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: | September 30, 2008 |
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from | to |
| Commission File Number: | 000-49901 |
NATURALNANO, INC.
(Exact name of registrant as specified in its charter)
Nevada |
| 87-0646435 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
832 Emerson St, Rochester, NY |
| 14613 |
(Address of principal executive offices) |
| (Zip Code) |
585-286-1836
(Registrant’s telephone number, including area code)
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. Yes [ X ] 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 ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 65,707,045as of November 13, 2008
Table of Contents
PART I—FINANCIAL INFORMATION 1
SIGNATURES 34
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets |
| September 30, 2008 |
| December 31,2007 |
| ||
Current assets: |
| (Unaudited) |
|
|
| ||
Cash and cash equivalents |
| $ | 187,495 |
| $ | 404,940 |
|
Halloysite and Pleximer inventory |
|
| 20,286 |
|
| 27,149 |
|
Accounts receivable |
|
| 480 |
|
| 6,500 |
|
Other current assets |
|
| 48,456 |
|
| 125,445 |
|
Total current assets |
|
| 256,717 |
|
| 564,034 |
|
Non-current assets: |
|
|
|
|
|
|
|
Deferred financing costs, net |
|
| 242,042 |
|
| 444,928 |
|
License, net of amortization |
|
| 607,197 |
|
| 707,061 |
|
Property and equipment, net |
|
| 525,919 |
|
| 517,943 |
|
Total non-current assets |
|
| 1,375,158 |
|
| 1,669,932 |
|
Total Assets |
| $ | 1,631,875 |
| $ | 2,233,966 |
|
See notes to consolidated financial statements
(continued on next page)
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)
|
| September 30, 2008 |
| December 31, 2007 |
| ||
|
| (Unaudited) |
|
|
| ||
Liabilities and Stockholders’ Deficiency |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
| $ | 398,322 |
| $ | 345,479 |
|
Accrued payroll |
|
| 435,687 |
|
| 58,801 |
|
Accrued expenses |
|
| 299,476 |
|
| 143,522 |
|
Capital lease obligations-current |
|
| 51,328 |
|
| 76,986 |
|
Patent license obligation-current |
|
| 200,000 |
|
| 250,000 |
|
Deferred revenue |
|
| 164,000 |
|
| — |
|
Registration rights liability |
|
| 82,489 |
|
| 82,489 |
|
Due to related parties |
|
| 62,835 |
|
| 56,206 |
|
Total current liabilities |
|
| 1,694,137 |
|
| 1,013,483 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
Related party note payable |
|
| — |
|
| 987,584 |
|
8% Senior secured convertible notes, net of $1,139,973 and $2,017,427 discount |
|
| 2,597,527 |
|
| 1,330,073 |
|
Deferred tax liability |
|
| 148,763 |
|
| — |
|
Patent license obligation |
|
| 200,000 |
|
| 200,000 |
|
Capital lease obligations |
|
| 23,374 |
|
| 38,945 |
|
Other long term liabilities |
|
| 17,500 |
|
| 31,034 |
|
Total Liabilities |
|
| 4,681,301 |
|
| 3,601,119 |
|
Stockholders’ Equity (Deficiency) |
|
|
|
|
|
|
|
Series B Preferred – $.001 par value, convertible: authorized, issued and outstanding 750,000 with an aggregate liquidation preference of $1,500 in 2008 |
|
| 750 |
|
| — |
|
Series C Preferred – $.001 par value, convertible: authorized, issued and outstanding 4,250,000 with an aggregate liquidation preference $8,500 in 2008 |
|
| 4,250 |
|
| — |
|
Common Stock - $.001 par value 300 million authorized, issued and outstanding 64,607,045 and 122,880,740, respectively |
|
| 64,607 |
|
| 122,881 |
|
Additional paid in capital |
|
| 18,527,253 |
|
| 15,907,241 |
|
Accumulated deficit |
|
| (21,646,286 | ) |
| (17,397,275 | ) |
Total stockholders’ deficiency |
|
| (3,049,426 | ) |
| (1,367,153 | ) |
Total liabilities and stockholders’ deficiency |
| $ | 1,631,875 |
| $ | 2,233,966 |
|
See notes to consolidated financial statements
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
|
| For the three months ended |
| For the nine months ended |
| From inception: |
| |||||||||
|
| September 30, |
| September 30, |
| December 22, 2004 |
| |||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| to September 30, 2008 |
| |||||
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 53,361 |
| $ | 5,500 |
| $ | 180,286 |
| $ | 8,750 |
| $ | 211,036 |
|
Cost of goods sold |
|
| 24,105 |
|
| — |
|
| 66,859 |
|
| — |
|
| 66,859 |
|
Gross profit |
| $ | 29,256 |
| $ | 5,500 |
| $ | 113,427 |
| $ | 8,750 |
| $ | 144,177 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development (a) |
|
| 298,842 |
|
| 529,301 |
|
| 1,239,316 |
|
| 1,585,905 |
|
| 5,965,769 |
|
General and administrative (a) |
|
| 275,024 |
|
| 317,065 |
|
| 1,102,846 |
|
| 1,367,614 |
|
| 8,910,167 |
|
Write down of prepaid inventory |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 249,650 |
|
|
|
| 573,866 |
|
| 846,366 |
|
| 2,342,162 |
|
| 2,953,519 |
|
| 15,125,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
| (544,610 | ) |
| (840,866 | ) |
| (2,228,735 | ) |
| (2,944,769 | ) |
| (14,981,409 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net |
|
| (634,578 | ) |
| (610,679 | ) |
| (1,959,545 | ) |
| (1,328,884 | ) |
| (3,830,168 | ) |
Income from cooperative research project |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 180,000 |
|
Gain (loss) on warrant |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 326,250 |
|
Financing fees |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,280,228 | ) |
Other, net |
|
| (60,731 | ) |
| — |
|
| (60,731 | ) |
| — |
|
| (60,731 | ) |
|
|
| (695,309 | ) |
| (610,679 | ) |
| (2,020,276 | ) |
| (1,328,884 | ) |
| (6,664,877 | ) |
Net loss |
| $ | (1,239,919 | ) | $ | (1,451,545 | ) | $ | (4,249,011 | ) | $ | (4,273,653 | ) | $ | (21,646,286 | ) |
Loss per common share - basic and diluted |
| $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.04 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
| 129,332,579 |
|
| 121,975,740 |
|
| 126,329,603 |
|
| 121,861,143 |
|
|
|
|
(a) Stock based compensation expense included in the Statement of Operations are as follows: |
-Research and development expense of $69,516 and $357,721 for the three and nine months ended September 30, 2008, |
respectively and, $155,067 and $507,128 for the three and nine months ended September 30, 2007, respectively. |
-General and administrative expense of $127,518 and $400,805 for the three and nine months ended September 30, 2008, |
respectively and, $(106,975) and $315,627 for the three and nine months ended September 30, 2007, respectively. |
See notes to consolidated financial statements
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
| Deficit |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| Additional |
| Accumulated |
| Stockholders’ |
| ||||
|
| Common Stock |
| Preferred Stock |
| Paid-in |
| in Development |
| Equity |
| ||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Stage |
| (Deficiency) |
| ||||
December 22, 2004 (inception) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000,000 shares issued for cash @ $.005 per share |
| 20,000,000 |
| $ | 20,000 |
|
|
|
|
| $ | 80,000 |
| $ | — |
| $ | 100,000 |
|
Net loss from inception to 12/31/04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7,336 | ) |
| (7,336 | ) |
Balance at December 31, 2004 |
| 20,000,000 |
| $ | 20,000 |
|
|
|
|
| $ | 80,000 |
| $ | (7,336 | ) | $ | 92,664 |
|
Warrant issued for 4,500,000 shares of common stock for services |
|
|
|
|
|
|
|
|
|
|
| 273,442 |
|
|
|
|
| 273,442 |
|
Vesting of stock options granted |
|
|
|
|
|
|
|
|
|
|
| 270,082 |
|
|
|
|
| 270,082 |
|
Shares issued pursuant to convertible bridge notes on 11/29/05 |
| 20,939,200 |
|
| 20,939 |
|
|
|
|
|
| 4,135,061 |
|
|
|
|
| 4,156,000 |
|
Recapitalization on 11/29/05 |
| 79,820,840 |
|
| 79,821 |
|
|
|
|
|
| (79,821 | ) |
|
|
|
| — |
|
Net loss for the year ended 12/31/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,666,382 | ) |
| (2,666,382 | ) |
Balance at December 31, 2005 |
| 120,760,040 |
| $ | 120,760 |
|
|
|
|
| $ | 4,678,764 |
| $ | (2,673,718 | ) | $ | 2,125,806 |
|
Grant of common stock in exchange for license @ $1.45 per share |
| 200,000 |
|
| 200 |
|
|
|
|
|
| 289,800 |
|
|
|
|
| 290,000 |
|
Grant of common stock as settlement of liability @ $1.45 per share |
| 60,600 |
|
| 61 |
|
|
|
|
|
| 87,809 |
|
|
|
|
| 87,870 |
|
Grant of common stock as settlement of liability @ $1.52 per share |
| 54,100 |
|
| 54 |
|
|
|
|
|
| 82,178 |
|
|
|
|
| 82,232 |
|
Common stock returned and cancelled @ $0.42 per share |
| (200,000 | ) |
| (200 | ) |
|
|
|
|
| (83,800 | ) |
|
|
|
| (84,000 | ) |
Vesting of stock options granted |
|
|
|
|
|
|
|
|
|
|
| 2,970,959 |
|
|
|
|
| 2,970,959 |
|
Warrants issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,770,000 shares at exercise prices from $0.75 to $1.30 per share |
|
|
|
|
|
|
|
|
|
|
| 3,006,786 |
|
|
|
|
| 3,006,786 |
|
200,000 shares at $0.28 per share |
|
|
|
|
|
|
|
|
|
|
| 32,460 |
|
|
|
|
| 32,460 |
|
Exercise of stock options @ $.05 per share |
| 826,000 |
|
| 826 |
|
|
|
|
|
| 40,474 |
|
|
|
|
| 41,300 |
|
Net loss for the year ended 12/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (8,862,917 | ) |
| (8,862,917 | ) |
Balance at December 31, 2006 |
| 121,700,740 |
| $ | 121,701 |
|
|
|
|
| $ | 11,105,430 |
| $ | (11,536,635 | ) | $ | (309,504 | ) |
See notes to consolidated financial statements
(continued on next page)
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY)
(unaudited-continued)
|
|
|
|
|
|
|
|
|
|
|
| Deficit |
|
|
| |||
|
|
|
|
|
|
|
|
|
| Additional |
| Accumulated |
| Stockholders’ |
| |||
|
| Common Stock |
| Preferred Stock |
| Paid-in |
| in Development |
| Equity |
| |||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Stage |
| (Deficiency) |
| |||
Balance at December 31, 2006 |
| 121,700,740 |
| 121,701 |
|
|
|
|
| $ | 11,105,430 |
| $ | (11,536,635 | ) | $ | (309,504 | ) |
Allocation of proceeds to warrants |
|
|
|
|
|
|
|
|
|
| 3,213,600 |
|
|
|
|
| 3,213,600 |
|
Fair market value of warrant issued to purchase: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,947,162 with an exercise price of $0.22 price per share in partial payment of offering costs |
|
|
|
|
|
|
|
|
|
| 501,018 |
|
|
|
|
| 501,018 |
|
240,741 shares at $0.26 per share for services |
|
|
|
|
|
|
|
|
|
| 50,767 |
|
|
|
|
| 50,767 |
|
Vesting of stock options granted |
|
|
|
|
|
|
|
|
|
| 912,006 |
|
|
|
|
| 912,006 |
|
Grant of common stock for services @: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.36 per share |
| 160,000 |
| 160 |
|
|
|
|
|
| 57,440 |
|
|
|
|
| 57,600 |
|
$0.10 per share |
| 340,000 |
| 340 |
|
|
|
|
|
| 33,660 |
|
|
|
|
| 34,000 |
|
Exercise of stock options @ $.05 per share |
| 680,000 |
| 680 |
|
|
|
|
|
| 33,320 |
|
|
|
|
| 34,000 |
|
Net loss for the year ended 12/31/07 |
|
|
|
|
|
|
|
|
|
|
|
|
| (5,860,640 | ) |
| (5,860,640 | ) |
Balance at December 31, 2007 |
| 122,880,740 |
| 122,881 |
|
|
|
|
| $ | 15,907,241 |
| $ | (17,397,275 | ) | $ | (1,367,153 | ) |
Vesting of stock options granted |
|
|
|
|
|
|
|
|
|
| 758,526 |
|
|
|
|
| 758,526 |
|
Beneficial conversion feature of debt, net of tax as of 9/30/2008 |
|
|
|
|
|
|
|
|
|
| 241,237 |
|
|
|
|
| 241,237 |
|
Grant of common stock for services @: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10 per share |
| 360,000 |
| 360 |
|
|
|
|
|
| 35,640 |
|
|
|
|
| 36,000 |
|
$0.06 per share |
| 162,000 |
| 162 |
|
|
|
|
|
| 10,008 |
|
|
|
|
| 10,170 |
|
$0.05 per share |
| 480,000 |
| 480 |
|
|
|
|
|
| 23,520 |
|
|
|
|
| 24,000 |
|
$0.04 per share |
| 734,286 |
| 734 |
|
|
|
|
|
| 27,903 |
|
|
|
|
| 28,637 |
|
$0.03 per share |
| 2,685,715 |
| 2,686 |
|
|
|
|
|
| 83,885 |
|
|
|
|
| 86,571 |
|
Fair market value of warrant issued as interest |
|
|
|
|
|
|
|
|
|
| 6,490 |
|
|
|
|
| 6,490 |
|
Issuance of common stock as interest payment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 per share |
| 6,607,493 |
| 6,607 |
|
|
|
|
|
| 339,900 |
|
|
|
|
| 346,507 |
|
Redemption of common stock |
| (69,303,189 | ) | (69,303 | ) |
|
|
|
|
| 68,303 |
|
|
|
|
| (1,000 | ) |
Gain on extinguishment of debt by shareholder |
|
|
|
|
|
|
|
|
|
| 1,029,600 |
|
|
|
|
| 1,029,600 |
|
Issuance of Series B Preferred stock |
|
|
|
|
| 750,000 |
| 750 |
