Weighted-average shares issuable upon the exercise of outstanding stock warrants and options were not included in the foregoing calculations at June 30, 2008 and 2007, because in loss periods, to do so would be anti-dilutive.
NOTE 3 – GOING CONCERN
The Company’s financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred negative cash flow from operations and significant losses, which have substantially increased its operating deficit at June 30, 2008 and the Company has a substantial working capital deficiency at September 30, 2008.
During 2007, the Company raised $1,250,000 through a private sale of common shares to its former President/CEO ($150,000) and to a significant shareholder ($1,100,000). In addition, this same significant shareholder loaned a total of $200,000 to the Company during July and August 2007, pursuant to two separate $100,000 unsecured promissory notes, each with a one-year term and interest at prime plus 2%. Additional unsecured loans have been received by the Company during 2007 totaling approximately $667,000 and another $60,000 was received in 2008, which have been used to fund the continued operations of the Company.
Also, during 2008 an additional $270,335 has been received from the issuance of a total of 2,746,624 shares of common stock to various investors.
Nevertheless, the Company currently does not have sufficient capital to sustain its planned business activities for the year. Accordingly, management believes the Company will need to raise additional capital in the near future to sustain its operations, either through additional private placements of common stock or loans, possibly unsecured.
NANO MASK, INC.
(Formerly, Emergency Filtration Products, Inc.)
Notes to the Financial Statements (Unaudited)
June 30, 2008
NOTE 3 – GOING CONCERN (Continued)
These funds will be required to either continue the Company’s efforts to obtain sales of its new products or to enable the Company to produce inventory sufficient to meet expected demand levels. Management and board members are continuing to discuss other alternative financing options, but no definitive proposals or agreements have been reached.
.
Throughout 2007 and most of 2008, the Company continued to make substantial efforts to secure authority from the FDA to market its NanoMask™ product as a class II medical device in the United States and to export it from the United States. On April 10, 2007, we received a response from the FDA on the latest submission that included additional requests for further information and testing (including efficacy, safety, and shelf-life), which we worked on completing. These additional requests required additional scientific testing. However, on September 28, 2007, the FDA 510(k) application with the FDA was withdrawn, since the requested information and testing had not yet been completed. On June 13, 2008, the Company filed a 510(k) pre-market notification with the U.S. FDA for the NanoMask™ product. However, the Company subsequently withdrew from this process when Applied Nanoscience, Inc. (Applied), who licensed the nanoparticle formulation to the Company, did not provide the nature of its NanoMask™ particle composition. Late in 2010, the Company decided to focus its efforts in developing sales of two new, major products: Nano Silver Hospital products and Nano Zyme products.
Consequently, the Company’s ability to continue as a going concern will be dependent upon the success of management's future plans as set forth above, which cannot be assured. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
NOTE 4 – SIGNIFICANT TRANSACTIONS
In March 2007, the Company issued a total of 2,434,275 shares of common stock in a private placement to two individuals for total proceeds of $1,250,000, without any identifiable offering costs.
For the three months ended June 30, 2007, $291,000 of deferred compensation expense was recognized as an expense.
During April 2007, the Company granted 100,000 common stock options, each, to the Company’s Chief Operating Officer and Director of Regulatory Compliance, with an exercise price of $0.48 per option, exercisable until April 5, 2010. The Company also granted 50,000 common stock options, each, to the Company’s four directors with an exercise price of $0.48 per option, exercisable until April 5, 2010. None of the options were ever exercised.
In April and June 2008, two private placement offerings of 2,746,624 common shares were completed and generated net proceeds of $270,335.
NOTE 5 – SUBSEQUENT EVENTS
During July 2007, the Company granted an additional 25,000 common stock options, each, to two separate consultants for services rendered related to the FDA 510(k) application process. These options are exercisable at $0.31 per share for three years from the grant date. These options vest, however, upon receipt by the Company of FDA clearance of its NanoMask™ products. However, since the condition of FDA approval never occurred during the three year period, such options lapsed in July, 2010.
On April 28, 2009, the Company announced that a majority of its shareholders had voted to change the Company’s name to Nano Mask, Inc., to better reflect its core business of developing, marketing, and producing its NanoMask™ products. A majority of shareholders further approved an increase in the Company’s authorized capital to 100 million shares of common stock from the previous 50 million shares.
