Item 1.
Business
Basis of Consolidation
The 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. As of April 20, 2010 the consolidated financial statements reflect the acquisition of a 51% controlling interest in Combotexs, LLC, (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of the Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”). All significant inter-company accounts and transactions have been eliminated in consolidation.
Description of Business
NaturalNano, located in Pittsford, New York, is a development stage company engaged in the development and commercialization of material science technologies with an emphasis on additives to polymers and other industrial and consumer products by taking advantage of technology advances developed in-house. 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:
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cosmetics, health and beauty products
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polymers, plastics and composites
Combotexs is a technology company organized on October 28, 2009 and has had minimal revenue and markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining. Combotexs also has certain marketing and distributions agreements for various household products. The Company acknowledges the acquisition of Combotexs as a short term source for revenue, cash flow and a method of incorporating nanotubes found in halloysite clay into Combotexs products. NaturalNano will evaluate and develop certain Combotexs products with nano-enhanced materials that may result in future sales growth for both of these business entities.
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 and Going Concern - The accompanying 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 consolidated financial statements, the Company incurred a net loss for 2010 of $541,774 and had negative working capital of $6,053,111 and a stockholders' deficiency of $5,901,652 at December 31, 2010. Since inception the Company’s growth has been funded through combination of convertible debt from private investors and from cash advances from its former parent and majority shareholder Technology Innovations, LLC. 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 Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to extend the terms of its existing obligations, to obtain additional financing and, ultimately, to attain successful operations.
During 2010, the Company entered into a series of senior secured Promissory Notes with Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special Financing, Inc. (“Longview”), the holders of the Company’s primary debt obligations since 2007. The aggregate principal borrowings on the 2010 Promissory Notes from Platinum and Longview during 2010 were $87,923 and $15,923, respectively. The proceeds from the 2010 Promissory Notes were provided for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was due and payable in full on various dates between March 9, 2009 and January 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances and waived the application of the 16% default interest rate. Additionally, Platinum and Platinum advisors waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. Longview has granted waivers of default, extended the due dates of all the outstanding principal balances and waived the application of the 16% default interest rate. Additionally, Longview waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services.
The Company’s management and Board of Directors continue to actively assess the Company's operating structure with an objective to reduce ongoing expenses, increase sources of recurring revenue as well as seeking additional debt or equity financing. 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.
On November 30, 2009 the Company entered into $225,000 10% Subordinated Secured Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One Finance LP, an accredited investor. The 10% Convertible Note has a fifteen month term, bears interest at 10% per annum payable quarterly and is secured by certain assets of the Company pursuant to a security agreement entered into on November 30, 2009. The Note is convertible at the investor’s option into common stock at any time prior to maturity at $0.005 per share, subject to certain anti-dilution provisions and provides that the result of such conversion cannot result in the beneficial ownership in excess of 4.99% of the issued and outstanding common stock. Pursuant to the terms of this financing obligation, 45,000,000 common stock purchase warrants were granted at an exercise price of $0.025 per share, these warrants are subject to certain anti-dilution adjustments as described in the agreement. The net proceeds from the 10% Convertible Note amounting to $197,000 after fees and were restricted to general working capital purposes only. Effective March 15, 2011, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to June 30, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.
The Company has experienced recurring losses from operations since its inception and continues to have a working capital deficiency and limited opportunities for additional capital infusion. The Company has experienced recurring defaults relating to the various provisions under its current debt obligations and continues to require forbearance, waivers and extensions relating to such provisions in the future. These negative financial conditions combined with delays experienced in product introduction and customer acceptance raises substantial doubt of the Company’s ability to continue as a going concern.
OTCBB delisting December 3, 2009
The Company received a OTCBB Delinquency Notification, dated November 24, 2009, from the Financial Industry Regulatory Authority (FINRA) indicating that the Company’s common stock will be removed from quotation on the OTC Bulletin Board, effective as of the opening of trading on December 3, 2009, as a result of three late filings (its Quarterly Report on Form 10-Q for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009) in a 24-month period. The Company was delinquent one day in filing its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, which triggered the Notification. The Company decided not to formally appeal this decision by FINRA.
On December 14, 2010, the Company applied for and was granted reinstatement to the OTCBB by FINRA.
51% Acquisition of Combotexs, LLC
On April 20, 2010 the Company acquired a 51% interest in Combotexs, LLC, (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of an Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”) the sole member of Combotexs. Combotexs is a technology company that has had minimal revenue since its inception in October 2009 and markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining. The acquisition of Combotexs provides the company with a short term source for revenue and cash flow, as well as a potential of incorporating nanotubes found in halloysite clay into Combotexs products.
In consideration for 51% of Combotexs, NaturalNano issued 20,000,000 shares of the Company’s common stock to WMS and in a contingent consideration arrangement, will grant up to 40,000,000 common stock warrants (based on future sales volumes). The grant of up to 40,000,000 each entitles WMS to purchase one share of the Company’s common stock. The first 20,000,000 warrants become exercisable at a price of $.05 on the first day that of the first month after the gross sales of Combotexs exceeds $1,000,000 in the aggregate, net of taxes. The second 10,000,000 warrants become exercisable at a price of $.08 on the first day of the first month after the gross sales of Combotexs exceed $3,000,000 in the aggregate, net of taxes. The final 10,000,000 warrants become exercisable at a price of $.10 on the first day of the first month after the gross sales of Combotexs exceed $4,000,000 in the aggregate, net of taxes. The warrants have a term of five years from and after the date on which they become exercisable and provide for cashless exercise.
The Company accounted for the acquisition in accordance with ASC 805-10 “Business Combinations”, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. The Company is required to recognize and measure any related goodwill acquired in the business combination or a gain from a bargain purchase. In order to determine the goodwill or gain from a bargain purchase, the Company is required to determine the fair value of the consideration transferred in a business combination. The fair value is calculated as the sum of the acquisition date fair value of the assets transferred by the Company, the liabilities incurred by the Company and the equity interest issued by the Company.
The goodwill of $80,332 arising from the acquisition consists of future cash flow, utilization of nano technology within their products and future profits. 51% of the goodwill recognized is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid for Combotexs and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.
The fair value of the 20,000,000 common shares issued as part of the consideration paid for Combotexs ($22,690) was determined by using an estimate of the enterprise value allocated to various instruments outstanding consistent with estimates used in valuing the derivative liability.
The fair value of the contingent consideration arrangement is in three parts, first, 20,000,000 warrants ($13,849) become exercisable on the first day of the first month after the gross sales of Combotexs from and after April 20, 2010 exceeds $1,000,000 in the aggregate, net of taxes. These warrants were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 7 years, exercise price of $.05, interest rate of 3.20%, a volatility rate of 150% and a probability factor of 100%. Second, 10,000,000 warrants ($5,632) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 8 years, exercise price of $.08,interest rate of 3.50%, a volatility rate of 150% and a probability factor of 80%. Third, 10,000,000 warrants ($2,626) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 10 years, exercise price of $.10,interest rate of 3.79%, a volatility rate of 150% and a probability factor of 30%.
Because the contingent consideration will be settled in a variable number of shares and the variability is based on something other than the value of the Company’s shares, the contingent consideration has been classified as a liability. The fair value of the liability will be evaluated on each reporting date with changes in fair value reported in the statement of operations. As of December 31, 2010, there have been no material changes in the value of the instruments.
Noncontrolling interest was calculated based on the fact the fair value of consideration transferred equaled 51% ($44,797) of the total Combotexs entity value, therefore 49% or the noncontrolling interest is $43,040.
The fair value of the assets acquired was based on current market values. Inventory, fixed asset, and prepaid expense were purchased within a 90 day period of April 20, 2010. Likewise the accounts payables were expenses incurred within the same 90 day period prior to April 20, 2010
The results of operations of Combotexs are included in the accompanying financial statements for the period beginning on April 20, 2010. The revenue and earnings of the Company as if Combotexs had been acquired by the Company as of January 1, 2010 are represented in the table below. Combotexs did not generate any revenue or earnings prior to January 1, 2010.
Terminology
A summary of the terms used to describe our technologies is presented below.
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Nanotechnology is research and technology development at the molecular or macromolecular levels, in the length scale of approximately 1 - 100 nanometer (nm) range, to provide a fundamental understanding of phenomena and materials at the nanoscale and to create and use structures, devices and systems that have novel properties and functions because of their small and/or intermediate size. The novel and differentiating properties and functions are developed at a critical length scale of matter typically under 100 nm.
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Nanoscale means measurements using one-billionth of a meter units.
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Active ingredient loading refers to the process in which the lumen (inner opening and surfaces) of the halloysite clay are either filled with or adsorbed to an application specific chemical.
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Application technologies refer to processes, treatments, or other innovations applied to a particular good or service for use by an end customer.
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Composite is an engineered material composed of two or more components.
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Compounder is a company that uses polymer extruders to mix plastic materials, including colorants and fillers.
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Concentration relates to the amount of tubular material by weight or volume resident in the halloysite sample.
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Extraction of halloysite nanotubes is comprised of separating the nanotube components out of a mixture of various mineral materials which are impurities from the mining of halloysite clay.
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Elongation is the percent increase in length resulting from a force or stress on a material.
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Elution attributes relate to the amount of time required for a given quantity of active ingredient to flow or desorbs from the nanotube.
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Functionalized HNT TM is an extracted halloysite nanotube that may have one or more of the following treatments: classification of size, outer surface treatment, outer surface metallization, inner surface coating, inner surface metallization or active ingredient loading.
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Halloysite clay is a clay-like mineral occurring in soft, smooth, amorphous masses of a whitish color. Halloysite frequently has a unique tubular quality and is mined throughout the world for various commercial purposes.
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Halloysite natural tubes (“HNT”) is a term that defines the materials found in halloysite clay that are tube shaped and can be measured in one-billionth of a meter units tubular quality and is mined throughout the world, for various commercial purposes also called Halloysite Natural Tubes.
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Halloysite nanotube processing technology means the manipulation of halloysite nanotubes, including mechanical and chemical treatments.
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Hot melt state is the chemical phase in which a material becomes liquid.
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Metallization is the process in which the lumen or surface of the halloysite clay is coated with a metal.
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Nanoclay is used to define a clay material that can be dimensionally measured in one-billionth of a meter unit.
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Nanotubular material is used to define a material that has a tubular geometric shape that can be dimensionally measured in a one-billionth of a meter unit.
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Polymer extruder is a machine used to mix plastic materials including colorants and fillers (additives) such as halloysite in a hot melt state.
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Spectrometers are tools that reveal the composition of things by measuring the light absorbed or emitted by atoms or molecules.
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Toll manufacturing is a contractual arrangement with a third-party processing or manufacturing business that has existing equipment and personnel for the production of materials to customer specifications generally utilizing the technologies and materials provided by the customer. These firms operate under non-disclosure agreements in order to protect the customers’ proprietary technology.
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Tubular content material is used to define a material that has been processed and has a high percentage of, or is completely comprised of, particles with tubular geometric shape.
Halloysite is a nanotubule mineral that occurs in nature in many kaolin clay deposits. This material is actively mined today, both in the USA and internationally and is used by the paper, cement and ceramics industries, among others. We intend to utilize these deposits, and other original sources, to economically obtain and refine nanotubes.
Research and Development
Our research and development plans have historically focused on material characterization, formulation testing and product accreditation for nanoscale materials and nanoclays, our Pleximer products and filled-tube products. These efforts have included process and product evaluations and development in the areas of:
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The use of halloysite as an additive in composites and polymers
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Enhancing the extended release properties resident halloysite clay.
For the twelve months ending December 31, 2010 and 2009 we invested $0.4 million and $0.3 million, respectively, in support of our research and development programs. Since inception, December 22, 2004, the Company has invested $6.8 million in research and development related to the evaluation, design and development of the Pleximer products, nanomaterial based products and filled-tube products.
Nanocomposites
Today, most nanocomposites used in the plastics industry are made with “platy nanoclay” materials or nano-sized versions of traditional fillers that are challenging and expensive to process. Platy nanoclays, such as montmorillonite, contain layered two-dimensional sheets held together by an intermediary layer. These clay sheets must be exfoliated (chemically separated) to produce a nanoparticulate filler with uniform dispersion characteristics within a polymer matrix. Today’s platy nanoclay composite production processes require multiple processing steps including: surface treatments, incorporation of nanoclay into the polymer synthesis process, and additional extrusion steps before the final polymer extruder or molding, in order to achieve the uniform dispersion required for most polymer composite products. These multiple manufacturing processes lead to complexity, increased cost and dispersion quality challenges. Even with the manufacturing processes described above, today’s platy nanoclays are only viable in a limited number of polymer families due to specialized chemistry and manufacturing requirements.
NaturalNano’s Pleximer concentrates have been designed to respond to certain industrial and commercial needs. These include strength increases without compromising ductility, aesthetic enhancements, flame retardant properties and other proprietary needs.
Filled Tube Products
NaturalNano’s halloysite natural tube (“HNT”) products involve filling HNTs with active agents for use in the polymer composites, health and beauty, household product, and agrichemical industries. Halloysite natural tubes are unique nanomaterials, since the tube can be filled with active agents of interest to add a feature or property to a material. The filled tube product contains a material of interest within the tubes such as an antimicrobial compound to provide antimicrobial properties to the resulting polymer composite material. This would be valuable, for example, in the fabric industry for athletic wear. During 2008 we began the evaluation and testing on several application opportunities relating to filled-tube products in industries including household, personal care and agrichemicals. Our preferred strategy for filled-tube products would be the establishment of a joint development agreement with a field-of-use development partner. Such JDA agreements would include various product demonstration, validation and accreditation trials prior to market commercialization.
The processes for filling the tubes, for applications of interest such as cosmetics and agricultural, are covered by patents licensed from the U.S. Department of the Navy and by pending patent applications. The underlying technology for these products and processes are covered by patent applications pending issuance and certain issued patents with expiration dates ranging from 2013 to 2025 and described further under the heading “Intellectual Property.”
Halloysite Materials and NaturalNano’s Technologies
Halloysite is different from other nanoclays because it allows for the potential to eliminate certain exfoliation processing required by other nanoclay materials. Conventional nanoclays, also known as platy clays, occur as stacks of two-dimensional sheets held together by an intercalation layer. These sheets must be separated, or exfoliated, to function as nanoparticulate fillers and be dispersed into the polymer matrix. Exfoliation can be a complex, expensive, multi-step process that is often incomplete, frequently leaving larger pieces of clay that create weak points in the resulting composite material. Halloysite nanotubes do not require exfoliation and therefore we believe the Company’s Pleximer products provide an opportunity for a reduction in processing cost and improvements in performance and production rates. Pleximer™ would allow manufacturers to use existing processing equipment without the need for the exfoliation process equipment used with platy clays. This broadens the potential market for clay-based nanocomposites by enabling more manufacturing sites to benefit from these materials and extends the use of the technology into different polymer systems.
The filled-tube products will focus on the utilization of the tubular nature of the halloysite nanotubes, by filling or adsorbing the tubes with active agents for the polymer nanocomposites, household products, cosmetics, agriculture, and pharmaceutical industries. NaturalNano has rights to patents covering usage of HNT and their unique hollow-tube structure that allows chemicals, additives or other materials to be added to the inside of the tubes, creating a slow or controlled release of the material. HNTs are a hollow tubular structure that is about 1 micron in length (1/1000 of a millimeter) with an average diameter of approximately 100 nanometers. Due to the unique chemistry and geometry of this material, HNTs may be used in an array of applications.
Combotexs
The Company designs, manufactures and sells custom designed error prevention/safety checklist boards. Patient safety checklist boards encourage users to check off tasks as they complete their vital duties. The boards improve communication, helps to reduce errors, improves productivity, promotes teamwork and promotes improved safety, The Company manufactures these boards primarily for use in hospitals and clinics.
Strategy
NaturalNano
The Company has made investments, through the purchase or lease of capital assets and licensing rights, in connection with the research, development and commercialization of the Pleximer and filled-tube products. During 2007-2008, the Company invested $540,000 in capital investment, including capital leases, for testing and characterization equipment associated with: (i) clay separation processes, (ii) polymer extruder equipment and upgrades, (iii) tube filling and evaluation tools, (iv) laboratory expansion, and (v) equipment such as a Scanning Electron Microscope (SEM). Our investment in this specialty engineering equipment is expected to provide the Company with tools for the characterization of thermal stability and strength of our nanocomposite formulations.
Under the NRL License Agreement, the Company was 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 a license to the Company for the licensed patents, any patents issuing thereon and any re-examination, re-issue, continuation or division thereof within the United States of America until each subject patent expire and is subject to certain Company requirements regarding commercial plans and investments in marketing and or research and development for the related product applications.
On November 13, 2009, the Company and the NRL agreed to an amended commercialization plan to: (a) include cosmetics as an exclusive field of use and (b) to extend the term of the license to May 15, 2010 in order to continue the discussions among the parties to develop and execute an amended license agreement. The License Agreement allows the Company to 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.
On November 5, 2010, the Company and the NRL agreed to an amended commercialization plan to include cosmetics as a non-exclusive field of use and to extend the term to yearly renewable as long as we are shipping commercial products and paying their licensee fees.
The critical milestones associated with the commercialization of the Pleximer and filled-tube products include: manufacturing scale trials, customer application definitions and formulation optimization developed in combination with the customer validation and accreditation processes. The Company estimates that product specific testing, in advance of customer acceptance and order receipt, could take between three and six months, and in certain instances even longer, from the initial completion date for product design.
Combotexs
The majority of the revenue from Combotexs is derived from its sale of products under the name WorldWide Medical. The mission of the company is to reduce medical procedure risk by preventing errors and saving lives. Its strategy to deliver on the mission is to offer tools to medical professionals to help them manage complex procedures and improve patient outcome.
The need for these products is profound as worldwide 500,000 people die each year due to preventable errors in hospital operating rooms according to the World Health Organization. According to the Institute of Medicine, there are 98,000 preventable deaths in the U.S. each year. The estimated cost of these errors is $27 billion. In addition, 1/3 of Americans surveyed have suffered from a medical error.
The causes of these errors include:
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Human error
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Poor communication
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Lack of teamwork
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Missed steps in common procedures
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Stress
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Lack of situational awareness
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Shift changes
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Demographic differences
The core business of Combotexs consists of two products that address these errors.
(1)
A safety training program called LESSONS from the FLIGHTDECKTM which is based on the aviation principles of Crew Resource Management. This program emphasizes team communication and the development and use of checklists.
(2)
Error prevention delivered through the use of the Company’s Error Prevention Safety Checklist/Sliderboards. These boards are ¼ inch acrylic with features that include:
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Full customization with the customer determining procedural copy and sequence
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Standard sizes up to 2’ by 3’ as well as custom sizes
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Portrait and landscape modes
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Manual sliders that move from red to green as you progress through the checklist process
Market Opportunities
NaturalNano
The Company believes its halloysite technologies can provide benefits across a variety of industry segments. Specific industries where management believes halloysite nanotubes may enhance products through controlled and extended release of active ingredients or through other treatments provided on the surfaces of the tubes include:
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Cosmetics, health and beauty products
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Household products
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Polymers, plastics and composites.
Combotexs
The Company markets its Combotexs business to hospitals in the United States and Canada, ambulatory surgical centers, private practice physicians, dentists and oral surgeons.
Raw Materials and Processing
NaturalNano
Halloysite and the closely related kaolonite are naturally occurring clays which are actively mined on a commercial scale in the United States and throughout the world for use in the paper, porcelain and concrete industries, among others. The halloysite nanotubes can be separated from kaolonite using standard processing equipment and techniques which are currently in use. We believe that halloysite clay does not require any special handling, storage, or disposal and can be treated like any other clay product.
