Attached files
file | filename |
---|---|
EX-32.1 - Shrink Nanotechnologies, Inc. | ex321.htm |
EX-31.1 - Shrink Nanotechnologies, Inc. | ex311.htm |
EX-10.17 - Shrink Nanotechnologies, Inc. | ex1017.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 June 30, 2010
[ ]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________ to _____________
Commission
File Number: 000-52860
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
__
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes X No
__
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a small reporting company:
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
__ No X
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date.
The
registrant has 193,371,640 shares of common stock, par value $0.001 per share,
outstanding as of August 13, 2010.
SHRINK
NANOTECHNOLOGIES, INC.
JUNE
30, 2010 FORM 10-Q QUARTERLY REPORT
INDEX
|
Page
|
Forward
Looking Statements
|
ii
|
Use
of Terms
|
ii
|
PART
I - FINANCIAL INFORMATION
|
F-1
|
Item
1. - Financial Statements
|
F-1
|
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
F-1
|
Consolidated
Statements of Operations for the Three and Six Months Ended June 30, 2010
and 2009 and from Inception January 15, 2008 through June 30, 2010
(unaudited)
|
F-2
|
Consolidated
Statements of Cash Flows for the Three and Six Months Ended June 30, 2010
and 2009 and from Inception January 15, 2008 through June 30, 2010
(unaudited)
|
F-3
|
Notes
to Unaudited Consolidated Financial Statements
|
F-4
|
Item
2 – Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
1
|
Item
3 - Quantitative and Qualitative Disclosures About Market
Risk
|
16
|
Item
4 - Controls and Procedures
|
17
|
PART
II - OTHER INFORMATION
|
|
Item
1 - Legal Proceedings
|
18
|
Item
1A – Risk Factors
|
18
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
30
|
Item
3 - Defaults Upon Senior Securities
|
31
|
Item
4 - Submission of Matters to a Vote of Security Holders
|
31
|
Item
5 - Other Information
|
31
|
Item
6 – Exhibits
|
31
|
i
Forward
Looking Statements
Certain
information contained in this Quarterly Report on Form 10-Q (this “Report” or
“Quarterly Report”) includes forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, (the “Exchange Act”). 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.).
The
statements herein which are not historical reflect our current expectations and
projections about the Company’s future results, performance, liquidity,
financial condition, prospects and opportunities and are based upon information
currently available to the Company and management and their interpretation of
what are believed to be significant factors affecting the businesses, including
many assumptions regarding future events. Such forward-looking
statements include statements regarding, without limitation:
·
|
the
development, commercialization and market acceptance of our recently
acquired microfluidic, “shrinkable plastic” and solar concentrator
technologies, and other related technologies, and the related costs to us
for the foregoing,
|
·
|
our
ability to continue funding under our various funding agreements with
universities under the California Regents as well as other research and
development relationships we may enter
into,
|
·
|
our
immediate and growing need to raise the capital needed or obtain
government or educational grants to implement our business
plan,
|
·
|
the
relative efficiencies of the solar concentrator technologies we are
developing, including our future ability in the future to produce power at
a commercially compelling dollar-per-watt
rate,
|
·
|
our
ability secure adequate component and manufacturing sourcing for the
various businesses we seek to engage
in,
|
·
|
our
ability to secure certain critical licenses from third parties, including
parties who may be potential commercial competitors, that may own
technology that is substantially similar and perhaps even superior to what
we have license to and have been
developing,
|
·
|
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 or
to fund our license agreements with the California
Regents,
|
·
|
the
projected growth in stem cell research and public policy changes relating
to government funding of the same,
|
·
|
alternative
energy demands (specifically, products ultimately derived from our solar
concentrator technology) and our ability to fund our solar technology
products, and
|
·
|
the
presumed size and growth of the market for lab-on-a-chip
devices.
|
These
forward looking statements should be considered in addition to our risk factors
(contained in this Report under the heading “Item 1A Risk Factors”
below). Additional risks not described above, or unknown to us, may
also adversely affect the Company or its results.
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 filing date of this Quarterly 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 shall
also include by reference herein and incorporate the same as if fully included
in their entirety, all Form 10-Ks, Form 10-Qs, Form 8-Ks and other periodic
reports filed by us in the SEC’s EDGAR filing system (www.sec.gov)) which
attempt to update interested parties of the risks and factors and other
disclosures that may affect our business, financial condition, results of
operation and cash flows.
ii
Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in the Risk Factors section in this Quarterly Report.
Use
of Terms
Except as
otherwise indicated by the context, references in this report to (i) the “Shrink
Parent” or “Parent” or similar terms refer to the publicly traded parent holding
company and registrant, Shrink Nanotechnologies, Inc., a Delaware
corporation, (ii) the “Company”, “we”, “us”, or “our”,
refer to the combined business of Shrink Parent, together with its wholly owned
subsidiaries, Shrink Technologies, Inc., ShrinkChips, LLC and Shrink Solar, LLC,
unless the context requires otherwise, (iii) “Shrink” refers to Shrink
Technologies, Inc., a California corporation acquired by us in May 2009,
inclusive of its R&D activities through universities or third parties; and
“Shrink Chips” and “Shrink Solar” refer to our recently organized Delaware
subsidiaries ShrinkChips LLC and Shrink Solar LLC, (iv) “Forward Split” refers
to the 5 for 1 forward split of the Parent’s stock effective as of April 8,
2010, (v) “SEC” are to the United States Securities and Exchange Commission,
(vi) “Securities Act” are to Securities Act of 1933, as amended, and (vii)
“Exchange Act” are to the Securities Exchange Act of 1934, as
amended.
