UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| ý | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2011
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
COMMISSION FILE NO. 1-11602
APPLIED NANOTECH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| TEXAS | 76-0273345 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
| 3006 Longhorn Blvd., Suite 107 | ||
| Austin, Texas | 78758 | |
| (Address of principal executive offices) | (Zip Code) |
(512) 339-5020
(Registrant's telephone number, including area code)
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 preceding 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.
[X] Yes [_] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.
[X] Yes [_] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in rule 12b-2 of the Act.
Large Accelerated Filer o Accelerated Filer o
Non-accelerated Filer þ 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 [X] No
As of October 31, 2011, the registrant had 118,915,698 shares of common stock, par value $.001 per share, issued and outstanding.
APPLIED NANOTECH HOLDINGS, INC.
INDEX
| Part I. Financial Information | Page | |||
| Item 1. Financial Statements | ||||
| Consolidated Balance Sheets--September 30, 2011 and December 31, 2010 | 3 | |||
| Consolidated Statements of Operations --Three Months and Nine Months Ended September 30, 2011 and 2010 | 4 | |||
| Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 2011 and 2010 | 5 | |||
| Notes to Consolidated Financial Statements | 6 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | |||
| Item 3. Quantitative and Qualitative Disclosures about Market Risk | 11 | |||
| Item 4. Controls and Procedures | 12 | |||
| Part II. Other Information | ||||
| Item 6. Exhibits | 13 | |||
| Signatures | 14 | |||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
| ASSETS | (Unaudited) September 30, 2011 | December 31, 2010 | ||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 4,190,585 | $ | 2,732,570 | ||||
| Accounts receivable – net of allowance for doubtful accounts | 932,199 | 757,507 | ||||||
| Prepaid expenses and other current assets | 191,231 | 116,784 | ||||||
| Total current assets | 5,314,015 | 3,606,861 | ||||||
| Property and equipment, net | 321,185 | 215,289 | ||||||
| Other assets | 25,894 | 22,233 | ||||||
| Total assets | $ | 5,661,094 | $ | 3,844,383 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 487,318 | $ | 545,973 | ||||
| Convertible notes payable | 1,434,660 | – | ||||||
| Obligations under capital lease | 39,680 | 17,317 | ||||||
| Accrued liabilities | 339,312 | 566,623 | ||||||
| Deferred revenue | 5,750 | 320,000 | ||||||
| Total current liabilities | 2,306,720 | 1,449,913 | ||||||
| Obligations under capital lease, long-term | 59,223 | 13,819 | ||||||
| Convertible notes payable, long-term | – | 1,570,571 | ||||||
Total Liabilities | 2,365,943 | 3,034,303 | ||||||
| Commitments and contingencies | – | – | ||||||
| Stockholders' equity: | ||||||||
Preferred stock, $1.00 par value, 2,000,000 shares authorized; No shares issued and outstanding | – | – | ||||||
Common stock, $.00l par value, 160,000,000 shares authorized, 118,915,698 and 109,967,628 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively | 118,916 | 109,968 | ||||||
| Additional paid-in capital | 114,571,222 | 110,986,117 | ||||||
| Accumulated deficit | (111,394,987 | ) | (110,286,005 | ) | ||||
| Total stockholders’ equity | 3,295,151 | 810,080 | ||||||
| Total liabilities and stockholders’ equity | $ | 5,661,094 | $ | 3,844,383 | ||||
See notes to consolidated financial statements.
