Indicate by check mark if the registrant is a well-known seasoned
issuer, defined in Rule 405 of the Securities Act
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Note- Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Act from their obligations under those Sections.
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.
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).
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
The aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter:
2,093,502 shares at a market valued by
reference to the closing price of such stock ($0.1599), as of June 30, 2015 was $334,751.
As of June 6, 2016, there were 2,911,658
shares of Common Stock of NaturalNano, Inc. issued and outstanding.
PART II
|
Item 5.
|
Market for Common Equity and Related Stockholder Matters
|
The Company’s common stock is listed
on the OTC Bulletin Board under the symbol NNAN.
The high and low share prices for the Company’s
common stock as reported on the exchange identified above, for each quarterly period since January 1, 2014 presented
below have been adjusted to reflect the 300 to 1 reverse stock split effective December 23, 2014. These quotations reflect inter-dealer
prices, without mark-up, mark-down or commission, and may not represent actual transactions.
|
|
|
Sales Prices
|
|
|
|
|
High
|
|
|
Low
|
|
|
For the year ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
7.51
|
|
|
$
|
1.02
|
|
|
Second quarter
|
|
$
|
1.08
|
|
|
$
|
0.33
|
|
|
Third quarter
|
|
$
|
0.78
|
|
|
$
|
0.15
|
|
|
Fourth quarter
|
|
$
|
1.11
|
|
|
$
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
.40
|
|
|
$
|
.03
|
|
|
Second quarter
|
|
$
|
.26
|
|
|
$
|
.06
|
|
|
Third quarter
|
|
$
|
.20
|
|
|
$
|
.02
|
|
|
Fourth quarter
|
|
$
|
.16
|
|
|
$
|
.06
|
|
The closing price of the
Company’s common stock on May 20, 2016, as reported on the OTC Bulletin Board, was $0.04 per share. As of June 6,
2016 there were outstanding 2,911,658 shares of our common stock, which were held by approximately 200 shareholders of
record. The Company has never declared or paid a cash dividend since inception (December 22, 2004) nor is there any intention
to do so in the near term.
Equity Compensation Plan Information
The following chart sets forth information
regarding our equity compensation plans as of December 31, 2015:
|
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
|
|
Securities available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a) )
|
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
-
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
1,217,941
|
|
|
$
|
0.32
|
|
|
|
-
|
|
|
Total
|
|
|
1,219,040
|
|
|
|
|
|
|
|
|
|
* These shares are issuable under the Company’s
2008, 2007 and 2005 incentive stock plans. Such shares may be issued upon the exercise of stock options or pursuant to restricted
stock units which vest based upon Board designation at the time of grant.
Equity Compensation Plans Approved by Security
Holders include the Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive
Stock Plan (the “2007 Plan”), the 2008 Incentive Stock Plan (the “2008 Plan”). Officers, employees,
directors and consultants may be granted options under these plans to purchase the Company’s common stock at fair market
value as of the date of grant. Options become exercisable over varying vesting periods commencing from the date of grant and have
terms of five to ten years. These plans also provide for the granting of performance-based and restricted stock awards.
Equity Compensation Plans approved by
the Company’s shareholders and authorized to grant awards are as follows:
|
|
□
|
2005 Plan is authorized to grant up to 823,529 share unit awards,
|
|
|
□
|
2007 Plan is authorized to grant up to 1,000,000 share unit awards and
|
|
|
□
|
2008 Plan is authorized to grant up to 47,058,824 share units awards.
|
Equity Compensation Plans Not Approved by Security Holders
as of December 31, 2015 are as follows
:
|
|
·
|
2009 Plan is authorized to grant up to 1,176,471 unit share awards,
|
|
|
·
|
2011 Plan is authorized to grant up to 1,470,588 unit share awards,
|
|
|
·
|
2012 Plan is authorized to grant up to 1,764,706 unit share awards,
|
|
|
·
|
2,353 warrants granted in connection with services provided for the
year ended December 31, 2010,
|
|
|
·
|
2,941 warrants granted in connection with services provided for the
year ended December 31, 2011,
|
|
|
·
|
380,000 warrants granted in connection with services provided for
the year ended December 31, 2013
|
|
|
·
|
160,000 warrants granted in connection with services provided for
the year ended December 31, 2014 and
|
|
|
·
|
675,000 warrants granted in connection with services provided
for the year ended December 31, 2015.
|
Recent Sales of Unregistered Securities
During the fourth quarter of 2015, the
Company issued 200,000 shares of common stock in a transaction exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received
from Marlin Capital Investments LLC as specified under the terms and conditions of the 8% convertible promissory notes. These shares
were converted at $0.05 per share price reflecting satisfaction in principal payments on the outstanding notes.
During the first quarter of 2016, the Company
issued 110,000 shares of common stock in a transaction exempt from the registration requirements of the Securities Act of 1933
pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Marlin
Capital Investments LLC as specified under the terms and conditions of the 8% convertible promissory notes. These shares were converted
at $0.05 per share price reflecting satisfaction in principal payments on the outstanding notes.
On January 7 and April 13, 2016, the Company
issued a total of 508,156 shares of common stock in connection with four cashless exercise transaction from warrant
holders. On January 7, 2016 and April 13, 2016, the Company issued 37,500 and 36,776 respectively, restricted common shares
to a consultant based on a request for the exercise of certain warrants agreement with the consultant. Also on January 7, 2016
and April 13, 2016 the Company issued 250,000 and 183,880 respectively, restricted common shares to the Company’s CEO based
on a request for the exercise of certain warrants agreement with the CEO.
Limitation on Liability and Indemnification
of Directors and Officers
Our articles of incorporation provide that
no director or officer shall have any liability to the Company if such director or officer acted in good faith and with the same
degree of care and skill as a prudent person in similar circumstances.
Our articles of incorporation and bylaws
provide that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted
by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices.
However, nothing in our articles of incorporation or bylaws protects or indemnifies a director, officer, employee or agent against
any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. To the extent that a director has been successful in defense
of any proceeding, the Nevada Revised Business Corporations Act provides that he or she shall be indemnified against reasonable
expenses incurred in connection with the proceeding.
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Note Regarding Forward-Looking Statements
This annual report on Form 10-K and other
reports that we file with the SEC contain statements that are considered forward-looking statements that involve risks and uncertainties.
These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,”
“projects,” “continuing,” “ongoing,” “expects,” “management believes,”
“we believe,” “we intend” and similar expressions. Such forward looking statements include statements addressing
operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements
relating to revenue realization, revenue growth, earnings, earnings per share, or similar projections. These statements estimates
involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for
the reasons described in this report. You should not place undue reliance on these forward-looking statements.
You should be aware that our actual results
could differ materially from those contained in the forward-looking statements due to a number of factors such as:
|
|
□
|
the ability to raise capital to fund our operations until we generate adequate cash flow internally;
|
|
|
□
|
the terms and timing of product sales and licensing agreements;
|
|
|
□
|
our ability to enter into strategic partnering and joint development agreements;
|
|
|
□
|
our ability to competitively market our controlled release and filled tube products;
|
|
|
□
|
the successful implementation of research and development programs;
|
|
|
□
|
our ability to attract and retain key personnel ;
|
|
|
□
|
general market conditions.
|
Our actual results may differ materially
from management’s expectations. The following discussion and analysis should be read in conjunction with our financial statements
included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue
in the future, or that any conclusion reached herein will necessarily be indicative of actual operating performance in the future.
Such discussion represents only the best present assessment of our management.
The forward-looking statements speak only
as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation
to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements.