All
references herein to share amounts and pricing information contained in this
Report are as adjusted to give effect to the recent Forward Split.
iii
(A
Development Stage Company)
|
||||||
CONSOLIDATED
- BALANCE SHEETS
|
||||||
June
30,
|
December
31,
|
|||||
2010
|
2009
|
|||||
(unaudited)
|
||||||
ASSETS
|
||||||
Current
assets
|
||||||
Cash
|
$
|
126,762
|
$
|
58,539
|
||
Litigation
receivable, discontinued operations
|
-
|
108,011
|
||||
Prepaid
expenses
|
1,605,389
|
120,333
|
||||
Total
current assets
|
1,732,150
|
286,883
|
||||
Prepaid
expenses, non-current
|
193,250
|
257,408
|
||||
Property,
plant and equipment, net
|
116,965
|
140,054
|
||||
Intangible
assets, net
|
249,701
|
219,062
|
||||
TOTAL
ASSETS
|
$
|
2,292,066
|
$
|
903,407
|
||
LIABILITIES
AND STOCKHOLDERS' EQUITY/(DEFICIT)
|
||||||
Current
liabilities
|
||||||
Accounts
payable and accrued expenses
|
$
|
1,204,986
|
$
|
973,840
|
||
Due
to former preferred stock shareholders
|
-
|
143,825
|
||||
Due
to a related party
|
12,500
|
12,500
|
||||
Convertible
debentures, net of discount
|
247,018
|
13,611
|
||||
Convertible
debentures, net of discount, default - related party
|
218,121
|
218,121
|
||||
Total
current liabilities
|
1,682,625
|
1,361,897
|
||||
TOTAL
LIABILITIES
|
1,682,625
|
1,361,897
|
||||
COMMITMENTS
|
||||||
STOCKHOLDERS'
DEFICIT
|
||||||
Preferred
stock, 25,000,000 shares authorized, $0.001 par value
|
||||||
issued
and outstanding 20,000,000 and 20,000,000
|
||||||
at
June 30, 2010 and December 31, 2009 respectively
|
20,000
|
20,000
|
||||
Common
stock, 475,000,000 shares authorized, $0.001 par value
|
||||||
issued
and outstanding 192,393,985 and 172,921,485
|
||||||
at
June 30, 2010 and December 31, 2009, respectively
|
192,395
|
172,921
|
||||
Additional
paid in capital
|
4,882,367
|
914,784
|
||||
Accumulated
deficit
|
(4,485,321)
|
(1,566,195)
|
||||
TOTAL
STOCKHOLDERS' DEFICIT
|
609,441
|
(458,490)
|
||||
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
|
2,292,066
|
$
|
903,407
|
||
The
accompanying notes are an integral part of these financial
statements
|
F-1
SHRINK
NANOTECHNOLOGIES, INC.
|
|||||||||||
(A
Development Stage Company)
|
|||||||||||
CONSOLIDATED
- STATEMENTS OF OPERATIONS
|
|||||||||||
(Unaudited)
|
|||||||||||
From
Inception
|
|||||||||||
For
the three months
|
For
the three months
|
For
the six months
|
For
the six months
|
January
15, 2008
|
|||||||
ended
June 30,
|
ended
June 30,
|
ended
June 30,
|
ended
June 30,
|
through
June 30,
|
|||||||
2010
|
2009
|
2010
|
2009
|
2010
|
|||||||
Revenues:
|
|||||||||||
Revenues,
net
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|
Cost
of sales
|
-
|
-
|
-
|
-
|
-
|
||||||
Gross
Profit
|
-
|
-
|
-
|
-
|
-
|
||||||
Expenses
|
|||||||||||
Research
and development
|
72,107
|
33,062
|
133,141
|
73,554
|
334,909
|
||||||
Professional
fees
|
56,044
|
41,930
|
84,663
|
47,347
|
235,779
|
||||||
General
and administrative
|
1,073,777
|
243,882
|
2,392,269
|
273,292
|
3,566,214
|
||||||
Depreciation,
depletion, and amortization
|
19,698
|
4,276
|
32,296
|
4,276
|
62,778
|
||||||
Total
operating expenses
|
1,221,626
|
323,150
|
2,642,369
|
398,469
|
4,199,680
|
||||||
Loss
from operations
|
(1,221,626)
|
(323,150)
|
(2,642,369)
|
(398,469)
|
(4,199,680)
|
||||||
Other
Income (Expense)
|
|||||||||||
Interest
expense
|
(166,147)
|
(10,290)
|
(276,757)
|
(14,086)
|
(311,345)
|
||||||
Loss
from extinguishment of debt
|
-
|
-
|
-
|
-
|
(118,121)
|
||||||
Total
Other Income (Expense)
|
(166,147)
|
(10,290)
|
(276,757)
|
(14,086)
|
(429,466)
|
||||||
Net
loss from continued operations
|
(1,387,773)
|
(333,440)
|
(2,919,126)
|
(412,555)
|
(4,629,145)
|
||||||
Discontinued
Operations
|
|||||||||||
Gain
from discontinued operations of Audiostocks business
|
-
|
-
|
-
|
-
|
143,825
|
||||||
Income
(loss) from discontinued operations
|
-
|
-
|
-
|
-
|
143,825
|
||||||
(Loss)
Before Income Taxes
|
(1,387,773)
|
(333,440)
|
(2,919,126)
|
(412,555)
|
(4,485,321)
|
||||||
Income
Taxes
|
-
|
-
|
-
|
-
|
-
|
||||||
NET
(LOSS)
|
$
|
(1,387,773)
|
$
|
(333,440)
|
$
|
(2,919,126)
|
$
|
(412,555)
|
$
|
(4,485,321)
|
|
Net
income (loss) per common share, basic and diluted:
|
|||||||||||
Net
(loss) from continued operations
|
(0.01)
|
(0.00)
|
(0.02)
|
(0.01)
|
-
|
||||||
Net
income from discontinued operations
|
-
|
-
|
-
|
-
|
-
|
||||||
Net
(loss) per common share:
|
$
|
(0.01)
|
$
|
(0.00)
|
$
|
(0.02)
|
$
|
(0.01)
|
$
|
-
|
|
Weighted
average common and common equivalent shares outstanding
|
|||||||||||
Basic
and diluted
|
191,974,754
|
86,517,720
|
183,433,336
|
65,597,305
|
102,339,293
|
||||||
The
accompanying notes are an integral part of these financial
statements
|
F-2
(A
Development Stage Company)
|
||||||||
CONSOLIDATED
- STATEMENTS OF CASH FLOWS
|
||||||||
(Unaudited)
|
||||||||
From
Inception
|
||||||||
For
the six months
|
For
the six months
|
January
15, 2008
|
||||||
ended
June 30,
|
ended
June 30,
|
through
June 30,
|
||||||
2010
|
2009
|
2010
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$
|
(2,919,126)
|
$
|
(412,555)
|
$
|
(4,485,321)
|
||
Adjustments
to reconcile net earnings to net cash used
|
||||||||
by
operating activities:
|
||||||||
Depreciation,
amortization
|
32,296
|
4,276
|
62,778
|
|||||
Debt
discount accretion
|
229,539
|
5,392
|
243,150
|
|||||
Non-cash
share-based payments
|
1,867,757
|
213,394
|
2,407,556
|
|||||
Loss
from extinguishment of debt
|
-
|
-
|
118,121
|
|||||
Changes
in assets and liabilities, net of effects from
acquisitions
|
||||||||
Prepaid
expenses
|
167,269
|
-
|
(210,472)
|
|||||
Accounts
receivable
|
108,011
|
(4,800)
|
1,672
|
|||||
Accounts
payable and accrued liabilities
|
87,321
|
143,643
|
991,634
|
|||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(426,932)
|
(50,650)
|
(870,881)
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Cash
purchased at acquisition
|
-
|
62,404
|
62,404
|
|||||
Additions
to fixed assets
|
-
|
(6,299)
|
(16,113)
|
|||||
Additions
to intangible assets