|
| (750 | ) |
|
|
|
| — |
|
Issuance of Series C Preferred stock |
|
|
|
|
| 4,250,000 |
| 4,250 |
|
| (4,250 | ) |
|
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the nine months ended 9/30/08 |
|
|
|
|
|
|
|
|
|
|
|
|
| (4,249,011 | ) |
| (4,249,011 | ) |
Balance at September 30, 2008 |
| 64,607,045 |
| 64,607 |
| 5,000,000 |
| 5,000 |
| $ | 18,527,253 |
| $ | (21,646,286 | ) | $ | (3,049,426 | ) |
See notes to consolidated financial statements
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
|
|
|
|
|
| From inception: |
| |||
|
| For the nine months ended |
| December 22, 2004 |
| |||||
|
| September 30, |
| to September 30, |
| |||||
Cash flows from operating activities |
| 2008 |
| 2007 |
| 2008 |
| |||
Net loss |
| $ | (4,249,011 | ) | $ | (4,273,653 | ) | $ | (21,646,286 | ) |
Adjustments to reconcile net loss to net cash |
|
|
|
|
|
|
|
|
|
|
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 186,450 |
|
| 81,184 |
|
| 404,594 |
|
Amortization of discount on convertible notes |
|
| 1,267,454 |
|
| 923,910 |
|
| 2,597,527 |
|
Amortization of deferred financing costs |
|
| 288,886 |
|
| 218,246 |
|
| 603,076 |
|
Vesting of stock options |
|
| 758,526 |
|
| 822,755 |
|
| 4,911,573 |
|
Issuance of warrants for services |
|
| 6,490 |
|
| 50,767 |
|
| 3,369,945 |
|
Issuance of stock for services |
|
| 119,378 |
|
| — |
|
| 153,378 |
|
Issuance of stock for interest |
|
| 346,507 |
|
| — |
|
| 346,507 |
|
Receipt of and gain on Atlas Mining warrant |
|
| — |
|
| — |
|
| (506,250 | ) |
Loss (gain) on disposal of asset |
|
| 61,231 |
|
| (1,823 | ) |
| 60,313 |
|
Deferred rent |
|
| (9,034 | ) |
| 6,324 |
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in inventory |
|
| 6,863 |
|
| (21,302 | ) |
| (20,286 | ) |
Decrease (increase) in accounts receivable and other current assets |
|
| 83,009 |
|
| (21,627 | ) |
| (36,808 | ) |
Increase (decrease) in accounts payable, |
|
|
|
|
|
|
|
|
|
|
accrued payroll and accrued expenses |
|
| 585,683 |
|
| (121,044 | ) |
| 1,303,587 |
|
Increase in deferred revenue |
|
| 164,000 |
|
| — |
|
| 164,000 |
|
Decrease in other liability |
|
| (4,500 | ) |
| 28,942 |
|
| 17,500 |
|
Net cash used in operating activities |
|
| (388,068 | ) |
| (2,307,321 | ) |
| (8,277,630 | ) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (131,219 | ) |
| (169,073 | ) |
| (558,815 | ) |
Proceeds from sale of property and equipment |
|
| 192 |
|
| 2,937 |
|
| 3,129 |
|
Purchase of license |
|
| (50,000 | ) |
| — |
|
| (200,000 | ) |
Proceeds from sale of Atlas Mining warrant |
|
| — |
|
| — |
|
| 506,250 |
|
Net cash (used in) provided by investing activities |
|
| (181,027 | ) |
| (166,136 | ) |
| (249,436 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes |
|
| 390,000 |
|
| 3,250,000 |
|
| 7,796,000 |
|
Advances on related party line of credit |
|
| — |
|
| 300,000 |
|
| 900,000 |
|
Advances from related parties |
|
| 141,948 |
|
| 326,095 |
|
| 1,338,309 |
|
Repayment of amounts due to related parties |
|
| (93,303 | ) |
| (326,791 | ) |
| (1,145,874 | ) |
Repayment of capital lease obligations |
|
| (65,995 | ) |
| (18,794 | ) |
| (104,035 | ) |
Payment of registration rights damages |
|
| — |
|
| (30,097 | ) |
| (63,539 | ) |
Deferred financing costs |
|
| (20,000 | ) |
| (160,600 | ) |
| (180,600 | ) |
(Redemption) issuance of common stock |
|
| (1,000 | ) |
| — |
|
| 99,000 |
|
Proceeds from exercise of stock options |
|
| — |
|
| 14,000 |
|
| 75,300 |
|
Net cash provided by financing activities |
|
| 351,650 |
|
| 3,353,813 |
|
| 8,714,561 |
|
Increase (decrease) in cash and cash equivalents |
|
| (217,445 | ) |
| 880,356 |
|
| 187,495 |
|
Cash and cash equivalents at beginning of period |
|
| 404,940 |
|
| 139,638 |
|
| — |
|
Cash and cash equivalents at end of period |
| $ | 187,495 |
| $ | 1,019,994 |
| $ | 187,495 |
|
See notes to consolidated financial statements
(continued on next page)
NATURALNANO, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited - continued)
|
|
|
|
|
| From inception: |
| |||
|
| For the nine months ended |
| December 22, 2004 |
| |||||
|
| September 30, |
| to September 30, |
| |||||
|
| 2008 |
| 2007 |
| 2008 |
| |||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest during the period |
| $ | 8,589 |
| $ | 132,552 |
| $ | 143,555 |
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
Issuance of warrants in partial payment of financing costs |
| $ | 6,490 |
| $ | 501,018 |
| $ | 507,508 |
|
Note issued in consideration of deferred financing costs |
|
|
|
| $ | 97,500 |
| $ | 97,500 |
|
Allocation of proceeds from discount on |
|
|
|
|
|
|
|
|
|
|
notes payable and warrants grants |
| $ | 390,000 |
| $ | 3,213,600 |
| $ | 3,603,600 |
|
Registration rights liability |
|
|
|
| $ | 133,900 |
| $ | 164,978 |
|
Capital lease obligations |
| $ | 24,766 |
| $ | 153,971 |
| $ | 178,737 |
|
Common stock issued for: |
|
|
|
|
|
|
|
|
|
|
Convertible notes |
|
|
|
|
|
|
| $ | 4,156,000 |
|
Property and equipment |
|
|
|
| $ | 57,600 |
| $ | 115,600 |
|
Services |
| $ | 77,700 |
|
|
|
| $ | 178,102 |
|
Acquisition of license settled through issuance |
|
|
|
|
|
|
|
|
|
|
of common stock (net of $100,000 cash)
|
|
|
|
|
|
|
| $ | 290,000 |
|
Common stock returned and cancelled in |
|
|
|
|
|
|
|
|
|
|
connection with license agreement |
|
|
|
|
|
|
| $ | (84,000 | ) |
Gain on extinguishment of debt by shareholder |
| $ | 1,029,600 |
|
|
|
| $ | 1,029,600 |
|
See notes to consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NaturalNano, Inc. for the three and six months ended September 30, 2008 and 2007
1) PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The condensed consolidated financial statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 are unaudited. However, in the opinion of management of the Company, these financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position and results of operations for such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007. Certain prior period amounts have been reclassified to be consistent with current period presentation.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of NaturalNano, Inc. (“NaturalNano” or the “Company”), a Nevada corporation, and its wholly owned subsidiary NaturalNano Research, Inc. (“NN Research”) a Delaware corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.
Description of the Business
NaturalNano, located in Rochester, New York, has been a development stage company through September 30, 2008. The Company expects to begin reporting material revenues during the year ending December 31, 2008, and will make a determination on reporting as a development stage company in each future reporting period. Our mission is to develop and commercialize material science technologies with a special emphasis on additives to polymers and other industrial and consumer products by taking advantage of technological advances developed in-house and through licenses from third parties. The Company’s current activities are directed toward research, development, production and marketing of its proprietary technologies relating to the treatment and separation of nanotubes from halloysite clay and the development of related commercial applications for:
• | polymers, plastics and composites, |
• | cosmetics and personal care products, |
• | household products, and |
• | agrichemical products. |
NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc. (“CMI”), which was completed on November 29, 2005.
Liquidity
Going Concern – The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements, the Company incurred a net loss for the nine months ended September 30, 2008 of $4,249,011 and had negative working capital of $1,437,420 and a stockholders’ deficiency of $3,049,426 at September 30, 2008. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing and, ultimately, to attain successful operations.
In addition, management is currently assessing the Company’s operating structure for the purpose of reducing ongoing expenses, increasing sources of revenue and is assessing the availability of additional debt and equity financing on terms that would be acceptable to the Company. In addition, recent successes in product testing for Pleximer and filled-tube applications are being leveraged in an attempt to increase revenues from sales.
As of September 30, 2008 the Company had received $390,000 of a contingent commitment for $2,500,000 of additional working capital (see Note 2). The commitment for such additional capital has been obtained contingent on
certain operational milestones to be achieved by the Company. If the Company fails to achieve the milestones, no assurance can be given that such additional capital will be made available on terms acceptable to the Company, or at all. If the Company fails to meet the milestones, it will be forced to secure additional capital or it will be forced to curtail or discontinue its operations.
The Company will continually evaluate funding options including additional offerings of its securities to private and institutional investors and other credit facilities as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.
The Company has incurred a $21,646,286 loss from operations since its inception, December 22, 2004. Since inception the Company’s growth has been funded through a combination of convertible debt from private investors and from cash advances from its former parent and majority owned shareholder Technology Innovations, LLC.
The Company has experienced an average monthly cash usage of approximately $63,000, which includes the receipt of $501,000 in tax rebates from the State of New York and the deferral of approximately $327,000 of employee salaries, during the first nine months of 2008. During the first nine months of 2007, the Company experienced monthly cash use of approximately $275,000.
Due to Related Party
On June 6, 2008 the Company received $200,000 under a promissory note. Such note did not bear any interest and was repaid on July 17, 2008 following the collection of certain receivables. The note had an attached 5 year warrant to purchase 200,000 shares of the Company’s common stock for $0.33 per common share. The Company valued such warrant at $6,490 as of June 30, 2008. During the nine months ended September 30, 2008, $6,490 was realized as additional interest related to this warrant.
Income Taxes
As of September 30, 2008 the Company had a deferred income tax liability of $148,763, which consisted of the tax effect of the difference in basis between GAAP and tax purposes for the beneficial conversion feature in connection with the Notes entered into during August and September of 2008 (see Note 2) with the offset recorded through additional paid-in capital as an offset to the beneficial conversion feature. This deferred tax liability will decrease with a corresponding increase to additional paid-in capital as the beneficial conversion feature is amortized over the term of the Notes.
Internal Revenue Code Section 382 (“Section 382”) imposes limitations on the availability of a company’s net operating losses and other corporate tax attributes as ownership changes occur. As a result of the transactions discussed in Notes 2, 3 and 6, a Section 382 ownership change is expected and a study will be required to determine the date of the ownership change. The amount of the Company’s net operating losses and other corporate tax attributes incurred prior to the ownership change may be limited based on the value of the Company on the date of ownership change. A full valuation allowance has been established for the deferred tax asset related to the net operating losses and other corporate tax attributes available. Accordingly, any limitation is not expected to have an impact on the balance sheet or statements of operations of the Company. The net operating loss and related corporate tax attributes along with the related deferred tax assets as of December 31, 2007 were disclosed in the notes to the audited financial statements included in the Company’s 10-KSB filed on April 9, 2008.
