UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007.
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number: 00-26067
NANO CHEMICAL SYSTEMS HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 87-0571300 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
105 Park Avenue, Seaford, Delaware | 19973 | |
(Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number: 302-628-2100
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the Registrant’s common stock as of December 31, 2006 was 60,222,368.
Transitional Small Business Disclosure Format:
Yes ¨ No x
1
TABLE OF CONTENTS
Page | ||||||
PART I - FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements | 3 | ||||
Balance Sheet as at March 31, 2007 (unaudited) | 4-5 | |||||
Statement of Operations for the Nine Months Ended March 31, 2007 and March 31, 2006 (unaudited) | 6 | |||||
Statement of Cash Flows for the Six Months Ended March 31, 2007 and March 31, 2006 (unaudited) | 7 | |||||
Statement of Changes in Stockholders’ Equity from September 1, 2003 (Inception) through the Six Months Ended March 31, 2007 | 8-9 | |||||
Notes to Financial Statements | 10 | |||||
Item 2. | Management’s Discussion and Analysis or Plan of Operation | 19 | ||||
Item 3. | Controls and Procedures | 24 | ||||
PART II - OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings | 25 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||||
Item 3. | Defaults Upon Senior Securities | 27 | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | 27 | ||||
Item 5. | Other Information | 27 | ||||
Item 6. | Exhibits and Reports on Form 8-K | 27 | ||||
SIGNATURES | 27 | |||||
2
ITEM 1. FINANCIAL STATEMENTS
As used herein, the term “Company” refers to Nano Chemical Systems Holdings, Inc., a Nevada corporation, and its subsidiary and predecessors unless otherwise indicated. Unaudited, interim, condensed, consolidated financial statements including a balance sheet for the Company as of the period March 31, 2007, and statements of operations, and statements of cash flows, for the interim period up to the date of such balance sheet and the comparable period of the preceding year are attached hereto as Pages 1 through 17 and are incorporated herein by this reference.
BASIS OF PRESENTATION
The accompanying consolidated interim unaudited financial statements are presented in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form 10-QSB and Item 310 under subpart A of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying statements should be read in conjunction with the audited financial statements for the year ended June 30, 2006. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included. Operating results for the quarter and period ended March 31, 2007 are not necessarily indicative of results that may be expected for the year ended June 30, 2007. The financial statements are presented on the accrual basis.
3
NANO CHEMICAL SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES | ||||
UNUADITED CONSOLIDATED BALANCE SHEET | ||||
(CONDENSED INTERIM FINANCIAL STATEMENTS) | ||||
AS OF MARCH 31, 2007 | ||||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and Cash Equivalents | $ | 13,490 | ||
Accounts Receivable | 97,702 | |||
Inventory | 478,669 | |||
Prepaid Expenses | 97,132 | |||
Total Current Assets | 686,993 | |||
PROPERTY & EQUIPMENT | ||||
Property and Equipment | 434,841 | |||
(Less) Accumulated Depreciation | (288,434 | ) | ||
Total Property & Equipment | 146,407 | |||
OTHER ASSETS | ||||
Prepaid Expenses of a Long-Term Nature | - | |||
Utility Deposit | 12,000 | |||
Total Other Assets | 12,000 | |||
Total Assets | $ | 845,400 | ||
4
NANO CHEMICAL SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES | ||||
UNAUDITED CONSOLIDATED BALANCE SHEET | ||||
(CONDENSED INTERIM FINANCIAL STATEMENTS) | ||||
AS OF MARCH 31, 2007 | ||||
LIABILITIES | ||||
CURRENT LIABILITIES: | ||||
Accounts Payable | $ | 433,445 | ||
Accrued Payroll | 8,200 | |||
Due to Related Parties | 557,499 | |||
Total Current Liabilities | 999,144 | |||
LONG-TERM DEBT | ||||
Note Payable - Related Party | 1,333,000 | |||
Notes Payable & Related Accrued Interest Payable | 572,939 | |||
Total Long-Term Debt | 1,905,939 | |||
Total Liabilities | 2,905,083 | |||
STOCKHOLDERS’ EQUITY (DEFICIENCY) | ||||
Preferred stock - $.001 par value, 20,000,000 shares | ||||
authorized, none issued and outstanding | - | |||
Common stock, - $.001 par value, 100,000,000 shares | ||||
authorized, 60,222,368 shares issued and outstanding | 60,222 | |||
Additional paid-in capital | 1,924,597 | |||
Accumulated (Deficit) | (4,044,502 | ) | ||
Net Stockholders' Equity (Deficiency) | (2,059,683 | ) | ||
Total Liabilities & Equity (Deficiency) | $ | 845,400 | ||
See Notes to Financial Statements |
5
NANO CHEMICAL SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES | |||||||||||||
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||
(CONDENSED INTERIM FINANCIAL STATEMENTS) | |||||||||||||
FOR THE THREE AND NINE MONTHS ENDING MARCH 31, | |||||||||||||
THREE MONTHS | NINE MONTHS | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
SALES | $ | 233,583 | $ | 165,009 | $ | 600,147 | $ | 994,400 | |||||
COST OF DIRECT MATERIALS | 172,686 | 186,467 | 568,877 | 733,508 | |||||||||
MARGIN AFTER DIRECT COST OF MATERIALS | 60,897 | (21,458 | ) | 31,270 | 260,892 | ||||||||
ALL OTHER OPERATING EXPENSES | |||||||||||||
Plant Salaries, labor and Employee payroll taxes and benefits | 84,188 | 66,145 | 225,920 | 273,484 | |||||||||
Plant rent, utilities, depreciation, and other plant overhead | 78,832 | 74,818 | 273,764 | 268,653 | |||||||||
Administrative Costs, including Compensation and Benefits | 221,703 | 161,461 | 521,497 | 364,424 | |||||||||
Research and Development | 151,000 | 28,500 | 155,040 | 28,500 | |||||||||
TOTAL ALL OTHER OPERATING EXPENSES | 535,723 | 330,924 | 1,176,221 | 935,061 | |||||||||
OPERATING INCOME (LOSS) | (474,826 | ) | (352,382 | ) | (1,144,951 | ) | (674,169 | ) | |||||
OTHER INCOME (EXPENSE): | |||||||||||||
Interest Income | - | - | - | - | |||||||||
Interest (Expense) | (37,357 | ) | (26,601 | ) | (92,242 | ) | (53,218 | ) | |||||
Other Income (expense) | - | - | - | ||||||||||
NET OTHER INCOME (EXPENSE): | (37,357 | ) | (26,601 | ) | (92,242 | ) | (53,218 | ) | |||||
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAX | (512,183 | ) | (378,983 | ) | (1,237,193 | ) | (727,387 | ) | |||||
PROVISION FOR INCOME TAX | - | - | - | - | |||||||||
NET INCOME (LOSS) | $ | (512,183 | ) | $ | (378,983 | ) | $ | (1,237,193 | ) | $ | (727,387 | ) | |
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | (0.01 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | |||||
BASIC & DILUTED WEIGHTED AVERAGE SHARES | |||||||||||||
OF COMMON STOCK | 57,403,455 | 57,403,455 | 56,474,150 | 56,474,150 | |||||||||
See Notes To Financial Statements |
6
NANO CHEMICAL SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES | |||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(CONDENSED INTERIM FINANCIAL STATEMENTS) | |||||||
FOR THE SIX MONTHS ENDING DECEMBER 31, | |||||||
2006 | 2005 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net (loss) | $ | (1,237,193 | ) | $ | (727,387 | ) | |
Adjustments to reconcile net (loss) | |||||||