In June 2009, two unrelated note-holders agreed to convert their notes of $255,673, including interest of $30,637, into 1,826,237 units of common shares and warrants to purchase shares at an exercise price of $.50 per share, exercisable for two years until June 17, 2011. In addition, another unrelated note-holder agreed to convert his note of $5,386 into 41,431 common shares at $.13 per share.
NANO MASK, INC.
(Formerly, Emergency Filtration Products, Inc.).
Notes to the Financial Statements (Unaudited)
June 30, 2008
NOTE 5 – SUBSEQUENT EVENTS (Continued)
Again in June 2009, the Company authorized issuance of 2,594,597 units of common shares and warrants (to purchase common shares at $.50 per share, exercisable for two years) for total proceeds of $464,000, settlement of $39,919 in expenses incurred by three key officers and conversion of a $15,000 loan made by a key officer.
Furthermore, the Company has received $87,500 in cash advances from two executive officers during 2010 and $58,500 in 2011. In July 2010, an executive officer converted the Company’s note payable to him of $10,000 into 196,078 common shares. In addition, a significant shareholder loaned the Company $25,000 with interest at prime, plus 2%, payable in six months from February 22, 2011. Moreover, during 2011 the Board of Directors has authorized the conversion of $93,500 in loans from one of its executives into 2,866,477 common shares at an average price of $.033 per share. In July 2011, 400,000 shares of common stock were issued in a private placement to an individual investor.
In 2009 through 2011, the Company negotiated settlements with vendors resulting in reductions of approximately $390,000 in trade payables and accrued expenses.
The following table summarizes the issuance of common shares in subsequent periods and their related amounts for cash proceeds from private placements offerings, stock-based compensation and expense reimbursements and notes payable conversions to common shares:
NOTE 6 – COMMITMENTS AND CONTINGENCIES
On December 29, 2010, the Company received a complaint from Applied seeking collection of the as yet unpaid notes payable to Applied in the amount of $453,500, plus interest and litigation expenses. On February 1, 2011, the Company countersued for breach of contract and related claims. The Company believes that the value of its counterclaim will exceed the value of the claims asserted against it.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2008 IS BEING FILED SUBSTANTIALLY LATE, ON OR ABOUT AUGUST 1, 2011. SOME OF THE INFORMATION CONTAINED HEREIN REFERS TO HISTORICAL ACTIVITIES OF THE COMPANY FOR THE FISCAL PERIOD. SHAREHOLDER AND INVESTORS ARE ADVISED TO CONSULT THE COMPANY’S MORE RECENT FILINGS OF CURRENT REPORTS ON FORM 8-K AS WELL AS ADDITIONAL PERIODIC REPORTS FOR SUBSEQUENT PERIODS THAT THE COMPANY INTENDS TO FILE AS SOON AS POSSIBLE.
Cautionary Statement Regarding Forward-looking Statements
This report may contain "forward-looking" statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of our management or Board of Directors; (c) statements of our future economic performance; (d) statements of assumptions underlying other statements and statements about us and our business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions.
Overview
The Company is in the business of producing environmental masks and filters for medical devices that are designed to reduce the possibility of transmission of contagious diseases.
Since its inception, the Company has been involved in the development of its technology. Through June 30, 2008, revenues have not been adequate to cover operating expenses and thus, the Company has reported a loss in each of its years of existence. Through June 30, 2008, the Company has funded itself by way of a series of private equity placements and had offset its accumulated deficit in this manner.
In July 2007, the Company entered into a letter of intent with Applied Nanoscience Inc. (“Applied”), a related company due to some common ownership, directors and employees. On July 14, 2008, the Company and Applied entered into a definitive merger agreement. The final merger agreement required the approval of the Company’s shareholders as well as the shareholders of Applied. The merger would likely have produced a number of significant recurring cost savings and made it easier to access capital markets, and to commercialize and get the Company’s products to market more quickly. However, on February 25, 2009, the merger agreement was unilaterally terminated by Applied.
Results of Operations for the Three Months Ended June 30, 2008 compared with 2007
Revenues: During the three months ended June 30, 2008 and 2007, revenues were inconsequential due to the Company’s election late in 2006 to suspend sales of the NanoMask™ and filters until FDA clearance could be obtained. The Company also elected during early 2007 to postpone any further development and marketing of the emergency CPR assistance device, enabling the Company to devote all of its resources to the FDA clearance process of the NanoMask™ and filters.
