UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended : June 30, 2013 |
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: | 000-49901 |
NATURALNANO, INC.
(Exact name of registrant as specified in its charter)
Nevada | 87-0646435 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
11 Schoen Place, Pittsford NY | 14534 | |
(Address of principal executive offices) | (Zip Code) |
585-267-4848
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark if the registrant has submitted electronically and posted on its Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
319,909,406 as of August 16, 2013
Table of Contents
PART I—FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements (unaudited) | |||
Consolidated Balance Sheets | 3 | |||
Consolidated Statements of Operations | 4 | |||
Consolidated Statement of Stockholders’ Deficiency | 5 | |||
Consolidated Statements of Cash Flows | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | |||
Note Regarding Forward-Looking Statements | ||||
Item 4. | Controls and Procedures | 18 | ||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 20 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20 | ||
Item 3. | Defaults Upon Senior Securities | 20 | ||
Item 4. | Mine Safety Disclosures | 22 | ||
Item 5. | Other Information | 22 | ||
Item 6. | Exhibits | 23 | ||
SIGNATURES | 24 |
2 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NATURALNANO, INC.
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2013 | 2012 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 8,343 | $ | 6,160 | ||||
Accounts receivable | 18,200 | 5,400 | ||||||
Inventory | 13,255 | 19,480 | ||||||
Prepaid expenses and other current assets | 18,240 | 10,196 | ||||||
Total current assets | 58,038 | 41,236 | ||||||
Total assets | $ | 58,038 | $ | 41,236 | ||||
Liabilities and Stockholders' Deficiency | ||||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Notes payable (See Note 2) | $ | 4,004,565 | $ | 3,893,972 | ||||
Accounts payable | 446,659 | 502,814 | ||||||
Accrued expenses | 95,289 | 96,343 | ||||||
Accrued interest | 571,370 | 444,131 | ||||||
Accrued payroll | 931,124 | 871,610 | ||||||
Deferred revenue | 100,000 | 100,000 | ||||||
Registration rights liability (See Note 2) | 82,489 | 82,489 | ||||||
Derivative liability (see Note 4) | 102,590 | 25,732 | ||||||
Total current liabilities | 6,334,086 | 6,017,091 | ||||||
Total liabilities | 6,334,086 | 6,017,091 | ||||||
Preferred Stock - $.001 par value, 10 million shares authorized | ||||||||
Series B - issued and outstanding 5,000 and 142,500 respectively with an aggregate liquidation preference of $10 and $310, respectively | 404 | 14,111 | ||||||
Series C - issued and outstanding 3,485,244 and 4,049,495 respectively with an aggregate liquidation preference value of $6,970 and $8,099, respectively | 282,051 | 153,648 | ||||||
Commitments and contingencies (See Note 7) | - | - | ||||||
Stockholder’s Deficiency | ||||||||
Common Stock - $.001 par value 294,117,647 authorized and 290,852,766 and 93,200,171 issued and outstanding, respectively | 290,853 | 93,200 | ||||||
Additional paid in capital | 20,926,800 | 21,159,134 | ||||||
Non-controlling interest in subsidiary | 14,264 | 14,264 | ||||||
Accumulated deficit | (27,790,420 | ) | (27,410,212 | ) | ||||
Total stockholders' deficiency | (6,558,503 | ) | (6,143,614 | ) | ||||
Total liabilities and stockholders' deficiency | $ | 58,038 | $ | 41,236 |
See notes to consolidated financial statements
3 |
NATURALNANO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended | For the six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Income: | ||||||||||||||||
Revenue | $ | 117,420 | $ | 17,275 | $ | 123,318 | $ | 48,548 | ||||||||
Cost of goods sold | 23,581 | 1,053 | 24,030 | 3,131 | ||||||||||||
Gross profit | 93,839 | 16,222 | 99,288 | 45,417 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 12,661 | 29,322 | 27,592 | 68,707 | ||||||||||||
General and administrative | 112,990 | 79,613 | 183,266 | 174,888 | ||||||||||||
125,651 | 108,935 | 210,858 | 243,595 | |||||||||||||
(Loss) from operations | (31,812 | ) | (92,713 | ) | (111,570 | ) | (198,178 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense, net | (91,401 | ) | (110,153 | ) | (181,550 | ) | (208,501 | ) | ||||||||
Net loss on derivative liability | (66,854 | ) | - | (76,688 | ) | - | ||||||||||
Net gain (loss) on forgiveness/modification of debt | 19,664 | (235,000 | ) | (10,336 | ) | (310,000 | ) | |||||||||
(138,591 | ) | (345,153 | ) | (268,574 | ) | (518,501 | ) | |||||||||
Net loss from continuing operations | (170,403 | ) | (437,866 | ) | (380,144 | ) | (716,679 | ) | ||||||||
Net income from discontinued operations | 2,022 | 4,441 | 11,115 | 11,020 | ||||||||||||
Loss on write-off of discontinued operation | (11,179 | ) | - | (11,179 | ) | - | ||||||||||
Consolidated net loss attributable to the controlling interest | $ | (179,560 | ) | $ | (433,425 | ) | $ | (380,208 | ) | $ | (705,659 | ) | ||||
Less: Preferred Stock conversion inducement | - | 12,235 | - | 12,235 | ||||||||||||
Consolidated net loss attributable to common shareholders | $ | (179,560 | ) | $ | (445,660 | ) | $ | (380,208 | ) | $ | (717,894 | ) | ||||
Continuing operations loss per common share – basic and diluted | $ | (.00 | ) | $ | (.01 | ) | (.00 | ) | $ | (.02 | ) | |||||
Discontinued operations income (loss) per common share – basic and diluted | $ | (.00 | ) | $ | (.00 | ) | $ | (.00 | ) | $ | (.00 | ) | ||||
Weighted average shares outstanding | 264,395,920 | 40,969,987 | 203,953,811 | 35,357,306 |
See notes to consolidated financial statements
4 |
NATURALNANO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
(unaudited)
Additional | Non-controlling | |||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | Interest | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | in Subsidiary | (Deficiency) | |||||||||||||||||||||||||
Balance at December 31, 2012 | 93,200,171 | $ | 93,200 | - | $ | - | $ | 21,159,134 | $ | (27,410,212 | ) | $ | 14,264 | $ | (6,143,614 | ) | ||||||||||||||||
Series B preferred converted to Common Stock and change in value | 22,000,000 | 22,000 | (8,294 | ) | 13,706 | |||||||||||||||||||||||||||
Series C preferred converted to Common Stock and change in value | 90,280,160 | 90,280 | (218,685 | ) | (128,405 | ) | ||||||||||||||||||||||||||
Warrant issued for services | 5,814 | 5,814 | ||||||||||||||||||||||||||||||
Shares issued on debt conversion | 21,500,000 | 21,500 | (1,587 | ) | 19,913 | |||||||||||||||||||||||||||
Shares issued for interest payment | 63,872,435 | 63,873 | (9,582 | ) | 54,291 | |||||||||||||||||||||||||||
Net loss | (380,208 | ) | (380,208 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2013 | 290,852,766 | $ | 290,853 | - | $ | - | $ | 20,926,800 | $ | (27,790,420 | ) | $ | 14,264 | $ | (6,558,503 | ) |
See notes to consolidated financial statements
5 |
NATURALNANO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: | ||||||||
Net loss attributable to controlling interest | $ | (380,208 | ) | $ | (705,659 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | - | 34,053 | ||||||
Fair value adjustment of derivative liabilities | 76,858 | - | ||||||
Issuance of stock for services | - | 10,800 | ||||||
Inducement to convert interest | - | 24,221 | ||||||
Issuance of warrants for services | 5,814 | 5,813 | ||||||
Loss on forgiveness/modification of debt | 10,336 | 310,000 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | (12,800 | ) | 3,186 | |||||
Decrease (increase) in inventory | 6,225 | (2,403 | ) | |||||
(Increase) in other current assets | (8,044 | ) | (2,511 | ) | ||||
Increase in accounts payable, accrued payroll and accrued expenses | 203,496 | 251,768 | ||||||
Decrease in other liability | - | (3,000 | ) | |||||
Net cash used in operating activities | (98,323 | ) | (73,732 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from senior secured Promissory Notes | 100,506 | 72,000 | ||||||
Net cash provided by financing activities | 100,506 | 72,000 | ||||||
Increase (decrease) in cash and cash equivalents | 2,183 | (1,732 | ) | |||||
Cash at beginning of period | 6,160 | 1,732 | ||||||
Cash at end of period | $ | 8,343 | $ | - | ||||
Schedule of non-cash investing and financing activities: | ||||||||
Common stock issued for Convertible notes | $ | 19,913 | $ | 969,585 | ||||
Common stock issued for accrued interest | $ | 54,291 | $ | 216,943 | ||||
Conversion of preferred shares into common shares | $ | 112,280 | $ | 6,236 |
See notes to consolidated financial statements
6 |
NaturalNano, Inc.
For the three and six months ended June 30, 2013 and 2012
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 are unaudited. However, in the opinion of management of the Company, these financial statements reflect all material adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position and results of operations for such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies. Accordingly, these financial statements do not include all of the information required by U.S. generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
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.
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 as of June 30, 2013 and December 31, 2012 based on rates charged being consistent with current market rates available to the Company. See Note 4 for discussion on the fair value of derivative liabilities.
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 and a 51% controlling interest in Combotexs, LLC, a dormant New York limited liability company. In the second quarter of 2013, the Company filed a Certificate of Dissolution for Combotexs, LLC with the state of New York under section 1003 of the Business Corporation Law in connection with the unanimous written consent of the shareowners of Combotexs. The dissolution was accepted by NYS in the third quarter of 2013. As a result of the dissolution, the non-controlling interest in subsidiary in the stockholders deficiency section of the balance sheet will be eliminated and the Company will recognize any assets and liabilities assumed as a result of the dissolution. 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 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:
· | cosmetics, health and beauty products |
· | polymers, plastics and composites |
During the six months ended June 30, 2013 and 2012, the Company derived 94% and 62%, respectively, of its nanotechnology revenue from one customer.
During the fourth quarter of 2011, the Company entered into a supply agreement with another company, which is 50% owned by NaturalNano’s CEO, to manufacture and sell Error Prevention/Safety Checklist Boards which the related party will then market to the end user. In the second quarter of 2013, the Company made a decision to cease this segment’s operations and ceased production of Error Prevention/Safety checklist Boards (the Medical Board business segment.) This business segment was not generating sufficient income to offset the efforts of production and administrative expenses. The Consolidated Statement of Operations as of June 30, 2013 reflects the results of the Medical Board business as a discontinued operation. As of June 30, 2013, $14,750 of amounts due from the entity which is 50% owned by NaturalNano’s CEO is included in Accounts Receivable on the balance sheet. (See Note 3 “Discontinued Operations”).
7 |
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
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 the six months ended June 30, 2013 of $380,208 and had negative working capital of $6,276,048 and a stockholders’ deficiency of $6,558,503 at June 30, 2013. Since inception the Company’s growth has been funded through a combination of convertible debt from private investors and from cash advances from its former parent and majority 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 obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from the uncertainty.
As of June 30, 2013, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lenders waivers and maturity extensions received from the lenders.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
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. Income tax expense was $0 for the six month periods ending June 30, 2013 and 2012.
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 June 30, 2013 and 2012 there were 5,292,124,009 and 107,820,194 shares, respectively, 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, Platinum Advisors, Merit Consulting, Alpha Capital and Technology Innovations LLC (“TI”). 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. The Company does not have sufficient authorized shares to satisfy conversion of all the potentially dilutive instruments. See Note 9 Subsequent Events for shares of common stock issued subsequent to June 30, 2013.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted, would have a material effect on the accompanying financial statements.
2. NOTES PAYABLE
Notes payable consisted of the following:
Notes Payable | June 30, 2013 | December 31, 2012 | ||||||
Senior Secured Convertible Notes | $ | 3,124,403 | $ | 3,134,415 | ||||
Senior Secured Promissory Notes | 609,062 | 508,557 | ||||||
Subordinated Secured Convertible Note at Face Value | 271,100 | 251,000 | ||||||
Total | $ | 4,004,565 | $ | 3,893,972 |
8 |
Senior Secured Convertible Notes and Senior Secured Promissory Notes
As of June 30, 2013, notes payable include $3,733,465 ($3,642,972 at December 31, 2012) 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 Merit Consulting, LLC (to whom Platinum Advisors has assigned their ownership interest in notes receivable from the Company) have granted waivers of default on their outstanding principal balance of $3,113,549 through September 1, 2013 and November 30, 2013, respectively. Alpha Capital Anstalt (to whom Longview Special Finance has assigned its ownership interest in notes receivable to the Company) has granted a waiver of default on their outstanding principal of $619,916 through November 30, 2013.
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 $3.74 (as cited in the March 7, 2007 agreement) which was adjusted to a conversion price of $0.085 in accordance with the anti-dilution provisions of this loan and security agreement. This conversion price adjustment was triggered as a result of the issuance of the 2008 Promissory Notes 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. As compensation for forbearance from the lenders in 2012, the conversion rate was further adjusted to 75% of the lowest daily volume weighted average price (VWAP) of the Company’s common stock for the 1, 5 or 10 days immediately prior to the conversion.
During the six month period ended June 30, 2013, the Company issued 9,500,000 shares of common stock to Alpha Capital Anstalt (to whom Longview Special Finance has assigned its ownership interest in notes receivable to the Company) upon the conversion of $10,013 of outstanding principal due on the 8% Senior Secured Convertible Notes held by Longview Special Finance. Also during this period the Company issued 29,000,000 shares of common stock to Alpha Capital Anstalt upon the conversion of $24,038 of interest due on the 8% Senior Secured Convertible Notes held by Longview Special Finance.
Also during this period the Company issued 25,872,435 shares of common stock to Merit Consulting upon the conversion of $21,478 of interest due on the 8% Senior Secured Convertible Notes held by Platinum Advisors.
2013 Senior Secured Promissory Notes
During the six month period ended June 30, 2013, the Company entered into various Senior Secured Promissory Notes aggregating to $100,506 with Platinum and Alpha (“the 2013 Senior Secured Promissory Notes”). The 2013 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 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 2013 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 2013 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% per annum and are payable in cash as follows: $21,000 due on June 30, 2013, $30,006 due on July 30, 2013, $47,000 due on September 30, 2013 and $2,500 due October 30, 2013. Past due amounts have been extended through forbearance agreements with the principal and interest due on dates ranging from September 1, 2013 to November 30, 2013.