3
APPLIED NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Revenues | ||||||||||||||||
| Government contracts | $ | 284,025 | $ | 685,662 | $ | 2,616,661 | $ | 1,925,129 | ||||||||
| Contract research | 242,782 | 197,133 | 1,086,381 | 786,098 | ||||||||||||
| License fees and royalties | 1,608,103 | – | 1,870,943 | 1,000,000 | ||||||||||||
| Other | 114,109 | 66,438 | 274,549 | 113,581 | ||||||||||||
| Total revenues | 2,249,019 | 949,233 | 5,848,534 | 3,824,808 | ||||||||||||
| Research and development | 1,434,599 | 1,244,015 | 4,428,239 | 3,290,001 | ||||||||||||
| Selling, general and administrative expenses | 792,070 | 644,759 | 2,247,766 | 1,471,942 | ||||||||||||
| Operating costs and expenses | 2,226,669 | 1,888,774 | 6,676,005 | 4,761,943 | ||||||||||||
| Gain on sale of intellectual property and other assets | – | – | – | 2,732 | ||||||||||||
| Income (loss) from operations | 22,350 | (939,541 | ) | (827,471 | ) | (934,403 | ) | |||||||||
| Other income (expense), net | ||||||||||||||||
| Interest expense | (86,238 | ) | (119,812 | ) | (296,809 | ) | (276,862 | ) | ||||||||
| Interest income | 1,822 | 649 | 15,298 | 1,407 | ||||||||||||
| Other income | – | 4,707 | – | 4,707 | ||||||||||||
| Income (loss) from continuing operations before taxes | (62,066 | ) | (1,053,997 | ) | (1,108,982 | ) | (1,205,151 | ) | ||||||||
| Provision for taxes | – | – | – | – | ||||||||||||
| Net income (loss) | $ | (62,066 | ) | $ | (1,053,997 | ) | $ | (1,108,982 | ) | $ | (1,205,151 | ) | ||||
| Earnings (loss) per share | ||||||||||||||||
| Basic and Diluted | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic | 118,853,585 | 108,841,403 | 116,155,990 | 108,941,722 | ||||||||||||
| Diluted | 118,853,585 | 108,841,403 | 116,155,990 | 108,941,722 | ||||||||||||
See notes to consolidated financial statements.
4
APPLIED NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
| 2011 | 2010 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,108,982 | ) | $ | (1,205,151 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 50,084 | 48,393 | ||||||
| Amortization of discount on debt | 190,089 | 167,402 | ||||||
| Stock based compensation expense | 564,908 | 205,892 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, trade | (174,692 | ) | (160,443 | ) | ||||
| Prepaid expenses and other assets | (78,108 | ) | (27,753 | ) | ||||
| Accounts payable and accrued liabilities | (134,572 | ) | 143,210 | |||||
| Deferred revenue | (314,250 | ) | (24,545 | ) | ||||
| Total adjustments | 103,459 | 352,156 | ||||||
| Net cash used in operating activities | (1,005,523 | ) | (852,995 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (70,611 | ) | (10,410 | ) | ||||
| Net cash used in investing activities | (70,611 | ) | (10,410 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of capital leases | (17,602 | ) | (16,190 | ) | ||||
| Payments on notes payable | – | (50,000 | ) | |||||
| Proceeds from long-term debt | – | 1,730,000 | ||||||
| Proceeds from stock issuance | 2,551,751 | 204,368 | ||||||
| Net cash provided by financing activities | 2,534,149 | 1,868,178 | ||||||
| Net increase in cash and cash equivalents | 1,458,015 | 1,004,773 | ||||||
| Cash and cash equivalents, beginning of period | 2,732,570 | 286,971 | ||||||
| Cash and cash equivalents, end of period | $ | 4,190,585 | $ | 1,291,744 | ||||
See notes to consolidated financial statements.
5
APPLIED NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The consolidated financial statements for the three and nine month periods ended September 30, 2011 and 2010 have been prepared by us without audit pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments necessary to present fairly our financial position, results of operations, and cash flows as of September 30, 2011 and 2010, and for the periods then ended, have been made. Those adjustments consist of normal and recurring adjustments. The consolidated balance sheet as of December 31, 2010, has been derived from the audited consolidated balance sheet as of that date.
Certain information and note disclosures normally included in our annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with a reading of the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the U.S. Securities and Exchange Commission.
The results of operations for the three and nine month periods ended September 30, 2011, are not necessarily indicative of the results to be expected for the full year.
