Filed herewith are the following financial
statements of OMNI Shrimp audited financial statements for the period from September 22, 2015 (inception) to December 31,
2015, and unaudited financial statements for the period January 1, 2016 to June 23, 2016 (Effective Date of Exchange Agreement).
Filed herewith is the unaudited pro forma
condensed financial information of NaturalNano, Inc. for the requisite periods.
Reference is made to the disclosure set
forth under Items 2.01 and 5.06 of this report, which disclosure is incorporated herein by reference.
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Omni Shrimp, Inc. ("Omni" or the
"Company" or “we”) was organized on September 22, 2015 with executive offices located in Madeira Beach, Florida
on the Gulf of Mexico. Omni is a wholesaler of locally caught wild American shrimp, predominantly the highly popular Key West pink
variety. Customers are large distributors in the US, who then resell the product to grocery store chains, restaurants and other
retail stores in the Florida, Boston and New York markets.
Omni does not own vessels nor have employees
who are involved with the catching, transporting or processing of shrimp. Omni’s business model is as follows:
On June 23, 2016 (the "Effective Date"),
all of the shareholders of Omni entered into a Share Exchange Agreement (the "Exchange Agreement") with NaturalNano,
Inc. (OTC PK: NNAN) , pursuant to which the shareholders exchanged with the Company all of the outstanding shares of stock of Omni
and Omni thereupon became a wholly owned subsidiary of NNAN. In consideration for the exchange of those OMNI shares, the Company
issued 28,500 shares of a newly created Series E Preferred Stock of NNAN(the "Series E Preferred Stock").
The accompanying condensed consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of business. The Company has earned no revenue since
inception, and supports its continued operations through contributions by its founding principals. As of December 31, 2016, the
company had an accumulated deficit of $1,277. These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern.
While the Company is just beginning its operations
and revenue generating activities, the Company's cash position may not be significant enough to support the Company's daily operations.
Management intends to raise additional funds by way of a public or private offering of debt, equity preferred stock or cash flow
from operations. . Management believes that the actions presently being taken to further implement its business plan and generate
revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of
its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The
ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business
plan and generate revenues.
The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern
The accompanying consolidated balance sheets
as of June 23, 2016 and December 31, 2015, which was derived from audited financial statements, and the unaudited interim consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
("U.S. GAAP") for interim financial information.
In the opinion of management, the information
furnished in these interim financial statements reflect all adjustments necessary for a fair statement of the financial position
and results of operations and cash flows as of and for the period from January 1, 2016 through the Effective Date. All such adjustments
are of a normal recurring nature. The financial statements do not include some information and notes necessary to conform to annual
reporting requirements.
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).
Critical accounting estimates are estimates
for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or
operating performance is material. The Company’s critical accounting estimate(s) and assumption(s) affecting the financial
statements were:
Those significant accounting estimates or assumptions
bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates
or assumptions are difficult to measure or value.
Management bases its estimates on historical
experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.
Management regularly evaluates the key factors
and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical
experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Inventories are stated at the lower of cost or market. All of our
other inventories are valued using the first-in, first-out (“FIFO”) method. The Company evaluates inventory quarterly
for reserves for obsolescence.
The Company uses the First-In First Out method of accounting for
its inventory cost-flow assumption.
Property, plant, and equipment are stated at
acquisition cost, plus capitalized interest on borrowings during the actual construction period of major capital projects. At this
time, the Company has not Property Plant and Equipment.
The Company has elected by unanimous consent
of its shareholders to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions,
the Company not pay federal or state corporate income taxes on its taxable income. Instead, the shareholders of the
Company were liable for individual federal income taxes on their respective shares of the Company”s taxable income.
Therefore, provisions for federal and state
income taxes are not calculated at the Corporate level.
If the asset or liability has a specified (contractual)
term, the level 2 input must be observable for substantially the full term of the asset or liability.
The asset's or liability's fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
When the Company changes its valuation inputs
for measuring financial assets and liabilities at fair value, either due to changes in current market conditions or other factors,
it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company
recognizes these transfers at the end of the reporting period that the transfers occur. For the period from January 1, 2016 through
June 23, 2016, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
There were no assets and liabilities remeasured
at fair value on a recurring basis as of June 23, 2016:
The accompanying condensed consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of business. The Company does not have a long period
of continued operations and has supported its operations to date through loans from entity with shared ownership.. These matters,
among others, raise substantial doubt about the Company's ability to continue as a going concern.
Given the nascent nature of the Company’s
operations, we believe it is difficult to forecast demands for cash at this time, The Company's cash position may not be significant
enough to support the Company's daily operations. If necessary, management plans to raise additional capital through the issuance
of common stock, issuance of debt or through any other means management feels is appropriate. management believes that the actions
presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue
as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise
additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent
upon the Company's ability to further implement its business plan and generate revenues.
The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a going concern
Accounts Receivable totaled $219,603 as of
June 23, 2016. The Company has no set up any reserve against accounts receivable at this time. Accounts receivable represent sales
of shrimp not yet paid for. Sales terms vary with each contract but payment is on average received in 30 days
Inventory represents the cost of shrimp caught
but not yet sold. Shrimp may be retained for up two years in a refrigerated environment. Thusly, spoilage is not an issue.