2012 Forbearance
During the six month period ended June 30, 2012, the Company entered into various forbearance agreements between the Company and Platinum, Platinum Advisors, Merit Consulting, Longview and Alpha (the lenders) which extended the due dates of all outstanding notes and accrued interest. As consideration for these forbearances, the lenders will be paid $50,000 which was added to the principal balance of the Initial Notes and resulted in a loss on modification of debt of $50,000 for the six month period ended June 30, 2012 and is reported in the statement of operations.
Subordinated Secured Convertible Note
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 2,647,059 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 $0.425 per share. The balance of this note as of June 30, 2013 is $271,100, a result of increases as consideration for forbearance and conversions of principal.
The 10% Convertible Note had 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 $0.085 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%. The company has entered into various forbearance agreements between Cape One and the Company which extended the due date of the outstanding principal and interest, which is accruing at the default rate of 18%.
9 |
During six month periods ended June 30, 2013 and 2012, the Company entered into various forbearance agreements which extended the due date of all the outstanding principal and interest balances. As consideration for these forbearances, Cape One will be paid $55,000 which was added to the principal balance of the note and resulted in a loss on modification of debt of $30,000 and $25,000 for the six month periods ended June 30, 2013 and 2012, respectively, as reported in the statement of operations. In consideration for forbearance in 2012, the conversion rate of the note was adjusted from $0.085 to 75% of the lowest VWAP for the 1, 5 or 10-day period immediately prior to the conversion. This note has been extended through forbearance agreements and is now due and payable on August 31, 2013.
During six month period ended June 30, 2013, the Company issued 12,000,000 shares of common stock to Cape One upon the conversion of $9,900 of outstanding principal due on the Subordinated Senior Convertible note. During the six month period ended June 30, 2013, the Company issued 9,000,000 shares of common stock to Cape One in payment of $8,775 of interest expense obligations on the Subordinated Secured Convertible Note.
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 registration statement had not been updated with the requisite SEC filings outlined above and as such, the Company was in default of this provision of the Registration Rights Agreement. 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 June 30, 2013 and December 31, 2012 the outstanding balance for this obligation was $82,489.
3. DISCONTINUED OPERATIONS
On May 10, 2013 the Company ceased all activities associated with the Medical Board business segment (the “Combotexs” business.) The Company assessed this segment and determined that inadequate income had been generated relative to the efforts of production and administrative support. The Statement of Operations for the three and six months ended June 30, 2013 reflects the Medical Board business as a discontinued operation and prior reported periods have been reclassified to reflect this presentation. The results of discontinued operations are as follows:
For the three months ended | For the six months ended | |||||||||||||||
June 30, 2013 | June 30, 2012 | June 30, 2013 | June 30, 2012 | |||||||||||||
Revenues from Medical Board business | $ | 13,000 | $ | 9,625 | $ | 14,750 | $ | 21,875 | ||||||||
Profit from Medical Board business | $ | 2,022 | $ | 4,441 | $ | 11,115 | $ | 11,020 |
In connection with this decision to exit the Medical Board business, the Company filed a Certificate of Dissolution on May 10, 2013 with the state of New York under section 1003 of the Business Corporation Law in connection with the unanimous written consent of the shareowners of Combotexs. As a result of this decision certain unrecovered sample inventory amounts were written off during the second quarter of 2013. The loss on write-off of discontinued operations was $11,179 and is reflected in the Statement of Operations for the three months ended June 30, 2013.
The Nanotechnology business remains as the Company’s only reportable operating segment.
4. DERIVATIVE LIABILITY
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 2012 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. Significant unobservable inputs used in determining the value of the Company’s derivative liability include the trended firm value and volatility. 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.
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The Company’s derivative liabilities as of June 30, 2013 are as follows:
· | The debt conversion feature embedded in the 8% Senior Secured Convertible Notes entered into in March 2007, August 2008, September 2008 and October 2008 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. |
· | The debt conversion feature and the 2,647,059 warrants exercisable at $0.425 per share granted in connection with the 10% Subordinated Secured Convertible Note (for which the rate has been increased to 18%) 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. |
· | The 882,353 warrant shares granted to the CEO of the Company at an exercise price of $0.17 per share on January 2011 which vest over three years, for which the value is not material. |
· | The 28,500,000 warrants granted to the CEO of the Company and to three independent contractors at an exercise price of $0.0014 per share on February 26, 2013 which vested upon grant, for which the value is not material. |
The fair value of the derivatives is as follows:
Derivative Liability | June 30, 2013 | December 31, 2012 | ||||||
8% Notes conversion feature | $ | 85,465 | $ | 24,285 | ||||
10% Notes conversion feature | 17,125 | 1,447 | ||||||
Total | $ | 102,590 | $ | 25,732 |
The increase in the fair value of the derivative liability of $76,688 was recognized as a loss on change in derivative liability in the statement of operations for the six months ended June 30, 2013. The remaining $170 increase was recorded in general and administrative expenses in the statement of operations for the six months ended June 30, 2013 and is associated with the value of warrants issued in February 2013 (see Note 5).
Significant fluctuations in the variables used in calculating the value of the Company’s derivative liabilities could have significant impact on the fair market valuation.
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 liability was determined utilizing Level 3 inputs.
5. STOCKHOLDERS EQUITY
As of June 30, 2013 the Company was authorized to issue up to 294,117,647 shares of common stock and 10,000,000 shares of preferred stock.
Preferred Stock Issuances
On June 10, 2013 the Company obtained the consent of the holders of the majority of the outstanding preferred shares for the creation of a Series D Preferred Stock. The holders of the Series D Preferred Stock are entitled to a 51% vote on all matters submitted to a vote of the shareholders of the Company. There are no other rights or preferences attached to the Series D Preferred Stock. On July 1, 2013, the Company issued 100 shares of the Company’s Series D Preferred Stock to Jim Wemett, the sole officer and a director of the Company, in consideration for services provided to the Company. Such securities were issued under Section 4(2) of the Securities Act of 1933, as amended and Regulation D promulgated by the Securities and Exchange Commission.
On September 29, 2008 Platinum and Longview agreed to exchange detachable warrants to purchase 71,691,180 shares of common stock of the Company for $0.085 per share held by such Investors related to the March 6, 2007 convertible notes payable for 5,000,000 shares of preferred stock.
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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). The conversion rate was reduced to 9.41 as a result of the 2012 reverse split (Note 8), but was subsequently changed back to 160 as part of the consideration related to 2012 forbearance agreements (Note 2). 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 $10 and the Series C Convertible Preferred Stock has an aggregate liquidation value of $6,970.
As a result of the Company not having sufficient authorized shares to satisfy the conversion of all outstanding convertible debt, convertible preferred stock, warrants and options, the Series B and C preferred shares have been moved into temporary equity classification on the balance sheet as of December 31, 2012. The preferred shares are presented at their fair value based on an allocation of the estimated total enterprise value to the preferred shares and other securities in the Company’s capital structure. The valuation methodology used is similar to that used in valuing the Company’s derivative liabilities (Level III inputs, see note 4). Any change in fair value of the preferred shares, which are deemed to be temporary equity, is reflected in additional paid in capital.
During the six months ended June 30, 2013, Alpha elected to convert 137,500 shares of Series B preferred shares owned by Longview into 22,000,000 common shares at the conversion rate of 160 common shares per each Series B share. Longview has assigned its Series B preferred stock ownership to Alpha Capital Anstalt.
During the six months ended June 30, 2013, Platinum elected to convert 564,251 shares of their Series C preferred shares into 90,280,160 common shares at the conversion rate of 160 common shares per each Series C share.
Common Stock Issuances
During the six months ended June 30, 2013, the Company issued an aggregate of 63,872,435 shares in satisfaction of $54,291 of interest obligations to lenders on convertible debt. Also during this period, the Company issued an aggregate of 21,500,000 shares of its common stock in satisfaction of $19,913 of principal obligations to lenders on convertible debt.
During the six months ended June 30, 2012, the Company issued an aggregate of 6,221,156 shares of its common stock in satisfaction of interest obligations of $241,164 and 11,406,881 shares in satisfaction of principal obligations of $969,585 to its senior debt holders. During the six months ended June 30, 2012, the Company issued an aggregate of 1,764,706 shares of common stock to various individuals or entities in connection with professional consulting provided to the Company in an aggregate amount of $10,800.
Warrants Grants
The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of June 30, 2013 and December 31, 2012 there were common stock warrants outstanding to purchase an aggregate 32,735,294 and 4,247,059 shares, respectively, of common stock pursuant to the warrant grant agreements summarized below.
On February 26, 2013 the Company issued warrants to purchase common stock to certain consultants, the Company’s CEO and the Company’s sole board member. These warrants (summarized below) grant the right to purchase one share of common stock at an exercise price of $0.0014 per share. The warrants were fully vested as of the grant date, expire February 26, 2023 and contain a cashless exercise provision. The fair value of the warrants was determined by estimating the total enterprise value of the Company based upon trending the firm value and considering company specific factors thereafter including the changes in forward estimated revenues and market factors.
Warrant grants made during the first quarter of 2013 are as follows:
· | 15,000,000 James Wemett CEO |
· | 7,500,000 Paul LeFrois Consultant |
· | 3,000,000 David Lubin Consultant |
· | 3,000,000 Alexander Ruckdaeschel Board Member |
A summary of the outstanding warrants is presented below:
2013 | ||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average Remaining Life-years | ||||||||||
Outstanding at January 1, 2013 | 4,247,059 | $ | 0.37 | 2.24 | ||||||||
Granted during the year | 28,500,000 | 0.0014 | 9.92 | |||||||||
Cancelled or forfeited | (11,765 | ) | 5.61 | |||||||||
Warrants outstanding at June 30, 2013 | 32,735,294 | $ | 0.05 | 8.77 |
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6. INCENTIVE STOCK PLANS
A summary of the status of the outstanding incentive stock plans is presented below at June 30, 2013:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Life-years | ||||||||||
Outstanding at January 1, 2013 | 723,137 | $ | 3.07 | 3.53 | ||||||||
Granted/Exercises/Cancelled/Forfeited | (14,117 | ) | ||||||||||
Options outstanding at June 30, 2013 | 709,020 | $ | 3.57 | 2.62 | ||||||||
Options exercisable at June 30, 2013 | 709,020 | $ | 3.57 | 2.62 |
All compensation costs for the above options have been previously recognized in operations.
7. COMMITMENTS and CONTINGENCIES
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, 2009. 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 is uncertain. No further communication has been had regarding this notice.
8. REVERSE STOCK SPLIT
On June 14, 2012, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Nevada, to effect a 1-for-17 reverse stock split of its common stock, or the Reverse Stock Split. This action had previously been approved by the Company’s Board of Directors on March 23, 2012. As a result of the Reverse Stock Split, every seventeen shares of the Company’s pre-reverse split common stock were combined and reclassified into one share of its common stock. No fractional shares were issued in connections with the Reverse Stock Split. Stockholders who would have been entitled to receive a fractional share in connection with the Reverse Stock Split received one whole share. The par value and other terms of the common stock were not affected by the Reverse Stock Split.
The Company’s authorized shares immediately prior to the Reverse Stock Split totaled 5,000,000,000. These were adjusted to 294,117,647. The Company’s shares outstanding immediately prior to the Reverse Stock Split totaled 732,073,557. These were adjusted to 43,063,150 shares outstanding as a result of the Reverse Stock Split. The Company’s common stock began trading at its post-Reverse Stock Split price at the beginning of trading on June 14, 2012. Share, per share, and stock option amounts for all periods presented within this quarterly report on Form 10-Q for common stock and additional paid-in-capital were retroactively adjusted to reflect the Reverse Stock Split.
9. SUBSEQUENT EVENTS
Subsequent to June 30, 2013 and prior to the filing of this report, the following items occurred:
Promissory Notes: On July 25, 2013, the Company borrowed $12,000 from Platinum Long Term Growth IV, LLC pursuant to the terms of a Senior Secured Promissory Note. The note bears interest at the rate of 8% per annum and is due and payable on November 30, 2013.
Series C Preferred Stock Conversion to Common Stock: On August 13, 2013, Platinum Long Term Growth IV, LLC elected to convert 181,604 shares of their Series C preferred shares into 29,056,640 common shares at the conversion rate of 160 common shares per each Series C share.
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Combotexs Dissolution: In the second quarter of 2013, the Company filed a Certificate of Dissolution with the state of New York under section 1003 of the Business Corporation Law in connection with the unanimous written consent of the shareowners of Combotexs. The dissolution was accepted by NYS in the third quarter of 2013.
Series D Preferred Stock: On July 1, 2013, the Company issued 100 shares of the Company’s Series D Preferred Stock to Jim Wemett, the sole officer and a director of the Company, in consideration for services provided to the Company. (See Note 5 Preferred Stock Issuances.) Such securities were issued under Section 4(2) of the Securities Act of 1933, as amended and Regulation D promulgated by the Securities and Exchange Commission.
Increase in Authorized Common Stock: On July 1, 2013 the Company received a unanimous written consent in lieu of a meeting from the members of the Board of Directors and a written consent from the Series D stockholder to amend its articles of incorporation to increase the Company’s authorized common shares from 294,117,647 shares to 800,000,000 shares of common stock. As of June 30, 2013 there were 5,292,124,009 shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. The Company does not have sufficient authorized shares to satisfy conversion of all the potentially dilutive instruments.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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
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. 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. During the second quarter of 2013, the Company made a decision to cease its Medical Board operating segment which focused on the design, manufacture and sale of customer designed error prevention/safety checklist boards to a related party which marketed and sold the boards.
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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 Capital Resources
Liquidity and Going Concern
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 the six months ended June 30, 2013 of $380,208 and had negative working capital of $6,276,048 and a stockholders’ deficiency of $6,558,503 at June 30, 2013. Since inception the Company’s growth has been funded through a combination of convertible debt and non-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 obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from this uncertainty.
