UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

 

Filed by the Registrant ☒

 

Filed by a Party other than the Registrant

 

Check the appropriate box:

 

o   Preliminary Proxy Statement
     
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x   Definitive Proxy Statement
     
o   Definitive Additional Materials
     
o   Soliciting Material under §240.14a-12

 

APPLIED NANOTECH HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
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    (1)   Amount Previously Paid:           
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Chairman’s Letter

3006 Longhorn Blvd., Suite 107, Austin, TX 78758

Phone (512) 339-5020, Fax (512) 339-5021

WWW.APPLIEDNANOTECH.NET

 

July 2, 2014

 

Dear Shareholders:

 

I invite you to join us for a special meeting of shareholders on August 22, 2014 at 1:00 P.M. (local time) unless postponed or adjourned to a later date. This is an important special meeting that affects your investment in Applied Nanotech Holdings, Inc. (“Applied Nanotech”). You will be asked to vote on three, possibly four, proposals. The fourth proposal will only be presented if there are not sufficient votes to approve proposal 1 and the combination and would be a vote to adjourn the meeting until a later date.

 

The first proposal presented at the special meeting will be to seek approval for the business combination described in the Agreement and Plan of Merger and Exchange. The effect of the combination will be to redomesticate Applied Nanotech in Delaware, change its name to PEN Inc. (“PEN”), and, in a related merger and exchange, to make Nanofilm Ltd. a subsidiary of PEN. In the redomestication merger the total number of authorized shares of PEN common stock will be significantly greater than the number now authorized by Applied Nanotech, and the common stock of PEN will be subdivided into three different classes. Other than as specified herein, all shares of PEN common stock are identical, regardless of which class they are part of. The different classes of common stock have different voting rights, and the Class Z shares have certain other rights. Applied Nanotech shareholders will receive Class A common stock of PEN in the redomestication merger. Each outstanding share of Applied Nanotech common stock will be converted into a share of Class A common stock of PEN. Those shares, together with shares issued or reserved for issuance for existing commitments to issue shares of Applied Nanotech, will represent approximately 38% of the total PEN common stock immediately following the closing of the combination. Shares of Class A common stock have one vote per share.

 

The PEN shares issued in the combination with Nanofilm Ltd. to stockholders of NanoHolding Inc. (“NanoHolding”) and Carl Zeiss, Inc. (“Zeiss”), the owners of Nanofilm, Ltd., will represent approximately 62% of the total PEN common stock. All three classes of PEN common stock will be issued in the combination with Nanofilm Ltd. Shares of Class B common stock issued to the Rickert Family, Limited Partnership which will have 100 votes per share. It is expected that upon completion of the combination, this Rickert partnership will own approximately 48% of the PEN common stock and will control approximately 99% of the voting power of PEN common stock immediately following the closing. The Class B common stock will also be convertible into Class A common stock at any time upon the election of the holders thereof. Scott Rickert, the sole general partner of this Rickert partnership is expected to be the Chief Executive Officer and Chairman of PEN after the combination. Zeiss will own approximately 9% of PEN through the ownership of Class Z common stock that is non-voting but has other rights described in this proxy, including the right to designate a member of the board of directors of PEN, certain anti-dilution rights and the right to convert into Class A common stock at any time upon election of the holders thereof. All stockholders of PEN will be subject to future dilution for, among other things, the conversion of the notes issued in the bridge financing by Applied Nanotech described below.

 

The second proposal at the special meeting will be to seek approval for an increase in the number of the shares of Applied Nanotech common stock if the combination does not occur. Approval of this proposal is important to enable us to meet our existing obligations, and to provide a greater variety of financing options to us if the combination does not occur. If the combination does not close and if the share increase is approved, we will issue or reserve approximately 46 million shares in satisfaction of existing obligations and we expect the balance of the increased number of Applied Nanotech shares, approximately 297 million shares, will be available for issuance without stockholder approval (unless approval is otherwise required by applicable law, regulation, agreement or other arrangements).

 

The third proposal is required under SEC rules. We are asking, on a non-binding, advisory basis, whether our shareholders approve the compensation arrangements for Dr. Yaniv that will become effective if Proposal 1 is approved and the combination closes.

 

The fourth proposal, if approved, will allow us to adjourn the meeting if at the time of the meeting we do not have sufficient proxies to approve Proposal 1 and the combination.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE VOTE YOUR SHARES BY INTERNET OR BY TELEPHONE AS IDENTIFIED IN THESE MATERIALS OR COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PREPAID ENVELOP.

 

 

Very truly yours

 

/s/ Robert Ronstadt

 

Robert Ronstadt, Chairman

 

 

 
 

 

Notice of Meeting

 


NOTICE OF APPLIED NANOTECH HOLDINGS, INC. SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON AUGUST 22, 2014


To Our Shareholders:

 

You are cordially invited to attend the Special Meeting of Shareholders of Applied Nanotech Holdings, Inc. (the "Company", "Applied Nanotech" or us) at The Hilton Garden Inn, DFW, Airport South 2001 Valley View Lane, Irving TX 75061 on Friday, August 22, 2014 at 1:00 P.M., Central Daylight Time. At the Special Meeting, shareholders will consider and act on the following matters described in more detail in the accompanying proxy statement:

 

  1. To approve the Agreement and Plan of Merger and Share Exchange, as amended, and the business combination contemplated thereby; 
     
  2. To approve a proposal to amend the Company’s Amended and Restated Articles of Incorporation to increase its authorized shares of capital stock from 162 million to 502 million and its authorized shares of common stock from 160 million to 500 million
     
  3. To approve, on an advisory, non-binding basis, certain compensation arrangements with our current Chief Operating Officer that will become effective at the closing of the combination contemplated by Proposal 1.  
     
  4. To adjourn the meeting to solicit additional proxies if at the time of the meeting the proxies are not sufficient to approve Proposal 1.

 

Our Board of Directors unanimously recommends a vote FOR Items 1, 2, 3 and 4 described above. Holders of Applied Nanotech common stock will have appraisal rights under Texas law in connection with the redomestication merger that is part of the business combination.

 

Our Board of Directors has fixed June 26, 2014, as the record date for determining shareholders entitled to notice of and to vote at the Special Meeting. Only shareholders of record as of the record date will be entitled to notice of and to vote at the Special Meeting or any adjournment thereof. The proxy statement and accompanying proxy card will first be sent to shareholders beginning July 7, 2014.

 

For entry to the Special Meeting, each shareholder may be asked to present valid picture identification, such as a driver’s license. Shareholders holding stock in brokerage accounts ("street name" holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

 

For ten days before the date of the Special Meeting, a complete list of the shareholders entitled to vote at the meeting will be available for examination by any shareholder for any purpose relating to the meeting during ordinary business hours at the Company’s executive offices at 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758.

 

   

By Order of the Board of Directors

 

/s/ Robert Ronstadt

 

Robert Ronstadt, Chairman

 

 Date: July 2, 2014

    

WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING OF SHAREHOLDERS IN PERSON, PLEASE COMPLETE, DATE, SIGN, AND RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED PREPAID ENVELOPE AS PROMPTLY AS POSSIBLE TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING OF SHAREHOLDERS. EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING OF SHAREHOLDERS. IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE (I.E., “STREET NAME”), YOU WILL NEED (1) TO OBTAIN FROM YOUR BROKER, BANK OR OTHER NOMINEE A PROXY ISSUED IN YOUR NAME, AUTHORIZING YOU TO VOTE THE SHARES, AND (2) BRING IT TO THE MEETING.

 

 
 

 

Table of Contents

 

Contents

Chairman’s Letter
   
Notice of Meeting
   
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE COMBINATION 1
Q: Why am I receiving this proxy statement? 1
Q: How does Applied Nanotech's board of directors recommend that Applied Nanotech's stockholders vote? 1
Q: May I vote in person? 1
Q: If my Applied Nanotech shares are held in "street name" by my broker, will my broker vote my shares for me? 1
Q: May I change my vote after I have submitted a proxy or provided proxy instructions? 2
Q: Am I entitled to appraisal rights? 2
Q: Who is soliciting my proxy? 2
Q: Who is entitled to vote at the special meeting? 2
Q: What is the combination that is contemplated by Proposal 1? 2
Q: What will happen to Applied Nanotech if, for any reason, the combination does not close? 3
Q: Why is Applied Nanotech proposing the combination? 3
Q: What is required to consummate the combination? 3
Q: Are there any federal or state regulatory filings, approvals or clearances that must be made or obtained in connection with the combination? 4
Q: What will stockholders of Applied Nanotech receive in the combination? 4
Q: Why does PEN have different classes of common stock and what does it mean that Applied Nanotech stockholders will receive Class A common stock of PEN? 4
Q: Who will be the directors of PEN following the combination? 5
Q: Who will be the executive officers of PEN following the combination? 5
Q: What are the material federal income tax consequences of the combination to me? 5
Q: What risks should Applied Nanotech's stockholders consider in deciding whether to vote in favor of the combination? 5
Q: When do you expect the combination to be consummated? 5
Q: How will the combination affect stock options to acquire Applied Nanotech common stock? 6
Q: What do I need to do now? 6
Q: What happens if I do not return a proxy card or otherwise provide proxy instructions? 6
Q: Should Applied Nanotech's stockholders send in their stock certificates now? 6
Q: Have NanoHolding's stockholders agreed to the combination? 6
Q: Have any of Applied Nanotech's stockholders agreed to vote in favor of the combination? 6
Q: Has either Applied Nanotech or NanoHolding entered into any agreements with NanoHolding's and Applied Nanotech's stockholders restricting the transfer of shares of their common stock? 6
Q: Who is paying for this proxy solicitation? 7
Q: Who can provide me with additional information and help answer my questions? 7

 

 

i
 

 

SUMMARY 7
The Companies 7
Summary of the Combination 7
Reasons for the Combination   8
Overview of the Merger & Exchange Agreement 8
Consideration 8
Stock Options of Applied Nanotech 9
Conditions to Completion of the Combination 9
No Solicitation 9
Termination of the Merger & Exchange Agreement 10
No Termination Fee 10
Voting and Conversion Agreement 10
Management Following the Combination   10
The Board of Directors Following the Combination   10
Interests of Applied Nanotech's Directors and Executive Officers   11
Interests of NanoHolding's Director Nominees 11
Material U.S. Federal Income Tax Consequences of the Combination 11
Risk Factors 11
Regulatory Approvals   11
Anticipated Accounting Treatment 11
Appraisal Rights 11
Comparison of Stockholder Rights 11
MARKET PRICE INFORMATION 12
RISK FACTORS 13
Risks related to the Combination 13
Risks relating to PEN after the Combination. 15
Risks Relating to Applied Nanotech 18
Risks relating to NanoHolding 24
FORWARD LOOKING STATEMENTS 25
INFORMATION ABOUT THE SPECIAL MEETING 26
Time, Place & Purpose of the Special Meeting 26
Record Date and Quorum 26
Attendance 27
Vote Required 27
Proxies and Revocation of Proxies 28
Adjournments and Postponements 29
Anticipated Completion Date for the Combination 29
Solicitation of Proxies, Payment of Solicitation Expenses 29

 

ii
 

 

APPLIED NANOTECH’S BUSINESS 30
APPLIED NANOTECH’S PROPERTY 36
NANOHOLDING’S BUSINESS 37
APPLIED NANOTECH’S MANAGEMENT DISCUSSION AND ANALYSIS 39
NANOHOLDING’S MANAGEMENT DISCUSSION AND ANALYSIS 45
Pro Forma Financial Information. 53
THE COMBINATION – PROPOSAL 1 57
Background of the Combination 57
Recommendation and Reasons for the Combination 59
The Merger & Exchange Agreement 61
Form of the Combination: the Mergers & Exchange 61
Effective Time of the Combination 62
Consideration to Applied Nanotech Shareholders 62
Consideration to Stockholders of NanoHolding and to Zeiss 62
Future Dilution from Bridge Financing, Stock Options and Other Equity Issuances 63
No Market Price Adjustment to Consideration 65
Certificates for Applied Nanotech Common Stock 66
Regulatory Approvals 66
OTCQB Trading 66
Appraisal Rights 66
Amendments to Certificate of Incorporation and Bylaws 66
Conditions to the Completion of the Combination 67
No Solicitation by Applied Nanotech 68
Meeting of Applied Nanotech's Stockholders and NanoHolding Stockholder Approval 68
Directors and Officers Following the Combination 69
Officers and Directors Insurance for Applied Nanotech Board 70
Covenants; Conduct of Business Pending the Combination 70
Termination 72
No Termination Fee 72
Representations and Warranties 72
Amendment 73
Other Agreements Related to the Combination 73
Voting and Conversion Agreement 73
Lock-Up Agreements 74
Interests of Applied Nanotech’s Directors and Executive Officers in the Combination 74
Interests of NanoHolding’s Director Nominees in the Combination 75
Material U.S. Federal Income Tax Consequences to Applied Nanotech Shareholders 76

 

iii
 

 

COMPARISON OF SHAREHOLDERS’ RIGHTS 77
DISSENTERS’ RIGHTS OF APPLIED NANOTECH STOCKHOLDERS 84
THE SHARE INCREASE – PROPOSAL 2 86
ADVISORY (NON-BINDING) VOTE ON CERTAIN EXECUTIVE COMPENSATION – PROPOSAL 3 87
VALIDITY OF COMMON STOCK 88
CERTAIN BENEFICIAL OWNERS OF APPLIED NANOTECH COMMON STOCK 88
HOUSEHOLDING OF PROXY MATERIALS 91
FUTURE SHAREHOLDER PROPOSALS 92
WHERE YOU CAN FIND MORE INFORMATION 92

 

 

****************************************

Annex A Agreement and Plan of Merger and Exchange, dated March 10, 2014

Annex B Voting and Conversion Agreement, dated March 10, 2014

Annex C Amendment to Agreement and Plan of Merger and Exchange, dated May 28, 2014

Annex D Second Amendment to Agreement and Plan of Merger and Exchange, dated July 2, 2014

Annex E Proposed amendment to Applied Nanotech Certificate of Incorporation to increase authorized Common Stock

Annex F Texas Business Organizations Code Chapter 10, Subchapter H

 

iv
 

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING

AND THE COMBINATION

 

The following section provides answers to frequently asked questions about the special meeting of stockholders and the combination. This section, however, only provides summary information. These questions and answers may not address all issues that may be important to you as a stockholder. For a more complete response to these questions and for additional information, please refer to the cross-referenced pages below. You should carefully read this entire proxy statement, including each of the annexes.

 

 

Q: Why am I receiving this proxy statement?

 

A: You are receiving this proxy statement because you have been identified as a stockholder of Applied Nanotech as of the record date, and thus you are entitled to vote at Applied Nanotech's special meeting of shareholders. This document serves as a proxy statement used to solicit proxies for the special meeting. This document contains important information about the combination and the special meeting of Applied Nanotech, and you should read it carefully.

 

 

Q: How does Applied Nanotech's board of directors recommend that Applied Nanotech's stockholders vote?

 

A: After careful consideration, Applied Nanotech's board of directors unanimously recommends that Applied Nanotech's stockholders vote:

 

FOR Proposal 1 to approve the Merger & Exchange Agreement and the combination;

 

FOR Proposal 2 to approve an amendment to Applied Nanotech's certificate of incorporation to increase the number of shares of Applied Nanotech common stock in the event the combination does not occur;

 

FOR Proposal 3 an advisory (non-binding) resolution to approve compensation payable to our current Chief Operating Officer if the combination closes; and

 

FOR Proposal 4 to approve an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal 1.

 

 

Q: May I vote in person?

 

A:If you are a stockholder of Applied Nanotech and your shares of Applied Nanotech's common stock are registered directly in your name with the transfer agent, with respect to those shares you are the stockholder of record, and the proxy materials and proxy card are being sent directly to you by Applied Nanotech. If you are an Applied Nanotech stockholder of record, you may attend the special meeting to be held on August 22, 2014 and vote your shares in person, rather than signing and returning your proxy.

 

If your shares of Applied Nanotech's common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in "street name," and the proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you are also invited to attend the special meeting. Since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the special meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the special meeting.

 

 

Q: If my Applied Nanotech shares are held in "street name" by my broker, will my broker vote my shares for me?

 

A: Your broker will not be able to vote your shares of Applied Nanotech's common stock without specific instructions from you for Proposal 1 (the combination) or Proposal 2 (the share increase) or Proposal 3 (the advisory vote on executive compensation) or Proposal 4 (to adjourn the meeting if there is a quorum but not sufficient votes to approve Proposal 1). You should instruct your broker to vote your shares, following the procedure provided by your broker.

 

Broker non-votes occur when a beneficial owner of shares held by a broker or other nominee does not give instructions as to how to vote on matters deemed "non-routine." If you are the beneficial owner of the shares you are generally entitled to give voting instructions to the broker or nominee holding the shares. If the beneficial owner does not provide voting instructions, the broker or nominee can only vote the shares with respect to matters that are considered to be "routine." Your broker will not be able to vote your shares of Applied Nanotech's common stock without specific instructions from you for any of Proposal 1, Proposal 2, Proposal 3 or Proposal 4. For your shares to be voted, you must instruct your broker to vote your shares by following the procedure provided by your broker.

 

1
 

 

Q: May I change my vote after I have submitted a proxy or provided proxy instructions?

 

A:Any Applied Nanotech stockholder of record voting by proxy, other than those Applied Nanotech stockholders who have executed a voting agreement, has the right to revoke the proxy at any time before the polls close at the special meeting by sending a written notice stating that he, she or it would like to revoke his, her or its proxy to the Corporate Secretary of Applied Nanotech, by providing a duly executed proxy card bearing a later date than the proxy being revoked or by attending the special meeting and voting in person. Attendance at the special meeting, without more, will not revoke a proxy. If a stockholder of Applied Nanotech has instructed a broker to vote its shares of Applied Nanotech's common stock that are held in "street name," the stockholder must follow directions received from its broker to change those instructions.

 

 

Q: Am I entitled to appraisal rights?

 

A: Yes, Applied Nanotech's stockholders are entitled to appraisal rights in connection with the combination that is Proposal 1, but not in connection with the other Proposals. To exercise this right, you must, among other requirements, give notice before the meeting to Applied Nanotech that you will exercise this right, you must vote against the merger, and you must reply within 20 days to the notice sent to you that the combination has occurred. This is more fully described in the section The Combination – Proposal 1, Dissenters Rights of Applied Nanotech Shareholders that starts on page 84. Stockholders interested in appraisal rights should carefully review that section of this proxy statement.

 

 

Q: Who is soliciting my proxy?

 

A: Applied Nanotech’s directors and management are soliciting your proxy. The Applied Nanotech board of directors recommends a vote in favor of all four proposals that will be presented at the special meeting. The interests of the directors may be different from your interests as a shareholder. Their interests and the interests of the directors and executive officers are more fully described in The Combination – Proposal 1, Interests of Applied Nanotech’s Directors and Executive Officers in the Combination that starts on page 75.

 

 

Q: Who is entitled to vote at the special meeting?

 

A: The holders of Applied Nanotech common stock are entitled to vote at the meeting. As of June 26, 2014 there were 157,553,526 shares of common stock outstanding. Each share of common stock is entitled to one vote per share.

 

 

Q: What is the combination that is contemplated by Proposal 1?

 

A: Applied Nanotech and NanoHolding, among others, have entered into an Agreement and Plan of Merger and Exchange, dated as of March 10, 2014 as amended, or the (“Merger & Exchange Agreement”), that contains the terms and conditions of the proposed business combination involving Applied Nanotech and NanoHolding. Defined terms herein may be found in the Merger and Exchange Agreement. Under the Merger & Exchange Agreement the combination occurs in three steps. First, Applied Nanotech will merge with and into its wholly-owned subsidiary PEN Inc., a Delaware corporation, with PEN as the survivor. This first merger is the Redomestication Merger. Immediately after the Redomestication Merger, NanoMerger Sub Inc., a wholly owned subsidiary of Applied Nanotech also called the acquisition subsidiary, will merge with NanoHolding. The acquisition subsidiary will be the survivor, and will change its name to Nanofilm Holdings Inc. This is referred to as the Nano Merger. Then, for the final step in the combination, Carl Zeiss, Inc. will exchange its membership interest in the subsidiary of NanoHolding, Inc. for stock in PEN. This step is referred to as the Exchange. After the Exchange, NanoHolding’s subsidiary, Nanofilm Ltd., referred to as Nanofilm, will be a wholly owned subsidiary of PEN. Together, the Redomestication Merger, the Nano Merger and the Exchange are referred to as the combination.

 

Immediately following the effective time of the combination, NanoHolding's stockholders and Zeiss will, collectively, own approximately 62%, and Applied Nanotech's stockholders will own approximately 38%, of PEN’s common stock, after giving effect to shares of Applied Nanotech issued following the Redomestication Merger pursuant to its outstanding obligations to, among others, holders of its convertible debt and its present and former executive officers and directors. As noted above, however, Scott Rickert as the general partner of Rickert Family, Limited Partnership will control approximately 99% of the voting power of all the common stock outstanding at the time of the closing.

 

For a more complete description of the combination, please see the section entitled The Combination – Proposal 1 beginning on page 57 of this proxy statement.

 

2
 

 

Q: What will happen to Applied Nanotech if, for any reason, the combination does not close?

 

A: Applied Nanotech has invested significant time and incurred, and expects to continue to incur, expenses related to the proposed combination with NanoHolding. In the event the combination does not close, Applied Nanotech plans to continue its current operations, but will need to raise funds to pay accrued liabilities and transaction expenses. To raise funds by selling equity or convertible debt, Applied Nanotech will need additional authorized shares as requested by Proposal 2. Applied Nanotech's board of directors will continue to look at alternatives including licensing and asset sales and other potential strategic transactions if the combination with NanoHolding does not close.

 

Proposal 2, to authorize an increase in the number of authorized shares of common stock is important to us if the combination is not approved or does not close. We do not have sufficient authorized stock to permit conversion of all of our outstanding convertible notes or the new convertible capital notes issued in the bridge financing. To meet our existing obligations, and to enable us to finance our operations with addition convertible debt or equity offerings, we must increase our authorized number of shares of common stock. Proposal 2 would result in an increase of 340 million shares. After satisfying existing obligations and reserving shares for other existing contingencies, the share increase would leave us with approximately 297 million shares that the board could use for future financings if we continue on a stand-alone basis. Further information about Proposal 2 and the share increase is set out in the section The Share Increase – Proposal 2 starting on page 86 of this proxy statement.

 

 

Q: Why is Applied Nanotech proposing the combination?

 

A: Applied Nanotech's board of directors considered a number of factors that supported its decision to approve the Merger & Exchange Agreement, including the provision that requires that they recommend to the shareholders a vote in favor of the combination. In the course of its deliberations, Applied Nanotech's board of directors also considered a variety of risks and other countervailing factors related to entering into the Merger & Exchange Agreement

 

For a more complete discussion of Applied Nanotech's reasons for the combination, please see the section The Combination – Proposal 1, Recommendation and Reasons for the Combination that starts on page 59.

 

 

Q: What is required to consummate the combination?

 

A: To consummate the combination, Applied Nanotech's stockholders must approve the Merger & Exchange Agreement which has the effect of approving: (1) the Redomestication Merger by which Applied Nanotech will become a Delaware corporation and our shareholders will receive PEN Class A common stock for their Applied Nanotech common stock, the creation of the Class B common stock and Class Z common stock and the name change to PEN Inc., (2) the Nano Merger that is the merger of acquisition subsidiary with NanoHolding in which acquisition subsidiary survives and changes its name to Nanofilm Holdings and the issuance of Class A common stock and Class B common stock of PEN to the stockholders of NanoHolding, and (3) the Exchange by which PEN issues shares of its Class Z common stock to Zeiss in exchange for interests in Nanofilm so that Nanofilm becomes a wholly owned subsidiary of PEN. Approval of Proposal 1 requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Applied Nanotech's common stock as of the record date for the special meeting, present in person or represented by proxy and voting at the meeting.

 

In addition, NanoHolding's stockholders must adopt the Merger & Exchange Agreement, which requires the affirmative vote of holders of a majority of the issued and outstanding shares of NanoHolding's common stock. On May 28, 2014, by the requisite vote, the stockholders of NanoHolding adopted the Merger & Exchange Agreement pursuant to a written consent in lieu of a meeting. In addition to obtaining stockholder approval, each of the other closing conditions set forth in the Merger & Exchange Agreement must be satisfied or waived.

 

For a more complete description of the closing conditions under the Merger & Exchange Agreement, please see the section The Combination – Proposal 1, The Merger & Exchange Agreement – Conditions to the Completion of the Combination that starts on page 67.

 

 

3
 

 

Q: Are there any federal or state regulatory filings, approvals or clearances that must be made or obtained in connection with the combination?

 

A: Neither Applied Nanotech nor NanoHolding is required to make any filings or to obtain any approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the combination. Applied Nanotech must comply with applicable United States federal and state securities laws in connection with the combination, including the filing with the SEC of this proxy statement.

 

 

Q: What will stockholders of Applied Nanotech receive in the combination?

 

A: Each share of Applied Nanotech common stock outstanding at the time of the Redomestication Merger will be converted into one share of PEN's Class A common stock.

 

After the Nano Merger and Exchange, the common stock issued or issuable to stockholders of Applied Nanotech, holders of its convertible debt and its officers and directors as a result of the combination is expected to represent approximately 38% of the PEN common stock. Shares of PEN’s common stock issued to stockholders of NanoHolding and to Zeiss in the combination are expected to represent approximately 62% of Applied Nanotech's common stock. At the effective time of the Nano Merger, each share of NanoHolding's common stock will be converted into and exchanged for the right to receive a number of shares of PEN's common stock equal to the exchange ratio calculated in accordance with the Merger & Exchange Agreement. The exact exchange ratio per share of NanoHolding's common stock will be based in part on the number of shares of Applied Nanotech common stock outstanding on the closing date and the number of shares Applied Nanotech is obligated to issue in the future, except that outstanding options to purchase 5,887,714 shares of common stock of Applied Nanotech will not be included. The exchange ratio will be determined immediately prior to the effective time of the Nano Merger and will not be calculated until that time. The same exchange ratio will be used to determine the number of PEN shares to be issued in the Nano Merger and the number of PEN shares that will be issued to Zeiss in the Exchange.

 

For a more complete discussion of consideration you will receive please see the section The Combination – Proposal 1, The Merger & Exchange Agreement– Consideration to Applied Nanotech Shareholders that starts on page 62.

 

 

Q: Why does PEN have different classes of common stock and what does it mean that Applied Nanotech stockholders will receive Class A common stock of PEN?

 

A: All shares of PEN common stock have the same rights to dividends and the same liquidation rights. The economic rights of the holders of Class A common stock, Class B common stock and Class Z common stock are the same.

 

Different classes of PEN common stock have different voting rights. Applied Nanotech stockholders will receive shares of Class A common stock. Holders of Class A common stock are entitled to one vote per share. Holders of Class B common stock are entitled to 100 votes per share. In the combination, Class B common stock will be issued to Rickert Family, Limited Partnership which is controlled by Scott Rickert, who will be the Chairman of the Board and Chief Executive Officer of PEN after the combination. Because of the super voting rights of the Class B common stock, Scott Rickert will control approximately 99% of the voting power of PEN after the combination. If Class B common stock is no longer controlled by the Rickert family, it automatically converts to Class A common stock. Each share of Class B common stock is also convertible into one share of Class A common stock at any time at the option of the holder.

 

The Class Z common stock has no voting rights. However the holder of the Class Z common stock will be entitled to nominate one person to serve on the PEN board of directors. James Sharp will be the Zeiss designated director on the PEN board. Class Z common stock also has anti-dilutive rights that, subject to limited exceptions, permit holders of Class Z common stock to purchase additional shares or equity rights issued by PEN (on the same terms as made available to third parties by PEN) to maintain their economic ownership percentage. The holders of Class Z common stock are also entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent to such holders. Shares of Class Z common stock are only being issued in the Exchange with Zeiss; the third step in the combination. If Class Z common stock is transferred out of the Zeiss control group, it automatically converts into Class A common stock and, if Zeiss sells or exchanges more than half of the stock it acquires in the Exchange, then all the Class Z common stock automatically converts into Class A common stock. In addition, each share of Class Z common stock is convertible into one share of Class A common stock at any time at the option of the holder.

 

 

4
 

 

Q: Who will be the directors of PEN following the combination?

 

A: From and immediately after the effective time of the combination, the initial directors to serve on the board of directors of PEN shall be three continuing directors of Applied Nanotech: Ronald J. Berman, Dr. Robert Ronstadt and Howard Westerman and four persons nominated by NanoHolding: Douglas Q. Holmes, Jeanne M. Rickert, Scott E. Rickert, and James Sharp. James Sharp will be the initial Zeiss designated director on the PEN board. Each of these individuals will serve until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal. In addition, until one year after the closing, PEN and its Board of Directors will permit a board observer to attend all meetings of the PEN Board of Directors in a nonvoting observer capacity. That observer is another current director of Applied Nanotech, Paul Rocheleau.

 

 

Q: Who will be the executive officers of PEN following the combination?

 

A: Promptly following the effective time of the combination, the executive management team for PEN is expected to include the three individuals identified below. None of them will have employment agreements with PEN or any of its subsidiaries.

 

Name   Position with the Combined Company   Current Position
Scott E. Rickert, PhD.   

Chairman of the Board

Chief Executive Officer

  Chief Executive Officer of NanoHolding & Nanofilm
         
Bruce Vereecken   Chief Financial Officer   Chief Financial Officer of NanoHolding & Nanofilm
         
Jeanne M. Rickert    Chief Legal Officer   General Counsel of NanoHolding & Nanofilm

 

 

Q: What are the material federal income tax consequences of the combination to me?

 

A: The Redomestication Merger and the Nano Merger have been structured to qualify as a reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, or the Code. No tax opinions will be given for any party. There will be no U.S. federal income tax consequences to Applied Nanotech's stockholders as a result of the combination.

 

Tax matters are very complicated, and the tax consequences of the combination to a particular stockholder will depend in part on such stockholder's circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the combination to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

 

For a more complete description of the consequences of the combination, please see the section The Combination – Proposal 1, Material U.S. Federal Income Tax Consequences to Applied Nanotech Shareholders that starts on page 76.

 

 

Q: What risks should Applied Nanotech's stockholders consider in deciding whether to vote in favor of the combination?

 

A: Applied Nanotech's stockholders should carefully read the section Risk Factors beginning on page 13, which sets forth certain risks and uncertainties related to the combination, risks and uncertainties to which the combined company's business will be subject, risks and uncertainties to which Applied Nanotech, as an independent company, is subject and risks and uncertainties to which NanoHolding, as an independent company, is subject.

 

 

Q: When do you expect the combination to be consummated?

 

A: Applied Nanotech and NanoHolding anticipate that the consummation of the combination (if approved) will occur as promptly as practicable after the special meeting. They expect at that time that all closing conditions will either have been satisfied or be waived. However, the exact timing of the consummation of the combination is not yet known. For a more complete description of the closing conditions under the Merger & Exchange Agreement, please see the section The Combination – Proposal 1, The Merger & Exchange Agreement – Conditions to Completion of the Combination that starts on page 67. See also, the section Information About the Special Meeting, Anticipated Completion Date for the Combination starting on page 29.

 

5
 

 

Q: How will the combination affect stock options to acquire Applied Nanotech common stock?

 

A: Upon the effectiveness of the combination, each outstanding option to purchase Applied Nanotech's common stock will continue and become an option to purchase an equivalent number of shares of PEN's Class A common stock.

 

 

Q:What do I need to do now?

 

A:You are urged to read this proxy statement carefully, including each of the annexes, and to consider how the combination affects you. If your shares are registered directly in your name, you may complete, date and sign the enclosed proxy card and mail return it in the enclosed postage-paid envelope. Alternatively, you can deliver your completed proxy card in person or vote by completing a ballot in person at the special meeting. If your shares are held in street name by your broker, bank or other nominee, you must instruct the broker, bank or nominee how to vote your shares following instructions that are provided to you.

 

 

Q: What happens if I do not return a proxy card or otherwise provide proxy instructions?

 

A:The failure to return your proxy card or otherwise provide proxy instructions will have the same effect as voting against Proposal 1, Proposal 2 and Proposal 3. If your shares are held in street name, the failure to give instructions as to how to vote your shares on Proposal 4 will have the same effect as voting against Proposal 4.

 

 

Q: Should Applied Nanotech's stockholders send in their stock certificates now?

 

A:No. After the combination is consummated, PEN shares will not be represented by certificates. Stockholders of Applied Nanotech will receive information as to the electronic certification of their PEN shares after the closing. After the PEN share information has been distributed to PEN shareholders Applied Nanotech with purge its shareholder records and you may destroy your Applied Nanotech share certificate(s).

 

 

Q: Have NanoHolding's stockholders agreed to the combination?

 

A: Yes. On May 28, 2014, NanoHolding's stockholders adopted the Merger & Exchange Agreement and approved the combination pursuant to a written consent in lieu of a meeting.

 

 

Q: Have any of Applied Nanotech's stockholders agreed to vote in favor of the combination?

 

A: Yes. In connection with the execution of the Merger & Exchange Agreement, the directors of Applied Nanotech and Sichuan Yinhee Chemical Co., Ltd. who hold, collectively, approximately 5% of Applied Nanotech's outstanding common stock have entered into an agreement with NanoHolding that provides, among other things, that they will vote in favor of the combination and the Merger & Exchange Agreement.

 

 

Q:Has either Applied Nanotech or NanoHolding entered into any agreements with NanoHolding's and Applied Nanotech's stockholders restricting the transfer of shares of their common stock?

 

A: Yes. Until the closing, the agreement that NanoHolding entered into with Applied Nanotech's directors and Sichuan Yinhee Chemical Co., Ltd. described above requires that any transferee acquiring shares of Applied Nanotech from a signatory stockholder agree to the voting covenants to assure that those shares are voted in favor of the combination. There are no agreements that restrict the transfer of shares in NanoHolding, but its stockholders have already approved the combination.

 

 

6
 

 

Q: Who is paying for this proxy solicitation?

 

A: Applied Nanotech will bear the cost of soliciting proxies, including the printing, mailing and filing of this proxy statement, the proxy card and any additional information furnished to Applied Nanotech's stockholders. Applied Nanotech has engaged Morrow & Co., LLC, a proxy solicitation firm, to solicit proxies from Applied Nanotech's stockholders. Morrow will be paid $10,000 plus $6.50 per holder to assist with the solicitation of proxies. Arrangements will also be made with banks, brokers, nominees, custodians and fiduciaries who are record holders of Applied Nanotech's common stock for the forwarding of solicitation materials to the beneficial owners of Applied Nanotech's common stock. Applied Nanotech will reimburse these banks, brokers, nominees, custodians and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.

 

 

Q: Who can provide me with additional information and help answer my questions?

 

 

A: If you would like additional copies, without charge, of this proxy statement or if you have questions about the combination and the other proposals being considered at the special meeting, including the procedures for voting your shares, you should contact Morrow & Co., LLC, Applied Nanotech's proxy solicitor, by telephone at 888-813-7566

 

SUMMARY

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the combination and the other proposals being considered at the special meeting, you should read this entire proxy statement carefully, including the materials attached as annexes, as well as other documents referred to or incorporated by reference herein. See Where You Can Find More Information beginning on page 92. Page references are included in parentheses to direct you to a more detailed description of the topics presented in this summary.

 

The Companies

 

Applied Nanotech, Inc.

3006 Longhorn Boulevard, Suite 107

Austin, Texas 78758

(512) 339-5020

   

Applied Nanotech Holdings, Inc. (APNT) is an Austin, Texas-based global leader in nanotechnology research and development and has ongoing research programs and license agreements with product innovators around the world. For information about Applied Nanotech Holdings, Inc., please visit www.appliednanotech.net.

 

NanoHolding Inc.

10111 Sweet Valley Drive

Valley View, Ohio 44125

(216) 447-1199

 

NanoHolding is the parent company of Nanofilm, Ltd., a private company located in Valley View, Ohio, that develops nano-layer coatings, nano-based cleaners, and nano-composite products. NanoHolding’s primary commercial products center on its unique eyewear glass cleaning and de-fogging products; other products include precision mold release treatments, stay-clean surface treatments for ceramic insulators, and scuff-resistant treatments for commercial dinnerware. For information about NanoHolding, please visit www.nanofilmtechnology.com.

 

 

Summary of the Combination

 

Upon the terms and subject to the conditions of the Merger & Exchange Agreement, Applied Nanotech will merge with and into its wholly-owned subsidiary, and that subsidiary, PEN Inc., a Delaware corporation, will be the survivor. This first merger is the Redomestication Merger. Immediately after the Redomestication Merger, another subsidiary of Applied Nanotech will merge with and into NanoHolding Inc. That acquisition subsidiary will be the survivor, and will change its name to Nanofilm Holdings Inc. This is referred to as the Nano Merger. Then, for the final step in the combination, Carl Zeiss, Inc. will exchange its membership interest in NanoHolding’s subsidiary for stock in PEN. After the Exchange, NanoHolding’s subsidiary, Nanofilm Ltd., referred to as Nanofilm, will be an indirect wholly owned subsidiary of PEN. The Redomestication Merger, the Nano Merger and the Exchange are referred to as the combination. The three steps are linked: if one happens, they will all happen. If one is not closing, none of the steps will occur. Immediately after the effective time of the combination, NanoHolding's stockholders and Zeiss will own approximately 62% of the value of PEN common stock, and Applied Nanotech's former stockholders will own approximately 38% of the value of PEN common stock. The former stockholders of Applied Nanotech will include those holding the common stock of Applied Nanotech that is now outstanding as well as shares that Applied Nanotech is obligated to issue to, among others, certain of its convertible note holders and its present and former executive officers and directors, but excluding outstanding options issued by Applied Nanotech. Rickert Family, Limited Partnership, one of the stockholders of NanoHolding will receive Class B common stock of PEN in the combination that has 100 votes per share and after the combination Scott Rickert, as the sole general partner of that partnership will control approximately 99% of the voting power of the PEN common stock.