to net cash from (to) operating activities: | |||||||
Stock Issued for Services | 13,500 | - | |||||
Depreciation Property & Equipment | 40,405 | 59,310 | |||||
Amortization Patents & Formulas | - | 3,676 | |||||
Changes in operating assets and liabilities which | |||||||
increase (decrease) cash flow: | |||||||
Accounts Receivable | 103,299 | 115,672 | |||||
Inventory | 118,471 | 197,201 | |||||
Prepaid Expenses | 35,095 | - | |||||
Accounts Payable and accrued expenses | (79,634 | ) | 276,984 | ||||
Net cash provided (used) from operating activities | (1,006,057 | ) | (74,544 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Capital (Outlays)/Disposals - net | (3,692 | ) | (1,029 | ) | |||
Net cash provided (used) from investing activities | (3,692 | ) | (1,029 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Due to Related Parties | 67,303 | 84,057 | |||||
Term Notes | 572,939 | - | |||||
Common stock sales for cash | 337,448 | 342,966 | |||||
Net cash provided (used) from financing activities | 977,690 | 427,023 | |||||
NET INCREASE (DECREASE) IN CASH EQUIVALENTS | (32,059 | ) | 351,450 | ||||
CASH AND CASH EQUIVALENTS - Beginning of Period | 45,549 | 7,548 | |||||
CASH AND CASH EQUIVALENTS - End of Period | $ | 13,490 | $ | 358,998 | |||
See Notes to Unaudited Financial Statements |
7
NANO CHEMICAL SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES | |||||||||||||||||||
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY) | |||||||||||||||||||
FROM SEPTEMBER 1, 2003 (INCEPTION) TO YEAR ENDING JUNE 30, 2006 | |||||||||||||||||||
AND FOR THE NINE MONTHS ENDING MARCH 31, 2007 (UNAUDITED) | |||||||||||||||||||
Common Stock | Paid In | Owner's | |||||||||||||||||
Par Value $0.001 | Excess | Capital | Accumulated | Net Equity | |||||||||||||||
Shares | Amount | of Par | Pre Merger | (Deficit) | (Deficiency) | ||||||||||||||
Balance - September 1, 2003 | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||
Owner's investment | 1,584,666 | 1,584,666 | |||||||||||||||||
(Loss) for Period September 1, 2003 (Inception) to June 30, 2004 (Year End) (10 Months) | (785,474 | ) | (785,474 | ) | |||||||||||||||
Balance - June 30, 2004 | - | - | - | 1,584,666 | (785,474 | ) | 799,192 | ||||||||||||
Common Stock Issued prior to the change of control of the Company on January 27, 2005 when previously known as Heritage Scholastic Corp. | |||||||||||||||||||
Not part of the change in control | 5,551,000 | 5,551 | (5,551 | ) | - | ||||||||||||||
Part of the change in control | 25,928,500 | 25,928 | (25,928 | ) | - | ||||||||||||||
Common stock issued on January 27, 2005 in exchange for Nano Chemical Systems, Inc., a wholly owned subsidiary | 36,000,000 | 36,000 | 14,000 | - | 50,000 | ||||||||||||||
Stock returned from the January 27, 2005 ownership change of 61,928,500 shares of previously issued and newly issued stock | (49,926,500 | ) | (49,926 | ) | 49,926 | - | - | - | |||||||||||
First phase in purchase of a portion of the assets and customer base of GreenTree Spray Technologies, Inc. on March 15, 2005 | |||||||||||||||||||
Stock issued to owner | 24,000,000 | 24,000 | 76,000 | (100,000 | ) | - | |||||||||||||
Note issued to owner | (1,000,000 | ) | (1,000,000 | ) | |||||||||||||||
Second phase completing the passing all of the assets and operations of GreenTree Spray Technologies, Inc. into the Company on June 30, 2005 | |||||||||||||||||||
Stock issued to owner | 8,000,000 | 8,000 | 25,333 | (33,333 | ) | - | |||||||||||||
Note issued to owner | (333,000 | ) | (333,000 | ) | |||||||||||||||
Debt GreenTree Spray retained | 577,595 | 577,595 | |||||||||||||||||
Reclassify rest of Owner's Capital | 695,928 | (695,928 | ) | - | |||||||||||||||
(Loss) for the fiscal year | (563,157 | ) | (563,157 | ) | |||||||||||||||
Balance - June 30, 2005 | 49,553,000 | 49,553 | 829,708 | - | (1,348,631 | ) | (469,370 | ) | |||||||||||
Common stock issued for cash | 5,802,559 | 5,803 | 673,807 | 679,610 | |||||||||||||||
* (Loss) for the period | (1,458,678 | ) | (1,458,678 | ) | |||||||||||||||
Balance - June 30, 2006 | 55,355,559 | 55,356 | 1,503,515 | - | (2,807,309 | ) | (1,248,438 | ) | |||||||||||
Common stock issued for cash | 221,809 | 221 | 20,227 | 20,448 | |||||||||||||||
- | |||||||||||||||||||
(Loss) for the period | (455,556 | ) | (455,556 | ) | |||||||||||||||
Balance -September 30, 2006 | 55,577,368 | 55,577 | 1,523,742 | - | (3,262,865 | ) | (1,683,546 | ) |
8
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY) - continued
Balance -September 30, 2006 | 55,577,368 | 55,577 | 1,523,742 | - | (3,262,865 | ) | (1,683,546 | ) | |||||||||||
Common stock issued | - | ||||||||||||||||||
For Cash From Stock Options Exercised | 1,000,000 | 1,000 | 149,000 | 150,000 | |||||||||||||||
(Less) Receivable From Stock Options Exercised | (40,000 | ) | (40,000 | ) | |||||||||||||||
For Services | 2,500,000 | 2,500 | 72,500 | 75,000 | |||||||||||||||
(Loss) for the period | (269,454 | ) | (269,454 | ) | |||||||||||||||
Balance - December 31, 2006 | 59,077,368 | $ | 59,077 | $ | 1,705,242 | $ | - | $ | (3,532,319 | ) | (1,768,000 | ) | |||||||
Common stock issued | |||||||||||||||||||
For Cash From Stock Options Exercised | 950,000 | 950 | 166,050 | 167,000 | |||||||||||||||
For Services | 195,000 | 195 | 13,305 | 13,500 | |||||||||||||||
Add Receivable from Prior Stock Options Exercised | 40,000 | 40,000 | |||||||||||||||||
(Loss) for the period | (512,183 | ) | (512,183 | ) | |||||||||||||||
Balance - March 31, 2007 | 60,222,368 | 60,222 | 1,924,597 | - | (4,044,502 | ) | (2,059,683 | ) | |||||||||||
* Includes the $234,018 correction of error to the prior reported financial statements as of fiscal year ending June 30, 2006 that the Company is still identifying the classifications and reporting needed to properly amend prior filings to the SEC as of June 30, 2006 and possibly as of March 31, 2006 as well. | |||||||||||||||||||
See Notes to Financial Statements |
9
NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 1 - Organization, History and Business Activity
General
Nano Chemical Systems Holdings, Inc., a Nevada corporation, was incorporated on July 30, 1999 under the name “Heritage Scholastic Corporation.” Prior to conducting its current operations, the Company was engaged in the business of publishing and distributing supplemental history textbooks for grades K through 12. On January 27, 2005, pursuant to a Stock Purchase and Share Exchange Agreement (the “Share Exchange Agreement”) between Heritage Scholastic Corporation and Nano Chemical Systems, Inc., a Nevada corporation (“NCS”) and its shareholders, Heritage Scholastic Corporation issued 36,000,000 shares of stock to the shareholders of NCS in exchange for 100% of the issued and outstanding stock of NCS.
In addition to the 36,000,000 shares the former shareholders of NCS obtained from the Company, they had acquired 25,928,500 shares from other shareholders of the Company. On January 27, 2005, these same two former shareholders of NCS turned back to the Company 49,926,500 shares of stock and let an existing shareholder of the Company that owed them 2,000 shares of stock to keep the stock. This effectively left the former two shareholders of NCS with a total of 12,000,000 shares of common stock in the Company.