As of June 30, 2013, the Company had $3,733,465 in principal that was outstanding and past due under the terms of the Senior Secured Convertible Notes and Promissory Notes with Platinum Partners Long Term Growth IV (“Platinum”), Merit Consulting, LLC (“Merit”) (to whom Platinum Advisors has assigned their ownership interest in notes receivable from the Company), and Alpha Capital Anstalt (“Alpha”) (to whom Longview Special Finance Inc. has assigned their ownership interest in notes receivable from the Company). The Company entered into various Senior Secured Convertible Notes and Promissory Note obligations during the period from 2007 through 2010 with Platinum, Platinum Advisors and Longview, the holders of the Company’s primary debt obligations since 2007. The outstanding principal and all accrued and unpaid interest on these obligations was due and payable in full on various dates between March 6, 2009 and June 30, 2013. Platinum and Merit have granted waivers of default, extended the due dates of all the outstanding principal balances to September 1, 2013 and November 30, 2013, respectively, and waived the application of the 16% default interest rate. Additionally Platinum and Merit waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. Alpha has granted waivers of default, extended the due dates of all the outstanding principal balances to November 30, 2013, and waived the application of the 16% default interest rate. Additionally, Alpha waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services.
As of June 30, 2013 the Company had $271,100 in principal that was outstanding and due under the terms of the Convertible Note with Cape One. Through a series of forbearance agreements, the Convertible Note matures and all outstanding principal is due and payable on August 31, 2013.
As of June 30, 2013, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 to the consolidated financial statements for lenders waivers and maturity extensions received from the lenders.
Operating activities
Net cash used in operating activities in the six months ended June 30, 2013 and 2012 was $98,323 and $73,732, respectively. The net loss generated in the first six months of 2013 was $325,451 less than the prior year period. The Company continues to actively monitor spending and cash outflows in an effort to reduce costs until continuing revenue sources are developed. The Company is actively seeking opportunities to continue to reduce expenses and improve its liquidity position. We expect that total consolidated spending in 2013 to be equal if not slightly less than the 2012 levels, although we will continue to invest in product and commercialization efforts as our cash position and liquidity allow.
Total adjustments to reconcile the net loss to the cash used in operations aggregated $93,008 in the first six months of 2013 versus $384,887 in first six months of 2012. The change in these non-cash items reflects decreases in Depreciation expense in 2013, and a reduction in the Loss on modification of debt and the impact of common shares issued in 2012 for services that did not recur in the first half of 2013.
Investing activities
No cash was used in investing activities in the three months ended June 30, 2013 or 2012.
Financing Activities
Net cash provided from financing activities in the six months ended June 30, 2013 and 2012 was $100,506 and $72,000, respectively. The cash flows from financing activities in the six months of 2013 include the receipt of an aggregate of $79,500 in proceeds from Platinum Long Term Growth IV and $21,006 in proceeds from Alpha (to whom Longview Special Finance has assigned portions of its ownership interest in notes receivable from the Company). The cash flows from financing activities in the six months of 2012 reflect a receipt of $72,000 in proceeds from Platinum Long Term Growth IV.
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.
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Refer to the Company’s December 31, 2012 report on Form 10K for a complete discussion of the critical accounting policies which have not changed during the six months ended June 30, 2013.
Comparison of Statement of Operations for the three months ended June 30, 2013 and 2012
Revenue and Gross Profit
During the three months ended June 30, 2013 and 2012, the Company recorded $117,420 and $17,275, respectively in revenue from continuing operations. Cost of goods sold for continuing operations was $23,581 and $1,053 for the shipments completed in these respective quarters. Gross margin for continuing operations of $93,839 and $16,222 was realized for the three months ended June 30, 2013 and 2012, respectively.
The change in the Nanotechnology products sales year over year is a result of the unique market application of these products. The Company expects that it will experience significant variations in sales and gross margins with its Nanotechnology products as it continues to introduce to market and develop new products and related applications. Gross margin realized in the three months ended June 30, 2013 was 80% and 2012 was 94%.
Operating Expenses
Research and development expenses for the three months ended June 30, 2013 were $12,661 compared to $29,322 for the three months ended June 30, 2012. The reduction in costs is primarily attributed to the reduction in depreciation due to the life of several long lived assets. Future research and development expenditure levels will be largely depend upon the availability of discretionary cash flow which is anticipated to be limited.
For the three months ended | Variance | |||||||||||
June 30, | increase | |||||||||||
Research and Development | 2013 | 2012 | (decrease) | |||||||||
Salaries | $ | - | $ | - | - | |||||||
Consulting services | - | 5,062 | $ | (5,062 | ) | |||||||
Patent costs | 485 | 1,840 | (1,355 | ) | ||||||||
Depreciation | - | 13,033 | (13,033 | ) | ||||||||
Rent & utilities | 9,523 | 7,413 | 2,110 | |||||||||
All other | 2,653 | 1,974 | 679 | |||||||||
$ | 12,661 | $ | 29,322 | $ | (16,661 | ) |
Total general and administrative expenses for the three months ended June 30, 2013 was $112,990 as compared to expenses of $79,613 for the three months ended June 30, 2012. The increase is a result of an increase in audit fees year over year. Management continues to actively assess the Company’s operating structure with the objective align cash expenditures and expenses with growth in total revenue.
For the three months ended | Variance | |||||||||||
June 30, | Increase | |||||||||||
General and Administrative | 2013 | 2012 | (decrease) | |||||||||
Salaries & benefits | $ | 46,949 | $ | 46,710 | $ | 239 | ||||||
Consulting Services | 8,525 | 8,306 | 219 | |||||||||
Legal & professional fees | 34,500 | 7,500 | 27,000 | |||||||||
Insurance expense | 2,073 | 717 | 1,356 | |||||||||
Shareholder and Board expense | 15,010 | 12,192 | 2,818 | |||||||||
State tax | 52 | 650 | (598 | ) | ||||||||
All other | 5,881 | 3,538 | 2,343 | |||||||||
$ | 112,990 | $ | 79,613 | $ | 33,377 |
Other (Expense) Income
Other expense consists of interest expense on convertible and promissory notes outstanding and other debt related financing and amortization expenses considered components of interest expense for financial reporting.
For the three months ended | Variance | |||||||||||
June 30, | increase | |||||||||||
Other (Expense) Income | 2013 | 2012 | (decrease) | |||||||||
Interest to Senior convertible and promissory notes | $ | (79,100 | ) | $ | (99,607 | ) | $ | (20,507 | ) | |||
Interest to 10% Subordinated Secured Convertible Notes | (12,301 | ) | (10,546 | ) | 1,755 | |||||||
$ | (91,401 | ) | $ | (110,153 | ) | $ | (18,752 | ) | ||||
Net (loss) gain on derivative liability | $ | (66,854 | ) | $ | - | $ | 66,854 | |||||
Gain (loss) on forgiveness/modification of debt | $ | 19,664 | $ | (235,000 | ) | $ | 254,664 |
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The overall decrease in interest expense for the second quarter of 2013 as compared to the second quarter of 2012 is due to conversions of outstanding principal to common stock during 2013 being greater than additions to principal through new notes or forbearance consideration.
The loss on derivative liability in the second quarter of 2013 is the result of updated valuations performed for the Company on instruments that, due to the Company’s number of authorized common shares being insufficient, result in derivative liabilities. As of June 30, 2012 the Company did not have sufficient shares to satisfy conversion of all outstanding instruments.
During the second quarter of 2013, 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 these agreements, liabilities of $19,664 were relieved, resulting in a gain on forgiveness of debt. These vendor concessions have been treated as gains in the period that the underlying agreement was reached.
The Company regularly received forbearance agreements from lenders due to the Company being in default of loan requirements. From time to time the lenders, as consideration for the forbearance agreements, add amounts to the principal of the outstanding notes. These amounts are recorded as losses on modification of debt in the income statement. In the second quarter of 2012, the consideration for the forbearance agreements with the lenders totaled $235,000.
Comparison of Statement of Operations for the six months ended June 30, 2013 and 2012
Revenue and Gross Profit
During the six months ended June 30, 2013 and 2012, the Company recorded $123,318 and $48,548, respectively in revenue from continuing operations. Cost of goods sold was $24,030 and $3,131 for the shipments completed in the respective quarters. Gross margin of $99,288 and $45,417 was realized for the six months ended June 30, 2013 and 2012, respectively.
The change in the Nanotechnology products sales year over year is a result of the unique market application of these products. The Company expects that it will experience significant variations in sales and gross margins with its Nanotechnology products as it continues to introduce to market and develop new products and related applications. Gross margin realized from continuing operations in the six months ended June 30, 2013 was 81% and in 2012 was 94%.
Operating Expenses
Research and development expenses for the six months ended June 30, 2013 were $27,592 compared to $68,707 for the six months ended June 30, 2012. The reduction in costs is primarily attributed to the reduction in depreciation. Future research and development expenditure levels will be largely depend upon the availability of discretionary cash flow which is anticipated to be limited.
For the six months ended | Variance | |||||||||||
June 30, | increase | |||||||||||
Research and Development | 2013 | 2012 | (decrease) | |||||||||
Salaries and benefits | $ | 6,730 | $ | - | $ | 6,730 | ||||||
Consulting services | - | 10,262 | (10,262 | ) | ||||||||
Patent costs | 620 | 4,651 | (4,031 | ) | ||||||||
Depreciation | - | 34,053 | (34,053 | ) | ||||||||
Rent & utilities | 17,820 | 15,766 | 2,054 | |||||||||
All other | 2,422 | 3,975 | (1,553 | ) | ||||||||
$ | 27,592 | $ | 68,707 | $ | (41,115 | ) |
Total general and administrative expenses for the six months ended June 30, 2013 was $183,266 as compared to expenses of $174,888 for the six months ended June 30, 2012. The increase is primarily a result of a increases in audit fees year over year. Management continues to actively assess the Company’s operating structure with the objective align cash expenditures and expenses with growth in total revenue.
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For the six months ended | Variance | |||||||||||
June 30, | Increase | |||||||||||
General and Administrative | 2013 | 2012 | (decrease) | |||||||||
Salaries & benefits | $ | 90,574 | $ | 94,897 | $ | (4,323 | ) | |||||
Consulting Services | 15,481 | 21,367 | (5,886 | ) | ||||||||
Legal & professional fees | 38,500 | 24,500 | 14,000 | |||||||||
Insurance expense | 3,247 | 1,793 | 1,454 | |||||||||
Shareholder and Board expense | 21,733 | 17,579 | 4,154 | |||||||||
State tax | 1,100 | 1,759 | (659 | ) | ||||||||
All other | 12,631 | 12,993 | (362 | ) | ||||||||
$ | 183,266 | $ | 174,888 | $ | 8,378 |
Other (Expense) Income
Other expense consists of interest expense on convertible and promissory notes outstanding and other debt related financing and amortization expenses considered components of interest expense for financial reporting.
For the six months ended | Variance | |||||||||||
June 30, | increase | |||||||||||
Other (Expense) Income | 2013 | 2012 | (decrease) | |||||||||
Interest to Senior convertible and promissory notes | $ | (156,999 | ) | $ | (187,725 | ) | $ | (30,726 | ) | |||
Interest to 10% Subordinated Secured Convertible Notes | (24,551 | ) | (20,776 | ) | 3,775 | |||||||
$ | (181,550 | ) | $ | (208,501 | ) | $ | (26,951 | ) | ||||
Net (loss) gain on derivative liability | $ | (76,688 | ) | $ | - | $ | 76,688 | |||||
Gain (loss) on forgiveness/modification of debt | $ | (10,336 | ) | $ | (310,000 | ) | $ | (299,664 | ) |
The overall decrease in interest expense in 2013 as compared to 2012 is due to conversions of outstanding principal to common stock during 2013 being greater than additions to principal through new notes or forbearance consideration.
The loss on derivative liability in 2013 is the result of updated valuations performed for the Company on instruments that, due to the Company’s current number of authorized common shares being insufficient, result in derivative liabilities. As of June 30, 2012 the Company had sufficient shares to satisfy conversion of all outstanding instruments.
During the second quarter of 2013, 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 these agreements, liabilities of $19,664 were relieved, resulting in a gain on forgiveness of debt. These vendor concessions have been treated as gains in the period that the underlying agreement was reached. Also during the second quarter of 2013, as consideration for a waiver of forbearances from Cape One, $30,000 was added to the outstanding principal balance of the note and resulted in a loss on modification of debt of $30,000.
The Company regularly received forbearance agreements from lenders due to the Company being in default of loan requirements. From time to time the lenders, as consideration for the forbearance agreements, add amounts to the principal of the outstanding notes. These amounts are recorded as losses on modification of debt in the income statement. During the six months ended June 30, 2013 $30,000 was added to the outstanding principal owed to Cape One in exchange for forbearance. During the six months ended June 30, 2012, $130,000 was added to the outstanding principal owed to Longview, $125,000 was added to the outstanding principal owed to Platinum, and $55,000 was added to the outstanding principal owed to Cape One in exchange for such forbearances.
Item 4. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management is responsible for establishing and maintaining effective disclosure controls and procedures. Our Chief Executive Officer has evaluated 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”)) as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the CEO as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, and in light of the material weaknesses in our internal control over financial reporting that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties and ineffective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles.
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The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with the segregation of duties were ineffective. During the fourth quarter of 2008 and the first half of 2009 the Company experienced the resignations in the positions of controller, Chief Financial Officer and Chief Executive Officer. These roles have been filled since the first quarter of 2009 by part time and contract staffing. To address the material weaknesses the Company performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Notwithstanding these material weaknesses, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.
