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, 2014___________________
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.) | |
763 Linden Ave Rochester NY | 14625 | |
(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:
597,473,866 as of August 18, 2014
Table of Contents
PART I—FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
Consolidated Balance Sheets | 3 | |||
Consolidated Statements of Operations | 4 | |||
Consolidated Statements 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 | 13 | |||
Note Regarding Forward-Looking Statements | ||||
Item 4. | Controls and Procedures | 17 | ||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 18 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 18 | ||
Item 3. | Defaults Upon Senior Securities | 18 | ||
Item 4. | Mine Safety Disclosures | 18 | ||
Item 5. | Other Information | 18 | ||
Item 6. | Exhibits | 19 | ||
SIGNATURES | 20 |
2 |
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, | December 31, | |||||||
2014 | 2013 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 182 | $ | - | ||||
Accounts Receivable | 8,400 | 23,206 | ||||||
Inventory | 13,131 | 13,246 | ||||||
Prepaid expenses and other current assets | 12,040 | 7,040 | ||||||
Bitcoin auction deposit | 200,000 | - | ||||||
Receivable due from MJ Enterprises | 200,000 | - | ||||||
Total current assets | 433,753 | 43,492 | ||||||
Total Assets | $ | 433,753 | $ | 43,492 | ||||
Liabilities and Stockholders' Deficiency | ||||||||
Liaiblities | ||||||||
Current Liabilities | ||||||||
Notes payable (Note 2) | $ | 1,721,036 | $ | 4,088,425 | ||||
Accounts payable | 445,223 | 478,127 | ||||||
Accrued expenses | 101,252 | 100,331 | ||||||
Accrued interest | 211,111 | 611,261 | ||||||
Accrued payroll | 1,024,584 | 978,340 | ||||||
Registration rights liability | 12,324 | 82,489 | ||||||
Derivative liability (Note 4) | 421,714 | 32,419 | ||||||
Total current liabilities | 3,937,244 | 6,371,392 | ||||||
Total Liabilities | 3,937,244 | 6,371,392 | ||||||
Preferred Stock - $.001 par value, 10 million shares authorized | ||||||||
Series B - 5,000 shares issued and outstanding with an aggregate liquidation preferance of $10 | 2,126 | 425 | ||||||
Series C - 0 and 2,857,266 shares issued and outstanding, with an aggregate liquidation preference value $0 and $5,175 respectively | - | 242,940 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Stockholders' Deficiency | ||||||||
Common Stock - $.001 par value 800,000,000 authorized with 597,473,866 and 554,339,146 shares issued and outstanding respectively | 597,474 | 554,339 | ||||||
Series D - issued and outstanding 100 shares | - | - | ||||||
Additional paid in capital | 21,352,055 | 21,176,747 | ||||||
Accumulated deficit | (25,455,146 | ) | (28,302,351 | ) | ||||
Total stockholders' deficiency | (3,505,617 | ) | (6,571,265 | ) | ||||
Total liabilities and stockholders' deficiency | $ | 433,753 | $ | 43,492 |
See notes to consolidated financial statements
3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended | For the six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Income: | ||||||||||||||||
Revenue | $ | 42,534 | $ | 117,420 | $ | 46,174 | $ | 123,318 | ||||||||
Cost of good sold | 8,149 | 23,581 | 8,634 | 24,030 | ||||||||||||
Gross Profit | 34,385 | 93,839 | 37,540 | 99,288 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 12,259 | 12,661 | 22,994 | 27,592 | ||||||||||||
General and administrative | 198,096 | 112,990 | 292,241 | 183,266 | ||||||||||||
210,355 | 125,651 | 315,235 | 210,858 | |||||||||||||
Loss from operations | (175,970 | ) | (31,812 | ) | (277,695 | ) | (111,570 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense (net) | (96,717 | ) | (91,401 | ) | (192,264 | ) | (181,550 | ) | ||||||||
Net loss on derivative liability | (363,801 | ) | (66,854 | ) | (390,109 | ) | (76,688 | ) | ||||||||
Net gain(loss) on extinguishment/modification of debt | 3,747,273 | 19,664 | 3,707,273 | (10,336 | ) | |||||||||||
Other income (expense) | 3,286,755 | (138,591 | ) | 3,124,900 | (268,574 | ) | ||||||||||
Net income (loss) from continued operations | 3,110,785 | (170,403 | ) | 2,847,205 | (380,144 | ) | ||||||||||
Net income from discontinued operations | - | 2,022 | - | 11,115 | ||||||||||||
Loss on write-off of discontinue doperations | - | (11,179 | ) | - | (11,179 | ) | ||||||||||
Consolidated net income (loss) | $ | 3,110,785 | ($ | 179,560 | ) | $ | 2,847,205 | ($ | 380,208 | ) | ||||||
Continuing operations income per common share - basic | $ | 0.01 | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | ||||||
Continuing operations income per common share - diluted | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | ||||||
Discontinued operations income per common share - basic and diluted | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | ||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 597,473,866 | 264,395,920 | 589,371,211 | 203,953,811 | ||||||||||||
Fully diluted | 1,132,701,808 | na | 1,124,599,153 | na |
See notes to consolidated financial statements
4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(Unaudited)
Series D | Additional | |||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid in | Accumulated | Stockholders' | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||
Balance at December 31, 2013 | 554,339,146 | $ | 554,339 | 100 | $ | - | $ | 21,176,747 | $ | (28,302,351 | ) | $ | (6,571,265 | ) | ||||||||||||||
Series C preferred shares converted to commons stock and change in value | 43,134,720 | 43,135 | - | - | 69,807 | - | 112,942 | |||||||||||||||||||||
Warrants issued for services | - | - | - | - | 105,501 | - | 105,501 | |||||||||||||||||||||
Net income for the six months ended June 30, 2014 | - | - | - | - | - | 2,847,205 | 2,847,205 | |||||||||||||||||||||
Balance at June 30, 2014 | 597,473,866 | $ | 597,474 | 100 | $ | - | $ | 21,352,055 | $ | (25,455,146 | ) | $ | (3,505,617 | ) |
See notes to consolidated financial statements
5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended | ||||||||
June 30, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Consolidated net income (loss) | $ | 2,847,205 | $ | (380,208 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Net gain(loss) on extinguishment/modification of debt | (3,707,273 | ) | 10,336 | |||||
Change in fair value of derivative liabilities | 390,109 | 76,858 | ||||||