 

7
 

 

Reasons for the Combination (see page 59)

 

After careful consideration of the terms and conditions of the Merger & Exchange agreement, the board of directors of Applied Nanotech has determined that the combination is fair to and in the best interests of Applied Nanotech and its stockholders. In reaching its decision, the board of directors of Applied Nanotech considered many factors, including the history of operating losses and limited financing options and the expense and dilution caused by recent financing activities and its meetings with Scott Rickert and the due diligence materials related to NanoHolding. The independent members of the Board who comprised the Special Committee that negotiated the Merger & Exchange Agreement concluded that they had explored available options for Applied Nanotech to remain independent, and there was sufficient information and appropriate procedural safeguards in place that they should not incur the expense of retaining an independent financial advisor.

     

 

Overview of the Merger & Exchange Agreement

 

Consideration (see page 62)

 

At the effective time of the Redomestication Merger:

 

·each share of Applied Nanotech common stock, other than dissenting shares, will be converted solely into the right to receive one share of PEN’s Class A common stock;

 

·any dissenting shares will cease to represent any interest in PEN and will have the rights and remedies under the Texas Business Organizations Code (“TBOC”), except if the holder loses the rights under the TBOC for any reason, each shares will be converted solely into the right to receive one share of PEN Class A common stock; and

 

·any shares of Applied Nanotech common stock held as treasury stock will be cancelled and cease to exist and no consideration shall be delivered in exchange therefor.

 

At the effective time of the Nano Merger:

 

·each share of NanoHolding common stock, other than dissenting shares, shall be converted solely into the right to receive that number of shares of PEN common stock determined by the exchange ratio. Rickert Family, Limited Partnership, the only holder of NanoHolding Class B common stock, will receive shares of PEN Class B common stock. All other stockholders of NanoHolding will receive PEN Class A common stock; and

 

·any shares of NanoHolding common stock held as treasury stock or held or owned by PEN or any of its subsidiaries shall be cancelled and cease to exist and no consideration shall be delivered in exchange therefor.

 

In the Exchange, Zeiss will exchange its Class Z membership units in Nanofilm for PEN Class Z common stock based on the number of Class Z membership units in Nanofilm multiplied by the exchange ratio.

  

No fractional shares of PEN common stock will be issued in the combination. Instead, any NanoHolding stockholder or Zeiss who would otherwise be entitled to receive a fraction of a share of Applied Nanotech common stock will be entitled to receive one additional share of the applicable class of PEN common stock.

 

 

8
 

 

Stock Options of Applied Nanotech (see page 75)

 

Each outstanding option to purchase Applied Nanotech common stock unexercised prior to the effective time of the combination will become an obligation of PEN as a result of the Redomestication Merger. Accordingly, from and after the closing of the combination, each option assumed by PEN may be exercised solely for an equal number of shares of PEN Class A common stock.

 

Conditions to Completion of the Combination

(see page 67)

 

Consummation of the combination is subject to a number of conditions (subject to certain exceptions in the Merger & Exchange Agreement), including, among others, the following:

 

·no action, suit or proceeding shall have been instituted before any court or governmental or regulatory body or instituted by any governmental authority to restrain, modify or prevent the carrying out of the combination, to seek material damages or a discovery order in connection with the combination, and there shall exist no injunction or other order issued by any governmental authority or court of competent jurisdiction which prohibits the consummation of any part of the combination;

 

·obtaining requisite Applied Nanotech and NanoHolding stockholder approvals;

 

·all representations and warranties in the Merger & Exchange Agreement must be true and correct, when read without any qualifications relating to “materiality,” or “Material Adverse Effect”, except in each case where the failure of to be true and correct has not had, and would not reasonably be expected to have, a material adverse effect on the party making the representations and warranties; and

 

·receipt of all required consents and performance or compliance with in all material respects all covenants and obligations on or before the closing of the combination, and delivery of certain certificates and other documents required under the Merger & Exchange Agreement for the closing.

 

In addition, the obligation of Applied Nanotech to complete the combination is further subject to the satisfaction or waiver of the following condition: there shall have not been any occurrence, event, incident, action, failure to act or transaction since September 30, 2013 which, subject to certain exceptions, has had or is reasonably likely to cause an effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations or results of operations of NanoHolding and its subsidiaries taken as a whole.

 

Similarly, the obligation of NanoHolding to complete the combination is further subject to the satisfaction or waiver of the following condition: there shall have not been any occurrence, event, incident, action, failure to act or transaction since September 30, 2013 which, subject to certain exceptions, has had or is reasonably likely to cause an effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations or results of operations of Applied Nanotech and its subsidiaries taken as a whole.

 

No Solicitation (see page 68)

 

Applied Nanotech agreed that, subject to specified exceptions in the Merger & Exchange Agreement, Applied Nanotech shall not, and shall not authorize or permit any investment banker, financial advisor, attorney, accountant or other person retained by or acting for or on behalf of Applied Nanotech to, directly or indirectly:

 

·initiate, assist, solicit, negotiate, or encourage any offer, inquiry or proposal from any person relating to any acquisition of that person or Applied Nanotech (regardless of the structure of any such acquisition);

 

·any other action that has the primary effect of avoiding the closing under the Merger & Exchange Agreement;

 

Applied Nanotech is required promptly to notify NanoHolding if Applied Nanotech receives any proposal or inquiry regarding a transaction that would be a superior proposal and provide NanoHolding with the significant terms and conditions of the proposal including the identity of the party making the proposal.

 

9
 

 

Termination of the Merger & Exchange Agreement (see page 72)

 

Either Applied Nanotech or NanoHolding can terminate the Merger & Exchange Agreement under specified circumstances, which would prevent the combination from being consummated.

 

No Termination Fee (see page 72)

 

There is no termination fee payable under the Merger & Exchange Agreement. If the combination does not occur, each party will bear its own expenses.

 

Voting and Conversion Agreement (see page 73)

 

Substantially concurrently with the execution of the Merger & Exchange Agreement, the directors of Applied Nanotech and Sichuan Yinhee Chemical Co., Ltd. who hold, collectively, approximately 5% of Applied Nanotech's outstanding common stock entered into an agreement with NanoHolding that provide, among other things, that such directors and stockholders will vote in favor of the combination and the Merger & Exchange Agreement. In addition, the voting and conversion agreement requires that any transferee acquiring shares of Applied Nanotech from a signatory stockholder agree to the voting covenants to assure that those shares are voted in favor of the combination.

 

Management Following the Combination (see page 69)

 

At the effective time of the combination, the executive management team of the combined company is expected to include the following individuals:

 

Name   Position with the Combined Company   Current Position
Scott E. Rickert, PhD.  

Chairman of the Board

Chief Executive Officer

  Chief Executive Officer of NanoHolding & Nanofilm
         
Bruce Vereecken   Chief Financial Officer   Chief Financial Officer of NanoHolding & Nanofilm
         
Jeanne M. Rickert    Chief Legal Officer   General Counsel of NanoHolding & Nanofilm

 

The Board of Directors Following the Combination (see page 69)

 

From and immediately after the effective time of the combination, the initial directors to serve on the board of directors of PEN shall be three continuing directors of Applied Nanotech: Ronald J. Berman, Dr. Robert Ronstadt and Howard Westerman and four persons nominated by NanoHolding: Douglas Q. Holmes, Jeanne M. Rickert, Scott E. Rickert, and James Sharp who is the Zeiss designee. Each of these will serve until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal. In addition, until one year after the closing, PEN and its Board of Directors will permit a board observer to attend all meetings of the PEN Board of Directors in a nonvoting observer capacity. That observer is another director of Applied Nanotech, Paul Rocheleau.

 

10
 

 

Interests of Applied Nanotech's Directors and Executive Officers (see page 74)

 

In considering the recommendation of Applied Nanotech's board of directors with respect the Merger & Exchange Agreement and the other matters to be acted upon by Applied Nanotech's stockholders at the special meeting, Applied Nanotech's stockholders should be aware that members of the board of directors and executive officers of Applied Nanotech have interests in the combination that may be different from, or in addition to, interests they may have as stockholders.

 

Interests of NanoHolding's Director Nominees (see page 75)

 

Applied Nanotech's stockholders also should be aware that the directors nominated by NanoHolding have interests in the combination that may be different from, or in addition to, interests of the shareholders of Applied Nanotech.

 

Material U.S. Federal Income Tax Consequences of the Combination (see page 76)

 

Assuming that the first two steps of the combination, the Redomestication Merger and the Nano Merger, will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and subject to the qualifications and assumptions described in this proxy statement, neither Applied Nanotech nor its stockholders will recognize any gain or loss for federal income tax purposes as a result of the combination. Therefore, there will be no material U.S. federal income tax consequences of the combination for Applied Nanotech stockholders.

 

Risk Factors (see page 13)

 

The combination, including the possibility that the transactions may not be consummated, poses a number of risks to Applied Nanotech and its stockholders. In addition, both Applied Nanotech and NanoHolding are subject to various risks associated with their businesses and their industries, and the combined business of PEN will also be subject to those and other risks.

 

Regulatory Approvals (see page 66)

 

Neither Applied Nanotech nor NanoHolding is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities in the United States or other countries to consummate the combination. In the United States, Applied Nanotech must comply with applicable federal and state securities laws, including filing this proxy statement with the SEC.

 

Anticipated Accounting Treatment

 

The combination will be treated by Applied Nanotech as a reverse combination under the purchase method of accounting in accordance with U.S. generally accepted accounting principles, or GAAP. For accounting purposes, NanoHolding is considered to be acquiring Applied Nanotech in this transaction.

 

Appraisal Rights (see page 66)

 

Applied Nanotech's stockholders are entitled to appraisal rights in connection with the combination. Texas law imposes very specific requirements on shareholders who want to exercise appraisal rights and those interested in appraisal rights should carefully review those provisions.

 

Comparison of Stockholder Rights (see page 77)

 

Applied Nanotech is incorporated under the laws of the State of Texas and, as a result of the Redomestication Merger, Applied Nanotech stockholders will receive shares in PEN, a Delaware corporation, and after the combination your rights will be governed by the Delaware General Corporation Law and the certificate of incorporation and the bylaws of PEN. As a result, there will be material differences between the current rights of Applied Nanotech stockholders, governed by the restated articles of incorporation, as amended, and third amended and restated by-laws, as amended, of Applied Nanotech and the TBOC, and the rights they will have as holders of PEN Class A common stock.

 

11
 

 

MARKET PRICE INFORMATION

 

Our common stock, $0.001 par value, trades on the OTC Bulletin Board system under the symbol “APNT”. The following table sets forth, on a per share basis for the periods indicated, the high and low sale prices for the common stock as reported by the OTC Bulletin Board system. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

        High   Low  
               
2012   First Quarter   $0.37   $0.22  
    Second Quarter   $0.25   $0.17  
    Third Quarter    $0.21   $0.14  
    Fourth Quarter    $0.21   $0.05  
               
2013   First Quarter   $0.20   $0.08  
    Second Quarter   $0.12   $0.08  
    Third Quarter    $0.10   $0.04  
    Fourth Quarter    $0.07   $0.02  
               
2014   First Quarter   $0.11   $0.03  
    Second Quarter   $0.09   $0.04  

 

As of June 27, 2014 the closing sale price for our common stock as reported on the OTC Bulletin Board system was $0.0524. As of that date, there were approximately 327 shareholders of record for our common stock. This does not include beneficial owners holding stock in street name in brokerage accounts. As of our last record of total shareholders, including those holding stock in street name, there were approximately 5,650 shareholders.

 

12
 

 

RISK FACTORS

 

You should consider the following factors in evaluating whether to approve the Merger & Exchange Agreement and the combination. These factors should be considered in conjunction with the other information included or incorporated by reference by Applied Nanotech in this proxy statement.

 

Risks related to the Combination

 

You cannot be sure of the market value of the shares of PEN common stock you will receive in the business combination.

 

Upon completion of the combination, each share of Applied Nanotech common stock that you hold will be converted into the right to receive one share of PEN Class A common stock. There will be no adjustment to the per share consideration or exchange ratio due to changes in the value of shares of NanoHolding, in the value of Nanofilm or because of changes in the market price of Applied Nanotech common stock; moreover, the Merger & Exchange Agreement does not provide for any price-based termination right. Accordingly, the market value of the shares of PEN Class A common stock that you will be entitled to receive upon completion of the combination could vary significantly from the market value on the date of this proxy statement or the date of the special meeting.

 

Variations in the value could be the result of changes in the business, operations or products of NanoHolding or Applied Nanotech prior to the combination, expectations regarding those businesses following the combination, market assessments of the likelihood that the combination will be completed or the timing of the completion of the combination, general market and economic conditions and other factors both within and beyond the control of any of the parties.

 

Because the lack of a public market for the NanoHolding shares makes it difficult to evaluate the fairness of the exchange ratio, NanoHolding's stockholders and Zeiss may receive consideration in the business combination that is greater than -- or less than -- the fair market value of the NanoHolding business.

 

The outstanding capital stock of NanoHolding is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of NanoHolding or its subsidiary Nanofilm. Since the percentage of Applied Nanotech's equity to be issued in exchange for the ownership of Nanofilm was determined based on negotiations between the parties, it is possible that the value of the PEN common stock to be issued to stockholders of NanoHolding and Zeiss in the combination will be greater than the fair market value of Nanofilm. Alternatively, it is possible that the value of the shares of PEN's common stock to be issued to them in the combination will be less than the fair market value of Nanofilm.

 

Recommendation of the Applied Nanotech Board of Directors for the Combination

 

After careful consideration of the terms and conditions of the Merger & Exchange Agreement the board of directors of Applied Nanotech has unanimously determined that the combination is fair to and in the best interests of Applied Nanotech and its shareholders and recommends that they vote for the combination.

 

In reaching its decision, the board of directors of Applied Nanotech considered the losses from operations that Applied Nanotech has had every year except for one during the past decade, the efforts undertaken over the years by Applied Nanotech to commercialize products using its intellectual property, and the terms of financing for Applied Nanotech’s operations that were available to it in 2013 and in prior years. The board of directors also considered the due diligence materials provided by NanoHolding and the boards assessment of the management team, especially Dr. Rickert.

 

The board of directors did not obtain a fairness opinion on which to base its assessment. Applied Nanotech is not required to obtain an opinion from an unaffiliated third party that the price it is paying is fair to its public shareholders from a financial point of view.

 

Some of Applied Nanotech's directors and officers, and the NanoHolding director nominees have conflicts of interest that may influence them to support or approve the business combination.

 

Officers and directors of Applied Nanotech have arrangements that provide them with interests in the combination that are different from yours, including, among others, their continued service as an officer or director of the combined company and director and officer insurance protection. These interests, among others, may influence the officers and directors of Applied Nanotech to support or approve the business combination. The NanoHolding nominees also have interests in the combination that would be different from yours. For example, Dr. Rickert, the sole director of NanoHolding also has interests in the combination that are different from yours, including the receipt of the Class B common stock of PEN, his service and that of his wife, Jeanne Rickert, as officers and directors of PEN. More information about this is set out in The Combination – Proposal 1, Interests of Applied Nanotech’s Directors and Executive Officers in the Combination, and Interests of NanoHolding Director Nominees in the Combination, that start on page 74 and page 75.

 

13
 

 

The combination may be completed even though material adverse changes may result from the announcement of the combination, industry-wide changes and other causes.

 

In general, either Applied Nanotech or NanoHolding can refuse to complete the business combination if there is a material adverse change affecting the other party after September 30, 2013 and the closing. However, some types of changes do not permit either party to refuse to close, even if those changes would have a material adverse effect on Applied Nanotech or NanoHolding. The following changes will not allow either party to refuse to complete the combination if the change does not have a materially disproportionate effect on Applied Nanotech or NanoHolding, as the case may be:

 

·changes in general economic conditions or capital or credit markets,
·changes to the economic conditions affecting the industries in which either of them operates,
·changes related to or arising from the execution, announcement or performance of, or compliance with, the Merger & Exchange Agreement or the consummation of the combination,
·changes in accounting requirements or principles or any change in applicable legal requirements or the interpretation thereof; or
·the failure to meet any projections.

 

If adverse changes occur but the parties must still complete the business combination, PEN’s stock price may suffer.

 

The closing of the business combination is subject to many conditions and if these conditions are not satisfied or waived, the business combination will not be completed.

 

The closing of the combination is subject to a number of conditions as set forth in the Merger & Exchange Agreement that must be satisfied or waived, including, the Applied Nanotech shareholder approval and the absence of any law or order prohibiting the closing of the business combination.

 

The closing of the business combination is also dependent on the accuracy of representations and warranties made by the parties to the Merger & Exchange Agreement (subject to customary materiality qualifiers and other customary exceptions) and the performance in all material respects by the parties of obligations imposed under the Merger & Exchange Agreement.

 

For a more complete summary of the conditions that must be satisfied or waived prior to completion of the business combination, see the section entitled The Combination – Proposal 1, The Merger & Exchange Agreement - Merger & Exchange Agreement—Conditions to Completion of the Combination beginning on page 67.

 

There can be no assurance whether or when the conditions to closing of the business combination will be satisfied or waived or the business combination will be consummated.

 

During the pendency of the business combination, Applied Nanotech may not be able to enter into a business combination with another party, incur additional financing or engage in certain other transactions because of restrictions in the Merger & Exchange Agreement.

 

Restrictions in the Merger & Exchange Agreement do not allow Applied Nanotech to accomplish a financing (other than the bridge financing), make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the combination. As a result, if the combination is not completed, the parties may be at a disadvantage to their competitors. In addition, while the Merger & Exchange Agreement is in effect and subject to limited exceptions, Applied Nanotech is prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, an acquisition of Applied Nanotech's common stock, a tender offer for Applied Nanotech's common stock, or another business combination outside the ordinary course of business. Any such transactions could be favorable to Applied Nanotech shareholders.

 

If the transactions under the Merger & Exchange Agreement are not consummated, Applied Nanotech will face difficulty continuing as a going concern and Applied Nanotech's stock price could decline.

 

The consummation of the Merger & Exchange Agreement is subject to a number of closing conditions, including the approval by Applied Nanotech's stockholders, and other customary closing conditions. Applied Nanotech is targeting a closing of the transaction early in the third quarter of 2014.

 

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If the proposed business combination is not consummated, Applied Nanotech will be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

 

·Applied Nanotech's research partners, customers, prospective customers, collaborators and other business partners and investors in general may view the failure to consummate the business combination as a poor reflection on its business or prospects.

 

·If the Merger & Exchange Agreement is terminated, Applied Nanotech will have a limited ability to continue its current operations without obtaining additional financing to fund its operations.

 

·As a result of the proposed business combination, current and prospective employees could experience uncertainty about their future roles within the combined company. This uncertainty may adversely affect Applied Nanotech's ability to retain its key employees, who may seek other employment opportunities.

 

·Applied Nanotech's management team may be distracted from day to day operations as a result of the proposed business combination or as a result of uncertainly about whether the combination will occur.

 

·The market price of Applied Nanotech's common stock may decline to the extent that the current market price reflects a market assumption that the proposed business combination will be completed.

 

In addition, if the Merger & Exchange Agreement is terminated and Applied Nanotech's board of directors determines to seek another business combination, it may not be able to find a third party willing to accomplish a transaction on terms that are as favorable as those in the Merger & Exchange Agreement. In that case, Applied Nanotech's board of directors may elect to, among other things, license or sell all or a significant portion of Applied Nanotech's intellectual property, or curtail its operations or otherwise change its strategy. In any of those situations, the consideration received by Applied Nanotech or its shareholders may be less attractive than the consideration to be received under the Merger & Exchange Agreement.

 

NanoHolding will be subject to business uncertainties and certain operating restrictions until consummation of the business combination.

 

Uncertainty about the effect of the combination on employees, customers and suppliers, and expenses associated with the Merger & Exchange Agreement and proposed combination may affect NanoHolding just as they may affect Applied Nanotech. Uncertainty about the combination may have an adverse effect on NanoHolding’s relationships with customers, employees and suppliers and, consequently, on the NanoHolding business prior to closing and may have an adverse effect on combined company following the business combination. These uncertainties could disrupt the business of NanoHolding and cause customers, suppliers, and others that deal with NanoHolding to defer entering into contracts or making other decisions concerning business with NanoHolding or seek to change or cancel existing business. The uncertainty could also cause key employees of NanoHolding to lose motivation or to leave their employment. In addition, the Merger & Exchange Agreement restricts NanoHolding from making certain acquisitions and taking other specified actions until the business combination occurs without the consent of Applied Nanotech. These restrictions may prevent NanoHolding from pursuing attractive business opportunities that may arise prior to the completion of the business combination.

 

Risks relating to PEN after the Combination.

 

The market price for PEN Class A common stock may be affected by factors different from those that historically have affected Applied Nanotech common stock.

 

Upon completion of the business combination, Applied Nanotech shareholders will become PEN shareholders. Applied Nanotech’s business differs from that of PEN, and the results of operations of PEN will be affected by some factors that are different from those currently affecting the results of operations of Applied Nanotech. For a discussion of the businesses of Applied Nanotech and NanoHolding and of some important factors to consider in connection with those businesses, see the sections entitled Applied Nanotech’s Business and NanoHolding’s Business that start on pages 30 and 37, respectively.

 

The market price of the combined company's common stock may decline as a result of the business combination.

 

The market price of the PEN’s common stock may decline as a result of the business combination for a number of reasons including if:

 

·the combined company does not achieve the perceived benefits of the business combination as rapidly or to the extent anticipated by investors;

 

·the effect of the business combination on the combined company's business and prospects is not consistent with the expectations of investors; or

 

·investors react negatively to the effect on the combined company's business and prospects from the business combination.

 

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Former Applied Nanotech shareholders will have less influence, as a group, as shareholders of PEN.

 

Immediately after completion of the business combination, former Applied Nanotech shareholders, who collectively own 100% of Applied Nanotech, will own, together with the holders of Applied Nanotech convertible debt and with others who have rights to acquire Applied Nanotech common stock, approximately 38% of outstanding PEN common stock. Consequently, Applied Nanotech shareholders, as a group, will exercise less influence over the management and policies of PEN than they currently have over the management and policies of Applied Nanotech.

 

PEN’s CEO will have control over key decision making as a result of his control of a majority of our voting stock.

 

Scott Rickert, who will be the Chairman and CEO of PEN after the combination, will control the vote of all the Class B common stock of PEN, representing approximately 48% of the value of PEN common stock and approximately 99% of the voting power of PEN’s outstanding common stock following the combination. As a result, Mr. Rickert has the ability to control the outcome of matters submitted to PEN stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of its assets. Under the terms of the Rickert Family, Limited Partnership, at the time of his death, control will transfer to his wife Jeanne Rickert. As a board member and officer, Mr. Rickert will owe a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr. Rickert is entitled to vote as the general partner of Rickert Family, Limited Partnership in the interest of the Rickert family, which may not always be in the interests of our stockholders generally.

 

Applied Nanotech's stockholders may not realize a benefit from the business combination commensurate with the ownership dilution they will experience in connection with the business combination.

 

If the combined company PEN is unable to realize the benefits anticipated from the business combination, Applied Nanotech's stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to maintain the current businesses of Applied Nanotech and NanoHolding and to execute the PEN business plan. Delays in implementing the PEN business plan or problems in the ongoing businesses could adversely affect PEN’s results, financial condition and stock price following the combination. Moreover, there can be no assurance that PEN business plan will result in the realization of the full benefits of the innovation and new products that may be possible from the combination or that these benefits will be achieved within a reasonable period of time.

 

The rights of former Applied Nanotech shareholders as shareholders of PEN will be governed by the restated certificate of incorporation and amended and restated by-laws of PEN and the DGCL.

 

Upon consummation of the business combination, the rights of Applied Nanotech shareholders as shareholders of PEN will be governed by the restated certificate of incorporation and amended and restated by-laws of PEN and the Delaware General Corporation Law, which we refer to as the DGCL. There will be material differences between the current rights of Applied Nanotech shareholders, which are governed by the restated articles of incorporation, as amended, and amended and restated by-laws, of Applied Nanotech and the TBOC, and the rights they will have as holders of PEN Class A common stock. See the section entitled The Combination – Proposal 1, Comparison of Shareholder’s Rights beginning on page 77.

 

The timeline for commercial sales of new products, the profit margins that new products can command and customer acceptance of new products, are all key elements of PEN’s business plan and are all unpredictable.

 

The board of Applied Nanotech and of NanoHolding consider PEN’s opportunity to create new products using the intellectual property of the two companies as a key benefit of the combination. To realize this benefit, PEN must identify products that can benefit from its intellectual property, take the products from concept to reality, and make and sell them commercially. Many factors affect a customer’s acceptance of new products and many new product ideas are never realized. Many others never achieve commercial success. If PEN cannot develop and commercialize new products it will adversely impact its business and results of operations.

 

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PEN’s business plan calls for the acquisition of businesses that are knowledgeable about the markets for new products to help PEN with the marketing, sales and distribution of the new products, the time required and the costs to accomplish these acquisitions are unknown.

 

To understand the potential market for new products, to better understand target customers, and to market and distribute new products, PEN expects to identify businesses that are already knowledgeable about the marketing, sales and distribution of products in order to add to the product offering the new products enhanced by nanotechnology available to PEN. Identifying those companies, negotiating the acquisition and integrating new personnel into the product development team must all happen for PEN’s new product development. If PEN cannot identify, or cannot successfully negotiate or finance the acquisition of a product company, PEN’s ability to implement its business plan will be delayed either until an acquisition can be identified and consummated or until a different product opportunity is identified where such an acquisition can be accomplished.

 

PEN’s acquisition strategy is expected to require additional capital, and PEN’s failure to raise capital when needed could prevent it from growing.

 

To fund acquisitions of product companies or to acquire technology to complete the development of new products, PEN expects that it will be required to raise capital through public or private financings. If financing is not available on acceptable terms, or at all, PEN’s failure to raise capital when needed could harm its business. Moreover, because there will not be earnings from new products for some period of time, financings may be equity financings that will dilute the holders of PEN common stock.

 

PEN’s designated executive team has not previously worked together to lead a public company, and any inability of members of the executive team to work together effectively or the loss of any of them could adversely affect its performance.

 

While the persons expected to be PEN’s executive officers have significant experience, some do not have any experience working for a public company, and they have not worked together as managers of a public holding company with several operating subsidiaries. PEN’s acquisition strategy will also mean that new key players will be expected to join the management team to accomplish the development, marketing, sales and distribution of new products. PEN’s success will depend, in part, on the ability of its executives to work effectively as a team in this new environment. Any inability of our executive officers to work together effectively or the loss of any of them, could impair PEN’s ability to execute its strategy.

 

PEN’s strategy to leverage the intellectual property of Applied Nanotech and NanoHolding with profitable new products may be more difficult, costly or time-consuming than expected, which may adversely affect PEN’s results and negatively affect the value of PEN common stock following the business combination.

 

Applied Nanotech and the owners of Nanofilm have entered into the Merger & Exchange Agreement because each believes that combining the businesses of Applied Nanotech and NanoHolding under PEN will enable the development of new products enabled by nanotechnology. Few companies, NanoHolding among them, have been able to develop commercial products based on nanotechnology. If PEN is not able to successfully develop products enhanced by nanotechnology, the anticipated benefits of the combination may not be realized fully, or at all, or may take longer to realize than expected, and the value of PEN common stock may be affected adversely.

 

The failure to manage successfully the business and operations of PEN while new products are under development until they can generate commercial sales may adversely affect PEN’s future results.

 

PEN management must continue to manage the historical operations of Applied Nanotech and NanoHolding and expects to make them profitable on a stand-alone basis in order to enable PEN to have time to accomplish its growth plans. Identifying new products that can be manufactured, marketed and sold at margins that justify the investment and then taking those products to market will take time and PEN must fund the ongoing operations of Applied Nanotech and NanoHolding, the costs of acquisitions of product companies, the acquisition of any additional required intellectual property rights, and product development, marketing and distribution in order to realize its plans. Therefore, in addition to executing its business plan, PEN must continue the contract research business of Applied Nanotech and work to make it profitable on a stand-alone basis, as well as the operations of NanoHolding in order to have the cash flow to support its operations even as it works to identify potential product opportunities to use its intellectual property. PEN expects to continue the operations of Applied Nanotech and NanoHolding at their current locations, but there may still be some disruptions resulting from the business combination as well as the changes and challenges that generally affect ongoing operations. Disruptions or the failure to address changes in the ongoing businesses of Applied Nanotech and NanoHolding could adversely affect PEN’s results, financial condition and stock price following the combination.

 

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PEN may not be able to adequately protect its intellectual property rights or may be accused of infringing intellectual property rights of third parties.

 

PEN considers the technology of Applied Nanotech and NanoHolding, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to its success, and will rely on patent, trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees and others to protect its proprietary rights. Effective intellectual property protection may not be available in every country in which products are manufactured or sold. PEN may also be required to obtain additional intellectual property rights in order to complete some product development projects.

 

PEN may not be able to discover or determine the extent of any unauthorized use of its proprietary rights. The protection of its intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps PEN takes to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating its proprietary rights. PEN may be subject to litigation and disputes related to its intellectual property and products. The costs of defending, bringing and supporting such litigation and disputes may be considerable, and there can be no assurances that favorable outcomes will be obtained.

 

PEN does not intend to pay dividends for the foreseeable future.

 

PEN intends to retain all of its earnings for the foreseeable future to finance the operation and expansion of its business and does not anticipate paying cash dividends. As a result, stockholders can expect to receive a return on PEN’s Class A common stock only if the market price of the stock increases.

 

The ability of PEN after the business combination to use Applied Nanotech’s net operating loss carryforwards may be limited.

 

Pursuant to Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of Applied Nanotech’s net operating losses are expected to be very limited as a result of the ownership change of 50% that will occur in connection with the combination.

 

Failure of the NanoMerger to qualify as a reorganization within the meaning of Section 368 of the Code could have adverse tax consequences.

 

The parties intend for the Redomestication Merger and the Nano Merger to qualify as a reorganization within the meaning of Section 368 of the Code. If the NanoMerger does not qualify, PEN could have a significant tax liability.

 

Risks Relating to Applied Nanotech

 

Our success is dependent on our principal technologies

 

Our technology platforms, which include nanocomposites, nanoelectronics, and nanosensors, are emerging technologies. Our financial condition and prospects are dependent upon commercializing our technology, licensing our intellectual property to others, or introduction of the technology into the marketplace. Additional R&D needs to be conducted on some of our technologies before products can be produced using this technology. Market acceptance of products using our technology will be dependent upon acceptance within the industries of those products of the quality, reliability, performance, efficiency, and breadth of application and cost-effectiveness of the products. There can be no assurances that these products will be able to gain commercial market acceptance.

 

Our technology development is in its early stages and the outcome is uncertain

 

Some of our applications of nanotechnologies, and certain products that use these technologies, will require significant additional development, engineering, testing and investment prior to commercialization. We are exploring the use of our technology in several different types of products. We have developed proof of concepts of potential products based on our technologies. In some cases, we may develop products jointly with others based on our technology. Upon successful completion of the development process, our development partners will likely be required to license our technology to produce and sell the products. We expect that our development partners will want to retain rights to any intellectual property that they develop in the process.

 

If any of the potential products that are being developed using our technologies are successfully developed, it may not be possible for us or potential licensees or partners to successfully introduce the products, distribute them, market them to customers, or produce these products in significant quantities at a price that is competitive with other similar products. At the present time, the only significant revenue that we receive related to our technology is related to reimbursed research expenditures and development fees. These revenues are identified in our quarterly filings on Form 10-Q and our annual filings on Form 10-K in the section: Management’s Discussion and Analysis of Financial Condition and Results of Operations. The first products using our technology were introduced in the marketplace in 2011, and we began receiving royalties as a result.

 

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We may not be able to provide system integration

 

In order to prove that our technologies work and will produce a complete product, we may be required to integrate a number of highly technical and complicated subsystems into a fully integrated prototype. There is no assurance that we will be able to successfully complete the development work on some of our proposed products or that there will ultimately be any market for those products.

 

Many products that may be developed using our technology will need to be integrated into end-user products by manufacturers of those products. Although we intend to develop products to be integrated into existing manufacturing capabilities, manufacturers may be required to make modifications to, or expand their manufacturing capabilities. Manufacturers may elect not to integrate products using our technology into their end-user products, or they may not devote adequate resources to modifying their manufacturing capabilities so that our technologies can be successfully incorporated into their end-user products. The cost and complexity of integration may delay the introduction of products using our technology.

 

Our development partners have certain rights to jointly developed property and to license our technology.

 

In some cases, we have committed to license our technology to our development partners upon completion of certain development projects that are in process. The terms of all such licenses have not yet been finalized. Our development partners usually also have rights to any jointly developed property; however, any such jointly developed property would likely be based, at least in part, on our underlying technology which would require our partners to enter into a license agreement with us. In the case of Ishihara, they have the right to use our jointly owned technology without license and the existing license agreement is only to preserve their exclusivity. They could choose to give up that exclusivity and then would owe no further royalties.

 

Products using our technology may not be accepted by the market.

 

Since our inception, we have focused our product development and R&D efforts on technologies that we believe will be a significant advancement over currently available technologies. With any new technology, there is a risk that the market may not appreciate the benefits or recognize the potential applications of the technology. Market acceptance of products using our technology will depend, in part, on our ability and the ability of our licensees and partners to convince potential customers of the advantages of such products as compared to competitive products. It will also depend upon our ability to train manufacturers and others to use our products.

 

We have limited resources and our focus on particular products may result in our failure to capitalize on other opportunities.

 

We have limited resources available to successfully develop and commercialize our technology. There is a wide array of potential applications for our technology, and our limited resources require us to focus on specific product areas, while ignoring others. We focus our efforts on those projects for which we can obtain external funding since the availability of funding provides an external verification of the probability of commercial success of resulting products.

 

Rapid technological changes could render our technology obsolete, and we may not remain competitive.

 

The industries in which we compete are highly competitive and are characterized by rapid technological change. Our existing and proposed products will compete with other existing products and may compete against other developing technologies. Development by others of new or improved products, processes or technologies may reduce the size of potential markets for our products. There is no assurance that other products, processes or technologies will not render our proposed products obsolete or less competitive. Most of our competitors have greater financial, managerial, distribution and technical resources than we do. We will be required to devote substantial financial resources and effort to further R&D. There is no assurance that we will successfully differentiate our technology from our competitors’ technology, or that we will adapt to evolving markets and technologies, develop new technologies, or achieve and maintain technological advantages.

 

We have limited manufacturing capacity and experience.

 

Our employees are primarily scientists, and we have no significant manufacturing experience. We have no established commercial manufacturing facilities, and we have no intention of establishing a large scale manufacturing facility on our own. We are focusing our efforts on licensing our intellectual property to others for use in their manufacturing processes, or working with strategic partners that have manufacturing capabilities. To the extent that any of the products that we develop require significant manufacturing facilities, we intend to either contract with a qualified manufacturer, or enter into a joint venture or other similar arrangement. We have established a pilot manufacturing facility for our inks, nanocomposites, and thermal management materials. Should the development proceed to the point where a production facility is required, we intend to license or contract with others for production. This will make our success dependent on these third party relationships.

 

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The health effects of nanotechnology are unknown.

 

There is no scientific agreement on the health effects of nanomaterials, but some scientists believe that in some cases, nanomaterials may be hazardous to an individual’s health or the environment. The science of nanotechnology is based on arranging atoms in such a way as to modify or build materials. Depending on the nanomaterials used, the resulting material may not be found naturally in nature; therefore, the effects are unknown. The Company takes appropriate precautions for its employees working with carbon nanotubes and believes that any health risks related to carbon nanotubes used in potential products can be minimized. Future research into the effects of nanomaterials in general, and carbon nanotubes in particular, on health and environmental issues may have an adverse effect on products using our technology.

 

We are dependent on the availability of materials and suppliers.

 

The materials used in producing current and future products using our technology are purchased from other vendors. We anticipate that raw materials used in products to be developed by us will be readily available to us and to potential manufacturers of our products. However, there is no assurance that the current availability of these materials will continue in the future, or if available, will be procurable at favorable prices.

 

We have a history of net losses.

