in which we
are
conducting our principal research. At the present time, we have no intention
of
establishing a manufacturing facility related to our field emission technology,
sensors, nanomaterials which include using composites, or any other aspects
of
our technology. We are focusing our efforts on licensing our technology to
others for use in their manufacturing processes. To the extent that any of
our
other products require manufacturing facilities, we intend to contract with
a
qualified manufacturer.
The
health effects of nanotechnology are unknown
There
is
no scientific agreement on the health effects of nanomaterials, but some
scientists believe that in some cases, nanomaterials may be hazardous to an
individual’s health or the environment. The science of nanotechnology is based
on arranging atoms in such a way as to modify or build materials not made in
nature; therefore the effects are unknown. The Company takes appropriate
precautions for its employees working with carbon nanotubes and believes that
any health risks related to carbon nanotubes used in potential products can
be
minimized. Future research into the effects of nanomaterials in general, and
carbon nanotubes in particular, on health and environmental issues may have
an
adverse effect on products using our technology.
The
loss of key personnel could adversely affect our business
Our
future success will depend on our ability to attract and retain highly qualified
scientific, technical and managerial personnel. Competition for such personnel
may be intense. We may not be able to attract and retain all personnel necessary
for the development of our business. In addition, much of the know-how and
processes developed by us reside in our key scientific and technical personnel.
The loss of the services of key scientific, technical and managerial personnel
could have a material adverse effect on us until we are able to replace those
personnel.
We
have a history of net losses
We
have a
history of net losses. From our inception through December 31, 2005, we incurred
net losses of approximately $85 million. Our only profitable year was 1999,
based on the strength of a license agreement of approximately $5.6 million
signed in March 1999. We have incurred net income and losses as
shown below:
|
Year
Ended December 31
|
|
Net
Income
(Loss)
|
|
|
|
|
|
1995
|
|
($14,389,856)
|
|
1996
|
|
($13,709,006)
|
|
1997
|
|
($6,320,901)
|
|
1998
|
|
($3,557,548)
|
|
1999
|
|
$1,118,134
|
|
2000
|
|
($7,671,014)
|
|
2001
|
|
($5,081,559)
|
|
2002
|
|
($4,908,856)
|
|
2003
|
($4,214,202)
|
|
|
2004
|
($4,612,026)
|
|
|
2005
|
|
($4,661,534)
|
Although
we expect to be profitable in the future, we may not be. Our profitability
in 2006 is dependent on the signing of additional license agreements or
obtaining additional research funding. We may, however, continue to incur
additional operating losses for an extended period of time as we continue to
develop our technologies. We do, however, expect the magnitude of those losses,
if they continue, to decrease. We have funded our operations to date primarily
through the proceeds from the sale of our equity securities and debt offerings.
We are primarily a contract research and development organization and are
dependent on license agreements and research funding to achieve profitability.
In order to continue development of our technology, we anticipate that
substantial research and development expenditures will continue to be
incurred.
We
have no current royalty agreements producing significant
revenue
Our
future strategy is dependent on licensing our technology to other companies
and
obtaining royalties based on products that these licensees develop and sell.
We
have no plans to manufacture and sell any carbon nanotube field emission
products ourselves, and as such, we have no carbon nanotube field emission
product revenues. We signed a license agreement in 1999, for a one-time, up
front, payment of approximately $5.6 million. This was a non-exclusive license
to Canon, Inc. that covered substantially all of our field emission patents,
but
excluding the basic carbon nanotube patent and specific applications for other
field emission display patents including, but not limited to, large area color
displays. This license will produce no future revenue unless Canon decides
to
license the additional patents or the excluded field emission display
applications. In 2002, we signed another license agreement with a large Japanese
display manufacturer. This license agreement calls for us to be paid royalties
equal to 2% of the licensee’s sales of products using our technology. The
licensee also will receive credit against royalties due under the agreement
for
$2 million of research funding and up-front payments that the licensee has
provided to us from 2001 to 2003. Accordingly, no royalties will be due under
the agreement until sales of the licensee’s products exceed $100
million.
We
expect
to license our technology to be used in other applications. See additional
discussion in the risk factor “Our technology development is in its early stages
and the outcome is uncertain”. It is our intention that all future license
agreements will include a provision that requires the payment of ongoing
royalties, although there is no assurance that will occur.
We
are dependent on the availability of materials and
suppliers
The
materials used in producing current and future products using our technology
are
purchased from other vendors. We anticipate that the majority of raw materials
used in products to be developed by us will be readily available to
manufacturers. However, there is no assurance that the current availability
of
these materials will continue in the future, or if available, will be procurable
at favorable prices.
Our
revenues have been dependent on government contracts in the
past
In
many
years, a significant part of our revenues is derived from contracts with
agencies of the United States government. Following is a summary of those
revenues for the past eleven years:
|
Year
Ended December 31
|
|
Revenues
from
Government
Contracts
|
|
Percentage
of
Total
Revenue
|
|
1995
|
|
$1,009,000
|
|
33%
|
|
1996
|
|
$2,869,000
|
|
50%
|
|
1997
|
|
$854,000
|
|
24%
|
|
1998
|
|
$0
|
|
0%
|
|
1999
|
|
$0
|
|
0%
|
|
2000
|
|
$352,341
|
|
13%
|
|
2001
|
|
$466,680
|
|
15%
|
|
2002
|
|
$254,152
|
|
18%
|
|
2003
|
$339,790
|
44%
|
||
|
2004
|
$305,721
|
|
80%
|
|
|
2005
|
|
$208,211
|
37%
|
We
currently have commitments for future government funding of approximately $2.6
million. We do not intend to seek any government funding unless it directly
relates to achievement of our strategic objectives.
Contracts
involving the United States government are, or may be, subject to various risks
including, but not limited to, the following:
| · |
Unilateral
termination for the convenience of the
government
|
| · |
Reduction
or modification in the event of changes in the government's requirements
or budgetary constraints
|
| · |
Increased
or unexpected costs causing losses or reduced profits under fixed-price
contracts or unallowable costs under cost reimbursement
contracts
|
| · |
Potential
disclosure of our confidential information to third
parties
|
| · |
The
failure or inability of the prime contractor to perform its prime
contract
in circumstances
|
where
we are a subcontractor
| · |
The
failure of the government to exercise options provided for in the
contracts
|
| · |
The
right of the government to obtain a non-exclusive, royalty free,
irrevocable world-wide license to technology developed under
contracts funded by the government if we fail to continue to develop
the technology
|
We
have technologies subject to licenses
As
a
licensee of certain research technologies through license and assignment
agreements with Microelectronics and Computer Technology Corporation (“MCC”), we
have acquired rights to develop and commercialize certain research technologies.
In certain cases, we are required to pay royalties on the sale of products
developed from the licensed technologies and fees on revenues from sublicensees.
We also have to pay for the costs of filing and prosecuting patent applications.
The agreement is subject to termination by either party, upon notice, in the
event of certain defaults by the other party. We consider it unlikely that
any
royalty payments would be required to be made to MCC based on the substantial
amounts of revenues that would have to be generated to offset the costs of
maintaining the patents over the years.
We
have
also licensed certain patents related to carbon nanotube technology from Till
Keesman (“the Keesman patents”). We licensed 6 patents in 2000 in exchange for a
payment of $250,000. Under the terms of the agreement, we are obligated to
pay
license fees equal to 50% of any royalties received by the Company related
to
these patents. We are allowed to offset certain expenses, up to a maximum of
$50,000 per year, against payments due under this agreement. The agreement
also
contains provisions related to minimum license fee payments. A total of
$1,000,000 of minimum payments has been made, with the last payment made in
May
2004. No future minimum payments are due and the minimum payments made to date
can be offset against future royalties due under the license agreement. No
license agreements have yet been signed that involve the Keesman patents.
Certain of the products that we are developing may, in part, be based on some
of
the patents that we have licensed.
We
may have future capital needs and the source of that funding is
uncertain
We
expect
to continue to incur substantial expenses for R&D, product testing, and
administrative overhead. The majority of R&D expenditures are for the
development of our technologies. Some of the proposed products using our
technology may not be available for commercial sale or routine use in the
immediate future. Commercialization of existing and proposed products that
would
use our technology may require additional capital in excess of that currently
available to us. A shortage of capital could prevent us from achieving
profitability for an extended period of time. Because the timing and receipt
of
revenues from the sale of products using our technology will be tied to the
achievement of certain product development, testing, manufacturing and marketing
objectives, which cannot be predicted with certainty, there may be substantial
fluctuations in our results of operations. If revenues do not increase as
rapidly as anticipated, or if product development and testing require more
funding than anticipated, we may be required to curtail our activities and/or
seek additional financing from other sources. We may seek additional financing
through the offer of debt, equity, or any combination of the two at any time,
although we do not expect to seek any significant additional financing for
the
remainder of the year.
We
have
developed a plan to allow us to maintain operations until we are able to sustain
ourselves and we believe our current cash levels are sufficient to fund
operations until we reach that point. We have the existing resources, including
expected revenue, to continue operations for a period through at least the
end
of 2006. Our plan is primarily dependent on raising funds through the licensing
of our technology and revenue generated from performing contract research
services. We intend to raise additional capital through debt or equity
offerings, only if necessary. We expect to sign significant license and
development contracts within the next year, although there is no assurance
that
this will occur.
Our
plan
is based on current development plans, current operating plans, the current
regulatory environment, historical experience in the development of electronic
products and general economic conditions. Changes could occur which would cause
certain assumptions on which this plan is based to be no longer valid. Our
plan
is primarily dependent on increasing revenues, licensing our technology, and
raising additional funds through additional debt and equity offerings, only
if
necessary. If adequate funds were not available from operations or additional
sources of financing, we may have to eliminate, or reduce substantially,
expenditures for research and development, and testing of our products. We
may
have to obtain funds through arrangements with other entities that may require
us to relinquish rights to certain of our technologies or products. These
actions could materially and adversely affect us.
We
may be unable to enforce or defend our ownership and use of proprietary
technology
Our
ability to compete effectively with other companies will depend on our ability
to maintain the proprietary nature of our technology. Although we have been
awarded patents, have filed applications for patents, or have licensed
technology under patents that we do not own, the degree of protection offered
by
these patents or the likelihood that pending patents will be issued is
uncertain. Competitors in both the United States and foreign countries, many
of
which have substantially greater resources and have made substantial investment
in competing technologies, may already have, or may apply for and obtain patents
that will prevent, limit or interfere with our licensees ability to make and
sell our products using our technology. Competitors may also intentionally
infringe on our patents. The defense and prosecution of patent suits is both
costly and time-consuming, even if the outcome is favorable to us. In foreign
countries, the expenses associated with such proceedings can be prohibitive.
In
addition, there is an inherent unpredictability in obtaining and enforcing
patents in foreign countries. An adverse outcome in the defense of a patent
suit
could subject us to significant liabilities to third parties. Although third
parties have not asserted infringement claims against us, there is no assurance
that third parties will not assert such claims in the future. A major law firm
has reviewed our patent portfolio and agreed to handle litigation related to
certain of our patents on a contingency basis.
We
also
rely on unpatented proprietary technology, and there is no assurance that others
will not independently develop the same or similar technology, or otherwise
obtain access to our proprietary technology. To protect our rights in these
areas, we require employees, consultants, advisors and collaborators to enter
into confidentiality agreements. These agreements may not provide meaningful
protection for our trade secrets, know-how, or other proprietary information
in
the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how, or other proprietary information. While we have attempted
to
protect proprietary technology that we develop or acquire and will continue
to
attempt to protect future proprietary technology through patents, copyrights
and
trade secrets, we believe that our success will depend upon further innovation
and technological expertise.
We
are exposed to litigation liability
We
have
lawsuits that arise in the normal course of business. We have been subject
to
litigation in the past and have settled litigation in the past that has in
rare
instances resulted in material payments. We expect all current lawsuits to
be
resolved with no material negative impact on our financial statements, and
we
are unaware of any other potential significant litigation. If we were to become
subject to a judgment that exceeds our ability to pay, that judgment would
have
a material impact on our financial condition and could affect our ability to
continue in existence.
As
described in more detail in Item 3, we are the plaintiff in litigation against,
Canon, Inc. While there is risk associated with any litigation, we expect no
negative impact on our financial condition as a result of this
litigation.
Item
1B. Unresolved
Staff
Comments
None.
We
lease
a facility in Austin that is used for our corporate headquarters and research
and development activities under a lease expiring in February 2007. We also
lease office space in Dallas on a month to month basis.
We
believe that these facilities are suitable and will be adequate for our
anticipated research, development, and administrative activities for the
foreseeable future. If we embark on significant new research that requires
significant additional employees, we may have to establish additional
facilities.
We
do not
currently invest in real estate or interests in real estate, real estate
mortgages, or securities of or interests in persons primarily engaged in real
estate activities. However, the Company has no policy, either for or against,
making such investments.
Item
3.
Legal
Proceedings
In
April
2005, we filed suit against Canon, Inc. and Canon USA, Inc. in
the
U.S. District Court for the Western District of Texas, Austin Division. We
are
seeking a declaratory judgment that new SED color
television products, scheduled to be manufactured by SED, Inc. and sold by
Canon and/or Toshiba beginning in 2006, are not covered under a 1999 patent
license agreement that we have with Canon. We assert that Canon’s license
does not cover its surface conductor electron emitter display screens (SED)
for
a new generation of flat screen color televisions. We also assert that SED,Inc.,
the joint venture formed by Canon and Toshiba Corporation to produce the
SED display screens, is not a licensed subsidiary under the 1999
agreement and that Canon is improperly transferring its license rights
under Nano-Proprietary's patents to the joint venture and Toshiba.
The
suit
also contained three additional claims related to a Lanham Act violation by
Canon, tortious interference by Canon, and a breach of covenant of good faith
and fair dealings against Canon. Canon filed its response in July 2005 denying
liability in the matter. In September 2005, Canon filed a motion to dismiss
Canon USA, Inc. from the case and dismiss the Lanham Act claim, the tortious
interference claim, and the breach of covenant of good faith and fair dealings.
In October 2005, the judge in the case denied Canon’s motion to dismiss Canon,
USA, Inc. and the breach of covenant of good faith and fair dealings claim.
The
judge granted Canon’s motion, without prejudice, to dismiss the Lanham Act claim
and the tortious interference claim. Dismissal without prejudice allows us
to
re-file these claims at any time if additional evidence supporting these claims
becomes available to us in the discovery process. The first two claims described
above were not at issue in the dismissal motion by Canon. The case is currently
in the discovery phase and a trial may occur as soon as March 2007. We believe
that the ultimate resolution of this matter will not have a negative impact
on
the consolidated financial statements of the Company.
From
time
to time the Company and its subsidiaries are also defendants in various lawsuits
that may arise related to minor matters. It is expected that any such lawsuits
would be settled for an amount no greater than the liability recorded in the
financial statements for such matters. If resolution of any of these suits
results in a liability greater than that recorded, it could have a material
impact on us.
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2005.
Item
5.
Market
for
Registrant's Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Our
common stock, $0.001 par value, trades on the OTC Bulletin Board system under
the symbol “NNPP”. The following table sets forth, on a per share basis for the
periods indicated, the high and low sale prices for the common stock as reported
by the OTC Bulletin Board system. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
|
High
|
Low
|
||
|
2004
|
First
Quarter
|
$3.23
|
$1.98
|
|
|
Second
Quarter
|
$2.70
|
$1.38
|
|
|
Third
Quarter
|
$2.14
|
$1.29
|
|
|
Fourth
Quarter
|
$2.52
|
$1.80
|
|
|
|
|
|
|
2005
|
First
Quarter
|
$3.53
|
$2.01
|
|
|
Second
Quarter
|
$3.99
|
$1.56
|
|
|
Third
Quarter
|
$2.81
|
$1.86
|
|
|
Fourth
Quarter
|
$2.45
|
$1.97
|
|
|
|
||
|
2006
|
First
Quarter (through February 24, 2006)
|
$2.68
|
$2.05
|
On
February 24, 2006, the closing sale price for our common stock as reported
on
the OTC Bulletin Board system was $2.55. As of February 24, 2006, there
were approximately 350 shareholders of record for our common stock. This does
not include shareholders holding stock in street name in brokerage
accounts.
We
have
never paid cash dividends on our common stock, nor do we have any plans to
pay
dividends. Our board of directors currently intends to invest future earnings,
if any, to finance expansion of our business. Any payment of cash dividends
in
the future will be dependent upon our earnings, financial condition, capital
requirements, and other factors deemed relevant by our board of directors.
