RedChip Research Issues Research Update on Applied Nanotech

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http://finance.yahoo.com/news/redchip-research-issues-research-applied-164501918.html

Proposed Sensor Technology Acquisition Aimed at Positioning Company for Robust Growth; Further Additions made to Direct Product Sales Lineup

Acquisition target for sensor division identified.
In its most recent letter to shareholders, APNT stated that it has signed a nonbinding letter of intent (LOI) to acquire a working interest in a sensor company (cannot disclose the name of the Company at this time) that produced revenue of $12.5 million in 2011 and expects sales of $15 - $20 million in 2012. The target company has a worldwide sales force, manufacturing facilities in three countries, and an intellectual property (IP) portfolio that APNT believes, when combined with APNT’s IP, will create stronger sensors. The Company is also speaking with various banks an equity raise of $20 - $30 million which will be used to complete the acquisition of the target company, and provide additional funds that will be needed to commercialize APNT’s sensor technology.

The announcement of the LOI follows the hire of Alan Jernigan as the CEO of APNT’s new wholly-owned sensor subsidiary, EZDiagnostiX, Inc. Prior to joining APNT, Mr. Jernigan had served as the Chief Commercial Officer at One Lambda Inc., a transplant diagnostic company, since 2010. Throughout his over 25-year career, Mr. Jernigan also worked at Abbott, Idexx, IGEN, and ThromboVision Inc.

We believe that this commitment to building the sensor division underscores what a large opportunity APNT believes is present regarding its sensor technology (along with the Company’s robust sensor revenue targets of $80 million per annum by 2015 and $360 million per annum by 2018). We expect that these large revenue targets can be reached as the Company further develops and eventually becomes a provider of personal health monitors and diagnostic equipment. However, in the short-term, the Company expects to earn revenue in its sensor division through industrial uses (through both license/royalty agreements and direct sales).

Direct product sales expected to increase throughout 2H12; introduction of new low-cost microcopper ink to product lineup.
APNT recently announced the further expansion of its direct product sales lineup with the introduction of a new copper ink material based on micron copper particles for low-cost direct printing of electronic circuits. The microcopper ink is an additional product separate from its nanocopper ink, for which it currently has a license and royalty agreement with Ishihara. The Company’s new microcopper ink has a variety of potential applications, including providing a lower-cost conductive material (relative to silver inks and pastes) in smart cards, RFID antennas, touchscreens and sensors in smart phones, and solar cells.

In addition to the new microcopper ink, the Company has also decided to market its solar inks directly to customers (outside of the areas in Asia already covered by its Sichuan
Anxian Yinhee Construction and Chemical Company (YHCC) license fee/royalty agreement). These two products are additions to the Company’s growing lineup of products offered through direct sales, joining CarbAl (the Company’s thermal management material), CNTstix (an ultra-strong carbon-nanotube reinforced adhesive for structural applications), and THERCOBOND (a family of highly thermally-conductive bonding and printed materials).

Given the Company’s recent actions, we believe that APNT is committed to moving its business model toward direct product sales and is providing less emphasis on license fee/royalty agreements. While we believe that this will reduce revenue in the near-term (as the Company will not be receiving as many upfront license fees), direct product sales have higher potential upside, and, in our view, will improve the Company’s results over the long-term. As a result of this strategy, we have increased our revenue estimates from direct product sales throughout 2013 and have decreased our revenue estimates from license fee and royalty agreements in 2013.

Yonex Royalties Decline QoQ.
License fee and royalty revenues increased from $177,300 in 1Q12 to $601,596 in 2Q12. However, the majority of this increase was due to a $500,000 one-time license fee payment from YHCC, meaning that royalty revenue from Yonex declined QoQ to $101,596. This is the first QoQ decline in revenue from Yonex since the Company began receiving royalties, and at this time it is difficult to ascertain if this trend will continue. However, in the coming quarters, we still expect royalty revenue to increase due to new royalties received from YHCC for solar inks and Ishihara for nanocopper inks. We continue to project initial royalties to be received from YHCC in 3Q12 and Ishihara in 2Q13.

Research revenue expected to increase in 2H12.
Since 3Q11, research revenues for APNT have remained below historical levels, which have caused the Company to incur higher net losses over the past year. However, the Company announced the signing of $1.2 million of government research contracts in July 2012, and APNT also expects to earn additional research contracts throughout the rest of the year. APNT had expected to originally sign many of these contracts earlier in the year, but various circumstances have delayed the signing of these contracts. Due to the recent government contract signings and the expectation of additional contracts to be signed in 2H12 and 1H13, we have increased our revenue expectations from government contracts. We expect these contracts to increase revenue and decrease net losses over the next few quarters.

