Attached files
file | filename |
---|---|
EX-31.1 - EXHIBIT 31.1 - Shrink Nanotechnologies, Inc. | ex311.htm |
EX-10.1 - EXHIBIT 10.1 - Shrink Nanotechnologies, Inc. | ex101.htm |
EX-32.1 - EXHIBTI 32.1 - Shrink Nanotechnologies, Inc. | ex321.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
[ ]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________ to _____________
Commission
File Number: 000-5286
Shrink Nanotechnologies,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
20-2197964
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
2038
Corte del Nogal, Suite 110
Carlsbad,
California 92011
________________________________________________________________
(Address
of principal executive offices, including zip
code)
|
Registrant’s
telephone number, including area
code: (760) 804-8844
Securities registered
pursuant to Section 12(b) of the
Act: None
Securities registered
pursuant to Section 12(g) of the
Act: $.001 par value common
stock
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company:
Large accelerated filer o
|
Accelerated
filer o
|
Non-accelerated filer o
|
Smaller
reporting company x
|
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13, or 15(d) of the Exchange Act of 1934 after the distribution of
securities under a plan confirmed by a court. Yes ___ No
____
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
34,563,965 common
shares outstanding, $0.001 par value, at November
17, 2009
SHRINK
NANOTECHNOLOGIES, INC.
September
30, 2009 FORM 10-Q QUARTERLY REPORT
INDEX
|
Page
|
Forward
Looking Statements
|
ii
|
PART
I - FINANCIAL INFORMATION
|
F-1
|
Item
1. - Financial
Statements.
|
F-1
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and
December 31, 2008
Consolidated
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2009 and 2008 (unaudited)
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
2008 (unaudited)
Notes
to Unaudited Consolidated Financial Statements
|
|
Item
2 – Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
1
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk.
|
4
|
Item
4 - Controls and Procedures.
|
5
|
PART
II - OTHER INFORMATION
|
|
Item
1 - Legal Proceedings
|
6
|
Item
1A – Risk Factors
|
6
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
15
|
Item
3 - Defaults Upon Senior Securities
|
16
|
Item
4 - Submission of Matters to a Vote of Security Holders
|
16
|
Item
5 - Other Information
|
16
|
Item
6 - Exhibits.
|
16
|
i
Forward
Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. In particular, this report includes
statements regarding our plans, goals, strategies, intent, beliefs or current
expectations with respect to our recently acquired business which is the primary
subject of this report, as well as our plans to wind down our existing
internet-based publishing business. These statements are expressed in
good faith and based upon what we believe are reasonable assumptions, but there
can be no assurance that these expectations will be achieved or
accomplished. These forward looking statements can be identified by
the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional
constructions (“will,” “may,” “could,” “should,” etc.). Some specific forward
looking statements that are necessarily subject to uncertainties include,
without limitation, items contemplating or making assumptions about
the progress of our research and development activities; our ability to further
acquire, hold and defend our intellectual property; the development,
commercialization and market acceptance of our recently acquired microfluidic
and “shrinkable plastic” technologies and other related technologies; the cost
to complete the development and commercialization of these technologies and
products made or based on these technologies; and the presumed size and growth
of the market for lab-on-a-chip devices; and the projected growth in stem cell
research and alternative energy demands (specifically, products ultimately
dervived from our solar concentrator technology), all of which constitute
forward-looking statements.
These
risk factors should be considered in addition to our cautionary comments
concerning forward-looking statements in this report. Additional
risks not described above, or unknown to us, may also adversely affect the
Company or its results.
Although
forward-looking statements in this report reflect the good faith judgment of
management, forward-looking statements are inherently subject to known and
unknown risks, business, economic and other risks and uncertainties that may
cause actual results to be materially different from those discussed in these
forward-looking statements.
Factors
that may cause actual results to differ materially from those expressed or
implied by our forward-looking statements include, but are not limited to,
changes the general industry and market conditions, laws or accounting rules,
general economic and political conditions, as well as unexpected delays or
difficulties which we may have in completing the development of our products,
manufacturing our products once developed, establishing a marketing and sales
infrastructure and establishing a presence in our target markets, as well as
other disruptions of expected business conditions and
development. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
report. We assume no obligation to update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this report, other than as may be required by applicable law or
regulation. Readers are urged to carefully review and consider the
various disclosures made by us in our reports filed with the SEC which attempt
to advise interested parties of the risks and factors that may affect our
business, financial condition, results of operation and cash flows.
References
All
references in this report to “we,’’ ‘‘us,’’ and ‘‘our’’ refer collectively
to the registrant, Shrink Nanotechnologies, Inc. (f/k/a Audiostocks, Inc.), a
Delaware corporation collectively with its newly acquired subsidiary Shrink
Technologies, Inc., a California corporation on a consolidated basis
after the acquisition, unless the context requires
otherwise. References to the “Company” mean Shrink Nanotechnologies,
Inc., itself. References to “Shrink” mean Shrink
Technologies, Inc., a California corporation which is our recently acquired
wholly owned subsidiary.
ii
Item
1. Financial Statements
(A
Development Stage Company)
|
||||
CONSOLIDATED
- BALANCE SHEETS
|
||||
September
30,
|
December
31,
|
|||
2009
|
2008
|
|||
(unaudited)
|
||||
ASSETS
|
||||
Current
assets
|
||||
Cash
|
$ 81,978
|
$ 37,939
|
||
Accounts
receivable
|
6,463
|
-
|
||
Prepaid
expenses
|
223,150
|
-
|
||
Total
current assets
|
311,591
|
37,939
|
||
Property,
plant and equipment, net
|
149,135
|
-
|
||
Intangible
assets, net
|
104,509
|
-
|
||
TOTAL
ASSETS
|
$ 565,235
|
$ 37,939
|
||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||
Current
liabilities
|
||||
Accounts
payable and accrued expenses
|
$ 521,038
|
$ 35,338
|
||
Stock
to be issued
|
67,500
|
-
|
||
Due
to a related party
|
12,500
|
-
|
||
Convertible
debentures, default - related party
|
-
|
45,547
|
||
Taxes
payable
|
14,744
|
-
|
||
Total
current liabilities
|
615,782
|
80,885
|
||
Long
term liabilities
|
||||
Convertible
debentures, net of discount - related party
|
24,007
|
45,547
|
||
TOTAL
LIABILITIES
|
629,590
|
126,432
|
||
COMMITMENTS
|
||||
STOCKHOLDERS'
DEFICIT
|
||||
Preferred
stock, 5,000,000 shares authorized, $0.001 par value
|
||||
issued
and outstanding 4,000,150 and 50
|
||||
at
September 30, 2009 and December 31, 2008, respectively
|
4,000
|
-
|
||
Common
stock, 95,000,000 shares authorized, $0.001 par value
|
||||
issued
and outstanding 34,117,297 and 8,888,888
|
||||
at
September 30, 2009 and December 31, 2008, respectively
|
34,117
|
8,889
|
||
Additional
paid in capital
|
1,006,968
|
(8,888)
|
||
Accumulated
deficit
|
(1,119,640)
|
(88,493)
|
||
TOTAL
STOCKHOLDERS' DEFICIT
|
(74,555)
|
(88,492)
|
||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$ 565,235
|
$ 37,939
|
||
See
accompanying unaudited notes to the financial
statements
|
F1
SHRINK
NANOTECHNOLOGIES, INC.
|
|||||||
(A
Development Stage Company)
|
|||||||
CONSOLIDATED
- STATEMENTS OF OPERATIONS
|
|||||||
For
nine months
|
From
Inception
|
From
Inception
|
|||||
For
the three months ended
|
ended
|
January
15, 2008
|
January
15, 2008
|
||||
September
30,
|
September
30,
|
September
30,
|
through
September 30,
|
through
September 30,
|
|||
2009
|
2008
|
2009
|
2008
|
2009
|
|||
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||
Net
revenues
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
||
Expenses
|
|||||||
Research
and development
|
-
|
41,094
|
73,554
|
41,094
|
152,906
|
||
Professional
fees
|
50,332
|
-
|
97,679
|
-
|
97,679
|
||
General
and administrative
|
537,977
|
4,264
|
811,269
|
4,264
|
820,410
|
||
Depreciation,
depletion, and amortization
|
12,733
|
-
|
17,009
|
-
|
17,009
|
||
Total
operating expenses
|
601,042
|
45,358
|
999,511
|
45,358
|
1,088,004
|
||
Loss
from Operations
|
(601,042)
|
(45,358)
|
(999,511)
|
(45,358)
|
(1,088,004)
|
||
Other
Income (Expense)
|
|||||||
Interest
expense
|
(17,550)
|
-
|
(31,636)
|
-
|
(31,636)
|
||
Total
Other Income (Expense)
|
(17,550)
|
-
|
(31,636)
|
-
|
(31,636)
|
||
(Loss)
Before Income Taxes
|
(618,592)
|
(45,358)
|
(1,031,147)
|
(45,358)
|
(1,119,641)
|
||
Income
Taxes
|
-
|
-
|
-
|
-
|
-
|
||
NET
(LOSS)
|
$ (618,592)
|
$ (45,358)
|
$ (1,031,147)
|
$ (45,358)
|
$ (1,119,640)
|
||
Net
(loss) per common share
|
$ (0.02)
|
$ (0.01)
|
$ (0.05)
|
$ (0.01)
|
$ (0.08)
|
||
Net
(loss) per common share - diluted
|
$ (0.02)
|
$ (0.01)
|
$ (0.05)
|
$ (0.01)
|
$ (0.08)
|
||
Weighted
average common and common equivalent shares outstanding
|
|||||||
Basic
|
33,281,950
|
8,888,888
|
19,913,706
|
8,888,888
|
13,712,246
|
||
Diluted
|
33,281,950
|
8,888,888
|
19,913,706
|
8,888,888
|
13,712,246
|
||
See
accompanying unaudited notes to the financial
statements
|
F2
(A
Development Stage Company)
|
||||
CONSOLIDATED
- STATEMENTS OF CASH FLOWS
|
||||
For
nine months
|
From
Inception
|
From
Inception
|
||
ended
|
January
15, 2008
|
January
15, 2008
|
||
September
30,
|
through
September 30,
|
through
September 30,
|
||
2009
|
2008
|
2009
|
||
(unaudited)
|
(unaudited)
|
|||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||
Net
income
|
$ (1,031,147)
|
$ (45,358)
|
$ (1,119,640)
|
|
Adjustments
to reconcile net earnings to net cash used
|
||||
by
operating activities:
|
||||
Depreciation,
amortization
|
17,009
|
-
|
17,009
|
|
Debt
discount amortization
|
21,568
|
-
|
21,568
|
|
Non-cash
share-based payments
|
518,037
|
-
|
528,237
|
|
Changes
in assets and liabilities, net of effects from
acquisitions
|
||||
Prepaid
expenses
|
(223,150)
|
(223,150)
|
||
Accounts
receivable
|
(4,790)
|
-
|
(4,790)
|
|
Accounts
payable and accrued liabilities
|
428,675
|
225
|
453,813
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(273,798)
|
(45,133)
|
(326,953)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||
Cash
purchased at acquisition
|
62,404
|
-
|
62,404
|
|
Additions
to fixed assets
|
(13,535)
|
-
|
(13,535)
|
|
Additions
to intangible assets
|
(106,033)
|
-
|
(106,033)
|
|
NET
CASH FROM INVESTING ACTIVITIES
|
(57,164)
|
-
|
(57,164)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||
Proceeds
from capital raise
|
355,000
|
1
|
355,001
|
|
Proceeds
from convertible debentures
|
20,000
|
51,094
|
111,094
|
|
NET
CASH FROM FINANCING ACTIVITIES
|
375,000
|
51,095
|
466,095
|
|
NET
CHANGE IN CASH
|
44,039
|
5,962
|
81,978
|
|
CASH
BALANCES
|
||||
Beginning
of period
|
37,939
|
-
|
-
|
|
End
of period
|
$ 81,978
|
$ 5,962
|
$ 81,978
|
|
SUPPLEMENTAL
DISCLOSURE:
|
||||
Interest
paid
|
$ 125
|
$ -
|
$ -
|
|
Income
taxes paid
|
-
|
-
|
-
|
|
NON-CASH
ACTIVITIES:
|
||||
Non-cash
assets acquired through reverse acquisition
|
$ 152,759
|
$ -
|
$ -
|
|
Liabilities
assumed through reverse acquisition
|
186,297
|
|||
See
accompanying unaudited notes to the financial
statements
|
F3
SHRINK
NANOTECHNOLOGIES, INC.