Tax Rebate from the State of New York
During the nine months ended September 30, 2008 the Company received a QETC Facilities, Operations, and Training tax rebate from the State of New York of $244,000 related to 2006 and $257,000 related to 2007 which were recorded as a reduction in general and administrative expenses.
Revenue Recognition
We have earned nominal operating revenue since our inception (December 22, 2004). This revenue was generated from funded development or the delivery of Pleximer and sample products specifically for customer applications in various industries in connection with product development evaluations and as such are considered operating revenue for financial reporting purposes. We earn and recognize such revenue to the extent such development activities are completed or when the shipment of the sample products has occurred.
Property and Equipment and Capital Lease Agreements
Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the related assets. Costs of internally developed intellectual property rights with indeterminate lives are expensed as incurred.
During the first nine months of 2008, the Company entered into one capital lease obligation totaling $24,766 for laboratory equipment. Assets under capital lease have been included in property and equipment. Additionally, the Company relocated its operations to a new facility, consequently the $61,231 net asset value of leasehold improvements and certain furnishings that did not move with the Company became impaired on the date of the move, and were expensed in the period.
On August 21, 2008, the lease for one of the Company’s facilities was assigned to Technology Innovations, LLC, an affiliate of the Company, releasing the Company from the related lease obligation for that facility.
Loss Per Share
Basic loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share gives effect to preferred stock, dilutive debt, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred. As of September 30, 2008 and 2007 there were 1,734,838,651 (see Note 7) and 64,411,905 shares, respectively, underlying convertible debt, outstanding options and warrants which have been excluded from this calculation.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” (“FAS 141R”). FAS 141R replaces Statement of Financial Accounting Standards No. 141, “Business Combinations” (“FAS 141”). Although it retains the fundamental requirement in FAS 141 that the acquisition method of accounting be used for all business combinations, FAS 141R establishes principles and requirements for how the acquirer in a business combination (a) recognizes and measures the assets acquired, liabilities assumed and any noncontrolling (“minority”) interest in the acquiree, (b) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase and (c) determines what information to disclose regarding the business combination. FAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the Company’s 2009 fiscal year. The Company does not expect that this Statement will have an effect on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling (“minority”) Interests in Consolidated Financial Statements” (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling (“minority”) interest in a subsidiary, commonly referred to as minority interest. Among other matters, FAS 160 requires (a) the noncontrolling (“minority”) interest be reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent and to the noncontrolling (“minority”) interest to be clearly presented in the statement of income. FAS 160 is effective for the Company’s 2009 fiscal year. FAS 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. The Company does not expect that this Statement will have an effect on the Company’s consolidated financial statements.
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”), which 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 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 statement will be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (that is, fiscal 2009 for the Company). The Company is currently assessing the potential effect of FAS No. 161 on its financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s 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 Company does not expect that this Statement will have an effect on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60”. This Statement interprets Statement 60, “Accounting and Reporting by Insurance Enterprises” and amends existing accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of this Statement. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 (that is, fiscal 2009 for the Company), and all interim periods within those fiscal years. The Company does not expect that this Statement will have an effect on the Company’s consolidated financial statements.
In June 2008, the Emerging Issues Task Force (“EITF”) Issue No. 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entities Own Stock” is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently assessing the potential effect of EITF No. 07-05 on its financial statements.
2. 8% SENIOR CONVERTIBLE DEBT
On March 7, 2007, we entered into a Loan and Security Agreement for $3,347,500 (the “Initial Notes”) with Platinum Partners Long Term Growth IV, Longview Special Financing, Inc. (collectively the “Investors”) and Platinum Advisors, LLC (collectively with the Investors “Platinum”). On August 4, 2008, we issued notes aggregating $170,000 with the Investors in contemplation of a new loan and security agreement for $2.5 million. On September 29, 2008 we entered into a Loan and Security Agreement and under this agreement, the Company issued another $220,000 of convertible notes. The loan and security agreement and the notes issued under that agreement had a conversion price of $0.005, resulting in a reset of a) the conversion price of the Initial Notes, b) the exercise price of the warrants related to the Initial Notes and c) the number of shares that may be purchased by such warrants. As of September 30, 2008 the shares underlying the Notes represent an aggregate of 747,500,000 common shares issuable upon the conversion of the principal amount of the Notes at the fixed conversion price of $0.005 per share. On September 29, 2008, the Investors agreed to cancel warrants to purchase 1,218,750,060 shares of common stock at $0.005 per share in exchange for shares of preferred stock (see Note 6). The remaining warrants held by Platinum Advisors, LLC gave the holder the right to purchase 162,734,651 shares of the Company’s common stock for $0.005 per share.
On September 29, 2008, the Company entered into a Loan and Security Agreement, by and among Platinum Long Term Growth IV, LLC (“Platinum”) and Longview Special Financing Inc. (“Longview” and together with Platinum, collectively, the “Lenders”). As of September 30, 2008 the Company had received an aggregate of $390,000 and issued 8% senior secured promissory notes due January 31, 2010 to the Lenders (the “New Notes”). The Loan Agreement provides for additional advances, subject to performance milestones being achieved by the Company, that could total an additional $2,110,000. The New Notes are convertible into common stock of the Company, with a conversion price of $0.005 that bear interest at the rate of 8% per annum, with interest payable quarterly, in arrears, in freely traded stock or in cash at election of the Company. All unpaid interest and principal will be due and payable at maturity on January 31, 2010 and no payments of interest are required prior to January 31, 2009.
The New Notes are secured on a pari-passu basis with the Initial Notes and (i) senior to all other current and future indebtedness, (ii) secured by all of the assets of the Company and each of the Company’s subsidiaries and (iii) unconditionally guaranteed by all of the Company’s subsidiaries. The Company and the Lenders (and their affiliates) entered into Forbearance Agreements for the purpose of making the maturity for the Existing Debt coterminous with the maturity date for the New Notes and that they will not enforce their rights provided for in the loan documents.
The Company considered SFAS No. 133 and EITF 00-19 and determined that the embedded conversion feature met the criteria to be classified as equity and as a result did not require derivative treatment. Because the New Notes are convertible into common stock of the Company at a price less than the fair market value of the Company’s common stock on the dates the New Notes were issued, there is a beneficial conversion feature related to the New Notes. The intrinsic value of the common stock each note is convertible into is greater than the face value of each note. The value of the beneficial conversion feature to be recorded was limited by EITF 98-05 to $390,000, the face value of the New Notes. The beneficial conversion feature was recorded as equity as a discount to the New Notes. As of December 31, 2007, the condensed consolidated balance sheet reflects a long term liability of $1,330,073 for the Notes, net of $2,017,427 of discount for warrants to purchase 25,106,254 shares of the Company’s common stock for a weighted average price of $0.28 per share issued to Platinum related to the Initial Notes. As of September 30, 2008 the condensed consolidated balance sheet reflects a long term liability of $2,597,527 for the Notes, net of $1,139,973 of discount, including the beneficial conversion feature of the New Notes. The discount will be amortized using a straight line method as interest during the term of the Notes (including the forbearance period), ending January 31, 2010. The Company has determined the use of the straight-line method for the amortization of the beneficial conversion feature is an appropriate effective yield method as required by EITF 98-5 as the principal of the note is due in full at maturity, the interest in not compounding and therefore this method appropriately matches the interest expense to the cash flow of the note.
During the nine months ended September 30, 2008 and 2007, the Company recorded $1,267,454 and $923,910, respectively, in amortization expense relating to the discount on the Notes. This amortization is included as interest expense in the accompanying Statement of Operations.
In May 2008 we issued an aggregate of 1,190,225 shares of our common stock to Platinum in satisfaction of $133,900 of interest due on the Notes. We were advised by Platinum that they believed our calculation of the number of shares required to be issued in satisfaction of such interest was incorrect. On June 2, 2008, we issued an aggregate of 5,417,268 additional shares of common stock, of which 2,618,197 was for satisfaction of $133,528 of interest due on
June 1, 2008 and 2,799,071 shares to settle the disputed amount of $79,079 for the six month period ended March 1, 2008.
3. AGREEMENTS WITH TECHNOLOGY INNOVATIONS, LLC
Technology Innovations, LLC (“TI”) was our principal stockholder with a beneficial ownership of 56.3% of our outstanding common stock as of December 31, 2007. TI is a New York limited liability corporation established in 1999 to develop intellectual property assets. A director on of our Board of Directors represents the interests of TI and has an 11.29% ownership of TI. TI founded NaturalNano, Inc., a Delaware corporation on December 22, 2004, with an initial cash contribution of $100,000 for all of the then outstanding shares of common stock.
In connection with the 8% senior secured convertible debt more fully described in Note 2, on March 2 and 5, 2007, NN Research entered into Patent Assignment agreements (the “Patent Assignments”) with TI, pursuant to which TI assigned to NN Research all of its rights, title and interest in certain issued patents and pending patent applications, with respect to which TI had previously granted NN Research licenses. No value was assigned to these patents. TI also agreed, in a letter to Platinum dated March 7, 2007 (the “Lock-Up Letter”), that for a period of two years from the date of the Lock-Up Letter it will not (except as permitted under the Lock-Up Letter in certain limited circumstances) sell, transfer or otherwise dispose of any shares of our common stock or any securities convertible into or exchangeable or exercisable for shares of our common stock. TI further agreed, in a letter to Platinum dated March 7, 2007 (the “Standstill Letter”), that it would not demand repayment by us or NN Research of any obligations for money borrowed except as defined in the Purchase Agreement.
On June 28, 2006, we entered into a Line of Credit agreement with TI pursuant to which TI committed to make advances in an aggregate amount of $1 million. Under the Line of Credit Agreement, advances were allowed in such amounts and at such times upon 15 days notice except that no more than $300,000 could be advanced in any 30-day period. Amounts borrowed bear interest at the rate of 8% per annum. The Agreement contains conventional terms, including provisions relating to events of default. Amounts borrowed under this agreement are to be used for general working capital needs.
On August 1, 2008 the $900,000 advanced by TI, along with $129,600 of accrued and unpaid interest, was satisfied in exchange for a warrant, described below, resulting in a gain on extinguishment of liabilities with a shareholder recorded as an increase in additional-paid-in-capital. Accordingly, no amount was outstanding as of September 30, 2008. During the nine months ended September 30, 2008, the Company recorded a total of $42,016 of interest related to this note, as compared to $52,690 for the same period of 2007. As of December 31, 2007, $900,000 had been advanced under the Line of Credit Agreement. The TI line of credit was established on terms we believed to be competitive with comparable transactions involving unaffiliated parties and was approved by the independent members of our Board of Directors. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of the debt approximates the carrying amount. The repayment obligation under the Line of Credit Agreement was originally scheduled to expire on March 31, 2007, at which time TI would be able to demand repayment upon 15 days notice. In connection with the March 7, 2007 issuance of the Notes (see Note 2), TI agreed not to demand repayment as long as any amounts were outstanding on the Notes.
On August 1, 2008, in connection with, and as a condition to the financing provided by Platinum and Longview (see Note 2), TI agreed (x) to sell its common share holdings in the Company at the direction of the Company for the sum of $1,000, and (y) agreed to cancel and forgive all principal, interest, fees and expenses accrued and due pursuant the Credit Agreement and note entered into by the Company with TI in connection with a line of credit provided by TI to the Company (the “TI Debt”). In consideration for the cancellation of the debt, the Company has agreed to issue to TI a warrant to purchase up to 4.99% of the Company’s common stock on terms more particularly set forth in the agreement with TI.
On August 6, 2008 the Company issued TI a warrant to purchase up to 4.99% of the Company’s common stock. Under the warrant TI may purchase up to that number of shares that would give TI beneficial ownership of not more than 4.99% of the Company. The price to be paid for the shares, if purchased on or before February 13, 2009 will be computed as $25 million divided by the fully diluted common stock outstanding on the date of exercise. If any such purchase occurs after February 13, 2009 and before the warrant expires on February 11, 2011, the purchase price shall be computed as $40 million divided by the fully diluted common shares outstanding on the date of exercise. On the date that the warrant was issued, TI beneficially owned 4.05% of the Company through common stock and derivatives convertible into common stock within 60 days from the issue date held by TI and its affiliates. The Company had 2,173,714,879 fully diluted common shares, which gave effect to the conversion of all debt and equity instruments into common stock, per the terms of the warrant. As of the date of issuance, a maximum of 646,377 common shares were issuable at a price of $0.0115 per share.
On September 26, 2008, the Company paid TI $1,000 and redeemed the 69,303,189 shares of common stock held by TI. Additionally, TI, and an affiliate of TI, Biomed, Inc. forgave approximately $66,000 of outstanding current account payable.