Our process begins with raw or minimally processed halloysite material from the mine. The halloysite would then be separated and treated utilizing our proprietary technologies and would be surface treated and optimized for the polymer of interest. This refined and treated material may be shipped to a partner company or a designated “toll manufacturing” facility in the form of a dry powder or slurry mixture. The use of tolling arrangements would allow the Company to limit our capital investment requirements and direct manufacturing hiring. Pleximer would be manufactured from the HNTs either at a partner company, toll manufacturer, or in-house and would typically be shipped to the customer in pellet or flake form, although the customer’s specific requirements will determine the final form of delivery. NaturalNano can add further value to the refined and classified nanotubes by either adding material to the surface of the nanotubes or loading the nanotubes with active materials. Typically, these materials would be incorporated with other ingredients to produce the finished product that our customer would sell, for instance providing a strengthening agent or extended release agent to be added to the partner’s existing materials or products. The resulting materials can then be shipped to customers for use in their individual manufacturing processes.
The Company has identified various sources of halloysite that are considered suitable as suppliers.
Combotexs
The Combotexs safety checklist boards are currently outsourced to a third party with redundancy built into the supply network. Typical turnaround time is 3-4 weeks from the time the order is placed. The outsourced company handles the design of the checklist boards as well as the manufacturing of the board. Combotexs staff handles the quality assurance and delivery of the completed boards.
Sales and Business Development
NaturalNano
For the halloysite business products division, the Company’s President is currently responsible for developing relationships with prospective customers and joint research and development partners. The Company does not maintain an in-house sales and business development team but has utilized consultants with chemical, manufacturing and engineering experience to assist with the design and commercialization of product and licensing revenues. Employees for such positions could be filled as in house position in the future, as cash flow and liquidity improvements allow.
The Company forecasts that operating revenues will be generated from the sale of: filled-tubes, Pleximer products and from unique sample formulations developed from business development opportunities. Our contract research and operations consultant receives numerous sample requests from various industry manufacturers and works with these businesses to develop tailored product formulations. Management believes this growing sample formulation and design program may result in future joint development opportunities. During 2010 the Company continued its program to provide small quantity samples to university researchers on a cost-free basis to encourage active research programs in the advancement of material science applications using halloysite based products.
During 2010 the Company continues to note interest in the Company’s recent findings in the use of halloysite nanotubes in the following area:
(a) “controlled release” products using filled tube applications for medical diagnosis and treatment,
(b) commercial and household products using anti-bacterial controlled release products, and
(c) a growing trend in the use of natural ingredients in health and beauty products.
The Company’s major commercial customer, Fiabila S.A., a world leader in the manufacture of private label nail polish products, utilizes NaturalNano’s Halloysite Natural Tubes (“HNT”). The Company’s HNT are environmentally friendly components that are incorporated into a range of the Fiabila produced nail polish products. In 2010 the Company’s sales of HNT to Fiabila represented approximately 32% of total sales. No other single customer represented more than 10% of the Company’s consolidated sales in 2010.
Fiabila made products using our technology are currently being sold at the largest retailers, including Target, Wal-Mart, CVS and Walgreen’s.
The Company’s relationship with Fiabila continues to represent an excellent long term revenue opportunity for us that utilize our HNT to provide nail polishes with increased durability and performance. NaturalNano has a three year exclusive supply agreement and license with Fiabila for the use of HNT as a component in nail polish and nail-care products.
NaturalNano continues to do development work in our lab for other major billion dollar cosmetic companies for other related cosmetic products excluding nail polish. These companies represent potential future revenue.
Combotexs
The sales strategy for Combotexs has three phases, the Compnay is currently in Phase 1.
Phase 1
Emphasize board sales to small to medium hospital groups, limited international focus (Canada only). These sales will be delivered through direct sales, referrals, trade shows, email blasts and web development. (The new website has been completed at www.checklistboards.com.)
Phase 2
Target existing clients to grow boards and introduce training while also expanding the market to include surgical centers.
Phase 3
Continue expansion into foreign markets while adding dental and private practice physicians.
Competition
NaturalNano
Competitors in the nanotechnology industry include large public firms where nanotechnology may be a business unit and private firms that may focus solely on nanomaterials and nanotechnologies. Many of our current and prospective competitors are larger and have greater financial resources, which could create significant competitive advantages for those companies. Our future success depends on our ability to compete effectively with other manufacturers of material additives that may have internal development programs. As a result, we may have difficulty competing with larger, established competitor companies. Generally, these competitors have:
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substantially greater financial, technical and marketing resources;
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larger customer bases;
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better name recognition; and
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potentially more expansive product offerings.
Many of these potential competitors have greater financial resources and are likely to command a larger market share, which may enable them to establish a stronger competitive position than we may have, in part through greater marketing opportunities. If we fail to address competitive developments quickly and effectively, we may not be able to remain a viable entity.
Larger companies that have nanotechnology business units or divisions that are working with nanotechnology, such as: Air Products and Chemicals, BASF, Dow, E.I. DuPont de Nemours & Company, and others; have substantial resources. They have the capability to produce nanomaterials for their own internal use as well as for sale on the open market. Numerous private firms, such as Applied Minerals (formerly Atlas Mining Company), may also be considered competitive in the general field of supplying nanoscale materials. The Company’s products will compete most directly with compounding companies marketing nanoclay concentrates.
Combotexs
Competition in the Combotexs business includes both do-it-yourself as well as paper and electronic medical recordkeeping. The most common is the do-it-yourself market which represents our low cost competition. Typically the medical facility will purchase a generic white board and then write out the specifics for each case. These boards get messy and develop shadows over time. A single person must re-write prior to each case, which is very time consuming and increases the likelihood of missed steps.
The Hospital System refers to the paper medical record or electronic medical record (“EMR”) methods. When either paper or and electronic checklist are done by itself, there is no team discussion around the patient and their particulars. The checklist board facilitates teamwork and improves communication while reducing errors because the entire procedural team must confirm each item on the checklist. While direct integration with EMR is a product in development, several clients have stated that our product works alongside the EMR an is as beneficial as when there is a paper checklist.
Competition for the Combotexs business includes Davis International and Imagexpress. Both produce a decidedly inferior product without the built in sliders we currently produce, and neither have medical industry experience to provide consultative sales processing, which we can do. There are a few online companies which allow a customer to upload an image to have a “white board” custom produced, however they do not have the capability to manufacture sliders built into the boards.
Employees
As of December 31, 2010, the Company had 3 employees, of which 2 were full time. All of the employees are located in Rochester. Two of the employees focus their energies solely on the business development and production of the Combotexs business. Due to the Company’s liquidity position described earlier, spending and staffing levels have been significantly reduced compared to prior reporting periods. Certain other staffing needs are met by part time independent contractors.
If our liquidity and cash positions improve, the Company will hire research staff in connection with the product development and commercialization of our products. There are no assurances that the Company’s liquidity and cash position will improve and allow hiring to be initiated in the near future. Our human resource needs have been filled through the use of experienced part-time consultants in various functional areas in lieu of hiring of full-time employees. All of our employees and consultants are required to signed confidentiality agreements and non-competition agreements, as appropriate.
Intellectual Property
NaturalNano owns or holds license to 20 issued or pending patents. An overview of the Company’s issued, pending and licensed patents are summarized below.
Issued and pending patents assigned from Technology Innovations, LLC (our former parent) include the following:
·
Issued #7,425,232 Hydrogen Storage Apparatus Comprised of Halloysite and Mineral Microtubules , issued on 9/16/08 and expires on 4/15/2024
·
Issued #7,400,490 Ultra-capacitors Comprised of Mineral Microtubules , issued on 7/15/08 and expires on 1/25/2025
·
Issued US2008 / 0316677A1 Ultra-capacitors Comprised of Mineral Microtubules (a continuation of #7,400,490)
·
Pending Method for Stabilizing Nanotubular Halloysite
Issued and pending patent applications developed internally cover the following processes and applications:
·
Issued #7,888,419 Polymeric Composite including Nanoparticle Filler, issued on 02/15/2011 and expires on 08/31/2026
·
Nanocomposite Master Batch Composition and Method of Manufacture
·
Nanocomposite Method of Manufacture
·
Polymeric Adhesive including Nano-particle Filler
·
Polymeric Coatings including Nano-particle Filler
·
Fire and Flame Retardant Polymer Composites
·
Nanoclay Filled Fluoro-polymer Dispersions and Method of Forming Same
·
Nanocomposite including Heat-treated Clay and Polymer
·
Low Polymer Halloysite Coatings
Issued patents and applications licensed on a partially-exclusive basis from the Naval Research Laboratories include the following processes and applications:
·
Patent #5,492,696 Controlled Release Microstructures, expires on 2/20/2013,
·
Patent #6,013,206 Process for Formulation of High Aspect Ratio Lipid Microtubules expires on 1/11/2017,
·
Patent #6,280,759 Method of Controlled Release and Controlled Release Microstructures expires on 8/28/2018,
·
Patent #6,913,828 Production of Hollow Metal Microcylinders from Lipids , expires on 7/5/2022,
·
Patent #6,936,215 Process for Control of Bilayer Numbers Leading to High Efficiency Production of Lipid Microtubules , expires on 8/30/2022
·
Patent #7,125,476 Methods and Devices for Microwave-attenuating Composite Materials , expires on 10/24/2023
·
Patent application No. 11/229,433 entitled Novel biodegradable biofouling control coating method of formulation
·
Patent Application No. 10/863,848 Waterborne coating containing microcylindrical conductors and non-conductive space filling latex polymers
Pending patent applications developed jointly with the Naval Research Labs under a Cooperative Research and Development Agreement (CRADA) include the following:
·
Cosmetic skincare applications employing mineral-derived tubules for controlled release
·
A method for treating agricultural crops using materials associated with tubular carriers
One patent licensed from Ambit Corporation is under a non-exclusive license agreement:
·
Patent # 6,885,845 Personal Communication Device Connectivity Arrangement , expires on 12/21/2014.
License with Naval Research Laboratory
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 was 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 allows the Company to 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 License Agreement provides for a license issue fee of $500,000 to be paid in installments as follows: $50,000 in October 2007, $50,000 in August 2008, $100,000 in October 2008, $100,000 in December 2008, $100,000 in June 2009, and $100,000 in December 2009. As of December 31, 2009, the Company had paid $100,000 under this agreement and was delinquent in $400,000 of payments defined under the agreement.
The License Agreement provides for royalties of 5% of net sales, subject to certain minimum royalty payments. The agreement requires minimum annual royalty payments, paid in advance, in October of the year prior to the royalty period. Minimum annual royalties defined under this agreement are as follows: $76,667 for amounts payable in 2007, $144,333 for amounts payable in 2008, $212,000 for amounts payable in 2009, $279,667 for amounts payable in 2010, $347,333 for amounts payable in 2012 and $30,000 per year thereafter as defined. As of December 31, 2009, the Company had paid $76,667 under this agreement and accrued $356,333 as the 2008 and 2009 minimum royalty payments had not been paid to the NRL. Royalty payments resulting from this agreement are expensed as incurred.
On November 13, 2009, the Company and the NRL agreed to an amended commercialization plan to: (a) include cosmetics as an exclusive field of use and (b) to extend the term of the license to May 15, 2010 in order to continue the discussions among the parties to develop and execute an amended license agreement.
On November 5, 2010, the Company and the NRL agreed to an amended commercialization plan to include cosmetics as a non-exclusive field of use and to extend the term to renewable yearly as long as we are shipping commercial products and paying their licensee fees. The Company plans to use these licenses to continue their commercial development plan related to their Halloysite products. The license requires the first commercial sale of the royalty-bearing product by October 1, 2012. Upon issuance of the license, a non-refundable fee of $5,000 was paid. The royalties due on the net sales for each royalty-bearing product are 5%. The royalty fees are accrued each year between January 1 and December 31 and they are required to be paid in full each May 1st of the following year. In addition, an annual license fee of $5,000 is due on October 31, 2012 and each year thereafter that the license is in effect. The license remains in effect but can be terminated by the Navy if the first commercial sale does not occur by October 1, 2012, along with several other provisions. In conjunction with this new license agreement, the NRL forgave all past royalties (totaling $756,333) due which was reflected in our financial statements. In November 2010, the accrued liability was reversed net of approximately $53,000 which had been recorded as prepaid expense and the net total amount relieved of $704,083 was recorded as a gain on forgiveness of debt.
Government Regulation and Environmental Laws
Our operations subject us to government regulations relating to air emissions, waste water disposal and solid waste disposal, building codes with respect to the storage of flammable gases and liquids and workplace safety requirements of the Occupational Health and Safety Act.
Our business involves the use of a broad range of chemicals and potentially hazardous materials. We may be required to obtain various permits pursuant to environmental law related to hazardous chemicals and materials, and will likely be required to obtain others as our operations continue to evolve. Any violation of environmental laws or regulations, material change in environmental laws or regulations or their enforcement or failure to properly use, handle, store, release or dispose of hazardous chemicals and materials could result in restrictions on our ability to operate our business and could cause us to incur potentially significant costs for personal injuries, property damage and environmental cleanup and remediation. We have assessed our compliance with environmental laws and regulations and management of environmental matters utilizing a combination of internal staff and external consultants. We believe we are currently substantially in compliance with environmental laws, and we have not incurred any material restrictions in our business operations. It is likely that we will be required to obtain a combination of federal, state and local permits relating to air emissions and waste water disposal. We do not believe the cost of obtaining such permits will be material. All of our operations are subject to the plant and laboratory safety requirements of various occupational safety and health laws and regulations.
Sales of some of the products and services we have developed or intend to develop, may be subject to the policies and approval of the U.S. Department of State, Department of Commerce or Department of Defense. Any international sales may also be subject to U.S. and foreign government regulations and procurement policies, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings.
Note Regarding September 29, 2005 Merger
Prior to November 29, 2005, we were a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) known as “Cementitious Materials, Inc.” Pursuant to an Agreement and Plan of Merger, dated September 26, 2005 (the “Merger Agreement”) by and among the Company, Cementitious Acquisitions, Inc., a Nevada corporation and wholly owned subsidiary of the Company (“Merger Sub”), and NaturalNano, Inc., now known as NaturalNano Research, Inc. (“NN Research”), on November 29, 2005 Merger Sub was merged with and into NN Research, with NN Research surviving as a wholly owned subsidiary of the Company (the “Merger”). Immediately following the Merger, we changed our name to “NaturalNano, Inc.” As a result of the Merger, we ceased being a shell company. Except where the context indicates otherwise, all references in this prospectus to “us”, “NaturalNano” or “the Company” refer, with respect to periods prior to the Merger, to NN Research and, with respect to periods after the Merger, to the consolidated enterprise consisting of NaturalNano, Inc. and NN Research.
Note Regarding February 8, 2006 Stock Split
On February 8, 2006 we effected a two-for-one stock split. All references in this report to the number of shares of our common stock and to related per-share prices (including references to periods prior to the effective date of the stock split) reflect this stock split.
Item 2.
Item 2.
Properties
During the third quarter of 2010, the business office for the Company was relocated to and is currently conducted from 800 square feet of office space located at 11 Schoen Place in Pittsford, New York. There is no signed lease agreement and the cost of rent for calendar year 2010 was $3,000. Our laboratory and research facilities are located in leased space in Rochester, New York, as described below.
On December 7, 2007, we entered into an agreement to lease approximately 9,200 square feet at 832 Emerson Street in Rochester, NY for laboratory space for a period beginning December 17, 2007 and ending February 28, 2011. From the period starting March 1, 2008 until February 28, 2011 the rent is $3,300 per month. We have the option to terminate this lease agreement at any time after March 1, 2010 with a 60 day notice. We also have the option of up to six (6) one year renewals of the lease agreement under substantially the same terms except that the rent shall be $3,400 per month during any such renewal period.
On December 8, 2010, NaturalNano and Cottrone Development, the current landlord at 832 Emerson Street, entered into an agreement to lower the rent to $2,000 per month for 12 months beginning March 1, 2011. No other changes have been made to the lease, but the operating costs will be decreased by $16,800 for the 12 month period March 1, 2011 through February 28, 2012.
We believe our current office and laboratory facilities will be adequate for our anticipated needs for the next twelve months. We believe that appropriate insurance coverage is in place and effective for these facilities and related business needs.
Item 3.
Item 3.
Legal Proceedings
On March 24, 2009 the Company received a demand notice from an attorney representing a group of certain former employees of the Company, including but not limited to the Company’s former President and Chief Financial Officer, demanding immediate payment of $331,265 for certain deferred compensation, severance and vacation benefits. Each of the former employees cited in the demand notice, as well as other former employees, had executed written agreements during 2008 that allowed the Company to defer certain of these compensation payments. The Company has accrued for earned and unused vacation benefits and deferred payroll costs for amounts electively deferred by these and other former employees as of December 31, 2010. The Company has retained counsel in connection with this demand and continues to evaluate this demand notice and responded to this demand on May 8, 2009. No actions or probable settlement discussions between the parties have developed since the filing of this demand. Due to the Company’s current cash and liquidity position discussed above and the current evaluation of the items in the demand notice, the timing of future payment of these outstanding amounts in uncertain. No further communication has been had regarding this notice.
During the third quarter of 2010, two former employees, one involved in the March 24, 2009 demand, agreed to forgive the Company’s liability to them of $54,691 related to deferred compensation in exchange for shares of common stock.
Except as described above, the Company is not a party to any material legal proceedings and there are no material legal proceedings pending with respect to us or our property. We are not aware of any legal proceedings contemplated by any governmental authorities involving either us or our property. None of our directors, officers, or affiliates is an adverse party in any legal proceedings involving us or our subsidiaries.
PART II
Item 5.
Item 5.
Market for Common Equity and Related Stockholder Matters
The Company’s common stock is listed on the OTC Bulletin Board under the symbol NNAN. The Company’s common stock was listed on Pink Sheets as of November 24, 2009 until December 14, 2010 under the symbol NNAN.PK.
The high and low share prices for the Company’s common stock as reported on the exchanges identified above, for each quarterly period since January 1, 2009 are presented below. These quotations reflect inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.
The closing price of the Company’s common stock on April 12, 2011, as reported on the OTC Bulletin Board, was $0.002 per share. As of April 12, 2011 there were outstanding 238,616,477 shares of our common stock, which were held by approximately 200 shareholders of record. The Company has never declared or paid a cash dividend since inception (December 22, 2004) nor is there any intention to do so in the near term.
Equity Compensation Plan Information
The following chart sets forth information regarding our equity compensation plans as of December 31, 2010:
*
These shares are issuable under the Company’s 2008, 2007 and 2005 incentive stock plans. Such shares may be issued upon the exercise of stock options or pursuant to restricted stock awards or restricted stock units which vest based upon Board designation at the time of grant. 800,000,000 shares of Common Stock are reserved for preferred share conversion.
Equity Compensation Plans Approved by Security Holders include the Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), the 2008 Incentive Stock Plan (the”2008 Plan”). Officers, employees, directors and consultants may be granted options under these plans 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. These plans also provide for the granting of performance-based and restricted stock awards.
Equity Compensation Plans approved by the Company’s shareholders and authorized to grant awards are as follows:
·
2005 Plan is authorized to grant up to 14 million share unit awards,
·
2007 Plan is authorized to grant up to 17 million share unit awards, and
·
2008 Plan is authorized to grant up to 800 million unit share awards.
Equity Compensation Plans Not Approved by Security Holders as of December 31, 2010 are as follows :
-
2009 Plan is authorized to grant up to 20 million unit share awards
-
45,000,000 warrants granted with the November 30, 2009 10% subordinated secured convertible debt
-
240,741 warrants granted in 2007 in connection with consulting services,
-
162,093,910 warrants granted with the March 7, 2007 due diligence services provided by the lenders agent, and
-
200,000 warrants granted in connection with a short term borrowing agreement in 2008.