The Company has elected by unanimous consent
of its shareholders to be taxed under the provisions of subchapter S of the Internal Revenue Code. Under those provisions,
the Company not pay federal or state corporate income taxes on its taxable income. Instead, the shareholders of the
Company were liable for individual federal income taxes on their respective shares of the Company”s taxable income.
Therefore, provisions for federal and state
income taxes are not calculated at the Corporate level.
We are currently authorized to issue up to
300 shares of $1 par value common stock. All issued shares of common stock are entitled to vote on a 1 share/1 vote basis.
On June 23, 2016 (the "Effective Date"),
all of the shareholders of Omni entered into a Share Exchange Agreement (the "Exchange Agreement") with NaturalNano,
Inc. (OTC PK: NNAN) , pursuant to which the shareholders exchanged with the Company all of the outstanding shares of stock of Omni
and Omni thereupon became a wholly owned subsidiary of NNAN. In consideration for the exchange of those OMNI shares, the Company
issued 28,500 shares of a newly created Series E Preferred Stock of NNAN(the "Series E Preferred Stock").
Madeira Beach Seafood, Inc. (“MBS”), which has lent
the company approximately $134,000 (see Note 5. Notes payable footnote) is owned by Colm Wrynn, the Company’s President and
Chief Executive Officer, Linda Giampietro and Daniel Stelcer. Mr. Wrynn, Ms. Giampietro and Mr. Stelcer are also co-owners of Omni.
Madeira Beach Seafood, Inc. (“MBS”)
, which has lent the company approximately $134,000 (see Note 4. Subsequent Events ) is owned by Colm Wrynn, the Company’s
President and Chief Executive Officer, Linda Giampietro and Daniel Stelcer. Mr. Wrynn, Ms. Giampietro and Mr. Stelcer are also
co-owners of Omni.
The Company's President and Chief Executive
Officer does not receive a management fee or other compensation in connection with his services to the Company. The Company reimburses
its President and Chief Executive Officer for all direct and indirect costs of services provided and other expenses necessary or
appropriate to the conduct of our business.
There were no events, besides the Exchange
Agreement, as noted in Note 8. Commitments and Contingencies, that are required to be disclosed.
On June 23, 2016 (“Date of Acquisition”),
NaturalNano, Inc. (“Nano” or the “Company”) entered into a Share Exchange Agreement (the "Exchange
Agreement") with all of the shareholders of Omni Shrimp, Inc., a Florida corporation ("Omni"), pursuant to which
the shareholders exchanged with the Company all of the outstanding shares of stock of Omni and Omni thereupon became a wholly owned
subsidiary of the Company. In consideration for the exchange of those OMNI shares, the Company issued 28,500 shares of
a newly created Series E Preferred Stock of the Company (the "Series E Preferred Stock").
As a result of their ownership of the Series
E Preferred Stock, the Omni shareholders acquired the right to vote 95% of the voting control of the Company. The Series E Preferred
Stock is also convertible into common stock which, in the aggregate, would represent up to 95% of the outstanding common stock
after the conversion. In addition, on the Effective Date, the holders of all of the Company's outstanding Series B and Series D
Preferred Stock.
The Merger is being accounted for as a reverse-merger and recapitalization.
The Company is the acquirer for financial reporting purposes, and Omni is the acquired company. Consequently, the assets, liabilities
and operations that will be reflected in the historical financial statements prior to the Merger will be those of the Company and
will be recorded at the historical cost basis of the Company, and the consolidated financial statements after completion of the
Merger will include the assets, liabilities and results of operations of the Company up to the day prior to the closing of the
Merger and the assets, liabilities and results of operations of the combined company from and after the closing date of the Merger.
The annexed unaudited pro forma combined financial information is based on individual historical financial statements of the Company
and Omni prepared under U.S. GAAP as adjusted to give effect to the Merger.
The historical financial statements have been adjusted in the pro
forma combined financial statements to give effect to events that are (1) directly attributable to the Merger, (2) factually
supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined entities.
The unaudited pro forma combined statements of operations eliminate any non-recurring charges directly related to the Merger that
the combined entities incurred upon completion of the Merger.
The unaudited pro forma combined statements of operations combine
the Company’s historical statements of operations for the year ended December 31, 2015 and for the period January 1,
2016 through the Date of Acquisition with Omni's historical statements of operations for the year ended December 31, 2015 as well
as from January 1, 2016 through the date of acquisition, giving effect to the events that are directly attributable to the Merger,
as if the Merger were consummated at the beginning of the year ended December 31, 2015, and that are expected to have a continuing
impact on the combined company. The difference in fiscal periods between the Company and Omni does not result in a material misstatement
in the combined pro-forma financial statements.
The unaudited pro forma combined financial information does not
purport to represent what the combined company’s results of operations or financial position would actually have been had
the Merger occurred on the dates described above or to project the combined company’s results of operations or financial
position for any future date or period.