Also on September 26, 2008, TI and the Company entered into a consulting agreement under which the TI agreed to provide certain advisory services until September 26, 2009. In exchange for such services, the Company is to issue to TI common stock valued at an aggregate of $66,000 based upon the trailing 20 day volume weighted average price (the “VWAP”) on the date of issue. To the extent that the VWAP on the date of an effective Form S-8 registering shares issued to TI is less than the VWAP on the date such shares were issued, the Company agreed to pay TI such difference in cash. As of September 30, 2009, TI was issued 300,000 shares of common stock valued at $11,700 under the Company’s 2007 Incentive Stock Plan.
4. INVENTORY AND TRANSACTIONS WITH ATLAS MINING COMPANY
During 2007, the Company purchased a supply of 15 tons of halloysite nanotubes from a mine in New Zealand. A portion of these halloysite nanotubes have been used to produce Pleximer which is available for sale. As of September 30, 2008, the $20,286 cost to purchase, ship, store halloysite nanotubes and produce Pleximer being held in inventory is reflected on the Company’s balance sheet as a current asset. The Company expects that such inventory may be substantially utilized in 2008.
When halloysite nanotubes or Pleximer held in inventory are used, the carrying value of any such inventory used (i) for research and development is expensed in the period that it is used for the development of proprietary applications and processes or (ii) cost of goods sold will be charged as customer shipments are made.
In December 2007, the board of directors determined that the Company should make its best efforts to recover the $250,000 it had pre-paid Atlas Mining Company for halloysite. On January 28, 2008, after attempts to contact Atlas Mining Company management failed, the Company formally notified Atlas Mining Company that it believes Atlas Mining Company was in breach of its contract with the Company for the supply of halloysite, for which the Company had prepaid $250,000 for future deliveries. The Company intends to file a claim against Atlas Mining Company and is seeking to recover the $250,000 it had previously paid and now believes it may never receive material from Atlas Mining Company. In addition, on February 4, 2008, the Company notified Atlas Mining Company’s distribution partner, NanoDynamics, Inc., that it may be liable for the $250,000. Any portion of such amount covered will be recognized by the Company when and as recovered.
The Company believes it has identified various sources of halloysite that are considered suitable as alternate suppliers of this raw material, and as such, is not solely dependent upon Atlas Mining Company nor the mine in New Zealand for delivery of halloysite materials.
5. PATENT LICENSE AGREEMENTS
Navy License Agreement
On October 3, 2007, the Company entered into a license agreement with the United States Department of the Navy as represented by the Naval Research Laboratory (“NRL”) (the “License Agreement”). Under the License Agreement, the Company has been granted rights to certain patents for use in the electromagnetic shielding/strength enhancement, cosmetic, fragrance, agriculture, ink and paper, electronics, fabrics and textiles, and local drug delivery fields.
The License Agreement provides for a license issue fee of $500,000 to be fully paid by December 31, 2009 and royalties of 5% of net sales, subject to certain minimum royalty payments. As of September 30, 2008, the Company has paid $100,000 of this obligation.
The License Agreement provides that the Company may sublicense the licensed inventions provided that the royalty for such sublicense shall be between 10% and 25% of any such sublicense revenue, depending on the number of such sublicenses in effect.
The $500,000 license issue fee will be amortized over the 5 year term of the license agreement on a straight-line basis. As of September 30, 2008, the net value of the Navy License was $400,000. Future royalty payments resulting from this agreement will be expensed as incurred. During the three and nine months ended September 30, 2008, $25,000 and $75,000, respectively, of amortization expense was recognized for this license agreement.
Ambit License Agreement
On December 31, 2005, the Company entered into an exclusive licensing agreement for the rights to a patented technology in the field of electronics shielding. On November 13, 2006, the parties signed an amended and restated non-exclusive license agreement, effective October 1, 2006, modifying the terms of the original agreement. The
amended license agreement calls for 20% royalty payments upon our sale of licensed products utilizing the technology or in instances of sublicense agreements and eliminates the original requirement calling for minimum royalty payments. The amended agreement includes annual reporting of progress made on product development and various confidentiality elements. This agreement shall remain in effect until the expiration date of the last-to-expire related patent that is cited in the agreement, which is currently projected to be in fiscal year 2014.
The license was recorded as a non-current asset and is amortized on a straight line basis over an estimated useful life of nine years ending in fiscal year 2014. As of September 30, 2008 the net value of the Ambit License was $207,197. Future royalty payments resulting from this agreement will be expensed as incurred. Amortization expense of $8,288 was recognized for this license agreement in the three months ended September 30, 2008 and 2007. Amortization expense of $24,864 was recognized for this license agreement in the nine months ended September 30, 2008 and 2007.
6. STOCKHOLDERS EQUITY, STOCK OPTIONS, WARRANTS AND CONVERTIBLE DEBT
As of September 30, 2008 the Company was authorized to issue up to 300,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of September 30, 2008, the Company had 64,607,045 shares of common stock issued and outstanding and had 5,000,000 shares of preferred stock outstanding. On October 9, 2008, the Company mailed an Information Statement on Schedule 14c, more fully described in Note 7, informing the stockholders that a majority of the common shares outstanding as of September 12, 2008 had voted to, among other things, amend the Company’s Certificate of Incorporation to increase the authorized common stock to 5,000,000,000 shares.
Preferred Stock Issuances
On September 29, 2008 the Investors (see Note 2) agreed to exchange detachable warrants to purchase 1,218,750,060 shares of common stock of the Company for $0.005 per share held by such Investors related to the March 6, 2007 convertible notes payable for 5,000,000 shares of preferred stock.
On October 7, 2008, the Company filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock (the “Series C Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Platinum Long Term Growth IV, LLC, evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the Company (“Series C”). On October 7, 2008, the Company also filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series B Preferred Stock (the “Series B Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Longview Special Funding, Inc., evidencing 750,000 shares of Series B Convertible Preferred Stock of the Company (“Series B”). The Series B and Series C have an aggregate liquidation preference of $10,000 and participate in any dividends or distributions to the common shareholders on an as converted basis.
Each share of the Series B Convertible Preferred Stock, and each share of Series C Convertible Preferred Stock is convertible into 160 shares of the Company’s common stock and votes on an as-converted basis (with each share having 160 votes). However, the Series B Designation limits the holder’s right to convert its Series B Convertible Preferred Stock, and the aggregate voting power attributable to its Series B Convertible Preferred Stock, to no more than 4.99% of the votes attributable to the total outstanding common shares. Accordingly, the votes attributable to the Series B Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis) and the votes attributable to the Series C Convertible Preferred Stock, therefore, represent approximately 86.74% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis), and the votes Series B Convertible Preferred and the Series C Convertible Preferred, voting together represent approximately 91.73% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis).
Common Stock Issuances
In January 2008, the Company issued 360,000 shares of its common stock as part of a 700,000 share obligation to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services to be received by the Company between October 2007 and February 2008. The Company issued 340,000 shares of common stock for such obligation in 2007 which was valued at $34,000 as of December 31, 2007. The aggregate of 700,000 shares of common stock issued and received in connection with this transaction has been valued at $70,000 based on the market price of the Company’s common stock as of February 29, 2008 being when the required performance by the attorney was complete, therefore the Company valued the 360,000 shares issued at $36,000.
In February 2008, the Company issued 150,000 shares of its common stock to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services to be received by the Company upon filing of the complaint against Atlas Mining Company (see Note 4). As of September 30, 2008, the 150,000 shares were valued at $9,450
based on the market price of the Company’s common stock as of September 30, 2008 and will be revalued and charged against the liability accrued as of December 31, 2007, when the required performance by the attorney is complete. Any amount in excess of the accrued liability will be charged to operations.
In March 2008 the Company issued 480,000 shares of its common stock to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services to be valued by the Company between March 2008 and June 2008 upon performance by the attorney. The common stock issued and received in connection with this transaction has been valued at $24,000 based on the market price of the Company’s common stock as of June 30, 2008 when the required performance by the attorney was complete.
In March 2008 the Company issued 12,000 shares of its common stock to Everblak, Inc. in settlement of a liability accrued for services to be received by the Company between November 2007 and March 2008. The common stock issued and received in connection with this transaction has been valued at $720 based on the market price of the Company’s common stock as of April 10, 2008, when the shares were delivered and the required performance by Everblak, Inc. was complete.
During the six months ended June 2008, the Company issued an aggregate of 6,607,493 shares of its common stock in satisfaction of interest obligations to its senior debt holders (see Note 2).
In July 2008 the Company issued 685,715 shares of its common stock to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services to be valued by the Company between July 2008 and August 2008 upon performance by the attorney. The common stock issued and received in connection with this transaction was valued at $20,571 based on the market price of the Company’s common stock as of August 31, 2008 when the required performance by the attorney was complete.
In August 2008, the Company issued 2,000,000 shares of its common stock to Sichenzia Ross Friedman and Ference for retention of legal services related to the efforts of the Company to secure financing as discussed in Note 2. These shares were valued at $66,000, which was capitalized and is being amortized over the term of the debt.
In September 2008 the Company issued 34,286 shares of its common stock to Everblak, Inc. in settlement of a liability accrued for services to be received by the Company between November 2008 and March 2009. The common stock issued and received in connection with this transaction has been valued at $1,337 based on the market price of the Company’s common stock as of September 30, 2008. These shares will be revalued at each reporting period until the services are complete. Any change in value for a given reporting period will be realized as operating income or expense.
In September 2008 the Company issued 400,000 shares of its common stock to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services to be valued by the Company between September 2008 and October 2008 upon performance by the attorney. The common stock issued and received in connection with this transaction will be valued based on the market price of the Company’s common stock as of October 31, 2008 charged to operations, when the required performance by the attorney is complete.
In September 2008, the Company issued 300,000 shares of common stock to TI as partial satisfaction of a contractual liability (see Note 3).
Options, Warrants and Convertible Debt
Under the Company’s 2005 Incentive Stock Plan (the “2005 Plan”) and Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), officers, employees, directors and consultants may be granted options to purchase the Company’s common stock at fair market value as of the date of grant. Options become exercisable over varying vesting periods commencing from the date of grant and have terms of five to ten years. The plan also provides for the granting of performance-based and restricted stock awards. The Company’s board of directors has approved the Company’s 2008 Incentive Stock Plan (the “2008 Plan”), but this plan was not in effect as of September 30, 2008 because the Company did not have sufficient capital authorized for such 2008 Plan as of September 30, 2008 (see Note 7).
The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. In addition, during 2007 the Company issued $3,347,500 of 8% senior convertible notes (see Note 2) that may be converted into Common Stock of the Company. The terms of the 8% senior convertible notes and related warrants provide an exercise or conversion price per common share, and such price shall be adjusted if the Company sells its securities to private and institutional investors in the future at a price less than the current exercise or conversion price. During the three months ended September 30, 2008, the Company issued an additional $390,000 of debt securities having a conversion price of $0.005 per common share, which triggered the anti-dilution provisions of the Initial Notes and the attached warrants (see note 2). As of September 30, 2008, the holders of the 8% senior convertible notes can
convert such notes into 747,500,000 shares of the Company’s common stock. On September 29, 2008, the Investors agreed to cancel their warrants in exchange for shares of preferred stock, as described above. The remaining warrants held by Platinum Advisors, LLC gave the holder the right to purchase 162,734,651 shares of the Company’s common stock for $0.005 per share.
On June 6, 2008 the Company received $200,000 under a promissory note and issued a 5 year warrant to purchase 200,000 shares of the Company’s common stock for $0.33 per common share, the Company valued such warrant at $6,490 as of the repayment date of the note. During the three and nine months ended September 30, 2008, $2,781 and $6,490, respectively, was realized as additional interest related to this warrant.
In consideration for the cancellation of TI’s debt (see Note 3), on August 6, 2008 the Company issued TI a warrant to purchase up to 4.99% of the Company’s common stock. Under the warrant TI may purchase up to that number of shares that would give TI beneficial ownership of not more than 4.99% of the Company. The price to be paid for the shares, if purchased on or before February 13, 2009 will be computed as $25 million divided by the fully diluted common stock outstanding on the date of exercise. If any such purchase occurs after February 13, 2009 and before the warrant expires on February 11, 2011, the purchase price shall be computed as $40 million divided by the fully diluted common shares outstanding on the date of exercise. On the date that the warrant was issued, TI beneficially owned 4.05% of the Company through common stock and derivatives convertible into common stock within 60 days from the issue date held by TI and its affiliates. The Company had 2,173,714,879 fully diluted common shares, which gave effect to the conversion of all debt and equity instruments into common stock, per the terms of the warrant. On the date of issuance, the warrant was for a maximum of 646,377 common shares at a price of $0.0115 per share.