 

We have a history of net losses. From our inception through December 31, 2013, we incurred net losses of approximately $121 million. Although we expect to at least breakeven in 2014, there is no guarantee that we will be profitable at any time in the future. We have incurred net income and losses for the ten preceding years as shown below:

 

Year Ended December 31  Net Income (Loss) 
2004  $(7,139,109)
2005  $(5,818,816)
2006  $(6,593,892)
2007  $(4,256,891)
2008  $(2,685,867)
2009  $(2,152,605)
2010  $(411,304)
2011  $(2,570,248)
2012  $(5,129,150)
2013  $(3,140,888)

 

Although we are working to be profitable in the future, we may not be. It is not possible for us to achieve sustainable profitability solely based on our research revenues, given the rate limitations imposed by the government and market factors related to private research contracts, especially with our cost structure. It is critical that we commercialize our technology to achieve profitability, whether that commercialization is the result of licensing, product sales, or other strategic relationships. It will require capital in excess of our current capital to commercialize any of our technologies. Our profitability in 2014 is dependent upon a combination of obtaining additional research funding, product sales by our licensees, product sales by us, and significant additional cost cutting. We may, however, continue to incur additional operating losses for an extended period of time as we continue to develop our technologies. We do, however, expect the magnitude of those losses, if they continue, to decrease. Currently, we are a contract research and development organization and are dependent on license agreements and research funding to achieve breakeven or profitability. In order to continue development of our technology, we anticipate that substantial research and development expenditures will continue to be incurred. We have funded our operations to date primarily through the proceeds from the sale of our equity securities and debt offerings. Our auditors have included a going concern paragraph in their opinion on our financial statements for 2013, as they did for 2012, which could impact our ability to obtain financing, or the terms of such financing. We expect to at least breakeven in 2014; however, we will need to raise additional capital.

 

We have no current royalty agreements producing significant revenue.

 

At the present time, our strategy is dependent on licensing our technology to other companies and obtaining royalties based on products that these licensees develop and sell. We are beginning to sell certain products ourselves; however, we have no plans to manufacture any products in significant quantities ourselves, and as such at the present time, and we have limited product revenues. We may enter into joint ventures or other business arrangements where we collaborate with others to sell or manufacture products. While we do have existing licenses, none of the licensees are currently producing products that generate royalties at the present time, and therefore at, we are receiving no royalty revenue. Successful implementation of our strategy requires product sales by us. We have two licensees that could introduce products into the marketplace; however, we expect royalties to be insignificant in 2014 and there is no guarantee that products will ever be introduced by our licensees, or that they will be successful.

 

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We may license our technology to be used in other applications. It is our intention that all future license agreements will include a provision that requires the payment of ongoing royalties, although there is no assurance that will occur. 

 

Our revenues have been dependent on government contracts in the past.

 

Historically, a significant portion of our revenues have been derived from contracts with agencies of the United States government and it continues to be our main source of revenue. The contracts are a critical revenue source for us and are critical to our development process. Following is a summary of those revenues for the past ten years:

 

Year Ended December 31  Revenues from
Government
Contracts
   Percentage of
Total Revenue
 
2004  $305,721    80% 
2005  $208,211    37% 
2006  $583,236    52% 
2007  $2,328,010    58% 
2008  $2,295,887    58% 
2009  $1,694,082    42% 
2010  $2,920,030    36% 
2011  $2,956,717    46% 
2012  $1,733,728    48% 
2013  $2,048,840    52% 

 

We currently have commitments for future government funding of approximately $1.2 million. We do not intend to seek any government funding unless it directly relates to achievement of our strategic objectives.

 

Contracts involving the United States government are, or may be, subject to various risks including, but not limited to, the following:

 

Unilateral termination for the convenience of the government
Reduction or modification in the event of changes in the government’s requirements or budgetary constraints
Increased or unexpected costs causing losses or reduced profits under fixed-price contracts or unallowable costs under cost reimbursement contracts
Potential disclosure of our confidential information to third parties
The failure or inability of the prime contractor to perform its prime contract in circumstances where we are a subcontractor
The failure of the government to exercise options provided for in the contract
The right of the government to obtain a non-exclusive, royalty free, irrevocable world-wide license to technology developed under contracts funded by the government if we fail to continue to develop the technology

 

In addition, the current political environment and current budget deficits may result in cuts in government research funding, which could have a significant negative impact on us. Additionally, any delays in payment by the government as a result of the failure of Congress to increase any debt limitations, to extend debt deadlines, or other limitations imposed, would likely have a significant negative impact on us.

 

We have technologies subject to licenses.

 

In May 2000, we licensed the rights to 6 carbon nanotube patents from Till Keesmann in exchange for an initial payment of $250,000 and additional minimum royalty payments of $1.0 million, all of which were made. This agreement gave us the exclusive right to license these patents to others. In 2008, as part of a litigation settlement, and as the result of a lack of interest in these patents from potential licensees, we agreed to return the licensing rights to Mr. Keesmann. We retain our irrevocable right to use these patents, and we are entitled to 50% of any royalties generated by these patents, up to a maximum of $1.2 million. We believe it is extremely unlikely we will receive any royalties from these patents, nor will we ever owe any royalties to Mr. Keesmann.

 

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We may be exposed to litigation liability.

 

We have had lawsuits that arise in the normal course of business. We have been subject to litigation in the past and have settled litigation in the past that has in certain instances resulted in material payments. We expect all current lawsuits to be resolved with no material negative impact on our financial statements, and we are unaware of any other potential significant litigation. If we were to become subject to a judgment that exceeds our ability to pay, that judgment would have a material impact on our financial condition and could affect our ability to continue in existence.

 

We need capital and the source of that funding is uncertain.

 

We expect to continue to incur substantial expenses for R&D, product testing, and administrative overhead. The majority of R&D expenditures are for the development of our technologies. Most of the proposed products using our technology will not be available for commercial sale or routine use in the immediate future. Commercialization of existing and proposed products that would use our technology will require additional capital in excess of that currently available to us. A shortage of capital could prevent us from achieving profitability for an extended period of time. Because the timing and receipt of revenues from the sale of products using our technology will be tied to the achievement of certain product development, testing, manufacturing and marketing objectives, which cannot be predicted with certainty, there may be substantial fluctuations in our results of operations. If revenues do not increase as rapidly as anticipated, or if product development and testing requires more funding than anticipated, we may be required to curtail our activities and/or seek additional financing from other sources. We intend to seek additional financing through the offer of debt, equity, or any combination of the two at any time.

 

We have developed a plan to allow us to maintain operations until we are able to sustain ourselves. That plan required significant cost cuts and increases in our research revenue, as well as raising additional capital. We believe that we have the existing resources to continue operations for a period through at least the end of July 2014 and possibly until the end of the year. Increased revenues may extend that period. Our plan is primarily dependent on raising funds through product sales, and revenue generated from performing contract research services, as well as cost cuts.

 

Our plan is based on current development plans, current operating plans, the current regulatory environment, historical experience, 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 on increasing revenues, selling products, cutting costs, and raising additional funds through additional debt and equity offerings. If adequate funds are not available from operations or additional sources of financing, we may have to eliminate, or reduce further, expenditures for research and development, and testing of our products. We may have to obtain funds through arrangements with other entities that may require us to relinquish rights to certain of our technologies or products. These actions could materially and adversely affect us.

 

Changes in patent laws could have a negative impact on us.

 

New legislation, regulations, or rules related to obtaining or enforcing patents could significantly increase our operating costs and make it more difficult to enforce or license our patents. If new legislation, regulations, or rules are implemented by Congress, the United States Patent and Trademark Office, or the courts that impact the patent application process, the patent enforcement process, or the rights of patent holders, these changes could negatively affect our expenses and potential revenue.

 

Our business is subject to changing regulation of corporate governance and public disclosure.

 

Because our common stock is publicly traded, we are subject to certain rules and regulations of federal and state entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities have continued to develop additional regulations and requirements in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002. Complying with these new regulations has resulted in, and is likely to continue to result in, increased general & administrative costs and a diversion of management time and attention from revenue generating and other business activities to compliance activities.

 

We may be unable to enforce or defend our ownership and use of proprietary technology.

 

Our ability to compete effectively with other companies will depend on our ability to maintain the proprietary nature of our technology. Although we have been awarded patents, have filed applications for patents, or have licensed technology under patents that we do not own, the degree of protection offered by these patents or the likelihood that pending patents will be issued is uncertain. Competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investment in competing technologies, may already have, or may apply for and obtain patents that will prevent, limit or interfere with our or our licensees’ ability to make and sell our products using our technology. Competitors or potential licensees may also intentionally infringe on our patents. The defense and prosecution of patent suits is both costly and time-consuming, even if the outcome is favorable to us.

 

In foreign countries, the expenses associated with obtaining and maintaining patents can be prohibitive for a company with our limited resources. In addition, there is an inherent unpredictability in obtaining and enforcing patents in foreign countries. An adverse outcome in the defense of a patent suit could subject us to significant liabilities to third parties. Although third parties have not asserted infringement claims against us, there is no assurance that third parties will not assert such claims in the future.

 

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We rely on unpatented proprietary technology.

 

We also rely on unpatented proprietary technology, and there is no assurance that others will not independently develop the same or similar technology, or otherwise obtain access to our proprietary technology. To protect our rights in these areas, we require employees, consultants, advisors and collaborators to enter into confidentiality agreements. These agreements may not provide meaningful protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how, or other proprietary information. While we have attempted to protect proprietary technology that we develop or acquire and will continue to attempt to protect future proprietary technology through patents, copyrights and trade secrets, we believe that our success will depend upon further innovation and technological expertise.

 

Public perception(s) of ethical and social issues may discourage the use of nanotechnology.

 

Nanotechnology has received both positive and negative publicity and is increasingly the subject of public discussion and debate. Governments may, for social or health purposes, prohibit or regulate the use of nanotechnology. This may restrict our ability to license our technology, or the ability to commercialize nanotechnology-based products.

 

Our business is subject to economic uncertainties affecting others with whom we have relationships.

 

A portion of our research revenues come from private sources, primarily large multinational corporations. In addition, our strategy is dependent upon the receipt of royalties related to the introduction of new products by these and other companies. During times of extreme economic uncertainty, companies may cut back on spending on research projects, or delay the introduction of new products.

 

The loss of key personnel could adversely affect our business.

 

Our future success will depend on our ability to continue to attract and retain highly qualified scientific, technical and managerial personnel. Competition for such personnel may be intense. In addition, our limited financial resources make it difficult for us to pay market salaries. We may not be able to attract and retain all personnel necessary for the development of our business. In addition, some of the know-how and processes developed by us reside in our key scientific and technical personnel. The loss of the services of key scientific, technical and managerial personnel could have a material adverse effect on us until we are able to replace those personnel.

 

We have significant convertible debt.

 

We have significant amounts of convertible debt due in August 2014. We do not have sufficient cash flow to pay this debt and therefore are dependent upon the majority of the debt being converted to equity, extended, or being replaced with another funding source. If debt holders do not convert, or otherwise agree to extend amounts due, we likely will be unable to meet our cash flow obligations and may be forced to curtail activities, seek financing on less favorable terms, or cease operations.

 

We have limited resources.

 

We are a small company with limited human and financial resources. Most of our competitors are larger than us with greater financial strength. Our limited resources may prevent us from moving as quickly as the market requires, or from taking advantage of all the opportunities that we have available to us on a timely basis. We do not have the resources to commercialize products ourselves and must rely on others for our ultimate success. Other competitors may move more quickly and gain an advantage by establishing a presence in the market place before us.

 

Our licensees may have conflicting priorities.

 

The products that are produced by our licensees using technologies that they have licensed from us generally make up only part of their overall business. There may be other factors besides the product itself that affect product introduction and sales by our licensees. These considerations may include other products sold by the licensee, financial commitments to other product lines, marketing considerations, financial considerations, desire to minimize royalties, and other factors. In addition, licensees may decide they no longer wish to maintain exclusivity and not make payments required to do so, may make improvements to the products such that they no longer believe they use our technology, may intentionally infringe on our technology for selected products, or may underreport sales of the products to minimize royalties.

 

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We have limited experience with product sales.

 

Our future profitability is dependent upon increasing our product sales and this is an important part of our business plan; however, we have limited experience in the sale of products, have not had significant success with product sales, and we do not have the financial resources to develop, market, distributed, and sell products. Our experience in generating revenue is through research and development agreements and license agreements. Product sales require a different skill set and will require us to hire new personnel and obtain resources to implement our business plan.

 

We have insufficient available authorized shares.

 

We have approximately 157 million shares of common stock outstanding as of the record date and only 160 million shares authorized. We have convertible notes and options outstanding, which if all converted, would exceed our ability to deliver shares. At current rates and prices, if converted, our notes would require the issuance of approximately 36 million shares, and if exercised, our options would require the issuance of approximately 6 million shares. We intend to increase our authorized shares at the special meeting. If prior to an increase in our authorized shares, our stock price were to increase significantly and note holders wished to convert, or option holders wished to exercise, we may be unable to deliver shares. We may be liable for damages based on investors lost profits if we are unable to honor our existing agreements.

 

Risks relating to NanoHolding

 

NanoHolding is disadvantaged by its relatively small size in selling into the optical industry, and its size also limits its ability to introduce new products to customers outside the optical industry.

 

NanoHolding is smaller in size than other companies that sell products into the optical industry. Larger companies may have a broader product line to offer customers and have the resources to put products into more distribution channels than NanoHolding has the resources to pursue. NanoHolding’s size also means it has fewer resources to hire people to pursue sales and marketing opportunities for products for other customers which inhibits its growth.

 

Sales to industrial customers that incorporate NanoHolding products into their own product offerings makes NanoHolding dependent on its customer’s commitment and success.

 

Some NanoHolding products are sold to industrial customers that incorporate the NanoHolding product into their own products for their customers. This means the success of NanoHolding’s product is dependent on the level of support, marketing and customer assistance of NanoHolding’s industrial customer, and NanoHolding cannot control timing of marketing or introduction if the improved products, or the timing or methods used to address customer concerns or directly affect marketing or distribution of its products. If the industrial customer has other priorities or is unsuccessful in its marketing or customer service, NanoHolding’s results of operations will be adversely affected.

 

Terms of secured debt make NanoHolding vulnerable if operational issues adversely impact its working capital.

 

Nanofilm redeemed a majority in number of its members in 2012 and took on secured debt in 2013 to pay notes issued to some former members in the redemption. That debt was refinanced in April 2014. The amount borrowed in the refinancing was $988,000, aggregating working capital financing for the business and amounts that had been used to repay notes to former members. NanoHolding must comply with the terms of its debt agreements in order to borrow for its regular working capital needs. Customer decisions to delay shipments, disruption in the supply chain or other operating difficulties that increase the inventory on hand or that delay collection of accounts receivable could mean that the lender will no longer advance funds and NanoHolding could need different terms from its lender in order to continue operations.

 

NanoHolding’s products may infringe the intellectual property rights of others, which may subject it to claims, or prevent or delay its product development efforts and stop it from selling or increase the costs of its products.

 

NanoHolding’s commercial success depends in part on its ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which NanoHolding is not aware and its products may infringe one or more of those patents. There also could be patents that NanoHolding believes it does not infringe, but that NanoHolding may ultimately be found to infringe.

 

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NanoHolding may also face claims that it is employing proprietary technology of third parties without authorization. If a court held that NanoHolding is using third party technology without authorization or that any third-party patents are valid, enforceable and cover NanoHolding’s products or their use, the holders of any of these patents or other intellectual property may be able to block the sale of NanoHolding’s products unless NanoHolding obtains a license or changes the products so as not to use the third-party’s intellectual property. NanoHolding may not be able to enter into licensing arrangements or redesign the products at a reasonable cost or on reasonable terms.

 

NanoHolding may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

 

NanoHolding relies on trade secrets to protect its proprietary know-how and technology, especially where NanoHolding does not believe patent protection is appropriate or obtainable. NanoHolding relies in part on confidentiality agreements with its employees and consultants to protect its trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. In addition, others may independently discover its trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of its proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use its proprietary information to develop products that compete with NanoHolding’s products.

 

Any lawsuits relating to infringement of intellectual property rights necessary to defend NanoHolding or enforce its rights will be costly and time consuming.

 

NanoHolding's ability to defend its intellectual property may require litigation to enforce its rights or to defend litigation brought by a third-party. Any of these lawsuits, regardless of their success, could be time consuming and expensive to defend and resolve and may require delay or suspension of commercial sales while they are pending. The cost could cause NanoHolding to forego litigation or to settle on terms that are disadvantageous. If litigation is undertaken or defended, that attendant cost or delay could have a material, adverse impact on NanoHolding’s results of operations.

 

FORWARD LOOKING STATEMENTS

 

This proxy statement includes forward-looking statements within the meaning of Section 21E of the Exchange Act. For this purpose, any statements in this proxy statement, other than statements of historical fact, including statements regarding the proposed combination and the expected timetable for completing the transaction; future financial and operating results, including future products; benefits of the transaction; future opportunities of PEN, the combined company; the plans for product development programs; and the strategy, plans and objectives of management of Applied Nanotech, NanoHolding or PEN, may be forward-looking statements under the provisions of The Private Securities Litigation Reform Act of 1995. In this proxy statement, words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "target," "will," "would" or other words that convey uncertainty of future events or outcomes are used to identify these forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements as a result of various important factors, including risks relating to: the ability to consummate the proposed business combination; the ability to implement the PEN business plan while continuing the operations of Applied Nanotech and NanoHolding, the ability to locate and accomplish additional acquisitions and to finance those transactions, to build marketing and distribution capability for new products and obtain access to required intellectual property, conduct development and commercialization activities; and the ability to obtain, maintain and enforce patent and other intellectual property protection for products and product candidates. These and other risks are described in greater detail in the section entitled Risk Factors beginning on page 13. If one or more risk factors materialize, or if any underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements.

 

In addition, any forward-looking statements in this proxy statement represent Applied Nanotech's views only as of the date of this proxy statement and should not be relied upon as representing Applied Nanotech's views as of any subsequent date. Applied Nanotech anticipates that subsequent events and developments will cause its views to change. However, while Applied Nanotech may elect to update these forward-looking statements publicly at some point in the future, Applied Nanotech specifically disclaims any obligation to provide updates, except as may be required by law, whether as a result of new information, future events or otherwise. If Applied Nanotech consummates the combination described in the Merger & Exchange Agreement, the descriptions of its strategy, future operations and financial position, future revenues, projected costs and prospects and the plans and objectives of management in this proxy statement may no longer be applicable.

 

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INFORMATION ABOUT THE SPECIAL MEETING

 

Time, Place & Purpose of the Special Meeting

 

Our special meeting of shareholders will be held on August 22, 2014 at 1:00 P.M. (local time) at The Hilton Garden Inn, DFW Airport, South 2001 Valley View Lane, Irving, Texas 75061, unless postponed or adjourned to a later date.

 

The purpose of the special meeting is for our shareholders to consider and vote on four proposals:

 

1.To approve the Merger & Exchange Agreement and the combination contemplated by that agreement;
2.To approve an amendment to our amended and restated articles of incorporation to increase the authorized number of shares of capital stock from 162 million to 502 million and our authorized shares of common stock from 160 million to 500 million;
3.To advise, by a non-binding vote, the directors regarding compensation of our executive officers; and
4.To adjourn the meeting if additional proxies are needed in order for there be sufficient votes to approve Proposal 1 and the combination.

 

Our board of directors unanimously recommends a vote FOR each of the four proposals that will be presented at the meeting.

 

Proposal 1 asks our shareholders to approve the Merger & Exchange Agreement and the combination described in that agreement. The effect of the combination will be to redomesticate Applied Nanotech in Delaware, change its name to PEN Inc., and, in a related merger and exchange, to make Nanofilm Ltd. a subsidiary of PEN. In the Redomestication Merger the total number of authorized shares of PEN common stock will be significantly greater than the number now authorized by Applied Nanotech, and the common stock of PEN will be subdivided into three different classes. Other than as specified herein, all shares of PEN common stock are identical, regardless of which class they are part of. The different classes of common stock have different voting rights, and the Class Z shares have certain other rights. Applied Nanotech shareholders will receive Class A common stock of PEN in the Redomestication Merger. Each outstanding share of Applied Nanotech common stock will be converted into a share of Class A common stock of PEN. Those shares, together with shares issued or reserved for issuance for existing commitments to issue shares of Applied Nanotech, will represent approximately 38% of the total PEN common stock immediately following the closing. The PEN shares issued in the combination to stockholders of NanoHolding and Zeiss, the owners of Nanofilm, Ltd., will be approximately 62% of the total PEN common stock. Shares of Class A common stock have one vote per share. Shares of Class B common stock issued to the Rickert Family Limited Partnership will have 100 votes per share. It is expected that upon completion of the combination, this Rickert partnership will own approximately 48% of the PEN common stock and will control approximately 99% of the voting power of PEN common stock. Zeiss will own approximately 9% of PEN through the ownership of Class Z common stock that is non-voting but has other rights described in this proxy. Scott Rickert, the sole general partner of this Rickert partnership is expected to be the Chief Executive Officer and Chairman of PEN after the combination. All stockholders of PEN will be subject to future dilution for, among other things, the conversion of the notes issued in the bridge financing by Applied Nanotech. This is set out in chart form on page 64.

 

Proposal 2 at the special meeting will be to seek approval for an increase in the authorized number of shares of Applied Nanotech common stock if the combination does not occur. Approval of this proposal is important to enable us to meet our existing obligations and to provide a greater variety of financing options to us if the combination does not occur. If the combination does not close and if the share increase is approved, we will issue or reserve approximately 44 million shares in satisfaction of existing obligations and we expect the balance of the increased number of Applied Nanotech shares, approximately 300 million shares, will be available for issuance without stockholder approval (unless approval is otherwise required by applicable law, regulation, agreement or other arrangements).

 

The third proposal is required under SEC rules by which we ask for an advisory (non-binding) vote to approve compensation to be paid to our current Chief Operating Officer and President, Dr. Yaniv, if the combination occurs. There is more information about their compensation under The Advisory (Non-Binding) Vote on Certain Compensation – Proposal 3 that starts on page 87.

 

The fourth proposal will only be presented if, when the meeting is called to order, we do not have the vote to approve the combination (Proposal 1). If that happens, those who are in attendance will be asked to vote to adjourn the meeting to a later date so that we can solicit additional proxies to approve the combination.

 

Record Date and Quorum

 

The board has fixed June 26, 2014 as the “record date” for determining shareholders that will be entitled to notice of and to vote at the special meeting. Only shareholders of record as of June 26, 2014 will be entitled to notice of the meeting and to vote at the meeting.

 

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The required quorum for the special meeting is a majority of the common stock issued and outstanding on the record date. If a quorum is not present when the meeting is called to order on the day and time stated above, the shareholders will be asked to vote to adjourn the meeting in order to enable us to have more shareholders in attendance, either in person or by proxy. Those who are present at the time of the meeting, though less than a quorum to transact other business, are sufficient to have a vote on adjournment of the meeting to a later date.

 

Attendance

 

Shareholders may attend the special meeting either in person or by proxy. Whether or not you plan to attend the special meeting, PLEASE vote your shares by internet or by telephone or complete, sign, date and return the proxy card included with this proxy statement. An addressed, postage prepaid envelope is included for your convenience.

 

If your shares of Applied Nanotech's common stock are held by a bank, broker or other nominee, you are considered the beneficial owner of shares held in "street name," and the proxy materials are being forwarded to you together with a voting instruction card. Beneficial owners may also attend the special meeting. Since a beneficial owner is not the stockholder of record, a beneficial owner may not vote these shares in person at the special meeting unless you obtain a proxy from your broker issued in your name giving you the right to vote the shares at the special meeting. If you do not attend, or you don’t obtain a proxy from your broker, your shares will NOT be voted. Your broker will not be able to vote your shares of Applied Nanotech's common stock without specific instructions from you. For your vote to count, you must instruct your broker how to vote on Proposal 1 (the combination), Proposal 2 (the share increase), Proposal 3 (the advisory vote on executive compensation) and Proposal 4 (to adjourn, if necessary, to seek additional votes in favor of the combination). PLEASE instruct your broker to vote your shares by following the procedure provided by your broker.

 

For entry to the special meeting, each shareholder may be asked to present valid picture identification, such as a driver’s license. Shareholders holding stock in brokerage accounts ("street name" holders) will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

 

Vote Required

 

To approve Proposal 1, the Merger & Exchange Agreement and the combination, requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Applied Nanotech common stock entitled to vote. For Proposal 1 you may vote FOR, AGAINST or ABSTAIN. Votes to abstain will not be counted as votes cast in favor of Proposal 1 for the Merger & Exchange Agreement and the combination, but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote to abstain, it will have the same effect as a vote “AGAINST” Proposal 1 and against the Merger & Exchange Agreement and the combination.

 

Similarly, to approve Proposal 2 and authorize the share increase requires the affirmative vote of the holders of a majority of the issued and outstanding shares of Applied Nanotech common stock entitled to vote. For Proposal 2 you may vote FOR, AGAINST or ABSTAIN. Votes to abstain will not be counted as votes cast in favor of Proposal 2 for the share increase, but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote to abstain, it will have the same effect as a vote “AGAINST” Proposal 2 and the share increase.

 

The vote on Proposal 3 is an advisory vote only. Whatever the result, it will be reported. Applied Nanotech and its board are not bound by the vote, and the compensation may be paid even if the shareholders vote against Proposal 3. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote to abstain, it will have the same effect as a vote “AGAINST” Proposal 3 and the compensation.

 

To approve Proposal 4 to authorize adjournment of the special meeting to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve Proposal 1 and the combination requires the affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote to abstain, your absence will not affect the vote. If your shares are held in street name, and are present at the meeting but you have not provided voting instructions, it will have the same effect as a vote “AGAINST” Proposal 4 and the adjournment.

 

If your shares of Applied Nanotech common stock are registered directly in your name with the transfer agent of Applied Nanotech, Registrar & Transfer Company, you are considered, with respect to those shares of Applied Nanotech common stock, the shareholder of record. If you are a shareholder of record, this proxy statement and the enclosed proxy card have been sent directly to you by Applied Nanotech. To vote, please complete and return the proxy card. Even if you are planning to attend the meeting, to be sure your shares are voted, PLEASE return the proxy card.

 

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If your shares of Applied Nanotech common stock are held through a bank, brokerage firm or other nominee, you are considered the beneficial owner of shares of Applied Nanotech common stock held in “street name”. If you are a beneficial owner of our shares, this proxy statement/prospectus has been forwarded to you by your bank, brokerage firm or other nominee who is the shareholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting. Without instructions from you, your bank, brokerage firm or other nominee can NOT vote your shares for Proposal 1, Proposal 2, Proposal 3, or on Proposal 4. If you do not give instructions, your shares will be broker non-votes and it will have the same effect as a vote “AGAINST” each of these proposals. If you do not want to be treated as voting against these proposals, you must instruct your bank, brokerage firm or other nominee to vote your shares FOR each of the proposals.

 

PLEASE take action to vote your shares at the special meeting. Our board recommends a vote FOR each of the four proposals being presented at the meeting.

 

Proxies and Revocation of Proxies

 

If you are a shareholder of record, you may have your shares of Applied Nanotech common stock voted on matters presented at the special meeting in any of the following ways:

 

  by telephone or over the Internet, by accessing the telephone number or Internet website specified on the enclosed proxy card. The control number provided on your proxy card is designed to verify your identity when voting by telephone or by Internet. Please be aware that if you vote by telephone or over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible;
     
  by completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope; or
     
  in person—you may attend the special meeting and cast your vote there.

 

If you are a beneficial owner, you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of Applied Nanotech common stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

 

Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for voting by telephone or over the Internet. If you choose to submit a proxy by mailing a proxy card, your proxy card should be mailed in the accompanying prepaid reply envelope, and your proxy card must be filed with the Corporate Secretary of Applied Nanotech by the time the special meeting begins. Please do not send in your share certificates with your proxy card. If the combination is completed your shares of Applied Nanotech will automatically become shares of PEN Class A common stock and you will not be required to exchange your share certificates.

 

If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, will vote your shares of Applied Nanotech common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of Applied Nanotech common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

 

If you properly sign your proxy card but do not mark the boxes showing how your shares of Applied Nanotech common stock should be voted on a matter, the shares of Applied Nanotech common stock represented by your properly signed proxy will be voted “ FOR ” Proposal 1 to approve the Merger & Exchange Agreement, “ FOR ” Proposal 2 to increase the number of authorized shares of our capital stock and common stock, “FOR” Proposal 3 to approve on a non-binding, advisory basis, the compensation arrangements for Dr. Yaniv that will become effective if and when the combination occurs, and “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve Proposal 1 and the combination.

 

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by attending the special meeting and voting in person, or by giving written notice of revocation to Applied Nanotech prior to the time the special meeting begins. Written notice of revocation should be mailed to: Applied Nanotech, Inc., 3006 Longhorn Boulevard, Suite 107, Austin, Texas 78758.

 

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If you have any questions or need assistance voting your shares, please contact Morrow & Co., LLC, Applied Nanotech’ proxy solicitor, by calling toll-free at 888-813-7566. Banks, brokerage firms, and other nominees may call 800-662-5200 or call collect at 203-658-9400.

 

IT IS IMPORTANT THAT YOU VOTE YOUR SHARES OF APPLIED NANOTECH COMMON STOCK PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE PRE-ADDRESSED POSTAGE-PAID ENVELOPE, OR FOLLOW THE INSTRUCTIONS ON THE PROXY CARD TO VOTE BY TELEPHONE OR OVER THE INTERNET. SHAREHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

 

Under the voting and conversion agreement signed at substantially the same time as the Merger & Exchange Agreement, the directors and executive officers of Applied Nanotech and Sichuan Yinhe Chemical Co., Ltd. are required to vote all their shares of Applied Nanotech common stock aggregating 8,288,333 or slightly more than 5% of the outstanding common stock “FOR” Proposal 1 to approve the Merger & Exchange Agreement and the combination and “FOR” the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the Merger & Exchange Agreement and the combination. These same shareholders have informed Applied Nanotech that they intend to vote “FOR” Proposal 2 to increase the authorized number of shares of capital stock and common stock and “FOR” Proposal 3 to approve, by non-binding, advisory vote, certain compensation arrangements for Dr. Yaniv that will be effective at the closing of the combination if Proposal 1 is approved.

 

Adjournments and Postponements

 

Although it is not currently expected, the special meeting may be adjourned for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the Merger & Exchange Agreement or if a quorum is not present at the special meeting. An adjournment generally may be made with the affirmative vote of the holders of a majority of the shares of Applied Nanotech common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned.

 

Anticipated Completion Date for the Combination

 

When the closing conditions set forth in the Merger & Exchange Agreement have all been satisfied or waived, including the approval of the Applied Nanotech shareholders at the special meeting, the combination can close. It is expected that will occur promptly following the special meeting as there are no governmental or regulatory approvals that need to be obtained by any of the parties to the Merger & Exchange Agreement. Accordingly, the parties expect that the combination will occur before the end of August, 2014. However, it is possible that events or circumstances outside the control of the parties could result in the combination closing at a different time or not at all. The closing conditions are described in greater detail in the section titled Proposal 1- The Combination, The Merger & Exchange Agreement – conditions to completion of the Combination starting on page 67.

 

Solicitation of Proxies, Payment of Solicitation Expenses

 

Applied Nanotech has engaged Morrow & Co., LLC, 470 West Avenue, Stamford CT 06902 to assist in the solicitation of proxies for the special meeting. Applied Nanotech will pay a fee of $10,000 plus $6.50 per holder to Morrow in connection with the solicitation. Applied Nanotech has agreed to reimburse Morrow for certain out-of-pocket fees and expenses and also will indemnify Morrow against certain losses, claims, damages, liabilities or expenses. Applied Nanotech also may reimburse banks, brokerage firms, other nominees or their respective agents for their expenses in forwarding proxy materials to beneficial owners of Applied Nanotech common stock. Applied Nanotech’s directors, officers and employees also may solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional compensation for soliciting proxies.

 

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APPLIED NANOTECH’S BUSINESS

 

General

 

We are a global leader in nanotechnology research and development focused on generating revenues through performing research services. Our goal is to ultimately commercialize the technology that we develop, although that will require capital in excess of our current resources. We are currently focused on stabilizing our financial situation and operating the Company based solely on revenues from our research activities at breakeven or better. Our nanotechnology research is aimed at solving problems at the molecular level - working with the basic properties of matter to create new and improved materials and technologies. In our core focus areas, we have succeeded in overcoming the challenge of nanotechnology, which is how to controllably assemble the fundamental nanoparticle building blocks in order to achieve these new materials for both existing and new applications. Our research efforts are currently primarily focused on the areas of nanosensors, nanocomposites and nanoelectronics.

 

Our nanotechnology research involves performing contract R&D services for others to develop products and materials for new applications, and then leveraging this research by applying it to other similar applications in other industries. During this process, we also develop intellectual property (“IP”) around our products and technologies.

 

We were founded in 1987, incorporated in Texas in 1989, and completed our initial public offering in 1993; however, as a result of our strategic review process, we completely shifted direction and refocused the business in 2006. Since that time, the majority of our research has been focused in other areas, but based on fundamental knowledge and skills that we gained in the course of our work prior to 2006.

 

Business Model

 

Our business model is built on generating research revenues based the development of innovative products and technologies based on strong intellectual property, with the goal of creating a portfolio of recurring revenue streams through a combination of the following methods:

 

·Performing research services for others;
·Licensing our technology to others;
·Forming strategic relationships with others to commercialize our technology; and
·Selling products based on our technology.

 

Since development of IP is a critical part of our strategy, before starting on, or accepting, a project, we analyze the potential to develop IP. As a result of this focus, we have built an extensive IP portfolio over the past 20 years, and we continue to develop new intellectual property every year. We have built a strong base of research revenues over the last four years; however, we cannot sustain profitability on a long term basis based solely on research revenues. In order for us to grow and achieve success in the marketplace, it is critical for us to commercialize the technologies that we develop. In the absence of commercialization, we are simply a research and development organization and will not be able to monetize the intellectual property that we develop.

 

Much of our research comes from government contracts, and there are restrictions that prevent us from earning a profit on, or even covering all of the costs associated with, government contracts. In addition, with private research contracts there is a relationship between revenues received on the contract and rights granted to the licensee under the contract. Since a critical component of any research contract is for us to retain the IP rights, we must contribute to the overall cost of the project, and therefore are unable to charge rates that result in us earning a profit on the contract. Our goal on private research contracts is, at a minimum, to cover all out of pocket costs and contribute to our overall overhead.

 

In commercializing our technology, because of limited resources, we initially focused on licensing our technology to others. Our research partners frequently have licensing rights as a result of the research that they funded, and upon completion of the work, license the technology for specific applications. Our goal from our license agreements is to obtain upfront payments, generate recurring royalties based on product shipments by the licensee, and secure minimum royalty payments by the licensee in future years to maintain their license. In rare cases, we may license technologies for a one time upfront payment, either to induce the licensee to introduce a product so that others will follow and become potential licensees for us, or because the technology licensed is not part of our core business moving forward. License agreements and the royalties from product shipments are a critical element in us eventually attaining sustainable long-term profitability. We expect to continue to pursue license agreements in those situations where we believe it is the best approach.

 

In recent years we have explored the commercialization of certain of our high potential products and technologies with internal teams focused on commercialization. Commercialization of products through these internal units would require raising capital, either by the company as a whole, or specifically related to the units through formation of a subsidiary.

 

We have also worked to commercialize these high potential technologies through strategic relationships and direct sales of products using our technology. In 2011, we began direct sales of some of our products, and we expanded that focus in 2012 and 2013. While we were able to grow sales of products, we did not have adequate capital and were unsuccessful at generating enough product sales to cover the costs associated with the effort. In November 2013, we abandoned all direct sales efforts and eliminated our sales force. We will continue to generate some direct product sales based on inquiries handled by our technical people.

 

Our focus for 2014 is on our core research and development revenues and on controlling costs to reach breakeven and achieve breakeven as a Company. Once we have attained stable operations, we intend to prepare a business plan and raise sufficient funds to enable us to commercialize our technology.

 

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Research and Development

 

Our research and development (R&D) activity is the driver of our technology innovations and is critical in developing and protecting our intellectual property, and therefore, we spend significant amounts on research and development. A significant portion of our research and development costs are associated with revenue producing projects and are a critical component of revenue generation for us. We spent $3,324,195; $4,471,208; and $5,517,937 on research and development in the years ended December 31, 2013, 2012, and 2011, respectively. This represents approximately 57%, 54%, and 63% of our total operating costs and expenses in each of those years. We are eliminating virtually all unfunded research and development cost. We will continue to seek funding for our research, so our spending will be dependent on the amount contracts we are able to obtain.

 

Much of our intellectual property and research relates to next-generation technologies that are not in wide current use and as such, additional development work is required before products can be manufactured using these technologies. Our research and development efforts occur across a continuum moving from concept to commercialization as follows:

 

Concept  à   Laboratory   à   Development   à   Pilot/Introduction   à   Commercialization

 

We have developed a distinctive competence in accelerating the process of moving ideas from the research lab to the pilot stage. We’ve also created pilot plant facilities for selected technologies to facilitate commercialization. Because of a lack of resources, we have had limited success in achieving actual commercialization of our products.

 

Business Segments

 

Our operations currently consist of only one reportable business segment. While we have three separate companies, the overwhelming majority of the revenue is derived from one company, we report as one segment. Applied Nanotech Holdings, Inc. (“ANHI”) is the parent company. ANHI is where we incur general operating overhead that is the approximate cost of being a public company, effectively the amount in excess of that which might be incurred by a private company performing these same activities. ANHI’s activities are generally limited to communicating and reporting to shareholders, consolidating financial information, monitoring activities at subsidiaries, and reviewing potential investments.