The unaudited pro forma combined financial information should be
read together with (1) the Company's audited consolidated financial statements for the years ended December 31, 2015
and 2014, and (2) the Company's unaudited condensed consolidated financial statements for the three month periods ended March
31, 2016 and 2015.
NaturalNano, Inc.
Pro-Forma Condensed Balance Sheet (Unaudited)
December 31, 2015
|
|
NaturalNano,
Inc.
|
|
|
Omni
Shrimp, Inc.
|
|
|
Pro-forma
Adjustments
|
|
|
Pro-forma
Merger
|
|
|
Pro-forma
Merger
Adjustments
|
|
|
Pro-Forma
Offering
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,743
|
|
|
|
|
|
|
|
|
|
|
|
4,743
|
|
|
|
|
|
|
|
4,743
|
|
Accounts Receivable
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Inventory
|
|
|
98,200
|
|
|
|
|
|
|
|
|
|
|
|
98,200
|
|
|
|
|
|
|
|
98,200
|
|
Prepaid and Other
|
|
|
7,040
|
|
|
|
|
|
|
|
|
|
|
|
7,040
|
|
|
|
|
|
|
|
7,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
109,983
|
|
|
|
-
|
|
|
|
|
|
|
|
109,983
|
|
|
|
|
|
|
|
109,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
109,983
|
|
|
|
-
|
|
|
|
|
|
|
|
109,983
|
|
|
|
-
|
|
|
|
109,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
$
|
1,929,941
|
|
|
|
-
|
|
|
|
|
|
|
|
1,929,941
|
|
|
|
-
|
|
|
|
1,929,941
|
|
Accounts Payable
|
|
|
476,127
|
|
|
|
-
|
|
|
|
|
|
|
|
476,127
|
|
|
|
-
|
|
|
|
476,127
|
|
Accrued Expenses
|
|
|
101,544
|
|
|
|
-
|
|
|
|
|
|
|
|
101,544
|
|
|
|
-
|
|
|
|
101,544
|
|
Accrued Interest
|
|
|
506,598
|
|
|
|
-
|
|
|
|
|
|
|
|
506,598
|
|
|
|
-
|
|
|
|
506,598
|
|
Accrued Taxes
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Payroll
|
|
|
1,151,448
|
|
|
|
-
|
|
|
|
|
|
|
|
1,151,448
|
|
|
|
-
|
|
|
|
1,151,448
|
|
Registration Rights Liability
|
|
|
12,324
|
|
|
|
-
|
|
|
|
|
|
|
|
12,324
|
|
|
|
-
|
|
|
|
12,324
|
|
Derivative liability
|
|
|
687,014
|
|
|
|
-
|
|
|
|
|
|
|
|
687,014
|
|
|
|
-
|
|
|
|
687,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,864,996
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,864,996
|
|
|
|
-
|
|
|
|
4,864,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,864,996
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,864,996
|
|
|
|
-
|
|
|
|
4,864,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Series B- $.001 par value,
10 million shares authorized, 5,000 shares issued and outstanding
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
Preferred Stock Series E- $.001 par value,
300 shares issued and authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock at $0.001 par value: 800,000,000
shares authorized; 2,293,502 shares issued and outstanding
|
|
|
2,294
|
|
|
|
300
|
|
|
|
|
|
|
|
2,594
|
2
|
|
|
(300
|
)
|
|
|
2,294
|
|
Series D- issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
21,953,148
|
|
|
|
977
|
|
|
|
|
|
|
|
21,954,125
|
2
|
|
|
102,668
|
|
|
|
22,056,793
|
|
Retained Earnings (Accumulated
Deficit)
|
|
|
(26,711,654
|
)
|
|
|
(1,277
|
)
|
|
|
-
|
|
|
|
(26,712,931
|
) 2.3.
|
|
|
(102,397
|
)
|
|
|
(26,815,328
|
)
|
Total Stockholders' Equity
(Deficit)
|
|
|
(4,755,013
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,755,013
|
)
|
|
|
0
|
|
|
|
(4,755,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Deficit
|
|
$
|
109,983
|
|
|
|
0
|
|
|
|
-
|
|
|
|
109,983
|
|
|
|
-
|
|
|
|
109,983
|
|
NaturalNano, Inc.
Pro Frorma Condendsed Statement of Operations
(Unaudited)
December 31, 2015
|
|
NaturalNano,
Inc.
|
|
|
Omni Shrimp,
Inc.