Notes
to the Consolidated Financial Statements
For
the nine months ended September 30, 2009
(Unaudited)
|
NOTE
1. ORGANIZATION
|
Shrink
Nanotechnologies, Inc. (the “Company or the “Successor Entity” or “us” or “we”)
was incorporated in the state of Delaware on January 15, 2002 as Jupiter
Processing, Inc. On January 13, 2005, the Company changed its name to
Audiostocks, Inc. On May 14, 2009, the Company changed its name to
Shrink Nanotechnologies, Inc.
On May
29, 2009 the Company entered into and completed a share exchange agreement with
Shrink Technologies, Inc., a privately-owned California corporation which held
and continues to hold, most of our Shrink related business
assets. The exchange of shares with Shrink Technologies, Inc.
has been accounted for as a reverse acquisition under the purchase method of
accounting with the business of Shrink Technologies, Inc. as the surviving
company for accounting and financial reporting purposes. Accordingly,
the merger of the two companies has been recorded as a recapitalization of the
Company. The historical financial statements presented therefore, are
those of Shrink Technologies, Inc., the operating entity. At the time
of the Shrink Acquisition, we were in the process of selling or winding down
most of our previous related operations.
Shrink is
a research, design and development company dedicated to the commercial adoption
of a nanotechnology platform called the ShrinkChip Manufacturing Solution™,
which we believe represents a new paradigm in the rapid design and low-cost
fabrication of diagnostic chips and other nano-size devices that we intend to
commercialize as measuring tools and energy and content transfer devices for a
wide range of applications from the life sciences, drug and chemical analysis
industries to the optoelectronics components and renewable energy
businesses.
The
information furnished herein was taken from the books and records of the Company
without audit. However, such information reflects all adjustments
which are, in the opinion of management, necessary to properly reflect the
results of the interim period presented. The information presented is
not necessarily indicative of the results from operations expected for the full
fiscal year.
|
NOTE
2. SUMMARY OF ACCOUNTING
POLICIES
|
Principles
of Consolidation
The
consolidated balance sheet include the accounts of Shrink Nanotechnologies, Inc
and its’ wholly owned subsidiaries, thereby reflecting the transactions related
to the May 29, 2009, effective date of the Exchange Agreement. The consolidated
statements of operations include the operations (which consisted mostly of
research and development) of the predecessor entity, Shrink Technologies, Inc.
since May 29, 2009, the effective date of the acquisition of the Shrink
business. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Shrink
Technologies, Inc. operated its research and development operations prior to the
Share Exchange and is continuing to do so. The accompanying financial statements
include the Balance Sheet of Shrink Technologies, Inc. as of December 31, 2008,
and the Statement of Operations, Statement of Cash Flows, and Statement of
Changes in Equity (Deficit) for the year then ended, as well as the Statement of
Operations and Statement of Cash Flows for the period ended September 30,
2008.
Accounting
Method
The
financial statements are prepared using the accrual method of accounting.
The Company has elected a December 31 year-end.
Use
of Estimates
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 of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
equivalents include short-term, highly liquid investments with maturities of
three months or less at the time of acquisition.
F4
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over estimated useful
lives of the asset.
In
accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 350-50, the Company capitalizes certain costs
incurred in connection with developing or obtaining internal use software. Costs
incurred in the preliminary project stage are expensed. All direct external
costs incurred to develop internal-use software during the development stage are
capitalized and amortized using the straight-line method over the remaining
estimated useful lives. Costs such as maintenance and training are expensed as
incurred.
September
30,
|
December
31,
|
|
2009
|
2008
|
|
Property
Plant and Equipment, net:
|
||
Computer
Software and Hardware
|
135,587
|
-
|
Furniture
and Equipment
|
27,354
|
-
|
Building
and Improvements
|
1,680
|
-
|
Accumulated
Depreciation
|
(15,487)
|
-
|
149,135
|
Provision
for Income Taxes
The
Company accounts for income taxes according to the provisions of ASC
740-10. Recognition of deferred tax assets and liabilities reflect
the expected future tax consequences of temporary differences between the
financial statement and tax basis of assets and liabilities. ASC 740-10 requires
a company to determine whether it is more likely than not that the tax position
will be sustained, will be sustained upon examination based upon the technical
merits of the position. If the more-likely-than-not threshold is met,
a company must measure the tax position to determine the amount to recognize in
the financial statements. As a result of the implementation of ASC
740-10, the Company performed a review of its material tax positions in
accordance with recognition and measurement standards.
The
components of income tax expense are as follows at September 30, 2009 and
September 30, 2008:
September
30,
|
September
30,
|
||
2009
|
2008
|
||
Federal
taxes
|
-
|
-
|
|
State
taxes
|
-
|
-
|
|
Benefit
of utilization of operating loss carryforward
|
(350,590)
|
(15,422)
|
|
Taxes
|
-
|
-
|
|
Change
in Valuation Allowance
|
350,590
|
15,422
|
|
Income
Tax Expense
|
-
|
-
|
As
of September 30, 2009, we had a net operating loss (NOL) carryforward of $
1,098,072. These NOL carryforwards begin to expire in the year
2028.
|
Deferred
tax assets and the valuation account are as follows:
September
30,
|
December 31,
|
|
2009
|
2008
|
|
NOL
Carryforward
|
373,344
|
(30,088)
|
Valuation
Allowance
|
(373,344)
|
30,088
|
Net
deferred tax assets
|
-
|
-
|
Basic
Net Loss per Share of Common Stock
In
accordance with ASC 260-10, basic net loss per common share is based on the
weighted average number of shares outstanding during the periods presented.
Diluted earnings per share are computed using weighted average number of
common shares plus dilutive common share equivalents outstanding during the
period. There is $218,121 in convertible debt currently outstanding,
$67,500 of stock to be issued, 4,000,000 preferred shares and stock options that
total 5,393,887 in common stock equivalents. Common stock equivalents
resulting from the issuance of these stock options have not been included in the
per share calculations because such inclusion would be
anti-dilutive.
F5
For
the three months
|
For
the three months
|
For
the nine months
|
From
inception
January
15, 2008
|
|
ending
September 30, 2009
|
ending
September 30, 2008
|
ending
September 30, 2009
|
through
September 30, 2008
|
|
Numerator
– (loss)
|
(618,592)
|
(45,358)
|
(1,031,147)
|
(45,358)
|
Denominator
– weighted avg.
|
||||
number
of shares outstanding
|
33,281,950
|
8,888,888
|
19,913,706
|
8,888,888
|
Loss
per share – basic and diluted
|
(0.02)
|
(0.01)
|
(0.05)
|
(0.01)
|
Research
and Development
In
accordance with ASC 730-10, the company expenses all costs related to research
and development as they are incurred. During the nine months ended
September 30, 2009 and 2008 the Company accrued $73,554 and $41,094 in research
and development costs, respectively.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update No. 2009-01, “Generally Accepted Accounting Principles”
(ASC Topic 105) which establishes the FASB Accounting Standards Codification
(“the Codification” or “ASC”) as the official single source of authoritative
U.S. generally accepted accounting principles. All existing accounting standards
are superseded. All other accounting guidance not included in the Codification
will be considered non-authoritative. The Codification also includes all
relevant Securities and Exchange Commission guidance organized using the same
topical structure in separate sections within the Codification. Following the
Codification, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates (“ASU”) which will serve to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the changes to the Codification. The Codification is
not intended to change GAAP, but it will change the way GAAP is organized and
presented. The Codification is effective for the Company’s third quarter
financial statements and the principal impact on the financial statements is
limited to disclosures as all future references to authoritative accounting
literature will be referenced in accordance with the Codification. In order to
ease the transition to the Codification, the Company is providing the
Codification cross-reference alongside the references to the standards issued
and adopted prior to the adoption of the Codification.
In August
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair
Value” (“ASU 2009-05”). The amendments in this ASU apply to all entities
that measure liabilities at fair value and provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, an entity is required to measure fair value using
one or more techniques laid out in this ASU. The guidance provided in this ASU
is effective for the first reporting period (including interim periods)
beginning after issuance. The Company does not expect the adoption of this ASU
to have a material impact on its consolidated financial statements.
In
September 2009, the FASB issued ASU No. 2009-13 “Revenue recognition –
Multiple deliverable revenue arrangements”. The ASU provides amendments to the
criteria in “Revenue recognition – multiple element arrangements” for separating
consideration in multiple element arrangements. The amendments in this ASU
establish a selling price hierarchy for determining the selling price of a
deliverable. Further, the term fair value in the revenue
guidance will be replaced with selling price to clarify that
the allocation of revenue is based on entity-specific assumptions rather than
assumptions of a market place participant. The amendments in this ASU will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. The Company is currently evaluating this
ASU.
Financial
Instruments
In
determining fair value, the Company uses various valuation approaches within the
ASC 820-10 fair value measurement framework. Fair value measurements are
determined based on the assumptions that market participants would use in
pricing an asset or liability. ASC 820-10 establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. ASC 820-10 defines levels within the
hierarchy based on the reliability of inputs as follows:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
Level 2 -
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.
Level 3 -
Unobservable inputs based on the Company’s assumptions.
F6
ASC
820-10 requires the use of observable market data if such data is available
without undue cost and effort. The Company’s adoption of ASC 820-10
did not result in any changes to the accounting for its financial assets and
liabilities.
The
recorded amounts of financial instruments, including cash equivalents accounts
payable and accrued expenses, and long-term debt approximate their market values
as of September 30, 2009 and December 31, 2008.
Convertible
Notes
In
accordance with ASC 470-20 we calculated the value of the beneficial conversion
feature embedded in the Convertible Notes. Since the note is
contingently convertible, the intrinsic value of the beneficial conversion
feature is not recorded until the note becomes convertible.
Convertible
notes are split into two components: a debt component and a component
representing the embedded derivatives in the debt. The debt component represents
the Company’s liability for future interest coupon payments and the redemption
amount. The embedded derivatives represent the value of the option that
debtholders have to convert into ordinary shares of the Company. Due
to the number of shares that may be required to be issued upon conversion of the
Convertible Notes is indeterminate, the embedded conversion option of the
Convertible Notes are accounted for as a derivative instrument liabilities
rather than equity debt as in accordance with ASC 815-40.
The debt
component of the convertible note is measured at amortized cost and therefore
increases as the present value of the interest coupon payments and redemption
amount increases, with a corresponding charge to finance cost – other than
interest. The debt component decreases by the cash interest coupon payments
made. The embedded derivatives are measured at fair value at each balance sheet
date, and the change in the fair value is recognized in the income
statement.
Accounts
Receivable
We must
make judgments about the collectability of our accounts receivable to be able to
present them at their net realizable value on the balance sheet. We analyze the
aging of our customer accounts and review historical bad debt problems. From
this analysis, we record an estimated allowance for receivables that we believe
will ultimately become uncollectible. As of September 30, 2009, we had no
allowance for bad debts since we deemed that 100% of the amount in Accounts
Receivable is collectible.
Concentration
of Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk are cash and marketable securities. The Company places its cash with
financial institutions deemed by management to be of high credit quality. The
amount on deposit in any one institution that exceeds federally insured limits
is subject to credit risk. All of the Company’s investment in marketable
securities are considered “available-for-sale” and are carried at their fair
value, with unrealized gains and losses (net of income taxes) that are temporary
in nature recorded in accumulated other comprehensive income (loss) in the
accompanying balance sheets. The fair values of the Company’s investments in
marketable securities are determined based on market quotations.
Intangible
Assets
Intangible
assets consist of intellectual property rights of an exclusive license to
several patents and patent pending inventions surrounding our core
technologies. The Company accounts for goodwill and other
intangible assets in accordance with ASC 350-10. Goodwill and other
intangible assets are required to be tested at least on an annual basis for
impairment or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
The fair value of definite lived intangible assets is determined by using a
“relief from royalty” approach. Intangible assets consisted of the
following at September 30, 2009 and December 31, 2008:
2009
|
2008
|
|
Intangible
Assets, net:
|
||
Patents
|
87,704
|
-
|
License
|
12,902
|
-
|
Trademarks
|
5,427
|
-
|
106,033
|
-
|
|
Less:
Amortization
|
(1,523)
|
-
|
104,509
|
-
|
NOTE
3. GOING
CONCERN
The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. Because of the recurring operating losses, no
revenues and the excess of current liabilities over current assets, there is
substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going concern is dependent on obtaining
additional outside financing, as it is not anticipated that the Company will
have profitable operations from its R&D activities during the near term.
The Company has funded losses from its research and development and other
operations primarily from the issuance of debt and, equity. The
Company believes that the issuance of equity and debt will continue to fund
operating losses in the short-term until the Company can generate revenues
sufficient to fund its operations.