Issuance of warrants for services | 105,501 | 5,814 | ||||||
Changes in operating assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable | 14,806 | (12,800 | ) | |||||
Decrease in inventory | 115 | 6,225 | ||||||
(Increase) in other current assets | (5,000 | ) | (8,044 | ) | ||||
Increase in accounts payable and accrued expenses | 205,719 | 203,496 | ||||||
Net cash used in operating activities | (148,818 | ) | (98,323 | ) | ||||
Cash flows from investing activities | ||||||||
Receivable from MJ Enterprises | (200,000 | ) | - | |||||
Deposit made on bitcoin auction | (200,000 | ) | - | |||||
Net cash used in investing activities | (400,000 | ) | - | |||||
Cash flows from financing activities | ||||||||
Proceeds from senior secured promissory notes | 649,000 | 100,506 | ||||||
Proceeds from bitcoin promissory notes | 2,150,000 | - | ||||||
Repayment of bitcoin promissory notes | (1,950,000 | ) | - | |||||
Payment on extinguishment of debt | (300,000 | ) | - | |||||
Net cash provided by financing activities | 549,000 | 100,506 | ||||||
Increase in cash | 182 | 2,183 | ||||||
Cash at beginning of period | - | 6,160 | ||||||
Cash at end of period | $ | 182 | $ | 8,343 | ||||
Schedule of non-cash investing and financing activities: | ||||||||
Common stock issued for convertible notes | $ | - | $ | 19,913 | ||||
Common stock issued for accrued interest | $ | - | $ | 54,291 |
See notes to consolidated financial statements
6 |
For the three and six months ended June 30, 2014 and 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES |
Interim Financial Statements
The consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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, 2013.
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. The Company generated net income for the six months ended June 30, 2014 of approximately $2,847,000, primarily from a non-cash gain on the extinguishment of debt in the second quarter of 2014, had negative working capital of approximately $3,503,000 and a stockholders’ deficiency of approximately $3,506,000 at June 30, 2014. Since inception the Company’s growth has been funded through a combination of convertible and non-convertible debt from private investors and from cash advances from its former parent 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, 2014, 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.
Basis of Consolidation
The consolidated financial statements include the accounts of NaturalNano, Inc. (“NaturalNano” or the “Company”), a Nevada corporation, and its wholly owned subsidiaries NaturalNano Research, Inc. (“NN Research”) a Delaware corporation and Bitcoin Bidder, Inc. a Nevada corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.
NaturalNano established its subsidiary, Bitcoin Bidder, Inc. in June, 2014 for the sole purpose of bidding on bitcoins which were seized by the FBI and were sold at auction June 27, 2014. Bitcoin Bidder, Inc. was not successful at the auction and is expected to be dissolved in 2014.
Description of the Business
NaturalNano (the “Company”), located in Rochester, 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; and |
• | polymers, plastics and composites |
During the six months ended June 30, 2014 and 2013 the Company derived 94% of its total revenue from one customer.
7 |
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
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
· | 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 carrying amounts reported in the balance sheet of cash, accounts receivable, prepaids, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes payable approximates their carrying value as the terms of this debt reflects market conditions. The Company’s derivative liability was determined utilizing Level 3 inputs.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to June 2014 considering company specific factors including the changes in forward estimated revenues and market factors, market multiples for comparable companies, and the Company’s market share price, all equally weighted. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities in the Company’s capital structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
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 the 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, 2014 and 2013.
Income (Loss) Per Share
Basic loss per common share is computed by dividing net income or loss by the weighted-average number of shares of common stock outstanding during the period. Diluted income or 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, 2014 and 2013 there were 1,125,518,683 and 5,292,124,009 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 lenders. 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. Approximately 5 million shares were excluded from the calculation of diluted earnings per share as of June 30, 2014 as their inclusion would have been anti-dilutive.
Recent Accounting Pronouncements
In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We have not yet selected a transition method and we are currently evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.
8 |
2. | NOTES PAYABLE |
Notes payable consisted of the following:
Notes Payable | June 30, 2014 | December 31, 2013 | ||||||
Senior Secured Convertible Notes | $ | 441,998 | $ | 3,124,403 | ||||
Senior Secured Promissory Notes | 398,938 | 692,922 | ||||||
Subordinated Secured Convertible Note | 311,100 | 271,100 | ||||||
2014 Convertible Promissory Notes | 369,000 | - | ||||||
Bitcoin Promissory Notes | 200,000 | - | ||||||
$ | 1,721,036 | $ | 4,088,425 |
Senior Secured Convertible Notes and Senior Secured Promissory Notes
As of June 30, 2014, Notes payable on the balance sheet includes $840,936 ($3,817,325 at December 31, 2013) for senior secured convertible and non-convertible senior secured promissory notes. The conversion rate for principal and accrued interest on Senior Secured Convertible Notes is 75% of the lowest volume weighted average price (VWAP) of the Company’s common stock for the 1, 5 or 10 days immediately prior to the conversion. As further described below, the Company has defaulted on certain provisions of the notes. The Company has obtained a waiver of default on the outstanding principal through November 20, 2014. As a condition of this forbearance the interest rate on these notes has been increased to 18% effective July 18, 2014.