As a result of the Share Exchange Agreement, NCS became a wholly owned subsidiary of Heritage Scholastic Corporation. In connection with the Share Exchange Agreement, on February 15, 2005, Heritage Scholastic Corporation changed its name from Heritage Scholastic Corporation to Nano Chemical Systems Holdings, Inc. (hereinafter the “Company”).
The Company has authorized 100,000,000 shares of common stock, par value of $0.001, with 59,077,368 shares issued and outstanding as of December 31, 2006. In addition, the Company has authorized 20,000,000 shares of preferred stock, par value of $0.001, none of which is issued or outstanding. Rights of preferred stock will be defined before or when issuance on such stock occurs.
Refer to the various Notes, particularly to the Note on “Related Party Transactions” for significant ownership and control, and to Note for “Financial Condition and Going Concern” as to the change in management.
Acquisition of Assets and operations of GreenTree Spray Technologies, LLC
Pursuant to an Asset Purchase Agreement between the Company and GreenTree Spray Technologies, LLC, a Delaware limited liability company (“GreenTree”) hereinafter referred to as the “GreenTree Asset Purchase Agreement,” or the “GreenTree Agreement”, the Company purchased the manufacturing assets, technical know-how, proprietary chemical formulae, and other assets and forward going operations of GreenTree in exchange for 32,000,000 shares of its restricted common stock and a promissory note in the principal amount of $1,333,000 (the “GreenTree Note”). The GreenTree Note requires quarterly interest accrued at 8% per annum with a final balloon payment equal to all remaining outstanding principal and interest due on March 31, 2007. Certain assets of the Company secure the GreenTree Note. The GreenTree Asset Purchase Agreement took effect over two phases. The first phase encompassed approximately 75% of the assets and operations on March 15, 2005, and the second phase brought in the balance of the assets and operations on June 30, 2005. For purposes of simplicity, the entire acquisition was recognized as of June 30, 2005. This agreement brought about a merger referred to as a “reverse acquisition” as discussed further in this footnote.
Refer also to other Notes discussing this purchase from the GreenTree Agreement.
10
NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 1 - Organization, History and Business Activity - continued
Financial reporting of Company treated as a “reverse acquisition”
Pursuant to the GreenTree Agreement, all GreenTree assets were transferred into the Company in two steps, the first on March 15, 2005 and the second on June 30, 2005. At that time, the owner of GreenTree took control of the Company, owning the majority of the Company stock.
The GreenTree Agreement constitutes a “reverse acquisition.” Accordingly, the prior financial history of the Company drops out and the prior financial history of GreenTree steps into its place, even though the Company survives the merger.
In August 2003, Marc Mathys (owner of GreenTree) purchased the assets of the then recently closed aerosol plant and operations of GreenTree Chemical Technologies, Inc., a division of an unrelated company, located in Seaford, Delaware. He reopened the plant in the same location and reestablished the manufacturing of canned aerosol products. On March 21, 2005, a Delaware limited liability company (LLC) was organized under the name of GreenTree Spray Technologies, LLC (“GreenTree”) and is owned 100% by Marc Mathys. It holds the secured promissory note the Company owes of $1,333,000. The notes are due and payable March 31, 2007. The Company is in default on the notes and related accrued interest payable, as no payments have been made to date. The Company is currently negotiating with Green Tree Spray Technologies, LLC as to the resolution of this obligation and is not currently under notice of default.
NOTE 2 - Summary of Significant Accounting Policies
(a) - General Statement of Accounting and Basis of Presentation
The Company prepares its books and records on the accrual basis for financial reporting. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The Company has two wholly owned subsidiaries:
Nano Chemical Systems, Inc.
Sea Spray Aerosol, Inc.
The Subsidiary, Nano Chemical Systems, Inc., (“Nano Inc.”) acquired two patent applications for $50,000. These patent applications were not renewed resulting in them being impaired and written off as of June 30, 2006. Nano Inc. has created other formulas that it is seeking to obtain funding to commercially develop. Nano Inc. is the research and development arm of the Company. Nano Inc. filed two US Patent applications in calendar year 2006. The titles of the inventions are: “Enhanced Petroleum-Based Aliphatic Hydrocarbon Lubricant Using Inorganic Fullerene-like Nanospheres” and “Non-Polymeric Encapsulation of a Key React to Control Chemo-Fluorescent Active Reaction Period for Chemoluminecent Paint.”
Other than administrative expenses handled by the Company, the rest of the Company and its operations are operated through Sea Spray Aerosol, Inc. (“SeaSpray”), a wholly owned subsidiary organized around April 2006 to own and operate such operations. These operations initially came from the GreenTree Asset Agreement and were operated under the umbrella of the Company until Sea Spray Aerosol, Inc. was organized.
The accompanying consolidated financial statements include the accounts of its subsidiaries. All significant Intercompany balances and transactions have been eliminated.
11
NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 2 - Summary of Significant Accounting Policies - continued
(b) - Income Taxes
The Company has adopted the provisions of statements of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which incorporates the use of the asset and liability approach of accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. Due to the GreenTree Agreement, the Company underwent an ownership change as defined in Section 382 of the Internal Revenue Code. Refer to the Note on “GreenTree Agreement.” Of the $4,045,000, accumulated losses of the Company, only $3,145,000 is available to the Company as net operating loss carry forwards, beginning to expire in 2019. No income tax benefit is recognized in the financial statements, as it is unknown whether such losses will be used in the future.
(c) - Reclassifications
The Company has reclassified and restated certain amounts in the period ending December 31, 2005 to conform to the current financial statement presentation. Part of this reclassifications is a result of the $234,018 correction of error to recognize in the prior fiscal year ended June 30,2006. Management has concluded the error also affected the quarterly financial statements as of March 31, 2006 even though the amount of which remains unknown at this time. Nevertheless, the Company has recognized as an estimate $74,650 of the $234,018 additional expenses relate to the three months ending March 31, 2006 over what was previously reported as of March 31, 2006. The remaining $159,368 additional loss will be recognized in the final quarter for the year ending June 30, 2006.
NOTE 3 - Financial Condition and Going Concern
The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The operations of the Company since inception (September 1, 2003) have sustained continued operating losses. In the event the Company is unable to raise sufficient operating capital, the aforementioned conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the occurrence of such conditions and have been prepared assuming that the Company will continue as a going concern. Management indicates that the financial arrangement the Company has entered into with Pangea Ultima Corporation can provide financing for continued operations.
During the past nine months the Company has changed CEO from James Ray to Matthew Zuckerman effective October 2006, and then to Alex Edwards effective March 31, 2007. Under Mr. Edward’s direction the Company continues seeking additional funding and is continuing the effort to develop a strong marketing plan in an effort to increase operations and to turn the Company into a profitable operation. The plant can handle much more volume with its existing plant configuration. Management is optimistic these new developments will garner net operating profits in the near future.
NOTE 4 - GreenTree Agreement
On or about March 15, 2005 a Form 8-K was filed with the Securities and Exchange Commission (“SEC”) disclosing the GreenTree Agreement and that the first phase had taken place and that the second phase would take place on or before June 30, 2005. The second phase took place on June 30, 2005. Under the GreenTree Agreement, the Company ultimately acquires all of the assets, proprietary chemical formulations, know how, intellectual property, goodwill, and operations going forward, of GreenTree. The Company’s results of operations as of June 30, 2005 and forward do recognize the entire operations of GreenTree.