General
NaturalNano (the “Company”),
located in Rochester, New York, operates in two business segments, the Nanotechnology segment and the ViralProtec reseller of personal
protective equipment.
Nanotechnology
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.
ViralProtec
On November 5, 2014 the Company announced
the new business line, ViralProtec, (www.viralprotec.com) a division of NaturalNano. ViralProtec, is a reseller for Ebola personal
protective equipment (PPE) and ancillary supplies. Our mission is to provide personal protective equipment for caregivers for
infectious patient care that meet or exceed CDC and WHO guidelines. ViralProtec was created in response of the public concern
and publicity surrounding the risk to caregivers and other responders created by the Ebola virus. The Company will maintain inventory
on hand for customers to order complete protection kits from a single source instead multiple sources.
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 a net loss
for the year ended December 31, 2015 of approximately $1,091,000, had negative working capital of approximately $4,755,000
and a stockholders’ deficiency of approximately $4,756,000 at December 31, 2015. 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 December 31, 2015, the Company continued
to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lender waivers and maturity
extensions received from the lenders.
The Company’s management and Board
of Directors continue to actively assess the Company's operating structure with an objective to reduce ongoing expenses, increase
sources of recurring revenue as well as seeking additional debt or equity financing. The Company will continually evaluate
funding options including additional offerings of its securities to private and institutional investors and other credit facilities
as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might
be available.
The Company has experienced recurring losses
from operations since its inception and continues to have a working capital deficiency and limited opportunities for additional
capital infusion. The Company has experienced recurring defaults relating to the various provisions under its current debt
obligations and is expected to require future forbearance and waivers relating to such provisions in the future. These negative
financial conditions combined with delays experienced in product introduction and customer acceptance raises substantial doubt
of the Company’s ability to continue as a going concern.
Comparison of Liquidity and Capital
Resources for the years ended December 31, 2015 and 2014
Operating activities
Net cash used in operating activities in
the years ended December 31, 2015 and 2014 was $106,257 and $474,010, respectively. A net loss of $1,091,050 was incurred in 2015
compared to net income of $2,681,747 in 2014. Included in net income for the year ended December 31, 2014 are non-cash gains of
$4,032,609 from the extinguishment and modification of certain debt instruments.
Total non-cash adjustments to reconcile
the net loss (income) to the cash used in operations aggregated $595,289 in 2015 and $3,446,843 in 2014. The change in these
non-cash items reflects the net gains on debt extinguishment, fair value adjustments for derivative liabilities, a provision for
the receivables due from MJ Enterprises and a gain on the forgiveness of certain vendor payables. During 2015 and 2014, the Company
reduced outstanding liabilities through negotiations with certain vendors resulting in a net gain on the forgiveness of debt of
$9,800 and $75,037 in 2015 and 2014, respectively.
Investing activities
Net cash provided from (used in) investing
activities in the years ended December 31, 2015 and 2014 was $50,000 and ($200,000), respectively.
During 2015, the Company realized a cash
gain on the sale of certain fully depreciated machinery. During 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. During 2014, the Company provided a reserve of $200,000 on the potential non-recovery
of the full amount due from MJE.
Financing Activities
Net cash provided from financing activities
in the years ended December 31, 2015 and 2014 was $61,000 and $674,010, respectively.
During 2015, the Company entered into two
Senior Secured Convertible Promissory Notes aggregating $61,000. During the fourth quarter of 2015, the Company issued 200,000
common shares in satisfaction of $10,000 of outstanding principal. The issuance of these shares reflects a debt conversion price
of $0.05 per share.
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 $674,010 were received for operating uses in 2014. The Payoff Agreement included $300,000 in cash disbursed to
settle the remaining liabilities with PLTG and Merit.
Results of Statement of Operations
for the years ended December 31, 2015 and 2014
Revenue and Gross Profit
During the years ended December 31, 2015
and 2014, the Company recorded $368,066 and $193,606, respectively in revenue from the sale of nanotechnology and ViralProtec products.
Gross margin was generated in years ended December 31, 2015 and 2014 of $210,932 and $130,684, respectively. The gross margins
for 2015 and 2014 was 57% and 67% for these periods, respectively.
The Nanotechnology segment generated
a gross profit of 91% in 2015 and the ViralProtec segment generated a loss on sales of 46%. The ViralProtec loss is
attributed to a provision for potential excess inventory of $83,100 recorded during the twelve months ended December 31,
2015. Excluding the impact of this charge, the ViralProtec would have generated a gross margin of approximately 44%.
Management continues to actively monitor and assess inventory units on hand compared with projected customer sales. The
Company continues to experience notable variations in gross margins with its business as it introduces and develops new
products and applications.
|
|
|
For the year ended
|
|
|
Variance
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Revenue, Cost of Goods, and Gross Profit
|
|
2015
|
|
|
2014
|
|
|
(decrease)
|
|
|
Revenue:
|
|
$
|
276,097
|
|
|
$
|
137,159
|
|
|
$
|
138,938
|
|
|
Nanotechnology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ViralProtec
|
|
|
91,969
|
|
|
|
56,447
|
|
|
|
35,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods:
|
|
|
22,530
|
|
|
|
25,952
|
|
|
|
(3,422
|
)
|
|
Nanotechnology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ViralProtec
|
|
|
134,604
|
|
|
|
36,970
|
|
|
|
97,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Gross Margin
|
|
$
|
210,932
|
|
|
$
|
130,684
|
|
|
$
|
80,249
|
|
|
Gross Margin %
|
|
|
57
|
%
|
|
|
67
|
%
|
|
|
|
|
Operating Expenses
Management continues to actively monitor
the operating structure for the purpose of controlling expenses across all categories of the business. Such evaluations continue
with the intent to invest nominally in research and development programs and product development in future years. No assurance
can be given that future investment or debt financing will develop thereby resulting in improved cash inflow or liquidity for the
Company.
Total research and development expenses
incurred in 2015 and 2014, respectively were $4,584 to $40,076.
|
|
|
For the year ended
|
|
|
Variance
|
|
|
|
|
December 31,
|
|
|
Increase
|
|
|
Research and Development
|
|
2015
|
|
|
2014
|
|
|
(decrease)
|
|
|
Salaries and benefits
|
|
$
|
4,584
|
|
|
$
|
15,966
|
|
|
$
|
(11,383
|
)
|
|
Rents & Utilities
|
|
|
-
|
|
|
|
18,800
|
|
|
|
(18,800
|
)
|
|
Supplies and other
|
|
|
-
|
|
|
|
5,310
|
|
|
|
(5,310
|
)
|
|
|
|
$
|
4,584
|
|
|
$
|
40,076
|
|
|
$
|
(35,493
|
)
|
Total general and administrative expense
for the year ended December 31, 2015 was $518,548 as compared to $554,090 for the year ended December 31, 2014.
Salaries and benefits increased in 2015
over costs incurred in 2014 reflecting part time staff hired in connection with the ViralProtec business in the fourth quarter
of 2014. Legal and professional services increased by $76,658 over 2014 reflecting additional complexities to the Company’s
legal structure, debt extinguishments and advances and expansion of business categories. In the fourth quarter of 2014, the Company
executed an agreement with ZA Capital LLC to provide $100,000 in strategic consulting services and public relations for the six
months period from October 2014 through April 2015.
On February 15, 2015, the Company granted
a total of 300,000 warrants to the Company’s board members. These warrants grant the right to purchase one share of common
stock at an exercise price of $0.10 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 $61,106. An expected volatility assumption of 140% was used based on the volatility of the Company’s
stock price utilizing a look-back basis and the risk-free interest rate of 1.62% 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 $0.22 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.