2014 Senior Secured Promissory Notes
During the first quarter of 2014, the Company entered into various Senior Secured Promissory Notes aggregating to $280,000. The 2014 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 2014 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 2014 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 18% per annum as a condition of forbearance and are payable in cash on November 20, 2014.
Payoff Agreement with Platinum Long Term Growth IV, LLC and Merit Consulting LLC
On June 26, 2014, the Company entered into a Payoff Agreement with two of its lenders (collectively referred to as “the holders”) where the holders agreed to surrender their outstanding promissory notes and debentures in the aggregate principal amount of $3,256,399 plus all accrued and unpaid interest amounting to $592,414 in consideration for an aggregate payment of $300,000. As further consideration, one of the lenders agreed to return its 2,587,674 shares of Series C Preferred Stock for cancellation. The Company reversed $70,165 in registration rights liabilities in connection with this Payoff Agreement. Effective upon the consummation of this Payoff Agreement, the Company had no further obligation to the holders pursuant to the terms of the preferred stock and the notes as defined in the Payoff Agreement. As a result of this Payoff Agreement, the Company recognized a gain on extinguishment of debt during the second quarter of 2014 in the amount of $3,747,273.
Subordinated Secured Convertible Note
As of June 30, 2014, Notes payable on the balance sheet includes $311,100 ($271,100 at December 31, 2013) for Subordinated Secured Convertible Notes. The conversion rate for principal and accrued interest on Subordinated Secured Convertible Notes is 75% of the lowest 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 periods ended June 30, 2014 and June 30, 2013, the Company entered into forbearance agreements with Cape One which extended the due dates of certain outstanding notes and accrued interest. As consideration for this forbearance, the lender increased its principal balance outstanding by $40,000 and $30,000 in the respectively periods cited above. These amounts were added to the principal balance of the Initial Notes and the Company recognized a loss on modification of debt of $40,000 and $30,000, respectively in the six month periods ended June 30, 2014 and June 30, 2013. Also as a condition of forbearance, the interest rate on this note had been increased to 18% in a prior year. On July 23, 2014, the Company and Cape One Master Fund II LLP agreed to exchange all outstanding notes and related accrued and unpaid interest in exchange for 2 billion reserved shares of the Company’s common stock. See Note 7 Subsequent Events.
2014 Convertible Promissory Notes
On June 27, 2014, the Company sold $300,000 in 8% convertible promissory notes to certain accredited investors due and payable on September 27, 2014. The Company used the proceeds from the sale of these notes for the payment described in the Payoff Agreement above with Platinum and Merit. These notes are convertible into shares of the Company’s common stock at an initial conversion price of $0.001 per share subject to adjustment in the event of lower price issuances, subject to customary exceptions. The Company may prepay any amount due under the notes prior to the maturity date. The notes are subject to certain events of default which would cause all amounts due to become immediately payable. The Company is prohibited from effecting the conversion of the notes to the extent that as a result of such conversion, the note holders would beneficially own more than 4.99% of the issued and outstanding shares of the Company’s common stock.
9 |
On May 8, 2014 the Company issued an 8% convertible promissory note in the amount of $45,000 that was due on June 30, 2014. The note holder has granted a forbearance agreement which extends the due date of this note to August 30, 2014 and increases the interest rate to 18%. The Company used the proceeds of this note for operating purposes. The May 8, 2014 note is convertible into shares of the Company’s common stock at a conversion price of $0.22 per share subject to adjustment in the event of lower price issuances, subject to customary exceptions. Based on the Company’s issuance of new notes subsequent to May 8, 2014, the conversion price was modified to $0.001 per share. The Company may prepay any amount due under the notes prior to the maturity date. The notes are subject to certain events of default which would cause all amounts due to become immediately payable. The Company is prohibited from effecting the conversion of the notes to the extent that as a result of such conversion, the note holders would beneficially own more than 4.99% of the issued and outstanding shares of the Company’s common stock.
On June 12, 2014 the Company issued an 8% convertible promissory note in the amount of $24,000 that is due and payable on September 27, 2014. The Company used the proceeds of this note for operating purposes. The June 12, 2014 note is convertible into shares of the Company’s common stock at a conversion price of $0.22 per share subject to adjustment in the event of lower price issuances, subject to customary exceptions. Based on the Company’s issuance of new notes subsequent to June 12, 2014 (see Note 7), the conversion price was modified to $0.001 per share. The Company may prepay any amount due under the notes prior to the maturity date. The notes are subject to certain events of default which would cause all amounts due to become immediately payable. The Company is prohibited from effecting the conversion of the notes to the extent that as a result of such conversion, the note holders would beneficially own more than 4.99% of the issued and outstanding shares of the Company’s common stock.