12
NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 4 - GreenTree Agreement - continued
On March 15, 2005, the Company and GreenTree Spray Technologies, LLC (“GreenTree”), owned 100% by Marc Mathys, entered into an Asset Purchase Agreement (“GreenTree Agreement”) buying approximately 75% of all of the assets and ongoing operations of GreenTree in exchange for a $1,000,000 promissory note bearing 8% accrued interest with the entire amount due on March 31, 2007 and for 24,000,000 newly issued restricted shares of common stock of the Company valued at $100,000. On June 30, 2005, the remaining balance of the assets and ongoing operations completed the asset purchase in exchange for an additional $333,000 promissory note and 8,000,000 shares of common stock of the Company valued at $33,333. This totals $1,333,000 for the note payable to GreenTree, as a related party, and $133,333 for the fair value of the stock issued. The debt obligation is secured by the assets transferred, or its equivalent thereafter, as outlined in the Security Agreement. The Company has not made the required quarterly interest payments under the GreenTree Note, and therefore, is currently in default under the GreenTree Note. Currently, $159,606 in accrued interest is payable and is included as part of the $530,898 Due to Related Parties on the Balance Sheet as of December 31, 2006.
The excess paid over the recorded value of the assets, including the $133,333 fair value for the common stock issued, is considered intangible assets, including goodwill. However, in a “reverse acquisition,” the excess paid in the transaction is offset against equity rather than recognized as an “intangible asset.” This is as per the guidelines set forth by the Staff of the Securities and Exchange Commission (“SEC”). In dealing with “reverse acquisitions,” the Staff of the SEC takes the position that a “reverse acquisition” is a restructuring of the ownership and equity of the Company, not a purchase, and therefore, it does not fall under the guidelines of the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FASB 141”). FASB 141 recognizes an asset purchase as a business combination and requires an entity to record the asset purchase as a purchase, wherein the Company then assigns the fair value as the amount to record the value of assets on the financial statements at the point of purchase. Consequently, FASB 141, which would recognize goodwill and intangibles, does not get recognized in this form of an asset purchase under the guidelines of the Staff of the SEC. These financial statements follow the guidelines of the Staff of the SEC.
NOTE 5 - GreenTree Initial Asset Value & its Affect on the Financial Statements
Marc Mathys purchased the assets of GreenTree from an unrelated third party company effective September 1, 2003 for $300,000 plus additional amounts he had to pay over the next few months to keep selected vendors supplying raw materials and selected other creditors to continue providing needed services and facilities. This increased his actual purchase price to approximately $365,000. He did not buy the predecessor’s company nor assume their position. Rather, he acquired it as an asset purchase. He did buy and did use the predecessor’s computer software and accounting system that has remained in place to do the accounting even as of December 31, 2006.
When GreenTree was originally acquired the assets of the predecessor company, effective September 1, 2003, by Marc Mathys, the assets were recorded at the value as carried on the predecessor company’s records. As this was at the predecessor’s cost, or what was thought at the time to be the estimated market value on the date of purchase by Marc Mathys, then this accounting treatment approximated fair value at the date of purchase. This does not conform to the accounting requirements as promulgated by FASB No. 141, effective after June 30, 2001, which requires virtually all business combinations be accounted for based on the values exchanged; i.e., the purchase method of accounting (recording what you paid for the assets, not what they may be worth).
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NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 5 - GreenTree Initial Asset Value & its Affect on the Financial Statements - continued
GreenTree recorded its assets at the value as carried on the predecessor company’s records, which approximated $1,100,000, or approximately $735,000 more than cost. The Company in developing the financial statements concluded that the spirit of FASB No. 141 is best served to have comparable statements of operations at the sacrifice of using the purchase method of accounting. So, rather than recognize a “built in gain” in the statement of operations, this difference of approximately $735,000 has been removed from the statement of operations and instead placed in the balance sheet as part of “Owner’s Capital Pre Merger” as recognized on the Statement of Stockholders’ Equity. Management is of the opinion that the accounting treatment reporting the assets at the predecessor’s cost more uniformly recognizes revenues and expenses in a more consistent light than if the purchase method of accounting had been used. The method used more clearly reflects the results of operations for each fiscal years ending June 30, 2007 and 2006 and each corresponding quarter therein, thus allowing one to more clearly see the results of operations in a consistent and more meaningful manner than would otherwise be reported. It also reflects more clearly the overall results of operations and asset values on a consistent basis, taking into consideration the required method of accounting to recognize the asset purchase of the assets from GreenTree by the Company on March 15, 2005 and completed on June 30, 2005 as discussed in the prior Note “GreenTree Agreement.”
The only difference in comparing the assets from September 1, 2003 (date of inception), which is not using the purchase price, and as recognized as of June 30, 2005, which uses the purchase price, is the values assigned to property and equipment. The Company has elected accelerated depreciation methods to more quickly bring the two methods into compliance with each other. Management estimates that the net asset value of property and equipment at December 31, 2006 is approximately $51,000 greater using the predecessor’s basis over what the purchase method of accounting would reflect. All other assets as of December 31, 2006 are at cost, as the flow through of the costs established at September 1, 2003 have long since passed through the accounting in the financial statements. Again, these “built in gains, ” or differences, are not recognized in the statements of operations, but rather are recognized in one step in the statement of stockholders’ equity as part of the initial balance of “Owner’s Capital Pre Merger,” except for the additional depreciation expense recognized through the statement of operations of approximately $63,400 for the ten months ended June 30, 2004, $66,700 for the fiscal year ended June 30, 2005, $45,200 for the fiscal year ended June 30, 2006 and $10,600 for the six months ended December 31, 2006.
NOTE 6 - Related Parties
As of December 31, 2006, one shareholder, GreenTree Spray Technologies, LLC (“GreenTree LLC”), owns the controlling interest in the Company, holding 32,000,000 shares, or 54.2% if all stock ownership. Of the 32,000,000 shares, 8,000,000 shares are in dispute by the Company and have not been issued. Even though all 32,000,000 shares are reported in the financial statements as issued and outstanding, if the 8,000,000 shares in dispute were settled in favor of the Company, then 24,000,000 out of 51,077,368 shares, or 47.0% of all stock, issued and outstanding would be in control of GreenTree LLC.
The Company owes Marc Mathys and his related companies (GreenTree LLC and Harvard Chemical) combined at least $1,333,000 plus accrued interest at 8% since around March 15, 2005. Refer to Note on “Contingent Liability Regarding GreenTree Agreement” for further explanation regarding this matter.
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NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 7 - CONTINGENT LIABILITIES REGARDING GREENTREE AGREEMENT
In the GreenTree Agreement, present Management takes the position that the Company assumes no liabilities, both known and unknown. Marc Mathys as the seller disagrees and contends that the accounts receivable should not have gone to the Company. Even though he remains as the majority shareholder, he has since resigned as an officer and director of the Company and takes no active part in the Company.
As of June 30, 2006 and 2005, the Company has recognized some liabilities it claims it does not owe as well as the receivables Marc Mathys claims are not the Company’s, the net of which approximates $680,000 liabilities over what management believes the GreenTree Agreement states. In contrast, Marc Mathys believes the GreenTree Agreement requires the Company to assume approximately $578,000 more in liabilities over what is recognized in these financial statements as of December 31, 2006.
Management and Marc Mathys continue negotiating in an effort to resolve these matters. Management is of the opinion that the Company is presently recognizing in these financial statements the maximum it may ultimately owe Marc Mathys and his entities.
GreenTree has not paid Tech Spray, L.P., a supplier, for $226,000 in raw material product purchased the end of June 2005. The vendor filed a complaint in Delaware seeking collection against GreenTree, LLC (Marc Mathys’ personal business) as well as Marc Mathys personally. GreenTree LLC claims the debt is owed by the Company, while the Company claims it is owed by Marc Mathys, d.b.a. GreenTree LLC. Both GreenTree LLC and the Company acknowledge the money is owed; each claiming it is the responsibility of the other. The entire amount due is recognized as part of the accounts payable by the Company and is part of the $680,000 the Company believes is not its responsibility to pay but has recognized in the financial statements.
In conjunction with pending legal matters, the Company could be indirectly liable for two legal proceedings regarding the GreenTree operations prior to the Company acquiring the GreenTree assets and operations. Management considers these two legal matters as not obligations of the Company and therefore no amounts have been recognized in the financial statements for these contingent liabilities.
