The following discussion should assist in understanding our financial condition,
liquidity, and capital resources as of
We are engaged in research and development, related to products that we expect to develop or improve using nanotechnology. It is our goal to commercialize these products, but as a result of limited resources, we restructured our operations in the fall of 2013 to focus primarily on maximizing our research revenues and minimizing costs. It is not possible for us to commercialize products on our own without an infusion in capital. We are currently focused on stabilizing our operations and achieving breakeven based on our research revenues only. In the past few years, we have focused on four main areas of research - Nanosensors, nanomaterials, thermal management, and nanoelectronics. We also possess extensive intellectual property related to electron emission technology. Our technologies, as well as many of the potential applications, are still new and in the early stages of development. Our revenue has primarily consisted of development projects involving either the U.S. government or large multinational corporations. We have also received upfront payments related to license agreements. In 2011, we also begin receiving royalties from the first products commercialized using our technology, however those royalties ended in 2013. We have also begun selling, in small quantities, some of the products that we developed.
We expect our total cash needs for operations to be approximately
We have a history of net operating losses, but in recent years we have been focusing on increasing our revenues and reaching profitability. We are targeting at least breakeven operations and positive cash flow, prior to working capital needs, for 2014. There can be no assurances that we will be achieve breakeven in 2014 or the future; however, we believe that based on our recent results, our revenue backlog, anticipated new contracts, and our recent cost cuts, that we will be able to at least reach breakeven in 2014. We expect to continue our concentrated research and development of our technology in 2014, although full commercial development of any of our technologies will require additional funds in the future.
As discussed in Liquidity and Capital Resources below, we have significant amounts of convertible debt, both currently due and coming due before the end of March, 2014. We do not have the funds to pay these notes and will be required to negotiate extensions, or new conversion terms with the note holders. We believe the note holders are willing to negotiate terms that will enable the Company to survive.
Based on our plan, we believe that we can reach the point where we can sustain ourselves on our own revenue. Our plan is primarily dependent on cutting costs, increasing research revenues, and raising funds through debt or equity. Our current cash balances, when combined with expected revenues sources and other assets that can be converted to cash, as well as raising funds, are expected to be adequate to insure that we can maintain our operations at a reduced level. We believe that we have the ability to continue to secure short term funding, if needed, to enable us to continue operations until our plan can be completed. Our auditors have included a going concern paragraph in their opinion on our financial statements, as they did in 2012, which could impact our ability to obtain financing, or impact the terms available. We were able to successfully raise capital in 2013 despite the going concern qualification. While we expect to achieve at least breakeven and generate positive cash flow from operations, prior to working capital needs, in 2014, we will need to raise additional debt or equity to cover temporary shortages and improve our working capital situation.
Our plan is based on current development plans, current operating plans, the current regulatory environment, historical experience in the development of products, and general economic conditions. Changes could occur which would cause certain assumptions on which this plan is based to be no longer valid. Our plan is primarily dependent upon cutting costs, increasing the level of revenues that we achieved in 2013 and raising money. Although we do not expect funding our operations to be an insurmountable problem, if adequate funds are not available from operations, or additional sources of financing, we may have to eliminate, or further reduce substantially, expenditures for research and development, or obtain funds through arrangements with other entities that may require us to relinquish rights to certain technologies or products. Such results could materially and adversely affect us.
Critical Accounting Policies
Our significant accounting policies are summarized in the footnotes to our financial statements. Some of the most critical policies are also discussed below.
Stock based compensation - We frequently grant stock options to employees and others. We have granted significant options in the past, but in 2012 and 2013, the compensation committee essentially discontinued options for employees and officers, making this policy less critical. We did, however, grant options to the Board of Directors in 2013 as compensation for their services. We may grant significantly more options in the future. We account for any options issued using the fair value method of accounting.