As of September 30, 2008 and December 31, 2007, the Company had the following options, warrants and convertible debt outstanding, excluding the warrant held by TI to purchase that number of shares which would provide TI with no more than a 4.99% ownership of the Company:
|
| As of September 30, 2008 |
| As of December 31, 2007 | ||||
|
| Shares of Common Stock subject to purchase |
| Weighted average exercise price per share of Common Stock |
| Shares of Common Stock subject to purchase |
| Weighted average exercise price per share of Common Stock |
Incentive stock plans |
| 24,604,000 |
| $0.172 |
| 18,479,000 |
| $0.20 |
Warrants |
| 162,734,651 |
| 0.006 |
| 25,546,995 |
| 0.27 |
Preferred Stock |
| 800,000,000 |
| - |
| - |
| - |
Convertible debt |
| 747,500,000 |
| 0.005 |
| 15,215,909 |
| 0.22 |
Total |
| 1,734,838,651 |
| $0.005 |
| 59,241,904 |
| $0.24 |
For the three months ended September 30, 2008 and 2007, the Company recorded $197,034 and $48,092 respectively, in compensation costs for stock options granted to employees and consultants under the Company’s incentive stock plans. For the nine months ended September 30, 2008 and 2007, the Company recorded $758,526 and $822,755 respectively, in compensation costs for stock options granted to employees and consultants under the Company’s incentive stock plans.
As of September 30, 2008, the Company had 12,390,000 stock options outstanding under the Company’s 2007 Plan. On September 30, 2008 the options outstanding and exercisable under the 2007 Plan had a weighted exercise price of $0.14 per share and had no intrinsic value at September 30, 2008. No option grants made in connection with the 2007 Plan were exercised and 212,500 stock options were cancelled during the nine months ended September 30, 2008. As of September 30, 2008 the 2007 Plan had 188,000 option shares available for future grant.
During the nine months ended September 30, 2008, the Company granted 6,395,000 stock options from the 2007 Plan. These option grants included 5,975,000 shares that vested upon the date of grant, with five year terms, an exercise price between $0.05 and $0.11 per share and grant date fair values between $0.04 and $0.09 per share. 350,000 of such options were granted to directors of the Company for their service through June 30, 2009 and will fully vest on that date. The vesting schedule for all options in the 2007 Plan includes vesting dates at various times through August 31, 2010. The fair market value of these options was determined at the date of grant utilizing the Black-Scholes model, as described below.
As of September 30, 2008, the Company had 12,124,000 stock options outstanding under the Company’s 2005 Plan. On September 30, 2008 the options outstanding and exercisable under the 2005 Plan had a weighted exercise price of $0.19 per share and had no intrinsic value at September 30, 2008. No option grants made in connection with the 2005 Plan were exercised and 13,333 stock options were cancelled during the nine months ended September 30, 2008. As of September 30, 2008 the 2005 Plan had 30,000 option shares available for future grant.
In addition to options granted under the Company’s 2005 and 2007 Plans described above, during 2006 the Company made certain option grants for an aggregate of 90,000 common stock options, outside of these plans. These grants include vesting criteria commencing from the grant date, an exercise price of $0.10 per share and expiration dates varying from five to ten years from the date of grant. The fair value of these stock options on the date of grant was determined utilizing the Black-Scholes model as described below. At September 30, 2008 there was no intrinsic value of these outstanding options.
The fair value of the stock options granted to consultants has been recorded as an expense of $10,592 and $39,464 for the three and nine months ended September 30, 2008, and reflects changes in fair market value of the unvested options since the prior reporting period and new grants during the quarter, calculated using the Black-Scholes valuation method. The Black-Scholes model utilizes the undiscounted quoted market price of the Company’s common stock and considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. Expected volatility assumptions utilized in the model were based on volatility of the Company’s stock price, the risk-free rate is derived from the U.S. treasury yield and the Company used a weighted average expected term.
|
| For the Nine Months Ended |
| ||||
Black-Scholes Valuation Assumptions: |
| September 30, 2008 |
| September 30, 2007 |
| ||
Risk-free interest rate |
|
| 2.5-3.7 | % |
| 4.2-5.0 | % |
Expected life in years |
|
| 3.9-8.9 |
|
| 3-9.7 |
|
Weighted average expected stock volatility |
|
| 115 to 182 | % |
| 107 to 109 | % |
Expected dividends |
|
| zero |
|
| zero |
|
As of September 30, 2008, unvested compensation cost for all stock options granted to employees and consultants was approximately $700,000. Future expenses will be recognized through 2010 for these charges in accordance with the underlying vesting conditions of each grant.
7. SUBSEQUENT EVENTS
On or about October 6, 2008, an information statement was furnished to all holders of Common Stock of the Company as of September 12, 2008, in connection with the proposed actions to be taken by the Company without a meeting pursuant to the written consent of the holder of a majority of the voting power of the Company:
| 1. | The amendment and restatement of the Articles of Incorporation to increase the number of authorized shares of the Company’s common stock, par $0.001 per share, from 300,000,000 shares to 5,000,000,000 shares. |
| 2. | The amendment and restatement of the Articles of Incorporation to give the board of directors the power and authority, without a shareholder vote, to approve and implement forward and reverse splits of our common stock upon approval of a majority of the directors. |
| 3. | The approval of the NaturalNano, Inc. 2008 Incentive Stock Plan (the “2008 Plan”) and the reservation of 800 million shares of the Company’s common stock for issuance under the 2008 Plan. |
On October 30, 2008, the Company filed a certificate of amendment to its second Amended and Restated Articles of Incorporation and filed the Amended and Restated Articles of Incorporation, authorizing for issuance up to 5,000,000,000 shares of common stock and 10,000,000 shares of preferred stock.
On October 31, 2008, the Company issued $85,000 of additional 8% senior secured debt securities to the Investors (see Note 2) under the terms of the Loan and Security Agreement dated September 29, 2008.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Note Regarding Forward-Looking Statements
This quarterly report contains forward-looking statements that involve risks and uncertainties. These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar expressions. These statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this report. You should not place undue reliance on these forward-looking statements.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors such as:
• | the successful implementation of research and development programs; |
• | the ability to demonstrate the effectiveness of our technology; |
• | the timeline for customer accreditation for product formulations; |
• | our ability to enter into strategic partnering and joint development agreements; |
• | our ability to competitively market our Pleximer and filled tube products; |
• | the terms and timing of product sales and licensing agreements; |
• | the timing and approval of filed and pending patent applications; |
• | the ability to raise additional capital to fund our operating and research activities until we generate adequate cash flow from operations; |
• | our ability to attract and retain key personnel and; |
• | general market conditions. |
Our actual results may differ significantly from management’s expectations. The potential risks and uncertainties that could cause our actual results to differ materially from those expressed or implied herein are set forth in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and our other filings with the Securities and Exchange Commission, all of which are available on Edgar.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
The forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Plan of operations for the period from September 1, 2008 through September 30, 2009
Milestones Anticipated for the Twelve Month Period Ending September 30, 2009
• | Re-negotiate the terms of our partially exclusive license agreement with the US Department of the Navy at the Naval Research Laboratory to, reduce the license cost and extend the timeframe of payment by changing the number and definition of the fields of use which are exclusive to NaturalNano, Inc. ( the anticipated new terms have been used to present the plan of operations below) |
• | Establishment of funded joint development agreements that will identify and develop additional applications for Pleximer and commercialize Pleximer and filled tube application products. |
• | Complete customer formulation and optimization trials demonstrating Pleximer and nanotube technology advantages in multiple application models. |
• | Complete manufacturing scale accreditation of multiple products. |
• | Achieve and grow revenue by establishing supply agreements for Pleximer, filled-tube applications and funded joint developments. |
• | File additional patents to expand our proprietary position on specialty applications and materials. |
Research and Development and Capital Expenditures for the Twelve Month Period ending September 30, 2009
Our research and development plans for the next twelve months include material characterization, formulation testing and product accreditation for our Pleximer and filled-tube products. These efforts will focus in the areas of:
| • | Use of halloysite as an additive in composites and polymers. |
| • | Extended release properties. |
| • | Halloysite material characteristics. |
| • | Process development and scale-up of HNT treatment processes. |
During the three and nine months ended September 30, 2008, research and development resources were used to support revenue generating activities. To the extent such resources are used to generate revenues, such costs will be reported as cost of goods sold.
For the twelve months ending September 30, 2009 we forecast spending approximately $1,021,000 in support of our research and development programs and an approximately $477,000 for investments in capital assets in the research and development area and approximately $40,000 in licensing fees required under existing licensing agreements.
The cash requirements for our research and development programs for the twelve months ending September 30, 2009 are summarized below.
Cash Requirements for Research and Development |
| For the twelve months ending September 30, 2009 |
| |
|
|
|
| |
Research and development team, including salaries, benefits and travel for staff and full-time consultants |
|
$ |
739,000 |
|
Professional and technical consultants and advisors |
|
| 147,000 |
|
Laboratory testing, materials, supplies, safety and other |
|
| 60,000 |
|
Facility leases |
|
| 75,000 |
|
|
|
|
|
|
Research and product development expenditures |
| $ | 1,021,000 |
|
Our cash spending for research and development projects, for the twelve months ended September 30, 2008, aggregated approximately $1.2 million. Research and development expenditures for the twelve month period ending September 30, 2009 will be focused on: testing and validation costs associated with customer accreditation and product development for our polymer based Pleximer products and filled-tube applications with our joint development partners. The Company is seeking additional joint development partners in order to expand our product and industry applications and as these develop; our research efforts will grow in response to these additional product and market opportunities. Product design and attribute validation for each joint development agreement may include: numerous lab, pilot and manufacturing scale tests in support of customer application and significant joint collaborative consulting efforts to refine and introduce process and product enhancements. During the 12 months ending September 30, 2009, we
anticipate that new joint development agreements will include funded research which will be used to offset our overall research and development costs.
Total research and development spending for the twelve month period ending September 30, 2009 reflects increases in capital expenditures compared to prior periods. Investments in capital assets in support of our research and development efforts is forecast to aggregate approximately $477,000 in the twelve month period ending September 30, 2009 as compared to approximately $255,000 for the twelve month period ended September 30, 2008. The planned increase in capital equipment spending reflects management’s commitment to product characterization, development of new application areas and investment in establishing reliable sources of halloysite in anticipation of new product sales and introductions. These investments will be evaluated internally before purchase as to the Company’s intention to buy or lease the relevant equipment based on the conditions and financing costs at that time. The investments anticipated in this capital expenditure forecast include investments for: (i) commercial scale surface treatment processes, (ii) polymer extruder upgrades, (iii) tube filling characterization and evaluation tools and (iv) enhancements and upgrades to various microscopic measuring equipment.
General and Administrative Expenses
The cash requirements for general and administrative efforts for the twelve month period ending September 30, 2009 (including interest) are projected to be approximately $1,318,000. The cash needs projected for our general and administrative expenses for the twelve months ending September 30, 2009, are composed of (i) salaries, benefits and travel of $773,000, (ii) professional services of $252,000, (iii) office rental and facility costs of $5,000, (iv) investor relations and marketing of $91,000 and (v) all other costs of $197,000. Actual cash spending for general and administrative expenses incurred during the twelve months ended September 30, 2008 was approximately $780,000, including $602,000 of tax rebates related to 2005, 2006 and 2007 that we received during such period. The planned increase reflects spending on marketing and public relations costs.
Employees
As of September 30, 2008 we employed a total of eleven full time employees. During the twelve months ending September 30, 2009, we anticipate adding an additional five full-time positions, primarily technicians, scientists and engineers to our research and product development team, as demand for our product developments increases and as our operating cash position allows. The cost of these incremental positions included in our forecast for the twelve months ended September 30, 2009 is $181,000, representing salaries for the portion of the 12 month period they are expected to be employed.
Financing Activities
During the twelve months ended September 30, 2008, the Company received tax rebates of $602,000, cash receipts on revenue or deferred revenue of $350,000 and $390,000 from additional 8% Senior Secured Convertible Notes. These sources have provided working capital proceeds of $4,592,000, that enabled the Company to continue as a viable business through September 30, 2008.
We will need additional funding to execute the 2008 business plan and otherwise continue our operations for the twelve months ending September 30, 2009. In light of this, management intends to seek additional sources of cash to be in place and available starting in the fourth quarter of 2008. Our business plan anticipates the receipt of net proceeds from a future funding source in the amount of $2 million to fund operations for the balance of 2008 and to continue operations through the September 30, 2009.
As of September 30, 2008 the Company had a contingent commitment for up to $2,110,000 of additional working capital. The commitment for such additional capital has been obtained contingent on certain operational milestones to be achieved by the Company. As of November 14, 2008, the Company had not yet met all the milestones it needs to achieve. If the Company fails to achieve the milestones, no assurance can be given that such additional capital will be made available on terms acceptable to the Company, or at all. If the Company fails to meet the milestones, it will be forced to secure additional capital or it will be forced to curtail or discontinue its operations.
