Nano Magic Inc. - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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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, 2008;
or
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o
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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
APPLIED
NANOTECH HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
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TEXAS
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76-0273345
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(State of
Incorporation)
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(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 o
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 o 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 o
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. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
Accelerated Filer o
Accelerated Filer þ
Non-accelerated
Filer o
Smaller Reporting Company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No þ
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, 2008 of $1.12, was
approximately $120 million. As of February 25, 2009, the registrant had
107,395,216 shares of Common Stock issued and outstanding.
Documents
Incorporated by Reference
No
documents are incorporated by reference into this annual report on Form
10-K
TABLE
OF CONTENTS
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Page
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| PART I | |||
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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16
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Item
2.
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Properties
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17
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Item
3.
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Legal
Proceedings
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17
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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|||
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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Item
6.
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Selected
Financial Data
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20
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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26
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Item
8.
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Financial
Statements and Supplementary Data
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27
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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49
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Item
9A.
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Controls
and Procedures
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49
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Item
9B.
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Other
Information
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51
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PART
III
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|||
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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52
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Item
11.
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Executive
Compensation
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54
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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63
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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65
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Item
14.
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Principal
Accountant Fees and Services
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66
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PART
IV
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|||
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Item
15.
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Exhibits
and Financial Statement Schedules
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67
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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” included at the beginning of this report and “Risk
Factors” beginning on page 11 of this report.
Item
1. Business.
DESCRIPTION
OF BUSINESS
General
We are a
nanotechnology company engaged in research based primarily on unique
applications of carbon nanotube technology. Our research is based on
intellectual property and expertise that we have developed over the past 20
years. As part of our research we perform services for others and develop
products and materials based on this intellectual property. Our ultimate goal is
to generate sustainable recurring revenues by licensing our technology to
others. Our work is focused in the areas of nanoelectronics, nanocomposites,
sensors, and electron emission activities.
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 intellectual
property will be required by any entity that develops a display using FED
technology. As discussed in greater detail under the heading “Electron emission
activities”, our FED technology includes both carbon nanotube based field
emission displays and thin-film based field emission technology.
While
initially focusing primarily on FED technology, in the past several years we
have expanded our research in many other areas to capitalize on the knowledge
that we have gained. Much of this research was an outgrowth of our work in the
FED area. This research was either related to 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
other areas beyond that solely related to the FED technology. At present, we
have over 300 total U.S. and foreign patents, including 120 issued, and over 200
pending.
Business
Model
We are
first and foremost a research and development company. We have an extensive
portfolio of intellectual property that we have developed throughout the last 20
years, and we intend to develop a portfolio of recurring revenue streams by
licensing our intellectual property to others.
Much of
our intellectual property relates to next-generation technologies that are not
in wide current use and as such, additional development work is required before
products can be manufactured using these technologies. Our research and
development efforts occur across a continuum moving from concept to
commercialization as follows:
Concept →
Laboratory → Development → Pilot /Introduction → Commercialization
To aid in
the process of moving our technologies from concept to commercialization, we
frequently perform funded research for both government entities and large
corporations. This enables us to focus our resources in areas that have the
highest level of interest to others, and thus the highest probability for
commercialization.
Page
1
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 $4,614,644,
$4,526,166, and $3,590,148 on research and development in the years ended
December 31, 2008, 2007, and 2006, respectively. This represents approximately
54%, 54%, and 41% of our total operating costs and expenses in each of those
years. We expect to continue to invest heavily in research and development, and
we expect our research and development costs for 2009 to be approximately 70% of
our operating costs. We seek to obtain funding for as much of our research as
possible.
Business
Segments
Our
operations currently consist of three reportable business segments.
Applied Nanotech,
Inc. ANI is the
main focus of our efforts. It was incorporated in January 1997 and is developing
our proprietary carbon nanotube and related technologies. Accordingly, our
research is focused in the broad area of carbon nanotube technology and its
application to the display, electronics, sensor, medical, and other industries.
Our development plans for our technologies 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 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 short term
potential and was less capital intensive. In 2006, we sold EBT’s intellectual
property in two simultaneous transactions. This is discussed in greater detail
below. To the extent that EBT is basically inactive, information relative to
this segment may not be that meaningful.
Other. We also incur general
operating overhead 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.
Following
is a summary of revenues, net loss from continuing operations, and total assets
for each segment for each of the last three years.
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2008
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2007
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2006
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||||||||||
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Revenues
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||||||||||||
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ANI
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$ |
3,957,832
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$ |
3,989,803
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$ |
1,116,670
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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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Other
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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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$ |
3,957,832
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$ |
3,989,803
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$ |
1,116,670
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||||||
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||||||||||||
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Net
income (loss) from continuing operations
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||||||||||||
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ANI
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$ |
(1,520,726
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) | $ |
(3,212,051
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) | $ |
(6,108,745
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) | |||
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EBT
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$ |
(1,296
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) | $ |
(1,298
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) | $ |
933,720
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||||
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Other
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$ |
(1,163,845
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) | $ |
(1,043,542
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) | $ |
(1,418,867
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) | |||
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Total
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$ |
(2,685,867
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) | $ |
(4,256,891
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) | $ |
(6,593,892
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) | |||
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Assets
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||||||||||||
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ANI
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$ |
1,105,627
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$ |
778,863
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$ |
1,101,205
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||||||
|
EBT
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$ |
—
|
$ |
—
|
$ |
—
|
||||||
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Other
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$ |
686,862
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$ |
2,965,995
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$ |
1,592,237
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||||||
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Total
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$ |
1,792,489
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$ |
3,744,858
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$ |
2,693,442
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||||||
Page
2
Applied
Nanotech, Inc.
Overall
We are a
nanotechnology company focusing our efforts on research, development of proof of
concepts for proposed products, and licensing our technology to others. We are
developing world-class technologies that generally fall under one of five
technology platforms. These platforms are:
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·
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Sensor
technology
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·
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Nanoelectronic
applications
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·
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Electron
emission activities, primarily in the display
area
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|
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·
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Functional
nanomaterials
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·
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Nanoecology
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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 manufacturing capabilities are needed for products
using our technology, we intend to use manufacturing partnerships, joint
ventures, or arrange to have products manufactured through contract
manufacturers.
Electron Emission
Activities
Until
recent years, our main focus for virtually the entire life of Applied Nanotech
Holdings has been on electron emission activities. We have performed extensive
research and accumulated significant intellectual property in this
area. The bulk of that activity has centered on Field Emission
Display (“FED”) technology. 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 and discussed in greater
detail below. While we have always worked, at least peripherally with
non-display related emission activities, recently we have observed an increase
in activities in this field and as a result we are focusing more of our research
on non-display activities. We have developed a broad patent portfolio covering
numerous aspects of emission activities, with the majority involving carbon. Our
most significant patent in this area is U.S. Patent 5869922, a patent we refer
to as the Raman Spectrum Patent. This basic patent covers field emission devices
using various forms of carbon; including carbon nanotubes (CNT)s, carbon films,
and other forms of carbon that fall within a particular range on the Ultraviolet
Raman band. Basic patents are fundamental and have broad applicability. This
patent has wide geographic coverage, having been issued in the U.S., China,
South Korea and has been validated in several European countries. The patent
application is also pending in Japan.
Our
electron emission activities can be divided into display activities and
non-display activities. The display industry is, in general, dominated by large
multinational corporations primarily based in Asia and participation in
manufacturing products for the display market involves significant capital
investments. While display applications represent potentially huge markets for
the use of our technology, realization of this potential will require one of
these companies to introduce a product based on our technology. Our intellectual
property in this area is well developed, and we believe that any manufacturer
that develops a product based on electron emission activities involving carbon
will require a license to our technology; however, any products using this
technology are still at present, next generation products. We believe that the
successful introduction of any display products using this technology will
require the participation of existing display manufacturers or component
suppliers. These manufacturers and suppliers have a variety of interests and the
introduction of new display products may be affected by general economic
conditions as well as the impact of these new products on other areas of their
business.
There is
also a wide array of non-display related electron emission applications. These
potential applications are spread among a much larger group of potential
licensees, and the markets generally are not as large as the display
markets, although the markets are still very significant and would generate
substantial royalties if products are introduced. We have performed research
related to lighting applications, ion sources, traveling wave tubes, and are
exploring other electron emission applications. We believe these applications
may have the capability of generating license revenues sooner than display
applications, may be easier to integrate into existing products, and may be in
wide use sooner than display applications. While the breadth (number of patents)
of our display related emission activity patents is currently greater than for
non-display patents, our non-display Intellectual Property is growing and our
basic Raman patent is expected to cover all emission activities.
Page
3
Display
Applications
Large area
CNT flat screen color field emission displays. TVs using FED
technology are intended to compete with and improve on the plasma, projection,
LCD, and CRT displays currently available in the large screen TV market. Because
of anticipated 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. Although, as discussed below some companies are still
working with other forms of carbon emission. Companies including Samsung,
DuPont, Noritake, Motorola, and others have made public announcements related to
the development of large area carbon nanotube based field emission displays, or
manufacturing processes for such displays, however none of these companies have
yet introduced a product. To the extent that any company brings a TV to market
using carbon nanotube based field emission display technology, we believe that
they would be required to license one or more of our patents.
Large
area surface conduction color field emission displays. Canon, Inc. and
Toshiba also have jointly developed a large area flat screen color TV based on
our FED technology, using a technology that they call SED, which they have
indicated does not use the emission from carbon nanotubes. Canon and Toshiba
formed a joint venture in 2004 to manufacture components for this TV, have
constructed a pilot line, and demonstrated their product on many occasions.
Neither Canon nor Toshiba has ever introduced a product using this technology
and Canon subsequently bought out Toshiba’s interest in the joint venture. Canon
has a non-exclusive license with us, signed in 1999, which covers substantially
all of our field emission patents, but excludes specific applications for those
field emission display patents. Toshiba has never had a license to any of our
technology.
Backlights for
displays. Our carbon nanotube technology is ideally suited to be used as
a backlight for other types of displays, such as LCDs. Use of CNTs in backlights
could improve the luminous efficiency at lower power levels and eliminate the
use of mercury and its related negative environmental impacts. We have developed
a proof of concept using our proprietary functionalized CNTs as a backlight for
an LCD. Many other companies have also performed research in this area. We
believe that successful development of a backlight device using carbon nanotubes
by anyone will require a license to our intellectual property and that such a
product would be applicable to the entire LCD market - not just large screen
displays. Introduction of a product will likely take additional research and in
the current economic environment, absent regulations banning the use of Mercury
in backlights, it is likely that companies will be hesitant to undertake such
research.
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 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. In 2002, we licensed a previous version of field emission display
technology that is not based on carbon nanotubes to a large Japanese display
manufacturer. This license calls for royalties of 2% of the licensee’s sales of
products using our technology, once its sales exceed $100 million. The licensee
has not yet introduced a product using this technology and we have no
information that would indicate they intend to introduce a product in the near
future.
Non-Display
Applications
Traveling wave
tubes – Traveling wave tubes (“TWT”) are key components for generating
high frequency and high power for communications, radar, and other electronic
equipment. Almost all current TWTs use thermal cathodes that require heating to
generate the high current density beam required for effective and efficient TWT
operation. A cold cathode using carbon nanotubes as the electron source has the
potential to improve the operating life of the cathode and the efficiency of the
TWT. We currently have a Phase II grant from the Air Force, in conjunction with
our development partner, Northrop Grumman, to further develop this
application.
Non-radioactive
sources. We are also working with the electron emission from carbon
nanotubes to replace radioactive sources in commercial applications. We are
currently working with Sionex Corporation, under a U.S. Department of Homeland
Security grant, to replace the ion source in a specific ion detection device
manufactured by Sionex. We consider the use of carbon nanotubes in replacing
radiological sources to be an extremely promising area of research.
Page
4
Neutron
and gamma-ray sources. We also have a contract with the Department of
Homeland Security for a research program related to the utilization of CNTs for
neutron and gamma-ray radiation sources. This type of radiation is needed today
for the detection of “special nuclear materials” that are of high interest to
Homeland Security authorities. We consider this another extremely promising area
of research.
Lighting Devices.
We have done work in the area of specialty lighting devices using carbon
nanotubes. In particular we have worked with and have a license agreement with
Shimane Masuda Electronics, Co., Ltd. (“SME”). In 2005, SME established a pilot
line for the development and production of carbon nanotube electron emission
based lighting devices and in 2006 signed a license agreement for a portion of
our technology. This license agreement limited SME to manufacturing in Japan and
sales in Asia. We received a payment of approximately $84,000 at the time the
license was signed. We will receive an additional $125,000, if SME
were to introduce a product, however SME has terminated work on the project, and
introduction of a product is not anticipated.
Key
Intellectual Property
In
addition to the previously mentioned Raman Spectrum Patent (U.S. Patent 5869922)
which is a basic patent covering emissions from a wide range of carbon forms, we
have an extensive portfolio of other patents in the area. We also licensed 6
patents from Till Keesmann in 2000, and we have an exclusive agreement to
license these patents to others. This agreement is described in greater detail
in the Technology Agreements section below. These patents are also 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 significantly
strengthened and reinforced the basic nature of this patent. It is our belief
that any company using carbon nanotubes in the U.S. or in certain western
European countries in an emission mode, regardless of application, will be
required to license this, as well as our other patents. No companies have yet
licensed the Keesmann patents from us, nor have they obtained the right to use
these patents. While this patent is more limited in scope and geography that our
basic Raman Spectrum Patent, we believe this to be a valuable patent and a nice
compliment to our core patent portfolio.
Competition.
Because of the strength of our intellectual property in the electron
emission area, our competition comes from other technologies, rather than from
other companies. We believe that 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 using forms of carbon, whether carbon nanotube based
or other carbon based methods such as the SED. However, even companies
developing these non-carbon based field emission displays may 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 would come
from existing products such as plasma panel displays, LCD displays, organic LED
displays, and color picture tubes. We believe FED technology, if 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 have done work on 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 our work and intellectual property in the area
of sensor technology. This is becoming an increasingly important part of our
business, and we expect it to become even more important in the future. Our
approach to sensor technology offers the unique advantage of manipulating
materials at the molecular level at which sensing events occur. We are pursuing
a multiplatform approach to address specific market needs. Some of the potential
applications are as follows:
Page
5
Hydrogen
sensors. These sensors are initially targeted for use in fuel cells for
automobiles and for remote monitoring of large power transformers. We developed
a hydrogen sensor for use in the measurement of hydrogen in power transformer
products. We are currently working with a large manufacturer of instruments,
controls, and monitoring systems used in the power transmission industry, and we
have an all encompassing agreement covering development, technology transfer,
and licensing with this partner. We expect this partner will introduce a product
using our sensor in 2009 and that it will begin generating royalties for
us.
Carbon Monoxide
Sensors. We have developed a low-power carbon monoxide sensor that can
last for 10,000 hours on a single battery. 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.
Biosensors.
Our carbon nanotube technology is ideally suited for use in biosensors. Sensors
based on carbon nanotubes or other nanomaterials 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.
Other sensors.
We have 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, 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 in 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.
Nanoelectronics
Applications
We are
working in several other areas that have grown out of our basic work in the
electron emission 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.
One such important area is conductive inks.
Conductive
Inks.
As a
result of the move towards flexible electronics, soldering processes are slowly
disappearing and new processes that are digital in nature, allowing a move
directly from design to the production line, are needed. One of those areas that
we have chosen to focus on is conductive inks. Nanotechnology will play an
important role in this process because only nanoparticles are capable of
producing inks that are compatible with the nozzles used in digital
printing.
To
facilitate our development of conductive inks, we entered into a research and
development agreement in 2006 with a leading industrial chemical products
company headquartered in Japan to develop conductive inks that can be deposited
using an additive process such as ink-jet printing or screen printing. The
target market for these technical inks includes printed circuit boards, flexible
electronics and displays, communications instrumentation, and Radio Frequency
Identification tags. This first phase of the project started in late 2006,
lasted one year and generated $500,000 in revenue for us. Upon successful
completion of the first phase, we began a second phase with the same company
that lasted approximately one year and generated $735,000 in revenue. We began a
third phase of this project in October 2008 which will generate a minimum of
$1.2 million in research revenues over a one year period.
Page
6
We chose
to start this project by focusing on nanocopper inks using copper nanoparticles
because of copper’s superior electrical conductivity properties, low cost, and
because it is the material of choice in the printed circuit board industry. We
have been able to achieve electrical conductivity properties similar to that of
bulk copper with these inks. We are optimistic that this project will lead to a
license agreement by April 2009.
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 upon the results of
our research compared with results achieved by others.
Functional
Nanomaterials
We are in
the advanced stages of research into nanomaterials using carbon nanotube and
other 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.
Large Sporting
Goods Manufacturer. In September 2005, we signed a development contract
with a large sporting goods manufacturer to develop nanocomposites to be used in
the manufacturer’s sporting equipment. The goal of the project, which involved
three separate areas, was to improve the existing base materials currently used
by the manufacturer to make the equipment stronger, lighter, and more powerful.
This culminated in a license agreement with this partner, signed in October
2008. We are currently working with this partner to integrate the technology
into its production process and expect this license to begin generating
royalties by the end of 2009.
Competition.