|
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma Merger
|
|
|
Merger
Adjustments
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Pro Forma Offering
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INCOME:
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Revenue
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$
|
368,066
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|
|
$
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|
|
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|
|
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$
|
368,066
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|
|
|
|
|
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$
|
368,066
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|
Cost of Goods Sold
|
|
|
(157,134
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)
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|
|
|
|
|
|
|
|
|
|
(157,134
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)
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|
|
|
|
|
|
(157,134
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)
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|
|
|
|
|
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|
|
|
|
|
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Gross Profit
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|
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210,932
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|
|
-
|
|
|
|
-
|
|
|
|
210,932
|
|
|
|
-
|
|
|
|
210,932
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|
|
|
|
|
|
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|
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OPERATING EXPENSES:
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|
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General and Administrative Expense
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|
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518,548
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|
|
|
1,277
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|
|
|
|
|
|
|
519,825
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|
|
|
|
|
|
|
519,825
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Research and Development
|
|
|
4,584
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|
|
|
-
|
|
|
|
|
|
|
|
4,584
|
|
|
|
|
|
|
|
4,584
|
|
Stock based compensation
attributable to warrant grants
|
|
|
102,782
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|
|
|
-
|
|
|
|
-
|
|
|
|
102,782
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|
|
|
|
|
|
|
102,782
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
|
|
|
625,914
|
|
|
|
1,277
|
|
|
|
-
|
|
|
|
627,191
|
|
|
|
-
|
|
|
|
627,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
GAIN (LOSS) FROM OPERATIONS
|
|
|
(414,982
|
)
|
|
|
(1,277
|
)
|
|
|
-
|
|
|
|
(416,259
|
)
|
|
|
-
|
|
|
|
(416,259
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)
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|
|
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|
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OTHER INCOME (EXPENSE):
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|
|
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|
|
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|
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|
|
|
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Net loss on derivative liability
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|
|
(164,480
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)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(266,661
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(266,661
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)
|
|
|
|
|
|
|
(266,661
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)
|
Loss on Exchange for share rights
|
|
|
(304,727
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)
|
|
|
-
|
|
|
|
|
|
|
|
(304,727
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)
|
|
|
|
|
|
|
(304,727
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)
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Gain on forgiveness, conversions and modifications
of debt
|
|
|
9,800
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|
|
|
-
|
|
|
|
|
|
|
|
9,800
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|
|
|
|
|
|
|
9,800
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Other Income
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|
|
50,000
|
|
|
|
-
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|
|
|
|
|
|
|
50,000
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|
|
|
|
|
|
|
50,000
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense),
net
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|
|
(676,068
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(511,588
|
)
|
|
|
-
|
|
|
|
(511,588
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(1,091,050
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
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|
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Net Income
|
|
|
(1,091,050
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)
|
|
|
(1,277
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)
|
|
|
-
|
|
|
|
(1,092,327
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)
|
|
|
-
|
|
|
|
(1,092,327
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)
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|
|
|
|
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|
|
|
|
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|
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Weighted average common shares outstanding
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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- Basic and diluted
|
|
|
2,102,391
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|
|
|
300
|
|
|
|
|
|
|
|
2,102,391
|
|
|
|
|
|
|
|
2,102,391
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|
Weighted average Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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- Basic and diluted
|
|
$
|
(0.52
|
)
|
|
$
|
(4.26
|
)
|
|
|
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
$
|
(0.52
|
)
|
NaturalNano, Inc.
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.
Notes payable as of December 31, 2015 and
2014, respectively consisted of the following:
|
|
2015
|
|
|
2014
|
|
Notes Payable
|
|
|
|
|
|
|
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 - Nondeductible 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.
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.
NaturalNano, Inc.
Pro-Forma Condensed Balance Sheet (Unaudited)
June 23, 2016
|
|
NaturalNano,
Inc.
|
|
|
Omni
Shrimp, Inc.
|
|
|
Pro-forma
Merger
|
|
|
|
|
Pro-forma
Merger
Adjustments
|
|
|
Pro-Forma
Offering
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
(151
|
)
|
|
$
|
85,795
|
|
|
$
|
85,644
|
|
|
|
|
$
|
|
|
|
$
|
85,644
|
|
Accounts Receivable
|
|
|
-
|
|
|
|
219,603
|
|
|
|
219,603
|
|
|
|
|
|
|
|
|
|
219,603
|
|
Inventory
|
|
|
120,858
|
|
|
|
74,141
|
|
|
|
194,999
|
|
|
3
|
|
|
(120,858
|
)
|
|
|
74,144
|
|
Prepaid and Other
|
|
|
7,040
|
|
|
|
2,867
|
|
|
|
9,907
|
|
|
3
|
|
|
(7,040
|
)
|
|
|
2,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
127,747
|
|
|
|
382,406
|
|
|
|
510,153
|
|
|
|
|
|
(127,898
|
)
|
|
|
382,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-current assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
127,747
|
|
|
$
|
382,406
|
|
|
$
|
510,153
|
|
|
|
|
$
|
(127,898
|
)
|
|
$
|
382,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
$
|
1,654,353
|
|
|
$
|
133,743
|
|
|
$
|
1,788,096
|
|
|
|
|
$
|
-
|
|
|
$
|
1,788,096
|
|
Accounts Payable
|
|
|
487,204
|
|
|
|
142,835
|
|
|
|
630,039
|
|
|
|
|
|
-
|
|
|
|
630,039
|
|
Accrued Expenses
|
|
|
109,573
|
|
|
|
-
|
|
|
|
109,573
|
|
|
4
|
|
|
47,500
|
|
|
|
157,077
|
|
Accrued Interest
|
|
|
463,864
|
|
|
|
2,154
|
|
|
|
466,018
|
|
|
|
|
|
-
|
|
|
|
466,018
|
|
Accrued Taxes
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Accrued Payroll
|
|
|
1,108,448
|
|
|
|
-
|
|
|
|
1,108,448
|
|
|
3
|
|
|
(764,728
|
)
|
|
|
343,722
|
|
Registration Rights Liability
|
|
|
12,324
|
|
|
|
-
|
|
|
|
12,324
|
|
|
|
|
|
-
|
|
|
|
12,324
|
|
Derivative liability
|
|
|
618,833
|
|
|
|
-
|
|
|
|
618,833
|
|
|
|
|
|
-
|
|
|
|
618,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
4,454,598
|
|
|
|
278,732
|
|
|
|
4,733,331
|
|
|
|
|
|
(717,228
|
)
|
|
|
4,016,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
4,454,598
|
|
|
|
278,732
|
|
|
|
4,733,331
|
|
|
|
|
|
(717,228
|
)
|
|
|
4,016,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Series E- $.001 par value,
300 shares issued and authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
29
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock at $0.001 par value: 800,000,000
shares authorized; 2,911,658 shares issued and outstanding
|
|
|
2,912
|
|
|
|
300
|
|
|
|
3,212
|
|
|
2
|
|
|
(300
|
)
|
|
|
2,912
|
|
Additional paid-in capital
|
|
|
21,979,242
|
|
|
|
977
|
|
|
|
21,980,219
|
|
|
2
|
|
|
102,668
|
|
|
|
22,082,887
|
|
Retained Earnings (Accumulated
Deficit)
|
|
|
(26,309,006
|
)
|
|
|
102,397
|
|
|
|
(26,206,609
|
)
|
|
2.4.
