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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Six Months Ended June 30, 2011
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, 2010, 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 six months ended June 30, 2011, 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 June 30, 2011, the Company has incurred negative cash flow from operations and significant losses, which have substantially increased its operating deficit at June 30, 2011. 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
The Company issued a short-term note payable of $25,000 to an affiliate with an annual interest rate of prime, plus 2%, payable in six months from February 22, 2011. Also, during the six months ended June 30, 2011, the Company received cash advances from an executive officer of $56,500.with no specific repayment terms.
The following table summarizes the common stock issued during the six months ended June 30, 2011:
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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Six Months Ended June 30, 2011
Due to the fair value of the common shares being less than the carrying value of the related payables, the Company recognized a gain on settlement of payables of $352,075 during the six months ended June 30, 2011. An additional gain of $20,000 was generated by writing off payables due to the expiration of the statute of limitations.
NOTE 4 – SUBSEQUENT EVENTS
Subsequent to June 30, 2011, the Company received cash advances from one executive officer of $59,000. Also, the Board of Directors authorized the repayment of another $26,000 in loans from the same executive with 928,570 common shares of stock. Finally, 1,400,000 shares of common stock were issued in a private placement to four individual investors for $35,000 in cash.
Subsequent to June 30, 2011, the Company negotiated settlements with vendors resulting in reductions of approximately $1,000 in trade payables.
The following table summarizes the common shares issued subsequent to June 30, 2011 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 fromOfferings | Stock-Based Compensation andExpense Reimbursements |
Settlement of Loans Payable |
Common Shares | Amount | Common Shares | Amount | Common Shares | Amount |
1,400,000 | $35,000 | 10,578,212 | $415,686 | 1,928,570 | $ 86,000 |
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 JUNE 30, 2011 IS BEING FILED SUBSTANTIALLY LATE, ON OR ABOUT JANUARY 27, 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 June 30, 2011, 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, 2011, the Company has funded itself by way of a series of private equity placements and had offset its accumulated deficit in this manner.
Results of Operations for the Three Months Ended June 30, 2011 compared with 2010
Revenues: During the three months ended June 30, 2011, there were revenues of approximately $25,500 derived from sales of Lab Coats (60%), Vira Masks (21%), Nano Zymes (16%) and other (3%). There were no revenues in the similar period of 2010.
Cost of Sales: Cost of sales as a percentage of sales approximated 66% for the three months ended June 30, 2011.
Operating Expenses: During the three months ended June 30, 2011 the Company increased its general and administrative expenses by approximately $125,000 or 95%, compared to the three months ended June 30, 2010, primarily due to significant auditing fees in a concerted effort to establish current filings with the SEC. 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 and travel.
Research and development: Research and development (R&D) relates to a new anti-viral and anti-bacterial mask, and includes related FDA testing. While there were no R&D expenses incurred during the three months ended June 30, 2011, approximately $2,000 was incurred in the three months ended June 30, 2010 on the new mask, an effort since discontinued. 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, 2011 compared with 2010
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Revenues:Revenues of approximately $26,000 and $0, respectively, were made during the six months ended June 30, 2011 and 2010. Product-line percentages are similar to those for the three months noted above.
Cost of Sales: The cost of sales percentage to sales of 66% is similar to that which occurred for the three months, as noted above.
Operating Expenses: During the six months ended June 30, 2011, the Company experienced a decrease in general and administrative expenses of approximately $13,000 or approximately 3% compared to the six months ended June 30, 2010, primarily attributable to elimination of the Chief Operating Officer position.
Research and development: Research and development relates to a new anti-viral and anti-bacterial mask, and includes related FDA testing. While no R&D expenses were incurred during the six months ended June 30, 2011, approximately $69,000 was incurred in the six months ended June 30, 2010 for 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. During the six months ended June 30, 2011 and 2010, the Company received cash advances from an executive officer for $56,500 and $77,500, respectively. Also, during 2011, the Company received $35,000 in cash from issuance of 1,400,000 shares of common stock. 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 instability in the financial markets and reduced credit availability 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 2010 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, 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.
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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.
The carrying values of prepaid expenses, accounts payable, accrued expenses and short term notes payable generally approximate the respective fair values of these instruments due to their current nature. The Company values its warrants and non cash common stock transactions under FASB ASC 820 which defines fair value and the criteria for its determination.
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The Company uses Level 3 inputs to value warrants issued, and Level 1 inputs to value its common stock transactions.
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
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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 June 30, 2011, 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. To overcome this weakness, our principal executive and financial officers have reviewed and provided additional substantive accounting information and data in connection with the preparation of this quarterly report. 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.
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 June 30, 2011 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, filed in the District Court of Clark County in Nevada (Case No. A-10-631192-C) and which seeks collection of notes payable by 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 October 31, 2011, 1,400,000 shares of common stock were issued in a private placement to four individual investors for $35,000 in cash.
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.
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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