Since this is a developing area of nanotechnology, there are not
significant established competitors. Our competition would come from companies
working with other materials. Since each project is unique, there are not
necessarily any established competitors in the market.
Nano-ecology
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. We began a one year project in the amount of roughly $950,000
to further develop this technology for the U.S. Army in November 2006. Based on
the results of this first phase, we were awarded a contract in the amount of
$1.45 million in January 2009.
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. As discussed below, we
sold EBT’s intellectual property in 2006.
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 issued in
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. There are also similar patents that have been
applied for and we have applications pending in Europe, Canada, Korea, and
Japan. As discussed below, we sold these patents in 2006.
Sale of
Intellectual Property. In 2006 we began discussions related to licensing
our communication patents referred to above. Those discussions culminated in the
sale of EBTs intellectual property in two simultaneous transactions to Novus
Communications Technologies, Inc. in June 2006. In the first transaction, we
sold our communications patents to Novus Partners, LLC, a majority owned
subsidiary of Novus Communications. We received an upfront payment of $1,000,000
and the right to future royalties based on the revenue received by Novus
Partners. The agreement also contains certain provisions related to future
minimum royalty payments, which if not met, could cause the patents to revert
back to EBT. No minimum royalty payments were due in 2008 and no royalties have
been received since the initial payment in 2006.
Page
7
In the
second transaction, we sold EBT’s remaining intellectual property and other
assets, which consisted solely of items related to the intellectual property,
such as drawings, etc. to Novus Displays, LLC, a newly formed organization owned
by Novus Communications. In exchange for the remaining intellectual property, we
received $500,000 and a 25% ownership interest in Novus Displays. One of the
patents that we sold in this transaction was a patent that had been assigned to
us by Advanced Technology Incubator, Inc. (“ATI”), a company owned by
Dr. Zvi Yaniv, our Chief Operating Officer. In order to acquire the
remaining interest in the patent and settle all potential future obligations to
ATI, we issued 200,000 shares of our common stock, valued at $400,000 to ATI.
Dr. Yaniv also received a 5% ownership interest in Novus Displays as part
of the transaction.
Future
Activities. EBT’s future activities
are limited to participation in the digital signage industry through Novus
Communications. Our communication patents are part of a larger package of
related patents held by Novus Partners and any future income that we may receive
is dependent on the ability of Novus Partners to license that patent package. We
have not received any royalties from Novus Partners since the time of the
initial payment in 2006, and we will not receive any royalties from Novus
Partners until such time as they have revenue producing agreements or make
minimum payments. While we anticipate receiving royalties in the future, we have
no control over, or input into, the licensing activities of Novus
Partners.
Our
ownership interest in Novus Displays is a passive ownership interest, and we
have no active role in the day to day management. Our sale of our remaining
intellectual property to Novus Displays was done to facilitate the sale of our
communications patents to Novus Partners. We had no interest in devoting further
resources to develop that technology. The sale to Novus Displays provided us the
opportunity to receive additional future value from that technology, if it is
successfully deployed by Novus Displays. We will receive no income from Novus
Displays and only profit from an eventual sale of Novus Displays, if it occurs.
To the best of our knowledge, Novus Displays has not yet been capitalized beyond
its initial minimal capitalization, has not yet actively developed any of the
technology acquired from us in 2006, and is not carrying on any significant
business activities.
Technology
Agreements
Till Keesmann.
In May 2000, we licensed the rights to 6 carbon nanotube patents from
Till Keesmann in exchange for a payment of $250,000 payable in shares of our
common stock. Under the terms of the agreement, we are obligated to pay license
fees equal to 50% of any royalties received by us specifically 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
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. We are allowed to offset these minimum payments against future royalty
payments; however, once these minimum payments and the expenses have been
offset, we may be liable for additional royalty payments.
The
Keesmann agreement was amended in 2008. As part of that amendment, the amount of
future offsets available for expenses incurred prior to June 2008 was fixed at
$300,000. In addition the amendment established licensing parameters under which
we can sublicense the patents without any additional approval by Mr. Keesmann.
The amendment also gave Mr. Keesmann the option of electing to receive an
additional advance of $100,000 against future royalties. In September 2008, Mr.
Keesmann elected to receive that advance, which is now also available for us to
offset against future royalties. Finally, the amendment contains provision which
would allow Mr. Keesmann to license the patents directly and remit 50% of the
royalties to us beginning in June 2010, if certain minimum royalties are not
achieved by that date.
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, the possibility is remote that we
will be required to pay MCC any royalties at any time in the future. MCC has
since gone out of business.
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 over
300 patents, including 120 issued patents and over 200 patent applications
pending before foreign and United States Patent and Trademark Offices. We also
have several unsubmitted patent applications in process. The patents, allowances
and applications relate to 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 our most
valuable asset.
Page
8
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.
Page
9
A portion
of our revenue has consisted of reimbursement of expenditures under U.S.
government contracts. We recognized $2,295,887 of revenue in 2008, $2,328,010 in
2007, and $583,236 in 2006, related to government contracts. These
reimbursements represent all or a portion of the costs associated with such
contracts. As of December 31, 2008, we have several government contracts in
process that have approximately $2.0 million of revenue yet to be recognized.
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 25, 2009 we had 32 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.appliednanotech.net.
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.
Page
10
Item
1A. Risk
Factors
Our
success is dependent on our principal technologies
Our
technology platforms, which include sensor technology, electron emission
activities, nano-electronics, functional nano-materials, and nano-ecology, are
emerging technologies. Our financial condition and prospects are dependent upon
licensing our intellectual property 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 the ability of our licensees 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. 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 likely 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
anticipate receiving up-front license fees in 2009.
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 all such
licenses have not yet been finalized. One of our past 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 usually also have rights to any jointly developed
property; however, any such jointly developed property would likely be based, at
least in part, on our underlying technology which would require our partners to
enter into a license 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 25, 2009, we had 32 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 focus our efforts on those projects for which we can obtain external funding
since the availability of funding provides an external verification of the
probability of commercial success of resulting products.
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11
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 need 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 elect not 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
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; and 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 intellectual
property to others for use in their manufacturing processes. To the extent that
any of the products that we develop 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.
Public
perception(s) of ethical and social issues may discourage the use of
nanotechnology
Nanotechnology
has received both positive and negative publicity and is increasingly the
subject of public discussion and debate. Governments may, for social or health
purposes, prohibit or regulate the use of nanotechnology. This may restrict our
ability to license our technology, or the ability of our licensees to sell their
products.
The
loss of key personnel could adversely affect our business
Our
future success will depend on our ability to continue 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, some 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.
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12
We
have a history of net losses
We have a
history of net losses. From our inception through December 31, 2008, we incurred
net losses of approximately $109 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
|
($14,557,426)
|
|
|
1996
|
($14,583,506)
|
|
|
1997
|
($7,306,232)
|
|
|
1998
|
($4,361,742)
|
|
|
1999
|
$474,599
|
|
|
2000
|
($9,471,279)
|
|
|
2001
|
($6,047,698)
|
|
|
2002
|
($5,452,890)
|
|
|
2003
|
($4,017,374)
|
|
|
2004
|
($7,139,109)
|
|
|
2005
|
($5,818,816)
|
|
|
2006
|
($6,593,892)
|
|
|
2007
|
($4,256,891)
|
|
|
2008
|
($2,685,867)
|
Although
we expect to be profitable in the future, we may not be. Our profitability in
2009 is dependent upon a combination of signing of additional license agreements
and 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 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 funded our operations
to date primarily through the proceeds from the sale of our equity securities
and debt offerings. Our auditors have included a going concern paragraph in
their opinion on our financial statements, which may impact our ability to
obtain financing, if financing is needed in 2009.
We
have no current royalty agreements producing significant revenue
Our
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 products ourselves, and as such, we
have no product revenues. While we do have existing licenses, none of the
licensees are producing products at the present time and therefore none of the
licenses are producing current revenue. Successful implementation of our
strategy requires royalty bearing license agreements.
We expect
to license our technology to be used in many applications. See additional
discussion in the risk factor “Our technology development is in its early stages
and the outcome is uncertain” above. 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.
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13
Our
revenues have been dependent on government contracts in the past
In many
years, a significant portion of our revenues are derived from contracts with
agencies of the United States government. Following is a summary of those
revenues for the past ten years:
|
Year
Ended December 31
|
Revenues
from
Government
Contracts
|
Percentage
of
Total
Revenue
|
|||
|
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%
|
|||
|
2006
|
$583,236
|
52%
|
|||
|
2007
|
$2,328,010
|
58%
|
|||
|
2008
|
$2,295,887
|
58%
|
|||
We
currently have commitments for future government funding of approximately $2.0
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
contract.
|
|
|
·
|
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
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.
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.
Page
14
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 to continue
operations for a period through at least the end of the first quarter of 2009.
Expected revenues, excluding any new license agreements, will extend that period
by several months. We also expect to sign a significant license agreement in
April that will provide sufficient operating cash for the balance of the 2009.
Our plan is primarily dependent on raising funds through the licensing of our
technology and revenue generated from performing contract research services. We
do not intend to raise additional capital through debt or equity offerings,
unless 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 licensee’s ability to make and
sell our products using our technology. Competitors or potential licensees 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.
Changes
in patent laws could have a negative impact on us
New legislation, regulations, or rules
related to obtaining or enforcing patents could significantly increase our
operating costs and make it more difficult to enforce or license our patents. If
new legislation, regulations, or rules are implemented by either Congress, the
United States Patent and Trademark Office, or the courts that impact the patent
application process, the patent enforcement process, or the rights of patent
holders, these changes could negatively affect our expenses and potential
revenue.
We
rely on unpatented proprietary technology
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.
Page
15
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 may be required to pay royalties on the sale of products
developed from the licensed technologies and fees on revenues from sublicenses.
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. MCC is also no longer in
business.
In May
2000, we licensed the rights to 6 carbon nanotube patents from Till Keesmann in
exchange for a payment of $250,000 payable in shares of our common stock. Under
the terms of the agreement, we are obligated to pay license fees equal to 50% of
any royalties received by us specifically 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 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. We are
allowed to offset these minimum payments against future royalty payments;
however, once these minimum payments and the expenses have been offset, we may
be liable for additional royalty payments.
The
Keesmann agreement was amended in 2008. As part of that amendment, the amount of
future offsets available for expenses incurred prior to June 2008 was fixed at
$300,000. In addition the amendment established licensing parameters under which
we can sublicense the patents without any additional approval by Mr. Keesmann.
The amendment also gave Mr. Keesmann the option of electing to receive an
additional advance of $100,000 against future royalties. In September 2008, Mr.
Keesmann elected to receive that advance, which is now available for us to
offset against future royalties. Finally, the amendment contains provision which
would allow Mr. Keesmann to license the patents directly and remit 50% of the
royalties to us beginning in June 2010, if certain minimum royalties are not
achieved by that date.
Our
business is subject to changing regulation of corporate governance and public
disclosure
Because our common stock is publicly
traded, we are subject to certain rules and regulations of federal and state
entities charged with the protection of investors and the oversight of companies
whose securities are publicly traded. These entities have continued to develop
additional regulations and requirements in response to laws enacted by Congress,
most notably the Sarbanes-Oxley Act of 2002. Complying with these new
regulations have resulted in, and are likely to continue to result in, increased
general & administrative costs and a diversion of management time and
attention from revenue generating and other business activities to compliance
activities.
Our
business is subject to economic uncertainties
A portion of our research revenues come
from private sources, primarily large multinational corporations. In addition,
our strategy is dependent upon the receipt of royalties related to the
introduction of new products by these and other companies. During times of
extreme economic uncertainty, some companies may cut back on spending on
research projects, or delay the introduction of new products.
Item
1B. Unresolved Staff
Comments
None.
Page
16
Item
2. Properties
We lease
a facility in Austin that is used for our corporate headquarters and research
and development activities under a lease expiring in February 2014. The lease
calls for payments of $12,505 through February 2010, $13,432 from March 2010
through February 2012, and $14,461 for the period from March 2012 through
February 2014.
We
believe that these facilities are suitable for our current needs and will be
adequate for our anticipated research, development, and administrative
activities, at least through the end of the lease period. We are currently
studying our facility needs and likely will move to a different facility at the
end of the lease period. We would expect a new facility to be similar in size to
our existing facility. 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
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.
Item
4. Submission of Matters to a Vote of
Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.
Page
17
PART
II
Item
5. Market for Registrant’s Common
Equity, 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 “APNT”. 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
|
||||||
|
2007
|
First
Quarter
|
$2.96
|
$1.20
|
||||
|
Second
Quarter
|
$2.86
|
$1.10
|
|||||
|
Third
Quarter
|
$1.33
|
$0.88
|
|||||
|
Fourth
Quarter
|
$1.40
|
$1.03
|
|||||
|
2008
|
First
Quarter
|
$1.30
|
$0.86
|
||||
|
Second
Quarter
|
$1.30
|
$0.96
|
|||||
|
Third
Quarter
|
$1.15
|
$0.40
|
|||||
|
Fourth
Quarter
|
$0.55
|
$0.18
|
|||||
|
2009
|
First
Quarter (through February 25, 2009)
|
$0.37
|
$0.19
|
As of
February 25, 2009, the closing sale price for our common stock as reported on
the OTC Bulletin Board system was $0.23. As of February 25, 2009, there were
approximately 350 shareholders of record for our common stock. This does not
include shareholders holding stock in street name in brokerage
accounts.
Cash
Dividends
We have
never paid cash dividends on our common stock, and it is unlikely that we will
pay any dividends in the foreseeable future. We currently intend 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.
Page
18
Performance
Graph
The
following graph shows a comparison, since December 31, 2003, of cumulative total
return for Applied Nanotech Holdings, the NASDAQ Market Index, and an index for
Commercial Physical Research (SIC code 8731).
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
||
|
Applied
Nanotech Holdings, Inc.
|
100.00
|
79.49
|
78.75
|
51.28
|
39.56
|
8.79
|
|
|
NASDAQ
Market Index
|
100.00
|
108.41
|
110.79
|
122.16
|
134.29
|
79.25
|
|
|
Commercial
Physical Research (SIC Code 8731)
|
100.00
|
128.37
|
137.29
|
149.30
|
173.14
|
107.77
|
|
The
performance graph assumes $100 invested on December 31, 2003 in our common
stock, the NASDAQ Market Index, and an index based on a basket of stocks
composing SIC Code 8731. The total return assumes reinvestment of dividends for
the NASDAQ Market Index and the SIC Code Index. The total return is based on
historical results and is not intended to indicate future performance. These
dates represent arbitrary points in time and if different dates were presented,
different results would be obtained.
Recent
Sales of Unregistered Securities
|
|
We
issued no unregistered shares of our securities in the fiscal quarter
ended December 31, 2008.
|
Page
19
Item
6. Selected Financial
Data
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Revenues
|
$ | 3,957,832 | $ | 3,989,803 | $ | 1,116,670 | $ | 565,660 | $ | 382,522 | ||||||||||
|
Net
income (loss)
|
$ | (2,685,867 | ) | $ | (4,256,891 | ) | $ | (6,593,892 | ) | $ | (5,818,816 | ) | $ | (7,139,109 | ) | |||||
|
Income
(loss) per share
|
$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.07 | ) | |||||
|
Total
assets
|
$ | 1,792,489 | $ | 3,744,858 | $ | 2,693,442 | $ | 1,187,981 | $ | 1,144,368 | ||||||||||
|
Long-term
obligations
|
$ | 27,909 | $ | 30,004 | $ | — | $ | — | $ | 5,944 | ||||||||||
|
Net
shareholders’ equity (deficit)
|
$ | 858,286 | $ | 2,828,902 | $ | 642,262 | $ | 859,339 | $ | 846,456 | ||||||||||
|
Cash
dividends per common share
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Page
20
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, 2008, and the results of
operations for the years ended December 31, 2008, 2007 and 2006. 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
We are
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, as well as many of
its potential applications, is 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 2009 to be approximately $7.0 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 2009
than was received in 2008. We have developed a plan to enable us to achieve
positive cash flow from operations with approximately $7.1 million of revenue.
As of February 1, 2009, we have approximately $500,000 in cash to cover
potential revenue shortfalls that may occur for the year. We do not expect to
need to raise any additional equity in 2009; however, a key component of our
plan is an expected license agreement in April 2009. Failure to achieve that
license during 2009 could have a significant impact on our ability to operate
and would likely cause us to need to seek alternative funding
sources.
We have a
history of net operating losses; however, our plan is to generate sufficient
revenues in 2009 to achieve breakeven or better; however, losses may continue as
we continue to develop our technologies. There can be no assurances that we will
be profitable in 2009 or 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 2009.
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, when combined with expected revenues
sources, are expected to be 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. Our
auditors have included a going concern paragraph in their opinion on our
financial statements, which may impact our ability to obtain financing, if
financing is needed in 2009.
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 routinely grant stock
options to employees and others. We have granted options in the past and each
year all employees have the opportunity to earn additional performance-based
option awards. We account for these options under the provisions
of 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.
Page
21
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 did not identify any impaired
items in 2006, 2007 or 2008. 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, 2008 accounts
receivable.