F7
NOTE
4. REVERSE ACQUISITION-RELATED PARTY
On May
29, 2009, the Company entered into and completed a reverse acquisition
pursuant to the Share Exchange Agreement, pursuant to which Shrink
Nanotechnologies, Inc. acquired 100% ownership of Shrink Technologies, Inc., and
settled and restructured certain debts in exchange for the issuance of 8,888,888
shares of the of common stock and 50 shares of preferred stock of Shrink
Nanotechnologies, Inc. The assets and business that were acquired by us as
a result of the Share Exchange comprised primarily of an exclusive licensing
agreement with the University of California Regents. The License
Agreement licenses a broad array of intellectual property and inventions vital
to our planned operations. The five months of operations of the
acquired entity since the acquisition date of May 29, 2009, are included in the
Consolidated Statement of Operations of the company.
This
transaction was accounted for as a reverse acquisition. As a result, all
financial information prior to May 29, 2009 is that of Shrink Technologies,
Inc. Following the merger, a reverse merger adjustment was made to
reflect Shrink Nanotechnologies, Inc. capital structure. All of the
assets and liabilities acquired in the reverse acquisition were recorded at
cost.
The
following is a condensed balance sheet disclosing the fair values of the Shrink
Business assets and liabilities acquired.
Assets
Cash
|
$ 687
|
||
Website
Development
|
4,200
|
||
Patents
and other IP
|
26,928
|
||
Total
Assets
|
$ 31,815
|
||
Liabilities
and Stockholders’ Deficit
|
|||
Accounts
Payable
|
$ 94,218
|
||
Total
Liabilities
|
94,218
|
||
Stockholders’
Deficit
|
(62,403)
|
||
Total
Liabilities and Stockholders’ Deficit
|
$ 31,815
|
The
following represents the approximate pro-forma effect assuming the acquisition
with the companies had occurred on January 1, 2009, the beginning of the
Company’s current fiscal year, including proforma adjustments for depreciation
and interest expense.
For
the three months
|
For
the nine months
|
|
ended
September 30, 2009
|
ended
September 30, 2009
|
|
Net
Loss
|
$ (936,658)
|
$ (1,367,295)
|
Earning
per share
|
$ (0.03)
|
$ (0.04)
|
Shrink
Technologies, Inc.’s president is and was Mark L. Baum, Esq., a director and
shareholder of the company prior to the acquisition. Mr. Baum is now
president and CEO of Shrink Nanotechnologies, Inc.
NOTE
5. RESEARCH AND LICENSE AGREEEMENT
The
intellectual property and patent rights to our proprietary technology are owned
by the Regents of the University of California, Merced (“the Regents” or “UC
Merced”). On June 16, 2008 (before we acquired them) Shrink
Technologies, Inc (“Shrink”), entered into an agreement (“the Option Agreement”)
with the Regents. Parallel to the Option Agreement, Shrink entered
into another agreement (“the Research Agreement”) with the Regents.
The
Option Agreement provides Shrink with the exclusive right to license two patent
pending inventions (the “Regents Inventions”), and requires Shrink to make
annual payments to the Regents as well as royalty payments on any products that
are commercialized which are based on the Regents
Inventions. Shrink’s rights under the Option Agreement require
customary measures of performance on the part of Shrink in terms of patent cost
maintenance and other payments of costs associated with the Regents
Inventions. With respect to the Option Agreement, Shrink’s rights are
broad in terms of the potential access Shrink has to use the Regents Inventions
in products, and services and many of the key economic terms of a future
license, should Shrink exercise it’s rights under the Option Agreement, are
agreed to in the Option Agreement. We exercised our rights under the option
agreement and as a result, entered into an exclusive license agreement for
processes for microfluidic fabrication and other inventions with the Regents
(“License Agreement”) which is currently our flagship asset.
F8
The
License Agreement licenses a broad array of intellectual property and inventions
vital to our planned operations.
The term
of the license agreement commenced April 29, 2009 and will continue in effect
until the expiration or abandonment of the last patent covered by the agreement,
unless we terminate it on 60 days’ notice or the Regents terminated it on 60
days’ notice if we default on our obligations under the agreement and fail to
cure such default during the 60 day period. Under the License
Agreement Shrink is permitted to make, use, sell, offer for sale the licensed
intellectual property and import licensed products and services and to practice
licensed methods in all fields and in all locations in which the Regents may
lawfully grant the licensed rights.
Our fees
to the Regents include:
-
$100,000 contract initiation fee paid to the Regents in the form of 99,010 shares of common stock of the Company; however, we have the option to reacquire the shares for $100,000 at any time through April 2010;
-
$25,000 annual maintenance fee, unless, by the time that such annual maintenance fee is due, Shrink has already commercialized its principal product and begun paying earned royalties;
-
a fee of 30% of all income attributed to revenues from a sublicensed product or technology;
-
milestone payments of $100,000 for total accumulated nets sales of $50,000,000; $500,000 for accumulated net sales of $150,000,000; and $2,000,000 for net sales of $500,000,000; and
-
earned royalty payments based on net sales of licensed products.
A minimum
$15,000 earned royalty payment will be due each year following the first
commercial sale of a licensed product. The minimum payment will
increase to $20,000 on the first commercial sale of the fourth licensed product,
and by an additional $5,000 after a commercial sale of each additional licensed
product. The minimum payments are payable by February 28 of each year
in which they are due. Earned royalties in excess of the minimums are
payable quarterly.
The
License Agreement encourages early commercialization of the licensed rights, by
providing that our earned royalty payments based on revenues shall be set at
between 2.5% of net sales in the event that the first commercial sale commences
prior to April of 2012; 4% of net sales in the event that the first commercial
sale commences after April 2012 but before the April 2015; and 5% of net sales
if the first commercial sale commences thereafter. First
commercial sale is defined as bona fide good faith sale of products that are
part of our licensed rights, in quantities sufficient to meet market demands,
and includes sales for any consideration.
If
we use the licensed products or methods as research tools, we are required to
pay royalties also, at a rate to be agreed upon, but no less than the rate
charged by the Regents for similar research tools licensed to
others.
The
Research Agreement commits Shrink to fund research based on the Regents
Inventions at UCM up to the amount of $640,935 in accordance with a planned
budget. The Research Agreement provides Shrink with an exclusive
right to license all technology that is discovered from the monies funded to UCM
through the Research Agreement (the “Derivative IP”). To the extent
that Shrink exercises its rights under the Research Agreement, Shrink will be
required to make customary annual payments to the Regents, who shall be the
owners of any Derivative IP, as well as royalty payments as any
commercialization of such Derivative IP occurs. Earned
royalties to be paid to UCM shall be from 1-5% of the net sale of product to end
users. An upfront fee will be paid to UCM in the range of $15,000 -
$30,000 that is commensurate with the value of the technology covered by patent
rights claiming the elected invention. Following the first commercial
sale, Shrink will pay minimum annual royalties of $15,000 which will be
creditable against earned royalties that are owed to UCM during the same
calendar year.
Shrink is
required to reimburse UCM on a quarterly basis for all direct and
indirect cost incurred in connection with the research. In turn,
these funds will be used to fund researchers’ salaries, equipment, materials,
supplies, and other miscellaneous expenses incurred by UCM. In
accordance with the planned budget, these expenses are expected to be incurred
by Shrink as follows:
Amount
|
|
2008
|
$ 79,958
|
2009
|
161,969
|
2010
|
158,324
|
2011
|
158,528
|
2012
|
82,156
|
Total
|
$ 640,935
|
NOTE
6. COMMITMENTS AND LEASES – RELATED PARTY
The
Company previously shared office space with the Noctua Fund Manager, LLC, which
is affiliated with two of our directors. On January 1, 2009 we began
accruing a $2,500 rental expense each month for the use of the space pursuant
to a verbal agreement between the two companies. The parties
memorialized their agreement in writing on May 29,
2009 upon the Company’s execution of a
sublease.
F9
Mark L.
Baum, Shrink’s CEO and president, is a managing member of the Noctua Fund
Manager, LLC. James B. Panther, II, one of Shrink’s directors, is
also a managing member of the Noctua Fund Manager, LLC. As of
September 30, 2009 there was $12,500 owed to the Noctua Fund Manager, LLC and no
payments have been made to the Noctua Fund Manager, LLC.
The
Company subleases space from Business Consulting Group Unlimited, Inc., an
entity owned by two of our directors, James B. Panther II, and Mark L. Baum,
Esq. pursuant to which the Company leases approximately 3,000 square feet of
office and administrative space, as well as use of, among other things,
internet, postage, copy machines, electricity, furniture, fixtures etc. at a
rate of $6,000 per month. The lease with Business Consulting Group
Unlimited, Inc. expires April 30, 2010. At September 30, 2009
$24,000 had been paid to Business Consulting Group Unlimited, Inc.
The
Company obtains certain administrative services from BCGU, LLC, an entity
indirectly controlled by James B. Panther II, and Mark L. Baum, Esq., who are
two of our directors, for a fee of $6,000 per month pursuant to an operating
agreement. At September 30, 2009 $24,000 had been paid to BCGU,
LLC. This agreement was subsequently amended and is disclosed in more
detail within Note 13. The Company believes, based on review of its
independent directors, that the foregoing transactions and agreements are no
less favorable (or even more favorable, given the flexibility) to the Company
than would otherwise be available from independent third parties.
NOTE
7. CONVERTIBLE
DEBENTURE-RELATED PARTY
In
accordance with ASC 470-20, we recognize the advantageous value of
conversion rights attached to convertible debt. Such rights give the debt holder
the ability to convert his debt into common stock at a price per share that is
less than the trading price to the public on the day the loan is made to the
Company. The beneficial value is calculated as the intrinsic value (the market
price of the stock at the commitment date in excess of the conversion rate) of
the beneficial conversion feature of debentures and related accruing interest is
recorded as a discount to the related debt and an addition to additional paid in
capital. The discount is amortized over the remaining outstanding period of
related debt using the interest method.
On July
1, 2007 a $25,000 0% Convertible Debenture was issued in exchange of cash, which
was used to purchase and retire shares from a shareholder. This note
was amended on July 1, 2008, to reflect a 10% interest rate and maturity date of
December 31, 2008. The note is due and payable on December 31,
2008. It is convertible into common stock at the price of $0.15 per
share. The conversion price is subject to proportional adjustment for
reclassification, stock splits, combinations and dividends. At the
time of the note agreement date, there was no determinable stock price,
therefore there is no beneficial conversion feature that applies to this
debenture. On September 1, 2009 the company received a notice of
conversion for the principal balance of this note and accrued interest into
common shares of stock. The stock had not been issued at September
30, 2009.
On July
1, 2008, we consolidated all obligations due and owing to The Baum Law Firm PC
and Mark L. Baum, Esq.,a related party and one of our principals and executive
officers, for legal services rendered to the Company, and issued to Meaux Street
Partners LP, a related party, a 10% promissory note for $25,000. The
note is due and payable on December 31, 2008. It is convertible into
common stock at the price of $0.15 per share. The conversion price is
subject to proportional adjustment for reclassification, stock splits,
combinations and dividends. At the time of the note agreement date,
the Company recorded a $16,667 discount, which represents the intrinsic value of
the beneficial conversion feature. The discount of $16,667 is being
amortized over the life of the note. On September 1, 2009 the company
received a notice of conversion for the principal balance of this note and
accrued interest into common shares of stock. The stock had not been
issued at September 30, 2009.
On May 7,
2009, Shrink Nanotechnologies, Inc. entered into a Debt Consolidation Agreement
with Noctua Fund LP to consolidate certain secured and unsecured liabilities
which were originally assigned to Dao Information Systems, Inc.
(“Dao”).
While the
Company did make an assignment of the Liabilities to Dao, the Company was
legally responsible to Noctua Fund LP for the principal and interest related to
the Liabilities. The principal amount of the secured part of the
Liabilities was $76,500 and the principal amount of the unsecured part of the
liabilities was approximately $5,000. All of the promissory notes
underlying the Liabilities have matured and were in default.
The Debt
Consolidation Agreement consolidates all monies presently owed to Noctua Fund LP
which are consolidated into one new secured convertible promissory note with a
principal amount of $100,000. The new note accrues interest at
fourteen percent (14%) but does not begin to accrue interest until October 1,
2009. Interest payments on the note are due monthly. The
note has a conversion price of $.20 per share. At the time of the
note consolidation date, the Company recorded a $100,000 discount, which
represents the intrinsic value of the beneficial conversion
feature. The discount of $100,000 is being amortized over the life of
the note.