Recent Sales of Unregistered Securities
I During the fourth quarter of 2010, the Company issued shares of common stock in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Platinum Long Term Growth as specified under the terms and conditions of the 8% Senior Secured Convertible Debt. These shares were converted at $0.005 per share reflecting satisfaction in interest payments on the outstanding notes:
October 15, 2010
4,790,400 shares in satisfaction of $23,952 in interest payments
November 17, 2010
7,500,000 shares in satisfaction of $37,500 in interest payments
December 16, 2010
7,500,000 shares in satisfaction of $37,500 in interest payments
During the first quarter of 2011, the Company issued shares of common stock in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Platinum Long Term Growth as specified under the terms and conditions of the 8% Senior Secured Convertible Debt. These shares were converted at $0.005 per share reflecting satisfaction in interest payments on the outstanding notes:
April 4, 2011
10,000,000 shares in satisfaction of $50,000 in interest payments
II During the fourth quarter of 2010, the Company issued shares of common stock in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Alpha Capital Anstalt as specified under the terms and conditions of the 8% Senior Secured Convertible Debt. These shares were converted at $0.005 per share reflecting satisfaction in principal payments on the outstanding notes.
November 16, 2010
1,500,000 shares in satisfaction of $7,500 in principal payments
November 26, 2010
6,500,000 shares in satisfaction of $32,500 in principal payments
December 16, 2010
7,500,000 shares in satisfaction of $40,000 in principal payments
December 30, 2010
10,000,000 shares in satisfaction of $50,000 in principal payments
During the first quarter of 2011, the Company issued shares of common stock in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Alpha Capital Anstalt as specified under the terms and conditions of the 8% Senior Secured Convertible Debt. These shares were converted at $0.005 per share reflecting satisfaction in principal payments on the outstanding notes.
February 10, 2011
7,000,000 shares in satisfaction of $35,000 in principal payments
III On March 17, 2011, we issued an aggregate of 3,750,000 shares of common stock to CROSBY, RUCKDASCHEL and RYAN, in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with board services. The issuance was made as a private placement not involving a public offering and in reliance on the exemption from the registration requirements of the Securities Act of 1933 provided in Section 4 (2) thereof.
On April 7, 2011, we issued an aggregate of 4,500,000 shares of common stock to RODRIGUEZ, in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with public relations services performed on our behalf. The issuance was made as a private placement not involving a public offering and in reliance on the exemption from the registration requirements of the Securities Act of 1933 provided in Section 4 (2) thereof.
Limitation on Liability and Indemnification of Directors and Officers
Our articles of incorporation provide that no director or officer shall have any liability to the Company if he or she acted in good faith and with the same degree of care and skill as a prudent person in similar circumstances.
Our articles of incorporation and bylaws provide that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices. However, nothing in our articles of incorporation or bylaws protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. To the extent that a director has been successful in defense of any proceeding, the Nevada Revised Business Corporations Act provides that he or she shall be indemnified against reasonable expenses incurred in connection with the proceeding.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward-Looking Statements
This annual report on Form 10-K and other reports that we file with the SEC contain statements that are considered 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. Such forward looking statements include statements addressing operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to revenue realization, revenue growth, earnings, earnings per share, or similar projections. These statements estimates 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 ability to raise capital to fund our operations until we generate adequate cash flow internally;
·
the terms and timing of product sales and licensing agreements;
·
our ability to enter into strategic partnering and joint development agreements;
·
our ability to competitively market our controlled release and filled tube products;
·
the successful implementation of research and development programs;
·
our ability to attract and retain key personnel ;
·
general market conditions.
Our actual results may differ materially from management’s expectations. 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 in the future, or that any conclusion reached herein will necessarily be indicative of actual operating performance 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.
General
During the year ended December 31, 2010 we were, and for 2011 we expect we will continue to be, a development stage company. Our primary mission is to develop and exploit technologies in the area of advanced materials science, with an emphasis on additives to industrial and consumer products, taking advantage of technological advances we have developed in-house and licensed from third parties. These technologies include a specific focus on nanoscale materials using modifications to tubular and spherical materials found in clay. Our strategy is to develop patentable processes and technologies related to these nanoscale materials and to develop products in the polymers and plastics industries as well as the composites, cosmetics, household products and agrichemical industries.
Liquidity
Going Concern - The accompanying 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 consolidated financial statements, the Company incurred a net loss for 2010 of $541,774 and had negative working capital of $6,053,111 and a stockholders' deficiency of $5,901,652 at December 31, 2010. Since inception the Company’s growth has been funded through combination of convertible debt from private investors and from cash advances from its former parent and majority shareholder Technology Innovations, LLC. 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 Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to extend the terms of its existing obligations, to obtain additional financing and, ultimately, to attain successful operations.
During 2010, the Company entered into a series of senior secured Promissory Notes with Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special Financing, Inc. (“Longview”), the holders of the Company’s primary debt obligations since 2007. The aggregate principal borrowings on the 2010 Promissory Notes from Platinum and Longview during 2010 were $87,923 and $15,923, respectively. The proceeds from the 2010 Promissory Notes were provided for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was due and payable in full on various dates between March 9, 2009 and January 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to June 30, 2011 and waived the application of the 16% default interest rate. Additionally, Platinum and Platinum advisors waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. Longview has granted waivers of default, extended the due dates to June 30, 2011 of all the outstanding principal balances and waived the application of the 16% default interest rate. Additionally, Longview waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services.
The Company’s management and Board of Directors continues to actively assess the Company's operating structure with an objective to reduce ongoing expenses, increase sources of recurring revenue as well as seeking additional debt or equity financing. 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.
On November 30, 2009 the Company entered into $225,000 10% Subordinated Secured Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One Finance LP, an accredited investor. The 10% Convertible Note has fifteen month term, bears interest at 10% per annum payable quarterly and is secured by certain assets of the Company pursuant to a security agreement entered into on November 30, 2009. The Note is convertible at the investor’s option into common stock at any time prior to maturity at $0.005 per share, subject to certain anti-dilution provisions and provides that the result of such conversion cannot result in the beneficial ownership in excess of 4.99% of the issued and outstanding common stock. Pursuant to the terms of this financing obligation, 45,000,000 common stock purchase warrants were granted at an exercise price of $0.025 per share, these warrants are subject to certain anti-dilution adjustments as described in the agreement. The net proceeds from the 10% Convertible Note amounting to $197,000 after fees and were restricted for general working capital purposes only. Effective March 15, 2011, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to June 30, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.
The Company has experienced recurring losses from operations since its inception and continues to have a working capital deficiency and limited opportunities for additional capital infusion. The Company has experienced recurring defaults relating to the various provisions under its current debt obligations and is expected to require future forbearance and waivers relating to such provisions in the future. These negative financial conditions combined with 2009 staff and officer resignations, delays experienced in product introduction and customer acceptance raises substantial doubt of the Company’s ability to continue as a going concern.
Comparison of Liquidity and Capital Resources
for the years ended December 31, 2010 and 2009
Operating activities
Net cash used in operating activities in the years ended December 31, 2010 and 2009 was $186,886 and $183,474, respectively. The net loss generated in 2010 was $1.0 million lower than the prior period reflecting the Company’s realization of the gain from writing off the accrued expenses related to the NRL License ($0.7 million) as well as further benefits resulting from the realignment of the business with the Combotexs acquisition.
Total non-cash adjustments to reconcile the net loss incurred to the cash used in operations aggregated $(210,539) in 2010 and $915,494 in 2009. For the twelve months ended December 31, 2010 and 2009 the company recognized non-cash expenses of $128,862 and $1,225,079, respectively, for amortization of debt discount and deferred financing costs incurred in connection with the 8% senior secured convertible debt and 10% subordinate debt. The decrease in these non-cash items reflects lower amortization on debt discount on a year over year basis as a result of certain discounts becoming fully amortized and the extensions of the amortization periods on 2008 and 2009 notes. The Company recognized a net credit for stock option costs due to an increase in forfeitures and cancellations for previously granted unvested stock options as a result of employee turnover experienced in the first quarter of 2009. There were no additional stock options vested, cancelled or granted in 2010. During 2010 and 2009, the Company reduced outstanding liabilities through negotiations with certain vendors, and the NRL resulting in a net gain on the forgiveness of debt of $816,401 and $86,245 in 2010 and 2009, respectively.
The reduction in the net loss for the year ended December 31, 2010 reflects increased year over year spending on salaries and benefits ($109,922), and marketing ($11,535) as compared to the prior twelve months, some related to the business combination with Combotexs. In 2009 we recognized a $74,050 gain related to the write off of expired and cancelled stock options. There were no such stock option entries in 2010. In addition, the $816,401 gain on forgiveness of debt offset much of the expenses. As described above, the Company is actively seeking opportunities to reduce expenses and improve its liquidity position. We expect that total spending in 2011 will be comparable to the 2010 levels, although we will continue to invest in product and commercialization efforts as our cash position and liquidity allow.
Investing activities
Net cash used in investing activities in the years ended December 31, 2010 and 2009 was $0 and $6,600, respectively. Our capital investments during 2009 were primarily related to our research and development efforts. No additional capital purchases were made in 2010. No capital lease obligations remained outstanding as of December 31, 2010.
Financing Activities
Net cash provided from financing activities in the years ended December 31, 2010 and 2009 was $103,846 and $278,827, respectively. During 2009, the Company received additional funding in the amount of $256,126 in the form of the 8% 2009 promissory notes. The Company repaid $110,414 on these borrowings in the third quarter of 2009.
On June 7, 2010 Combotexs LLC entered into an Unsecured Promissory Note with an unrelated party for $5,000. The Unsecured Promissory Note is due on October 7, 2010, payable in four monthly principal payments of $1,250, and bears interest at an annual rate of 5%. The Note along with interest has been paid in full.
On July 21, 2010, the Company borrowed a total of $23,846 with $20,000 from Platinum and $3,846 from Longview. These promissory notes were pursuant to the terms of the Senior Secured Promissory Note. Both the notes bear interest at the rate of 8% per annum and are due and payable on January 1, 2011.
On October 20, 2010, the Company borrowed a total of $20,000 with $16,923 from Platinum and $3,077 from Longview. These promissory notes were pursuant to the terms of the Senior Secured Promissory Note. Both the notes bear interest at the rate of 8% per annum and are due and payable on January 1, 2011.
On November 12, 2010, the Company borrowed a total of $60,000 with $51,000 from Platinum and $9,000 from Longview. These promissory notes were pursuant to the terms of the Senior Secured Promissory Note. Both the notes bear interest at the rate of 8% per annum and are due and payable on January 1, 2011.
During 2010, the Company issued 26,000,000 shares of common stock to Alpha Capital Anstalt (“Alpha”) in payment of $130,000 of coverted Longview Special Finance debt obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement and accompanying assignment, these shares were issued to Alpha using a conversion price of $0.005 per common share.
During 2010, the Company issued 38,761,600 shares of common stock to Platinum in payment of $193,808 of interest expense obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a conversion price of $0.005 per common share.
On November 30, 2009 the Company entered into $225,000 10% Subordinated Secured Convertible Promissory Agreement (the “10% Note”) with Cape One Finance LP, an accredited investor. The 10% Convertible Note has fifteen month term, bears interest at 10% per annum payable quarterly and is secured by certain assets of the Company pursuant to a security agreement entered into on November 30, 2009. The proceeds from the 10% Note were restricted for general working capital purposes and totaled $197,000.
During the year ended December 31, 2010 and 2009, we made capital lease payments of $0 and $62,536, respectively.
Results of Statement of Operations
For the years ended December 31, 2010 and 2009
Revenue and Gross Profit
During the twelve months ended December 31, 2010 and 2009, the Company recorded $311,915 and $81,045, respectively in revenue for medical checklist boards, samples, products and funded development. $201,556 of the total increase in revenue of $230,870 since 2009 resulted from the sales of medical checklist boards and other items generated through the acquisition of Combotexs in April 2010. Gross margin realized in 2010 was 43% compared to 69% in 2009. The Company expects that it may experience significant variations in gross margins as it continues to market and develop new products and applications in the future.
Operating Expenses
Total research and development expenses increased by $22,848 to $369,978 in the year ended year ended December 31, 2010. This increase is attributable to the impact of the forfeiture of unvested stock options for employees terminated in the first quarter of 2009 which resulted in a credit of $28,538 for 2009. No such event took place in 2010. The Company spent $39,278 less on patent maintenance filings in 2010 than 2009 due to cash flow constraints, while recording an additional $51,667 in obligations related to the Navy license which were later forgiven during the renegotiation of the license terms. The rent and utilities expense for the Emerson Street laboratory decreased by $21,919 in 2010 as a result of a reduction in the monthly rent coupled with a concerted effort to reduce unnecessary utility costs.
Management continues to actively assess the Company's operating structure for the purpose of controlling expenses across all categories of the business. Such evaluations will continue with the intent to invest in research and development programs and product development in 2011 as our cash position and liquidity allows. No assurance can be given that future investment or debt financing will develop thereby resulting in improved cash inflow or liquidity for the Company.
Total general and administrative expense for the year ended December 31, 2010 was $648,523 as compared to $245,504 for the year ended December 31, 2009. During 2009, the Company received $253,000 for QETC Facilities, Operations and Training tax rebates from the State of New York relating to the 2008 operating period. The Company recorded these tax rebates as a reduction to general and administrative expenses upon receipt. No QETC rebate was received in 2010. No QETC rebate for 2009 was received during 2010 as the 2009 return was still being audited. On March 28, 2011, the Company was notified that the 2009 QETC audit was complete and that a rebate check for $60,073 would be issued in April 2011. All such amounts are recorded as a reduction in general and administrative expenses in the period they are received. Salaries and benefits costs increased in 2010 with the acquisition of Combotexs in April 2010 and with the recording of the valuation of the warrants granted to the Company’s CEO ($83,700). In 2009, the Company recognized a $45,512 gain related to the expiration or cancellation of options for employees who resigned in the first quarter of 2009. No gain or additional expense was incurred in 2010 for stock options. Consulting services decreased by $63,281 in 2010 as a result of a reduction in the need for administrative support.
Management continues to actively assess the Company's operating structure for the purpose of controlling expenses across all categories of the business. We expect that spending for general and administrative expenses will continue to be controlled in 2011, although investments in marketing and sales will be a priority if the Company’s cash and liquidity position improves. No assurance can be given that future investment or debt financing will develop thereby resulting in improved cash inflow or liquidity for the Company.
Interest and Other Income (expense)
Other income for the year ended December 31, 2010 was $341,894 as compared to other expense of $970,226 for the year ended December 31, 2009. Other income was primarily derived from the $816,401 gain on the forgiveness of debt as a result of the settlement of various accounts payable that were outstanding for amounts less than the liability that had been recorded on at the time the expense was incurred. Other expense in 2009 consisted primarily of interest expense and other debt related financing and amortization expenses considered components of interest expense for financial reporting.
Interest expense includes the amortization of the debt discount, the interest on the senior and subordinated debt obligations and the amortization of related financing costs.
Interest was earned on cash balances held at certain financial institutions during 2010 and 2009. The decrease in interest income earned in 2010 reflects the decline in cash on-hand during the current year.
In June 2008, the FASB finalized ASC 815, formerly Emerging Issues Task Force 07-05, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,” which was adopted by the Company effective January 1, 2009. The impact of the adoption of this accounting guidance as of January 1, 2009 was a decrease in Additional Paid in Capital of $501,018 and an increase in Accumulated Deficit of $71,761. During the twelve months ended December 31, 2010 and 2009, the Company recognized $7,936 and $500,779 respectively in net gains relating to the changes in fair market value for these derivative liabilities.
Creditor Concessions
During the year December 31, 2010, the Company entered into various agreements with certain vendors to settle accounts payable that were outstanding for amounts less than the liability that was recorded in the accompanying balance sheet. As a result of agreements completed, liabilities of $816,850 were satisfied for revised payment terms of $551, resulting in a gain on forgiveness of debt of $816,401. These vendor concessions have been treated as gains in the period that the underlying agreements were reached.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during 2010 or 2009.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
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.
Business Combinations
During 2010, the Company adopted the accounting guidance for business combinations and non-controlling interests. The guidance on business combinations requires the Company to account for business combinations at fair value. The fair value of the consideration paid, including the fair value of contingent consideration and the non-controlling interest, is determined at the date of acquisition. Assets acquired and liabilities assumed are also recorded at their fair values at the date of acquisition. The excess of the consideration paid over the estimated fair values of net assets acquired is recorded as goodwill. Goodwill is not amortized, but alternatively, tested annually for impairment. If the carrying value of the reporting unit exceeds the fair value, an impairment of goodwill would be recorded. If actual consideration paid under contingent consideration arrangements varies from liabilities recorded at the date initial estimates are made, differences will be reflected in the statement of operations. Under certain circumstances, when contingent consideration related to contingent equity instruments is considered to be treated as a liability rather than equity, the fair value of the liability will be evaluated at each reporting date with changes in fair value being reported in the statement of operations. This is the case when the contingent consideration will be settled in a variable number of shares and the variability is based on something other than the value of the Company’s shares, the contingent consideration has been classified as a liability. The application of business combination and impairment accounting requires the use of significant estimates and assumptions. All acquisition costs related to a business combination are expensed as incurred.
Revenue Recognition
The Company has earned nominal operating revenue since inception (December 22, 2004). This revenue was generated from funded development and the delivery of Pleximer, sample products specifically formulated for customer applications and error prevention safety checklist boards and as such has been reported as operating revenue for financial reporting purposes. The Company earns and recognizes such revenue to the extent such development activities are completed or when the shipment of the products has occurred and when no further performance obligation exists.
Deferred Taxes
Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. ASC 740 requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company evaluates the realizability of its net deferred tax assets on an annual basis and any additional valuation allowances are provided or released, as necessary. Since the Company has had cumulative losses in recent years, the accounting guidance suggests that we should not look to future earnings to support the realizability of the net deferred tax asset.
As of the years ended December 31, 2010 and 2009, the Company has recorded a valuation allowance to reduce its gross deferred tax assets to zero in accordance with ASC 740. In addition, as of December 31, 2009 the Company has recorded a deferred tax liability of $11,805, which consists of the tax effect of the difference in the basis between GAAP and tax purposes for the beneficial conversion feature in connection with the Notes entered into during 2007 with the offset recorded through Additional Paid in Capital as an offset to the beneficial conversion feature. This deferred tax liability was decreased with a corresponding increase to Additional Paid in Capital as the beneficial conversion feature was amortized over the term of the Notes and is $0 as of December 31, 2010.
The Company believes that the accounting estimates related to deferred tax valuation allowances are “critical accounting estimates” because: (1) the need for valuation allowance is highly susceptible to change from period to period due to changes in deferred tax asset and deferred tax liability balances, (2) the need for valuation allowance is susceptible to actual operating results and (3) changes in the tax valuation allowance can have a material impact on the tax provisions/benefit in the consolidated statements of operations and on deferred income taxes in the consolidated balance sheets.
Share-based compensation
Compensation expense related to stock-based payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determines the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.
The Company’s policy for equity instruments issued to consultants and vendors in exchange for goods and services as follows: The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which the commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is based on the fair value of the services or the award, whichever is more readily determinable and is recognized over the term of the consulting agreement.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to December 2010 and considering company specific factors including the changes in forward estimated revenues and market factors. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities in the Company’s capital structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Item 8.
Item 8.