The Company will continually evaluate funding options including additional offerings of its securities to private and institutional investors and other credit facilities as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might be available. No commitment for such additional capital has been obtained and no assurance can be given that such additional capital will be available on terms acceptable to us, or at all. If we fail to secure additional capital, we will be forced to curtail or discontinue our operations.
Cash Requirements and Liquidity
Our cash balance as of September 30, 2008 and projected cash outflows for the twelve-month period through September 30, 2009 are presented below.
Cash on hand at September 30, 2008 |
|
| $ | 187,000 |
|
Projected cash requirements for the twelve-month period ending June 30, 2009 : |
|
|
|
|
|
Research and product development expenses | (1,021,000 | ) |
|
|
|
Capital expenditures for research and development | (477,000 | ) |
|
|
|
Collaborative research & licensing agreements | (40,000 | ) |
|
|
|
General and administrative expenses including: administrative salaries and benefits, office, rent, legal expenses, accounting, investor relations and marketing | (1,318,000 | ) |
|
|
|
Interest on convertible debt | (350,000 | ) |
|
|
|
Total estimated cash needs for the twelve month period ending June 30, 2009 |
|
|
| (3,206,000 | ) |
Projected cash receipts as of September 30, 2009 on forecast product sales of $3 million |
|
|
| 2,317,000 |
|
Estimated direct cost of materials for such sales |
|
|
| (1,155,000 | ) |
Anticipated financing required by 6/30/2009, net of financing costs |
|
|
| 2,000,000 |
|
Estimated cash balance on September 30, 2009 |
|
| $ | 143,000 |
|
Our average monthly cash usage for operating and investing activities has averaged $63,000 per month during the nine months ended September 30, 2008, inclusive of the $501,000 of tax rebates received during such period.
We estimate that we will need to raise additional capital of approximately $2 million during the 9 month period ending June 30, 2009 to accomplish our business objectives and otherwise continue our operations and will actively evaluate all funding options including additional offerings of our securities to private and institutional investors and other credit facilities as they become available. It has been assumed that this financing is raised through sale of our equity securities, if all $2,000,000 of such amount is raised through sale of debt securities under the terms of the Loan and Security Agreement dated September 29, 2008, there would be additional interest expense of approximately $140,000. We have no commitment for such future capital and cannot be assured that additional capital will be available on terms acceptable to us, or at all. If we fail to secure additional capital, we will be forced to curtail or discontinue our operations.
Our operating plan for the twelve months ending September 30, 2009 assumes revenue of $3 million for which $2.3 million in gross cash receipts would be realized during that period. During the twelve months ended September 30, 2009, we will be required to spend approximately $1.2 million to purchase the raw materials needed to support the portion of such sales which are for Pleximer related products. If we are unable to achieve such sales, or unable to do so at the assumed margin, we will likely require additional capital to fund our operations.
Management Discussion and Analysis
General
NaturalNano, located in Rochester, New York, has been a development stage company from its inception through September 30, 2008. The Company expects to begin reporting material revenues during the year ended December 31, 2008, and will make a determination on reporting as a development stage company in each future reporting period. Our mission is to develop and commercialize material science technologies with a special emphasis on additives to polymers and other industrial and consumer products by taking advantage of technological advances developed in-house and through licenses from third parties. Our current activities are directed toward research, development, production and marketing of our proprietary technologies relating to the treatment and separation of nanotubes from halloysite clay and the development of related commercial applications for:
• | polymers, plastics and composites to provide stronger, lighter and less expensive materials, |
• | cosmetics and personal care products utilizing filled nanotube technology for extended release of fragrances or other active agents, |
• | household products utilizing filled nanotube technology for extended release of fragrances or other active agents and |
• | agrichemical products utilizing filled nanotube technology for extended release of pesticides or herbicides or other active agents resulting in the use lower concentrations of active ingredients and achieving longer lasting treatment. |
NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc. (“CMI”), which was completed on November 29, 2005.
Redemption of common stock
On August 1, 2008, in connection with, and as a condition to the financing provided by Platinum and Longview (see Note 2 to the condensed consolidated financial statements), TI agreed (x) to sell its common share holdings in the Company at the direction of the Company for the sum of $1,000, and (y) agreed to cancel and forgive all principal, interest, fees and expenses accrued and due pursuant the Credit Agreement and note entered into by the Company with TI in connection with a line of credit provided by TI to the Company (the “TI Debt”). In consideration for the cancellation of the debt, the Company has agreed to issue to TI a warrant to purchase up to 4.99% of the Company’s common stock on terms more particularly set forth in the agreement with TI.
On September 26, 2008, the Company paid TI $1,000 and redeemed the 69,303,189 shares of common stock held by TI.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Our actual results may differ from these estimates.
We believe, that of the significant accounting policies described in the notes to our consolidated financial statements, the following policies involve a greater degree of judgment and complexity and accordingly; these policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We have earned nominal operating revenue since our inception (December 22, 2004). This revenue was generated from funded development or the delivery of Pleximer and sample products specifically for customer applications in various industries in connection with product development evaluations and as such are considered operating revenue for financial reporting purposes. We earn and recognize such revenue to the extent such development activities are completed or when the shipment of the sample products has occurred.
Deferred Revenue
Deferred revenue consists of amounts received by us in cash or receivables which cannot yet be recognized as revenue to the extent that further performance obligations still remain as of the end of the period presented.
Intangible Assets
Licenses are initially measured and recorded based on their cost at the date of their acquisition. We evaluate the recoverability of identifiable intangibles whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable. Such circumstances could include, but are not limited to, a significant decrease in fair value of the asset or a significant adverse change in the extent or manner in which an asset is used. The evaluation of potential asset impairment requires significant judgments about future cash flows over the life of the asset under evaluation and actual future results may differ from assumed and estimated amounts.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply when the differences are expected to be realized. A valuation allowance is recognized if it is anticipated that some or all of the deferred tax asset may not be realized.
As of September 30, 2008 the Company had a deferred income tax liability of $148,763, which consisted of the tax effect of the difference in basis between GAAP and tax purposes for the beneficial conversion feature in connection with the Notes entered into during August and September of 2008 (see Note 2 to the condensed consolidated financial statements) with the offset recorded through additional paid-in capital as an offset to the beneficial conversion feature. This deferred tax liability will decrease with a corresponding increase to additional paid-in capital as the beneficial conversion feature is amortized over the term of the Notes.
Internal Revenue Code Section 382 (“Section 382”) imposes limitations on the availability of a company’s net operating losses and other corporate tax attributes as ownership changes occur. As a result of the transactions discussed in Notes 2, 3 and 6 to the condensed consolidated financial statements, a Section 382 ownership change is expected and a study will be required to determine the date the ownership change occurred. The amount of our net operating losses incurred prior to the ownership change will be limited based on the value of the Company on the date of ownership change. A full valuation allowance has been established for the deferred tax asset related to the net operating losses available. Accordingly, the limitation will not have an impact on our balance sheet or statements of operations. The net operating loss and related deferred tax assets as of December 31, 2007 were disclosed in the notes to the audited financial statements included in the Company’s 10-KSB filed on April 9, 2008.
Share-Based Compensation
On January 1, 2006, we adopted the stock option expensing rules of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” using the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation” for stock options already granted. We utilized the modified prospective approach of adoption under SFAS No. 123R. Results for prior periods have not been restated. We previously accounted for our employee stock option plan under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no stock-based employee compensation cost was reflected in the statement of operations in reporting periods prior to the first quarter of 2006, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. For the years ended December 31, 2007 and 2006, we recorded stock-based compensation costs of $912,006 and $2,970,959, respectively in accordance with SFAS No. 123(R). The estimated fair value of stock options granted in 2007 and 2006 were calculated using the Black-Scholes model. This model requires the use of input assumptions. These assumptions include expected volatility, expected life, expected dividend rate, and expected risk-free rate of return.
As of September 30, 2008, unvested compensation cost for all stock options granted to employees and consultants was approximately $700,000. Future expenses will be recognized through 2010 for these options in accordance with the underlying vesting conditions of each grant.
Liquidity and Capital Resources
As of September 30, 2008, we had a cash balance of $187,495 and working capital deficit of $1,437,420. We incurred a net loss attributable to common shareholders for the nine months ended September 30, 2008 of $4,249,011 and had a stockholders’ deficiency of $3,049,426 at September 30, 2008. These factors, among others, may indicate that we will be unable to continue as a going concern for a reasonable period of time.
On June 6, 2008 we received $200,000 under a promissory note. Such note did not bear any interest and was repaid on July 17, 2008 following the collection of certain receivables. The note had an attached 5 year warrant to purchase 200,000 shares of our common stock for $0.33 per common share, we valued such warrant at $6,490. During the nine months ended September 30, 2008, $6,490 was realized as additional interest related to this warrant.
As of September 30, 2008 we had received $390,000 of a contingent commitment for $2,500,000 of additional working capital. The commitment for such additional capital has been obtained contingent on certain operational milestones to be achieved by the Company. If the Company fails to achieve the milestones, no assurance can be given that such additional capital will be made available on terms acceptable to the Company, or at all. If the Company fails to meet the milestones, it will be forced to secure additional capital or it will be forced to curtail or discontinue its operations.
The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations, to obtain additional financing and, ultimately, to attain successful operations.
In addition, management is currently assessing our operating structure for the purpose of reducing ongoing expenses, increasing sources of revenue and is assessing the availability of additional debt and equity financing on terms that would be acceptable to us. In addition, recent successes in product testing for Pleximer and filled-tube applications are being leveraged in an attempt to increase revenues from sales.
We will continually evaluate funding options including additional offerings of its securities to private and institutional investors and other credit facilities as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might be available.
We have incurred a loss from operations since inception, December 22, 2004. Since inception our growth has been funded through a combination of convertible debt from private investors and from cash advances from our parent and majority owned shareholder Technology Innovations, LLC.
We have experienced an average monthly cash usage of approximately $63,000, which includes the receipt of a $501,000 tax rebate from the State of New York and the deferral of approximately $327,000 of employee salaries, during the first nine months of 2008. During the first nine months of 2007, the Company experienced monthly cash usage of approximately $275,000.
Comparison of Statement of Operations For the three and nine months ended September 30, 2008 and 2007
Income
During the three and nine months ended September 30, 2008, we recognized revenue of $53,361 and $180,286, respectively, as compared to $5,500 and $8,750 in the same respective periods of 2007. For the three and nine months ended September 30, 2008, this revenue consisted of $13,361 and $61,236, respectively, from shipments of quantities of our Pleximer product and $40,000 and $119,050, respectively, for funded development. The cost of goods sold during the three and nine months ended September 30, 2008 was $24,105 and $66,859, respectively, providing a gross margin of $29,256 and $113,427 for the same respective periods.
We expect that revenues and cost of goods sold will both increase in future periods. These revenues are expected to be generated through the sale of Pleximer related products as well as funding for development of specific applications for our proprietary halloysite technologies in the consumer products and other industries.
Operating Expenses
Total research and development expenses for the three and nine months ended September 30, 2008 were $298,842 and $1,239,316 as compared to $529,301 and $1,585,905 for the same respective periods of 2007. The decrease in spending on research and development was primarily due to the allocation of a portion of research and development expenses directly related to the generation of revenue as well as decreases in consulting services used, equipment costs, salaries due to the reduction of employees from 9 to 6 and stock option compensation expense realized due to vesting of grants during the periods net of increases in depreciation and patent costs, as follows:
|
| For the three months ended |
| Variance |
| For the nine months ended |
| Variance |
| ||||||||||
|
| September 30, |
| favorable |
| September 30, |
| favorable |
| ||||||||||
|
| 2008 |
| 2007 |
| (unfavorable) |
| 2008 |
| 2007 |
| (unfavorable) |
| ||||||
Consulting Services |
| $ | 16,484 |
| $ | 110,933 |
| $ | 94,449 |
| $ | 137,470 |
| $ | 335,695 |
| $ | 198,225 |
|
Depreciation |
|
| 25,966 |
|
| 22,595 |
|
| (3,371 | ) |
| 75,365 |
|
| 44,846 |
|
| (30,519 | ) |
Equipment Costs |
|
| 3,753 |
|
| 12,707 |
|
| 8,954 |
|
| 6,066 |
|
| 35,555 |
|
| 29,489 |
|
Patents |
|
| 30,667 |
|
| 6,917 |
|
| (23,750 | ) |
| 155,136 |
|
| 19,689 |
|
| (135,447 | ) |
Salaries |
|
| 114,928 |
|
| 126,999 |
|
| 12,071 |
|
| 361,162 |
|
| 394,537 |
|
| 33,375 |
|
Stock option compensation |
|
| 69,516 |
|
| 155,067 |
|
| 85,551 |
|
| 357,721 |
|
| 507,127 |
|
| 149,406 |
|
Allocation to cost of goods |
|
| (19,240 | ) |
| — |
|
| 19,240 |
|
| (57,250 | ) |
| — |
|
| 57,250 |
|
All other |
|
| 56,768 |
|
| 94,083 |
|
| 37,315 |
|
| 203,646 |
|
| 248,456 |
|
| 44,810 |
|
|
| $ | 298,842 |
| $ | 529,301 |
| $ | 230,459 |
| $ | 1,239,316 |
| $ | 1,585,905 |
| $ | 346,589 |
|
We expect that we will continue to invest in research and development and that our investment may increase during 2008 as we develop commercial applications for Pleximer and other potential applications for halloysite to the extent that such development activities are not directly offset by revenue. No assurance can be given that such spending for research and development will result in increased revenue from the sale of Pleximer or any other application of halloysite.