On May
29, 2009 we assumed convertible notes and accrued interest of $118,121 owed to
Noctua Fund LP, as part of the share exchange agreement with the shareholders of
Shrink Technologies, Inc. The terms of the note were then renegotiated into a
new note with a principal amount of $118,121. The note’s maturity
date is October 1, 2012. The note accrues interest at fourteen
percent (14%) but does not begin to accrue interest until October 1,
2009. Interest payments on the note are due monthly. The
note is convertible into shares of our common stock at an original conversion
price of $.20 per share. At the time of the issuance date, the
Company recorded an $118,121 discount, which represents the intrinsic value of
the beneficial conversion feature. The discount of $118,121 is being
amortized over the life of the note.
F10
Mark L.
Baum, our CEO, president and a director, and James B. Panther II, a director,
are both limited partners in Noctua Fund LP, and through entities which Mr. Baum
and Mr. Panther II own, equally own and control Noctua Fund Manager LLC, the
general partner of Noctua.
Notes
Payable consists of the following:
As
of September 30, 2009
|
As
of September 30, 2008
|
|
Gross
proceeds from notes
|
$
268,121
|
$
91,094
|
Less:
Discount on Notes
|
(218,121)
|
-
|
Less:
Principal Payments
|
-
|
-
|
Add:
Amortization of Discount
|
24,007
|
|
Add:
Accrued Interest
|
8,125
|
-
|
Carrying
Value of Notes
|
$
82,132
|
$
91,094
|
NOTE
8. COMMON
STOCK
During
January 2009, the Company issued 3,624,888 shares of common stock, valued at
$.75 per share, as consideration for the reacquisition and retirement of 100
shares of series B preferred stock.
During
May 2009, the company issued 8,888,888 shares of common stock with as part of a
share exchange agreement with the shareholders of Shrink Technologies,
Inc.
During
June 2009, the company issued 725,000 shares of common stock in exchange of
$145,000.
During
June 2009, the company issued 20,000 shares of common stock to consultants with
a value of $20,400 as payment for services.
During
June 2009, the company issued 99,100 shares of common stock with a value of
$100,000 as payment for a contract initiation fee related to our license
agreement.
During
July 2009, the company issued 30,000 shares of common stock to consultants with
a value of $30,600 as payment for services rendered.
During
July 2009, the company issued 50,000 shares of common stock in exchange of
$10,000.
During
August 2009, the company issued 250,000 shares of common stock in exchange of
$50,000.
During
August 2009, the company issued 348,334 shares of common stock to consultants
with a value of $392,800 as payment for services.
During
September 2009, the company issued 700,000 shares of common stock in exchange of
$140,000.
During
September 2009, the company issued 5,000 shares of common stock to an employee
with a value of $5,100 as payment for services.
NOTE
9. PREFERRED STOCK
During
January 2009, the Company reacquired and immediately retired 100 shares of
series B preferred shares in exchange for 3,624,888 common
shares. Following this transaction, the Company has no series B
preferred stock issued and outstanding.
During
March of 2009, our board of directors voted to designate 150 shares of series C
preferred stock, carrying a par value of $.001 per shares. Holder of
the series C preferred stock shall be entitled to receive a cash dividend of 15%
of the Company’s gross revenues. This dividend amount will be payable
in the form of cash, but the holders may elect to accept stock as
payment. The value of any stock payable to the holders will be
determined by the closing price of stock on the date the dividend is
declared. The holders of the series C preferred shares have no voting
rights.
The first
100 shares of Series C Preferred Stock were issued during March of
2009, pursuant to the designation of the Series C preferred stock to Noctua
Fund, LP with the remaining 50 Series C Shares issued as part of a share
exchange with the shareholders of Shrink Technologies, Inc. in May of
2009.
NOTE
10. STOCK OPTIONS
The
company has issued stock options to key employees, consultants, and
non-employee's advisors and directors of the Company. These issuances shall be
accounted for based on the fair value of the consideration received or the fair
value of the equity instruments issued, or whichever is more readily
determinable. The Company has elected to account for the stock option plan in
accordance with ASC 718-10 where the compensation to employees should be
recognized over the period(s) in which the related employee services are
rendered. In accordance with ASC 718-10 the fair value of a stock option granted
is estimated using an option-pricing model. As of September 30, 2009 the
following stock options were outstanding:
F11
203,281
options were issued to the members of our advisory board and
employees. These options are valued at $99,416 the options are
exercisable for 1-2 years following their effective dates that begin to expire
9/1/2010. The options were valued using a binomial valuation
model. The variables used in this option-pricing model included: (1)
discount rates of 0.92-1.04%, (2) expected option life is the actual remaining
life of the options as of each period end, (3) expected volatility of 200%-271%
and (4) zero expected dividends.
NOTE
11. LEGAL MATTERS
On
October 28, 2009, the Company filed a complaint in the Superior Court for the
County of San Diego against American Scientific Resources, Inc. (“ASFX”) for,
among other causes of action, breach of contract seeking initial damages of
$1,428,000. The Company believes ASFX intentionally misled the Company by
issuing untradeable restricted stock as compensation for services rendered
pursuant to the Company’s services agreements with ASFX. In
accordance with the asset sale agreement dated 9/30/08, proceeds, if any, from
this litigation following reimbursements to the company for any legal fees, will
be assigned to Dao Information Systems, Inc., whereby some of the liabilities
related to the Company's previous business operations will be paid down
including convertible debt due to the Noctua Fund, LP. The Company has served a
copy of the complaint on ASFX and as of the date of this report, has not
received an answer.
Due to
the uncertainty of the above mentioned matter, the company has not accounted for
any possible proceeds related to the litigation. Management believes
at this time that the final resolution of this matter will not have a
material adverse effect upon the Company’s consolidated annual results of
operations, cash flows or financial position.
NOTE
12. STOCK TO BE ISSUED
On
September 1, 2009 the company received redemption notices for full conversion of
convertible notes, described in Note 7, with principal balances totaling $50,000
and accrued interest of $7,500. The notes and accrued interest are
convertible into 383,334 shares of common stock. As of September 30,
2009 the company had not issued the common stock.
On
September 4, 2009 the company received $10,000 as payment for 50,000 shares of
common stock. As of September 30, 2009 the company had not issued the
common stock.
NOTE
13. SUBSEQUENT EVENTS
During
October 2009, the company issued 50,000 shares of common stock in exchange of
$10,000
During
October 2009, the company issued 13,334 shares of common to consultants with a
value of $15,600 as payment for services.
During
October 2009, the company’s Series C Shareholders agreed to cancel all of its
series c preferred stock.
During
October 2009, the company amended its operating agreement with BCGU, LLC.
The amended agreement allows the company to retain certain day-to-day
administrative services and management in consideration of a monthly fee of
$30,000 per month. The agreement also included a $270,000 signature
bonus.
During
November 2009, the company issued 383,334 shares of common stock for conversion
of convertible notes and accrued interest totaling $57,500
F12
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion and analysis should be read in conjunction with our
unaudited financial statements and related notes included in this report and the
“Forward Looking Statements” section in the forepart of this Report (see above)
and the “Risk Factors” set forth in Part II of this Report, as may be amended or
updated from time to time. The statements contained in this report
that are not historic in nature, particularly those that utilize terminology
such as “may,” “will,” “should,” “expects,” “anticipates,” “estimates,”
“believes,” or “plans” or comparable terminology are forward-looking statements
based on current expectations and assumptions. These statements are based on
current information available to management. No assurance can be made that any
of our forward looking statements will materialize as planned.
Various
risks and uncertainties could cause actual results to differ materially from
those expressed in forward-looking statements. Factors that could cause actual
results to differ from expectations include, but are not limited to, those set
forth under the sections “Forward Looking Statements” above, and “Risk Factors”
and other business risks and information, set forth herein, as well as
business
Background
The
Company, originally named Jupiter Processing Inc. incorporated under the laws of
the State of Delaware on January 22, 2002. We changed our name to
Audiostocks, Inc. on January 13, 2005. Effective May 14, 2009, we
changed our name to Shrink Nanotechnologies, Inc., in contemplation of our
acquisition of Shrink Technologies, Inc., a California corporation (“Shrink”),
which was completed on May 29, 2009 (the “Shrink Acquisition”).
Prior to
the Shrink Acquisition, the Company was operating solely as an Internet-based
publishing platform designed to compile, catalogue, distribute and make
functional, financial content and data related to that content. Due
to certain regulatory changes in the securities and financial markets following
the Sarbanes-Oxley Act of 2002, as well as the most recent global financial
crisis and resulting limits on smaller public company budgets dedicated towards
public relations, our ability to find paying customers for our internet
publishing services has been severely challenged. While the Company
has nominal remaining operations in this sector, including the vertical search
business through StockVert.com, it intends to wind it down and, if possible,
liquidate or sell its previous internet publishing business and remaining assets
used in this sector.
Shrink As Accounting
Acquirer
As
a result of our Shrink Acquisition from its former shareholder Mr. Marshall
Khine, we have succeeded to the business and research and development operations
of Shrink, which now constitute our primary asset and
operations. Accordingly, Shrink is deemed the financial acquirer for
accounting related purposes and, the financial statements presented in Part I of
this Report, and in this Management Discussion and Analysis of Financial
Condition and Results of Operations, are those of Shrink, unless the context
requires otherwise.
Plans for Preexisting
Operations
Prior to
and since the Shrink Acquisition we were operating and looking to liquidate, our
investor relations and other internet businesses. We intend on
selling or licensing our previous investor relations and related internet
business software and do not intend to continue operations in that operating
segment any longer. No assurance can be made that we will be able to
do so, or, if we do so, that it will be at favorable terms.
Because
we were operational and have revenues from non Shrink related operations in
previous periods prior to the Shrink Acquisition, certain portions of this
Report and specifically, this Management Discussion and Analysis of Financial
Condition and Results of Operations, also contains information that may relate
to our previous, non-Shrink related operations, which are no longer material to
our business. As our operations switched to those of Shrink as of May
29, 2009 with Shrink as the surviving accounting acquirer, and since Shrink is a
development stage company, a comparison for our pre-Shrink Acquisition business
revenues and operations with those of Shrink’s would is necessarily be
appropriate or helpful in this Report. Moreover, as Shrink on its own
has limited operations or history, there is little historic information upon
which shareholders may assess our business prospects.
Recent
Events
Restated By Laws Adoption
Effective
as of June 19, 2009, we adopted Amended and Restated By-Laws (the “Restated
By-Laws”), which provide, among other things, for the formation of and
delegation of responsibilities to, committees of the Board of Directors, and
indemnification of officers and directors. A copy of the Restated
By-Laws were filed as an Exhibit to our Current Report on Form 8-K, Date of
Event: June 17, 2009.
Appointment of New
Director
Effective
as of June 22, 2009, Dr. Heiner Dreismann was appointed to the board of
directors of Shrink Nanotechnologies, Inc., a Delaware corporation (the
“Company”), bringing the number of persons on the Company’s board to four,
consisting of Mark L. Baum, Esq., James B. Panther II, Marshall Khine and Dr.
Heiner Dreismann, and simultaneously with the appointment of Dr. Dreismann, the
Company entered into a consulting agreement with Mr. Dreisman providing for
compensation in stock and, if certain capital needs are met, cash.
1
Completion of Equity
Financing
During October of 2009, the
Company completed its private placement offering of Common
Stock, pursuant to which it issued an aggregate of
1,775,000 shares at a purchase price of $.20 per share to an
aggregate of 18 accredited investors with gross proceeds of
$355,000 The shares were issued without registration rights. The
Company reasonably believes that the foregoing offering of securities was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to, among other exemptions, Regulation D and 4(2) in that said offering
was made directly by the Company’s management to a limited number of accredited
investors and without means of public distribution or solicitation. (See Item 2
Unregistered Sales of Equity Securities” below)
Strategic Manufacturing
Relationship
Effective
as of August 31, 2009 and as previously reported, the Company entered into a
Material Transfer Agreement (the “Douglas Agreement”) with Douglas Scientific, a
division of Douglas Machine, Inc. (“Douglas”), pursuant to which the Company
engaged Douglas to develop certain prototype chips and manufacturing processes
based on the Company’s proprietary technologies, in a manner that would
facilitate mass production of these chips in the future. The
Company’s management believes that development of a high quality, “mass
production” capable manufacturing process is vital to its overall SHRINKCHIP™
commercialization strategy.
Strategic
Marketing and Development Agreement Relating to Solar Products
Effective
as of September 1, 2009 and as previously reported, the Company entered into a
Strategic Marketing and Development Agreement (the “Marketing Agreement”) with
Inabata America Corporation (“Inabata”), a subsidiary of Inabata & Co.
Ltd.