$600,000 in 8% convertible debt issued in 2Q12, expected to issue an additional $1.4 million of convertible debt in aggregate; existing $1.6 million of convertible debt due Aug/Sept 2012 expected to be extended.
Given the costs the Company has/is incurring with regards to commercializing its various technologies, and the extra costs associated with doing due diligence on its sensor acquisition target in 2Q12 and 3Q12, APNT has needed to raise additional funds. To this end, APNT issued $600,000 of 8% convertible debt, with a conversion price of $0.16 per share and a maturity date of January 2014, during 2Q12. The Company expects to issue an additional $1.4 million of convertible debt with the same terms as above during 3Q12. The existing $1.6 million of 8% convertible debt, with a conversion price of $0.20 per share, is expected to have its maturity date extended shortly. This extra debt, while increasing the Company’s interest expense, will give the Company the capital necessary to fund its commercialization activities.

Maintaining Buy Rating; Lowering Target Price to $0.75.
We believe that APNT remains on track to execute its commercialization plan (direct sales, license fees and royalties). APNT has added sales executives, added new products to its direct product sales lineup. completed an onsite pilot manufacturing facility, and identified an acquisition target that, if acquired, should improve its sensor IP and further the commercialization of its sensor technologies. Additionally, we expect royalties from YHCC beginning in 3Q12, which would further strengthen the Company’s revenues and help lead it to eventual profitability. However, we are lowering our target price to $0.75 due to the issuance of additional convertible debt with a strike price of $0.16. Over a 12-month time horizon, we feel that this may provide some overhang on the share price. We are still bullish on the stock’s prospects, and we therefore maintain our Buy rating on the stock.

2Q12 Financial Results
Total revenue in 2Q12 was $1.8 million, a 32% YoY decrease as compared to 2Q11 total revenue of $1.7 million. The decline in revenue was due to a 67% YoY decrease in research revenue. We expect research revenue to increase for the rest of the year, due mostly to $1.2 million in government contracts signed in July 2012. Research backlog as of August 7, 2012, was $2.9 million, up from $1.1 million as of June 30, 2011 and $2.3 million as of December 31, 2011. License fees and royalty revenue increased to $601,596 in 2Q12, with the majority of the increase related to a $500,000 license fee payment from Ishihara for the Company’s nanocopper ink technology. Royalty revenue from Yonex decreased from $177,300 in 1Q12 to $101,596 in 2Q12. Direct product sales in 2Q12 were $65,618, up from $5,518. We expect this total to increase going forward as the Company continues to further its commercialization efforts.

Research and development expenses were $1.4 million in 2Q12, and were essentially flat YoY. The decrease was due to lower research revenues. We believe that research and development expenses will remain at around $1.3-$1.4 million per quarter going forward.

Selling, general, and administrative expenses were approximately $1.2 million in 2Q12, up from about $0.6 million in 2Q11. The result of the increase was primarily due to increased expenses from commercialization activities, and due diligence expenses incurred regarding APNT’s potential sensor technology acquisition.

Interest expense increased from $89,911 in 1Q12 to $98,052 in 2Q12, which was mostly due to the addition of $600,000 in convertible debt during the quarter. We expect interest expense to continue to increase, as the Company expects to add an additional $1.4 million of convertible debt in 3Q12.

Net loss in the quarter was $1.6 million, which was higher than our estimate of a $1.0 million net loss. The reason for the difference in our estimate versus actual results was a combination of lower than expected research and royalty revenue, and higher than expected S,G&A expenses. We expect the Company’s bottom line to improve in the coming quarters as the Company earns additional revenues from direct product sales, royalties, and research revenues.

APNT’s cash balance declined to $0.7 million as of June 30, 2012, compared to $2.2 million as of March 31, 2012. We expect the Company’s bottom line to improve in future quarters, and thus we believe that cash burn will decline. Taking into account the addition of $1.4 million from convertible debt that is expected to be issued in 3Q12, we believe the Company’s cash balance will be sufficient to support operations until the end of 2012. We expect that APNT may need to raise additional funds near the end of 2012, depending on how fast its commercialization plan is achieved and how much research revenue is generated. Currently, we are projecting APNT to incur net losses through 2Q13, followed by achievement of profitability beginning in 3Q13.

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