2. Supplemental Cash Flow Information
Cash paid for interest for the nine months ended September 30, 2011 and 2010, was $3,504 and $4,578, respectively. During the nine months ended September 30, 2011 and 2010, the Company had non-cash transactions related to share-based payments described in greater detail in Note 5 and non-cash transactions related to the conversion of notes payable and related accrued interest into common stock that are described in greater detail in Note 3. In addition, a total of $120,000 and $90,000 of accounts payable were converted into common stock in 2011 and 2010, respectively. A total of $216,000 of accrued expenses were converted into convertible notes payable in 2010 and $340,000 of accounts payable were converted into notes payable in 2010, all of which were paid in 2010. In addition the Company entered into a capital lease in 2011, the amount of which was $85,369.
3. Notes Payable and Long-Term Debt
We issued convertible notes payable in 2009 and 2010. These notes bear interest at a rate of 8% and are due in 2012. The notes and resulting accrued interest are convertible into shares of our common stock at rates of $0.20 to $0.25 per share. The face amount of the notes due was $2,146,000 and we valued the conversion rights at $647,250, which was recorded as a discount at the time of issuance. This discount is being amortized to interest expense over the term of the note and at September 30, 2011 $185,340 of the discount remained. $216,000 of these notes were issued to officers and directors of the Company. As of September 30, 2011, a total of $526,000 of these notes have been converted to common stock, leaving a remaining principal balance as of that date of $1,620,000. During the nine months ended September 30, 2011, a total of $326,000 of principal and related accrued interest of $31,394 was converted into 1,764,144 shares of common stock.
4. Stockholders’ Equity
During the nine months ended September 30, 2011, we issued 6,578,948 restricted shares of common stock and received proceeds of $2.5 million in an exempt offering under Regulation D of the Securities Act of 1933, and 200,454 shares for total proceeds of $51,751 in connection with the exercise of options by former employees. We also issued 300,752 shares of restricted common stock in payment of accounts payable in the amount of $120,000 during the same period, as well as 103,772 shares in connection with restricted stock payments to employees.
During the nine months ended September 30, 2010, we issued 1,000,000 restricted shares of common stock and received proceeds of $200,000 in an exempt offering under Regulation D of the Securities Act of 1933 and 18,200 shares for total proceeds of $4,368 in connection with the exercise of expiring options by former employees. We also issued 352,657 restricted shares of common stock in payment of accounts payable in the amount of $90,000.
6
APPLIED NANOTECH HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Share-Based Payments
We use the fair value method to account for stock based compensation. We recorded $564,908 and $205,892 in compensation expense in the periods ended September 30, 2011 and 2010, respectively, related to options and restricted stock issued under our stock-based incentive compensation plans. This includes expense related to both options issued and committed, but unissued, restricted stock in the current year, and options issued in prior years for which the requisite service period for those options includes the current year. The fair value of these options was calculated using the Black-Scholes option pricing model. Information related to the assumptions used in this model is set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. For options issued in 2011, the same approximate assumptions were used.
6. Contingencies
Litigation
The Company is a defendant in minor lawsuits described in greater detail in its 2010 Annual Report on Form 10-K. The Company expects any potential eventual payment to have no material effect on the financial statements.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that we believe are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by such acts. For this purpose, any statements that are not statements of historical fact may be deemed to be forward-looking statements, including the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our strategy, future operations, future expectations or future estimates, financial position and objectives of management. Those statements in this Form 10-Q containing the words "believes," "anticipates," "plans," "expects" and similar expressions constitute forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, results of operations, competitive factors, shifts in market demand and other risks and uncertainties.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate and actual results may differ from those indicated by the forward-looking statements included in this Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included in this Form 10-Q, you should not consider the inclusion of such information as a representation by us or anyone else that we will achieve such results. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Nine months ended September 30, 2011 and 2010
OVERVIEW
We are primarily a nanotechnology company engaged in the performance of services and development and commercialization of technologies based principally on our intellectual property. During all periods presented, our primary revenues were earned as a result of reimbursed research expenditures and licenses. As more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2010, we expect to incur additional research and development expenses throughout 2011 in developing our technology. We are focused on licensing our technology and obtaining sufficient revenue to cover our ongoing research expenditures and operating expenses.
