UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2009 | |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number: 000-10065 |
ADVANCE NANOTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-1614256 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
400 Rella Blvd, Suite 160, Montebello, NY | 10901 |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code) | |
(845) 533-4225 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
56,576,204 shares as of May 13, 2009.
TABLE OF CONTENTS
Page (s) | ||
PART I -- | FINANCIAL INFORMATION | |
ITEM 1 | FINANCIAL STATEMENTS | |
Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008 | 1 | |
Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008 from inception (August 17, 2004) through March 31, 2009 (unaudited) | 2 | |
Consolidated Statements of Stockholders’ Equity for the period from inception (August 17, 2004) through March 31, 2009 (unaudited) | 3 | |
Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 and from inception (August 17, 2004) through March 31, 2009 (unaudited) | 4 | |
Notes to Consolidated Financial Statements (unaudited) | 5 | |
ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23 |
ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 26 |
ITEM 4T | CONTROLS AND PROCEDURES | 26 |
PART II -- | OTHER INFORMATION | 27 |
ITEM 1 | LEGAL PROCEEDINGS | 27 |
ITEM 1A | RISK FACTORS | 27 |
ITEM 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 27 |
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 | 27 |
SIGNATURES | 28 | |
i
ADVANCE NANOTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
March 31, 2009 | December 31, 2008 | |||||||
ASSETS | (Unaudited) | (a) | ||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | - | $ | 66,810 | ||||
Prepaid expenses and other current assets | 273,086 | 201,524 | ||||||
Accounts receivable | 347,307 | 511,213 | ||||||
Inventory | 220,616 | 221,376 | ||||||
VAT tax refund receivable | 2,017 | 23,476 | ||||||
TOTAL CURRENT ASSETS | 843,026 | 1,024,399 | ||||||
Property plant and equipment, net | 250,770 | 282,076 | ||||||
Patents | 573,943 | 569,835 | ||||||
TOTAL ASSETS | $ | 1,667,739 | $ | 1,876,310 | ||||
CURRENT LIABILITIES | ||||||||
Accounts payable | 1,347,630 | 1,107,614 | ||||||
Accrued expenses | 1,546,951 | 1,120,248 | ||||||
Deferred equity compensation | 101,502 | 61,001 | ||||||
Capital lease obligation, current portion | 8,733 | 8,561 | ||||||
Current liabilities of discontinued operations | 307,074 | 326,617 | ||||||
TOTAL CURRENT LIABILITIES | 3,311,890 | 2,624,041 | ||||||
Convertible notes payable | 9,786,373 | 9,905,623 | ||||||
Common stock warrants | 2,912,137 | 1,150,224 | ||||||
Capital lease obligation, net of current portion | 3,069 | 5,318 | ||||||
TOTAL LIABILITIES | 16,013,469 | 13,685,206 | ||||||
Minority interests in subsidiaries | 5,581,388 | 6,201,034 | ||||||
STOCKHOLDERS' DEFICIT | ||||||||
Preferred stock; $0.001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding | - | - | ||||||
Common stock; $0.001 par value; 200,000,000 shares authorized; 55,407,572 and 53,590,459 shares issued and outstanding in March 31,2009 and December 31, 2008, respectively | 55,408 | 53,591 | ||||||
Additional paid in capital | 17,545,702 | 17,287,151 | ||||||
Warrant valuation | 662,200 | 662,200 | ||||||
Accumulated other comprehensive loss | (513,809 | ) | (1,131,389 | ) | ||||
Deficit accumulated during development stage | (37,676,619 | ) | (34,881,483 | ) | ||||
TOTAL STOCKHOLDERS' DEFICIT | (19,927,118 | ) | (18,009,930 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 1,667,739 | $ | 1,876,310 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements. | ||||||||
(a) Derived from audited financial statements. |
1
ADVANCE NANOTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three months ended March 31, 2009 | Three months ended March 31, 2008 | Period from August 17, 2004 (Date of inception) to March 31, 2009 | ||||||||||
Revenue- product | $ | 28,202 | $ | 126,079 | $ | 1,455,564 | ||||||
Revenue- service | 664,812 | 544,816 | 3,522,060 | |||||||||
Total net revenue | 693,014 | 670,895 | 4,977,624 | |||||||||
Cost of sales | (238,748 | ) | (399,721 | ) | (1,611,459 | ) | ||||||
Gross margin | 454,266 | 271,174 | 3,366,165 | |||||||||
Research and development | (419,689 | ) | (550,202 | ) | (8,933,349 | ) | ||||||
Selling, general and administrative | (801,898 | ) | (1,975,478 | ) | (33,251,739 | ) | ||||||
Total operating expenses | (1,221,587 | ) | (2,525,680 | ) | (42,185,088 | ) | ||||||
Loss from operations | (767,320 | ) | (2,254,506 | ) | (38,818,923 | ) | ||||||
Other income/ (expense) | ||||||||||||
Interest Income | 4 | 11,894 | 378,069 | |||||||||
Grant income | - | - | 198,831 | |||||||||
Gain on sale of investment | - | - | 937,836 | |||||||||
Forgiveness of accounts payable | - | 38,006 | 641,393 | |||||||||
Other income | 97 | - | 1,047,864 | |||||||||
Interest expense | (206,436 | ) | (165,484 | ) | (1,091,793 | ) | ||||||
Fair value of warrants gain | (1,761,913 | ) | 961,516 | 9,874,682 | ||||||||
Accrued late registration costs | (109,555 | ) | - | (2,557,051 | ) | |||||||
Net loss before minority interest | $ | (2,845,123 | ) | $ | (1,408,574 | ) | $ | (29,389,091 | ) | |||
Minority interest in net loss of subsidiary | 52,174 | 534,434 | 5,216,940 | |||||||||
Loss from Continuing Operations | $ | (2,792,949 | ) | $ | (874,140 | ) | $ | (24,172,151 | ) | |||
Provision for income taxes | - | - | - | |||||||||
Loss from Discontinued Operations | (2,187 | ) | (211,501 | ) | 13,504,468 | |||||||
Net loss | $ | (2,795,136 | ) | $ | (1,085,641 | ) | $ | (37,676,619 | ) | |||
Foreign currency translation adjustment gain / (loss) | 617,580 | (571,051 | ) | (513,809 | ) | |||||||
Comprehensive loss | $ | (2,177,556 | ) | $ | (1,656,692 | ) | $ | (38,190,428 | ) | |||
Loss per share from continuing operations - basic and diluted | $ | (0.05 | ) | $ | (0.02 | ) | ||||||
Loss per share from discontinued operations - basic and diluted | $ | (0.00 | ) | $ | (0.01 | ) | ||||||
Net loss per share - basic and diluted | $ | (0.05 | ) | $ | (0.03 | ) | ||||||
Comprehensive loss per share-basic and diluted | $ | (0.04 | ) | $ | (0.05 | ) | ||||||
Weighted average shares outstanding- basic and diluted | 54,941,333 | 36,650,279 | ||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements. |
2
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/ (DEFICIT)
FROM INCEPTION (AUGUST 17, 2004) TO MARCH 31, 2009
(Unaudited)
Common Stock Shares | Amount | Preferred Stock | Additional Paid In Capital | Warrant Valuation | Deficit Accumulated During Development | Accumulated Other Comprehensive Income/Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||
Initial capitalization | 200,000 | $ | 200 | $ | (200 | ) | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
Acquisition shares, net of financing costs | 19,352,778 | 19,353 | (444,353 | ) | (425,000 | ) | ||||||||||||||||||||||||||
Shares issued at $1/share | 1,500,000 | 1,500 | 1,498,500 | 1,500,000 | ||||||||||||||||||||||||||||
Shares issued for cash | 112,500 | 112 | 224,888 | 225,000 | ||||||||||||||||||||||||||||
Net loss | (1,585,858 | ) | (1,585,858 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | 19,828 | 19,828 | ||||||||||||||||||||||||||||||
Balance as of Dec 31, 2004 | 21,165,278 | 21,165 | - | 1,278,835 | (1,585,858 | ) | 19,828 | (266,030 | ) | |||||||||||||||||||||||
Shares issued in connection with private placement, net of financing costs | 11,666,123 | 11,667 | 20,569,193 | 20,580,860 | ||||||||||||||||||||||||||||
Shares issued as late registration penalty | 384,943 | 386 | 2,324,807 | 2,325,193 | ||||||||||||||||||||||||||||
Shares issued from cashless warrant conversions | 71,549 | 71 | (71 | ) | - | |||||||||||||||||||||||||||
Shares issued for services | 265,000 | 265 | 2,182,235 | 2,182,500 | ||||||||||||||||||||||||||||
Common stock warrants | (10,140,471 | ) | 10,140,471 | - | ||||||||||||||||||||||||||||
Placement agent warrants | (1,925,996 | ) | 1,925,996 | - | ||||||||||||||||||||||||||||
Fair value of warrant loss | (8,739,143 | ) | (8,739,143 | ) | ||||||||||||||||||||||||||||
Net loss | (8,367,182 | ) | (8,367,182 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | (217,682 | ) | (217,682 | ) | ||||||||||||||||||||||||||||
Balance as of Dec 31, 2005 | 33,552,893 | 33,554 | - | 5,549,389 | 12,066,467 | (9,953,040 | ) | (197,854 | ) | 7,498,516 | ||||||||||||||||||||||
Warrants issued for services | 157,708 | 157,708 | ||||||||||||||||||||||||||||||
Shares issued for services | 95,000 | 95 | 88,905 | 89,000 | ||||||||||||||||||||||||||||
Shares issued to employees | 723,569 | 723 | 982,354 | 983,077 | ||||||||||||||||||||||||||||
Stock options issued (FAS 123R) | 962,542 | 962,542 | ||||||||||||||||||||||||||||||
Common stock warrants | 5,203,445 | (5,203,445 | ) | - | ||||||||||||||||||||||||||||
Placement agent warrants | 1,119,906 | (1,119,906 | ) | - | ||||||||||||||||||||||||||||
Net loss | (16,228,839 | ) | (16,228,839 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | (282,926 | ) | (282,926 | ) | ||||||||||||||||||||||||||||