|
(39,845)
|
(68,017)
|
(162,243)
|
|||||
NET
CASH FROM INVESTING ACTIVITIES
|
(39,845)
|
(11,912)
|
(115,952)
|
|||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Proceeds
from subsidiary prior to merger
|
-
|
12,500
|
12,500
|
|||||
Proceeds
from issuance of common stock
|
-
|
90,000
|
355,001
|
|||||
Proceeds
from convertible debentures
|
535,000
|
20,000
|
746,094
|
|||||
NET
CASH FROM FINANCING ACTIVITIES
|
535,000
|
122,500
|
1,113,595
|
|||||
NET
CHANGE IN CASH
|
68,223
|
59,938
|
126,762
|
|||||
CASH
BALANCES
|
||||||||
Beginning
of period
|
58,539
|
37,940
|
-
|
|||||
End
of period
|
$
|
126,762
|
$
|
97,878
|
$
|
126,762
|
||
SUPPLEMENTAL
DISCLOSURE:
|
||||||||
Interest
paid
|
$
|
375
|
$
|
-
|
$
|
-
|
||
Income
taxes paid
|
$
|
-
|
$
|
-
|
$
|
-
|
||
NON-CASH
INVESTING AND FINANCING TRANSACTIONS :
|
||||||||
Stock
based prepaid expenses
|
$
|
1,588,167
|
$
|
-
|
$
|
-
|
||
The
accompanying notes are an integral part of these financial
statements
|
F-3
SHRINK
NANOTECHNOLOGIES, INC.
Notes
to the Consolidated Financial Statements
For
the six months ended June 30, 2010
(Unaudited)
|
NOTE
1. BASIS OF PRESENTATION AND NATURE OF
BUSINESS
|
The
accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months
ended June 30, 2010 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2010. For further
information, refer to the Company’s financial statements and footnotes thereto
included in the Company’s annual report on Form 10-K for the year ended December
31, 2009.
NOTE
2. 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.
As a
result of the aforementioned conditions the Company may be unable to meet
certain obligations to fund future research and development
activities. 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 research and
development 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. If management can’t achieve its plans there is a
possibility that operations will discontinue.
NOTE
3. INCOME TAXES
Income
tax expense is provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are recognized for differences between the
basis of assets and liabilities for financial statement and income tax
purposes. The differences relate primarily to the effects of net
operating loss carry forwards and differing basis, depreciation methods, and
lives of depreciable assets. The deferred tax assets represent the future tax
return consequences of those differences, which will be deductible when the
assets are recovered.
No income
tax benefit (expense) was recognized for the six months ended June 30, 2010 as a
result of tax losses in this period and because deferred tax benefits, derived
from the Company’s prior net operating losses, were previously fully reserved
and the Company has cumulative net operating losses for tax purposes in excess
of $4 million.
The
Company currently has tax return periods open beginning with December 31, 2006
through December 31, 2009.
NOTE
4. RECENT ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Policies
In
January 2010, the FASB issued amended guidance on fair value measurements and
disclosures. The new guidance requires additional disclosures regarding fair
value measurements, amends disclosures about postretirement benefit plan assets,
and provides clarification regarding the level of disaggregation of fair value
disclosures by investment class. This guidance is effective for interim and
annual reporting periods beginning after December 15, 2009, except for certain
Level 3 activity disclosure requirements that will be effective for reporting
periods beginning after December 15, 2010. Accordingly, we adopted this
amendment effective January 1, 2010, except for the additional Level 3
requirements which will be adopted in 2011.
Not
Yet Adopted
F-4
In March
2010, the Financial Accounting Standards Board (FASB) ratified Emerging Issues
Task Force (EITF) guidance related to Revenue Recognition that applies to
arrangements with milestones relating to research or development deliverables.
This guidance provides criteria that must be met to recognize consideration that
is contingent upon achievement of a substantive milestone in its entirety in the
period in which the milestone is achieved. This guidance is effective for us
January 1, 2011 and is not expected to have a material impact to our
consolidated financial position or results of operations.
NOTE
5. INTANGIBLE ASSETS
Intangible
assets consist of intellectual property rights of an exclusive license to
several 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 with estimable
useful lives and those assets with defined lives due to the legal nature of the
asset are amortized over their estimated useful lives, 15 years, using the
straight-line method. During the six months ended June 30, 2010 and
2009 the Company recorded $9,208 and $312 in amortization expenses,
respectively.
Intangible
assets consisted of the following at June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||
2010
|
2009
|
|||
Intangible
Assets, net:
|
||||
Patents
|
$
|
135,849
|
$
|
98,559
|
License
|
112,902
|
112,902
|
||
Trademarks
|
13,494
|
10,938
|
||
Less:
Amortization
|
(12,544)
|
(3,336)
|
||
$
|
249,701
|
$
|
219,063
|
NOTE
6. PREPAID EXPENSES
Prepaid
expenses (current and non-current) consisted of the following at June 30, 2010
and December 31, 2009:
June
30,
|
December
31,
|
|||
2010
|
2009
|
|||
Prepaid
stock based compensation
|
$
|
1,588,168
|
$
|
120,333
|
BCGU
Operating Agreement bonus
|
202,500
|
247,500
|
||
Other
prepaid expenses
|
|
7,971
|
9,908
|
|
Total
Prepaid Expenses
|
$
|
1,798,639
|
$
|
377,741
|
NOTE
7. RESEARCH AND LICENSE AGREEEMENTS
Research
and License Agreement with UC Regents (June 2008 and April 2009)
The
intellectual property and patent rights to our proprietary technology are owned
by the University of California (the “Regents”). 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, based on work which was to be performed at the
University of California, Merced (“UCM”).