The
Marketing Agreement provides for the appointment of Inabata by the Company, as
the Company’s non-exclusive representative for the purposes of marketing and
promoting the Company’s solar concentrator technology and SHRINKCHIP ™ RPS solar
products to third parties (the “Solar Products”). Pursuant to the
Marketing Agreement, Inabata is required to use best efforts in, among other
things, introducing the Solar Products to potential purchasers, licensees,
customers, development partners or possible funding sources, and to provide
certain technical assistance and training. In exchange therefore,
Inabata was granted a good faith right of first negotiation to act as
non-exclusive distributor of the Solar Products. In addition, the
Marketing Agreement provides for fees to be paid to Inabata if it introduces a
funding, grant or development funding source which completes a capital
transaction with the Company up to 50% of which may be paid in stock, at the
sole discretion of the Company.
Nine Months Ended
September 30, 2009 Compared to the Period ended
September 30, 2008
Results
of Operations; Material Changes in Financial Condition
The most significant event and change
to our Company during the nine months ended September 30, 2009, was the
acquisition of Shrink on May 29, 2009, which is our only material business, and
completion of our recent equity financing. The Shrink Acquisition
resulted in Shrink being the surviving entity for financial and accounting
reporting purposes. Our discussion herein, therefore, primarily
relates to this business, as Shrink is our surviving entity for accounting
purposes.
Shrink
was formed on January 15, 2008. Accordingly, any comparison data
herein relating to periods of Shrink in 2008, includes such period, from the
date of inception of Shrink.
As Shrink is a development stage
company, in the health sciences technology industry, we expect to incur
substantial additional investment expenses in commercializing our Shrink related
technologies.
Since our acquisition of Shrink we have
also made various trademark applications relating to our SHRINKCHIP™ and other
technologies and entered into additional service or research contracts to
develop our manufacturing process.
Revenues
We have
not had revenues from operating activities for the nine months ended September
30, 2009 as compared to the same period in 2008 from our previous
business. Management attributes the lack of revenues from non-Shrink
related business to general market conditions.
As our
recently acquired Shrink business is a development stage company that has not
commercialized its technologies yet, Shrink has not had revenues and, we do not
expect to have revenues from Shrink’s operations for some time.
Operating
Expenses
2
Our
non-Shrink related business had total operating expenses of $ 48,397 associated
with for the nine months ended September 30, 2009 as compared with total
operating expenses of $1,019,635 for the nine months ended September 30,
2008. Management attributes the lack of operating expense to the
general decrease in business operations.
Our
Shrink related business had total operating expenses of $999,511 related to
research and development activities for the nine months ended September 30 and
$45,358, as compared to the same period in 2008. We expect operating
expenses to continue as we invest further in research and development
activities.
Net
Loss From Operations
For the
nine months ended September 30, 2009, we had a net loss
of $1,031,147 from operations as compared to a net loss of
$45,358 from operations for the period ended September 30,
2008. Management attributes the increase in net loss to general
market conditions, to the cessation of our internet operations and, more
recently to our acquisition of Shrink.
We
anticipate that losses relating to our previous non-Shrink related business will
diminish as we have wound down or sold much of these related
operations in late 2008 and early 2009. We do not currently incur
material expenses related to these businesses.
We
anticipate, however, continued losses relating to investment into our research
and development activities relating to Shrink, and to our capital raising
activities. We intend to fund our R&D activities, as we have in
the past, through government grants, partnerships and arrangements with
universities (such as those that are in effect with the Regents and Merced) and
equity and debt financings.
Liquidity
and Capital Resources
Our cash
on hand at September 30, 2009 was $ 81,978 as compared to $5,962 on
hand September 30, 2008,. The recent increase is primarily
attributable to our recent equity financings.
Our
expectations are based on certain assumptions concerning the anticipated costs
associated with any new projects. These assumptions concern future
events and circumstances that our officers believe to be significant to our
operations and upon which our working capital requirements will
depend. Some assumptions will invariably not materialize and some
unanticipated events and circumstances occurring subsequent to the date of this
annual report. A portion of our research is being conducted by the
University of California, through grants. We will continue to seek to
fund our capital requirements over the next 12 months from the additional sale
of our securities, however, it is possible that we will be unable to obtain
sufficient additional capital through the sale of our securities as
needed.
The amount and timing of our future
capital requirements will depend upon many factors, including the level of
funding received by us anticipated private placements of our common stock and
the level of funding obtained through other financing sources, and the timing of
such funding.
We intend to retain any future earnings
to retire any existing debt, finance the expansion of our business and any
necessary capital expenditures, and for general corporate purposes.
The Company estimates that it will cost
approximately $9,000,000 in deficit cash flows until sustained potential
profitability, and that substantial additional costs will be incurred in order
to commercialize its Shrink related technologies.
Research
Agreement with UC Merced
Shrink is a party to a research
agreement with UC Merced, which agreement is referred to in this Report as the
Research Agreement. Pursuant to the Research Agreement, UC Merced
agreed to undertake a research project and Shrink agreed to reimburse it for all
direct and indirect costs incurred in connection with the research, up to the
amount of $640,935 and in accordance with an agreed-upon budget. The
Research Agreement provides Shrink with the right to elect to receive an
exclusive royalty-bearing license to make, use, sell, offer for sale and import
any products and practice any methods in the inventions or discoveries conceived
and reduced to practice in the performance of the research conducted under the
Research Agreement. We have exercised our rights under this agreement
and entered into a license agreement with the California Regent.
Our
Exclusive License Agreement
The underlying intellectual property
and patent rights to Shrink’s proprietary technologies are owned by the
California Regents. On April 29, 2009 and pursuant to the terms of
the Research Agreement, Shrink and the California Regents entered into an
Exclusive License Agreement for Processes for Microfluidic Fabrication and Other
Inventions, which is referred to in this Report as the License
Agreement. The License Agreement licenses a broad array of
intellectual property and inventions vital to our planned
operations. The following description of the License Agreement is a
summary only, and is qualified in its entirety by the actual agreement which is
filed as an Exhibit to our Current Report on Form 8-K, filed June 5,
2009.
3
The term of the License Agreement
commenced April 29, 2009 and will continue in effect until the expiration or
abandonment of the last patent covered by the agreement, unless we terminate it
on 60 days’ notice or the California Regents terminated it on 60 days’ notice if
we default on our obligations under the agreement and fail to cure such default
during the 60 day period.
Off-Balance
Sheet Arrangements
We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, and results of
operations, liquidity or capital expenditures.
Contractual
Obligations
The
Company’s subsidiary is a party to the License Agreements and Option and
Research Agreements mentioned above and incorporated herein, as well as to its
strategic Marketing Agreement and Douglas Agreement described above and
incorporated by reference herein.
The
Company subleases space from Business Consulting Group Unlimited, Inc., an
entity owned by two of our directors, James B. Panther II, and Mark L. Baum,
Esq. pursuant to which the Company leases approximately 3,000 square feet of
office and administrative space, as well as use of, among other things,
internet, postage, copy machines, electricity, furniture, fixtures etc. at a
rate of $6,000 per month. The lease with Business Consulting Group
Unlimited, Inc. expires April 30, 2010. On
October 1, 2009 the company amended its operating agreement with BCGU,
LLC. The amended agreement allows the company to retain certain
day-to-day administrative services and management in consideration of a monthly
fee of $30,000 per month. The agreement also included a $270,000 signature
bonus. The foregoing is a summary only of our sublease with Business
Consulting Group Unlimited, Inc., as amended, a copy of which is attached as an
Exhibit to this Report, the provisions of which are incorporated by reference
herein.
The
Company previously shared office space with the Noctua Fund Manager, LLC.
On January 1, 2009 we began accruing a $2,500 rental expense each month for the
use of the space. There is currently no written agreement; it is a verbal
agreement between the two companies. The verbal agreement ceased on May
29, 2009 pursuant the Company’s execution of a
sublease.
Recent
Accounting Pronouncements
We are
not aware of any additional pronouncements that materially effect our financial
position or results of operations.
Research
and Development
The
Company estimates that at least $73,554 has been spent by Shrink during fiscal
2009 and $79,352 during fiscal 2008 on research and development activities, all
of which has stemmed from payments from Shrink through UC Merced or, to a
limited extent, CIRM.
Employees
We
currently do not have any full time employees. We obtain certain
administrative services from BCGU, LLC, or BCGU, an entity indirectly controlled
by James B. Panther II, and Mark L. Baum, Esq., who are two of our directors,
for a fee of $6,000 per month pursuant to an operating agreement. The
foregoing is a summary only of our operating agreement with BCGU, LLC, a copy of
which is attached as an Exhibit to our Current Report on Form 8-K, Filed June 5,
2009.
We hire
independent contractor labor on an as needed basis and have entered into
consulting arrangements with certain directors and advisory board members in
exchange for stock or derivative securities. We have not entered into a
collective bargaining agreement with any union.
Properties
The
Company subleases space from Business Consulting Group Unlimited, Inc., an
entity owned by two of our directors, James B. Panther II, and Mark L. Baum,
Esq. pursuant to which the Company leases approximately 3,000 square feet of
office and administrative space, as well as use of, among other things,
internet, postage, copy machines, electricity, furniture, fixtures etc. at a
rate of $6,000 per month. The lease with Business Consulting Group
Unlimited, Inc. expires April 30, 2010. The foregoing is a
summary only of our sublease with Business Consulting Group Unlimited, Inc., a
copy of which is attached as an Exhibit to this Report, the provisions of which
are incorporated by reference herein.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
The
Company primarily holds its cash in checking, bank money market and savings
accounts. As of November 18, 2009, we have not entered into any type
of hedging or interest rate swap transaction. We do not have any foreign
operations or research activities, and, management believes, we do not have
exposure to financial product risks.
4
Item
4. Controls and Procedures.
As
required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange
Act”) we carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of September 30, 2009,
being the date of our most recently completed fiscal quarter. This
evaluation was carried out under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and that such
information is accumulated and communicated to them to allow timely decisions
regarding required disclosure.
During
our most recently completed quarter ended September 30, 2009, there were no
changes in our internal control over financial reporting that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
5
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors
Shrink’s primary asset is its exclusive
license to utilize certain patent-pending technologies (the “Technologies”) owned by the
California Regents. Dr. Michelle Khine was the primary
scientist and driving force behind Shrink’s development and
founding. Shrink’s technology is subject to a number of risks and
uncertainties, including, without limitation, our ability to continue and
complete developing the Technologies to perfection and continually innovating
its use for new processes, our ability to obtain market acceptance for our
Technology and commercialize the Technology, which involves an extended
marketing and development period until manufacturers accept and utilize our
Technologies regularly, our ability to protect our Technology and intellectual
property rights as well our ability to compete with other technologies by
companies with more capital and greater market penetration and resources than
we. Government regulation may hamper or altogether prevent Shrink
from ever commercializing any product. The following risks, as well
as other related risks and information relating to our liquidity and capital
resources and competition, should be carefully considered by all our
shareholders or persons otherwise reviewing this Report.
General
Risks
You
will suffer immediate and subsequent dilution and the costs of the securities
you may purchase at exceed the price paid by current principal
shareholders.
Many of the present owners of our
issued and outstanding securities acquired such securities at a cost
substantially less than that of the open market. Therefore, the
shareholders will bear a substantial portion of the risk of loss.
We
may not be able to continue operations as a going concern and we need
substantial additional capital to continue our research and development
activities and begin commercialization plans. Research and
Development costs of Shrink have been completely paid for to date by the
California Regents, and to a lesser extent, CIRM and, we do not have any capital
commitments at this time.
Shrink is currently a research and
development company only. We do not believe that the sale of our
remaining AudioStocks business related assets will be sufficient to fund our
operations or research to any material degree. Nonetheless, we have
no further commitments for grants and grant funds can not, generally, be used
towards commercialization and manufacturing efforts. Accordingly, the
corporation will be dependant on obtaining additional external sources of
capital in order to fund its operations or even continue as a going
concern.
A future capital raise could involve a
private or public sales of equity securities or the incurrence of additional
indebtedness. Additional funding may not be available on favorable terms, or at
all. If we borrow additional funds, we likely will be obligated to make periodic
interest or other debt service payments and may be subject to additional
restrictive covenants. If we fail to obtain sufficient additional capital in the
future, we could be forced to curtail our growth strategy by reducing or
delaying capital expenditures, selling assets or downsizing or restructuring our
operations. If we raise additional funds through public or private sales of
equity securities, the sales may be at prices below the market price of our
stock, and our shareholders may suffer significant dilution as a result of such
sale.
Anti-takeover
provisions in our organizational documents and Delaware law may limit the
ability of our stockholders to control our policies and effect a change of
control of our company and may prevent attempts by our stockholders to replace
or remove our current management, which may not be in your best
interests.