On May 30, 2015, the Company granted a
total of 375,000 warrants to the Company’s board members and one consultant. These warrants grant the right to purchase one
share of common stock at an exercise price of $0.05 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 $41,676. An expected volatility assumption of 140% was used based on the volatility
of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.49% 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 $0.12 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.
During the second quarter of 2014, the
Company granted a total of 160,000 warrants to certain consultants, the Company’s CEO and the Company’s board member.
These warrants grant the right to purchase one share of common stock at an exercise price of $0.42 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 various dates of grant at $105,501. An expected
volatility assumption of 289% has been used based on the volatility of the Company’s stock price utilizing a look-back basis
and the risk-free interest rate of 1.63% and was derived from the U.S. treasury yields on the dates of grant. The market
price of the Company’s common stock on the grant was $0.661 per share. The expiration date used in the valuation
model aligns with the warrant life of five and ten years as indicated in the agreements. The dividend yield was assumed
to be zero.
|
|
|
For the year ended
|
|
|
Variance
|
|
|
|
|
December 31,
|
|
|
increase
|
|
|
General and Administrative
|
|
2015
|
|
|
2014
|
|
|
(decrease)
|
|
|
Salary & Benefits
|
|
$
|
212,456
|
|
|
$
|
222,523
|
|
|
$
|
(10,067
|
)
|
|
Legal and Professional Fees
|
|
|
89,045
|
|
|
|
150,645
|
|
|
|
(61,600
|
)
|
|
Investor Relations
|
|
|
68,496
|
|
|
|
44,421
|
|
|
|
24,075
|
|
|
Consulting Services
|
|
|
33,084
|
|
|
|
35,819
|
|
|
|
(2,735
|
)
|
|
Rent and utilities
|
|
|
35,663
|
|
|
|
20,377
|
|
|
|
15,286
|
|
|
Insurance
|
|
|
6,216
|
|
|
|
5,399
|
|
|
|
817
|
|
|
Shareholder and Board
|
|
|
38,594
|
|
|
|
38,982
|
|
|
|
(388
|
)
|
|
Travel and Entertainment
|
|
|
16,383
|
|
|
|
12,261
|
|
|
|
4,122
|
|
|
Supplies and other
|
|
|
18,611
|
|
|
|
23,663
|
|
|
|
(5,052
|
)
|
|
General and administrative excluding stock based compensation
|
|
$
|
518,548
|
|
|
$
|
554,090
|
|
|
$
|
(35,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation related to warrants
|
|
$
|
102,782
|
|
|
$
|
105,501
|
|
|
$
|
(2,719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative
|
|
$
|
621,330
|
|
|
$
|
659,591
|
|
|
$
|
(38,261
|
)
|
Management continues to monitor the Company's
operating structure for the purpose of controlling expenses across all categories of the business. We expect that spending for
2016 general and administrative expenses will be comparable to the 2015 actual expenses incurred, although investments in marketing
and sales will be a priority if the Company’s cash and liquidity position improves. No assurance can be given that future
investment or debt financing will develop thereby resulting in improved cash inflow or liquidity for the Company.
Interest and Other Income (expense)
Other (expense) income for the year ended
December 31, 2015 reflected net expenses of $676,068 compared to net income of $3,250,730 for the year ended December 31, 2014.
During the year ended December 31, 2014 the Company recognized certain vendor concessions as well as a non-recurring gain on extinguishment/modification
of debt of $3,747,273 as further described below.
Interest expense includes the interest
on the senior and subordinated convertible and non-convertible promissory notes. The Company incurred $266,661 in interest expense
in 2015 and $301,614 in interest expense in 2014. The reduction in 2015 expense reflects new borrowings and the settlement of certain
debt instruments in connection with the extinguishment of debt as further described below.
In June 2008, the FASB finalized ASC 815,
formerly Emerging Issues Task Force 07-05,
“Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s
Own Stock,”
which was adopted by the Company effective January 1, 2009. During the year ended December 31, 2015 and
2014, the Company recognized a loss of $164,480 and $355,302 respectively relating to the changes in fair market value for these
derivative liabilities.
On December 15, 2015, the Company’s
board of directors determined that it was in the best interest of the corporation to exchange 6,666,667 reserved shares of the
Company’s common stock, held by Cape One Master Fund II LLP (as described in footnote 2), for four convertible promissory
notes totaling $344,000 with an interest rate of 8% per annum due June 30, 2017. These promissory notes are convertible to common
stock at the rate of $0.05 per share. In the event that the Company shall, at any time, issue any additional shares of common stock
or equivalents at a price per share less than the $0.05 conversion price then the conversion price for these convertible promissory
notes shall be reduced. The Company recognized a loss on the exchange of the rights to reserved commons shares upon the issuance
of these convertible promissory notes of $304,727 during the fourth quarter of 2015.
During 2015, the Company settled
liabilities of $10,000 for $200, resulting in a $9,800 gain on forgiveness of debt. Also in 2015, the Company sold
fully depreciated equipment for proceeds of $50,000.
In 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 2014 in the amount of $3,747,273.
Also in 2014, the Company and Cape One
Master Fund II LLP agreed to exchange the Subordinated Secured Convertible Note and related accrued and unpaid interest totaling
a combined $379,624 in exchange for 6.667 million 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 estimated the total enterprise value based upon a combination of the trending of the
firm value from December 2006 to December 2014, market comparables and the market value of the Company’s stock 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 these 6.667 million share rights and other securities
in the Company’s capital structure. The fair value of these 6.667 million share rights was estimated at $54,289 on the date
of the agreement and the Company recognized a gain on extinguishment of debt of $325,335 during the quarter September 30, 2014
based on the excess of the value of the instruments settled over the estimated fair market value of the 6.667 million share rights.
These Rights to reserved common stock were valued based on the total enterprise value of the Company at December 31, 2014 at $559,289.
The change in fair market value of this rights liability of $505,000 was re-measured as of December 31, 2014 and has been reflected
in Additional Paid In Capital.
In 2014, the Company recorded an expense
of $40,000 in connection with debt modifications related to forbearance agreements signed during the year. These losses from debt
modification were netted against gains on forgiveness of debt in 2014 of $75,038. No fees for modification of debt were incurred
in 2015. The Company also 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. These vendor concessions have been treated
as gains in the period that the underlying agreements were reached.
Inflation
Although our operations are influenced by general economic conditions,
we do not believe that inflation had a material effect on our results of operations during 2015 or 2014.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have, or are reasonably likely to have, an effect on our financial condition, financial statements, revenues or expenses.
Critical Accounting Policies and Estimates
Our consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make assumptions that affect the reported amounts of assets, liabilities, revenue,
costs and expenses, and related disclosures. Our actual results may differ from these estimates. We believe, that of the significant
accounting policies described in the notes to our consolidated financial statements, the following policies involve a greater degree
of judgment and complexity and accordingly; these policies are the most critical to aid in fully understanding and evaluating our
consolidated financial condition and results of operations.
Revenue Recognition
Revenue is generated upon the delivery
of Pleximer™ and Viral Protec products. The Company earns and recognizes such revenue when the shipment of the products has
occurred, title transfers, no further performance obligation exists, and when collection is reasonably assured.
Deferred Taxes
Deferred tax assets and liabilities are
determined based on temporary differences between income and expenses reported for financial reporting and tax reporting.
FASB ASC 740 requires that a valuation allowance be established when management determines that it is more likely than not that
all or a portion of a deferred tax asset will not be realized. The Company evaluates the probability of realization of its
net deferred tax assets on an annual basis and any additional valuation allowances are provided or released, as
necessary. Since the Company has had cumulative losses in recent years, the accounting guidance suggests that it should not
look to future earnings to support the realization of the net deferred tax asset.