Balance as of December 31, 2006 | 34,371,462 | 34,372 | - | 14,064,249 | 5,743,116 | (26,181,879 | ) | (480,780 | ) | (6,820,922 | ) | |||||||||||||||||||||
Warrants issued in connection with private placement | (2,184,266 | ) | (2,184,266 | ) | ||||||||||||||||||||||||||||
Placement costs relating to private placement | (567,755 | ) | (567,755 | ) | ||||||||||||||||||||||||||||
Shares issued to consultants for services | 1,100,000 | 1,100 | 438,900 | 440,000 | ||||||||||||||||||||||||||||
Shares issued to employees | 1,124,224 | 1,124 | 593,946 | 595,070 | ||||||||||||||||||||||||||||
Stock options issued- FAS123R | 748,901 | 748,901 | ||||||||||||||||||||||||||||||
Common stock warrants | 3,034,758 | (3,034,758 | ) | - | ||||||||||||||||||||||||||||
Net loss | (4,644,230 | ) | (4,644,230 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | (320,606 | ) | (320,606 | ) | ||||||||||||||||||||||||||||
Balance as of December 31, 2007 | 36,595,686 | 36,596 | - | 16,128,733 | 2,708,358 | (30,826,109 | ) | (801,386 | ) | (12,753,808 | ) | |||||||||||||||||||||
Warrants issued in connection with private placement | - | - | - | (1,590,250 | ) | (1,590,250 | ) | |||||||||||||||||||||||||
Placement costs relating to private placement | - | - | - | (896,427 | ) | (896,427 | ) | |||||||||||||||||||||||||
Shares issued to consultants for services | 89,192 | 89 | - | 11,506 | 11,595 | |||||||||||||||||||||||||||
Warrants issued to consultants for services | - | - | - | 255,191 | 255,191 | |||||||||||||||||||||||||||
Shares issued on conversion of notes | 985,888 | 986 | - | 244,814 | 245,800 | |||||||||||||||||||||||||||
Shares issued in connection with Owlstone Exchange | 13,291,039 | 13,291 | - | (13,291 | ) | - | ||||||||||||||||||||||||||
Shares issued for interest paid on convertible notes | 518,749 | 519 | - | 78,120 | 78,639 | |||||||||||||||||||||||||||
Shares issued as late registration penalty | 364,551 | 365 | - | 87,854 | 88,219 | |||||||||||||||||||||||||||
Shares issued to employees | 1,745,354 | 1,745 | - | 219,568 | 221,313 | |||||||||||||||||||||||||||
Stock options issued-FAS123R | - | - | - | 715,175 | 715,175 | |||||||||||||||||||||||||||
Common stock warrants | - | - | - | 2,046,158 | (2,046,158 | ) | - | |||||||||||||||||||||||||
Net loss | (4,055,374 | ) | (4,055,374 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | (330,003 | ) | (330,003 | ) | ||||||||||||||||||||||||||||
Balance as of December 31, 2008 | 53,590,459 | 53,591 | - | 17,287,151 | 662,200 | (34,881,483 | ) | (1,131,389 | ) | (18,009,930 | ) | |||||||||||||||||||||
Shares issued to consultants for services | 238,889 | 239 | - | 42,761 | 43,000 | |||||||||||||||||||||||||||
Shares issued on conversion of notes | 477,000 | 477 | - | 118,773 | 119,250 | |||||||||||||||||||||||||||
Shares issued for interest paid on convertible notes | 1,101,224 | 1,101 | - | 97,016 | 98,117 | |||||||||||||||||||||||||||
Common stock warrants | - | - | - | - | - | - | ||||||||||||||||||||||||||
Net loss | (2,795,136 | ) | (2,795,136 | ) | ||||||||||||||||||||||||||||
Foreign currency translation | 617,580 | 617,580 | ||||||||||||||||||||||||||||||
Balance as of March 31, 2009 | 55,407,572 | $ | 55,408 | - | $ | 17,545,702 | $ | 662,200 | $ | (37,676,619 | ) | $ | (513,809 | ) | $ | (19,927,118 | ) | |||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements. |
3
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 2009 | Three Months Ended March 31, 2008 | From Inception (August 17, 2004) To March 31, 2009 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (2,792,949 | ) | $ | (874,140 | ) | $ | (24,172,151 | ) | |||
Adjustments to reconcile net loss to cash flows used in operating activities | ||||||||||||
Depreciation | 31,935 | 33,193 | 460,128 | |||||||||
Loss from discontinued operations | (2,187 | ) | (211,501 | ) | (13,504,468 | ) | ||||||
Fair value of warrant liability | 1,761,913 | (961,516 | ) | (9,874,682 | ) | |||||||
Common stock issued for services | 43,000 | - | 2,766,095 | |||||||||
Common stock issued to employees | - | 15,840 | 1,799,460 | |||||||||
Common stock issued for interest on convertible note | 98,117 | - | 176,756 | |||||||||
Common stock issued on conversion of notes | 119,250 | - | 365,050 | |||||||||
Stock options issued to employees | - | 188,060 | 2,426,618 | |||||||||
Warrants issued for services | - | - | 412,899 | |||||||||
Late registration costs | - | - | 2,447,496 | |||||||||
Gain on sale of investment | - | - | (937,836 | ) | ||||||||
Forgiveness of accounts payable | - | (38,005 | ) | (641,393 | ) | |||||||
Changes in operating assets and liabilities | ||||||||||||
Increase in restricted cash | - | (286 | ) | - | ||||||||
Increase in prepayments and other | (71,562 | ) | (164,953 | ) | (293,653 | ) | ||||||
Increase in inventory | 760 | (43,477 | ) | (220,616 | ) | |||||||
Decrease (increase) in accounts receivable | 163,906 | 554,600 | (347,307 | ) | ||||||||
Decrease in grants receivable | - | - | - | |||||||||
Decrease (increase) in VAT receivable | 21,459 | (87,133 | ) | (2,017 | ) | |||||||
Increase in accounts payable | 324,862 | 394,528 | 1,989,023 | |||||||||
Increase in accrued expenses | 341,858 | 229,490 | 1,546,951 | |||||||||
Decrease in deferred grant income | - | (38,279 | ) | - | ||||||||
Increase (decrease) in deferred equity compensation | 40,501 | 66,127 | 101,502 | |||||||||
NET CASH USED IN CONTINUING OPERATING ACTIVITIES | 80,863 | (937,452 | ) | (35,502,146 | ) | |||||||
NET CASH USED IN DISCONTINUED OPERATIONS | (19,543 | ) | (413,059 | ) | 307,074 | |||||||
NET CASH USED IN OPERATING ACTIVITIES | 61,320 | (1,350,511 | ) | (35,195,072 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchase of property plant and equipment | (629 | ) | (34,656 | ) | (697,052 | ) | ||||||
Development of patent technology | (4,108 | ) | (8,453 | ) | (573,943 | ) | ||||||
Investment | - | - | 937,836 | |||||||||
Minority investment in subsidiary | (619,646 | ) | 333,280 | 5,581,389 | ||||||||
NET CASH PROVIDED BY INVESTING ACTIVITIES | (624,383 | ) | 290,171 | 5,248,230 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Capital lease obligations, net | (2,077 | ) | 5,890 | 11,802 | ||||||||
Proceeds from (repayments of) convertible notes | (119,250 | ) | - | (119,250 | ) | |||||||
Amortization of deferred financing costs | - | 39,427 | - | |||||||||
Proceeds from issuance of common stock ($1 round) | - | - | 1,500,000 | |||||||||
Proceeds from issuance of common stock | - | - | 20,805,860 | |||||||||
Proceeds from issuance of convertible notes | - | 2,737,574 | 10,151,423 | |||||||||
Financing fees from issuance of convertible notes | - | (517,678 | ) | (1,464,182 | ) | |||||||
Financing fees on merger shares issued | - | - | (425,000 | ) | ||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES FROM CONTINUING OPERATIONS | (121,327 | ) | 2,265,213 | 30,460,653 | ||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES FROM DISCONTINUED OPERATIONS | - | (171,478 | ) | (2 | ) | |||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | (121,327 | ) | 2,093,735 | 30,460,651 | ||||||||
Effect of exchange rates on cash and cash equivalents | 617,580 | (571,051 | ) | (513,809 | ) | |||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | $ | (66,810 | ) | $ | 462,344 | $ | - | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | $ | 66,810 | $ | 1,867,626 | $ | - | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | - | $ | 2,329,970 | $ | - | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest and income taxes | $ | 32,934 | $ | 203,253 | $ | 438,987 | ||||||
Conversion of amounts due on related party credit facility to common stock | $ | - | $ | - | $ | 1,500,000 | ||||||
Convertible note issued in repayment of loan and accounts payable | $ | - | $ | 246,000 | $ | 956,000 | ||||||
Supplemental disclosure of non-cash transactions: | ||||||||||||
Fair value of warrant liability | $ | 1,761,913 | $ | (961,516 | ) | $ | (9,874,682 | ) | ||||
Common stock issued for services | $ | 43,000 | $ | - | $ | 2,766,095 | ||||||
Common stock issued to employees | $ | - | $ | 15,840 | $ | 1,799,460 | ||||||
Common stock issued for interest on convertible note | $ | 98,117 | $ | - | $ | 176,756 | ||||||
Common stock issued on conversion of notes | $ | 119,250 | $ | - | $ | 365,050 | ||||||
Stock options issued to employees | $ | - | $ | 188,060 | $ | 2,426,618 | ||||||
Warrants issued for services | $ | - | $ | - | $ | 412,899 | ||||||
Accrued Late registration costs | $ | 109,555 | $ | - | $ | 2,557,051 | ||||||
Forgiveness of accounts payable | - | $ | (38,005 | ) | $ | (641,393 | ) | |||||
Convertible note issued in repayment of loan payable and accounts payable | $ | - | $ | 246,000 | $ | 956,000 | ||||||
Warrants issued in connection with private placement | - | $ | 849,708 | $ | 3,774,516 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements. |
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(Unaudited)
NOTE A - ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
As used in these Notes to Consolidated Financial Statements, the terms “we”, “us”, “our” and “the Company” refer to Advance Nanotech, Inc. and its subsidiaries.