Financial Statements
Our consolidated financial statements, together with the reports thereon by our independent registered public accounting firms, begin on page of this Form 10-K.
Item 9A
Item 9A
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining effective disclosure controls and procedures. As of December 31, 2010, our Chief Executive Officer participated in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (“SEC”) reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure. In light of the discussion of material weaknesses set forth below, this officer has concluded that our disclosure controls and procedures were not effective as of December 31, 2010. To the best of his knowledge, our Chief Executive Officer believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America.
Management’s Annual Report on Internal Control Over Financial Reporting
A company’s internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) is a process designed by, or under the supervision of, a public company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our Chief Executive Officer has assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, this officer used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our Chief Executive Officer’s assessment of our internal control over financial reporting described above, this officer has identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2010:
The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with segregation of duties were ineffective. During the fourth quarter of 2008 and the first half of 2009 the Company experienced resignations in the positions of controller, Chief Financial Officer, and Chief Executive Officer. Due primarily to limited resources and the stage of growth, the Company failed to maintain appropriate controls over the selection, identification and application of GAAP related to complex accounting transaction that we have encountered, which also require detailed financial reporting. Further, nearly all aspects of our December 31, 2009 and December 31, 2010 financial reporting processes, including but not limited to access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements were performed by outside consultants without adequate oversight and review by a second individual. This creates certain incompatible duties and a lack of review over the financial reporting process that would likely fail to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. As a result of these circumstances, the Company determined that the controls over the preparation, review and monitoring of the financial statements were ineffective to provide reasonable assurance that the financial records and related disclosures complied with accounting principles generally accepted in the United States. These factors resulted in the identification of adjustments to our December 31, 2009 and December 31, 2010 consolidated financial statements and related disclosures during the audit conducted by our independent registered public accounting firm.
As a result of resignations during the first quarter of 2009, throughout the majority of 2010 the Company had only one member on its Board of Directors. This Board member is also the Company’s Chief Executive Officer and President and reports directly to the Company’s debt holders. The Chief Executive Officer was the only administrative employee of the company and his responsibilities during 2010 included all financial, treasury, asset, debt and equity functions. Additionally, the Company does not have an independent audit committee since the resignation of the Audit Committee Chairman in December 2008. In November 2010, there were three independent members of the board of directors elected. These board members reviewed and approved the 2010 10-K, however, they were not active in the day to day operations of the company.
As a result of the material weaknesses described above, our management concluded that as of December 31, 2010, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control-Integrated Framework issued by the COSO.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual report.
Plan for Remediation of Material Weaknesses
In response to the identified material weaknesses, management plans to continually monitor the overall control environment and to remedy the identified material weakness by consulting with third party accounting firms with the appropriate level of expertise to determine the proper application of GAAP for complex and non-routine transactions where applicable and when resources allow.
Notwithstanding the material weaknesses discussed above, the Company believes that the financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.
Changes in Internal Control over Financial Reporting
There were no changes made to our internal controls over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) during 2010 that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.
PART III
Item 10.
Item 10.
Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
Our directors and executive officers are:
* All Board members are elected to serve until the Company’s next meeting of shareholders.
John P. Ryan Mr. Ryan is currently the Chief Executive Officer of Senetek PLC and has been in that position since March 10, 2010. Mr Ryan has been President of Fontana Capital Corporation, a closely held consulting company for the last ten years as well as an Officer and/or Director of a number of public companies including High Plains Uranium, Inc., U.S. Silver Corporation, and Gold Crest Mines, Inc. He is a graduate of the University of Idaho with an engineering degree in mining and he also holds a law degree from Boston College.
Howard Crosby Mr. Crosby is currently the President of Senetek PLC and has held that position since March 10, 2010. Mr. Crosby has been the President of Crosby Enterprises, Inc., a closely held family investment company, for more than twenty years. He is also an officer and a director of a number of public companies including High Plains Uranium, Inc., White Mountain Titanium Corporation, and Cadence Resources Corporation.
Alexander Ruckdäschel Mr. Ruckdäschel is a venture capitalist who serves on the board of directors of several small cap companies. Mr. Ruckdäschel is a co-founder of Blue Rock-AG, a Swiss-based investment manager. From 2002 to 2006 he was a Fund Advisor at DAC-FONDS, a Euorpean Investment company specializing in clean tech and small-cap equities worldwide. Since 2003, Mr. Ruckdäschel has served as an investment advisor to Nanostart AG. Founded in 2003, Nanostart quickly became the leading European venture investment firm in the area of nanotechnology. Prior to 2003, Mr. Ruckdäschel was a research analyst with Dunmore Management, a global hedge fund, and Thieme Associates, an investment advisor.
James Wemett On February 19, 2009 Mr. Wemett became our President and the sole member of our Board of directors when Platinum Long Term Growth IV, LLC, (the “Series C Holder”), the sole holder of the Series C Convertible Preferred Stock, of NaturalNano, Inc., a Nevada corporation (the “Registrant”), elected and appointed Mr. Wemett as the Series C Director to the Registrant’s Board of Directors. The election was made pursuant to Section 7 of the Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock of the Registrant. Mr. Wemett will serve at the discretion of the Series C Holder, until his successor is duly appointed and qualified. Mr. Wemett is an experienced entrepreneur and consultant, and has been involved in the formation and growth of numerous private and public companies. From July 2007 until November 2008, Mr. Wemett was a member of the Board of Directors of the Registrant. In 1975 Mr. Wemett started ROC Communications, Inc., a retail distributor of electronics products, which was sold in 2001. Mr. Wemett has been a Director of Technology Innovations, LLC, since its inception in 1999, and has served on the board of OncoVista LLC, (OVIT) a publicly traded oncology company, since June 2007. Mr. Wemett has been an active fundraiser for Camp Good Days, a non-profit summer camp for children with cancer.
The Board and Committees of the Board
The Company does not currently have an Audit Committee, Compensation Committee or a Nominating committee and has not established specific procedures for selecting candidates for director. However, in the past directors were nominated by a majority vote of the Board. There is also no established procedure for shareholder communications with members of the Board or the Board as a whole. However, shareholders requests for communication are referred by the president of the Company for a response.
Code of Ethics
The Company has adopted a Code of Ethics for the Senior Executive Officer that is applicable to our principal executive officer and can be viewed on our website www.naturalnano.com .
Limitation on Liability and Indemnification of Directors and Officers
Our articles of incorporation provide that no director or officer shall have any liability to the Company if he or she acted in good faith and with the same degree of care and skill as a prudent person in similar circumstances.
Our articles of incorporation and bylaws provide that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices. However, nothing in our articles of incorporation or bylaws protects or indemnifies a director, officer, employee or agent against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. To the extent that a director has been successful in defense of any proceeding, the Nevada Revised Business Corporations Act provides that he or she shall be indemnified against reasonable expenses incurred in connection with the proceeding.
Compliance with Section 16(a) of the Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers and directors and persons who own more than ten percent of our common stock to file reports of ownership and changes in ownership with the SEC. Such executive officers, directors and greater than ten percent stockholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file. There were no Section 16(a) required filings during the fiscal year ended December 31, 2010.
Item 11.
Item 11.
Executive Compensation
Summary Compensation Table
The table set forth below summarizes the compensation earned by our named executive officers in 2010 and 2009.
(a) The amounts in the column “Option Awards” reflect the dollar amount recognized for financial statement reporting purposes in accordance with ASC 718, for option awards granted pursuant to, and outside of, the NaturalNano Incentive Compensation Plans.
Stock Options
On September 23, 2005, the Board of Directors adopted the NaturalNano, Inc. 2005 Stock Incentive Plan (the “2005 Plan.”) The 2005 Plan provides for incentive and non-qualified stock options to employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The 2005 Plan is administered by the Board of Directors and authorizes the grant of 14,000,000 shares. The Board of Directors determines the employees and consultants who participate under the Plan, the terms and conditions of options, the option price, the vesting schedule of options and other terms and conditions of the options granted pursuant thereto.
On October 29, 2007, the Board of Directors adopted the NaturalNano, Inc. Amended and Restated 2007 Stock Incentive Plan (the “2007 Plan.”) The 2007 Plan provides for incentive and non-qualified stock options to employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The 2007 Plan is administered by the Board of Directors and authorizes the grant of 17,000,000 shares. The Board of Directors determines the employees and consultants who participate under the Plan, the terms and conditions of options, the option price, the vesting schedule of options and other terms and conditions of the options granted pursuant thereto.
On September 23, 2008, the stockholders of the Company approved the NaturalNano, Inc. 2008 Incentive Stock Plan (the “2008 Plan”) pursuant to a written consent of the then majority stockholder. This action was taken by the Company without a stockholders meeting pursuant to the written consent of the holder of a majority of the voting power of the Company on September 23, 2008. The 2008 Plan provides for incentive and non-qualified stock options to employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The 2008 Plan is administered by the Board of Directors and authorizes the grant of 800 million shares of the Company’s common stock.
On October 14, 2009, the Company established the 2009 Incentive Stock Plan (the “2009 Plan”) without a vote from the stockholders of the Company. The 2009 Plan provides for the grant of incentive and non-qualified stock options to employees, the grant of non-qualified options to selected consultants and to directors and advisory board members. The 2009 Plan is administered by the Board of Directors and authorizes the grant of 20 million shares of the Company’s common stock.
On May 15, 2010, Mr. Jim Wemett, the Company’s CEO, was awarded 12 million warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.02 per warrant share. The warrants expire May 15, 2015 and contain a cashless exercise provision. The fair value of the warrant on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $83,700. An expected volatility assumption of 150% has been used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 3.2% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on March 7, 2010 was $0.008 per share. The expiration date used in the valuation model aligns with the warrant life of five years. The dividend yield was assumed to be zero.
The plans also provide for the granting of performance-based and restricted stock awards.
In addition to options granted under the plans described above, the Company has from time to time made option grants outside of the incentive stock plans described above. These options were granted outside the plan primarily because their exercise price was less than the market price of our common stock on the date of grant and the plan does not permit the grant of options at below-market prices.
Outstanding Equity Awards at December 31, 2010
The following tables summarize information concerning outstanding equity awards held by the named executive officers at December 31, 2010.
Certain columnar information required by Item 402(p)(2) of Regulation SK has been omitted for categories where there was no compensation awarded to, or paid to, the named director during the fiscal year ended December 31, 2010.
Employment Agreements
The Company has no formal written or oral employment agreements with the current President, James Wemett. Mr. Wemett joined the Company in the February 2009 and has agreed to provide services to the Company under an informal employment agreement.
Prior to their resignations in the first quarter of 2009, the Company had employment agreements with Cathy A. Fleischer, President and Chief Technology Officer, and Kent A. Tapper, Chief Financial Officer, Secretary and Treasurer. Both of these Employment Agreements contained the terms covering such matters as vacation time and reimbursement of expenses.
Compensation of the Board
One of our Directors is also the President of the Company and was paid an annual fee of $10,000 for services provided in 2010. The three most recent members elected to our board in November will earn compensation beginning in 2011. The three independent directors will each receive 1,000,000 shares of restricted common stock for joining the board and then earn 1,000,000 shares of restricted common stock each, vesting 250,000 at the end of each quarter of 2011 (March 31, June 30, September 30 and December 31), for serving as a board member. All directors are reimbursed for their reasonable expenses incurred in attending all board meetings.
The following table shows compensation earned for the fiscal year ended December 31, 2010 for our directors who are not also named executive officers:
DIRECTOR COMPENSATION (1)
(1) Certain columnar information required by Item 402(f)(2) of Regulation S-K has been omitted for categories where there was no compensation awarded to, or paid to, the named directors during the fiscal year ended December 31, 2010.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information as of April 12, 2011 with respect to beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our directors and executive officers and by all of the directors and executive officers as a group. Unless otherwise indicated, the address of each of the persons below is c/o NaturalNano, Inc., 11 Schoen Place, Sixth Floor, Pittsford, New York 14534. Unless otherwise indicated in the footnotes, shares are owned of record and beneficially by the person.
For purposes of the following table, a person is deemed to be the beneficial owner of any shares of common stock (a) over which the person has or shares, directly or indirectly, voting or investment power, or (b) of which the person has a right to acquire beneficial ownership at any time within 60 days after April 12, 2011. “Voting power” is the power to vote or direct the voting of shares and “investment power” includes the power to dispose or direct the disposition of shares.
1)
Except as set forth below, the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them.
2)
Applicable percentage of ownership is based on 238,616,477 shares outstanding on April 12, 2011 together with applicable options for such stockholder. Shares subject to options currently exercisable or exercisable within 60 days are included in the number of shares beneficially owned and are deemed outstanding for purposes of computing the percentage ownership of the person holding such options, but are not deemed outstanding for computing the percentage of any other stockholder.
3)
Includes (i) currently exercisable options to purchase 50,000 shares of common stock at $0.24 per share (ii) 518,700 shares held by Mr. Wemett’s wife, of which shares Mr. Wemett disclaims beneficial ownership (iii) 12,000,000 warrants to purchase shares of common stock at $0.02 per share and (iv) currently exerciseable options to purchase 2,500,000 shares of common stock at $0.01 per share.
4)
Includes currently exercisable options to purchase 1,000,000 shares of common stock at $0.05 per share held by Technology Innovations, LLC (“TI”).
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Platinum Partners Long Term Growth IV and Longview Special Financing, Inc. and Platinum Advisors LLC
March 7, 2007 Loan and Security Agreement and Related Warrants
On March 7, 2007, we entered into a Loan and Security Agreement (the “Purchase Agreement”) for $3,347,500 (the “Initial Notes”) consisting of $3,250,000 8% senior secured convertible notes and a note for $97,500 as partial consideration of due diligence fees with Platinum Partners Long Term Growth IV (“Platinum”), Longview Special Financing, Inc. (“Longview”) and Platinum Advisors LLC (the “Agent”). The shares underlying these notes represented an aggregate of 15,215,910 common shares issuable upon the conversion of the principal amount of the notes at the original fixed conversion price of $0.22 per share at the time of the agreement.
During 2010, the Company issued 26,000,000 shares of common stock to Alpha Capital Anstalt (“Alpha”) in payment of $130,000 of coverted Longview Special Finance debt obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement and accompanying assignment, these shares were issued to Alpha using a conversion price of $0.005 per common share.
During 2010, the Company issued 38,761,600 shares of common stock to Platinum in payment of $193,808 of interest expense obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a conversion price of $0.005 per common share.
On March 7, 2007, the Company issued a series of warrants, to Platinum, Longview and Platinum Advisors, for the purchase of an aggregate of 25,106,254 shares of our common stock at any time on or before March 7, 2011. The first series of warrants (the “Series A Warrants”) covers the purchase of an aggregate of 11,411,933 shares of the Company’s common stock at an exercise price of $0.22 per share. The second series of warrants (the “Series B Warrants”) covers the purchase of an additional aggregate of 12,553,127 shares of the Company’s common stock at an exercise price of $0.33 per share. The third series of warrants (the Series C Warrants”) covers the purchase of 1,141,194 shares of the Company’s common stock with an exercise price of $0.22 per share.
2008 Promissory Notes
On September 29, 2008, the Company entered into a $475,000 Loan and Security Agreement, by and among Platinum Advisors LLC, as agent for the investors. Pursuant to this Loan Agreement, on October 31, 2008, the Company made and delivered to Platinum and to Longview (collectively, the “Lenders”) an 8% Senior Secured Promissory Note Due January 31, 2010. The Notes are convertible into NNAN common stock, with a conversion price of $0.005 that will bear interest at the rate of 8% per annum, with interest payable monthly, in arrears, in freely traded stock or in cash at the election of NNAN. 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 Notes are secured on a pari-passu basis with the Company’s existing indebtedness to the Lenders (the “Existing Debt”) and (i) senior to all other current and future indebtedness of the Company, (ii) secured by all of the assets of the Company and each of its subsidiaries and (iii) unconditionally guaranteed by all subsidiaries of the Company.
The Loan and Security Agreement and the related underlying notes issued in accordance with the March 7, 2007 agreement had the original conversion price of $.022 (as cited in the March 7, 2007 agreement) adjusted to a conversion price of $0.005. This conversion price was triggered as a result of the notes issued on September 29, 2008 thereby 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. The warrants issued in connection with the March 7, 2007 Loan and Security Agreement were adjusted under the anti-dilution provisions of the agreement, resulting in a new exercise price of $.005 per share. On September 29, 2008, the Lenders also agreed to cancel warrants to purchase 1,218,950,060 shares of common stock at $.005 per share in exchange for 5,000,000 shares of preferred stock.
2009 Promissory Notes
During 2009, the Company entered into various 8% and 16% Senior Secured Promissory Notes aggregating $181,376 and $74,750, respectively with Platinum and Longview. The 2009 Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2009 Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was due and payable in full on June 30, 2009 (the maturity date of the notes.) The 2009 Promissory Notes bear interest, in arrears, at a rate of 8% or 16% per annum payable in cash on June 30, 2009. In the event of a default (as defined in the agreement), interest will be charged at 16% during the period of the default and until such default has been cured. The 2009 Promissory Notes contain a provision for a mandatory principal prepayment upon the Company’s receipt of any funds from any source including the receipt of any payment from the State of New York or any other sources. The outstanding principal is payable in full at the earlier of the maturity date (June 30, 2009) or earlier as defined by the mandatory prepayment provision, as described above.
2010 Senior Secured Promissory Notes
During 2010, the Company entered into various Senior Secured Promissory Notes aggregating to $87,923 and $15,923, respectively, with Platinum and Longview (“the 2010 Senior Secured Promissory Notes”). The 2010 Senior Secured Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2010 Senior Secured Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was originally due and payable in full on January 1, 2011 (the maturity date of the notes). The 2010 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% or 16% per annum and were payable in cash on January 1, 2011. These notes have been extended through forbearance agreements and are now due and payable on June 30, 2011.
Waivers of Default and Forbearance Agreements
On April 4, 2011 the Company entered into various Forbearance Agreements with Platinum Long Term Growth IV LLC, Platinum Advisors LLC and Longview Special Finance Inc. (collectively referred to as “the Lenders “ ) relating to the Company’s default on various terms and conditions with borrowing agreements. The lenders agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Notes until June 30, 2011 (for the debt outstanding from Platinum Long Term Growth and Platinum Advisors) and until June 30, 2011 (for the debt outstanding from Longview Special Finance), unless extended by the lenders in their discretion.
On April 4, 2011 the Company entered into a Forbearance Agreement with Platinum Long Term Growth LLC due to the Company’s default on various terms and conditions under the following borrowing agreements:
$2,750,000 8% Senior Secured Notes due March 6, 2009,
$150,000 8% Senior Secured Notes due March 6, 2009,
$59,500 8% Senior Secured Notes due January 31, 2010,
$190,000 8% Senior Secured Promissory Note due January 31, 2010,
$136,375 8% Senior Secured Promissory Note due January 31, 2010,
$5,000 8% Senior Secured Promissory Note due June 30, 2009,
$15,000 8% Senior Secured Promissory Note due June 30, 2009,
$25,000 16% Senior Secured Promissory Note due October 12, 2009,
$20,000 8% Senior Secured Promissory Note due January 1, 2011,
$16,923 8% Senior Secured Promissory Note due January 15, 2011, and
$51,000 8% Senior Secured Promissory Note due January 15, 2011.
On April 4, 2011 the Company entered into a Forbearance Agreement with Platinum Advisors LLC relating to the Company’s default on $97,500 of 8% Senior Secured Notes due March 6, 2009.