|
|
|
494,434
|
|
|
|
(25,712,175
|
)
|
Total Stockholders' Equity
(Deficit)
|
|
|
(4,326,852
|
)
|
|
|
103,674
|
|
|
|
(4,223,178
|
)
|
|
|
|
|
596,831
|
|
|
|
(3,626,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Deficit
|
|
$
|
127,747
|
|
|
$
|
382,406
|
|
|
$
|
510,153
|
|
|
|
|
$
|
(120,398
|
)
|
|
$
|
389,755
|
|
NaturalNano, Inc.
Pro Forma Condendsed Statement of Operations
(Unaudited)
For the Period from January 1, 2016 through
June 23, 2016
|
|
NaturalNano,
Inc.
|
|
|
Omni Shrimp,
Inc.
|
|
|
Pro Forma Merger
|
|
|
|
|
Merger
Adjustments
|
|
|
Pro Forma Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
150,811
|
|
|
$
|
1,199,948
|
|
|
$
|
1,350,759
|
|
|
|
|
|
|
|
|
$
|
1,350,759
|
|
Cost of Goods Sold
|
|
|
(4,656
|
)
|
|
|
(1,043,928
|
)
|
|
|
(1,048,584
|
)
|
|
|
|
|
|
|
|
|
(1,048,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
146,155
|
|
|
|
156,020
|
|
|
|
302,175
|
|
|
|
|
|
-
|
|
|
|
302,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expense
|
|
|
132,282
|
|
|
|
50,193
|
|
|
|
182,475
|
|
|
4
|
|
|
47,500
|
|
|
|
229,975
|
|
Stock based compensation
attributable to warrant grants
|
|
|
25,292
|
|
|
|
-
|
|
|
|
25,292
|
|
|
1
|
|
|
61,486
|
|
|
|
86,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
157,574
|
|
|
|
50,193
|
|
|
|
207,767
|
|
|
|
|
|
108,986
|
|
|
|
316,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN (LOSS) FROM OPERATIONS
|
|
|
(11,419
|
)
|
|
|
105,827
|
|
|
|
94,408
|
|
|
|
|
|
(108,986
|
)
|
|
|
(14,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(156,066
|
)
|
|
|
(2,154
|
)
|
|
|
(158,220
|
)
|
|
|
|
|
|
|
|
|
(158,220
|
)
|
Gain on forgiveness, conversions and modifications
of debt
|
|
|
502,305
|
|
|
|
-
|
|
|
|
502,305
|
|
|
|
|
|
|
|
|
|
502,305
|
|
Gain on Disposition of Legacy Business
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
3
|
|
|
636,831
|
|
|
|
636,831
|
|
Gain on change in derivative
liability
|
|
|
67,827
|
|
|
|
-
|
|
|
|
67,827
|
|
|
|
|
|
|
|
|
|
67,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense),
net
|
|
|
414,067
|
|
|
|
(2,154
|
)
|
|
|
411,913
|
|
|
|
|
|
636,831
|
|
|
|
1,048,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(425,486
|
)
|
|
|
103,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
402,648
|
|
|
|
103,674
|
|
|
|
506,322
|
|
|
|
|
|
527,845
|
|
|
|
1,034,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
2,792,843
|
|
|
|
300
|
|
|
|
2,792,843
|
|
|
|
|
|
|
|
|
|
2,792,843
|
|
Weighted average Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
$
|
0.14
|
|
|
$
|
345.58
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
$
|
0.37
|
|
Omni Shrimp, Inc.