During June 2008, the Company re-filed its 510(k) pre-market notification with the FDA for the NanoMask™ and filters. The process, timing, and results of the submission are uncertain at the present time. Upon receiving clearance from the FDA, should this occur, the Company will immediately pursue a number of substantial domestic governmental and international sales opportunities, especially in geographical areas more prone to avian influenza outbreaks.
Cost of Sales: Since there were no sales during the three months ended June 30, 2008, there was no cost of sales. However, the cost of sales as a percentage of sales during the three months ended June 30, 2007 rose disproportionately, primarily due to high production overhead costs under shutdown conditions while awaiting FDA clearance of the NanoMask™ and filters.
Since sales of all products were less than $10,000 for the comparative quarters, analysis of percentages by product are not meaningful for comparative cost of sales to sales results and are no longer presented hereafter. The significant components of our cost of sales include actual product cost, including outsourced manufacturing and packaging, overhead allocations, salaries and wages, rent and utilities, freight and shipping.
Operating Expenses: During the three months ended June 30, 2008, the Company continued to generate reductions in general and administrative expenses of approximately $204,000 or approximately 42%, compared to the three months ended June 30, 2007, primarily due to significantly lower officer compensation and related reductions in professional, consulting and legal fees. The significant components of our operating expenses include salaries and wages, consulting and other professional services, accounting, audit and legal fees, product and liability insurance, travel and office rent.
For the three months ended June 30, 2007, $291,000 of deferred compensation expense was recognized as an expense, with a remaining $6,000 recorded in stockholder’s equity as deferred compensation, to be recognized during the third quarter of 2007.
Research and development: Although not significant for the periods presented, the Company does not expect research and development costs to increase in the near future as it has determined to postpone any further development of additional pending products, allowing the Company to focus its entire resources to the FDA approval process of the NanoMask™ and filters. If resources are available in the future, the Company intends to bring additional products to market, assuming those products are still viable at the time the resources are available. The significant components of the Company’s research and development costs ordinarily include prototype development and materials, governmental filings and laboratory testing.
Results of Operations for the Six Months Ended June 30, 2008 compared with 2007
Revenues:During the six months ended June 30, 2008 and 2007, revenues were inconsequential, due to the Company’s election late in 2006 to suspend sales of the NanoMask™ and related filters until FDA clearance could be obtained. The Company also elected during early 2007 to postpone any further development and marketing of the emergency CPR assistance device, enabling the Company to devote all of its resources to the FDA clearance process of the NanoMask™ and filters.
Cost of Sales: Since there were no sales during the six months ended June 30, 2008, there was no cost of sales. However, the cost of sales as a percentage of sales during the six months ended June 30, 2007 rose disproportionally, primarily due to high production costs under shutdown conditions while awaiting FDA clearance of its masks and mask components.
Operating Expenses: During the six months ended June 30, 2008, the Company experienced a substantial decrease in general and administrative expenses of approximately $976,000 or approximately 53% compared to the six months ended June 30, 2007, primarily attributable to decreases in advertising, wages and officer compensation. Also, for the six months ended June 30, 2007, $582,000 of deferred compensation expense was recognized as an expense for which no such charges occurred in 2008.
Liquidity and Capital Resources
The Company has not been able to generate sufficient net cash inflows from operations to sustain its business efforts and accommodate its growth plans. During 2007, funds were raised totaling approximately $667,000 through the issuance of unsecured promissory notes from various individuals and another $60,000 was raised during 2008 from similar sources. Management and board members are continuing to discuss other alternative financing options, but no definitive proposals or agreements have been reached. Management is also working on minimizing the Company’s operating expenses, primarily overhead costs, salaries, consulting and professional fees, to the extent possible, to conserve available cash pending FDA clearance of the Company’s products.
The Company intended to pursue additional domestic and international distributor agreements, pending the outcome of the FDA process. Once cleared by the FDA, the Company expected the demand for its environmental masks and filters to substantially increase, enabling the Company to be able to generate sufficient cash flow from operations to cover its ongoing expenses. These efforts were largely abandoned in the latter part of 2008.
Beginning in the third quarter of 2008, the United States has been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, and is also engaged in war, all of which are likely to continue to have far reaching effects on economic activity in the country for an indeterminate period. The effects and probable duration of these conditions and related risks and uncertainties on the Company's ability to obtain financing, success in its marketing efforts and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.
The Company does not believe, however, that it currently has sufficient capital to sustain its business efforts for the next twelve months. Accordingly, the Company will need to raise additional capital in the near future to sustain operations.