On April 5, 2011 the Company entered into a Forbearance Agreement with Longview Special Finance Inc. due to the Company’s default on various terms and conditions under the following borrowing agreements:
$500,000 8% Senior Secured Notes due March 6, 2009,
$20,000 8% Senior Secured Notes due March 6, 2009,
$30,000 Senior Secured Promissory Note due January 31, 2010,
$25,500 Senior Secured Promissory Note due January 31, 2010,
$40,000 16% Senior Secured Promissory Note due November 1, 2009,
$3,846 Senior Secured Promissory Note due January 1, 2011,
$3,077 Senior Secured Promissory Note due January 15, 2011, and
$9,000 Senior Secured Promissory Note due January 15, 2011.
These Forbearance Agreements also extend to the Registration Rights Agreement entered into by the Company on March 7, 2007. Platinum Long Term Growth and Platinum Advisors agreed to forbear from demanding payments defined in these agreements until June 30, 2011. Longview Special Finance agreed to forbear from demanding payments defined in these agreements until June 30, 2011.
Series B and C Preferred Stock
On October 6, 2008, the Company, filed a Certificate of Designation Of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Platinum, evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the Company. On October 6, 2008, the Company also filed a Certificate of Designation Of Rights, Preferences, Designations, Qualifications and Limitations of the Series B Preferred Stock with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Longview, evidencing 750,000 shares of Series B Convertible Preferred Stock of the Company.
On September 3, 2009, Platinum filed an amendment to the Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock with the Secretary of State of the State of Nevada. The amendment removed the Platinum’s right to appoint a director to the Company. Platinum desires to remain a passive investor in the Issuer and does not want to exercise any control over the business of the Company. As of the date of this amendment, the Series C Director was removed and now serves only as a director deemed elected by the holders of the common stock and continues to serve in this capacity until the next annual meeting of stockholders is scheduled. The amendment also added to the Series C Preferred Stock a limitation on the conversion of such Series C Preferred Stock, such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such Series C Preferred Stock shall be limited to the extent necessary to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock.
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). Both the Series B and Series C designations limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to no more than 4.99% of the votes attributable to the total outstanding common shares. Accordingly, the votes attributable to the Series B and Series C Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares on an as converted basis and the votes Series B and Series C Convertible Preferred and the Series C Convertible Preferred, voting together represent approximately 9.98% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis).
In April 2010, Longview elected to convert 20,000 shares of their Series B into 3,200,000 common shares at the previously discussed conversion rate of 160 common shares per each Series B share.
Technology Innovations LLC
Prior to September 26, 2008, TI was our principal stockholder with a beneficial ownership of 56.3% of our outstanding common stock. TI is a New York limited liability corporation established in 1999 to develop intellectual property assets. 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.
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. In connection with the March 7, 2007 issuance of the Notes, 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, TI agreed (a) to sell its common share holdings in the Company at the direction of the Company for the sum of $1,000, and (b) agreed to cancel and forgive all principal, interest, fees and expenses accrued and due pursuant the Line of Credit agreement. On August 1, 2008, $900,000 of principal and $129,600 of accrued and unpaid interest was satisfied in exchange for this warrant. TI and an affiliate of TI, Biomed, Inc., forgave approximately $66,000 of outstanding account payable. On September 26, 2008, the Company paid TI $1,000 and redeemed the 69,303,189 shares of common stock held by TI.
On August 6, 2008 in connection with the satisfaction of the Line of Credit Agreement, 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 would have been computed as $25 million divided by the fully diluted common stock outstanding on the date of exercise. If the 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. Based on the terms of the warrant conversion agreement TI has the right to purchase up to 32,342,884 shares at an exercise price of $0.06 per share as of December 31, 2010 assuming all other potentially dilutive instruments are also exercised. This warrant expired unexercised at 5:30 P.M. on February 11, 2011.
On September 26, 2008, TI and the Company entered into a consulting agreement under which 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. As of December 31, 2009, TI was issued 300,000 shares of common stock valued at $11,700 under the Company’s 2007 Incentive Stock Plan and $54,700 is included as accrued expense related to the obligation to issue the remaining shares. In March of 2010, TI was issued 750,000 shares of common stock valued at $9,000 under the 2009 Incentive Stock Plan. The remaining $45,700 was realized as a gain on forgiveness of debt.
Our current Board member, James Wemett is an equity holder of Technology Innovations, LLC, which previously owned 56.3% of our outstanding common stock.
Director Independence
Although we are not subject to the rules or requirement of the American Stock Exchange (“AMEX”), we have, generally speaking, looked to those rules for guidance as to which members of our Board qualify as “independent directors.” Under these rules, an “independent director” is a person, other than an officer or employee of the Company or any parent or subsidiary, who has been affirmatively determined by our Board of Directors not to have a material relationship with us that would interfere with the exercise of independent judgment. As determined by AMEX, the following persons would not be deemed independent:
a)
a director who is, or during the past three years was, employed by the Company or by any parent or subsidiary of the Company, other than prior employment as an interim Chairman or CEO;
b)
a director who accepts or has an immediate family member who accepts any payments from the Company or any parent or subsidiary of the Company in excess of $100,000 during the current or any of the past three fiscal years, other than compensation for board service, compensation paid to an immediate family member who is a non-executive employee, non-discretionary compensation, certain requirement payments and a limited number of other specified types of payments;
c)
a director who is an immediate family member of an individual who is, or has been in any of the past three years, employed by the Company or any parent or subsidiary of the Company as an executive officer;
d)
a director who is, or has an immediate family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments (other than those arising solely from investments in the Company’s securities or payments under non-discretionary charitable contribution matching programs) that exceed 5% of the organization’s consolidated gross revenues for that year, or $200,000, whichever is more, in any of the most recent three fiscal years;
e)
a director who is, or has an immediate family member who is, employed as an executive officer or any other entity where at any time during the most recent three fiscal years any of the Company’s executive officers serve on that entity’s compensation committee; and Company’s audit at any time during any of the past three years.
Our board has determined that each of Messrs. Crosby, Ruckdäschel and Ryan is an “independent director.”
Item 14.
Item 14.
Principal Accountant Fees and Services
On April 24, 2008, we engaged Freed Maxick & Battaglia, CPAs, PC as our independent registered public accounting firm for the years ending December 31, 2008, 2009 and 2010.
The aggregate fees billed or expected to be billed by for services performed for the years ended December 31, 2010 and 2009 are as follows:
AUDIT FEES
The aggregate audit fees for the years ended December 31, 2010 and 2009 were primarily related to the audit of the Company's annual financial statements and review of those financial statements included in the Company's quarterly reports on Forms 10Q and 10-QSB.
AUDIT RELATED FEES
The Company did not engage Freed Maxick & Battaglia CPAs, PC to provide any other services during the last three fiscal years other than reported above.
TAX FEES
The Company did not engage Freed Maxick & Battaglia CPAs, PC to provide tax compliance, tax advice or tax planning services during the last three fiscal years.
ALL OTHER FEES
The Company did not engage Freed Maxick & Battaglia CPAs, PC to provide any other services during the last three fiscal years other than reported above.
Pre-Approval Policies and Procedures
In accordance with its charter, the Audit Committee is required to approve all audit and non-audit services provided by the independent auditors and shall not engage the independent auditors to perform the specific non-audit services prescribed by law or regulation.
Item 15.
Item 15.
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
(84)
10.30
Warrant purchase agreement dated June 6, 2008 between NaturalNano, Inc. and Ross B. Kenzie
(85)
10.31
8% Senior Secured Promissory Note Due March 6, 2009, in the principal a mount 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)
10.43
Letter Agreement dated April 8, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to the $500,000 8% Senior Secured Promissory Note due March 6, 2009, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, the $30,000 Senior Secured Promissory Note due January 31, 2010, and the $25,500 Senior Secured Promissory Note due January 31, 2010
(80)
10.44
Letter Agreement dated April 8, 2009 with Platinum Advisors LLC regarding their forbearance $97,500 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007 (together the “Notes”)
(81)
10.45
Letter Agreement dated April 8, 2009 with Platinum Long Term Growth IV, LLC, regarding forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and the $14,941.34 8% Senior Secured Promissory Note, issued on or about February 20, 2009 (together the “Notes”)
(82)
10.46
Series C Amendment
(57)
10.47
Letter Agreement dated May 20, 2009 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, the $190,000 Senior Secured Promissory Note due January 31, 2010, the $59,500 Senior Secured Promissory Note due January 31, 2010.
(60)
10.48
Letter Agreement dated May 20, 2009 with Platinum Advisors LLC regarding their forbearance with respect to $97,500 8% Senior Secured Promissory Note due March 6, 2009.
(61)
10.49
Letter Agreement dated May 20, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to $500,000 8% Senior Secured Promissory Note due March 6, 2009, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, the $30,000 Senior Secured Promissory Note due January 31, 2010, the $25,500 Senior Secured Promissory Note due January 31, 2010.
(62)
10.50
8% Senior Secured Promissory Note dated as of April 3, 2009 in the original principal amount of $34,750 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance Inc.
(63)
10.51
8% Senior Secured Promissory Note dated as of April 3, 2009 in the original principal amount of $136,375.98 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.
(64)
10.52
8% Senior Secured Promissory Note dated as of April 17, 2009 in the original principal amount of $5,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.
(58)
10.53
8% Senior Secured Promissory Note dated as of May 12, 2009 in the original principal amount of $15,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.
(59)
10.54
Letter Agreement dated August 31, 2009 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and the $14,941.34 8% Senior Secured Promissory Note, issued on or about February 20, 2009 (together the “Notes")
(65)
10.55
Letter Agreement dated August 31, 2009 with Platinum Advisors LLC regarding their forbearance with respect to $97,500 8% Senior Secured Promissory Note due March 6, 2009 (the “Notes”).
(66)
10.56
Letter Agreement dated August 31, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to the $500,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $30,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, and the $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 (together the "Notes")
(67)
10.57
Letter Agreement dated August 31, 2009 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the 8% Senior Secured Promissory Note, dated as of April 3, 2009, in the original principal amount of $136,375.98, the 8% Senior Secured Promissory Note, dated as of April 17, 2009, in the original principal amount of $5,000, and the 8% Senior Secured Promissory Note, dated as of May 12, 2009, in the original principal amount of $15,000 (collectively the "Notes")
(68)
10.58
Letter Agreement dated August 31, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to the 8% Senior Secured Promissory Note, dated as of April 3, 2009, in the original principal amount of $34,750 (the "Note") from NaturalNano, Inc. and NaturalNano Research, Inc. (jointly and severally, the "Borrower") to Longview Special Financing, Inc. (the "Lender")
(69)
10.59
Letter Agreement dated as of October 2, 2009 with Platinum Long Term Growth IV, LLC (“Platinum”) to pay Platinum the sum $25,000 plus interest of 16% per annum within 10 days of the date of the Agreement.
(70)
10.60
Letter Agreement dated as of October 22, 2009 with Longview Special Finance, Inc. (“Longview”) to pay Longview sum $40,000 plus interest of 16% per annum within 10 days of the date of the Agreement.
(71)
10.61
Letter Agreement dated November 10, 2009 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, the $190,000 Senior Secured Promissory Note due January 31, 2010, the $59,500 Senior Secured Promissory Note due January 31, 2010, the $136,376 8% Senior Secured Promissory Note, $5,000 due June 30, 2009, $15,000 due June 30, 2009, $25,000 due October 12, 2009.
(72)
10.62
Letter Agreement dated November 12, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to $500,000 8% Senior Secured Promissory Note due March 6, 2009, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, the $30,000 Senior Secured Promissory Note due January 31, 2010, the $25,500 Senior Secured Promissory Note due January 31, 2010, the $34,750 8% Senior Secured Promissory Note due June 30, 2009, the $40,000 16% Senior Secured Promissory Note due November 1, 2009.
(73)
10.63
Letter Agreement dated November 17, 2009 with Platinum Advisors LLC regarding their forbearance with respect to the $97,500 8% Senior Secured promissory notes due March 6, 2009.
(74)
10.63
Form of a Subscription Agreement, dated as of November 30, 2009, by and between NaturalNano, Inc. and the Subscribers.
(75)
10.64
Form of a Subordinated Secured Convertible Promissory Note, dated as of November 30, 2009, by and between NaturalNano, Inc. and the Borrower.
(76)
16.65
Form of a Common Stock Purchase Warrant, dated as of November 30, 2009 (Right to Purchase 45,000,000 shares of Common Stock of NaturalNano, Inc)
(77)
10.66
Form of a Security Agreement, dated as of November 30, 2009, by and between NaturalNano, Inc. and the Subscribers.
(78)
10.67
Letter Agreement, dated November 30, 2009 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $70,961.12 (together the “Notes”).
(79)
10.68
Letter Agreement, dated November 30, 2009 with Platinum Advisors LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.
(86)
10.69
Letter Agreement, dated March 20, 2010 with Cape One Financial LP regarding their forbearance with respect to the $225,000 10% Subordinated Secured Promissory Note.
(87)
10.70
Letter Agreement, dated November 30, 2009 with Longview Special Finance Inc. regarding their forbearance with respect to the $500,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $30,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008, the $34,750 16% Senior Secured Promissory Note due January 31, 2010 and the $40,000 16% Senior Secured Promissory Note due November 1, 2009.
(88)
10.71
Consent Agreement, dated November 30, 2009, by and between Platinum Long Term Growth IV, LLC, Platinum Advisors LLC and Longview Special Finance Inc.(“Senior Creditors”) and NaturalNano, Inc. (“Company’) regarding the Senior Creditors’ consent to the issuance by the Company of a subordinate convertible promissory note in the aggregate principal amount of $225,000 (the “Junior Note”), convertible (subject to adjustment) at a conversion price of $.005 per share of Common Stock of the Company.
(89)
10.72
Settlement dated March 17, 2010 from Technology Innovations, LLC in favor of NaturalNano, Inc.
(90)
10.75
Letter Agreement effective as of June 30, 2010 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $70,961.12 (together the “Notes”).
(91)
10.76
Letter Agreement effective as of June 30, 2010 with Pla Platinum Advisors, LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.
(92)
10.77
8% Senior Secured Promissory Note dated as of July 21, 2010 in the original principal amount of $3,846.15 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance Inc.
(93)
10.78
8% Senior Secured Promissory Note dated as of November 12, 2010 in the original principal amount of $20,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC
(94)
10.79
Letter Agreement effective as of August 10, 2010 with Longview Special Finance Inc. regarding their forbearance with respect to the $500,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $30,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008, the $34,750 16% Senior Secured Promissory Note due January 31, 2010 and the $40,000 16% Senior Secured Promissory Note due November 1, 2009.
(95)
10.80
8% Senior Secured Promissory Note dated as of October 20, 2010 in the original principal amount of $16,293 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.
(96)
10.81
8% Senior Secured Promissory Note dated as of October 20, 2010 in the original principal amount of $3,077 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance Inc.
(97)
10.82
Letter Agreement effective as of October 22, 2010 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $70,961.12 (together the “Notes”).
(98)
10.83
Letter Agreement effective as of October 22, 2010 with Platinum Advisors, LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.
(99)
10.85
8% Senior Secured Promissory Note dated as of November 12, 2010 in the original principal amount of $9,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance Inc.
(100)
10.86
8% Senior Secured Promissory Note dated as of November 12, 2010 in the original principal amount of $51,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC
(101)
10.87
Letter Agreement effective as of March 15, 2011 with Cape One Financial regarding their forbearance with respect to the $225,000 10% Senior Secured Convertible Note due March 1, 2011.
**
10.88
Letter Agreement effective as of March 15, 2011 with Platinum Advisors, LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.
**
10.89
Letter Agreement effective as of April 4, 2011 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $158,884 (together the “Notes”).
**
10.90
Letter Agreement effective as of April 5, 2011 with Longview Special Finance Inc. regarding their forbearance with respect to the $500,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $30,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008, the $34,750 16% Senior Secured Promissory Note due January 31, 2010 issued on or about April 3, 2009, the $40,000 16% Senior Secured Promissory Note due November 1, 2009 issued on or about October 22, 2009 and one or more secured bridge notes in the current principal amount of $15,923 (together the “Notes”).
**
14.1
Code of Ethics for CEO and Senior Financial Officer
(44)
21.1
Subsidiaries
(45)
23.1
Consent of Freed Maxick & Battaglia CPAs, PC
**
31.1
Certification of principal executive officer and principal accounting officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
**
32.1
Certification of principal executive officer and principal accounting officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002
**
*
Previously filed+
**
Filed herewith
#
May be deemed a compensatory plan or arrangement
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 Exhibit 4.1 to Current Report on Form 8-K filed October 3, 2008.
2.2
Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed October 3, 2008.
2.3
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed October 3, 2008.
2.4
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed October 3, 2008.
2.5
Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed October 3, 2008.
2.6
Incorporated by reference to Exhibit 10.4 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 Exhibit 10.1 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
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
55.
Incorporated by reference to Exhibit 4.19 to Quarterly Report on Form 10-Q filed November 19, 2008
56.
Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-8 filed October 15, 2009
57.
Incorporated by reference to Exhibit 10.42 to Quarterly Report on Form 10-Q filed September 14, 2009
58.
Incorporated by reference to Exhibit 4.20 to Current Report on Form 8-K filed April 21, 2009
59.
Incorporated by reference to Exhibit 4.20 to Current Report on Form 8-K filed May 13, 2009
60.
Incorporated by reference to Exhibit 10.46 to Quarterly Report on Form 10-Q filed June 19, 2009
61.
Incorporated by reference to Exhibit 10.47 to Quarterly Report on Form 10-Q filed June 19, 2009
62.
Incorporated by reference to Exhibit 10.48 to Quarterly Report on Form 10-Q filed June 19, 2009
63.
Incorporated by reference to Exhibit 10.49 to Quarterly Report on Form 10-Q filed June 19, 2009
64.
Incorporated by reference to Exhibit 10.50 to Quarterly Report on Form 10-Q filed June 19, 2009
65.
Incorporated by reference to Exhibit 10.53 to Quarterly Report on Form 10-Q filed September 15, 2009
66.
Incorporated by reference to Exhibit 10.54 to Quarterly Report on Form 10-Q filed September 15, 2009
67.
Incorporated by reference to Exhibit 10.55 to Quarterly Report on Form 10-Q filed September 15, 2009
68.
Incorporated by reference to Exhibit 10.56 to Quarterly Report on Form 10-Q filed September 15, 2009
69.
Incorporated by reference to Exhibit 10.57 to Quarterly Report on Form 10-Q filed September 15, 2009
70.
Incorporated by reference to Exhibit 4.21 to Current Report on Form 8-K filed October 2, 2009
71.
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed October 23, 2009
72.
Incorporated by reference to Exhibit 10.58 to Quarterly Report on Form 10-Q filed November 24, 2009
73.
Incorporated by reference to Exhibit 10.59 to Quarterly Report on Form 10-Q filed November 24, 2009
74.
Incorporated by reference to Exhibit 10.60 to Quarterly Report on Form 10-Q filed November 24, 2009
75.
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed December 12, 2009
76.
Incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed December 12, 2009
77.
Incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed December 12, 2009
78.
Incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed December 12, 2009
79.
Incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed December 12, 2009
80.
Incorporated by reference to Exhibit 10.43 to Annual Report on Form 10-K filed April 15, 2009
81.
Incorporated by reference to Exhibit 10.44 to Annual Report on From 10-K filed April 15, 2009
82.
Incorporated by reference to Exhibit 10.45 to Annual Report on From 10-K filed April 15, 2009
83.
Incorporated by reference to Exhibit 3.(II) to Quarterly Report on Form 10-Q filed on November 14, 2008
84.
Incorporated by reference to Exhibit 10.29 to Quarterly Report on Form 10-Q filed on November 14, 2008
85.