Pro-Forma Assumptions (Unaudited)
1)
|
|
To record NaturalNano, Inc. warrants issued to former CEO
|
|
$
|
61,486
|
|
|
|
|
|
|
|
|
2a)
|
|
Issuance of Series E Preferred stock for assets of Omni Shrimp, Inc.
|
|
$
|
28
|
|
|
|
|
|
|
|
|
2b)
|
|
Elimination of Common stock and Additional Paid in capital accounts
|
|
|
|
|
|
|
of Omni Shrimp
|
|
$
|
1,277
|
|
|
|
|
|
|
|
|
2c)
|
|
Elimination of retained earnings of Omni Shrimp, Inc.
|
|
$
|
66,558
|
|
|
|
|
|
|
|
|
2d)
|
|
Increase in Additional paid-in capital associated with merger
|
|
$
|
103,645
|
|
|
|
|
|
|
|
|
3a)
|
|
Elimination of accrued wages payable to former CEO
|
|
$
|
764,728
|
|
|
|
|
|
|
|
|
3b)
|
|
Transfer of inventory to former CEO
|
|
$
|
120,858
|
|
|
|
|
|
|
|
|
3c)
|
|
Transfer of prepaid and other assets to former CEO
|
|
$
|
7,040
|
|
|
|
|
|
|
|
|
3d)
|
|
Gain on transfer of net assets to former CEO
|
|
$
|
636,831
|
|
|
|
|
|
|
|
|
4)
|
|
Legal and other fees
|
|
$
|
47,500
|
|
1.
|
PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
|
Interim Financial Statements
The condensed consolidated financial statements
as of June 23, 2016 and for the period from January 1, 2016 to June 23, 2016 are unaudited. However, in the opinion of management
of the Company, these condensed consolidated financial statements reflect all material adjustments, consisting solely of normal
recurring adjustments, necessary to present fairly the consolidated financial position and results of operations for such interim
periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained
for a full year. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation
S-X for smaller reporting companies. Accordingly, these condensed consolidated financial statements do not include all
of the information required by U.S. generally accepted accounting principles for complete financial statements. These
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
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.. Since inception the Company’s growth has been funded through
a combination of convertible and non-convertible debt from private investors and from cash advances from its former parent Technology
Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for
a reasonable period of time. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and
ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements
do not include any adjustments that might result from the uncertainty.
As of June 23, 2016, 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.
Basis of Consolidation
The condensed consolidated financial statements
include the accounts of NaturalNano, Inc. (“NaturalNano” or the “Company”), a Nevada corporation, and its
wholly owned subsidiaries NaturalNano Research, Inc. (“NN Research”) a Delaware corporation. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Description of the Business
New lines
of Business
Shrimp
Omni Shrimp
On June 23, 2016, the Company announced the
acquisition of all the outstanding shares of, Omni Shrimp (“Omni”) a Florida corporation, located in Madeira Beach,
Florida on the Gulf of Mexico. Omni is a seller of wild American shrimp. Omni wholesales its locally caught shrimp, predominantly
the highly popular Key West pink variety, to large distributors in the United States, who then resell the product to grocery store
chains, restaurants and other retail stores in the Florida, Boston and New York markets. See Note 7. Subsequent Events for more
detail.
Omni believes that it differentiates itself
from its competitors not only by the quality of its product but its relationships with distributors allowing it to get its product
to market as quickly as possible in order to guarantee freshness and taste.
Existing lines of Business
Following the acquisition discussed above,
On June 23, 2016, the following businesses were transferred to the former Management of the Company. See Note 8 to the Consolidated
Financial statements below.
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.
Significant Accounting Policies
Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions
that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ
materially from these estimates. On an ongoing basis, we evaluate such estimates. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
Fair Value of Financial Instruments
Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
·
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
·
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the
full term of the financial instrument.
|
|
·
|
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure
assets and liabilities at fair value.
|
A financial asset or liability’s classification
within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The carrying
amounts reported in the balance sheet of cash, accounts receivable, inventory, prepaid assets, 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 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
March 2016 considering company specific factors including the changes in forward estimated revenues and market factors, market
multiples for comparable companies, and the Company’s market share price, all equally weighted. Once the enterprise
value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities
in the Company’s capital structure. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet date.
Reclassifications
Certain prior year amounts have been reclassified
to conform to the current year presentation.
Income Taxes
The Company accounts for income taxes in accordance
with 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 tax items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced
by available tax benefits not expected to be realized. The Company recognizes penalties and accrued interest related to unrecognized
tax benefits in income tax expense. Income tax expense was $0 for theperiod ending June 23, 2016
Loss Per Share
Loss per common share is computed by dividing
net income or loss by the weighted-average number of shares of common stock outstanding during the period. Diluted income or loss
per common share gives effect to dilutive convertible preferred stock, convertible debt, options and warrants outstanding during
the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss
per share as their effect is anti-dilutive based on the net loss incurred.
As of March 31, 2016 and 2015 there were 39,567,578
and 9,130,044 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 March 31, 2015 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.
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.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-011 to Topic 330, Inventory. This ASU requires
entities using inventory costing methods other than last-in-first-out and retail inventory method to value their inventory at the
lower of cost and net realizable value. This ASU is effective for fiscal years beginning after December 15, 2016 and is to be applied
prospectively. Early adoption of this ASU is permitted. The Company does not expect adoption of this ASU to have a material impact
on its Consolidated Financial Statements.