There are provisions in our certificate
of incorporation and bylaws that may discourage a third party from making a
proposal to acquire us, even if some of our stockholders might consider the
proposal to be in their best interests, and may prevent attempts by our
stockholders to replace or remove our current management. These provisions
include the following:
-
Currently, we have at least two classes of preferred stock authorized and outstanding, all of which contain significant anti-takeover and change of control deterrents and her held or controlled by our principal shareholders. Our Series C Shareholders, however, have already agreed to cancel their shares of Series C Preferred Stock, for nominal consideration. Additionally, our certificate of incorporation authorizes our board of directors to issue shares of preferred stock without stockholder approval and to establish the preferences and rights of any preferred stock issued, which would allow the board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or change in control;
-
our certificate of incorporation prohibits our stockholders from filling board vacancies, calling special stockholder meetings or taking action by written consent;
-
our certificate of incorporation provides for the removal of a director only with cause and by the affirmative vote of the holders of 75% or more of the shares then entitled to vote at an election of directors; and
-
our bylaws require advance written notice of stockholder proposals and director nominations. Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which, in general, imposes restrictions upon acquirers of 15% or more of our stock. Finally, the board of directors may in the future adopt other protective measures, such as a stockholder rights plan, which could delay, deter or prevent a change of control
6
Compliance
With Sarbanes-Oxley Could Be Time Consuming and Costly, Which Could Cause Our
Independent Registered Public Accounting Firm To Conclude That Our Internal
Control Over Financial Reporting Is Not Effective.
As a public company, we are required to
document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which will require annual
management assessments of the effectiveness of our internal control over
financial reporting and a report by our independent registered public accounting
firm that both addresses management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal
control over financial reporting. During the course of our testing, we may
identify deficiencies which we may not be able to remediate in time to meet our
deadline for compliance with Section 404. Testing and maintaining internal
controls can divert our management’s attention from other matters that are
important to our business. We also expect the new regulations to increase our
legal and financial compliance cost, make it more difficult to attract and
retain qualified officers and members of our Board of Directors (particularly to
serve on an audit committee) and make some activities more difficult, time
consuming and costly. We may not be able to conclude on an ongoing
basis that we have effective internal control over financial reporting in
accordance with Section 404. Our independent registered public accounting firm
may not be able or willing to issue an unqualified report on the effectiveness
of our internal control over financial reporting. If we conclude that our
internal control over financial reporting is not effective, we cannot be certain
as to the timing of completion of our evaluation, testing and remediation
actions or their effect on our operations since there is presently no precedent
available by which to measure compliance adequacy. If we are unable to conclude
that we have effective internal control over financial reporting or our
independent auditors are unable to provide us with an unqualified report as
required by Section 404, then we may be unable to continue to have our common
stock traded on the Over-the-Counter Bulletin Board and investors could lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock.
You
will experience substantial dilution upon the conversion of the shares of
already issued preferred stock; the existence of our preferred stock may
adversely affect our ability to raise capital.
Currently, four million shares
(4,000,000) of Series A Preferred Stock and 150 shares of non-voting Series
C Preferred Stock are issued and outstanding and held by certain principal
shareholders or their affiliates. These shares are all
convertible and contain strict anti dilution provisions and other restrictive
covenants. As a result, over 90% of our voting control is vested in
three beneficial owners. Moreover, as shares of preferred stock are
converted and sold, such sales are likely to have a highly dilutive effect on
our stock price.
Additionally, the existence of our
outstanding preferred stock may hinder our ability to raise capital at favorable
prices if and as needed, or to make acquisitions.
As a result, these members of
management will be able to:
-
control the composition of our board of directors; control our management and policies;
-
determine the outcome of significant corporate transactions, including changes in control that may be beneficial to stockholders; and
-
act in each of their own interests, which may conflict with, or be different from, the interests of each other or the interests of the other stockholders
Our
principal stockholders have the ability to exert significant control in matters
requiring stockholder vote and could delay, deter or prevent a change in control
of our company.
Since our
stock ownership is concentrated among a limited number of holders, those holders
have significant influence over all actions requiring stockholder approval,
including the election of our board of directors. Through their concentration of
voting power, they could delay, deter or prevent a change in control of our
company or other business combinations that might otherwise be beneficial to our
other stockholders. In deciding how to vote on such matters, they may
be influenced by interests that conflict with other stockholders.
Conflicts
of interest between the stockholders and our company or our directors could
arise because we do not comply with the listing standards of any exchange with
regard to director independence.
We are not listed on a stock exchange
and our Board of Directors does not comply with the independence and committee
requirements which would be imposed upon us if we were listed on an
exchange. In the absence of a majority of independent directors, our
directors could establish policies and enter into transactions without
independent review and approval. This could present the potential for a conflict
of interest between the stockholders and our company or our
directors.
7
We
may issue additional shares and dilute your ownership percentage.
The
bylaws allow the board to issue common shares without stockholder
approval. Currently, the board is authorized to issue a total of
95,000,000 common shares, of which less than 40% have been issued or reserved
for issuance as of August 12, 2009. In addition, the board is
authorized to issue up to 5,000,000 preferred shares. For instance,
currently contemplate raising capital and issuing equity or convertible debt,
which could result in immediate further dilution. If additional funds
are raised through the issuance of equity securities, the percentage of equity
ownership of the existing stockholders will be reduced. We are
authorized to issue millions more shares of common stock and preferred stock. We
have the right to raise additional capital or incur borrowings from third
parties to finance our business. Our board of directors has the authority,
without the consent of any of the stockholders, to cause us to issue more shares
or our common stock and shares of our preferred stock at such price and on such
terms and conditions as are determined by the Board in our sole
discretion. The issuance of additional shares of capital stock by us
would dilute the stockholders’ ownership in us.
Lack
of economic review may interfere with investors’ ability to fully assess merits
and risks associated with purchase of our stock.
The
procurement by prospective investors of an independent review of the investments
merits of a proposed subscription for our stock would be costly and can normally
be conducted only by those prospective investors whose subscriptions will be of
sufficient magnitude that they, either alone or by a pooling of their resources
with those of other prospective investors, could afford the expense of such
independent analysis, including the retaining of independent consultants. Such a
review might or might not prove favorable. Accordingly, subscription
to the stock is suitable only for such proposed investors willing and able to
accept the risks created by a failure to conduct an independent analysis of this
investment.
We
Do Not Anticipate Paying Cash Dividends, Which Could Reduce The Value Of Your
Stock.
We have never paid cash dividends on
our common stock and do not anticipate paying cash dividends in the foreseeable
future. The payment of dividends on our common stock will depend on earnings,
financial condition and other business and economic factors affecting it at such
time as our board of directors may consider relevant. If we do not pay
dividends, we have certain obligations to the holders of our Series B Preferred
stock, who are entitled to a 15% of gross revenues priority
dividend. Our common stock may be less valuable because a return on
your investment will only occur if our stock price appreciates.
Future
sales of our common stock issuable upon conversion of our senior convertible
notes or preferred stock may adversely affect the market price of our common
stock.
In connection with our acquisition of
Shrink, we assumed and consolidate outstanding notes due to Noctua Fund LP,
which have a currently outstanding principal balance of $118,121. The
note, as consolidated is initially convertible into our common stock at a
conversion price of $.20 per share, or approximately
590,605 shares. We also have outstanding 4,000,000 shares of
Series A Preferred Stock, which is immediately convertible, on a 1-to-1 basis,
into our common stock. Sales of a substantial number of shares of our
common stock in the public market could depress the market price of our common
stock and impair our ability to raise capital through the sale of additional
equity securities. We cannot predict the effect that future sales of our common
stock or other equity-related securities would have on the market price of our
common stock. The price of our common stock could be affected by possible sales
of our common stock by holders of our senior convertible notes and by hedging or
arbitrage trading activity that may develop involving our common
stock.
There
is limited historical information available for investors to evaluate our
performance or a potential investment in our shares.
We are a development stage company with
little historical information available to help prospective investors evaluate
our performance or an investment in our shares, and our historical financial
statements are not necessarily a meaningful guide for evaluating our future
performance because we have not begun to manufacture and market our
products.
Our
common stock does not trade in a mature market and therefore has limited
liquidity.
Our
common stock trades on the over-the-counter market. The average daily
trading volume of our common stock on the over-the-counter market has not been
consistent. Our daily volume remains relatively limited and there is no
assurance that increased volume, if any occurs, will continue. Holders of the
our common stock may not be able to liquidate their investments in a short time
period or at the market prices that currently exist at the time a holder decides
to sell. Because of this limited liquidity, it is unlikely that
shares of our common stock will be accepted by lenders as collateral for
loans.
The
Company’s shareholders may face significant regulatory restrictions relating to
the sale of their stock, as a result of penny stock and similar
rules.
The
Company’s stock differs from many stocks in that it is a “penny stock.” The
Commission has adopted a number of rules to regulate “penny stocks” including,
but not limited to, those rules from the Securities Act as follows:
8
-
3a51-1 which defines penny stock as, generally speaking, those securities which are not listed on either NASDAQ or a national securities exchange and are priced under $5, excluding securities of issuers that have net tangible assets greater than $2 million if they have been in operation at least three years, greater than $5 million if in operation less than three years, or average revenue of at least $6 million for the last three years;
-
15g-1 which outlines transactions by broker/dealers which are exempt from 15g-2 through 15g-6 as those whose commissions from traders are lower than 5% total commissions;
-
15g-2 which details that brokers must disclose risks of penny stock on Schedule 15G;
-
15g-3 which details that broker/dealers must disclose quotes and other information relating to the penny stock market;
-
15g-4 which explains that compensation of broker/dealers must be disclosed;
-
15g-5 which explains that compensation of persons associated in connection with penny stock sales must be disclosed;
-
15g-6 which outlines that broker/dealers must send out monthly account statements; and
-
15g-9 which defines sales practice requirements.
Since
the Company’s securities constitute a “penny stock” within the meaning of the
rules, the rules would apply to us and our securities. Because these rules
provide regulatory burdens upon broker-dealers, they may affect the ability of
shareholders to sell their securities in any market that may develop; the rules
themselves may limit the market for penny stocks. Additionally, the market among
dealers may not be active. Investors in penny stock often are unable to sell
stock back to the dealer that sold them the stock. The mark-ups or commissions
charged by the broker-dealers may be greater than any profit a seller may make.
Because of large dealer spreads, investors may be unable to sell the stock
immediately back to the dealer at the same price the dealer sold the stock to
the investor. In some cases, the stock may fall quickly in value. Investors may
be unable to reap any profit from any sale of the stock, if they can sell it at
all. Shareholders should be aware that, according to Commission Release No.
34-29093 dated April 17, 1991, the market for penny stocks has suffered
from patterns of fraud and abuse. These patterns include:
-
control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
-
manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
-
“boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
-
excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
-
the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Risks
Related To Development And Commercialization Of Our Products:
Our
previous Audiostocks related businesses have dramatically diminished and we do
not intend to pursue them in any significant manner. Our Shrink
subsidiary is a research and development startup company and has not generated
any operating revenues and may never achieve profitability, and we have yet to
commercialize its inventions.
We sold the assets relating to our
AudioStocks internet based investor relations business in late 2008, with the
exception of certain proprietary software which we intend to sell in the future,
if possible. Therefore, we do not have any revenues or significant
assets from our prior businesses.
Our recently acquired subsidiary,
Shrink, is a risky and
unproven development stage company and, to date, has not generated any
revenues from sales. We cannot assure you that we will generate
revenues or that we can achieve or sustain profitability in the
future. Our operations are subject to the risks and competition
inherent in the establishment of a business enterprise. There can be no
assurance that future operations will be profitable. Revenues and
profits, if any, will depend upon various factors, including whether our product
development can be completed, and if we can achieve market
acceptance. We may not achieve our business objectives and the
failure to achieve such goals would have an adverse impact on us.
If
we are unable to obtain required clearances or approvals for the
commercialization of our products in the United States, we may not be able to
sell products and our sales could be adversely affected.
Our future performance depends on,
among other matters, our estimates as to when and at what cost we will receive
regulatory approval for our products. Regulatory approval can be a lengthy,
expensive and uncertain process, making the timing, cost and ability to obtain
approvals difficult to predict.