As of the years ended December 31, 2015
and 2014, the Company has recorded a valuation allowance to reduce its gross deferred tax assets to zero in accordance with ASC
740.
The Company believes that the accounting
estimates related to deferred tax valuation allowances are “critical accounting estimates” because: (1) the need for
valuation allowance is highly susceptible to change from period to period due to changes in deferred tax asset and deferred tax
liability balances, (2) the need for valuation allowance is susceptible to actual operating results and (3) changes in the tax
valuation allowance can have a material impact on the tax provisions/benefit in the consolidated statements of operations and on
deferred income taxes in the consolidated balance sheets.
Share-based compensation
Compensation expense related to stock-based
payments is recorded over the requisite service period based on the grant date fair value of the awards. The Company uses the Black-Scholes
option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use
of assumptions which determines the fair value of stock-based awards, including the option’s expected term and the price
volatility of the underlying stock.
The Company’s policy for equity instruments
issued to consultants and vendors in exchange for goods and services as follows: The measurement date for the fair
value of the equity instruments issued is determined at the earlier of (i) the date at which the commitment for performance by
the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the fair value of the equity instrument is based on the fair value of the services
or the award, whichever is more readily determinable and is recognized over the term of the consulting agreement.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine
if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued
at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative
financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to
December 2015 and considering industry and Company specific factors including the changes in forward estimated revenues and market
factors. Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the
individual derivative securities in the Company’s capital structure. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Recent Accounting Pronouncements
In November 2015, the FASB issued ASU-2015-17
Balance Sheet Classification of Deferred Taxes (Income Taxes topic 740). The Board issued this update as part of its Simplification
Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting
principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information
provided to users of financial statements. To simplify the presentation of deferred income taxes, this guidance requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance applies to
all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and
assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this
Update. This update will be effective for public business entities for annual periods, including interim periods within those annual
periods, beginning after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2015-17 on our consolidated
financial statements.
In May 2014 the FASB issued
ASU 2014-09 Revenue from Contracts with Customers (Topic 606): The standard is effective for annual periods beginning
after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect
certain practical expedients, or (ii) a retrospective approach with the cumulative effect recognized at the date of adoption
(which includes additional footnote disclosures). This update supersedes nearly all existing revenue recognition guidance
under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or
services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. We are currently
evaluating the impact of the adoption of this new guidance.
In July 2015, the FASB issued ASU-2015-11
Simplifying the Measurement of Inventory (Inventory topic 330) The Board issued this update as part of its Simplification Initiative.
Under this guidance an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
This update will be effective for public business entities for annual periods, including interim periods within those annual periods,
beginning after December 15, 2016. We
are currently evaluating the impact of the adoption of this new guidance.
In January 2015 the FASB issued ASU
2015-1, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation
by Eliminating the Concept of Extraordinary Items This ASU eliminates from GAAP the concept of extraordinary items. ASU
2015-1 is effective for the annual period ending after December 15, 2015. Early adoption is permitted provided that the
guidance is applied from the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption
of this new guidance.
In August 2014, the FASB issued ASU-2014-15
– Going Concern (subtopic 205-40) Disclosure of Uncertainty about an Entity’s Ability to Continue as a Going Concern.
Under generally accepted accounting principles (GAAP), this guidance requires an entity’s management to evaluate whether
there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued (or within one year after the date that
the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant
conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date
that the financial statements are available to be issued when applicable). This guidance is effective for public business entities
for annual periods, including interim periods within those annual periods, beginning after December 15, 2016. We will evaluate
the impact of the adoption of ASU 2014-15 on our consolidated financial statements based upon the financial condition of the Company
at the time of adoption.
On February 25, 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases,”
a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in
its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance.
An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the
obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases.
The standard is effective for fiscal periods beginning after December 15, 2018, and requires modified retrospective adoption, with
early adoption permitted. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements
and related disclosures.
On March 30, 2016, the FASB issued ASU
No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,”
which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based
compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified.
The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating
the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
In April, 2016, the FASB issued ASU No. 2016-10,
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” to clarify two
aspects of Topic 606: (i) identifying performance obligations and (ii) the licensing implementation guidance, while retaining the
related principles for those areas. The Company is evaluating the impact of the adoption of this standard on our consolidated financial
statements and related disclosures.
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.
|
Item 8.
|
Financial Statements
|
Our consolidated financial statements,
together with the reports thereon by our independent registered public accounting firms, begin on page F-1 of this Form 10-K.
|
Item
9A
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
The Company’s management is responsible
for establishing and maintaining effective disclosure controls and procedures. As of December 31, 2015, our Chief Executive Officer
participated in evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures
are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (“SEC”)
reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified
by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief
Executive Officer, to allow timely decisions regarding required disclosure. In light of the discussion of material weaknesses set
forth below, this officer has concluded that our disclosure controls and procedures were not effective as of December 31, 2015.
To the best of his knowledge, our Chief Executive Officer believes that the consolidated financial statements included in this
Annual Report on Form 10-K fairly present, in all material respects, our financial condition, result of operations and cash flows
for the periods presented in accordance with accounting principles generally accepted in the United States of America.
Management’s Annual Report on
Internal Control Over Financial Reporting
A company’s internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f) is a process designed by, or under
the supervision of, a public company’s principal executive and principal financial officers, or persons performing similar
functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles (“GAAP”) including those policies and procedures that: (i) pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company,
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and
directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on the financial statements.
Management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our Chief Executive Officer has assessed the effectiveness
of our internal control over financial reporting. In making this assessment, this officer used the criteria established in
Internal
Control—Integrated Framework
issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency,
or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual
or interim financial statements will not be prevented or detected on a timely basis. In connection with our Chief Executive Officer’s
assessment of our internal control over financial reporting described above, this officer has identified the following material
weaknesses in the Company’s internal control over financial reporting as of December 31, 2015.
The Company did not maintain a sufficient
complement of qualified accounting personnel and controls associated with segregation of duties were ineffective. Due primarily
to limited resources and the stage of growth, the Company failed to maintain appropriate controls over the selection, identification
and application of GAAP related to complex accounting transaction that we have encountered, which also require detailed financial
reporting. Further, nearly all aspects of our December 31, 2015 and December 31, 2014 financial reporting processes, including
but not limited to access to the underlying accounting records and systems, the ability to post and record journal entries and
responsibility for the preparation of the financial statements were performed by outside consultants without adequate oversight
and review by a second individual. This creates certain incompatible duties and a lack of review over the financial reporting
process that would likely fail to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements
and related disclosures as filed with the SEC. As a result of these circumstances, the Company determined that the
controls over the preparation, review and monitoring of the financial statements were ineffective to provide reasonable assurance
that the financial records and related disclosures complied with accounting principles generally accepted in the United States.
These factors resulted in the identification of adjustments to our December 31, 2015 and December 31, 2014 consolidated financial
statements and related disclosures during the audit conducted by our independent registered public accounting firm.
There are currently three members of the Board of Directors, one of which is the CEO and President of the Company.
As a result of the material weaknesses
described above, our management concluded that as of December 31, 2015, we did not maintain effective internal control over financial
reporting based on the criteria established in
Internal Control—Integrated Framework
issued by the COSO.
This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this annual
report.
Plan for Remediation of Material Weaknesses
In response to the identified material
weaknesses, management plans to continually monitor the overall control environment and to remedy the identified material weakness
by consulting with third party accounting firms with the appropriate level of expertise to determine the proper application
of GAAP for complex and non-routine transactions where applicable and when resources allow.