Notes payable consisted of the following:
Notes Payable
|
|
June 23,
2016
|
|
|
December 31,
2015
|
|
Senior Secured Convertible Notes
|
|
$
|
289,115
|
|
|
$
|
441,988
|
|
Senior Secured Promissory Notes
|
|
|
398,938
|
|
|
|
398,938
|
|
2014-2015 Convertible Promissory Notes
|
|
|
594,515
|
|
|
|
745,015
|
|
Convertible Promissory Notes
|
|
|
344,000
|
|
|
|
344,000
|
|
Total Notes Payable Outstanding
|
|
|
1,626,468
|
|
|
|
1,929,941
|
|
Lines of credit
|
|
|
161,528
|
|
|
|
|
|
|
|
|
1,788,096
|
|
|
|
1,929,941
|
|
Senior Secured Convertible Notes and Senior
Secured Promissory Notes
As of March 31, 2016 and December 31, 2015
Notes payable on the balance sheets includes $840,926 for senior secured convertible and non-convertible senior secured promissory
notes. The conversion rate for principal and accrued interest on Senior Secured Convertible Notes is 75% of the lowest
volume weighted average price (VWAP) of the Company’s common stock for the 1, 5 or 10 days immediately prior to the conversion.
As further described below, the Company has defaulted on certain provisions of the notes. The Company has obtained a waiver of
default on the outstanding principal. As a condition of this forbearance the interest rate on certain of these notes has been increased
to 18%.
Pursuant to the Forbearance agreement, $152,873
of this debt was forgiven at the Closing on June 23, 2016.
2014-2015 Convertible Promissory Notes
During nine months ended March 31, 2016, the
Company entered into two Senior Secured Convertible Promissory Notes aggregating $61,000. The 2014-2015 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, 2015. As a condition of this forbearance
the interest rate on certain of these notes has been increased to 18%. On March 10, 2016, an investor converted $5,500 of principal
into 110,000 shares.
On February 15, 2015, the Company granted 300,000
warrants to the Company’s board members with an exercise price of $0.10 per share and on May 30, 2015, the Company granted
375,000 warrants to the Company’s board members and one consultant with an exercise price of $0.05 per share. The 2014-2015
Convertible Promissory Notes were convertible into shares at $0.30 per share subject to adjustment in the event of lower price
issuances, subject to customary exceptions. Based on the Company’s issuance of warrants described above, the conversion price
on these debt obligations were modified to $0.05 per share.
Pursuant to the Forbearance agreement, $145,000
of this debt was forgiven on June 23, 2016.
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.
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.
Bridge Loans
Bridge loans are short term notes taken on demand. $133,743 was
at Omni as follows:
Date Issued
|
|
Amount
|
|
|
Interest Rate
|
|
|
Holder
|
|
|
|
|
|
|
|
|
|
February 12, 2016
|
|
$
|
85,000
|
|
|
|
5.25
|
%
|
|
Madeira Beach Seafood, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
April 7, 2016
|
|
|
48,743
|
|
|
|
5.25
|
%
|
|
Madeira Beach Seafood, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,743
|
|
|
|
|
|
|
|
Approximately $27,000 in demand loans were issued at NaturalNano,
Inc.
Subsequent to the Acquisition
of Omni and the disposition of the Nanotechnology and Viral Protec businesses, the Company operates in only segment, Shrimp. Thusly,
there is no need to present segment data.
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 March 2016, 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 June 23, 2016 and December 31, 2015 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 June 23, 2016 and December 31, 2015.
|
The fair value of the derivative liabilities as of June 23, 2016
and December 31, 2015 are as follows:
|
|
June 23,
2016
|
|
|
December 31,
2015
|
|
Note conversion feature liabilities
|
|
$
|
615,243
|
|
|
$
|
686,255
|
|
Warrant liability
|
|
|
3,590
|
|
|
|
759
|
|
Total
|
|
|
618,833
|
|
|
|
687,014
|
|
As of June 23, 2016 the Company was authorized
to issue up to 800,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Authorized Common Stock:
In 2013 the
Company received a unanimous written consent in lieu of a meeting from the members of the Board of Directors and a written consent
from the Series D stockholder to amend its articles of incorporation to increase the Company’s authorized common shares to
800,000,000 common shares. As of June 23, 2016 there were approximately 250 million shares underlying preferred stock, convertible
debt, outstanding options and warrants that could potentially dilute future earnings. The company does not have sufficient authorized
shares to facilitate conversion of all the potentially dilutive instrument.
Preferred Stock Issuances
The Series E Convertible
Preferred Stock is convertible into 95% of the Company’s common stock and votes on an as-converted basis. The Series
E designation limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to
no more than 4.99% of the votes attributable to the total outstanding common shares. As a result of the Company not having
sufficient authorized shares to satisfy the conversion of all outstanding convertible debt, share rights, convertible preferred
stock, warrants and options, the Series B preferred shares have been moved into temporary equity classification on the balance
sheet.