Other -As a matter of policy, we review our major assets for impairment. Our major operating assets are accounts receivable, and property and equipment. We depreciate our property and equipment over their estimated useful lives. We did not identify any impaired items in 2011, 2012 or 2013. We have not experienced significant bad debt expense, and we do not believe that we need an allowance for doubtful accounts for any exposure to loss in our
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance decreased during the year - from approximately
The principal source of our liquidity has historically been from funds received from exempt offerings of our common stock and convertible debt. We have not raised money from common stock offerings in 2012 or 2013, but we received
We also issued convertible notes payable with a face amount of
We believe that our current cash level, when combined with our backlog, expected revenue, and cost reductions, is sufficient for us to operate at least through the end of
The primary factor that drives our cash used in operations is our net loss. Factors affecting our net loss are discussed in the Results of Operations section below. In 2012 and 2013, because of our reduced cash position, a substantial portion of the net loss was offset by management of working capital items, including deferral of officer, employee, and board compensation resulting in an increase in accrued expenses. We also significantly increased accounts payable in 2012 and generally maintained that level in 2013. The cash used in operations in 2011 relative to the net loss in that period is a much more normal relationship between the net loss and cash used in operations. We plan to breakeven in 2014, but likely still will have negative cashflow from operations as our accounts payable are stretched to the limit and need to be brought current and our accrued expenses will be reduced as well.
Cash used in investing activities was the result of the purchase of capital assets in all years. We would expect minimal cash to be used in investing activities in 2014. No material commitments exist as of
Our contractual obligations as of
Total 2014 2015 2016 2017 2018 2019 Capital leases
$10,427 $10,427- - - - - Operating leases $1,031,732 $220,896 $200,424 $199,742 $186,804 $191,744 $32,122Convertible notes $2,335,240 $2,335,240- - - - - payable
We will not have the cash available to meet our cash requirements for fiscal 2014, when considering the notes payable; however, we believe that many of the holders of the notes due in 2014 will extend, and may agree to convert both principal and interest to common stock so no cash will need to be paid.
RESULTS OF OPERATIONS
Business Segments. We operate with a single reportable business segment.
Revenues. Following is a summary of key revenue categories for the three years covered by this report. 2013 2012 2011 Government Revenues
$ 2,048,840 $ 1,733,728 $ 2,956,717Other Contract Research $ 1,054,305 $ 309,274 $ 1,102,428Upfront License Fees $ 250,000 $ 750,000 $ 1,500,000Product Royalties $ 238,936 $ 433,453 $ 499,638Product Sales $ 286,622 $ 228,200 $ 186,267Other Revenues $ 39,659 $ 138,713 $ 242,411Total Revenues $ 3,918,362 $ 3,593,368 $ 6,487,461
Revenue backlog at
Our total revenue decreased significantly, by about 45%, from 2011 to 2012, but increased 9% from 2012 to 2013. Our revenues decreased in 2012 as a result of several factors. In the government revenue area, we had an extraordinary
Our other contract research revenues decreased from 2011 to 2012 for the same reasons as government revenues. Those revenues were rebuilt to over
Our royalty revenue - both upfront payments and product royalties decreased from 2011 to 2012, and further decreased from 2012 to 2013, primarily as a result of our decreased focus on licensing. The upfront payments were all from YHCC in all years, and the product royalties were all from Yonex in all years. We are no longer actively pursuing licensing arrangements, except in limited situations, so we expect no upfront payments in 2014. We also will receive no product sale royalties from Yonex, as Yonex bought out their license in 2013. We have two remaining licenses that could generate licenses in the future, but we expect any royalties in 2014 to be insignificant.
Our product sales increased in each of the years presented. However, we do not have the capital required to effectively pursue product sales and the results we were achieving did not justify the costs that we were incurring. In the fall of 2013, we eliminated our salesperson and sales support as part of our cost reduction program. We expect some product sales in 2014 as a result of inquiries to our technical personnel, but they will be significantly reduced from 2013.
The revenue backlog as of
We expect revenue to be higher in 2014 than in 2012. We are targeting revenues in 2014 of
Cost of sales.Because we do not ship significant amounts of products or provide homogenous services, we do not incur costs of sales in the traditional sense. We do keep track of our costs on individual projects, but because there is a wide variation in cost percentages, presenting cost of sales information is not meaningful. Government sponsored research has nominal or no gross margins and is primarily just a reimbursement of costs. In some cases we charge nominal amounts for projects that have much higher costs because we are proving a concept that will be helpful to us in other areas, or are seeking a significantly larger follow up contract with the customer. In other instances we may perform research contracts that have significant positive margins because we are able to capitalize on work that we have done and knowledge that we have gained in the past. At the present stage of our development, it is more meaningful to look at total research and development costs in conjunction with revenues than to look at solely internally funded research projects and the cost of research associated with revenue producing contracts. We have, however, broken out some of our costs in the R&D discussion below.
