Item
8.
Financial Statements and
Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
NANO-PROPRIETARY, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
Independent
Auditor’s Report
30
Consolidated
Balance Sheets - December 31, 2007 and 2006
31
Consolidated
Statement of Operations - Years Ended December 31, 2007, 2006, and
2005
32
Consolidated
Statements of Shareholders’ Equity - Years Ended December 31, 2007, 2006,
and 2005
33
Consolidated
Statements of Cash Flows - Years Ended December 31, 2007, 2006, and
2005
34
Notes
to Consolidated Financial Statements
35
Page
29
INDEPENDENT
AUDITOR’S REPORT
To the
Board of Directors and Shareholders
Nano-Proprietary,
Inc.
Austin,
Texas
We have
audited the accompanying consolidated balance sheets of Nano-Proprietary, Inc.
and Subsidiaries (collectively, the “Company”) as of December 31, 2007 and 2006
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,
2007. 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 Nano-Proprietary, Inc. and
Subsidiaries as of December 31, 2007 and 2006, and the results of its operations
and its cash flows for each of the years in the three year period ended December
31, 2007 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, 2007, 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 21, 2008 expressed an unqualified opinion on the effectiveness of
internal control over financial reporting.
Padgett,
Stratemann & Co, L.L.P.
Austin,
Texas
February
21, 2008
Page
30
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
ASSETS
December
31,
2007
2006
Current
assets:
Cash
and cash equivalents
$
3,020,096
$
2,085,338
Accounts
receivable, trade – net of allowance for doubtful accounts
253,963
364,718
Prepaid
expenses and other current assets
77,038
79,301
Total
current assets
3,351,097
2,529,357
Property
and equipment, net
278,456
154,545
Other
assets
115,305
9,540
Total
assets
$
3,744,858
$
2,693,442
LIABILITIES
AND SHAREHOLDERS’ EQUITY
Current
liabilities:
Accounts
payable
$
447,106
$
1,562,488
Obligations
under capital lease
29,416
—
Accrued
liabilities
103,003
87,237
Deferred
revenue
306,427
401,455
Total
current liabilities
885,952
2,051,180
Obligations
under capital lease, long-term
30,004
—
Total
liabilities
915,956
2,051,180
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,
107,173,549
and
104,257,607 shares issued and outstanding, respectively
107,174
104,258
Additional
paid-in capital
108,580,565
102,139,950
Accumulated
deficit
(105,858,837
)
(101,601,946
)
Total
shareholders’ equity
2,828,902
642,262
Total
liabilities and shareholders’ equity
$
3,744,858
$
2,693,442
See notes
to consolidated financial statements.
Page
31
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year
ended December 31,
2007
2006
2005
Revenues
Contract
research
$
990,598
$
360,054
$
59,995
Government
contracts
2,328,010
583,236
208,211
License
fees and royalties
—
83,928
—
Other
671,195
89,452
297,454
Total
revenues
3,989,803
1,116,670
565,660
Operating
costs
Research
and development
4,526,166
3,590,148
2,635,412
Selling,
general and administrative expenses
3,858,720
5,229,014
3,779,820
Total
operating costs
8,384,886
8,819,162
6,415,232
Gain
on sale of assets and other intellectual property
—
1,100,000
—
Loss
from operations
(4,395,083
)
(6,602,492
)
(5,849,572
)
Other
income (expense):
Interest
income
139,118
9,204
33,346
Interest
expense
(926
)
(604
)
(2,590
)
Total
other Income
138,192
8,600
30,756
Loss
before taxes
(4,256,891
)
(6,593,892
)
(5,818,816
)
Provision
for taxes
—
—
—
Net
loss applicable to common shareholders
$
(4,256,891
)
$
(6,593,892
)
$
(5,818,816
)
Earnings
(loss) per share
Basic
and diluted
$
(0.04
)
$
(0.07
)
$
(0.06
)
Weighted
average common shares outstanding
Basic
and diluted
106,321,400
100,895,795
98,957,812
See notes
to consolidated financial statements.