The first matter deals with sixteen containers used in the operations that GreenTree understood and said it owned. However, Mitchell Container Services, Inc. has filed a lawsuit in Delaware which may now be in a default judgment, demanding $22,000 in back rents and other related costs to collect and another $26,000 to buy out the containers, for a total of $48,000. The Company continues to use the sixteen containers in its operations.
The second matter stems from a series of violations identified by the Environmental Protection Agency (“EPA”). The EPA has proposed a series of penalties totaling approximately $105,000. These proposed penalties EPA has filed against GreenTree LLC and Marc Mathys personally. The Company is not named in the EPA complaint. The proposed penalties relate to violations occurring prior to 2005, and have nothing to do with the time since the Company took over the operations of GreenTree.
NOTE 8 - Common Stock Sold for Cash
From July 1, 2006 to September 30, 2006 the Company sold 221,809 shares of common stock for $20,448 in cash.
From October 1, 2006 to December 31, 2006 the Company issued 1,000,000 shares of common stock for $150,000 cash when Robert Esposito, or his assignees, exercised 1,000,000 stock options at $0.15 per share.
From January 1 to March 31, 2007 Mr. Esposito or his assignees exercised an additional 950,000 stock options for 950,000 shares at $0.15 per share for a total of $317,000. As of March 31, 2007 Mr. Esposito had 3,350,000 stock options remaining, of which he exercised 3,300,000 in April 2007.
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NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 9 - Common Stock Issued for Services
During November 2006 the Company entered into a consulting agreement with a non-employee, non-officer of the Company for services to perform through November 2007. As an incentive to work with the Company, the Company issued a one time, non-refundable, up front payment of 2,500,000 shares of restricted common stock. All future services by the consulting company through November 2007 have been prepaid with the issuance of this stock. The Company has chosen to record the value of this stock as a prepaid expense and to write it off over twelve months. The non-employee consultant has determined the value of his services at $75,000; accordingly, the value assigned for this restricted stock has been set at $75,000.
On January 12, 2007, the Company consummated a consulting agreement with a non-employee, non-officer. The agreement was signed in December 2006 and took affect when the Company issued 70,000 restricted shares of common stock in January 2007 as an up front non-returnable incentive bonus. Additional amounts will be due upon the raising for funds and other capital as a commission. This agreement lasts for six months. The consultant has valued his services for this stock at $5,000. The $5,000 has been expensed in the statement of operations.
On March 14, 2007 the Company issued 125,000 shares of restricted stock to a consultant, the services of which were given an intrinsic fair value of $8,500. This $8,500 has been expensed in this quarter’s financial statements.
NOTE 10 - Stock Issued and Awaiting Cancellation
On December 15, 2005, we entered into two Stock Purchase and Subscription Agreements with Mercatus & Partners, LP (“Mercatus”) (collectively, the “Mercatus Agreements”). Under each Mercatus Agreement, Mercatus may purchase 4,455,310 shares of our common stock at $.38 per share. Each Mercatus Agreement provides Mercatus up to thirty (30) days to purchase our common stock. If we do not receive payment for the common stock within thirty (30) days from the date of execution of the Mercatus Agreements, we may demand that the shares be returned to us. As of the date of this filing, the Company has not received any funding under either Mercatus Stock Purchase Agreement and there can be no assurance that the Company will ever receive any proceeds under either Mercatus Stock Purchase Agreement. The two share certificates in the amount of 4,455,310 each issued for a total of 8,910,620 shares to Mercatus & Partners were returned to the Company and cancelled on February 5, 2007. This stock, which was held in escrow, was not ever recognized as issued and outstanding stock.
The Company has sought continuing financing and may issue additional shares to raise operating capital or obtain loans and services. Since September 30, 2006, the Company issued 12,000,000 shares of stock for each of three different entities for a total of 36,000,000 shares of common stock in connection with proposed transactions. The Agreements for delivery of these shares has been rescinded by mutual consent and the stock was never recognized as issued and outstanding shares.
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NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 11 - Prepaid Expenses
The Company has incurred two kinds of prepaid expenses it is reporting as a current asset. The first is discussed above under “Common Stock Issued for Services” for $75,000. The Company expects to receive these services in the near future, and management has elected to amortize this amount so it is fully amortized as of June 30, 2007. Accordingly, $37,500 was amortized for the three months ending March 31, 2007 with the balance to amortize in the next three months.
The other prepaid expense had a remaining balance to amortize of $137,035. These prepaid expenses relate to the reimbursement to an officer for expenses he has or will incur for the Company, primarily for research and development. During the quarter ended March 31, 2007 the officer was paid for the balance of the services involved and resigned as an officer of the Company. Present management has concluded to fully amortize this amount by fiscal year end, June 30, 2007. Therefore, the Company amortized $59,631 in the three months ending March 31, 2007 and will amortize the balance in the three month ending June 30, 2007.
NOTE 12 - Notes payable
Between November 29 and March 31, 2007 the Company borrowed $560,000 from Pangea Ultima Corporation (“Pangea”), a non-related company. The terms involve notes that are non-assignable and unsecured; bearing daily interest accrued at a rate of 10% annually. All notes have principal and accrued interest due dates of November 28, 2008. As of March 31, 2007 the $560,000 borrowed has accrued $12,939 in interest, totaling $572,939 payable.
NOTE 13 - Correction of Accounting Error(s) in Prior Period(s)
Around November 15, 2006 the Company discovered its computerized accounting data used in preparing financial statements did not include all of the Company’s financial activity occurring on or before June 30, 2006. The amount of the error, which is $234,018, involves an overstatement of cash and cash equivalents on the balance sheet of the Company as of June 30, 2006. This is a significant amount and the Company has determined that the released financial statements for its year-end June 30, 2006 should not be relied upon. The Company has taken into account these errors and made the necessary corrections in reporting the results of its operations since its year-end June 30, 2006 for the three months ending September 30, 2006 and for the six months ending December 31, 2006.
Presently, the Company is still identifying whether the only accounting periods involved is just June 30, 2006, or whether it also affects March 31, 2006. Management believes the correction of an accounting error does not affect any periods prior to March 31, 2006. Therefore, the financial statements as of December 31, 2005 remain as previously reported while the statement of equity in this December 31, 2006 quarterly reporting has recognized the correction of error as of June 30, 2006. The Company has not filed an 8-K reporting this error as it thought it would promptly resolve the matter. The Company intends to make the necessary corrections and to file the amended 10-KSB as of June 30, 2006 and the 10-QSB as of March 31, 2006, if needed, before filing its quarterly report as of March 31, 2007.
NOTE 14 - SEC Investigation of the Company
Around March 2006 the Company received a subpoena issued by the Securities and Exchange Commission (“SEC”) asking for certain data, documents, and depositions dealing primarily with the acquisitions and ownership changes of the Company during 2004 to around March 2006. Management is of the opinion that it has provided all that the SEC has requested and intends to remain totally cooperative with any other requests that the SEC may make. The current status of this investigation is unknown by the Company. However, the Company has received no notices or correspondence during this quarter or the prior two quarters of operations. Therefore Management believes, although it cannot be certain, that the initial inquiry was fully satisfied by the response the Company made at the time.
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NANO CHEMICAL SYSTEMS HOLDINGS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED INTERIM
UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2007
NOTE 15 - Subsequent Event
On April 4, 2007 Robert Esposito exercised his remaining 3,300,000 stock options for $671,726, or about $0.20 pre share of the average price per share of the stock. Payment will come in the form of assuming $327,226 of the long-term debt of Pangea Ultima, Corporation and $454,000 in cash .