It is
unlikely that any dividends on our common stock will be paid in the foreseeable
future.
Recent
Sales of Unregistered Securities
In
October 2005, we issued 482,393 shares of our common stock for $1,000,000 in
a
private placement under Rule 506 of Regulation D of the Securities Act of 1933
to the Pinnacle Fund, LP.
Item
6. Selected
Financial
Data
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||
|
Revenues
from continuing operations
|
$
|
565,660
|
$
|
382,522
|
$
|
773,959
|
$
|
1,414,848
|
$
|
1,101,951
|
|
Income
(loss) from continuing operations
|
$
|
(4,661,534)
|
$
|
(4,612,026)
|
$
|
(4,214,202)
|
$
|
(4,683,419)
|
$
|
(4,850,770)
|
|
Income
(loss) from continuing operations per share
|
$
|
(0.05)
|
$
|
(0.05)
|
$
|
(0.05)
|
$
|
(0.07)
|
$
|
(0.07)
|
|
Total
assets
|
$
|
1,187,981
|
$
|
1,144,368
|
$
|
3,784,017
|
$
|
321,955
|
$
|
1,839,055
|
|
Long-term
obligations
|
$
|
—
|
$
|
5,944
|
$
|
27,353
|
$
|
46,283
|
$
|
121,651
|
|
Net
shareholders’ equity (deficit)
|
$
|
859,339
|
$
|
846,456
|
$
|
3,552,829
|
$
|
(2,460,595)
|
$
|
(945,614)
|
|
Cash
dividends per common share
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
In
2002,
we sold our Sign Builders of America, Inc. subsidiary. All information related
to Sign Builders has been removed from this summary as a result of its
presentation as a discontinued operation. Also in 2002, we restructured our
Electronic Billboard Technology, Inc. subsidiary. EBT no longer sells products
or services, but seeks to license its intellectual property to others. Revenue
from continuing operations includes $130,386 and $10,000 in 2003 and 2002,
respectively. There was no revenue from EBT in all other years presented.
Item
7. Management’s
Discussion
and Analysis of Financial Condition and
Results of Operations
The
following discussion should assist in understanding our financial condition,
liquidity, and capital resources as of December 31, 2005, and the results of
operations for the years ended December 31, 2005, 2004 and 2003. The Notes
to
our Consolidated Financial Statements included later in this report contain
detailed information that should also be read in conjunction with this
discussion.
OVERVIEW
Nano-Proprietary,
Inc. is engaged in research and development related to nanotechnology products,
primarily those involving carbon nanotubes, to be used in the display,
electronics, sensor, and other industries. Our technology and many of its
potential applications are still new and in the early stages of development.
Our
revenue has primarily consisted of development projects involving either the
U.S. government or large multinational corporations.
OUTLOOK
We
expect
our cash needs for 2006 to be approximately $6.0 million. We intend to fund
those needs through a combination of sales, reimbursements for research, and
license agreements. We anticipate receiving significantly more revenue in 2006
than was received in 2005. We have developed a plan to enable us to achieve
positive cash flow from operations with approximately $6.0 million of revenue.
As of February 24, 2006, we have approximately $2.0 million in cash to cover
any
potential revenue shortfall that may occur for the year. Our cash balance
includes $1.5 million from equity that we raised in February 2006. We do not
expect to need to raise any additional equity in 2006.
Our
plan
is to generate sufficient revenues in 2006 to achieve breakeven or better;
however, losses may continue as we continue to fund the development of field
emission technology, sensors, nano-electronics, and nanomaterials. There can
be
no assurances that we will be profitable in the future. Full commercial
development of our technology may require additional funds in the future.
We expect to continue our concentrated research and development of ANI’s
technology in 2006.
We
have
developed a plan to allow ourselves to maintain operations until we are able
to
sustain ourselves on our own revenue. Our plan is primarily dependent on raising
funds through the licensing of our technology and through reimbursed research
arrangements. Our current cash balances are adequate to insure that we can
maintain our operations at the present level. We believe that we have the
ability to continue to secure short term funding, if needed, to enable us to
continue operations until our plan can be completed if this plan takes longer
than anticipated.
This
plan
is based on current development plans, current operating plans, the current
regulatory environment, historical experience in the development of electronic
products, and general economic conditions. Changes could occur which would
cause
certain assumptions on which this plan is based to be no longer valid. Our
plan
is primarily dependent on increasing revenues. Although we do not expect funding
our operations to be a problem, if adequate funds are not available from
operations, or additional sources of financing, we may have to eliminate, or
reduce substantially, expenditures for research and development, testing of
our
products, or obtain funds through arrangements with other entities that may
require us to relinquish rights to certain technologies or products. Such
results could materially and adversely affect us.
Critical
Accounting Policies
Our
significant accounting policies are summarized in the footnotes to our financial
statements. Some of the most critical policies are also discussed
below.
Stock
based compensation
- We
have granted stock options to employees and others. In addition, all employees
have the opportunity to earn additional goal-based option awards each year.
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires
that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995.
Up
until this time, we have accounted for stock based compensation under the
provisions of APB 25 and disclosed pro-forma compensation expense calculated
using the Black-Scholes model in the footnotes to the financial statements.
We
will
be required to adopt the provisions of SFAS No. 123R in the financial statements
for the quarter ended March 31, 2006. Under the provisions of SFAS No. 123R,
pro-forma presentation is no longer allowed, and we will be required to record
compensation expense for option grants in the financial statements. It is likely
that implementation of SFAS No. 123R will have a material impact on our
financial statements. The exact impact cannot be predicted because it is
dependent on future factors that can not be determined at the present time,
such
as the volatility of our common stock and the number of options granted. Had
we
been accounting for stock based compensation using SFAS 123 during the period
covered by the report, the effect would have been as shown in the following
table:
|
|
2005
|
|
2004
|
|
2003
|
|
Net
Loss
|
|
|
|
||
|
As
reported
|
$(4,661,534)
|
$(4,612,026)
|
$(4,214,202)
|
||
|
SFAS
No. 123 Charge
|
1,182,482
|
|
2,259,387
|
|
552,927
|
|
Pro
Forma
|
(5,844,016)
|
|
(6,871,413)
|
|
(4,767,129)
|
|
Net
income (loss) per common share - basic and
diluted
|
|
|
|||
|
As
reported
|
$(0.05)
|
|
$(0.05)
|
|
$(0.05)
|
|
Pro
Forma
|
$(0.06)
|
|
$(0.07)
|
|
$(0.05)
|
Other
-
As a
matter of policy, we review our major assets for impairment. Our major operating
assets are accounts receivable, and property and equipment. We depreciate our
property and equipment over their estimated useful lives. We recorded impairment
charges in 2002, but did not identify any impaired items in 2003, 2004 or 2005.
We have not experienced significant bad debts expense, and we do not believe
that we need an allowance for doubtful accounts for any exposure to loss in
our
December 31, 2005 accounts
receivable.
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash
balance was $897,247 at December 31, 2005, which was approximately the same
as
the cash balance of $901,585 at December 31, 2004. Our working capital was
approximately $700,000 at both December 31, 2005 and 2004. During the same
period, our current ratio remained relatively constant at approximately 3.3
to
1.
The
principal source of our liquidity has been funds received from exempt offerings
of common stock. Cash provided by financing activities was $4,519,913,
$2,037,390, and $7,267,465 in 2005, 2004, and 2003, respectively. Of this,
the
majority came from private placements of our common stock in the amounts of
$4,000,000, $1,065,000, and $4,812,943 in 2005, 2004, and 2003, respectively.
The majority of the balance of the cash provided by financing activities in
all
years came from proceeds from the exercise of stock options by current and
former employees. The larger than normal amount of fundraising activity in
2003
was the result of a conscious decision to raise money to solidify our financial
condition and to insure that we had sufficient funds to last through the end
of
2004 regardless of the revenue received in 2004, which accounts for the
relatively small amount of fundraising in 2004. The fundraising activity in
2005
was to provide operating funds for 2005.
We
completed another private placement of our common stock in February 2006. We
raised a total of $1.5 million by issuing 750,000 shares of our common stock
to
provide liquidity until we reach breakeven. As of February 24, 2006, our cash
balance is approximately $2.0 million. This combined with expected revenue
is
enough for us to operate into 2007, even if there were no significant new
positive developments. We may receive additional funds from the exercise of
warrants, although there is no assurance that warrants will be exercised. We
may
receive additional funds from the exercise of employee stock options, although
a
significant portion of the funds received from stock option exercises in 2005,
2004 and 2003 was from former employees that had options expiring in 2003 and
2004. There are no remaining options held by former employees and only minimal
options expiring in 2006.
In
the
unlikely event that we need additional funds in 2006 beyond the amount that
we
have as of the date of this filing and those that we expect to receive as
revenues, we may seek to sell additional debt or equity securities. We have
no
plans to do this, however. While we expect to be able to obtain any funds needed
for operations, there is no assurance that any financing alternatives can be
arranged on commercially acceptable terms. We believe that our success in
reaching profitability will be dependent upon the viability of products using
our technology and their acceptance in the marketplace.
Net
cash
used in operating activities was $4,507,579 in 2005, $4,581,513 in 2004, and
$3,716,964 in 2003. The cash used in operations was primarily the result of
the
net losses incurred in each year. We expect a reduction in cash used in
operating activities in 2006 as the result of an expected increase in revenues.
We have a plan to
generate
positive cash from operations; however, since that will require significantly
increased revenues, there is no assurance that will be achieved. Such
significantly increased revenues would most likely result from license
agreements with significant up-front payments, or substantial research
contracts. The cash used in operations was virtually unchanged from 2004 to
2005. The increase in the cash used in operating activities from 2003 to 2004
was primarily the result of three factors: A decrease in revenue of roughly
$400,000, an increase in royalty payments of approximately $100,000, and
generally increased spending on research and development, particularly related
to prototype displays.
Cash
used
in investing activities was the result of the purchase of capital assets in
all
years. We would expect minimal cash to be used in investing activities in 2006.
No material commitments exist as of December 31, 2005, for future purchases
of
capital assets.
A
summary
of our contractual cash obligations at December 31, 2005 is as
follows:
|
Contractual
Obligations
|
Total
|
2006
|
2007
|
2008
|
2009
|
|||||||||||
|
Notes
payable including interest
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
|
Long-term
debt including interest
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
|
Operating
leases
|
207,003
|
131,891
|
34,862
|
21,000
|
19,250
|
|||||||||||
|
Capital
leases including interest
|
4,368
|
4,368
|
—
|
—
|
—
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
211,371
|
$
|
136,259
|
$
|
34,862
|
$
|
21,000
|
$
|
19,250
|
During
2003, all convertible notes payable were converted into common stock and all
long-term debt was paid in 2003 as well. We currently have no notes payable
or
long-term debt. We believe that we have currently have the cash available to
meet our cash requirements for fiscal 2006.
RESULTS
OF OPERATIONS
Business
Segments.
We have
three reportable business segments, our Applied Nanotech, Inc. subsidiary,
our
Electronic Billboard Technology, Inc. subsidiary and our remaining activities,
primarily corporate overhead. Because our Electronic Billboard Technology,
Inc.
subsidiary has only minimal activity, our management discussion and analysis
related to results of operations is much more meaningful if done on a
consolidated basis. To the extent that EBT activity had a significant impact
on
consolidated activity, it will be discussed in the context of the consolidated
results. The only significant financial activity at EBT in 2004 was the variable
option pricing effect of options held by former EBT employees.
Revenues.
Following is a summary of revenues for the three years covered by this
report.
|
2005
|
2004
|
2003
|
||||||||
|
Government
Revenues
|
$
|
208,211
|
$
|
305,721
|
$
|
339,790
|
||||
|
Futaba
Contract Research
|
$
|
—
|
$
|
—
|
$
|
400,000
|
||||
|
Total
ANI Revenues
|
$
|
565,660
|
$
|
382,522
|
$
|
773,959
|
||||
|
Total
EBT Revenues
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Total
Revenues
|
$
|
565,660
|
$
|
382,522
|
$
|
773,959
|
||||
|
Revenue
backlog at December 31
|
$
|
2,764,000
|
$
|
130,000
|
$
|
425,000
|
||||
All
of
the revenues during the 3-year period came from ANI. The Government revenues
in
2003 and 2004 resulted from a project for the Department of Defense (“DOD”)
being done in conjunction with Northrop Grumman. The Government revenues in
2005
came from the same Department of Defense grant plus two new SBIR Phase I grants
from the Department of Defense. The Futaba revenues in 2003 resulted from the
completion of a project started in 2001. EBT changed its business model in
2002
and no longer sells products. EBT is pursuing licenses for its technology,
but
is not currently actively pursuing further development of its technology. EBT
had no revenue in any of the years presented.
The
revenue backlog as of December 31, 2005 results primarily from six government
programs. In addition, we have a backlog of $180,000 related to a project being
done for a large sporting goods manufacturer. The revenue backlog at both
December 31, 2004 and 2003 consists of revenue related to our project being
done
in conjunction with Northrop Grumman for the Department of Defense.
We
expect
revenue to be significantly higher in 2006 than in 2005 and we plan to generate
minimum revenues in 2006 of $5.0 million at ANI. We have specifically identified
approximately $3.7 million of potential revenue for 2006, although there is
no
guarantee that these revenues will be obtained, and expect the remaining $1.3
million to come from some of the many opportunities currently being explored.
Revenues could increase above these levels as a result of royalty agreements
or
additional research revenues, but there is no assurance that this will occur,
or
that even $3.7 million in revenue will be achieved. All of the $3.7 million
in
revenue is from customers with whom we have existing relationships and have
previously recognized revenue of some amount. We are actively pursuing revenue
producing contracts from numerous additional sources in several different areas.
Of
the
$3.7 million of specifically identified revenues, we expect a minimum of $1.7
million to come from government contracts. There is approximately $100,000
of
revenue yet to be recognized on the three previously mentioned projects that
resulted in revenue in 2005. In addition, we have been notified by the
Department of Defense of its intent to award two SBIR Phase II awards as
continuations to the two SBIR Phase I awards that we are currently in the
process of completing. Each of these awards are expected to be approximately
$750,000 and are expected to start in the second quarter of 2006. In addition,
ANI received funding of $1 million to develop its PhotoscrubTM
concept.
This project is expected to start no later than the second quarter of 2006.
In
addition, we have applied for, and expect to receive additional SBIR Phase
I
grants during 2006.
The
non-governmental revenue specifically identified as part of the $3.7 million
is
expected to come from Kelman related to the sale of hydrogen sensors and
royalties from Kelman products containing the sensors, from SME upon completion
of the prototype line that it is building and from other existing customers.
We
have many additional opportunities beyond those quantified above and expect
our
revenues at ANI to exceed the minimum of $5.0 million for ANI to break
even.
We
also
expect EBT to generate significant revenue in 2006 as a result of licensing
its
intellectual property. In particular, we expect to license the communication
patent described in more detail in the description of Business section of this
Annual Report on Form 10-K
Cost
of sales.
Because
we do not ship products or provide homogenous services, we do not incur costs
of
sales in the traditional sense. We do keep track of our costs on individual
projects, but because there is a wide variation in cost percentages, presenting
cost of sales information is not meaningful. Government sponsored research
has
nominal or no gross margins and is primarily just a reimbursement of costs.
In
some cases we charge nominal amounts for projects that have much higher costs
because we are proving a concept that will be helpful to us in other areas,
or
are seeking a significantly larger follow up contract with the customer. In
other instances we may perform research contracts that have significant positive
margins because we are able to capitalize on work that we have done and
knowledge that we have gained in the past. At the present stage of our
development, it is more meaningful to look at total research and development
costs in conjunction with revenues than to look at solely internally funded
research projects and the cost of research associated with revenue producing
contracts.
Research
and development.
Following is a summary of research and development expenditures for the three
years.
|
2005
|
2004
|
2003
|
||||||||
|
ANI
Research and development
|
$
|
2,525,292
|
$
|
2,611,583
|
$
|
1,861,660
|
||||
|
EBT
Research and development
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Total
Research and development
|
$
|
2,525,292
|
$
|
2,611,583
|
$
|
1,861,660
|
||||
Company
sponsored research and development expenses at Applied Nanotech, Inc. increased
substantially from 2003 to 2004, but remained relatively constant from 2004
to
2005. This increase in 2004 was primarily the result of spending on two
prototype carbon nanotube based field emission displays that we developed.