There can be no assurance, however, that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material developments to the legal proceeding disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
I. | During the second quarter of 2013, the Company issued shares of common stock in transactions 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 Cape One as specified under the terms and conditions of the 10% Subordinated Secured Convertible Promissory Note. These shares were converted at $0.000825 per share reflecting satisfaction in principal payments on the outstanding notes. |
May 7, 2013 12,000,000 shares in satisfaction of $9,900 in principal payments
II. | During the second quarter of 2013, the Company issued shares of common stock in transactions 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 the per share price presented below reflecting satisfaction in interest payments on the outstanding notes. |
April 16, 2013 8,000,000 shares in satisfaction of $6,000 in interest payments converted at $0.00075 per share
April 29, 2013 11,500,000 shares in satisfaction of $9,487 in interest payments converted at $0.000825 per share
III. | During the second quarter of 2013, the Company issued shares of common stock in transactions 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 IV as specified under the terms and conditions of the Preferred C shareholder agreement. These shares were converted at 160 shares for each preferred share: |
April 16, 2013 8,996,640 shares in conversion of 56,229 shares of Preferred C shares
IV. | During the second quarter of 2013, the Company issued shares of common stock in transactions 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 Merit Consulting, LLC as specified under the terms and conditions of the 8% Senior Secured Convertible Debt. These shares were converted at the per share price presented below reflecting satisfaction in interest payments on the outstanding notes. |
May 7, 2013 12,050,135 shares in satisfaction of $9,037 in interest payments converted at $0.00075 per share
June 5, 2013 13,822,300 shares in satisfaction of $12,440 in interest payments converted at $0.0009 per share
V. | On July 1, 2013, the Company issued 100 shares of the Company’s Series D Preferred Stock to Jim Wemett, the sole officer and a director of the Company, in consideration for services provided to the Company. Such securities were issued under Section 4(2) of the Securities Act of 1933, as amended and Regulation D promulgated by the Securities and Exchange Commission. |
VI. | On August 13, 2013 the Company issued shares of common stock in transactions 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 IV as specified under the terms and conditions of the Preferred C shareholder agreement. These shares were converted at 160 shares for each preferred share: |
August 13, 2013 29,056,640 shares in conversion of 181,604 shares of Preferred C shares
Item 3. Defaults Upon Senior Securities
Effective as of June 30, 2013, the Company entered into various Forbearance Agreements with Platinum Long Term Growth IV LLC and Merit Consulting LLC relating to the Company’s default on various terms and conditions with borrowing agreements. Platinum Long Term Growth IV LLC and Merit Consulting LLC 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 September 1, 2013 and November 30, 2013, respectively, unless extended by the lenders in their discretion.
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Effective as of June 30, 2013 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, and
one or more secured bridge notes in the current principal amount of $280,673 (together the “Notes”).
Also, effective as of June 30, 2013 the Company entered into a Forbearance Agreement with Merit Consulting LLC (to whom Platinum Advisors LLC has assigned its ownership interest in notes receivable to the Company) relating to the Company’s default on $97,500 of 8% Senior Secured Notes due March 6, 2009. Merit 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 November 30, 2013 unless extended by Merit in their discretion.
Effective as of August 15, 2013 the Company entered into a Forbearance Agreement with Alpha Capital Anstalt (to whom Longview Special Finance has assigned its ownership interest in notes receivable to the Company) relating to the Company’s default on various terms and conditions with borrowing agreements. Alpha Capital Anstalt 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 November 30, 2013 unless extended by Alpha Capital Anstalt in their discretion.
As consideration for the January 1, 2012 forbearance agreement Longview was paid $30,000 which was added to the principle balance of the note. The January 1, 2012 forbearance agreement was considered and accounted for as modification of debt and a loss of $30,000 for the three months ending March 31, 2013 and reported in the statement of operations. As consideration for the forbearance agreement, effective April 16, 2012, Longview/Alpha will be paid $50,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $50,000 for the three months ending June 30, 2012 and was reported in the statement of operations.
The Company is in default on various terms and conditions under the assigned Alpha Capital Anstalt 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,
$34,750 16% Senior Secured Promissory Note due January 31, 2010,
$40,000 16% Senior Secured Promissory Note due November 1, 2009,
one or more secured bridge notes in the current principal amount of $90,673 (together the “Notes.”)
These Forbearance Agreements also extend to the Registration Rights Agreement entered into by the Company on March 7, 2007. Platinum Long Term Growth and Merit Consulting LLC have agreed to forbear from demanding payments defined in these agreements until September 1, 2013 and November 30, 2013, respectively. Alpha Capital Anstalt has agreed to forbear from demanding payments defined in the Registration Rights Agreement until November 30, 2013.
As of December 31, 2009, the Company was not in compliance with certain debt covenants of the Subordinated Secured Convertible Note including limitations on the use of proceeds. On January 31, 2013 the Company received a waiver from the Cape One Financial LP (“Cape One”) 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, 2013. On March 15, 2011, the Company entered into a forbearance agreement with Cape One which extended 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 to 18%. The forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended March 31, 2011 reported in the statement of operations. Effective June 30, 2011, the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from June 30, 2011 to October 1, 2011. Effective September 30, 2011, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note from October 1, 2011 to November 22, 2011. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note. This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended September 30, 2011 reported in the statement of operations. Effective January 17, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to April 16, 2012. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $30,000 for the three months ending March 31, 2012 and reported in the statement of operations. Effective June 30, 2013, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note to August 31, 2013. As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note. This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the six months ended June 30, 2013 reported in the statement of operations.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit No. |
Description | |
10.141 | 8% Senior Secured Promissory Note dated as of May 20, 2013 in the original principal amount of $12,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC. | |
10.142 | 8% Senior Secured Promissory Note dated as of June 28, 2013 in the original principal amount of $2,500 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Alpha Capital. | |
10.143 | 8% Senior secured Promissory Note dated as of July 25, 2013 in the original principal amount of $12,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC. | |
10.144 | Letter Agreement effective as of June 30, 2013 with Merit Consulting LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009. | |
10.145 | Letter Agreement effective as of June 30, 2013 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $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, and one or more secured bridge notes in the current principal amount of $298,173 (together the “Notes”). | |
10.146 | Letter Agreement effective as of June 30, 2013 with Cape One Financial regarding their forbearance with respect to the $225,000 10% Senior Secured Convertible Note due March 1, 2010. | |
10.147 | Letter Agreement effective as of August 15, 2013 with Alpha Capital Anstalt regarding their forbearance with respect to Letter Agreement 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 $82,173. | |
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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NaturalNano, Inc. | |||||
Date: | August 19, 2013 | /s/ James Wemett | |||
James Wemett | |||||
President and Director (Principal Executive, Financial and Accounting Officer) |
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NATURALNANO, INC.
NATURALNANO RESEARCH, INC.
8% Senior Secured Promissory Note
Issuance Date: | May 20, 2013 |
Principal Amount: | $12,000 |
For value received, Naturalnano, inc., a Nevada corporation, and NATURALNANO RESEARCH, INC., a Delaware corporation (jointly and severally, the “Maker”), hereby promises to pay to the order of Platinum Long Term Growth IV, LLC, a Delaware limited liability company with an address of 152 West 57th Street, 54th Floor, New York, NY 10019 (together with its successors, representatives, and permitted assigns, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of Twelve Thousand ($12,000), together with interest thereon.
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by wire transfer of funds to the Holder’s account, as requested by the Holder. The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable in full on September 30, 2013 (the “Maturity Date”) or at such earlier time as provided herein.
ARTICLE I
PAYMENT
Section 1.1 Interest. Beginning on the date of this Note (the “Issuance Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a rate per annum equal to eight percent (8%), payable in cash on the Maturity Date. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months, shall compound monthly and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1 hereof), the Maker will pay interest to the Holder, payable on demand, on the outstanding principal balance of and unpaid interest on the Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of sixteen percent (16%) and the maximum applicable legal rate per annum.
Section 1.2 Payment of Principal; Prepayment. The Principal Amount hereof shall be paid in full on the earliest of (i) the Maturity Date, or (ii) upon acceleration of this Note in accordance with the terms hereof. Any amount of principal repaid hereunder may not be reborrowed. The Maker may prepay all or any portion of the principal amount of this Note without premium or penalty.
Section 1.3 Security Agreement. The obligations of the Maker hereunder are secured by, among other things, (i) a continuing security interest in certain assets of the Maker pursuant to the terms of a Loan and Security Agreement, dated on or about March 7, 2007 (the “Loan and Security Agreement”), by and among the Maker, on the one hand, and the Holder, certain other investors and Platinum Advisors, LLC, as agent (the “Agent”), on the other hand, (ii) the Pledge Agreement (as defined in the Loan and Security Agreement) and (iii) the Patent Security Agreement, dated as of March 6, 2007, by and among the Maker, the Agent and the other parties named therein ((i), (ii) and (iii), collectively, the “Security Agreements”). Maker hereby ratifies and confirms said Security Agreements and acknowledges and agrees that the term “Obligations” under the Security Agreements includes all indebtedness and obligations of the Maker to the Holder under this Note, which obligations shall be secured on a parity basis with all other obligations secured pursuant to the Security Agreements. The Maker hereby ratifies and confirms the Security Agreements. Maker hereby further authorizes the Holder and the Agent to file one or more financing statements, describing the collateral as “All Assets,” with such governmental authorities as the Holder and/or the Agent may deem necessary or advisable.
Section 1.4 Payment on Non-Business Days. Whenever any payment to be made shall be due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.
Section 1.5 Use of Proceeds. The Maker shall use the proceeds of this Note only for general working capital and not to redeem or make any payment on account of any securities of the Maker.
Section 1.6 Mandatory Prepayment. Notwithstanding anything to the contrary contained herein, payments on this Note shall be made on a pro rata basis with payments under the $37,000 8% Senior Secured Promissory Note issued as of the date hereof to Longview Special Finance Inc. (the “Other Note”) (based on the principal amount of outstanding hereunder and under the Other Note).
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1 Events of Default. Unless waived in writing by the holders of at least a majority of the principal amount of this Note and the Other Note, the occurrence of any of the following events shall be an “Event of Default” under this Note:
(a) any default in the payment of (1) the principal amount hereunder when due, or (2) interest on this Note when the same shall become due and payable (whether on the Maturity Date, the date of any mandatory prepayment, by acceleration or otherwise); or
(b) the Maker shall fail to observe or perform any other covenant or agreement contained in this Note, the Other Note, any existing notes issued to the Holder (the “Existing Notes”) or any of the Security Agreements; or
(c) a default or “event of default,” or event that, with the passage of time or giving of notice or both, constitutes or would constitute a default or “event of default,” shall have occurred under any of the Security Agreements, the Other Note or the Existing Notes; or
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(d) any material representation or warranty made by the Maker herein or in the Security Agreements or the Existing Notes shall prove to have been false or incorrect or breached in a material respect on the date as of which made; or
(e) the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any indebtedness (other than the indebtedness hereunder) the aggregate principal amount of which indebtedness is in excess of $50,000 or (B) default in the observance or performance of any other agreement or condition relating to any indebtedness, that, in the aggregate, exceeds $50,000, or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such indebtedness to cause with the giving of notice if required, such Indebtedness to become due prior to its stated maturity; or
(f) the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(g) a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of thirty (30) days.
Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have occurred and shall be continuing, the Holder of this Note may, at any time, at its option, declare the entire unpaid principal balance of this Note, together with all interest accrued hereon, due and payable, and thereupon, the same shall be accelerated and so due and payable, without presentment, demand, protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker. Upon an Event of Default, the Holder may proceed to exercise all rights and remedies against any and all collateral pledged to the Holder as security for this Note, including all collateral pledged under the Security Agreements. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note.
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ARTICLE
III
MISCELLANEOUS
Section 3.1 Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address set forth on the signature page hereto (in the case of the Maker) or above (in the case of the Holder) (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.
Section 3.2 Governing Law; Drafting; Representation. This Note shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted. It is acknowledged by the Holder and the Maker that Platinum Long Term Growth IV, LLC has retained Burak Anderson & Melloni, PLC to act as its counsel in connection with its investment in and loans to the Maker and that Burak Anderson & Melloni, PLC has not acted as counsel for any party, other than the Platinum Long Term Growth IV, LLC, in connection with such transactions.
Section 3.3 Headings. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.
Section 3.4 Binding Effect; Amendments. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and assigns of each such party. This Note may not be modified or amended in any manner except in writing executed by the Maker and the Holder.
Section 3.5 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it hereunder and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.
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Section 3.6 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
Section 3.7 Maker Waivers; Dispute Resolution. Except as otherwise specifically provided herein, the Maker and all others that may become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon, all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.
(a) No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right or rights on any future occasion.
(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
Section 3.8 Fees and Expenses. Upon execution of this Note, the Maker shall reimburse the Holder for reasonable and actual legal fees incurred by the Holder in the drafting and negotiation of this Note, together with un-reimbursed legal fees and expenses incurred by the Holder in connection with the Holder’s prior loans to and investments in the Maker (which amount may be withheld by the Holder from amounts to be delivered to the Maker in connection with the issuance of this Note). The Maker will pay on demand all costs of collection and attorneys’ fees paid or incurred by the Holder in enforcing the obligations of the Maker. The Borrower represents and warrants that this Note is the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms.
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed by its duly authorized officer as of the date first above indicated.
NATURALNANO, INC. |
By: | |||
Name: | James Wemett | ||
Title: | CEO/president |
NATURALNANO RESEARCH, INC. |
By: | |||
Name: | James Wemett | ||
Title: | CEO//President |
Address of Maker: | |
11 Schoen Place | |
Pittsford,NY 14534 | |
Fax:585-267-4861 |
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NaturalNano, Inc.
15 Schoen Place
Pittsford, NY 14534
June 28, 2013
Alpha Capital
C/o LH Financial 150 Central
Park South
2nd Floor
New York, NY 10019
Ladies and Gentlemen:
This letter shall serve as the agreement and promise of NaturalNano, Inc. (the "Company") to pay to the order of Alpha Capital. ("Alpha"), the sum of $2,500 plus interest at 8% per annum. The Company acknowledges that Alpha has advanced $2,500 in funds at the Company's request, and the Company's obligations hereunder shall be secured by all other collateral that secures the various senior secured promissory notes that the Company has previously issued to Longview. In the event the Company fails to repay Alpha in accordance with the terms of this letter, Alpha should be entitled to exercise all rights granted to it as a secured creditor pursuant to the Security Agreements (as defined in the 8% Senior Secured Promissory Note issued to Longview by the Company on or about November 5, 2008).
All payments under or pursuant to this Note shall be made in United States Dollars, in immediately available funds, to Longview at the address set forth above or at such other place as Longview may designate from time to time in writing to the Company or by wire transfer of funds to Longview's account, as requested by Longview. The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable in full on October 30, 2013.
Very truly yours, | ||
Natural Nano, Inc. | ||
Name: | James Wemett | |
Title: | CEO |
NATURALNANO, INC.
