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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Six Months Ended June 30, 2012
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, 2011, 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, 2012 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, 2012, the Company has incurred negative cash flow from operations and significant losses, which have substantially increased its operating deficit at June 30, 2012. 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
During the six months ended June 30, 2012, the Company received cash advances from two executive officers of $13,700 and $12,000, respectively with no specific repayment terms. And two officers paid expenses on behalf of the Company for an amount of $9,613 and $5,297, respectively. In addition, the Company repaid $8,703 to one officer by issuing common stock of 290,099 shares and repaid $22,927 to another officer in cash. Furthermore, the Company received $25,000 from issuance of 1,000,000 shares of common stock during February, 2012.
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 $2,365 during the six months ended June 30, 2012. An additional gain of $5,000 was generated by writing off payables due to the expiration of the statute of limitations.
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NANO MASK, INC.
Notes to the Financial Statements (Unaudited)
For the Six Months Ended June 30, 2012
The following table summarizes the common stock issued during the six months ended June 30, 2012:
NOTE 4 – SUBSEQUENT EVENTS
Subsequent to June 30, 2012, the Company received cash advances from two executive officers of $13,200.
NOTE 5 – CONTINGENCIES
On March 5 2012, the Company received a complaint from a certain attorney seeking collection of his invoices in the amount of $167,167, plus interest and litigation expenses. The Company does not believe the claim has any merit and has submitted a motion for dismissal. At this point, the Company is awaiting the claimant’s amendment to his claim.
On or about May 8, 2012, the Company received a complaint from a certain former employee seeking collection of his charges as a distributor and as an employee in the amount of $409,525, plus interest and litigation expenses. The Company believes the likelihood of loss in this case is remote and intends to offset for certain expenditures made by the Company caused by employee. The Company has already recognized $37,500 as a liability at June 30, 2012.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2012, 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, 2012, 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, 2012 compared with 2011
Revenues: During the three months ended June 30, 2012, there were revenues of approximately $81,000 derived from sale of Sheets (84%) and Nano Zymes (16%). 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%).
Cost of Sales: Cost of sales as a percentage of sales approximated 79% for the three months ended June 30, 2012 compared with 66% in the similar period of 2011. This higher percentage in the last three months is attributable to lower margins for our product sales in this period.
Operating Expenses: During the three months ended June 30, 2012 the Company’s general and administrative expenses declined by approximately $96,000 or 37%, compared to the three months ended June 30, 2011, primarily due to a significant reduction in auditing fees ($120,000) offset by increases in salaries ($27,000). 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) expenditures have become inconsequential in both 2012 and 2011 as management devotes its limited resources to the products that it has recently developed through third-party sources. 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, 2012 compared with 2011
Revenues: During the six months ended June 30, 2012, revenues of approximately $300,000 reflect the following products: Sheets (96%) and Nano Zyme products (4%). Revenues of approximately $25,700 in 2011 for the same period reflect the following products: Lab Coats (60%), Vira Masks (21%), Nano Zymes (16%) and other (3%).
Cost of Sales: During the six months ended June 30, 2012, the cost of sales percentage to sales of 68% is largely similar to the 66% for the six months ended June 30, 2011.
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Operating Expenses: During the six months ended June 30, 2012, the Company realized reduced general and administrative expenses of approximately $29,000 or approximately 7% compared to the six months ended June 30, 2011, primarily attributable to reduced auditing fees ($106,000), offset by salaries and director fees ($58,000) and sales-related expenses ($21,000).
Research and development: Research and development (R&D) expenditures have become inconsequential in both 2012 and 2011 as management devotes its limited resources to the products that it has recently developed through third-party sources. 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. During the six months ended June 30, 2012, the Company received cash advances from two executive officers of $13,700 and $12,000, respectively with no specific repayment terms. And two officers paid expenses on behalf of the Company for an amount of $9,613 and $5,297, respectively. In addition, the Company repaid $8,703 to one officer by issuing common stock of 290,099 shares and repaid $22,927 to another officer in cash. During the six months in 2011, the company received cash advances from two officers for the amount of $56,500 and $2,000. The company repaid $2,000 to one officer. Also, during 2012, the Company received $25,000 in cash from issuance of 1,000,000 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 2011 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
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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.
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.
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.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of June 30, 2012, the end of the period covered by this quarterly report, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company’s management, including our company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our company’s Chief Executive Officer and Chief Financial Officer concluded that our company’s disclosure controls and procedures are ineffective as at the end of the period covered by this report.
There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On March 5 2012, the Company received a complaint from a certain attorney seeking collection of his invoices in the amount of $167,167, plus interest and litigation expenses. The Company does not believe the claim has any merit and has submitted a motion for dismissal. At this point, the Company is awaiting the claimant’s amendment to his claim.
On or about May 8, 2012, the Company received a complaint from a certain former employee seeking collection of his charges as a distributor and as an employee in the amount of $409,525, plus interest and litigation expenses. The Company believes the likelihood of loss in this case is remote and intends to offset for certain expenditures made by the Company caused by employee. The Company has already recognized $37,500 as a liability at June 30, 2012.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the month ended February 28, 2012, 1,000,000 shares of common stock were issued in a private placement to two individual investors for $25,000 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
