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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Nine Months Ended September 30, 2010
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, 2009, from which the balance sheet information as of that date is derived. 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 nine months ended September 30, 2010, 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 – GOING CONCERN
The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, in addition to a working capital deficiency at September 30, 2010, the Company has incurred negative cash flow from operations and significant losses, which have substantially increased its operating deficit at September 30, 2010. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern will be dependent upon economic developments and the success of management's plans as set forth below, 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. Management and board members are continuing to discuss other alternative financing options, but no definitive proposals or agreements have been reached.
The foregoing notwithstanding, management does not believe the Company currently has sufficient capital to sustain its planned business activities for the next twelve months following the issuance of these financial statements. Accordingly, while management has historically been successful generating sufficient funds to sustain operations, there is no assurance that they will continue to do so. Nevertheless, the Company will seek additional capital to sustain its operations, either through additional private placements of common stock or loans, possibly unsecured, until such time as its operations are self-sustaining. These funds will be required to continue the Company’s efforts to generate sales of its products and to provide sufficient working capital to meet the expected sales demand.
NOTE 3 –SIGNIFICANT TRANSACTIONS
In July 2010, an executive officer was issued 196,078 shares of common stock for his $10,000 cash advance to the Company.
During 2010, the Company received cash advances from an executive officer for $77,500. These amounts are included in related party accounts payable as of September 30, 2010.
For the nine months ended September 30, 2010, 939,474 shares of common stock were issued to satisfy accrued payroll obligations amounting to $83,850. In addition, 376,508 shares were issued to satisfy key officer expenses of $27,737 during the same period.
In 2010, the Company issued a short-term note payable of $6,855 with an annual interest rate of 7.5%. This note was repaid as of September 30, 2010. In addition, a Nevada judgment caused the face amount of a note payable to increase by $12,620, but the interest rate declined from 12% per annum to prime rate, plus 2%.
Gains on settlement of vendor accounts payable and other largely represents $14,754 and $12,256 for the years 2010 and 2009, respectively, from reductions by vendors of their receivables from the Company.
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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Nine Months Ended September 30, 2010
NOTE 4 - SUBSEQUENT EVENTS
A significant shareholder loaned the Company $25,000 with interest at prime, plus 2%, payable in six months from February 22, 2011. During 2011, the Company received cash advances from one executive officer of $117,500. 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. Finally, in 2011, 1,400,000 shares of common stock were issued in a private placement to four individual investors.
Subsequent to September 30, 2010, the Company negotiated settlements with vendors which resulted in reductions of approximately $383,000 in trade payables and accrued expenses.
The following table summarizes the common shares issued subsequent to December 31, 2010 and their related amounts for cash proceeds from private placements offerings, stock-based compensation and expense reimbursements as well as settlement of loans payable:
| | | | | |
Cash Proceeds from Offerings | Stock-Based Compensation and Expense Reimbursements | Settlement of Loans Payable |
Common Shares |
Amount | Common Shares |
Amount | Common Shares |
Amount |
1,400,000 | $35,000 | 18,508,036 | $603,353 | 2,866,477 | $ 93,500 |
NOTE 5 – CONTINGENCIES
On December 29, 2010, the Company received a complaint from Applied Nanoscience, Inc. 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 maintains a right of offset against Applied’s notes in the amount of $41,360 and is reflected on the balance sheet in the net amount of $412,140.
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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 SEPTEMBER 30, 2010 IS BEING FILED SUBSTANTIALLY LATE, ON OR ABOUT JANUARY 5, 2012. 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 September 30, 2010, 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 September 30, 2010, 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 September 30, 2010 compared with 2009
Revenues: During the three months ended September 30, 2010 and 2009, there were no revenues, due to three reasons: 1) The Company’s election late in 2006 to suspend sales of the NanoMask™ and related filters until FDA clearance could be obtained which was anticipated as late as July, 2008; 2) The Company’s efforts thereafter until March 1, 2010 to develop a new anti-viral and anti-bacterial mask; and 3) The Company’s marketing efforts after March 1, 2010 to sell its new Nano Zyme and Nano Silver Hospital Products
Cost of Sales: Since there were no sales during the three months ended September 30, 2010 and 2009, there was no cost of sales.
Operating Expenses: During the three months ended September 30, 2010, the Company experienced a decrease in general and administrative expenses of approximately $10,000 or approximately 8% compared to the three months ended September 30, 2009, primarily due to decreases in officer compensation.
Research and development: Research and development relates to a new anti-viral and anti-bacterial mask, and includes related FDA testing. However, no costs were incurred in the three months ended September 30, 2010 and 2009. If resources are available in the future, the Company intends to bring additional products to market,
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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 Nine Months Ended September 30, 2010 compared with 2009
Revenues:During the nine months ended September 30, 2010 and 2009, there were no revenues, due to three reasons: 1) the Company’s election late in 2006 to suspend sales of the NanoMask™ and related filters until FDA clearance could be obtained which was anticipated as late as July, 2008; 2) the Company’s efforts thereafter until March 1, 2010 to develop a new anti-viral and anti-bacterial mask; and 3) the Company’s marketing efforts after March 1, 2010 to sell its new Nano Zyme and Nano Silver Hospital Products.
Cost of Sales: Since there were no sales during the nine months ended September 30, 2010, there was no cost of sales.
Operating Expenses: During the nine months ended September 30, 2010, the Company experienced an increase in general and administrative expenses of approximately $192,000 or approximately 58% compared to the nine months ended September 30, 2009, primarily attributable to increases in officer compensation.
Research and development: Research and development relates to a new anti-viral and anti-bacterial mask, and includes related FDA testing. Such expenses increased marginally from the nine months ended September 30, 2009. Approximately $69,000 was incurred in the nine months ended September 30, 2010 on this new mask.
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 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. During 2010, the Company received cash advances from an executive officer for $77,500.
Management and board members are continuing to discuss other alternative financing options, but no definitive proposals or agreements have been reached.
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 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 2010 audited financial statements.
Impact of Inflation
At this time, the Company does not anticipate that inflation will have a material impact on 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 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
Smaller reporting companies are not required to provide the information required by this item.
ITEM 4
CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.
For the period ended September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In the course of this evaluation, our management considered the material weakness in our internal control over financial reporting as discussed in our Annual Report on Form 10-K for the period ended December 31, 2010. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report on Form 10-Q, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the registrant’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
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Changes in Internal Control over Financial Reporting
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financing reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2010 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On December 29, 2010, the Company received a complaint from Applied Nanoscience, Inc., a Nevada corporation, filed in the District Court of Clark County in Nevada (Case No. A-10-631192-C) and which seeks 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
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. In July 2010, the Company issued 196,078 shares of common stock for $10,000 received in cash from an executive officer.
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
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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.
January 5, 2012
By /s/ Edward Suydam
Edward Suydam, Chief Executive Officer
January 5, 2012
By /s/ Michael J. Marx
Michael J. Marx, Chief Financial Officer
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