Corporate History
We were originally formed as Colorado Gold & Silver, Inc., a Colorado corporation, on March 3, 1980, and subsequently changed our name to Dynamic I-T, Inc. and then in January 2004, changed our name to Artwork & Beyond, Inc., or Artwork. On October 1, 2004, Artwork entered into a share exchange agreement to acquire all of the issued and outstanding common stock of Advance Nanotech Holdings, Inc. pursuant to the terms and conditions set forth in the share exchange agreement. The acquisition transaction closed simultaneously with the execution of the share exchange agreement. Artwork and its affiliates were unrelated to the stockholders of Advance Nanotech Holdings, Inc. prior to the execution, delivery and performance of the share exchange agreement. As a result of this transaction (and certain capital transactions, including a reverse 100-to-1 stock split on October 5, 2005), control of Artwork was changed, with the former stockholders of Advance Nanotech Holdings, Inc. acquired approximately 99% of Artwork’s outstanding common stock. In addition, all of the officers and directors of Artwork prior to the transaction were replaced by designees of the former shareholders of Advance Nanotech Holdings, Inc., and Artwork’s corporate name was changed to “Advance Nanotech, Inc.” As a consequence of the change in control of Artwork resulting from these transactions, all prior business activities of Artwork were completely terminated, and Artwork adopted the business plan developed by Advance Nanotech Holdings, Inc. prior to the transaction. On October 5, 2004, the new Board of Directors approved the change of the issuer’s name to “Advance Nanotech, Inc. (a Colorado corporation),” or Advance Nanotech Colorado.
On June 19, 2006, Advance Nanotech Colorado merged with and into its newly-formed, wholly-owned subsidiary, Advance Nanotech, Inc., a Delaware corporation, or Advance Nanotech Delaware, in order to reincorporate in the State of Delaware. The reincorporation was approved by Advance Nanotech Colorado's shareholders on May 11, 2006. As a result of the reincorporation, our legal domicile is now Delaware. Each outstanding Advance Nanotech Colorado common share was automatically converted into one Advance Nanotech Delaware common share. As a result of the reincorporation, each outstanding option, right or warrant to acquire shares of Advance Nanotech Colorado common stock converted into an option, right or warrant to acquire an equal number of shares of Advance Nanotech Delaware common stock, with no further action required by any party, under the same terms and conditions as the original option, right or warrant.
On December 19, 2007, the Company entered into an exchange agreement (as amended, the “Exchange Agreement”) with certain stockholders (the “Owlstone Founders”) of its majority owned subsidiary Owlstone Nanotech, Inc. (“Owlstone”) to increase the Company's ownership interest in Owlstone. Pursuant to the Exchange Agreement, the Company on September 4, 2008 (i) issued 13,291,039 shares of its common stock to the Owlstone Founders in exchange for Owlstone shares representing approximately 24% of Owlstone that we did not already own and (ii) granted to the employees of Owlstone options to purchase in the aggregate 11,000,000 shares of common stock for $0.25 per shares in exchange for the cancellation of Owlstone options outstanding and the right to acquire further Owlstone option grants. The Company is also obligated under the Exchange Agreement (i) to issue in the aggregate 10,000,000 shares of restricted stock with a vesting schedule still to be determined and (ii) to offer to acquire the remaining shares of Owlstone common stock outstanding or issuable upon conversion of Owlstone convertible notes (representing approximately 26.21% of the remaining Owlstone shares) for in the aggregate up to 16,511,760 shares of our common stock and warrants to purchase 9,448,881 additional shares of our common stock for $0.30 per share.
Discontinued Operations
In November 2008, we de-listed Advance Display Technologies plc from the Plus Market Group in the United Kingdom as part of our strategy of divesting away from our non-core technologies and also shut down all our U.K. subsidiaries, except for Owlstone Limited, to further reduce operating costs. Therefore, the Company has discontinued operations of the following U.K. subsidiaries: Advance Nanotech Limited, Nanofed Limited, Cambridge Nanotechnology Limited, Bio-Nano Sensium Limited, Nano Solutions Limited, Advance Display Technologies plc, and Advance Homeland Security plc. The operations and cash flows of these subsidiaries have been eliminated from the accounts of our ongoing operations and major classes of assets and liabilities related thereto have been segregated. The losses from discontinued operations, including the impairment of certain assets of discontinued operations, have been reflected in the financial statements of this report.
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Current Operations
We are a development stage company seeking to commercialize novel chemical sensor products based on our proprietary and innovative gas sensing technology, developed by our Owlstone Nanotech, Inc. subsidiary. Our technology offers an attractive combination of small size, high sensitivity, low power consumption, reprogrammability, high chemical selectivity and low cost. Historically, we were developing several nanotechnologies. In December 2007, we decided to revise our strategy and to focus our efforts, principally, on the commercialization of our chemical detection technology. As such, we have determined to progressively divest ourselves of our other technologies and their respective subsidiaries, which we have substantially completed. Our operating business today is centered upon our Owlstone subsidiary and the ongoing commercialization of its products.
In the United States alone, the chemical sensor market is projected to surpass $5 billion by 2012, according to Freedonia Group, with additional opportunities in the military market. We have initially targeted the industrial and homeland defense sectors. In later stages, we plan to commercialize sensing products for the consumer, environmental monitoring and medical diagnostics markets. We are poised to benefit from powerful trends driving the demand for improved technologies within the chemical sensing arena, including substantial government and private sector investment in homeland security, regulatory emphasis on safety, and increasingly stringent environmental regulations.
The market for chemical sensing faces unique challenges in detecting hazardous substances in various forms and in a myriad of operating environments. In homeland defense, chemical sensors are used to detect chemical warfare agents and explosives to protect military personnel, government buildings and civilians. In industrial applications, chemical sensors monitor air quality for health and safety purposes and also provide vital information during manufacturing processes. The existing technologies for chemical sensors in these industries are outdated and are typically limited by physical size, sensitivity and/or reliability. We believe that these factors have led to unacceptable sample collections, uninspired deployment scenarios, high false-positive rates and, subsequently, a call to action by the U.S. Department of Defense for better solutions.
Our Solution
Our sensing technology was specifically designed to meet the specifications set forth by the U.S. Department of Defense. The key element of the Owlstone sensor is a silicon chip that provides a chemical-sensing mechanism using Field Asymmetric Ion Mobility Spectrometry, or FAIMS, a variant of conventional Ion Mobility Spectrometry, or IMS. Our technology enables unprecedented miniaturization of sensors with superior analytical capability at a compelling cost advantage, the ability to be programmed and reprogrammed to detect a wide range of substances, and high selectivity and sensitivity. The Owlstone detector was conceived by Andrew Koehl who began the development of Owlstone’s fundamental technology in 2001. Mr. Koehl was later joined by Paul Boyle and David Ruiz-Alonso and, together, they developed the core technology.
Our Products
We are currently marketing two chemical sensing products: Tourist and Lonestar. Tourist is an evaluation platform currently being sold by Owlstone to select partners and customers. Our Lonestar product is a fully functional unit for certain applications in industrial markets as well as a test platform for partners providing a fully integrated and deployable chemical detection system. Lonestar was launched in July 2007, and we have commenced shipping units to end-users. In addition, we have also developed and shipped a third product called the Owlstone OVG-4, which is a system for generating trace concentration levels of chemicals and calibration gas standards.
We intend to keep our sales organization lean and are pursuing product-based strategies within markets that are characterized by high-volume, centralized procurements. In applications where procurement is fragmented, we intend to partner with existing market leaders that already possess distribution networks and infrastructure using either “component” supply or contract sales strategies and with other partners whose placement in a territory or market offers advantages, particularly if the territory is one in which we would not otherwise concentrate our own efforts.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND USE OF ESTIMATES
The unaudited financial statements included herein have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements included in the Company's report on Form 10-K for the year ended December 31, 2008. 1n the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may he expected for any other interim period or the entire year. For further information, these unaudited financial statements and the related notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2008 included in the Company's report on Form 10-K.
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
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The consolidated financial statements of continuing operations include the accounts of Advance Nanotech, Inc., Owlstone Nanotech, Inc., Owlstone Limited and Advance Nanotech (Singapore) Pte Ltd. (the "Company"). The consolidated financial statements of discontinued operations include Advance Nanotech Ltd, Bio-Nano Sensium Limited, Advance Display Technologies plc, Nanofed Limited, Cambridge Nanotechnology Limited, Nano Solutions Limited and Advance Homeland Security plc (the “Discontinued Group”).
Minority stockholders of Owlstone Nanotech, Inc. (15.97%), Advance Nanotech (Singapore) Pte Ltd (10%), Bio-Nano Sensium Limited (45%), Nano Solutions Limited (25%) and Advance Display Technologies plc (7.1%) are not required to fund losses; accordingly no losses have been allocated to them. All inter-company accounts and transactions have been eliminated in consolidation and minority interests were accounted for in the consolidated statements of operations and the balance sheets.