OUTLOOK
We expect our present cash balances, which were approximately $4.2 million at September 30, 2011, when combined with expected revenue sources, to enable us to operate into the third quarter of 2012, and we expect to sign additional contracts which would extend that period further. We have a plan to achieve profitability in 2011, and that plan anticipated a loss early in the year, which was expected to be offset by profits later in the year. A critical component of that plan is the receipt of license fees – either in the form of an upfront payment, or from ongoing royalties as a result of product sales by our licensees. In order to achieve our plan of profitability, we will need to sign a license agreement with an upfront payment (meeting revenue recognition criteria) greater than or equal to $2.5 million, or recognize a gain from patent sales of the same amount, in the fourth quarter.
At the present time, there can be no assurance that we will achieve our plan for profitability in 2011, or even break-even, or that expected revenue sources will occur as planned. At our present level of activity, it is not possible for us to achieve profitability without upfront license fees, significant royalties, or other similar items. In order to achieve profitability solely based on research revenues, our research revenue would have to more than double from our expected level for 2011, and the majority of the revenue would have to come from non-governmental sources. The mix of revenues received could also cause the revenues required to reach break-even to increase. If revenue producing projects require unanticipated expenses, or heavier than anticipated use of outside services and materials, we may be unable to achieve profitability at the expected level of revenues. We believe that we have the ability to continue to raise funding, if necessary, to enable us to continue operations until we reach profitability.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
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. If adequate funds are not available from operations, or other sources of financing, we may have to eliminate, or reduce substantially, expenditures for research and development, testing and production of our products, or obtain funds through arrangements with other entities that may require us to relinquish rights to certain of our technologies or products. Such results could materially and adversely affect us.
RECENT DEVELOPMENTS
In July 2011, we signed a license agreement with Sichuan Anxian Yinhe Construction and Chemical Company (“YHCC”) for our solar ink and paste technology. We received an upfront license fee of $1.5 million. An additional $500,000 is due in April 2012, assuming certain technical specifications have been achieved by that date. In addition, we will receive a royalty of 3% of their future sales of inks and pastes that use the technology.
RECENT ACCOUNTING PRONOUNCEMENTS
There are no recent accounting pronouncements that we have not implemented that are expected to have a material impact on our financial statements.
FINANCIAL CONDITION AND LIQUIDITY
Our cash position increased significantly during the period. At September 30, 2011 we had cash and cash equivalents of approximately $4.2 million as compared with cash and cash equivalents of slightly more than $2.7 million at December 31, 2010. This increase in cash is primarily the result of cash provided by financing activities, partially offset by cash used in operations.
We had net cash provided by financing activities of approximately $2.5 million during the nine months ended September 30, 2011 (the “2011 Period”), as compared with approximately $1.9 million provided by financing activities during the nine months ended September 30, 2010 (the “2010 Period”). The cash flow in both periods was the result of the issuance of common stock and convertible notes payable to increase our cash balance and solidify our financial position, partially offset by payments on capital leases and notes payable.
Our net cash used in operating activities increased from approximately $850,000 in the 2010 Period to approximately $1.0 million in the 2011 Period. This is primarily the result of operating factors discussed below in the “Results of Operations”. If we achieve our planned financial results, we will generate positive cash flow from operations for 2011; however, if we do not sign any significant agreements in the fourth quarter of 2011, we expect our cash used in operations to be approximately $2.0 million for the year.
Cash used in investing activities in both periods was insignificant and related to the purchase of capital equipment. We expect cash used in investing activities to remain at relatively insignificant levels for the balance of 2011.