In the United States, clearance or
approval to commercially distribute new medical devices is received from the FDA
through clearance of a Premarket Notification, or 510(k), or through approval of
a Premarket Approval, or PMA. To receive 510(k) clearance, a new product must be
substantially equivalent to a medical device first marketed in interstate
commerce prior to May 1976. The FDA may determine that a new product is not
substantially equivalent to a device first marketed in interstate commerce prior
to May 1976 or that additional information is needed before a substantial
equivalence determination can be made. A “not substantially equivalent”
determination, or a request for additional information, could prevent or delay
the market introduction of new products that fall into this category. The 510(k)
clearance and PMA review processes can be expensive, uncertain and lengthy. It
generally takes from three to five months from submission to obtain 510(k)
clearance, and from six to eighteen months from submission to obtain a PMA
approval; however, it may take longer, and 510(k) clearance or PMA approval may
never be obtained.
9
Modifications or enhancements that
could significantly affect safety or effectiveness, or constitute a major change
in the intended use of the device, require new 510(k) or PMA
submissions.
We
may suffer the loss of key personnel or may be unable to attract and retain
qualified personnel to maintain and expand our business.
Our success is highly dependent on the
continued services of a limited number of skilled scientists, especially, Dr.
Michelle Khine and Dr. Heiner Dreismann. The company does not have an employment
agreement with Dr. Khine, and the company does have a consulting agreement with
Dr. Dreismann. In addition, our success will depend upon, among other
factors, our ability to attract, retain and motivate qualified research and
development, engineering and operating personnel, generally and during periods
of rapid growth, especially in those areas of our businesses focused on new
products and advanced manufacturing processes. There can be no assurance that we
will be able to retain existing employees or to attract and retain additional
personnel on acceptable terms. The competition for qualified
personnel in industrial, academic and nonprofit research sectors is
significant.
The loss of the services of any of our
key research and development, engineering or operational personnel or senior
management without adequate replacement, or the inability to attract new
qualified personnel, would have a material adverse effect on our
operations.
Significant existing or additional
governmental regulation could subject us to unanticipated delays and costs,
which would adversely affect our revenues.
Our
products are still in the development stage, however, certain products which we
may produce may be subject to government regulation depending upon their
ultimate use. The successful implementation of our business strategy depends in
part on our ability to get our products into the market as quickly as possible.
Additional laws and regulations, or changes to existing laws and regulations,
applicable to our business may be enacted or promulgated and the interpretation,
application or enforcement of existing laws and regulations may change. We
cannot predict the nature of any future laws, regulations, interpretations,
applications or enforcements, or the specific effects any of these might have on
our business. Any future laws, regulations, interpretations, applications, or
enforcements could delay or prevent regulatory approval or clearance of our
products and our ability to market our products. Moreover, if we do not comply
with existing or future laws or regulations, we could be subject to the
following types of enforcement actions by the FDA and other
agencies:
-
Fines;
-
Injunctions;
-
Civil penalties;
-
Recalls or seizures of our products;
-
Total or partial suspension of the production of our products;
-
Withdrawal of existing approvals or premarket clearances of our products;
-
Refusal to approve or clear new applications or notices relating to our products;
-
Recommendations by the FDA that we not be allowed to enter into government contracts; and
-
Criminal prosecution.
Risks
Relating To Our Products And Technology
We
rely in part, on the University of California Regents to file and secure our
patents.
In addition to the option agreement
with the California Regents, Shrink has entered into a research and development
agreement with UC Merced in order to fund certain research based on the
intellectual property we have licensed and have the right to license from the
California Regents. The agreement with UC Merced provides Shrink with
an exclusive opportunity to license any technology that flows (derivative IP)
from the research Shrink funds at UC Merced. Should any intellectual
property flow from this research and development agreement and Shrink elects to
exercise such rights, it will be required to make annual payments to the
California Regents as well as royalty payments as commercialization
occurs.
Under
our research and development agreements we rely on third party laboratories that
can experience manufacturing problems or delays, which could result in decreased
revenue or increased costs.
All of our research and development
agreements require processes that are complex and require specialized and
expensive equipment. Replacement parts for this specialized equipment can be
expensive and, in some cases, can require lead times of up to a year to acquire.
There can be no assurance that our funding commitment under the UC Merced
research and development agreements will be adequate to fund the equipment
requirements. We also rely on numerous third parties to supply
production materials and in some cases there may not be alternative sources
immediately available, or they may not be available at a reasonable
cost.
We
will be subject to applicable regulatory approval requirements of the foreign
countries in which we could sell products, which are costly and may prevent or
delay us from marketing our products in those countries.
In addition to regulatory requirements
in the United States, we will be subject to the regulatory approval requirements
for each foreign country to which could export our products. In the European
Union, regulatory compliance requires affixing the “CE” mark to product
labeling. Although our new products could be made eligible for CE marking
through self-certification, this process can be lengthy and expensive. In
Canada, as another example, our new products could require approval by Health
Canada prior to commercialization along with International Standards
Organization, or ISO, 13485/CMDCAS certification. It generally takes from three
to six months from submission to obtain a Canadian Device License. Any changes
in foreign approval requirements and processes may cause us to incur additional
costs or lengthen review times of our new products, if any. We may not be able
to obtain foreign regulatory approvals on a timely basis, if at all, and any
failure to do so may cause us to incur additional costs or prevent us from
marketing our products in foreign countries, which may have a material adverse
effect on our business, financial condition and results of
operations.
10
We
may experience difficulties that may delay or prevent our development,
introduction or marketing of new or enhanced products.
We intend to continue to invest in
product and technology development. The development of new or enhanced products
is a complex and uncertain process. We may experience research and development,
manufacturing, marketing and other difficulties that could delay or prevent our
development, introduction or marketing of new products or enhancements. We
cannot be certain that:
-
any of the products under development will prove to be effective in generating sales demand;
-
we will be able to obtain, in a timely manner or at all, regulatory approval, if required, to market any of our products that are in development or contemplated;
-
the products we develop can be manufactured at acceptable cost and with appropriate quality; or these products, if and when approved, can be successfully marketed.
The factors listed above, as well as
manufacturing or distribution problems, or other factors beyond our control,
could delay new product launches. In addition, we cannot assure you that the
market will accept these products. Accordingly, there is no assurance that our
overall revenue will increase if and when new products are
launched.
Intense
competition could limit our ability to secure market share which could impair
our ability to sell our products and harm our financial
performance.
The microfluidics, biochip and
renewable energy industries, along with nearly every market we seek to
penetrate, are new and underdeveloped markets and industries are rapidly
evolving, and developments are expected to continue at a rapid pace. Competition
in this industry, which includes competition from professional diagnostic,
consumer diagnostic and renewable energy businesses, among others, is intense
and expected to increase as new products and technologies become available and
new competitors enter the market. Our competitors in the United States and
abroad are numerous and include, among others, diagnostic testing, medical
products and renewable energy companies, universities and other research
institutions.
Our future success depends upon
maintaining a competitive position in the development of products and
technologies in our areas of focus. Our competitors may:
-
develop technologies and products that are more effective, less expensive, safer or more readily available than our products or that render our technologies or products obsolete or noncompetitive;
-
obtain patent protection or other intellectual property rights that would prevent us fromdeveloping potential products; or
-
obtain regulatory approval for the commercialization of our products more rapidly or effectivelythan we do
As a result, our products or processes
may not compete successfully, and research and development by others may render
our products or processes obsolete or uneconomical.
Also, the possibility of patent
disputes with competitors holding domestic and/or foreign patent rights may
limit or delay expansion possibilities. In addition, many of our existing or
potential competitors have or may have substantially greater research and
development capabilities, clinical, manufacturing, regulatory and marketing
experience and financial and managerial resources, giving them a competitive
advantage in the markets in which we hope to operate.
The market for the sale of our products
is also highly competitive. This competition is based principally upon price,
quality of products, customer service and marketing support. We believe that a
number of our competitors are substantially larger than we are and have greater
financial resources, and have a more established sales and marketing force
already operating in the market, which would give them a competitive advantage
over us.
We must be able to manufacture new
and improved products to meet customer demand on a timely and cost-effective
basis.
We do not have any manufacturing
facilities. Even if we are able to develop our products, and
penetrate the drug and life science industries, we would have to construct or
acquire a manufacturing facility and train appropriate personnel or find third
parties to whom we could outsource such manufacturing. To build
a manufacturing facility, we will need substantial additional capital and we do
not have any capital commitments to fund such construction. In
addition, we must be able to resolve in a timely manner manufacturing issues
that may arise from time to time as we commence production of our complex
products. With a start up manufacturing facility, unexpected problems
may be more frequent as new equipment is put on line and operators are
inexperienced in its operation. Unanticipated difficulties or
delays in manufacturing improved or new products in sufficient quantities to
meet customer demand could diminish future demand for our products and harm our
business.
11
A significant portion of our sales
will be dependent upon our customers’ capital spending policies and research and
development budgets, and government funding of research and development programs
at universities and other organizations, which are subject to significant and
unexpected fluctuations.
Our target markets include
pharmaceutical and biotechnology companies, academic institutions, government
laboratories, and private foundations. Fluctuations in the research and
development budgets at these organizations could have a significant effect on
the demand for our products and services. Research and development budgets
fluctuate due to changes in available resources, mergers of pharmaceutical and
biotechnology companies, spending priorities, general economic conditions, and
institutional and governmental budgetary policies. Our business could be
seriously damaged by any significant decrease in capital equipment purchases or
life sciences research and development expenditures by pharmaceutical and
biotechnology companies, academic institutions, government laboratories, or
private foundations.
The timing and amount of revenues from
customers that rely on government funding of research may vary significantly due
to factors that can be difficult to forecast. Research funding for life science
research has increased more slowly during the past several years compared to the
previous years and has declined in some countries, and some grants have been
frozen for extended periods of time or otherwise become unavailable to various
institutions, sometimes without advance notice. Although the level of research
funding increased significantly during the years 1999 through 2003, increases
for fiscal 2004 through 2008 were significantly lower. Government funding of
research and development is subject to the political process, which is
inherently fluid and unpredictable. Other programs, such as homeland security or
defense, or general efforts to reduce the federal budget deficit could be viewed
by the U.S. government as a higher priority. These budgetary pressures may
result in reduced allocations to government agencies that fund research and
development activities. Past proposals to reduce budget deficits have included
reduced NIH and other research and development allocations. Any shift away from
the funding of life sciences research and development or delays surrounding the
approval of government budget proposals may seriously damage our
business.
Many
of our current and potential competitors have longer operating histories, larger
customer or user bases, greater brand recognition, greater access to brand name
suppliers, and significantly greater financial, marketing and other resources
than we do.
Many of these current and potential
competitors can devote substantially more resources to the development of their
business operations than we can at present. Currently, we do not have
a marketing or manufacturing infrastructure in place. In
addition, larger, well-established and well-financed entities may acquire,
invest in or form joint ventures with other established competitors or with
specific product manufacturers, which will allow them pricing advantages due to
economies of scale or pursuant to distribution agreements with suppliers. Some
large product distributors may also have exclusive distribution agreements or
protected territories in which they can sell specific brand name products at a
significant discount, or territories in which they may seek to exclude us from
selling a specific brand of product. These types of arrangements between our
competitors and manufacturers and suppliers may limit our ability to distribute
certain products and could adversely affect our revenues.
There
can be no assurance that new products we introduce will achieve significant
market acceptance or will generate significant revenue.
The market for products in
micro-fluidics, bio-sensing and renewable energy industries is characterized by
rapid technological advances, evolving standards in technology and frequent new
product and service introductions and enhancements. Possible short life cycles
for products we sell may necessitate high levels of expenditures for continually
selecting new products and discontinuing the sale of obsolete product lines. To
obtain a competitive position, we must continue to introduce new products and
new versions of existing products that will satisfy increasingly sophisticated
customer requirements and achieve market acceptance. Our inability or failure to
position and/or price our new or existing products competitively, in response to
changes in evolving standards in technology, could have a material adverse
effect on our business, results of operations or financial
position.
If we deliver products with defects,
our credibility may be harmed, market acceptance of our products may decrease
and we may be exposed to liability.
The manufacturing and marketing of our
products will involve an inherent risk of product liability claims. In addition,
our product development is and production will be extremely complex and could
expose our products to defects. Any defects could harm our credibility and
decrease market acceptance of our products. In the event that we are held liable
for a claim for which we are not indemnified or insured that claim could
materially damage our business and financial condition. Even if we are
indemnified, we may not be able to obtain reimbursement of our damages from the
indemnifying party, because for example they do not have sufficient funds or
insurance coverage to pay us. If a claim is made for which we have
insurance coverage, we can not be certain that the amount of such coverage will
be sufficient, or that we will be able to collect on a claim when we make
it.
12
Because we have not yet begun to sell
our products, we have not obtained insurance covering product liability claims
or product recall claims against us. When we begin to market our
products, such insurance may not be available to us, or not available on terms
which we find acceptable. We may determine that the cost of
such insurance is too high when compared to the risks of not having coverage and
we may determine not to obtain policies insuring such risks, or we may obtain
policies with a high deductible.