Notwithstanding the material weaknesses
discussed above, the Company believes that the financial statements included in this report present fairly, in all material respects,
our financial position, results of operations, and cash flows for the periods presented in accordance with U.S. generally accepted
accounting principles.
Changes in Internal Control over
Financial Reporting
There were no changes made to our internal
controls over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)
during 2015 that materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.
Item 9B Other Information
Effective April 11, 2016 Mr. David Rector
resigned his position as board director of the Company. Mr. Rector reported that he had no disagreements with management or the
Company at the time of this resignation.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31,
2015
1.
PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
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. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Description of the Business
Nanotechnology
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.
ViralProtec
In the fourth quarter of 2014, the Company
announced the new business line, ViralProtec, (www.viralprotec.com) a division of NaturalNano. ViralProtec, is a reseller for healthcare
personal protective equipment (PPE) and ancillary supplies. Our mission is to provide personal protective equipment for caregivers for
infectious patient care that meet or exceed CDC and WHO guidelines. ViralProtec was created in response of the public concern
and publicity surrounding the risk to caregivers and other responders created by the Ebola virus. The Company will maintain inventory
on hand for customers to order complete protection kits from a single source instead multiple sources.
Liquidity and Going Concern
Going Concern – The accompanying
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The Company generated a net loss for the year ended
December 31, 2015 of approximately $1,091,000, had negative working capital of approximately $4,755,000 and a stockholders’
deficiency of approximately $4,756,000 at December 31, 2015. 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 December 31, 2015, the Company continued
to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lender waivers and maturity
extensions received from the lenders.
The Company’s management and Board
of Directors continue to actively assess the Company's operating structure with an objective to reduce ongoing expenses, increase
sources of recurring revenue as well as seeking additional debt or equity financing. The Company will continually evaluate
funding options including additional offerings of its securities to private and institutional investors and other credit facilities
as they become available. There can be no assurance as to the availability or terms upon which such financing alternatives might
be available.
The Company has experienced recurring losses
from operations since its inception and continues to have a working capital deficiency and limited opportunities for additional
capital infusion. The Company has experienced recurring defaults relating to the various provisions under its current debt
obligations and is expected to require future forbearance and waivers relating to such provisions in the future. These negative
financial conditions combined with delays experienced in product introduction and customer acceptance raises substantial doubt
of the Company’s ability to continue as a going concern.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
Concentration of Credit Risk
The Company maintains cash in bank deposit
accounts which could, at times, exceed federally insured limits. The Company has not experienced any losses on these accounts.
Accounts Receivable
The Company grants credit to substantially
all of its customers and carries its accounts receivable at original invoice amount less an allowance for doubtful accounts. On
a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on history
of past write-offs, collections, and current credit conditions. As of December 31, 2015 and 2014 no allowance for doubtful
accounts was considered necessary.
Inventory
Inventory is stated at the lower
of cost or market value. When halloysite nanotubes or Pleximer™ held in inventory are used, the carrying value of any
such inventory used (i) for research and development is expensed in the period that it is used for the development of
proprietary applications and processes and (ii) in cost of goods sold will be charged as customer shipments are made.
Inventory for overhead costs are applied during production and included in cost of goods sold. As of December 31, 2015 and
2014, the reserve for excess inventory was approximately $83,100 and zero, respectively.
Property and Equipment
Property and equipment are recorded at
cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged
to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.
Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. No depreciation
expense was recorded during the years ended December 31, 2015 or 2014 as all property and equipment owned by the Company was fully
depreciated in prior years.
Accrued Payroll
The Company accrues for earned and unused
vacation benefits and deferred compensation costs for amounts contractually owed to employees.
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, prepaid, 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
December 2015 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.
Income Taxes
The Company accounts for income taxes in
accordance with FASB 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.
Revenue Recognition
Revenue is recognized upon shipment of
ViralProtec orders and upon delivery of Pleximer™ and sample products. The Company earns and recognizes such revenue when
the shipment of the sample products has occurred, title transfers, no further performance obligation exists, and when collection
is reasonably assured.
Research and Development
Research and development costs are expensed
in the period the expenditures are incurred. Capital assets acquired in support of research and development are capitalized and
depreciated over their estimated useful life and related depreciation expense is included in research and development expense.
Other (Expense) Income
During 2015, the Company recognized a gain
of $50,000 on the sale of fully depreciated equipment. During 2014, the Company recorded a $200,000 provision related to the uncertainty
of future collection of the receivable due from MJ Enterprises. The Company continues to aggressively pursue the collection of
this amount with all possible avenues for recovery.
Income (Loss) Per Share
Basic income (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 for the year ended December 31, 2015 as their effect is anti-dilutive based on the net loss incurred.
As of December 31, 2015 there were 39,567,578
shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings.
These potentially dilutive shares have been limited by certain debt and equity agreements with 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.
As of December 31, 2014 there were 7,851,283
shares, respectively, underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute
future earnings. In addition to these potentially dilutive shares as of December 31, 2014 were an additional 6,666,667 reserved
shares underlying the July 23, 2014 Exchange and Right to Shares Agreement with Cape One Master Fund II LLP further described in
Note 2 below. The reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) calculation
was as follows for the year ended December 31, 2014:
|
Numerator:
|
|
|
|
|
|
Net income
|
|
$
|
2,681,747
|
|
|
Adjustment for interest expense on convertible notes
|
|
|
60,229
|
|
|
Net income, adjusted
|
|
|
2,741,976
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares used to compute basic EPS
|
|
|
1,995,172
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Dilutive warrants
|
|
|
185,934
|
|
|
Cape One share rights
|
|
|
5,388,741
|
|
|
Convertible preferred B shares
|
|
|
2,667
|
|
|
Dilutive potential common shares
|
|
|
5,577,342
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
7,572,514
|
|
The 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. These limitations have not
been taken into account in the calculation of diluted earnings per share for the year ended December 31, 2014.
Share Based Payments
The Company has six incentive stock plans:
the 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007
Plan”), the 2008 Incentive Stock Plan (“the 2008 Plan”), the 2009 Stock Incentive Plan (“the 2009 Plan”),
the 2011 Incentive Stock Plan (“the 2011 Plan") and the 2012 Stock Incentive Plan (“the 2012 Plan”) or (collectively,
the “Plans”). The Plans provide for issuance of share-based awards to officers, key employees, non-employee
directors, vendors and consultants. The terms and vesting schedules for share-based awards vary by type of grant and the employment
status of the grantee. Generally, option awards vest based upon time-based conditions and are granted at exercise prices based
on the closing market price of the Company’s stock on the date of grant.
The Company’s accounting policy for
equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of FASB ASC 505-50,
Equity-Based Payments to Non-Employees. The measurement date for the fair value of the equity instruments issued is determined
at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants,
the fair value of the equity instrument is recognized over the term of the consulting agreement.
Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions
that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ
materially from these estimates. On an ongoing basis, we evaluate such estimates. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
Recent Accounting Pronouncements
In November 2015, the FASB issued ASU-2015-17
Balance Sheet Classification of Deferred Taxes (Income Taxes topic 740). The Board issued this update as part of its Simplification
Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of generally accepted accounting
principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information
provided to users of financial statements. To simplify the presentation of deferred income taxes, this guidance requires that deferred
tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The guidance applies to
all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and
assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this
Update. This update will be effective for public business entities for annual periods, including interim periods within those annual
periods, beginning after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2015-17 on our consolidated
financial statements.