Historically, the principal source of our liquidity has been funds received from exempt offerings of common stock. Our current cash balance is strong and our plan is to sign additional contracts so that we do not need to raise additional debt or equity; however, in the unanticipated event that we do need additional funds as some point in the future, we may seek to sell additional debt or equity securities. While we expect to be able to obtain any funds needed for operations, 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 be dependent on our patent portfolio and upon the viability of products using our technology and their acceptance in the marketplace, as well as our ability to obtain additional debt or equity financings in the future, if needed.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
We expect to continue to incur substantial expenses for research and development ("R&D"). Further, we believe that certain products that may be developed by potential licensees of our technology may not be available for commercial sale or routine use for a period of one to two years. The first products using our technology, golf clubs and badminton racquets from Yonex, are now available in 2011 and others, including products from Ishihara and YHCC, are expected to be available in 2012. While we would likely receive initial license payments, ongoing royalty streams related to some licenses may not be available until potential licensees have introduced products using our technology. Therefore, it is possible that the commercialization of our existing and proposed products may require additional capital in excess of our current funding. We do, however, have a plan to operate profitably in 2011 based on the receipt of research funding, license agreements, and other revenues. This plan requires us to sign significant agreements in the fourth quarter, which may not occur. Achievement of at least break-even would enable us to continue our research without seeking additional debt or equity financing in the future.
Because the timing and receipt of revenues from the license or royalty agreements will be tied to the achievement of certain product development, testing 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 operations or seek additional financing from other sources at some point in the future. The combined effect of the foregoing may prevent us from achieving sustained profitability for an extended period of time.
RESULTS OF OPERATIONS
Our net loss for the third quarter ended September 30, 2011 was $62,066 as compared with a net loss of $1,053,997 for the same period last year. Our net loss of $1,108,982 for the nine months ended September 30, 2011 was decreased from the loss of $1,205,151 for the nine months ended September 30, 2010. This decreased loss was the result of reasons set forth below.
Our revenues for the quarter ended September 30, 2011 totaled approximately $2.25 million compared to approximately $950,000 for the same quarter of 2010. For the nine-month period ended September 30, 2011 (the “2011 Period”), our revenues were approximately $5.85 million, as compared with approximately $3.8 million for the nine-month period ended September 30, 2010 (the “2010 Period”), a substantial increase. Our business strategy is built on developing a royalty stream from licensing our intellectual property, as well as developing a revenue stream from product sales. To supplement this, we also seek funding from both governmental and private sources to help fund our research. At the present time, the majority of our revenue comes from funded research, primarily from the U.S. Government. Our revenue from government contracts increased from approximately $1.9 million in the 2010 Period to approximately $2.6 million in the 2011 Period. The main reason for this increase was a U.S. Department of Energy (“DOE”) grant that we received related to the development of conductive inks for solar cell production. We recognized $1.2 million in revenue from that particular contract in the 2011 Period. In addition, our research revenue from non-governmental contracts increased from approximately $800,000 in the 2010 Period to approximately $1.1 million in the 2011 Period as the result of a general increase in the level of activity.
Our license fee and royalty income increased from $1.0 million in the 2010 Period to approximately $1.9 million in the 2011 Period. The revenue in the 2010 Period resulted from an up-front payment from Ishihara Chemical Company, while the revenue in the 2011 Period was the result of an upfront of $1.5 million from Sichuan Anxian Yinhe Construction and Chemical Company and royalty payments of approximately $370,000 based on product shipments by our licensee, Yonex Corporation. These represent the first royalty payments that we have received based on product shipments by our licensees and we expect these royalty payments to continue in future quarters.
We have a research revenue backlog of approximately $1.7 million as of the date of this filing, as compared to our backlog of approximately $4.75 million as of September 30, 2010. We have several quotes in process, and we expect to land additional research contracts; however, we expect our research revenue to continue at approximately the same level during the fourth quarter of 2011 as it was for the quarter ended September 30, 2011. The previously mentioned DOE contract that resulted in $1.2 million in revenue during the first six months is substantially complete as of September 30, 2011. As a result of completion of that contract, our research revenue will return to more normal historical levels. Our ability to perform continued research, or fulfill our backlog, will not require additional personnel. We do not anticipate hiring any additional research people for the balance of the year, unless we receive significant new revenues. We do; however, plan to hire two business development people.