The
Option Agreement provided Shrink with the exclusive right to license two patent
pending inventions (the “Regents Inventions”), and required Shrink to make
annual payments to the Regents as well as royalty payments on any commercialized
products based on the Regents Inventions. Shrink’s rights under
the Option Agreement required 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 were broad in terms of the potential access Shrink
had 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, were agreed to in the Option Agreement.
F-5
We
exercised our rights under the Option Agreement and as a result, entered into
the License Agreement for processes for microfluidic fabrication and other
inventions with the Regent which is currently our flagship asset.
The
License Agreement licenses an 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 and 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 under the License Agreement include:
·
|
A $100,000
contract initiation fee paid to the Regents in the form of 495,500 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;
|
·
|
A $25,000
annual maintenance fee, unless, (i) by the time that such
annual maintenance fee is due, Shrink has already commercialized its
principal product and begun paying earned royalties; or (ii) the Company
maintains the Research Agreement or another research agreement at the
University of California, Merced.
|
·
|
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. Subsequent to the
execution of the License Agreement, all Derivative IP flows into the same
License Agreement, and the use of said Derivative IP and the relative economic
terms regarding its use, are contained within the License
Agreement.
Shrink
shall reimburse UCM on a quarterly basis for all direct and indirect cost
incurred in connection with the research. These funds will be used to
fund researchers’ salaries, equipment, materials, supplies, and other
miscellaneous expenses incurred by UCM.
Sponsored
Research Agreement with UC Regents (May 2010)
During May, 2010,
Shrink entered into the Sponsored Research Agreement (or, the “SRA Agreement”)
with UC Regents on behalf of the Irvine campus (“UCI”). The SRA
Agreement is for a term of three years or such time as the research is
completed, whichever is longer. The SRA Agreement may be terminated by the
Company subject to satisfying appropriate notice requirements required under the
agreement.
F-6
The SRA
Agreement provides, among other things, that the Company will sponsor specified
research relating to development of (i) integrated, manufacturable,
nanostructured substrates for biosensing and testing of new bioassays as well as
assessing viability of other shrinkable materials, and (ii) stem cell tools that
use shrinkable plastic microfluidic technologies, each as more fully provided in
the SRA Agreement. The SRA Agreement provides that the Company shall
sponsor the research costs up to a budget of $632,051, of which $20,000 has been
paid to the California Regents. We have exclusive access to license
intellectual property from the SRA Agreement beginning from July 1, 2009 forward
according to the terms of the SRA Agreement.
The
Company’s research sponsorship obligations require it to provide funding (which
may be from the Company or other third parties) totaling $632,051 during the
three year term of the SRA Agreement. Of this amount $202,796 shall
be paid during the 12 month period ended April 30, 2011; $211,311 shall be paid
during the 12 month period ended April 30, 2012; and the remaining $217,944
shall be paid during the 12 month period ended April 30, 2013. The
foregoing payments are to be paid in quarterly installments of ¼ of the total
cash fees payable during such 12 month period.
In the
event that research under the SRA Agreement yields additional inventions and
intellectual property, we have the right to enter into an additional exclusive
license agreement with the UC Regents. In order to exercise its
rights, we must not be in default of any payment or funding obligation under the
SRA Agreement and, must notify the UC Regents of its intent to license the
additional intellectual property within nine (9) months of receipt of notice
from the UC Regents of the invention. In addition, among other
conditions and limitations, we would be required to pay for patent application
and filing costs relating to additional patents licenses and, to prosecute its
rights as against third parties.
The
license we have the right to enter into under the SRA Agreement, is
substantially similar to the previously disclosed license rights we have with
the UC Regents above, except that we are not required to pay an initial license
issue fee, or initial legal fee reimbursement of $35,000, and the terms of the
annual license fee has changed to a fee of $5,000 for rights to each patent
license acquired by us, with an overall license maintenance fee of $10,000 per
annum commencing the fourth year after entry into the license (the “License
Date”). In addition, we are required to pay a fee of 30% of certain
income generated from third party sublicenses of the additional intellectual
property we license as well as royalty payments of:
·
|
2.5%
of net sales where the first sale occurs within three years after the
License Date;
|
·
|
4%
of net sales where the first sale occurs between three and six years after
the License Date;
|
·
|
and
5% of net sales where the first sale occurs beyond six years after the
License Date.
|
·
|
In
each case, the minimum earned royalty payment paid shall be $15,000
commencing the year of the first commercial sale of the licensed
technology, subject to increase, if and as we expand the SRA License
to include additional patents from time to
time.
|
NOTE 8. 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. From
January 1, 2009 to May 28, 2009 there was not a written agreement; there was
simply a verbal agreement between the two companies. The verbal agreement
ceased on May 29, 2009, pursuant the Company’s execution of a
sublease.
Mark L.
Baum, Esq. (“Baum”) our CEO and president, is a managing member of the Noctua
Fund Manager, LLC. James B. Panther, II (“Panther”), Shrink’s
chairman of its Board of Directors, is also a managing member of the Noctua Fund
Manager, LLC. As of June 30, 2010, there was $12,500 owed to the
Noctua Fund Manager, LLC and no payments have been made to the Noctua Fund
Manager, LLC. This liability is recorded as a related party payable
on our balance sheets.
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. expired April 30, 2010, and has continued as a month to month
tenancy thereafter. For the six months ended June 30, 2010
$36,000 had been paid to Business Consulting Group Unlimited, Inc and nothing
was owed to Business Consulting Group Unlimited, Inc.