In May 2014 the FASB issued
ASU 2014-09 Revenue from Contracts with Customers (Topic 606): The standard is effective for annual periods beginning
after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full
retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect
certain practical expedients, or (ii) a retrospective approach with the cumulative effect recognized at the date of adoption
(which includes additional footnote disclosures). This update supersedes nearly all existing revenue recognition guidance
under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or
services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and
estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. We are currently
evaluating the impact of the adoption of this new guidance.
In July 2015, the FASB issued ASU-2015-11
Simplifying the Measurement of Inventory (Inventory topic 330) The Board issued this update as part of its Simplification Initiative.
Under this guidance an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
This update will be effective for public business entities for annual periods, including interim periods within those annual periods,
beginning after December 15, 2016. We
are currently evaluating the impact of the adoption of this new guidance.
In January 2015 the FASB issued ASU
2015-1, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation
by Eliminating the Concept of Extraordinary Items This ASU eliminates from GAAP the concept of extraordinary items. ASU
2015-1 is effective for the annual period ending after December 15, 2015. Early adoption is permitted provided that the
guidance is applied from the beginning of the fiscal year of adoption. We are currently evaluating the impact of the adoption
of this new guidance.
On February 25, 2016, the Financial Accounting
Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases,”
a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in
its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance.
An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the
obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases.
The standard is effective for fiscal periods beginning after December 15, 2018, and requires modified retrospective adoption, with
early adoption permitted. The Company is evaluating the impact of the adoption of this standard on our consolidated financial statements
and related disclosures.
On March 30, 2016, the FASB issued ASU
No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,”
which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock based
compensation, including adjustments to how excess tax benefits and a company's payments for tax withholdings should be classified.
The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating
the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
In April, 2016, the FASB issued ASU No. 2016-10,
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” to clarify two
aspects of Topic 606: (i) identifying performance obligations and (ii) the licensing implementation guidance, while retaining the
related principles for those areas. The Company is evaluating the impact of the adoption of this standard on our consolidated financial
statements and related disclosures.
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 as of December 31, 2015
and 2014, respectively consisted of the following:
|
Notes Payable
|
|
2015
|
|
|
2014
|
|
|
Senior Secured Convertible Notes
|
|
$
|
441,988
|
|
|
$
|
441,988
|
|
|
Senior Secured Promissory Notes
|
|
|
398,938
|
|
|
|
398,938
|
|
|
2014-2015 Convertible Promissory Notes
|
|
|
745,015
|
|
|
|
694,020
|
|
|
Convertible Promissory Notes
|
|
|
344,000
|
|
|
|
-
|
|
|
Total
|
|
$
|
1,929,941
|
|
|
$
|
1,534,946
|
|
Senior Secured Convertible Notes and
Senior Secured Promissory Notes
As of December 31, 2015 and 2014, Notes
payable on the balance sheets includes $840,926 for senior secured convertible notes and non-convertible senior secured promissory
notes. The 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 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. The Company has defaulted on certain provisions of the
notes. The Company has obtained a waiver of default on the outstanding principal through November 30, 2016. As a condition of this
forbearance the interest rate on these notes has been increased to 18%.
2014 and 2015 Convertible Promissory
Notes
During 2015, the Company entered into two
Senior Secured Convertible Promissory Notes aggregating $61,000. During 2015, the Company issued 200,000 common shares in satisfaction
of $10,000 of outstanding principal. The issuance of these shares reflects a debt conversion price of $0.05 per share.
The 2015 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 2014-2015 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
Company has obtained a waiver of default on the outstanding principal through November 30, 2016. As a condition of this forbearance
the interest rate on certain of these notes has been increased to 18 %.
In 2015, the Company granted
certain warrants with an exercise prices less than the conversion price defined in the 2015 debt agreements. As a
result, the conversion price of the 2015 Convertible Promissory Notes have been adjusted Based on the Company’s
issuance of warrants described above, the conversion price on these debt obligations were modified to $0.05 per share. On
January 5, 2016 the conversion price on the debt was adjusted to $0.02 per share upon the issuance of 450,000 warrants
exercisable at $0.02 per share.
During 2014 the Company entered into various
Senior Secured Convertible Promissory Notes aggregating $694,020. 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. These notes are convertible into shares of the Company’s common stock at a conversion price of
$0.30 per share and are 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. 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
Company has obtained a waiver of default on the outstanding principal through November 30, 2016 and bear an interest rate of 18%
per annum as a condition of forbearance.
2015 Exchange of Cape One Master Fund
II LLP shares for Convertible Promissory Notes
On December 15, 2015, the Company’s
board of directors determined that it was in the best interest of the corporation to exchange 6,666,667 reserved shares of the
Company’s common stock, held by Cape One Master Fund II LLP (as described below), for four convertible promissory notes totaling
$344,000 with an interest rate of 8% per annum due June 30, 2017. These promissory notes are convertible to common stock at the
rate of $0.05 per share. In the event that the Company shall, at any time, issue any additional shares of common stock or equivalents
at a price per share less than the $0.05 conversion price then the conversion price for these convertible promissory notes shall
be reduced. The Company recognized a loss on the exchange of the rights to reserved commons shares upon the issuance of these convertible
promissory notes of approximately $305,000 in 2015. On
January 5, 2016 the conversion price on the debt was adjusted to $0.02 per share upon the issuance of 450,000 warrants
exercisable at $0.02 per share.
2014 Subordinated Secured Convertible
Note and 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 totaling
a combined $379,624 in exchange for 6,666,667 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 estimated the total enterprise value based upon a combination of the trending of the
firm value from December 2006 to December 2014, market comparables and the market value of the Company’s stock 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 these 6,666,667 rights and other securities in
the Company’s capital structure. The fair value of these 6,666,667 share rights was estimated at $54,289 and the Company
recognized a gain on extinguishment of debt of $325,335 during the quarter ended September 30, 2014 based on the excess of the
value of the instruments settled over the estimated fair market value of the underlying share rights.
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.
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 dissolved Bitcoin Bidder, Inc. in 2014.
3
. SEGMENT
INFORMATION
The Company's reportable segments are strategic
business units that offer different products and services. The Company’s reportable segments are organized, managed and internally
reported separately because each business requires different technology and marketing strategies. The Company currently has two
operating segments, Nanotechnology and ViralProtec. A summary of the two segments is as follows:
|
Nanotechnology
|
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.
|
|
|
|
|
ViralProtec
|
Distributor and reseller of personal protective equipment and supplies to protect medical workers from infection and contagious incidents.
|
The accounting policies of the segments
are the same as those described in the summary of significant accounting policies of the Company. The Company accounts
for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The
Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would
report the results contained herein. For purposes of determining segment loss, corporate overhead is primarily included
in NaturalNano, other than direct expense of ViralProtec. Approximate information concerning the Company’s operations
by reportable segment as of and for the years ended December 31, 2014 and December 31, 2013 is as follows:
|
|
|
Nanotechnology
|
|
|
ViralProtec
|
|
|
Consolidated
|
|
|
|
|
For
the years ended
December
31
|
|
|
For
the years ended
December
31
|
|
|
For
the years ended
December
31
|
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Revenue
|
|
$
|
276,097
|
|
|
$
|
137,159
|
|
|
$
|
91,969
|
|
|
$
|
56,447
|
|
|
$
|
368,066
|
|
|
$
|
193,606
|
|
|
Loss from operations
|
|
$
|
(288,060
|
)
|
|
$
|
(549,741
|
)
|
|
$
|
(126,922
|
)
|
|
$
|
(19,242
|
)
|
|
$
|
(414,982
|
)
|
|
$
|
(568,983
|
)
|
|
Interest expense
|
|
$
|
266,661
|
|
|
$
|
301,614
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
266,661
|
|
|
$
|
301,614
|
|
|
Loss on exchange of rights for debt
|
|
$
|
(304,727
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(304,727
|
)
|
|
$
|
-
|
|
|
Gain on modification of debt
|
|
$
|
9,800
|
|
|
$
|
4,107,646
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,800
|
|
|
$
|
4,107,646
|
|
|
Net income (loss)
|
|
$
|
(964,128
|
)
|
|
$
|
2,700,989
|
|
|
$
|
(126,922
|
)
|
|
$
|
(19,242
|
)
|
|
$
|
(1,091,050
|
)
|
|
$
|
2,681,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
26,958
|
|
|
$
|
90,052
|
|
|
$
|
83,025
|
|
|
$
|
219,888
|
|
|
$
|
109,983
|
|
|
$
|
309,940
|
|
Geographic Areas –
The Company had no long-lived
assets in any country other than the United States for any period presented. The Company had $10,800 and $9,300 in sales outside
of the United States in 2015 and 2014, respectively.