GOING CONCERN
The accompanying consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America, contemplates the continuation of the Company as a going concern. The Company has been in the development stage since its inception (August 17, 2004), has sustained losses and has used capital raised from the issuance of stock and convertible and non-convertible debt to fund its operations. Continuation of the Company as a going concern is dependent upon establishing and achieving profitable operations. The Company expects to continue to incur losses until it can generate sufficient revenue from existing and new business and achieve and maintain positive margins. Until then, the Company’s operations will require additional funds.
At At March 31, 2009, the Company had no cash or cash equivalents, however the Company had $347,307 in accounts receivable from customers. On April 15 and April 16, 2009, the Company issued and sold $500,000 of Senior Secured Notes under the authorization of existing agreements. These Senior Secured Notes are due on June 30, 2009 (See Note P – “Subsequent Events” section). Based upon the Company’s forecast of future revenues from its products, services and grants, in conjunction with the cash and cash equivalents on hand, the Company’s continued ability to operate is dependent upon obtaining additional funds. The Company is presently pursuing various options to generate additional funds, including, among others, strategic partnering arrangements, financing on a senior secured basis, and raising additional capital through the sale of securities. If the Company is unable to generate sufficient cash flow through sales or partnering arrangements or obtain additional financing through other means to support its operations and meet its obligations or is unable to repay the Senior Secured Notes on June 30, 2009, the Company will be forced to consider the further restructuring of its operations, disposition of various assets, seeking protection from its creditors, or cessation of operations and liquidation.
The Company is actively exploring various debt and equity financing transactions. Other plans to generate additional revenue from operations could include co-development and co-funding of its products, licensing products for upfront and milestone payments, and applying for more government grants. The Company has initiated cost reduction programs and will continue to closely manage expenses until funds from operations can support the growth of the business. Although the Company is exploring all opportunities to improve its financial condition, there is no assurance that these programs will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
CONCENTRATION OF CREDIT RISK
The Company's future results of operations involve a number of risks and uncertainties, including those described in the Company’s annual report on Form 10-K under Item 1A. “Risk Factors.” The Company is potentially subject to concentrations of credit risk, which consist principally of cash and cash equivalents. The cash and cash equivalent balances at March 31, 2009 are principally held by two institutions in the US and two banks in the UK. Each US financial institution insures our aggregated accounts with the Federal Deposit Insurance Corporation ("FDIC"), up to $250,000. At March 31, 2009, the Company had no uninsured cash deposits in excess of or not covered by the Federal Deposit Insurance Corporation insurance limit.
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CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in liquid instruments having maturity of three months or less at the time of purchase.
RESEARCH AND DEVELOPMENT
Research and development costs are clearly identified and are expensed as incurred in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 2, "Accounting for Research and Development Costs."
FOREIGN CURRENCY TRANSLATION
The Company's primary functional currencies are the United States Dollar (USD$) and the Great Britain Pound (GBP£). Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Expenses are translated at the average exchange rates in effect during the period. Translation gains and losses not reflected in earnings are reported in accumulated other comprehensive income/loss in stockholders' equity.
EARNINGS / LOSS PER SHARE
The Company computes basic earnings (loss) per share using the weighted average number of common shares outstanding during the period in accordance with Statement of Financial Standards No. 128, “Earnings Per Share” ("SFAS 128") which specifies the compilation, presentation, and disclosure requirements for income per share for entities with publicly held common stock or instruments which are potentially common stock. Under SFAS No. 128, diluted earnings (loss) per share are computed using the weighted average number of common shares outstanding and the dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and warrants issued by the Company. For the year ended December 31, 2008 and the three months ended March 31, 2009, the effect of the options and warrants were anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. The provisions of SFAS No. 161 are effective for fiscal years beginning after November 15, 2008. SFAS No. 161 will be effective for the Company on January 1, 2009. The Company is currently evaluating the impact of the adoption of SFAS No. 161 may have on its consolidated financial statement disclosures.
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets”. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009. We do not expect FSP 142-3 to have a material impact on our accounting for future acquisitions of intangible assets.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities (the “Hierarchy”). The Hierarchy within SFAS No. 162 is consistent with that previously defined in the AICPA Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“SAS 69”). SFAS No. 162 is effective 60 days following the United States Securities and Exchange Commission’s (the “SEC”) approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS No. 162 will not have a material effect on the financial statements because the Company has utilized the guidance within SAS 69.
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In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS No. 163”). SFAS No. 163 requires recognition of an insurance claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. Early application is not permitted. The Company’s adoption of SFAS No. 163 will not have a material effect on the financial statements.
On May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) . FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FSP APB 14-1 will be effective for the Company on January 1, 2009. The adoption of FSP APB 14-1 is not expected to have a material impact on our consolidated results of operations or financial position.
On June 16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP No. EITF 03-6-1”). FSP EITF 03-6-1 addresses the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 will be effective for the Company on January 1, 2009. The adoption of FSP EITF 03-6-1 is not expected to have a material impact on our consolidated results of operations or financial position.
In June 2008, the FASB issued EITF Issue 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF No. 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 “Accounting for Derivatives and Hedging Activities”, specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. EITF 07-5 is effective for us on January 1, 2009. The adoption of EITF 07-5 is not expected to have a material impact on our consolidated financial statements.
In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. As it relates to our financial assets and liabilities recognized or disclosed at fair value in our financial statements on a recurring basis (at least annually), the adoption of FSP 157-3 did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) About Transfers of Financial Assets and Interest in Variable Interest Entities” (“FSP 140-4”). FSP 140-4 requires additional disclosure about transfers of financial assets and an enterprise’s involvement with variable interest entities. FSP 140-4 is effective for the first reporting period ending after December 15, 2008. FSP 140-4 is not expected to have a material impact on our consolidated financial statements.
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Certain reclassifications have been made to the 2008 financial statements in order to conform to the current presentation.
NOTE B- PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation. Property and equipment are depreciated on a straight-line basis over their estimated useful lives, which range from 3 to 5 years.
Estimated | March 31, | December 31, | ||||||||
Asset Description | Useful Life | 2009 | 2008 | |||||||
Furniture and Fixtures | 3-5 years | $ | 183,870 | $ | 184,662 | |||||
Office Equipment | 3-5 years | 72,080 | 72,165 | |||||||
Computers | 3 years | 113,041 | 113,341 | |||||||
Software | 3 years | 59,387 | 59,387 | |||||||
Plant and Machinery | 5 years | 211,181 | 284,755 | |||||||
639,558 | 714,310 | |||||||||
Less: accumulated depreciation | (388,789 | ) | (432,234 | ) | ||||||
Net Property and equipment | $ | 250,770 | $ | 282,076 |
The Company recorded depreciation of $31,935 and $33,193 for the three months ended March 31, 2009 and 2008, respectively. The historical costs of Owlstone Ltd’s assets are 306,804 in Great Britain Pounds Sterling.
Maintenance and repairs are expensed as incurred and were $3,837 and $8,462 for the three months ended March 31, 2009 and 2008, respectively.
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NOTE C- INTANGIBLE ASSETS
The Company capitalizes internally developed assets related to certain costs associated with patents. These costs include legal and registration fees needed to apply for and secure patents. As of March 31, 2009 and 2008, the Company had capitalized internally developed patents of $573,943 and $644,834, respectively with respective accumulated amortization of $4,517 and $474 relating to issued patents. For the three months ending March 31, 2009 and 2008, the Company had amortization expense of $1,536 and $367, respectively. Intangible assets are amortized in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” ("SFAS 142") using the straight-line method over the shorter of their estimated useful lives or remaining legal life. The Company expenses any administrative costs related to the legal work on these patents. Intangible assets acquired from other enterprises or individuals in an “arms length” transaction are recorded at cost.
Our ability to successfully commercialize our products and technologies is significantly enhanced by our ability to secure strong intellectual property rights-generally patents-covering these products and technologies. The development and protection of intellectual property and proprietary technology is a key priority in our current and ongoing activities. As of December 31, 2008, we had been issued three U.S. patents. As of March 31, 2009, we had one additional U.S. Patent issued and we had ten patent applications submitted and awaiting response and four patent applications pending submittal under PCT protection with the United States Patent and Trademark Office. In addition, we had six patent applications pending with European patent offices and four applications pending submittal, covering the key functional and operational features of our chemical detection technologies. Lastly, we had one patent issued in other jurisdictions with three applications submitted and four applications pending.
NOTE D - INVESTMENT IN SUBSIDIARY
On July 28, 2005, Advance Nanotech Singapore Pte Ltd., a subsidiary of Advance Nanotech, Inc., acquired a 12.08% equity stake in Singular ID Pte Ltd for an investment of SGD$300,000 or approximately US$207,510. As a result of subsequent equity financings, Advance Nanotech Singapore Pte Ltd.’s equity stake in Singular ID was reduced to 8.8% prior to its sale in December 2007. On December 28, 2007, the Company sold its 8.8% equity interest in Singapore-based Singular ID Pte Ltd. for $1.19 million and, as a result, realized a gain of $937,836.
The Company did not exercise significant influence over the entity and carried the investment at cost. The Company recorded its investment in Singular ID in accordance with FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, using the cost method. The original investment under the cost method is accounted for in the same manner as marketable equity securities and recorded on the parent company’s balance sheet at original cost measured by the fair market value of the consideration given. There were no adjustments or impairment charges to the fair market value from acquisition through the period ending March 31, 2009.