Bitcoin Promissory Notes
The Company established its subsidiary, Bitcoin Bidder, Inc. in June, 2014 for the sole purpose of bidding on bitcoins which had been seized by the FBI and were sold at auction June 27, 2014. In connection with this, the Company issued notes aggregating $2,150,000 under a Securities Purchase Agreement. Bitcoin Bidder, Inc. was not successful at the auction and $1,950,000 in borrowings was repaid to the lenders on June 30, 2014. The remaining $200,000 was repaid to the lenders in July, 2014 without any penalty or interest charges to NaturalNano. The Company intends to dissolve Bitcoin Bidder, Inc. in 2014.
3. | 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 June 2014 considering company specific factors including the changes in forward estimated revenues and market factors. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative and other securities in the Company’s capital structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
The Company’s derivative liabilities as of June 30, 2014 and December 31, 2013 are as follows:
· | The debt conversion feature embedded in the Senior Secured Convertible Notes entered into in March 2007 which contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price (described in Note 2.) |
· | The debt conversion feature and the 2,647,059 warrants exercisable at $0.425 per share granted in connection with the Subordinated Secured Convertible Note entered into in November 2009. These agreements contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below the exercise price (described in Note 2.) |
· | The debt conversion feature embedded in the 2014 Convertible Promissory Notes entered into in 2014 which contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price (described in Note 2.) |
· | Derivative liabilities related to outstanding warrants and options due to the Company having insufficient authorized shares to satisfy the exercise or conversion of all outstanding instruments as of June 30, 2014 and December 31, 2013. |
The fair value of the derivative liabilities as of June 30, 2014 and December 31, 2013 are as follows:
June 30 2014 | December 31, 2013 | |||||||
Derivative Instrument | ||||||||
Senior Secured Convertible Notes conversion feature | $ | 43,666 | $ | 18,045 | ||||
Subordinated Secured Convertible Note conversion feature | 35,731 | 3,946 | ||||||
2014 Convertible Promissory Notes conversion feature | 244,117 | - | ||||||
Warrant liability | 98,200 | 10,428 | ||||||
Total | $ | 421,714 | $ | 32,419 |
The increase in the fair value of the derivative liability of $390,109 was recognized as a loss on change in derivative liability in the statement of operations for the six months ended June 30, 2014. 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.
10 |
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 Company’s derivative liability was determined utilizing Level 3 inputs.
4. | STOCKHOLDERS EQUITY |
As of June 30, 2014 the Company was authorized to issue up to 800,000,000 shares of common stock and 10,000,000 shares of preferred stock.
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 to 800,000,000 common shares. As of June 30, 2014 there were 1,125,518,683 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. (See Note 7 Subsequent Events.)
Preferred Stock Issuances
Each share of the Series B and Series C Convertible Preferred Stock is convertible into 160 shares of the Company’s common stock and votes on an as-converted basis (with each share having 160 votes). Both the Series B and Series C designations limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to no more than 4.99% of the votes attributable to the total outstanding common shares. Accordingly, the votes attributable to the Series B and Series C Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares on an as converted basis and the votes attributable to Series B and 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).
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.
During the six months ended June 30, 2014, Platinum elected to convert 269,592 shares of their Series C preferred shares into 43,134,720 common shares at the conversion rate of 160 common shares per each Series C share.
In connection with the June 27, 2014 Payoff Agreement (Note 2) all shares of the remaining Series C preferred shares were cancelled.
Warrants Grants
The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of June 30, 2014 and December 31, 2013 there were common stock warrants outstanding to purchase an aggregate of 118,235,294 and 166,235,294 shares of common stock, respectively, pursuant to the warrant grant agreements.
On May 8, 2014, the Company granted a total of 48,000,000 warrants to certain consultants, the Company’s CEO and the Company’s independent board member. These warrants, included in the summary 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 and contain a cashless exercise provision. The fair value of the warrants on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $105,501. An expected volatility assumption of 289% was used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.63% which was derived from the U.S. treasury yields on the date of grant. The market price of the Company’s common stock on the grant date was $0.0022 per share. The expiration date used in the valuation model aligns with the warrant life of five years as indicated in the agreements. The dividend yield was assumed to be zero.
A summary of the outstanding warrants is presented below:
2014 | ||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average Remaining Life-years | ||||||||||
Outstanding at January 1, 2014 | 118,235,294 | $ | 0.0142 | 5.9 | ||||||||
Granted | 48,000,000 | 0.0014 | ||||||||||
Cancelled or forfeited | - | |||||||||||
Warrants outstanding at June 30, 2014 | 166,235,294 | $ | 0.0105 | 5.24 | ||||||||
Warrants exercisable at June 30, 2014 | 166,235,294 | $ | 0.0105 | 5.24 |
11 |
5. | INCENTIVE STOCK PLANS |
A summary of the status of the outstanding incentive stock plans is presented below at June 30, 2014 and December 31, 2013:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Life-years | ||||||||||
Options outstanding at January 1, 2014 | 709,020 | $ | 3.57 | 2.11 | ||||||||
Options granted/exercises/cancelled/forfeited | - | |||||||||||
Options outstanding at June 30, 2014 | 709,020 | $ | 3.57 | 1.61 | ||||||||
Options exercisable at June 30, 2014 | 709,020 | $ | 3.57 | 1.61 |
All compensation costs for the above options have been previously recognized in operations.
6. | DISCONTINUED OPERATIONS |
In the second quarter of 2013, the Company ceased all activities associated with the Medical Board business segment. 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 six month period ended June 30, 2013 reflects the Medical Board business as a discontinued operation. The six months ended June 30, 2013 included revenues from this discontinued operation of $14,750, cost of goods sold of $3,635 and gross margin of $11,115. 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. The Nanotechnology business remains as the Company’s only reportable operating segment.