LIQUIDITY
AND CAPITAL RESOURCES
Our cash
balance was $710,111 at December 31, 2008, which was significantly lower than
our cash balance of $3,020,096 at December 31, 2007, as a result of our decision
to not raise additional equity in 2008. Our working capital was approximately
$0.5 million at December 31, 2008, compared with working capital of roughly $2.5
million at December 31, 2007, a decrease similar to our decrease in cash. During
the same period, our current ratio decreased from approximately 3.8 to 1 to
approximately 1.6 to 1 as a result of our decrease in cash. Our cash balance
decreased primarily as a result of cash used in operations driven by our net
loss. Our current liabilities remained relatively constant from December 31,
2007 to December 31, 2008.
The
principal source of our liquidity has been funds received from exempt offerings
of our common stock; however, in 2008 we did not raise any equity from private
placements. We did receive proceeds from exempt offerings for our common stock
of $6,000,000, and $5,004,193 in 2007 and 2006, respectively. We also received
proceeds of approximately $60,000, $300,000, and $25,000 from the exercise of
stock options by current and former employees in 2008, 2007, and 2006,
respectively. We have no current plans to raise any additional funds from the
sale of equity in 2009.
As of
February 1, 2009, our cash balance is approximately $500,000. We believe that
our current cash level, when combined with expected revenue is enough for us to
operate at least through the end of 2009 and into 2010. We may receive
additional funds from the exercise of employee stock options. The level of
option exercise activity is highly correlated with the market price of our
common stock and currently there are very few options outstanding with a
exercise price below the current market value of our stock.
In the
event that we need additional funds in 2009 beyond the amount that we have as of
the date of this filing and those that we expect to receive as revenues or from
other sources, we may seek to sell additional debt or equity securities. We have
no specific 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 $2.3 million in 2008, as compared with $5.3
million in 2007, and $3.7 million in 2006. The cash used in operations was
primarily the result of the net losses incurred in each year. Factors affecting
this are discussed in the Results of Operations section below. Payment of legal
fees related to the Keesmann litigation also significantly impacted the cash
used in operations in 2006 and 2007. Approximately $1.1 million of legal fees
incurred in 2006 were paid in 2007, which had the overall effect of decreasing
cash used in operations in 2006 and increasing cash used in operations in 2007
by that amount. We have a plan to generate positive cash flow from operations in
2009; however, since that will require significantly increased revenues, there
is no assurance that will be achieved.
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 2009.
No material commitments exist as of December 31, 2008, for future purchases of
capital assets.
The only
contractual cash obligations that we have as of December 31, 2008 are operating
and capital leases. We have no long-term debt or notes payable. A summary of our
lease obligations at December 31, 2008 is as follows:
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||||||||||||||
|
Capital
leases
|
$ | 76,568 | $ | 41,498 | $ | 9,787 | $ | 9,787 | $ | 9,787 | $ | 5,709 | — | |||||||||||||||
|
Operating
leases
|
$ | 975,442 | $ | 209,486 | $ | 183,102 | $ | 184,956 | $ | 191,804 | $ | 176,652 | $ | 29,442 | ||||||||||||||
Page
22
We
believe that we will have the cash available to meet our cash requirements for
fiscal 2009.
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. Since EBT 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 any year presented was the sale of its intellectual property in
2006.
Revenues. Following
is a summary of key revenue categories for the three years covered by this
report.
|
2008
|
2007
|
2006
|
||||||||||
|
Government
Revenues
|
$ | 2,295,887 | $ | 2,328,010 | $ | 583,236 | ||||||
|
Other
Contract Research
|
$ | 824,358 | $ | 990,598 | $ | 360,054 | ||||||
|
License
Fees and Royalties
|
$ | 577,000 | $ | — | $ | 83,928 | ||||||
|
Total
Revenues
|
$ | 3,957,832 | $ | 3,989,803 | $ | 1,116,670 | ||||||
|
Revenue
backlog at December 31
|
$ | 3,272,000 | $ | 3,891,000 | $ | 3,026,000 | ||||||
All of
the revenues during the 3-year period came from ANI. Our revenues were roughly
similar in 2007 and 2008, both of which were substantially higher than in 2006.
This is a result of a concentrated effort to seek funding for our
research. Our license revenue in 2008 came from the
license agreement with our sporting goods partner. We also received some license
revenue in 2006 as a result of the license agreement that we signed with Shimane
Masuda Electronics.
The
revenue backlog as of December 31, 2008 results from several government programs
and private contracts and is similar to prior years. The majority of these
programs are currently in progress and generating revenue, with the remainder
related to contracts awarded, but not yet started. The overwhelming majority of
this backlog will be converted into revenue in 2009. We also have some highly
likely contracts that have not yet been finalized, and therefore, are not
included in the backlog numbers as of December 31, 2008.
We expect
revenue to be significantly higher in 2009 than in 2008, and we expect to
generate minimum revenues in 2009 of $7.0 million at ANI. Of that, $3.3 million
is already committed and in process, and the remaining $3.7 million has been
specifically identified. There is no guarantee that these revenues will be
obtained; however, we think it is equally as likely that revenues will exceed
these numbers, as it is that they fall short of them. 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 the
projected minimum of $7.0 million in revenue will be achieved. We are currently
pursuing opportunities in several areas that could result in additional revenue
in 2009.
We expect
our revenues in all categories – government contracts, private research, and
license agreements to increase in 2009 over 2008 levels.
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.
Page
23
Research and
development. Following is a summary of research and development
expenditures for the past three years.
|
2008
|
2007
|
2006
|
||||||||||
|
Total
Research and development
|
$ | 4,614,644 | $ | 4,526,166 | $ | 3,590,148 | ||||||
All
research and development expenses were incurred by Applied Nanotech, Inc. Our
level of research activity was roughly similar in 2008 and 2007, as was our
revenue in those years. Activity in both 2008 and 2007 was up from 2006 levels
as a result of more revenue producing projects. Research activity was up much
less on a percentage basis than our revenue because prior to 2007, a much higher
percentage of our research activity was unfunded.
We expect
to continue to incur substantial expenses in support of additional research and
development activities related to the commercial development of our
technologies. We expect to incur at least similar amounts of research related
expenditures in 2009 to those incurred in 2008. We may, however, incur more
research and development expense in 2009 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:
|
2008
|
2007
|
2006
|
||||||||||
|
Stock
based compensation
|
$ | 418,252 | $ | 22,705 | $ | 410,448 | ||||||
|
Litigation
related expenses
|
$ | 166,278 | $ | 1,110,946 | $ | 1,933,603 | ||||||
|
EBT
related S, G, & A
|
$ | 1,296 | $ | 1,298 | $ | 166,280 | ||||||
|
Other
S, G, & A
|
$ | 3,312,113 | $ | 2,723,771 | $ | 2,718,683 | ||||||
|
Total
selling, general, and administrative
|
$ | 3,897,939 | $ | 3,858,720 | $ | 5,229,014 | ||||||
Total
selling, general and administrative expense was similar in 2007 and 2008, both
of which were significantly lower than 2006; however, the total is significantly
impacted by several factors that are discussed below.
The first
significant component of selling, general, and administrative expense is stock
based compensation. Stock based compensation is significantly impacted by two
factors. First, the number of options vested, or expected to vest, each year.
Second, the fair value of the options vested. One of the factors impacting the
fair value is the underlying price of our stock. As a general rule, options
granted when the stock price is lower will have a lower fair value than options
granted when the stock price is higher. Stock based compensation expense was low
in 2007 as a result of a change in the estimate of the number of options related
to a multiyear goal program that were expected to vest, resulting in a reversal
of expenses booked in previous years. We will incur stock based compensation
expense in 2009, but it is difficult to predict the amount. The majority of
options that we grant are performance based options that vest upon the
achievement of specified goals. The amount of expense that we incur in 2009 will
depend on the goals achieved. As of December 31, 2008, there were outstanding
unvested options with a total fair value of approximately $597,000. This amount,
in addition to the fair value of any new options granted that vest, may be
recognized as an expense in 2009 or after. The better our financial results are,
the more of these options that will likely vest, and thus the larger our stock
based compensation expense will be.
The
second major component of selling, general, and administrative expense during
the periods presented is litigation related expense. We incurred significant
amounts of litigation related expense in both 2006 and 2007 as a result of our
litigation against both Canon, Inc. and Till Keesmann. The amount was
significantly lower in 2008 because both of these cases were completed. The
Canon case went to trial in 2007 and only minimal activity related to the appeal
took place in 2008. The Keesmann litigation was settled in 2008. As a result,
our litigation expense decreased significantly. We currently have no significant
litigation in process and expect litigation expense to be insignificant in
2009.
Page
24
Other
selling, general, and administrative expense was relatively constant from 2006
to 2007, but increased in 2008. The increase related to three main areas –
patents, professional fees, and royalty payments. Our patent expense, including
professional fees related to patents, increased from 2007 to 2008 by roughly
$250,000 as a result of our growing patent portfolio and a substantial increase
in rates at our primary patent law firm. Our other professional fees increased
by approximately $250,000 also as a result of fees associated with the sale of
portions of our intellectual property and marketing efforts. Finally, we made an
advance royalty payment of $100,000 to Till Keesmann in connection with the
amendment of our existing license agreement with Mr. Keesmann.
We
expect selling, general and administrative expense in 2009 to be approximately
$2.9 million, a significant reduction from 2008 levels as a result of our cost
reduction efforts and the elimination of some nonrecurring items included in
2008, such as the professional fees and royalty payment. To the extent those or
similar costs were to occur in 2009, it would be as a result of increased
revenue or other IP sales and be more than offset by revenue or other
gains.
Gain on sale of intellectual
property and other assets. In 2008, we had total gains of $1,329,571
related to the sale of intellectual property and other assets. The majority of
that, $1,225,999, came from a sale of a portion of our future interest in
royalties from sublicensing the Keesmann patents. We also had a gain of $100,000
from the sale of certain excess patents, which we were no longer using and which
did not relate to any of our current active technology platforms. The balance of
the gain in 2008 came from the sale of miscellaneous equipment.
In June
2006, our Electronic Billboard Technology, Inc. subsidiary sold all of its
intellectual property in two simultaneous transactions. We received a total of
$1.5 million in cash, the right to future royalties, and an ownership interest
in a newly formed entity. One of the patents that we sold was a patent that had
been assigned to us by Advanced Technology Incubator, Inc. (“ATI”), a company
owned by Dr. Zvi Yaniv, our Chief Operating Officer. In order to acquire
the remaining interest in the patent and settle all potential future obligations
to ATI, we issued 200,000 shares of our common stock, valued at $400,000 to ATI.
The gain of $1.1 million recorded in the financial statements resulted from the
cash payment received of $1.5 million, less the $400,000 cost associated with
the acquisition of the patent rights. We may receive additional proceeds from
this transaction if the purchaser successfully licenses the patents, however we
have not received any payments since 2006 and can not predict the amounts that
we may or may not receive in the future.
Other income.
Following is a summary of other income for the last three fiscal
years.
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
expense
|
$ | (7,180 | ) | $ | (926 | ) | $ | (604 | ) | |||
|
Interest
Income
|
$ | 46,493 | $ | 139,118 | $ | 9,204 | ||||||
|
Litigation
settlement
|
$ | 500,000 | $ | — | $ | — | ||||||
Our
interest expense in all years was associated with capital leases. We expect
interest expense to remain at insignificant levels in 2009. Our interest income
is earned as a result of the investment of excess cash balances. Our interest
income was higher in 2007 as a result of the private placement of our common
stock that was completed in April 2007 and resulted in higher average levels of
invested funds throughout the remainder of the year. We expect our interest
income in 2009 to be similar to 2008 levels, although that is at least partially
dependent on interest rate levels in 2009. The litigation settlement in 2008 was
income from our settlement with the defendants in the Keesmann
litigation.
Overview
The
largest single component of cost that we incur is payroll related expense.
Excluding the cost related to stock based compensation, we incurred payroll
related expense of approximately, $2.9 million in 2006, $3.3 million in 2007,
and $3.5 million in 2008. We expect payroll related expense in 2009 to be
approximately $3.1 million. The reduction from the 2008 level results from a
decrease in the number of employees, as well as other cost reduction
initiatives. We expect our burn rate for 2009, excluding any revenue, to average
slightly less than $600,000 per month. Based on this, we believe we can reach
breakeven at a revenue level of $7.0 million, but there is no assurance that
this will occur, or that we can achieve that level of revenue.
Page
25
SEASONALITY
AND INFLATION
Applied
Nanotech Holdings’ business is not seasonal in nature. Management believes that
Applied Nanotech Holdings’ operations have not been affected by
inflation.
ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
Statement defined fair value and expanded disclosures about fair value
measurements. These methods also apply to other accounting standards that use
fair value measurements. This statement was effective in 2008 and adoption did
not have a material effect on the company’s consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
measure most financial instruments at fair value if desired. The
items measured at fair value must be shown separately on the balance sheet. This
statement was effective in 2008 and did not have a material effect on
the consolidated financial statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business
Combinations, and Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements. Statement No. 141 (revised 2007) which requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. This standard also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies and research and development. Statement No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the noncontrolling interest with disclosure
of both amounts on the consolidated statement of income. The calculation of
earnings per share will continue to be based on income amounts attributable to
the parent. The effective date for both Statements is the 2009 calendar year.
The company does not believe that adoption of the statements will have a
material effect on the consolidated financial statements.
In
May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. The statement becomes effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411. The Company does not expect implementation to have a material
impact on its consolidated 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.
Page
26
Item
8. Financial Statements and
Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
APPLIED NANOTECH HOLDINGS, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
|
Independent
Auditor’s Report
|
28
|
|
Consolidated
Balance Sheets - December 31, 2008 and 2007
|
29
|
|
Consolidated
Statement of Operations - Years Ended December 31, 2008, 2007, and
2006
|
30
|
|
Consolidated
Statements of Shareholders’ Equity - Years Ended December 31, 2008, 2007,
and 2006
|
31
|
|
Consolidated
Statements of Cash Flows - Years Ended December 31, 2008, 2007, and
2006
|
32
|
|
Notes
to Consolidated Financial Statements
|
33
|
Page
27
INDEPENDENT
AUDITOR’S REPORT
To the
Board of Directors and Shareholders
Applied
Nanotech Holdings, Inc.
Austin,
Texas
We have
audited the accompanying consolidated balance sheets of Applied Nanotech
Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of December 31,
2008 and 2007 and the related consolidated statements of operations,
shareholders’ equity and cash flows for each of the years in the three year
period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated 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 Applied Nanotech Holdings,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 20, 2009 expressed an unqualified opinion on the effectiveness of
internal control over financial reporting.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations and negative cash flow from operations. This raises
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plan in regard to these matters is also described in Note 1 to the
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Padgett,
Stratemann & Co, L.L.P.
Austin,
Texas
February
20, 2009
Page
28
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
ASSETS
|
||||||||
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 710,111 | $ | 3,020,096 | ||||
|
Accounts
receivable, trade – net of allowance for doubtful accounts
|
661,704 | 253,963 | ||||||
|
Prepaid
expenses and other current assets
|
121,920 | 77,038 | ||||||
|
Total current assets
|
1,493,735 | 3,351,097 | ||||||
|
Property
and equipment, net
|
278,853 | 278,456 | ||||||
|
Other
assets
|
19,901 | 115,305 | ||||||
|
Total
assets
|
$ | 1,792,489 | $ | 3,744,858 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 438,878 | $ | 447,106 | ||||
|
Obligations
under capital lease
|
35,012 | 29,416 | ||||||
|
Accrued
liabilities
|
207,809 | 103,003 | ||||||
|
Deferred
revenue
|
224,595 | 306,427 | ||||||
|
Total
current liabilities
|
906,294 | 885,952 | ||||||
|
Obligations
under capital lease, long-term
|
27,909 | 30,004 | ||||||
|
Total
liabilities
|
934,203 | 915,956 | ||||||
|
Commitments
and contingencies
|
— | — | ||||||
|
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,
107,395,216
and
107,173,549 shares issued and outstanding, respectively
|
107,395 | 107,174 | ||||||
|
Additional
paid-in capital
|
109,295,595 | 108,580,565 | ||||||
|
Accumulated
deficit
|
(108,544,704 | ) | (105,858,837 | ) | ||||
|
Total
shareholders’ equity
|
858,286 | 2,828,902 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,792,489 | $ | 3,744,858 | ||||
See notes
to consolidated financial statements.
