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APNT > SEC Filings for APNT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for APPLIED NANOTECH HOLDINGS, INC

Form 10-Q for APPLIED NANOTECH HOLDINGS, INC


2-Nov-2012

Quarterly Report


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, 2012 and 2011

OVERVIEW

We are primarily a nanotechnology company engaged in the development of technologies, based principally on our intellectual property. We generate revenues by performing research services, licensing our technology, and selling products based on our technology. During all periods presented, our primary revenues were earned as a result of reimbursed research expenditures and licensing of our technology. As more fully discussed in our Annual Report on Form 10-K for the year ended December 31, 2011, we expect to incur significant additional research and development expenses in 2012 to further develop and commercialize our technology. We are focused on commercializing our technology and obtaining sufficient revenue to cover our ongoing expenditures.

OUTLOOK

We expect our present cash balances, which were approximately $360,000 at September 30, 2012, when combined with expected revenue sources, to enable us to operate through the end of 2012. We expect to raise additional money to extend that period and we also expect to sign additional revenue generating contracts which will continue to extend this time period. If we do not receive the expected revenue sources as quickly as anticipated, we may be required to cut back on our commercialization activities, or raise additional funding beyond the amount currently planned.

We had a plan to achieve profitability in 2012, and that plan anticipated a loss in the first half, which was expected to be offset by profits for the balance of the year. Since developing this plan, we have accelerated spending on commercialization activities, including pursuing an acquisition opportunity. In addition, revenues from product sales have not increased as quickly as planned. That has made it unlikely that we can achieve profitability this year. A critical component of our plan is the receipt of additional revenues. These revenues must come from a variety of sources, including research revenues, license fees - either in the form of an upfront payment, or from ongoing royalties as a result of product sales by our licensees, and product sales by us.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont.)

At the present time, there can be no assurance that expected revenue sources will all occur as planned. It is not possible for us to achieve profitability without license fees or royalties at our present level of activity. In order to achieve profitability solely based on research revenues, our research revenue would have to more than double from our expected level for 2012, 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 obtain funding, if necessary, to enable us to continue operations until we reach profitability.

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 its 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 October 2012, we amended our license agreement with Sichuan Anxian Yinhee Construction and Chemical Group to extend their exclusivity for our solar inks and pastes to a worldwide exclusive license. Under this amendment, we will receive an initial royalty payment of $500,000, of which $250,000 was received in October 2012, and $250,000 is payable in 2013 if we achieve certain technical specifications related to our silver paste. The original agreement contained a similar provision related to the specifications for aluminum pastes. Those specifications were achieved early this year and the payment tied to those specifications was received. We expect to achieve the specifications set forth for the silver paste and receive the contingent payment in 2013. In addition, if these specifications are achieved, the royalty rate on running royalties under the agreement will be increased from 3% to 3.5%.

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 decreased during the period from approximately $3.1 million at December 31, 2011 to approximately $360,000 at September 30, 2012. This decrease in cash is primarily the result of cash used in operating activities.

Our net cash used in operating activities increased from approximately $1.0 million in the 2011 Period to approximately $3.4 million in the 2012 Period. This is primarily the result of operating factors discussed below in the "Results of Operations", as well as management of working capital items.

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 2012.

We had cash provided by financing activities in both periods. In 2012 we had cash generated from the issuance of notes payable in the amount of $735,700 and in 2011 we received approximately $2.6 million in proceeds from the issuance of common stock . There were insignificant amounts of cash used in financing activities in both periods related to payments on capital leases.

Historically, the principal source of our liquidity has been funds received from exempt offerings of common stock. We are currently seeking funds to accelerate our commercialization activities and to potentially facilitate a potential acquisition. 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.

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, development and commercialization activities. 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. Others are expected to be available in 2012 and 2013. 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 did, however, have a plan to operate profitably in 2012 based on the receipt of research funding, license agreements, product sales, and other revenues. However, our accelerated spending on commercialization activities, including a potential acquisition, has made it unlikely that we will achieve profitability in 2012. Achievement of at least break-even would enable us to continue our research without seeking additional financing in the future.