F-7
On May
29, 2009, the Company signed an operating agreement (the “Operating Agreement”)
with 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. During October 2009, the Company amended the Operating
Agreement with BCGU, LLC. The amended Operating Agreement (“the “Amended
Operating Agreement”) allows us to retain certain day-to-day administrative
services and management in consideration of a monthly fee of $30,000 per
month. The Amended Operating Agreement also included a $270,000 signature
bonus. The Amended Operating Agreement expires October 1,
2012. For the six months ended June 30, 2010 $84,000 had been paid to
BCGU, LLC and there was $442,000 owed to BCGU, LLC. This liability is
recorded in a accounts payable and accrued expense on our balance
sheets. There is an option within the Amended Operating Agreement
that allows BCGU, LLC to convert outstanding payables related to the Operating
Agreement into a 10% convertible note. Because BCGU, LLC is (i)
substantially managing the affairs of the company, (ii) is familiar with the
affairs of the Company and its strategic direction, (iii) is receiving minimal
cash compensation for its efforts and is deferring most payments, the Company
believes that the transactions are no less favorable to the Company than would
otherwise be available from independent third parties, 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.
The
Company’s rent expense for the six months ended June 30, 2010 and 2009 was
$36,000 and $18,500, respectively.
As of
June 30, 2010, the Company does not have any future minimum lease payments for
the next 5 years.
NOTE
9. CONVERTIBLE
DEBENTURES, PRIVATE PLACEMENT OFFERING
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. This feature 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.
A.
|
Convertible
Debentures – Related Party
|
On May 7,
2009, Shrink Nanotechnologies, Inc. entered into a debt consolidation agreement
(the “Debt Consolidation Agreement”) with Noctua Fund LP to consolidate certain
secured and unsecured liabilities (“Dao Liabilities”) which were originally
assigned to Dao Information Systems, Inc. (“Dao”). While the Company
did make an assignment of the Dao Liabilities to Dao, the Company was legally
responsible to Noctua Fund LP for the principal and interest related to the Dao
Liabilities. The principal amount of the secured part of the Dao
Liabilities was $76,500 and the principal amount of the unsecured part of the
Dao Liabilities was approximately $5,000. All of the promissory notes
underlying the Dao 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 note’s maturity date is October 1,
2012. 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 $.04 per share. In accordance with ASC 470-50, the
Company determined this to be a substantial modification to the debt instruments
and prior to the merger applied debt extinguishment accounting to record a loss
on extinguishment of debt of $100,000. The loss
related to this modification is not reflected in our financial statements as it
was part of Shrink Parent’s (the accounting acquiree) earnings prior to our
reverse merger. At
December 31, 2009 the Company had not made any of the required interest payments
and as a result this note was in default and accruing interest at its default
rate of 18%.
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 these notes 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 did 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 $.04 per share. In accordance with ASC 470-50, the Company
has determined this to be a substantial modification to the debt instruments and
has applied debt extinguishment accounting to record a loss on extinguishment of
debt of $118,121 for the year ended December 31, 2009.
F-8
At
December 31, 2009 the Company had not made any of the required interest payments
and as a result this note was in default and accruing interest at its default
rate of 18%.
Baum,
our president and CEO, and Panther, a director, are equal indirect beneficial
owners of Noctua Fund Manager, LLC, the general partner of Noctua Fund, L.P.,
and are non-voting minority investors in the Noctua Fund,
L.P.
B.
|
Private
Placement Offering
|
During
November of 2009, a confidential financing offering (“the Offering”) was made by
the Company to various private accredited investors. The Offering was
set to close on March 31, 2010. The principal amount of the Offering
is set at $1,000,000 with excess of $1,000,000 accepted at the option of the
Company and consists of convertible notes and stock purchase
warrants. The notes will mature at the one year anniversary of their
effective date, be sold at their face value, accrue interest at 12% and have a
conversion feature that allows the investor to convert the note and accrued
interest into common stock at a price of $0.10 per share. The Class A
common stock purchase warrants are exercisable via cashless exercise commencing
six months after each respective closing, at $0.20 per share, beginning to
expire 3 years from the first closing of this Offering. The investors
shall be issued warrants to purchase such number of common stock as equals fifty
percent (50%) of the number of common shares underlying the convertible note
based on the fixed conversion price. The warrants shall contain a standard
cashless provision, which permits the holder to exercise the warrants if the
stock price is above the exercise price, by turning in warrants and not paying
cash.
From
November 12, 2009 through June 30, 2010, the Company issued 12%
convertible notes totaling $635,000 and detachable series A warrants to purchase
up 3,175,000 shares of common stock in exchange of cash as part of
the Offering. The notes’ maturity dates begin on November 12, 2010
through May 7, 2011. At the time of the issuances, the Company
recorded a $424,935 discount, which represents the intrinsic value of the
beneficial conversion feature. The discount is being accreted over 12
month life of the notes.
In
accordance with FASB ASC 470-20, the Company used the effective conversion price
based on the proceeds received to compute the intrinsic value of the embedded
conversion option. The Company allocated the proceeds received from
the offering to the convertible instrument and the detachable warrants included
in the exchange on a relative fair value basis. The Company then
calculated an effective conversion price and used that price to measure the
intrinsic value of the embedded conversion option. The conversion
price of the convertible notes is equal to $0.10 per share of the Company’s
common stock. The number of shares issuable upon conversion of the
notes shall be determined by dividing the outstanding principal amount, together
with accrued but unpaid interest, to be converted by the conversion price in
effect on the conversion date.
Warrants
associated with the Offering were issued to purchase up to 3,175,000 shares at
an exercise price of $.20 per share. These warrants are valued at
$206,198 and were combined with the
beneficial conversion feature of $424,935, to record a total $631,133 discount
on the convertible notes. The warrants are exercisable at 6 months
following their effective date and begin to expire 11/12/2012. The
warrants were valued using a Black-Scholes valuation model. The
variables used in this option-pricing model included: (1) discount rates of
1.36-1.64% (2) expected warrant life is the actual remaining life of the warrant
as of each period end, (3) expected volatility of 276-300% and (4) zero expected
dividends.
There are
500,000 and 0 warrants immediately exercisable at June 30, 2010 and 2009,
respectively.