 

Applied Nanotech, Inc. (“ANI”), a subsidiary of ANHI, has been almost the entire focus of our current efforts and until 2012 was our only operating subsidiary. ANI has its own management structure; including its own President and CEO, Dr. Zvi Yaniv. ANI generated all of the revenues in the consolidated group during 2011 and 2012, and it performs the majority of the research and development. In 2012 we formed EZDiagnostix, Inc., (“EZDX”) to focus on commercializing our sensor technology. EZDX was able to generate some research revenue in 2013 related to the sensor technology, but was unable to raise the funds necessary to begin commercialization of its technology. As a result, in August 2013, as a cost saving measure, we made the decision to cease operations at EZDX, eliminate its staff, and transfer its only research contract to ANI. Should there be opportunities to raise capital in the future; ANI expects to pursue commercialization of the EZDX technology.

 

Overall

 

We are a global leader in nanotechnology, focusing our efforts on research, development of proof of concepts and prototypes for proposed products, commercializing our technology, and licensing our technology to others. We are developing world-class technologies that generally fall under one of three technology platforms. These platforms are:

 

·Nanosensor technology;
·Nanocomposites, based on carbon nanotube composites; and
·Nanoelectronics applications.

 

Our research and development efforts are all focused in these areas; however, we previously developed an extensive portfolio of intellectual property in the electron emission area and may be able to monetize that IP by licensing or selling it if there is interest at some point in the future. We are no longer actively pursuing any research projects in the electron emission area.

 

Our goal is to ultimately commercialize our core technologies by selling products ourselves, or in conjunction with strategic partners, or in limited cases, by licensing these technologies to others to allow them to manufacture products using our technology, However, commercialization, other than by licensing, will require resources significantly in excess of those available to us at the present time. We have a pilot facility that enables us to manufacture significant quantities of some of our products.

 

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Nanoelectronics Applications

 

We consider nanoelectronics a very promising area with the potential for short term commercialization.

 

Conductive Inks

 

Copper Inks - As a result of the move towards flexible electronics, the extra processes of soldering are slowly disappearing. New processes that are digital in nature are required to allow industries to move from the design process directly to the production line. One of our areas of focus is conductive inks, starting with copper. Nanotechnology will play an important role in this process because at this time, only nanoparticles are capable of producing inks that are compatible with the nozzles used in digital printing.

 

To facilitate our development of conductive copper inks, we entered into a research and development agreement with Ishihara Chemical Company, Ltd., a leading industrial chemical products company headquartered in Japan, to develop conductive inks that can be deposited using an additive process such as ink-jet printing, aerosol-jet printing or screen printing. The target market for these technical inks includes printed circuit boards, flexible electronics and displays, communications instrumentation, and Radio Frequency Identification tags and others. Our work with Ishihara started with a feasibility study in early 2006 and culminated with a license agreement for copper inks and pastes in July 2009. As a result of this partnership, we have received over $2.5 million in research funding from Ishihara and a $1.5 million up-front license payment. Because of Ishihara’s heavy financial commitment to the project, all IP generated by the project is jointly owned by ANI and Ishihara and the license agreement signed in 2009 gave Ishihara the exclusive right to use this technology. Ishihara can choose to give up this exclusivity at any time. Ishihara is currently readying its production facility and conducting pilot and prototype manufacturing. We expect Ishihara to introduce a product at some point in the future, but not in 2014, and we will receive a 4% royalty on product shipments by Ishihara if they introduce a product. If, however, Ishihara chooses to give up its exclusivity, it will owe no future royalties.

 

Solar inks - After our initial work in copper, we expanded our work with conductive inks to other inks including nickel, silver, aluminum, and others, as well as to various conductive pastes. In particular, we have developed aluminum and silver inks and pastes that are ideal for use in the production of solar cells. In the photovoltaic solar cell industry, cells are made starting with silicon wafers and printing aluminum pastes on one side and silver pastes on the other. Currently, the industry uses screen printing techniques, which involves direct contact with the wafer. The wafer thickness can’t be reduced any further because the contact method in use today causes cracking and breaking. Our inks are capable of being printed using noncontact methods, which would allow the wafer thickness to be reduced. Since over half of the cost of the cell is the silicon wafer, this has significant cost reduction potential. In addition, inks result in a more efficient solar cell than the existing pastes. We have also developed a highly efficient aluminum paste that can be used in current solar cell production.

 

In 2011, we licensed our solar ink technology to Sichuan Anxian Yinhee Construction and Chemical Company (“YHCC”), a Chinese chemical company, for an upfront payment of $1.5 million. An additional payment of $500,000 was paid in 2012, after we achieved certain technical standards. This original license agreement covered Asia, excluding Korea and Japan. In 2012, we amended the license agreement with YHCC to cover the rest of the world in exchange for an upfront payment of $500,000. We received $250,000 in 2012 and the remaining $250,000 in 2013. In 2014 we further amended our agreements, transferring the patents to an affiliate of YHCC and receiving a royalty free license back for use in fields other than solar applications.

 

Competition

 

There are silver inks on the market today, but because of the high cost of silver relative to copper, a successful copper ink is likely to open up many additional markets. Most existing inks and pastes in the markets today are manufactured and sold by large multinational chemical companies. For example, the two largest suppliers of inks and pastes for solar cell production are DuPont and Ferro. We are unable to compete directly with companies of that size; consequently, we are targeting, as partners and licensees, medium sized companies with the resources to compete.

 

Intellectual Property

 

We have developed a strong intellectual property position in this area. Even after the transfer to the affiliate of YHCC, we have over 40 U.S. and foreign patents and patent applications pending related to copper and other conductive metallic inks.

 

Technical Inks Printing Solution (TIPS)

 

Conductive inks have the power to revolutionize many types of electronics manufacturing. Our strategy is to provide a comprehensive solution for end users by not only developing inks, but assisting in the process from start to finish. We call this our Technical Inks Printing Solution. As part of our concept, we have done extensive research on raw materials (nanoparticles). We have developed relationships with nanoparticle suppliers and are able to supply a variety of nanoparticles as a result of these relationships. In addition, we have conducted research and development on a variety of potential end user products to help develop specifications for the inks. We have also formed relationships with hardware manufacturers with the goal of providing seamless integration into high volume manufacturing for companies wishing to use conductive inks in their manufacturing processes.

 

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Competition

 

Numerous other companies are working with other technologies with the goal of achieving results similar to the goals of our technology. The ultimate success of products using our technology depends on the results of our research compared with results achieved by others, as well as other factors including marketing, resources, and production capabilities.

 

Sensors

 

Overview

 

We have greatly expanded our work and intellectual property in the area of sensor technology. Our approach to sensor technology offers the unique advantage of manipulating materials at the molecular level, where sensing events occur. We are pursuing a multiplatform approach to address specific market needs. Some of the potential applications are as follows:

 

Ion Mobility Sensors. We are currently developing sensors based on Ion Mobility Sensor (“IMS”) technology focusing on Differential Mobility Spectroscopy (“DMS”). These sensors are ideal for use when both high sensitivity and high selectivity (low false positives) are required. We have also improved on existing IMS and DMS technology by developing our proprietary nonradioactive gas ionization sources to replace the radioactive isotopes that are currently used in these tools. We are currently involved in projects to develop highly sensitive Mercaptan and Methane sensors for use in the natural gas industry under funding from the NorthEast Gas Association, and sensors for detection of citrus greening disease under funding from the California Citrus Research Board.

 

We have also worked with applying this technology to other applications including other agricultural pathology areas, wound care, and breath analysis. There has been extensive research performed that indicates that there is a significant correlation between changes in the level of particular gases in a person’s breath and changes in that person’s health. In fact, research indicates that these changes occur quickly and can be a predictor of future health changes. Breath analysis has the potential to significantly lower health care costs, as a preventive tool, by providing early indications of potential changes in people’s health and providing that information digitally to health professionals.

 

Hydrogen Sensors. These sensors are initially targeted for use in fuel cells for automobiles and for remote monitoring of large power transformers. We developed a hydrogen sensor for use in the measurement of hydrogen in power transformer products. We may explore alternatives to maximize the value to be received from this sensor development by selling our intellectual property portfolio in this area.

 

Carbon Monoxide Sensors. We have developed a low-power carbon monoxide sensor that can last for 10,000 hours on a single battery. The sensor will be specific to carbon monoxide with no cross sensitivity to other gases and elements and is also easily portable and highly sensitive. We are seeking a development partner interested in commercializing this technology.

 

Biosensors. Our carbon nanotube technology is ideally suited for use in biosensors. Sensors based on carbon nanotubes or other nanomaterials can be used to detect chemical, organic, or biological warfare agents, as well as explosives, hydrogen, ammonia and numerous other chemicals. We have developed several proofs of concepts demonstrating the viability of our sensor technology, and are currently seeking development partners to license the technology and integrate it into specific products.

 

Other Sensors. We have demonstrated that carbon nanotubes can be used to develop sensors for detecting chemical industrial agents and biological warfare agents. We have also demonstrated that carbon nanotubes and other nanodetectors can be used for the remote detection of explosives, sensors used in environmental monitoring, health care, the food industry, and biotech-biopharma applications. We are currently seeking funding to take our research in this area to the next level of development, which would include proofs of concept, and product development.

 

Competition

 

Our competition in the sensor area will come from a variety of technologies and companies depending on the purpose and use of the sensor. There are other technologies used in sensors; however, we believe carbon nanotube based sensors and other nanodetectors are more versatile, can sense a broader range of materials, and are more selective (sensitive) in their sensor results. We believe that selecting the right strategic partners for development of proof of concepts for our sensor technology is an important step in the market acceptance of sensors using our technology.

 

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Intellectual Property

 

In the sensor area, we have developed intellectual property related to several types of sensors, with over 70 U.S. and foreign patents and patent applications pending.

 

Nanocomposites

 

We are in the advanced stages of development of nanomaterials using carbon nanotube (“CNT”) and other composites. We believe that some of the first widespread use of nanotechnology by established companies will be in this area as they work to improve existing products, materials, and processes. The first products using our technology were introduced in the market place in 2011 and fall within the nanocomposites area. Our work with CNT composites has been in several areas, including epoxies, nylons, polyesters, vinyl esters and glass fibers.

 

Epoxies - Epoxies are used in industries with significant worldwide markets, with applications including adhesives, paints, coatings, and composites. The objective of our CNT epoxy program has been to create composite materials to be used as an alternative to traditional materials. We have reinforced epoxy with CNTs to take advantage of CNTs mechanical properties while reducing the weight of materials needed for specific applications. We have developed patented processes and know-how which has enabled us to uniformly disperse CNTs throughout the epoxy to create significant improvements in strength, toughness, durability, vibration dampening, and other mechanical properties.

 

In September 2005, we signed a development contract with Yonex Co. Ltd., a large sporting goods manufacturer, to develop nanocomposites to be used in sporting equipment. This agreement culminated in a license agreement in October 2008 that allowed Yonex to use our technology in its tennis and badminton racquets. In 2010, we completed an additional agreement with Yonex to license this technology for use in golf shafts. This development agreement served as the foundation of our work in the CNT composites area. In 2011, Yonex introduced golf shafts and badminton racquets using our technology and began generating royalties for us. In 2013, Yonex bought out the remainder of payments under its license for a lump sum payment. No further royalties will be received from Yonex.

 

Other CNT Enhanced Resins - In addition to epoxy resins, we have done work with other types of resins including polyesters and vinyl esters. Our polyester resin development has been funded by the U.S. Army for applications primarily related to ballistic protection, although polyester resins enhanced by CNTs have many other applications. Vinyl esters are currently widely used in a variety of industrial applications including storage tanks, piping, and construction, and we have done initial work in this area with promising results.

 

Nylons - The addition of CNTs to nylons can enhance certain mechanical properties and the electrical conductivity of insulating material. Of all the types of nylons available, Nylon 6 is the most common, with an estimated 60% of the world volume and with uses in a variety of industries including textiles, carpeting, safety belts, fishing lines, and many other applications. We have developed a patented process for coating nylon pellets with CNTs to improve electrical conductivity. Nylon 6 with improved electrical conductivity can be used for its anti-static qualities, electrostatic discharge, and electromagnetic/RF shielding.

 

Glass Fibers - We have applied our knowledge in CNT enhanced composites to develop a strengthened fiberglass that can be used for applications with long lifetime requirements, such as wind turbine blades. Current wind blade research is focused on lowering the weight of materials to reduce overall cost and increase efficiency. Our early research has shown dramatic results in lowering the weight of materials using CNT strengthened materials, and we are continuing to apply resources with our partners, to further develop this technology.

 

Competition

 

A wide range of companies work with composite materials, including some working with CNT enhanced composites. Since each project is unique, our competition would come from different companies for different applications. Since we rely on patented technology, competition comes from different composites, or different formulations of CNT composites. Some of the companies known to be working in the CNT composite area are Zyvex Performance Materials in Columbus, Ohio, GSI Creos in Tokyo, Japan, and Amroy Europe, Ltd. in Finland.

 

Intellectual Property

 

We have developed a strong intellectual property position in the nanocomposites area with over 50 U.S. and foreign patents and patent applications pending.

 

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Electron Emission Activities

 

Until 2006, our main focus for virtually the entire history of ANHI was on electron emission activities. We performed extensive research and accumulated significant intellectual property in this area. The bulk of that activity has centered on Field Emission Display (“FED”) technology. FED is a next generation display technology that is ideally suited for use in large flat screen televisions. Our intellectual property in the electron emission area is mature and well developed. We are now dependent on a manufacturer to introduce a product using our technology. As such, we are no longer devoting any resources to further develop this technology, unless funded for a specific application. We are no longer actively seeking funding in this area. We are, however, closely monitoring developments in the industry to determine if a manufacturer introduces a product that requires a license for our technology.

 

Key Intellectual Property

 

Our most significant patent in the electron emission area is a basic patent that we refer to as the Raman Spectrum Patent (U.S. Patent 5,869,922) covering electron emission from a wide range of carbon films. This patent covers field emission devices using various forms of carbon films including carbon nanotubes (CNT) and other forms of carbon that fall within a particular range on the Ultraviolet Raman band. This basic patent is fundamental and has broad applicability and wide geographic coverage, having been issued in the U.S., China, South Korea, Japan, and validated in several European countries. In addition to this basic patent, we have a wide variety of other patents that compliment this basic patent in specific situations. Since we believe anyone using our technology will require a license to the Raman patent, as a cost saving measure, we are letting all other electron emission patents lapse as maintenance fees become due. Our patents in this area are aging and the likelihood of monetization decreases with each passing year.

 

Competition

 

Because of the strength of our intellectual property in the electron emission area, our competition comes from other technologies, rather than from other companies. For displays, this competition comes from LCD displays, Plasma displays, LED displays, and color picture tubes.

 

Intellectual Property Rights

 

An important part of our business and product development strategy is to seek, when appropriate, protection for our products and proprietary technology through the use of various United States and foreign patents. In fact, before starting any research projects, we analyze the potential for the project to generate valuable IP. Our patent portfolio consists of over 240 patents, including issued patents and patent applications pending before foreign and United States Patent and Trademark Offices. We consider our patent portfolio to be our most valuable asset. However, as a cost saving measure, we are becoming much more selective in filing patents in foreign jurisdictions and are focusing our efforts on the U.S.

 

The patenting of technology-related products and processes involves uncertain and complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of claims of such technology patents. Therefore, there is no assurance that our pending United States and foreign applications will issue, or what scope of protection any issued patents will provide, or whether any such patents ultimately will be upheld as valid by a court of competent jurisdiction in the event of a legal challenge. Interference proceedings, to determine priority of invention, also could arise in any of our pending patent applications. The costs of such proceedings would be significant and an unfavorable outcome could result in the loss of rights to the invention at issue in the proceedings. If we fail to obtain patents for our technology, and are required to rely on unpatented proprietary technology, there is no assurance that we can protect our rights in such unpatented proprietary technology, or that others will not independently develop substantially equivalent proprietary products and techniques, or otherwise gain access to our proprietary technology.

 

Competitors have filed applications for, or have been issued patents, and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with, or otherwise related to, our patents. The scope and validity of these patents, and the extent to which we may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses is unknown. This may limit our ability to license our technology. Litigation concerning these or other patents could be protracted and expensive. If suit were brought against us for patent infringement, a challenge in the suit by us as to the validity of the other patent would have to overcome a legal presumption of validity. There can be no assurance that the validity of the patent would not be upheld by the court or that, in such event, a license of the patent to us would be available. Moreover, even if a license were available, the payments that would be required are unknown and could materially reduce the value of our interest in the affected products. We do, however, consider our patents to be very strong and defendable in any action that may be brought against us.

 

We also rely upon unpatented trade secrets. No assurances can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our rights to our unpatented trade secrets.

 

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We require our employees, directors, consultants, outside scientific collaborators, sponsored researchers, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be our exclusive property. There is no assurance, however, that these agreements will provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.

 

Government Regulation

 

Products using our technology may be subject to government regulation in the United States and in other countries. Products using our technology must satisfy mandatory safety standards established by the U.S. Occupational Safety and Health Administration (“OSHA”), and manufacturing must meet pollution control standards established by the U.S. Environmental Protection Agency (“EPA”) and comparable state and foreign regulatory agencies. We may also be subject to regulation under the Radiation Control for Health and Safety Act administered by the Center for Devices and Radiological Health (“CDRH”) of the U.S. Food and Drug Administration. These and other governmental agencies, both in the United States and in foreign countries, may adopt additional rules and regulations that may affect us and products using our technology. Additionally, our arrangements with our licensees and their affiliates may require compliance with export and import control regulations of the U.S. and other countries. The cost of compliance with these regulations has not been significant in the past and is not expected to be material in the future.

 

A portion of our revenue has consisted of reimbursement of expenditures under U.S. government contracts. We recognized $2,048,840 of revenue in 2013; $1,733,728 of revenue in 2012; and $2,956,717 of revenue in 2011, related to government contracts. These reimbursements represent all or a portion of the costs associated with such contracts. As of December 31, 2013, we have several government contracts in process that have approximately $1.9 million of revenue yet to be recognized. Government contracts are subject to delays and risk of cancellation. Also, government contractors generally are subject to various kinds of audits and investigations by government agencies. These audits and investigations involve review of a contractor’s performance on its contracts, as well as its pricing practices, the costs it incurs and its compliance with all applicable laws, regulations and standards. We have been audited by the government, with no material changes, and in the future we expect to be audited by the government; however we expect the results of any government audits to have an insignificant effect on our operations and our financial statements.

 

Employees

 

As of June 30, 2014 we had 13 full-time employees, including 2 executive officers. At the present time, we do not anticipate the need to hire significant additional employees to support our plans for increasing revenue levels in the next 12 months; however, if revenues increase beyond expected levels, we may hire additional employees. We are not subject to any collective bargaining agreements, and we consider our relations with our employees to be good.

 

APPLIED NANOTECH’S PROPERTY

 

We lease a facility in Austin that is used for our corporate headquarters and research and development activities. Our original lease has been extended through 2019. Our new rent that started in March 2014, is approximately $15,000 per month, down from approximately $20,000 per month because we reduced our space from approximately 22,000 square feet to approximately 16,000 square feet.

 

We believe that these facilities are suitable for our current needs and will be adequate for our anticipated activities, at least through the end of the lease period.  

 

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NANOHOLDING’S BUSINESS

 

Overview

 

NanoHolding develops and sells a portfolio of nano-layer coatings, nano-based cleaners, and nano-composite products based on its proprietary technology. We say “nano” to describe the nanoscale particles that are incorporated into NanoHolding products to provide particular performance characteristics. NanoHolding’s primary commercial products center on its customized eye care glass cleaning and de-fogging products; other products include precision mold release treatments, stay-clean surface treatments for ceramic surfaces, and scuff-resistant treatments for commercial dinnerware. Ongoing research and development applies NanoHolding’s knowledge of nanotechnology to control and manipulate materials at the molecular level to solve everyday problems for customers in the optical, transportation, military, sports, and safety industries. NanoHolding was founded in Ohio in 1985.

 

Revenue is based on the successful development of products and technologies using proprietary intellectual property and the sale of liquid products, and wet and dry towelettes, based on these technologies. NanoHolding’s goal continues to be to create segment leading brands through direct sales of high quality consumer products, and by developing and producing customized formulas for sale to strategic, industrial partners to be incorporated into their customer’s products. Whenever feasible NanoHolding is actively involved in the manufacture of its formulas in order to produce reliable, consistent quality for the products that NanoHolding and its commercial partners bring to the marketplace.

 

NanoHolding continues to develop and introduce formulas and packaged formulas for purchase by its customers in the optical, safety, military, sports, consumer products, precision-casting, electronics, and transportation markets. NanoHolding’s main products are:

 

·packaged products for retail sale to consumers for eyeglass and sunglass lens cleaning and conditioning,

 

·packaged products for retail sale to consumers for antifog and conditioning of masks and goggles,

 

·packaged products for sale to the military for safety anti-fogging and conditioning of lenses, masks, head gear and other applications such as head’s up displays,

 

·liquids for sale to industrial customers who resell to those who need porcelain coatings for restaurant dinnerware, and

 

·liquids for sale to suppliers to local governments and agencies for coatings for porcelain and other applications in mass transportation.

 

In addition, NanoHolding has developed a series of formulations used in the manufacture of precision casting and decorative architectural glass products which provides a barrier to soiling, helping keep decorative art-glass clean longer and making it easier to clean.

 

Recently, NanoHolding completed development of a new long-lasting, anti-bacterial formula for use in several of its existing products. Use of this formulation has been shown to prevent bacteria growth, in laboratory testing, for several days. The formulations can be customized for different applications, market segments and to specific customer needs.

 

Marketing and Distribution

 

NanoHolding sells its products directly to retailers in the United States and internationally, including manufacturers who utilize product formulations in their own branded products. For certain customers or market segments, NanoHolding relies on outside sales agents or distributors

 

Manufacturing Operations

 

Most of NanoHolding’s manufacturing is done at its 74,000 square foot Valley View, Ohio facilities. Additional manufacturing, packaging and assembly is done by third-party contract manufacturers in the United States, India and Taiwan.

 

Intellectual Property and Proprietary Rights

 

NanoHolding’s nanotechnology expertise and related intellectual property is specialized in the areas of molecular self-assembly, transparent nano-composites, and liposomal surfactants. Its research and development is focused on the molecular engineering of liquid formulas that can be applied by hand or by machine. The intellectual property developed from this work is protected primarily in the form of trade secrets, as opposed to patents. This intellectual property strategy is similar to that used by leading companies in the fragrance and flavors industry. NanoHolding has twenty four issued patents and two pending patent applications.

 

Competition

 

NanoHolding’s products have a small number of significant competitors in the market segments in which the products are sold. NanoHolding does not believe that any of those competitors utilize nanotechnology in their products, nor do their products offer the performance advantages provided by its products that incorporate nanotechnology in their formulations. NanoHolding’s products do compete for certain customers or certain applications against lower priced, traditional materials. Most of the companies selling products into NanoHolding’s market segments are privately-held, U.S. packaging or catalog companies. Examples include Hilco Accessories, California Accessories, and Amcon Laboratories and internationally from the catalog company, Prosben, Inc., from the Peoples Republic of China.

 

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Government Regulation

 

NanoHolding’s products and its manufacturing operations must satisfy governmental safety standards. In the U.S. this is the Occupational Safety and Health Administration, and there are comparable regulations in other parts of the world. There are also environmental regulations regarding manufacturing and transportation of NanoHolding’s products under the U.S. Environmental Protection Agency and other state and local regulations, including foreign regulation for products manufactured or shipped outside the U.S. NanoHolding takes these requirements into account in product development. Cost of compliance with these regulations has not been significant in the past and NanoHolding does not expect it to be material in the future.

 

Backlog

 

Sales are primarily pursuant to purchase orders for delivery of products. NanoHolding does not believe that a backlog as of any particular date is indicative of future results. Some agreements give customers the right to purchase a specific quantity of products during a specified time period, but these agreements do not obligate the customers to purchase any minimum quantity. The quantities actually purchased by the customer, as well as the shipment schedules, are frequently revised during the agreement term to reflect changes in the customer’s needs. Because of NanoHolding’s small size, a customer’s delay of a product shipment can make a difference in the results for a particular accounting period. For these reasons we do not believe that these agreements are meaningful for determining backlog amounts.

 

Business Segment and Geographical Information

 

NanoHolding’s operations comprise a single business segment. All long-lived assets are located in the United States.

 

Sources and availability of raw materials and the names of principal suppliers

 

NanoHolding uses third-party suppliers and contract manufacturers in the United States to obtain substantially all of its raw materials, components and packaging products. Over time, one unrelated third party has become NanoHolding’s leading supplier in the United States. As is customary in its industry, historically NanoHolding has not had long-term or exclusive agreements with third-party suppliers or contract manufacturers and has generally made purchases through purchase orders. NanoHolding believes that it has good relationships with its suppliers and manufacturers and that there are alternative sources should one or more of these suppliers or manufacturers become unavailable. The loss of, or a significant adverse change in its relationship with, any of its key suppliers or manufacturers, or any supply change disruptions could have a material adverse effect on NanoHolding’s business, prospects, results of operations, financial condition or cash flows.

 

Key Customers

 

A limited number of key customers account for a substantial portion of NanoHolding’s commercial revenue. In particular, revenue from three customers constituted approximately 31%, 14% and 12%, respectively, of 2013 total revenue. Many of NanoHolding’s customers are significantly larger than it is and, therefore, may be able to exert a high degree of influence over NanoHolding. The loss of one of the largest customers or the failure to attract new customers could have a material adverse effect on NanoHolding’s business, results of operations and financial condition.

 

Research and Development

 

Research and development activity is the driver of NanoHolding’s new product development and improvement of existing products. For 2012 and 2013 research and development costs were $1,144,154 and $878,364, respectively, and are included in operating expenses on the accompanying consolidated statements of operations. This represents approximately 28% and 24% of NanoHolding’s total operating costs in each of those years. The ability to engineer product performance using nanotechnology is one of the ways NanoHolding distinguishes its products in marketing and sales of products in its different market segments. Research and development work includes development and refinement of formulas, optimization for performance, testing and characterization, and work on manufacturing processes and techniques both for producing the product, and for a customer’s use of the product.

 

Employees

 

As of March 31, 2014, NanoHolding had 32 full-time employees and 5 part-time employees. NanoHolding does not anticipate hiring additional employees for the operations of NanoHolding during the next twelve months. NanoHolding is not subject to any collective bargaining agreements and NanoHolding’s relations with its employees are good

 

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APPLIED NANOTECH’S MANAGEMENT DISCUSSION AND ANALYSIS

 

Overview

 

We are a nanotechnology company, primarily engaged in research and development, with the goal of creating products that we expect to develop, or improve, using nanotechnology. Historically, we have generated revenues by performing research services, licensing our technology, and selling products based on our technology. In the fall of 2013, as a result of limited resources, we restructured our operations to focus primarily on maximizing our research revenues and minimizing costs. As a result of further cuts in 2014, we are now focusing almost exclusively on our research contracts and have temporarily abandoned all commercialization efforts related to our technology. As such, there will be no significant product sales in the foreseeable future. It is not possible for us to commercialize products on our own without a significant infusion of capital. We are currently focused on stabilizing our operations and achieving cash-flow breakeven based on our research revenues only.

 

Outlook

 

We have a plan to achieve positive cash flow from current operations for 2014, prior to interest expense and expenses related to the business combination. Our plan anticipated a significant loss for the first quarter of 2014 and it anticipates a loss for the full year. A critical component of our plan is to maintain our research revenue at its current level, or above, and this will require the receipt of additional contracts. If we do not receive the expected revenue sources as quickly as anticipated by the plan, we likely will be required to cut expenses further, and to raise additional funding. Longer term, if the business combination does not occur as planned, we will need financing to continue as a going concern. If we are unable to raise additional funding on commercially acceptable terms, we may be forced to drastically curtail activities or obtain funding on terms that are more unfavorable for the Company. Our ability to raise additional funds will also be dependent, in part, on whether our shareholders approve Proposal 2 to increase the number of our authorized shares to permit us to raise equity or convertible debt financing.

 

We have a history of net operating losses, and we expect a significant net loss in 2014. In recent years we have been focusing on increasing our revenues, reducing our costs, and 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 achieve this target 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 positive monthly operating cash flow from current operations in 2014. However, it is not possible for us to ever achieve more than nominal profitability on an ongoing basis based solely on research activities, and our research activities are not capable of generating sufficient cash flow to commercialize any products based on our technology.

 

As discussed in Liquidity and Capital Resources below, we have significant amounts of convertible debt coming due in August 2014. If this transaction is approved and consummated, these notes will be converted into equity of Pen, Inc. If this transaction is not consummated, 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; however, the terms likely would be unfavorable to existing shareholders.

 

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, maintaining the level of research 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 likely will have to reduce costs further, 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.

   

Stock based compensation - We frequently grant stock options to employees and others. We have granted significant options in the past, but in 2012 the compensation committee essentially discontinued options for employees and officers, making this policy less critical. We have, however, continued to grant options to the Board of Directors 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 2012, 2013, or 2014. 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 accounts receivable at either December 31, 2013 or March 31, 2014.

 

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Liquidity and Capital Resources

 

The Company has a history of net losses and negative cash flow from operations. We have had losses in each of the last three years, and expect a significant net loss in 2014, as well. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern, and do not include any adjustments that may be required if it were unable to continue as a going concern. Management and the Board believe that the actions taken to date in 2014 and currently being taken will allow the Company to achieve positive cashflow from current operations for 2014, prior to interest expense and expenses associated with the business combination.

 

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 any money from common stock offerings in 2012, 2013, or 2014. We did raise money from convertible debt during those periods. We issued convertible notes payable with a face amount of $935,700 and $513,375 in 2012 and 2013, respectively. In 2014, we have issued convertible notes totaling $211,250 through the date of this filing. Included in this total is $75,000 raised in the private placement of convertible notes, of up to $250,000, as contemplated by the Merger & Exchange Agreement. These funds are earmarked for expenses to enable us to accomplish the proposed combination and to increase our working capital by allowing for a reduction of accounts payable, accrued expenses, and the retirement of other notes with more unfavorable terms.

 

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 September 2014, and possibly the end of the year. We have cut costs significantly, and if revenue sources do not materialize as quickly as we expect, we intend to cut expenses further to a level to enable us to continue operations. However, without raising additional funds, or completion of the business combination, it will require the continued cooperation of our vendors and note holders.

 

Cash Flow Activity for the Years Ended December 31, 2013, and 2012

 

Our cash balance decreased during 2013 – from approximately $300,000 at December 31, 2012 to approximately $120,000 at December 31, 2013. Our working capital also decreased significantly, both as a result of a decrease in our current assets and an increase in our current liabilities. Our current liabilities increased significantly as a result of movement of our long-term debt to current as well as a significant increase in accrued expenses as a result of cash conservation programs and working capital management.

 

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.

 

Our cash flow from financing activities resulted from the issuance of convertible notes payable, partially offset by payments on long term debt and capital leases. We issued convertible notes payable with a face amount of $935,700 and $513,375 in 2012 and 2013, respectively. These notes are convertible into common stock, and a portion of these notes have been converted as of December 31, 2013. We also have convertible notes still outstanding from prior years. If the business combination occurs, all of the notes other than those issued as part of the bridge financing in 2014 will either be converted before the closing, or will be converted in connection with the closing of the combination.

 

Cash used in investing activities was the result of the purchase of capital assets in both years. We would expect minimal cash to be used in investing activities in 2014. No material commitments exist as of December 31, 2013, for future purchases of capital assets.

 

Our contractual obligations as of December 31, 2013 consist of notes payable (including interest), operating leases, and capital leases. The notes payable are convertible into common stock at fixed rates of $0.08 to $0.25 per share, as well as a small portion at variable rates of 30% to 50% below the market price at the time of conversion. A summary of our obligations at December 31, 2013 is as follows:

 

   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   $32,122 
Convertible notes payable  $2,335,240   $2,335,240   $   $   $   $   $ 

 

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.

 

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Cash Flow Activity for the Three Months Ended March 31, 2014 and 2013

 

Our cash position increased during the period from approximately $120,000 at December 31, 2013 to approximately $160,000 at March 31, 2014. This increase in cash is primarily the result of cash provided by financing activities raised through the issuance of convertible notes.

 

For the quarter ended March 31, 2014 (the “2014 Period), operating activities used approximately $8,000 of cash, as compared to approximately $85,000 of cash provided by operating activities in the same period in 2013 (the “2013 Period”). The cash used in operating activities in the 2014 Period was the result of the net loss, offset by noncash expenses and working capital management. During the same period in 2013 a $600,000 deposit related to a potential acquisition from 2012 was returned to us, providing significant working capital to us in that period.

 

We would expect our cash used in, or provided by, operating activities to fluctuate in future quarters in 2014, depending on the timing of receipt of various items. The proceeds from the current fundraising round of convertible notes discussed below are earmarked to increase working capital on our balance sheet by allowing for a reduction of accounts payable and accrued expenses, as well as to pay transaction expenses related to the proposed business combination. Each of these items will have a negative effect on cash flow from operations. We expect positive cash flow from operations in future quarters in 2014, but not in all quarters, depending on the timing of the receipt of funds from the convertible notes and timing of payment of expenses,

 

We had no capital expenditures in either period, and we expect cash used in or provided by investing activities to remain at relatively insignificant levels for the balance of 2014.

 

Our cash provided by financing activities was approximately $45,000 and $230,000 in the 2014 and 2013 Periods, respectively. In both periods, this was the result of issuing convertible notes payable to supplement our cash balance, partially offset by payments on capital leases and notes payable. We are currently in the process of raising up to $250,000 in additional convertible notes, and as a result cash provided by financing activities may increase in the second quarter of 2014. A total of $75,000 of these notes have been issued in the period between April 1, 2014 and the date of this filing.

 

If the combination does not occur, we will have approximately $2.4 million of convertible notes payable, including accrued interest, due in August 2014. We do not have the funds to pay these notes, nor are we likely to be able to raise outside funding to pay these notes prior to the due date. We expect the majority of the remaining notes to be extended, or converted into common stock in 2014 and future years; however, if note holders were to pursue immediate collection of these notes, it would have a negative impact on our ability to survive and continue operations. We currently do not have the authorized shares available to either convert the notes currently outstanding, or to issue new equity. If Proposal 2 to increase the authorized shares passes, this issue related to availability of shares will be solved; however, if Proposal 2 is not approved, our financing alternatives will be limited, and it will have a significant negative effect on our ability to survive.

 

We do not expect significant additional fundraising prior to the shareholder’s meeting. If the combination is not approved, or does not occur, we will need to determine whether we can sustain research operations while pursuing an alternate transaction or develop a plan to commercialize products based on our intellectual property and seek funding for that plan. While we expect to be able to obtain any funds needed for operations, there is no assurance that any financing alternatives can be arranged on commercially acceptable terms.

 

Results of Operations

 

Comparison of the Results of Operations for the Years Ended December 31, 2013 and 2012

 

Business Segments We operate with a single reportable business segment.

 

Revenues Following is a summary of key revenue categories for the two years covered by this report.

 

   2013   2012 
Government Revenues  $2,048,840   $1,733,728 
Other Contract Research   1,054,305    309,274 
Upfront License Fees   250,000    750,000 
Product Royalties   238,936    433,453 
Product Sales   286,622    228,200 
Other Revenues   39,659    138,713 
Total Revenues  $3,918,362   $3,593,368 
           
Revenue backlog at December 31  $2,812,000   $2,929,000 

 

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Our total revenue increased 9% from 2012 to 2013. In 2013, we focused on rebuilding our core, bread and butter, research efforts and both our government and private research revenue increased as a result. We are anticipating about $3.6 million of revenues in 2014.

 

Our royalty revenue, both upfront payments and product royalties, decreased from 2012 to 2013, primarily as a result of our decreased focus on licensing. The upfront payments were all from YHCC in both years, and the product royalties were all from Yonex in both 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 in the future, 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 from 2012 to 2013. 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 received by our technical personnel, but those sales will be significantly reduced from 2013.

 

The revenue backlog as of December 31, 2013 results from several government programs and private contracts. The majority of these programs are currently in progress and generating revenue, with the remainder related to contracts awarded, but not yet started. The overwhelming majority of this backlog will be converted into revenue in 2014. We also have some expected contracts that we consider likely that have not yet been finalized, and therefore, are not included in the backlog numbers as of December 31, 2013.

 

We expect revenue to be lower in 2014 than in 2013. We expect our research revenue levels to approach 2013 levels; however, with no royalties and reduced product sales, we expect our total revenues in 2014 to be less than 2013. Research revenues are also negatively impacted in 2014 by two factors. Our research revenues are primarily based on invoicing for costs incurred. We have reduced the number of research employees, resulting in fewer employees to work on programs. We also have reduced employee wage rates. This also results in a reduction in costs available to be billed on programs. It is unlikely that revenues could equal 2013 levels without raising significant additional capital that would allow us to aggressively pursue product sales, or increasing costs.

 

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 two years.

 

   2013   2012 
         
Direct Materials – Funded Projects  $189,625   $405,014 
Direct Materials – Internal Projects   110,219    422,675 
Direct Subcontractors – Funded Projects   327,455    321,332 
Direct Labor - Funded Projects   877,466    734,263 
Direct Labor – Internal Projects   209,513    552,330 
Overhead Labor   302,265    296,450 
Benefits   433,545    634,037 
Facilities and supplies   762,572    937,894 
Other Overhead   111,535    167,213 
           
Total Research and development  $3,324,195   $4,471,208 

 

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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 below that of 2013.