One
is a 14-inch prototype done entirely by us and the other is a 25-inch prototype
that was done in conjunction with an international consortium of display
component manufacturers. Even though the 25-inch prototype was done in
conjunction with the consortium, we incurred a significant amount of expenses
related to this prototype in 2005. In addition, we incurred significant expenses
related to development of our sensor technologies.
We
expect
to continue to incur substantial expenses in support of additional research
and
development activities related to the commercial development of our field
emission technology, sensors, nano-electronics, and functional nanomaterials.
We
expect to incur approximately $3.1 million in research related expenditures
in
2006. We expect our research expenditures to increase in 2006 because of the
new
research contracts that we have obtained for 2006. We may, however, incur more
research and development expense in 2006 than presently expected. We are
pursuing numerous opportunities for research contracts and depending upon the
nature of the contracts signed, we may require more research materials than
expected, or we may require additional personnel.
Selling,
general, and administrative.
Following are key components of selling, general, and administrative
expense:
|
2005
|
2004
|
2003
|
||||||||
|
Variable
option pricing
|
$
|
25,200
|
$
|
(267,696
|
)
|
$
|
749,755
|
|||
|
EBT
related S, G, & A
|
$
|
3,734
|
$
|
—
|
—
|
|||||
|
Other
S, G, & A
|
$
|
2,703,724
|
$
|
2,171,059
|
$
|
1,934,357
|
||||
|
Total
selling, general, and administrative
|
$
|
2,732,658
|
$
|
1,903,363
|
$
|
2,684,112
|
||||
|
Pro-forma
SFAS No. 123 Expense
|
$
|
1,182,482
|
$
|
2,259,387
|
$
|
552,927
|
||||
Total
selling, general and administrative expense declined significantly from 2003
to
2004 and then increased back to slightly above 2003 levels in 2005, however
the
total is significantly impacted by variable option pricing, which is dependent
upon the market price of our common stock, as explained below.
As
explained in greater detail in Note 8 to the financial statements, we repriced
a
total of 900,500 options in April 2001. These options, all with an exercise
price greater than $1.50 per share, were repriced to $1.50 per share. At the
time of the repricing our common stock was trading at approximately $0.95 per
share. No compensation expense related to the employees was recorded at the
time. The repricing of these options resulted in a new measurement date for
accounting purposes and reclassification of these options as variable plan
awards beginning on the date of the repricing. We previously accounted for
these
option grants as fixed plan awards. From the date of the repricing through
December 31, 2002, the quoted value of our common stock did not exceed the
exercise price of the options, and as such, no compensation expense was
recognized at any period through that date. In 2003, our common stock price
exceeded the exercise price and remained above it, closing at $2.73 per share
on
December 31, 2003, $2.17 on December 31, 2004, and $2.15 on December 31, 2005.
We recorded $749,755 in non-cash option expense for the cumulative effects
of
the repricing in the year ended December 31, 2003. In the year ended December
31, 2004, a total of $267,696 was recorded as a reduction in expense as a result
of the reduction in our stock price in 2004. In the year ended December 31,
2005
we recorded additional expense of $25,200 related to a portion of these options
that were exercised while the price was higher at an interim date during the
year. As of December 31, 2005, a total of 167,500 of these options held by
employees and 5,000 options held by a consultant remain
outstanding.
The
increase in other selling, general, and administrative expense from 2003 to
2004
is primarily related to payroll. Virtually all employees, including all
officers, took salary reductions effective November 1, 2002. These reductions
remained in effect until November 1, 2003, for employees, and December 1, 2003,
for officers. As such, these reductions were in effect for the majority of
2003.
The reinstated levels were in effect for all of 2004. Non-payroll related
expense remained relatively constant from year to year. The increase in other
selling, general, and administrative expense from 2004 to 2005 of approximately
$500,000 was primarily the result of two components. The first component was
the
litigation against Canon. While our attorney’s are handling this litigation on a
contingency basis, we are still responsible for out-of-pocket costs. We incurred
approximately $175,000 of cost related to this litigation in 2005. The remaining
component of the increase related primarily to payroll. We hired an additional
executive officer effective May 1, 2005. This officer also was a consultant
for
the Company during the first four months of the year. In addition to the
increased number of employees, all administrative personnel received salary
increases in 2005.
We
expect
selling, general and administrative expense in 2006 to be approximately $2.9
million, before considering the effects of the implementation of SFAS No. 123R.
The expected increase in selling, general, and administrative expense in 2006
is
the result of expected increased fringe benefit costs, the estimated cost of
an
annual meeting, an exchange listing fee, and the Canon litigation. The Canon
litigation is set for trial in March 2007. If Canon does not choose to settle
prior to that date, we would expect to incur approximately $250,000 in costs
in
2006 related to that litigation.
As
previously discussed, we will be required to implement SFAS No. 123R in our
financial statements for the quarter ended March 31, 2006. Implementation will
likely have a material impact on our selling, general, and administrative
expense. The table presented in the Critical Accounting Policies section above
shows the amount of expense that would have been recorded in the years ended
December 31, 2005, 2004, and 2003, if we had recorded the amounts calculated
under SFAS No. 123 in those years, rather than disclosing pro-forma information
in the footnotes to the financial statements. It is not possible to accurately
predict the exact effect of SFAS No. 123R on future periods because the expense
to be calculated is dependent up on future events including the number of
options granted, the number of options vested, volatility as impacted by changes
in the price of our common stock, and others.
The
largest single component of cost that we incur is payroll related expense.
Excluding the cost related to variable option accounting, we incurred payroll
related expense of approximately $1.7 million in 2003, $1.9 million in 2004,
and
$2.3 million in 2005. We expect payroll related expense in 2006 to be
approximately $2.9 million as a result of anticipated new personnel. We expect
our burn rate for 2006 to average about $500,000 per month, excluding revenues.
Based on this we believe we can reach breakeven at a revenue level of $6.0
million, but there is no assurance that this will occur, or that we can achieve
that level of revenue.
Other
income. Following is a summary of other income for the last three calendar
years.
|
2005
|
2004
|
2003
|
||||||||
|
Interest
expense
|
$
|
(2,590
|
)
|
$
|
(4,584
|
)
|
$
|
(56,065
|
)
|
|
|
Miscellaneous
other income
|
$
|
33,346
|
$
|
24,982
|
$
|
13,676
|
||||
Interest
expense decreased substantially from $56,065 in 2003 to $4,584 in 2004, and
again to $2,590 in 2005. A significant portion of the interest expense in 2003
resulted from the amortization of the value of beneficial conversion features
associated with convertible debt and interest payments on that convertible
debt.
All of the convertible notes payable outstanding at December 31, 2002 were
converted into common stock in 2003. We had no debt outstanding at December
31,
2003, 2004, or 2005, and expect to incur no debt in 2006. We expect our interest
expense to continue to be negligible in 2006. The majority of the miscellaneous
other income is interest income earned on excess cash balances. We expect
miscellaneous other income to continue to be insignificant in 2005.
SEASONALITY
AND INFLATION
Nano-Proprietary's
business is not seasonal in nature. Management believes that Nano-Proprietary's
operations have not been affected by inflation.
ACCOUNTING
PRONOUNCEMENTS
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires
that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995.
The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will
no
longer be an alternative. SFAS 123R is effective for the first annual period
beginning after June 15, 2005. Accordingly, we will adopt this provision for
its
financial statements for the period ended March 31, 2006. The financial impact
of adopting SFAS 123R can not be predicted; however it will likely have a
material impact on the Company’s financial statements.
Item
7A. Quantitative
and
Qualitative Disclosures About Market
Risk
We
do not
use any derivative financial instruments for hedging, speculative, or trading
purposes. Our exposure to market risk is currently immaterial.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
NANO-PROPRIETARY, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
|
Independent
Auditor’s Report
|
26
|
|
Consolidated
Balance Sheets - December 31, 2005 and 2004
|
27
|
|
Consolidated
Statement of Operations - Years Ended December 31, 2005, 2004, and
2003
|
28
|
|
Consolidated
Statements of Shareholders’ Equity - Years Ended December 31, 2005, 2004,
and 2003
|
29
|
|
Consolidated
Statements of Cash Flows - Years Ended December 31, 2005, 2004, and
2003
|
30
|
|
Notes
to Consolidated Financial Statements
|
31
|
To
the
Board of Directors and Shareholders
Nano-Proprietary,
Inc.
Austin,
Texas
We
have
audited the accompanying consolidated balance sheets of Nano-Proprietary, Inc.
and Subsidiaries (collectively, the “Company”) as of December 31, 2005 and 2004
and the related consolidated statements of operations, shareholders’ equity and
cash flows for each of the three years in the period ended December 31,
2005. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Nano-Proprietary, Inc.
and
Subsidiaries as of December 31, 2005 and 2004, and the results of its operations
and its cash flows for each of the three years in the period ended December
31,
2005 in conformity with U.S. generally accepted accounting
principles.
Sprouse
& Anderson, L.L.P.
Austin,
Texas
January
27, 2006
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
|
ASSETS
|
|
||||||
|
|
December
31,
|
||||||
|
|
2005
|
2004
|
|||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
897,247
|
$
|
901,585
|
|||
|
Accounts receivable, trade - net of allowance for doubtful accounts
|
94,103
|
6,735
|
|||||
|
Prepaid
expenses and other current assets
|
85,306
|
85,135
|
|||||
|
Total
current assets
|
1,076,656
|
993,455
|
|||||
|
Property
and equipment, net
|
101,785
|
141,373
|
|||||
|
Other
assets
|
9,540
|
9,540
|
|||||
|
Total
assets
|
$
|
1,187,981
|
$
|
1,144,368
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
231,131
|
$
|
140,597
|
|||
|
Obligations
under capital lease
|
4,348
|
21,430
|
|||||
|
Accrued
liabilities
|
93,163
|
74,956
|
|||||
|
Deferred
Revenue
|
—
|
54,985
|
|||||
|
Total
current liabilities
|
328,642
|
291,968
|
|||||
|
Obligations
under capital lease, long-term
|
—
|
5,944
|
|||||
|
Commitments
and contingencies
|
—
|
—
|
|||||
|
Total
liabilities
|
328,642
|
297,912
|
|||||
|
Shareholders’
equity :
|
|||||||
|
Preferred
stock, $1.00 par value, 2,000,000 shares authorized;
no
shares issued and outstanding
|
—
|
—
|
|||||
|
Common
stock, 120,000,000 shares authorized, $.001 par value,
99,746,440
and
97,246,422 shares issued and outstanding, respectively
|
99,746
|
97,246
|
|||||
|
Additional
paid-in capital
|
85,494,542
|
80,822,625
|
|||||
|
Accumulated
deficit
|
(84,734,949
|
)
|
(80,073,415
|
)
|
|||
|
Total
shareholders’ equity
|
859,339
|
846,456
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,187,981
|
$
|
1,144,368
|
|||
See
notes
to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
|
Year
ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
|
||||||||||
|
Revenues
|
||||||||||
|
Contract
research
|
$
|
59,995
|
$
|
—
|
$
|
400,000
|
||||
|
Government
contracts
|
208,211
|
305,721
|
339,790
|
|||||||
|
License
fees and royalties
|
—
|
10,852
|
2,248
|
|||||||
|
Other
|
297,454
|
65,949
|
31,921
|
|||||||
|
|
||||||||||
|
Total
revenues
|
565,660
|
382,522
|
773,959
|
|||||||
|
Operating
costs
|
||||||||||
|
Research
and development
|
2,525,292
|
2,611,583
|
1,861,660
|
|||||||
|
Selling,
general and administrative expenses
|
2,732,658
|
1,903,363
|
2,684,112
|
|||||||
|
Royalty
expense
|
—
|
500,000
|
400,000
|
|||||||
|
Total
operating costs
|
5,257,950
|
5,014,946
|
4,945,772
|
|||||||
|
|
||||||||||
|
Income
(loss) from operations
|
(4,692,290
|
)
|
(4,632,424
|
)
|
(4,171,813
|
)
|
||||
|
|
||||||||||
|
Other
income (expense):
|
||||||||||
|
Gain
(loss) on disposal of assets
|
—
|
125
|
4,695
|
|||||||
|
Interest
income
|
33,346
|
24,857
|
8,981
|
|||||||
|
Interest
expense
|
(2,590
|
)
|
(4,584
|
)
|
(56,065
|
)
|
||||
|
Other
income (loss)
|
—
|
—
|
—
|
|||||||
|
|
||||||||||
|
Loss
before taxes
|
(4,661,534
|
)
|
(4,612,026
|
)
|
(4,214,202
|
)
|
||||
|
|
||||||||||
|
Provision
for taxes
|
—
|
—
|
—
|
|||||||
|
|
||||||||||
|
Net
(loss) applicable to common shareholders
|
$
|
(4,661,534
|
)
|
$
|
(4,612,026
|
)
|
$
|
(4,214,202
|
)
|
|
|
Earnings
(loss) per share
|
||||||||||
|
Basic
and diluted
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
|
|
Weighted
average common shares outstanding
|
||||||||||
|
Basic
and diluted
|
98,957,812
|
96,609,237
|
87,366,507
|
|||||||
See
notes to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
|
Preferred
|
Common
|
Additional
|
Accumulated
|
|||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid-In
Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance
January 1, 2003
|
-
|
$
|
-
|
76,970,792
|
$
|
76,971
|
$
|
68,709,621
|
$
|
(71,247,187
|
)
|
$
|
(2,460,595
|
)
|
||||||||
|
Issuance
of common stock as
compensation
|
-
|
-
|
-
|
-
|
101,400
|
-
|
101,400
|
|||||||||||||||
|
Issuance
of common stock for patents
|
-
|
-
|
71,021
|
71
|
13,565
|
-
|
13,636
|
|||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
-
|
-
|
3,132,060
|
3,132
|
2,508,765
|
-
|
2,511,897
|
|||||||||||||||
|
Issuance
of common stock for cash
|
-
|
-
|
7,607,097
|
7,607
|
4,805,336
|
-
|
4,812,943
|
|||||||||||||||
|
Issuance
of common stock in
payment of accounts payable
|
-
|
-
|
125,000
|
125
|
276,657
|
-
|
276,782
|
|||||||||||||||
|
Issuance
of common stock as result
of convertible notes payable
|
-
|
-
|
7,707,020
|
7,707
|
1,753,506
|
-
|
1,761,213
|
|||||||||||||||
|
Variable
Option Pricing
|
-
|
-
|
-
|
-
|
749,755
|
-
|
749,755
|
|||||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
-
|
-
|
(4,214,202
|
)
|
(4,214,202
|
)
|
|||||||||||||
|
Balance
December 31, 2003
|
-
|
-
|
95,612,990
|
95,613
|
78,918,605
|
(75,461,389
|
)
|
3,552,829
|
||||||||||||||
|
Issuance
of common stock options
as compensation
|
-
|
-
|
-
|
-
|
116,600
|
-
|
116,600
|
|||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
-
|
-
|
1,211,545
|
1,211
|
972,138
|
-
|
973,349
|
|||||||||||||||
|
Issuance
of common stock for cash
|
-
|
-
|
421,887
|
422
|
1,082,978
|
-
|
1,083,400
|
|||||||||||||||
|
Variable
Option Pricing
|
-
|
-
|
-
|
-
|
(267,696
|
)
|
-
|
(267,696
|
)
|
|||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
-
|
-
|
(4,612,026
|
)
|
(4,612,026
|
)
|
|||||||||||||
|
Balance
December 31, 2004
|
-
|
-
|
97,246,422
|
97,246
|
80,822,625
|
(80,073,415
|
)
|
846,456
|
||||||||||||||
|
Issuance
of common stock options
as compensation
|
-
|
-
|
-
|
-
|
106,278
|
-
|
106,278
|
|||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
-
|
-
|
817,625
|
818
|
542,121
|
-
|
542,939
|
|||||||||||||||
|
Issuance
of common stock for cash
|
-
|
-
|
1,682,393
|
1,682
|
3,998,318
|
-
|
4,000,000
|
|||||||||||||||
|
Variable
Option Pricing
|
-
|
-
|
-
|
-
|
25,200
|
-
|
25,200
|
|||||||||||||||
|
Net
(loss)
|
-
|
-
|
-
|
-
|
-
|
(4,661,534
|
)
|
(4,661,534
|
)
|
|||||||||||||
|
|
||||||||||||||||||||||
|
Balance
December 31, 2005
|
-
|
$
|
-
|
99,746,440
|
$
|
99,746
|
$
|
85,494,542
|
$
|
(84,734,949
|
)
|
$
|
859,339
|
|||||||||
See
notes
to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
|
Year
Ended
December
31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||
|
Net
loss
|
$
|
(4,661,534
|
)
|
$
|
(4,612,026
|
)
|
$
|
(4,214,202
|
)
|
|
|
Adjustments
to reconcile loss to net
cash
used in operating activities:
|
|
|||||||||
|
Depreciation
and amortization expense
|
56,260
|
54,928
|
44,419
|
|||||||
|
(Gain)
loss on disposal of assets
|
—
|
(125
|
)
|
(4,695
|
)
|
|||||
|
Stock
and options issued for services
|
106,278
|
116,600
|
101,400
|
|||||||
|
Stock
issued for patent option
|
—
|
—
|
13,636
|
|||||||
|
Variable
option accounting charge
|
25,200
|
(267,696
|
)
|
749,755
|
||||||
|
Changes
in assets and liabilities:
|
|
|||||||||
|
Accounts
receivable, trade
|
(87,368
|
)
|
34,397
|
(8,816
|
)
|
|||||
|
Prepaid
expenses and other assets
|
(171
|
)
|
6,326
|
57,531
|
||||||
|
Accounts
payable
|
90,534
|
13,788
|
(181,287
|
)
|
||||||
|
Accrued
expenses
|
18,207
|
17,310
|
(274,705
|
)
|
||||||
|
Customer
deposits and other current liabilities
|
(54,985
|
)
|
54,985
|
—
|
||||||
|
|
||||||||||
|
Total
adjustments
|
153,955
|
30,513
|
497,238
|
|||||||
|
|
||||||||||
|
Net
cash used in operating activities
|
(4,507,579
|
)
|
(4,581,513
|
)
|
(3,716,964
|
)
|
||||
|
|
||||||||||
|
Cash
flows from investing activities:
|
|
|
|
|||||||
|
Capital expenditures
|
(16,672
|
)
|
(118,987
|
)
|
(6,494
|
)
|
||||
|
Proceeds
from sale of assets
|
—
|
125
|
4,695
|
|||||||
|
|
||||||||||
|
Net
cash provided by (used in) investing activities
|
(16,672
|
)
|
(118,862
|
)
|
(1,799
|
)
|
||||
|
|
||||||||||
|
Cash
flows from financing activities:
|
|
|||||||||
|
Proceeds
from issuance of common stock
|
4,542,939
|
2,056,749
|
7,324,840
|
|||||||
|
Repayment
of long-term notes payable and capital lease
obligations
|
(23,026
|
)
|
(19,359
|
)
|
(57,375
|
)
|
||||
|
|
|
|||||||||
|
Net
cash provided by financing activities
|
4,519,913
|
2,037,390
|
7,267,465
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(4,338
|
)
|
(2,662,985
|
)
|
3,548,702
|
|||||
|
Cash
and cash equivalents, beginning of year
|
901,585
|
3,564,570
|
15,868
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
897,247
|
$
|
901,585
|
$
|
3,564,570
|
||||
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization,
Operations, and Liquidity:
Nano-Proprietary,
Inc. and its subsidiaries (“the Company”) are engaged in the development of
products for applications using proprietary field emission technology, sensors,
nanoelectronics, and nanomaterials, as well as the performance of significant
research in that area. The Company has also developed patented electronic sign
technology, sold products using that technology, but has now limited itself
to
licensing that technology to others. It intends to obtain development revenues
for applying its technology to specific applications for customers and royalty
revenues from licensing its technology to others.