NATURALNANO RESEARCH, INC.
8% Senior Secured Promissory Note
Issuance Date: | July 25, 2013 |
Principal Amount: | $12,000 |
For value received, Naturalnano, inc., a Nevada corporation, and NATURALNANO RESEARCH, INC., a Delaware corporation (jointly and severally, the “Maker”), hereby promises to pay to the order of Platinum Long Term Growth IV, LLC, a Delaware limited liability company with an address of 152 West 57th Street, 54th Floor, New York, NY 10019 (together with its successors, representatives, and permitted assigns, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of Twelve Thousand ($12,000), together with interest thereon.
All payments under or pursuant to this Note shall be made in United States Dollars in immediately available funds to the Holder at the address of the Holder first set forth above or at such other place as the Holder may designate from time to time in writing to the Maker or by wire transfer of funds to the Holder’s account, as requested by the Holder. The outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable in full on November 30, 2013 (the “Maturity Date”) or at such earlier time as provided herein.
ARTICLE I
PAYMENT
Section 1.1 Interest. Beginning on the date of this Note (the “Issuance Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a rate per annum equal to eight percent (8%), payable in cash on the Maturity Date. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months, shall compound monthly and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence of an Event of Default (as defined in Section 2.1 hereof), the Maker will pay interest to the Holder, payable on demand, on the outstanding principal balance of and unpaid interest on the Note from the date of the Event of Default until such Event of Default is cured at the rate of the lesser of sixteen percent (16%) and the maximum applicable legal rate per annum.
Section 1.2 Payment of Principal; Prepayment. The Principal Amount hereof shall be paid in full on the earliest of (i) the Maturity Date, or (ii) upon acceleration of this Note in accordance with the terms hereof. Any amount of principal repaid hereunder may not be reborrowed. The Maker may prepay all or any portion of the principal amount of this Note without premium or penalty.
Section 1.3 Security Agreement. The obligations of the Maker hereunder are secured by, among other things, (i) a continuing security interest in certain assets of the Maker pursuant to the terms of a Loan and Security Agreement, dated on or about March 7, 2007 (the “Loan and Security Agreement”), by and among the Maker, on the one hand, and the Holder, certain other investors and Platinum Advisors, LLC, as agent (the “Agent”), on the other hand, (ii) the Pledge Agreement (as defined in the Loan and Security Agreement) and (iii) the Patent Security Agreement, dated as of March 6, 2007, by and among the Maker, the Agent and the other parties named therein ((i), (ii) and (iii), collectively, the “Security Agreements”). Maker hereby ratifies and confirms said Security Agreements and acknowledges and agrees that the term “Obligations” under the Security Agreements includes all indebtedness and obligations of the Maker to the Holder under this Note, which obligations shall be secured on a parity basis with all other obligations secured pursuant to the Security Agreements. The Maker hereby ratifies and confirms the Security Agreements. Maker hereby further authorizes the Holder and the Agent to file one or more financing statements, describing the collateral as “All Assets,” with such governmental authorities as the Holder and/or the Agent may deem necessary or advisable.
Section 1.4 Payment on Non-Business Days. Whenever any payment to be made shall be due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.
Section 1.5 Use of Proceeds. The Maker shall use the proceeds of this Note only for general working capital and not to redeem or make any payment on account of any securities of the Maker.
Section 1.6 Mandatory Prepayment. Notwithstanding anything to the contrary contained herein, payments on this Note shall be made on a pro rata basis with payments under the $37,000 8% Senior Secured Promissory Note issued as of the date hereof to Longview Special Finance Inc. (the “Other Note”) (based on the principal amount of outstanding hereunder and under the Other Note).
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1 Events of Default. Unless waived in writing by the holders of at least a majority of the principal amount of this Note and the Other Note, the occurrence of any of the following events shall be an “Event of Default” under this Note:
(a) any default in the payment of (1) the principal amount hereunder when due, or (2) interest on this Note when the same shall become due and payable (whether on the Maturity Date, the date of any mandatory prepayment, by acceleration or otherwise); or
(b) the Maker shall fail to observe or perform any other covenant or agreement contained in this Note, the Other Note, any existing notes issued to the Holder (the “Existing Notes”) or any of the Security Agreements; or
(c) a default or “event of default,” or event that, with the passage of time or giving of notice or both, constitutes or would constitute a default or “event of default,” shall have occurred under any of the Security Agreements, the Other Note or the Existing Notes; or
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(d) any material representation or warranty made by the Maker herein or in the Security Agreements or the Existing Notes shall prove to have been false or incorrect or breached in a material respect on the date as of which made; or
(e) the Maker shall (A) default in any payment of any amount or amounts of principal of or interest on any indebtedness (other than the indebtedness hereunder) the aggregate principal amount of which indebtedness is in excess of $50,000 or (B) default in the observance or performance of any other agreement or condition relating to any indebtedness, that, in the aggregate, exceeds $50,000, or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such indebtedness to cause with the giving of notice if required, such Indebtedness to become due prior to its stated maturity; or
(f) the Maker shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors’ rights generally, (v) acquiesce in writing to any petition filed against it in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic), (vi) issue a notice of bankruptcy or winding down of its operations or issue a press release regarding same, or (vii) take any action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(g) a proceeding or case shall be commenced in respect of the Maker, without its application or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker or (iii) similar relief in respect of it under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or any order for relief shall be entered in an involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of thirty (30) days.
Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have occurred and shall be continuing, the Holder of this Note may, at any time, at its option, declare the entire unpaid principal balance of this Note, together with all interest accrued hereon, due and payable, and thereupon, the same shall be accelerated and so due and payable, without presentment, demand, protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker. Upon an Event of Default, the Holder may proceed to exercise all rights and remedies against any and all collateral pledged to the Holder as security for this Note, including all collateral pledged under the Security Agreements. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note.
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ARTICLE
III
MISCELLANEOUS
Section 3.1 Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery, telecopy or facsimile at the address set forth on the signature page hereto (in the case of the Maker) or above (in the case of the Holder) (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.
Section 3.2 Governing Law; Drafting; Representation. This Note shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted. It is acknowledged by the Holder and the Maker that Platinum Long Term Growth IV, LLC has retained Burak Anderson & Melloni, PLC to act as its counsel in connection with its investment in and loans to the Maker and that Burak Anderson & Melloni, PLC has not acted as counsel for any party, other than the Platinum Long Term Growth IV, LLC, in connection with such transactions.
Section 3.3 Headings. Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.
Section 3.4 Binding Effect; Amendments. The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and assigns of each such party. This Note may not be modified or amended in any manner except in writing executed by the Maker and the Holder.
Section 3.5 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby irrevocably submits to the exclusive jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Maker and the Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it hereunder and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.
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Section 3.6 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
Section 3.7 Maker Waivers; Dispute Resolution. Except as otherwise specifically provided herein, the Maker and all others that may become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby consent to any number of renewals of extensions of the time or payment hereof and agree that any such renewals or extensions may be made without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon, all without affecting the liability of the other persons, firms or Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.
(a) No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right or rights on any future occasion.
(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
Section 3.8 Fees and Expenses. Upon execution of this Note, the Maker shall reimburse the Holder for reasonable and actual legal fees incurred by the Holder in the drafting and negotiation of this Note, together with un-reimbursed legal fees and expenses incurred by the Holder in connection with the Holder’s prior loans to and investments in the Maker (which amount may be withheld by the Holder from amounts to be delivered to the Maker in connection with the issuance of this Note). The Maker will pay on demand all costs of collection and attorneys’ fees paid or incurred by the Holder in enforcing the obligations of the Maker. The Borrower represents and warrants that this Note is the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms.
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed by its duly authorized officer as of the date first above indicated.
NATURALNANO, INC. | |||
By: | |||
Name: | James Wemett | ||
Title: | CEO/president | ||
NATURALNANO RESEARCH, INC. | |||
By: | |||
Name: | James Wemett | ||
Title: | CEO//President | ||
Address of Maker: | |||
11 Schoen Place | |||
Pittsford,NY 14534 | |||
Fax:585-267-4861 |
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Merit Consulting LLC
152 WEST 57TH STREET, 54TH FLOOR
NEW YORK, NEW YORK 10019
VIA FACSIMILE AND FIRST CLASS MAIL
Effective as of June 30, 2013
Re: FORBEARANCE AGREEMENT
Ladies and Gentlemen:
Reference is made to the $97,500 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007 (the “Note”) from NaturalNano, Inc. and NaturalNano Research, Inc. (jointly and severally, the “Borrower”) to Merit Consulting LLC (the “Lender”). Capitalized terms used herein and not otherwise defined shall have the respective meanings given in the Note.
The Borrower has requested that the Lender forbear from exercising its various rights and remedies under the Notes and other related documents (collectively, the “Loan Documents”) that may otherwise be exercised by the Lender, in order to provide the Borrower with additional time during which it may resolve its current financial problems.
The Lender is prepared to forbear from demanding payment of principal on the Notes on the Maturity Date of the Notes, or taking any other action to collect the principal amount of the Notes (other than conversions in respect thereof) until the earlier of November 30, 2013 (unless extended by the Lender in its discretion) or the termination of the Forbearance Period pursuant to the terms of this Letter Agreement (such period, the “Forbearance Period”), provided the Borrower accepts and agrees to the terms, conditions and covenants set forth herein, and communicates such acceptance (by delivering a signed copy of this Letter Agreement) to the Lender no later than 5:00 p.m. on November 30, 2013; provided further that it is understood that the Borrower is not obligated to make all interest payments required under the Notes during the Forbearance Period.
Upon execution by the Borrower, this letter shall be a binding agreement among the respective parties hereto (referred to as the “Letter Agreement”).
By its execution, the Borrower represents, warrants and covenants as follows:
1. No Duress. The Borrower has freely and voluntarily entered into this Letter Agreement after an adequate opportunity to review and discuss the terms and conditions and all factual and legal matters relevant hereto with counsel freely and independently chosen by it and this Letter Agreement is being executed without fraud, duress, undue influence or coercion of any kind or nature whatsoever having been exerted by or imposed upon any party.
2. Amount Due. The Borrower ratifies and confirms the obligations under the Note (the “Outstanding Amount”). The Borrower shall also be responsible for reimbursing the Lender for all costs and expenses, including the fees and expenses of legal counsel that may be incurred in connection with the enforcement of this Letter Agreement, which, if incurred, shall be added to the Outstanding Amount. The Borrower acknowledges and agrees that the Outstanding Amount (as reduced by payments made pursuant hereto), plus interest accrued thereon, shall be due and owing upon termination of the Forbearance Period.
3. No Defenses. The Borrower has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, or causes of action of any kind or nature whatsoever against the Lender, its officers, directors, employees, attorneys, legal representatives or affiliates (collectively, the “Lender Group”), directly or indirectly, arising out of, based upon, or in any manner connected with, any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or began prior to the execution of this Letter Agreement and accrued, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of the Notes or any of the terms or conditions of the Loan Documents, or which directly or indirectly relate to or arise out of or in any manner are connected with the Notes or any of the Loan Documents; TO THE EXTENT ANY SUCH DEFENSES, AFFIRMATIVE OR OTHERWISE, RIGHTS OF SETOFF, RIGHTS OF RECOUPMENT, CLAIMS, COUNTERCLAIMS, OR CAUSES OF ACTION EXIST, SUCH DEFENSES, RIGHTS, CLAIMS, COUNTERCLAIMS, AND CAUSES OF ACTION ARE HEREBY FOREVER WAIVED, DISCHARGED AND RELEASED.
4. Interest Continues to Accrue. During the Forbearance Period, the Outstanding Amount shall bear interest at the interest rate set forth under the Notes (8%); it being understood that the default rate shall apply upon the occurrence of any Event of Default (other than Existing Defaults) thereunder or upon termination of the Forbearance Period.
5. Other Notes. The Borrower agrees that it shall not provide any holder of the Notes issued on or about March 6, 2007, August 5, 2008, September 29, 2008 or October 31, 2008 or any other promissory note (collectively, the “Other Notes”) any concession or payment with respect to such Other Notes without first offering the Lender the opportunity to receive such payment or concession with respect to the Notes.
6. Adjustment of Conversion Prices and Ratios. In consideration of the agreement of the Lender to forbear from exercising its rights and remedies as is set forth herein, the Borrowers covenant and agree that, with respect to any Note that is convertible pursuant to its terms, the Conversion Price (as defined and as set forth in the Notes) is, effective as of the date hereof, hereafter reduced to the lowest of (A) 75% of the lowest of the average VWAP (as defined in such Notes) for the one business day. five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the Lender, or (B) $0.01 per shared, effective as of the date hereof, which $0.01 per share Conversion Price shall be subject to such further adjustment as may be set forth in the Notes.
7. Beneficial Ownership Provisions. The Lender and the Borrower agree that the 4.99% Limitation, as set forth and as defined in Notes convertible pursuant to their terms shall be deemed waived by the Lender, which waiver shall be deemed effective immediately, notwithstanding the provisions of such Notes requiring at least 61 days’ advance written notice: provided, that, it is understood and agreed that in no event shall the Lender be entitled to convert such Notes into shares of Common Stock to the extent such conversion would result in the beneficial ownership of more than 9.99% of the then outstanding number of shares of Common Stock on such date without providing at least 61 days’ advance written notice to the Borrowers that the Lender elects to waive such restriction with respect to all or a portion of such Notes. For purposes hereof, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934 and Regulation 13d-3 thereunder.
Forbearance. During the Forbearance Period, the Lender agrees that it will not take any further action against the Borrower or exercise or move to enforce any other rights or remedies provided for in the Loan Documents or otherwise available to it, at law or in equity, by virtue of the occurrence and/or continuation of any default or Event of Default under the Notes existing on the date hereof, including any default relating to the Borrower’s failure to maintain the effectiveness of any registration statement (the “Existing Defaults”), or take any action against any property in which the Borrower has any interest.
Lender to Retain all Rights. It is understood and agreed that this Letter Agreement does not waive or evidence consent to any default or Event of Default (including the Existing Defaults) under the Notes or the Loan Documents. The parties hereto acknowledge and agree that the Lender (i) shall retain all rights and remedies it may now have with respect to the Notes and the Borrower’s obligations under the Loan Documents (“Default Rights”), and (ii) shall have the right to exercise and enforce such Default Rights upon termination of the Forbearance Period. The parties further agree that the exercise of any Default Rights by the Lender upon termination of the Forbearance Period shall not be affected by reason of this Letter Agreement, and the parties hereto shall not assert as a defense thereto the passage of time, estoppel, laches or any statute of limitations to the extent that the exercise of any Default Rights was precluded by this Letter Agreement.