Page
32
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Additional
Preferred
Common
Paid-In
Accumulated
Shares
Amount
Shares
Amount
Capital
Deficit
Total
Balance
December 31, 2004
-
-
97,246,422
97,246
89,938,448
(89,189,238
)
846,456
Issuance
of common stock
options
as compensation
-
-
-
-
1,288,760
-
1,288,760
Issuance
of common stock
as
a result of the exercise of
employee
stock options
-
-
817,625
818
542,121
-
542,939
Issuance
of common stock for cash
-
-
1,682,393
1,682
3,998,318
-
4,000,000
Net
(loss)
-
-
-
-
-
(5,818,816
)
(5,818,816
)
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
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 common stock
options
as compensation
-
-
-
-
128,957
-
128,957
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
See notes
to consolidated financial statements.
Page
33
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended
December
31,
2007
2006
2005
Cash
flows from operating activities:
Net
loss
$
(4,256,891
)
$
(6,593,892
)
$
(5,818,816
)
Adjustments
to reconcile loss to net
cash
used in operating activities:
Depreciation
and amortization expense
50,498
49,172
56,260
Stock
and options issued for services
139,108
695,978
1,288,760
Stock
issued for patent
—
400,000
—
Changes
in assets and liabilities:
Accounts
receivable, trade
110,755
(270,615
)
(87,368
)
Prepaid
expenses and other assets
(103,502
)
6,005
(171
)
Accounts
payable
(1,115,382
)
1,581,357
90,534
Accrued
expenses
15,766
(5,926
)
18,207
Customer
deposits and other current liabilities
(95,028
)
401,455
(54,985
)
Total
adjustments
(997,785
)
2,857,426
1,311,237
Net
cash used in operating activities
(5,254,676
)
(3,736,466
)
(4,507,579
)
Cash
flows from investing activities:
Capital
expenditures
(112,682
)
(101,932
)
(16,672
)
Net
cash used in investing activities
(112,682
)
(101,932
)
(16,672
)
Cash
flows from financing activities:
Proceeds
from issuance of common stock
6,304,423
5,030,837
4,542,939
Repayment
of capital lease obligations
(2,307
)
(4,348
)
(23,026
)
Net
cash provided by financing activities
6,302,116
5,026,489
4,519,913
Net
increase (decrease) in cash and cash equivalents
934,758
1,188,091
(4,338
)
Cash
and cash equivalents, beginning of year
2,085,338
897,247
901,585
Cash
and cash equivalents, end of year
$
3,020,096
$
2,085,338
$
897,247
See notes
to consolidated financial statements.
Page
34
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Organization, Operations,
and Liquidity:
Nano-Proprietary,
Inc. and its subsidiaries (“the Company”) are engaged in the development of
products for applications using proprietary field emission technology, sensors,
nanoelectronics, and nanomaterials, as well as the performance of significant
research in that area. We intend to obtain development revenues for applying our
technology to specific applications for customers and royalty revenues from
licensing this technology to 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 will likely receive additional funds from the exercise
of 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, the research and development performed is
internally funded by us.
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
35
NANO-PROPRIETARY,
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
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 used by us. 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 other entities
generally allow the other entity to license the technology from us upon
completion of the project.
The
Company revenues also include royalties from licensing its technology, revenue
from the sale of products, and other miscellaneous revenues. Many of the
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. 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. 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
cost incurred as 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.
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
cost incurred as compared with total expected cost. However, to the extent there
are other significant contract provisions such as the delivery of more than a
nominal amount of samples or delivery of equipment, we would modify this as
appropriate. For other short term contracts, generally less than $50,000, we
recognize revenue when it is billed under the terms of the
contract.
Royalty
Revenue - The Company recognizes royalty revenues based on the shipment of
products by a licensee at the time the underlying product upon which the royalty
is based is shipped by the entity paying the royalty. For minimum royalty
payments paid by a licensee that are required for the licensee to maintain
exclusivity, royalty revenue is recognized at the time the minimum royalty
payment, is due, which normally corresponds 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
36
NANO-PROPRIETARY,
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. Under this method,
deferred income taxes are recorded to reflect the tax consequences on future
years of temporary differences between the tax basis of the assets and
liabilities and their financial amounts at year-end. The Company provides a
valuation allowance to reduce deferred tax assets to their net realizable
value.