Incorporated by reference to Exhibit 10.30 to Quarterly Report on Form 10-Q filed on November 14, 2008
86.
Incorporated by reference to Exhibit 10.68 to Annual Report on Form 10-K filed April 9, 2010
87.
Incorporated by reference to Exhibit 10.69 to Annual Report on Form 10-K filed April 9, 2010
88.
Incorporated by reference to Exhibit 10.70 to Annual Report on Form 10-K filed April 9, 2010
89.
Incorporated by reference to Exhibit 10.71 to Annual Report on Form 10-K filed April 9, 2010
90.
Incorporated by reference to Exhibit 10.72 to Quarterly Report on Form 10-Q filed on May 17, 2010
91.
Incorporated by reference to Exhibit 10.75 to Quarterly Report on Form 10-Q filed on August 23, 2010
92.
Incorporated by reference to Exhibit 10.76 to Quarterly Report on Form 10-Q filed on August 23, 2010
93.
Incorporated by reference to Exhibit 10.77 to Quarterly Report on Form 10-Q filed on August 23, 2010
94.
Incorporated by reference to Exhibit 10.78 to Quarterly Report on Form 10-Q filed on August 23, 2010
95.
Incorporated by reference to Exhibit 10.79 to Quarterly Report on Form 10-Q filed on August 23, 2010
96.
Incorporated by reference to Exhibit 10.80 to Current Report on Form 8-K filed October 21, 2010
97.
Incorporated by reference to Exhibit 10.81 to Current Report on Form 8-K filed October 21, 2010
98.
Incorporated by reference to Exhibit 10.82 to Quarterly Report on Form 10-Q filed on November 15, 2010
99.
Incorporated by reference to Exhibit 10.83 to Quarterly Report on Form 10-Q filed on November 15, 2010
100.
Incorporated by reference to Exhibit 10.85 to Quarterly Report on Form 10-Q filed on November 15, 2010
101.
Incorporated by reference to Exhibit 10.86 to Quarterly Report on Form 10-Q filed on November 15, 2010
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, that this report be signed by the Company’s principal executive officer(s), principal financial officer(s), controller or principal account officer and at least a majority of the members of the Company’s Board of Directors, this report has been signed below, by the following persons, on behalf of the registrant, and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John P. Ryan
Director
April 15, 2011
John P. Ryan
Signature
Title
Date
/s/ Howard Crosby
Director
April 15, 2011
Howard Crosby
NATURALNANO, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NaturalNano, Inc
We have audited the accompanying consolidated balance sheets of NaturalNano, Inc. and Subsidiaries (a development stage company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for the years then ended and for the cumulative period from inception (December 22, 2004) through December 31, 2010. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NaturalNano, Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended and for the cumulative period from inception (December 22, 2004) through December 31, 2010 in conformity with United States generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is a development stage enterprise that has suffered recurring losses from operations, has negative working capital, a stockholders’ deficiency, has experienced recurring defaults related to various provisions of debt instruments, and will be dependent on extending the terms of its existing financing and obtaining future financing. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Freed, Maxick & Battaglia, CPAs, PC
Buffalo, New York
April 15, 2011
NaturalNano, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
NaturalNano, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
NaturalNano, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
See notes to consolidated financial statements
NaturalNano, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
NaturalNano, Inc.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of NaturalNano, Inc. (“NaturalNano”), a Nevada corporation, and its wholly owned subsidiary NaturalNano Research, Inc. (“NN Research”), a Delaware corporation. As of April 20, 2010, the consolidated financial statements reflect the acquisition of a 51% controlling interest in Combotexs, LLC, (“Combotexs”) (see Note 2), a privately held New York limited liability company, pursuant to the terms of the Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”). All significant inter-company accounts and transactions have been eliminated in consolidation.
Description of the Business
NaturalNano (the “Company”), located in Pittsford, New York, is a development stage company engaged in the development and commercialization of material science technologies with an emphasis on additives to polymers and other industrial and consumer products by taking advantage of technology 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:
·
Cosmetics, health and beauty products
·
Polymers, plastics and composites
Combotexs is a technology company organized on October 28, 2009 that markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining. Combotexs also has certain marketing and distributions agreements for various household products. NaturalNano will evaluate and develop certain Combotexs products with nano-enhanced materials that may result in future sales growth for both of these business entities.
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 and Going Concern - The accompanying 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 consolidated financial statements, the Company incurred a net loss for 2010 of $541,774 and had negative working capital of $6,053,111 and a stockholders' deficiency of $5,901,652 at December 31, 2010. Since inception the Company’s growth has been funded through combination of convertible debt from private investors and from cash advances from its former parent and majority shareholder Technology Innovations, LLC. 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 Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to extend the terms of its existing obligations, to obtain additional financing and, ultimately, to attain successful operations.
During 2010, the Company entered into a series of senior secured Promissory Notes with Platinum Partners Long Term Growth IV (“Platinum”) and Longview Special Financing, Inc. (“Longview”), the holders of the Company’s primary debt obligations since 2007. The aggregate principal borrowings on the 2010 Promissory Notes from Platinum and Longview during 2010 were $87,923 and $15,923, respectively. The proceeds from the 2010 Promissory Notes were provided for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was due and payable in full on various dates between March 9, 2009 and January 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to June 30, 2011 and waived the application of the 16% default interest rate. Additionally, Platinum and Platinum advisors waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. Longview has granted waivers of default, extended the due dates to June 30, 2011 of all the outstanding principal balances and waived the application of the 16% default interest rate. Additionally, Longview waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services.
The Company’s management and Board of Directors continue to actively assess the Company's operating structure with an objective to reduce ongoing expenses, increase sources of recurring revenue as well as seeking additional debt or equity financing. 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.
On November 30, 2009 the Company entered into $225,000 10% Subordinated Secured Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One Finance LP (“Cape One”), an accredited investor. The 10% Convertible Note has fifteen month term, bears interest at 10% per annum payable quarterly and is secured by certain assets of the Company pursuant to a security agreement entered into on November 30, 2009. The Note is convertible at the investor’s option into common stock at any time prior to maturity at $0.005 per share, subject to certain anti-dilution provisions and provides that the result of such conversion cannot result in the beneficial ownership in excess of 4.99% of the issued and outstanding common stock. Pursuant to the terms of this financing obligation, 45,000,000 common stock purchase warrants were granted at an exercise price of $0.025 per share, these warrants are subject to certain anti-dilution adjustments as described in the agreement. The net proceeds from the 10% Convertible Note amounting to $197,000 after fees and were restricted for general working capital purposes only. Effective March 15, 2011, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to June 30, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.
The Company has experienced recurring losses from operations since its inception and continues to have a working capital deficiency and limited opportunities for additional capital infusion. The Company has experienced recurring defaults relating to the various provisions under its current debt obligations and is expected to require future forbearance and waivers relating to such provisions in the future. These negative financial conditions combined with delays experienced in product introduction and customer acceptance raises substantial doubt of the Company’s ability to continue as a going concern.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash Equivalents
Cash equivalents consist of money market securities with a maturity of three months or less when purchased. Cash equivalents are stated at cost plus accrued interest, which approximates market value.
Concentration of Credit Risk
The Company maintains cash in bank deposit accounts which, at times, exceed federally insured limits. The Company has not experienced any losses on these accounts.
Accounts Receivable
The Company grants credit to substantially all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history of past write-offs, collections, and current credit conditions. As of December 31, 2010 and 2009 no allowance for doubtful accounts was considered necessary.
Inventory
Inventory is stated at the lower of cost or market value. 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 and (ii) cost of goods sold will be charged as customer shipments are made. Overhead costs are applied to inventory during production and included in cost of goods sold.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Leasehold improvements are amortized over the lesser of the assets' useful lives or the remaining term of the lease.
Property and equipment, at cost, consists of the following:
Goodwill
Goodwill is the excess of cost of an acquired entity over the fair value of amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is not amortized, rather it is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company will perform annual assessments beginning in 2011 for the goodwill that resulted from the 2010 business combination.
Accrued Payroll
The Company accrues for earned and unused vacation benefits and deferred compensation costs for amounts contractually owed to employees.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to December 2010 considering company specific factors including the changes in forward estimated revenues and market factors. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities in the Company’s capital structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740 which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized. The Company recognizes penalties and accrued interest related to unrecognized tax benefits in income tax expense.
Tax Rebate from the State of New York
During the year ended December 31, 2009 the Company received a QETC Facilities, Operations, and Training tax rebate (“QETC rebate”) from the State of New York of $253,000 related to the tax year ended December 31, 2008. No QETC rebate for 2009 was received during 2010 as the 2009 return was still being audited. On March 28, 2011, the Company was notified that the 2009 QETC audit was complete and that a rebate check for $60,073 would be issued in April 2011. All such amounts are recorded as a reduction in general and administrative expenses in the period they are received.
Revenue Recognition
The Company has earned nominal operating revenue since inception (December 22, 2004). This revenue was generated from funded development, the delivery of Pleximer and sample products specifically formulated for customer applications and production and delivery of medical boards and as such has been reported as operating revenue for financial reporting purposes. The Company earns and recognizes such revenue to the extent such development activities are completed or when the shipment of the sample products or medical boards has occurred and when no further performance obligation exists.
Research and Development
Research and development costs are expensed in the period the expenditures are incurred. Capital assets acquired in support of research and development are capitalized and depreciated over their estimated useful life and related depreciation expense is included in research and development expense.
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 dilutive convertible preferred stock, convertible 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 December 31, 2010 and December 31, 2009 there were 493,170,475 and 412,528,308 shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. These potentially dilutive shares have been limited by certain debt and equity agreements with Platinum Long Term Growth, Platinum Advisors, Longview Special Finance and Technology Innovations LLC. These agreements provide limitations on the conversion of the dilutive instruments such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such instruments shall be limited to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock.
Share Based Payments
The Company has four incentive stock plans: the 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), and the 2008 Incentive Stock Plan (“the 2008 Plan”) and the 2009 Stock Incentive Plan (“the 2009 Plan”) or (collectively, the “Plans”). The Plans provide for issuance of share-based awards to officers, key employees, non-employee directors, vendors and consultants. The terms and vesting schedules for share-based awards vary by type of grant and the employment status of the grantee. Generally, option awards vest based upon time-based conditions and are granted at exercise prices based on the closing market price of the Company’s stock on the date of grant.
The Company accounts for stock option awards granted under the Plans in accordance with ASC 718. Under ASC 718, compensation expense related to stock based payments are recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.
The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50, Equity-Based Payments to Non-Employees (Formerly FASB Staff Positions Emerging Issues Task Force Issue No. 96-18 and 00-18.) The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts payable and accrued expenses, notes payable, capital leases and derivative liabilities. Fair values for all instruments except for derivative liabilities were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s convertible notes payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair value of these debt instruments in 2010 and 2009 based on rates charges being consistent with current market rates available to the Company.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate such estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Recent Accounting Pronouncements
ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements - This ASU affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements under FASB ASC Topic 820, originally issued as FASB Statement No. 157, Fair Value Measurements. The ASU requires certain new disclosures and clarifies two existing disclosure requirements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect the adoption of this pronouncement to have a material impact on the financial statements.
ASU 2010-28, Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts - a consensus of the FASB Emerging Issues Task Force - This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company does not expect the adoption of this pronouncement to have a material impact on the financial statements.
ASU 2010-29, Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations - a consensus of the FASB Emerging Issues Task Force - This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The ASU also expands the supplemental pro forma disclosures under ASC Topic 805. The amendments are effective prospectively for business combinations for which the acquisition date is on or after December 15, 2010. The Company does not expect the adoption of this pronouncement to have a material impact on the financial statements.
Management does not believe that other recently issued, but not yet effective, accounting standards if currently adopted, would have a material effect on the accompanying financial statements.
2. 51% Acquisition of Combotexs, LLC
On April 20, 2010 the Company acquired a 51% voting equity interest in Combotexs, LLC, (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of an Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”) the sole member of Combotexs. Combotexs is a technology company that has had minimal revenue since its inception in October 2009 and markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining. The acquisition of Combotexs provides the Company with a short term source for revenue and cash flow, as well as the potential of incorporating nanotubes found in halloysite clay into Combotexs products.
In consideration for 51% of Combotexs, NaturalNano issued 20,000,000 shares of the Company’s common stock to WMS and in a contingent consideration arrangement, will grant up to 40,000,000 common stock warrants (based on future sales volumes). The grant of up to 40,000,000 warrants each entitles WMS to purchase one share of the Company’s common stock. The first 20,000,000 warrants become exercisable at a price of $.05 on the first day that of the first month after the gross sales of Combotexs exceeds $1,000,000 in the aggregate, net of taxes. The second 10,000,000 warrants become exercisable at a price of $.08 on the first day of the first month after the gross sales of Combotexs exceed $3,000,000 in the aggregate, net of taxes. The final 10,000,000 warrants become exercisable at a price of $.10 on the first day of the first month after the gross sales of Combotexs exceed $4,000,000 in the aggregate, net of taxes. The warrants have a term of five years from and after the date on which they become exercisable and provide for cashless exercise.
The Company accounted for the acquisition in accordance with ASC 805-10 “Business Combinations”, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value. The Company is required to recognize and measure any related goodwill acquired in the business combination or a gain from a bargain purchase. In order to determine the goodwill or gain from a bargain purchase, the Company is required to determine the fair value of the consideration transferred in a business combination. The fair value is calculated as the sum of the acquisition date fair value of the assets transferred by the Company, the liabilities incurred by the Company and the equity interest issued by the Company.
The goodwill of $80,332 arising from the acquisition consists of future cash flow, utilization of nano technology within their products and future profits. 51% of the goodwill recognized is expected to be deductible for income tax purposes.
The following table summarizes the consideration paid for Combotexs and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.
The fair value of the 20,000,000 common shares issued as part of the consideration paid for Combotexs ($22,690) was determined by using an estimate of the enterprise value allocated to various instruments outstanding consistent with estimates used in valuing the derivative liability.
The fair value of the contingent consideration arrangement is in three parts, first, 20,000,000 warrants ($13,849) become exercisable on the first day of the first month after the gross sales of Combotexs from and after April 20, 2010 exceeds $1,000,000 in the aggregate, net of taxes. These warrants were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 7 years, exercise price of $.05, interest rate of 3.20%, a volatility rate of 150% and a probability factor of 100%. Second, 10,000,000 warrants ($5,632) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 8 years, exercise price of $.08, interest rate of 3.50%, a volatility rate of 150% and a probability factor of 80%. Third, 10,000,000 warrants ($2,626) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 10 years, exercise price of $.10, interest rate of 3.79%, a volatility rate of 150% and a probability factor of 30%.
Because the contingent consideration will be settled in a variable number of shares and the variability is based on something other than the value of the Company’s shares, the contingent consideration has been classified as a liability. The fair value of the liability will be evaluated on each reporting date with changes in fair value reported in the statement of operations. As of December 31, 2010, there have been no material changes in the value of the instruments.
Noncontrolling interest was calculated based on the fact the fair value of consideration transferred equaled 51% ($44,797) of the total Combotexs entity value, therefore 49% or the noncontrolling interest is $43,040.
The fair value of the assets acquired was based on current market values. Inventory, fixed asset, and prepaid expense were purchased within a 90 day period of April 20, 2010. Likewise the accounts payables were expenses incurred within the same 90 day period prior to April 20, 2010.
The results of operations of Combotexs are included in the accompanying financial statements for the period beginning on April 20, 2010. The revenue and earnings of the Company as if Combotexs had been acquired by the Company as of January 1, 2010 are represented in the table below. Combotexs did not generate any revenue or earnings prior to January 1, 2010.
3. 8% SENIOR CONVERTIBLE DEBT AND PROMISSORY NOTES
As of December 31, 2010, the consolidated balance sheet reflects a current liability of $3,853,557 ($3,800,730 at December 31, 2009) for senior secured convertible and non-convertible promissory notes. As further described below, the Company has defaulted on certain provisions of the notes. Platinum Long Term Growth and Platinum Advisors have granted waivers of default on their outstanding principal balance of $3,405,884 through June 30, 2011. Longview Special Finance has granted a waiver of default on their outstanding principal of $447,673 through June 30, 2011.
Debt discount on these notes is amortized using a straight line method and classified as interest during the term of the Notes. The Company has determined the use of the straight-line method for the amortization of the discount is an appropriate effective yield method as required by ASC 470-20, Debt with Conversions and Other Options. 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 twelve months ended December 31, 2010 and 2009, the Company recorded $78,981 and $1,054,814 respectively, in amortization expense relating to the discount on the Notes. This amortization is included as interest expense in the accompanying Statement of Operations.
The Loan and Security Agreement and the related underlying convertible notes issued in accordance with the Initial Note agreement had the original conversion price of $0.22 (as cited in the March 7, 2007 agreement) which was adjusted to a conversion price of $0.005 in accordance with the anti-dilution provisions of this loan and security agreement. This conversion price was triggered as a result of the issuance of the 2008 Promissory Notes (described below) on September 29, 2008 thereby 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.
During 2010 and 2009 respectively, the Company issued 26,000,000 and 15,500,000 shares of common stock upon conversion of $130,000 and $77,500 of outstanding principal by Longview Special Finance. During 2010 and 2009, respectively, the Company issued an aggregate of 38,761,600 and 3,000,000 shares of our common stock to Platinum in satisfaction of $193,808 and $15,000 of interest due on the 8% Senior Secured Notes.
The Initial Notes March 7, 2007
On March 7, 2007, we entered into a Loan and Security Agreement (the “Purchase Agreement”) for $3,347,500 (the “Initial Notes”) consisting of $3,250,000 8% senior secured convertible notes and a note for $97,500 as partial consideration of due diligence fees with Platinum Partners Long Term Growth IV (“Platinum”), Longview Special Financing, Inc. (“Longview”) and Platinum Advisors LLC (the “Agent”). Since inception, $218,500 of the loans have been converted to common stock. The shares underlying these notes represented an aggregate of 15,215,910 common shares issuable upon the conversion of the principal amount of the notes at the original fixed conversion price of $0.22 per share at the time of the agreement.
Loan and Security Agreement with Platinum Partners Long Term Growth IV and Longview Special Financing, Inc.
Pursuant to the Purchase Agreement, the Company issued $3,250,000 face amount of 8% Senior Secured Promissory Notes (the “Notes”) to Platinum and Longview. The holders of the Notes may elect to convert the Notes at any time into shares of the Company’s common stock at an original price of $0.22 per share (the “Conversion Price”). The Notes contain anti-dilution protection that will automatically adjust the Conversion Price should the Company issue equity or equity-linked securities (with certain specified exceptions including option grants made in accordance with the Company’s existing benefit plans) at a price per common share below the Conversion Price to the price at which the Company issued such equity or equity-linked securities. This anti-dilution provision was triggered in the third quarter of 2008 when the Conversion Price was modified to $0.005.
Interest on the outstanding principal amount under the Notes is payable quarterly at a rate of 8% per annum, payable at the Company’s option in cash or in shares of its common stock registered for resale under the Securities Act of 1933 (the “Securities Act”). If the Company elects to make an interest payment in common stock, the number of shares issuable will be based upon 85% of the 20-day trailing volume weighted average price per share as reported on Bloomberg LP (the “VWAP”). Principal on the Notes was originally due and payable on March 7, 2009 and has been extended numerous times to the currently payable date of June 30, 2011 under a forbearance agreement entered into in 2011. If the closing price of the Company’s common stock on the principal market or exchange on which its stock is traded is at least $1.00 for twenty consecutive trading days, it can compel conversion of the Notes at the Conversion Price.