7. | SUBSEQUENT EVENTS |
8% Convertible Promissory Notes – Alpha Capital Anstalt LLC
On July 28, 2014, the Company issued a $30,000 convertible promissory note with Alpha Capital Anstalt LLC. The note is due on September 27, 2014, bears interest at 8% per annum. The note and the interest accrued on the note are convertible into the Company’s 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% of the issued and outstanding Common Stock) at $0.001 per share subject to adjustment upon the occurrence of certain anti-dilution events.
On July 29, 2014, the Company issued a $5,000 convertible promissory note with Marlin Capital Investments LLC. The note is due on November 20, 2014, bears interest at 8% per annum. The note and the interest accrued on the note are convertible into the Company’s 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% of the issued and outstanding Common Stock) at $0.001 per share subject to adjustment upon the occurrence of certain anti-dilution events.
Increase in Authorized Shares and Reverse Split
On July 18, 2014 the holder of the Company’s preferred D shares which control 51% of all votes in matters subject to shareholder approval, approved an amendment to the Company’s articles of incorporation to increase the number of authorized common and preferred shares from 800,000,000 and 10,000,000, respectively, to 1,800,000,000 and 100,000,000, respectively. Additionally, a reverse split was authorized for issued and outstanding shares of common stock in a range of 100 to one to 600 to one. None of these approved changes have been affected as of August 14, 2014.
Exchange and Right to Shares Agreement – Cape One Master Fund II LP
On July 23, 2014, the Company and Cape One Master Fund II LLP agreed to exchange the Subordinated Secured Convertible Note and related accrued and unpaid interest in exchange for 2 billion reserved shares of the Company’s common stock. The Company and Cape One agreed that a beneficial ownership limitation of 4.99% shall be maintained at all times as to the number of the shares of the common stock outstanding immediately after giving effect to the issuance of the common stock issuable under this agreement. Cape One also agreed to a Lockup provision in the agreement that specifies that Cape One will not sell, transfer or hypothecate any of the reserved shares until Alpha Capital Anstalt has received $3,500,000 from the proceeds of sales of shares obtained upon conversion of notes issued by the Company and held by Alpha as of the date of this agreement. Upon expiration of the Lockup period, Cape One shall be allowed to sell the lesser of (i) 5% of the daily trading volume of the Company’s common stock or, (ii) 10% of the reserved shares in any calendar month. The Company has agreed to reserve 10 million shares (based upon a one-for 200 reverse stock split) in connection with this agreement.
Bitcoin Bidder, Inc. return of $200,000 deposit and Note Payoff Agreement
On July 3, 2014, the $200,000 deposit submitted by Bitcoin Bidder, Inc. was refunded to the Company (see Note 2.) The Company repaid the remaining $200,00010% promissory notes with no penalty or interest charges incurred. The note holders agreed to waive any and all interest accrued on the notes as of the date of the payoff agreement.
12 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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.
The Company
NaturalNano, Inc. (the “Company”), located in Rochester, New York, is engaged in the development and commercialization of material additives based on nanomaterials technology utilizing halloysite nanotubes (HNTs). The Company provides additives designed to improve the processing characteristics and mechanical properties of engineering thermoplastics and additives designed to optimize release of active agent such as vitamins and fragrance in cosmetics products. NaturalNano holds patents relating to the commercial use of HNTs in composite materials as well as specialized techniques used in the refinement and processing of HNTs and intermediaries that it ships to customers. HNT materials used as a surface treatment have also shown promise in medical research in stem cell collection and in trapping circulating cancer cells. The Company is also exploring surface treatments related to improved adhesion of protective coatings for polymer components used in several commercial applications.
NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc., (“CMI”), which was completed on November 29, 2005.
Liquidity
Going Concern – The accompanying 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. The Company generated net income for the six months ended June 30, 2014 of approximately $2,847,000, primarily from a non-cash gain on the extinguishment of debt in the second quarter of 2014, had negative working capital of approximately $3,503,000 and a stockholders’ deficiency of approximately $3,506,000 at June 30, 2014. Since inception the Company’s growth has been funded through a combination of convertible and non-convertible debt from private investors and from cash advances from its former parent 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, 2014 the Company owed $1,932,147 to lenders in the form of notes payable and accrued interest. Much of this debt is convertible into the Company’s common stock at terms beneficial to the lenders compared to the market price of the Company’s common stock. The Company continues to rely on these lenders to provide additional loans to cover Company expenses and to provide forbearance agreements extending the due dates of the various notes. As June 30, 2014, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 of the consolidated financial statements for lenders waivers and maturity extensions received.
13 |
Operating activities
Net cash used in operating activities in the six months ended June 30, 2014 and 2013 was $148,818 and $98,323, respectively. The net income generated in the first half of 2014 was $2,847,205 compared to a net loss of $380,208 in the prior year period. Included in the income for the six months ended June 30, 2014 earnings is $3,747,273 in non-cash gain on extinguishment of debt. The Company continues to actively monitor spending and cash outflows in an effort to reduce costs until continuing revenue sources are developed. The Company continues to evaluate opportunities to reduce expenses and improve its liquidity position. We expect that total consolidated spending in 2014 to be comparable to the 2013 levels, although we will continue to invest in product and commercialization efforts as our cash position and liquidity allow.
Total non-cash adjustments to reconcile the net income (loss) to the cash used in operations aggregated a net reduction of $3,211,663 in the first half of 2014 versus an increase of $93,008 in first half of 2013. The change in these non-cash items reflects the net gain on extinguishment of debt, and the change in the fair market value of warrant and derivative liabilities.