Termination of Forbearance Period. The Forbearance Period shall terminate upon the earlier to occur of: (1) 5:00 pm (New York City Time) on November 30, 2013; (2) the Borrower shall fail to observe, perform, or comply with any of the terms, conditions or provisions of this Letter Agreement as and when required and/or any other Event of Default (other than the Existing Defaults occurring prior to the date hereof) shall occur under the Notes or any of the Loan Documents or any other agreement between the Borrower and the Lender (or its affiliates) or any other indebtedness issued by the Borrower to the Lender or its affiliates; (3) any representation or warranty made herein, in any document executed and delivered in connection herewith, or in any report, certificate, financial statement or other instrument or document now or hereafter furnished by or on behalf of the Borrower in connection with this Letter Agreement, shall prove to have been false, incomplete or misleading in any material respect on the date as of which it was made; (4) any suit preceding or other action is commenced by any other creditor against the Company; (5) any default or event of default shall occur under any other indebtedness of the Company, including the Subordinated Notes issued on or about November 2009 or the “Transaction Documents” referred to therein: or (6) a court of competent jurisdiction shall enter an order for relief or take any similar action in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect or a petition for relief under any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law shall be filed by or against the Borrower.
Upon termination of the Forbearance Period, should the Notes or any of the Borrower’s obligations under the Loan Documents not be satisfied in full, the Lender shall be entitled to pursue immediately its various rights and remedies, including its Default Rights, against the Borrower, all collateral given by the Borrower to secure the Loan and the obligations under the Loan Documents, without regard to notice and cure periods, all of which are hereby waived by the Borrower. Without limiting the generality of the foregoing, upon termination of the Forbearance Period, the Lender shall be permitted to immediately exercise its rights to demand and collect on the Outstanding Amount.
If the foregoing is acceptable to you. please sign in the space provided below.
Sincerely, | ||
Merit Consulting. LLC | ||
By: | /s/ Moshe Mueller | |
Name: Moshe Mueller | ||
Title: |
Accepted and Agreed as of this 23rd day of July, 2013
NATURALNANO, INC.
By: | ||
Title: jim wemett CEO |
NATURALNANO RESEARCH, INC. | ||
By: | ||
Name: jim wemett | ||
Title: CEO |
PLATINUM LONG TERM GROWTH IV, LLC
152 WEST 57TH STREET, 54TH FLOOR
NEW YORK, NEW YORK 10019
VIA FACSIMILE AND FIRST CLASS MAIL
Effective as of June 30, 2013
Re: FORBEARANCE AGREEMENT
Ladies and Gentlemen:
Reference is made to the $2,750,000 8% Senior Secured Promissory Note, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note, issued on or about October 31, the $136,376 8% Senior Secured Promissory Note, issued on or about April 3, 2009, the $5,000 8% Senior Secured Promissory Note, issued on or about April 17, 2009, the $15,000 8% Senior Secured Promissory Note, issued on or about May 12, 2009, the $25,000 8% Senior Secured Promissory Note, issued on or about October 2, 2009,the $20,000 8% senior secured promissory note, issued on or about July I, 2010, the $16,923 8% Senior Secured Promissory Note, issued on or about October 20, 2010, the $51,000 8% Senior Secured Promissory Note, issued on or about November 12, 2010, the $15,000 8% Senior Secured Promissory Note, issued on or about January 26, 2011, the $12,750 8% Senior Secured Promissory Note, issued on or about April 15, 2011, the $15,000 8% Senior Secured Promissory Note, issued on or about September 21, 2011, the the $15,000 8% senior secured Promissory note , issued on or about October 11, 2011, the $15,000 8% Senior Secured Promissory Note, issued on or about December 6, 2011, the $15,000 8% Senior Secured Promissory Note, issued on or about December 19, 2011, the $25,000 8% Senior Secured Promissory Note, issued on or about February 10, 2012, the $12,000 8% Senior Secured Promissory Note, issued on or about March 7, 2012, the $15,000 8% Senior Secured Promissory Note, issued on or about April 16, 2012, and the $20,000 8% Senior Secured Promissory note, issued on or about May 15, 2012, on or about July 20 for $7,000, and on or about October 17, 2012 for $13,500, and on or about November 15, 2012 for $12,500, and on or about February 7, 2013 for $17,500 (together the “Notes”) from NaturalNano, Inc. and NaturalNano Research, Inc. (jointly and severally, the “Borrower”) to Platinum Long Term Growth IV, LLC (the “Lender”). Capitalized terms used herein and not otherwise defined shall have the respective meanings given in the Notes.
The Borrower has requested that the Lender forbear from exercising its various rights and remedies under the Notes and other related documents (collectively, the “Loan Documents”) that may otherwise be exercised by the Lender, in order to provide the Borrower with additional time during which it may resolve its current financial problems.
The Lender is prepared to forbear from demanding payment of principal on the Notes on the Maturity Date of the Notes, or taking any other action to collect the principal amount of the Notes (other than conversions in respect thereof) until the earlier of September 1st, 2013(unless extended by the Lender in its discretion) or the termination of the Forbearance Period pursuant to the terms of this Letter Agreement (such period, the “Forbearance Period”), provided the Borrower accepts and agrees to the terms, conditions and covenants set forth herein, and communicates such acceptance (by delivering a signed copy of this Letter Agreement) to the Lender no later than 5:00 p.m. on September 1st, 2013; provided further that it is understood that the Borrower is not obligated to make all interest payments required under the Notes during the Forbearance Period.
Upon execution by the Borrower, this letter shall be a binding agreement among the respective parties hereto (referred to as the “Letter Agreement”).
By its execution, the Borrower represents, warrants and covenants as follows:
1. No Duress. The Borrower has freely and voluntarily entered into this Letter Agreement after an adequate opportunity to review and discuss the terms and conditions and all factual and legal matters relevant hereto with counsel freely and independently chosen by it and this Letter Agreement is being executed without fraud, duress, undue influence or coercion of any kind or nature whatsoever having been exerted by or imposed upon any party.
2. Amount Due. The Borrower acknowledges and agrees that the Borrower owes the Lender $2,700,605.62 (the “Outstanding Amount”) as of September 1st, 2013. The Borrower shall also be responsible for reimbursing the Lender for all costs and expenses, including the fees and expenses of legal counsel that may be incurred in connection with the enforcement of this Letter Agreement, which, if incurred, shall be added to the Outstanding Amount. The Borrower acknowledges and agrees that the Outstanding Amount (as reduced by payments made pursuant hereto), plus interest accrued thereon, shall be due and owing upon termination of the Forbearance Period.
3. No Defenses. The Borrower has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, or causes of action of any kind or nature whatsoever against the Lender, its officers, directors, employees, attorneys, legal representatives or affiliates (collectively, the “Lender Group”), directly or indirectly, arising out of, based upon, or in any manner connected with, any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or began prior to the execution of this Letter Agreement and accrued, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of the Notes or any of the terms or conditions of the Loan Documents, or which directly or indirectly relate to or arise out of or in any manner are connected with the Notes or any of the Loan Documents; TO THE EXTENT ANY SUCH DEFENSES, AFFIRMATIVE OR OTHERWISE, RIGHTS OF SETOFF, RIGHTS OF RECOUPMENT, CLAIMS, COUNTERCLAIMS, OR CAUSES OF ACTION EXIST, SUCH DEFENSES, RIGHTS, CLAIMS, COUNTERCLAIMS, AND CAUSES OF ACTION ARE HEREBY FOREVER WAIVED, DISCHARGED AND RELEASED.
4. Interest Continues to Accrue. During the Forbearance Period, the Outstanding Amount shall bear interest at the interest rate set forth under the Notes (8%); it being understood that the default rate shall apply upon the occurrence of any Event of Default (other than Existing Defaults) thereunder or upon termination of the Forbearance Period.
5. Other Notes. The Borrower agrees that it shall not provide any holder of the Notes issued on or about March 6, 2007, August 5, 2008, September 29, 2008 or October 31, 2008 or any other promissory note (collectively, the “Other Notes”) any concession or payment with respect to such Other Notes without first offering the Lender the opportunity to receive such payment or concession with respect to the Notes.
6. Adjustment of Conversion Prices and Ratios. In consideration of the agreement of the Lender to forbear from exercising its rights and remedies as is set forth herein, (i) the Borrowers covenant and agree that, with respect to any Note that is convertible pursuant to its terms, the Conversion Price (as defined and as set forth in the Notes) is, effective as of the date hereof, hereafter reduced to the lowest of (A) 75% of the lowest of the average VWAP (as defined in such Notes) for the one business day, five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the Lender, or (B) $0.01 per share, effective as of the date hereof, which $0.01 per share Conversion Price shall be subject to such further adjustment as may be set forth in the Notes, and (ii) within five (5) business days of the date hereof, NaturalNano, Inc. shall cause an amendment to the Amended and Restated Certificate of Designations (the “Certificate of Designations”) of the Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock, par value $0.01 per share, of NaturalNano, Inc. to provide that each of the 4,250,000 shares of Series C Preferred Stock held by the Lender shall convert into 160 shares of Common Stock of NaturalNano, Inc. (or an aggregate of 680,000,000 shares of Common Stock of NaturalNano, Inc.).
7. Beneficial Ownership Provisions. The Lender and the Borrower agree that the conversion restriction set forth in Section 7(a) of the Certificate of Designations shall be deemed waived by the Lender, which waiver shall be deemed effective immediately, notwithstanding the provisions of such Section 7(a); provided, that, it is understood and agreed that the limitations set forth in Section 7(b) of the Certificate of Designations shall remain in full force and effect. Further, the 4.99% Limitation, as set forth and as defined in Notes convertible pursuant to their terms shall be deemed waived by the Lender, which waiver shall be deemed effective immediately, notwithstanding the provisions of such Notes requiring at least 61 days’ advance written notice; provided, that, it is understood and agreed that in no event shall the Lender be entitled to convert such Notes into shares of Common Stock to the extent such conversion would result in the beneficial ownership of more than 9.99% of the then outstanding number of shares of Common Stock on such date without providing at least 61 days’ advance written notice to the Borrowers that the Lender elects to waive such restriction with respect to all or a portion of such Notes. For purposes hereof, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934 and Regulation 13d-3 thereunder.
Forbearance. During the Forbearance Period, the Lender agrees that it will not take any further action against the Borrower or exercise or move to enforce any other rights or remedies provided for in the Loan Documents or otherwise available to it, at law or in equity, by virtue of the occurrence and/or continuation of any default or Event of Default under the Notes existing on the date hereof, including any default relating to the Borrower’s failure to maintain the effectiveness of any registration statement (the “Existing Defaults”), or take any action against any property in which the Borrower has any interest.
Lender to Retain all Rights. It is understood and agreed that this Letter Agreement does not waive or evidence consent to any default or Event of Default (including the Existing Defaults) under the Notes or the Loan Documents. The parties hereto acknowledge and agree that the Lender (i) shall retain all rights and remedies it may now have with respect to the Notes and the Borrower’s obligations under the Loan Documents (“Default Rights”), and (ii) shall have the right to exercise and enforce such Default Rights upon termination of the Forbearance Period. The parties further agree that the exercise of any Default Rights by the Lender upon termination of the Forbearance Period shall not be affected by reason of this Letter Agreement, and the parties hereto shall not assert as a defense thereto the passage of time, estoppel, laches or any statute of limitations to the extent that the exercise of any Default Rights was precluded by this Letter Agreement.
Termination of Forbearance Period. The Forbearance Period shall terminate upon the earlier to occur of: (1) 5:00 pm (New York City Time) on September 1st, 2013; (2) the Borrower shall fail to observe, perform, or comply with any of the terms, conditions or provisions of this Letter Agreement as and when required and/or any other Event of Default (other than the Existing Defaults occurring prior to the date hereof) shall occur under the Notes or any of the Loan Documents or any other agreement between the Borrower and the Lender (or its affiliates) or any other indebtedness issued by the Borrower to the Lender or its affiliates; (3) any representation or warranty made herein, in any document executed and delivered in connection herewith, or in any report, certificate, financial statement or other instrument or document now or hereafter furnished by or on behalf of the Borrower in connection with this Letter Agreement, shall prove to have been false, incomplete or misleading in any material respect on the date as of which it was made; (4) any suit preceding or other action is commenced by any other creditor against the Company; (5) any default or event of default shall occur under any other indebtedness of the Company, including the Subordinated Notes issued on or about November 2009 or the “Transaction Documents” referred to therein; or (6) a court of competent jurisdiction shall enter an order for relief or take any similar action in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect or a petition for relief under any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law shall be filed by or against the Borrower.
Upon termination of the Forbearance Period, should the Notes or any of the Borrower’s obligations under the Loan Documents not be satisfied in full, the Lender shall be entitled to pursue immediately its various rights and remedies, including its Default Rights, against the Borrower, all collateral given by the Borrower to secure the Loan and the obligations under the Loan Documents, without regard to notice and cure periods, all of which are hereby waived by the Borrower. Without limiting the generality of the foregoing, upon termination of the Forbearance Period, the Lender shall be permitted to immediately exercise its rights to demand and collect on the Outstanding Amount.
If the foregoing is acceptable to you, please sign in the space provided below.
Sincerely,
PLATINUM LONG TERM GROWTH IV LLC
By: /s/ Mar Nordlicht
Name: Mar Nordlicht
Title:
Accepted and Agreed as of this 23h day of July, 2013
NATURALNANO, INC.
By: /s/ JAMES WEMETT
Name: JAMES WEMETT
Title: CEO
NATURALNANO RESEARCH, INC.
