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NANO MASK, INC.
(Formerly, Emergency Filtration Products, Inc.)
Notes to the Financial Statements (Unaudited) (Continued)
For the Three Months Ended March 31, 2009 and 2008
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited and has been prepared consistent with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8, Rule 8.03 of Regulation S-K. Accordingly, these financial statements do not include all information required by generally accepted accounting principles for annual financial statements. These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2008, from which the balance sheet information at that date is derived and reference is made thereto elsewhere in this report. These interim financial statements contain all adjustments necessary in the opinion of management for a fair statement of results for the interim periods presented.
The results of operations for the three months ended March 31, 2009, are not necessarily indicative of the results to be expected for the full year.
Certain minor reclassifications in prior period amounts have been made to conform to the current period presentation.
NOTE 2 – LOSS PER SHARE
Following is information relative to the computation of basic loss per share:
| | | |
| | For the Three Months Ended |
| | March 31, |
| | 2009 | 2008 |
| | (Unaudited) |
| | | |
Net loss | | $ (126,228) | $ (216,666) |
| | | |
Weighted-average shares outstanding | | 47,865,535 | 45,118,911 |
| | | |
Basic loss per share | | $ (0.01) | $ (0.01) |
Weighted-average shares issuable upon the exercise of outstanding stock options were not included in the foregoing calculations at March 31, 2009 and 2008, 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 March 31, 2009, and the Company has a substantial working capital deficiency at March 31, 2009.
Unsecured loans were received by the Company in 2008 totaling approximately $60,000, which have been used to fund the continued operations of the Company. During the three months ended June 30, 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. 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 $479,000, settlement of $16,930 in expenses incurred by three key officers and conversion of a $22,989 loan made by a key officer, including interest of
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NANO MASK, INC.
(Formerly, Emergency Filtration Products, Inc.)
Notes to the Financial Statements (Unaudited) (Continued)
For the Three Months Ended March 31, 2009 and 2008
$2,989. Management and board members are continuing to discuss other alternative financing options, but no definitive proposals or agreements have been reached.
Nevertheless, the Company currently does not have sufficient working capital to sustain its planned business activities for the next 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. 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 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 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
Unsecured loans were received by the Company in 2008 totaling approximately $60,000 which has been used to fund the continued operations of the Company. In April and June 2008, two private placement offerings totaling 2,746,624 common shares were completed and generated net proceeds of $270,335.
Gain from settlement of vendor liabilities largely represents $12,256 from reductions by vendors of their receivables from the Company.
NOTE 5 - SUBSEQUENT EVENTS
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 accept 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, as payment of their notes of $255,673, including interest of $30,673. In addition, another unrelated note-holders agreed to convert his note of $5,386, including interest of $386, into 41,431 common shares at $.13 per share.
Also 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 $479,000, settlement of $16,930 in expenses incurred by three key officers and conversion of a $22,989 loan made by a key officer, including interest of $2,989.
During 2010 and 2011, the Company received cash advances from two executive officers of $87,500 and $68,500, respectively. In July 2010 an executive officer accepted 196,078 common shares as repayment of the Company’s
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NANO MASK, INC.
(Formerly, Emergency Filtration Products, Inc.)
Notes to the Financial Statements (Unaudited) (Continued)
For the Three Months Ended March 31, 2009 and 2008
note payable to him of $10,000. 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 repayment of $93,500 in loans from one of its executives with 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, including the $12,256 noted under Note 4, which has resulted in reductions of approximately $403,000 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 placement offerings, stock-based compensation and expense reimbursements and notes payable conversions to common shares:
NOTE 6 – 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.
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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 MARCH 31, 2009 IS BEING FILED SUBSTANTIALLY LATE, ON OR ABOUT SEPTEMBER 9, 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
We are a materials-technology development company focused on health and wellness-related markets. The Company has evolved from a specialty filter products Company that developed a state-of-the-art air filtration technology for removing infectious bacteria and viruses in air flow systems into a Company providing a proprietary line of antibacterial and antimicrobial products for the hospital, clinic and health industry. Such products now include our Nano Zyme line of products which offer a multi-enzyme hospital pre-soak and cleaning solution, as well as other complementary products in the line. Another line of products surrounds our new Nano Silver Hospital Curtains which, with additional testing, should offer excellent anti microbial efficacies against a wide spectrum of organisms. These products have been developed by partnering with innovative technology companies. The new product lines are in addition to our traditional anti-viral, antibacterial and disposable NanoMask™, a protective filtration face mask which we continue to improve upon. Largely, the evolution to this broader spectrum of products only began in 2010.
Since its inception, the Company has been involved in the development of its technology. Through March 31, 2009, 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 December 31, 2009, the Company has funded itself by way of a series of private equity placements and unsecured loans which has offset its accumulated equity 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 March 31, 2009 compared with 2008
Revenues: During the three months ended March 31, 2009 and 2008, there were no revenues, due to the Company’s election late in 2006 to suspend sales of the NanoMask™ and related filters until FDA clearance could be obtained. In addition, the Company 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.
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Cost of Sales: Since there were no sales during the three months ended March 31, 2009 and 2008, there was no cost of sales.
Operating Expenses: During the three months ended March 31, 2009, the Company experienced a substantial decrease in general and administrative expenses of approximately $108,000 or approximately 53% compared to the three months ended March 31, 2008, primarily due to reductions in professional and legal fees incurred, consulting fees, product testing, travel costs, and insurance.
Research and development: Research and development relates to a new nano-particle mask and includes related FDA testing. $30,273 was spent in the three months ended March 31, 2009. 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.
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. In April and June 2008, two private placement offerings of 2,746,624 common shares were completed and generated net proceeds of $270,335. During 2008, funds were raised totaling approximately $60,000 through the issuance of unsecured promissory notes from various individuals. In June 2009, the Company authorized issuance of 2,395,000 units of common shares and warrants (to purchase common shares at $.50 per share, exercisable for two years) for total proceeds of $479,000.
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 reducing 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.
During 2008, 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. The Company is also working on minimizing operating expenses, to the extent possible, by reducing overhead costs, salaries, and other consulting and professional fees, in order to conserve available cash.
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 2008 audited financial statements.
Impact of Inflation
At this time, the Company does not expect that inflation will have a material impact on its current or future operations.
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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 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 September 8, 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
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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, 2008. 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 June 30, 2008, the Company issued 2,746,624 shares of its common stock in two private placements to various investors for total proceeds of $270,335. 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 $479,000, settlement of $16,930 in expenses incurred by three key officers and conversion of a $22,989 loan made by a key officer, including interest of $2,989. 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 UPON SENIOR SECURITIES
None.
ITEM 4 - RESERVED
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
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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.
September 9, 2011
By /s/Edward Suydam
Edward Suydam, Chief Executive Officer
September 9, 2011
By /s/Michael J. Marx
Michael J. Marx, Chief Financial Officer
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