Investing activities
During the first half of 2014, the Company entered into a purchase agreement to acquire all the issued and outstanding membership interest in MJ Enterprises (“MJE”). In connection with this purchase agreement, the Company advanced $200,000 to MJE. The Company decided during the first quarter of 2014 not to pursue this acquisition. The $200,000 advance was due and payable from MJE due on June 30, 2014.The Company believes this amount will be collected from MJE and is actively pursuing all collection efforts.
The Company established its subsidiary, Bitcoin Bidder, Inc. in June, 2014 for the sole purpose of bidding on bitcoins which had been seized by the FBI and were sold at auction June 27, 2014. In connection with this, the Company issued notes aggregating $200,000 under a Securities Purchase Agreement and Securities Agreement. Bitcoin Bidder, Inc. used this advance as a deposit to participate in the auction process. The Company was not successful at the auction. The $200,000 deposit were returned to the Company and all related borrowing was repaid in July, 2014 without any penalty or interest charges to NaturalNano. Bitcoin Bidder, Inc. is expected to be dissolved in 2014.
Financing Activities
Net cash provided from financing activities in the six months ended June 30, 2014 and 2013 was $549,000 and $100,506, respectively. The cash flows from financing activities in 2014 include the receipt of an aggregate of $300,000 in new borrowing in connection with the Payoff Agreement with Platinum Long Term Growth IV LLC and Merit Advisors LLC. Other convertible and non-convertible promissory notes aggregating $349,000 were received for operating uses in the six month period ended June 30, 2014. The Payoff Agreement included $300,000 in cash disbursed to settle the remaining liabilities with PLTG and Merit. The cash flows from financing activities in 2013 reflect a receipt of $79,500 in proceeds from Platinum Long Term Growth IV LLC and $21,006 in proceeds from Alpha.
The Company established its subsidiary, Bitcoin Bidder, Inc. in June, 2014 for the sole purpose of bidding on bitcoins which had been seized by the FBI and were sold at auction June 27, 2014. In connection with this, the Company issued notes aggregating $2,150,000 under a Securities Purchase Agreement and Securities Agreement that allowed borrowings of up to $2,150,000. Bitcoin Bidder, Inc. was not successful at the auction and $1,950,000 in borrowings was repaid to the lenders on June 30, 2014. The remaining $200,000 was repaid to the lenders in July, 2014 without any penalty or interest charges to NaturalNano.
Critical Accounting Policies and Estimates
Refer to the Company’s December 31, 2013 report on Form 10K for a complete discussion of the critical accounting policies which have not changed during the six months ended June 30, 2014.
Comparison of Statement of Operations for the three months ended June 30, 2014 and 2013
Revenue and Gross Profit
During the three months ended June 30, 2014 and 2013, the Company recorded $42,534 and $117,420, respectively in revenue from continuing operations. Cost of goods sold was $8,149 and $23,581 for the shipments of nanotechnology formulations completed in the respective quarters. Gross margin of $34,385 and $93,839 was realized for the three months ended June 30, 2014 and 2013, respectively.
Fluctuations in 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, 2014 was 81% compared to 80% for three months ended June 30, 2013. In the second quarter of 2013, the Company exited the Medical Board segment operations (See Note 6 “Discontinued Operations”).
Operating Expenses
Research and development expenses for the three months ended June 30, 2014 were $12,259 compared to $12,661 for the three months ended June 30, 2013. Future research and development expenditure levels will be largely depend upon the availability of discretionary cash flow which is anticipated to be limited.
14 |
For the three months ended | Variance | |||||||||||
June 30, | increase | |||||||||||
Research and Development | 2014 | 2013 | (decrease) | |||||||||
Patent costs | - | 485 | (485 | ) | ||||||||
Rent & utilities | 8,240 | 9,523 | (1,283 | ) | ||||||||
All other | 4,019 | 2,653 | 1,366 | |||||||||
$ | 12,259 | $ | 12,661 | $ | (402 | ) |
Total general and administrative expenses for the three months ended June 30, 2014 was $198,096 as compared to expenses of $112,990 for the three months ended June 30, 2013. The increase in expenses in 2014 is primarily the result of warrants granted for services during the second quarter of 2014. 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 | 2014 | 2013 | (decrease) | |||||||||
Salaries & benefits | $ | 35,919 | $ | 46,949 | $ | (11,030 | ) | |||||
Warrants granted for services | 105,501 | 2,737 | 102,764 | |||||||||
Consulting Services | 5,306 | 8,525 | (3,219 | ) | ||||||||
Legal & professional fees | 24,938 | 34,500 | (9,562 | ) | ||||||||
Rent and utilities | 3,300 | - | 3,300 | |||||||||
Insurance expense | 2,985 | 2,073 | 912 | |||||||||
Shareholder and Board expense | 7,983 | 15,010 | (7,027 | ) | ||||||||
All other | 12,164 | 3,196 | 8,968 | |||||||||
$ | 198,096 | $ | 112,990 | $ | 85,106 |
Other Expense
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 | 2014 | 2013 | (decrease) | |||||||||
Interest to Senior convertible and promissory notes | $ | (82,718 | ) | $ | (79,100 | ) | $ | (3,618 | ) | |||
Interest to 10% Subordinated secured convertible notes | (13,999 | ) | (12,301 | ) | (1,698 | ) | ||||||
$ | (96,717 | ) | $ | (91,401 | ) | $ | (5,316 | ) | ||||
Net loss on derivative liability | $ | (363,801 | ) | $ | (66,854 | ) | $ | (296,947 | ) | |||
Gain (loss) on extinguishment/modification of debt | $ | 3,747,273 | $ | 19,664 | $ | 3,727,609 |
The increase in interest expense for the second quarter of 2014 as compared to the second quarter of 2013 is due to incremental borrowing in the 2014.