Notes
Payable consists of the following at June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||
2010
|
2009
|
|||
14%
convertible notes due October 2012
|
$
|
218,121
|
$
|
218,121
|
12%
convertible notes due November 2010
|
100,000
|
100,000
|
||
12%
convertible notes due January 2011
|
225,000
|
-
|
||
12%
convertible notes due February 2011
|
110,000
|
-
|
||
12%
convertible notes due April 2011
|
50,000
|
-
|
||
12%
convertible notes due May 2011
|
150,000
|
-
|
||
Total
convertible notes payable
|
$
|
853,121
|
$
|
318,121
|
Less:
Discount on notes
|
(387,983)
|
(86,389)
|
||
Less:
Current portion
|
(465,138)
|
(231,732)
|
||
Long-term
portion
|
$
|
-
|
$
|
-
|
F-9
The
following represents minimum payments due for notes payable:
Amount
|
|
2010
|
318,121
|
2011
|
535,000
|
2012
|
-
|
Total
|
$ 853,121
|
The
Company has notes payable in the amount of $218,121 with a maturity date of
October 1, 2012. These notes are currently in default due to
non-payment of monthly interest accruals and are classified as current
liabilities on the balance sheet. Interest payments are due
monthly on these notes.
NOTE
10. DERIVATIVE
INSTRUMENTS
Effective
for financial statements issued for fiscal periods beginning after December 15,
2008, or interim periods therein, FASB ASC 815 (formerly, EITF 07-05) requires
that warrants and convertible instruments with certain conversion or exercise
price protection features be recorded as derivative liabilities on the balance
sheet based on the fair value of the 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. FASB ASC 820 establishes a fair value hierarchy that
prioritizes the use of inputs used in valuation methodologies into the following
three levels:
·
|
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets. A quoted price in an active market provides the most
reliable evidence of fair value and must be used to measure fair value
whenever available.
|
·
|
Level
2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data.
|
·
|
Level
3: Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in
pricing an asset or liability. For example, level 3 inputs would relate to
forecasts of future earnings and cash flows used in a discounted future
cash flows method.
|
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.
NOTE
11. COMMON
STOCK
The
Company has made various private issuances of securities to fund its operations
and satisfy obligations from time to time.
Following
a shareholder action described in a Form 14C filed on with the Securities and
Exchange Commission on February 15, 2010, the Board of Directors effected a 5
for 1 forward split. All per share amounts and calculations in our
presentation reflect this change.
During
the month of March 2010, pursuant to agreements and commitments the Company
issued 18,382,500 shares of common stock with a value of $3,127,025 as payment
for various services.
During
the month of May 2010, the Company issued 1,090,000 to consultants for services
provided, valued at $222,500.
NOTE
12. WARRANTS
The
following summarizes stock purchase warrants as of June 30, 2010 and December
31, 2009:
F-10
Weighted
Average
|
||||
Amount
|
Exercise
Price
|
|||
Outstanding
December 31, 2008
|
-
|
$
|
||
Expired/Retired
|
-
|
-
|
||
Exercised
|
-
|
-
|
||
Issued
|
500,000
|
0.20
|
||
Outstanding
December 31, 2009
|
500,000
|
$
|
0.20
|
|
Expired/Retired
|
-
|
-
|
||
Exercised
|
-
|
-
|
||
Issued
|
2,675,000
|
0.20
|
||
Outstanding
June 30, 2010
|
3,175,000
|
$
|
0.20
|
The
following summarizes the changes in warrants outstanding for the six months
ended June 30, 2010:
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||
Number
|
Weighted
|
Remaining
|
Weighted
|
||||||||
of
|
Average
|
Exercise
Life
|
Number
|
Average
|
Expiration
|
||||||
Date
of Grant
|
Shares
|
Exercise
Price
|
in
Years
|
Exercisable
|
Exercise
Price
|
Date
|
|||||
First
quarter fiscal 2010
|
750,000
|
$
|
0.20
|
2.54
|
-
|
$
|
-
|
1/11/2013
|
|||
First
quarter fiscal 2010
|
250,000
|
0.20
|
2.55
|
-
|
-
|
1/15/2013
|
|||||
First
quarter fiscal 2010
|
125,000
|
0.20
|
2.58
|
-
|
-
|
1/28/2013
|
|||||
First
quarter fiscal 2010
|
375,000
|
0.20
|
2.60
|
-
|
-
|
2/2/2013
|
|||||
First
quarter fiscal 2010
|
50,000
|
0.20
|
2.60
|
-
|
-
|
2/4/2013
|
|||||
First
quarter fiscal 2010
|
125,000
|
0.20
|
2.63
|
-
|
-
|
2/14/2013
|
|||||
Second
quarter fiscal 2010
|
250,000
|
0.20
|
2.81
|
-
|
-
|
4/22/2013
|
|||||
Second
quarter fiscal 2010
|
750,000
|
0.20
|
2.85
|
-
|
-
|
5/7/2013
|
|||||
Total
at June 30, 2010
|
2,675,000
|
$
|
-
|
-
|
$
|
-
|
NOTE
13. 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 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 June 3, 2010, the following stock options
were outstanding:
700,000
options were issued to the members of our advisory board and employees. These
options are valued at $258,220 the options are exercisable for 1-3 years
following their effective dates that begin to expire 9/1/2010. During
the six months ended June 30, 2010 the Company recorded a stock option expense
of $106,399. The options were valued using a binomial valuation
model. The variables used in this option-pricing model included: (1)
discount rates of 0.67-1.04%, (2) expected option life is the actual remaining
life of the options as of each period end, (3) expected volatility of 200%-575%
and (4) zero expected dividends.