Research
and development expenses
Costs of
research and development for Company-sponsored projects are expensed as
incurred.
Disclosures
about fair value of financial instruments
The
following methods and assumptions were used to estimate the fair value of each
class of certain financial instruments for which it is practicable to estimate
that fair value. For cash equivalents and accounts receivable, the
carrying amount approximates fair value because of the short-term nature of
these instruments. The fair value of the Company’s capital lease obligations is
estimated based on the quoted market prices for the same, or similar issues, or
on the current rates offered to the Company for obligations of the same
remaining maturities with similar collateral requirements. For all years
presented, the fair value of the Company’s capital lease obligations approximate
their carrying values.
Page
37
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant
Accounting Policies (continued):
Income
(loss) per common share
Basic per
share amounts are computed, generally, by dividing net income or loss by the
weighted average number of common shares outstanding. Diluted per-share amounts
assume the conversion, exercise, or issuance of all potential common stock
instruments unless the effect is anti-dilutive, thereby reducing the loss or
increasing the income per common share. As described in Notes 7, 8 and 9, the
Company had options and warrants outstanding as indicated in the table below.
However, because the Company incurred losses in all years presented, the
inclusion of those potential common shares in the calculation of diluted loss
per-share would have an anti-dilutive effect. Therefore, basic and diluted
per-share amounts are the same in all years presented.
2007
2006
2005
Options
6,897,180
7,713,912
6,703,151
Warrants
1,304,353
60,000
95,000
Weighted
average exercise price
$1.70
$1.58
$1.57
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.
2007
2006
2005
Expected
dividend yield
0%
0%
0%
Risk
Free Interest Rate
3.3%-
4.8%
4.6%-
5.2%
3.5%
- 4.4%
Expected
option term (in years)
3.5
- 5.0
2.0
- 3.5
1.5
- 3.5
Turnover/Forfeiture
Rate
0%
0%
0%
Expected
volatility
75%
- 82%
70%
- 87%
72%
- 100%
Weighted-average
volatility
79%
78%
99%
The
Black-Scholes option valuation model and other existing models were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. These option valuation models require
the input of, and are highly sensitive to, subjective assumptions including the
expected stock price volatility. Nano-Proprietary’s stock options have
characteristics significantly different from those of traded options, and
changes in the subjective input assumptions could materially affect the fair
value estimate.
Page
38
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.
Summary of Significant
Accounting Policies (continued):
Recently
issued accounting pronouncements
In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. This Interpretation clarifies that the recognition for uncertain
tax positions should be based on a more-likely-than-not threshold that the tax
position will be sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than 50 percent probability of
being realized upon settlement. The standard was adopted in 2007 and had no
effect on the financial statements.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This
Statement defines fair value and expands disclosures about fair value
measurements. These methods will apply to other accounting standards that use
fair value measurements and may change the application of certain measurements
used in current practice. The effective date is the beginning of 2008. The
adoption is not expected to 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. It may be applied
on a contract by contract basis and is irrevocable once applied to those
contracts. The standard may be applied at the time of adoption for existing
eligible items, or at initial recognition of eligible items. After election of
this option, changes in fair value are reported in earnings. The items measured
at fair value must be shown separately on the balance sheet. The effective date
is the beginning of 2008. The Company has not elected to measure eligible items
at fair value and does not believe adoption of the statement will 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.
3.
Operating Lease
Obligations:
The
Company leases various facilities and equipment under operating lease agreements
having terms expiring at various dates through 2010. Rental expense was
$179,594, $124,805, and $133,487 for the years ended December 31, 2007,
2006 and 2005, respectively.
Future
minimum lease payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2007, were as
follows:
2008
47,579
2009
22,344
2010
and thereafter
20,482
Total
future minimum lease payments
$
90,405
Page
39
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.