Also, on April 20, 2007, Pangea Ultima, Corporation loaned an additional $25,000 to the Company.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INFORMATION RELATED TO FORWARD LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), we are hereby providing cautionary statements identifying important factors which could cause our actual results to differ materially from those projected in forward-looking statements made herein. Any statements which express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions of future events or performance are not statements of historical facts and may be forward-looking. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, growth strategies, available financing and other factors discussed elsewhere in this report and in documents we have filed with the Securities and Exchange Commission. Many of these factors are beyond our control. Actual results could differ materially from the forward-looking statements made. In light of these risks and uncertainties, there can be no assurance that the results anticipated in the forward-looking information contained in this report will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Nano Chemical Systems Holdings, Inc., a Nevada corporation, was incorporated on July 30, 1999 under the name “Heritage Scholastic Corporation.” Prior to conducting its current operations, the Company was engaged in the business of publishing and distributing supplemental history textbooks for grades K through 12. However, on January 27, 2005, pursuant to a Stock Purchase and Share Exchange Agreement (the “Share Exchange Agreement”) between Heritage Scholastic Corporation, Nano Chemical Systems, Inc., a Nevada corporation (“NCS”), and the shareholders of NCS, Heritage Scholastic Corporation issued 36,000,000 shares of its issued and outstanding stock to the shareholders of NCS in exchange for 100% of the issued and outstanding stock of NCS. As a result of the Share Exchange Agreement, NCS became a wholly-owned subsidiary of Heritage Scholastic Corporation. In connection with the Share Exchange Agreement, on February 15, 2005, Heritage Scholastic Corporation changed its name from Heritage Scholastic Corporation to Nano Chemical Systems Holdings, Inc. (hereinafter the “Company”). To date we have devoted most of our efforts to developing our business plan, generating a demand for our products and raising working capital through equity financing. Our ability to generate revenues is primarily dependent upon our ability to cost-effectively and efficiently develop and market our proprietary products and successfully service our present customers. During the next six to twelve months of operations our priorities are to:
1. | implement a marketing strategy to reach our target markets; |
2. | develop and strengthen our strategic relationships with suppliers and distributors; | |
3. | respond to competitive developments in the marketplace; |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
4. | establish the brand identity of our proprietary products; and |
5. | continue to service our present customer base. |
The Company currently manufactures and sells aerosol-delivered janitorial and industrial products, waxes, lubricants, and polishes to other companies, which those companies then sell under their own brand-names. The Company also has its own line of branded products. Management believes that the Company can employ its excess production capacity to combine its aerosol operations with nanotechnology in order to bring to market aerosol-delivered nanoparticle products.
In order to make the most efficient use of the capital available to us, we plan to conduct a limited research and development program for new products that will attempt to take advantage of nano-particulate enhancement. In particular, the Company has a line of solvents, penetrating oils, glass cleaners, and polishes for automobiles which will benefit from the inclusion of nano-particulates.
We plan to use the nanomaterials and titanium dioxide technology to produce titanium dioxide nanoparticles. Titanium dioxide nanoparticles and other products we intend to initially produce with the nanomaterials and titanium dioxide technology generally must be customized for a specific application working in cooperation with the end-user. We are still testing and customizing our titanium dioxide nanoparticle products for various applications and have no long-term agreements with end-users to purchase any of our titanium dioxide nanoparticle products. We may be unable to recoup our investment in the nanomaterials and titanium dioxide technology and nanomaterials and titanium dioxide equipment for various reasons, including the following:
1. | products utilizing our titanium dioxide nanoparticle products, most of which are in the research or development stage, may not be completed or, if completed, may not be readily accepted by expected end-users; |
2. | we may be unable to customize our titanium dioxide nanoparticle products to meet the distinct needs of potential customers; |
3. | potential customers may purchase from competitors because of perceived or actual quality or compatibility differences; |
4. | our marketing and branding efforts may be insufficient to attract a sufficient number of customers; and |
5. | because of our limited funding, we may be unable to continue our development efforts until a strong market for nanoparticles develops. |
We have not produced any nanoparticles or other products using our nanomaterials and titanium dioxide technology and equipment on a commercial basis. Our actual costs of production, or those of our licensees, may exceed those of competitors. Even if our costs of production are lower, competitors may be able to sell titanium dioxide and other products at a lower price than is economical for us or our licensees.
The Company is primarily dependent upon six large customers and operates in a highly competitive environment. One of these six customers, Pioneer Manufacturing, Inc., provides the majority of the Company’s sales. The loss of this major customer would have a negative impact on the future operations of the Company.
RESULTS OF OPERATIONS—QUARTER ENDING MARCH 31, 2007 AND 2006
For the nine months ended March 31, 2007, we had losses totaling $1,237,193 compared to losses of $727,387 for the same period in 2006. This increased loss of $509,806 is primarily attributed to 1) a $394,253 decrease in sales and a $229,622 decrease in margin after direct cost of materials, 2) an increase in research and development of $126,540, and a significant outlay in attempting to raise capital in excess of $100,000. As we implement our business plan, we believe our revenues should increase. By focusing our efforts on limiting general and administrative expenses as we increase revenue, we expect to establish net income.
Sales for the nine months ended March 31, 2007 and 2006 are $600,000 and $994,000 respectively, a decrease of $394,000, or 30%. The decrease was primarily attributed to cash flow shortages, which in turn restricted production and the ability to take on new orders and getting them timely filled. We expect that sales will increase markedly as the Company implements its business plan. We expect this increase to take the form of increased costs; however, we intend to ensure that gross profit margins will improve over what we presently experience. We have already invested $20,000 last quarter to upgrade our production lines in anticipation of the new sales orders we are receiving and expect to receive. We are negotiating a better method in selling to allow our production to flow through the assembly lines in a more efficient manner. Our customers are responding favorably. However, production is down because of the lack of funding to complete the work in a timely manner, which in turn if not correctly quickly will most likely negate the favorable manner we have strived to serve our customers.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
Cost of direct materials for the nine months ended March 31, 2007 was $569,000 compared to $734,000 for the same period in 2006. The $165,000 decrease in direct cost of materials was generally attributed to a decrease in sales. We expect that this figure will increase significantly as we implement our business plan and increase production of our products. We expect this increase to take the form of increased direct materials and packaging; however, we intend to ensure that any increase in the aforementioned expenses remains commensurate with an increase in revenues.
Plant salaries, labor, and employee payroll taxes and benefits were $226,000 for the nine months ended March 31, 2006, compared to $273,000 for the same period in 2006, a decrease of $47,000. The decrease was primarily attributed to a decrease in sales. We expect that these costs will increase as the Company implements its business plan. We expect this increase to take the form of increased wages and employee expenses; however, we intend to ensure that any increase in the aforementioned expenses remains commensurate with an increase in revenues.
Plant, rent, utilities, depreciation, and other plant overhead were $274,000 for the nine months ended March 31, 2007, compared to $269,000 for the same period in 2006, a decrease of $5,000. The costs are generally fairly well fixed in nature and should not change significantly despite the sales volume increases we expected, provided an expansion of the existing plant and facilities remains constant. We intend to ensure that any increase in the aforementioned expenses remains commensurate with an increase in revenues.
Selling, general, and administrative expense were $521,000 for the nine months ended March 31, 2007, compared to $364,000 for the same period in 2006, a $157,000 increase. The increase was primarily attributed to an increase in legal and accounting fees and costs associated with efforts to raise capital and to manage the Company at the corporate/administrative level. We expect that selling, general and administrative expenses will increase as the Company implements its business plan. We expect this increase to take the form of increased wages and employee expenses, sales and marketing expense, and other general and administrative expenses; however, we intend to ensure that any increase in the aforementioned expenses remains commensurate with an increase in revenues.
Research and Development expenses were $155,000 for the nine months ended March 31, 2007, compared to $29,000 for the same period in 2006, an increase of $126,000. The increase was primarily attributed to an increase in employee participation in research and development. The Company is making a concerted effort to increase its research and development activities.