Because the timing and receipt of revenues from product sales, or license and 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, 2012 was approximately $1.2 million as compared with a net loss of approximately $60,000 for the same period last year. Our net loss of approximately $4.4 million for the nine months ended September 30, 2012 was increased from the loss of approximately $1.1 for the nine months ended September 30, 2011. This increased loss was the result of reasons set forth below.

Our revenues for the quarter ended September 30, 2012 totaled approximately $700,000 compared to approximately $2.25 million for the same quarter of 2011. For the nine-month period ended September 30, 2012 (the "2012 Period"), our revenues were approximately $2.6 million as compared with approximately $5.8 million for the nine-month period ended September 30, 2011 (the "2011 Period"). The largest source of revenues in the 2012 Period was from research services - approximately $1,474,000, of which approximately $1,223,000 of which was from government sources. This is a significant decrease from the 2011 Period and was the result of two main reasons. First, during 2011, we had a Phase 3 commercialization contract which resulted in $1.2 million in revenue in the 2011 Period. There was no such contract in 2012. In addition, we had significant research revenue from the NE Gas association in 2011, approximately $700,000, whereas we had only approximately $50,000 in revenue from the same source in 2012. In addition, certain research contracts that we expected to receive were delayed in 2012.

Our license fees and royalties decreased significantly in 2012. Of the total of approximately $888,000 in royalty revenue, $500,000 was from the remainder of the YHCC license signed in 2011. The balance of approximately $388,000 was from Yonex. The 2011 royalty revenues were $1.5 million from YHCC related to the solar inks license and the remaining $371,000 was from Yonex. We also had a significant increase in our product sales from 2011 to 2012, which is the result of our increased focus in this area. We expect product sales to continue to grow throughout the remainder of the year.

We have a research revenue backlog of approximately $2.4 million as of the date of this filing, as compared to our backlog of approximately $1.7 million as of September 30, 2011, and $2.3 million at December 31, 2011. We have several quotes in process and we expect to land additional research contracts and we expect our research revenue to increase during the fourth quarter of 2012. Our ability to perform continued research, or fulfill our backlog, will not require additional personnel. We do not anticipate hiring any additional people for research purposes for the balance of the year, unless we receive significant new revenues.

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; however, we would expect the quarterly revenue for the balance of 2012 to increase above the level of the first three quarters. We are currently behind our revenue plan for 2012 and likely will not be able to make up the shortfall, particularly in the research area; however, our plan anticipated increased revenues in the third and fourth quarters. At our present pace, we would expect revenues to be approximately $4.0 million for 2012; however, we have potential agreements that, if completed, would increase that amount. Our business strategy is built on commercializing our technology through product sales and developing a royalty stream from licensing our intellectual property. To supplement this, we also seek funding from both governmental and private sources to help fund our research. Until we are able to develop a steady revenue stream from royalties, or product sales, our revenues will tend to fluctuate greatly from quarter to quarter. Our private research funding tends to come in large amounts at sporadic times.

We incurred research and development expenses of approximately $3.7 million in the 2012 Period, which was down from the amount of approximately $4.4 million incurred in the 2011 Period. This decrease in research expenses is a direct result of the decreased research revenue in 2012. The decrease in expense was less than the decrease in research revenue since some of the expenses are fixed and a portion of the labor previously devoted to funded projects is now devoted to unfunded commercialization development activities. In addition we have shifted some of our resources that were previously focused on R&D to the sales area as a result of our increased focus on commercialization. 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 increased from approximately $2.2 million in 2011 to $3.0 million in 2012. The overwhelming majority of this increase, approximately $800,000, is the result of the formation of our sensor subsidiary and due diligence activities related to the potential acquisition for the subsidiary. The balance of the increase is primarily related to increased selling expenses related to other areas of our business, partially offset by cost reductions in other administrative areas.

Our interest income is insignificant in both periods. 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 2012. Our interest expense, which is primarily the result of our convertible notes payable, increased slightly in the 2012 Period. 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 similar levels for the fourth quarter of 2012.

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