Major Customers –
During the years ended
December 31, 2015 and 2014, the Company derived 99% and 95% respectively of its Nanotechnology revenue from one customer.
During the year ended December 31, 2015, three Viral Protec customers represented 63% of the segment revenues.
4
.
DERIVATIVE
LIABILITIES
For stock based derivative financial instruments,
the Company estimated the total enterprise value based upon a combination of the trending of the firm value from December 2006
to December 2015, market comparables, and the market value of the Company’s stock, considering company specific factors including
the changes in forward estimated revenues and market factors. Once the enterprise value was determined an option pricing
model was used to allocate the enterprise value to the individual derivative and other securities in the Company’s capital
structure. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet
as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve
months of the balance sheet date.
The Company’s derivative liabilities
as of December 31, 2015 and December 31, 2014 are as follows:
|
|
·
|
The debt conversion feature embedded in the various Convertible Promissory Notes 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 December 31, 2015 and December 31, 2014.
|
The fair value of the derivative liabilities as of December
31, 2015 and December 31, 2014 are as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Derivative Instrument
|
|
|
|
|
|
|
|
|
|
Notes conversion feature liability
|
|
$
|
686,255
|
|
|
$
|
375,949
|
|
|
Warrant liability
|
|
|
759
|
|
|
|
11,772
|
|
|
Total
|
|
$
|
687,014
|
|
|
$
|
387,721
|
|
Fair Value Valuation Hierarchy Measurement
FASB ASC 820 establishes a valuation hierarchy for disclosure
of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.
|
|
□
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
□
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
|
|
□
|
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
|
A financial asset or liability’s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The derivative liabilities are measured at fair value using certain estimated factors such as volatility and probability and are
classified within Level 3 of the valuation hierarchy. The following table provides a roll forward of the liabilities carried at
fair value measured using significant unobservable inputs (level 3).
|
|
|
2015
|
|
|
2014
|
|
|
Fair value – beginning of year
|
|
$
|
387,721
|
|
|
$
|
32,419
|
|
Liability recognized for conversion feature of debt
issued in exchange for share rights
|
|
|
134,813
|
|
|
|
-
|
|
|
Loss recognized
|
|
|
164,480
|
|
|
|
355,302
|
|
|
Fair value – end of year
|
|
$
|
687,014
|
|
|
$
|
387,721
|
|
5. INCOME TAXES
Following is a summary of the components giving rise to the
income tax benefit for the years ended December 31:
The benefit for income taxes consists of the following:
|
|
|
2015
|
|
|
2014
|
|
|
Currently payable
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total currently payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(121,318
|
)
|
|
$
|
(1,084,885
|
)
|
|
State
|
|
$
|
(413
|
)
|
|
$
|
(17,832
|
)
|
|
Total deferred
|
|
$
|
(121,731
|
)
|
|
$
|
(1,102,717
|
)
|
|
Less: increase in valuation allowance
|
|
|
121,731
|
|
|
|
1,102,717
|
|
|
Net deferred
|
|
|
-
|
|
|
|
-
|
|
|
Total income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Individual components of deferred taxes at December 31 are
as follows:
|
|
|
2015
|
|
|
2014
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
2,939,421
|
|
|
$
|
2,910,879
|
|
|
Equity issued for services
|
|
|
1,333,873
|
|
|
|
1,298,831
|
|
|
Accrued compensation
|
|
|
351,870
|
|
|
|
323,575
|
|
|
Other
|
|
|
205,952
|
|
|
|
175,683
|
|
|
Total
|
|
$
|
4,831,116
|
|
|
|
4,708,968
|
|
|
Less valuation allowance
|
|
|
(4,831,116
|
)
|
|
|
(4,708,968
|
)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has
approximately $11,700,000 in federal net operating loss carry-forwards (“NOLs”) available to reduce future
taxable income. These carry-forwards expire at various dates from 2024 through 2035. Due to the uncertainty of
the Company’s ability to generate sufficient taxable income in the future to utilize the NOLs before they expire,
the Company has recorded a valuation allowance to reduce the gross deferred tax asset to zero. The $1,047,000 reduction of
the net operating loss deferred tax asset reflected on the financial statements is attributable to the
unrecognized tax benefit of $760,000 plus approximately $287,000 related to tax deductions for stock awards, options and
warrants exercised subsequent to the implementation of FASB ASC 718, which are not included in the determination of the
deferred tax asset above and will be recognized in accordance with FASB ASC 718 when realized for tax purposes.
Internal Revenue Code Section
382 ("Section 382") imposes limitations on the availability of a company's net operating losses and other corporate
tax attributes as ownership changes occur. As a result of the historical equity instruments issued by the Company, a Section
382 ownership change or changes may have occurred and a study will be required to determine the date(s) of the ownership change,
if any. The amount of the Company's net operating losses and other tax attributes incurred prior to the ownership change may
be limited based on the Company's value. A full valuation allowance has been established for the deferred tax assets
including the net operating losses. Accordingly, any limitations resulting from
Section 382 application is not expected to have a material effect on the balance sheets or statements of operations of the
Company.
The differences between the United States statutory federal
income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
Statutory United States federal rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Nontaxable gain on extinguishment of debt
|
|
|
-
|
|
|
|
(52.9
|
)
|
|
Nondeductible interest expense
|
|
|
(8.3
|
)
|
|
|
3.8
|
|
|
Reduction of NOL carryover from extinguishment of debt
|
|
|
-
|
|
|
|
52.9
|
|
|
Change in valuation allowance
|
|
|
(11.2
|
)
|
|
|
(41.1
|
)
|
|
Other - Non deductible loss
|
|
|
14.5
|
|
|
|
3.3
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
Unrecognized tax benefits balance at January 1
|
|
$
|
760,000
|
|
|
$
|
760,000
|
|
|
Unrecognized tax benefits balance at December 31
|
|
$
|
760,000
|
|
|
$
|
760,000
|
|
At each of December 31, 2015 and 2014,
the total unrecognized tax benefits of $760,000 have been netted against the related deferred tax assets.
The Company recognizes interest accrued
and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2015 and 2014 the Company
recognized no interest and penalties. The Company files income tax returns in the U.S. federal jurisdiction and New York State.
The tax years 2012 - 2015 generally remain open to examination by major taxing jurisdictions to which the Company is subject.
6. STOCKHOLDERS DEFICIENCY
As of December 31, 2015 the Company was
authorized to issue up to 800,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Preferred Stock Issuances
Series D Preferred Stock
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 holder of the Series D Preferred Stock is 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. 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.
