http://www.appliednanotech.net/investors/shareholder_comm_2012-Jan.php

At the start of another year, I wanted to share an update on some of our activities and discuss our vision for the future.

Vision
Our vision always has been, and continues to be, to develop new technologies that will result in new, or substantially improved products, and to commercialize these technologies either by ourselves, or in conjunction with strong manufacturing partners. A discussion of our vision for the future needs to start with a recap of our recent history. Prior to 2006, when we made a major strategic shift, we were almost entirely focused on display technology – more specifically, a field emission display (FED) technology applicable to large flat screen televisions. By 2006, given improvements and cost reductions in competing existing technologies, such as LCD, it was becoming clear that the odds of an industry introduction of FED technology were decreasing. With that foresight, we recognized that this reliance on one area would not sustain the company for the long-term and undertook a diversification plan; focusing on other areas where we could apply the same expertise we had developed in the display industry. We focused on more basic products, many in the materials or industrial areas, rather than on end consumer products. While we still possess significant intellectual property (IP) around our FED technology and are working towards monetizing that IP, today our entire business is built around technology that we have developed since that strategic shift in 2006.

Commercialization Plan/Revenue Model
Obviously a company of our size was never going to become a TV manufacturer, so our revenue model was built on licensing our technology to established display manufacturers. In 2006, as we began diversifying in other areas, we continued to pursue the technology licensing model we had used with display manufacturers. Both to validate the applications that we worked on, and because of our limited financial resources, we sought out partners willing to fund substantial research and development, yet at the same time preserved our IP ownership. Of course those parties received licensing rights for their particular applications, many times with a pre-negotiated framework for an eventual license. Since we were in very early phases, these projects were multiyear projects that moved from an idea, to a concept, to a prototype, to pilot production, to products. While this took time, as I will discuss more later, it provided us the opportunity to develop extensive IP that can be applied to other applications that fall outside of the scope of the funded projects we had developed with our partners.

Although we have been successful in licensing our technologies, a drawback of the licensing model is that it cedes a lot of control to the licensees. Introduction of new products, or new technologies, by licensees is affected by a lot of factors unique to the licensee and unrelated to our technology, such as marketing cycles, existing products, endorsements, investments in existing technologies, and more. One of our objectives has always been to have more input into, and control over, the commercialization process with our licensing partners, and over the past few years we have been focusing on relationships that enable that type of control.

We have spent the last two years focusing on our fundamental financial measures – improving our balance sheet and cash position and increasing revenue, and building a strong base for growth. We now have a full complement of technologies ready to be commercialized, with at least one product in each of our four core areas of technology – Nanomaterials, Nanoelectronics, Thermal Management, and Sensors.

Nanomaterials
Our nanomaterials division is focused on carbon nanotube enhanced composites and is built on the foundation of work that we developed for Yonex. We have moved beyond the epoxies used by Yonex to other types of resins, including polyesters and vinyl esters, as well as many other types of applications - industrial as well as consumer based applications. Our revenue from Yonex comes primarily from royalties on product sales by Yonex, and we will continue to pursue licenses in the nanomaterials area, especially in cases where we can generate royalties based on the end products. In addition to licensing, we are also actively pursuing direct sales of enhanced resins to end-users.

For industrial applications, customers are much more interested in simply purchasing a product, rather than licensing a technology and our revenue potential is much greater because we do not have to license our technology to another materials supplier. We have the capability to supply these enhanced resins relatively easily, with the capacity (in our pilot facility) to produce significant quantities, as we do with Yonex now. When order quantities exceed our capacity, production is then easily outsourced and we have already identified potential outsourcing partners.

Of course the important thing is our ability to sell the product. For that, we have added sales resources to work with our extensive list of potential customers and are making excellent progress. Because of the extensive work that we have already done and the knowledge we have gained over the past few years, we have drastically shortened our sales cycle. While there are many types of resins used by potential customers, because of the similarities and our knowledge in this market, once we start working with a customer, we can be supplying materials within a period of months, rather than the years. In addition, we have reached the point where dedicated sales resources in this area make sense, unlike in our development phase, where the sales process required heavy involvement of our scientists. Now that we have reached this point, we expect to see rapid results of our efforts.

In 2012, we expect the royalties from Yonex to increase over the 2011 level and we expect to begin building momentum with our direct resin sales. We are also exploring opportunities to expand our capabilities, beyond simply enhanced resins, to prepreg and other related products. Within the CNT composite area, we also expect to pursue additional licenses with royalties based on end products.

Nanoelectronics
Our work in nanoelectronics focuses on conductive metallic inks. It was built on the work we did with copper inks and pastes with Ishihara, and as part of our initial agreement, they reserved the copper inks and pastes for themselves. We have licensed the copper inks and pastes exclusively to Ishihara, but because of our work with Ishihara, we have been able to expand to other types of inks and pastes, such as aluminum, silver, nickel, and more. Within the inks area, we are primarily pursuing a licensing model, with some relationships more strategic in nature. For example, our working relationship with YHCC goes beyond our license agreement for our solar inks, which covers Asia (excluding Korea and Japan). YHCC also has a strategic investment into the company and we are pursuing other opportunities together. We are also exploring relationships with other potential partners for our solar inks in the rest of the world and anticipate the resulting agreement would involve more than just a license. This agreement could be a joint venture, or other strategic relationship.