Until
the
Company is able to operate profitably as a result of revenues from either
reimbursed research or license agreements, it may continue to seek additional
funds through the equity markets, or raise funds through debt instruments to
allow it to maintain operations. There is no assurance that license agreements
will be signed, that commercialization of the Company’s technology and products
will result in income from operations, or that funds will be available in the
equity or debt markets. Management believes it will continue to be able to
secure additional short term funding, if necessary, to allow the Company to
continue operations until it achieves profitability.
The
principal source of the Company's liquidity since the time of its initial public
offering in 1993 has been from the funds received from exempt offerings of
common stock, preferred stock, and convertible debt securities, as well as
license and development revenues. The Company will likely receive
additional funds from the exercise of warrants or options. The Company may
also
seek to increase its liquidity through bank borrowings or other
financings. There can be no assurance that any of these financing
alternatives can be arranged on commercially acceptable terms. The Company
believes that its success in reaching profitability will depend on the viability
of its technology and products using that technology, their acceptance in the
marketplace, and the Company’s ability to obtain additional debt or equity
financings in the future.
A
portion
of the Company's research and development has been funded by others. To
the extent that other funding is not available, the research and development
performed is internally funded by the Company.
2. Summary
of Significant Accounting Policies:
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Applied Nanotech, Inc. (“ANI”), and Electronic
Billboard Technology, Inc. (“EBT”), after the elimination of all significant
intercompany accounts and transactions. ANI is primarily involved in developing
products for applications using the Company’s proprietary field emission
technology, sensors, and nanomaterials which include composites. EBT was
primarily involved in the commercialization of electronic digitized sign
technology, but has now limited itself to licensing that technology.
Management’s
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets, liabilities, revenues, and expenses,
as
well as the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. Significant estimates include NOL reserves,
bad debt reserves, and litigation reserves.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
Revenue
recognition
The
Company's revenues include reimbursements under agreements to perform research
and development for government agencies and others. The Company does not perform
research contracts that are contingent upon successful results. Larger projects
are broken down in phases to allow the customer to determine at the end of
each
phase if they wish to move to the next phase. The agreements with federal
government agencies generally provide that, upon completion of a technology
development program, the funding agency is granted a royalty-free license to
use
the newly developed technology for its own purposes. The Company retains
all other rights to use, develop, and commercialize the technology and
recognizes revenue when it is billed pursuant to the terms of the contract.
Agreements with other entities generally allow the other entity to license
the
technology from the Company upon completion of the project.
The
Company revenues also include royalties from licensing its technology, revenue
from the sale of products, and other miscellaneous revenues. Many of the
companies projects may involve a combination of these types of revenues.
Revenues are recognized as follows.
Government
Contracts - Revenue from government contracts is recognized when it is earned
pursuant to the terms of the contract. Long-term projects, such as SBIR Phase
II
grants that usually total $500,000 to $1,000,000 and usually extend for a period
of approximately two years, are generally based on reimbursement of costs.
These
projects are usually billed monthly based on costs, hours, or some other measure
of activity during the month. Revenue from these projects is recognized as
it is
billed. Short-term projects, such as SBIR Phase I grants that usually are less
than $100,000 and usually extend for a period of approximately 6 months, are
usually billed at periodic intervals as specified in the contract. Revenue
from
this type of contract is generally recognized as billed, unless the billing
terms specified by the contract would result in a distortion in the amount
of
revenue being recognized relative to the activity level. For example, if the
grant called for one billing at the end of the grant, the revenue would be
recognized based on the activity level incurred in the period as compared with
total projected activity level. A situation like this would be unusual and
rarely happens.
Other
Research Contracts - Revenue from nongovernment contracts is recognized when
it
is earned pursuant to the terms of the contract. Each contract is unique and
tailored to the needs of the customer and goals of the project. Some contracts
may call for a monthly payment for a fixed period of time. Other contracts
may
be for a fixed dollar amount with an unspecified time period, although there
is
frequently a targeted completion date. These contracts generally involve some
sort of up front payment. Some contracts may call for the delivery of samples,
or may call for the transfer of equipment or other items developed during the
project to the customer. As a general rule, we recognize revenue on long term
contracts based on the activity level of the contract during the period as
compared with total estimated activity. This generally would be a measure of
cost incurred as compared with total expected cost. However, to the extent
there
are other significant contract provisions such as the delivery of more than
a
nominal amount of samples or delivery of equipment, we would modify this as
appropriate. For other short term contracts, generally less than $50,000, we
recognize revenue when it is billed under the terms of the
contract.
Royalty
Revenue - The Company recognizes royalty revenues based on the shipment of
products by a licensee at the time the underlying product upon which the royalty
is based is shipped by the entity paying the royalty. For minimum royalty
payments paid by a licensee that are required for the licensee to maintain
exclusivity, royalty revenue is recognized at the time the minimum royalty
payment, or notice of intended payment, is received. The Company recognizes
royalty payments received at the time of the signing of a royalty agreement
at
the time of receipt, unless the terms of the agreement make it clear that the
up-front payment was a prepayment of future royalties.
Product
Sales - Revenue from product sales is recognized at the time the product
shipped. The Company’s primary business is research and development and the
licensing of its technology, not the sale of products. Product sales are
generally insignificant in number, and are usually limited to the sale of
samples, proofs of concepts, prototypes, or other items resulting from its
research.
Other
Revenue - Other miscellaneous revenue is recognized as deemed appropriate given
the facts of the situation and is generally not material.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
Cash
and
cash equivalents
The
Company considers all highly liquid investments purchased with a maturity of
approximately three months or less to be cash equivalents.
Accounts
receivable
The
Company occasionally sells products to others on credit; however most sales
are
to large financially stable companies, or the Federal government. It is the
Company's policy to record reserves for potential credit losses. Since
inception, the Company has experienced minimal losses. The Company considered
no
reserves to be necessary at December 31, 2005, 2004, or 2003.
Property
and equipment
Property
and equipment are recorded at cost, net of accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, which range from three to seven years,
or
the lease term for leasehold improvements, if less. Expenses for major
renewals and betterments that extend the original estimated economic useful
lives of the applicable assets are capitalized. Expenses for normal repairs
and
maintenance are charged to operations as incurred. The cost and related
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts, and any gain or loss is included in income.
Impairment
At
each
balance sheet date, the Company evaluates the carrying amount and the
amortization period for its long-lived assets. If an indicator of impairment
exists, it is recorded at that time. There were no impairment charges recorded
in any of the years presented in these financial statements.
Income
taxes
The
Company accounts for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards (“SFAS”) No. 109. Under this
method, deferred income taxes are recorded to reflect the tax consequences
on
future years of temporary differences between the tax basis of the assets and
liabilities and their financial amounts at year-end. The Company provides
a valuation allowance to reduce deferred tax assets to their net realizable
value.
Research
and development expenses
Costs
of
research and development for Company-sponsored projects are expensed as
incurred.
Disclosures
about fair value of financial instruments
The
following methods and assumptions were used to estimate the fair value of each
class of certain financial instruments for which it is practicable to estimate
that fair value. For cash equivalents and accounts receivable, the
carrying amount approximates fair value because of the short-term nature of
these instruments. The fair value of the Company’s capital lease obligations is
estimated based on the quoted market prices for the same, or similar issues,
or
on the current rates offered to the Company for obligations of the same
remaining maturities with similar collateral requirements. For all years
presented, the fair value of the Company’s capital lease obligations approximate
their carrying values.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
Income
(loss) per common share
Basic
per
share amounts are computed, generally, by dividing net income or loss by the
weighted average number of common shares outstanding. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive, thereby reducing the
loss
or increasing the income per common share. As described in Notes 7, 8 and
9, the Company had options and warrants outstanding as indicated in the table
below. However, because the Company incurred losses in all years presented,
the
inclusion of those potential common shares in the calculation of diluted loss
per-share would have an anti-dilutive effect. Therefore, basic and diluted
per-share amounts are the same in all years presented.
|
2005
|
2004
|
2003
|
||||
|
Options
|
6,703,151
|
5,398,703
|
5,253,175
|
|||
|
Warrants
|
95,000
|
95,000
|
155,000
|
|||
|
Weighted
average exercise price
|
$1.57
|
$1.29
|
$1.10
|
Stock-based
employee compensation
The
Company uses the intrinsic value method to account for stock-based employee
compensation. During the years presented, the Company did not incur any
compensation cost under APB No. 25 for options granted under the Plans. Had
the
compensation cost for the Company’s compensation plans been determined
consistent with SFAS No. 123 and SFAS No. 148 using the fair value method,
the
Company’s net loss and net loss per common share for 2005, 2004, and 2003 would
approximate the pro forma amounts as shown below:
|
|
2005
|
|
2004
|
|
2003
|
|
Net
Loss
|
|
|
|
||
|
As
reported
|
$(4,661,534)
|
$(4,612,026)
|
$(4,214,202)
|
||
|
SFAS
No. 123 Charge
|
1,182,482
|
|
2,259,387
|
|
552,927
|
|
Pro
Forma
|
(5,844,016)
|
|
(6,871,413)
|
|
(4,767,129)
|
|
Net
income (loss) per common share - basic and
diluted
|
|
|
|||
|
As
reported
|
$(0.05)
|
|
$(0.05)
|
|
$(0.05)
|
|
Pro
Forma
|
$(0.06)
|
|
$(0.07)
|
|
$(0.05)
|
The
effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts. SFAS No. 123 does not apply to awards
prior to 1995, and the Company anticipates making awards in the future under
its
compensation plans. The Company also granted 50,000 options to a non-employee
consultant in 2003, 100,000 options to a non-employee consultant in 2004, and
120,000 options to non-employee consultants in 2005. We recorded expense of
$101,400, $116,600, and $106,278 in 2003, 2004, and 2005, respectively, related
to those options. These expenses were calculating using approximately the same
assumptions used to determine the SFAS No. 123 charge in 2003 and 2004. In
2005
this charge was computed using volatility rates ranging from 72% to 78%, risk
free interest rates of 3.5% to 4.35%, expected option terms of 1.5 to 2.5 years,
and dividend and forfeiture rates of zero.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
The
fair
value of each stock option granted to employees in 2005, 2004, and 2003 is
estimated on the date of the grant using the Black-Scholes option pricing-model
with the following weighted-average assumptions:
|
2005
|
2004
|
2003
|
||||
|
Dividend
Yield
|
0%
|
0%
|
0%
|
|||
|
Risk
Free Interest Rate
|
3.5%
|
3.5%
|
3%
|
|||
|
Expected
Option Life
|
3.5
Years
|
5
Years
|
5
Years
|
|||
|
Turnover/Forfeiture
Rate
|
0%
|
45%
|
25%
|
|||
|
Volatility
|
100%
|
72%
|
108%
|
The
Black-Scholes option valuation model and other existing models were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. These option valuation models require
the input of, and are highly sensitive to, subjective assumptions including
the
expected stock price volatility. Nano-Proprietary’s stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions could materially affect the fair
value estimate.
Recently
issued accounting pronouncements
In
December 2004, the FASB issued Statement of Financial Accounting Standards
No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires
that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995.
The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will
no
longer be an alternative. The Statement is effective for the first annual
reporting period beginning after June 15, 2005. Accordingly, the Company will
adopt this provision for its financial statements for the period ended March
31,
2006. The financial impact of adopting this statement can not be predicted,
however it will likely have a material impact on the Company’s financial
statements.
3. Operating
Lease Obligations
:
The
Company leases various facilities and equipment under operating lease agreements
having terms expiring at various dates through 2009. Rental expense was
$133,487, $115,217, and $124,425 for the years ended December 31, 2005,
2004 and 2003, respectively.
Future
minimum lease payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2005, were
as
follows:
|
2006
|
$
|
131,891
|
||
|
2007
|
34,862
|
|||
|
2008
|
21,000
|
|||
|
2009
and thereafter
|
19,250
|
|||
|
Total
future minimum lease payments
|
$
|
207,003
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Capital
Lease Obligations
:
Capital
leases payable at December 31, 2005 and 2004 consisted of the
following:
|
|
2005
|
2004
|
|||||
|
Capital
leases for copier equipment due in
monthly
installments totaling $1,932 through 2006.