Interest expense for the nine month period ended March 31, 2007 was $92,000, compared to $53,000 for the same period in 2006, an increase of $39,000. These increases were due to 1) $12,000 accrued interest due to the Pangea Ultima Corporation Notes, described below in “Financing,” and 2) the initial accrual for interest on the Green Tree Agreement was not in all of 2006 whereas it is in 2007.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash, cash equivalents, and investments amounted to $46,000 as of March 31, 2007. The net cash provided or (used) by the Company’s operating activities was ($1,006,000) and ($75,000) for the nine months ended as of March 31, 2007 and 2006, respectively. Net cash provided or (used) by financing activities, which is primarily due to stock issued for cash and notes payable, amounted to $978,000 for the nine months ended March 31, 2007, compared to $427,000 in the nine months ended March 31, 2006.
As of March 31, 2007, we had cash on hand of approximately $46,000, which is not sufficient to satisfy our operating requirements through June 31, 2007. To satisfy our operating requirements through June 30, 2007 we estimate that we will need an additional $300,000. If we do not generate revenues or secure debt or equity financing before the end of June 30, 2007, we anticipate that we will be unable to adequately package and sell the nano enhanced products that are being developed by our Research and Development department.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
The Company’s actual future capital requirements in 2007 and beyond will depend, however, on many factors, including customer acceptance of the Company’s current and potential products, continued progress in the Company’s research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand the Company’s manufacturing capabilities and to market and sell the Company’s products. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the continued service of existing customers.
FINANCING
On June 30, 2005, the Company completed the issuance of a promissory note in the principal amount of One Million Three Hundred Thirty Three Thousand and No/100 Dollars ($1,333,000) to the Company’s largest shareholder, Green Tree Spray Technologies, LLC, a Delaware limited liability company (the “GreenTree Note”). The GreenTree Note was issued as part of the consideration under the Asset Purchase Agreement dated March 15, 2005, by and between GreenTree Spray Technologies, LLC and the Company. The GreenTree Note requires quarterly interest payments at 8% per annum with a final balloon payment equal to all remaining outstanding principal and interest due on March 15, 2007. The GreenTree Note is secured by certain assets of the Company. The Company has not made the required quarterly interest payments under the GreenTree Note, and therefore, is currently in default under the GreenTree Note. The Company is currently negotiating with Green Tree Spray Technologies, LLC as to the resolution of this obligation and is not currently under notice of default.
On February 28, 2006, we entered into a Regulation S Stock Purchase Agreement (“Stock Purchase Agreement”) with Xtera Establishment Corporation, a Panamanian company (“Xtera”). Under the Stock Purchase Agreement, Xtera may, at its discretion, periodically purchase shares of our common stock for a total purchase price of up to $2,000,000. For each share of common stock purchased under the Stock Purchase Agreement, Xtera will pay us 32% of the previous day’s trading price of our common stock, as reported on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded. Xtera will notify us of its desire to purchase shares of our common stock by sending us a written purchase notice, which notice shall set forth the number of shares Xtera desires to purchase and the total consideration due to us. To date, we have sold 4,886,571 shares of our common stock to Xtera and have received proceeds of $586,839 under the Stock Purchase Agreement. There can be no assurance that Xtera will purchase any additional shares of our common stock under the Stock Purchase Agreement.
On December 15, 2005, we entered into two Stock Purchase and Subscription Agreements with Mercatus & Partners, LP (“Mercatus”) (collectively, the “Mercatus Agreements”). Under each Mercatus Agreement, Mercatus may purchase 4,455,310 shares of our common stock at $.38 per share. Each Mercatus Agreement provides Mercatus up to thirty (30) days to purchase our common stock. If we do not receive payment for the common stock within thirty (30) days from the date of execution of the Mercatus Agreements, we may demand that the shares be returned to us. As of the date of this filing, the Company has not received any funding under either Mercatus Stock Purchase Agreement and there can be no assurance that the Company will ever receive any proceeds under either Mercatus Stock Purchase Agreement. The two share certificates in the amount of 4,455,310 each issued for a total of 8,910,620 shares to Mercatus & Partners were returned to the Company and cancelled on February 5, 2007. This stock, which was held in escrow, was not ever recognized as issued and outstanding stock.
Since September 30, 2006, the Company issued 12,000,000 shares of stock to each of three different entities for a total of 36,000,000 shares of common stock. The stock was placed in escrow pending completion of the terms of the agreements. Since that time all parties mutually rescinded the agreements and the stock will be returned to the Company. The stock was never recognized as issued and outstanding shares.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
We compete or may compete against entities that are much larger than we are, have more extensive resources than we do, and have an established reputation and operating history. Because of their size, resources, reputation, history and other factors, certain of our competitors may be able to exploit acquisition, development, and joint venture opportunities more rapidly, easily or thoroughly than we can. In addition, potential customers may choose to do business with our more established competitors, without regard to the comparative quality of our products, because of their perception that our competitors are more stable, are more likely to complete various projects, are more likely to continue as a going concern, and lend greater credibility to any joint venture.
Should events arise that make it appropriate for the Company to seek additional financing, it should be noted that additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company’s stockholders. Such a financing could be necessitated by such things as the loss of existing customers, currently unknown capital requirements in light of the factors described above, new regulatory requirements that are outside the Company’s control; or various other circumstances coming to pass that are currently not anticipated by the Company.
GOING CONCERN
From our inception on September 1, 2003 through March 31, 2007, we have incurred operating losses of $. The likelihood of our success must be considered in light of the expenses, complications and delays frequently encountered in connection with the establishment and expansion of new businesses. Our independent auditors have issued a going concern qualification in their report dated October 12, 2006, which raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there can be no assurance that we will generate sufficient revenues from the services offered by us to operate at a profit or pay expenses. Management indicates that the financial arrangement the Company has entered into with Pangea Ultima Corporation can provide financing for continued operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments which affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities which are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes that the information contained in this Report is complete and correct in all material respects. However, the Company notes that, because of Dr. Zuckerman's involvement with the Company's affairs during the fiscal period covered by this Report, Dr. Zuckerman may or may not be aware of information that would require a change in the information presented in this Report. The Company notes that Dr. Zuckerman resigned from his position as CEO on March 31, 2007 and from his position as CTO on April 27, 2007. Dr. Zuckerman has since taken a position with a different company and is no longer directly or indirectly associated with this Company (except to the extent that Dr. Zuckerman may continue to be a shareholder of this Company). The Company is seeking the cooperation of Dr. Zuckerman in determining whether he is aware of any information that would require a change in the information presented in this Report. If Dr. Zuckerman provides any such information to the Company, then the Company shall promptly file an appropriate amendment to this Report.
Pending Correction on an accounting error. Around November 15, 2006 the Company discovered its computerized accounting data used in preparing financial statements did not include all of the Company’s financial activity occurring on or before June 30, 2006. The amount of the error, which is $234,018, involves an overstatement of cash and cash equivalents on the balance sheet of the Company as of June 30, 2006. This is a significant amount and the Company has determined that the released financial statements for its year-end June 30, 2006 should not be relied upon. The Company has taken into account these errors and made the necessary corrections in reporting the results of its operations since its year-end June 30, 2006 for the three months ending September 30, 2006 and for the six months ending December 31, 2006.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - continued
Presently, the Company is still identifying whether the only accounting periods involved is just June 30, 2006, or whether it also affects March 31, 2006. Management believes the correction of an accounting error does not affect any periods prior to March 31, 2006, but that it most likely does affect the quarter ended March 31, 2006, the extent of which remains unknown. However, the Company concluded to recognize a portion of the additional loss as of March 31, 2007. Accordingly, the Company attributed approximately 30%, or $75,000 of the additional loss to the three months ending March 31, 2007. The Company has not filed an 8-K reporting this error as it thought it would promptly resolve the matter. The Company intends to make the necessary corrections and to file the amended 10-KSB as of June 30, 2006 and the 10-QSB as of March 31, 2006, if needed, before filing its quarterly report as of March 31, 2007.
Stock Based Compensation. In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment.” SFAS 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe that it will impact the company’s overall results of operations and financial position.