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)
At the present stage of our development, significant conclusions cannot be drawn by comparing revenues from period to period. Until we are able to develop a steady revenue stream from royalties, our revenues will tend to fluctuate greatly from quarter to quarter. Much of our private research funding tends to come in large amounts at sporadic times. Our plan calls for targeted revenues of $10.0 million for 2011. At the present time, we expect research and other revenues to be approximately $5.0 million, meaning the remainder will have to come from licenses and royalties. A portion of this will be filled by the upfront payment on our previously discussed solar ink and paste technology license signed in July, as well as royalties from Yonex. Our ability to achieve this plan depends upon the contracts that we sign during the remainder of the year, however, unless we sign an agreement, or agreements, with upfront payments greater than or equal to $3.0 million in total, we likely will not achieve our revenue target.
Our operating costs and expenses increased from approximately $4.8 million in the 2010 Period to approximately $6.7 million in the 2011 Period. Costs by category are discussed in greater detail below, but during the 2010 Period we had a wide ranging and extensive cost reduction program in place to insure our survival until we completed our fundraising and until expected revenue increases took effect in the second half of 2010. While we were able to operate at that reduced expense level for a temporary period of time, we could not achieve growth and sustain our progress while operating at that level.
We incurred research and development expenses of approximately $4.4 million in the 2011 Period, which was up from the amount of approximately $3.3 million incurred in the 2010 Period. This reflects an increase in the general level of research activity and an increase in funded research projects. In addition, as previously mentioned, we had a cost reduction program in place during the 2010 Period. In the 2011 Period, we incurred greater labor costs, higher facility costs as a result of our expansion of the facility, and increased research costs as a result of the higher level of activity. We expect research and development expenditures to decline in the fourth quarter as a result of the expected lower level of research revenue for the balance of the year. Significant new revenue producing research programs beyond those already identified could, however, cause research and development expenditures to increase.
Our selling, general, and administrative expenses were approximately $2.2 million for the 2011 Period, compared with approximately $1.5 million for the 2010 Period. This increase is the result of the previously mentioned cost reduction activities in 2010. The selling, general, and administrative costs in the 2011 Period were slightly higher than the costs in the same period in 2009 and below the costs in the same period in 2008. During the 2011 Period, we spent substantially more on investor relations activities, patents, and sales costs related to new projects and contracts. We would expect selling, general, and administrative costs to remain at similar levels for the balance of the year.
Our interest income is insignificant, but increased during the 2011 Period as a result of a higher average level of invested cash balances. Our interest income results from the investment of excess funds in short term interest bearing instruments, primarily certificates of deposit, commercial paper, and money market funds. We expect our interest income to remain at insignificant levels for the balance of 2011. Our interest expense increased in the 2011 Period as a result of our issuance of the convertible notes payable in 2010. This interest expense includes both the stated interest rate on the debt and the amortization of the discount associated with the notes. We would expect our interest expense to remain at these higher levels for the balance of 2011.
During the 2010 Period we had a small gain of $2,732 related to the sale of certain scrap materials and equipment and miscellaneous income of $4,707. There were no such sales in the 2011 Period.
ITEM 3. 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.
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ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report (the "Evaluation Date"). Based upon this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission ("SEC") reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to the Company, including, our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
In addition, there were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the Evaluation Date. We have not identified any material weaknesses in our internal controls, and therefore, no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibits: See Index to Exhibits on page 15 for a descriptive response to this item.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
APPLIED NANOTECH HOLDINGS, INC. (Registrant) | |
| Date: October 31, 2011 | /s/ Douglas P. Baker Douglas P. Baker Chief Executive Officer, Chief Financial Officer (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
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INDEX TO EXHIBITS
The following documents are filed as part of this Report:
| Exhibit | |
| 11 | Computation of (Loss) Per Common Share |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certificate of Douglas P. Baker |
| 32.1 | Section 1350 Certificate of Douglas P. Baker |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Labels Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
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