The
following summarizes options as of June 30, 2010 and December 31,
2009:
Weighted
Average
|
||||
Amount
|
Exercise
Price
|
|||
Outstanding
December 31, 2008
|
-
|
$
|
-
|
|
Expired/Retired
|
-
|
-
|
||
Exercised
|
-
|
-
|
||
Issued
|
275,000
|
0.22
|
||
Outstanding
December 31, 2009
|
275,000
|
$
|
0.22
|
|
Expired/Retired
|
-
|
-
|
||
Exercised
|
-
|
-
|
||
Issued
|
425,000
|
0.22
|
||
Outstanding
June 30, 2010
|
700,000
|
$
|
0.22
|
F-11
The
following summarizes the changes in options outstanding at June 30,
2010:
Options
Outstanding
|
Options
Exercisable
|
|||||||||
Number
|
Weighted
|
Remaining
|
Weighted
|
|||||||
of
|
Average
|
Exercise
Life
|
Number
|
Average
|
Expiration
|
|||||
Date
of Grant
|
Shares
|
Exercise
Price
|
in
Years
|
Exercisable
|
Exercise
Price
|
Date
|
||||
First
quarter fiscal 2010
|
25,000
|
$
|
0.11
|
1.53
|
25,000
|
$
|
0.11
|
1/10/2012
|
||
First
quarter fiscal 2010
|
25,000
|
0.20
|
1.62
|
25,000
|
0.20
|
2/13/2012
|
||||
First
quarter fiscal 2010
|
25,000
|
0.23
|
1.67
|
25,000
|
0.23
|
3/1/2012
|
||||
Second
quarter fiscal 2010
|
25,000
|
0.17
|
1.78
|
25,000
|
.17
|
4/10/2012
|
||||
Second
quarter fiscal 2010
|
250,000
|
0.26
|
2.80
|
-
|
-
|
4/17/2013
|
||||
Second
quarter fiscal 2010
|
25,000
|
0.21
|
1.87
|
25,000
|
.21
|
5/13/2012
|
||||
Second
quarter fiscal 2010
|
25,000
|
0.15
|
1.90
|
25,000
|
0.15
|
5/25/2012
|
||||
Second
quarter fiscal 2010
|
25,000
|
0.17
|
1.92
|
25,000
|
0.17
|
6/1/2012
|
||||
Total
at June 30, 2010
|
425,000
|
$
|
0.22
|
175,000
|
$
|
0.18
|
NOTE
14. DISCONTINUED OPERATIONS – AUDIOSTOCKS
During
the year ended December 31, 2009, the Company reported a litigation receivable
in the amount of $108,011 and accounts payable to former Series C Preferred
shareholders for $143,825 related to the disposal of its Audiostocks business
segment. During March of 2010, the Company received proceeds from the
litigation settlement to satisfy that receivable and subsequently paid its
former Series C Preferred shareholders balance in full. The Company
has disposed of all assets related to its previous business segment,
Audiostocks. The Company no longer has any assets, or liabilities
that will be or would be transferred, sold or disposed of related to this
business segment.
NOTE
15. SUBSEQUENT EVENTS
The
Company has performed an evaluation of events occurring subsequent to the period
end through the issuance date of this report. Based on our evaluation, nothing
other than the events described below need to be disclosed.
During
the month of July 2010, the Company issued 512,197 common shares to consultants
for services provided, valued at $111,025.
F-12
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.
For ease
of reference we use certain defined terms as defined in “Use of Terms” on page
iii above, in the forepart of this Report.
Background
General
We are,
through our subsidiary, a research, design and development company dedicated to
the commercialization of a nanotechnology platform called the ShrinkChip
Manufacturing Solution™, which we believe represents a new low cost alternative
for fabrication of otherwise costly diagnostic chips and various other nano-size
structures and devices with a multitude of applications. Our
manufacturing technology can be used to manufacture plastic chips and other
devices used 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 solar/renewable energy
businesses.
FIGA™
Business
Due to
very limited cash resources, and to capitalize on government and institutional
grants and our management’s relationships with universities, we have fashioned
our business using a corporate development model called FIGA™ which is an
acronym that stands for: Finance, Industry, Government and Regulatory and
Academia. Under this model, we have sought to access experts – by
building an “expert network” comprised of people with backgrounds in specialized
areas of finance, industry, government and regulatory affairs and
academia. We believe that as a small business with limited resources,
attracting experts from these areas and using them as key drivers for how we
allocate our resources will allow us to add more value quicker for our
shareholders. This model also involves the use of exploring grant
availability and programs where able.
Business
Strategy
Our core
shrink-film technology is a “platform technology” which could have a variety of
applications in numerous fields that relate to the use of and functionalization
of nano-sized structures, including channels, tubes, holes, wrinkles as well as
“cracked” surfaces. These technologies have a number of applications
in a wide variety of industries from the life sciences/diagnostic test
industries to solar and optics applications.
We have
gained access to what we have using a business model that has inexpensively
allowed us to access technologies from two primary sources: (1) university
laboratories, and (2) “secondary” technologies from very large industrial
businesses. Traditionally and historically, university engineering
labs have been used as commercial resources for venture capital organizations
and other funding sources looking for high quality low cost
technology. However, as a result of a number of negative economic
factors over the past few years which have “dried up” these funds, Shrink has
been able to strategically locate select engineering – primarily in the
biomechanical engineering space – and develop sponsored research arrangements
that fund critical research and also provide us with access to intellectual
property with commercial potential.
We have
recently undertaken a program to develop commercial relationships with larger,
multi-national United States-based industrial companies in order to potentially
work with their technologies and products which have been abandoned or
“orphaned” for one or a number of reasons – primarily due to a limited market
opportunity. We are actively seeking to develop licensing agreements
in this regard to provide the right to develop and market these “orphaned”
technologies and product lines.
1
We
presently have the right to exclusively license (with the exception of certain
rights reserved by universities for educational purposes) a number of
technologies (as well as future technologies developed through additional
university-specific agreements), pursuant to agreements we have with the Regents
of the University of California (the “UC Regents”), as described more fully
herein and in our previous reports and press releases. Some of these
rights stem from research we sponsored or have agreed to sponsor.
In
addition to our licensed technologies, we may develop technologies on our own as
a result of our research or joint development activities.
We also
have developed a Science Advisory Board (“SAB”) and a Product Development and
Commercialization Committee (Life Sciences) to the Company. Through
the relationships with our SAB members, we have the exclusive right to certain
intellectual property rights derived from their respective work for the Company
as a part of the Shrink SAB.
We are
focusing on developing and commercializing our technologies in three specific
business segments which are discussed in greater depth in this Report: (1) our
NanoShrink™ business, (2) our StemDisc™ business and (3) our Quantum Dot-based
Solar business. As we develop additional uses for our core “Shrink
Film” abilities (discussed below), we will likely add to the market segments we
seek to enter. All of the business segments we presently are engaged
in are relatively immature and require additional development before products
may ultimately reach a commercial customer.