Total general and administrative expenses for the three and nine months ended September 30, 2008 were $275,024 and $1,102,846, respectively, as compared to $317,065 and $1,367,614 for the same respective periods of 2007. The decrease in spending on general and administrative was primarily due to a 2006 and 2007 R&D tax rebate for which we qualified and the decrease of professional fees related to the registration of securities related to the 8% senior secured notes (see Note 2 to the financial statements) net of increases in stock option compensation expense realized due to vesting of grants during the periods, salaries and benefits due to increasing employees from 2 to 4 and amortization expense related to the license of patents for the Department of the Navy (see Note 5 to the financial statements), as follows:
|
| For the three months ended |
| Variance |
| For the nine months ended |
| Variance |
| ||||||||||
|
| September 30, |
| favorable |
| September 30, |
| favorable |
| ||||||||||
|
| 2008 |
| 2007 |
| (unfavorable) |
| 2008 |
| 2007 |
| (unfavorable) |
| ||||||
Amortization |
| $ | 33,288 |
| $ | 8,288 |
| $ | (25,000 | ) | $ | 99,864 |
| $ | 24,864 |
| $ | (75,000 | ) |
Professional fees |
|
| 105,600 |
|
| 116,430 |
|
| 10,830 |
|
| 315,800 |
|
| 338,771 |
|
| 22,971 |
|
Salaries |
|
| 145,306 |
|
| 110,241 |
|
| (35,065 | ) |
| 383,112 |
|
| 248,964 |
|
| (134,148 | ) |
Stock option compensation |
|
| 127,518 |
|
| (106,975 | ) |
| (234,493 | ) |
| 400,805 |
|
| 315,627 |
|
| (85,178 | ) |
State Tax |
|
| (249,969 | ) |
| — |
|
| 249,969 |
|
| (491,211 | ) |
| 3,315 |
|
| 494,526 |
|
All other |
|
| 113,281 |
|
| 189,081 |
|
| 75,800 |
|
| 394,476 |
|
| 436,073 |
|
| 41,597 |
|
|
| $ | 275,024 |
| $ | 317,065 |
| $ | 42,041 |
| $ | 1,102,846 |
| $ | 1,367,614 |
| $ | 264,768 |
|
We expect that spending in the forth quarter of 2008 for general and administrative will be relatively consistent with the prior quarters of 2008, we will need to invest in marketing and sales, investor relations and will likely incur additional professional fees related to financing activities required if we succeed in obtaining the additional working capital needed to fund our operations.
Other income (expense)
Other expense for the three and nine months ended September 30, 2008 which was $695,309 and $2,020,276, respectively, as compared to $610,679 and $1,328,884 for the same respective periods of 2007. Other expense primarily consisted of interest expense. There was $60,731 of non-interest expense which was related to disposals of the leasehold improvement assets resulting from the relocation of our operations into a new facility.
Interest is earned on cash balances held at certain financial institutions and we pay interest as part of our capital equipment leases arrangements; interest accrued for the 8% convertible note payable to TI, debt discount accretion, amortization of deferred financing cost and adjustments to the registration rights liability related to the 8% senior secured convertible notes described in Note 2 to the financial statements. Interest expense and interest income were as follows:
|
| For the three months ended |
| Variance |
| For the nine months ended |
| Variance |
| ||||||||||
|
| September 30, |
| favorable |
| September 30, |
| favorable |
| ||||||||||
|
| 2008 |
| 2007 |
| (unfavorable) |
| 2008 |
| 2007 |
| (unfavorable) |
| ||||||
Interest earned on cash |
| $ | 187 |
| $ | 17,403 |
| $ | (17,216 | ) | $ | 3,384 |
| $ | 54,273 |
| $ | (50,889 | ) |
Interest paid on capital leases |
|
| (3,060 | ) |
| (1,917 | ) |
| (1,143 | ) |
| (8,589 | ) |
| (2,371 | ) |
| (6,218 | ) |
Interest to TI note |
|
| (6,115 | ) |
| (18,148 | ) |
| 12,033 |
|
| (42,016 | ) |
| (52,690 | ) |
| 10,674 |
|
Interest to 8% senior notes |
|
| (70,682 | ) |
| (66,950 | ) |
| (3,732 | ) |
| (349,494 | ) |
| (152,498 | ) |
| (196,996 | ) |
Accretion of debt discount |
|
| (455,128 | ) |
| (410,627 | ) |
| (44,501 | ) |
| (1,267,454 | ) |
| (923,910 | ) |
| (343,544 | ) |
Interest on financed receivables |
|
| (2,781 | ) |
| — |
|
| (2,781 | ) |
| (6,490 | ) |
| — |
|
| (6,490 | ) |
Amortization of financing costs |
|
| (96,998 | ) |
| (96,998 | ) |
| — |
|
| (288,886 | ) |
| (218,246 | ) |
| (70,640 | ) |
Registration right obligation |
|
| — |
|
| (33,442 | ) |
| (33,442 | ) |
| — |
|
| (33,442 | ) |
| (33,442 | ) |
|
| $ | (634,578 | ) | $ | (610,679 | ) | $ | (23,899 | ) | $ | (1,959,545 | ) | $ | (1,328,884 | ) | $ | (630,661 | ) |
Comparison of Liquidity and Capital for the nine months ended September 30, 2008 and 2007
Operating activities
Net cash used in operating activities in the nine months ended September 30, 2008 and 2007 were $388,068 and $2,307,321, respectively. The net loss generated in 2008 was $24,642 less than the prior period and non-cash items (depreciation, amortization, stock option vesting, warrant expense and stock issued for services or interest) were $462,645 more than the prior period in 2007.
Non-cash expenses increased by $414,184 during the nine months ended September 30, 2008 as compared to the same period of 2007 for amortization of debt discount and deferred financing costs incurred in connection with the 8% senior secured convertible debt. The amortization of the remaining $1,139,973 of debt discount and deferred financing costs will continue as non-cash expenses through January 2010.
The increase of accounts payable, payroll and other accrued expenses as of September 30, 2008 as compared to September 30, 2007 includes approximately $327,000 of deferred salaries, an increase of $53,000 in accounts payable and $156,000 in accrued expenses.
The increase of $164,000 of deferred revenue as of September 30, 2008 as compared to September 30, 2007 includes amounts collected which are expected to be realized as revenue in future periods.
Investing activities
Net cash used in investing activities in the nine months ended September 30, 2008 and 2007 was $181,027 and $166,136, respectively. Our capital investments during 2008 were related to our research and development efforts.
The growth in the research and development capital assets reflects approximately $113,000 of leasehold improvements required to relocate our laboratory facility and $10,614 related to a capital lease agreement commencing in 2008 for improved feeder systems for our twin screw extruder equipment. This capital lease has a term of twenty-four months and includes a $1 purchase option at the end of the term. Our intent is to purchase the equipment at that time. As a result, the leased equipment is being depreciated over the expected life (five years) of the equipment rather than the term of the lease. We had capital lease obligations of $74,702 as of September 30, 2008 in connection with lease agreements.
Financing Activities
Net cash provided from financing activities in the nine months ended September 30, 2008 and 2007 was $351,650 and $3,353,813, respectively. The cash flow from financing activities during 2008 primarily reflects long term related party financing of $390,000, net of $20,000 in expenses, during the three month period.
The cash flows from financing activities during 2007 primarily reflects the net proceeds received in connection with the 8% senior secured convertible notes on March 7, 2007.
During the first quarter of 2007, we also received $300,000 in advances in accordance with the TI line of credit agreement. No additional borrowings are available under this line of credit agreement that expired on March 31, 2007. On August 1, 2008 in connection with the note issued to Platinum (see Note 2), TI agreed to discharge the $900,000 principal balance of these notes and $129,600 of unpaid interest in exchange for warrants.
During the nine months ended September 30, 2008, we received net cash advances from affiliated entities for shared services agreements, of $48,645 and had net cash repayments of $696 for the same period of 2007. This change in net payables outstanding between affiliates reflects the sharing of certain networking and consultant services provided among these affiliate entities. Our independent board members review all shared service agreements for commercially reasonable terms.
During the nine months ended September 30, 2008, we made capital lease payments of $65,995 as compared to $18,794 for the same period of 2007.
During the nine months ended September 30, 2008, we incurred cash expenses of $20,000 for fees and professional services in connection with the issuance of our 8% sr. convertible debt as compared to $160,600 for the same period of 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
N/A
Item 4. Controls and Procedures.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures. Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of September 30, 2008.
Disclosure controls and procedures and other procedures are designed to ensure that information required to be disclosed in our reports or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management including our president and financial officer as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2008, which have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.
PART II—OTHER INFORMATION
None.
Reader should refer to “Risk Factors”, which are incorporated herein by reference, found in our Annual Report of Form 10-KSB for the years ended December 31, 2007 and 2006 as filed with the Securities and Exchange Commission on April 9, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In consideration for the cancellation of TI’s debt (see Note 3 to the Condensed Consolidated Financial Statements), on August 6, 2008 the Company issued TI a warrant to purchase up to 4.99% of the Company’s common stock. Under the warrant TI may purchase up to that number of shares that would give TI beneficial ownership of not more than 4.99% of the Company. The price to be paid for the shares, if purchased on or before February 13, 2009 will be computed as $25 million divided by the fully diluted common stock outstanding on the date of exercise. If any such purchase occurs after February 13, 2009 and before the warrant expires on February 11, 2011, the purchase price shall be computed as $40 million divided by the fully diluted common shares outstanding on the date of exercise. On the date that the warrant was issued, TI beneficially owned 4.05% of the Company through common stock and derivatives convertible into common stock within 60 days from the issue date held by TI and its affiliates. The Company had 2,173,714,879 fully diluted common shares, which gave effect to the conversion of all debt and equity instruments into common stock, per the terms of the warrant. On the date of issuance, the warrant was for a maximum of 646,377 common shares at a price of $0.0115 per share.
On September 29, 2008 the Investors (see Note 2 to the Condensed Consolidated Financial Statements) agreed to exchange detachable warrants to purchase 1,218,750,060 shares of common stock of the Company for $0.005 per share held by such Investors related to the March 6, 2007 convertible notes payable for 5,000,000 shares of preferred stock.
On October 7, 2008, the Company filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock (the “Series C Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Platinum Long Term Growth IV, LLC, evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the Company (“Series C”). On October 7, 2008, the Company also filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series B Preferred Stock (the “Series B Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Longview Special Funding, Inc., evidencing 750,000 shares of Series B Convertible Preferred Stock of the Company (“Series B”). The Series B and Series C have an aggregate liquidation preference of $10,000 and participate in any dividends or distributions to the common shareholders on an as converted basis.
Each share of the Series B Convertible Preferred Stock, and each share of Series C Convertible Preferred Stock is convertible into 160 shares of the Company’s common stock and votes on an as-converted basis (with each share having 160 votes). However, the Series B Designation limits the holder’s right to convert its Series B Convertible Preferred Stock, and the aggregate voting power attributable to its Series B Convertible Preferred Stock, to no more than 4.99% of the votes attributable to the total outstanding common shares. Accordingly, the votes attributable to the Series B Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis) and the votes attributable to the Series C Convertible Preferred Stock, therefore, represent approximately 86.74% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis), and the votes Series B Convertible Preferred and the Series C Convertible Preferred, voting together represent approximately 91.73% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis).
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits.