NOTE E - MINORITY INTERESTS IN SUBSIDIARIES
Minority interest in subsidiary represents the minority stockholders’ proportionate share of the equity of:
· | Owlstone Nanotech, Inc. - At March 31, 2009, the Company owned 84.03% of Owlstone’s outstanding shares, which also represented its percentage of voting control. | |
· | Advance Display Technologies plc- At March 31, 2009, the Company owned 92.9% of Advance Display Technologies’ outstanding shares, which also represented its percentage of voting control. | |
· | Advance Nanotech Singapore Pte. Ltd.- At March 31, 2009, the Company owned 90.0% of Advance Nanotech Singapore Pte. Ltd.’s outstanding shares, which also represented its percentage of voting control. | |
· | Bio-Nano Sensium Technologies Ltd.- At March 31, 2009, the Company owned 55.0% of Bio-Nano Sensium Technologies Ltd.’s outstanding shares, which also represented its percentage of voting control. | |
· | Nano Solutions Ltd.- At March 31, 2009, the Company owned 75.0% of Nano Solutions Ltd.’s outstanding shares, which also represented its percentage of voting control. |
The Company’s percentage of controlling interest requires that operations be included in the consolidated financial statements. The percentage of equity interest that is not owned by the Company is shown as “Minority interests in subsidiaries” in the consolidated balance sheets and “Minority interest in net loss of subsidiary” in the consolidated statements of operations.
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In November 2008, we de-listed Advance Display Technologies plc from the Plus Market Group in the United Kingdom as part of our strategy of divesting away from our non-core technologies and also shut down all our U.K. subsidiaries, except for Owlstone Limited, to further reduce operating costs. Therefore, the Company has discontinued operations of the following U.K. subsidiaries: Advance Nanotech Limited, Nanofed Limited, Cambridge Nanotechnology Limited, Bio-Nano Sensium Limited, Nano Solutions Limited, Advance Display Technologies plc, and Advance Homeland Security plc.
NOTE F- REVENUE RECOGNITION
Revenue from product sales, net of estimated provisions, will be recognized when the merchandise is shipped to an unrelated third party, as provided in Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB104”). Accordingly, revenue is recognized when all four of the following criteria are met:
· | persuasive evidence that an arrangement exists; | |
· | delivery of the products has occurred; | |
· | the selling price is both fixed and determinable; and | |
· | collectability is reasonably probable. |
As of March 31, 2009 and 2008, the Company has recognized revenue of $693,014 and $670,895, respectively.
Revenues generated were a direct result of our subsidiary, Owlstone Nanotech, Inc., shipping its Lonestar and Owlstone Vapor Generators (“OVG”) products, along with instructional and engineering services provided to customers as of March 31, 2009.
Owlstone Nanotech, Inc. has obtained other purchase orders for its products and contracted services. Owlstone revenues include both product sales and service revenue from industrial partners. Service revenue includes contracted research and development or engineering work for specific customers.
Our customers consist primarily of governmental agencies and large manufacturers and wholesalers who sell directly into retail channels. Provisions for sales discounts and estimates for damaged product returns and exchanges will be established as a reduction of product sales revenues at the time revenues are recognized.
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NOTE G - STOCKHOLDERS' EQUITY
1. Common Stock
At the Company's Special Meeting of Stockholders held on February 12, 2008, the stockholders of the Company voted in favor of an amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of the Company's common stock from 75,000,000 to 200,000,000. At March 31, 2009, 55,407,572 shares of common stock were outstanding.
2. Preferred Stock
On June 19, 2006, the Company created a class of "blank check" preferred stock, par value $0.001 per share, consisting of 25,000,000 shares. The term "blank check" preferred stock refers to stock for which the designations, preferences, conversion rights, and cumulative, relative, participating, optional or other rights, including voting rights, qualifications, limitations or restrictions thereof, are determined by the Board of Directors (“Board”). As such, the Board will be entitled to authorize the creation and issuance of 25,000,000 shares of preferred stock in one or more series with such limitations and restrictions as may be determined in the sole discretion of the Board, with no further authorization by stockholders required for the creation and issuance of the preferred stock. Any preferred stock issued would have priority over the common stock upon liquidation and might have priority rights as to dividends, voting and other features. Accordingly, the issuance of preferred stock could decrease the amount of earnings and assets allocable to or available for distribution to holders of common stock and adversely affect the rights and powers, including voting rights, of the common stock. As of March 31, 2009, there were no shares of preferred stock issued or outstanding.
Restricted stock, stock options and warrants issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123, “Share-Based Payment” and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction With Selling Goods or Services”, and recognized over the related service period.
4. Warrants
The following table summarizes information about our warrants: |
Warrants Summary | Weighted Average Exercise Price | ||||||
December 31, 2008 | 20,712,848 | $ | 0.32 | ||||
Granted | - | $ | - | ||||
Exercised | - | - | |||||
Cancelled or Forfeited | (60,000 | ) | (a ) | $ | 1.94 | ||
March 31, 2009 | 20,652,848 | $ | 0.32 |
(a) | As of March 31, 2009, certain warrants totaling 60,000 expired according to the terms of the warrants. | |
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NOTE H - STOCK OPTION PLANS AND STOCK BASED COMPENSATION
On August 28, 2008, the Board of Directors of Advance Nanotech, Inc. adopted the Advance Nanotech, Inc. 2008 Equity Incentive Plan (the "2008 Plan"). The aggregate number of shares of Common Stock that may be issued under the Plan shall be the sum of i) 10% of the fully diluted shares of the Company (the "2008 Equity Plan Shares"), subject to adjustment as set forth in the 2008 Equity Incentive Plan, ii) securities under the Old Plan as necessary, and iii) the shares and options as defined in the Exchange Agreement for the issuance of the a) AVNA Exchange Shares, b) the AVNA Restricted Stock shares, c) the AVNA Options, and such shares are hereby reserved for issuance out of the authorized but previously unissued Shares. Employees, service providers and non-employee directors of the Company and its affiliates are eligible to receive stock options, restricted stock, performance awards and other stock- or performance-based awards. Incentive stock options may be granted only to employees. The Plan will continue until the earlier of the termination of the Plan by the board of directors or ten years after the effective date.
The 2008 Plan will be administered by a committee of the Board of Directors of the Company. The 2008 Plan is currently being administered by the Company's compensation committee which is comprised of three non-executive directors. The compensation committee may determine the specific terms and conditions of all Awards (as defined in the 2008 Plan) granted under the 2008 Plan, including, without limitation, the number of shares subject to each Award, the price to be paid for the shares and the vesting criteria, if any. The compensation committee has discretion to make all determinations necessary or advisable for the administration of the 2008 Plan.
The foregoing description of the 2008 Plan is qualified in its entirety by the terms and provisions of the 2008 Plan that was executed, a copy of which is incorporated by reference to Exhibit 10.1 to Form 8-K filed on September 4, 2008. The Board of Directors also adopted a form of stock option agreements under the 2008 Plan, a form of which is incorporated by reference to Exhibit 10.2 to Form 8-K filed on September 4, 2008.
Shares Granted to Employees
As of March 31, 2009, the Company accrued executive equity grants totaling $13,813 for shares to be issued to certain executives of the Company according to their employment contracts related to service in the first quarter of 2009 and accrued a non-cash compensation expense related to the fair market value of the stock compensation. These awards were not yet issued as of March 31, 2009.
As of March 31, 2009, the Company granted 238,889 shares of common stock to certain non-employee consultants pursuant to the 2008 Plan and certain contractual agreements. The grants vested immediately upon grant. The Company estimated that the fair market value of these stock grants was approximately $43,000.
As of March 31, 2009, there were 26,449,904 shares that had not been issued under the 2008 Equity Incentive Plan.
The Company accounts for employee stock option grants in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
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In December 2004, the FASB issued SFAS No. 123(R)”). This statement revises SFAS No. 123, “Accounting for Stock-Based Compensation,” which provided alternative methods of disclosure for stock-based employee compensation. It also supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and its related implementation guidance. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123(R) eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. The effective date for SFAS 123(R) for public entities that file as smaller reporting companies began on January 1, 2006. Compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123(R) for either recognition or pro forma disclosures. The Company accounts for stock options in accordance with SFAS 123 and has also elected to adopt the disclosure only provisions of SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure.”
Number of Options | Weighted Average Exercise Price | |||||||
Balance, December 31, 2008 | 11,622,845 | 0.39 | ||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Cancelled or forfeited | (38 | ) | 100.00 | |||||
Balance, March 31, 2009 | 11,622,807 | 0.39 |
Range of Exercise Prices | Number Outstanding as of March 31, 2009 | Average Remaining Contractual Life | Weighted Average Exercise Price | Compensation Cost Recorded as of March 31, 2009 | Compensation Cost Yet to be Recorded | |||||||||||
$0.25 | 11,340,343 | 8.49 | $ | 0.25 | $ | 241,500 | $ | - | ||||||||
$2.03-$3.50 | 280,000 | 1.02 | 2.24 | 2,029,895 | - | |||||||||||
$20.00-80.00 | 488 | 1.01 | 70.26 | - | - | |||||||||||
$100.00-200.00 | 625 | 0.33 | 164.00 | - | - | |||||||||||
$700.00 | 1,351 | 0.43 | 700.00 | - | - |
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NOTE I- FAIR VALUE ACCOUNTING
The following table sets forth the Company's financial assets and liabilities measured at fair value by level within the fair value hierarchy. As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Assets | ||||||||||||||||
Cash equivalents | $ | - | $ | - | $ | - | $ | - | ||||||||
$ | - | $ | - | $ | - | $ | - | |||||||||
Liabilities | ||||||||||||||||
Detachable warrants | $ | 1,150,224 | $ | - | $ | - | $ | 1,150,224 | ||||||||
$ | 1,150,224 | $ | - | $ | - | $ | 1,150,224 |
The Company had no financial assets that were classified within the fair value hierarchy as of the period ending March 31, 2009.