The
equipment value and lease obligation was determined
using
a discount rate of 10%. The equipment is included in
office
equipment at December 31, 2005 at a cost of $94,383
and
with accumulated amortization of $91,018.
|
$
|
4,368
|
$
|
29,228
|
|||
|
Less
interest
|
(20
|
)
|
(1,854
|
)
|
|||
|
Less
current portion
|
(4,348
|
)
|
(21,430
|
)
|
|||
|
Capital
Lease Obligations, long-term
|
$
|
—
|
$
|
5,944
|
|||
5. Details
of Certain Balance Sheet Accounts:
Additional
information regarding certain balance sheet accounts at December 31, 2005 and
2004 is as follows:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
|
|||||||
|
Property
and equipment:
|
|
|
|||||
|
Plant
and equipment
|
$
|
755,436
|
$
|
755,436
|
|||
|
Furniture
and office equipment
|
199,184
|
182,512
|
|||||
|
Leasehold
Improvements
|
14,382
|
14,382
|
|||||
|
Total
carrying cost
|
969,002
|
952,330
|
|||||
|
Less
accumulated depreciation
|
(867,217
|
)
|
(810,957
|
)
|
|||
|
|
$
|
101,785
|
$
|
141,373
|
|||
|
Accrued
liabilities:
|
|||||||
|
Payroll
and related accruals
|
$
|
65,507
|
$
|
37,927
|
|||
|
Other
|
27,656
|
37,029
|
|||||
|
Total
|
$
|
93,163
|
$
|
74,956
|
|||
Depreciation
for the years ended December 31, 2005, 2004, and 2003 was $56,260, $54,928,
and
$44,419, respectively.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. Income
Taxes
:
The
components of deferred tax assets (liabilities) at December 31, 2005 and 2004,
were as follows:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carry forwards
|
$
|
30,849,000
|
$
|
28,759,000
|
|||
|
Research
and experimentation credits
|
468,000
|
469,000
|
|||||
|
Capitalized
intangible assets
|
185,000
|
223,000
|
|||||
|
Depreciation
assets
|
6,000
|
12,000
|
|||||
|
Accrued
expenses not deductible until paid
|
24,000
|
15,000
|
|||||
|
Total
deferred tax assets
|
31,532,000
|
29,478,000
|
|||||
|
|
|||||||
|
Deferred
tax liabilities:
|
—
|
—
|
|||||
|
Net
deferred tax assets before valuation allowance
|
31,532,000
|
29,478,000
|
|||||
|
|
|||||||
|
Valuation
allowance
|
(31,532,000
|
)
|
(29,478,000
|
)
|
|||
|
|
|||||||
|
Net
deferred tax asset
|
|||||||
|
$
|
—
|
$
|
—
|
||||
The
following is a reconciliation of the amount of the income tax expense (benefit)
that would result from applying the statutory federal income tax rates to pretax
income (loss) and the reported amount of income tax expense (benefit) for the
periods ended December 31, 2005, 2004, and 2003.
|
|
December
31,
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
|
|
|
|
|||||||
|
Expected
income tax expense (benefit)
|
$
|
(1,585,000
|
)
|
$
|
(1,568,000
|
)
|
$
|
(1,433,000
|
)
|
|
|
Deductible
expenses not charged against book income
|
(528,000
|
)
|
(614,000
|
)
|
(1,158,000
|
)
|
||||
|
Non-taxable
income
|
—
|
(91,000
|
)
|
—
|
||||||
|
Non-deductible
expenses
|
56,000
|
7,000
|
260,000
|
|||||||
|
Expiration
of Tax Credit Carryforwards
|
1,000
|
556,000
|
—
|
|||||||
|
Other
|
2,000
|
1,000
|
11,000
|
|||||||
|
Increase
in Valuation Allowance
|
2,054,000
|
1,709,000
|
2,320,000
|
|||||||
|
Total
Tax
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
As
of
December 31, 2005, the Company had net operating loss carry forwards of
approximately $90 million that expire from 2006 through 2025, and are available
to offset future taxable income. The majority of these carry forwards expire
after 2009. Additionally, the Company has tax credit carry forwards related
to
research and development expenditures of approximately $468,000 that expire
through 2011.
The
Company’s IPO, completed in 1993, and subsequent issuances of stock have
effected ownership changes under Internal Revenue Code Section 382. The
ownership changes resulting from these stock issuances will likely limit the
Company's ability to utilize any net operating loss carry forwards or credits
generated before the changes in ownership.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. Capital
Stock:
Preferred
stock
The
Company has authorization for the issuance of 2,000,000 shares of $1.00 par
value preferred stock. As of December 31, 2005, 2004 and 2003, no preferred
shares were outstanding.
Common
stock
During
2003, 2004, and 2005, the Company issued shares of its common stock in a series
of private placements in exempt offerings under Regulation D of the Securities
Act of 1933. These shares were issued at prices that represented a slight
discount to the market price of the stock at the time of the offerings. All
of
these shares were registered to enable the shareholder to be able to sell the
shares, with the latest registration statement declared effective October 27,
2005.
|
Shares
|
Proceeds
|
||||||
|
2005
|
1,682,393
|
$
|
4,000,000
|
||||
|
2004
|
401,887
|
$
|
1,065,000
|
||||
|
2003
|
7,607,097
|
$
|
4,812,943
|
||||
In
a
series of private placements of the Company’s common stock in exempt offerings
under Regulation D of the Securities Act of 1933, the Company also issued 71,021
shares in 2003, valued at $13,636 in payment for the Keesman patent described
in
more detail in Note 11. The Company also issued 125,000 shares of its common
stock in 2003 in payment of accounts payable. These shares were valued at
$276,782. The Company also issued 7,707,020 shares in 2003 as the result of
the
conversion of convertible notes payable issued in previous years and related
accrued interest totaling $1,761,213.
At
December 31, 2005, common stock was reserved for the following
reasons:
|
Exercise
of stock warrants
|
95,000
|
|||
|
Exercise
and future grants of stock options
|
8,724,260
|
|||
|
|
||||
|
Total
shares reserved
|
8,819,260
|
8. Stock
Options:
The
Company sponsors four stock-based incentive compensation plans (the “Plans”).
The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and
related interpretations in accounting for the Plans. In 1995, the FASB issued
SFAS No. 123 “Accounting for Stock-Based Compensation” which, if fully adopted
by the Company, would change the methods the Company applies in recognizing
the
cost of the Plans. Adoption of the cost recognition provisions of SFAS No.
123
is optional and the Company has decided not to elect these provisions of SFAS
No. 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are
presented in Note 2.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock
Options (continued):
The
plans
allow the Company to grant either incentive stock options or non-qualified
stock
options. The incentive stock options are exercisable for up to ten years, at
an
option price per share not less than the fair market value on the date the
option is granted. The incentive stock options are limited to persons who have
been regular full-time employees of the Company or its present and future
subsidiaries for more than one (1) year and at the date of the grant of any
option are in the employ of the Company or its present and future subsidiaries.
Non-qualified options may be granted to any person, including, but not limited
to, employees, independent agents, consultants and attorneys, who the Company's
Compensation Committee believes have contributed, or will contribute, to the
success of the Company. Non-qualified options may be issued at option
prices of less than fair market value on the date of grant and are exercisable
for up to ten years from date of grant. The option-vesting schedule for options
granted is determined by the Compensation Committee of the Board of Directors
at
the time of the grant.
In
April
2001, the Company repriced a total of 900,500 options. All options with an
exercise price greater than $1.50 per share, which was approximately 160% of
the
market price of the stock at the time of the repricing, held by individuals
employed by the Company as of the repricing date, including one consultant
under
contract at the time, were repriced to $1.50 per share. No compensation expense
related to the employees was recorded at the time. The repricing of these
options resulted in a new measurement date for accounting purposes and
reclassification of these options as variable plan awards beginning on the
date
of the repricing. The Company previously accounted for these option grants
as
fixed plan awards. From the date of the repricing through December 31, 2002,
the
quoted value of the Company’s common stock did not exceed the exercise price of
the options, and as such, no compensation expense was recognized at any period
through that date. In 2003, the Company’s common stock price exceeded the
exercise price and remained above it, closing at $2.73 per share on December
31,
2003, $2.17 on December 31, 2004, and $2.15 on December 31, 2005. The Company
recorded $749,755 in non-cash option expense for the cumulative effects of
the
repricing and increased additional paid in capital by the same amount in the
year ended December 31, 2003. In the year ended December 31, 2004, a total
of
$267,696 was recorded as a reduction in expense and a reduction to paid in
capital as a result of the reduction in the Company’s stock price in 2004. The
Company recorded additional expense of $25,200 in the year ended December 31,
2005. As of December 31, 2005, a total of 167,500 of these options held by
employees and 5,000 options held by a consultant remain
outstanding.
In
March
1992, the shareholders of the Company approved the 1992 Employees Stock Option
Plan (the "1992 Employees Plan") for purposes of granting incentive or
non-qualified stock options. The plan was amended several times by the Company’s
Board of Directors to increase the number of shares authorized under the plan.
The latest amendment, in December 1999, increased the authorized shares under
the plan to 6,500,000. This plan expired in March 2002; however, options granted
under this plan prior to expiration remain outstanding until they are exercised,
forfeited, or the exercise period expires. At December 31, 2005, no shares
remained available for grant under the 1992 Employees Plan.
In
March
1992, the Board of Directors adopted the 1992 Outside Directors’ Stock Option
Plan (the "1992 Directors Plan"), for purposes of granting non-qualified options
to non-employee directors of the Company. The plan was amended several times,
the latest being in December 1999. A total of 1,000,000 shares were reserved
for
issuance under the plan and were issued each year based on a formula defined
by
the plan. The stock options granted under the 1992 Directors Plan are
exercisable for up to 10 years at an option price equal to the fair market
value
on the date the option is granted. This plan expired in March 2002;
however, options granted under the plan prior to expiration remain outstanding
until they are exercised, forfeited, or the exercise period expires. At December
31, 2005, no shares remained available for grant under the 1992 Directors
Plan.
In
May
1998, the Board of Directors of the Company established the 1998 Officers and
Directors Stock Option Plan (the “1998 Officers and Directors Plan”) and
reserved a total of 1,200,000 shares for issuance under the Plan. The plan
was
amended in January 1999 by the Board of Directors of the Company to increase
the
shares reserved for issuance under the plan to 2,500,000. Options under this
plan are granted at the discretion of the Board of Directors. No additional
shares are currently available under this plan and no shares will be come
available under this plan in the future.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock
Options (continued):
In
September 2002, the Board of Directors of the Company established the 2002
Equity Compensation Plan and reserved a total of 5,000,000 shares for issuance
under the Plan, effective March 2002. The purpose of this plan was to replace
the 1992 Employees Plan and the 1992 Directors Plan, both of which expired
in
March 2002. The plan was amended effective December 31, 2004 to increase the
authorized shares to 8,000,000. A total of 2,010,109 shares remain available
for
grant under this at December 31, 2005.
The
following is a summary of stock option activity under all four
plans:
|
|
Number
of
Shares
|
Wgtd.
Ave.
Exercise
Price
|
|||||
|
|
|||||||
|
Options
outstanding at January 1, 2003
|
6,965,629
|
$0.79
|
|||||
|
|
|
||||||
|
Granted
|
1,496,995
|
$1.88
|
|||||
|
Exercised
|
(3,132,060
|
)
|
$0.80
|
||||
|
Canceled
|
(77,389
|
)
|
$0.82
|
||||
|
|
|||||||
|
Options
outstanding at December 31, 2003
|
5,253,175
|
$1.09
|
|||||
|
Granted
|
2,457,073
|
$2.73
|
|||||
|
Exercised
|
(1,211,545
|
)
|
$0.80
|
||||
|
Cancelled
|
(1,100,000
|
)
|
$2.94
|
||||
|
Options
outstanding at December 31, 2004
|
5,398,703
|
$1.52
|
|||||
|
Granted
|
2,872,073
|
$2.25
|
|||||
|
Exercised
|
(817,625
|
)
|
$0.66
|
||||
|
Cancelled
|
(750,000
|
)
|
$2.42
|
||||
|
Options
outstanding at December 31, 2005
|
6,703,151
|
$1.84
|
|||||
The
following table summarizes information about stock options outstanding and
exercisable under all four stock option plans at December 31, 2005:
|
|
Options
Outstanding
|
Options
Exercisable
|
||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
12/31/05
|
Wgtd. Avg.
Remaining
Contractual
Life
|
Wgtd.
Avg.
Exercise
Price
|
Number
Exercisable
at
12/31/05
|
Wgtd.
Avg.
Exercise
Price
|
|||||
|
|
|
|
|
|
|
|||||
|
$0.00
- $0.50
|
804,089
|
3.9
Years
|
$0.44
|
804,089
|
$0.44
|
|||||
|
$0.51
- $1.00
|
1,124,083
|
5.7
Years
|
$0.83
|
1,124,083
|
$0.83
|
|||||
|
$1.01
- $2.00
|
745,833
|
5.8
Years
|
$1.54
|
745,833
|
$1.54
|
|||||
|
$2.01
- $2.99
|
4,029,146
|
8.6
Years
|
$2.45
|
1,929,146
|
$2.49
|
|||||
|
|
|
|
|
|||||||
|
Total
|
6,703,151
|
7.3
Years
|
$1.84
|
4,603,151
|
$1.57
|
|||||
|
|
|
|
|
|||||||
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock
Options (continued)
:
The
weighted-average fair values of options under the plans granted during 2005,
2004, and 2003 were as follows:
|
|
2005
|
2004
|
|
2003
|
|
|
Discounted
options
|
$0.00
|
$0.00
|
|
$0.00
|
|
|
At-the-money
options
|
$1.50
|
$1.71
|
|
$1.58
|
|
|
Premium
options
|
$1.41
|
$1.28
|
|
$0.38
|
9. Stock
Warrants
:
Common
stock warrants
In
1996,
the Company issued 35,000 warrants to an advisor in connection with the
Company’s fundraising activities. These warrants enable the holder to purchase
shares of the Company’s common stock at a price of $2.00 per share through 2006.
These warrants expired unexercised at the end of January 2006. In 1997, the
Company issued 75,000 additional warrants to this advisor in connection with
services related to a joint venture agreement. A total of 15,000 of these
warrants were exercised in 1999. These warrants enable the holder to purchase
shares of the Company’s Common Stock at a price of $1.00 per share through
2007.
In
1999,
the Company issued a total of 60,000 warrants to three separate individuals
in
connection with services rendered to the Company. The exercise price of these
warrants was based on the fair market value of the Company’s common stock at the
time of issuance and ranged from $0.92 to $2.15 per share. These warrants were
exercisable for a period of 5 years from the date of issuance and were either
exercised or expired in 2004.
The
following is a summary of outstanding warrants:
|
|
Number
of
Shares
|
Exercise
Price
|
|||||
|
|
|
|
|||||
|
Warrants
outstanding at January 1, 2003
|
155,000
|
$0.92-2.15
|
|||||
|
Expired
or canceled
|
—
|
—
|
|||||
|
|
|
||||||
|
Warrants
outstanding at December 31, 2003
|
155,000
|
$0.92-2.15
|
|||||
|
Exercised
|
(20,000
|
)
|
$0.92
|
||||
|
Expired
or canceled
|
(40,000
|
)
|
$2.15
|
||||
|
Warrants
outstanding at December 31, 2004
|
95,000
|
$1.00-2.00
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Expired
|
—
|
—
|
|||||
|
|
|
||||||
|
Warrants
outstanding at December 31, 2005
|
95,000
|
$1.00-2.00
|
|||||
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. Supplemental
Cash Flow Information:
Cash
paid
for interest was $2,590, $4,584, and $10,503 for 2005, 2004, and 2003,
respectively. The following non-cash transactions have been excluded from
the accompanying consolidated statement of cash flows:
|
2005
|
2004
|
2003
|
||||||||
|
|
||||||||||
|
Non-cash
financing activities:
|
||||||||||
|
Conversion
of notes payable and interest into common shares
|
—
|
$
|
—
|
$
|
1,761,213
|
|||||
|
Issuance
of common shares in payment of accounts payable
|
—
|
$
|
—
|
$
|
276,782
|
|||||
|
Non-cash
investing activities:
|
|
|||||||||
|
Common
shares issued for patent
|
—
|
$
|
—
|
$
|
13,636
|
|||||
11. Commitments
and Contingencies:
Till
Keesman Agreement
In
May
2000, the Company licensed the rights to 6 carbon nanotube patents that, at
the
time, had been applied for by Till Keesman in exchange for a payment of
$250,000 payable in shares of the Company’s common stock. Under the terms of the
agreement, the Company is obligated to pay license fees equal to 50% of any
royalties received by the Company related to these patents. The Company is
allowed to offset certain expenses, up to a maximum of $50,000 per year, against
payments due under this agreement. The agreement also contained provisions
related to minimum license fee payments. These minimum payments, totaling
$1,000,000, have been made and no further minimum payments are due. The Company
is allowed to offset these minimum payments against future royalty payments,
however once these minimum payments and the expenses have been offset, the
Company may be liable for additional royalty payments.