If we are not able to adequately
protect our intellectual property, we may not be able to compete
effectively.
Our success depends, to a significant
degree, upon the protection of our proprietary technologies. While we currently
license certain U.S. patents and patent applications from UC Merced, we may
need to pursue additional protections for our intellectual property as we
develop new products and enhance existing products and technologies. We may not
be able to obtain appropriate protections for our intellectual property in a
timely manner, or at all. Our inability to obtain appropriate protections for
our intellectual property may allow competitors to enter our markets and produce
or sell the same or similar products.
The risks and uncertainties that we
face with respect to our patents and other proprietary rights include the
following:
-
the pending patent applications we have filed or to which we have exclusive rights may not resultin issued patents or may take longer than we expect to result in issued patents;
-
the claims of any patents which are issued may not provide meaningful protection;
-
we may not be able to develop additional proprietary technologies that are patentable; the patentslicensed or issued to us or our customers may not provide a competitive advantage;
-
other parties may challenge patents or patent applications licensed or issued to us or ourcustomers;
-
patents issued to other companies may harm our ability to do business; and
-
other companies may design around technologies we have patented, licensed or developed.
We
may need to obtain licenses to patents or other proprietary rights from third
parties. We may not be able to obtain the licenses required under any patents or
proprietary rights, or they may not be available on acceptable terms. If we do
not obtain required licenses, we may encounter delays in product development or
find that the development, manufacture or sale of products requiring licenses
could be foreclosed. We may, from time to time, support and collaborate in
research conducted by universities and governmental research organizations, such
as UC Merced, UC Irvine and MF3 at UC Irvine. We may not be able to acquire
exclusive rights to the inventions or technical information derived from these
collaborations, and disputes may arise over rights in derivative or related
research programs conducted by us or our collaborators.
In addition to patents, we rely on a
combination of trade secrets, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property
rights. Nevertheless, these measures may not be adequate to safeguard
the technology underlying our products. If these measures do not protect our
rights, third parties could use our technology and our ability to compete in the
market would be reduced. In addition, employees, consultants and others who
participate in the development of our products may breach their agreements with
us regarding our intellectual property, and we may not have adequate remedies
for the breach. We also may not be able to effectively protect our intellectual
property rights in some foreign countries.
In order to protect or enforce our
patent rights, we may initiate patent litigation against third parties, such as
infringement suits or interference proceedings. Litigation may be
necessary to:
-
assert claims of infringement;
-
enforce our patents;
-
protect our trade secrets or know-how; or
-
determine the enforceability, scope and validity of the proprietary rights of others.
Any lawsuits that we initiate could be
expensive, take significant time and divert management’s attention from other
business concerns. Litigation also puts our patents, if any, at risk of being
invalidated or interpreted narrowly and our patent applications at risk of not
issuing. Additionally, we may provoke third parties to assert claims against
us.
Litigation may be necessary to enforce
intellectual property rights. Litigation is inherently uncertain and the outcome
is often unpredictable. Patent law relating to the scope of claims in the
technology fields in which we operate is still evolving and, consequently,
patent positions in our industry are generally uncertain. We may not prevail in
any and the damages or other remedies awarded, if any, may not be commercially
valuable.
For a variety of reasons, for example,
because we do not have adequate funds, we may decide not to file for patent,
copyright or trademark protection or prosecute potential infringements of our
patents. Our trade secrets may also become known through other means not
currently foreseen by us. Despite our efforts to protect our intellectual
property, our competitors or customers may independently develop similar or
alternative technologies or products that are equal or superior to our
technology and products without infringing on any of our intellectual property
rights or design around our proprietary technologies. Changes in laws concerning
intellectual property would affect our ability to protect our intellectual
property, if any.
13
Although
we have implemented safeguards to prevent unauthorized access to our ecommerce
sites, there always exists certain security risks, which may cause
interruptions, delays or cessation in service.
Despite the implementation of security
measures, our network infrastructure may be vulnerable to computer viruses or
problems caused by third parties, which could lead to interruptions, delays or
cessation in service to our clients. Inappropriate use of the Internet by third
parties could also potentially jeopardize the security or deter certain persons
from using our services. Such inappropriate use of the Internet would include
attempting to gain unauthorized access to information or systems - commonly
known as "cracking" or "hacking." Although we intend to continue to implement
security measures, such measures have been circumvented in the past, and there
can be no assurance that measures implemented will not be circumvented in the
future. Alleviating problems caused by computer viruses or other inappropriate
uses or security breaches may require interruptions, delays or cessation in
service to our operations. There can be no assurance that customers or others
will not assert claims of liability against us as a result of failures. Further,
until more comprehensive security technologies are developed, the security and
privacy concerns of existing and potential customers may inhibit the growth of
the Internet service industry in general and our customer base and revenues in
particular.
We could suffer monetary damages,
incur substantial costs or be prevented from using technologies important to our
products as a result of a legal proceedings being commenced against
us.
Because of the nature of our
business, we may be subject at any particular time to commercial disputes,
consumer product claims, negligence or various other lawsuits arising in the
ordinary course of our business, including employment matters, and we expect
that this will continue to be the case in the future. Such lawsuits generally
seek damages, sometimes in substantial amounts, for commercial or personal
injuries allegedly suffered and can include claims for punitive or other special
damages. An adverse ruling or rulings in one or more such lawsuits could,
individually or in the aggregate, have a material adverse effect on our sales,
operations or financial performance. We cannot assure you that any
future lawsuits relating to our businesses will not have a material adverse
effect on us.
If
the results of clinical studies required to gain regulatory approval to sell our
products are not available when expected or do not demonstrate the anticipated
utility of those potential products, we may not be able to sell future products
and our sales could be adversely affected.
To the extent we are successful in
developing health and other related products that require clinical trials and
regulatory approval, we may conduct clinical studies intended to demonstrate
that our potential products perform as expected. The results of these clinical
studies are used as the basis to obtain regulatory approval from government
authorities such as the FDA. Clinical studies are experiments conducted using
potential products and human patients having the diseases or medical conditions
that the product is trying to evaluate or diagnose. Conducting clinical studies
is a complex, time-consuming and expensive process. In some cases, we may spend
as much as several years completing certain studies.
To the extent we are required to
conduct clinical or other studies and we fail to adequately manage our clinical
studies, our clinical studies and corresponding regulatory approvals may be
delayed or we may fail to gain approval for our potential product candidates
altogether. Even if we successfully manage our clinical studies, we may not
obtain favorable results and may not be able to obtain regulatory approval. If
we are unable to market and sell our new products or are unable to obtain
approvals in the timeframe needed to execute our product strategies, our
business and results of operations would be materially and adversely
affected.
Risks
Relating to Our Operations
We are currently in a growth stage
and may experience setbacks in both business and product
development.
We are subject to all of the risks
inherent in both the creation of a new business and the development of new and
existing products. As a growth-stage company, our cash flows may be insufficient
to meet expenses relating to our operations and the growth of our business, and
may be insufficient to allow us to develop new and existing products. We
currently so not manufacture or market any product and we cannot be certain that
we will ever be able to develop, manufacture, market or sell any
product.
We
currently do not have adequate insurance coverage for claims against
us.
We face the risk of loss resulting from
product liability, securities, fiduciary liability, intellectual property,
antitrust, contractual, warranty, environmental, fraud and other lawsuits,
whether or not such claims are valid. In addition, we do not have
adequate or in some cases, any product liability, fiduciary, directors and
officers, property, natural catastrophe and comprehensive general liability
insurance. To the extent we secure adequate insurance it may not be
adequate to cover such claims or may not be available to the extent we expect.
If we are able to secure adequate insurance our costs could be volatile and, at
any time, can increase given changes in market supply and demand. We may not be
able to obtain adequate insurance coverage in the future at acceptable
costs. A successful claim that exceeds or is not covered by our
policies could require us to pay substantial sums. Even to the extent
we are able to acquire adequate insurance, we may not be able to afford to
continue coverage through a policy period or in multiple and successive policy
periods.
Presently,
we have under-qualified management operating the company.
14
The present management team is likely
not experienced enough and sufficient in number to maximize or even realize the
potential of Shrink. It is very likely that more qualified additional
managers, with significantly more specific experience in the businesses we seek
to engage in, will need to be hired. The sooner we can hire these
people the better. These persons will likely require substantial
salaries and compensation packages that the company cannot presently
afford. Additionally, to the extent we use a service to assist the
company in finding qualified managers, there may be substantial fees associated
with recruiting new additional or replacement managers. To the extent
that we are unable to ultimately bring managers into the company who are more
qualified than our present team, the company and it’s shareholders will be
negatively impacted.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
During July
2009, the company issued an aggregate of 30,000 shares of common stock to 2
consultants with an aggregate value of $30,600 as payment for services
rendered.
During July
2009, the company issued 50,000 shares of common stock to an investor in
exchange for $10,000.
During August
2009, the company issued 100,000 shares of common stock each (total of 200,000
shares) to two members of its scientific advisory board valued at
$204,000.
During August
2009, the company issued 20,000 shares of common stock to a member of its board
of advisors valued at $20,400.
During August
2009, the company issued 128,334 shares of common stock to 4 consultants with an
aggregate value of $167,600 as payment for services rendered.
During
August 2009, the company issued 250,000 shares of common stock to an
investor in exchange for $50,000.
During
September 2009, the company issued 700,000 shares of common stock to 7 investors
in exchange for $140,000.
During
September 2009, the company issued 5,000 shares of common stock to a employee
with an aggregate value of $5,100 as payment for services rendered.
During
October 2009, the company issued 13,334 shares of common stock to 2
consultants with an aggregate value of $15,601 as payment for services
rendered.
During
October 2009, the company issued 50,000 shares of common stock to an
investor in exchange for $10,000.
During
November 2009, the company issued 383,334 shares of common stock for
conversion of 2 convertible notes and accrued interest totaling
$57,500.
All of
the issuances of securities described above were restricted share issuances and
deemed to be exempt from registration in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the “Act”) as transactions by an issuer not
involving a public offering. We made the determination that each investor
had enough knowledge and experience in finance and business matters to evaluate
the risks and merits of the investment. There was no general
solicitation or general advertising used to market the securities and all of the
issuees were either affiliates of the Company or had a pre-existing business
relationship with the Company. We made available to each investor with
disclosure of all aspects of our business, including providing the investor with
press releases, access to our auditors, and other financial, business, and
corporate information. A legend was placed on the stock certificates stating
that the securities have not been registered under the Securities Act and cannot
be sold or otherwise transferred without an effective registration or an
exemption therefrom.
Effective
as of October 08, 2009, the Company completed its first closing of a private
placement offering of Common Stock, pursuant to which, in aggregate
with subsequent closings, it issued 1,775,000 shares at a purchase
price of $.20 per share to an aggregate of 18 accredited investors with gross
proceeds of $355,000. The shares were issued without registration
rights. The Company reasonably believes that the foregoing offering of
securities was exempt from the registration requirements of Act of 1933,
pursuant to, among other exemptions, Regulation D and 4(2) of the Act in that
said offering was made directly by the Company’s management to a limited number
of accredited investors and there was no general solicitation or general
advertising used to market the securities. In addition, we made available to We
made available toeach investor with disclosure of all aspects of our business,
including providing the investor with press releases, access to our auditors,
and other financial, business, and corporate information. A legend was placed on
the stock certificates stating that the securities have not been registered
under the Securities Act and cannot be sold or otherwise transferred without an
effective registration or an exemption therefrom. Proceeds from this
offering were allocated towards working capital, research, rent and
administrative expenses.
15
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
None.
Item
6. Exhibits.
10.1 First
Amended Operating Agreement, dated as of October 1,2009, between Shrink
Nanotechnologies, Inc. and BCGU, LLC*
31.1 Certification
by Principal Executive Officer pursuant to Sarbanes Oxley Section
302.*
32.1 Certification
by Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*
* Filed herewith.
16
Pursuant to the requirements of Section
13 or 15(d) of the Exchange Act, the registrant has duly caused this Quarterly
Report on Form 10-Q for the period ended September 30, 2009, to be signed on its
behalf by the undersigned on November 18, 2009, thereunto duly
authorized.
SHRINK
NANOTECHNOLOGIES, INC.
By:
|
/s/ Mark L.
Baum
|
|
Name:
Mark L. Baum
Title:
President (Principal Executive Officer)
|
||
By:
|
/s/
Mark L.
Baum
|
|
Name:
Mark L. Baum
Title:
Vice Chairman (Principal Accounting Officer, Principal Financial
Officer)
|
17