The Company’s obligations under the Notes are secured by first priority security interests in substantially all of the Company’s assets and substantially all of the assets of its wholly-owned subsidiary, NaturalNano Research, Inc. (“NN Research”). In connection with the grant of these security interests, on March 7, 2007, the Company entered into a Pledge Agreement (the “Pledge Agreement”) with the Agent and the other investors, pursuant to which it granted to the investors and the Agent a security interest in all of the outstanding shares of the common stock of NN Research. In connection with the grant of these security interests, on March 7, 2007, NN Research entered into the Patent Security Agreement (the “Patent Security Agreement”) with the Agent and the other investors, pursuant to which NN Research granted to the investors and the Agent a security interest in all of NN Research’s patent interests.
Warrant Agreements with Platinum Partners Long Term Growth IV and Longview Special Financing, Inc.
As further consideration, on March 7, 2007 the Company issued to Platinum and Longview two series of warrants, for the purchase at any time on or before March 7, 2011, of an aggregate of 22,159,092 shares of the Company’s common stock. The first series of warrants (the “Series A Warrants”) covered the purchase of an aggregate of 11,079,546 shares of the Company’s common stock at an exercise price of $0.22 per share. The second series of warrants (the “Series B Warrants”) covered the purchase of an additional aggregate of 11,079,546 shares of the Company’s common stock at an exercise price of $0.33 per share. Each series of Warrants contained anti-dilution protection that automatically adjusted the exercise price of such series of Warrants when the Company issued equity or equity-linked securities at a price per common share below the exercise price of such series to the price at which it issued such equity or equity-linked securities. This anti-dilution provision was triggered in the third quarter of 2008 when the conversion price was modified to $0.005. On September 29, 2008 Platinum and Longview agreed to exchange these warrants for 5,000,000 shares of preferred stock (see Stockholders Equity Note).
The fair value of the warrants on the date of grant was determined using the Black-Scholes model and was measured on March 7, 2007 at $3,767,046. The Company recorded a discount on such Notes in the amount of $3,347,500 for the fair value of these warrants, limited by the aggregate proceeds received. This discount is being amortized on a straight line basis over the term of the Notes and is included in interest expense in the accompanying Statement of Operations. The Black-Scholes valuation model was used to derive the fair value of the related warrants on the date of grant. An expected volatility assumption of 112% has been based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 4.5% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on March 7, 2007 was $0.23 per share. The expiration date used in the valuation model aligns with the warrant life of four years. The dividend yield was assumed to be zero.
Due Diligence Fees and Related Agreements with Platinum Advisors, LLC (the “Agent”)
On March 7, 2007, as consideration for due diligence services in connection with the Purchase Agreement, the Company paid to the Agent a cash fee of $97,500 and issued to that firm (i) a Note (identical in form to the Notes issued to the other investors) in the principal amount of $97,500, (ii) Series A Warrants for the purchase of 332,387 shares of the Company’s common stock at $0.22 per share, (iii) Series B Warrants for the purchase of 1,473,581 shares of the Company’s common stock at $0.33 per share, and (iv) a warrant (the “Series C Warrant”) for the purchase at any time on or before March 7, 2011 of 1,141,194 shares of the Company’s common stock at an exercise price of $0.22 per share. Each series of Warrants contained anti-dilution protection that automatically adjusted the exercise price of such series of Warrants when the Company issued equity or equity-linked securities at a price per common share below the exercise price of such series to the price at which it issued such equity or equity-linked securities. This anti-dilution provision was triggered in the third quarter of 2008 and the conversion price was modified to $0.005 and the number of warrants was modified to be 162,093,910. As of December 31, 2010 and 2009, there were 162,093,910 of these warrant rights, held by Platinum Advisors, LLC, to purchase shares of common stock at $0.005 per share.
The Platinum Advisors Note provides a limitation on the conversion of such note, such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such note shall be limited to the extent necessary to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock.
Registration Rights Agreement
On March 7, 2007, the Company entered into a Registration Rights Agreement with the Agent and the other investors, pursuant to which the Company agreed to prepare and file within 60 days of the March 7, 2007 agreement, a registration statement for resale under the Securities Act of 1933, the common stock issuable upon the exercise of the Warrants, in payment of interest on, or upon conversion of, the Notes. The Company further agreed to use its best efforts to cause the Registration Statement to be declared effective 120 days following the March 7, 2007 agreement date, or within 150 days if the Company receives a comment letter from the SEC, and to maintain such Registration Statement for the two year period following this date. This agreement allows for liquidated damages based on a daily amount of 0.0333% of the principal amount of the notes relating to the common stock issuable upon conversion of the Notes included in the Registration Statement.
The Company recorded a total of $146,028 in such liquidated damages as of December 17, 2007, the date the registration statement was declared effective. As of December 31, 2007, $63,539 of this obligation was paid in cash and $82,489 was recorded as an accrued liability. The lender has the option to settle the liquidated damages in common stock valued at the average price for the five days prior to the end of a payment period. At December 31, 2010 and 2009 the outstanding balance for this obligation was $82,489.
As of the December of 2010, the registration statement had not been updated with the requisite SEC filings and as such, the Company was in default of this provision of the Registration Rights Agreement. The lenders have provided the Company a forbearance agreement related to this default through June 30, 2011.
September 29, 2008 Promissory Notes
On September 29, 2008, the Company entered into a Loan and Security Agreement (the “2008 Promissory Notes”), by and among Platinum and Longview allowing for borrowing of up to $2,500,000. During the year ended December 31, 2008, the Company received an aggregate of $475,000 and in turn issued 8% senior secured promissory notes originally due January 31, 2010 to the Lenders and extended multiple times to the current date of June 30, 2011 during the first quarter of 2011. This agreement provided for additional advances, subject to performance milestones being achieved by the Company. These milestones were not achieved and as a result this agreement was terminated.
The 2008 Promissory Notes are convertible into common stock of the Company, with a conversion price of $0.005 per share. 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 FASB ASC 470-20, Debt with Conversions and Other Options to $475,000, the face value of the New Notes. The beneficial conversion feature was recorded as equity and as a discount to the New Notes. This discount is being amortized on a straight line basis over the term of the notes.
During 2010, the note terms were extended such that all unpaid interest and principal were due and payable at maturity on January 1, 2011. Platinum Long Term Growth and Platinum Advisors have granted waivers of default on their outstanding principal balance of through June 30, 2011. Longview Special Finance has granted a waiver of default on their outstanding principal of through June 30, 2011.
The 2008 Promissory 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.
As of December 31, 2010 and 2009, the total common shares underlying the Initial and 2008 Notes represent an aggregate of 720,800,000 and 746,800,000, respectively, common shares issuable upon the conversion of the principal amount of these Notes at the fixed conversion price of $0.005 per share.
2009 Senior Secured Promissory Notes
During 2009, the Company entered into various Senior Secured Promissory Notes aggregating to $181,376 and $74,750, respectively, with Platinum and Longview (“the 2009 Senior Secured Promissory Notes”). The 2009 Senior Secured Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2009 Senior Secured Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was originally due and payable in full on June 30, 2009 (the maturity date of the notes). These notes have been extended numerous times through forbearance agreements and are now due and payable on June 30, 2011. The 2009 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% or 16% per annum. In the event of a default (as defined in the agreement), interest will be charged at 16% during the period of the default and until such default has been cured. The Company repaid $110,415 on these borrowings in the third quarter of 2009 upon the receipt of $253,000 from the QETC Facilities, Operations, and Training rebate (“the QETC rebate”) from the State of New York related to the 2008 tax year as required in the debt agreement. The due date on the remaining balance has been extended multiple times through forbearance agreements and is now due on June 30, 2011.
2010 Senior Secured Promissory Notes
During 2010, the Company entered into various Senior Secured Promissory Notes aggregating to $87,923 and $15,923, respectively, with Platinum and Longview (“the 2010 Senior Secured Promissory Notes”). The 2010 Senior Secured Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes (see Note 2) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2010 Senior Secured Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest was originally due and payable in full on January 1, 2011 (the maturity date of the notes). The 2010 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% or 16% per annum and were payable in cash on January 1, 2011. These notes have been extended through forbearance agreements and are now due and payable on June 30, 2011.
4. 10% SUBORDINATED SECURED CONVERTIBLE NOTE
10% Convertible Notes
On December 4, 2009, the Company received net proceeds of $197,500 pursuant to the terms of a subscription agreement dated as of November 30, 2009 with Cape One an accredited investor. Pursuant to the terms of the Subscription Agreement the Company issued (i) a 10% Subordinated Secured Convertible Promissory Note (“the 10% Convertible Note”) in the principal amount of $225,000 and (ii) a five-year common stock purchase warrant to purchase 45,000,000 shares, subject to certain anti-dilution provisions in the agreement of the Company’s common stock, par value $0.001 per share at an exercise price of $0.025 per share.
The 10% Convertible Note has a 15-month term, bears interest at 10% per annum and is secured by certain assets of the Company pursuant to a security agreement, dated November 30, 2009. The 10% Convertible Note is convertible into Common Stock at any time prior to maturity (provided that such conversion does not result in the holder and its affiliates beneficially owning in excess of 4.99% (9.99% upon 61 days’ prior written notice) of the issued and outstanding Common Stock at $0.005 per share (the “Conversion Price”), subject to adjustment upon the occurrence of certain anti-dilution events. Interest under the Note is due quarterly in cash or if registered, in the Company’s common stock at a 20% discount in accordance with a formula set forth in the 10% Note. The 10% Note and security interest is subordinate to certain outstanding senior indebtedness of the Company held by Platinum Long Term Growth IV, LLC, Platinum Advisors LLC and Longview Special Finance Inc. (“Senior Lenders”). Upon the occurrence of Events of Default as set forth in the Note, the principal and interest due under the Note may be accelerated and the interest rate payable may be increased to 18%. During the first quarter of 2011, a forbearance agreement was entered into between Cape One and the Company which altered the due date from March 1, 2011 to June 30, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.
Warrant Agreement and Debt Discount
As further consideration, the Company issued to Cape One 45 million warrants for the purchase of the Company’s common stock any time prior to December 4, 2012 at an exercise price of $0.025 per share. The Warrant provides for cashless exercise and contains full ratchet and other anti-dilution provisions. The Warrant is convertible by the Investor into Common Stock at any time during the term of the Warrant (provided that such exercise does not result in the holder and its affiliates beneficially owning in excess of 4.99% (9.99% upon 61 days’ prior written notice) of the issued and outstanding Common Stock.
The warrant and conversion terms related to the transaction were considered to be derivatives as a result of the anti-dilution provisions. The fair value of the Cape One derivatives was determined by estimating the total enterprise value of the Company based upon trending the firm value from December 2006 to December 2010 and considering company specific factors thereafter including the changes in forward estimated revenues and market factors. An option pricing model was then used to allocate $12,603 to the Cape One derivatives, recorded as a note discount.
Debt discount on these notes is amortized using a straight line method and classified as interest during the term of the Notes through the period ending March 4, 2011. The Company has determined the use of the straight-line method for the amortization of the discount is an appropriate effective yield method as required by generally accepted accounting principles as the principal of the note is due in full at maturity, the interest is not compounding and therefore this method appropriately matches the interest expense to the cash flow of the note. During the years ended December 31, 2010 and 2009, the Company recorded $10,804 and $0 respectively, in amortization expense relating to the discount on the Notes. This amortization is included as interest expense in the accompanying statement of operations.
10% Convertible Note Covenants and Other Agreements
The proceeds from the 10% Convertible Note, after taking into account expenses related to the Offering including a $20,000 commitment fee paid to the Investor and $7,500 paid to the Investor’s counsel was $197,000. The proceeds from the 10% Convertible Note were restricted for general working capital purposes.
The Subscription Agreement provides for mandatory redemption in certain circumstances: (i) The Company is prohibited from issuing Conversion Shares or Warrant Shares, (ii) redeemed securities junior to the Note, or (iii) if an Event of Default as defined in the Note and Subscription Agreement has occurred which is not cured in 7 days. In addition, upon a Change of Control (as defined in the Subscription Agreement), the Company may be required to pay the Investor an amount equal to the principal outstanding amount under the Note multiplied by 125%, plus unpaid interest.
As of December 31, 2010, the Company was not in compliance with certain debt covenants including limitations on the use of proceeds. On March 15, 2011 the Company received a waiver from the Lenders indicating that the Lender will not demand payment of principal, default interest and liquidated damages as a result of non-compliance with any existing covenant violations through June 30, 2011. As consideration for forbearance, the lender will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.
The Conversion Shares and Warrant Shares granted in connection with the 10% Convertible Note have piggyback registration rights as described in the Subscription Agreement. Except for certain excepted issuances, if during the term of the Note, the Company consummates a certain new equity or financing transaction, the Investor has the right to exchange the Note for securities issued in such new transaction. The Investor is entitled to liquidated damages of $100 per business day for each $10,000 of principal under the Note for Conversion Shares or purchase price of Warrant Shares or the Mandatory Redemption Amount that is not timely paid or delivered or for Unlegended Shares (as defined in the Subscription Agreement) not timely delivered. In addition, the Company may be required to redeem the Conversion Shares at a price per share equal to the greater of 120% or the Unlegened Redemption Amount for failure to deliver Unlegended Shares for 30 days in any 360 day period. The issuances of the Note and Warrant were made pursuant to a private placement under Section 4(2) of the Securities Act of 1933, as amended (the “Act”), and/or Rule 506 of Regulation D promulgated under the Act, pursuant to the terms of the Subscription Agreement.
Senior Secured Notes Forbearance Agreements received from Senior Lenders in connection with the 10% Notes
Pursuant to forbearance agreements, dated November 30, 2009 with each of its current secured senior lenders, each such Senior Lender agreed to forbear from exercising its rights and remedies under the Senior Debt and related loan documents until June 30, 2011, unless earlier terminated in accordance with the Forbearance Agreements. During the forbearance period, the Company agrees, among other things, not to make any payment or concession to other lenders without the consent of the Senior Lenders. The Senior Lenders have also agreed, pursuant to a consent agreement with the Company, dated November 30, 2009 (the “Consent Agreement”), to permit the Company to issue the Note, as junior debt.
5. AGREEMENTS WITH TECHNOLOGY INNOVATIONS, LLC
Prior to September 26, 2008, 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. 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.
Redemption of TI common stock and grant of warrant in exchange for TI debt
On August 1, 2008, in connection with, and as a condition to the 2008 Promissory Notes provided by Platinum and Longview (described in Note 3), Technology Innovations, LLC (“TI”) agreed (a) to sell its common share holdings in the Company at the direction of the Company for the sum of $1,000, and (b) 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”). On September 26, 2008, the Company paid TI $1,000 and redeemed the 69,303,189 shares of common stock held by TI.
Also on August 1, 2008 the $900,000 principal outstanding to 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. The Company recorded a total of $42,016 of interest expense related to this note during 2008. Additionally, TI, and an affiliate of TI, Biomed, Inc. forgave approximately $66,000 of outstanding current account payable.
On August 6, 2008 and in connection with 2008 Promissory Notes provided by Platinum and Longview, the Company issued TI a warrant to purchase up to 4.99% of the Company’s common stock. Under the warrant agreement 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 would have been computed as $25 million divided by the fully diluted common stock outstanding on the date of exercise. If the 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. These warrants expired unexercised on February 11, 2011.
On September 26, 2008, TI and the Company entered into a consulting agreement under which 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, or 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. On September 26, 2008, TI was issued 300,000 shares of common stock valued at $11,700 under the Company’s 2007 Incentive Stock Plan and $54,700 is included as an accrued expense as of December 31, 2009 related to the obligation to issue remaining shares. On March 17, 2010, TI was issued 750,000 shares of common stock valued at $9,000 under the 2009 Incentive Stock Plan to settle all outstanding obligations. The remaining $45,700 was recognized as a gain on forgiven debt during the year ended December 31, 2010.
6 . DERIVATIVE LIABILITIES
For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending of the firm value from December 2006 to December 2010 considering company specific factors including the changes in forward estimated revenues and market factors. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative and other securities in the Company’s capital structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
The Company’s derivative liabilities as of December 31, 2010 are as follows:
·
The debt conversion feature embedded in the 8% Senior Secured Convertible notes entered into in March 2007 which contains anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price (described in Note 3.)
·
The 162,093,910 warrants granted to Platinum Advisors LLC at an exercise price of $0.005 per share in 2007 as consideration for due diligence services in connection with the 8% Senior Secured Convertible debt entered into in 2007 (described in Note 3.) These warrants contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price.
·
The warrant granted to Technology Innovations LLC (“TI”) in August 2008, (described in Note 5. above.) The warrant was determined not to have a fixed settlement provision as the exercise price will fluctuate based upon the number of shares fully diluted outstanding. This warrant expired unexercised on February 11, 2011.
·
The debt conversion feature and the 45 million warrants exercisable at $0.0025 per share granted in connection with the 10% Subordinated Secured Convertible debt entered into in November 2009. These agreements contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below the exercise price (described in Note 4.)
The fair value of the derivative liabilities as of December 31, 2010 and 2009 are as follows:
During the twelve months ended December 31, 2010 and 2009, the Company recognized $7,936 and $500,779 respectively in net gains relating to the changes in fair market value for these derivative liabilities.
Fair Value Valuation Hierarchy Measurement
ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.
·
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
·
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
·
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The derivative liabilities are measured at fair value using certain estimated factors such as volatility and probability and are classified within Level 3 of the valuation hierarchy. The following table provides a roll forward of the liabilities carried at fair value measured using significant unobservable inputs (level 3).
7. PATENT LICENSE AGREEMENTS
License with naval Research Laboratory
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 was 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 allows the Company to 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 License Agreement provides for a license issue fee of $500,000 to be paid in installments as follows: $50,000 in October 2007, $50,000 in August 2008, $100,000 in October 2008, $100,000 in December 2008, $100,000 in June 2009, and $100,000 in December 2009. As of December 31, 2009, the Company had paid $100,000 under this agreement and was delinquent in $400,000 of payments defined under the agreement.
The License Agreement provides for royalties of 5% of net sales, subject to certain minimum royalty payments. The agreement requires minimum annual royalty payments, paid in advance, in October of the year prior to the royalty period. Minimum annual royalties defined under this agreement are as follows: $76,667 for amounts payable in 2007, $144,333 for amounts payable in 2008, $212,000 for amounts payable in 2009, $279,667 for amounts payable in 2010, $347,333 for amounts payable in 2012 and $30,000 per year thereafter as defined. As of December 31, 2009, the Company had paid $76,667 under this agreement and accrued $356,333 as the 2008 and 2009 minimum royalty payments had not been paid to the NRL. Royalty payments resulting from this agreement are expensed as incurred.
On November 13, 2009, the Company and the NRL agreed to an amended commercialization plan to: (a) include cosmetics as an exclusive field of use and (b) to extend the term of the license to May 15, 2010 in order to continue the discussions among the parties to develop and execute an amended license agreement.
On November 5, 2010, the Company and the NRL agreed to an amended commercialization plan to include cosmetics as a non-exclusive field of use and to extend the term to renewable yearly as long as we are shipping commercial products and paying their licensee fees. The Company plans to use these licenses to continue their commercial development plan related to their Halloysite products. The license requires the first commercial sale of the royalty-bearing product by October 1, 2012. Upon issuance of the license, a non-refundable fee of $5,000 was paid. The royalties due on the net sales for each royalty-bearing product are 5%. The royalty fees are accrued each year between January 1 and December 31 and they are required to be paid in full each May 1st of the following year. In addition, an annual license fee of $5,000 is due on October 31, 2012 and each year thereafter that the license is in effect. The license remains in effect but can be terminated by the Navy if the first commercial sale does not occur by October 1, 2012, along with several other provisions. In conjunction with this new license agreement, the NRL forgave all unpaid royalties (totaling $756,333) due which are reflected in our financial statements. In November, 2010, the accrued liability was reversed net of approximately $53,000 which had been recorded as prepaid expense and the net total relieved of $704,083 was recorded as a gain on forgiveness of debt.