Research and development.Following is a summary of research and development expenditures for the past three years.
2013 2012 2011 Direct Materials - Funded Projects 189,625 405,014 1,016,803 Direct Materials - Internal Projects 110,219 422,675 486,836
Direct Subcontractors - Funded Projects 327,455 321,332 236,826 Direct Subcontractors - Internal Projects
- - 18,813 Direct Labor - Funded Projects 877,466 734,263 1,030,037 Direct Labor - Internal Projects 209,513 552,330 398,569 Overhead Labor 302,265 296,450 339,343 Benefits 433,545 634,037 768,727 Facilities and supplies 762,572 937,894 1,006,203 Other Overhead 111,535 167,213 215,780 Total Research and development
$ 3,324,195 $ 4,471,208 $ 5,517,937
Our research and development spending varies with revenue, as a significant portion of our spending is on funded programs. Overall, in 2013 we focused on cost reductions and elimination of spending not related to the generation of revenue. Our spending on internal projects in 2013 was significantly down from 2012 and was largely in support of potential product sales - working with potential customers, tailoring our technology to products, and providing samples, as well as continued refinement of our licensed products, as opposed to new research. Subcontractors are usually involved in specific projects and the amount spent on subcontractors depends on the type of contracts that we have in process at any particular time.
We intend to pursue further cost cuts in 2014, and we expect total research and development spending in 2014 to be similar to that of 2013, despite higher expected revenues. We expect the increased costs related to increased revenues to be offset by additional cost reductions.
We expect to continue to incur substantial expenses in support of additional research and development activities related to the commercial development of our technologies, as long as we have the revenues to support it. If research revenue does not materialize as expected at the present time, we would reduce research expenditures accordingly.
Selling, general, and administrative. Following are some key components of selling, general, and administrative expense:
2013 2012 2011 Labor and benefits
$ 1,429,800 $ 1,525,923 $ 1,162,202Board of Director costs $ 169,773 $ 180,038 $ 180,153Professional fees $ 203,563 $ 876,964 $ 474,764Patent expense $ 424,239 $ 629,985 $ 744,658Trade shows and conferences $ 40,540 $ 83,734 $ 134,695Other S, G, & A $ 249,121 $ 503,652 $ 475,922
Total selling, general, and administrative
The most significant cost in selling, general and administrative expense is labor and benefits. It increased significantly in 2012 as a result of new hires, in particular in the sales and marketing area. It was reduced in 2013, primarily as a result of the vacancy in the CEO position. The amount will decrease significantly further in 2014 as the result of staff reductions late in 2013, the savings from which will show up in 2014.
Board of Director costs were similar in all years. The reduction in 2013 is the result of the resignation of one of the Directors in 2013.
We also spend a significant amount on patents. Our patent expense decreased from approximately
We expect total selling, general, and administrative expenses to be approximately
Other income. Following is a summary of other income for the last three fiscal years. 2013 2012 2011 Interest expense from capital leases and other
$ (6,226 ) $ (11,025 ) $ (6,274 )Interest expense associated with notes payable $ (194,296 ) $ (187,797 ) $ (135,879 )Interest expense associated notes payable discount $ (1,022,100 ) $ (253,779 ) $ (241,939 )Interest income $ 3,803 $ 1,587 $ 16,714
Our convertible notes bear interest at a rate of 8%. In addition, the value of the conversion feature was recorded as a discount at the time of issuance and is being amortized to expense over the life of the notes. We also lowered the conversion price on certain notes in 2013 to induce conversion and recognized additional discount at the time of conversion. We expect approximately
Our interest income is earned as a result of the investment of excess cash balances. Our interest income is negligible in all years, and we expect it to be negligible in 2014.
The largest single component of cost that we incur is payroll related expense. Excluding the cost related to stock based compensation, we incurred payroll related expense of approximately
We expect our overall spending rate for 2014, excluding any revenue, to average approximately
SEASONALITY AND INFLATION
There are no recently issued accounting pronouncements which have not been implemented in our financial statements that would have a material impact on our financial statements.