By: /s/ JAMES WEMETT
Name: JAMES WEMETT
Title: CEO
Cape One Financial Master Fund LTD
410 Park Avenue, 15TH floor
New York, New York 10022
Via Facsimile and First Class Mail
Effective June 30, 2013
Re: FORBEARANCE AGREEMENT
Ladies and Gentlemen:
Reference is made to the $225,000 8% Senior Secured Convertible Note due March 1, 2010, issued on or about November 30, 2009 and the $30,000 added to principle on or about March 8., 2011 from NaturalNano, Inc. and NaturalNano Research, Inc. (jointly and severally, the “Borrower”) to Cape One Financial Master Fund LTD (the “Lender”). Capitalized terms used herein and not otherwise defined shall have the respective meanings given in the Notes.
The Borrower has requested that the Lender forbear from exercising its various rights and remedies under the Notes and other related documents (collectively, the “Loan Documents”) that may otherwise be exercised by the Lender on the date hereof, in order to provide the Borrower with additional time during which it may resolve its current financial problems.
The Lender is prepared to forbear from demanding payment of principal on the Notes on the Maturity Date of the Notes, or taking any other action to collect the principal amount of the Notes until the earlier of August 31, 2013 (unless extended by the Lender in its discretion) or the termination of the Forbearance Period pursuant to the terms of this Letter Agreement (such period, the “Forbearance Period”), provided the Borrower accepts and agrees to the terms, conditions and covenants set forth herein, and communicates such acceptance (by delivering a signed copy of this Letter Agreement) to the Lender no later than 5:00 p.m. on August 31, 2013; provided further it is understood that Borrower is not obligated to make any interest payments required under the Notes during the Forbearance Period.
Upon execution by the Borrower, this letter shall be a binding agreement among the respective parties hereto (referred to as the “Letter Agreement”).
By its execution, the Borrower represents warrants and covenants as follows:
1. No Duress. The Borrower has freely and voluntarily entered into this Letter Agreement after an adequate opportunity to review and discuss the terms and conditions and all factual and legal matters relevant hereto with counsel freely and independently chosen by it and this Letter Agreement is being executed without fraud, duress, undue influence or coercion of any kind or nature whatsoever having been exerted by or imposed upon any party.
2. Amount Due. The Borrower does not contest the amounts outstanding under the Notes as set forth in the Lender’s books and records (the “Outstanding Amount”). The Borrower shall also be responsible for reimbursing the Lender for all costs and expenses, including the fees and expenses of legal counsel that may be incurred in connection with the enforcement of this Letter Agreement, which, if incurred, shall be added to the Outstanding Amount. The Borrower acknowledges and agrees that the Outstanding Amount, plus interest accrued thereon, shall be due and owing upon termination of the Forbearance Period.
3. No Defenses. The Borrower has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, or causes of action of any kind or nature whatsoever against the Lender, its officers, directors, employees, attorneys, legal representatives or affiliates (collectively, the “Lender Group”), directly or indirectly, arising out of, based upon, or in any manner connected with, any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or began prior to the execution of this Letter Agreement and accrued, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of the Notes or any of the terms or conditions of the Loan Documents, or which directly or indirectly relate to or arise out of or in any manner are connected with the Notes or any of the Loan Documents; TO THE EXTENT ANY SUCH DEFENSES, AFFIRMATIVE OR OTHERWISE, RIGHTS OF SETOFF, RIGHTS OF RECOUPMENT, CLAIMS, COUNTERCLAIMS, OR CAUSES OF ACTION EXIST, SUCH DEFENSES, RIGHTS, CLAIMS, COUNTERCLAIMS, AND CAUSES OF ACTION ARE HEREBY FOREVER WAIVED, DISCHARGED AND RELEASED.
4. Interest Continues to Accrue. During the Forbearance Period, the Outstanding Amount shall bear interest at a new interest rate under the Notes of eighteen percent (18%).
5. Other Notes. none
6. Forbearance. During the Forbearance Period, the Lender agrees that it will not take any further action against the Borrower or exercise or move to enforce any other rights or remedies provided for in the Loan Documents or otherwise available to it, at law or in equity, by virtue of the occurrence and/or continuation of any default or Event of Default under the Notes existing on the date hereof, including any default relating to the Borrower’s failure to maintain the effectiveness of any registration statement (the “Existing Defaults”), or take any action against any property in which the Borrower has any interest. Interest payments are not required during forbearance period.
7. Lender to Retain all Rights. It is understood and agreed that this Letter Agreement does not waive or evidence consent to any default or Event of Default (including the Existing Defaults) under the Notes or the Loan Documents. The parties hereto acknowledge and agree that the Lender (i) shall retain all rights and remedies it may now have with respect to the Notes and the Borrower’s obligations under the Loan Documents (“Default Rights”), and (ii) shall have the right to exercise and enforce such Default Rights upon termination of the Forbearance Period. The parties further agree that the exercise of any Default Rights by the Lender upon termination of the Forbearance Period shall not be affected by reason of this Letter Agreement, and the parties hereto shall not assert as a defense thereto the passage of time, estoppel, laches or any statute of limitations to the extent that the exercise of any Default Rights was precluded by this Letter Agreement.
8. Termination of Forbearance Period. The Forbearance Period shall terminate upon the earlier to occur of: (1) 5:00 pm (New York City Time) on August 31, 2013; (2) the Borrower shall fail to observe, perform, or comply with any of the terms, conditions or provisions of this Letter Agreement as and when required and/or any other Event of Default (other than the Existing Defaults occurring prior to the date hereof) shall occur under the Notes or any of the Loan Documents or any other agreement between the Borrower and the Lender (or its affiliates) or any other indebtedness issued by the Borrower to the Lender or its affiliates; (3) any representation or warranty made herein, in any document executed and delivered in connection herewith, or in any report, certificate, financial statement or other instrument or document now or hereafter furnished by or on behalf of the Borrower in connection with this Letter Agreement, shall prove to have been false, incomplete or misleading in any material respect on the date as of which it was made; (4) any suit preceding or other action is commenced by any other creditor against the Company; or (5) a court of competent jurisdiction shall enter an order for relief or take any similar action in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect or a petition for relief under any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law shall be filed by or against the Borrower.
9. Adjustment of Conversion Prices and Ratios. In consideration of the agreement of the Lender to forbear from exercising its rights and remedies as is set forth herein, (i) the Borrowers covenant and agree that, with respect to any Note that is convertible pursuant to its terms, the Conversion Price (as defined and as set forth in the Notes) is, effective as of the date hereof, hereafter reduced to the lowest of (A) 75% of the lowest of the average VWAP (as defined in such Notes) for the one business day, five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the Lender. This conversion adjustments covers from August 31, 2013 and going forward until changed.
Upon termination of the Forbearance Period, should the Notes or any of the Borrower’s obligations under the Loan Documents not be satisfied in full, the Lender shall be entitled to pursue immediately its various rights and remedies, including its Default Rights, against the Borrower, all collateral given by the Borrower to secure the Loan and the obligations under the Loan Documents, without regard to notice and cure periods, all of which are hereby waived by the Borrower. Without limiting the generality of the foregoing, upon termination of the Forbearance Period, the Lender shall be permitted to immediately exercise its rights to demand and collect on the Outstanding Amount. If the foregoing is acceptable to you, please sign in the space provided below.
Sincerely, | ||
Cape One Financial Advisors, LLC | ||
By: | /s/ Reid Drescher | |
Name: Reid Drescher | ||
Title: Managing Member |
Accepted and Agreed as of this day of JULY 23,2013
NATURALNANO, INC.
By: | ||
Name: | ||
Title: |
NATURALNANO RESEARCH, INC. | ||
By: | ||
Name: | ||
Title: |
Alpha Capital
150 Central Park South
2nd Floor
New York, NY 10019
VIA FACSIMILE AND FIRST CLASS MAIL
Effective June 30, 2013
Re: FORBEARANCE AGREEMENT
Ladies and Gentlemen:
Reference is made 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, on or about 4/3/2009 a $34,750 note, on or about 10/22/2009 a note for $40,000, on and about 7/21/2010 a note for $3846. on and about 10/20/2010 a note for $3077, on and about 11/12/2010, a note for $9000 and $24,000 on or about July 19, 2012, on or about December 4, 2012, $2500 and on or about December 10, 2012, $2500, and on or about February 11, 2013 $3500 and on or about June 28, 2013 $2500(together the “Notes”) from NaturalNano, Inc. and NaturalNano Research. Inc. (jointly and severally, the “Borrower”) to Alpha Capital (the “Lender”). Capitalized terms used herein and not otherwise defined shall have the respective meanings given in the Notes.
The Borrower has requested that the Lender forbear from exercising its various rights and remedies under the Notes and other related documents (collectively, the “Loan Documents”) that may otherwise be exercised by the Lender on the date hereof, in order to provide the Borrower with additional time during which it may resolve its current financial problems.
The Lender is prepared to forbear from demanding payment of principal on the Notes on the Maturity Date of the Notes, or taking any other action to collect the principal amount of the Notes until the earlier of November 30, 2013 (unless extended by the Lender in its discretion) or the termination of the Forbearance Period pursuant to the terms of this Letter Agreement (such period, the “Forbearance Period”), provided the Borrower accepts and agrees to the terms, conditions and covenants set forth herein, and communicates such acceptance (by delivering a signed copy of this Letter Agreement) to the Lender no later than 5:00 p.m. on November 30, 2013; provided further it is understood that Borrower is not obligated to make all interest payments required under the Notes during the Forbearance Period.
Upon execution by the Borrower, this letter shall be a binding agreement among the respective parties hereto (referred to as the “Letter Agreement”).
By its execution, the Borrower represents, warrants and covenants as follows:
1. No Duress. The Borrower has freely and voluntarily entered into this Letter Agreement after an adequate opportunity to review and discuss the terms and conditions and all factual and legal matters relevant hereto with counsel freely and independently chosen by it and this Letter Agreement is being executed without fraud, duress, undue influence or coercion of any kind or nature whatsoever having been exerted by or imposed upon any party.
2. Amount Due. The Borrower does not contest the amounts outstanding under the Notes as set forth in the Lender’s books and records (the “Outstanding Amount”). The Borrower shall also be responsible for reimbursing the Lender for all costs and expenses, including the fees and expenses of legal counsel that may be incurred in connection with the enforcement of this Letter Agreement, which, if incurred, shall be added to the Outstanding Amount. The Borrower acknowledges and agrees that the Outstanding Amount, plus interest accrued thereon, shall be due and owing upon termination of the Forbearance Period.
3. No Defenses. The Borrower has no defenses, affirmative or otherwise, rights of setoff, rights of recoupment, claims, counterclaims, or causes of action of any kind or nature whatsoever against the Lender, its officers, directors, employees, attorneys, legal representatives or affiliates (collectively, the “Lender Group”), directly or indirectly, arising out of, based upon, or in any manner connected with, any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, whether known or unknown, which occurred, existed, was taken, permitted, or began prior to the execution of this Letter Agreement and accrued, existed, was taken, permitted or begun in accordance with, pursuant to, or by virtue of the Notes or any of the terms or conditions of the Loan Documents, or which directly or indirectly relate to or arise out of or in any manner are connected with the Notes or any of the Loan Documents; TO THE EXTENT ANY SUCH DEFENSES, AFFIRMATIVE OR OTHERWISE, RIGHTS OF SETOFF, RIGHTS OF RECOUPMENT, CLAIMS, COUNTERCLAIMS, OR CAUSES OF ACTION EXIST, SUCH DEFENSES, RIGHTS, CLAIMS, COUNTERCLAIMS, AND CAUSES OF ACTION ARE HEREBY FOREVER WAIVED, DISCHARGED AND RELEASED.
4. Interest Continues to Accrue. During the Forbearance Period, the Outstanding Amount shall bear interest at a new interest rate under the Notes (8%); it being understood that the default rate shall apply upon the occurrence of any Event of Default (other than Existing Defaults) there under or upon termination of the Forbearance Period.
5. Other Notes. The Borrower agrees that it shall not provide any holder of the Notes issued on or about March 6, 2007, August 5, 2008, September 29, 2008 or October 31, 2008, 4/3/2009, 10/22/2009, 07/21/2010, 10/20,2010, 11,12,2010 (the “Other Notes”) any concession or payment with respect to such Other Notes without first offering the Lender the opportunity to receive such payment or concession with respect to the Notes.
6. Forbearance. During the Forbearance Period, the Lender agrees that it will not take any further action against the Borrower or exercise or move to enforce any other rights or remedies provided for in the Loan Documents or otherwise available to it, at law or in equity, by virtue of the occurrence and/or continuation of any default or Event of Default under the Notes existing on the date hereof, including any default relating to the Borrower’s failure to maintain the effectiveness of any registration statement (the “Existing Defaults”), or take any action against any property in which the Borrower has any interest.
7. Lender to Retain all Rights. It is understood and agreed that this Letter Agreement does not waive or evidence consent to any default or Event of Default (including the Existing Defaults) under the Notes or the Loan Documents. The parties hereto acknowledge and agree that the Lender (i) shall retain all rights and remedies it may now have with respect to the Notes and the Borrower’s obligations under the Loan Documents (“Default Rights”), and (ii) shall have the right to exercise and enforce such Default Rights upon termination of the Forbearance Period. The parties further agree that the exercise of any Default Rights by the Lender upon termination of the Forbearance Period shall not be affected by reason of this Letter Agreement, and the parties hereto shall not assert as a defense thereto the passage of time, estoppel, laches or any statute of limitations to the extent that the exercise of any Default Rights was precluded by this Letter Agreement.
8. Termination of Forbearance Period. The Forbearance Period shall terminate upon the earlier to occur of: (1) 5:00 pm (New York City Time) on November 30, 2013; (2) the Borrower shall fail to observe, perform, or comply with any of the terms, conditions or provisions of this Letter Agreement as and when required and/or any other Event of Default (other than the Existing Defaults occurring prior to the date hereof) shall occur under the Notes or any of the Loan Documents or any other agreement between the Borrower and the Lender (or its affiliates) or any other indebtedness issued by the Borrower to the Lender or its affiliates; (3) any representation or warranty made herein, in any document executed and delivered in connection herewith, or in any report, certificate, financial statement or other instrument or document now or hereafter furnished by or on behalf of the Borrower in connection with this Letter Agreement, shall prove to have been false, incomplete or misleading in any material respect on the date as of which it was made; (4) any suit preceding or other action is commenced by any other creditor against the Company; or (5) a court of competent jurisdiction shall enter an order for relief or take any similar action in respect of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization, moratorium or similar law now or hereafter in effect or a petition for relief under any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law shall be filed by or against the Borrower.