Research
and development commitments
As
of
December 31, 2005, the Company was in the process of a SBIR Phase II contract
for research from the US Department of Defense. The total contract amount is
$742,212 and $704,243 of the revenue was recognized as of December 31, 2005.
In
addition, the company had two SBIR Phase I contracts totaling $167,289 at
December 31, 2005. A total of $117,000 of the revenue related to these contracts
had been recognized as of December 31, 2005. The Company also had a $240,000
contract with a large sporting goods manufacturer in process as of December
31,
2005. A total of $59,995 of revenue related to that contract has been recognized
as of December 31, 2005. The revenue to be received from these research
contracts in 2006 is expected to exceed the cost of this research.
Agreements
with MCC
The
Company entered into an agreement in 1994 with Microelectronics and Computer
Technology Corporation (“MCC”) that was amended on several subsequent occasions
to cross license and pool technologies. As part of this relationship with MCC,
62 Diamond Field Emission patents and patent applications were assigned directly
to the Company and the Company has agreed to pay a royalty fee of 2% of future
commercial revenues related to the patents received. The Company has the right
to offset one half of the costs of maintaining these patents against any
royalties due under the agreement. No payments have been made to, or are due
to,
MCC under this agreement and the possibility is remote that any payments will
ever be due under this agreement.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. Commitments
and Contingencies (continued):
Legal
proceedings
In
April
2005, we filed suit against Canon, Inc. and Canon USA, Inc. in the U.S. District
Court for the Western District of Texas, Austin Division. We are seeking a
declaratory judgment that new SED color television products,
scheduled to be manufactured by SED, Inc. and sold by Canon and/or Toshiba
beginning in 2006, are not covered under a 1999 patent license agreement
that we have with Canon. We assert that Canon’s license does not cover its
surface conductor electron emitter display screens (SED) for a new generation
of
flat screen color televisions. We also assert that SED,Inc., the joint venture
formed by Canon and Toshiba Corporation to produce the SED display screens,
is not a licensed subsidiary under the 1999 agreement and that Canon
is improperly transferring its license rights under Nano-Proprietary's patents
to the joint venture and Toshiba. The suit also contained three additional
claims related to a Lanham Act violation by Canon, tortious interference by
Canon, and a breach of covenant of good faith and fair dealings against Canon.
Canon filed its response in July 2005 denying liability in the matter. In
September 2005, Canon filed a motion to dismiss Canon USA, Inc. from the case
and dismiss the Lanham Act claim, the tortious interference claim, and the
breach of covenant of good faith and fair dealings. In October 2005, the judge
in the case denied Canon’s motion to dismiss Canon, USA, Inc. and the breach of
covenant of good faith and fair dealings claim. The judge granted Canon’s
motion, without prejudice, to dismiss the Lanham Act claim and the tortious
interference claim. Dismissal without prejudice allows us to re-file these
claims at any time if additional evidence supporting these claims becomes
available to us in the discovery process. The first two claims described above
were not at issue in the dismissal motion by Canon. The case is currently in
the
discovery phase and a trial may occur as soon as March 2007. We believe that
the
ultimate resolution of this matter will not have a negative impact on the
consolidated financial statements of the Company.
On
July
20, 1998, TFI Telemark, Inc. filed a complaint in the County Court at Law No.
2
of Travis County, Texas against the Company for debts of its now defunct
subsidiary, Plasmatron. The Company was served with notice of this suit on
August 5, 1998. The Company believes that no amounts are due to TFI; however,
all amounts claimed as owing by TFI are recorded as liabilities in the
consolidated financial statements of the Company. The Company believes the
ultimate resolution of this matter will not have a material impact on the
consolidated financial statements of the Company.
From
time
to time the Company and its subsidiaries are also defendants in various lawsuits
that may arise related to minor matters. It is expected that all such lawsuits
will be settled for an amount no greater than the liability recorded in the
financial statements for such matters. If resolution of any of these suits
results in a liability greater than that recorded, it could have a material
impact on us.
Government
contracts
Governmental
contractors are subject to many levels of audit and investigation. Among
United States agencies that oversee contract performance are: the Defense
Contract Audit Agency, the Inspector General, the Defense Criminal Investigative
Service, the General Accounting Office, the Department of Commerce, the
Department of Justice and Congressional Committees. The Company's management
believes that an audit or investigation, if any, as a result of such oversight
would not have any material adverse effect upon the Company's financial
condition or results of operations.
12. Concentrations
of Credit Risk:
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist of cash and cash equivalents and receivables. The Company places
its cash and cash equivalents with high credit quality financial institutions;
however for periods of time during the year, bank balances on deposit were
in
excess of the Federal Deposit Insurance Corporation insurance limit. No amounts
in excess of the FDIC limit were held in bank accounts at December 31, 2005.
At
December 31, 2004 and 2003, amounts in excess of the FDIC limit of $175,058
and
$1,263,331, respectively, were held at JP Morgan Chase.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. Concentrations
of Credit Risk (continued):
The
Company’s receivables are uncollateralized and result primarily from its
research and development projects performed primarily for U.S. Federal
Government Agencies and services performed for large U.S. and multinational
corporations. The Company has not incurred any material losses on these
receivables.
13. Research
and Development Contracts
:
The
Company makes significant expenditures for research and development. On
occasion, the Company may seek funding for a portion of its research and
development costs to reduce the cost of such expenditures to the Company. The
Company only seeks funding for projects that it already intended to do, or
for
projects that would apply its technology for other uses in instances where
that
application would allow the Company to achieve technical milestones that are
part of its strategic plan. A substantial portion of the Company’s funded
research has been from government contracts. Under government contracts, the
government has the right to utilize the results for its purposes and the Company
has the right to utilize the technology for commercial purposes.
Generally, when the Company contracts with other entities, the entity is also
conducting its own internal research related to application of the Company’s
technology to its products and such expenditures by the entity may exceed the
amount of funding provided to the Company. Usually the entity has the right
to
license the technology at the conclusion of the project, if they desire. The
costs of a particular research program may significantly exceed the funding
received, however since the research was part of planned research, these
contracts generally involve only nominal additional costs to the
Company.
The
following schedule summarizes certain information with respect to research
and
development contracts:
|
2005
|
2004
|
2003
|
||||||||
|
Contract
research revenues
|
$
|
268,206
|
$
|
305,721
|
$
|
739,790
|
||||
|
Costs
incurred charged to operations included in research and
development
|
$
|
254,656
|
$
|
278,928
|
$
|
405,962
|
||||
|
Amount
of additional funding commitments at December 31
|
$
|
268,258
|
$
|
129,090
|
$
|
424,075
|
||||
14. Retirement
Plan
:
The
Company sponsors a defined contribution 401(k) profit sharing plan. No company
contributions were made in any of the years presented.
15. Significant
Customers
:
Applied
Nanotech, Inc. received research and development revenues from the U.S.
Government in the three years as disclosed on the income statement. ANI’s
revenues tend to be project oriented and are not necessarily recurring with
a
particular customer. Net revenue from a project with one customer was $109,970
in 2005. No revenue was received from this customer in 2004 or 2003. Net
revenues for contract research with a different major customer of Applied
Nanotech, Inc. totaled $400,000 in 2003. No revenue was received from this
customer in 2004 or 2005.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. Segment
Information
:
The
Company’s operations are classified into three principal reportable segments
that provide slightly different products or services.
|
|
|
|
|
|
|||||||||
|
|
ANI
|
|
EBT
|
|
All
Other
|
|
Total
|
||||||
|
2005
|
|
|
|
||||||||||
|
Revenue
|
$
|
565,660
|
$
|
-
|
$
|
-
|
$
|
565,660
|
|||||
|
Interest
Expense
|
2,193
|
-
|
397
|
2,590
|
|||||||||
|
Depreciation
and Amortization
|
52,242
|
-
|
4,018
|
56,260
|
|||||||||
|
Research
and Development
|
2,525,292
|
-
|
-
|
2,525,292
|
|||||||||
|
Income
(Loss) from Continuing Operations
|
(3,730,450
|
)
|
(3,734
|
)
|
(927,350
|
)
|
(4,661,534
|
)
|
|||||
|
Assets
|
301,870
|
-
|
886,111
|
1,187,981
|
|||||||||
|
Capital
Expenditures
|
13,017
|
-
|
3,655
|
16,672
|
|||||||||
|
2004
|
|
|
|
|
|||||||||
|
Revenue
|
$
|
382,522
|
$
|
-
|
$
|
-
|
$
|
382,522
|
|||||
|
Interest
Expense
|
3,949
|
-
|
635
|
4,584
|
|||||||||
|
Depreciation
and Amortization
|
50,185
|
-
|
4,743
|
54,928
|
|||||||||
|
Research
and Development
|
2,611,583
|
-
|
-
|
2,611,583
|
|||||||||
|
Income
(Loss) from Continuing Operations
|
(4,030,353
|
)
|
106,251
|
(687,924
|
)
|
(4,612,026
|
)
|
||||||
|
Assets
|
310,005
|
-
|
834,363
|
1,144,368
|
|||||||||
|
Capital
Expenditures
|
116,613
|
-
|
2,374
|
118,987
|
|||||||||
|
|
|
|
|
|
|||||||||
|
2003
|
|
|
|
|
|||||||||
|
Revenue
|
773,959
|
-
|
-
|
773,959
|
|||||||||
|
Interest
Expense
|
5,999
|
20
|
50,046
|
56,065
|
|||||||||
|
Depreciation
and Amortization
|
37,653
|
-
|
6,766
|
44,419
|
|||||||||
|
Research
and Development
|
1,861,660
|
-
|
-
|
1,861,660
|
|||||||||
|
Loss
from Continuing Operations
|
(2,890,175
|
)
|
(361,784
|
)
|
(962,243
|
)
|
(4,214,202
|
)
|
|||||
|
Assets
|
1,424,724
|
527
|
2,358,766
|
3,784,017
|
|||||||||
|
Capital
Expenditures
|
6,494
|
-
|
-
|
6,494
|
|||||||||
Financial
information is furnished to the chief operating officer for review regarding
each subsidiary of the Company.
The
ANI
segment consists of the activities of ANI and includes license revenues and
contract research revenues related to ANI’s technology. In both years,
virtually all ANI revenues were contract research revenues. The Company’s EBT
subsidiary previously sold electronic display products, but is now limiting
itself pursuing licenses for its technologies to others for use in display
products. All other segments include the Company’s general
overhead.
The
accounting policies applied by each of the segments are the same as those used
by the Company.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. Subsequent
Events
:
During
the period from January 1, 2006 through February 24, 2006, the Company received
$1,500,000 in proceeds and issued 750,000 shares of common stock in connection
with a private placement of the Company’s common stock.
18. Quarterly
Financial Information (Unaudited)
:
|
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||
|
2005
|
||||||||||||||||
|
Revenues
|
$
|
68,815
|
$
|
88,544
|
$
|
245,917
|
$
|
162,384
|
$
|
565,660
|
||||||
|
Operating
income (loss)
|
(1,472,793
|
)
|
(984,223
|
)
|
(1,014,643
|
)
|
(1,220,631
|
)
|
(4,692,290
|
)
|
||||||
|
Net
(loss)
|
(1,469,192
|
)
|
(974,181
|
)
|
(1,005,078
|
)
|
(1,213,083
|
)
|
(4,661,534
|
)
|
||||||
|
Earnings
(loss) per share
|
||||||||||||||||
|
Basic
and Diluted
|
(0.02
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.05
|
)
|
||||||
|
2004
|
||||||||||||||||
|
Revenues
|
$
|
77,658
|
$
|
100,718
|
$
|
100,473
|
$
|
103,673
|
$
|
382,522
|
||||||
|
Operating
income (loss)
|
(1,117,862
|
)
|
(1,269,201
|
)
|
(1,108,338
|
)
|
(1,137,023
|
)
|
(4,632,424
|
)
|
||||||
|
Net
(loss)
|
(1,111,641
|
)
|
(1,263,529
|
)
|
(1,100,534
|
)
|
(1,136,322
|
)
|
(4,612,026
|
)
|
||||||
|
Earnings
(loss) per share
|
||||||||||||||||
|
Basic
and Diluted
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.05
|
)
|
||||||
|
2003
|
||||||||||||||||
|
Revenues
|
444,452
|
160,380
|
88,195
|
80,932
|
773,959
|
|||||||||||
|
Operating
income (loss)
|
(749,524
|
)
|
(681,333
|
)
|
(1,200,627
|
)
|
(1,540,329
|
)
|
(4,171,813
|
)
|
||||||
|
Net
(loss)
|
(770,969
|
)
|
(696,056
|
)
|
(1,212,280
|
)
|
(1,534,897
|
)
|
(4,214,202
|
)
|
||||||
|
Earnings
(loss) per share
|
||||||||||||||||
|
Basic
and Diluted
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.02
|
)
|
(0.05
|
)
|
||||||
Annual
Earnings (loss) per share may not equal the sum of the four quarterly amounts
due to rounding.
None
Item
9A. Controls
and
Procedures.
Management
is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rule 13a-15 of the Securities Exchange Act
of 1934, that are designed to cause the material information required to be
disclosed by Nano-Proprietary in the reports it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized, and
reported to the extent applicable within the time periods required by the
Securities and Exchange Commission’s rules and forms. In designing and
evaluating the disclosure controls and procedures, management recognized that
a
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, with a company have been detected.
As
of the
end of the period covered by this report, Nano-Proprietary performed an
evaluation under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective
at
the reasonable assurance level.
Report
on Management’s Assessment of Internal Control over Financial Reporting
The
management of Nano-Proprietary, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined under applicable Securities and Exchange
Commission rules as a process designed under the supervision of the Company’s
Chief Executive Officer and Chief Financial Officer and effected by the
Company’s Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. The Company’s
internal control over financial reporting includes those policies and procedures
that:
|
|
•
|
Pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures
of the
Company are being made only in accordance with authorizations of
management and the directors of the Company; and
|
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
of
December 31, 2005, management, with the participation of the Company’s
Chief Executive Officer and Chief Financial Officer, assessed the effectiveness
of the Company’s internal control over financial reporting based on the criteria
for effective internal control over financial reporting established in “Internal
Control — Integrated Framework,” issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based on the assessment,
management determined that the Company’s internal control over financial
reporting was effective as of December 31, 2005.
Sprouse
& Anderson, L.L.P., the independent registered public accounting firm that
audited the consolidated financial statements of the Company included in this
Annual Report on Form 10-K, has issued an attestation report on management’s
assessment of the Company’s internal control over financial reporting as of
December 31, 2005. The report, which expresses -unqualified opinions on
management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, is included in
this Item under the heading “Attestation Report of Independent Registered Public
Accounting Firm.”
Changes
in Internal Control over Financial Reporting
No
changes were made to the Company’s internal control over financial reporting (as
defined in Rule 13a-15 under the Securities Exchange Act of 1934) during
the last fiscal quarter that materially affected, or are reasonably likely
to
materially affect, the Company’s internal control over financial reporting.
Attestation
Report of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders of Nano-Proprietary, Inc.
We
have
audited management’s assessment, included in the accompanying Report on
Management’s Assessment of Internal Control over Financial Reporting, that
Nano-Proprietary, Inc. maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control — Integrated Framework, issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Nano-Proprietary, Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Nano-Proprietary, Inc. maintained
effective internal control over financial reporting as of December 31, 2005,
is
fairly stated, in all material respects, based on criteria established
in
Internal Control — Integrated Framework, issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also in our opinion, Nano-Proprietary, Inc. maintained in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control — Integrated Framework, issued
by
the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders equity, and cash flows of Nano-Proprietary, Inc., and
our report dated January 27, 2006 expresses an unqualified opinion.
Sprouse
& Anderson, L.L.P.
Austin,
Texas
January
27, 2006
Item
9B.Other
Information.
Nano-Proprietary
completed a private placement of $1,500,000 whereby it issued 750,000 shares
of
common stock to accredited investors at a price of $2.00 per share. The proceeds
will be used for working capital. A total of 375,000 shares were acquired by
Pinnacle Fund LP and 375,000 shares were acquired by Karrison Nichols, both
participants in previous private placements of the Company’s stock.