The loss on derivative liability in the second quarter of 2014 is the result of updated valuations performed for the Company on instruments that, due to the nature of the instruments and the Company’s current number of authorized common shares being insufficient to facilitate conversion or exercise of all outstanding instruments, result in derivative liabilities. During the second quarter of 2014 warrant grants representing 48 million common shares were granted for services provided to the Company. The loss on derivatives also reflects the 2014 convertible debt granted in the current period.
On June 26, 2014, the Company entered into a Payoff Agreement with Platinum and Merit (collectively referred to as “the holders”) where the holders agreed to surrender their outstanding promissory notes and debentures in the aggregate principal amount of $3,256,399 plus all accrued and unpaid interest in consideration for an aggregate payment of $300,000. As further consideration, Platinum agreed to return its 2,587,674 shares of Series C Preferred Stock for cancellation. Effective upon the consummation of this Payoff Agreement, the Company had no further obligation to the holders pursuant to the terms of the preferred stock and the notes as defined in the Payoff Agreement. As a result of this Payoff Agreement, the Company recognized a gain on extinguishment of debt during the second quarter of 2014 in the amount of $3,747,273.
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 three months ended June 30, 2014 and June 30, 2013, $40,000 and $30,000, respectively, was added to the outstanding principal owed to Cape One in exchange for forbearance.
15 |
Comparison of Statement of Operations for the six months ended June 30, 2014 and 2013
Revenue and Gross Profit
During the six months ended June 30, 2014 and 2013, the Company recorded $46,174 and $123,318, respectively in revenue from continuing operations. Cost of goods sold was $8,634 and $24,030 for the shipments of nanotechnology formulations completed in the respective quarters. Gross margin of $37,540 and $99,288 was realized for the six months ended June 30, 2014 and 2013, respectively.
Fluctuations in 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 was 81% during each of the six month periods in 2014 and 2013. In the second quarter of 2013, the Company exited the Medical Board segment operations (See Note 6 “Discontinued Operations”).
Operating Expenses
Research and development expenses for the six months ended June 30, 2014 were $22,994 compared to $27,592 for the six months ended June 30, 2013. 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 | 2014 | 2013 | (decrease) | |||||||||
Salaries and benefits | $ | 8,620 | $ | 6,730 | 1,890 | |||||||
Patent costs | - | 620 | (620 | ) | ||||||||
Rent & utilities | 9,990 | 17,820 | (7,830 | ) | ||||||||
All other | 4,384 | 2,422 | 1,962 | |||||||||
$ | 22,994 | $ | 27,592 | $ | (4,598 | ) |
Total general and administrative expenses for the six months ended June 30, 2014 was $292,241 as compared to expenses of $183,266 for the six months ended June 30, 2013. The increase is a primarily driven by the expense incurred in the second quarter of 2014 related to warrants issued for services in the amount of $105,501. 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 six months ended | Variance | |||||||||||
June 30, | Increase | |||||||||||
General and Administrative | 2014 | 2013 | (decrease) | |||||||||
Salaries & benefits | $ | 84,342 | $ | 90,574 | $ | (6,232 | ) | |||||
Warrants granted for services | 105,501 | 5,814 | 99,687 | |||||||||
Consulting Services | 14,429 | 15,481 | (1,052 | ) | ||||||||
Legal & professional fees | 42,536 | 38,500 | 4,036 | |||||||||
Rent and utilities | 8,540 | - | 8,540 | |||||||||
Insurance expense | 2,985 | 3,247 | (262 | ) | ||||||||
Shareholder and Board expense | 17,050 | 21,733 | (4,683 | ) | ||||||||
All other | 16,858 | 7,917 | 8,941 | |||||||||
$ | 292,241 | $ | 183,266 | $ | 108,975 |
Other Expense
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 | 2014 | 2013 | (decrease) | |||||||||
Interest to Senior convertible and promissory notes | $ | (166,065 | ) | $ | (156,999 | ) | $ | (9,066 | ) | |||
Interest to 10% Subordinated secured convertible notes | (26,199 | ) | (24,551 | ) | (1,648 | ) | ||||||
$ | (192,264 | ) | $ | (181,550 | ) | $ | 10,714 | |||||
Net loss on derivative liability | $ | (390,109 | ) | $ | (76,688 | )) | $ | 313,421 | ||||
Loss on forgiveness/modification of debt | $ | 3,707,273 | $ | (10,336 | ) | $ | 3,717,609 |
The increase in interest expense for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 is due to incremental borrowing in 2014.
16 |
The loss on derivative liability in the second quarter of 2014 is the result of updated valuations performed for the Company on instruments that, due to the nature of the instruments and the Company’s current number of authorized common shares being insufficient to facilitate conversion or exercise of all outstanding instruments, result in derivative liabilities. During the second quarter of 2014 warrant grants representing 48 million common shares were granted for services provided to the Company. The loss on derivatives also reflects the 2014 convertible debt granted in the current period.