Accordingly, for these and other reasons, there is significant uncertainty regarding the Company’s future, and the Company’s auditors expressed substantial doubt as to the Company’s ability to continue as a going concern in their report on the Company’s 2007 audited financial statements..
Impact of Inflation
At this time, the Company does not anticipate that inflation will have a material impact on its current or future operations.
Critical Accounting Policies and Estimates
Except with regard to the estimated useful lives of patents and acquired technology, the net realizable value of the Company’s inventory due to shelf-life issues and design, the allowance for bad debts on accounts receivable, and the effective provision of a 100% deferred income tax asset valuation allowance, (discussed below), the Company does not employ any critical accounting policies or estimates that are either selected from among available alternatives or require the exercise of significant management judgment to apply or that if changed are likely to materially affect future periods.
Management reviews the carrying value of the technology assets annually based on its current marketing activities, plans and expectations, and the perceived effects of competitive factors and possible obsolescence, whether any write-downs should be taken or whether the estimated useful lives should be shortened.
Management also reviews the carrying value of its inventory periodically for evidence of declines in estimated fair value and considers, based on its current marketing activities, plans and expectations, and the perceived effects of competitive factors and possible obsolescence due to shelf-life issues on the environmental filters, whether any write-downs should be taken.
Management also reviews the collectability of outstanding receivables based upon historical collection history from each customer, the age of the receivables, and the customers wherewithal to pay the outstanding balance, and records an estimated allowance for bad debts sufficient to cover any potential losses to be incurred for non-collections.
Recent Accounting Pronouncements
While there have been Financial Accounting Standards Board (FASB) pronouncements made effective subsequent to the issuance of these financial statements, none would have required restatement of the financial statements herein nor have they had any significant effect on future financial statements of the Company.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in prevailing market interest rates affecting the return on our investments but do not consider this interest rate market risk exposure to be material to our financial condition or results of operations. We invest primarily in bank money market funds with short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. Under our current policies,
we do not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage our exposure to changes in interest rates or commodity prices.
ITEM 4
CONTROLS AND PROCEDURES
Our principal executive and principal financial officers have participated with management in the evaluation of effectiveness of the controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our principal executive and financial officers believe that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) were not effective as of the end of the period covered by the report.
Pursuant to a letter from our independent auditors, dated June 30, 2011, that identified certain deficiencies in internal control over financial reporting as significant deficiencies identified as material weaknesses, we are in the process of making changes to our internal controls and procedures. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.
To overcome the material weaknesses, our principal executive and financial officers have provided additional substantive accounting information and data to our outside auditors in connection with their audit of the financial statements for the year ended December 31, 2007. Therefore, despite the weaknesses identified, our principal executive and financial officers believe that there are no material inaccuracies or omissions of material facts necessary to make the statements included in this report not misleading in light of the circumstances under which they are made.
We believe that all changes, when implemented, will likely provide reasonable assurance of the accuracy and completeness of our financial reporting. These changes in internal controls are believed reasonably likely to materially affect, our internal controls over financial reporting in future periods.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On December 29, 2010, the Company received a complaint from Applied, filed in the District Court of Clark County in Nevada (Case No. A-10-631192-C), seeking collection of notes payable to Applied in the amount of $453,500, including accrued interest. On February 1, 2011, we countersued for breach of contract and claims related thereto. Our management believes that the value of its counterclaim will exceed the value of the claims asserted against the Company but cannot fully assess the outcome of the action at this time. Accordingly, management believes adequate provision has been made in the accompanying financial statements related to this complaint.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2007, the Company issued 2,434,275 shares of its common stock in a private placement to two individuals for total proceeds of $1,250,000. In April and June 2008, two private placement offerings of 2,746,624 common shares were made generating proceeds of $270,335. These shares were issued in reliance on the exemption from registration and prospectus delivery requirements of the Act set forth in Section 3(b) and/or Section 4(2) of the Securities Act and the regulations promulgated hereunder.
ITEM 3 - DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
Exhibit 31.1 - Certification of principal executive officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
Exhibit 31.2 - Certification of principal financial officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
Exhibit 32.1 - Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NANO MASK, INC.
August 1, 2011
By /S/Edward Suydam
Edward Suydam, Chief Executive Officer
August 1, 2011
By /S/Michael J. Marx
Michael J. Marx, Chief Financial Officer