Capital Lease
Obligations
:
Capital
leases payable at December 31, 2007 and 2006 consisted of the
following:
2007
2006
Capital
lease equipment due in 24 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, 2007 at a cost of $92,586
and
with accumulated amortization of $772.
$
66,301
$
—
Less
interest
6,881
—
Less
current portion
29,416
—
Capital
Lease Obligations, long-term
$
30,004
$
—
5.
Details of Certain Balance
Sheet Accounts
:
Additional
information regarding certain balance sheet accounts at December 31, 2007 and
2006 is as follows:
December
31,
2007
2006
Property
and equipment:
Plant
and equipment
$
974,324
$
837,436
Furniture
and office equipment
134,911
106,146
Leasehold
Improvements
19,019
14,382
Total
carrying cost
1,128,254
957,964
Less
accumulated depreciation
(849,798
)
(803,419
)
$
278,456
$
154,545
Accrued
liabilities:
Payroll
and related accruals
$
79,003
$
63,237
Other
24,000
24,000
Total
$
103,003
$
87,237
Depreciation
and amortization for the years ended December 31, 2007, 2006, and 2005 was
$50,498, $49,172, and $56,260, respectively. Equipment held under capital leases
and accumulated amortization on that equipment is included in these
totals.
Page
40
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6.
Income
Taxes
:
The
components of deferred tax assets (liabilities) at December 31, 2007 and 2006,
were as follows:
December
31,
2007
2006
Deferred
tax assets:
Net
operating loss carry forwards
$
33,920,000
$
32,904,000
Stock
Based Compensation
1,718,000
1,804,000
Research
and experimentation credits
460,000
468,000
Partnership
Asset
57,000
—
Capitalized
intangible assets
112,000
149,000
Depreciation
assets
3,000
5,000
Accrued
expenses not deductible until paid
27,000
24,000
Total
deferred tax assets
36,297,000
35,354,000
Deferred
tax liabilities:
—
—
Net
deferred tax assets before valuation allowance
36,297,000
35,354,000
Valuation
allowance
(36,297,000
)
(35,354,000
)
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, 2007, 2006, and 2005.
December
31,
2007
2006
2005
Expected
income tax expense (benefit)
$
(1,447,000
)
$
(2,242,000
)
$
(1,978,000
)
Non-deductible
expenses
10,000
10,000
11,000
Expiration
of Tax Credit Carryforwards
8,000
—
1,000
Expiration
of NOL Carryforwards
486,000
—
—
Other
—
(4,000
)
2,000
Increase
in Valuation Allowance
943,000
2,236,000
1,964,000
Total
Tax
$
—
$
—
$
—
As of
December 31, 2006, the Company had net operating loss carry forwards of
approximately $100 million that expire from 2008 through 2027, and are available
to offset future taxable income. The majority of these carry forwards expire
after 2009. Additionally, the Company has tax credit carry forwards related to
research and development expenditures of approximately $460,000 that expire
through 2011.
The
Company’s IPO, completed in 1993, and subsequent issuances of stock have
effected ownership changes under Internal Revenue Code Section 382. The
ownership changes resulting from these stock issuances will likely limit the
Company’s ability to utilize any net operating loss carry forwards or credits
generated before the changes in ownership.
Page
41
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.
Capital
Stock
:
Preferred
stock
The
Company has authorization for the issuance of 2,000,000 shares of $1.00 par
value preferred stock. There were no shares of preferred stock outstanding for
any of the years presented.
Common
stock
During
2005, 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
2005
1,682,393
$
4,000,000
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, 2007, common stock was reserved for the following
reasons:
Exercise
of stock warrants
1,304,353
Exercise
and future grants of stock options
10,331,633
Total
shares reserved
11,635,986
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, 2007, 2006, and 2005 was
$139,108, $695,978, and $1,288,760, 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
42
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.
Stock Options
(continued):
In March
1992, the shareholders of the Company approved the 1992 Employees Stock Option
Plan (the “1992 Employees Plan”) for purposes of granting incentive or
non-qualified stock options. The plan was amended several times by the Company’s
Board of Directors to increase the number of shares authorized under the plan.