PART
III
The
following sets forth the names, ages and certain information concerning the
Directors and Executive Officers of Nano-Proprietary.
|
Name
|
Age
|
Class
|
Position
|
Director/Officer
Since
|
Term
Expires
|
|
|
|
|
|
|
|
|
Marc
W. Eller
|
50
|
III
|
Director,
Chairman, Chief
Executive Officer
|
November
1995
|
2006
|
|
Dr. Zvi
Yaniv
|
59
|
II
|
Director,
President, Chief
Operating Officer
|
July
1996
|
2006
|
|
Douglas
P. Baker
|
49
|
N/A
|
Chief
Financial Officer
|
June
1996
|
N/A
|
|
John
Ruberto
|
60
|
N/A
|
Senior
Vice President
|
May
2005
|
N/A
|
|
Charles
C. Bailey
|
57
|
I
|
Director
|
November
1999
|
2006
|
|
Ronald
J. Berman
|
49
|
III
|
Director
|
May
1996
|
2006
|
|
Eddie
Lee
|
43
|
II
|
Director
|
October
2001
|
2006
|
|
Dr.
Robert Ronstadt
|
64
|
II
|
Director
|
January
2003
|
2006
|
|
David
R. Sincox
|
67
|
I
|
Director
|
October
1994
|
2006
|
______________________
Marc
W.
Eller has served as the Company’s Chief Executive Officer since July 29, 1996.
Mr. Eller is Chairman of the Board of Directors and has been a Director since
November 1995. Prior to becoming CEO, Mr. Eller was involved in commercial
real
estate investment and in investment banking activities for publicly traded
companies. Mr. Eller has a B.A. degree in Economics.
Dr.
Zvi
Yaniv has served as the Company’s President and Chief Operating Officer and a
Director since July 29, 1996. Dr. Yaniv has degrees in physics, mathematics,
and
electro-optics as well as a Ph.D. in Physics. Prior to joining the Company,
in
May 1996, Dr. Yaniv operated a consulting practice and previously was President
and CEO of Optical Imaging Systems Inc., a supplier of flat panel color liquid
crystal displays to the avionics and defense industries.
Douglas
P. Baker has been with the Company since June 17, 1996. Mr. Baker is a C.P.A.
and has both a B.B.A. and a M.B.A. Immediately prior to joining
Nano-Proprietary, Inc., Mr. Baker was a divisional controller for MascoTech,
Inc. from 1991 to 1996. Mr. Baker also had prior experience in public accounting
and as CFO of a privately held company.
John
Ruberto has been with the Company since May 1, 2005. From 2002 to 2005, Mr.
Ruberto was an independent management consultant. During 2001 and 2002, Mr.
Ruberto was Executive Vice President of Strategy and Development at Eagle Picher
Technologies and President of Eagle Picher Power. Prior to 2001 Mr. Ruberto
had
extensive corporate development, program management and business development
experience at United Technologies Corporation and Gen Corp. Mr. Ruberto also
served as a Principal Deputy Assistant to the U.S. Secretary of Defense where
he
managed system acquisition responsibilities for many defense
programs.
Charles
C. Bailey has been an attorney in private practice since 1995. Prior to that
Mr.
Bailey had a 20-year career in government. Positions held include Assistant
Criminal District Attorney and Chief Prosecutor in Lubbock County, Texas;
General Counsel for the Texas Department of Public Safety; Assistant General
Counsel for Governor Bill Clements; and Director of Legal Services and Franchise
Taxes for the Texas State Comptroller’s Office. His last position with the state
of Texas, from 1993 to 1995, was Executive Assistant and General Counsel to
Lt.
Governor Bob Bullock.
Ronald
J.
Berman has been a Director since May 1996. Mr. Berman co-founded BEG
Enterprises, Inc. with Marc W. Eller and was its President from 1989 until
1998. Mr. Berman currently is President of R.J. Berman Enterprises, Ltd.,
a real estate development company, Inergi Fitness, and Walkers Warehouse. Mr.
Berman earned a Juris Doctor degree in 1980 from the University of Detroit.
Prior to 1989, Mr. Berman was an attorney in private practice.
Eddie
Lee
is Chairman and CEO of Pacific Northern, Inc., a Company that he founded in
1987. Pacific Northern, Inc. is the largest visual display company serving
the retail jewelry industry.
Dr.
Robert Ronstadt has been a Director since January 2003. Dr. Ronstadt became
Vice President of Technology Commercialization for Boston University in June
2003. At the same time, he became the Director of Boston University's
Technology Commercialization Institute. He was special advisor to the
Chancellor of Boston University from January to May 2003. Prior to that,
from 1998 to 2002, he was Director of the IC2 Institute at the University
of Texas in Austin and the J. Marion West Chair of Constructive Capitalism.
Dr.
Ronstadt was a professor of entrepreneurship at the Pepperdine University School
of Business Management from 1992 to 1998 and Babson College in Wellesley
Massachusetts from 1975 to 1985. From 1986 to 1992, he was the CEO of a
software enterprise.
David
R.
Sincox has been a Director of the Company since October 1994. From 1987 through
2000, Mr. Sincox served as the Vice President of Administration of
Ref-Chem Construction Corporation, an engineering and construction firm. Since
January 2001, Mr. Sincox has been President of Clear Lake Business Services,
Inc. a consulting firm.
Shareholder
Director Nominating Procedures
The
Company does have a procedure in place for holders of the Company‘s common stock
to recommend nominees to the Company’s Board of Directors. These procedures are
set forth in Article 9(b) of the Company’s Restated Articles of Incorporation
(the “Restated Articles”). A copy of the Company’s Restated Articles is filed as
Exhibit 3(I) to this Annual Report on Form 10-K. As set forth in Article 9(b)
of
the Restated Articles, only persons who are nominated in accordance with the
procedures set forth in that Article are eligible for election as Directors
of
the Company. Nominations of persons for election to the Board of Directors
of
the Company may be made at a meeting of shareholders by or at the direction
of
the Board of Directors or by any shareholder of the Company entitled to vote
for
the election of Directors at the meeting who complies with the notice procedures
set forth in Article 9(b). Such nominations, other than those made by or at
the
direction of the Board of Directors, shall be made pursuant to timely notice
in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Company not less than 60 days nor more than 90 days prior to
the
meeting; provided, however, that in the event that less than 70 days' notice
or
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure
was
made. Such shareholder's notice shall set forth (i) as to each person whom
the
shareholder proposes to nominate for election or re-election as a Director,
(A)
the name, age, business address and residence address of such person, (B) the
principal occupation or employment of such person, (C) the class and number
of
shares of the Company which are beneficially owned by such person, and (D)
any
other information relating to such person that is required to be disclosed
in
solicitations of proxies for election of Directors, or is otherwise required,
in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serve as a Director if
elected); and (ii) as to the shareholder giving the notice, (1) the name and
address, as they appear on the Company’s books, of such shareholder and (2) the
class and number of shares of the Company which are beneficially owned by such
shareholder. No person shall be eligible for election as a Director of the
Company unless nominated in accordance with the procedures set forth in Article
9(b) of the Restated Articles. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made
in
accordance with the procedures prescribed herein, and if he should so determine,
he shall so declare to the meeting and the defective nomination shall be
disregarded.
Committees
The
Board
of Directors has four committees. The audit committee consists of Mr. Sincox
and
Mr. Bailey. The compensation committee consists of Mr. Lee and Mr. Berman.
The
nominating committee consists of Dr. Ronstadt and Mr. Bailey. The executive
committee consists of Mr. Eller and Dr. Yaniv.
Audit
Committee Financial Expert
The
Board
of Directors has determined that David R. Sincox, a member of the audit
committee, is an “audit committee financial expert” and “independent” as defined
under applicable SEC rules. The board’s affirmative determination was based
upon, among other things, his experience as Vice President of Administration
of
Ref-Chem Construction Company and his consulting practice.
Code
of Ethics
We
have
adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B
of
the Securities Exchange Act of 1934. This Code of Ethics applies to all
directors, officers, and employees of the Company. A copy of this Code of Ethics
is publicly available on our website at www.nano-proprietary.com.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities of Exchange Act of 1934 requires Nano-Proprietary’s
officers, and Directors, and persons who beneficially own more than 10 % of
a
registered class of Nano-Proprietary’s common stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Officers, Directors, and beneficial owners of more than 10% of
Nano-Proprietary’s common stock are required by the Securities and Exchange
Commission regulations to furnish Nano-Proprietary with copies of all Section
16(a) forms that they file.
Based
solely on review of the copies of such reports furnished to us, or written
representations that no reports were required, we believe that for the period
from January 1, 2005 through December 31, 2005, all Officers, Directors, and
greater than 10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them, with the exception of Director Bailey as
described below.
On
October 11, 2005 Director Bailey exercised 25,000 options and sold the shares
received from the exercise on the same day. The Form 4 for these transactions
was due on October 13, 2005, but was not filed until October 14,
2005.
The
following table sets forth the total cash compensation paid or to be paid,
as
well as certain other compensation paid or accrued, for services rendered during
the fiscal years ended December 31, 2005, 2004 and 2003 by the Chief Executive
Officer and all executive officers whose total annual salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 2005 (the "Named Executive
Officers"):
SUMMARY
COMPENSATION TABLE
|
Annual
Compensation (1)
|
Long-Term
Compensation
|
||||||||||||
|
Name
and Principal Position
|
Year
|
Salary($)
|
Bonus($)
|
Securities
Underlying
Options(#)
|
|||||||||
|
Marc
W. Eller,
|
2005
|
|
|
$250,000
|
|
|
-0-
|
|
|
700,000
|
|
||
|
Chief
Executive Officer
|
|
|
2004
|
|
|
$200,000
|
|
|
-0-
|
|
|
750,000
|
|
|
|
|
|
2003
|
|
|
$145,000
|
|
|
-0-
|
|
|
280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zvi
Yaniv, President and
|
|
|
2005
|
|
|
$250,000
|
|
|
-0-
|
|
|
700,000
|
|
|
Chief
Operating Officer
|
|
|
2004
|
|
|
$200,000
|
|
|
-0-
|
|
|
750,000
|
|
|
|
|
|
2003
|
|
|
$145,000
|
|
|
$147,917
|
|
|
280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
P. Baker,
|
|
|
2005
|
|
|
$180,000
|
|
|
-0-
|
|
|
350,000
|
|
|
Chief
Financial Officer
|
|
|
2004
|
|
|
$150,000
|
|
|
-0-
|
|
|
400,000
|
|
|
|
|
|
2003
|
|
|
$127,083
|
|
|
-0-
|
|
|
213,000
|
|
|
John
Ruberto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice
President
|
|
|
2005
|
|
|
$120,000
|
|
|
-0-
|
|
|
535,000
|
|
______________________
|
(1)
|
No
Named Executive Officers received perquisites that exceeded in value
the
lesser of $50,000 or 10% of such officers' salary and bonus.
|
|
(2)
|
Mr.
Ruberto started employment on May 1,
2005.
|
EMPLOYMENT
AGREEMENTS
The
Company currently has no employment agreements with any of its executive
officers.
OPTION
GRANTS IN LAST FISCAL YEAR
In
2002,
Nano-Proprietary established its 2002 Equity Compensation Plan, which may be
used to grant employees, including officers of Nano-Proprietary, incentive
stock
options designed to qualify under Section 422 of the Internal Code of 1986,
or
non-qualified stock options. The following table sets forth information
concerning stock-option grants to the Named Executive Officers in
2005.
|
Name
|
Number
of
Securities
Underlying
Options
Granted(#)(1)
|
Percent
of Total
Options
Granted to
Employees
in
Fiscal
Year 2005
|
Exercise
or
Base Price ($/Sh)
|
Expiration
Date
|
Grant
Date
Present
Value (5)
|
|
Marc
W. Eller
|
400,000 (2)
|
13.93%
|
$2.17
|
1/1/15
|
$583,960
|
|
300,000
(3)
|
10.45%
|
$2.30
|
11/17/15
|
$421,470
|
|
|
Dr.
Zvi Yaniv
|
400,000 (2)
|
13.93%
|
$2.17
|
1/1/15
|
$583,960
|
|
300,000
(3)
|
10.45%
|
$2.30
|
11/17/15
|
$421,470
|
|
|
Douglas
P. Baker
|
200,000 (2)
|
6.96%
|
$2.17
|
1/1/15
|
$291,980
|
|
150,000
(3)
|
5.22%
|
$2.30
|
11/17/15
|
$210,735
|
|
|
John
Ruberto
|
535,000
(4)
|
18.63%
|
$2.30
|
4/25/15
|
$827,806
|
_____________
|
(1)
|
The
options were granted for a term of ten (10) years, subject to earlier
termination in certain events related to termination of
employment.
|
|
(2)
|
For
Mr. Eller and Dr. Yaniv, these options vest as follows: 200,000 if
royalty
or other agreements that will result in revenues totaling $3 million
are
executed in 2005 or 2006 and 200,000 options if the Company achieves
profitability in 2005. The options for Mr. Baker vest according to
the
same milestones, but the amounts are 100,000 for each milestone.
Since the
Company did not achieve profitability in 2005, all options related
to that
milestone did not vest and expired December 31, 2005. The present
value
includes all options granted, including those which expired at the
end of
2005.
|
|
(3)
|
These
options will vest if the Company achieves profitability in
2006.
|
|
(4)
|
A
total of 35,000 of these options vested on the grant date. The remaining
500,000 options are performance based options that vest when the
Company
receives commitments for future revenues related to specific sources.
A
total of 150,000 of these options vested by December 31, 2005. The
remaining 350,000 may still vest in the future.
|
|
(5)
|
The
fair value of these options at the date of grant was estimated using
a
Black-Scholes option pricing model. The following weighted average
assumptions were used to estimate the value of the options: a 3.5
year
expected life of the options, a dividend yield of 0%, expected volatility
for the shares of 100%, a turnover/forfeiture percentage of 0%, and
a risk
free rate of return of 3.5%.
|
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
The
following table sets forth certain information concerning (i) the exercise
of
stock options by each of the Named Executive Officers during the last fiscal
year ended December 31, 2005 and (ii) the number and intrinsic value of the
options held by the Named Executive Officers at December 31, 2005. Year-end
values are based on the closing price of $2.15 per share of the common stock
on
December 31, 2005, on the OTC Bulletin Board System. They do not reflect the
actual amounts, if any, which may be realized upon the future exercise of
remaining stock options and should not be considered indicative of future stock
performance.
|
Name
|
Shares
Acquired
on
Exercise (#)
|
Value
Realized
($)
|
Number
of
Unexercised
Securities
Underlying
Options
at
December
31, 2005 (#)
Exercisable/
Unexercisable
|
Value
of
Unexercised
In-the-Money
Options
at
December
31, 2005 ($)
Exercisable/
Unexercisable
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Marc
W. Eller
|
|
|
0
|
|
|
0
|
|
|
230,000
/ 700,000
|
|
|
$0
/ $0
|
|
|
Dr. Zvi
Yaniv
|
|
|
0
|
|
|
0
|
|
|
560,000
/ 700,000
|
|
|
$185,200
/ $0
|
|
|
Douglas
P. Baker
|
|
|
0
|
|
|
0
|
|
|
725,000
/ 350,000
|
|
|
$605,210
/ $0
|
|
|
John
Ruberto
|
|
|
0
|
|
|
0
|
|
|
185,000
/ 350,000
|
|
|
$0
/ $0
|
|
DIRECTOR
COMPENSATION FOR 2005
All
Directors who are not employees of the Company receive $150 per board meeting
or
committee meeting attended in person, and $50 per telephonic meeting. Reasonable
expenses incurred by each Director in connection with his duties as a Director
are also reimbursed by Nano-Proprietary.
All of
Nano-Proprietary’s outside Directors participate in the 2002 Equity Compensation
Plan, under which Nano-Proprietary may grant stock options to any Director.
On
July 25, 2005, each of the five outside Directors was granted an automatic
grant
of 50,000 options under the 2002 Equity Compensation Plan at a price of $2.12.
These grants became exercisable in full on the date of the grant.
All
of
the Directors have retained the right to pursue additional business activities
that are not competitive with the business of Nano-Proprietary, and do not
adversely affect their performance as Directors. If, as, and when conflicts
of
interest arise, the nature of the conflict must be fully disclosed to the Board
of Directors, and the person who is subject to the conflict must abstain from
participating in any decision that may impact on his conflict of interest.
Except for this disclosure and abstention policy, the Directors will not be
in
breach of any fiduciary duties owed to Nano-Proprietary or the shareholders
by
virtue of their participation in such additional business
activities.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee currently consists of Mr. Lee and Mr. Berman, neither
of
which is or has been an officer or employee of Nano-Proprietary. No interlocking
relationship existed during the fiscal year ended December 31, 2005, between
Nano-Proprietary’s Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company.
