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.

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:

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.

 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

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

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

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:

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.

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.

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.

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.

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.

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.

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.

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.

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 .

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:

At the effective time of the Nano Merger:

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.

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:

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:

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.

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.

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.

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.

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.

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.

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.

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:

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.

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:

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:

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.

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.

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.

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.

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:

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.

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:

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:

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.

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.

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.

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.

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.

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:

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.

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.

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:

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.

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.

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:

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.

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:

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.

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.

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.

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.

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.

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.  

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:

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.

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

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.

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:

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.

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.

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.

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:

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.

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.

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.

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.

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:

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:

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:

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.

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.

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:

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.

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 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 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.

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.

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.