 

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 
Labor and benefits  $1,429,800   $1,525,923 
Board of Director costs  $169,773   $180,038 
Professional fees  $203,563   $876,964 
Patent expense  $424,239   $629,985 
Trade shows and conferences  $40,540   $83,734 
Other S, G, & A  $249,121   $503,652 
Total selling, general, and administrative  $2,517,036   $3,800,296 

 

The most significant cost in selling, general and administrative expense is labor and benefits. 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, and significant additional cuts in 2014.

 

Board of Director costs were similar in both years. The reduction in 2013 is the result of the resignation of one of the Directors in 2013.

 

Professional fees decreased significantly from 2012 to 2013 because in 2012, we were pursuing a potential acquisition. As a result we incurred significant consulting, investment banking, legal due diligence, accounting due diligence, and other related professional fees in 2012. That effort was abandoned and no such fees were incurred in 2013.

   

We also spend a significant amount on patents. Our patent expense decreased from approximately $630,000 in 2012 to approximately $425,000 in 2013 as we did an extensive review of our portfolio and discontinued maintenance payments on old patents that we considered to no longer have value to us. We expect patent expense to decrease significantly further in 2014, as we continue to cull old patents that we believe no longer have value from our patent portfolio, and as we become more selective in our foreign filings.

 

We expect our ongoing selling, general, and administrative expenses to be significantly lower in 2014, as we focus on keeping costs low to match our revenue levels. We will have the full year effect of staff reductions implemented in 2013, additional staff reductions made in 2014, and cuts in salary levels in 2014. Total selling, general, and administrative expenses will be significantly affected by transactions costs. Further, if the business combination is consummated, we are obligated to issue 7,074,000 shares to all outside Directors of the Company, except David Li, for time spent on Company matters in excess of that covered by their normal compensation as Directors, including time related to the merger. The exact expense recorded will be dependent on the value of the stock at the time that it is issued.

 

Other income

 

Following is a summary of other income for the last three fiscal years.

 

   2013   2012 
         
Interest expense from capital  leases and other  $(6,226)  $(11,025)
Interest expense associated with notes payable  $(194,296)  $(187,797)
Interest expense associated notes payable discount  $(1,022,100)  $(253,779)
Interest income  $3,803   $1,587 

 

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The majority of 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 interest expense to in increase further in 2014 as the result of additional note issuances and conversion discounts. Also, under the terms of the Merger and Exchange Agreement, all existing convertible notes are required to be converted to stock. In order to induce note holders to agree to convert, conversion prices were lowered significantly, which will result in a substantial noncash interest charge in 2014.

 

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.

 

Overview

 

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 $3.6 million in 2012, and $3.2 million in 2013. We expect payroll related expense in 2014 to decrease to approximately $1.5 million, as a result of our cost reduction efforts, which involve the full year effect of cuts made in 2013, reduction in salary rates in 2014, and further staff reductions.

 

We expect our overall spending rate for 2014, excluding any revenue or transaction costs related to this business combination, to average approximately $300,000 per month from the date of this filing forward. Based on this, we believe we can reach positive cash flow from current operations, excluding transaction costs, on a monthly basis, but there is no assurance that this will occur, or that we will achieve the level of revenue required to achieve that. This expenditure level is based on anticipated revenue levels. If these revenue levels are not attained, we will not incur many of these expenses, and our expense level will also be lower than anticipated. In addition, we have significant amounts of accrued expense, accounts payable, and notes payable that when paid will have a negative impact on overall cash flow. Ultimately, we will be required to raise additional cash to address these issues.

 

Seasonality and Inflation

 

Applied Nanotech Holdings’ business is not seasonal in nature. Management believes that Applied Nanotech Holdings’ operations have not been affected by inflation.

 

Comparison of the Results of Operations for the Three Months Ended March 31, 2014 and 2013

 

Our net loss for the three months ended March 31, 2014 was approximately $450,000, substantially down from the net loss of approximately $1.375 million for the same period in 2013. Our loss from operations also decreased by approximately 50% from the 2013 Period to the 2014 Period – from approximately $665,000 to approximately $345,000. The reasons for the decreased loss are discussed in more detail below.

 

Our revenues for the quarter ended March 31, 2014, totaled approximately $880,000, compared to approximately $950,000 for the same quarter in 2013. The revenues in both periods were substantially all the result of reimbursed research expenditures. The majority of the revenues in both periods came from government sources, which is included in government contract revenue in the statement of operations. The decrease related to reductions in royalties and product sales, while total research revenues remained relatively consistent from period to period. The royalties decreased because the royalties in the 2013 Period were from Yonex, and Yonex made a one-time lump sum payment later in 2013 to buy out the remainder of their license. As such there will be no future royalties from Yonex. Product sales decreased because we eliminated our sales force later in 2013 and are no longer focusing on product sales. Product sales will remain at negligible levels for the balance of 2014.

 

At the present stage of our development, significant conclusions cannot be drawn by comparing revenues from period to period; however, we would expect the quarterly revenue for the balance of 2014 to approximate the first quarter level in the majority of quarters. As discussed above, our revenue levels are expected to decrease in 2014. Our current business strategy is built on generating revenue through research contracts and keeping costs down to a level to attain positive cash flow from operations. Our revenues will not increase significantly without commercialization of our technology, which will require capital in excess of that currently available to us.

 

We had a research revenue backlog of approximately $2.8 million as of both March 31, 2014 and 2013. Our ability to perform continued research, or fulfill our backlog, should not require significant additional personnel. We expect our revenue backlog to continue to support our expected revenue levels.

 

We incurred research and development expenses of approximately $625,000 for the 2014 Period, a decrease from the approximately $870,000 incurred in the 2013 Period. This decrease in research expenses is a direct result of our cost cutting initiatives and elimination of almost all unfunded research activities. We expect research and development expenditures to remain near the current level for the balance of 2014; however, significant new revenue producing research programs beyond those already identified could cause research and development expenditures to increase.

 

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Our selling, general, and administrative expenses decreased from approximately $750,000 for the 2013 Period to approximately $600,000 for the 2014 Period. The 2014 amount includes approximately $175,000 of expenses related to the proposed business combination. Without those expenses, the selling general and administration expenses would have been approximately $425,000. This decrease in selling, general, and administrative expenses was primarily the result of our cost cutting efforts, which included a reduction in the number of administrative personnel, a reduction in salary rates, a reduction in patent expenses, and a reduction in travel and other expenses. Significant additional cuts were made in March 2014, so excluding transaction costs, the quarterly selling general and administrative expenses should decline further in future quarters as the effect of those cuts are realized over an entire quarter. The actual amount of decrease is dependent on the amount of transaction costs incurred related to the proposed business combination. We expect significant additional transaction related costs in the second and third, quarters of 2014.

 

Our interest expense decreased significantly from 2013 to 2014. The 2013 period contained significant noncash interest charges related to lowering the conversion price on convertible notes to induce conversion by the note holder. As discussed above, there will be similar charges in future quarters of 2014 and interest expense will increase significantly in future quarters and overall will be higher for the full 2014 year than for 2013.

 

Our interest income is insignificant in both periods. Historically, our interest income results from the investment of excess funds in short term interest bearing instruments, primarily certificates of deposit, commercial paper, and money market funds. We expect our interest income to remain at insignificant levels for the balance of 2014 as a result of limited investible funds and the current interest rate environment.

 

 

NANOHOLDING’S MANAGEMENT DISCUSSION AND ANALYSIS

 

Overview

 

NanoHolding Inc. and Subsidiary (“NanoHolding”) develops and markets products based on technology which permits the fabrication of oriented, ultra-thin films of organic or polymeric coatings. NanoHolding also produces a line of personal lens cleaners and accessories. These products are marketed globally primarily to customers in the eyeglass industry.

 

Critical Accounting Policies and Estimates

 

Discussion and analysis of NanoHolding’s consolidated financial condition and consolidated results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires NanoHolding to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. NanoHolding continually evaluates its estimates, including those related to bad debts, inventories, recovery of long-lived assets, income taxes, and the valuation of certain liability instruments and equity transactions. NanoHolding bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to NanoHolding’s reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. NanoHolding believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

 

Accounts Receivable

 

NanoHolding has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. NanoHolding periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

As a basis for estimating the likelihood of collection has been established, NanoHolding considers a number of factors when determining reserves for uncollectable accounts. NanoHolding believes that it uses a reasonably reliable methodology to estimate the collectability of its accounts receivable. NanoHolding reviews its allowances for doubtful accounts on at least a quarterly basis. NanoHolding also considers whether the historical economic conditions are comparable to current economic conditions. If the financial condition of its customers or other parties that NanoHolding has business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

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Inventory

 

Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

 

Revenue Recognition

 

Pursuant to the guidance of ASC Topic 605, NanoHolding recognizes sales when persuasive evidence of an arrangement exists, delivery has occurred, the purchase price is fixed or determinable and collectability is reasonably assured. Net sales is recognized when the product is shipped to the customer and title is transferred.

 

Sales Incentives and Consideration Paid to Customers

 

NanoHolding accounts for certain promotional costs such as sales incentives and cooperative advertising as a reduction of net sales.

 

Income Taxes

 

In 2013 and 2012, NanoHolding operated as a limited liability company and passed all income and loss to its member based on their proportionate interest in Nanofilm. Accordingly, no provision for federal and state income taxes has been made in the consolidated financial statements for the years ended December 31, 2013 and 2012.

 

Beginning in March 2014, income taxes are accounted for pursuant to generally accepted accounting standards for corporate income taxes, which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in NanoHolding’s financial statements or tax returns. The charge for taxes is based on the results for the period as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is accounted for using the balance sheet asset and liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they related to income taxes levied by the same taxation authority and NanoHolding intends to settle its current tax assets and liabilities on a net basis.

 

Recent Accounting Pronouncements 

 

Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. NanoHolding does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows, or disclosures.

 

RESULTS OF OPERATIONS

 

Comparison of Results of Operations for the Years Ended December 31, 2013 and 2012

 

Sales. For the year ended December 31, 2013, NanoHolding had sales of $9,075,348, as compared to sales of $10,600,279 for the year ended December 31, 2012, a decrease of $1,524,931 or 14.4%. The decrease in sales from 2012 to 2013 consisted of a $1,371,607 or 13.4% decrease in sales to third parties and a decrease in sales to a related party of $153,324 or 42.3%. The decrease in sales for the year ended December 31, 2013 as compared to the 2012 period was primarily attributable to a 2013 delay in sales of the anti-fog cloth due to the necessity to reformulate and change a certain raw material included that product. NanoHolding reformulated the materials included on its anti-fog cloth and commenced shipments of this product in late 2013 and beyond. Additionally, during 2013, the customer who purchased a majority of the liquid anti-fog lens cleaner to be used in their anti-fog lens kit systems discontinued its anti-fog lens kit and accordingly, NanoHolding’s sales decreased.

 

Cost of sales. Cost of sales includes the cost of raw materials, labor, depreciation, freight out and other overhead costs. For the year ended December 31, 2013, cost of sales was $5,644,017 as compared to $6,493,041 for the year ended December 31, 2012, a decrease of $849,024, or 13.1%, consistent with the decrease in sales.

 

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Gross profit and gross margin. NanoHolding’ gross profit was $3,431,331 for the year ended December 31, 2013 as compared to $4,107,238 for the year ended December 31, 2012, representing gross margins of 37.8% and 38.7%, respectively. The decrease in gross margins was attributable to lower sales described earlier.

 

Operating expenses. For the year ended December 31, 2013, operating expenses amounted to $3,611,259 as compared to $4,055,614 for the year ended December 31, 2012, a decrease of $444,355 or 11.0%. For the years ended December 31, 2013 and 2012, operating expenses consisted of the following:

 

   Year Ended
December 31, 2013
   Year Ended
December 31, 2012
 
Salaries, wages and contract services  $1,865,415   $2,392,331 
Professional services   522,085    405,492 
Sales and marketing   340,270    351,416 
Occupancy   375,903    352,706 
Travel and entertainment   154,332    217,170 
Depreciation   115,571    152,384 
Administrative   200,056    137,118 
Materials and development   37,627    46,997 
Total  $3,611,259   $4,055,614 

 

  Salaries, wages and contract services for the year ended December 31, 2013 decreased by $526,916, or 22.0%, as compared to the year ended December 31, 2012. The decrease was mainly attributable to the full year impact of a reduction in workforce of 8 employees during 2012.  NanoHolding expects that salaries, wages and contract services to increase due to merit increases and increased staffing.  
     
  Professional services fees for the year ended December 31, 2013 increased by $116,593, or 28.7%, as compared to the year ended December 31, 2012. The increase was attributable to an increase in accounting fees of $64,758 and an increase in legal fees of $72,333 offset by a decrease in other professional fees of $20,498.  
     
  For the year ended December 31, 2013, sales and marketing expense decreased by $11,146 or 3% as compared to the year ended December 31, 2012.  
     
  For the year ended December 31, 2013, occupancy costs increased by $23,197 or 6.6% as compared to the 2013 Interim Period. This increase is primarily attributable to an increase in contract facility lease for corporate office and Real Estate tax accrual for production facility.  
     
  For the year ended December 31, 2013, travel and entertainment expenses decreased by $62,838 or 28.9% as compared to the year ended December 31, 2012. This decrease is primarily attributable to a decrease in overall sales expenses due to cost cutting measures.  
     
  For the year ended December 31, 2013, depreciation expenses included in operating expenses decreased by $36,813 or 24.2% as compared to the year ended December 31, 2012. This decrease is primarily attributable to a decrease in depreciable assets.  
     
  For the year ended December 31, 2013, administrative expenses increased by $62,938 or 45.9% as compared to the year ended December 31, 2012. This increase is primarily attributable to an increase in bank fees from securing loan with Fifth Third to pay off investors and bad debt recovery.
     
  For the year ended December 31, 2013, materials and development expenses decreased by $9,370 or 20.0% as compared to the year ended December 31, 2012. This decrease is primarily attributable to a decrease in research costs for coatings, as NanoHolding focused more on application development for these materials and scaled up new anti-fog product.

 

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Income (loss) from operations. As a result of the factors described above, for the year ended December 31, 2013, loss from operations amounted to $179,928, as compared to income from operations of $51,624 for the year ended December 31, 2012, a decrease of $231,552 or 448.5%.

 

Other income (expense). Other income (expense) includes interest expense, other income, net and interest income. For the year ended December 31, 2013, total other expense amounted to $38,392 as compared to other income of $10,094 for the year ended December 31, 2012. During 2013, NanoHolding incurred interest expense of $80,326 and compared to $0 in 2012. In 2012, NanoHolding had no outstanding interest-bearing debt. In 2013, NanoHolding recorded other income of $41,894 and compared to $9,806 in 2012, an increase of $32,088.

 

Net income (loss). As a result of the foregoing, NanoHolding’s net loss was $(218,320), or $(0.11) per share (basic and diluted), for the year ended December 31, 2013, as compared to net income of $61,718, or $0.02 per share (basic and diluted) for the year ended December 31, 2012.

 

Comparison of Results of Operations for the Three Months Ended March 31, 2014 and 2013

 

Sales. For the three months ended March 31, 2014 (the “2014 Interim Period”), NanoHolding had sales of $2,771,411, as compared to sales of $2,394,663 for the three months ended March 31, 2013 (the “2013 Interim Period”), an increase of $376,748 or 15.7%. The increase in sales during the 2014 Interim Period as compared to the 2013 Interim period consisted of a $349,638 or 14.9% increase in sales to third parties and an increase in sales to a related party of $27,110 or 48.8% which was primarily attributable an increase in shipments of the anti-fog cloths which was delayed in the 2013 period.

 

Cost of sales. Cost of sales includes the cost of raw materials, labor, depreciation, freight out and other overhead costs. For the 2014 Interim Period, cost of sales was $1,450,141 as compared to $1,361,852 for the 2013 Interim Period, an increase of $88,289, or 6.5% and was attributable to an increase in sales.

 

Gross profit and gross margin. NanoHolding’s gross profit was $1,321,270 for the 2014 Interim Period as compared to $1,032,811 for the 2013 Interim Period, representing gross margins of 47.7% and 43.1%, respectively. The increase in gross margins was attributable to increased sales and a change in product mix to products with higher gross margins.

 

Operating expenses. For the 2014 Interim Period, operating expenses amounted to $995,581 as compared to $853,288 for the 2013 Interim Period, an increase of $142,293 or 16.7%. For the 2014 and 2013 Interim Periods, operating expenses consisted of the following:

 

   2014 Interim Period   2013 Interim Period 
Salaries, wages and contract services  $533,561   $486,107 
Professional services   186,026    72,303 
Sales and marketing   73,517    82,008 
Occupancy   90,735    94,600 
Travel and entertainment   22,084    31,642 
Depreciation   22,137    32,643 
Administrative   45,862    40,872 
Materials and development   21,659    13,113 
Total  $995,581   $853,288 

 

  Salaries, wages and contract services for the 2014 Interim Period increased by $47,454, or 9.8%, as compared to the 2013 Interim Period. The increase was mainly attributable to a planned expenditure for market development activities and increased headcount.  NanoHolding expects that salaries, wages and contract services will increase primarily due to continued emphasis on planned market development programs for the balance of 2014.
     
  Professional services for the 2014 Interim Period increased by $113,723 or 157.3%, as compared to the 2013 Interim Period. The increase was attributable to an increase in accounting fees of $35,599, an increase in legal fees of $31,623, and an increase in other professional fees of $6,101 which are attributable in an increase in fees related to the proposed acquisition.
     
  For the 2014 Interim Period, sales and marketing expenses decreased by $8,491 or 10.4% as compared to the three months ended March 31, 2013.
     
  For the 2014 Interim Period, occupancy costs decreased by $3,865 or 4.1%as compared to the 2013 Interim Period.
     
  For the 2014 Interim Period, travel and entertainment expenses decreased by $9,558 or 30.2% as compared to the 2013 Interim Period. This decrease is primarily attributable to a decrease in overall sales expenses due to cost cutting measures.
     
  For the 2014 Interim Period, depreciation expenses included in operating expenses decreased by $10,506 or 32.2% as compared to the 2013 Interim Period. This decrease is due to some assets becoming fully depreciated.

 

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For the 2014 Interim Period, administrative expenses increased by $4,990 or 12.2% as compared to the 2013 Interim Period.

 

     
 

For the 2014 Interim Period, materials and development expenses increased by $8,546 or 65.2% as compared to the 2013 Interim Period. This increase is primarily attributable to an increase in emphasis on development of product and market development projects for lens coatings.

 

 

Income (loss) from operations. As a result of the factors described above, for the 2014 Interim Period, income from operations amounted to $325,689, as compared to $179,523 for the 2013 Interim Period, an increase of $146,166 or 81.4%.

 

Other income (expense). Other income (expense) includes interest expense, other income, net and interest income. For the 2014 Interim Period, total other expense amounted to $7,320 as compared to other expenses of $24,072 for the 2013 Interim Period. During the 2014 Interim Period, NanoHolding incurred interest expense of $7,333 as compared to $28,526 for the 2013 Interim Period.

 

Income taxes. For the 2014 Interim Period, income tax expense amounted to $47,608 as compared to $0 for the 2013 Interim Period. Beginning in March 2014, NanoHolding became subject to federal and state corporate income taxes.

Net income. As a result of the foregoing, net income attributable to NanoHolding was $231,455, or $0.12 per share (basic and diluted) for the 2014 Interim Period as compared to net income attributable to NanoHolding of $132,884, or $0.07 per share (basic and diluted) for the 2013 Interim Period.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2014 and December 31, 2013, NanoHolding had cash balances of $230,170 and $100,367, respectively.

 

The following table sets forth a summary of changes in working capital from December 31, 2012 to December 31, 2013 and from December 31, 2013 to March 31, 2014:

 

           December 31, 2012 to
December 31, 2013
 
   December 31, 2013   December 31, 2012   Change   Percentage Change 
Working capital:                    
Total current assets  $3,234,068   $4,067,347   $(833,279)   (20.5%)
Total current liabilities   1,326,050    1,455,064    129,014    8.9% 
Working capital:  $1,908,018   $2,612,283   $(704,265)   (27.0%)

 

           December 31, 2013 to
March 31, 2014
 
   March 31, 2014   December 31, 2013   Change   Percentage Change 
Working capital:                    
Total current assets  $3,434,502   $3,234,068   $200,434    6.2% 
Total current liabilities   1,207,354    1,326,050    118,696    9.0% 
Working capital:  $2,227,148   $1,908,018   $319,129    16.8% 

 

Working capital decreased $704,265 to $1,908,018 at December 31, 2013 from $2,612,283 at December 31, 2012 and working capital increased $319,129 to $2,227,148 at March 31, 2014 from $1,908,018 at December 31, 2013.

 

The decrease in working capital from December 31, 2012 to December 31, 2013 is primarily attributable to a decrease in cash and cash equivalents of $1,440,214 as described below, an increase in accounts payable of $430,929, and an increase in a bank revolving line of credit of $199,919 offset by an increase in accounts receivable (third party and related party) of $399,820, an increase in inventory of $209,478 and a decrease in notes payable of $870,787.

 

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In conjunction with the redemption of Class A common shares in 2012, Nanofilm issued promissory notes to certain Class A stockholders totaling $1,935,084. Interest payments were due quarterly at an annual interest rate of 6%. The notes were to be repaid at 45% of the principal balance due on December 31, 2013 with the remaining balance due December 31, 2014. The notes were personally guaranteed by the majority member and were subordinated to future debt incurred. As discussed below, in July 2013, Nanofilm received a bank loan from Fifth Third Bank and repaid all remaining notes.

 

On July 30, 2013 Nanofilm entered into a financing arrangement with Fifth Third Bank to provide funds to repay notes payable to Class A stockholders and provide working capital. The financing arrangement provided for a $600,000 term loan (the “Term Loan”) and a $1,200,000 Revolving Credit Facility (“Revolving Credit Facility”) as described below.

 

   Term Loan  Revolving Credit Facility
Amount  $600,000  $1,200,000
Loan term  5 years  1 year
Interest rate  Libor plus 3% (3.138% at
December 31, 2013)
  Libor plus 2.75% (2.92%
December 31, 2013)
Monthly payment  $5,000 monthly plus interest  Interest only

 

The notes were secured by substantially all of the assets of Nanofilm and were personally guaranteed by the NanoHolding’s chief executive officer/principal stockholder.

 

The bank term loan and revolving credit facility were as follows:

 

   Term Loan   Revolving Credit Facility 
Balance at December 31, 2013  $575,000   $199,919 
Less: current portion   (60,000)   (199,919)
           
Bank term loan, net of current portion  $515,000   $ 

 

Pursuant the Term Loan agreement, in addition to covenants to provide quarterly and annual financial statements and other standard covenants, effective December 31, 2014, NanoHolding’s Fixed Charge Coverage Ratio (“Fixed Ratio”), as defined in the Term Loan Agreement, may not be less than 1.20 to 1.0, calculated as of the last day of each fiscal year. The Fixed Ratio shall equal the ratio of (a) earnings before interest, income taxes, depreciation and amortization (“EBITDA”) plus rent and operating leases, less distributions, dividends and certain capital expenditures, as defined to (b) the consolidated sum of (i) interest expense and (ii) all principal payments with respect to indebtedness that were paid or were due and payable plus rent and operating lease expense incurred and all cash taxes paid during the respective fiscal year. If these covenants are not met, the Term Loan shall become immediately due on demand.

 

At December 31, 2013, maximum funds available to borrow under the Revolving Credit Facility amounted to $1,000,081. The weighted average interest rate during the period was approximately 3%.

 

In April 2014, NanoHolding entered into a $1,500,000 revolving credit note agreement (the “Revolving Note”) with Mackinac Commercial Credit, LLC. The unpaid principal balance of this Revolving Note is payable on demand, is secured by all of the assets of its subsidiary, and bears interest computed at a rate of interest (the "Effective Rate") which is equal to 7.0% above the LIBOR Rate, as defined, payable monthly. NanoHolding will pay a late charge of 5.0% of any monthly payment not received by Lender within 10 calendar days after said payment is due. NanoHolding may, at any time or from time to time upon three business days' written notice to Lender, prepay the Note in whole provided that (i) if its prepays the Revolving Note in full and terminates the Revolving Note after the date hereof, or (ii) Lender, after the date hereof, terminates the Revolving Note after default, then NanoHolding will pay, in addition to all other amounts, a termination premium equal to 2.0% of the maximum loan amount. NanoHolding used the proceeds of the Revolving Note disbursed at closing to retire and extinguish all of the indebtedness to Fifth Third Bank. NanoHolding borrowed approximately $988,000 under the Revolving Note which repaid Fifth Third Bank.

 

The increase in working capital from December 31, 2013 to March 31, 2014 is primarily attributable to an increase in cash and cash equivalents of $129,803 as described below, and a decrease in accounts payable of $377,222 offset by an increase in a bank revolving line of credit of $200,000.

 

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Cash flow activity for the year ended December 31, 2013 and 2012

 

Net cash flow used in operating activities was $214,079 for the year ended December 31, 2013 as compared to net cash provided by operating activities of $1,147,574 for the year ended December 31, 2012, a decrease of $1,361,651.

 

·Net cash flow used in operating activities for the year ended December 31, 2013 was primarily attributable to the use of cash to fund the net loss of $218,320 adjusted for non-cash activities such as bad debt recovery of $45,343, a change in inventory obsolescence reserves of $126,275 and depreciation and amortization expense of $244,077 and changes in operating assets and liabilities such as an increase in accounts receivable – related party of $75,259, a decrease in accounts payable of $193,558 and a decrease in accrued expenses of $149,571, offset by a decrease in accounts receivable of $929,429 and a decrease in inventory of $511,428.   

 

·Net cash flow provided by operating activities for the year ended December 31, 2012 was primarily attributable to changes in operating assets and liabilities such as: a decrease in accounts receivable of $929,429 from the collection of outstanding accounts receivable balances and a decrease in inventory of $511,428 offset primarily by a decrease in accounts payable of $193,558 and a decrease in accrued expenses of $149,571.

 

Net cash flow used in investing activities reflects the purchase of property and equipment of $66,109 and $106,243 for the year ended December 31, 2013 and 2012, respectively.

 

Net cash flow used in financing activities was $1,160,026 for the year ended December 31, 2013 as compared to $1,325,170 for the year ended December 31, 2012. During the year ended December 31, 2013, Nanofilm repaid notes payable of $1,935,084 repaid a bank line of credit of $525,081 and repaid bank loans of $25,000 offset by proceeds received from a bank line of credit of $725,000 and proceeds from bank loans of $600,000. During the year ended December 31, 2012, Nanofilm used cash to pay distributions to members of $129,328 and redeemed LLC member units for $1,190,617.

 

Cash flow activity for the three months ended March 31, 2014 and 2013

 

Net cash flow used in operating activities was $57,683 for the 2014 Interim Period as compared to net cash used in operating activities of $337,390 for the 2013 Interim Period.

 

·Net cash flow used in operating activities for the 2014 Interim Period was primarily attributable to changes in operating assets and liabilities such as an increase in accounts receivable of $103,507 and a decrease in accounts payable of $377,222 offset by net income of $270,761 adjusted for the add back of non-cash items such as a change in inventory obsolescence reserve of $63,729 and depreciation and amortization expense of $42,183.  

 

·Net cash flow used in operating activities for the 2013 Interim Period was primarily attributable to changes in operating assets and liabilities such as: an increase in accounts receivable of $433,666 and an increase in inventory of $212,362 offset by net income of $155,451 adjusted for the add back of non-cash items such as a change in inventory obsolescence reserve of $36,379 and depreciation and amortization expense of $55,071.  

 

Net cash flow used in investing activities reflects the purchase of property and equipment of $2,514 and $19,095 for the 2014 and 2013 Interim Periods, respectively.

 

Net cash flow provided by financing activities was $190,000 for the 2014 Interim Period as compared to net cash used in financing activities of $50,045 for the 2013 Interim Period. During the 2014 Interim Period, NanoHolding received proceeds from a bank line of credit of $200,000 offset by the repayment of bank loans of $10,000. During the 2013 Interim Period, NanoHolding used cash to redeem LLC member units for $50,045.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

NanoHolding has certain fixed contractual obligations and commitments that include future estimated payments. Changes in NanoHolding’s business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. NanoHolding cannot provide certainty regarding the timing and amounts of payments. NanoHolding has presented below a summary of the most significant assumptions used in its determination of amounts presented in the tables, in order to assist in the review of this information within the context of NanoHolding’s consolidated financial position, results of operations, and cash flows. The following tables summarize NanoHolding’s contractual obligations as of March 31, 2014, and the effect these obligations are expected to have on NanoHolding’s liquidity and cash flows in future periods.

 

   Payments Due by Period 
Contractual obligations:  Total   Less than 1 year   1-3 years   3-5 years   5+ years 
Bank loans  $565,000   $60,000   $180,000   $325,000   $ 
Bank line of credit   399,919    399,919             
Operating leases   1,311,232    383,746    927,486         
Total  $2,276,151   $783,755   $1,107,486   $325,000   $ 

 

Off-balance Sheet Arrangements

 

NanoHolding has not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. NanoHolding has not entered into any derivative contracts that are indexed to its shares and classified as shareholder’s equity or that are not reflected in NanoHolding’s consolidated financial statements. Furthermore, NanoHolding does not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. NanoHolding do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or engages in leasing, hedging or research and development services with it.

 

Pro Forma Financial Information.

 

The following unaudited combined pro forma balance sheet has been derived from the unaudited consolidated balance sheet of Applied Nanotech Holdings, Inc. and Subsidiaries (the “Company” or “we”) at March 31, 2014, and adjusts such information to give the effect of 1) the conversion of convertible debt and accrued expenses to common shares and 2) the acquisition of Nanoholding Inc. and Subsidiary (“Nanoholding”), as if it would have existed on March 31, 2014.  The unaudited combined pro forma balance sheet gives effect to the anticipated share exchange agreement between the Company, the Company’s debt holders, Nanoholding, and the non-controlling interest of Nanoholding’s subsidiary. Nanoholding is a holding company formed under the laws of Delaware on February 24, 2014. Nanoholding is a majority owner of membership interests in Nanofilm, Ltd. (“Nanofilm”), a company formed under the laws of the Ohio on June 14, 1995 as a limited liability company. Nanofilm develops and markets products based on technology which permits the fabrication of oriented, ultra-thin films of organic or polymeric crystals. The Company also produces a line of personal lens cleaners and accessories. These products are marketed internationally primarily to customers in the eyeglass industry.

 

The following pro forma combined statements of operations for the year ended December 31, 2013 and for the three months ended March 31, 2014 have been derived from the consolidated statement of operations of the Company and Nanoholding. The unaudited pro forma combined balance sheet and unaudited combined statements of operations are presented for informational purposes only and do not purport to be indicative of the combined financial condition that would have resulted if the acquisition would have existed on December 31, 2013 and March 31, 2014.

 

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APPLIED NANOTECH HOLDING, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

March 31, 2014

 

    Applied Nanotech Holdings, Inc. and Subsidiaries     Nanoholding Inc. and Subsidiary              
    March 31,     March 31,     Pro Forma Adjustments     Pro Forma  
    2014     2014     Dr     Cr.     Balances  
    (Unaudited)     (Unaudited)                 (Unaudited)  
ASSETS                                        
CURRENT ASSETS:                                        
Cash and cash equivalents   $ 159,039     $ 230,170     $     $     $ 389,209  
Accounts receivable, net     327,177       1,627,810                   1,954,987  
Accounts receivable - related party           35,517                   35,517  
Inventories           1,387,253                   1,387,253  
Prepaid expenses     78,401       153,752                   232,153  
Total Current Assets     564,617       3,434,502                   3,999,119  
Property and equipment, net     141,692       633,035                   774,727  
Intangible assets                 3,959,074             3,959,074  
Other assets     27,114       37,890                   65,004  
Total Assets   $ 733,423     $ 4,105,427     $ 3,959,074     $     $ 8,797,924  
                                         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                
CURRENT LIABILITIES:                                        
Accounts payable   $ 704,002     $ 344,638     $     $     $ 1,048,640  
Accrued expenses     1,376,981       355,189       1,014,461             717,709  
Current portion of bank term loan           60,000                   60,000  
Bank revolving line of credit           399,919                   399,919  
Convertible notes payable, net     1,823,729             1,823,729              
Income taxes payable     -       47,608       -       -       47,608  
Deposits and deferred revenue     194,355                         194,355  
Total Current Liabilities     4,099,067       1,207,354       2,838,190             2,468,231  
                                         
LONG-TERM LIABILITIES:                                
Accrued compensation - stock appreciation rights Plan A           58,999                   58,999  
Deferred lease incentives           40,628                   40,628  
Equity credits issued           11,373                   11,373  
Bank loans, net of current portion           505,000                   505,000  
Total Liabilities     4,099,067       1,823,354       2,838,190             3,084,231  
                                         
STOCKHOLDERS' EQUITY(DEFICIT):                            
Preferred stock, $1.00 par value, 2,000,000 shares authorized; no shares issued and outstanding                              
Common stock, 160,000,000 shares authorized, $.001 par value, 157,053,526 and shares issued and outstanding, respectively     157,054                   391,680       548,734  
Paid-in capital     118,045,073       197       121,567,771       9,560,670       6,038,169  
Accumulated deficit     (121,567,771 )     (873,210 )           121,567,771       (873,210 )
      (3,365,644 )     (873,013 )     121,567,771       131,520,121       5,713,693  
Non-controlling interest in Nanofilm           3,155,086       3,155,086              
Total Stockholders' Equity (Deficit)     (3,365,644 )     2,282,073       124,722,857       131,520,121       5,713,675  
Total Liabilities and Stockholders' Equity (Deficit)   $ 733,423     $ 4,105,427     $ 127,561,047     $ 131,520,121     $ 8,797,924  

 

See accompanying notes to unaudited pro forma combined financial statements.

 

53
 

 

APPLIED NANOTECH HOLDING, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

 

 

    Applied Nanotech Holdings, Inc. and Subsidiaries     Nanoholding Inc. and Subsidiary              
    For the Three Months Ended
March 31,
    For the Three Months Ended
March 31,
   
Pro Forma Adjustments
     
Pro Forma
 
    2014     2014     Dr     Cr.     Balances  
    (Unaudited)     (Unaudited)                 (Unaudited)  
                                         
SALES   $ 882,432     $ 2,771,411     $        $  - -     $ 3,653,843  
                                         
COST OF SALES           1,450,141                   1,450,141  
                                         
GROSS PROFIT     882,432       1,321,270                   2,203,702  
                                         
OPERATING EXPENSES                                        
Research and development     626,355       146,969                   773,324  
Selling, general and administrative     601,688       848,612                   1,450,300  
                                         
Total Operating Expenses     1,228,043       995,581                   2,223,624  
                                         
INCOME (LOSS) FROM OPERATIONS     (345,611 )     325,689                   (19,922 )
                                         
OTHER INCOME (EXPENSE):                                        
Interest income     30                         30  
Interest expense     (98,454 )     (7,333 )                 (105,787 )
Other           13                   13  
                                         
Total Other Income (Expense)     (98,424 )     (7,320 )                 (105,744 )
                                         
INCOME (LOSS) BEFORE INCOME TAXES     (444,035 )     318,369                   (125,666 )
                                         
Provision for income taxes           (47,608)                   (47,608)  
                                         
NET INCOME (LOSS)   $ (444,035 )   $ 270,761     $     $     $ (173,274 )
                                         
Net loss per common share:                                        
Basic   $                             $  
Diluted   $                             $  
                                         
Weighted average shares outstanding:                                        
Basic     154,425,018                               548,733,000  
Diluted     154,425,018                               548,733,000  

 

See accompanying notes to unaudited pro forma combined financial statements

 

54
 

 

APPLIED NANOTECH HOLDING, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

 

   Applied Nanotech Holdings, Inc. and Subsidiaries   Nanoholding Inc. and Subsidiary         
 
 
 
 
For the Year
Ended December 31,
 
 
 
 
For the Year
Ended December 31,
 
 
 
 
Pro Forma Adjustments  
 
 
 
 
Pro Forma
 
 
   2013   2013   Dr   Cr.   Balances 
                   (Unaudited) 
                     
SALES  $3,918,362   $9,075,348   $   $   $12,993,710 
                          
COST OF SALES       5,644,017            5,644,017 
                          
GROSS PROFIT   3,918,362    3,431,331            7,349,693 
                          
OPERATING EXPENSES                         
Research and development   3,324,195    878,364            4,202,559 
Selling, general and administrative   2,516,236    2,732,895            5,249,131 
                          
Total Operating Expenses   5,840,431    3,611,259            9,451,690 
                          
LOSS FROM OPERATIONS   (1,922,069)   (179,928)           (2,101,997)
                          
OTHER INCOME (EXPENSE):                         
Interest income   3,803    40            3,843 
Interest expense   (1,222,622)   (80,326)           (1,302,948)
Other       41,894            41,894 
                          
Total Other Income (Expense)   (1,218,819)   (38,392)           (1,257,211)
                          
LOSS BEFORE INCOME TAXES   (3,140,888)   (218,320)           (3,359,208)
                          
Provision for income taxes                    
                          
NET LOSS  $(3,140,888)  $(218,320)  $   $   $(3,359,208)
                          
Net income (loss) per common share:                         
Basic  $(0.02)                 $(0.01)
Diluted  $(0.02)                 $(0.01)
                          
Weighted average shares outstanding:                         
Basic   131,744,328                   548,733,000 
Diluted   131,744,328                   548,733,000 

 

See accompanying notes to unaudited pro forma combined financial statements.