Page
29
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
|
||||||||||||
|
Revenues
|
|
|
|
|||||||||
|
Contract
research
|
$ | 824,358 | $ | 990,598 | $ | 360,054 | ||||||
|
Government
contracts
|
2,295,887 | 2,328,010 | 583,236 | |||||||||
|
License
fees and royalties
|
577,000 | — | 83,928 | |||||||||
|
Other
|
260,587 | 671,195 | 89,452 | |||||||||
|
|
||||||||||||
|
Total
revenues
|
3,957,832 | 3,989,803 | 1,116,670 | |||||||||
|
Operating
costs
|
||||||||||||
|
Research
and development
|
4,614,644 | 4,526,166 | 3,590,148 | |||||||||
|
Selling,
general and administrative expenses
|
3,897,939 | 3,858,720 | 5,229,014 | |||||||||
|
Total
operating costs
|
8,512,583 | 8,384,886 | 8,819,162 | |||||||||
|
Gain
on sale of assets and other intellectual property
|
1,329,571 | — | 1,100,000 | |||||||||
|
|
||||||||||||
|
Loss
from operations
|
(3,225,180 | ) | (4,395,083 | ) | (6,602,492 | ) | ||||||
|
|
||||||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
46,493 | 139,118 | 9,204 | |||||||||
|
Interest
expense
|
(7,180 | ) | (926 | ) | (604 | ) | ||||||
|
Litigation
settlement
|
500,000 | — | — | |||||||||
|
|
||||||||||||
|
Total
other Income
|
539,313 | 138,192 | 8,600 | |||||||||
|
Loss
before taxes
|
(2,685,867 | ) | (4,256,891 | ) | (6,593,892 | ) | ||||||
|
|
||||||||||||
|
Provision
for taxes
|
— | — | — | |||||||||
|
Net
loss applicable to common shareholders
|
$ | (2,685,867 | ) | $ | (4,256,891 | ) | $ | (6,593,892 | ) | |||
|
Earnings
(loss) per share
|
||||||||||||
|
Basic
and diluted
|
$ | (0.03 | ) | $ | (0.04 | ) | $ | (0.07 | ) | |||
|
Weighted
average common shares outstanding
|
||||||||||||
|
Basic
and diluted
|
107,292,686 | 106,321,400 | 100,895,795 | |||||||||
See notes
to consolidated financial statements.
Page
30
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
Preferred
|
Common
|
Additional
|
Accumulated
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid-In
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
|
Balance
December 31, 2005
|
- | $ | - | 99,746,440 | $ | 99,746 | $ | 95,767,647 | $ | (95,008,054 | ) | $ | 859,339 | |||||||||||||||
|
Issuance
of common stock options
as compensation
|
- | - | - | - | 695,978 | - | 695,978 | |||||||||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
- | - | 54,383 | 55 | 26,589 | - | 26,644 | |||||||||||||||||||||
|
Issuance
of common stock for cash
|
- | - | 4,039,393 | 4,040 | 5,000,153 | - | 5,004,193 | |||||||||||||||||||||
|
Issuance
of common stock for accounts
payable
|
- | - | 217,391 | 217 | 249,783 | - | 250,000 | |||||||||||||||||||||
|
Issuance
of Common Stock for Patents
|
- | - | 200,000 | 200 | 399,800 | - | 400,000 | |||||||||||||||||||||
|
Net
(loss)
|
- | - | - | - | - | (6,593,892 | ) | (6,593,892 | ) | |||||||||||||||||||
|
Balance
December 31, 2006
|
- | - | 104,257,607 | $ | 104,258 | $ | 102,139,950 | $ | (101,601,946 | ) | 642,262 | |||||||||||||||||
|
Issuance
of common stock options
as compensation
|
- | - | - | - | 128,957 | - | 128,957 | |||||||||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
- | - | 307,244 | 307 | 304,116 | - | 304,423 | |||||||||||||||||||||
|
Issuance
of common stock for cash
|
- | - | 2,608,698 | 2,609 | 5,997,391 | - | 6,000,000 | |||||||||||||||||||||
|
Issuance
of restricted common stock
as compensation
|
- | - | - | - | 10,151 | - | 10,151 | |||||||||||||||||||||
|
Net
(loss)
|
- | - | - | - | - | (4,256,891 | ) | (4,256,891 | ) | |||||||||||||||||||
|
Balance
December 31, 2007
|
- | - | 107,173,549 | $ | 107,174 | $ | 108,580,565 | $ | (105,858,837 | ) | 2,828,902 | |||||||||||||||||
|
Issuance
of common stock as
a result of the exercise of employee
stock options
|
- | - | 170,000 | 170 | 61,080 | - | 61,250 | |||||||||||||||||||||
|
Issuance
of common stock options
as compensation
|
- | - | - | - | 605,393 | - | 605,393 | |||||||||||||||||||||
|
Issuance
of restricted common stock
as compensation
|
- | - | 51,667 | 51 | 48,557 | - | 48,608 | |||||||||||||||||||||
|
Net
(loss)
|
- | - | - | - | - | (2,685,867 | ) | (2,685,867 | ) | |||||||||||||||||||
|
Balance
December 31, 2008
|
- | $ | - | 107,395,216 | $ | 107,395 | $ | 109,295,595 | $ | (108,544,704 | ) | $ | 858,286 | |||||||||||||||
See notes
to consolidated financial statements.
Page
31
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
|
|
||||||||||
|
Net
loss
|
$ | (2,685,867 | ) | $ | (4,256,891 | ) | $ | (6,593,892 | ) | |||
|
Adjustments
to reconcile loss to net
cash
used in operating activities:
|
||||||||||||
|
Depreciation
and amortization expense
|
70,536 | 50,498 | 49,172 | |||||||||
|
Stock
and options issued for services
|
654,001 | 139,108 | 695,978 | |||||||||
|
Stock
issued for patent
|
— | — | 400,000 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable, trade
|
(407,741 | ) | 110,755 | (270,615 | ) | |||||||
|
Prepaid
expenses and other assets
|
50,522 | (103,502 | ) | 6,005 | ||||||||
|
Accounts
payable
|
(8,228 | ) | (1,115,382 | ) | 1,581,357 | |||||||
|
Accrued
expenses
|
104,806 | 15,766 | (5,926 | ) | ||||||||
|
Customer
deposits and other current liabilities
|
(81,832 | ) | (95,028 | ) | 401,455 | |||||||
|
Total
adjustments
|
382,064 | (997,785 | ) | 2,857,426 | ||||||||
|
Net
cash used in operating activities
|
(2,303,803 | ) | (5,254,676 | ) | (3,736,466 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(35,943 | ) | (112,682 | ) | (101,932 | ) | ||||||
|
|
||||||||||||
|
Net
cash used in investing activities
|
(35,943 | ) | (112,682 | ) | (101,932 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of common stock
|
61,250 | 6,304,423 | 5,030,837 | |||||||||
|
Repayment
of capital lease obligations
|
(31,489 | ) | (2,307 | ) | (4,348 | ) | ||||||
|
Net
cash provided by financing activities
|
29,761 | 6,302,116 | 5,026,489 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(2,309,985 | ) | 934,758 | 1,188,091 | ||||||||
|
Cash
and cash equivalents, beginning of year
|
3,020,096 | 2,085,338 | 897,247 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 710,111 | $ | 3,020,096 | $ | 2,085,338 | ||||||
See notes
to consolidated financial statements.
Page
32
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization,
Operations, and Liquidity:
|
Applied
Nanotech Holdings, 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 those areas. We intend to obtain
development revenues for applying our technology to specific applications for
our development partners and to obtain royalty revenues from licensing this
technology to those partners and others. We have also developed patented
electronic sign technology and sold products using that technology, but have now
sold that technology. We may receive additional income from the sale of that
technology based on license revenues received by the purchaser of the
technology.
Until we
are able to operate profitably as a result of revenues from either reimbursed
research or license agreements, we may be required to seek additional funds
through the equity markets, or raise funds through debt instruments to allow us
to maintain operations. There is no assurance that license agreements will be
signed, that commercialization of our 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 we achieve profitability.
The
principal source of our liquidity since the time of our 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. We may receive additional funds from the exercise of
employee stock options. We may also seek to increase our liquidity through bank
borrowings or other financings, although this is not likely. There can be no
assurance that any of these financing alternatives can be arranged on
commercially acceptable terms. We believe that our success in reaching
profitability will depend on the viability of our technology and products using
that technology, their acceptance in the marketplace, and our ability to obtain
additional debt or equity financings in the future.
A portion
of our research and development has been funded by others. To the extent that
other funding is not available, research and development may be internally
funded by us, however our primary objective is to focus our resources on
projects for which we receive funding.
The
Company has a history of net losses and negative cash flow from operations,
which may raise doubt about its ability to continue as a going concern. The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern, and do not include any adjustments that may be
required if it were unable to continue as a going concern. Management believes
that actions currently being taken will allow it to achieve profitability and
allow the Company to continue as a going concern.
|
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, nanoelectronics, and nanomaterials which include
composites. EBT was primarily involved in the commercialization of electronic
digitized sign technology, but has now sold its 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, assumptions used in calculating share based compensation
under FAS 123R, depreciation, and litigation reserves.
Page
33
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
2.
|
Summary of Significant
Accounting Policies
(continued):
|
Revenue
recognition
Our
revenues include reimbursements under agreements to perform research and
development for government agencies and others. We do not perform research
contracts that are contingent upon successful results. Larger projects are
sometimes 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
any technology developed during the course of the program for its own purposes,
but not any preexisting technology that we use in connection with the program.
We retain all other rights to use, develop, and commercialize the technology and
recognize revenue when it is earned pursuant to the terms of the contract.
Agreements with nongovernmental entities generally allow the entity the first
opportunity to license the technology from us upon completion of the
project.
The
Company’s revenues also include royalties from licensing its technology, revenue
from the sale of products, and other miscellaneous revenues. Many of the
company’s 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 range from $500,000 to $1,000,000 in total 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. As a general
rule, we recognize revenue on these 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 proportional performance on the contract, such
as cost incurred compared with total expected cost. The recognition of revenue
may not correspond with the billings allowable under the contract. To the extent
that billings exceed revenue earned, a portion of the revenue is deferred until
such time as it is earned. 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 billed at periodic intervals as specified in the
contract.
Other
Research Contracts - Revenue from nongovernmental 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
proportional performance on the contract, such as cost incurred 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, is due, which normally corresponds somewhat with the time that the
payment is received. The Company recognizes license fees due at the time of the
signing of a royalty agreement when the licensee has an enforceable commitment
to pay, unless the terms of the agreement make it clear that the license fee is
a prepayment of future royalties. This normally corresponds with or
is reasonably close to the time of receipt of the payment.
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.
Page
34
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
2.
|
Summary of Significant
Accounting Policies
(continued):
|
Other
Revenue - Other miscellaneous revenue is recognized as deemed appropriate given
the facts of the situation and is generally not material.
Cash and
cash equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of 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 credit losses. The Company
considered no reserves to be necessary for any of the years
presented.
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 and FASB
interpretation number 48, accounting for uncertainty income taxes. 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.
The company has determined that no reserve for uncertain tax positions is
required; however tax years 2005 through 2008 remain open for examination by the
U.S. Internal Revenue Service.
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.
Page
35
APPLIED
NANOTECH HOLDINGS, 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.
|
2008
|
2007
|
2006
|
||||
|
Options
|
7,889,897
|
6,897,180
|
7,713,912
|
|||
|
Warrants
|
1,304,353
|
1,304,353
|
60,000
|
|||
|
Weighted
average exercise price
|
$1.52
|
$1.70
|
$1.58
|
Share-based
payments
The
Company has four stock based compensation plans described in greater detail in
Note 8 to these financial statements. The Company uses the fair value method to
account for stock-based compensation. The fair value of each award is estimated
on the date of each grant. For restricted stock the fair market value is based
on the market value of the stock granted on the date of the grant. For options,
it is estimated using the Black Scholes option pricing model that uses the
assumptions noted in the following table. Estimated volatilities are based on
the historical volatility of the Company’s stock over the same period as the
expected term of the options. The expected term of options granted represents
the period of time that options granted are expected to be outstanding. The
Company uses historical data to estimate option exercise behavior and to
determine this term. The risk free rate used is based on the U.S. Treasury yield
curve in effect at the time of the grant using a time period equal to the
expected option term. The Company has never paid dividends and does not expect
to pay any dividends in the future.
|
2008
|
2007
|
2006
|
||||
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
|||
|
Risk
Free Interest Rate
|
1.1%-
3.3%
|
3.3%-
4.8%
|
4.6%-
5.2%
|
|||
|
Expected
option term (in years)
|
0.75
- 3.5
|
3.5
- 5.0
|
2.0
- 3.5
|
|||
|
Turnover/Forfeiture
Rate
|
0%
|
0%
|
0%
|
|||
|
Expected
volatility
|
75%
- 89%
|
75%
- 82%
|
70%
- 87%
|
|||
|
Weighted-average
volatility
|
82%
|
79%
|
78%
|
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. Applied Nanotech Holdings’ 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.
Page
36
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
2.
|
Summary of Significant
Accounting Policies
(continued):
|
Recently
issued accounting pronouncements
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
Statement defined fair value and expanded disclosures about fair value
measurements. These methods also apply to other accounting standards that use
fair value measurements. This statement was effective in 2008 and adoption did
not have a material effect on the company’s consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement permits entities to
measure most financial instruments at fair value if desired. The
items measured at fair value must be shown separately on the balance sheet. This
statement was effective in 2008 and did not have a material effect on
the consolidated financial statements.
In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business
Combinations, and Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements. Statement No. 141 (revised 2007) which requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. This standard also requires the fair value measurement of
certain other assets and liabilities related to the acquisition such as
contingencies and research and development. Statement No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements. Consolidated net income should include the
net income for both the parent and the noncontrolling interest with disclosure
of both amounts on the consolidated statement of income. The calculation of
earnings per share will continue to be based on income amounts attributable to
the parent. The effective date for both Statements is the 2009 calendar year.
The company does not believe that adoption of the statements will have a
material effect on the consolidated financial statements.
In
May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally
Accepted Accounting Principles”. This Statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. The statement becomes effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411. The Company does not expect implementation to have a material
impact on its consolidated financial statements.
|
3.
|
Operating Lease
Obligations:
|
The
Company leases various facilities and equipment under operating lease agreements
having terms expiring at various dates through 2014. Rental expense was
$221,787, $179,594, and $124,805 for the years ended December 31, 2008,
2007 and 2006, respectively.
Future
minimum lease payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2008, were as
follows:
|
2009
|
209,486 | |||
|
2010
|
183,102 | |||
|
2011
|
184,956 | |||
|
2012
|
191,804 | |||
|
2013
|
176,652 | |||
|
2014
|
29,442 | |||
|
Total
future minimum lease payments
|
$ | 975,442 |
Page
37
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
4.
|
Capital Lease
Obligations:
|
Capital
leases payable at December 31, 2008 and 2007 consisted of the
following:
|
|
2008
|
2007
|
||||||
|
Capital
lease equipment due in monthly installments of $816
through
July 2013. The equipment value and lease obligation
was
determined using a discount rate of 14.08%. The equipment
is
included in plant and equipment at December 31, 2008 at a
cost
of $42,040 and with accumulated amortization of $3,503.
|
$ | 44,859 | $ | — | ||||
|
Capital
lease equipment due in monthly installments of
$2,883
through November 2009. The equipment value and lease
obligation
was determined using a discount rate of 11.20%. The
equipment
is included in office equipment at December 31, 2008
at
a cost of $92,586, with accumulated amortization of
$10,030.
|
$ | 31,709 | $ | 66,301 | ||||
|
Total
Capital Leases
|
76,568 | 66,301 | ||||||
|
Less
interest
|
13,647 | 6,881 | ||||||
|
Less
current portion
|
35,012 | 29,416 | ||||||
|
Capital
Lease Obligations, long-term
|
$ | 27,909 | $ | 30,004 | ||||
|
5.
|
Details of Certain
Balance Sheet Accounts:
|
Additional
information regarding certain balance sheet accounts at December 31, 2008 and
2007 is as follows:
|
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Property
and equipment:
|
||||||||
|
Plant
and equipment
|
$ | 1,038,861 | $ | 974,324 | ||||
|
Furniture
and office equipment
|
141,307 | 134,911 | ||||||
|
Leasehold
Improvements
|
19,019 | 19,019 | ||||||
|
Total
carrying cost
|
1,199,187 | 1,128,254 | ||||||
|
Less
accumulated depreciation
|
(920,334 | ) | (849,798 | ) | ||||
|
|
$ | 278,853 | $ | 278,456 | ||||
|
Accrued
liabilities:
|
||||||||
|
Payroll
and related accruals
|
$ | 183,809 | $ | 79,003 | ||||
|
Other
|
24,000 | 24,000 | ||||||
|
Total
|
$ | 207,809 | $ | 103,003 | ||||
Depreciation
and amortization for the years ended December 31, 2008, 2007, and 2006 was
$70,536, $50,498, and $49,172, respectively. Equipment held under capital leases
and accumulated amortization on that equipment is included in these
totals.
Page
38
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
6.
|
Income
Taxes:
|
The
components of deferred tax assets (liabilities) at December 31, 2008 and 2007,
were as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carry forwards
|
$ | 32,309,000 | $ | 33,920,000 | ||||
|
Stock
Based Compensation
|
1,882,000 | 1,718,000 | ||||||
|
Research
and experimentation credits
|
270,000 | 460,000 | ||||||
|
Partnership
Asset
|
48,000 | 57,000 | ||||||
|
Capitalized
intangible assets
|
74,000 | 112,000 | ||||||
|
Depreciation
assets
|
4,000 | 3,000 | ||||||
|
Accrued
expenses not deductible until paid
|
58,000 | 27,000 | ||||||
|
Total
deferred tax assets
|
34,645,000 | 36,297,000 | ||||||
|
Deferred
tax liabilities:
|
— | — | ||||||
|
Net
deferred tax assets before valuation allowance
|
34,645,000 | 36,297,000 | ||||||
|
Valuation
allowance
|
(34,645,000 | ) | (36,297,000 | ) | ||||
|
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, 2008, 2007, and 2006.
|
|
December
31,
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Expected
income tax expense (benefit)
|
$ | (914,000 | ) | $ | (1,447,000 | ) | $ | (2,242,000 | ) | |||
|
Non-deductible
expenses
|
3,000 | 10,000 | 10,000 | |||||||||
|
Expiration
of Tax Credit Carryforwards
|
190,000 | 8,000 | — | |||||||||
|
Expiration
of NOL Carryforwards
|
2,373,000 | 486,000 | — | |||||||||
|
Other
|
— | — | (4,000 | ) | ||||||||
|
Increase
(Decrease) in Valuation Allowance
|
(1,652,000 | ) | 943,000 | 2,236,000 | ||||||||
|
Total
Tax
|
$ | — | $ | — | $ | — | ||||||
As of
December 31, 2008, the Company had net operating loss carry forwards of
approximately $95 million that expire from 2009 through 2028, that are available
to offset future taxable income. The majority of these carry forwards expire
after 2010. Additionally, the Company has tax credit carry forwards related to
research and development expenditures of approximately $270,000 that expire
through 2011.