The Company's detachable warrants were valued using pricing models, and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. These financial liabilities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.
The table below sets forth a summary of changes in the fair value of the Company's Level 3 financial liabilities (detachable warrants) for the three months ended March 31, 2009.
Balance at beginning of period, December 31, 2008 | $ | 1,150,225 | ||
Change in fair value of warrants | 1,761,913 | |||
Fair value of warrants issued or accrued during the period | - | |||
Balance at end of period, March 31, 2009 | $ | 2,912,138 |
The total amount of the changes in fair value for the three month period was a non-cash loss of $1,761,913 and was included in net loss as a result of changes in the Company's stock price from December 31, 2008.
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NOTE J- COMMITMENTS AND CONTINGENCIES
1. Leases
As of March 31, 2009, the Company had the following lease commitments:
Operating | Capital | |||||||
Year ending December 31, | Leases | Leases | ||||||
2009 | $ | 184,431 | $ | 7,021 | ||||
2010 | 188,655 | 5,460 | ||||||
2011 | 24,806 | - | ||||||
Thereafter | - | - | ||||||
Amounts representing interest | - | (679 | ) | |||||
Total principal payments | $ | 397,892 | $ | 11,802 |
The Company previously leased 3,569 square feet of general office space for its principal executive offices at 600 Lexington Avenue, 29th Floor, New York, New York 10022 for base rent of approximately $15,706 per month. These facilities were the center for all of our administrative functions in the United States. On September 30, 2008, the Company assigned the entire lease for the premises located at 600 Lexington Avenue to Meredith Financial Group (“MFG”). MFG is an affiliate of a director of the Company, Lee Cole. Under the terms of the assignment, MFG assumes all cost of the lease with the Landlord and in the event of default by MFG, the Company may be held liable by the Landlord for the remaining term of the lease which expires on September 13, 2010.
Effective June 23, 2008, the Company’s indirectly owned subsidiary, Owlstone Ltd., entered into a five-year lease agreement for Unit 127/136 Cambridge Science Park, Milton Road, Cambridge (UK). The unit has approximately 10,037 square feet which is sufficient for all of the operations of the subsidiary. The monthly rent is approximately $28,716 (GPB £15,800), payable quarterly in advance beginning December 24, 2008.
The Company has a defined contribution 401(k) Plan whereby the Company can make discretionary matches to employee contributions. The Company has not made any contributions to the 401(k) Plan as of March 31, 2009.
NOTE K -INCOME TAXES
Income taxes are recorded in accordance with SFAS No. 109, “Accounting for Income Taxes.” This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax assets, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
The Company is subject to the income tax laws in the United States of America and the United Kingdom. As of December 31, 2008, the Company had net operating loss carry forwards for income tax reporting purposes of approximately $31,922,000 that may be offset against future taxable income through 2028. Current tax laws such as IRC §382 limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the consolidated financial statements because the Company believes there is no assurance the carry forwards will be used. Potential tax benefits of the loss carry forwards are offset by valuation allowance of the same amount.
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NOTE L - RELATED PARTY TRANSACTIONS
The Company previously leased 3,569 square feet of general office space for its principal executive offices at 600 Lexington Avenue, 29th Floor, New York, New York 10022 for base rent of approximately $15,706 per month. These facilities were the center for all of our administrative functions in the United States. The lease was due to expire on September 13, 2010. On September 30, 2008, the Company assigned the entire lease for the premises located at 600 Lexington Avenue to Meredith Financial Group (“MFG”). MFG is an affiliate of a director of the Company, Lee Cole. Under the terms of the assignment, MFG assumes all cost of the lease with the Landlord. MFG has a promissory note due and outstanding in the amount of $43,151 payable to the Company.
NOTE M - CONVERTIBLE NOTES PAYABLE
On December 19 and 21, 2007, we entered into subscription agreements with selected institutional and accredited investors regarding the private placement of up to a maximum of $8,800,000 principal amount of 8% senior secured convertible notes. Each investor who subscribed to the notes received 50% warrant coverage at $0.30 per share as common stock warrants. The notes mature on the date that is three years from the date of issuance and are convertible into shares of our common stock at a price of $0.25 per share. The notes constitute our senior indebtedness and provide that we can not incur other indebtedness (excluding an additional $3,000,000 in debt, certain credit facility lines and trade payables incurred in the ordinary course of business) without the consent of the note holders. The notes are secured by all of our intellectual property, books and records and proceeds of the sale of our intellectual property, as well as all of the equity interests in our subsidiaries. The warrants are exercisable into shares of our common stock for a period of five years from the date they are issued at a price of $0.30 per share.
In connection with the private placement, we received gross proceeds of an aggregate of $6,700,000. However, because we did not have a sufficient number of authorized shares of our common stock to allow for conversion of the notes and exercise of the warrants, representing the total amount of proceeds received, we issued notes and warrants in December 2007 for only that portion of the total proceeds that was allowed given our current capital structure. As a result, we issued notes with a principal face amount of $3,953,000 and warrants convertible into 7,906,000 shares of our common stock. The remainder of the proceeds received during the private placement was held in escrow as of December 31, 2007 pursuant to the terms of an escrow agreement, pending amendment of our certificate of incorporation to increase the number of our authorized shares of common stock from 75,000,000 to 200,000,000. This charter amendment was approved by our stockholders in February 2008. Upon obtaining approval of the charter amendment by the stockholders on February 15, 2008, the Company issued notes with a principal face amount of $2,747,000 and warrants convertible into 5,494,000 shares of common stock.
Pursuant to the terms of the registration rights agreement entered into in connection with the December 2007 8% Convertible Note offering, the Company was required to pay a penalty if it failed to file with the SEC a registration statement under the Securities Act of 1933, as amended, covering the common stock underlying the notes purchased and the common stock underlying the issued warrants. The fair value of the 7,906,000 warrants issued in connection with the December 2007 offering was estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.46%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, ” the estimated fair value of the warrants, in the amount of $2,184,266, was recorded as a liability, with an offsetting charge to additional paid-in capital.
The fair value of the 5,494,000 warrants issued upon obtaining approval of the charter amendment in connection with the December 2007 offering was also estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.31%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, the estimated fair value of the 5,494,000 investor warrants, in the amount of $849,708, was recorded as a liability, with an offsetting charge to additional paid-in capital.
As of September 30, 2008, the fair value of the warrant liability was re-valued according to EITF No. 00-19 as of the end of the current period. The Company recorded a gain for the nine-month period ended September 30, 2008 of $400,343 which was recorded as non-operating income in the Company's consolidated statement of operations.
On July 24, 2008, the Company was notified by the Securities Exchange Commission that the Form S-1 Registration (No. 333-148780) statement, filed on January 22, 2008, was declared effective. As of September 30, 2008, in accordance with the registration rights agreement for the shares registered in the Form S-1 registration, the Company issued late registration costs in the amount of $88,219.
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On September 4, 2008, the Company entered into additional subscription agreements with selected institutional and accredited investors regarding the private placement of $1,146,000 principal amount of 8% Senior Secured Convertible Notes, increasing the total amount of notes issued to $7,846,000. Each investor who subscribed to the notes received 50% warrant coverage at $0.30 per share as common stock warrants. The Company issued investor warrants of 2,292,000 in relation to this issuance of notes. The private placement was made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 because the transaction complied with the requirements of Rule 506 of Regulation D promulgated under the Securities Act of 1933. Axiom Capital Management Inc. ("Axiom") acted as placement agent in connection with the private placement.
The notes mature in September 2011 and are convertible into shares of the Company's common stock, par value $0.001 par value per share, at a price of $0.25 per share. The notes constitute senior indebtedness of the Company and provide that no other indebtedness of the Company (excluding an additional $3,000,000 in debt, certain credit facility lines and trade payables incurred in the ordinary course of business) shall be incurred without the consent of the note holders. The warrants are exercisable into shares of common stock until September 2013 at a price of $0.30 per share. The notes and the warrants each have anti-dilution provisions that provide for conversion or exercise price adjustments under certain circumstances.
The obligations outstanding under the notes are secured by all of the Company's intellectual property, books and records and proceeds of the sale of its intellectual property owned directly by the Company, as well as all of its equity interests in its subsidiaries pursuant to that certain Security Agreement, dated December 19, 2007, between the Company and Axiom and the Collateral Agent Agreement, dated December 19, 2007, among the Company, Axiom and each of the investors named therein, copies of which were filed as Exhibits 10.16 and 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and are incorporated herein by reference.
The subscription agreements require the Company to register the shares of common stock to be issued upon conversion of the Notes sold to the investors pursuant to the Subscription Agreements and exercise of the warrants and to use its commercially reasonable efforts to maintain the effectiveness of such registration until the earlier of (a) the date that all of such Common Stock has been sold by the Investors, or (b) the date that the Common Stock may be sold without volume restrictions under Rule 144.
The foregoing descriptions of the subscription agreement, notes and warrants are qualified in their entirety by the executed documents, forms of which are incorporated by reference to Exhibits 10.1, 10.2 and 10.3, respectively, to the Form 8-K filed on September 10, 2008.
As of September 30, 2008, in connection with the closings of the sale of convertible notes totaling $7,846,000, the Company paid cash fees to certain placement agents in the aggregate of approximately $600,000, and the Company issued placement agents warrants to purchase, in aggregate, 2,342,000 shares of common stock at $0.30 per share. The warrants are exercisable into shares of our common stock for a period of five years from the date they are issued at a price of $0.30 per share.
The fair value of the 2,292,000 investor warrants issued on September 4, 2008 and the 2,342,000 placement agent warrants issued in connection with the sale of the total $7,846,000 convertible note offering was also estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.14%, the contractual life of 5 years and volatility of 149%. In accordance with EITF No. 00-19, the estimated fair value of the 2,292,000 investor warrants and the 2,342,000 placement agent warrants, in the amount of $740,542, was recorded as a liability, with an offsetting charge to additional paid-in capital.