The latest amendment, in December 1999, increased the authorized shares under
the plan to 6,500,000. This plan expired in March 2002; however, options granted
under this plan prior to expiration remain outstanding until they are exercised,
forfeited, or the exercise period expires. At December 31, 2007, no shares
remained available for grant under the 1992 Employees Plan.
In March
1992, the Board of Directors adopted the 1992 Outside Directors’ Stock Option
Plan (the “1992 Directors Plan”), for purposes of granting non-qualified options
to non-employee directors of the Company. The plan was amended several times,
the latest being in December 1999. A total of 1,000,000 shares were reserved for
issuance under the plan and were issued each year based on a formula defined by
the plan. The stock options granted under the 1992 Directors Plan are
exercisable for up to 10 years at an option price equal to the fair market value
on the date the option is granted. This plan expired in March 2002; however,
options granted under the plan prior to expiration remain outstanding until they
are exercised, forfeited, or the exercise period expires. At December 31, 2007,
no shares remained available for grant under the 1992 Directors
Plan.
In May
1998, the Board of Directors of the Company established the 1998 Officers and
Directors Stock Option Plan (the “1998 Officers and Directors Plan”) and
reserved a total of 1,200,000 shares for issuance under the Plan. The plan was
amended in January 1999 by the Board of Directors of the Company to increase the
shares reserved for issuance under the plan to 2,500,000. Options under this
plan 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 1992 Employees Plan and the
1992 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 3,402,786 shares remain available for grant under this at December 31,
2007.
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, 2007:
Options
Outstanding
Options
Exercisable
Range
of
Exercise
Prices
Number
Outstanding
at
12/31/07
Wgtd. Avg.
Remaining
Contractual
Life
Wgtd.
Avg.
Exercise
Price
Number
Exercisable
at
12/31/07
Wgtd. Avg.
Remaining
Contractual
Life
Wgtd.
Avg.
Exercise
Price
$0.00
- $0.50
679,998
1.8
Years
$0.44
679,998
1.8
Years
$0.44
$0.51
- $1.00
981,250
3.8
Years
$0.83
981,250
3.8
Years
$0.83
$1.01
- $2.00
2,788,696
8.3
Years
$1.28
1,204,946
6.3
Years
$1.41
$2.01
- $3.00
2,447,236
5.2
Years
$2.38
2,447,236
5.2
Years
$2.38
Total
6,897,180
5.9
Years
$1.52
5,313,430
Years
$1.62
Aggregate
intrinsic value
$676,929
$676,929
Page
43
NANO-PROPRIETARY,
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, 2004
5,398,703
$
1.52
Granted
2,872,073
$
2.25
Exercised
(817,625
)
$
0.66
Cancelled
(750,000
)
$
2.42
Options
outstanding at December 31, 2005
6,703,151
$
1.84
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
The
weighted-average grant-date fair value of options granted during the years ended
December 31, 2007, 2006, and 2005 was $0.63, $0.90, and $1.43, respectively. The
total intrinsic value of options exercised during the years ended December 31,
2007, 2006, and 2005 was $387,905, $57,050, and $1,552,038 respectively. As of
December 31, 2007, there was $966,015 of total unrecognized compensation cost
related to 1,583,750 non-vested options granted under the plan. Of these
unvested options, 697,500 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 period of weighted average period of approximately 1.9 years.
The fair value of shares vested during the years ended December 31, 2007, 2006,
and 2005 was $299,519, $1,363,348, and $764,166, respectively.
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.
The 2002
Equity Compensation Plan also allows the issuance of restricted shares of common
stock. During the year, we granted 31,667 shares of restricted stock, resulting
in compensation expense of $10,151, in connection with our compensation of
outside Directors. A total of 20,001 of these shares were granted when our stock
price was $0.94, resulting in a total fair value of $18,801. The remaining
11,666 shares were granted when our stock price was $1.19, resulting in a total
fair value of $13,882. These shares vest quarterly over a one year time period
starting with the date of the grant and no share certificates are actually
issued until the grants are fully vested, so none of these shares are reflected
as issued and outstanding. As of December 31, only 4,700 of these shares were
vested. No shares of restricted stock were granted prior to 2007. The weighted
average fair value of shares granted during the year, vested during the year,
and unvested at December 31, 2007 was $1.03, $0.94, and $1.05,
respectively.