 

55
 

 

Notes to Unaudited Pro Forma Combined Financial Statements

 

On March 10, 2014, the Company entered into an Agreement and Plan of Merger and Exchange (the “Merger Agreement”) with Nanoholding and with Carl Zeiss, Inc. (“Zeiss”), the Class Z member of Nanofilm, pursuant to which, subject to the terms and conditions of the Merger Agreement, NanoHolding will merge with and into the Company and become a wholly-owned subsidiary of the Company. Immediately thereafter Zeiss will exchange its interest in Nanofilm for stock in the Company. Upon completion of the Merger, current stockholders of the Company and holders of certain debt convertible into the Company’s common stock are expected to receive approximately 38% of the Company’s outstanding common stock and stockholders of NanoHolding and Zeiss are expected to receive approximately 62% of the Company’s outstanding common stock. Consummation of the Merger is subject to certain conditions, including (i) approval by the holders of at least a majority of the Company’s common stock, (ii) payment or conversion of all of the Company’s debt that is convertible into its equity securities (exclusive of the any securities issued as part of the Bridge Financing), and (iii) the absence of any law restraining, enjoining or prohibiting the Merger. Moreover, each party’s obligation to consummate the Merger and the exchange is subject to certain other conditions including (a) the accuracy of the other parties’ representations and warranties (subject to customary materiality qualifiers) and (b) the other parties’ material compliance with its covenants and agreements contained in the Merger Agreement. The Company intends to treat this transaction as a reverse acquisition using the acquisition method of accounting with the Company as the acquiree for accounting purposes.

 

We have derived the Company’s historical financial data at March 31, 2014 and for the three months ended March 31, 2014 from its unaudited financial statements contained on Form 10-Q as filed with the Securities and Exchange Commission and for the year ended December 31, 2013 from its audited financial statements contained on Form 10-K as filed with the Securities and Exchange Commission.

 

We have derived Nanoholding’s historical consolidated financial statements as of March 31, 2014 and the three months ended March 31, 2014 and for the year ended December 31, 2013 from Nanoholding’s consolidated financial statements contained elsewhere in this proxy statement.

 

The unaudited combined pro forma balance sheet gives effect to the anticipated share exchange agreement between the Company, the Company’s debt holders, Nanoholding, and the non-controlling interest of Nanoholding’s subsidiary and includes the following pro forma adjustments. The pro forma combined statements of operations do not include any adjustment for the amortization of intangible assets as the allocation of the purchase price has not been determined.

 

        Debit       Credit  
1)   To reflect conversion of debt and accrued expenses into approximately 45,210,000 shares of common shares                
  Convertible notes payable, net     1,823,729        
  Accrued expenses     1,014,461        
  Common stock           45,210  
  Paid-in capital           2,792,980  
                   
2) To reflect anticipated share exchange agreement between the Company, Nanoholding, and the non-controlling interest of Nanoholding’s subsidiary                
  Intangible assets     3,959,074        
  Non-controlling interest in Nanofilm     3,155,086        
  Common stock           346,470  
  Paid-in capital           6,767,690  
  Paid-in capital     121,567,771        
  Accumulated deficit           121,567,771  

 

The information presented in the unaudited pro forma combined financial statements does not purport to represent what our financial position or results of operations would have been had the Share Exchange Agreement and all related transactions occurred as of the dates indicated, nor is it indicative of our future combined financial position or combined results of operations for any period. You should not rely on this information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the Share Exchange Agreement and all related transactions.

 

These unaudited pro forma combined financial statements should be read in conjunction with the accompanying notes and assumptions and the historical financial statements and related notes of us and Nanoholding.

 

56
 

 

THE COMBINATION – PROPOSAL 1

 

Background of the Combination

 

Dr. Rickert was contacted by a search firm retained by Applied Nanotech in July 2013 to determine whether he would have any interest in becoming the Chief Executive Officer of Applied Nanotech. He indicated that he would not consider an employment relationship absent a broader business combination. On July 30, Dr. Ronstadt and Dr. Rickert spoke on the phone to explore the concept. Dr. Ronstadt said he would follow up with Dr. Rickert if, after his report to the board at Applied Nanotech, there was interest in exploring a potential transaction.

 

On August 22, 2013, Dr. Rickert and Mr. Vereecken from Nanofilm, Mr. Holmes, from Holmes Hollister & Co, the Nanofilm investment banker (and also a member of the Nanofilm board of managers) spoke in a conference call with Messrs. Ronstadt, Berman, Rocheleau and Westerman, directors of Applied Nanotech. They discussed whether there was mutual interest in setting up a process to determine if the two parties could create a structure to combine their businesses.

 

There was a follow-up call on August 30, in which Dr. Yaniv and Mr. Baker also participated. As a result of these discussions, the parties agreed to start sharing information and signed a mutual non-disclosure agreement.

 

On September 5 and 6, the Nanofilm team visited the Applied Nanotech facilities in Austin, to learn about their operations, technologies and personnel and to provide information to the Applied Nanotech team about Nanofilm.

 

On September 7 Mr. Holmes met with Dr. Ronstadt in New Hampshire to discuss the potential structure and terms for a business combination. A merger in which Applied Nanotech would be the survivor with Nanofilm owners having 75% of the combined company was discussed.

 

On September 12, Mr. Holmes, Mr. Vereecken, John Hollister from Holmes Hollister & Co and Mr. Baker from Applied Nanotech began sharing and discussing financial information about the two businesses.

 

On September 13, during a scheduled weekly call, the parties decided to establish teams at both companies to continue to move forward with discussions and diligence for a potential transaction. Work began on setting up a meeting at the Nanofilm facilities in Valley View, Ohio for diligence and negotiations Messrs. Holmes and Ronstadt met on September 19 to discuss the relative ownership of the combined company.

 

On September 21, Mr. Holmes met with Dr. Ronstadt to review a proposal for a combination that would result in Nanofilm owners owning 66-2/3% and Applied Nanotech shareholders owning 33-1/3% of the combined companies. Applied Nanotech took that under advisement.

 

On September 30, the parties, via conference call, started to discuss how the businesses might be structured after a transaction.

 

A conference call to discuss a variety of issues related to the potential combination was held on September 25. Discussions continued, concerning the ownership split between the two ownership groups, Rickert family control, board membership, potential roles in a combined company for Dr. Yaniv and Mr. Baker, and other concerns of both parties. After negotiations over a draft letter, on October 22 the letter of intent was executed.

 

On October 9 and 10, Messrs. Ronstadt, Baker, Berman, Rocheleau, Westerman, and Dr. Yaniv visited Nanofilm’s offices to learn about its operations, technologies and personnel and for discussions and negotiations with Dr. Rickert, and Messrs. Holmes, Hollister and Vereecken. Dr. Rickert’s role as the Chief Executive Officer of the combined company was discussed, as were proposed financial terms for a combination. Dr. Yaniv indicated a willingness to continue in a research and strategic role, and a willingness for Dr. Rickert to take the lead management role. The parties agreed to begin work on the terms of a letter of intent.

 

 

Conference calls were held on November 1, 11, 15, and 22 to continue discussion of deal terms to be reflected in the transaction agreement, to answer questions related to ongoing diligence and to confirm that diligence was progressing on both sides. The need for additional capital for Applied Nanotech’s continued operations through closing was discussed and Messrs. Holmes and Ronstadt met on the 11th to discuss terms for a potential capital raise that would need to occur before a combination cold occur.

 

On December 3, there was a call to discuss which deferred obligations of Applied Nanotech could be satisfied by converting them to equity and which obligations would need to be satisfied with cash. There was also discussion regarding potential nominees for the board of the combined company and terms of service.

 

57
 

 

On December 11 and 13, the teams met by conference call to discuss financial terms for the combination, potential terms for new capital notes and issues arising from diligence by the parties.

 

On January 4, 2014, Messrs. Ronstadt and Holmes met to discuss terms for the capital notes.

 

On January 8, the teams discussed the status of discussions with Dr. Yaniv regarding new employment arrangements.

 

On January 13, Mr. Berman joined Messrs. Ronstadt and Holmes on a conference call to discuss financial terms and the capital raise.

 

During January and February, regular calls were held weekly and working groups exchanged information and met by phone to develop a model reflecting the information developed in diligence to confirm the financial issues to be addressed. Issues addressed included terms for continued employment for Dr. Yaniv and Mr. Baker, the Zeiss participation in the transaction, the post-closing lock up regarding sale of Applied Nanotech shares for controlling persons, whether Sichuan Yinhee Chemical Co., Ltd would support the transaction, the budget for ongoing operations in Austin, the need for additional capital, use of proceeds from the sale of new notes and the conversion into equity of the outstanding Applied Nanotech debt. The parties also discussed what items needed to be completed as part of the execution of the transaction document, and what would be better accomplished after an agreement was signed.

 

On February 3, the Applied Nanotech merger committee told Nanofilm that the Merger & Exchange Agreement needed to be finalized by mid-February or the transaction was in jeopardy. By mid-February the Merger & Exchange Agreement was being negotiated, while discussions were continuing about the cash needs of the business, the expenses of the Austin operations and the terms for a capital raise. Negotiations continued with Dr. Yaniv regarding new employment arrangements and settlement of his claims for compensation. Negotiations also continued with Mr. Baker regarding the terms for and the timing of his separation from service and a continued consulting role.

 

On February 28 the Applied Nanotech Board met and approved the terms of the transaction, delegating to Dr. Ronstadt the authority to resolve open issues. The parties continued to finalize terms with Dr. Yaniv and Mr. Baker.

 

On March 10 the parties signed the Merger & Exchange Agreement and the Applied Nanotech directors (other than Mr. Li) signed the Voting and Conversion Agreement, and Applied Nanotech signed the agreements with Dr. Yaniv and Mr. Baker. The following week Mr. Li and Sichuan Yinhee Chemical Co., Ltd signed the voting and conversion agreement.

 

During the following weeks the parties agreed on terms for the bridge financing notes that would automatically convert into shares of PEN Class A common stock after the combination occurred, or that could convert into common stock of Applied Nanotech at the option of the holder if additional Applied Nanotech shares were authorized. During that same time period the parties agreed on terms for amendment of the outstanding notes of Applied Nanotech were convertible at a fixed conversion price.

 

On March 25 and 26, Mr. Westerman, Dr. Rickert and Messrs. Holmes and Vereecken held meetings in both Dallas and Austin with Applied Nanotech note holders about the conversion of their notes into equity as part of the combination and about the bridge financing. On March 28, Mr. Rocheleau, Dr. Rickert and Mr. Vereecken met in Richmond with an Applied Nanotech note holder and were joined by conference call by other note holders for similar discussions.

 

On April 2, April 11 and April 23, the teams met by conference call to discuss status and strategy for working with Applied Nanotech note holders regarding conversion of their notes as part of the combination and progress on the bridge financing. Analysis continued as to the cash required to fund operations in Austin through closing and to determine the required transaction costs.

 

On April 25, the parties discussed the status of agreements with various note holders regarding conversion of their notes and the possibility of changing terms for the bridge financing. Over the weekend the Applied Nanotech team circulated proposed new terms for the bridge financing.

 

On April 29, the teams met by conference call and discussed significantly downsizing the bridge financing, continuing with that financing on its original terms, and amending the Merger & Exchange Agreement to allow certain notes of Applied Nanotech to remain outstanding as well as strategy for working with other note holders. Discussions continued with note holders to negotiate their agreements to convert their notes in the combination.

 

On May 5, the teams met by conference call. Dr. Ronstadt reported that all note holders with fixed conversion prices had signed amendments extending the due date of their notes and agreeing to automatic conversion of their notes into shares of PEN Class A common stock at the closing. The parties also determined to reduce the size of the bridge financing to a maximum of $250,000.

 

58
 

 

Recommendation and Reasons for the Combination

 

The Applied Nanotech board unanimously recommends that shareholders vote FOR Proposal 1 to approve the Merger & Exchange Agreement and the combination. .

 

In evaluating the combination and the Merger & Exchange Agreement, the board established a merger committee that consulted with management and the board’s legal advisors. (This is described in more detail in the immediately preceding section The Combination – Proposal 1, Background of the Combination starting at page 57.) In reaching its decision at its meeting on February 28, 2014 to approve the combination, the board considered a variety of factors weighing positively and negatively in respect of the combination. These factors were considered in the context of the board’s ongoing work to provide increased value to the shareholders. The context for making the recommendation in favor of the combination is described first, followed by a summary of the reasons for recommending the combination.

 

Context

 

The Applied Nanotech board decided in the second quarter of 2013 that it would be necessary to make significant adjustments in executive leadership and for Applied Nanotech redirect its focus. In 2012 the cash flow from research contracts that funded our research work fell dramatically. We had hired salespeople to sell products but there was no evidence that their efforts were producing or would produce sufficient revenue in the near term to help support our research programs that were operating at a loss, or to support the staff and expenses necessary to commercialize our technologies. At the same time, management worked independently and with Woodrock & Company, an investment banking firm based in Houston, to raise capital. We and Woodrock & Company were not successful, and we could not continue our research and development work and sales efforts without additional capital. Even after the announcement of the letter of intent in October of 2013 while negotiating the Merger & Exchange Agreement, management continued to work with Woodrock & Company, but no alternative transaction or sources of funding were identified for us to continue independent operations.

 

Also during the May-to-October period, management worked with several companies that had previously licensed technology from us in an attempt to raise additional funds through licensing or the sale of intellectual property. However, those efforts also failed to result in additional funding. At the same time we engaged a search firm to find a new chief executive officer, preferably one with access to capital and experience in the nanotechnology space. With the exception of Scott Rickert and Nanofilm, there were no promising prospects from that effort.

We also realized that the sources of financing and terms for loans available to us in 2013 were different from what we had experienced in the past. In prior years we had been able to obtain funding from individuals by issuing promissory notes convertible into stock of Applied Nanotech at a fixed conversion price, typically at the market price of our stock at the time the loan was made. In 2013, those funds were not forthcoming and management turned to institutions that were willing to loan money in exchange for notes that converted into Applied Nanotech stock based on a conversion price that reflected a discount to the market price at the time of conversion. Continuing to finance on those terms was very expensive from the perspective of our shareholders. The board did not want to continue financing that was both dilutive to our shareholders and depressed our stock price. Furthermore, additional convertible debt financing would not be available to us in the future unless we incurred the expense of a shareholders’ meeting and asked our shareholders to vote for an increase of our authorized number of shares of common stock.

 

Reasons for and against the Combination

 

It was against this background that the Applied Nanotech board evaluated the terms of the proposed combination with NanoHolding and Zeiss. In light of the number and wide variety of factors considered in connection with its evaluation, the Applied Nanotech board did not consider it practicable to, and did not attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its determination. The Applied Nanotech board made its decision based on all of the information available and the factors presented to and considered by it. Individual directors may have given different weight to different factors.

 

The reasons in favor of the combination considered by the Applied Nanotech board include, but are not limited to, the following:

 

·Applied Nanotech shareholders will receive equity consideration in the combination and will have the opportunity to participate in value that PEN can create using the intellectual property of Applied Nanotech. This will allow them, if PEN is successful, to realize value for their investment in Applied Nanotech. Moreover, Dr. Rickert has confirmed that he sees value in the intellectual property that we have in our intellectual property portfolio and he is committed to working to commercialize products from our technology.

 

59
 

 

 

·Nanofilm has commercial products based on its nanotechnology and the board believes the NanoHolding team has both the ability and commitment to bring that experience to commercialize and monetize our technology; this is a growth strategy that the board has tried to implement several times and the one that the board believes will create the highest growth and best opportunity for value. The board believes that the sale or licensing of our technology will not realize the profits that we can achieve if the combined company can develop and sell products using our technology.

 

·The due diligence conducted regarding NanoHolding, its business, assets, financial condition, results of operations and management team, confirmed to the board that NanoHolding will bring a business discipline and focus that utilizes our technology in ways that will enable Applied Nanotech to continue its operations and the commercialization of its intellectual property.

 

·The NanoHolding management team, and the directors from NanoHolding and Zeiss bring business experience to guide the operations as well as merger and acquisition expertise that we do not presently have. By working with that team through the negotiations and since the execution of the Merger & Exchange Agreement , the board believes the NanoHolding team can help PEN accomplish the acquisitions that are part of its business strategy.

 

·The conclusion of the Applied Nanotech board is based on their understanding of the business, assets, financial condition, results of operations, current business strategy, projections and prospects of Applied Nanotech. Our conclusion is that no other alternative available to us was likely to provide greater value to the shareholders than the combination with NanoHolding and Zeiss.

 

·

The review by the Applied Nanotech board with its legal advisor included the structure of the combination, the terms of the Merger & Exchange Agreement, including the parties’ representations, warranties and covenants, the conditions to closing and the termination provisions, as well as the likelihood of consummation of the combination.

The Applied Nanotech board also considered the following specific aspects of the Merger & Exchange Agreement:

 

Øthe closing conditions included in the Merger & Exchange Agreement , including the exceptions to the events that would constitute a material adverse effect with respect to Applied Nanotech or NanoHolding for purposes of the Merger & Exchange Agreement , as well as the likelihood of satisfaction of all conditions to the closing of the combination;

 

Øthe conditions related to payment or conversion of our debt into equity as part of the combination that will strengthen the combined company for future operations;

 

Øthe provisions regarding the bridge financing to help us to pay off debt, fund operations and pay transaction expenses as well as the controls over expenditures that will also strengthen the combined company, and better position us if the combination does not occur; and

 

Øcertain other provisions in the Merger & Exchange Agreement, including the termination provisions. and

 

The Applied Nanotech board considered the following factors relating to the procedural safeguards that the Applied Nanotech board believed were present to ensure the fairness of the combination to Applied Nanotech shareholders:

 

  the exchange ratio and post-closing ownership of PEN by former shareholders of Applied Nanotech and the owners of NanoHolding, and the other terms and conditions of the Merger & Exchange Agreement  resulted from extensive negotiations between the merger committee of our board and its advisors, on the one hand, and NanoHolding’s leadership and its advisors, on the other hand;
     
  the fact that the Applied Nanotech board was actively involved in the Company’s strategic process for many months;
     
  the ability of the Applied Nanotech shareholders who comply with the required procedures under Texas law to seek appraisal of the “fair value” of the shares;
     
  the independent members of the Applied Nanotech board, without members of management, met in executive session to consider the terms of the Merger & Exchange Agreement  and the combination.

 

60
 

 

The Applied Nanotech board considered the following factors to be generally negative or unfavorable in its deliberations and making its recommendations:

 

  the risk that the proposed combination might not be completed in a timely manner or at all;
     
  the risks and costs to Applied Nanotech if the combination does not close, including the diversion of management and employee attention;
     
  the fact that the exchange ratio is not adjusted based on changes in our value or stock price, or changes in the value of NanoHolding or Nanofilm,  and the lack of a collar or other mechanism to mitigate that risk;
     
  the transaction costs to be incurred in connection with the combination; and
     
  the fact that if the proposed combination is not completed, Applied Nanotech will be required to pay its own expenses associated with the negotiation of the Merger & Exchange Agreement , and the transactions contemplated thereby; the business and execution risk associated with the PEN business strategy after the combination is completed.

 

The Applied Nanotech board believed and continues to believe that these potential risks and drawbacks are outweighed by the potential benefits that our shareholders may realize as a result of the combination.

 

During its consideration of the combination described above, the Applied Nanotech board was also aware that certain of its directors and executive officers may have interests in the combination that are different from, in addition to or in conflict with, those of Applied Nanotech shareholders generally, as described in the section entitled The Combination – Proposal 1, Interests of Applied Nanotech’s Directors and Executive Officers in the Combination beginning on page 74.

 

The Merger & Exchange Agreement

 

The following is a summary of the material terms of the Merger & Exchange Agreement A copy of the Merger & Exchange Agreement is attached as Annex A to this proxy statement and the amendments to that agreement are attached as Annex C and Annex D, all of which are incorporated by reference into this proxy statement. All references to the Merger & Exchange Agreement in this proxy statement refer to the agreement as amended. The Merger & Exchange Agreement has been attached to this proxy statement to provide you with information regarding its terms. The summary of the material terms of the Merger & Exchange Agreement below and elsewhere in this proxy statement are qualified in its entirety by reference to the Merger & Exchange Agreement. This summary may not contain all of the information about the Merger & Exchange Agreement that is important to you. We urge you to read carefully the Merger & Exchange Agreement in its entirety as it is the legal document governing the merger.

 

Form of the Combination: the Mergers & Exchange

 

The Merger & Exchange Agreement sets out a combination that involves three parts. The three parts are all interdependent, and if one is closed, all will close. Similarly, if one part is not closed, none of the three will close.

 

The first part of the combination is the Redomestication Merger. Subject to the terms and conditions of the Merger & Exchange Agreement, Applied Nanotech will merge into PEN Inc., a Delaware corporation and wholly-owned subsidiary of Applied Nanotech that was formed by Applied Nanotech for purposes of the merger. The Merger & Exchange Agreement provides that upon the consummation of the Redomestication Merger the separate existence of Applied Nanotech will cease. PEN will continue as the surviving corporation and will be the parent of the companies that are now subsidiaries of Applied Nanotech.

 

The second part of the combination is the Nano Merger. Subject to the terms and conditions of the Merger & Exchange Agreement, after the Redomestication Merger, NanoMerger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Applied Nanotech also called acquisition subsidiary and formed by Applied Nanotech for purposes of the merger, will merge with NanoHolding. Acquisition subsidiary will be the survivor in the Nano Merger and will change its name to Nanofilm Holding Inc. The Merger & Exchange Agreement provides that upon the consummation of the Nano Merger the separate existence of NanoHolding will cease. Acquisition subsidiary, under its new name, will continue as a subsidiary of PEN.

 

The third and final part of the combination is the Exchange with Zeiss. Subject to the terms and conditions of the Merger & Exchange Agreement, after the Nano Merger, Zeiss will exchange its ownership interest in Nanofilm for shares of PEN Class Z common stock.

 

After completion of the combination, PEN expects its Class A common stock to trade on the OTCQB and will apply for a new trading symbol to reflect the name of the corporation.

 

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Effective Time of the Combination

 

The Merger & Exchange Agreement requires the parties to consummate the combination after all of the conditions in the Merger & Exchange Agreement are satisfied or waived, including the approval of the Merger & Exchange Agreement by the shareholders of Applied Nanotech. The Redomestication Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware and the Secretary of State of Texas or at such later time as is agreed by Applied Nanotech and NanoHolding and specified in the certificate of merger. The Nano Merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such later time as is agreed by Applied Nanotech and NanoHolding and specified in the certificate of merger. The Zeiss exchange will take place immediately after the Nano Merger becomes effective.

 

Neither Applied Nanotech nor NanoHolding can predict the exact timing of the consummation of the combination. They intend that the closing occur shortly after the approval of the Merger & Exchange Agreement by the shareholders of Applied Nanotech.

 

Consideration to Applied Nanotech Shareholders

 

At the effective time of the Redomestication Merger:

 

·any shares of Applied Nanotech common stock held as treasury stock or held or owned by Applied Nanotech or any of its subsidiaries or acquisition subsidiary will be cancelled and cease to exist and no consideration will be delivered in exchange therefor;

 

·additional shares of PEN Class A common stock will be issued or reserved as follows:

 

·to satisfy convertible notes of Applied Nanotech with a fixed conversion price that will automatically convert at the time of the closing;

 

·to satisfy accrued director fees owed to present and former Applied Nanotech directors in the amount of $193,908 (through March 31), and the special merger fee owed to members of the merger committee of the board aggregating $353,700.

 

·to pay in full the promissory note issued to our former Chief Financial Officer and to reserve shares to be issued to him under his stock grant agreement;

 

·for shares to be issued at the closing under a restricted stock agreement with Dr. Yaniv, the current Chief Operating Officer and President of Applied Nanotech; and

 

·each share of Applied Nanotech common stock (excluding shares to be cancelled as described above and shares which are held by Applied Nanotech shareholders who have exercised and not lost appraisal rights or dissenters' rights for such shares in accordance with the DGCL or TBOC, if and to the extent applicable) will be converted solely into one share of PEN Class A common stock.

 

These shares issued or reserved for issuance will represent approximately 38% of the PEN shares of common stock after the combination has been completed, and they will represent 0.8% of the voting power of the PEN common stock.

 

Consideration to Stockholders of NanoHolding and to Zeiss

 

·In the Nano Merger, any shares of NanoHolding common stock held as treasury stock or held or owned by NanoHolding or any of its subsidiaries will be cancelled and cease to exist and no consideration will be delivered in exchange therefor; and

 

·each share of NanoHolding common stock (excluding shares to be cancelled as described above ) will be converted into that number of shares equal to one multiplied by the exchange ratio, with holders of Class A common stock of NanoHolding receiving Class A common stock of PEN and Rickert Family, Limited Partnership, as the only holder of NanoHolding Class B common stock, receiving Class B common stock of PEN.

 

·In the Exchange, Zeiss will deliver to PEN its Class Z membership units in Nanofilm for that number of shares of Class Z common stock of PEN equal to the number of Class Z membership units, multiplied by the exchange ratio.

 

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The "exchange ratio" means (1) shares outstanding at the time of the Redomestication Merger, plus those reserved as described immediately above, plus any other shares reserved to satisfy any other obligations of Applied Nanotech to issue its shares, but excluding both (a) options to purchase 5,887,714 shares of Applied Nanotech common stock, and (b) shares issuable on the conversion of the capital notes issued in the bridge financing, multiplied by (2) 1.6316, divided by (3) the number of membership units in Nanofilm.

 

No fractional shares of PEN common stock will be issuable pursuant to the Nano Merger to NanoHolding stockholders or to Zeiss in the Exchange. Instead, each person who would otherwise be entitled to receive a fraction of a share of PEN common stock, after aggregating all fractional shares of PEN common stock issuable to that stockholder, will be entitled to receive one additional share of PEN common stock.

 

After the Nano Merger and the Exchange, the former stockholders of NanoHolding and Zeiss will own approximately 62% of the common stock of PEN. The Class Z common stock owned by Zeiss is, generally, non-voting but has certain rights described below, including the right to designate a director to serve on the PEN board of directors and the right to convert into Class A common stock at any time. The Class Z common stock also has anti-dilutive rights that, subject to limited exceptions, permit a Class Z holder to purchase on the same terms as are offered to third-parties additional shares or equity rights issued by PEN for the Class Z holder to maintain its economic ownership percentage. The holders of Class Z common stock are also entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent. Zeiss will own approximately 9% of PEN. The stockholders of NanoHolding other than Rickert Family, Limited Partnership will own Class A common stock representing approximately 0.1% of the voting power of the common stock of PEN. Rickert Family, Limited Partnership will own approximately 48% of the common stock of PEN and its Class B common stock will represent approximately 99% of the voting power of the common stock. The Class B common stock will also be convertible into Class A common stock at any time upon the election of the holders thereof.

 

Future Dilution from Bridge Financing, Stock Options and Other Equity Issuances

 

After signing the Merger & Exchange Agreement, Applied Nanotech privately placed convertible debt securities in an offering we refer to as the bridge financing. As a result of the bridge financing, all stockholders of PEN including former shareholders of Applied Nanotech, former stockholders of NanoHolding and Zeiss, will be subject to future dilution when those notes are automatically converted into PEN common stock. Conversion of the notes issued in the bridge financing will occur on the later of (i) the day that is 180 days after the date the note is issued, (ii) the day that is 60 days after the closing under the Merger & Exchange Agreement, or (iii) October 15, 2014. The conversion price for mandatory conversion is 75% of the average closing price for Class A common stock of PEN for the twenty trading days immediately preceding the conversion date. All the notes sold in the bridge financing will convert into Class A common stock of PEN except for $20,000 in principal amount that were purchased by Scott Rickert and Jeanne Rickert that will convert into Class B common stock of PEN.

 

All PEN stockholders will also be diluted by any future exercise of the 5,887,714 options to purchase common stock of Applied Nanotech that are outstanding. In the Redomestication Merger, those options become options to purchase PEN Class A common stock; all other terms, including exercise price and expiration date, remain unchanged. From and after the effective time of the combination each option assumed by PEN may be exercised solely for shares of PEN Class A common stock. Any restriction on the exercise of any option assumed by PEN will continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such option will otherwise remain unchanged. If all the options were exercised before they expire, the dilution would be 0.2% of the shares that are expected to be issued or reserved in the combination.

 

In addition, as part of the Nano Merger, PEN will assume obligations under the equity credit and stock appreciation rights programs of Nanofilm. Equity credits can be exercised for one membership unit in Nanofilm. Under the exchange ratio, that would entitle each equity credit to approximately 150 shares of PEN Class A common stock. There are an aggregate of 160,150 equity credits that could be exercised. The stock appreciation rights entitle holders to purchase shares of PEN Class A common stock in its first registered offering of common stock. Under the stock appreciation rights plan, The 235,782 stock appreciation rights outstanding represent 1.18% of Nanofilm. After the combination, the outstanding stock appreciation rights will represent 0.73% of PEN. The stock appreciation rights will be satisfied at the time of the first initial public offering as defined in the plan. Under the plan, at the time of the initial public offering, the value of the stock appreciation rights will be stated as a dollar amount based on the pricing of the PEN Class A common stock in the offering and 70% of that value will be used to purchase shares in the offering and the other 30% will be paid in cash to the holders of the stock appreciation rights. Their value will be subject to any dilution for stock issuances that occur after the closing of the combination and before the initial public offering.

 

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Security   Potential Date of Issuance (i)   Market Price 6/27/14     Dilution Formula   Remaining Debt interest thru 6/30/14     Price Per Share     Underlying Shares
(thousands)
 
PEN Class A Common Stock Authorized                                     1,300,000  
Applied Nanotech Common Stock (ii)   Now outstanding           Each APNT share outstanding converts into one share in redomestication merger.                     157,554  
Fixed Convertible Notes (iii)
 
 
  Closing
 
 
          Based on accrued interest through closing date at interest rate of 8.0% annually; conversion to stock at either $0.05, $0.08 or $0.10.   $
$
$
979,210
41,537
1,146,723
    $
$
$
0.05
0.08
0.10
      19,584
519
11,467
 
Variable Convertible Notes                                        
JMJ Financial   Any time   $ 0.0524     Note converts based on lesser of $0.25 or 70% of market price. Example shown based on 6/27/14 closing share price of $0.0524.   $ 22,704     $ 0.037       619  
Chief Financial Officer Promissory Note   Closing               $ 75,000     $ 0.05       1,500  
Chief Financial
Officer Stock
Grant Agreement
 

9/1/14

Closing + 180 days

1/31/15

                                1,200
1,200
890 
 
Chief Operating Officer
Restricted Stock
Agreement (iv)
 
 
 
  Date > 180 days
after Closing Date;
expires Closing + 5 yrs.
          When average stock price reaches
price threshold during
measurement period.
  
 
          $
$
$
$
$
$
0.10
0.15
0.20
0.25
0.30
0.35
      1,000
1,000
1,000
1,000
1,000
1,800
 
Accrued Director Fees (v)   Closing               $ 205,316     $ 0.05       4,106  
Special Committee Fees   Closing               $ 353,700     $ 0.05       7,074  
To NanoHolding Class A shareholders (vi)   Closing Date                                 29,462  
To NanoHolding Class B shareholders (vi)   Closing Date           Shares of Class B/Z common issued at closing require reserve of equivalent number of Class A common for conversion of Class B/Z shares. Class B/Z can be converted at any time at holder's                     266,935  
To NanoHolding Class Z shareholder (vi)   Closing Date           option; are subject to mandatory conversion under certain circumstances.                     50,335  
Variable Convertible Notes from Bridge Financing   Later of 180 days after the date the Note is issued or 60 days after closing or 10/15/14.   $ 0.0524     Note converts based on 75% of market price; interest compounds at 8.0%. Example shown is estimated amount of Bridge Financing at 6/27/14 market close of $0.0524.   $ 100,000     $ 0.039       2,545  
Options   various           See Options Table                     5,888  
Equity Credits   Registered public offering                                 5,258  
Stock Appreciation Rights (SAR's)   Registered public offering           70% payable in stock; cash payment not reflected                     2,865  
Remaining authorized shares available                                     724,198  

 

 

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Footnotes on above table:

(i) First date convertible notes are convertible, restricted stock is non-forfeitable, options are exercisable, etc.
(ii) Based on shares outstanding on record date.
(iii) Holder also has option to convert if combination does not occur after Applied Nanotech has sufficient authorized shares.
(iv) All shares will become non-forfeitable upon a change of control of PEN or the death of Dr. Yaniv, regardless of whether price thresholds have been met.
(v) Includes present and former directors.
(vi)

Shares issued at closing will be based on actual shares outstanding or saved for issuance in calculating the exchange ratio under the merger & exchange agreement.

 

Assuming all these shares are issued, and after reserving Class A common stock for potential conversion of the Class B and Class Z common stock, PEN will still have approximately 724,000 shares of Class A common stock available for issuance. The PEN business plan contemplates that PEN will make acquisitions. PEN may use shares of its Class A common stock as currency to pay for all or part of one or more acquisition and PEN may also issue shares in public or private placements to provide cash to fund its operations or to pay, in whole or in part, for one or more acquisitions. Holders of PEN Class A common stock will be diluted by future equity issuances authorized by the PEN board of directors.

 

PEN also has two million shares of preferred stock authorized. The PEN board has the power to set the terms of different series of preferred stock, including dividends rights, liquidation rights and preferences, and voting rights, among other terms. The rights of common stockholders would be junior to the rights of any preferred stock that the board would decide to issue and the ownership represented by the common stock will be diluted by any preferred stock that is issued.

 

No Market Price Adjustment to Consideration

  

The Merger & Exchange Agreement does not include a price-based termination right. Moreover, there will be no adjustment to the total number of shares of PEN common stock to be issued to Applied Nanotech stockholders in the Redomestication Merger, to the stockholders of NanoHolding in the Nano Merger or to Zeiss in the Exchange based on changes to the market price of Applied Nanotech common stock, the value of NanoHolding or the interests in Nanofilm. Accordingly, the market value of the shares of PEN common stock issued under the Merger & Exchange Agreement will depend on the market value of the shares of Applied Nanotech common stock at the time the merger closes, and could vary significantly from the market value on the date of this proxy statement.

 

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Certificates for Applied Nanotech Common Stock

 

At the effective time of the Redomestication Merger, holders of certificates representing shares of our common stock that were outstanding immediately prior to the effective time of the Redomestication Merger will cease to have any rights as shareholders of Applied Nanotech. From and after the effective time of the Redomestication Merger, each Applied Nanotech stock certificate will represent only the right to receive shares of PEN Class A common stock.

 

No certificates for PEN Shares will be issued as a result of the Redomestication Merger, and no holder of record of any Applied Nanotech certificates will be required to surrender any certificate for cancellation to PEN or its transfer agent in exchange for a certificate representing PEN shares, The registered owner on the books and records of Applied Nanotech or its transfer agent will continue as the registered owner on the books and records of PEN or its transfer agent and, as such, will have and be entitled to exercise any voting and other rights with respect to and to receive any dividend and other distributions upon the PEN Shares.

 

After the Redomestication Merger effective time, a holder of Applied Nanotech certificates may surrender certificates for cancellation. If there has been a transfer of ownership that is not registered on the transfer records, an instrument reflecting the transfer may be issued to the transferee if the certificate is presented to PEN or its transfer agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid.

 

If any Applied Nanotech certificate has been lost, stolen or destroyed, PEN or its transfer agent will issue documents evidencing ownership only after the owner makes an affidavit of the loss, theft or destruction. PEN may, in its discretion and as a condition precedent to the issuance of documents (or entry on the register of shareholders, as the case may be), require the owner of such lost, stolen or destroyed Applied Nanotech certificates to deliver a bond or indemnity in such sum as it may reasonably direct as indemnity against any claim that may be made against PEN with respect to the Applied Nanotech certificates so alleged to have been lost, stolen or destroyed.

 

Regulatory Approvals

 

Neither Applied Nanotech nor NanoHolding is required to make any filings or to obtain approvals or clearances from any antitrust regulatory authorities to consummate the merger. In the United States, Applied Nanotech must comply with applicable federal and state securities laws in connection with the issuance of shares of PEN common stock in the merger, including the filing with the SEC of this proxy statement.

 

OTCQB Trading

 

Applied Nanotech's common stock currently is traded on the OTCQB operated by the OTC Market’s Group under the symbol "APNT". We intend that PEN will continue to trade on the OTCQB and will apply for a new trading symbol reflecting the PEN name.

 

Appraisal Rights

 

Holders of Applied Nanotech common stock are entitled to appraisal rights or dissenters' rights in connection with the merger. These rights, and the procedures to be followed to claim these rights, are set forth in the section The Combination – Proposal 1, Dissenters Rights of Applied Nanotech Shareholders that starts on page 84.

 

Amendments to Certificate of Incorporation and Bylaws

 

At the effective time of the Redomestication Merger, the amended and restated certificate of incorporation of PEN attached as Exhibit B-1 to the amendment to the Merger & Exchange Agreement will be the certificate of incorporation governing the rights of stockholders in PEN. The parties chose Delaware as the jurisdiction of incorporation rather than Texas because investors and participants in the capital markets are more familiar with Delaware corporate law and because the case law interpreting the DGCL is more extensive, providing more guidance to stockholders and companies.