Preferred Stock Cancellations
As a part of the Forbearance Agreement, 5,000
shares of Series B Preferred stock and 100 shares of Series D Preferred stock were also cancelled.
Warrants Grants
The Company has issued warrants to purchase
shares of its common stock to certain consultants and debt holders. As of June 23, 2016 and December 31, 2015 there were common
stock warrants outstanding to purchase an aggregate of 2,917,941 and 1,217,941 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, included in the summary below, 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 January 6, 2016, the Company granted a total
of 450,000 warrants to the Company’s board members and one consultant. These warrants, included in the summary below, grant
the right to purchase one share of common stock at an exercise price of $0.02 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 $25,292. 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 1.00% 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 $0.06 per share. The expiration date used in the valuation model aligns with the
warrant life of five years as indicated in the agreements. The dividend yield was assumed to be zero
A summary of the outstanding warrants is presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life-years
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2016
|
|
|
1,217,941
|
|
|
$
|
.35
|
|
|
|
4.07
|
|
Issued
|
|
|
2,000,000
|
|
|
$
|
.05
|
|
|
|
5.98
|
|
Exercised
|
|
|
(300,000
|
)
|
|
$
|
.05
|
|
|
|
4.75
|
|
Warrants outstanding at June 23, 2016
|
|
|
2,917,941
|
|
|
$
|
.17
|
|
|
|
4.75
|
|
A summary of the status of the outstanding incentive stock plans
is presented below:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Life-years
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2016
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
1.32
|
|
Options outstanding at June 23, 2016
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
1.07
|
|
Options exercisable at June 23, 2016
|
|
|
1,099
|
|
|
$
|
2,008
|
|
|
|
1.07
|
|
All compensation costs for the above options
have been previously recognized in operations. As of March 31, 2016, the aggregate intrinsic value of the stock options outstanding
and exercisable was $0. There were no option grants made in the three month periods ended March 31, 2016 and 2015.
Transfer of Former Lines of Business
Subsequent to the closing
of the Exchange Transaction pursuant to which Omni became a wholly-owned subsidiary of the Company, the Company entered into an
Asset Purchase Agreement, with James Wemett, who had been the President and CEO of the Company until the closing of the Exchange
Transaction and NaturalNano Corp., a New York corporation wholly-owned by Mr. Wemett ("Transferee"), pursuant to which
the Transferee acquired all right, title and interest to those specific business activities of the Company which the Company had
been conducting immediately prior to the closing of the Exchange Transaction, specifically, (i) developing and commercializing
material additives based on a technology utilizing halloysite nanotubes, which line of business the Company had been engaged in
for more than three years prior to the Effective Date, and (ii) reselling Ebola personal protective equipment and ancillary supplies.
These business activities generated revenues for the Company, which revenues increased from $125,638 in 2012 to $368,066 in 2015.
In connection with the
transaction contemplated by the Asset Purchase Agreement, Mr. Wemett waived all accumulated compensation due to him from the Company,
the Transferee assumed certain liabilities relating to those transferred business activities, the Company and Mr. Wemett exchanged
releases, and the Company issued to Mr. Wemett a six year divisible Warrant with cashless exercise rights to purchase up to
2,000,000 shares of the Company's common stock at a purchase price of $0.05 per share.
Management Change
As disclosed in an Information
Statement pursuant to Rule 14f filed on June 27, 2016, two of the Company's directors, Isaac Onn and Alex Ruckdaschel, resigned
from those positions on June 15, 2016. Neither of the resignations was the result of any disagreement with the management of the
Company.
On June 21, 2016, to fill
one of the Board vacancies, Colm Wrynn was elected as a director of the Company.
On the Effective Date,
James Wemett resigned as an officer of the Company and Colm Wrynn, the President of Omni became the President and Chief Executive
Officer of the Company, and Daniel Stelcer, a Vice President of Omni became the Secretary and Chief Operating Officer of the Company.
Mr. Wemett resigned as a director of the Company, and Mr. Stelcer will be appointed in his stead, effective as of ten (10) days
after the delivery to the shareholders of the Company of an Information Statement pursuant to Rule 14f-1.
Change in Independent Registered Public
Accounting Firm
On August 3, 2016, the
Board of Directors of the Company notified Freed Maxick CPAs, P.C (“Freed Maxick”) that it had determined to dismiss
them as the Company’s independent registered public accounting firm, effective as of August 3, 2016. Also on August 3, 2016,
the Board determined to engage Scrudato & Co., PA as its new independent registered public accounting firm to replace Freed
Maxick. Please see our form 8-K filed on August 3, 2016 for more detail.
Issuance of Common shares and Conversion
of debt
On July 6, 2016, the Company issued 142,811
shares due to the conversion of $1,000 of notes payable plus $785 of accrued interest.
Issuance of Debt
On August 8, 2016, the Company borrowed $20,000 from a third
party. The convertible promissory note bears interest at 10% per annum and matures on August 1, 2017. The third party has
the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of
the lowest closing bid price for the twenty days prior to the conversion.
New Lease
Commencing August 1, 2016, the Company entered
into a lease for a period of twelve months for its Madeira Beach location. The monthly rent will be $1,500.