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. On June 26, 2014, the Company entered into a Payoff Agreement with two of its lenders (collectively referred to as “the holders”) where the holders agreed to surrender their outstanding promissory notes and debentures in the aggregate principal amount of $3,256,399 plus all accrued and unpaid interest amounting to $592,414 in consideration for an aggregate payment of $300,000. As further consideration, one of the lenders agreed to return its 2,587,674 shares of Series C Preferred Stock for cancellation. The Company reversed $70,165 in registration rights liabilities in connection with this Payoff Agreement. Effective upon the consummation of this Payoff Agreement, the Company had no further obligation to the holders pursuant to the terms of the preferred stock and the notes as defined in the Payoff Agreement. As a result of this Payoff Agreement, the Company recognized a gain on extinguishment of debt during the second quarter of 2014 in the amount of $3,747,273. During the six months ended June 30, 2014 and 2013, $40,000 and $30,000, respectively, was added to the outstanding principal owed to Cape One in exchange for forbearance.
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, 2013 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.
The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with the segregation of duties were ineffective. 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.
17 |
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, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities
The Company entered into Forbearance Agreements with Alpha Capital Anstalt and Marlin Capital Investments effective on July 18, 2014 relating to the Company’s default on various terms and conditions with borrowing agreements. The lenders agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Notes until November 20, 2014. |
Item 4. Mine Safety Disclosures
Not applicable.
None.
18 |
Exhibit No. |
Description | |
10.169 | 8% Convertible Promissory Note dated as of May 8, 2014 in the original principal amount of $45,000 issued by NaturalNano, Inc. to Marlin Capital Investments LLC due and payable on June 30, 2014. | |
10.170 |
8% Convertible Promissory Note dated as of June 12 2014 in the original principal amount of $24,000 issued by NaturalNano, Inc. to Alpha Capital Anstalt due and payable on August 12, 2014.
| |
10.171 |
8% Convertible Promissory Note dated as of July 29, 2014 in the original principal amount of $5,000 issued by NaturalNano, Inc. to Marlin Capital Investments LLC due and payable on November 20, 2014.
| |
10.172 |
Exchange and Right to Shares Agreement dated as of July 23, 2014 between Cape One Master Fund II LP and NaturalNano, Inc.
| |
10.173 |
Forbearance Agreement effective July 18, 2014 between Alpha Capital Anstalt and NaturalNano, Inc. and NaturalNano Research, Inc.
| |
10.174 | Forbearance Agreement effective July 18, 2014 between Marlin Capital Investments LLC and NaturalNano, Inc. and NaturalNano Research, Inc. | |
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 |
19 |
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 18, 2014 | /s/ James Wemett | |
James Wemett | |||
President and Director (Principal Executive, Financial and Accounting Officer) |
20 |
Exhibit 10.173
Via Facsimile and First Class Mail
Effective July 18, 2014
Re: | FORBEARANCE AGREEMENT |
Ladies and Gentlemen:
Reference is made to the 8% Convertible Notes set forth on Schedule I hereto issued by NaturalNano, Inc. (the “Borrower”) to Marlin Capital Investments 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 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 or taking any other action to collect the principal amount of the Notes until the earlier of November 20, 2014 (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 July 21, 2014; 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 under the Notes of eighteen percent (8%).
5. 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.
6. 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.
7. 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 20, 2014; (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.
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, | ||
MARLIN CAPITAL INVESTMENTS LLC | ||
By: | ||
Name: | ||
Title: | ||
NATURALNANO, INC. |
By: | /s/ James Wemett | |
Name: James Wemett | ||
Title: CEO |
Exhibit A
Loan for $45,000 on May 8, 2014
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, 2014, |
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 18, 2014
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, 2014, 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 18, 2014
By: | /s/ James Wemett | |
Name: | James Wemett | |
Title: | President | |
(Principal Executive, Financial and Accounting Officer) |
G)E4WI.5&-Z:V,Y9"(_/B`\>#IX;7!M971A('AM
M;&YS.G@](F%D;V)E.FYS.FUE=&$O(B!X.GAM<'1K/2)!9&]B92!835`@0V]R
M92`T+C$M8S`S-B`T-BXR-S8W,C`L($UO;B!&96(@,3D@,C`P-R`R,CHT,#HP
M."`@("`@("`@(CX@/')D9CI21$8@>&UL;G,ZD
MNWPXR^T]_?(K?W4O8=-MK(_*'K39.R^QH-Q[.08O=_7^SJGKW;_9NV!297
M'%,F^SZP156-J2])-4TD$JLEYED\*:P[>7#KR_TA@FIZ2U1\!,1M_:_\O[K_
M`*TW5%@-E?!??^(WA24^>Q]3F,QOFCQ?7>Y]BR8]JN&OIZ?$5V3J-USU\LY2
M:..11''&$-Q4J"F@$@:@?V&O5V8O(9#QS_/J?NWX?[KR_P`QMY?+>AR.P
>ERF(JF@U8ZNBF@65X9A(E9"DBZ3FG#Y>O5D73
M7''HL.1_EP]P;[VSF.L-U9?9>U]G;A_F@;@^=F8W-A\Q79;/1[$H-Q4VZ]H;
M*P>-;!4,=)O/,92EBAKJIJA:6AIED*&I9]'NM36?/Q8'V4_S]7#.HM]+952#
M_/\`S]7W-A]?UNX
M-C=EXGJ(;IVL\N]Z*@K=M=I]9[CJ6&:QN1HXX160SK"Y2.+QEEU8#5XA'388
MFORZ$2K^1??V)[L_E_\`QU;>T]>ORTV;OCMO?G;5=M3:\&2PN!ZUZ
O\^MBM<@4ZL9Q&5HL[B<9F\9-]QC