The
Company’s IPO, completed in 1993, effected an ownership change under Internal
Revenue Code Section 382 which limited the Company’s ability to utilize carry
forwards from prior to the IPO. All net operating losses from 1993 and prior
have now been utilized or have expired. An additional ownership
change resulting from stock issuances subsequent to the IPO will likely limit
the Company’s ability to utilize any net operating loss carry forwards or
credits generated before this change in ownership. These limitations tend to
relate to the timing of usage, rather than the loss of the ability to use these
net operating losses.
Page
39
APPLIED
NANOTECH HOLDINGS, 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. There were no shares of preferred stock outstanding for
any of the years presented.
Common
stock
No shares
were issued in private placements in 2008; however, during 2006, and 2007, 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 June 19, 2007. The shares issued in
2006 include both shares issued for cash and shares issued in payment of
accounts payable..
|
Shares
|
Proceeds
|
|||||||
|
2007
|
2,608,698 | $ | 6,000,000 | |||||
|
2006
|
4,256,784 | $ | 5,254,193 | |||||
In 2006
in an exempt offering under Regulation D of the Securities Act of 1933 , the
Company also issued 200,000 shares in connection with the acquisition and resale
of a patent. See Notes 18 and 19 for additional information.
At
December 31, 2008, common stock was reserved for the following
reasons:
|
Exercise
of stock warrants
|
1,304,353 | |||
|
Exercise
and future grants of stock options
|
10,161,633 | |||
|
Total
shares reserved
|
11,465,986 |
|
8.
|
Stock
Options:
|
The
Company sponsors four stock-based incentive compensation plans (the “Plans”),
which are described below. The compensation cost that has been charged against
income for these plans for the years ended December 31, 2008, 2007, and 2006 was
$654,001, $139,108, and $695,978, respectively. No income tax benefit was
recognized in the income statement and no compensation was capitalized in any of
the years presented.
The plans
allow the Company to grant incentive stock options, non-qualified stock options,
or restricted stock. 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. Historically, the Company has not granted incentive stock options.
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. The plans provide for accelerated vesting of unvested options if
there is a change in control, as defined in the plan.
Page
40
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock Options
(continued):
In 1992,
the Company adopted the 1992 Employees Stock Option Plan (the “Employees Plan”)
and the 1992 Outside Directors’ Stock Option Plan (the “Directors
Plan”), for purposes of granting incentive or non-qualified stock
options. These plans were amended several times by the Company’s Board of
Directors to ultimately increase the number of shares authorized under the plans
to 6,500,000 for the Employees plan and 1,000,000 for the Directors Plan. Both
of these plans expired in 2002; however, options granted under these plans prior
to expiration remain outstanding until they are exercised, forfeited, or the
exercise period expires. At December 31, 2008, no shares remained available for
grant under either of these plans.
In May
1998, the Board of Directors of the Company established the 1998 Officers and
Directors Stock Option Plan (the “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 were
granted at the discretion of the Board of Directors. No additional shares are
currently available under this plan and no shares will become available under
this plan in the future.
In
September 2002, the Board of Directors of the Company established the 2002
Equity Compensation Plan to replace the Employees Plan and the
Directors Plan, both of which expired in 2002, and reserved a total of 5,000,000
shares for issuance under the Plan. The plan was amended effective December 31,
2004 to increase the authorized shares to 8,000,000, and again effective
December 12, 2007 to increase the authorized shares to 10,000,000. A total of
2,271,736 shares remain available for grant under this at December 31,
2008.
The
company issues new shares for all options exercised, It does not expect to
repurchase any shares to facilitate future option exercises. The following table
summarizes information about stock options outstanding, all of which are
expected to ultimately vest, and options currently exercisable under all four
stock option plans at December 31, 2008:
|
Options
Outstanding
|
Options
Exercisable
|
||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
12/31/08
|
Wgtd. Avg.
Remaining
Contractual
Life
|
Wgtd.
Avg.
Exercise
Price
|
Number
Exercisable
at
12/31/08
|
Wgtd. Avg.
Remaining
Contractual
Life
|
Wgtd.
Avg.
Exercise
Price
|
|
|
|
|||||||
|
$0.00
- $0.50
|
1,513,127
|
6.9
Years
|
$0.33
|
1,009,995
|
5.4
Years
|
$0.36
|
|
|
$0.51
- $1.00
|
1,256,250
|
3.7
Years
|
$0.83
|
1,101,250
|
3.0
Years
|
$0.84
|
|
|
$1.01
- $2.00
|
2,685,220
|
5.5
Years
|
$1.27
|
2,020,220
|
4.4
Years
|
$1.29
|
|
|
$2.01
- $3.00
|
2,435,300
|
4.2
Years
|
$2.38
|
2,435,300
|
4.2
Years
|
$2.38
|
|
|
|
|
||||||
|
Total
|
7,889,897
|
5.1
Years
|
$1.36
|
6,556,765
|
5.0
Years
|
$1.47
|
|
|
Aggregate
intrinsic value
|
$0
|
$0
|
|||||
Page
41
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock Options
(continued):
The
following is a summary of stock option activity under all four
plans:
|
Number
of
Shares
|
Wgtd.
Ave.
Exercise
Price
|
||
|
Options
outstanding at December 31, 2005
|
6,703,151
|
$1.84
|
|
|
Granted
|
2,972,970
|
$1.54
|
|
|
Exercised
|
(54,383)
|
$0.49
|
|
|
Cancelled
|
(1,907,826)
|
$2.43
|
|
|
Options
outstanding at December 31, 2006
|
7,713,912
|
$1.58
|
|
|
Granted
|
1,831,196
|
$1.20
|
|
|
Exercised
|
(307,244)
|
$0.99
|
|
|
Cancelled
|
(2,340,684)
|
$1.52
|
|
|
Options
outstanding at December 31, 2007
|
6,897,180
|
$1.52
|
|
|
Granted
|
1,623,129
|
$0.57
|
|
|
Exercised
|
(170,000)
|
$0.36
|
|
|
Cancelled
|
(460,412)
|
$1.25
|
|
|
Options
outstanding at December 31, 2008
|
7,889,897
|
$1.36
|
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2008, 2007, and 2006 was $0.28, $0.63, and $0.90, respectively. The
total intrinsic value of options exercised during the years ended December 31,
2008, 2007, and 2006 was $131,245, $387,905, and $57,050 respectively. As of
December 31, 2008, there was a total of $597,209 of unrecognized compensation
cost related to 1,316,882 non-vested options granted under the plan. Of these
unvested options, 464,382 vest based on the passage of time and the remaining
options vest upon the attainment of goals. This cost is expected to be
recognized over a weighted average period of approximately 1.3 years. The fair
value of shares vested during the years ended December 31, 2008, 2007, and 2006
was $605,393, $299,519, and $1,363,348, respectively.
The 2002
Equity Compensation Plan also allows the issuance of restricted shares of common
stock. We issue shares of restricted stock in connection with our compensation
of outside Directors. We granted 45,000 shares of restricted stock in 2008 and
31,667 shares in 2007. No restricted shares were granted in 2006. These shares
vest quarterly over a one year time period starting with the date of the grant.
A total of 51,667 of these shares have vested and are issued and outstanding as
of December 31, 2008. The shares granted in 2008 had a fair value of $45,000 and
were granted at prices ranging from $0.91 to $1.15. The shares granted in 2007
had a fair value of $32,683 and were granted at prices ranging from $0.94 to
$1.19. We recognized expense in the financial statements of $48,609 and $10,150
in the years ended December 31, 2008 and 2007, respectively. The weighted
average fair value of shares granted during 2008, vested during 2008, and
unvested at December 31, 2008 was $1.00, $1.02, and $1.01, respectively. The
weighted average fair value of shares granted during 2007, vested during 2007,
and unvested at December 31, 2007 was $1.03, $0.94, and $1.05,
respectively.
Page
42
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Stock Options
(continued):
During
2008, we repriced the exercise price of 200,000 options held by the Company’s
CEO from $1.19 per share to $0.75 per share in connection with a simultaneous
reduction in his compensation. The expense associated with this repricing is
$10,510 and is being recognized over the vesting term of the options. A total of
$2,366 was recognized in 2008 and the balance will be recognized in 2009. The
Company also adjusted the price of certain non-officer options issued in 2008.
The Company has a performance based option program covering all non-officer
employees. The options are granted early in the year and vest as of December 31,
if certain goals are achieved. A total of 229,997 were granted under this
program. The original exercise price of these options was to be $1.19 per share,
however the exercise price was adjusted to be equal to the market price of the
stock on the date of vesting, December 31, 2008. The effect of this adjustment
in exercise price, which effectively amounts to a repricing, was an expense of
$18,114, which was fully recorded in 2008. During the years ended December 31,
2007 and 2006, we extended the contractual life of 20,000 options granted to a
consultant by two years and one year, respectively, and as a result, we
recognized additional compensation expense of $5,990 and $1,750, respectively.
During 2006, we also recognized $9,000 of compensation expense when we repriced
100,000 options granted to a consultant. These options were originally priced
above market when issued in 2005. We account for options issued to consultants
using the same assumptions as for employees.
|
9.
|
Stock
Warrants:
|
Common
stock warrants
In 1996
and 1997, we issued 110,000 warrants in connection with fundraising activities.
These warrants enabled the holder to purchase shares of the our common stock at
prices of $1.00 to $2.00 per share through 2007. A total of 15,000 of these
warrants were exercised in 1999. The remaining warrants expired
unexercised.
In 2007,
we issued 1,304,353 warrants in connection with a private placement of the
Company’s stock. These warrants enable the holder to purchase shares of the
Company’s common stock at a price of $2.50 per share through the
earlier of April 2011, or the date that the shares acquired in the private
placement are sold by the shareholder.
The
following is a summary of outstanding warrants:
|
|
Number
of
Shares
|
Exercise
Price
|
||||||
|
|
||||||||
|
Warrants
outstanding at January 1, 2006
|
95,000 |
$1.00-2.00
|
||||||
|
Expired
|
(35,000 | ) |
$2.00
|
|||||
|
Warrants
outstanding at December 31, 2006
|
60,000 |
$1.00-2.00
|
||||||
|
Issued
|
1,304,353 |
$2.50
|
||||||
|
Expired
|
(60,000 | ) |
$2.00
|
|||||
|
Warrants
outstanding at December 31, 2007
|
1,304,353 |
$2.50
|
||||||
|
Expired
|
— |
—
|
||||||
|
Warrants
outstanding at December 31, 2008
|
1,304,353 |
$2.50
|
||||||
Page
43
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. Supplemental Cash Flow
Information:
Cash paid
for interest was $7,180, $926, and $604 for 2008, 2007, and 2006, respectively.
The following non-cash transactions have been excluded from the accompanying
consolidated statement of cash flows:
|
2008
|
2007
|
2006
|
||||||||||
|
Non-cash
financing activities:
|
||||||||||||
|
Issuance
of common shares in payment of accounts payable
|
$ | — | $ | — | $ | 250,000 | ||||||
|
Capital
lease transaction
|
$ | 34,990 | $ | 61,727 | $ | — | ||||||
|
11.
|
Commitments and
Contingencies:
|
Till
Keesmann Agreement
In May
2000, we licensed the rights to 6 carbon nanotube patents from Till Keesmann in
exchange for a payment of $250,000 payable in shares of our common stock. Under
the terms of the agreement, we are obligated to pay license fees equal to 50% of
any royalties received by us specifically 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 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. We are
allowed to offset these minimum payments against future royalty payments;
however, once these minimum payments and the expenses have been offset, we may
be liable for additional royalty payments.
The
Keesmann agreement was amended in 2008. As part of that amendment, the amount of
future offsets available for expenses incurred prior to June 2008 was fixed at
$300,000. In addition the amendment established licensing parameters under which
we can sublicense the patents without any additional approval by Mr. Keesmann.
The amendment also gave Mr. Keesmann the option of electing to receive an
additional advance of $100,000 against future royalties. In September 2008, Mr.
Keesmann elected to receive that advance, which is now available for us to
offset against future royalties. Finally, the amendment contains provision which
would allow Mr. Keesmann to license the patents directly and remit 50% of the
royalties to us beginning in June 2010, if certain minimum royalties are not
achieved by that date.
In 2008,
we also sold a portion of our potential future royalty stream related to the
Keesmann patents to IP Verwertungs GmbH (“IPV”) for $1.4 million. A total of
$1.226 million has been received and the remaining $174,000 will be offset
against future royalties due IPV. IPV will receive 25% of our portion of the
Keesmann royalties until we have received and retained $1.8 million. After that
level has been reached, IPV will receive 50% of our portion of the Keesmann
royalties, or approximately 25% of the total royalties on the Keesmann
patents.
Research
and development commitments
As of
December 31, 2008, the Company had several research contracts pending and in
process. The total amount of those contracts is $7,949,203. Of that total,
$4,677,399 has been recognized as revenue and $3,271,805 will be recognized in
the future. The revenue to be recognized from these research contracts in
2009 is expected to exceed the cost of this research.
Agreements
with MCC
We
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 us and
we agreed to pay a royalty fee of 2% of future commercial revenues related to
the patents received. We have 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.
Page
44
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
11.
|
Commitments and
Contingencies (continued):
|
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.
Legal
proceedings
Canon
litigation
During 2008, our suit against Canon,
Inc. was concluded. A final judgment was entered in May 2007 in the U.S.
District Court for the Western District of Texas, Austin Division. This judgment
reaffirmed the Court’s earlier ruling that Canon had materially breached the
terms of the patent license agreement between the two companies. The judgment
upheld our termination of Canon’s license, while awarding no additional damages.
This decision was appealed to the Fifth Circuit Court of Appeals. The Appeals
Court, while upholding Canon’s material breach of contract, ruled that
termination of the license was too severe a remedy for the breach and reinstated
Canon’s license. No additional appeals were filed and the case is now
concluded.
Keesmann
litigation
During 2008, we also concluded our
litigation against Till Keesmann, a German citizen, and other defendants that
were investors in his patents that were subject to our existing license. In
February 2008, we settled with all defendants except Mr. Keesmann in exchange
for a payment from the defendants to us in the amount of $500,000. In June 2008,
we settled with Mr. Keesmann and both parties released all claims against each
other. No payment was made by either party in connection with the final
settlement, however the terms of the existing license were amended as described
earlier in this note under the heading “Till Keesmann agreement”.
Other
litigation
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. There has been no activity on
this case in the last year. 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.
|
12.
|
Retirement
Plan:
|
The
Company sponsors a defined contribution 401(k) profit sharing plan. No company
contributions were made in any of the years presented.
Page
45
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
13.
|
Research and
Development Contracts:
|
The
Company makes significant expenditures for research and development. We seek
funding for our research and development costs to reduce the cost of such
expenditures to us. We only seek funding for projects that fit within our
strategic vision. A substantial portion of our funded research has been from
government contracts. Under government contracts, the government has the right
to utilize the results for its purposes and the we have the right to utilize the
technology for commercial purposes. Generally, when we contract with other
entities, the entity is also conducting its own internal research related to
application of our technology to its products and such expenditures by the
entity frequently exceeds the amount of funding provided to the Company. Usually
the entity has the first opportunity to license the technology at the conclusion
of the project, if they desire. The costs of a particular research program may
exceed the funding received, however since the goal of the research is to
ultimately lead to a license, our willingness to share part of the development
cost is evaluated on a case by case basis.