Page
44
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.
Stock
Warrants
:
Common
stock warrants
In 1996
and 1997, the Company issued a total of 110,000 warrants to an advisor in
connection with the Company’s fundraising activities. These warrants enabled the
holder to purchase shares of the Company’s 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. These remaining warrants expired unexercised.
In 2007,
the Company issued 1,304,353 warrants to shareholders 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 April 2008.
The
following is a summary of outstanding warrants:
Number
of
Shares
Exercise
Price
Warrants
outstanding at January 1, 2005
95,000
$1.00-2.00
Exercised
—
—
Expired
or canceled
—
—
Warrants
outstanding at December 31, 2005
95,000
$1.00-2.00
Exercised
—
—
Expired
(35,000)
$2.00
Warrants
outstanding at December 31, 2006
60,000
$1.00-2.00
Issued
1,304,353
$2.50
Exercised
—
—
Expired
(60,000)
$1.00
Warrants
outstanding at December 31, 2007
1,304,353
$2.50
10.
Supplemental Cash Flow
Information
:
Cash paid
for interest was $926, $604, and $2,590 for 2007, 2006, and 2005, respectively.
The following non-cash transactions have been excluded from the accompanying
consolidated statement of cash flows:
2007
2006
2005
Non-cash
financing activities:
Issuance
of common shares in payment of accounts payable
$
—
$
250,000
$
—
Capital
lease transaction
$
61,727
$
—
$
—
Page
45
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. As discussed in more detail below,
this agreement is currently under litigation.
Research
and development commitments
As of
December 31, 2007, the Company had several research contracts pending and in
process. The total amount of those contracts is $6,614,281. Of that total,
$2,723,439 has been recognized as revenue and $3,890,842 will be recognized in
the future. The revenue to be recognized from these research contracts in
2007 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.
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
In April 2005, we filed suit against
the Japanese camera and copier manufacturer Canon, Inc., and its wholly-owned
U.S. subsidiary Canon USA, Inc., in the U.S. District Court for the Western
District of Texas, Austin Division, seeking a declaratory
judgment that new SED color television products being developed
and manufactured by a Canon/Toshiba joint venture are not covered under a
non-exclusive 1999 patent license agreement that we granted to Canon.
We asserted that the Canon/Toshiba joint-venture – SED, Inc. – was not a
licensed party under that agreement. The original complaint asserted
additional claims related to whether the Canon/Toshiba joint venture’s
television panels constituted excluded products under the 1999 license, as well
as breach of covenant of good faith and fair dealing, tortious interference and
a Lanham Act violation by Canon. In the Fall of 2005, Canon moved to dismiss
Canon U.S.A. from the litigation, and moved to dismiss several of the counts
asserted. The court denied the motion, in part, by ruling that Canon
U.S.A. was an appropriate defendant and refusing to dismiss our claims for
breach of the covenant of good faith and fair dealing. Our tortious
interference and Lanham Act claims were dismissed, without
prejudice.
Page
46
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.
Commitments and
Contingencies (continued)
:
After
initial discovery, in April 2006, we amended the complaint to drop one count
related to the definition of excluded products in the 1999 license, and add two
counts for fraudulent inducement and fraudulent non-disclosure related to events
and representations made during our negotiations on the license, and
leading up to and following the formation by Canon and Toshiba of their joint
venture effort, including Canon’s failure to disclose an ongoing relationship
with Toshiba and misrepresentations made to us about the joint venture’s
structure and operation. Canon moved to dismiss the fraud claims, and
the Court denied Canon’s motion in May 2006. Discovery was completed
in August 2006. Upon completion of discovery, Canon filed a motion for partial
summary judgment seeking to dismiss the claim that SED is not a licensed party
under the agreement. Canon did not file a motion for summary judgment seeking to
dismiss the other claims. In November 2006, the Court denied Canon’s partial
motion for summary judgment, describing SED, Inc. as a “corporate fiction
designed for the sole purpose of evading Canon’s contractual
obligations”.