8. INCOME TAXES
Following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:
The provision (benefit) for income taxes consists of the following:
Individual components of deferred taxes are as follows:
As of December 31, 2010 and 2009, the Company has a deferred income tax liability of $0 and $11,805, respectively which consists of the tax effect of the difference in the basis between GAAP and tax purposes for the beneficial conversion feature in connection with the various financing obligations entered into during 2010 and 2009 with the offset recorded through Additional Paid in Capital attributable 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. Once the valuation allowance is eliminated in its entirety, the tax effect of the gross beneficial conversion feature of $475,000 will reverse into contributed capital.
The Company has approximately $14,055,000 in federal net operating loss carry-forwards (“NOL’s”) available to reduce future taxable income. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future to utilize the NOL’s before they expire, the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero. A portion of the net operating loss carry-forward, amounting to approximately $840,000, relates to tax deductions for stock awards, options and warrants exercised subsequent to the implementation of ASC 718, which are not included in the determination of the deferred tax asset above and will be recognized in accordance with ASC 718 when realized for tax purposes. These carry-forwards expire at various dates from 2025 through 2030.
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 controlling ownership by Technology Innovations, as well as with the changes in ownership that occurred during 2010, 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 tax attributes incurred prior to the ownership change may be limited based on the Company's value. A full valuation allowance has been established for the gross deferred tax asset related to the net operating losses and other corporate tax attributes available. Accordingly, any limitation resulting from Section 382 application is not expected to have a material effect on the balance sheet or statements of operations of the Company.
The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
At December 31, 2010 and 2009, the total unrecognized tax benefits of $760,000 and $1,033,000, respectively, have been netted against the related deferred tax assets.
The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2010 and 2009 the Company recognized no interest and penalties.
The Company files income tax returns in the U.S. federal jurisdiction and New York State. The tax years 2007-2010 generally remain open to examination by major taxing jurisdictions to which the Company is subject.
9. STOCKHOLDERS EQUITY
As of December 31, 2010 the Company was authorized to issue up to 5,000,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Preferred Stock Issuances
On September 29, 2008 the Platinum and Longview agreed to exchange detachable warrants (see Note 2) 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 and 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). Both the Series B and Series C designations limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to no more than 4.99% of the votes attributable to the total outstanding common shares. Accordingly, the votes attributable to the Series B and Series C Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares on an as converted basis and the votes Series B and Series C Convertible Preferred and the Series C Convertible Preferred, voting together represent approximately 9.98% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis). The Series B Convertible Preferred Stock has an aggregate liquidation value of $1,500 and the Series C Convertible Preferred Stock has an aggregate liquidation value of $8,500.
On September 3, 2009, Platinum filed an amendment to the Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock with the Secretary of State of the State of Nevada. The amendment removed the Platinum’s right to appoint a director to the Company. Platinum desires to remain a passive investor in the Issuer and does not want to exercise any control over the business of the Company. As of the date of this amendment, the Series C Director was removed and now serves only as a director deemed elected by the holders of the common stock and continues to serve in this capacity until the next annual meeting of stockholders is scheduled. The amendment also added to the Series C Preferred Stock a limitation on the conversion of such Series C Preferred Stock, such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such Series C Preferred Stock shall be limited to the extent necessary to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock.
In April 2010, Longview elected to convert 20,000 shares of their Series B into 3,200,000 common shares at the previously discussed conversion rate of 160 common shares per each Series B share.
Common Stock Issuances
During the twelve months ended December 31, 2010, the Company issued an aggregate of 26,000,000 and 38,761,600 shares, respectively of its common stock in satisfaction of principal and interest obligations to its senior debt holders (see Note 2). During the twelve months ended December 31, 2009, the Company issued an aggregate of 15,500,000 and 3,000,000 shares, respectively of its common stock in satisfaction of principal and interest obligations to its senior debt holders. During the twelve months ended December 31, 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.
In April 2010, the Company issued 20,000,000 shares of the Company’s common stock to Worldwide Medical Solutions (“WMS”) pursuant to the agreement for the 51% acquisition of Combotexs (refer to Note 3).
In April 2010, the Company issued 3,200,000 Longview Special Financing, Inc. (“Longview”) upon their request to convert 20,000 shares of Preferred Series B stock into common shares.
During the twelve months ended December 31, 2010, the Company issued an aggregate of 19,772,832 shares of common stock to 13 individuals or entities in connection with professional consulting, lab and research services, facility rent, marketing support and website assistance provided in 2010 to the Company in an aggregate amount of $52,000.
During the fourth quarter of 2009, we issued an aggregate of 8,875,000 shares of common stock to 23 individuals or entities in connection with professional consulting, lab and research services, facility rent, and website assistance provided in 2009 to the Company in an aggregate amount of $89,445. On December 29, 2009, we issued an aggregate of 4,500,000 shares of common stock valued at $81,000 to Spencer Clarke LLC, in connection with investment banking services.
In 2008, the Company issued 4,275,715 shares of its common stock to Sichenzia Ross Friedman and Ference in settlement of a liability accrued for general legal services received by the Company between October 2007 and December 2008. The aggregate shares of common stock issued and received in 2008 in connection with these services was valued at $175,621 based on the market price of the Company’s common stock when the required performance by the attorney was complete.
In September 2008, the Company issued 300,000 shares of common stock to TI as partial satisfaction of a contractual obligation and the shares were valued at $11,700 (See Note 5). In March 2010, the Company issued 750,000 shares of common stock to TI to satisfy all outstanding obligations and the shares were valued at $9,000.
In March 2008 the Company issued 46,286 shares of its common stock to Everblak, Inc. in settlement of a liability accrued for services to be received by the Company between November 2007 and March 2009. The common stock issued and received in connection with this transaction has been valued at $2,057 based on the market price of the Company’s common stock when the shares were delivered and the required performance by Everblak, Inc. was complete.
On March 26, 2007, we issued 100,000 common shares to F.M. Office Express, Inc. and 60,000 shares to Pittsford Flour Mill, LLC in connection with services performed on our behalf in connection with the relocation and planning for our new office location. The common stock issued in connection with these transactions has been valued at $57,600 based on the market price of the stock when the services were delivered and required performance by the vendor was complete.
On February 1 and 9, 2006 we issued an aggregate of 314,700 shares of our common stock to three entities in settlement of liabilities accrued for services and assets received by the Company during 2005. On February 1 and 9, 2006 we issued an aggregate of: (i) 40,000 shares to High Technology of Rochester, Inc., our previous landlord, in consideration for certain leasehold improvements and rent concessions to our office facilities, (ii) 74,700 shares to Medienimpuls GmbH as payment for consulting services, and (iii) 200,000 shares to Ambit Corporation in connection with the license of certain patented technology in the field of electronic shielding. The 200,000 shares to Ambit Corporation were returned to the Company during the fourth quarter of 2006 in connection with the November 13, 2006 amended license agreement. The value of the common stock issued and received in connection with these transactions has been valued based on the market price of the Company’s common stock on the date of these issuances and receipts.
Warrants Grants
The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of December 31, 2010 and 2009 respectively, there were common stock warrants outstanding to purchase an aggregate 259,534,651 and 207,534,651 shares of common stock, excluding the warrant shares available to TI, pursuant to the warrant grant agreements described below.
On May 15, 2010, Mr. Jim Wemett, the Company’s CEO, was awarded 12 million warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.02 per warrant share. The warrants expire May 15, 2015 and contain a cashless exercise provision. The fair value of the warrant on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $83,700. An expected volatility assumption of 150% has been used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 3.2% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on March 7, 2010 was $0.008 per share. The expiration date used in the valuation model aligns with the warrant life of five years. The dividend yield was assumed to be zero.
On April 20, 2010, the Company acquired a 51% interest in Combotexs, LLC (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of an Equity Purchase Agreement executed with Worldwide Medical Solutions, LLC (“WMS”) the sole member of Combotexs. In consideration for 51% of Combotexs, NaturalNano will grant up to 40,000,000 common stock warrants (based on future sales volumes). The grant of up to 40 million warrants entitles WMS to purchase one share of the Company’s common stock. The first 20,000,000 warrants become exercisable at a price of $0.05 on the first day of the first month after the gross sales of Combotexs exceed $1,000,000 in the aggregate, net of taxes. The second 10,000,000 warrants become exercisable at a price of $0.08 on the first day of the first month after the gross sales of Combotexs exceed $3,000,000 in the aggregate, net of taxes. The final 10,000,000 warrants become exercisable at a price of $0.10 on the first day of the first month after the gross sales of Combotexs exceed $4,000,000 in the aggregate, net of taxes. The warrants have a term of five years from and after the date on which they be come exercisable and provide for cashless exercise.
The fair value of the contingent consideration arrangement is in three parts, first, 20,000,000 warrants ($13,849) become exercisable on the first day of the first month after gross sales of Combotexs from and after April 20, 2010 exceeds $1,000,000 in the aggregate net of taxes. These warrants were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the company utilized key assumptions of an expected term of 7 years, exercise price of $0.05, interest rate of 3.20%, a volatility rate of 150% and a probability factor of 100%. Second, 10,000,000 warrants ($5,632) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 8 years, exercise price of $0.08, interest rate of 3.50%, a volatility rate of 150% and a probability factor of 80%. Third, 10,000,000 warrants ($2,626) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 10 years, exercise prices of $0.10, interest rate of 3.79%, a volatility rate of 150% and a probability factor of 30%.
On December 4, 2009, the Company issued 45 million warrants to Cape One Financial LP in connection with the 10% Notes (described in Note 3) for the purchase of the Company’s common stock any time prior to December 4, 2012 at an exercise price of $0.025 per share. The Warrant provides for cashless exercise and contains full ratchet and other anti-dilution provisions. The Warrant is convertible into common stock at any time during the term of the Warrant (provided that such exercise does not result in the holder and its affiliates beneficially owning in excess of 4.99% (9.99% upon 61 days’ prior written notice) of the issued and outstanding Common Stock.
During 2007 the Company issued $3,347,500 of 8% senior convertible notes and 25,106,254 in detachable warrants (as described below and in Note 3). During the third quarter of 2008, the Company issued the 2008 Promissory Notes for $475,000 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. On September 29, 2008, Platinum and Longview agreed to cancel 1,218,750,060 warrants in exchange for shares of preferred stock, as allowed under the agreement. As of December 31, 2010 and 2009, there were remaining 162,093,910 of these warrant rights, held by Platinum Advisors, LLC, to purchase shares of common stock at $0.005 per share.
In consideration for the cancellation of TI’s debt (see Note 5), 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. Based on the terms of the warrant conversion agreement TI has the right to purchase up to 32,342,884 shares at an exercise price of $0.06 per share as of December 31, 2010 assuming all other potentially dilutive instruments are also exercised. These warrant shares expired unexercised in February 2011.
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 twelve months ended December 31, 2008, $6,490, was recognized as additional interest expense related to this warrant.
On April 23, 2007, the Company granted 240,741warrants to Katan Associates with an exercise price of $0.26 per share in connection with a consulting services agreement. This warrant was fully vested on the date of grant and expires on April 23, 2012.
On December 27, 2006, the Company granted 200,000 warrants to PR Financial Marketing, LLC (“PRM”) with an exercise price of $0.28 per share in connection with a consulting services agreement. This warrant was fully vested on the date of grant and expired unexercised on December 27, 2008.
10. INCENTIVE STOCK PLANS
Under the Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), the 2008 Incentive Stock Plan (the”2008 Plan”) and the 2009 Stock Incentive Plan (the “2009 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 plans also provide for the granting of performance-based and restricted stock awards. The shares of Common Stock underlying the plans are reserved by the Company from its authorized, but not issued Common Stock. Such shares are issued by the Company upon exercise by any option holder pursuant to any grant of such shares. The Plans are authorized to grant awards as follows: the 2005 Plan is authorized to grant up to 14 million share unit awards, the 2007 Plan is authorized to grant up to 17 million share unit awards, and the 2008 Plan is authorized to grant up to 800 million unit share awards. The 2009 Plan is authorized to grant up to 20 million share unit awards.
Employee stock compensation expense was $0 for the twelve months ended December 31, 2010 compared to ($74,050) for the twelve months ended December 31, 2009. The negative compensation in 2009 reflects the impact of forfeitures of unvested options for employees terminated in the first quarter of 2009. No option grants were made in 2010.
A summary of the status of outstanding incentive stock plans is presented below:
(1) 800,000,000 shares of common stock are reserved for preferred share conversion.
As of December 31, 2010, the aggregate intrinsic value of the stock options outstanding and exercisable was $0. No incentive stock option awards were exercised in 2010 or 2009.
During 2006 the Company made certain option grants for an aggregate of 90,000 common stock options outside of the stock incentive plans described above. These grants included 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. At December 31, 2010 there was no intrinsic value of these outstanding options.
The Company uses the Black-Scholes pricing model to value options granted under the Plans. 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. No option grants were made during the twelve month periods ended December 31, 2009 or December 31, 2010.
11. CREDITOR CONCESSIONS
During the years ended December 31, 2010 and December 31, 2009, the Company entered into various agreements with certain vendors to settle accounts payable that were outstanding for amounts less than the liability that was recorded in the accompanying balance sheet. As a result of agreements completed, liabilities of $815,850 and $141,941 respectively were satisfied for revised payment terms of $551 and $55,696 respectively, resulting in a gain on forgiveness of debt of $816,401 and $86,245 respectively. These vendor concessions have been treated as gains in the period that the underlying agreements were reached.
12. COMMITMENTS AND LEASE OBLIGATIONS
Lease obligations
On December 7, 2007, we entered into an agreement to lease approximately 9,200 square feet in Rochester, NY for laboratory space for a period beginning December 17, 2007 and ending February 28, 2011. From the period starting March 1, 2008 until February 28, 2011 the rent shall be $3,300 per month. We have the option to terminate this lease agreement at any time after March 1, 2010 with a 60 day notice. We also have the option of up to six (6) one year renewals of the lease agreement under substantially the same terms except that the rent shall be $3,400 per month during any such renewal period. In August 2010, the Company renegotiated the lease agreement for the period July 2010 through February 2011. The rent for that period decreased to $2,000 per month. In December 2010, the Company renegotiated the first year of the renewal period (March 1, 2011 through February 28, 2012) at a rate of $2,000 per month. Total rent expense for the years ended December 31, 2010 and 2009 was $30,925 and $42,600 respectively.
During the first quarter of 2009, the business office for the Company was relocated to and is currently conducted from office space located at 15 Schoen Place in Pittsford, New York. There is no signed lease agreement and the cost of rent for calendar year 2009 was $3,000. During the third quarter of 2010, the business office for the Company was relocated to and is currently conducted from office space located at 11 Schoen Place in Pittsford, New York. There is no signed lease agreement and the cost of rent for calendar year 2010 was $4,075.
Commitments
As more fully described in Note 6, the Company has entered into patent license agreements with the United States Department of the Navy which obligates it to pay license fees and certain minimum royalty payments until at least October 2012.
Presented below are the minimum future payments under these license and lease agreements.
Legal Proceedings
On March 24, 2009 the Company received a demand notice from an attorney representing a group of certain former employees of the Company, including but not limited to the Company’s former President and Chief Financial Officer, demanding immediate payment of $331,265 for certain deferred compensation, severance and vacation benefits. Each of the former employees cited in the demand notice, as well as other former employees, had executed written agreements during 2008 that allowed the Company to defer certain of these compensation payments. The Company has accrued for earned and unused vacation benefits and deferred payroll costs for amounts electively deferred by these and other former employees as of December 31, 2010. The Company has retained counsel in connection with this demand and continues to evaluate this demand notice and has responded to this demand. No actions or probable settlement discussions between the parties have developed since the filing of this demand. Due to the Company’s current cash and liquidity position discussed above and the current evaluation of the items in the demand notice, the timing of future payment of these outstanding amounts in uncertain. No further communication has been had regarding this notice.
During the third quarter ending September 30, 2010, two former employees, one involved in the March 24, 2009 demand, agreed to forgive the Company’s liability to them of $54,691 related to deferred compensation in exchange for shares of common stock.
13. SEGMENT INFORMATION
In conjunction with the acquisition a 51% voting equity interest in Combotexs, the Company adopted ASC 280 Segment Reporting. The Company's reportable segments are strategic business units that offer different products and services. The Company’s reportable segments are organized, managed and internally reported separately because each business requires different technology and marketing strategies. The Company currently has two operating segments, NaturalNano and Combotexs. A summary of the two segments is as follows:
NaturalNano
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 cosmetics, health and beauty products and polymers, plastics and composites.
Combotexs
Production and marketing of Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining, as well as certain marketing and distributions agreements for various household products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies of the Company. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein. For purposes of determining segment loss, corporate overhead is primarily included in NaturalNano, other than direct expense of Combotexs. The Company only operated in the NaturalNano business during 2009. Approximate information concerning the Company’s operations by reportable segment as of and for the year ended December 31, 2010 is as follows:
Geographic Areas - The Company had no revenue and no long-lived assets in any country other than the United States for any period presented.
Major Customers - During the year ended December 31, 2010, the Company derived 32% of its revenue from one customer, which is included in the NaturalNano operating segment.
14. SUBSEQUENT EVENTS
Grants of Stock and Warrants
Subsequent to December 31, 2010 and prior to the filing of this report, the board of directors voted in favor of the following grants:
·
1,000,000 shares of restricted common stock vested immediately for each of John P. Ryan, Howard Crosby and Alexander Ruckdäschel for becoming board members.
·
1,000,000 shares of restricted common stock vesting 250,000 at the end of each quarter of 2011 (March 31, June 30, September 30 and December 31) for serving as a board member for each of John P. Ryan, Howard Crosby and Alexander Ruckdäschel.
·
15,000,000 warrants to purchase common stock at $0.01/share vested monthly over three years beginning January 1, 2011 for James Wemett.
Common Stock Issued
Subsequent to December 31, 2010 and prior to the filing of this report, the Company issued 27,500,000 common shares as follows:
·
16,000,000 shares to Platinum Long Term Growth IV in payment of interest on the 8% Senior Secured Convertible Notes.
·
7,000,000 shares to Alpha Capital in conversion of principal on the Longview Special Finance, Inc. 8% Senior Secured Convertible Notes.
·
4,500,000 shares for services.
QETC Tax Rebate for fiscal year ended December 31, 2009
The QETC tax rebate for 2009 had been in audit since its filing in September of 2010. The Company was notified in March 2011 that the audit was complete and that the rebate for 2009 would be for $60,073. On March 28, 2011, NaturalNano received the first payment of $43,615 and the remaining $16,458 is expected in April 2011.
8% Senior Secured Promissory Notes
On January 23, 2011, the Company entered into various Senior Secured Promissory Notes aggregating to $35,000 and $15,000, respectively, with Platinum and Longview. On April 15, 2011, the Company entered into various Senior Secured Promissory Notes aggregating to $12,750 and $2,250, respectively, with Platinum and Longview. These 2011 Senior Secured Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes (see Note 3) dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2011 Senior Secured Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders. The outstanding principal and all accrued and unpaid interest is due and payable in full on June 30, 2011 (the maturity date of the notes). The 2011 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% per annum.
Subordinated Secured Convertible Note
On March 31, 2011 the Company and Cape One Financial LP entered into a forbearance agreement which altered the due date of the 10% Senior Secured Convertible Note (see Note 4) from March 1, 2011 to June 30, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.