The
following schedule summarizes certain information with respect to research and
development contracts:
|
2008
|
2007
|
2006
|
||||||||||
|
Contract
research revenues
|
$ | 3,120,245 | $ | 3,318,608 | $ | 943,290 | ||||||
|
Costs
incurred charged to operations included in research and
development
|
$ | 2,200,603 | $ | 2,222,473 | $ | 879,592 | ||||||
|
Amount
of additional funding commitments at December 31
|
$ | 3,271,805 | $ | 3,890,842 | $ | 3,026,133 | ||||||
|
14.
|
Quarterly Financial
Information (Unaudited):
|
|
First
|
Second
|
Third
|
Fourth
|
Total
|
||||||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Revenues
|
$ | 870,014 | $ | 853,234 | $ | 891,853 | $ | 1,342,731 | $ | 3,957,832 | ||||||||||
|
Operating
income (loss)
|
(1,267,391 | ) | (1,357,688 | ) | (79,386 | ) | (520,715 | ) | (3,225,180 | ) | ||||||||||
|
Net
(loss)
|
(747,579 | ) | (1,345,041 | ) | (74,577 | ) | (518,670 | ) | (2,685,867 | ) | ||||||||||
|
Earnings
(loss) per share
|
||||||||||||||||||||
|
Basic
and Diluted
|
(0.01 | ) | (0.01 | ) | (0.00 | ) | (0.01 | ) | (0.03 | ) | ||||||||||
|
2007
|
||||||||||||||||||||
|
Revenues
|
$ | 956,867 | $ | 916,038 | $ | 1,049,749 | $ | 1,067,149 | $ | 3,989,803 | ||||||||||
|
Operating
income (loss)
|
(1,357,317 | ) | (1,281,562 | ) | (790,693 | ) | (965,511 | ) | (4,395,083 | ) | ||||||||||
|
Net
(loss)
|
(1,345,887 | ) | (1,229,787 | ) | (759,910 | ) | (921,307 | ) | (4,256,891 | ) | ||||||||||
|
Earnings
(loss) per share
|
||||||||||||||||||||
|
Basic
and Diluted
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.04 | ) | ||||||||||
|
2006
|
||||||||||||||||||||
|
Revenues
|
$ | 162,184 | $ | 115,009 | $ | 213,841 | $ | 625,636 | $ | 1,116,670 | ||||||||||
|
Operating
income (loss)
|
(1,797,193 | ) | (1,387,807 | ) | (1,933,196 | ) | (1,484,296 | ) | (6,602,492 | ) | ||||||||||
|
Net
(loss)
|
(1,794,166 | ) | (1,385,583 | ) | (1,931,038 | ) | (1,483,105 | ) | (6,593,892 | ) | ||||||||||
|
Earnings
(loss) per share
|
||||||||||||||||||||
|
Basic
and Diluted
|
(0.02 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | (0.07 | ) | ||||||||||
Annual
Earnings (loss) per share may not equal the sum of the four quarterly amounts
due to rounding.
Page
46
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
15.
|
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 as of either December 31,
2007 or 2008, however $1,345,520 in excess of the FDIC limit was held at JP
Morgan Chase at December 31, 2006. At December 31, 2007 and 2008, the Company
held $2,414,958 and $103,603, respectively, in excess of the Securities Investor
Protection Corporation limits in an account at Charles Schwab & Co.
Inc.
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.
|
16.
|
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
particular customers at the present time. In addition to the U.S.
Government, the Company had three customers from which it has received in excess
of 10% of its consolidated revenues in one or more of the past three years. We
had revenues of $233,333, $416,787, and $31,060 from Mitsui & Co., Ltd. in
the years ended December 31, 2008, 2007, and 2006, respectively. We also had
revenues from Ishihara Chemical Company, Ltd. of $633,250, $685,963 and $111,600
in the years ended December 31, 2008, 2007, and 2006, respectively. Finally, we
recognized revenues of $663,108, $348,448 and $248,454 in the years ended
December 31, 2008, 2007 and 2006 respectively from Yonex Co. Ltd.
|
17.
|
Related Party
Transactions:
|
During
2006, as part of a transaction to sell intellectual property owned by our EBT
subsidiary, we entered into an agreement with a related party. One of the
patents that we sold was a patent that had been assigned to us by Advanced
Technology Incubator, Inc. (“ATI”), a company owned by Dr. Zvi Yaniv, our
Chief Operating Officer. In order to acquire the remaining interest in the
patent and settle all potential future obligations to ATI, we issued 200,000
shares of our common stock, valued at $400,000 to ATI. We also paid $25,000 to
ATI for additional services related to this transaction during
2006.
|
18.
|
Gain on Sale of
Intellectual Property and Other
Assets:
|
In
January 2008, we had a gain of $100,000 from the sale of certain excess patents,
which we were no longer using and which did not relate to any of our current
active technology platforms. We had an additional gain of $1,225,999 from the
sale of a portion of our interest in any future royalties received from
sublicensing the Keesmann patents as described in more detail in Note
11.
In June
2006, our Electronic Billboard Technology, Inc. subsidiary sold all of its
intellectual property in two simultaneous transactions. We received a total of
$1.5 million in cash, the right to future royalties, and an ownership interest
in a newly formed entity. One of the patents that we sold was a patent that had
been assigned to us by Advanced Technology, Incubator, Inc. (“ATI”), a company
owned by Dr. Zvi Yaniv, our Chief Operating Officer. In order to acquire
the remaining interest in the patent and settle all potential future obligations
to ATI, we issued 200,000 shares of our common stock, valued at $400,000 to ATI.
The gain of $1.1 million recorded in the financial statements resulted from the
cash payment received of $1.5 million, less the $400,000 cost associated with
the acquisition of the patent rights.
Page
47
APPLIED
NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
|
19.
|
Segment
Information:
|
The
Company’s operations are classified into three principal reportable
segments.
|
ANI
|
EBT
|
All
Other
|
Total
|
|||||||||||||
|
2008
|
||||||||||||||||
|
Revenue
|
$ | 3,957,832 | $ | — | $ | — | $ | 3,957,832 | ||||||||
|
Interest
Expense
|
7,180 | — | — | 7,180 | ||||||||||||
|
Depreciation
and Amortization
|
70,141 | — | 395 | 70,536 | ||||||||||||
|
Research
and Development
|
4,614,644 | — | — | 4,614,644 | ||||||||||||
|
Net
Loss
|
(1,520,726 | ) | (1,296 | ) | (1,163,845 | ) | (2,685,867 | ) | ||||||||
|
Assets
|
1,105,627 | — | 686,862 | 1,792,489 | ||||||||||||
|
Capital
Expenditures
|
70,933 | — | — | 70,933 | ||||||||||||
|
2007
|
||||||||||||||||
|
Revenue
|
$ | 3,989,803 | $ | — | $ | — | $ | 3,989,803 | ||||||||
|
Interest
Expense
|
926 | — | — | 926 | ||||||||||||
|
Depreciation
and Amortization
|
49,575 | — | 923 | 50,498 | ||||||||||||
|
Research
and Development
|
4,526,166 | — | — | 4,526,166 | ||||||||||||
|
Net
Loss
|
(3,212,051 | ) | (1,298 | ) | (1,043,542 | ) | (4,256,891 | ) | ||||||||
|
Assets
|
778,863 | — | 2,965,995 | 3,744,858 | ||||||||||||
|
Capital
Expenditures
|
174,409 | — | — | 174,409 | ||||||||||||
|
2006
|
||||||||||||||||
|
Revenue
|
$ | 1,116,670 | $ | — | $ | — | $ | 1,116,670 | ||||||||
|
Interest
Expense
|
573 | — | 31 | 604 | ||||||||||||
|
Depreciation
and Amortization
|
46,191 | — | 2,981 | 49,172 | ||||||||||||
|
Research
and Development
|
3,590,148 | — | — | 3,590,148 | ||||||||||||
|
Net
Income (Loss)
|
(6,108,745 | ) | 933,720 | (1,418,867 | ) | (6,593,892 | ) | |||||||||
|
Assets
|
1,101,205 | — | 1,592,237 | 2,693,442 | ||||||||||||
|
Capital
Expenditures
|
101,932 | — | — | 101,932 | ||||||||||||
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 sold its technology
in 2006. 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.
Page
48
Item
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
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 Applied Nanotech Holdings 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, Applied Nanotech Holdings 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 Applied Nanotech Holdings, 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, 2008, 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, 2008. Our independent auditors,
Padgett Stratemann & Co., LLC have issued an attestation report, which is
included below, on our internal control.
Page
49
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 Applied Nanotech Holdings,
Inc.:
We have
audited the internal control over financial reporting of Applied Nanotech
Holdings, Inc. (the Company) as of December 31, 2008, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The
Company’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 included in the accompanying Report on
Management’s Assessment of Internal Control over Financial
Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included
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, Applied Nanotech Holdings, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
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 consolidated balance sheets and the related
consolidated statements of operations, shareholders equity and cash flows of
Applied Nanotech Holdings, Inc and our report dated February 20, 2009 expressed
an unqualified opinion with an explanatory paragraph about the Company’s ability
to continue as a going concern.
Padgett,
Stratemann & Co., L.L.P.
Austin,
TX
February
20, 2009
Page
50
Item 9B. Other
Information.
None
Page
51
PART
III
Item
10. Directors, Executive
Officers and Corporate Governance
The
following sets forth the names, ages and certain information concerning the
Directors and Executive Officers of Applied Nanotech Holdings.
|
Name
|
Age
|
Position
|
Director/Officer Since
|
Term Expires
|
|
|
|
|
|
|
|
Thomas
F. Bijou
|
57
|
Director,
Chief
Executive Officer
|
December
2006
|
2009
|
|
Dr. Zvi
Yaniv
|
62
|
Director,
President,
Chief
Operating Officer
|
July
1996
|
2009
|
|
Douglas
P. Baker
|
51
|
Director,
Chief
Financial Officer
|
June
1996
|
2009
|
|
Ronald
J. Berman
|
52
|
Director
|
May
1996
|
2009
|
|
Dr.
Robert Ronstadt
|
67
|
Director
|
January
2003
|
2009
|
|
Howard
Westerman
|
56
|
Director
|
May
2007
|
2009
|
|
Tracy
K. Bramlett
|
53
|
Director
|
September
2007
|
2009
|
|
Patrick
V. Stark
|
54
|
Director
|
September
2007
|
2009
|
|
Clinton
J. Everton
|
35
|
Director
|
October
2008
|
2009
|
|
Dr.
Richard Fink
|
49
|
Vice
President
|
January
2008
|
N/A
|
______________
Thomas F.
Bijou has been Chief Executive Officer and a member of the Board of Directors
since December 1, 2006. From 1997 through the present, Mr. Bijou has been
Chief Executive Officer of BHM Associates, a company involved in funding and
mentoring technology companies. In connection with these BHM activities,
Mr. Bijou also served as Chairman of Knowledge Communications, Inc., an
early pioneer in the distance learning marketplace. Mr. Bijou began his
career at General Electric Company, but left GE in 1982 with several associates
to form Tigon Corporation, a voicemail outsourcing company that was sold to
Ameritech in 1988.
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, and has been a Director
since May 2006. Mr. Baker is a Certified Public Accountant and has both a
Bachelors in Business Administration and a Masters in Business Administration.
Immediately prior to joining Applied Nanotech Holdings, Inc., Mr. Baker was
a divisional controller for MascoTech, Inc. from 1991 to 1996. Mr. Baker
also has prior experience in public accounting and as CFO of a privately held
company. Mr. Baker is also Chairman of the Board of Directors of Total Health
Care, Inc., a non-profit Health Maintenance Organization and has been a member
of the Board of Directors of that organization since 1987.
Ronald J.
Berman has been a Director since May 1996. Mr. Berman co-founded BEG
Enterprises, Inc. 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.
Dr. Robert
Ronstadt has been a Director since January 2003. Dr. Ronstadt was Vice
President of Technology Commercialization for Boston University from June
2003 through 2005. 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.
Page
52
Howard
Westerman is the Chief Executive Officer of JW Operating Company, a privately
held energy development and energy services company headquartered in Dallas,
Texas. Mr. Westerman joined JW Operating Company in 1978 and became CEO in 1999.
Under his leadership as CEO, the Company’s revenues increased from approximately
$70 million to $1 Billion. Mr. Westerman is also a member of the Board of
Directors of Peerless Manufacturing Company, a global provider of environmental
and separation filtration products, listed on the NASDAQ Global Market Exchange.
Mr. Westerman also serves on numerous charitable and community
boards.
Tracy K.
Bramlett is President of Industrial Hygiene and Safety Technology, Inc. (IHST),
a full service industrial hygiene consulting company that he formed in 1987.
IHST specializes in Indoor Environmental Quality issues. Prior to forming IHST,
Mr. Bramlett was a corporate industrial hygienist for Burlington Northern
Railroad.
Patrick
V. Stark is an attorney with the firm of Kane Russell Colman and Logan in
Dallas. Mr. Stark is a Director at the firm and specializes in corporate finance
and securities law, representing clients in a variety of
industries.
Clinton
J. Everton has been a Director of the Company since October 2008, and is
currently President of the Margrave Group, a company that he founded in 2008.
Prior to that, from 2001 to 2007, he held a variety of roles at Thompson NETg,
including Vice President, Chief Technology Officer, and SVP Product operations
before becoming President in 2005. Prior to Thompson NETg, Mr. Everton was
President of Knowledge Communication, a pioneer in the e-learning
field.
Dr.
Richard Fink is Vice President of Engineering for Applied Nanotech, Inc.; a
subsidiary of Applied Nanotech Holdings, Inc. Dr. Fink has a Bachelor in Science
degree from South Dakota State University and a Masters in Science and
Ph.D. in Physics from the University of Illinois and has worked for the Company
since 1995. Dr. Fink is also the co-founder of the
Nanomaterials Applications Center at Texas State University
– San Marcos, and has been chairman of the Texas Chapter of the Society for
Information Display since 2004.
Shareholder
Director Nominating Procedures
The
Company has 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 which is filed as Exhibit 3(I) to this Annual
Report on Form 10-K. 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.
Page
53
Committees
The Board
of Directors has three committees. The audit committee consists of
Mr. Everton, Mr. Westerman and Mr. Stark. Mr. Westerman is chairman of the
audit committee. The compensation committee consists of Mr. Berman, Mr.
Bramlett, and Dr.. Ronstadt. Mr. Berman is chairman of the compensation
committee. The nominating committee consists of Dr. Ronstadt, Mr.
Westerman, and Mr. Bramlett. Dr. Ronstadt is chairman of the nominating
committee.
Audit
Committee Financial Expert
The Board
of Directors has determined that Mr. Westerman is an “audit committee financial
expert” under applicable SEC rules and that all members of our audit committee
qualify as “independent” as defined under applicable SEC rules.
Code
of Ethics
We have
adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K 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.appliednanotech.net.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities of Exchange Act of 1934 requires Applied Nanotech
Holdings’ officers, Directors, and persons who beneficially own more than 10 %
of a registered class of Applied Nanotech Holdings’ common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors, and beneficial owners of more than 10% of
Applied Nanotech Holdings’ common stock are required by the Securities and
Exchange Commission regulations to furnish Applied Nanotech Holdings 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, 2008 through December 31, 2008, all Officers, Directors, and
greater than 10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them.
Item
11. Executive Compensation
Compensation
Discussion and Analysis
Objectives
of Compensation Program
The
primary objective of our compensation program for employees, including our
compensation program for executive officers, is to attract, retain, and motivate
qualified individuals and reward them in a manner that is fair to all
stakeholders. We strive to provide incentives for every employee that rewards
them for their contribution to the Company, while at the same time promoting an
ownership mentality.
Elements
of Compensation
There are
three main components to our compensation package - base salaries, bonuses, and
stock based compensation. A fourth, less significant component is other benefits
and perquisites. Our compensation program is designed to be competitive with
other employment opportunities and to align the interests of all employees,
including executive officers, with the long-term interests of our shareholders.
For our executive officers, we link a much higher percentage of total
compensation to incentive compensation such as bonus and stock based
compensation than we do for other employees.
Base
Salaries
We
provide our executive officers with a level of cash compensation that
facilitates an appropriate lifestyle and provides a reasonable minimum
compensation. We make this determination based on a variety of factors including
professional accomplishments, level of education, past experience and scope of
responsibilities. The actual amount of base salary paid to each named executive
officer is set forth in the summary compensation table included later in this
section. The salary level for our executive officers was basically frozen from
2005 to 2007. The salary of our chief operating officer, Dr. Yaniv, was set at
$250,000 during each of those years. The salary of the chief executive officer
was set at the same rate until the arrival of Mr. Bijou. When
Mr. Bijou joined us in December 2006, we entered into a slightly modified
arrangement with Mr. Bijou. He was paid at an annualized rate of $288,000 per
year; however that amount represents a combination of salary and management fee
paid to an entity owned by Mr. Bijou. As part of the management fee,
Mr. Bijou assumes responsibility for certain costs, including basic
employee benefits that would normally be paid by us. We believe the amount that
we pay Mr. Bijou is similar to the amounts paid to or on behalf our
previous CEOs. The salary level for our chief financial officer, Mr. Baker, was
set at a rate of $180,000 per year during the 2005 to 2007 time
period.
Page
54
As
discussed in more detail below, the following base salary amounts for
these executive officers became effective January 1, 2008: Mr. Bijou - $300,000,
Dr. Yaniv - $275,000, and Mr. Baker $225,000. In addition, effective December
31, 2007, Dr. Richard Fink, Vice President became a named executive officer. Dr.
Fink’s salary became $125,000 effective January 1, 2008.