Exhibit No. | Description |
| Location |
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2.1 | Agreement and Plan of Merger among NaturalNano, Inc., Cementitious Materials, Inc. and Cementitious Acquisitions, Inc. |
| (1) |
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3.1 | Third Amended and Restated Articles of Incorporation |
| ** |
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3.2 | By-laws |
| ** |
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4.1 | NaturalNano, Inc. Amended and Restated 2007 Incentive Stock Plan # |
| (46) |
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4.2 | NaturalNano, Inc. 2005 Incentive Stock Plan # |
| (4) |
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4.3 | Form of Non-Qualified Stock Option Agreement # |
| (5) |
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4.4 | Non-Qualified Stock Option Agreement dated July 24, 2006 between NaturalNano, Inc. and Cathy A. Fleischer # |
| (6) |
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4.5 | Non-Qualified Stock Option Agreement dated December 7, 2006 between NaturalNano, Inc. and Sir Harold Kroto # |
| (7) |
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4.6 | Registration Rights Agreement dated as of December 22, 2004 between NaturalNano, Inc. and Technology Innovations, LLC |
| (8) |
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4.7 | Form of Subscription Agreement for the Purchase of Convertible Notes of NaturalNano, Inc. |
| (9) |
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4.8 | Loan and Security Agreement, dated March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (10) |
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4.9 | Registration Rights Agreement, dated March 7, 2007, by and among NaturalNano, Inc., and the Investors named therein |
| (11) |
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4.10 | Observation Rights Agreement dated July 20, 2007 among NaturalNano, Inc., Technology Innovations, LLC, Michael L. Weiner and Ross B. Kenzie |
| (12) | |||
4.11 | Warrant for 4,770,000 shares of Common Stock issued to SBI Brightline XIII |
| (13) | |||
4.12 | Warrant for 4,500,000 shares of Common Stock issued to SBI USA, LLC |
| (14) | |||
4.13 | Form of 8% Senior Secured Promissory Notes due March 7, 2009 issued pursuant to the Loan and Security Agreement, dated March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (15) | |||
4.14 | Form of Series A Common Stock Purchase Warrants issued pursuant to the Loan and Security Agreement, dated March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (16) | |||
4.15 | Form of Series B Common Stock Purchase Warrants issued pursuant to the Loan and Security Agreement, dated March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (17) | |||
4.16 | Form of Series C Common Stock Purchase Warrants issued to Platinum Advisors LLC pursuant to the Loan and Security Agreement, dated March 7, 2007, by and among NaturalNano, Inc., NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (18) | |||
4.17 | Certificate Of Designation Of Rights, Preferences, Designations, Qualifications And Limitations Of The Series B Preferred Stock, a copy of which is filed herewith. |
| (2.1) | |||
4.18 | Certificate Of Designation Of Rights, Preferences, Designations, Qualifications And Limitations Of The Series C Preferred Stock, a copy of which is filed herewith. |
| (2.2) | |||
4.19 | NaturalNano, Inc. 2008 Incentive Stock Plan # |
| ** |
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10.1 | Lease Agreement – Schoen Place |
| (19) | |||
10.2 | Amendment No. 1 to Lease between Schoen Place, LLC and NaturalNano, Inc. |
| (20) | |||
10.3 | Exclusive License Agreement between Technology Innovations, LLC and NaturalNano, Inc. effective as of January 24, 2006 |
| (21) |
10.4 | Joint Research Agreement between Nanolution, LLC and NaturalNano, Inc. dated as of May 25, 2005 |
| (22) |
10.5 | Patent Assignments dated March 2, 2007 and March 5, 2007 by and between Technology Innovations, LLC and NaturalNano Research, Inc. |
| (23) |
10.6 | Amended and Restated License Agreement between Ambit Corporation and NaturalNano, Inc., effective as of October 1, 2006 |
| (24) |
10.7 | Nonexclusive License between NaturalNano and U.S. Department of the Navy at Naval Research Laboratory |
| (25) |
10.8 | Employment Agreement with Cathy A. Fleischer, Ph.D. # |
| (26) |
10.9 | Employment Letter of Michael D. Riedlinger and Amendment No. 1 thereto # |
| (27) |
10.10 | Separation Agreement and Mutual Release dated as of October 31, 2006 between NaturalNano, Inc. and Michael D. Riedlinger # |
| (28) |
10.11 | Employment Letter of Kathleen A. Browne and Amendment No. 1 thereto # |
| (29) |
10.12 | Employment Letter of Sarah Cooper # |
| (30) |
10.13 | Stock Purchase Agreement dated March 30, 2006 between NaturalNano, Inc. and SBI Brightline XIII, LLC |
| (31) |
10.14 | Termination Agreement dated July 9, 2006 between SBI Brightline XIII, LLC and NaturalNano, Inc. |
| (32) |
10.15 | Stock Purchase Agreement dated July 9, 2006 between NaturalNano, Inc. and SBI Brightline XIII, LLC |
| (33) |
10.16 | Line of Credit Agreement dated as of December 29, 2004 between NaturalNano, Inc. and Technology Innovations, LLC |
| (34) |
10.17 | Line of Credit Agreement dated as of June 28, 2006 between NaturalNano, Inc. and Technology Innovations, LLC |
| (35) |
10.18 | Promissory Note dated June 28, 2006 to the order of Technology Innovations, LLC |
| (36) |
10.19 | Letter from Technology Innovations, LLC to Platinum Advisors LLC, as Agent, and the Investors named therein |
| (37) |
10.20 | Pledge Agreement, dated March 7, 2007, by and among NaturalNano, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (38) |
10.21 | Patent Security Agreement, dated March 7, 2007, by and among NaturalNano Research, Inc., Platinum Advisors LLC, as Agent, and the Investors named therein |
| (39) |
10.22 | Warrant Purchase Agreement dated August 9, 2006 between NaturalNano, Inc. and Crestview Capital Master, LLC |
| (40) |
10.23 | Joint Development Agreement dated April 23, 2007 between Nylon Corporation of America and NaturalNano, Inc. |
| (47) |
10.24 | Joint Development Agreement dated April 24, 2007 between Cascade Engineering, Inc. and NaturalNano, Inc. |
| (47) |
10.25 | Joint Development Agreement dated July 18, 2007 between Pactiv Corporation and NaturalNano, Inc. |
| (47) |
10.26 | Employment Agreement with Kent A. Tapper # |
| (41) |
10.27 | Partially Exclusive License between NaturalNano, Inc. and United States Department of the Navy at Naval Research Laboratory, dated October 3, 2007. |
| (42) |
10.28 | Lease Agreement between Cottrone Development Co., Inc. and NaturalNano, Inc. dated December 7, 2007. |
| (43) |
10.29 | Promissory Note dated June 6, 2008 to the order of Ross B. Kenzie |
| ** |
10.30 | Warrant purchase agreement dated June 6, 2008 between NaturalNano, Inc. and Ross B. Kenzie |
| ** |
10.31 | 8% Senior Secured Promissory Note Due March 6, 2009, in the principal amount of $150,000, payable to the order of Platinum Long Term Growth IV, LLC. |
| (48) |
10.32 | 8% Senior Secured Promissory Note Due March 6, 2009, in the principal amount of $20,000, payable to the order of Longview Special Financing Inc. |
| (49) |
10.33 | Agreement with Technology Innovations, LLC, dated August 1, 2008. |
| (50) |
10.34 | Agreement with Technology Innovations, LLC, dated August 1, 2008. |
| (51) |
10.35 | Loan and Security Agreement, dated September 29, 2008, by and among investors listed on Schedule 1 thereto, and Platinum Advisors LLC, as agent for the investors. |
| (2.3) |
10.36 | 8% Senior Secured Promissory Note Due January 31, 2010, made to Platinum Long Term Growth IV, LLC on September 29, 2008, in the amount of $190,000. |
| (2.4) |
10.37 | 8% Senior Secured Promissory Note Due January 31, 2010, made to Longview Special Financing Inc. on September 29, 2008, in the amount of $30,000. |
| (2.5) |
10.38 | Form of Forbearance Agreement, dated September 29, 2008. |
| (2.6) |
10.39 | Joint Development and Supply Agreement, dated October 20, 2008. |
| (52) |
10.40 | 8% Senior Secured Promissory Note Due January 31, 2010, made to Platinum Long Term Growth IV, LLC on October 31, 2008, in the amount of $59,500. |
| (53) |
10.41 | 8% Senior Secured Promissory Note Due January 31, 2010, made to Longview Special Financing Inc. on October 31, 2008, in the amount of $25,500. |
| (54) |
14.1 | Code of Ethics for CEO and Senior Financial Officer |
| (44) |
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21.1 | Subsidiaries |
| (45) |
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31.1 | Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| ** |
31.2 | Certification of principal accounting officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| ** |
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32.1 | Certification of principal executive officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| ** |
32.2 | Certification of principal accounting officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| ** |
* | Previously filed |
** | Filed herewith |
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# | May be deemed a compensatory plan or arrangement |
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1. | Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed September 30, 2005 |
2.1 | Incorporated by reference to Exhibit4.1 to Current Report on Form 8-K filed October 3, 2008. |
2.2 | Incorporated by reference to Exhibit4.2 to Current Report on Form 8-K filed October 3, 2008. |
2.3 | Incorporated by reference to Exhibit10.1 to Current Report on Form 8-K filed October 3, 2008. |
2.4 | Incorporated by reference to Exhibit10.2 to Current Report on Form 8-K filed October 3, 2008. |
2.5 | Incorporated by reference to Exhibit10.3 to Current Report on Form 8-K filed October 3, 2008. |
2.6 | Incorporated by reference to Exhibit10.4 to Current Report on Form 8-K filed October 3, 2008. |
4. | Incorporated by reference to Appendix C to Information Statement on Schedule 14C filed November 8, 2005 |
5. | Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed December 5, 2005 |
6. | Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed July 28, 2006 |
7. | Incorporated by reference to Exhibit 4.5 to Annual Report on Form 10-KSB for the year ended December 31, 2006 |
8. | Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed December 5, 2005 |
9. | Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed December 5, 2005 |
10. | Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 8, 2007 |
11. | Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K filed March 8, 2007 |
12. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 26, 2007 |
13. | Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed July 10, 2006 |
14. | Incorporated by reference to Exhibit 4.6 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
15. | Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed March 8, 2007 |
16. | Incorporated by reference to Exhibit 4.3 to Current Report on Form 8-K filed March 8, 2007 |
17. | Incorporated by reference to Exhibit 4.4 to Current Report on Form 8-K filed March 8, 2007 |
18. | Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K filed March 8, 2007 |
19. | Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-QSB for the period ended September 30, 2006 |
20. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 7, 2007 |
21. | Incorporated by reference to Exhibit 10.1 to Quarterly Report (amended) on Form 10-QSB/A for the period ended March 31, 2006, filed June 26, 2006 |
22. | Incorporated by reference to Exhibit 10.4 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
23. | Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed March 8, 2007 |
24. | Incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-QSB for the period ended September 30, 2006 |
25. | Incorporated by reference to Exhibit 10.7 to Annual Report on Form 10-KSB for the year ended December 31, 2006 |
26. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 28, 2006 |
27. | Incorporated by reference to Exhibit 10.2 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
28. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed November 2, 2006 |
29. | Incorporated by reference to Exhibit 10.5 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
30. | Incorporated by reference to Exhibit 10.6 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
31. | Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 31, 2006 |
32. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 10, 2006 |
33. | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed July 10, 2006 |
34. | Incorporated by reference to Exhibit 10.7 to Registration Statement on Form SB-2 (No. 333-135667) filed July 10, 2006 |
35. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed July 3, 2006 |
36. | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed July 3, 2006 |
37. | Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed March 8, 2007 |
38. | Incorporated by reference to Exhibit10.1 to Current Report on Form 8-K filed March 8, 2007 |
39. | Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 8, 2007 |
40. | Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed August 14, 2006 |
41 | Incorporated by reference to Exhibit 10.1 to Current Report on form 8-K filed September 4, 2007 |
42. | Incorporated by reference to Exhibit 10.1 to Current Report on form 8-K filed October 9, 2007 |
43. | Incorporated by reference to Exhibit 10.1 to Current Report on form 8-K filed December 7, 2007 |
44. | Incorporated by reference to Exhibit 14.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 |
45. | Incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005 |
46. | Incorporated by reference to Exhibit 4.1 to Registration Statement on Form SB-2 (No. 333-142688) filed December 12, 2007 |
47. | Incorporated by reference to Exhibit 4.1 to Registration Statement on Form SB-2 (No. 333-142688) filed October 3, 2007 |
48. | Incorporated by reference to Exhibit 10.1 to Current Report on form 8-K filed August 7, 2008 |
49. | Incorporated by reference to Exhibit 10.2 to Current Report on form 8-K filed August 7, 2008 |
50. | Incorporated by reference to Exhibit 10.3 to Current Report on form 8-K filed August 7, 2008 |
51. | Incorporated by reference to Exhibit 10.4 to Current Report on form 8-K filed August 7, 2008 |
52. | Incorporated by reference to Exhibit 10.1 to Current Report on form 8-K filed October 24, 2008 |
53. | Incorporated by reference to Exhibit 10.2 to Current Report on form 8-K filed November 6, 2008 |
54. | Incorporated by reference to Exhibit 10.3 to Current Report on form 8-K filed November 6, 2008 |
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.
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| NaturalNano, Inc. |
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Date: | November 14, 2008 |
| /s/Cathy A. Fleischer |
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| Cathy A. Fleischer, President |
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Date: | November 14, 2008 |
| /s/Kent A. Tapper |
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| Kent A. Tapper, CFO |