 

PEN, like Applied Nanotech, will have authorized shares of preferred stock that can be authorized for issuance by the board. The PEN certificate, like that of Applied Nanotech, permits the board to set the terms of different series of preferred stock, including their dividends rights, liquidation rights and preferences and voting rights, among other terms. The rights of common stockholders would be junior to the rights of any preferred stock that the board would decide to issue. Series preferred stock can provide financing options to PEN.

 

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While Applied Nanotech has only one class of common stock, PEN will have three classes of common stock. The terms of those three classes recreate the rights held by the Class A, Class B and Class Z unit holders in Nanofilm, and in the Class A and Class B common stock of NanoHolding. The stockholders of NanoHolding and Zeiss required that those rights be preserved in the PEN capital structure as part of the terms of the combination.         

 

The PEN certificate of incorporation also has a larger number of authorized shares than are required to complete the combination. The balance of the authorized number of PEN shares, less those reserved or otherwise subject to issuance commitment, will be available for issuance without stockholder approval (unless approval is otherwise required by applicable law, regulation, agreement or other arrangements).

 

In addition, at the effective time of the Redomestication Merger, the Bylaws of PEN will be amended and restated in its entirety to read identically to the Bylaws as set forth in Exhibit B-2 of the amendment to the Merger & Exchange Agreement.

 

A chart comparing your rights as a common shareholder of Applied Nanotech with your rights as a holder of PEN Class A common Stock can be found in the section The Combination – Proposal 1, Comparison of Shareholder’s Rights that starts on page 77.

 

Conditions to the Completion of the Combination

 

Applied Nanotech and NanoHolding are each obligated to complete the combination only if certain conditions are satisfied or, to the extent permitted by applicable law, waived in writing by each of them, at or prior to the combination, which include the following:

 

·All representations and warranties of the other party in the Merger & Exchange Agreement must be true and correct on the closing date of the combination, when read without any qualifications relating to “materiality,” or “Material Adverse Effect”, except in each case where the failure to be true and correct has not had, and would not reasonably be expected to have, a material adverse effect on the party making the representations and warranties;

 

·Each of the parties shall have performed and complied in all material respects with all covenants and agreements required by the Merger & Exchange Agreement to be performed by it prior to the closing;

 

·No action, suit or proceeding shall have been instituted before any court or governmental or regulatory body or instituted by any governmental authority to restrain, modify or prevent the carrying out of the combination, to seek material damages or a discovery order in connection with the combination, and there shall exist no injunction or other order issued by any governmental authority or court of competent jurisdiction which prohibits the consummation of any part of the combination;

 

·There shall not have been any occurrence, event, incident, action, failure to act, or transaction since September 30, 2013 which has had or is reasonably likely to cause a “material adverse effect” on Applied Nanotech or NanoHolding;

 

·Shareholders of Applied Nanotech must have approved the Merger & Exchange Agreement and the combination; and

 

·Applied Nanotech and NanoHolding shall have timely obtained from each governmental authority all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger & Exchange Agreement and the combination.

 

“Material adverse effect means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business, operations or results of operations of either party (together with its subsidiaries, taken as a whole). However, material adverse effect does not include events caused by (A) changes in general economic conditions or capital or credit markets, except to the extent that the same disproportionately impact either party as compared to other others similarly situated; (B) changes to the economic conditions affecting the industries in which a party operates, except to the extent that the same disproportionately impact either party as compared to others in its industry; (C) changes related to or arising from the execution, announcement or performance of, or compliance with, the Merger & Exchange Agreement or the consummation of the combination; (D) changes in accounting requirements or principles or any change in applicable legal requirements or the interpretation thereof; (E) the failure to meet any projections.

 

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In addition, NanoHolding’s obligation to complete the Nano Merger is further subject to confirmation that Applied Nanotech has met the conditions under the Merger & Exchange Agreement including the following:

 

·Applied Nanotech shall have filed all reports and other documents required to be filed by it under the U.S. federal securities laws through the closing;

 

·Applied Nanotech will have closed on the bridge financing and applied the proceeds as the parties mutually agree;

 

·Applied Nanotech has followed in all material respects the revised operating budget from March 10, 2014 until the closing with only those changes to the budget, if any, that were approved by NanoHolding; and

 

·all debts or other obligations of Applied Nanotech which are convertible into equity securities of Applied Nanotech that are outstanding on the closing date (other than any securities issued as part of the Bridge Financing) have been paid in full or converted into Applied Nanotech stock.

 

Finally, each party must have delivered and received certain certificates and other documents required under the Merger & Exchange Agreement for the closing of the merger, including, without limitation, certificates of good standing and written resignations executed by the other party's directors and officers who will not be officers or directors of the combined company upon the closing of the combination.

  

No Solicitation by Applied Nanotech

 

Under the Merger & Exchange Agreement, except as described below, Applied Nanotech will not take, and will not authorize or permit any investment banker, financial advisor, attorney, accountant or other person retained by or acting for or on behalf of Applied Nanotech, directly or indirectly, to take:

 

(i)any action to initiate, assist, solicit, negotiate, or encourage any offer, inquiry or proposal from any person relating to any acquisition of that person or Applied Nanotech (regardless of the structure of any such acquisition) or

 

(ii)any other action that has the primary effect of avoiding the closing under the Merger & Exchange Agreement .

 

The Merger & Exchange Agreement allows the board of directors of Applied Nanotech to engage in discussions with any person who has made an unsolicited bona fide written proposal relating to an acquisition if the board determines in good faith that the proposal is, or could reasonably be expected to result in, a “superior proposal.” The discussions that are allowed under the Merger & Exchange Agreement may not limit, affect or impair the enforceability of the Merger & Exchange Agreement against Applied Nanotech prior to the termination of Merger & Exchange Agreement. A “superior proposal” is any bona fide (i) proposal or offer for a merger, consolidation, dissolution, recapitalization or other business combination involving Applied Nanotech, (ii) proposal for the issuance by Applied Nanotech of over 50% of its common stock as consideration for the assets or securities of another person or (iii) proposal or offer (including a merger, tender offer or exchange offer) to acquire in any manner, directly or indirectly, over 50% of the common stock or consolidated total assets of Applied Nanotech, made by a third party that the Applied Nanotech board or any committee thereof determines in its reasonable judgment (after consultation with financial advisors) to be more favorable to holders of Applied Nanotech common stock than the combination.

 

Applied Nanotech is required promptly to notify NanoHolding if Applied Nanotech receives any proposal or inquiry regarding a transaction that would be a superior proposal and provide NanoHolding with the significant terms and conditions of the proposal including the identity of the party making the proposal.

 

Meeting of Applied Nanotech's Stockholders and NanoHolding Stockholder Approval

 

Applied Nanotech is obligated under the Merger & Exchange Agreement to call, give notice of and hold a meeting of its shareholders to vote on the Merger & Exchange Agreement. In connection with the Stockholders’ Meeting, APNT (a) will use commercially reasonable efforts to file with the SEC as promptly as practicable the Proxy Statement, which shall serve as a proxy statement pursuant to Section 14(a), Regulation 14A, and Schedule 14A under the Exchange Act and all other proxy materials for such meeting, (b) upon receipt of approval from the SEC, will mail to its stockholders the Proxy Statement and other proxy materials, (c) will use commercially reasonable efforts to obtain the necessary approvals by its stockholders of this Agreement and the Transactions contemplated hereby under applicable Legal Requirements (the “Stockholder Approval”), and (d) will otherwise comply with all Legal Requirements applicable to the Stockholders’ Meeting.

 

NanoHolding is obligated under the Merger & Exchange Agreement to obtain its stockholders’ approval of the Merger & Exchange Agreement. On May 28, 2014, NanoHolding obtained written consents of its stockholders sufficient to adopt the Merger & Exchange Agreement and approve the combination.

 

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Directors and Officers Following the Combination

 

After the combination, PEN will initially have a seven member board of directors. The initial directors of PEN will be three continuing directors of Applied Nanotech: Ronald J. Berman, Dr. Robert Ronstadt and Howard Westerman; and four individuals nominated by NanoHolding: Douglas Q. Holmes, Jeanne M. Rickert, Scott E. Rickert, and James Sharp. Mr. Sharp is the Zeiss designee. Each of these will serve until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal. In addition, until one year after the closing, PEN will permit a board observer to attend all meetings of the PEN board of directors in a nonvoting, observer capacity. That observer is another current director of Applied Nanotech, Paul Rocheleau. Subject to certain limitations, the observer is entitled to attend all PEN board meetings and to receive the information PEN provides to its directors.

 

Dr. Robert Ronstadt has been a director since January 2003, and Chairman of the Board since May 2009. Currently he is the co-owner of “The Journal of Print World, a newspaper devoted to works of fine art on paper. As an author, he has written a number of books and articles over the last six years on the high cost of higher education. He holds a doctorate in international business and the management of technology. Prior to retiring in 2006, Dr. Ronstadt was Vice President of Technology Commercialization for Boston University and Director of Boston University’s Technology Commercialization Institute. For seven years, he was CEO and Chairman of Lord Publishing, Inc., a small privately held software and book publishing company, which he cofounded. He's also held senior academic and administrative positions at the University of Texas in Austin where he was Director of IC 2 Institute and the J. Marion West Chair of Constructive Capitalism; at Pepperdine University where he was professor of entrepreneurship; and at Babson College in Wellesley Massachusetts where he was a tenured associate professor and recipient of the Leavey Award for Excellence in Private Enterprise Education. Mr. Ronstadt is 72 years old.

 

Ronald J. Berman has been a director since May 1996. After graduating law school with honors, Mr. Berman went into the private practice of law from 1980-1987. Mr. Berman co-founded Rock Financial (now Quicken Loans) in 1985 and was a member of its Board of Directors. Mr. Berman cofounded BEG Enterprises and served as its President from 1989 to 1998. Mr. Berman is currently President of R.J. Berman Enterprises, Ltd., a real estate investment company, and practicing law as a sole practitioner. Mr. Berman is a licensed attorney in both the states of Michigan and Florida. Mr. Berman filed for personal bankruptcy in 2011. He is 57 years old.

 

Howard Westerman has been a director since 2007. He is the Chief Executive Officer of JW Energy Company, a privately held energy development and energy services company headquartered in Dallas, Texas. Mr. Westerman joined JW Energy Company in 1978 and became CEO in 1999. Under his leadership as CEO, the JW Energy Company’s revenues increased from approximately $70 million to $1 billion. Mr. Westerman is also a member of the Board of Directors of Peerless Manufacturing Company, a global provider of environmental and separation filtration products, listed on the NASDAQ Global Market Exchange. Mr. Westerman is 61 years old and serves on numerous charitable and community boards.

 

Mr. Holmes is a nominee for the PEN board. He is also an investment banker and Member of Holmes Hollister & Co., having offices in Cleveland and New York City. Mr. Holmes has been an investment banker since 1978.  He has been an investment banker in New York and Chicago for Lazard Freres & Co., The First Boston Corporation and Kidder, Peabody & Co. before starting two private investment banks, Carleton McCreary Holmes & Co., which was merged with Key Corp., and subsequently, Holmes Hollister & Co.  Mr. Holmes has been a founding partner of a private equity firm, Full Circle Investments, and a mezzanine fund, Key Mezzanine Partners, and has been a principal and board member in several companies as a financial investor. Mr. Holmes has a wide range of merger and acquisition experience, advising both domestic and international corporations on both buying and selling companies, structuring joint ventures, providing fairness opinions and starting new businesses.  His corporate finance experience includes public equity and debt offerings, structuring new asset based securities with complex tax structures and privately placing all forms of capital.  Industry experience includes automotive/truck, specialty materials, consumer, healthcare, and natural resources.  Mr. Holmes received a B.A. from Kenyon College and an M.B.A. from Tuck at Dartmouth College. He is 56 years old.

 

Jeanne Rickert is a nominee for the PEN board. She has served as the General Counsel of Nanofilm since January, 2014. Before that she was a lawyer with the Cleveland office of the international law firm of Jones Day, as Of Counsel in 2013, and as a partner of the firm for the 25 preceding years. Her practice focused on mergers and acquisitions, joint ventures and general corporate and commercial matters. Her undergraduate degree is from Cornell University and her law degree from Case Western Reserve University. She is 61 years old and married to Dr. Rickert.

 

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Scott Rickert is the Chief Executive Officer of Nanofilm and of NanoHolding, and a nominee for the PEN board. He founded Nanofilm in 1985, leaving a tenured position as a professor of Macromolecular Science to start his business career. He has a B.S. Chem E. from Cornell University and an M.S. and PhD. From Case Western Reserve University. He did post-doctoral work at the University of Pennsylvania. He is 61 years old and he is married to Jeanne Rickert.

 

James Sharp is the initial Zeiss designee to the PEN board. He is President and CEO of Zeiss and he is also President of Carl Zeiss Microscopy. Mr. Sharp began his career 40 years ago as a Zeiss service technician with an undergraduate degree in electrical engineering. Mr. Sharp has served Zeiss in North America as well as in Germany, supervising operations in both light and electron microscopy. Over the years he has held a number of regional and national managerial positions, becoming President of the Microscope Division in 1991. After spending four years at Carl Zeiss Jena GmbH in Germany as Senior Vice President and General Manager of the Microscopy Business Unit, Mr. Sharp returned to the U.S. as head of Carl Zeiss MicroImaging. He is currently a board member of Nanofilm, and a trustee of the Marine Biological Laboratories. He also serves on the board of several Carl Zeiss companies. Mr. Sharp is 59 years old.

 

The observer, Paul F. Rocheleau has served as a director of Applied Nanotech since May 2009, and as Vice Chairman of the Board since October 2009. He is Chairman of the Board and Chief Investment Officer of Virginia Life Science Investments, LLC. Prior to that he was a managing director at Cary Street Partners, a regional investment banking firm based in Richmond, Virginia. Mr. Rocheleau also serves on the Board of Directors of four specialty materials and medical device companies, and the advisory Board of Apex Systems, an IT staffing company. He is 60 years old.

 

After the combination, the officers of PEN will be:

 

Name   Position with the Combined Company   Current Position
Scott E Rickert, PhD.   

Chairman of the Board,

Chief Executive Officer

 

 

Chief Executive Officer of NanoHolding & Nanofilm

 

Bruce Vereecken   Chief Financial Officer  

Chief Financial Officer of NanoHolding & Nanofilm

 

Jeanne M Rickert   

Chief Legal Officer,

General Counsel

 

General Counsel of NanoHolding & Nanofilm

 

 

Officers and Directors Insurance for Applied Nanotech Board

 

The Merger & Exchange Agreement provides that, for a period of at least one year after the effective time of the merger, PEN will maintain a directors' and officers' liability insurance policy, with coverage containing terms and conditions at least as favorable as the coverage under the presently existing policies maintained by Applied Nanotech. PEN is not, however, required to pay for this insurance coverage more than an amount equal to the current premiums paid by Applied Nanotech for its existing policy.

 

Covenants; Conduct of Business Pending the Combination

 

During the period commencing on March 10, 2014 and ending at the earlier of the date of termination of the Merger & Exchange Agreement and the effective time of the merger, NanoHolding agreed that it will conduct its business in the ordinary course in accordance with past practices and in compliance with all applicable laws, rules, regulations, and to take other agreed-upon actions, including, without limitation, preserving intact its current business organization and providing Applied Nanotech prompt notice upon the occurrence of certain events or discovery of certain conditions, facts or circumstances. During the same period, Applied Nanotech also agreed that it will conduct its business in the ordinary course within the financial parameters set forth in the operating budget approved by NanoHolding and to take other agreed-upon actions, including, without limitation, providing NanoHolding prompt notice upon the occurrence of certain events or discovery of certain conditions, facts or circumstances.

 

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Applied Nanotech and NanoHolding also agreed that prior to the effective time of the combination, subject to certain limited exceptions set forth in the Merger & Exchange Agreement, without the consent of the other party, each of Applied Nanotech and NanoHolding would not, and would not cause or permit any of their subsidiaries to:

 

·amend its certificate of incorporation, bylaws or other charter or organizational documents;

 

·change accounting policies;

 

·for Applied Nanotech, fail to file or furnish to the SEC all documents required to be so filed or furnished;

 

·subject to certain limited exceptions, declare, accrue, set aside or pay any dividend or made any other distribution in respect of any shares of capital stock; or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities, or, in the case of Applied Nanotech, make any other changes in its capital structure;

 

·enter into a material contract or violate, modify or waive any existing material contract;

 

·except for the bridge financing, sell, issue or grant, or authorize the issuance of: (i) any capital stock or other security (except in the case of Applied Nanotech, Applied Nanotech common stock issued upon the exercise of outstanding options to purchase or conversion of outstanding notes in accordance with their terms); (ii) any option, warrant or right to acquire any capital stock or any other security; or (iii) any instrument convertible into or exchangeable for any capital stock or other security;

 

·transfer or license any intellectual property rights or waive or enter into any agreement, or violate, modify or waive terms of agreements related to intellectual property;

 

·in the case of NanoHolding, sell, lease or otherwise dispose of or encumber tangible assets or properties that are material (individually or in the aggregate) to the business and, in the case of Applied Technology, sell, lease or otherwise dispose of or encumber any properties or material assets;

 

·issue or sell debt securities, guaranty debt securities of others or incur indebtedness for borrowed money (in each case other than the Bridge Financing);

 

·NanoHolding will not pay or discharge claims or obligations other than in the ordinary course of business, for liabilities reflected or reserved on the relevant balance sheet, or incurred in connection with the combination; and Applied Nanotech will pay or discharge only those liabilities or obligations as provided in the Applied Nanotech operating budget or expenses of the combination as the parties agree;

 

·make capital expenditures except, in the case of NanoHolding, in the ordinary course of business that do not exceed $5,000 or, in the case of Applied Nanotech, as set forth in its Applied Nanotech operating budget;

 

·acquire any other business or material assets or the equity interests in any other business;

 

·adopt, terminate or change any employee benefits plans or employment agreements, increase compensation or grant or pay bonuses to employees, officers or directors, amend or accelerate vesting of benefits, grant any awards under any benefits plan or otherwise;

 

·open or close any facility except, in the case of NanoHolding, in the ordinary course of business;

 

·make, change or revoke any material tax election; adopt or change any accounting method in respect of taxes; change any annual tax accounting period; file any tax return or amendment; enter into any closing agreement with respect to any tax; settle or compromise any claim or assessment in respect of taxes; or consent to any extension or waiver of the limitation period applicable to any tax claim or assessment;

 

·initiate, compromise or settle any material litigation or arbitration proceeding, except, in the case of NanoHolding, relating to an amount less than or equal to $5,000;

 

·make any loans, advances or capital contributions except for advances for travel and other normal business expenses to officers and employees in accordance with policies and procedures already in effect;

 

·in the case of NanoHolding, make any payments to any of its officers, directors, employees, shareholders or other equity interest holders, except as required pursuant to any binding agreement already in effect or, for Applied Nanotech, any payment not contemplated in the agreed operating budget; and enter into arrangements with affiliates..

 

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The parties also agreed to allow each other access to information for preparation of this proxy statement, to use commercially reasonable efforts to try to fulfill all conditions precedent to the merger, to seek any required governmental or third party consents to permit the combination, to file tax returns and pay any required taxes, and for each to notify the other of any event or development that would have a material adverse effect on the party giving notice or would require an amendment to this proxy statement.

 

Termination

 

The Merger & Exchange Agreement may be terminated at any time before the completion of the merger, whether before or after the required shareholder approvals to complete the merger have been obtained, as set forth below:

 

·by mutual written consent of each of NanoHolding and Applied Nanotech;

 

·by NanoHolding or Applied Nanotech if the combination has not been completed by September 3, 2014 or such later date as Applied Nanotech and NanoHolding may agree, except that this right to terminate the Merger & Exchange Agreement will not be available to any party whose failure to comply with any provision of the Merger & Exchange Agreement has been the cause of the failure of the combination to be completed by such date;

 

·by either Applied Nanotech or Nano if a court of competent jurisdiction or other governmental authority shall have issued an order or injunction or taken any other action (which order, injunction or action the parties will use their use their commercially reasonable efforts to lift) permanently restraining, enjoining or otherwise prohibiting the combination or any part of the transactions under the Merger & Exchange Agreement and such order or action shall have become final and nonappealable;

 

·by NanoHolding or Applied Nanotech if the shareholders of Applied Nanotech have not given the requisite approval to the Merger & Exchange Agreement;

 

·by NanoHolding or Applied Nanotech if the other party has breached any of its representations, warranties, covenants or agreements contained in the Merger & Exchange Agreement or if any representation or warranty of the other party has become inaccurate, in either case has prevented the satisfaction of the conditions to the closing of the combination; and such violation or breach has not been waived by or cured by within thirty (30) days after written notice thereof. Merger & Exchange Agreement

 

NanoHolding agreed that it would not exercise its termination rights set forth above or terminate the Merger & Exchange Agreement without the prior written approval of Zeiss (such approval not to be unreasonably withheld, conditioned or delayed).

 

No Termination Fee

 

All fees and expenses incurred in connection with the Merger & Exchange Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses, whether or not the merger is consummated. No termination fee is payable by or to either Applied Nanotech or NanoHolding if the combination does not occur.

 

Representations and Warranties

 

The Merger & Exchange Agreement contains customary representations and warranties of Applied Nanotech, NanoHolding and the other parties. The representations and warranties of Applied Nanotech and NanoHolding are qualified by their respective disclosure schedules and, in some cases, by Applied Nanotech's SEC reports. NanoHolding's representations and warranties are qualified by its disclosure schedules. The representations and warranties in the Merger & Exchange Agreement relate to, among other things:

 

·Capital structure
·Organization and Standing
·Authority; Execution and Delivery; Enforceability
·Subsidiaries; Equity Interests
·No Conflicts
·Consents and Approvals
·Financial Statements
·Absence of Certain Changes or Events
·Undisclosed Liabilities

 

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·Litigation
·Intellectual Property
·Taxes
·Transactions With Affiliates and Employees.
·Material Contracts
·Compliance with Applicable Laws.
·Foreign Corrupt Practices
·Brokers and Finders’ Fees
·Investment Company
·SEC Documents; Financial Statements
·Internal Accounting Controls
·Sarbanes-Oxley
·Minute Books
·Board Approval
·Required Vote
·OTC Markets
·Permits
·Properties
·Employment Matters
·Benefit Plans
·Labor Matters
·Officers
·OFAC
·Environmental Matters
·Restrictions on Business Activities
·Insurance

 

The representations and warranties are, in many respects, qualified by materiality and knowledge, and will not survive the merger. Their accuracy (subject to customary materiality qualifiers and other customary exceptions) is one of the conditions to the obligations of NanoHolding and Applied Nanotech to complete the merger.

 

Amendment

 

The Merger & Exchange Agreement may be amended by an instrument in writing signed on behalf of each of Applied Nanotech, NanoHolding and Zeiss. However, after the Merger & Exchange Agreement has been adopted by the stockholders of NanoHolding or Applied Nanotech, no amendment that, by law, requires further approval by the stockholders of NanoHolding or Applied Nanotech, as the case may be, can be made without the required approval.

 

Other Agreements Related to the Combination

 

Voting and Conversion Agreement

 

In connection with the execution of the Merger & Exchange Agreement , the directors of Applied Nanotech and its single largest stockholder, Sichuan Yinhee Chemical Co., Ltd., entered into a voting and conversion agreement that requires each of them to vote in favor of the combination and the Merger & Exchange Agreement and to vote against proposals that oppose, compete with, or that would unreasonably impede, interfere with, delay, postpone, discourage or adversely affect the Merger & Exchange Agreement or the combination. Share transfers are permitted, but any transferee must agree to the voting restrictions that apply to the transferor. In that agreement the directors also agree to take Class A common stock of PEN as payment for their accrued director fees on the basis of a share price of $0.05 per share. As of March 10, 2014, when that agreement was executed, the shareholders of Applied Nanotech that were bound by the voting and conversion agreement owned in the aggregate approximately 5% of the outstanding common stock of Applied Nanotech.

 

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Lock-Up Agreements

 

The three directors of Applied Nanotech who will serve as directors of PEN and the observer who will have the right to attend PEN board meetings will sign, at the closing, lock-up agreements under which they agree not to sell or dispose of any PEN stock during the six-month period after the closing of the combination. However, shares of PEN Class A common stock that these individuals own as a result of conversion of notes sold to them in the bridge financing are not subject to these restrictions. The lock-up agreements also permit gifts to family members, to family controlled entities and testamentary transfers.

 

Interests of Applied Nanotech’s Directors and Executive Officers in the Combination

 

In considering the recommendation of the Applied Nanotech board to approve the combination, shareholders should be aware that our directors and executive officers have certain interests in the combination that may be different from, in addition to, or in conflict with, the interests of our shareholders generally. These interests include, but are not limited to, the payment of accrued obligations in our stock in connection with the combination, the treatment of convertible notes and equity awards held by these executive officers and directors, and revised compensation arrangements with Dr. Yaniv. The new arrangements with Dr. Yaniv are described under The Advisory (Non-Binding) Vote on Certain Compensation -- Proposal 3 that begins on page 87.

 

Change of Control Provisions. Other than the compensation arrangements with Dr. Yaniv as set forth in the March 10, 2014 Letter Agreement he entered into with Applied Nanotech and discussed below, there are no change of control provisions in any employment arrangement or stock options that are triggered by the combination. Our equity compensation plans include provisions that would vest all outstanding options upon a change of control, but all options awarded under the plans are already vested, so no options will become vested under the change of control provisions. Similarly, Dr. Yaniv’s employment agreement contains a change of control provision, but as part of the new arrangements with Dr. Yaniv, that agreement is being terminated. Therefore the cash payment that would otherwise be due will not be owed to him.

 

Amended Employment Arrangement with Dr. Yaniv. On March 10, 2014 in connection with the Merger Agreement Applied Nanotech and Dr. Yaniv entered into a letter agreement setting forth amended compensation arrangements and the terms of his continued employment with PEN after the Merger. At the time of the Merger, Dr. Yaniv will become Vice President of Strategic Innovation for the Company reporting to Dr. Rickert and will resign as a director and all other positions he holds with Applied Nanotech and its subsidiaries. This amendment will include mutual releases and a grant of 6,800,000 shares of PEN’s Class A Common Stock subject to vesting as discussed below. The new arrangements terminate the previous employment agreement and include mutual releases of claims through the closing date. Dr. Yaniv’s compensation on an annualized basis is now $153,000. After the closing it will increase to $175,000. The 6,800,000 shares of PEN’s Class A common stock vest and will not be subject to forfeiture on the earlier of a change of control of PEN, Dr. Yaniv’s death, or if more than 180 days after closing the average trading price of the shares during a measurement period of ten consecutive trading days reaches certain price thresholds. At a $0.10 price, one million of the shares vest, with additional tranches of one million shares vesting if the price reaches $0.15, $0.20, $0.25 and $0.30. The last 1.8 million shares vest at a $0.35 price threshold. Any shares that have not vested five years after the closing will be forfeited. Dr. Yaniv will also be entitled to piggyback registration rights that will allow him, subject to other customary terms and conditions, to register the recently awarded shares when they are no longer subject to forfeiture if PEN is registering its stock.

 

Obligations Converted to Equity. Accrued director fees aggregating $205,315 through June 2014, plus accruals through the date of closing, that are payable to our present and former directors will be paid in our common stock in connection with the combination. The special fee to the members of the board’s merger committee aggregating $353,700 will also be paid in common stock in connection with the closing of the combination. The fee breaks down $168,300 to Dr. Ronstadt, $92,700 to Mr. Berman, $36,000 to Mr. Westerman and $56,700 to Mr. Rocheleau. These obligations will all be converted to equity on the basis of a $0.05 share price. Dr. Yaniv, Dr. Fink and Mr. Baker, our former Chief Financial Officer, also agreed to convert convertible promissory notes of Applied Nanotech in connection with the closing of the combination. The principal of Mr. Baker’s note is $100,000, Dr. Yaniv’s is $65,000 and Dr. Fink’s $30,000. These notes, plus accrued interest, will be converted into Class A common stock of PEN at a per share price of $0.10.

 

Bridge Financing. Several of our continuing directors and several director nominees purchased notes in the bridge financing. Dr. Ronstadt and Mr. Westerman invested $20,000 each, Mr. Berman $10,000, and Scott and Jeanne Rickert $5,000 each. Those notes will convert on the same terms as the other notes issued in the bridge financing.

 

Stock Options. Options held by our executive officers and directors, will receive the same treatment as other outstanding options of Applied Nanotech and will become exercisable on a share for share basis for Class A common stock of PEN. The other terms of each option will remain unchanged. All options are fully vested, so there is no vesting as a result of the combination.

 

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The following table summarizes information about stock options outstanding, some of which may not ultimately vest, and options currently exercisable under the option plan at May 27, 2014:

 

   Options Outstanding  Options Exercisable
                   
Range of Exercise Prices  Number 
Outstanding 
at 5/27/2014
  Wgtd. Avg. Remaining
Contractual 
Life
  Wgtd. Avg.
Exercise 
Price
  Number
Exercisable 
at 5/27/2014
  Wgtd. Avg. Remaining
Contractual
Life
  Wgtd. Avg. 
Exercise
Price
$0.00 - $0.25  1,022,866  5.9 Years  $0.19  1,022,866  5.9 Years  $0.19
$0.26 - $0.50  3,531,061  4.9 Years  $0.37  3,531,061  4.9 Years  $0.37
$0.51 - $1.00  172,748  4.9 Years  $0.56  172,748  4.9 Years  $0.56
$1.01 - $2.00  588,396  2.6 Years  $1.32  588,396  2.6 Years  $1.32
$2.01 - $3.00  563,243  0.8 Years  $2.16  563,243  0.8 Years  $2.16
Total  5,877,714  4.8 Years  $0.61  5,877,714  4.8 Years  $0.61
Aggregate intrinsic value     $0.00        $0.00   

 

Indemnification; Directors and Officers Insurance. Generally our directors and executive officers are entitled to be indemnified by Applied Nanotech only if a determination is made that there should be indemnification in that instance. If that determination is made, they can be indemnified for any loss or expense incurred in connection with claims or proceedings brought against them as a result of their service as a director or officer of Applied Nanotech. These rights are further described in the Applied Nanotech column under the heading “Indemnification of Directors and Officers” in the section The Combination – Proposal 1, Comparison of Shareholders’ Rights that is found on page 77. Under the Merger & Exchange Agreement, for a period of at least one year after the closing, PEN will maintain a directors' and officers' liability insurance policy with coverage containing terms and conditions at least as favorable as the coverage under the presently existing policies maintained by Applied Nanotech. PEN is not, however, required to pay for this insurance coverage more than an amount equal to the current premiums paid by Applied Nanotech for its existing policy.

 

Continued Board Service

 

Directors Berman, Ronstadt and Westerman will be continuing as directors on the PEN board of directors.

 

Interests of NanoHolding’s Director Nominees in the Combination

 

Dr. Rickert and Messrs. Holmes and Sharp are on the board of Nanofilm and upon closing of the combination they will become directors of PEN.

 

Holmes Hollister & Co., the investment banking firm in which Mr. Holmes is a member, was retained by Nanofilm in 2011 for advisory services and assistance in sourcing and considering potential transactions. For those services the firm was paid fees of $100,000 in 2012, and it was reimbursed for expenses in 2011 and 2012 in the amounts of $2,240.43 and $2,786.02 for those two years. In 2013 the firm was reimbursed $18,320 in expenses and paid fees aggregating $87,514 for services associated with valuation and assistance negotiating Nanofilm’s repurchase of a majority in number of its members at the end of 2012. Holmes Hollister & Co was also engaged by Nanofilm in 2013 to assist with the potential transaction with Applied Nanotech. If the combination with Applied Nanotech closes, the firm will earn a fee of $100,000. Through March 31, 2014 the firm has been paid approximately $67,000 in fees and expenses in 2014. As with each of the prior engagements, Nanofilm is obligated to indemnify and hold Holmes Hollister & Co, its members and employees harmless against any loss or liability arising out of the engagement, including attorney’s fees and expenses except to the extent that a court determines that that the loss or liability results from the gross negligence or fraud of any indemnified party. This contractual indemnity is in addition to any right the indemnified parties may have under law or otherwise.

 

Dr. Rickert will become the Chairman of the Board and Chief Executive Officer of PEN if the combination closes. He will also be its controlling stockholder as the sole general partner of Rickert Family, Limited Partnership that will own substantially all the Class B common stock of PEN, representing approximately 48% of the economics of the PEN common stock and approximately 99% of the voting power of PEN’s common stock. His wife will also be employed by PEN and will be an officer and director of PEN. Dr. Rickert’s annual compensation is $205,000. It will be unchanged if the combination closes.

 

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Jeanne Rickert is Dr. Rickert’s wife. If he is incapacitated, she will become the sole general partner of Rickert Family, Limited Partnership and will, therefore, control the Class B common stock. She receives annual compensation of $75,000, which will not change as result of the closing. Likewise, the annual compensation of $200,000 paid to Mr. Vereecken, the Chief Financial Officer of PEN will not change if the combination occurs. None of the executive officers of NanoHoldings has an employment contract, and there will be no employment agreements at PEN.

 

James Sharp is the Zeiss designee to the PEN board. Zeiss will own all the Class Z common stock issued in the Exchange that is part of the combination. Zeiss buys products from NanoHolding on arm’s length terms. Sales to Zeiss were $362,494 in 2012, $209,170 in 2013, and $83,000 during the first quarter of 2014. In addition, as the Zeiss designee, Mr. Sharp is the beneficiary of the provision in the PEN certificate of incorporation that exculpates the Zeiss designee from liability for corporate opportunity except for a corporate business opportunity is first presented to him by PEN in good faith in connection with PEN’s strategic activities, or is expressly offered to him in writing solely in his capacity as a director of PEN. Further, Delaware law permits corporations to adopt provisions renouncing any interests or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. In its certificate of incorporation PEN, on its behalf and on behalf of its subsidiaries, renounces and waives any interest or expectancy in, or in being offered an opportunity to participate in, and Zeiss and Mr. Sharp will have no obligation to offer PEN an opportunity to participate in, business opportunities presented to Zeiss or its controlled affiliates, or its designee on the board of directors of PEN even if the opportunity is one that PEN might reasonably have pursued, and no such person will be liable for breach of any duty by reason of the fact that such person pursues or acquires such corporate opportunity, directs such corporate opportunity to another person or fails to present such corporate opportunity, or information regarding such corporate opportunity, to PEN or its subsidiaries, except in the limited circumstances described in the previous sentence.

 

Material U.S. Federal Income Tax Consequences to Applied Nanotech Shareholders

 

Applied Nanotech and NanoHolding intend the Redomestication Merger qualify as a reorganization within the meaning of Section 368 of the Code. That means that Applied Nanotech shareholders, Applied Nanotech, and its successor, PEN will not recognize any gain or loss for federal income tax purposes as a result of the Redomestication Merger. Therefore, there will be no material U.S. federal income tax consequences of the combination for Applied Nanotech shareholders. Generally, the tax basis of an Applied Nanotech shareholder it its stock of Applied Nanotech will be carried over and be that shareholder’s basis in its PEN stock.

 

The foregoing discussion is for general information purposes only and is not intended to be a complete analysis or description of all potential U.S. federal income tax consequences of the combination. The Nano Merger is also intended to qualify as a reorganization under Section 368 of the Code. If the Nano Merger is not treated as a reorganization, it is not expected to affect the treatment of the Redomestication Merger, so it should not directly affect shareholders of Applied Nanotech and the tax consequences to them, but it could result in a significant tax liability for PEN.

 

The discussion does not address tax consequences which may vary with, or are contingent on, your individual circumstances. The discussion does not address any non-income tax or any foreign, state or local tax consequences of the combination. Accordingly, you are strongly encouraged to consult with your own tax advisor as to the tax consequences of the combination in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.

 

TAX MATTERS ARE VERY COMPLICATED, AND THE TAX CONSEQUENCES TO HOLDERS WILL DEPEND UPON THE FACTS OF THEIR PARTICULAR SITUATION. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPLICABILITY TO THEM OF THE RULES DISCUSSED ABOVE AND THE PARTICULAR TAX EFFECTS TO THEM OF THE COMBINATION, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.

 

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COMPARISON OF SHAREHOLDERS’ RIGHTS

 

If the combination is completed, Applied Nanotech stockholders will receive shares of PEN Class A common stock in the Redomestication Merger. Applied Nanotech is organized under the laws of the State of Texas, and PEN is organized under the laws of the State of Delaware. The following is a summary of the material differences between (i) the current rights of holders of Applied Nanotech common stock under the Texas Business Organizations Code (“TBOC”) and Applied Nanotech’s amended and restated articles of incorporation and amended and restated bylaws and (ii) the rights of holders of PEN Class A common stock under the DGCL and PEN’s amended and restated certificate of incorporation and amended and restated bylaws that will become effective at the time of the Redomestication Merger.

 

The following summary is not a complete statement of the rights of stockholders of the two companies or a complete description of the specific provisions referred to below. This summary is qualified in its entirety by reference to the TBOC and the DGCL and Applied Nanotech’s and PEN’s governing documents, which we urge you to read carefully and in their entirety. Copies of Applied Nanotech’s governing documents have been filed with the SEC and those for PEN are exhibits to amendment to the Merger & Exchange Agreement that is Annex C to this proxy statement. To find out where copies of the Applied Nanotech documents can be obtained, see the section entitled Where You Can Find More Information beginning on page 92.