Bonuses
We have a
formula bonus plan covering all employees, including executive officers. This
plan was originally established in 2004 and is based solely on the profitability
of the company. This plan is designed to reward all employees when we are
successful in reaching profitability. No bonuses have ever been paid under this
plan, since we have incurred losses in each of the years since adoption of the
plan. The maximum bonuses payable under this plan are $250,000 for the chief
executive officer, $200,000 for the chief operating officer, and $150,000 for
the chief financial officer. The maximum amounts would be payable if our net
income is equal to, or exceeds $10 million. For purposes of this plan, net
income is calculated using the accounting principles in effect at the time the
plan was adopted, meaning stock based compensation using fair value as required
by FAS 123R is excluded from the calculation. There are no minimum amounts
payable under the plan and the target amounts are equal to the maximum amounts
payable. The compensation committee of the board of the directors also has the
power to award discretionary bonuses; however, no such bonuses have been granted
since 2002 in the case of the CEO and the CFO. The COO received a discretionary
bonus of $115,000 in 2007.
Stock
Based Compensation
All of
our employees participate in our stock based compensation plans and receive
awards of non-qualified stock options annually. We use non-qualified options
because of the favorable tax treatment to us and the near universal expectation
by employees in our industry that they will receive stock options. The
overwhelming majority of these awards are performance based awards that only
vest upon achievement of specific goals. For non-executive officer employees,
these goals tend to be operational oriented goals relating to specific projects
or potential projects. For executive officers, these goals are broad in nature
and involve more substantial accomplishments. Following is a discussion of the
option grants to executive officers.
In 2004,
the compensation committee adopted a multiyear program of performance based
options covering the years from 2004 to 2007. The goals associated with this
program related to breakeven in various years and certain revenue targets. When
Mr. Bijou commenced employment in December 2006, he also received an option
package which included a small portion of time based options which vested over a
period of one year and the remainder of which were performance based options
vesting based on achievement of certain modified cashflow from operations and
EPS goals.
By the
end of 2007, the majority of the options included in the 2004 grant had not
vested and certain of the goals associated with the options granted in December
2006 were no longer considered reasonable based on events that had occurred in
2007. As such, a new multiyear program was adopted at the end of 2007 designed
to replace expiring performance based options, provide reasonable goals, and
align the goals of all executive officers. This program included a mixture of
time based option and performance based options. The majority of these grants
were performance based options with goals related to modified cashflow from
operations and various earnings per share targets. This new program did not
result in an increase in the number of options held by any of the existing
executive officers. Dr. Fink received options as part of this program, however
as previously indicated, Dr. Fink became an executive officer effective December
31, 2007 and was not an executive officer at the time of the grant.
Page
55
A portion
of the goals related to options granted in 2007 were unique to cash flow goals
for 2008. These options expired unvested as of December 31, 2008. The executive
officers were granted new options on December 31, 2008 to replace the expiring
options. These new options vest based on cash flow goals for 2009 and were
priced 15% above the market price of the common stock on the date of
grant.
For
purposes of this discussion of performance based option goals, we consider the
goals related to earnings per share targets to be part of our confidential
strategic plans, and as such we do not disclose the specifics of the goals at
this time. Attainment of these goals will require the company to achieve
financial results never before achieved in the history of the Company. We
consider these goals achievable, but they represent a stretch and are considered
essential to proving the business model. They align the interests of the
executive officers with those of the shareholders.
At the
present time, we have no formal policy related to stock ownership for executive
officers, other than for those officers that are also members of the Board of
Directors and are covered under the Board policy, which is described later in
this section. In establishing grant levels, we do not consider the equity
ownership levels of the executive officer. In general, we do not consider the
existence of fully vested prior awards when establishing new grants. However,
with newer executive officers, we may consider the lack of prior awards in
establishing a higher level of new grants.
Timing of
Option Grants
We do not
have a formal written policy related to the timing of option grants; however we
do have certain time periods when options are normally granted. At the present
time, we do not have any analysts that follow our stock and the release of our
quarterly financial reports normally has no impact on the price of our stock. As
such, we do not have trading windows, nor do we limit option grants to any sort
of windows. There are two normal situations where options are granted. The first
would be at the time a new employee, including executive officers, is hired. If
a new employee receives options as part of starting employment, those options
are granted either at, or shortly after, the employment start date.
The
majority of options are performance based awards granted on an annual basis as
part of a budgeting/goal setting process. For executive officers, the
compensation committee meets annually to establish compensation levels,
including salary, bonus, and options, for the year. This meeting normally occurs
in late November or early December prior to the start of the new year - for
example in December 2008 for 2009 compensation. It could, however, occur as
early as November as late as January. For all other employees, the goal setting
process starts in December, but since it involves many more distinct goals and
many more individuals; it is a longer process and as a result usually is not
ready for submission to the Compensation Committee until January or later. All
performance based awards for employees other than executive officers are annual
awards that must either vest by the end of the calendar year, or they will
expire unvested. At the time of the proposed award, we consider whether there
are any known upcoming significant events, and have in the past delayed awards
as a result of expected positive events.
All
option grants for employees are approved by the compensation committee of the
Board of Directors. The compensation committee has authorized the executive
officers to grant limited amounts of options to new hires without seeking
additional compensation committee approval. The compensation committee does not
delegate any of its powers for granting options to others, except that it has
granted the executive officers the power to grant up to 20,000 options to new
hires without the specific approval of the compensation
committee.
Other
Benefits and Perquisites
Since we
have not yet reached profitability on a consistent basis, we take a relatively
bare-bones approach to benefits for all employees, including executive officers.
There are no benefit plans available to executive officers that are not
available to all employees. Executive officers participate in the same benefit
plans covering other employees. These benefits include limited health and dental
insurance, and group term life insurance. The only retirement plan that we
maintain is a 401K plan funded entirely by employee elective deferrals. We have
no company funded retirement plans or deferred compensation plans. We also do
not provide any of the perquisites
common at larger companies. The only perq that we provide is an auto
allowance. Our CEO and COO receive an auto allowance of $1,000 per month and our
CFO receives an auto allowance of $500 per month. The amounts paid as auto
allowances are considered in setting the overall level of compensation for the
executive officer.
Page
56
Compensation
Approval Process
The
Compensation Committee of the Board of Directors approves all compensation and
awards to executive officers. The CEO provides recommendations to the
compensation committee for the other executive officers, all of which directly
or indirectly report to him, and regarding most compensation matters, including
executive compensation, the CFO in consultation with the CEO, provides
information to the Compensation Committee. However, the Compensation Committee
does not delegate any of its functions to others in setting compensation. We did
not make formal use of any compensation consultants in determining executive
compensation levels for any of the executive officers.
In 2006
we used an executive search firm in connection with our search for a new CEO.
That firm, Christian & Timbers, indicated that at the time our CEO salary
was at the low end of the range for similar companies, although when considering
options, total compensation fell within the normal range of CEO compensation. In
November 2007, we performed a compensation analysis to benchmark our
compensation package against other similar companies. We did not use an outside
compensation consultant for this study, but rather performed the analysis
internally. We selected the following companies: Nanogen (NGEN), Nanosphere
(NSPH), Harris & Harris (TINY), Nanosys (NNSY), Acacia Research/Acacia
Technologies (ACTG), Arrowhead Research (ARWR), and Symyx Technologies (SMMX).
In selecting these companies, we considered such factors as nanotechnology
involvement, market capitalization, revenue levels, profitability, and line of
business. While no particular company is a perfect match, we believe that
overall this is a representative mix of companies to use as a comparison. We
gathered data on these companies from publicly available data, including SEC
filings. In general, there was a lag of one or more years related to these
filings, so the most recent data available for these companies was from 2006 or
prior.
The
results of our benchmarking study showed that the compensation paid to executive
officers at Applied Nanotech Holdings, Inc. was well below average for the peer
group selected. Salaries were at or near the bottom of the range. In
the case of the CEO and COO, all but one of the comparison companies paid higher
salaries and in the case of the CFO, all of the comparison companies paid higher
salaries. The majority of the comparison companies paid bonuses despite the
existence of net operating losses. While the Applied Nanotech Holdings officers
had the potential for larger option grants, based on options actually vested, on
average the comparison companies also had higher levels of options
granted.
When
setting compensation levels for 2008, we considered the result of this study.
Salaries were set at the previously disclosed levels based on this study and in
consideration of the fact that salary levels had been unchanged for three years.
These new salary levels are, in general, still below average for the comparison
companies, but much closer than previous levels. Until such time as the company
attains profitability, we believe it reasonable for salaries to be slightly
below average. When the company reaches profitability, it is anticipated that
salaries will be adjusted to market levels. We continued our bonus plan based on
profitability and it is anticipated that future bonuses will not be paid until
such time as we have reached profitability. Finally, as previously described, we
granted options to the executive officers in December 2006, 2007, and 2008.
These options included both time based and performance based options, although
the majority of the options were performance based. This split was determined,
in part based on the option vesting history over the past several
years.
We
updated the previously mentioned compensation study at the end of 2008 and found
that in general, compensation levels had increased at the comparison companies.
We, however, left compensation unchanged for our executive officers for
2009.
Compensation
Committee Report
We have
reviewed and discussed with management certain Compensation Discussion and
Analysis provisions to be included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008, filed pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 (“Form 10-K”). Based on the
reviews and discussions referred to above, we recommend to the Board of
Directors that the Compensation Discussion and Analysis referred to above be
included in the Company’s Form 10-K.
Compensation
Committee
Ronald
J. Berman, Chairman; Dr. Robert Ronstadt; Tracy Bramlett
Page
57
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, 2008, 2007 and 2006 by all individuals that
served as Chief Executive Officer during 2008, the Chief Financial Officer, all
individuals that were Named Executive Officers as of the end of the previous
year, and all executive officers whose total annual salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 2008 (the “Named Executive
Officers”):
SUMMARY
COMPENSATION TABLE
|
Name & Principal
Position
|
Year
|
Salary (1)
|
Option Awards (2)
|
All
Other
Compensation (5)
|
Total
|
||||||||||||
|
Thomas
F. Bijou (3)
|
2008
|
$ | 284,167 | $ | 37,876 | $ | 12,000 | $ | 334,043 | ||||||||
|
Chief
Executive Officer
|
2007
|
$ | 288,000 | $ | 505,357 | $ | 0 | $ | 793,357 | ||||||||
|
2006
|
$ | 24,000 | $ | 663,422 | $ | 0 | $ | 687,422 | |||||||||
|
Dr.
Zvi Yaniv
|
2008
|
$ | 275,000 | $ | 13,680 | $ | 12,000 | $ | 300,680 | ||||||||
|
Chief
Operating Officer
|
2007
|
$ | 250,000 | $ | 247,588 | $ | 12,000 | $ | 509,588 | ||||||||
|
2006
|
$ | 250,000 | $ | 265,369 | $ | 12,000 | $ | 527,369 | |||||||||
|
Douglas
P. Baker
|
2008
|
$ | 225,000 | $ | 8,550 | $ | 6,000 | $ | 239,550 | ||||||||
|
Chief
Financial Officer
|
2007
|
$ | 180,000 | $ | 154,743 | $ | 6,000 | $ | 340,743 | ||||||||
|
2006
|
$ | 180,000 | $ | 132,684 | $ | 6,000 | $ | 318,684 | |||||||||
|
Dr.
Richard Fink (4)
|
2008
|
$ | 125,000 | $ | 3,420 | $ | 0 | $ | 128,420 | ||||||||
|
2007
|
$ | 100,000 | $ | 73,842 | $ | 0 | $ | 173,842 | |||||||||
|
2006
|
$ | 97,667 | $ | 18,244 | $ | 0 | $ | 115,911 | |||||||||
(1)
Salary amounts for 2008 for all officers reflect amounts earned during the year.
Effective August 1, 2008, the officers began deferring a portion of their
salaries as part of the Company’s cost reduction/cash conservation initiatives.
The amount of 2008 salaries still payable as of December 31, 2008 are $9,225 for
Mr. Bijou, $13,200 for Mr. Baker, $17,187 for Dr. Yaniv, and $7,812 for Dr.
Fink.
(2)
Amounts included in the option awards column are calculated utilizing the
provisions of SFAS No. 123R, “Share-Based Payments.” See Note 8 of the
consolidated financial statements included in this annual report for the
assumptions underlying valuation of equity awards. The amounts are calculated
based on all options granted during the year without regard to whether the
options vest or expire. As discussed in the Compensation Discussion and
Analysis, the majority of options granted are performance based options
associated with specific goals. To the extent that the goals are not achieved,
the options do not vest and expire. None of the options granted in 2006 to
Dr. Yaniv, or Mr. Baker vested and all have expired as of December 31,
2007. A total of 1,000,000 options were granted to Mr. Bijou in 2006, of which
200,000 options have vested and the remaining 800,000 options have expired. All
of the options granted to Dr. Fink in 2006 have vested. In 2007, Mr. Bijou
received a total of 800,000 options – 180,000 of which have vested, 200,000 of
which expired, and 420,000 that may vest in the future. In 2007, Dr. Yaniv was
granted 400,000 options - 90,000 have vested, 100,000 have expired, and 210,000
may vest in the future. In 2007, Mr. Baker was granted 250,000 options - 56,250
have vested, 62,500 have expired, and 131,250 may vest in the future. In 2007,
Dr. Fink was granted 100,000 options - 22,500 have vested, 25,000 have expired,
and 52,500 may vest in the future. None of the options granted to officers in
2008 have vested.
(3)
Mr. Bijou began employment as CEO on December 1, 2006. His compensation is
a combination of salary and management fee and as part of the management fee, he
is responsible for certain expenses such as employee benefits and secretarial
services.
(4) Dr.
Fink has been employed by the Company since 1995; however he only became a named
executive officer as of December 31, 2007. Amounts for 2006 and 2007 are
included for comparative purposes.
(5) The
amounts included in the “All Other Compensation” column represent automobile
allowances in all years.
Page
58
GRANTS
OF PLAN-BASED AWARDS TABLE
|
Estimated
Future Payouts Under
Equity
Incentive Plan
Awards (Shares) (1)
|
All
Other
Option
Awards;
Number
of
Shares
|
Exercise
Price
of
|
Market
Price
on
|
|||||||||||||||||||||||
|
Name
|
Grant Date
|
Approval
Date
|
Threshold
|
Target
|
Maximum
|
Underlying
Options
|
Option
Awards
|
Date
of
Grant
|
||||||||||||||||||
|
Thomas
F. Bijou(2)
|
12/31/2008
|
12/29/2008
|
0
|
200,000 | 200,000 | 0 | $ | 0.28 | $ | 0.24 | ||||||||||||||||
|
10/06/2008
|
10/04/2008
|
0
|
0 | 0 | 200,000 | $ | 0.75 | $ | 0.48 | |||||||||||||||||
|
Dr.
Zvi Yaniv
|
12/31/2008
|
12/29/2008
|
0
|
100,000 | 100,000 | 0 | $ | 0.28 | $ | 0.24 | ||||||||||||||||
|
Douglas
P. Baker
|
12/31/2008
|
12/29/2008
|
0
|
62,500 | 62,500 | 0 | $ | 0.28 | $ | 0.24 | ||||||||||||||||
|
Dr.
Richard Fink
|
12/31/2008
|
12/29/2008
|
0
|
25,000 | 25,000 | 0 | $ | 0.28 | $ | 0.24 | ||||||||||||||||
___________________
(1)
Performance-based option awards that vest upon the achievement of positive cash
flow from operations in 2009.
(2) The
grant for Thomas F. Bijou on 10/06/08 was the repricing of a previous grant. A
total of 200,000 options originally granted on 12/12/07 with an exercise price
of $1.19 per share were repriced to $0.75 per share in conjunction with a
reduction of Mr. Bijou salary from $300,000 annually to $224,000 annually – an
annual reduction of $76,000. The maximum benefit that Mr. Bijou can receive from
this repricing is $88,000.
Page
59
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END TABLE
The
following table sets forth information concerning the outstanding equity awards
held by the Named Executive Officers at December 31, 2008.
|
Number
of Securities
Underlying
Unexercised
Options
|
Equity
Incentive
Plan
Awards:
Number
|
|
|||||||||||||||
|
Name
|
Number
Exercisable
|
Number
Unexercisable
|
of
Securities Underlying Unexercised
Unearned
Options
|
Option
Exercise
Price
|
Option
Expiration
Date
|
||||||||||||
|
Thomas
F. Bijou
|
200,000 | - |
$1.19
|
11/30/2016
|
|||||||||||||
| 135,000 | 25,000 |
$1.19
|
12/03/2017
|
||||||||||||||
| 45,000 | 155,000 |
$0.75
|
12/03/2017
|
||||||||||||||
| - | - |
240,000
|
$1.19
|
12/12/2017
|
|||||||||||||
| - | - |
200,000
|
$0.28
|
12/31/2018
|
|||||||||||||
|
Dr.