Series B and C Preferred
Stock
Each share of the Series B and C
Convertible Preferred Stock are 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 C designations limit 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 C Convertible Preferred constitutes
4.99% of the aggregate votes attributable to the Company’s outstanding shares on an as converted basis.
During 2014, Platinum elected to convert
269,592 shares of their Series C preferred shares into 143,782 common shares at the then prescribed 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.
Common Stock Issuances
During 2015, the Company issued 200,000
common shares in satisfaction of $20,000 of principal obligations to lenders on convertible debt. During 2014, the Company issued
100,000 common shares in satisfaction of $12,000 of interest obligations to lenders on convertible debt.
Warrants Grants
The Company has issued warrants to purchase
shares of its common stock to certain consultants and debt holders. As of December 31, 2015 and December 31, 2014 there were common
stock warrants outstanding to purchase an aggregate of 1,217,941 and 545,294 shares of common stock, respectively, pursuant to
the warrant grant agreements.
On February 15, 2015, the Company granted
a total of 300,000 warrants to the Company’s board members. These warrants grant the right to purchase one share of common
stock at an exercise price of $0.10 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 $61,106. An expected volatility assumption of 140% was used based on the volatility of the Company’s
stock price utilizing a look-back basis and the risk-free interest rate of 1.62% 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 $0.22 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.
On May 30, 2015, the Company granted a
total of 375,000 warrants to the Company’s board members and one consultant. These warrants grant the right to purchase one
share of common stock at an exercise price of $0.05 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 $41,676. An expected volatility assumption of 140% was used based on the volatility
of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.49% 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 $0.12 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.
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
life-Years
|
|
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
life-Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding: beginning of the year
|
|
|
545,294
|
|
|
$
|
1.13
|
|
|
|
5.9
|
|
|
|
394,110
|
|
|
$
|
4.26
|
|
|
|
2.24
|
|
|
Granted during the year
|
|
|
675,000
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
160,000
|
|
|
$
|
0.42
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(2,353
|
)
|
|
$
|
102.00
|
|
|
|
|
|
|
|
(8,824
|
)
|
|
$
|
127.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding: end of year
|
|
|
1,217,941
|
|
|
$
|
0.35
|
|
|
|
4.1
|
|
|
|
545,294
|
|
|
$
|
1.13
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable: end of year
|
|
|
1,217,941
|
|
|
$
|
0.35
|
|
|
|
4.1
|
|
|
|
545,294
|
|
|
$
|
1.13
|
|
|
|
5.9
|
|
During 2014, the Company granted a total
of 160,000 warrants to certain consultants, the Company’s CEO and the Company’s independent board member. These warrants
grant the right to purchase one share of common stock at an exercise price of $0.42 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 various dates of grant at $105,501. An expected volatility assumption
of 289% has been used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free
interest rate of 1.63% and was derived from the U.S. treasury yields on the dates of grant. The market price of the
Company’s common stock on the grant date was $0.66 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.
Incentive Stock Plans
Under the Company’s 2005 Incentive
Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), the
2008 Incentive Stock Plan (the”2008 Plan”), the 2009 Stock Incentive Plan (the “2009 Plan”), the 2011 Stock
Incentive Plan (the “2011 Plan”) and the 2012 Stock Incentive Plan (the “2012 Plan”), officers, employees,
directors and consultants may be granted options to purchase the Company’s common stock at fair market value as of the date
of grant. Options become exercisable over varying vesting periods commencing from the date of grant and have terms of five to ten
years. The plans also provide for the granting of performance-based and restricted stock awards. The shares of Common
Stock underlying the plans are reserved by the Company from its authorized, but not issued Common Stock. Such shares are issued
by the Company upon exercise by any option holder pursuant to any grant of such shares. The Plans are authorized to grant awards
as follows: the 2005 Plan is authorized to grant up to 823,529 share unit awards, the 2007 Plan is authorized to grant up to 1,000,000
share unit awards, and the 2008 Plan is authorized to grant up to 47,058,824 unit share awards. The 2009 Plan is authorized to
grant up to 1,176,471 share unit awards. The 2011 Plan is authorized to grant up to 1,470,588 share unit awards. The 2012 Plan
is authorized to grant up to 1,764,706 share unit awards.
Employee stock compensation expense was
$0 for the years ended December 31, 2015 and 2014. No option grants were made in 2015 or 2014.
A summary of the status of outstanding
incentive stock plans is presented below:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life-years
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life-years
|
|
|
Outstanding beginning of year
|
|
|
2,363
|
|
|
$
|
1,070
|
|
|
|
3.53
|
|
|
|
2,363
|
|
|
$
|
921
|
|
|
|
3.5
|
|
|
Granted during the year
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(1,264
|
)
|
|
$
|
255
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Options outstanding end of year
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
1.05
|
|
|
|
2,363
|
|
|
$
|
1,070
|
|
|
|
2.1
|
|
|
Options exercisable end of year
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
1.05
|
|
|
|
2,363
|
|
|
$
|
1,070
|
|
|
|
2.1
|
|
As of December 31, 2015, the aggregate intrinsic value of the
stock options outstanding and exercisable was $0.
7. CREDITOR
CONCESSIONS
During the 2015 and 2014, 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 consolidated balance sheet. As a result of these agreements, liabilities of $10,000 and $75,037
respectively, 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.
8. COMMITMENTS AND LEASE OBLIGATIONS
Lease obligations
The Company leases approximately
9,200 square feet in Rochester, NY for laboratory space. The lease is a month-to-month agreement at $2,000 per
month with no targeted end date. Total rent expense of $24,000 was incurred in each of the years ended December 31, 2015 and
2014. The Company’s corporate operations are currently conducted from office space located at 763 Linden Avenue
Rochester, New York. There is no signed lease agreement for this location, the Company incurred $2,500 in rent expense during
each of the years ended 2015 and 2014.
Commitments
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, 2015. The Company has retained counsel in connection with this demand and continues
to evaluate this demand notice and has responded to this demand. No actions or probable settlement discussions between the parties
have developed since the filing of this demand. Due to the Company’s current cash and liquidity position discussed above
and the current evaluation of the items in the demand notice, the timing of future payment of these outstanding amounts in uncertain. No
further communication has been had regarding this notice.
During the third quarter ending September
30, 2010, two former employees, one involved in the March 24, 2009 demand, agreed to forgive the Company’s liability to them
of $54,691 related to deferred compensation in exchange for shares of common stock.
9. REVERSE STOCK SPLIT
On December 19, 2014, 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-300 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 November 4, 2014. As a result of the Reverse Stock Split, every three hundred
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 common stock began
trading at its post-Reverse Stock Split price at the beginning of trading on December 23, 2014.
10. SUBSEQUENT
EVENTS
Debt, Stock and Warrant
transactions subsequent to December 31, 2015
On March 10, 2016, the Company issued 110,000
common shares in satisfaction of $5,500 of outstanding principal. The issuance of these shares reflects a debt conversion price
of $0.05 per share.
On January 7 and April 13, 2016, the Company
issued a total of 508,156 shares of restricted common stock in connection with four cashless exercise transaction from warrant
holders. On January 7, 2016 and April 13, 2016, the Company issued 37,500 and 36,776 respectively, restricted common shares
to a consultant based on a request for the exercise of certain warrants agreement with the consultant. Also on January 7, 2016
and April 13, 2016 the Company issued 250,000 and 183,880 respectively, restricted common shares to the Company’s CEO based
on a request for the exercise of certain warrants agreement with the CEO.
On January 5, 2016, the Company issued a total of 450,000
warrants to directors and a consultant. These warrants vested immediately and were granted with a ten year life, an
exercise price of $0.02 per share and included a cashless exercise provision.