The
consolidated financial statements for the three and six month periods ended
June
30, 2006 and 2005 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 June 30, 2006 and 2005, 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, 2005,
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, 2005, as filed with the U.S. Securities and Exchange
Commission.
The
results of operations for the three and six month periods ended June 30, 2006,
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 six months ended June 30, 2006 and 2005, was $296 and
$1,906, respectively. During the six months ended June 30, 2006 and 2005, the
Company had non-cash transactions related to share based payments covered by
FAS
123R. These transactions are described in greater detail in Note 4. During
the
six months ended June 30, 2006 we also had a non-cash transaction related to
the
issuance of shares in connection with the acquisition of patent as described
in
greater detail in Note 3.
3.
Stockholders’
Equity
During
the six months ended June 30, 2006, we issued 750,000 restricted shares of
common stock and received net proceeds of $1,500,000 in an exempt offering
under
Regulation D of the Securities Act of 1933. In the six months ended June 30,
2005, we issued 1,200,000 restricted shares of common stock and received net
proceeds of $3,000,000 in an exempt offering under Regulation D of the
Securities Act of 1933, and we also issued 717,625 shares of our common stock
and received $477,938 in connection with the exercise of employee stock options,
primarily by former employees.
In
June
2006, we issued 200,000 shares of our common stock valued at $400,000 to acquire
the remaining interest in a patent that had been assigned to us. This patent
was
part of the intellectual property that we sold during the six months ended
June
30, 2006. This transaction is described in greater detail in Note
5.
4.
Share-Based
Payments
Effective
January 1, 2006, the Company adopted FASB Statement of Financial Accounting
Standards No. 123R (Revised 2004), Share-Based Payment, which requires that
the
compensation cost relating to share-based payment transactions be recognized
in
financial statements based on the provisions of SFAS 123 issued in 1995. We
have
adopted this statement using the modified retrospective method of
implementation, whereby the 2005 statements included have been restated to
give
effect to the fair-value based method of accounting for awards granted,
modified, or settled in that year as though they had been accounted for under
FAS 123.
The
Company recorded $787,866 in compensation expense in the six months ended June
30, 2006 related to options issued under its stock-based incentive compensation
plans. This includes expense related to both options issued 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, 2005. For options issued
in
2006, the same assumptions were used except that risk free interest rates of
4.64% to 5.0% were used and annualized volatility rates ranging from
approximately 70% to 85% were used.
6
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4.
Share-Based
Payments (cont.)
The
Company recorded $351,194 in compensation expense in the period ended June
30,
2005 related to options issued under its stock-based incentive compensation
plans. A portion of this expense, $19,339, related to options issued to
contractors and was recorded in the financial statements at the time. The
remaining expense, $331,855, related to employee options and was originally
accounted for using the intrinsic value method, which resulted in no expense.
The 2005 statements have been restated to account for these options as if they
had been accounted for under FAS 123. The Company also increased both additional
paid in capital and the accumulated deficit as of December 31, 2005 by
$10,273,105 to reflect the cumulative effect of the implementation of FAS 123R
as of that date. This amount represents the total share-based compensation
expense that would have been recorded for the period from 1995 through 2005
if
the company had accounted for share based awards under FAS 123.
5.
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.
6.
Contingencies
Litigation
The
Company is a defendant in minor lawsuits described in greater detail in its
2005
Annual Report on Form 10-K. The Company expects any potential eventual payment
to have no material affect on the financial statements.
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 assert that the Canon/Toshiba joint-venture - SED,
Inc. - is 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. Last year, 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.
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. Canon moved
to
dismiss the fraud claims, and the Court denied Canon’s motion in May 2006. The
suit is now proceeding under the amended complaint and a trial date has been
set
for March 2007.
7
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6.
Contingencies
(cont.)
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. Last year, 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 20, 2006,
we announced a letter of intent to form a joint venture with a leading Asian
display manufacturer, Da Ling Co., Ltd., to develop display products utilizing
our intellectual property. Two days later, Keesmann purported to terminate
the
exclusive license that he granted to us six years ago. Our May 2006 complaint
seeks a declaratory judgement that Keesmann had no right to terminate the
exclusive license, and we also filed for 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 a preliminary
injunction hearing and decision. The matter is proceeding on an expedited basis,
and arguments related to the preliminary injunction are expected to be heard
in
September or October, 2006. In June 2006, Keesman filed an Answer and
Counterclaim, denying that the purported termination was null and void, and
asserting a counterclaim that asks the court to find that we breached the
exclusive license by not actively marketing the Keesmann patents, among other
things.
7.
Business
Segments
Following
is information related to our business segments for the six months ended June
30, 2006 and 2005:
ANI
EBT
All
Other
Total
2006
Revenue
$
277,193
$
-
$
-
$
277,193
Profit
(Loss)
(3,233,473
)
973,019
(919,295
)
(3,179,749
)
Expenditures
for
long-lived
assets
17,629
-
-
17,629
2005
Revenue
$
157,359
$
-
$
-
$
157,359
Profit
(Loss)
(2,236,508
)
-
(504,895
)
(2,741,403
)
Expenditures
for
long-lived
assets
5,232
-
1,282
6,514
8.
Subsequent
Events
There
have been no subsequent events requiring disclosure through July 28,
2006.
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