9. Adjustment of Conversion Prices and Ratios. In consideration of the agreement of the Lender to forbear from exercising its rights and remedies as is set forth herein, (i) the Borrowers covenant and agree that, with respect to any Note that is convertible pursuant to its terms, the Conversion Price (as defined and as set forth in the Notes) is, effective as of the date hereof, hereafter reduced to the lowest of (A) 75% of the lowest of the average VWAP (as defined in such Notes) for the one business day, five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the Lender. This conversion adjustments covers from July 1, 2012 and going forward until changed.
Upon termination of the Forbearance Period, should the Notes or any of the Borrower’s obligations under the Loan Documents not be satisfied in full, the Lender shall be entitled to pursue immediately its various rights and remedies, including its Default Rights, against the Borrower, all collateral given by the Borrower to secure the Loan and the obligations under the Loan Documents, without regard to notice and cure periods, all of which are hereby waived by the Borrower. Without limiting the generality of the foregoing, upon termination of the Forbearance Period, the Lender shall be permitted to immediately exercise its rights to demand and collect on the Outstanding Amount.
If the foregoing is acceptable to you. please sign in the space provided below.
Sincerely, | ||
Alpha Capital. | ||
By: | /s/ Konrad Ackermann | |
Name: Konrad Ackermann | ||
Title: Director |
Accepted and Agreed as of this 23 of July 2013
NATURALNANO, INC.
By: | ||
Name: James Wemett | ||
Title: Acting President and CEO |
NATURALNANO RESEARCH, INC. | ||
By: | ||
Name: James Wemett | ||
Title: Acting President and CEO |
EXHIBIT 31.1
CERTIFICATION OF
PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER
PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, James Wemett, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of NaturalNano, Inc. (the “registrant”) for the period ended June 30, 2013, |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | As the registrant's certifying officer I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5) | As the registrant's certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: August 19, 2013
By: | /s/ James Wemett |
Name: | James Wemett |
Title: | President |
(Principal Executive, Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NaturalNano, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, James Wemett, President of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 19, 2013
By: | /s/ James Wemett |
Name: | James Wemett |
Title: | President |
(Principal Executive, Financial and Accounting Officer) |
NOTES PAYABLE (Tables)
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
|
||||||||||||||||||||||||||||||||||||||||||
Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||
Schedule of Debt [Table Text Block] | Notes payable consisted of the following:
|
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Income: | ||||
Revenue | $ 117,420 | $ 17,275 | $ 123,318 | $ 48,548 |
Cost of goods sold | 23,581 | 1,053 | 24,030 | 3,131 |
Gross profit | 93,839 | 16,222 | 99,288 | 45,417 |
Operating expenses: | ||||
Research and development | 12,661 | 29,322 | 27,592 | 68,707 |
General and administrative | 112,990 | 79,613 | 183,266 | 174,888 |
Operating Expenses, Total | 125,651 | 108,935 | 210,858 | 243,595 |
(Loss) from operations | (31,812) | (92,713) | (111,570) | (198,178) |
Other income (expense): | ||||
Interest expense, net | (91,401) | (110,153) | (181,550) | (208,501) |
Net loss on derivative liability | (66,854) | 0 | (76,688) | 0 |
Net gain (loss) on forgiveness/modification of debt | 19,664 | (235,000) | (10,336) | (310,000) |
Nonoperating Income (Expense), Total | (138,591) | (345,153) | (268,574) | (518,501) |
Net loss from continuing operations | (170,403) | (437,866) | (380,144) | (716,679) |
Net income from discontinued operations | 2,022 | 4,441 | 11,115 | 11,020 |
Loss on write-off of discontinued operation | (11,179) | 0 | (11,179) | 0 |
Consolidated net loss attributable to the controlling interest | (179,560) | (433,425) | (380,208) | (705,659) |
Less: Preferred Stock conversion inducement | 0 | 12,235 | 0 | 12,235 |
Consolidated net loss attributable to common shareholders | $ (179,560) | $ (445,660) | $ (380,208) | $ (717,894) |
Continuing operations loss per common share - basic and diluted (in dollars per share) | $ 0.00 | $ (0.01) | $ 0.00 | $ (0.02) |
Discontinued operations income (loss) per common share - basic and diluted | $ 0.00 | $ 0.00 | $ 0.00 | $ 0.00 |
Weighted average shares outstanding (in shares) | 264,395,920 | 40,969,987 | 203,953,811 | 35,357,306 |
DERIVATIVE LIABILITY
|
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Text Block] | 4. DERIVATIVE LIABILITY 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 2012 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. Significant unobservable inputs used in determining the value of the Company’s derivative liability include the trended firm value and volatility. 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 June 30, 2013 are as follows:
The fair value of the derivatives is as follows:
The increase in the fair value of the derivative liability of $76,688 was recognized as a loss on change in derivative liability in the statement of operations for the six months ended June 30, 2013. The remaining $170 increase was recorded in general and administrative expenses in the statement of operations for the six months ended June 30, 2013 and is associated with the value of warrants issued in February 2013 (see Note 5). Significant fluctuations in the variables used in calculating the value of the Company’s derivative liabilities could have significant impact on the fair market valuation. 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.
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 liability was determined utilizing Level 3 inputs. |
NOTES PAYABLE (Details Textual) (USD $)
|
1 Months Ended | 6 Months Ended | 6 Months Ended | 6 Months Ended | 6 Months Ended | 1 Months Ended | 6 Months Ended | 1 Months Ended | 0 Months Ended | 1 Months Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 17, 2007
|
Jun. 30, 2013
|
Jun. 30, 2012
|
Feb. 26, 2013
|
Dec. 31, 2012
|
Jan. 31, 2011
|
Nov. 30, 2009
|
Oct. 31, 2008
|
Sep. 30, 2008
|
Aug. 31, 2008
|
Mar. 31, 2007
|
Jun. 30, 2013
Merit Consulting [Member]
|
Jun. 30, 2013
Five Year Common Stock Purchase Warrant [Member]
|
Jun. 30, 2013
Platinum Long Term Growth and Platinum Advisors [Member]
|
Jun. 30, 2013
Longview Special Financing Inc [Member]
|
Jun. 30, 2013
Cape One [Member]
|
Jun. 30, 2012
Cape One [Member]
|
Jun. 30, 2013
Senior Secured Convertible Promissory Notes [Member]
|
Jun. 30, 2013
Senior Secured Nonconvertible Promissory Notes [Member]
|
Dec. 31, 2012
Senior Secured Nonconvertible Promissory Notes [Member]
|
Jun. 30, 2013
8% Senior Secured Convertible Notes [Member]
Longview Special Financing Inc [Member]
|
Jul. 30, 2013
2013 Senior Secured Promissory Notes [Member]
|
Jun. 30, 2013
2013 Senior Secured Promissory Notes [Member]
|
Oct. 30, 2013
2013 Senior Secured Promissory Notes [Member]
Subsequent Event [Member]
|
Sep. 30, 2013
2013 Senior Secured Promissory Notes [Member]
Subsequent Event [Member]
|
Dec. 04, 2009
10% Subordinated Secured Convertible Promissory Note [Member]
|
Nov. 30, 2009
10% Subordinated Secured Convertible Promissory Note [Member]
|
Jun. 30, 2013
Convertible Notes Payable [Member]
|
|
Notes Payable [Line Items] | ||||||||||||||||||||||||||||
Notes Payable, Total | $ 4,004,565 | $ 3,893,972 | $ 3,733,465 | $ 3,642,972 | $ 100,506 | $ 271,100 | ||||||||||||||||||||||
Notes Payable Written Off | 3,113,549 | 619,916 | ||||||||||||||||||||||||||
Debt Instrument Convertible Conversion Price Initial | $ 3.74 | |||||||||||||||||||||||||||
Debt Instrument, Convertible, Conversion Price | $ 0.085 | |||||||||||||||||||||||||||
Debt Instrument, Convertible, Terms of Conversion Feature | In consideration for forbearance in 2012, the conversion rate of the note was adjusted from $0.085 to 75% of the lowest VWAP for the 1, 5 or 10-day period immediately prior to the conversion. | As compensation for forbearance from the lenders in 2012, the conversion rate was further adjusted to 75% of the lowest daily volume weighted average price (VWAP) of the Company’s common stock for the 1, 5 or 10 days immediately prior to the conversion. | 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 $0.085 per share (the “Conversion Price”), subject to adjustment upon the occurrence of certain anti-dilution events. | |||||||||||||||||||||||||
Debt Instrument Convertible Number Of Equity Instruments For Outstanding Principal | 9,000,000 | 9,500,000 | ||||||||||||||||||||||||||
Convertible Debt | 10,013 | |||||||||||||||||||||||||||
Debt Instrument Convertible Number Of Equity Instruments For Accrued Interest | 8,775 | 29,000,000 | ||||||||||||||||||||||||||
Convertible Debt Accrued Interest | 24,038 | |||||||||||||||||||||||||||
Notes Payable Interest Payment | 30,006 | 21,000 | 2,500 | 47,000 | ||||||||||||||||||||||||
Forbearance Charges Added To Principal Balance | 50,000 | 55,000 | ||||||||||||||||||||||||||
Loss On Modification Notes Payable | 50,000 | 30,000 | 25,000 | |||||||||||||||||||||||||
Proceeds from Issuance of Secured Debt | 197,500 | |||||||||||||||||||||||||||
Notes Issued | 225,000 | |||||||||||||||||||||||||||
Class of Warrant or Right, Number of Securities Called by Warrants or Rights | 2,647,059 | |||||||||||||||||||||||||||
Class Of Warrant Or Right Par Value Of Securities Called By Warrants Or Rights | $ 0.001 | |||||||||||||||||||||||||||
Class of Warrant or Right, Exercise Price of Warrants or Rights | 0.0014 | 0.17 | 0.425 | 0.425 | ||||||||||||||||||||||||
Stock Issuance For Interest Payment Percentage Discount | 20.00% | |||||||||||||||||||||||||||
Interest Payment Percentage Payable On Default | 18.00% | |||||||||||||||||||||||||||
Liquidated Damages | 146,028 | |||||||||||||||||||||||||||
Liquidated Damages Paid Value | 63,539 | |||||||||||||||||||||||||||
Accrued Registration Rights Obligation | 82,489 | 82,489 | ||||||||||||||||||||||||||
Liquidated Damage Allowed As Percentage Of Note | 0.0333% | |||||||||||||||||||||||||||
Stock Issued During Period, Shares, Conversion Of Convertible Securities | 21,478 | 11,406,881 | 25,872,435 | 12,000,000 | ||||||||||||||||||||||||
Debt Instrument, Face Amount | $ 9,900 | |||||||||||||||||||||||||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | 10.00% | 8.00% | 8.00% | 8.00% | 8.00% |
DISCONTINUED OPERATIONS (Tables)
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued Operations and Disposal Groups [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Disposal Groups Including Discontinued Operations Income Statement Disclosures [Table Text Block] | The results of discontinued operations are as follows:
|
DERIVATIVE LIABILITY (Details) (USD $)
|
Jun. 30, 2013
|
Dec. 31, 2012
|
---|---|---|
Derivative [Line Items] | ||
Derivative Liability, Fair Value, Net | $ 102,590 | $ 25,732 |
8% Notes conversion feature [Member]
|
||
Derivative [Line Items] | ||
Derivative Liability, Fair Value, Net | 85,465 | 24,285 |
10% Notes conversion feature [Member]
|
||
Derivative [Line Items] | ||
Derivative Liability, Fair Value, Net | $ 17,125 | $ 1,447 |
DISCONTINUED OPERATIONS (Details Textual) (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
|
Discontinued Operations [Line Items] | ||||
Loss on write-off of discontinued operation | $ 11,179 | $ 0 | $ 11,179 | $ 0 |
SUBSEQUENT EVENTS (Details Textual) (USD $)
|
6 Months Ended | 6 Months Ended | 1 Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jul. 01, 2013
|
Dec. 31, 2012
|
Nov. 30, 2009
|
Oct. 31, 2008
|
Sep. 30, 2008
|
Aug. 31, 2008
|
Mar. 31, 2007
|
Jun. 30, 2013
Series D Preferred Stock [Member]
|
Aug. 31, 2013
Subsequent Event [Member]
Platinum Partners Long Term Growth IV [Member]
|
Jul. 25, 2013
Subsequent Event [Member]
Platinum Partners Long Term Growth IV [Member]
|
|
Subsequent Event [Line Items] | ||||||||||||
Long-term Debt, Gross | $ 12,000 | |||||||||||
Debt Instrument, Interest Rate, Stated Percentage | 8.00% | 10.00% | 8.00% | 8.00% | 8.00% | 8.00% | 8.00% | |||||
Conversion of Stock, Description | On August 13, 2013, Platinum Long Term Growth IV, LLC elected to convert 181,604 shares of their Series C preferred shares into 29,056,640 common shares at the conversion rate of 160 common shares per each Series C share. | |||||||||||
Stock Issued During Period Shares New Issues | 100 | |||||||||||
Common Stock, Shares Authorized | 294,117,647 | 294,117,647 | 294,117,647 | |||||||||
Weighted Average Number of Shares Outstanding, Diluted | 5,292,124,009 | 107,820,194 | ||||||||||
Increase In Common Stock Authorized | 800,000,000 |
INCENTIVE STOCK PLANS (Details) (Incentive Stock Plans [Member], USD $)
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Incentive Stock Plans [Member]
|
|
Stock Option Plan [Line Items] | |
Shares Outstanding at beginning of year | 723,137 |
Shares Granted/Exercises/Cancelled/Forfeited | (14,117) |
Shares outstanding at end of year | 709,020 |
Shares exercisable at end of year | 709,020 |
Weighted Average Exercise Price Outstanding at beginning of year | $ 3.07 |
Weighted Average Exercise Price outstanding at end of year | $ 3.57 |
Weighted Average Exercise Price exercisable at end of year | $ 3.57 |
Weighted Average Remaining Life-years Outstanding at beginning of year | 3 years 6 months 11 days |
Weighted Average Remaining Life years Warrants outstanding at end of year | 2 years 7 months 13 days |
Weighted Average Remaining Life Years Warrants exercisable at end of year | 2 years 7 months 13 days |
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