CERTAIN
BENEFICIAL OWNERS
The
only
persons or entities known to be the beneficial owner of 5% or more of the
outstanding voting stock of the common stock of Nano-Proprietary, Inc. stock
as
of February 24, 2006, are listed below. For the purposes of this Annual Report
on Form 10-K, beneficial ownership of securities is defined in accordance with
the rules of the SEC to mean generally the power to vote or dispose of
securities, regardless of any economic interest therein.
|
Beneficial
Ownership
|
Percent
of Outstanding Common
Stock
|
|||
|
Pinnacle
Fund, L.P.
|
6,821,461
|
6.84%
|
||
|
Barry
Kitt, General Partner
4965
Preston Park Blvd.,Suite 240
Plano,
TX 75093
|
||||
|
Jeffrey
L. Feinberg
|
5,955,350
|
5.97%
|
||
|
JLF
Asset Management LLC
2775
Via de la Valle, Suite 204
Del
Mar, CA 92014
|
SECURITY
OWNERSHIP OF MANAGEMENT
Set
forth
below is certain information with respect to beneficial ownership of
Nano-Proprietary’s common stock as of February 24, 2006, by each Director, each
Named Executive Officer and by the directors and executive officers as a group.
Unless otherwise indicated, each person or member of the group listed has sole
voting and investment power with respect to the shares of common stock
listed.
|
Name
|
Options
Included
in
Beneficial
Ownership
(1)
|
Common
Stock
Beneficial
Ownership
|
Percentage
of
Class
|
|||||||
|
Dr.
Robert Ronstadt
|
125,000
|
125,000
|
*
|
|||||||
|
David
R. Sincox
|
445,000
|
570,000
|
*
|
|||||||
|
Charles
C. Bailey
|
218,333
|
218,333
|
*
|
|||||||
|
Marc
W. Eller
|
230,000
|
247,500
|
*
|
|||||||
|
Eddie
Lee
|
216,667
|
216,667
|
*
|
|||||||
|
Ronald
J. Berman
|
689,383
|
1,104,925
|
1.10%
|
|
||||||
|
Dr.
Zvi Yaniv
|
560,000
|
596,000
|
*
|
|||||||
|
Douglas
P. Baker
|
725,000
|
734,500
|
*
|
|||||||
|
John
Ruberto
|
185,000
|
185,000
|
*
|
|||||||
|
All
Executive Officers and
Directors
as a group (9 persons)
|
3,394,383
|
3,997,925
|
3.88%
|
|
||||||
_________________________
|
*
|
Less
than 1%
|
|
|
|
|
(1)
|
This
column lists shares that are subject to options exercisable within
sixty
(60) days of February 24, 2006, and are included in common stock
beneficial ownership pursuant to Rule 13d-3(d)(1) of the Exchange
Act.
|
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
|
Equity
Compensation
Plans
Not Approved by
the
Shareholders of
the
Nano-Proprietary
|
Number
of Securities to
be
issued upon exercise
of
outstanding options
|
Weighted-average
exercise
price of
outstanding
options
|
Number
of Securities remaining available for future issuance
under
equity
compensation
plans
(3)
|
|
|
(a)
|
(b)
|
(c)
|
|
1992
Employee Plan (1)
|
977,000
|
$1.01
|
-
|
|
1992
Outside Directors
Plan (2)
|
327,716
|
$1.09
|
-
|
|
1998
Directors and
Officers Plan
|
550,000
|
$0.47
|
-
|
|
2002
Equity
Compensation Plan
|
4,848,435
|
$2.21
|
2,010,109
|
|
Total
|
6,703,151
|
$1.57
|
2,010,109
|
|
(1)
|
The
1992 Employee Plan was originally approved by shareholders and authorized
3.0 million shares. The plan was subsequently amended twice by the
Board
to increase the authorized number of shares and is therefore classified
as
a plan not approved by our shareholders.
|
|
(2)
|
The
1992 Outside Directors Plan was originally approved by shareholders
and
authorized 500,000 shares. The plan was subsequently amended by the
Board
to increase the authorized number of shares and is therefore classified
as
a plan not approved by our shareholders
|
|
(3)
|
This
column excludes securities reflected in column
(a)
|
There
are
no equity compensation plans approved by shareholders at the present
time.
The
1992
Employee Plan was created in 1992 for the purpose of granting incentive or
non-qualified stock options to employees of, or contractors for, the Company.
A
total of 6.5 million shares were authorized under the plan. All options granted
under this plan were priced at the fair market value of our common stock on
the
date of grant, or greater, and have a life of ten (10) years from their date
of
grant, subject to earlier termination as set forth in such plan. The plan
expired in 2002; however, options granted prior to such plan’s expiration remain
exercisable, subject to the terms of the respective option grants.
The
1992
Outside Directors’ Plan was established in 1992 for the purpose of granting
non-qualified options to non-employee Directors of the Company. A total of
1.0
million options were authorized under the plan. All options granted under this
plan were priced at the fair market value of our common stock or greater on
the
date of grant and have a life of ten (10) years from their date of grant,
subject to earlier termination as set forth in such plan. The plan expired
in 2002; however, options granted prior to such plan’s expiration remain
exercisable, subject to the terms of the respective option grants.
In
1998,
the Company’s Board of Directors established the 1998 Directors’ and Officers
Plan to award non-qualified options to Officers and Directors. All options
granted under this plan were priced at the fair market value of our common
stock, or greater, on the date of grant and have a life of ten (10) years from
their date of grant, subject to earlier termination as set forth in such
plan. A total of 2.5 million options were granted under this plan; however
no options remain available for granting under this plan.
In
2002,
the Company’s Board of Directors established the 2002 Equity Compensation Plan
for the purpose of granting incentive or non-qualified stock options to
employees or directors of the Company. All options granted under this plan
were
priced at the fair market value of our common stock, or greater, on the date
of
grant and have a life of up to ten (10) years from their date of grant, subject
to earlier termination as set forth in such plan. A total of 5,000,000
options were initially authorized under this plan. This plan was amended
December 31, 2004 to increased the authorized shares by 3,000,000 to a total
of
8,000,000 shares.
For
a
further description of each of the stock option plans described above, please
see Note 8 to the Consolidated Financial Statements herein.
In
October 1998, EBT entered into a Patent Assignment and Royalty Agreement with
Advanced Technology Incubator, Inc., (“ATI”) a corporation based in Austin,
Texas and owned by Dr. Zvi Yaniv, the Company’s President and Chief Operating
Officer. Under the terms of the agreement, ATI agreed to assign U.S. Patent
No.
5,469,187 related to certain LCD technology to EBT in exchange for an initial
payment of $200,000. In addition, ATI is entitled to receive a royalty of 5%
of
gross revenue related to products using this patent. EBT may terminate this
assignment at any time upon 30 days written notice to ATI. The assignment may
be
terminated by ATI if, within two years of the first sale or lease of a display
unit using this technology, cumulative royalty payments under the agreement
have
not totaled $500,000, or if payments do not equal $500,000 in any one-year
period following this initial two-year period. If the assignment is terminated
by ATI, EBT will be granted a non-exclusive worldwide license to use the
technology under terms similar to those contained in this agreement. There
have
been no sales or leases of display units using this technology, therefore the
two year period that could result in minimum payments being due has not yet
started.
Audit
Fees
The
aggregate fees billed to the Company by Sprouse & Anderson, L.L.P. for the
audit of Nano-Proprietary’s annual financial statements and for the review of
the financial statements included in its quarterly reports on Form 10-Q for
the
Fiscal Years ended December 31, 2005 and 2004 totaled $42,700 and $24,650,
respectively.
Audit-Related
Fees
Nano-Proprietary
did not incur or pay any fees to Sprouse & Anderson, L.L.P., and Sprouse
& Anderson, L.L.P. did not provide any services related to audit-related
fees in the last two fiscal years.
Tax
Fees
There
were no fees billed to Nano-Proprietary by Sprouse & Anderson, L.L.P. for
services rendered to Nano-Proprietary during the last two fiscal years for
tax
compliance, tax advice, or tax planning.
All
Other Fees
There
were no fees billed to Nano-Proprietary by Sprouse & Anderson, L.L.P. for
services rendered to Nano-Proprietary during the last two fiscal years, other
than the services described above under “Audit Fees.”
It
is the
audit committee’s policy to pre-approve all services provided by Sprouse &
Anderson, L.L.P. All services provided by Sprouse & Anderson, L.L.P. during
the years ended December 31, 2005 and 2004 were pre-approved by the audit
committee.
As
of the
date of this filing, Nano-Proprietary current policy is to not engage Sprouse
& Anderson, L.L.P. to provide, among other things, bookkeeping services,
appraisal or valuation services, or internal audit services. The policy provides
that Nano-Proprietary engage Sprouse & Anderson, L.L.P. to provide audit,
tax, and other assurance services, such as review of SEC reports or filings.
The
Audit Committee considered and determined that the provision of the services
other than the services described under “Audit Fees” is compatible with
maintaining the independence of the independent auditors.
PART
IV
| (a) |
Exhibits:
See Index to Exhibits on page 60 for a descriptive response to this
item.
|
| (b) |
None
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
NANO-PROPRIETARY,
INC.
By:
/s/
Marc W.
Eller
Marc
W. Eller,
Chief
Executive Officer
March
2, 2006
|
In
accordance with the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Marc
W. Eller
Marc
W. Eller
|
Chairman,
Chief Executive
Officer
(Principal Executive Officer and
Director)
|
March
2, 2006
|
|
/s/
Douglas P. Baker
Douglas
P. Baker
|
Vice
President and
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
March
2, 2006
|
|
Dr.
Robert Ronstadt*
David
R. Sincox*
Eddie
Lee*
Ronald
J. Berman*
Charles
G. Bailey*
Dr. Zvi
Yaniv*
|
Directors
|
March
2, 2006
|
*By:
//s// Douglas P. Baker
(Douglas P. Baker,
Attorney-in-Fact)
INDEX
TO
EXHIBITS
The
exhibits indicated by an asterisk (*) have been previously filed with the
Securities
and
Exchange Commission and are incorporated herein by reference.
|
EXHIBIT
NUMBER
|
DESCRIPTION
OF EXHIBIT
|
|
3(i).1
|
Restated
Articles of Incorporation of Company, as filed March 1, 2006 with
the
Secretary of State for the State of Texas.
|
|
3(ii).1
|
Amended
and Restated Bylaws of the Company.
|
|
4.1
*
|
Form
of Certificate for shares of the Company’s common stock (Exhibit 4.1 to
the Company’s Registration Statement on Form SB-2[No.33-51446-FW] dated
January 7, 1993).
|
|
4.2*
|
Amended
and Restated Rights Agreement dated as of November 16, 2000, between
the
Company and American Securities Transfer, Incorporated, as Rights
Agent,
which includes as Exhibit A the form of Statement of Resolution
establishing and designating series of preferred stock as “Series H
Junior Participating Preferred Stock” and fixing and determining the
relative rights and preferences thereof, as Exhibit B the form of
Rights
Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred
Shares. (Exhibit 4.1 to the Company’s Current Report on Form 8-K dated as
of November 16, 2000).
|
|
4.3*
|
Form
of Regulation D Subscription agreement by and between the Company
and the
participants of private placements. (Exhibit 4.3 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004)
|
|
4.4*
|
Form
of Registration Rights Agreement by and between the Company and the
participants of private placements. (Exhibit 4.4 to the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2004)
|
|
10.1*
|
Amended
and Restated 1992 Outside Directors’ Stock Option Plan (Exhibit 4.2 to the
Company’s Registration Statement on Form S-8 [No. 333-56547] dated June 9,
1998).
|
|
10.2*
|
1998
Directors and Officers Stock Option Plan (Exhibit 4.3 to the Company’s
Registration Statement on Form S-8 [No. 333-56547] dated June 9,
1998).
|
|
10.3*
|
Amended
and Restated 1992 Stock Option Plan (Exhibit 4.1 to the Company’s
Registration Statement on Form S-8 [No. 333-56457] dated June 9,
1998)
|
|
10.4*
|
Amended
and Restated 2002 Equity Compensation Plan. (Exhibit 10.4.to the
Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2004)
|
|
10.5*
|
Patent
Assignment and Royalty Agreement between Electronic Billboard Technology,
Inc. and Advanced Technology, Incubator, Inc. dated as of October
6, 1998.
(Exhibit 10.18 to the Company’s Current Report on Form 10-KSB dated as of
March 31, 1999).
|
|
10.6*
|
Lease
agreement between the Company and Industrial Properties Corporation
dated
as of February 15, 2004. (Exhibit 10.11 to the Company’s Annual Report on
Form 10-KSB for the fiscal year ended December 31,
2004).
|
|
10.7*
|
Patent
License Agreement, dated as of March 26, 1999, by and between the
Company
and Canon, Inc. (Exhibit 10.1 to the Company’s amended Current Report on
Form 8-K/A dated as of April 16, 1999).
|
|
10.8*
|
Agreement
of Research and Development by and between the Applied Nanotech,
Inc. and
Futaba Corporation (Exhibit 10.1 to the Company’s Current Report on Form
8-K dated as of January 1, 2001)
|
|
10.9*
|
Agreement
of Research and Development by and between the Applied Nanotech,
Inc. and
Futaba Corporation for Phase II development (Exhibit 10.14 to the
Company’s Annual Report on From 10-KSB for the fiscal year ended December
31, 2001).
|
|
10.10*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Electrovac Ges.m.b.H. (Exhibit 10.2
to the
Company’s Current Report on Form S-2 date August 24,
2001)
|
|
EXHIBIT
NUMBER
|
DESCRIPTION
OF EXHIBIT
|
|
10.11*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Imaging System Technology, Inc. (Exhibit
10.3
to the Company’s Current Report on Form S-2 date August 24,
2001)
|
|
10.12*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Supertex, Inc. (Exhibit 10.4 to the
Company’s
Current Report on Form S-2 date August 24, 2001)
|
|
10.13*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Schott Fiber Optics. (Exhibit 10.5 to
the
Company’s Current Report on Form S-2 date August 24,
2001)
|
|
10.14*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Lead Sangyo Co., Ltd. (Exhibit 10.6
to the
Company’s Current Report on Form S-2 date August 24,
2001)
|
|
10.15*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Shanghai Novel Color Picture Tube Co.,
Ltd.
(Exhibit 10.7 to the Company’s Current Report on Form S-2 date August 24,
2001)
|
|
10.16*
|
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Shanghai Vacuum Electron Devices Co.,
Ltd.
(Exhibit 10.8 to the Company’s Current Report on Form S-2 date August 24,
2001)
|
|
10.17*
|
Nano-Proprietary,
Inc. Audit Committee Charter (Exhibit 10.23 to the Company’s Annual Report
on Form 10-KSB for the fiscal year ended December 31,
2002)
|
|
10.18
|
Nano-Proprietary,
Inc. Compensation Committee Charter
|
|
10.19
|
Nano-Proprietary,
Inc. Nominating Committee Charter
|
|
10.21*
|
Research/Development
and License Agreement entered into by Applied Nanotech, Inc. dated
as of
September 11, 2002 (Exhibit 10.1 to the Company’s Current Report on Form
8-K dated as of September 27, 2002).
|
|
10.22*
|
Patent
License Agreement between SI Diamond Technology, Inc. and Till Keesman
(Exhibit 10 to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2000)
|
|
10.23*
|
Second
Addendum to Patent License Agreement by and among Nano-Proprietary,
Inc.
and Till Keesman (Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated as of November 18, 2002).
|
|
10.24*
|
Development,
Purchase, and License Agreement for Hydrogen Sensor Products and
related
Services between, Nano-Proprietary, Inc. Applied Nanotech, Inc. and
Kelman
Ltd. (Exhibit 10.1 to the Company’s Current Report on Form 8-K dated as of
July 13, 2005).
|
|
11
|
Computation
of (Loss) per Common Share
|
|
14*
|
Nano-Proprietary,
Inc. Code of Ethics (Exhibit 14 to the Company’s Annual Report on Form
10-KSB for the fiscal year ended December 31, 2004)
|
|
21
|
Subsidiaries
of the Company
|
|
24
|
Powers
of Attorney.
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certificate of Marc W. Eller, Chief Executive
Officer
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certificate of Douglas P. Baker, Chief Financial
Officer
|
|
32.1
|
Section
1350 Certificate of Marc W. Eller, Chief Executive
Officer
|
|
32.2
|
Section
1350 Certificate of Douglas P. Baker, Chief Financial
Officer
|
Page
61