In
January 2007, Canon filed another motion for partial summary judgment seeking a
declaration that a reconstituted SED, Inc. which is purportedly owned 100% by
Canon but which still involved numerous reciprocal agreements with Toshiba,
would be considered a Canon subsidiary. At the same time, we filed a motion for
partial summary judgment, seeking the Court’s affirmation of our termination of
the license agreement due to Canon’s breach of contract in 2004. On February 22,
2007, the Court issued a ruling denying Canon’s motion and granting our motion
for partial summary judgment, ruling our termination of the contract effective
December 1, 2006, to be valid.
A trial
on the case began on April 30, 2007 and a final judgment was entered in the case
in May 2007. The final judgment reaffirmed Canon’s material breach of the patent
license, while awarding no additional damages. Both parties have filed appeals
related to the litigation. All appeal briefs and responses have been filed with
the Fifth Circuit Court of Appeals and we are currently waiting for the Court to
set a date for oral arguments in the case.
Keesmann
litigation
In May
2006, we filed suit in the U.S. District Court for the Northern District of
Illinois against Till Keesmann, a German citizen who in 2000 granted us an
exclusive and perpetual license to certain of his U.S. and European patents in
carbon nanotube cathode technology. In 2005, Keesmann conveyed
part of his interests in the Exclusive License to investors associated with a
German patent evaluation firm, IP Bewertungs AG (“IPB”). Thereafter,
IPB approached us with proposals to buy or auction our rights to Keesmann’s
patents. On March 22, 2006, after we declined to participate in the
auction process, Keesmann purported to terminate the exclusive license that he
granted to us six years earlier. Our May 2006 complaint seeks a
declaratory judgment that Keesmann had no right to terminate the exclusive
license and a Temporary Restraining Order and Preliminary Injunction to prevent
Keesmann from taking any actions inconsistent with his obligations under the
exclusive license. The Court granted a consent order that prevents
Keesmann from licensing the patents pending an injunction hearing and
decision. In June 2006, Keesmann filed an Answer and Counterclaim,
denying that the purported termination was null and void, and asserting a
counterclaim that asked the court to find that we breached the exclusive license
by not actively marketing the Keesmann patents, among other things.
We
amended our complaint in December 2006 to include additional defendants, JK
Patentportfolio GmbH & Co., Jochen Kamlah, NPV Nano Patent GmbH & Co.,
and Arnold Amsinck. The amended complaint also contains additional claims
including breach of contract, conversion, aiding and abetting conversion,
conspiracy to commit conversion, misappropriation, aiding and abetting
misappropriation, conspiracy to commit conversion, Lanham Act violations,
tortious interference with a prospective economic relationship, aiding and
abetting tortious interference with a prospective economic relationship, and
conspiracy to tortiously interfere with a prospective economic
relationship.
Page
47
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.
Commitments and
Contingencies (continued)
:
In
January 2007, the Court granted our motion for preliminary injunction, ruling
that there is a reasonable likelihood that we will prevail on the merits of the
case. The preliminary injunction enjoins Keesmann, his agents, employees, and
all those acting in concert with him from terminating the license agreement for
the reasons asserted in the March 2006 default notice, or otherwise acting in
violation of the license agreement. In connection with this injunction, the
Court set a surety bond, which is required by law, at $100,000. We posted the
bond in February 2007. Days after the Court issued the injunction,
Keesmann again asserted a number of alleged defaults under the license. In April
2007, we filed a second motion for a temporary restraining order and preliminary
injunction. We have established a discovery schedule leading up to trial, but no
trial date has yet been set. We have had settlement discussions at various times
during the course of the litigation, but have not, as yet reached a settlement
agreement to resolve the litigation.
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.