Impairment or Disposal of Long-Lived Assets. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. The adoption of this Statement is not expected to have a material effect on our financial statements.
Revenue Recognition. The Company expects our primary source of revenue to come from the sales of our products. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or the service has been performed, the fee is fixed and determinable, and collectibility is probable.
In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument which is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of this Statement is not expected to have a material effect on our financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures are, in fact, not effective in recording, processing, summarizing and reporting information required to be disclosed by the Company in the reports it files or submits under the Exchange Act within the time periods specified in the Commission’s rules and forms.
Historically, the Company has not had a formal system of controls and procedures due to the fact that the Company is small in size and has had limited operations. Currently, management, with the oversight of the Principal Executive Officer and Principal Financial Officer, is devoting considerable effort to developing and implementing a formal system of disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
In connection with the evaluation of the Company’s internal controls during the Company’s quarter ended December 31, 2006, the Company’s Principal Executive Officer and Principal Financial Officer have determined that there are no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.
In the Matter of Nano Chemical Systems Holdings, Inc., (SF-2982). On January 26, 2006, the Company received a subpoena from the U.S. Securities and Exchange Commission (the “SEC”) requesting production of documents relating to the following matters: (i) the Stock Purchase and Share Exchange Agreement with Heritage Scholastic Corporation; (ii) the Asset Purchase Agreement with GreenTree Spray Technologies, LLC; (iii) our issuance of stock to various investors; (iv) our issuance of press releases; and (v) our filings under the Securities Exchange Act of 1934. The Company has responded to the subpoena and intends to cooperate fully with the SEC in this matter.
In conjunction with the following pending legal matters, management believes that there is a remote possibility that the Company will be held liable to pay damages and/or fines alleged or assessed against GreenTree Spray Technologies, LLC (“GreenTree”) as a result of its acquisition of certain assets of GreenTree. Although management believes that these legal matters are not obligations of the Company, it has reserved sufficient amounts to discharge the obligations owed to Tech Spray in the event the Company is found legally responsible for these matters. No amounts have been reserved in the financial statements included in this 10-QSB for the action brought by the Environmental Protection Agency against Marc Mathys or for the action brought by Mitchell Container against GreenTree.
In the Matter of: Marc Mathys d/b/a GreenTree Spray Technologies, LLC, U.S. EPA Docket Number RCRA-03-2005-0191, pending before Administrative Law Judge Carl Charneski. On June 30, 2005, the Environmental Protection Agency filed a complaint against Marc Mathys d/b/a GreenTree Spray Technologies, LLC (“GreenTree”), seeking fines of $103,738.00 for violations of the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. Sections 6901 et seq. The complaint is divided into seven counts as follows: 1) owning and/or operating a hazardous waste storage facility without a permit or interim status, 2) failure to keep hazardous waste containers closed, 3) failure to provide workers with hazardous waste training, 4) inadequate contingency plan, 5) failure to conduct weekly inspections, 6) inadequate 2003 annual report, and 7) improper management of universal waste lamps. The conduct complained of has been corrected since 2004. The EPA named Mr. Mathys individually because it alleges that the violations complained of occurred before the formation of GreenTree Spray Technologies, LLC.
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ITEM 1. LEGAL PROCEEDINGS - continued
The director of Research and Development at GreenTree, via a response to the complaint, has admitted GreenTree’s guilt as to most of the violations. The Company does not believe that it is liable for these civil fines, and is of the opinion that payment of any fines is the responsibility of the parties who operated the plant at the time of the alleged violations. Furthermore, the Company believes that the parties who operated the plant at the time of the alleged violations are contractually bound to indemnify the Company against any environmental liability assessed against the Company.
Mitchell Container Services, Inc. v. GreenTree Spray Technologies, LLC, Case No. 2005-04-094, pending before the Court of Common Pleas of the State of Delaware in New Castle County. On April 6, 2005, Mitchell Container filed an action for replevin of fourteen separate 550 gallon steel containers leased to GreenTree Chemical Technologies, Inc. The plaintiff claims that GreenTree Spray Technologies, LLC had wrongfully taken possession of the containers, which GreenTree Chemical Technologies, Inc. had no right to sell. No representative from GreenTree Spray Technologies, LLC responded to the plaintiff’s complaint, and the plaintiff has obtained a default judgment of $46,235.50 against GreenTree Spray Technologies, LLC. The Company is in possession of the containers.
Tech Spray, L.P. v. GreenTree Spray Technologies, LLC, Case No. 093670-00-C, pending before the 251st District Court of Potter County Texas. On August 24, 2005, Tech Spray, L.P. filed an action to recover $226,149.00 it claims it is owed by GreenTree Spray Technologies, LLC for a delivery of 37,590 pounds of compressed gas. The court granted summary judgment in favor of Tech Spray against GreenTree. The plaintiff recently named the Company as a defendant in this matter. The Company answered the complaint on April 3, 2006.
In addition to the foregoing proceedings, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
Other than those proceedings described above, neither the Company nor our property is a party to any known proceeding that a governmental authority is contemplating.
From July 1, 2006 to December 31, 2006 the Company sold 221,809 shares of common stock for $20,448 in cash, which was used is its operations.
From October 1, 2006 to March 31, 2007 the Company issued 1,950,000 shares of common stock for $307,500 cash when Robert Esposito, or his assignees, which had owned approximately 5,300,000 stock options, exercised 1,950,000 stock options at and average price of approximately $0.15 per share. The remaining 3,350,000 stock options as of March 31, 2007 he can exercise at anytime for $0.15 per share. He exercised an additional 3,300,000 stock options for 3,300,000 shares during April 2007. All proceeds were used in the Company’s operations.
During November 2006 the Company entered into a consulting agreement with a non-employee, non-officer of the Company for services to perform through November 2007. As an incentive to work with the Company, the Company issued a one time, non-refundable, up front payment of 2,500,000 shares of restricted common stock. All future services by the consulting company through November 2007 have been prepaid with the issuance of this stock. The Company has chosen to record the value of this stock as a prepaid expense and to write it off over twelve months. The non-employee consultant has determined the value of his services at $75,000; accordingly, the value assigned for this restricted stock has been set at $75,000. These services will be used in helping raise capital for the Company.
In addition, the Company entered into another consulting agreement with another non-employee, non-officer. The agreement was signed in December 2006 and took affect when the Company issued 70,000 restricted shares of common stock in January 2007 as an up front non-returnable incentive bonus. Additional amounts will be due upon the raising for funds and other capital as a commission. This agreement lasts for six months. Nothing is recognized in these financial statements as of December 31, 2006. The consultant has valued this initial service for the stock at $5,000, which will be the value placed on the issuance of the stock in January 2007. These services will be used in helping raise capital for the Company.
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During March 2007 the Company entered into a consulting agreement with a non-employee, non-officer of the Company for services to perform through March 2008. As an incentive to work with the Company, the Company issued a one time, non-refundable, up front payment of 125,000 shares of restricted common stock. All future services by the consulting company through March 2008 have been prepaid with the issuance of this stock. The Company has chosen to record the value of this stock as a prepaid expense and to write it off over twelve months. The non-employee consultant has determined the value of his services at $8,500; accordingly, the value assigned for this restricted stock has been set at $8,500. These services will be used in helping raise capital for the Company.
None
None.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
*31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a). | |
*31.2 | Certification of Chief Financial officer pursuant to Rule 13a-14(a). | |
*32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | |
*32.2 | Certification of the Chief Financial Officer 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed Herewith |
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NANO CHEMICAL SYSTEMS HOLDINGS, INC. | ||
| | |
Date: May 21, 2007 | By: | /s/ Alexander H. Edwards III |
Alexander H. Edwards III | ||
Title President and Chief Executive Officer |
| | |
Date: May 21, 2007 | By: | /s/ Alexander H. Edwards III |
Alexander H. Edwards III | ||
Title Treasurer and Chief Financial Officer (Principal Financial Officer) |
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