We anticipate several significant events in 2012 in our inks area. First, we expect YHCC to introduce its aluminum pastes this summer. They are building an $18 million dedicated facility to produce aluminum paste and we would expect that to begin generating royalties in the third quarter. We also expect to finalize an agreement in the first half of 2012 that would cover the solar inks area for the rest of the world not already covered by the YHCC agreement.

Most importantly, we expect Ishihara to introduce a product by the end of the year. They are currently constructing a dedicated facility for production of copper inks and pastes, and they have a sales force in place and are actively working with potential customers. They have an impressive pilot facility and will be able to supply some inks from that facility later this year.

Thermal Management
Our thermal management technology is based on our CarbAl™ material. In addition to the Carbon Aluminum composite material, we have developed a simplified version based on graphite that we call CarbAl™ G. We have spent the last two years developing a reliable supply source and working with the material to develop value added services, such as laminating, cutting, and printing directly on the CarbAl™. We have developed an extensive list of potential customers and have reached the point where a more focused sales presence is necessary. Therefore, we have hired a senior sales executive with extensive experience in the thermal management industry to lead these efforts – he began this month, January 2012. We are expecting to see substantial increases in CarbAl™ sales in 2012.

Our focus in thermal management is on direct sales of the material. Our business model is to buy the basic raw material, provide value added services, and sell the product to customers. We have a pilot facility capable of producing the products that we anticipate selling and with a relatively small capital investment can substantially increase our capacity. To the extent our sales demand exceeds our internal capacity; we can easily outsource some of the production, or partner with a higher volume manufacturer. We do not anticipate significant licenses in the thermal management area, but in instances where we are able to receive a royalty on the end product, will certainly consider licenses.

Nanosensors
I have saved one of our most potentially lucrative divisions for last. We work with a variety of sensor technologies, but over the past two years have been focusing on differential mobility sensors using our proprietary nonradioactive ion source. Much of our development work on this sensor has been funded by the N.E. Gas association in conjunction with the development of a mercaptan sensor. Having developed a highly sensitive sensor that is capable of measuring gas levels at parts per trillion, we named our sensor EZKnowz™. While developed for mercaptan, EZKnowz™ has wide ranging applicability including in plant pathology, wound care, threat detection based on body scent, and breath analysis.

One of the more exciting potential applications involves breath analysis for the early detection of potentially serious diseases and we recently received a patent related to the collection of a breath sample and the analysis of that sample for potential disease states. We believe this is a very powerful patent that will have significant value, with the potential to control the area. As the world moves toward personalized medicine, breath analysis has the capability of significantly reducing costs in the health care area.

We have developed prototype units of our EZKnowz™ sensor which are being tested in the field for mercaptan and plant pathology. While its use for breath analysis requires additional application development related to the correlation of gas levels to specific diseases and software development related to the application, the potential upside is tremendous. We have hired Dr. Royce Johnson, who has experience with the commercialization of products in the medical equipment industry to help us with the sensor. Even though introduction of a product for breath analysis will like take a couple of years, for some of the other applications, a product introduction is likely in 2012.

Revenue Projections
Our revenue projections (shown below) are based on a mix of revenue from each of these four divisions, including research revenues, royalties where appropriate, and product sales.

Our business plans and projections for each of the four divisions underlie the numbers in these projections. We believe that that these individual division projections are very conservative - any one of these divisions has potential on its own to achieve the total forecasted product sales. Or, said another way, these projections are not based on assumed perfection. Certainly we have to execute, but there is so much upside in some divisions, that they could easily overcome shortfalls in other divisions, if that were to happen.

We also realize that we will have to bring in more resources to achieve these numbers and have included those resources and related costs in our projections at the appropriate times. Over the past three months, we have added to our sales team and anticipate adding more as sales increase. We also anticipate adding to our management team at the appropriate time. Some of our divisions could easily progress to the point where they would operate as a separate subsidiary with their own management team.

At the present time, our plan is built upon insuring that we operate within the scope of our existing resources. We are reviewing some options that would accelerate our growth and unlock the value of our technologies more quickly.

2011 Results
We are currently finalizing our results for 2011 and our auditors will begin their audit this week. We will be filing our 10K approximately March 1, 2012 and I will comment in detail on our results once they are released. Our revenues will end up in the projected range of $6.5 to $7.0 million, which represents an increase over our core revenues (excluding the Samsung license) of $5.5 million in 2010.

Investor Relations Activities
Things are progressing well with our IR activities and we continue to focus on introducing our story to new potential investors. We believe the groundwork that we have put in place is instrumental to attracting investor activity, both now and in the future. We have additional events scheduled with RedChip in the first quarter and will continue to tailor our efforts as appropriate.

Patent Auction
The ICAP Ocean Tomo patent auction that included some of our IP was held in November 2011. No bids were submitted that met the minimum requirement for our IP, however several parties expressed interest and we are following up with those companies. This is exactly what happened at the March 2010 patent auction that ultimately resulted in the patent sale/license several months later to Samsung in November 2010. While that does not guarantee that the same result will be achieved, we remain optimistic. Our 2012 plan does not include any amounts related to these patent sales, so if we conclude an agreement at some point, it will be additive to our plan.

Conclusion
We look forward to continuing our growth in 2012 and executing on our business plan. We are encouraged by our overall business development activity and the opportunities in front of us. We expect continued year over year revenue growth in our core activities and look forward to profitability in 2012. We believe that our plan, including our expanded IR activities, will result in increased investor awareness, and ultimately increased shareholder value. We appreciate the support we have received and we are excited to continue to implement the plan that we have put in place.

Sincerely,
Doug Baker
Chief Executive Officer