Zvi Yaniv (1)
|
100,000 | - |
$0.50
|
01/11/2009
|
|||||||||||||
| 30,000 | - |
$1.50
|
02/02/2010
|
||||||||||||||
| 200,000 | - |
$1.50
|
06/27/2010
|
||||||||||||||
| 30,000 | - |
$0.96
|
07/28/2013
|
||||||||||||||
| 250,000 | - |
$2.73
|
12/31/2013
|
||||||||||||||
| 250,000 | - |
$2.17
|
12/31/2014
|
||||||||||||||
| 90,000 | 90,000 |
$1.19
|
12/03/2017
|
||||||||||||||
| - | - |
120,000
|
$1.19
|
12/03/2017
|
|||||||||||||
| - | - |
100,000
|
$0.28
|
12/31/2018
|
|||||||||||||
|
Douglas
P. Baker (1)
|
30,000 | - |
$1.50
|
02/02/2010
|
|||||||||||||
| 50,000 | - |
$1.50
|
06/27/2010
|
||||||||||||||
| 60,000 | - |
$0.63
|
03/02/2011
|
||||||||||||||
| 100,000 | - |
$0.92
|
07/16/2011
|
||||||||||||||
| 150.000 | - |
$0.73
|
12/05/2011
|
||||||||||||||
| 13,000 | - |
$0.96
|
07/28/2013
|
||||||||||||||
| 200,000 | - |
$2.73
|
12/31/2013
|
||||||||||||||
| 150,000 | - |
$2.17
|
12/31/2014
|
||||||||||||||
| 56,250 | 56,250 |
$1.19
|
12/03/2017
|
||||||||||||||
| - | - |
75,000
|
$1.19
|
12/03/2017
|
|||||||||||||
| - | - |
62,500
|
$0.28
|
12/31/2018
|
|||||||||||||
|
Dr.
Richard Fink
|
2.500 | - |
$1.50
|
01/03/2010
|
|||||||||||||
| 2,500 | - |
$1.50
|
02/15/2010
|
||||||||||||||
| 2,000 | - |
$0.58
|
02/16/2011
|
||||||||||||||
| 32,750 | - |
$1.00
|
12/31/2012
|
||||||||||||||
| 6,875 | - |
$0.50
|
03/20/2013
|
||||||||||||||
| 21,000 | - |
$0.56
|
04/16/2013
|
||||||||||||||
| 19,881 | - |
$2.50
|
03/10/2014
|
||||||||||||||
| 15,906 | - |
$2.17
|
01/01/2015
|
||||||||||||||
| 3,487 | - |
$2.17
|
02/14/2016
|
||||||||||||||
| 10,112 | - |
$2.25
|
04/11/2016
|
||||||||||||||
| 16,713 | - |
$1.28
|
01/29/2017
|
||||||||||||||
| 22,500 | 22,500 |
$1.19
|
12/03/2017
|
||||||||||||||
| - | - |
30,000
|
$1.19
|
12/03/2017
|
|||||||||||||
| - | - |
25,000
|
$0.28
|
12/31/2018
|
|||||||||||||
______________________
(1)
Includes options still outstanding that were previously transferred by gift and
reported on Form 4 by the Named Executive Officer. For Dr. Yaniv these options
are the 100,000 options expiring 01/11/2009. For Mr. Baker, these options are
the 60,000 options expiring 03/02/2011.
Page
60
OPTION
EXERCISE AND STOCK VESTED TABLE
Named
executive officers exercised no options and received no vested stock awards in
2008.
PENSION
BENEFITS TABLE
We
maintain no retirement plans covering Named Executive Officers or other
employees, except for a 401K plan funded solely by elective employee
contributions. As such no pension benefits table is included.
NON-QUALIFIED
DEFERRED COMPENSATION TABLE
We do not
maintain any non-qualified deferred compensation plans covering Named Executive
Officers or other employees. As such, no deferred compensation table is
included.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
None of
the named executive officers have employment contracts, and therefore, there are
no formal payments due on a change in control or other employment termination.
Our 2002 Equity Compensation Plan, which includes all employees, including
executive officers, includes a provision which accelerates the vesting of all
unvested options upon certain change in control events. Unvested options held by
Named Executive Officers as of December 31, 2008 are reflected in the
Outstanding Equity Awards at Fiscal Year-End Table included in this
item.
It is our
policy to pay severance upon termination when termination is initiated by us and
is for other than cause. We have no formal guidelines, but rather each case is
handled on an individual basis. Factors considered include position, length of
service, reason for termination, possible future relationships, as well as other
potential factors. Payments may be made in a lump sum or in periodic
installments and are usually accompanied by a severance agreement that includes
a release, a non-disparagement clause, and possibly a non-compete agreement. In
the case of executive officers, the starting point for negotiations is one month
of severance for each year or partial year of service at the Company, with a
minimum of six months. In the case of the existing executive officers, that
would equate to six months for Mr. Bijou, thirteen months for Dr. Yaniv and Mr.
Baker, and fourteen months for Dr. Fink. This could be viewed as the minimum
potential pay out upon termination; however, upon mutual agreement of
the parties, a lower amount could be negotiated.
DIRECTOR
COMPENSATION
|
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards (1)
|
Total
|
|||
|
Howard
Westerman
|
$ 12,000
|
$ 7,500
|
$
19,500
|
|||
|
Ronald
J. Berman
|
$ 18,000
|
$ 7,500
|
$
25,500
|
|||
|
Bradford
S. Lamb (2)
|
$ 9,000
|
$ 7,500
|
$
16,500
|
|||
|
Tracy
K. Bramlett
|
$ 12,000
|
$ 7,500
|
$
19,500
|
|||
|
Dr. Robert
Ronstadt
|
$ 18,000
|
$ 7,500
|
$
25,500
|
|||
|
Patrick
V. Stark
|
$ 12,000
|
$ 7,500
|
$
19,500
|
|||
|
Clinton
J. Everton (3)
|
$ 3,000
|
-
|
$ 3,000
|
(1)
Amounts included in the restricted stock awards column are calculated based on
the total fair market value of the shares granted on the date of the
grant.
(2)
Director Lamb resigned in October 2008.
(3)
Director Everton became a Director in October 2008.
Page
61
We pay
our outside Directors with a combination of cash and restricted stock. We
believe this mixture of cash and equity is appropriate at our current level of
development and provides the Directors with current compensation for services
rendered while still aligning the interests of the Directors with the
shareholders. Reasonable expenses incurred by each Director in connection with
his duties as a Director are also reimbursed by Applied Nanotech
Holdings.
The
Directors each receive an annual retainer of $12,000, paid quarterly. Each
committee chairman receives an additional annual retainer of $6,000, paid
quarterly, and the Board Chairman, if not an employee, receives an additional
annual retainer of $8,000. As part of our cost reduction/cash conservation
initiative, all outside Directors deferred their cash compensation for the
3rd
an 4th
quarters of 2008. For all Directors other than Directors Lamb and Everton, this
is equal to one half of the amount reflected in table above. Director Lamb was
paid the full amount reflected in the table above and Director Everton joined
the Board in the fourth quarter, and therefore the entire portion of his cash
compensation was deferred
In
addition to the cash payments, each outside Director receives restricted stock.
Up until 2008, a quarterly grant of 2,500 shares of restricted stock was granted
on the last day of January, April, July, and October. These grants were prorated
if a Director only serves a portion of the quarter and the grants vest quarterly
over a one year period starting on the date of the grant. This policy continued
until July 2008, at which time it was changed to a single annual grant of 10,000
fully vested shares on the last day of July each year. The first such grant will
be in July 2009 and this annual grant is prorated for partial years of
service.
All of
the Directors have retained the right to pursue additional business activities
that are not competitive with the business of Applied Nanotech Holdings, and do
not adversely affect their performance as Directors. If 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 Applied Nanotech Holdings or the
shareholders by virtue of their participation in such additional business
activities.
Director
Ownership Requirements
We also
have a policy related to stock ownership requirements that covers all Directors
- both outside Directors and employee Directors. All Directors are required to
own a minimum of 20,000 shares of Applied Nanotech Holdings, Inc. common stock.
There is no time limit in which a new director must meet those requirements;
however, until a Director owns a minimum of 20,000 shares, the Director is not
allowed to sell any shares. Furthermore, if a Director owns in excess of 20,000
shares, that Director is not allowed to sell shares, whether owned or received
as a result of the exercise of options, if at the completion of the transaction,
it will result in an ownership position of less than 20,000 shares. All current
Directors currently meet this ownership requirement with the exception of
Director Bramlett, who became a Director in September 2007 and owns 18,333
shares as of the date of this filing. He has purchased 10,000 shares
since becoming a Director and received an additional 8,333 shares of restricted
stock under the Director compensation plan.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee currently consists of Mr. Berman, Mr. Bramlett, and
Dr. Ronstadt. None of them is or has been an officer or employee of Applied
Nanotech Holdings, Inc. nor do any of them have any relationships requiring
disclosure under Item 404 of Regulation S-K. No interlocking relationship
existed during the fiscal year ended December 31, 2008, between Applied Nanotech
Holdings’ Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company.
Page
62
Item
12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
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 Applied Nanotech Holdings, Inc.
stock as of February 25, 2009, 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.
|
9,141,034
|
8.51%
|
||
|
Barry
Kitt, General Partner
4965
Preston Park Blvd., Suite 240
Plano,
TX 75093
|
Page
63
SECURITY
OWNERSHIP OF MANAGEMENT
Set forth
below is certain information with respect to beneficial ownership of Applied
Nanotech Holdings’ common stock as of February 25, 2009, 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
and Restricted
Stock
Included
in
Beneficial
Ownership
(1)
|
Common
Stock
Beneficial
Ownership
|
Percentage
of
Class
|
|||||||||
|
Thomas
F. Bijou
|
425,000 | 593,429 |
*
|
|||||||||
|
Dr. Zvi
Yaniv
|
872,500 | 1,032,500 |
*
|
|
||||||||
|
Douglas
P. Baker
|
763,312 | 822,812 |
*
|
|||||||||
|
Dr.
Richard Fink
|
161,849 | 161,849 |
*
|
|||||||||
|
Ronald
J. Berman
|
412,292 | 952,217 |
*
|
|||||||||
|
Howard
Westerman
|
9,792 | 188,499 |
*
|
|||||||||
|
Dr. Robert
Ronstadt
|
192,292 | 191,659 |
*
|
|||||||||
|
Clinton
J. Everton
|
- | 30,000 |
*
|
|||||||||
|
Tracy
Bramlett
|
6,458 | 16,548 |
*
|
|||||||||
|
Patrick
V. Stark
|
6,458 | 45,753 |
*
|
|||||||||
|
All
Executive Officers and
Directors
as a group (10 persons)
|
2,849,853 | 4,055,592 |
3.68%
|
|||||||||
|
*
|
Less
than 1%
|
|
(1)
|
This
column lists shares that are subject to options exercisable within sixty
(60) days of February 25, 2009 and restricted stock that vests within
sixty (60) days of February 25, 2009, 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
Applied
Nanotech Holdings
|
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
(4)
|
|
(a)
|
(b)
|
(c)
|
|
|
1992
Employee Plan (1)
|
905,000
|
$1.05
|
-
|
|
1992
Outside Directors Plan
(2)
|
190,000
|
$1.20
|
-
|
|
1998
Directors and Officers
Plan
|
350,000
|
$0.50
|
-
|
|
2002
Equity Compensation
Plan (3)
|
6,444,897
|
$1.46
|
2,271,736
|
|
Total
|
7,889,897
|
$1.36
|
2,271,736
|
|
(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.
|
Page
64
|
(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)
|
The
2002 Equity Compensation Plan was overwhelmingly approved by a majority of
the shareholders actually casting votes at both the 2008 and 2007 annual
meeting of shareholders. However, since less than 50% of the shares
eligible to vote actually cast votes, the plan does not fall into the
category of plans approved by shareholders under SEC
rules.
|
|
(4)
|
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 increase the authorized shares by 3,000,000 to a total of 8,000,000
shares and again on December 12, 2007 to increase the authorized shares by
another 2,000,000 to a total of 10,000,000 shares.
For a
further description of each of the stock option plans described above, please
see Note 8 to the Consolidated Financial Statements herein.
Item
13. Certain Relationships and
Related Transactions, and Director Independence
It
is our written policy that all material related party transactions be approved
by the Board of Directors, with any member of the Board affected by the related
party transaction abstaining from the vote.
Page
65
Item 14. Principal
Accountant Fees and Services
Audit
Fees
The
aggregate fees billed to the Company by Padgett, Stratemann & Co., L.L.P.
for the audit of Applied Nanotech Holdings’ annual financial statements and for
the review of the financial statements included in its quarterly reports on Form
10-Q for the Fiscal Year ended December 31, 2008 were $62,500. No fees were
billed to the Company in 2007 or 2006 by, the Company’s current auditor. Our
prior auditor, Sprouse & Anderson, L.L.P. merged with Padgett, Stratemann
& Co., L.L.P. in 2007 and no longer exists. The aggregate fees billed to the
Company by Sprouse & Anderson, L.L.P. for the audit of Applied Nanotech
Holdings’ 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, 2007 and 2006 totaled $56,609 and $57,200,
respectively.
Audit-Related
Fees
Applied
Nanotech Holdings did not incur or pay any fees to either Padgett, Stratemann
& Co. L.L.P. or Sprouse & Anderson, L.L.P., and neither Padgett,
Stratemann & Co. L.L.P. or Sprouse & Anderson; L.L.P. provided any
services related to audit-related fees in the last two fiscal
years.
Tax
Fees
There
were no fees billed to Applied Nanotech Holdings by either Padgett, Stratemann
& Co. L.L.P. or Sprouse & Anderson, L.L.P. for services rendered to
Applied Nanotech Holdings during the last two fiscal years for tax compliance,
tax advice, or tax planning.
All
Other Fees
There
were no fees billed to Applied Nanotech Holdings by either Padgett, Stratemann
& Co. L.L.P. or Sprouse & Anderson, L.L.P. for services rendered to
Applied Nanotech Holdings 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 the Company’s
auditors. All services provided by Padgett Stratemann & Co. L.L.P. in 2008
and by Sprouse & Anderson, L.L.P. during the years ended December 31, 2007
and 2006 were pre-approved by the audit committee.
As of the
date of this filing, Applied Nanotech Holdings current policy is to not engage
Padgett, Stratemann & Co., L.L.P. to provide, among other things,
bookkeeping services, appraisal or valuation services, or internal audit
services. The policy provides that Applied Nanotech Holdings engage Padgett,
Stratemann & Co., 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.
Page
66
PART
IV
Item
15. Exhibits and Financial
Statement Schedules
|
(a)
|
The
following documents are filed as part of this Annual Report on Form
10-K:
|
|
|
(1)
|
All Financial
Statements
|
The
response to this portion of Item 15 is set forth in Item 8 of Part II
hereof.
|
|
(2)
|
Financial Statement
Schedules
|
Schedules
for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
|
|
(3)
|
Exhibits
|
See
accompanying Index to Exhibits on page 69 for a descriptive response to
this item. The Company will furnish to any shareholder, upon written request,
any exhibit listed in the accompanying Index to Exhibits upon payment by such
shareholder of the Company’s reasonable expenses in furnishing any such
exhibit.
|
(b)
|
Reference
is made to Item 15(a)(3)
above.
|
|
(c)
|
Reference
is made to Item 15 (a)(2)
above.
|
Page
67
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
APPLIED
NANOTECH HOLDINGS, INC.
|
|||
|
By:
|
/s/
Thomas F. Bijou
|
||
|
Thomas
F. Bijou, Chief Executive Officer
March
2, 2009
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, 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/
Thomas F. Bijou
Thomas
F. Bijou
|
Chairman,
Chief Executive
Officer
(Principal Executive Officer and Director)
|
March
2, 2009
|
|
/s/
Douglas P. Baker
Douglas
P. Baker
|
Vice
President and Chief Financial Officer
(Principal
Financial Officer and Principal Accounting Officer and
Director)
|
March
2, 2009
|
|
Dr. Robert
Ronstadt*
Clinton
J. Everton*
Ronald
J. Berman*
Dr. Zvi
Yaniv*
Howard
Westerman*
Tracy
Bramlett*
Patrick
V. Stark*
|
Directors
|
March
2, 2009
|
|
*By:
|
/s/
Douglas P.
Baker
|
||
|
(Douglas
P. Baker,
Attorney-in-Fact)
|
|||
Page
68
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 with the Secretary of State
for the State of Texas. (Exhibit 3(i).1 to the Company’s Current Report on
Form 8-K dated as of December 12, 2007).
|
|
|
3(ii).1*
|
Amended
and Restated Bylaws of the Company. (Exhibit 3(ii).1 to the Company’s
Current Report on Form 8-K dated as of December 12,
2007).
|
|
|
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*
|
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)
|
|
|
10.3*
|
Amended
and Restated 2002 Equity Compensation Plan. (Exhibit 99.1 to the Company’s
Current Report on Form 8-K dated as of December 12,
2007).
|
|
|
10.4*
|
Applied
Nanotech Holdings, 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)
|
|
|
10.5*
|
Applied
Nanotech Holdings, Inc. Compensation Committee Charter (Exhibit 10.18 to
the Company’s Current Report on Form 10-K for the fiscal year ended
December 31, 2005).
|
|
|
10.6*
|
Applied
Nanotech Holdings, Inc. Nominating Committee Charter (Exhibit 10.19 to the
Company’s Current Report on Form 10-K for the fiscal year ended December
31, 2005).
|
|
|
10.7*
|
Patent
License Agreement between SI Diamond Technology, Inc. and Till Keesmann
(Exhibit 10 to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2000)
|
|
|
11
|
Computation
of (Loss) per Common Share
|
|
|
14
*
|
Applied
Nanotech Holdings, 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 Thomas F. Bijou, 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 Thomas F. Bijou, Chief Executive
Officer
|
|
|
32.2
|
Section
1350 Certificate of Douglas P. Baker, Chief Financial
Officer
|
Page
69