 

APPLIED NANOTECH PEN
Authorized Capital Stock

Applied Nanotech is authorized to issue up to 162,000,000 shares, 160,000,000 shares of common stock, par value $0.001 per share and 2,000,000 shares of preferred stock, par value $1.00 per share. As of the record date, there were 157,553,526 shares of Applied Nanotech common stock outstanding and no shares of Applied Nanotech preferred stock outstanding.

 

PEN is authorized to issue up to a total of 1,820,000,000 shares of capital stock, consisting of 20,000,000 shares of Preferred Stock, par value $0.0001 per share (“preferred stock”), 1,300,000,000 shares of Class A Common Stock, par value $0.0001 per share (“Class A common stock”), 400,000,000 shares of Class B Common Stock, par value $0.0001 per share (“Class B common stock”), and 100,000,000 shares of Class Z Common Stock, par value $0.0001 per share (“Class Z common stock”).

 

The rights of each share of Class A common stock, each share of Class B common stock and each share of Class Z common stock are the same with respect to dividends, distributions and rights upon liquidation. The different classes of common stock have different voting rights as described below, and shares of Class B common stock and shares of Class Z common stock will be or may be converted into Class A common stock as described below.

 

Conversion Rights of Class B Common Stock
Applied Nanotech has only one class of common stock and no conversion rights. Shares of Class B common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class B common stock will automatically be converted into shares of Class A common stock if the shares of Class B common stock are not owned by Scott Rickert, his spouse, or their descendants and their spouses, or by entities or trusts wholly-owned by them.  Since shares of Class A common stock are economically equivalent to shares of Class B common stock, conversion of Class B into Class A common stock will not change the economic participation of Class A stockholders. Because shares of Class B common stock have 100 votes per share while Class A common stock has one vote per share, conversion of Class B common stock into Class A common stock will result in an increase in the voting power of the Class A stockholders.

 

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Conversion Rights of Class Z Common Stock

Applied Nanotech has only one class of common stock and no conversion rights.

 

Shares of Class Z common stock can be converted, one-for-one, into shares of Class A common stock at any time at the option of the holder. Shares of Class Z common stock will automatically be converted into shares of Class A common stock if the shares of Class Z common stock are not owned by Zeiss or an entity wholly owned by the ultimate parent of Zeiss. In addition, if Zeiss and other permitted holders of shares of Class Z common stock sell or convert more than one-half of the shares of Class Z common stock that are received in the Exchange that is part of the combination, all shares of Class Z common stock will automatically convert into Class A common stock. As stated above, shares of Class A common stock are economically equivalent to shares of Class Z common stock, so conversion of Class Z into Class A common stock will not change the economic participation of Class A stockholders. Because shares of Class Z common stock are non-voting, conversion of Class Z common stock into Class A common stock will dilute the voting power of the Class A stockholders.

Size of Board of Directors
Applied Nanotech’s board of directors must be not less than three and not more than nine. There are currently six directors of Applied Nanotech.

PEN’s board of directors shall consist of a number of directors to be fixed from time to time by the board of directors by vote of a majority of the total number of directors then in office; provided, that, PEN must have at least 3 directors so long as the holders of Class Z common stock have the right to designate a director. Immediately after the combination, PEN’s board of directors will consist of 7 directors.

Voting Rights, Cumulative Voting

 

Each holder of Applied Nanotech common stock is entitled to one vote per share.

 

Applied Nanotech stockholders are not entitled to cumulative voting rights in the election of directors.

 

 

 

Holders of PEN Class A common stock are entitled to one vote per share in the election of directors and other matters submitted to a vote of the stockholders. Holders of PEN Class B common stock are entitled to 100 votes per share in the election of directors and other matters submitted to a vote of the stockholders. Holders of PEN Class Z common stock do not vote in the election of directors or otherwise, but they do have the right to designate a director to the PEN Board, have anti-dilution rights described below and have consent rights with respect to certain amendments to PEN’s certificate of incorporation as described below.

 

PEN stockholders are not entitled to cumulative voting in the election of directors.

Classes of Directors
Applied Nanotech’s board of directors consists of one class of directors, each serving a one-year term expiring at the annual meeting of stockholders in each year.

Except for the director designated by the holders of Class Z common stock, PEN’s board of directors consists of one class of directors, each serving a one-year term expiring at the annual meeting of stockholders in each year.

Removal of Directors
Applied Nanotech’s directors may be removed for cause by the affirmative vote of the holders of a majority of the voting power of shares of Applied Nanotech common stock then entitled to vote at an election of directors. Directors may also be removed without cause if there is a vote for removal by both (i) 60% of the directors then in office and (ii) 60% of the voting power of shares of Applied Nanotech common stock then entitled to vote at an election of directors. Cause for removal of a director exists only if (a) the Director whose removal is proposed has been convicted, or where a Director is granted immunity to testify where another has been convicted, of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal; (b) such Director has been found by the affirmative vote of at least 60% of all Directors then in office to have been negligent or guilty of misconduct in the performance of his duties in a matter of substantial importance to Applied Nanotech; or (c) such Director has been adjudicated by a court of competent jurisdiction to be mentally incompetent, directly affecting his ability as a Director.  If a shareholder proposes the removal of a director, there are additional procedures to be completed in advance of the meeting at which the proposal will be considered.

Directors, other than the director designated by the Class Z common stock holders, may be removed at any time, without cause, by majority vote at a meeting at which a quorum is present. Directors can also be removed for cause if, for example, the individual has been declared of unsound mind, has failed to attend at least 75% of the meetings of the board in a twelve month period.

 

The director designated by the Class Z common stock holders may only be removed (with or without cause) by the Class Z common stock holders.

 

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Filling Vacancies on the Board of Directors

Vacancies on the Applied Nanotech Board of Directors may be filled by the affirmative vote of a majority of the remaining directors, whether or not a quorum, for the unexpired term of the departed director. A director position created by an increase in the number of directors may be filled by the board of directors for a term continuing only until the next election of one or more directors by the stockholders. The Applied Nanotech board of directors may not fill more than two such directorships during the period between any two successive annual meetings of stockholders.

 

A vacancy on PEN’s board of directors may be filled by the affirmative vote of a majority of the remaining PEN board of directors, except that only Class Z holders can replace the director they designate or fill any vacancy in such position. Each director filling a vacancy shall remain in office until the next annual meeting of shareholders.
Qualifications for Director Candidates

Directors must be at least 21 years of age.

 

Subject to certain limited exceptions, no person can serve as a Director if he or she is a party to any compensatory, payment or other financial agreement, arrangement or understanding with any person or entity other than PEN, or has received any compensation or other payment from any person or entity other than PEN, in connection with candidacy or service as a PEN director.
Nomination of Director Candidates by Stockholders

A shareholder can only nominate a director candidate by giving written notice to the Secretary of the Corporation that is delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; except, that if less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. The Board of Director’s shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or re-election as a Director, (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the Corporation which are beneficially owned by such person, and (D) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the shareholder giving the notice, (1) the name and address, as they appear on the Corporation's books, of such shareholder and (2) the class and number of shares of the Corporation which are beneficially owned by such shareholder.

 

Any stockholder holding at least $2,000 in value of shares entitled to vote in the election of directors may nominate one or more directors by delivering notice to PEN’s corporate secretary not less than 60 days nor more than 90 days prior to the meeting of stockholders at which the directors are to be elected, but if less than 75 days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice is due not more than 10 days following the day on which notice of the date of the meeting was mailed or public disclosure was made, whichever is first. The notice must set forth, among other things, (i) the name and address of the shareholder making the nomination; (ii) the name, age, principal occupation or employment, business address and residence address of each person to be nominated; (iii) the class and number of shares of stock held of record, owned beneficially and represented by proxy by such shareholder or any person directly or indirectly controlling, controlled by, under common control with or acting in concert with such shareholder, which we refer to as a shareholder associated person, and by each person to be nominated as of the record date for the meeting and of the date of such notice; (iv) a description of all contracts, arrangements, understandings or relationships between (a) the shareholder making the nomination and any shareholder associated person that relate to the nomination, (b) the shareholder making the nomination and the proposed nominee and (c) the shareholder making the nomination, the proposed nominee or any shareholder associated person and any other person or persons that relate to the nomination; (v) such other information regarding each nominee that would be required to be disclosed in a proxy statement; and (vi) the consent of each nominee to serve as a director of the corporation if elected.

 

Calling Special Meetings of Stockholders
A special meeting of stockholders may be called by the Board of Directors, by the Chairman, the President or by holders of not less than 10% of all of the outstanding shares entitled to vote at the meeting. A special meeting of stockholders may be called by PEN’s Chief Executive Officer, its Chairman of the board of directors, by the board of directors, or at the written request of stockholders representing at least 25% of the voting power in the election of directors.

 

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Quorum; Vote Required

A majority of the outstanding shares of Applied Nanotech entitled to vote, and represented in person or by proxy, is a quorum at any meeting of Applied Nanotech stockholders. If a quorum is not present, a majority of the stockholders represented may adjourn the meeting until a quorum is obtained.

 

The vote required to approve any matter for which the TBCA specifies a specific percentage vote (including amendment of the articles or a merger) is the affirmative vote of a majority of shares entitled to vote, except that directors are elected by a plurality vote.

 

The holders of at least one-third of the voting power in the election of directors, and represented in person or by proxy, are a quorum for a meeting of stockholders. If a quorum is not present, the stockholders represented may adjourn the meeting until a quorum is obtained.

The vote required is a majority of a quorum or, for the election of directors, a plurality vote.

Shareholder Proposals
A shareholder may present a proposal at a stockholders meeting if the holder gives written notice to the Secretary of the Corporation received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; except, that if less than 70 days' notice or prior to public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on Applied Nanotech’s books, of the shareholder proposing such business, (iii) the class and number of shares beneficially owned by the shareholder, and (iv) any material interest of the shareholder in such business.

A stockholder holding at least $2,000 in value of shares entitled to vote in the election of directors may present a proposal at a meeting of stockholders if the shareholder gives written notice to the corporate secretary received not less than 60 days nor more than 90 days prior to the meeting, but if  less than 75 days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice is due not later than the close of business on the 10th day following the day on which notice of the date of the meeting was mailed or public disclosure was made, whichever was first. Each notice must set forth as to each matter the shareholder proposes to bring before the meeting: (i) a description of each proposed item of business and the reasons for conducting that business at the annual meeting; (ii) any material interest in that business of that shareholder and any shareholder associated person, including any anticipated benefit to the shareholder or any shareholder associated person; (iii) the name and record address of the shareholder proposing to bring that item of business before the meeting; (iv) the class and number of shares of stock held of record, owned beneficially and represented by proxy by that shareholder or any shareholder associated person as of the record date for the meeting and as of the date of the notice; (v) whether and the extent to which any derivative instrument, hedging or other transaction or transactions has been entered into by or on behalf of, or any other agreement or understanding has been made to increase or decrease economic interest in PEN’s stock or manage the risk or benefit of share price changes for, or to increase or decrease the voting power of, that shareholder or any shareholder associated persons with respect to PEN’s stock; (vi) a description of all contracts, arrangements, understandings or relationships between that shareholder and any shareholder associated persons or between that shareholder or any shareholder associated persons and any other person or persons that relate to the proposal of that business by that shareholder; and (vii) all other information which would be required to be included in a proxy statement.

 

Notice of Shareholder Meetings
Applied Nanotech must give written notice not less than 10 and not more than 60 days before a shareholders meeting to each shareholder entitled to vote at such a meeting. The notice shall state the place, day and hour and, if a special meeting, the purpose of the meeting.

PEN must give written notice not less than 10 and not more than 60 days before any stockholders meeting to each shareholder entitled to vote at such a meeting. The notice shall state the place, date and hour, and, if a special meeting, the purpose of the meeting.

 

The holders of Class Z common stock are entitled to receive a copy of any notice sent to the holders of Class A common stock or Class B common stock, as and when the notice is sent to such holders.

 

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Anti-Takeover Provisions and Other Shareholder Protections

TBOC § 21.606 prohibits a Texas corporation from engaging in a “business combination” (as defined in the TBOC) with a person owning 20% or more of a corporation’s voting stock for three years following the time that person becomes a 20% shareholder, with certain exceptions. Applied Nanotech has not opted out of § 21.606 and is therefore governed by the default terms of this provision of the TBOC.

 

DGCL § 203 prohibits a Delaware corporation from engaging in a “business combination” (as defined in the DGCL) with a person owning 15% or more of a corporation’s voting stock for three years following the time that person becomes a 15% shareholder, with certain exceptions. PEN has not opted out of § 203 and is therefore governed by the default terms of this provision of the DGCL.
Limitation of Personal Liability of Directors

No director of Applied Nanotech will be liable for monetary damages for an act or omission (or an alleged act or omission), except to the extent the director is found liable for: (1) a breach of a director's duty of loyalty; (2) an act or omission not in good faith which constitutes a breach of duty of the director to the corporation, or an act or omission which involves intentional misconduct or a knowing violation of-the law; (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; (4) an act or omission for which the liability of a director is expressly provided for by an applicable statute; or (5) an act related to an unlawful stock repurchase or payment of a dividend.

 

If the TBOC or any other applicable law is amended or adopted to authorize action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by such law(s), as so amended or adopted.

 

A director of PEN shall not be personally liable to PEN or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent required by the DGCL.

 

In addition to the general exculpation provisions, any director designated by Zeiss as the holder of Class Z common stock is protected by a specific exculpation provision relating to corporate opportunity. Specifically, unless a corporate business opportunity that would otherwise be required to be submitted to PEN is first presented to the Zeiss board designee by PEN in good faith in connection with PEN’s strategic activities, or is expressly offered to the Zeiss board designee in writing solely in that person’s capacity as a director of PEN, PEN renounces any expectation in that business opportunity.

Waiver of Corporate Opportunities Presented to Zeiss
Applied Nanotech does not have any provisions with respect to waiver of corporate opportunity.   PEN, on its behalf and on behalf of its subsidiaries, renounces and waives any interest or expectancy in, or in being offered an opportunity to participate in, and Zeiss and the Zeiss designee to the board of directors will have no obligation to offer PEN an opportunity to participate in, business opportunities presented to Zeiss or its controlled affiliates, or its designee to the board of directors, even if the opportunity is one that PEN or its subsidiaries might reasonably have pursued, and no such person will be liable for breach of any duty by reason of the fact that such person pursues or acquires such corporate opportunity, directs such corporate opportunity to another person or fails to present such corporate opportunity, or information regarding such corporate opportunity, to PEN or its subsidiaries, except in the limited circumstances where such corporate business opportunity is one that would otherwise be required to be submitted to PEN and which is either first presented to the Zeiss board designee by PEN in good faith in connection with PEN’s strategic activities, or is expressly offered to the Zeiss board designee in writing solely in that person’s capacity as a director of PEN.  

 

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Indemnification of Directors and Officers

Applied Nanotech’ will only indemnify officers and directors if ordered by a court or in a specific case upon a determination that indemnification is proper under the circumstances because the person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Company, or with respect to a criminal proceeding if the individual had no reasonable cause to believe his conduct was unlawful. The determination can be made (i) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to the action or proceeding, or (ii) if a quorum of disinterested Directors so directs, by independent legal counsel in written opinion, or (iii) by the shareholders.

 

A director or officer cannot receive reimbursement or advancement of expenses incurred in advance of the final disposition of an action or proceeding unless Applied Nanotech has received a written undertaking to repay the amounts advanced if it is subsequently be determined that the officer or director was not entitled to indemnification.

 

Applied Nanotech may purchase insurance on behalf of its directors and officers against any liability asserted them in those capacities.

 

PEN’s amended and restated bylaws provide that PEN shall indemnify each of its directors and officers against all expense, liability and loss (including attorneys’ fees, judgments, fines, Employee Retirement Income Security Act of 1974 (or comparable non-U.S. law) excise taxes or penalties and amounts paid in settlement) incurred in an action, suit or proceeding by reason of service as a director, officer or administrator or fiduciary with respect to any employee benefit plan.

 

A director or officer is also entitled to advancement of expenses incurred in defending any proceeding in advance of its final disposition, except that, if the DGCL so requires, advancement will only occur after delivery of an undertaking to repay all amounts advanced if it is ultimately be determined by final judicial decision from which there is no further right to appeal that the beneficiary is not entitled to be indemnified.

 

PEN may purchase insurance for its directors and officer regardless whether the corporation would have the right to indemnify the person.

 

 

Amendments to Articles/Certificate of Incorporation and By-laws

To amend the articles of incorporation requires the affirmative vote of a majority of shares entitled to vote.

 

Applied Nanotech’ bylaws may be amended, altered or repealed, and new bylaws may be approved, by the board of directors. For shareholders to amend the bylaws it requires the vote of holders of not less than 60% of the outstanding shares entitled to vote in the election of directors.

The vote of at least a majority of a quorum, voting together as a single class, is required to amend or repeal the PEN Certificate of Incorporation. In addition, the vote of at least 50% of the outstanding shares of Class Z common stock is required to change: (i) the provisions regarding the appointment or removal of the director designated by the Class Z holders; (ii) the distribution provisions related to common stock; (iii) the provisions regarding transfer or issuance of Class Z common stock, the anti-dilution rights of the Class Z common stock, the conversion rights of the Class Z common stock and the notice rights of the holders of Class Z common stock; (iv) the waiver of corporate opportunities presented to Zeiss and the related exculpatory provisions; or (v) to create other differences under the Amended and Restated Certificate to the rights, powers, duties or restrictions applicable to the Class Z common stock and either the Class A common stock or the Class B common stock.

 

The Board or the stockholders may make, amend and repeal the PEN bylaws.

 

Action by Written Consent
An action that could be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the stockholders entitled to vote. Any action required or permitted to be taken at a meeting of stockholders can be accomplished by a written consent signed by those who would be entitled to vote at a meeting who have the voting power necessary to authorize or take the action at a meeting at which all shares entitled to vote were present and voted.

 

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Anti-Dilutive and Preemptive Rights

No holder of Applied Nanotech stock has preemptive or anti-dilutive rights.

 

No PEN stockholder has preemptive rights.

 

Holders of shares of Class Z common stock are entitled to maintain their economic ownership percentage by purchasing the securities being sold if PEN issues additional shares or equity rights that are the economic equivalent of the Class A common stock, the Class B common stock or the Class Z common stock or that have the right to subscribe for, purchase or acquire, convert into, be exchangeable or exercisable for or otherwise participate in distributions (whether interim or liquidating) with the Class A common stock, the Class B common stock or the Class Z common stock (such shares, together with the Class A common stock, Class B common stock and Class Z common stock, “Common Equivalents”). The purchase price paid by a holder of Class Z common stock will be equal to the price for which PEN issues the Common Equivalents to others. These anti-dilutive rights do not apply to (i) the issuance of Class A common stock and Class B common stock up to 10% of the Common Equivalents in connection with employee compensation programs approved by the board, or (ii) the issuance of Common Equivalents that do not reduce the outstanding shares of Class Z common stock below 8% of the Common Equivalents. Further, PEN may not permit any of its subsidiaries to take any action that would circumvent or frustrate the anti-dilutive rights of the holders of Class Z common stock by issuing equity of any subsidiary without offering the holders of Class Z common stock the right to purchase their pro-rata share thereof on the terms described above.

 

Rights of Dissenting Stockholders

Under the TBOC, a shareholder generally has the right to dissent from any merger to which the corporation is a party, from any sale of all or substantially all assets of the corporation, or from any plan of exchange and to receive fair value for his or her shares. However, rights of dissent and appraisal are not available for a merger in which there is a single surviving corporation, or with respect to an exchange, if: (1) the shares held by the shareholder are part of a class or series that are, on the record date set for the vote, (a) listed on a national securities exchange, (b) designated as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (c) held of record by not less than 2,000 holders on the record date; (2) the shareholder is not required to accept for the shareholder’s shares any consideration that is different than the consideration (other than cash in lieu of fractional shares) to be provided to any other holder of shares of the same class or series held by such shareholder; and (3) the shareholder is not required to accept for his or her shares any consideration other than (a) shares of a corporation that, immediately after the effective time of the merger or exchange, will be part of a class or series of shares that are (i) listed, or authorized for listing upon official notice of issuance, on a national securities exchange, (ii) approved for quotation as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or (iii) held of record by not less than 2,000 holders and (b) cash in lieu of fractional shares otherwise entitled to be received.

 

The appraisal rights of Applied Nanotech shareholders are governed by the TBOC.

The DGCL provides that appraisal rights are available to dissenting stockholders in connection with certain mergers or consolidations. The DGCL does not provide for appraisal rights if: (1) the shares of the corporation are (a) listed on a national securities exchange or (b) held of record by more than 2,000 stockholders; or (2) the corporation is the surviving corporation and no vote of its stockholders is required for the merger. However, appraisal rights will be available if the stockholders are required by the terms of a merger agreement to accept anything except: (i) shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; (ii) shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 holders; (iii) cash in lieu of fractional shares or fractional depository receipts; or (iv) any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts as described above. The DGCL does not provide appraisal rights to shareholders with respect to the sale of all or substantially all of a corporation’s assets or an amendment to a corporation’s certificate of incorporation. Among other procedural requirements to exercise appraisal rights, a shareholder’s written demand for appraisal must be received before the vote on the matter giving rise to appraisal rights, when the matter is voted on at a meeting of shareholders.

 

The appraisal rights of PEN stockholders are governed by the DGCL.

 

Forum for Disputes and Derivative Actions
Claims involving Applied Nanotech and its officers and directors are not restricted to any particular forum. State or federal courts in Delaware are the sole and exclusive forum for actions against PEN or its officers or directors that are derivative actions, claims for breach of fiduciary duty, claims arising under the DGCL or claims governed by the internal affairs doctrine.

 

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DISSENTERS’ RIGHTS OF APPLIED NANOTECH STOCKHOLDERS

 

General. If you hold one or more shares of Applied Nanotech common stock, you are entitled to dissenters’ rights under Texas law which means you have the right to dissent from the merger and have the appraised fair value of your shares of Applied Nanotech common stock paid to you in cash. The appraised fair value may be more or less than the value of the PEN stock to be issued in the Redomestication Merger. If you are contemplating exercising your right to dissent, we urge you to read carefully the provisions of Chapter 10, Subchapter H of the TBOC, which are attached to this proxy statement/prospectus as Annex E, and consult with your legal counsel before electing or attempting to exercise these rights. The following discussion describes the steps you must take if you want to exercise your right to dissent. You should read this summary and the full text of the law carefully.

 

How to Exercise and Perfect Your Right to Dissent. To be eligible to exercise your right to dissent to the merger:

 

·you must, prior to the special meeting, provide Applied Nanotech with a written objection to the merger that states that you intend to exercise your right to dissent if the proposal to approve the Merger & Exchange Agreement is approved and the merger is completed and that provides an address to which PEN may send a notice if the merger is completed;

 

·you must vote your shares against approval of the proposal to approve the Merger & Exchange Agreement at the special meeting.

 

·you must, not later than the 20th day after PEN sends you notice that the merger was completed, provide PEN with (i) a written demand for payment that states the number and class of shares of Applied Nanotech common stock you own, your estimate of the fair value of that stock and an address to which a notice relating to the dissent and appraisal procedures may be sent and (ii) (x) if your shares are certificated, your certificates representing the shares and (y) if your shares are uncertificated, signed assignments of the ownership interests in the shares; and

 

·you must continuously hold your shares of Applied Nanotech common stock from the record date through the completion of the merger.

 

If you intend to dissent from the merger, you should send the notice to:

 

Applied Nanotech Holdings, Inc.

3006 Longhorn Boulevard, Suite 107

Austin, TX 78758

Attention: Corporate Secretary

 

If you fail to vote your shares at the meeting against the proposal to approve the Merger & Exchange Agreement, or otherwise fail to comply with any of these conditions and the merger is completed, you will lose your right to dissent from the merger and will instead receive shares of PEN Class A common stock. If you comply with the items set forth in the first two bullet points above and the merger is completed, PEN will send you a written notice advising you that the merger has been completed. PEN must deliver this notice to you within 10 days after the merger is completed. A proxy card which is signed and does not contain voting instructions will, unless revoked, be voted “FOR” the proposal to approve the Merger & Exchange Agreement, will constitute a waiver of your dissenters’ rights, and will nullify any previous written demand for appraisal.

 

Your Demand for Payment. If you wish to receive the fair value of your shares of Applied Nanotech common stock in cash, you must, within 20 days of the date the notice was delivered or mailed to you by PEN, send a written demand to PEN for payment of the fair value of your shares of Applied Nanotech common stock. The fair value of your shares of Applied Nanotech common stock will be the value of the shares on the day immediately preceding the merger, excluding any appreciation or depreciation in anticipation of the merger. Your written demand and any notice addressed to PEN must be sent to:

 

PEN Inc.

c/o NanoHolding Inc.

10111 Sweet Valley Drive

Valley View, Ohio 44125

Attention: Jeanne M. Rickert, Secretary

 

Your written demand must state how many shares of Applied Nanotech common stock you own and your estimate of the fair value of your shares of Applied Nanotech common stock. If you fail to send this written demand to PEN within 20 days of PEN’s delivery or mailing of your notice, you will be bound by the merger and you will not be entitled to receive a cash payment representing the fair value of your shares of Applied Nanotech common stock. Instead, you will receive shares of PEN Class A common stock.

 

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PEN’s Actions Upon Receipt of Your Demand for Payment. Within 20 days after PEN receives your demand for payment and your estimate of the fair value of your shares of Applied Nanotech common stock, PEN must send you written notice stating whether or not it accepts your estimate of the fair value of your shares.

 

If PEN accepts your estimate, PEN will notify you that it will pay the amount of your estimated fair value within 90 days of the merger being completed. PEN will make this payment to you only if you have surrendered the share certificates or the signed assignments of ownership in non-certificated shares, as applicable, representing your shares of Applied Nanotech common stock, duly endorsed for transfer, to PEN.

 

If PEN does not accept your estimate, PEN will notify you of this fact and will make an offer of an alternative estimate of the fair value of your shares that it is willing to pay you within 120 days of the merger being completed, which you may accept within 90 days or decline.

 

Payment of the Fair Value of Your Shares of Applied Nanotech Upon Agreement of an Estimate. If you and PEN have reached an agreement on the fair value of your shares of Applied Nanotech common stock within 90 days after the merger is completed, and if you have surrendered to PEN the duly endorsed share certificates or the signed assignments of ownership in non-certificated shares, as applicable, representing your shares of Applied Nanotech common stock, PEN must pay you the agreed amount within 120 days after the merger is completed.

 

Commencement of Legal Proceedings if a Demand for Payment Remains Unsettled. If you and PEN have not reached an agreement as to the fair value of your shares of Applied Nanotech common stock within 90 days after the merger is completed, you or PEN may, within 60 days after the expiration of the 90-day period, commence proceedings in Travis County, Texas, asking the court to determine the fair value of your shares of Applied Nanotech common stock. The court will determine if you have complied with the dissent provisions and if you have become entitled to a valuation of and payment for your shares of Applied Nanotech common stock. The court will appoint one or more qualified persons to act as appraisers to determine the fair value of your shares. The appraisers will determine the fair value of your shares and will report this value to the court. The court will consider the report, and both you and PEN may address the court about the report. The court will determine the fair value of your shares and direct PEN to pay that amount, plus interest, which will begin to accrue 91 days after the merger is completed.

 

Rights as a Shareholder. If you have made a written demand on PEN for payment of the fair value of your shares of Applied Nanotech common stock, you will not thereafter be entitled to vote or exercise any other rights as a shareholder except the right to receive payment for your shares as described herein and the right to maintain an appropriate action to obtain relief on the ground that the merger would be or was fraudulent. In the absence of fraud in the merger, your right under the dissent provisions described herein is the exclusive remedy for the recovery of the value of your shares or money damages with respect to the merger.

 

Withdrawal of Demand. If you have made a written demand on PEN for payment of the fair value of your Applied Nanotech common stock, you may withdraw such demand at any time before payment for your shares has been made or before a petition has been filed with a court for determination of the fair value of your shares. If you withdraw your demand or are otherwise unsuccessful in asserting your dissenters’ rights, you will be bound by the terms of the merger and your status as a shareholder of PEN will be restored without prejudice to any corporate proceedings, dividends or distributions which may have occurred during the interim.

 

Income Tax Consequences. If you dissent from the merger the income tax consequences to you will be different. Please consult your tax advisor to understand the federal, state or local income tax consequences of your action if you elect to dissent from the merger.

 

 

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THE SHARE INCREASE – PROPOSAL 2

 

Our amended and restated articles of incorporation currently authorize up to 162 million shares of capital stock, of which 160 million are shares of our common stock and the remaining 2 million can be shares of preferred stock. As of the record date we have approximately 157 million shares of common stock issued and outstanding leaving approximately 3 million shares of common stock available for future issuances. We have outstanding various convertible debt instruments, stock options and a restricted stock award summarized in the table below that in the aggregate would require the issuance of approximately 49.8 million shares of our common stock. These commitments exceed our shares of common stock available for issuance by approximately 46.8 million.

 

 

Security

Potential

Date of

Issuance (i)

Market

Price

6/27/14

Dilution

Formula

Remaining

Debt

interest thru

6/30/14

Price

Per

Share

Underlying

Shares

(thousands

Applied Nanotech Common Stock Authorized            160,000
Applied Nanotech Common Stock (ii) Now outstanding         157,554
Fixed Convertible Notes (iii) At Holder's option   Based on accrued interest $ 979,210 $0.05  19,584
      through conversion date at $  41,537 $0.08 519
      interest rate of 8.0% annually; conversion to stock at either $0.05, $0.08 or $0.10. $ 1,146,723 $0.10 11,467
Variable Convertible Notes            
JMJ Financial At Anytime $0.0524 Note converts based on $ 22,704 $0.037 619
      lesser of $0.25 or 70% of market price. Example shown based on 6/27/14 closing share price of $0.0524.  
Chief Financial Officer Promissory Note 12/31/14      $ 75,000 $0.05 1,500
Chief Financial Officer Stock Grant Agreement

9/1/14

Closing + 180 days

1/31/15

        1,200
1,200
890
Variable Convertible Notes from Bridge Financing Later of 180 days after the date the Note is issued or 60 days after closing or 10/15/14. $0.0524 Note converts based on 75% of market price; interest compounds at 8.0%. Example shown is estimated amount of Bridge Financing at 6/27/14 market close of $0.0524. $ 100,000 $0.039  2,545
Options various   See Options Table   5,888
Proposed increase authorized shares           340,000
Remaining authorized shares available           297,035

 

Footnotes on above table:

(i) First date convertible notes are convertible, restricted stock is non-forfeitable, options are exercisable, etc.

(ii) Based on shares outstanding on record date.

(iii) Holder also has option to convert if combination does not occur after Applied Nanotech has sufficient authorized shares.      

 

 

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The board believes it is important for us to have additional shares of our common stock available to meet our existing commitments discussed above and for future issuance. A significant additional factor is our need for future working capital needs. For the past ten years, with the exception of 2010 when we had net income of $411,304, our expenditures have exceeded our revenues and we have recorded losses of several million dollars each of the other nine years. While the board and management have significantly reduced expenses for 2014 and proposals have been submitted for additional research contracts to attempt to increase our revenue, we will require additional financing in order to continue our operations if the combination does not occur. Without additional authorized shares of common stock financing using convertible debt or equity will not be possible.

 

Additional authorized common stock will allow the board to issue common stock as an incentive to employees or new executives if the combination does not occur and we determine to work to create commercial products using our intellectual property. Additional common stock will also allow the board to use stock to acquire assets or businesses or to participate in joint ventures that may allow us to commercialize our intellectual property and increase the value of our business.

 

For these reasons the board has unanimously recommended that the shareholders vote FOR an increase in our authorized capital stock from 162 million to 502 million shares, of which 2 million would remain preferred stock and the rest, 500 million shares would be shares of common stock. As described above, our 157 million outstanding shares of common stock and the approximate 46 million reserved for issuance total approximately 203 million shares. Of the increased number of shares if Proposal 2 is approved, approximately 297 million would be available for future issuance as the board determines.

 

ADVISORY (NON-BINDING) VOTE ON CERTAIN

EXECUTIVE COMPENSATION – PROPOSAL 3

 

Under SEC rules that now apply to us, our shareholders have the right to vote to inform the board of directors whether the shareholders approve or disapprove of certain compensation, called “golden parachute compensation”, that would be payable to our executive officers if their employment is terminated after the combination closes.

 

The only executive officer whose compensation will be changed as a result of the combination is Dr. Yaniv. The terms for Mr. Baker, our former Chief Financial officer were entered into on or about the date of the Merger & Exchange Agreement, but those terms will not be affected, regardless whether the combination closes or the Merger & Exchange Agreement is terminated. Dr. Fink and Ms. Soptick have no employment agreements, and there are no plans or programs that will result in any payments or any change in their compensation or benefits as a result of the closing of the combination, their continued employment, or a separation from service except for severance policies applicable to all employees. Both Dr. Fink and Ms. Soptick hold options to purchase Applied Nanotech shares, 383,318 and 89,061, respectively. These options have already vested, so the change of control as a result of the combination has no effect, and they will be assumed by PEN as will all other options of Applied Nanotech.

 

If the combination occurs, at that time the employment arrangement with Dr. Yaniv will change. He will cease being our Chief Operating Officer and President and will resign all director positions with Applied Nanotech and its subsidiaries. At the time of the closing, he will become the Vice President of Strategic Innovation of PEN, reporting to Dr. Rickert. He will have no employment agreement with PEN. The new arrangements terminate the previous employment agreement and include mutual releases of claims through the closing date. There will also be a Restricted Stock Agreement that grants Dr. Yaniv 6,800,000 shares of PEN’s Class A common stock, subject to forfeiture. All these shares become vested and not subject to forfeiture on the earlier of a change of control of PEN, Dr. Yaniv’s death, or if more than 180 days after closing the average trading price of the shares during a measurement period of ten consecutive trading days reaches certain price thresholds. At a $0.10 price, one million of the shares vest, with additional tranches of one million shares vesting if the price reaches $0.15, $0.20, $0.25 and $0.30. The last 1.8 million shares vest at a $0.35 price threshold. Any shares that have not vested five years after the closing will be forfeited. Dr. Yaniv will also be entitled to piggyback registration rights that will allow him, subject to other customary terms and conditions, to register the recently awarded shares when they are no longer subject to forfeiture if PEN is registering its stock.

 

Quantification of Payments to Our Named Executive Officers

 

The information set forth below is intended to comply with Item 402(t) of Regulation S-K, which requires disclosure of information about certain compensation for our named executive officers that is based on or otherwise relates to the Combination.

 

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The table below sets forth the amount of compensation payable to Zvi Yaniv, an executive officer of Applied Nanotech in connection with the Combination. For additional details regarding the terms of the payment described below, see Interests of Applied Nanotech’s Directors and Executive Officers in the Combination at page 74, and Certain Beneficial Owners of Applied Nanotech Common Stock at page 88.

 

Golden Parachute Compensation

 

Named Executive Officers  Cash($)   Equity(1)($)    Pension/ NQDCP   Perquisites/ Benefits($)   Tax Reimbursement($)   Other($)   Total($) 
                                    
Dr. Zvi Yaniv President and Chief Operating Officer       467,160                    467,160 

 

(1) The amount in this column represents the average closing market price of Applied Nanotech common stock over the first five business days following the March 11, 2014 public announcement of the proposed grant of 6,800,000 shares of PEN’s Class A common stock as provided for in the March 10, 2014 Restricted Stock Agreement that Applied Nanotech entered into with Dr. Yaniv as part of his amended compensation arrangements set forth in a March 10, 2014 letter agreement as discussed above.  The grant of shares is subject to certain vesting requirements discussed above.

 

VALIDITY OF COMMON STOCK

 

 The validity of the shares of PEN Class A common stock to be issued in the Redomestication Merger and the Nano Merger will be passed upon by Donald T. Locke.

 

CERTAIN BENEFICIAL OWNERS OF APPLIED NANOTECH COMMON STOCK

 

No persons or entities are known to be the beneficial owner of 5% or more of the outstanding voting stock of the common stock of Applied Nanotech Holdings, Inc. stock as of February 20. 2014. This information is based on public filings as of May 28, 2014. For the purposes of this Proxy Statement, beneficial ownership of securities is defined in accordance with the rules of the SEC to mean generally the power to vote or dispose of securities, regardless of any economic interest therein.

 

Set forth below is certain information with respect to beneficial ownership of Applied Nanotech Holdings’ common stock as of May 27, 2014, by each Director, each Named Executive Officer, and by the directors and executive officers as a group. Unless otherwise indicated, each person or member of the group listed has sole voting and investment power with respect to the shares of common stock listed.

 

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       Balance 5/27/14   6/30/2014   Total   Percentage 
 
 
 
 
Shares
Owned
 
 
 
 
Total Options Held  
 
 
 
Vested (1)
Options
 
 
 
 
Convertible
Notes
 
 
 
 
Vested
5/27/2014
 
 
 
 
of Ownership
of Securities
 
 
                         
Doug Baker (officer through 3/15/14)   100,000                   100,000      
Convertible notes                  2,846,740    2,846,740      
Options        786,100    786,100         786,100      
                               
Total   100,000    786,100    786,100    2,846,740    3,732,840    2.32% 
                               
Zvi Yaniv                              
Shares   160,000                   160,000      
Convertible notes                  875,380    875,380      
Options        805,600    805,600         805,600      
                               
Total   160,000    805,600    805,600    875,380    1,840,980    1.16% 
                               
Jacque Soptick (officer effective 4/15/14)                              
Shares   344,582                   344,582      
Options        89,061    89,061         89,061