Research and Development
Contracts
:
The
Company makes significant expenditures for research and development. On
occasion, the Company may seek funding for a portion of its research and
development costs to reduce the cost of such expenditures to the Company. The
Company only seeks funding for projects that it already intended to do, or for
projects that would apply its technology for other uses in instances where that
application would allow the Company to achieve technical milestones that are
part of its strategic plan. A substantial portion of the Company’s funded
research has been from government contracts. Under government contracts, the
government has the right to utilize the results for its purposes and the Company
has the right to utilize the technology for commercial purposes. Generally, when
the Company contracts with other entities, the entity is also conducting its own
internal research related to application of the Company’s technology to its
products and such expenditures by the entity may exceed the amount of funding
provided to the Company. Usually the entity has the right to license the
technology at the conclusion of the project, if they desire. The costs of a
particular research program may significantly exceed the funding received,
however since the research was part of planned research, these contracts
generally involve only nominal additional costs to the Company.
The
following schedule summarizes certain information with respect to research and
development contracts:
2007
2006
2005
Contract
research revenues
$
3,318,608
$
943,290
$
268,206
Costs
incurred charged to operations included in research and
development
$
2,222,473
$
879,592
$
254,656
Amount
of additional funding commitments at December 31
$
3,890,842
$
3,026,133
$
2,763,565
Page
48
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13.
Retirement
Plan
:
The
Company sponsors a defined contribution 401(k) profit sharing plan. No company
contributions were made in any of the years presented.
14.
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,
2005 or 2007, 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 2006, the Company
held $2,414,958 and $439,808, 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.
15.
Quarterly Financial
Information (Unaudited)
:
First
Second
Third
Fourth
Total
Quarter
Quarter
Quarter
Quarter
Year
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
)
2005
Revenues
$
68,815
$
88,544
$
245,917
$
162,384
$
565,660
Operating
income (loss)
(1,368,793
)
(1,386,251
)
(1,526,478
)
(1,568,050
)
(5,849,572
)
Net
(loss)
(1,365,194
)
(1,376,209
)
(1,516,913
)
(1,560,500
)
(5,818,816
)
Earnings
(loss) per share
Basic
and Diluted
(0.01
)
(0.01
)
(0.02
)
(0.02
)
(0.06
)
Annual
Earnings (loss) per share may not equal the sum of the four quarterly amounts
due to rounding.
Page
49
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16.
Segment
Information
:
The
Company’s operations are classified into three principal reportable segments
that provide slightly different services.
ANI
EBT
All
Other
Total
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
—
2,982
49,173
Research
and Development
3,590,148
—
—
3,590,148
Net
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
2005
Revenue
$
565,660
$
—
$
—
$
565,660
Interest
Expense
2,193
—
397
2,590
Depreciation
and Amortization
52,242
—
4,018
56,260
Research
and Development
2,635,412
—
—
2,525,292
Net
Loss
(4,326,457
)
(3,734
)
(1,488,615
)
(5,818,806
)
Assets
301,870
—
886,111
1,187,981
Capital
Expenditures
13,017
—
3,655
16,672
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
50
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17.
Significant
Customers
:
Applied
Nanotech, Inc. received research and development revenues from the U.S.
Government in the three years as disclosed on the income statement. ANI’s
revenues tend to be project oriented and are not necessarily recurring with a
particular customer at the present time. In addition to the U.S.
Government, the Company had two customers in 2007 from which it received in
excess of 10% of its consolidated revenues. In the year ended December 31, 2007,
we had revenues of $416,787 from Mitsui & Co., Ltd. compared with revenues
of $31,060 in the year ended December 31, 2006. We also had revenues from
Ishihara Chemical Company, Ltd. of $685,963 and $111,600 in the years ended
December 31, 2007 and 2006, respectively. We also had revenues of $348,448 and
$248,454 in the years ended December 31, 2007 and 2006 respectively from Yonex
Co. Ltd.
18.
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 the
year.
19.
Gain on Sale of Intellectual
Property and Other Assets
:
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.
20.
Subsequent
Events
:
In February 2008, we signed a new six
year lease on our facility, effective March 1, 2008. The lease calls for
payments of $12,505 for each of the first 24 months, payments of $13,432 for
months 25 through 48, and $14,461 for the final 24 months of the
lease.
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