As of December 31, 2008, the fair value warrant liability for the investor warrants and the placement agent warrants issued in connection with the sale of the total $7,846,000 convertible note offering was revalued using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 2.69%, the contractual life of 4.25-5 years and volatility of 196%. In accordance with EITF No. 00-19, the estimated fair value of the investor warrants and the placement agent warrants, in the amount of $1,150,224, was recorded as a liability, with an offsetting charge to additional paid-in capital. The Company recognized a non-cash gain of $2,897,452 for this revaluation for the twelve month period ending December 31, 2008, which correlates to the decline in the Company’s share price of its common stock.
As of March 31, 2009, the fair value warrant liability for the investor warrants and the placement agent warrants issued in connection with the sale of the total $7,846,000 convertible note offering was revalued using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 3.56%, the contractual life of 3.75-4.5 years and volatility of 206%. In accordance with EITF No. 00-19, the estimated fair value of the investor warrants and the placement agent warrants, in the amount of $2,912,138, was recorded as a liability. The Company recognized a non-cash loss of $1,761,913 for this revaluation for the three month period ending March 31, 2009, which correlates to the increase in the Company’s share price of its common stock.
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Fair Value Measurements
On January 1, 2008, the Company adopted SFAS No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 relates to financial assets and financial liabilities. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end entities.
SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This standard is now the single source in GAAP for the definition of fair value, except for the fair value of leased property as defined in SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under SFAS 157 are described below:
• | Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
• | Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• | Level 3 - Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. (The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.) |
The following table presents the Company's fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | |||||||||||||||||||
Level | Fair Value | Carrying Amount | Fair Value | Carrying Amount | ||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | 2 | $ | - | $ | - | $ | 66,810 | $ | 66,810 | |||||||||||
Restricted cash | 2 | - | - | - | - | |||||||||||||||
Prepaid expenses and other | 3 | 273,086 | 273,086 | 201,524 | 201,524 | |||||||||||||||
Accounts receivable | 2 | 347,307 | 347,307 | 511,213 | 511,213 | |||||||||||||||
VAT receivable | 2 | 2,017 | 2,017 | 23,476 | 23,476 | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Accounts payable | 2 | 1,347,630 | 1,347,630 | 1,107,614 | 1,107,614 | |||||||||||||||
Accrued expenses | 3 | 1,546,951 | 1,546,951 | 1,120,248 | 1,120,248 |
Fair Value Option
On January 1, 2008, the Company adopted SFAS No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 provides a fair value option election that allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value are recognized in earnings as they occur for those assets and liabilities for which the election is made. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements as the Company did not elect the fair value option for any of its financial assets or liabilities.
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NOTE O – DISCONTINUED OPERATIONS
On November 14, 2008, the Company ceased operations of its U.K. subsidiaries as follows: Advance Display Technologies plc, Advance Nanotech Limited, Nano Solutions Limited, Nanofed Limited, Bio Nano Sensium Limited, Cambridge Nanotechnology Limited and Advance Homeland Security plc “the Discontinued Group”. Accordingly, the results of operations of these entities are reported as loss from discontinued operations in the consolidated statement of income.
The Company does not expect to derive any revenues from the Discontinued Group in the future and does not expect to incur any significant ongoing operating expenses.
Results for discontinued operations were as follows:
Loss from Discontinued Operations | ||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||
Advance Display Technologies plc gain (loss) | $ | (729) | $ | (1,576,022 | ) | $ | (379,879 | ) | $ | (3,652,621 | ) | $ | (2,502,451 | ) | $ | (89,729 | ) | |||||
Advance Nanotech Limited gain (loss) | (718) | (13,683 | ) | (65,186 | ) | (210,852 | ) | (93,969 | ) | (246,563 | ) | |||||||||||
Bio Nano-Sensium Limited gain (loss) | - | 7,411 | (5,995 | ) | (12,180 | ) | (1,567,874 | ) | - | |||||||||||||
Nano Solutions Limited gain (loss) | (739) | (3,411 | ) | 543,413 | (1,764,968 | ) | (1,471,209 | ) | (396,512 | ) | ||||||||||||
Loss from discontinued operations | $ | (2,187) | $ | (1,585,705 | ) | $ | (92,352 | ) | $ | (5,640,621 | ) | $ | (5,635,503 | ) | $ | (732,804 | ) |
Assets and Liabilities of discontinued operations were comprised of the following at March 31, 2009 and December 31, 2008:
March 31, 2009 | December 31, 2008 | |||||||
Property Plant and Equipment | $ | - | $ | - | ||||
Deferred Financing Costs, current portion | - | - | ||||||
Deferred Financing Costs, long term portion | - | - | ||||||
Intangibles | - | - | ||||||
$ | - | $ | - | |||||
Accounts payable | $ | 83,125 | $ | 84,845 | ||||
Accrued expenses and other | 223,949 | 241,772 | ||||||
Loans payable – other liabilities | - | - | ||||||
$ | 307,074 | $ | 326,617 | |||||
In connection with management’s strategic decision to discontinue the operations of its non-revenue subsidiaries, the Company wrote off and expensed the remaining financing costs related to capital raised through its ADT plc subsidiary and took an impairment write-off of the intangible assets primarily related to patents that were no longer to be maintained.
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NOTE P - - SUBSEQUENT EVENTS
Under the authorization of its existing agreements to offer up to $3,000,000 of Senior Secured Notes, the Company commenced an offering of up to $800,000 of Senior Secured Notes. On April 15 and April 16, 2009, the Company issued and sold (i) $150,000 in principal amount of its 7% Senior Secured Notes due June 30, 2009 and (ii) investment units consisting of (A) $350,000 in principal amount of its 3% Senior Secured Notes due June 30, 2009 and (B) common stock purchase warrants exercisable until April 15, 2012 to purchase in the aggregate 583,333 shares of the Company’s common stock, par value $.001 per share, for $.30 per share. The Senior Secured Notes are secured by a first security interest in substantially all of the Company’s assets. The purchasers of the securities were “accredited investors” within the meaning of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder and the transaction was exempt from registration pursuant to Section 4(2) thereof and Rule 506 of Regulation D. Axiom Capital Management Inc. acted as placement agent and received (i) a placement fee of $29,000 in connection with the transaction and (ii) common stock purchase warrants exercisable until April 15, 2012 to purchase in the aggregate 96,667 shares of the Company’s common stock, par value $.001 per share, for $.30 per share. If the Company is unable to repay the Senior Secured Notes on June 30, 2009 or to renegotiate the maturity date, the Company would be forced to consider seeking protection from its creditors or cessation of operations and liquidation.
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This report contains certain forward-looking statements of our intentions, hopes, beliefs, expectations, strategies, and predictions with respect to future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are usually identified by the use of words such as “believe,” “will,” “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “should,” “could,” or similar expressions. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Item 1A. “Risk Factors” in our Form 10-K for the period ended December 31, 2008 and other sections of this report, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, express or implied by these forward-looking statements.
Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and any amendments to this report. We will not update these statements unless the securities laws require us to do so. Accordingly, you should not rely on forward-looking statements because they are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise noted, the terms "Advance Nanotech", the "Company", "we", "us", and "our" refer to the ongoing business operations of Advance Nanotech, Inc. and its subsidiaries, whether conducted through Advance Nanotech or a subsidiary of the company.
Overview and Plan of Operations
Our efforts are principally focused on the development of chemical sensing products using our Owlstone technology. Owlstone has developed a chemical detector that has been incorporated into its lead product named Lonestar, which is currently being sold and used in the marketplace. This product was launched in July 2007 and has a growing customer base. Our plan of operations includes a strategic mixture of selling completely integrated products and supplying component parts to original equipment manufacturers, as is the case with our Lonestar product.. We intend to partner with market leaders to integrate our technologies into existing commercial applications, partner with contract manufacturers to bring our products directly to market and to partner with others whose placement in a territory or market offers advantages, particularly if the territory is one on which we would not otherwise concentrate our own efforts. We believe that this strategy positions us to best achieve the potential for our technologies in the most effective and time-sensitive manner.
On April 21, 2009, the Company announced that its majority owned subsidiary, Owlstone Nanotech, Inc., has received a development contract from Crowcon Detection Instruments Ltd, based in the United Kingdom, specializes in developing, manufacturing and marketing innovative, reliable and cost-effective flammable and toxic gas detection equipment. Crowcon, founded in 1970, is a leader in the fields of safety and environmental monitoring. The contract will take Owlstone's Lonestar detection platform and integrate it into Crowcon's PGSi Programmable Sampling System, a highly versatile system that can monitor up to 32 sample lines sequentially. The PGSi is used in applications for which a wide area detection is required, such as building protection and brewery monitoring. The integration of Lonestar adds a broad band detection capability that will allow the combined unit to be sold into a wider range of industrial applications.
On April 8, 2009, the Company announced that the Company's majority owned subsidiary, Owlstone Nanotech, Inc., has received a follow-on order from SELEX Galileo totaling $272,000. SELEX Galileo, a Finmeccanica company and one of Europe's foremost Aerospace and Defense organizations, is a leader in surveillance, protection, tracking, targeting, navigation & control and imaging systems. This contract is the third contract from SELEX Galileo and follows the contract announced in June 2008 that was completed in December. Owlstone is expected to complete delivery under this new contract by July 2009. The order from SELEX Galileo contracts Owlstone to continue to build specific chemical detection end instruments that meet the specifications set forth by the U.S. Department of Defense. The work involved is primary product development and engineering work on the surrounding components for a specific application using the NEXSENSE C platform that was initiated with SELEX Galileo in 2007.
