Letter To The Shareholders
A Quarterly Update – November 4, 2011
I wanted to provide our regular quarterly update on our financial results, discuss some of the exciting developments, and provide some guidance related to our future financial goals. I will start with our financial results.
We recently filed our 10Q with our third quarter results and it was another excellent quarter for the company as we continue to build a strong base for future growth. Revenues for the first three quarters of 2011 were approximately $5.8 million, up from $3.8 million in 2010 – a 53% increase. In the third quarter alone, we had revenues of $2.2 million compared with just under $1.0 million in 2010 – over a 100% increase. The most significant revenue event in the third quarter was the $1.5 million license agreement from YHCC. Our research revenue for the quarter was about $640K, down from previous quarters as a result of our completion of the Department of Energy Solar Inks projects. We have already received some new projects and are replenishing our backlog of research projects.
Our strong revenue for the quarter resulted in basically a breakeven quarter with a small income from operations offset by the noncash interest expense from our 2010 financing. This came to a loss of $62K for the quarter, compared with a loss of a little over $1.0 million in the third quarter of 2010, and brings our loss for the year to roughly $1.1 million, compared with a loss of $1.2 million for the same period last year.
An important component of our revenue mix is our royalty income. We recorded another $108K of royalty revenue from Yonex in the quarter, which brings our year to date royalties to $370K. Of these royalties, approximately 50% of our royalties came from Yonex product sales in March, while they were filling their pipeline, 20% came from Yonex product sales in the second quarter and 30% came from Yonex product sales in the third quarter. This represents a roughly 50% quarter over quarter growth from the second to third quarter. We are looking forward to continued growth in the fourth quarter and in the coming years.
On our balance sheet, our cash position remains strong, with approximately $4.2 million in cash as of September 30, 2011. If no significant royalty agreements are signed before year end, we still anticipate ending the year with at least $3.0 million in cash and have cash to operate through the end of the third quarter 2012, at a minimum, even without the revenue increases that we expect.
In recent shareholder letters, I have covered some of the refinements, or shifts, in our strategy over the past several months and years, with the latest being to focus a portion of our resources on direct product sales. After conducting extensive analysis of our current pipeline of potential joint ventures, licensees and other partnerships in our core focus areas, we have identified the areas that we believe to have the greatest potential for rapid deployment of our direct business model. Through extensive market and product analysis, we have determined that the direct sales model is the right path for some of our highest potential technologies. In an effort to bring these technologies and materials to market quickly, we are expanding our sales and business development resources and are currently in the process of hiring two to three business development executives.
As many of our licensees are beginning to introduce products in the market, or are getting closer to market, we are now able to obtain more information related to potential royalties. In addition, as a result of moving to a direct sales approach in some areas, we are able to utilize the extensive market data we have gathered over the past couple of years related to our technologies and are able to better project sales in those areas. Building on this information, we have developed some revenue targets for the coming years.
We are targeting $75 million in revenue by 2015, which would be a roughly 80% annualized growth rate from our projected 2011 revenues. The key to this growth rate will be primarily dependent on the successful execution of our direct product sales activities, which we believe can propel us to the next level, supported by the continued growth we expect to generate from royalty income. These projections also contain assumptions that we will continue to license some of our technologies. However, in the cases where we can generate significant margins, a direct sale approach will be used.
Our projections contain relatively conservative assumptions for new licenses, royalty growth, and direct product sales spread across our four technology areas of nanocomposites, thermal management, nanoelectronics, and nanosensors, each of which have some high potential applications within them.
Translating this to the bottom line is also important. The chart below shows profit growth to roughly $24 million by 2015.
Absent any significant license agreements before year end, we will likely end 2011 with revenue of roughly $7.0 million and a loss of $2.2 million. This would represent a revenue increase in our core areas (not accounting for the one time Samsung payment in 2010) of close to 30% over 2010.
I wanted to highlight a few additional important developments. Firstly, our upcoming patent auction will occur at the end of November. We are auctioning two different patent groups, our hydrogen sensor patents and related IP, and many of our electron emission patents. This does not include our core Raman patents, which we believe to have high value potential and we will continue to retain these patents for their future license potential. We do think it is advantageous for our shareholders, however; to sell the rest of our electron emission portfolio. A successful auction could bring us to profitability for the year. As we do have minimum bid requirements for our portfolio, we will not sell the patents for less than a value that we believe would be beneficial for our shareholders.
I also wanted to provide an update on YHCC. Dr. Yaniv is returning from a recent trip to Asia, where he has seen, first hand, the construction of their solar inks facility, their pilot activities, and sales activities. We are more convinced than ever that YHCC is an ideal partner for us and will successfully introduce a product in 2012 that will begin generating royalties. We also are looking forward to expanding our relationship with YHCC to other technology areas.
Our Austin pilot facility for solar inks is up and running as planned. The new facility has allowed us to provide extensive samples to potential users and as expected, we have been experiencing a high level of activity. In addition, our pilot facility is a great tool to help YHCC with the commercialization of their product and accelerate their timeline to bring their product to market.
We recently filed an 8K related to the fact that one of our Directors, Clint Everton, resigned from the Board. I wanted to take this opportunity to thank Clint, who has been an invaluable asset to the company. He has spent considerable time assisting us with strategic issues and has brought a unique and beneficial perspective to our discussions. I know that we will miss his wise and insightful contributions and wish him the best in all of his future endeavors.
Investor Relations Activities
We are hosting an Investor Day on Wednesday, November 16, 2011 at 10:00 a.m. at the Embassy Suites - Austin Arboretum, 9505 Stonelake Blvd., Austin, TX 78759. The presentation will be followed by an open house at our new pilot plant. I urge all investors to take this opportunity to get an update on some of our latest activities, see our facilities, and speak with management.
We have also begun our investor relations program with RedChip. I presented at a virtual conference on October 20 and the next scheduled event is the RedChip Fall Conference in New York on November 9. We are also expecting that RedChip will come out with its analyst report shortly after the conference. We believe that as the RedChip program gains traction, it will continue to increase visibility of our company with new investors.
We have another solid quarter behind us and we are focused, above all else, on achieving revenue increases and sustainable profitability based on a mix of research revenues, license agreements and direct products sales. We are strongly convinced that this approach is the best way to maximize the benefits and value of our technology and deliver the greatest shareholder returns. We are excited to begin this new phase of growth.
Chief Executive Officer
Safe Harbor Statement
This letter contains forward-looking statements that involve risks and uncertainties concerning our business, products, and financial results. Actual results may differ materially from the results predicted. More information about potential risk factors that could affect our business, products, and financial results are included in our annual report on Form 10-K for the fiscal year ended December 31, 2010, and in reports subsequently filed by us with the Securities and Exchange Commission ("SEC"). All documents are available through the SEC's Electronic Data Gathering Analysis and Retrieval System (EDGAR) at www.sec.gov or from our website at www.appliednanotech.net. We hereby disclaim any obligation to publicly update the information provided above, including forward-looking statements, to reflect subsequent events or circumstances.