On April 7, 2009, the Company announced that its Owlstone Nanotech, Inc. subsidiary has been granted two additional patents by the United States Patent office. This issuance brings the total issued patent portfolio to four. Additionally, the Company has ten patent applications submitted and awaiting response and four patent applications pending submittal under PCT protection with the United States Patent and Trademark Office. The recently issued patents cover technology developed by Owlstone used in both its core sensor system and surrounding components. The patents describe several methods and embodiments of a microchip spectrometer and a highly integrated means of sample ionization that fits within the confines of a microchip -- sample ionization is a required functionality for Owlstone's spectrometry solutions. In addition to utility within Owlstone's products, the patented ionization technology could be of benefit to other ion based analytical technologies.
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Liquidity and Capital Resources
Cash Flows
Our operations have not historically generated positive cash flow. The Company has been in the development stage since its inception (August 17, 2004), has sustained losses and has used capital raised from the issuance of stock and convertible debt to fund its operations. Continuation of the Company as a going concern is dependent upon establishing and achieving profitable operations. The Company expects to continue to incur losses until it can generate sufficient revenue from existing and new business and achieve and maintain positive margins. Until then, the Company’s operations will require additional funds. (See Note A Going Concern section)
At March 31, 2009, the Company had no cash or cash equivalents, however the Company had $347,307 in accounts receivable from customers. As of April 16, 2009, the Company also issued and sold notes totaling $500,000. The transaction is further described under Debt Obligations below. Based upon the Company’s forecast of future revenues from its products, services and grants, in conjunction with the cash and cash equivalents on hand, the Company’s continued ability to operate is dependent upon obtaining additional funds. The Company is presently pursuing various options to generate additional funds, including, among others, strategic partnering arrangement, financing on a senior secured basis, and raising additional capital through the sale of securities. If the Company is unable to generate sufficient cash flow through sales or partnering arrangements or obtain additional financing through other means to support its operations and meet its obligations, the Company will be forced to consider the further restructuring of its operations, disposition of various assets, seeking protection from its creditors, or cessation of operations and liquidation.
The Company is actively exploring various debt and equity financing transactions. In addition, plans to generate additional revenue from operations could include co-development and co-funding of our products, licensing products for upfront and milestone payments, and applying for more government grants. We have initiated cost reduction programs and will continue to control and reduce expenses until funds from operations can support the growth of the business. Although the Company is exploring all opportunities to improve its financial condition within the next several months, there is no assurance that these programs will be successful.
Debt Obligations
The Company, under the authorization of its existing agreements to offer up to $3,000,000 of Senior Secured Notes, has commenced an offering of up to $800,000 of Senior Secured Notes. On April 15 and April 16, 2009, the Company issued and sold (i) $150,000 in principal amount of its 7% Senior Secured Notes due June 30, 2009 and (ii) investment units consisting of (A) $350,000 in principal amount of its 3% Senior Secured Notes due June 30, 2009 and (B) common stock purchase warrants exercisable until April 15, 2012 to purchase in the aggregate 583,333 shares of the Company’s common stock, par value $.001 per share, for $.30 per share. The Senior Secured Notes are secured by a first security interest in substantially all of the Company’s assets. The purchasers of the securities were “accredited investors” within the meaning of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder and the transaction was exempt from registration pursuant to Section 4(2) thereof and Rule 506 of Regulation D. Axiom Capital Management Inc. acted as placement agent and received (i) a placement fee of $29,000 in connection with the transaction and (ii) common stock purchase warrants exercisable until April 15, 2012 to purchase in the aggregate 96,667 shares of the Company’s common stock, par value $.001 per share, for $.30 per share. If the Company is unable to repay the Senior Secured Notes on June 30, 2009 or to renegotiate the maturity date, the Company would be forced to consider seeking protection from its creditors or cessation of operations and liquidation.
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Results of Operations
Three months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Revenues for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 were $693,014 and $670,895, respectively, representing an increase of $22,119, or 3.3%. Revenues generated were a direct result of our subsidiary, Owlstone, shipping its Tourist, Lonestar and Vapor Generator products along with contracted, instructional and set-up services provided to customers as of March 31, 2009.
Research and development costs for the three months ended March 31, 2009 compared to same three months ended March 31, 2008 were $419,688 and $550,202, respectively, representing a decrease of $130,514, or 23.7%. Research and development costs relate directly to the Owlstone Nanotech, Inc. majority owned subsidiary.
General and administrative expenses for the three months ended March 31, 2009 compared to same three months ended March 31, 2008 were $801,898 and $1,975,478 respectively, representing a decrease of $1,173,580, or 59.4%. Non-cash related general and administrative expenses for the three months ended March 31, 2009 were approximately $114,000 compared to approximately $490,000 for the same three months ended March 31, 2008. Non-cash expenses include costs related to FAS123R options, employee and Board of Directors equity grants, equity options and grants and warrants for consultants in lieu-of-cash. General and administrative expenses for the three months ended March 31, 2009 compared to the same three months ended March 31, 2008 included:
· | a decrease in salaries and related benefits of approximately $674,000. | |
· | a decrease in professional (legal, accounting and consulting) fees of approximately $228,000; | |
· | a decrease in marketing and investor relations fees of approximately $75,000; | |
· | a decrease in business license fees for our products and Board of Director fees of approximately $88,000; and | |
· | a decrease in insurance, travel and rent of approximately $106,000; |
Interest and other income for the three months ended March 31, 2009 and for the three months ended March 31, 2008 was $100 and $48,900, respectively, representing a decrease of $48,800 from 2008. The decrease in other income is due mainly for the forgiveness of accounts payable recognized in 2008 of approximately $38,000. Interest income decreased by $11,890 for the same period in 2009 compared to 2008. This decrease was a result of our decreased cash and cash equivalents maintained in our short-term money market account. Cash decreased throughout 2008 as a result of our need to continue funding operations. All of our cash reserves had been invested in liquid securities at large financial institutions.
Interest expense for the three months ended March 31, 2009 and for the three months ended March 31, 2008 was $206,436 and $165,484, respectively, representing an increase of $40,952 from 2008. The increase in interest expense correlates to the increase in convertible notes that the Company issued and the corresponding interest expense obligation on those notes. Other Expenses include a non-cash late registration accrual of $109,555 for the three months ended March 31, 2009 relating to the registration obligations for the convertible note holders. The Company also incurred a non-cash loss of $1,761,913, during the same period, for the re-valuation of the Company’s warrant liability driven by the increase in the price of the Company’s common stock from December 31, 2008. For the three months ended March 31, 2008, the Company recognized a non-cash gain of 961,516 during the same period for the re-valuation of the Company’s warrant liability, representing a decrease of $2,723,429 from 2008.
The Company had a loss from operations of $767,320 for the three months ended March 31, 2009, compared to $2,254,506 for the comparable period in 2008, representing a decrease of $1,487,186, or approximately 66%. The Company had a loss from continuing operations of $2,792,949 for the three months ended March 31, 2009, compared to $874,140 for the comparable period in 2008, representing an increase of $1,918,808. This increase was directly related to the non-cash loss recognized as of March 31, 2009 for the warrant re-valuation. We had a net loss of $2,795,136 for the three months ended March 31, 2009 compared to $1,085,641 for the comparable period in 2008, representing an increase of $1,709,495. The increase in Net Loss for 2009 is a result of the non-cash loss of the warrant liability revaluation of $1,761,913.
Revenue increased by over 3% while operating expenses decreased by over 51% and the Company had a gain of $52,174 from minority interest related to subsidiaries’ losses for the three months ended March 31, 2009. For the three months of 2009, the Company had a loss from continuing operations of $0.05 cents per share, compared with a loss of $0.02 cents per share for the same three month period in 2008.
Off-Balance Sheet Arrangements
As of March 31, 2009, we had no material off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
As of March 31, 2009, our management carried out an evaluation, under the supervision and with the participation of our Acting Principal Executive Officer ("PEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Disclosure controls are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As described fully in the Company’s Form 10-K for the period ending December 31, 2008 under Item 9A(T) (b) Management's Report on Internal Control over Financial Reporting, our management has identified and reported to our audit committee and Mendoza Berger & Company LLP, our independent registered public accounting firm, a material weakness in our internal control over financial reporting. As a result of this material weakness, our CEO and CFO have concluded that, as of March 31, 2009, our disclosure controls and procedures were not effective. However, management believes based on its knowledge, that (1) this report does not contain any untrue statement of a material fact or omit a material fact necessary to make the statements made not misleading with respect to the period covered by this report, and (2) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows for the years and periods then ended.
ITEM 4(T). CONTROLS AND PROCEDURES
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2008, we identified a material weakness with the accounting of our majority owned subsidiary and with the internal controls associated with oversight of this subsidiary. We continue to improve and further develop and re-design controls over Owlstone Limited in the first quarter and beyond in 2009 including assigning responsibility for execution of the controls throughout various levels of our organization and focusing on increasing the precision, speed and efficiency of the controls. The Company plans to hire a senior level Financial Controller/Finance Director in the U.K. to provide oversight, improve internal financial controls and provide local accounting expertise for the Company. During the period from inception (August 17, 2004) to March 31, 2009 and during the first quarter of 2009, there were no other changes in our internal control over financial reporting which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None ..
ITEM 6. EXHIBITS.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) See Index to Financial Statements located on page i.
(3) Exhibits
Exhibit No. | Document Description |
Certification of Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. | ||
31.2+ | Certification of Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended. | |
32+ | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
+ | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 15, 2009 | ADVANCE NANOTECH, INC. | |
By: | /s/ Bret Bader | |
Bret Bader | ||
Chief Executive Officer (Principal Executive Officer) | ||
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