We also
intend to review, and as such opportunities present themselves, seek to acquire
synergistic assets and businesses, although these are not within the Company’s
primary initial focus as management believes that initial development,
manufacturing and commercialization will be most economical through joint
venture or contractor venues.
Core
“Shrink Film” Abilities
Our core
technologies allow for the flexible and rapid design, prototyping and
manufacture of certain complex chips, polymer-based nano-structured systems and
microfluidic diagnostic tools and measuring devices. Our low cost
manufacturing processes avoid costly expenditures such as factories with
clean-rooms and complex machinery. This is made possible by our
ability to design at a larger scale and then use the inherent properties of our
NanoShrink™ plastic material to functionalize a device by controllably shrinking
the same by a factor of up to 95%, through a proprietary
process. While the markets for what we can do is meaningful, we
believe that our “shrinkable technology” offers, if successfully commercially
accepted, a low cost and flexible replacement for existing chips and related
devices which are currently being manufactured through very expensive and
relatively inflexible manufacturing processes primarily using soft lithograph, a
technology that was developed from the semi-conductor industry.
These
kinds of devices are most actively used in the life sciences industry and for
diagnostic purposes. However, some of our products, we believe, have viable
applications in the solar manufacturing industry.
Technology
and Intellectual Property
We
license or have the right to license, through various agreements with the
University of California, Merced (“UC Merced”) and the UC Regents, various
patent applications and rights relating to the ShrinkChip Manufacturing
Solution™. A description of these agreements and related
technologies, applications and cost estimates is provided in our Reports, along
with a list of patents and other intellectual property owned by, or licensed to
us. Additionally, we have rights to the filed patent applications
with the US Patent and Trademark Office (“USPTO”) and we possess significant
know-how as it relates to using shrinkable films in the manner in which we seek
to design and build products for our focused markets.
Our most
recent contract for additional intellectual property, the Sponsored Research
Agreement with the UC Regents on behalf of the Irvine, California campus, was
entered into as of May 3, 2010. Under this sponsorship agreement we
agreed to fund various specified research projects and, in the event viable
inventions or discoveries are made, we have the right to exclusively (with
exception for educational or similar purposes) license those fees in exchange
for up front and royalty fees. We have negotiated this agreement to
grant us the exclusive access to license inventions which have been developed by
this laboratory as early as July 1, 2009.
2
Abandonment
of Intellectual Property Rights
Shrink
may, from time-to-time and as a result of rights granted in one or more of its
licensing agreements, take a license to inventions (and the related license to
domestic and international patent application rights) which result from a
sponsored research arrangement. Doing so will trigger the license to
Shrink, but will also trigger the payment of certain fees and various ongoing
financial commitments, all of which have been negotiated and are disclosed in
the license agreement.
The
Company regularly reviews its licenses and patents and, once a technology or
invention has been further commercially vetted, management may determine using
its reasonable business judgment, to not continue to support the development of
a technology, and may therefore abandon its licensing rights and or intellectual
property rights (if not otherwise licensed) with respect to that technology,
invention and the related license. The Company may abandon
intellectual property rights which it formerly thought would be valuable or
which may still have some value but would be too expensive to
maintain. These same abandoned intellectual property rights may have
been a part of a public announcement and even been a key part of the Company’s
operational strategy.
Abandonment
of a license to a particular invention may occur more often as Shrink acquires
more IP rights, and the same inventions are commercially vetted. To
the extent the Company abandons such non-critical intellectual property rights,
the Company may not file a specific abandonment notice. With respect
to the UC Regents, the Company remains obligated, for 90 days after abandonment,
to pay for various costs related to abandoned intellectual property, including
attorneys’ fees and maintenance costs.
To the
extent that Shrink abandons or otherwise loses its rights to intellectual
property and patent applications or full patent rights which are material and
critical to the execution of Shrink’s stated business goals, regardless of the
reason, the Company will make the appropriate filings with the SEC.
Corporate
History and Structure
General.
We were
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 Shrink Parent changed its name
to Shrink Nanotechnologies, Inc. in anticipation of its acquisition of Shrink
Technologies, Inc. On May 29, 2009, the Company entered into and
completed a share exchange agreement with the former principal of Shrink
Technologies, Inc., for the acquisition of Shrink which held and continues to
hold, most of our related business assets and has agreements with both UC Merced
and the UC Regents granting the Company the exclusive rights to the Shrink
related technologies discussed herein. We have two additional,
recently organized, business-specific operating entities: Shrink Solar, LLC and
Shrink Chips, LLC. All subsidiary entities to Shrink
Nanotechnologies, Inc. are 100% owned. Below is a chart of our
present corporate structure:
Shrink
Nanotechnologies, Inc.
(Delaware
Corporation)
|
|||||||
Shrink
Technologies, Inc.
(California
Corporation)
|
Shrink
Chips, LLC
(Delaware
LLC)
|
Shrink
Solar, LLC
(Delaware
LLC)
|
We have
limited liquidity and our funds are allocated towards research, development and
commercialization of our technologies and products, identifying and retaining
executive management that will be able to clear the Company’s path into the life
sciences industry.
3
We have
disposed of our Audiostocks related operations and
assets. Nonetheless, certain information relating to our
previous AudioStocks business is contained towards the end of this “Business”
section below, but should not be relied upon as meaningful in assessing our
Shrink operations.
Our
common stock was quoted on the Over-the-Counter Bulletin Board under the symbol
“INKN” through Tuesday, April 13, 2010. On April 15, 2010, and as a
result of our Forward Split which became effective, the Company’s common stock
trading symbol was changed to “INKND.” Effective as of May 14, 2010,
the symbol for our common stock was changed back to INKN. All
references to share amounts, exercise, sale or conversion prices in this Report
are as adjusted to reflect post Forward Split amounts and prices.
Our
principal offices are located at 2038 Corte Del Nogal, Suite 110, Carlsbad,
California, 92011. Our phone no. is 760-804-8844, and our main
contact person is Mark L. Baum, Esq., our CEO. Our main corporate
website is www.shrinknano.com.
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. At this time, we were in the process of disposing of our
AudioStocks related business.
Summary
of Shrink Acquisition Terms
We
acquired 100% ownership of Shrink from its sole shareholder, Marshall Khine in
May 2009. Shrink’s (and therefore our) primary assets is a license
agreement with the UC Regents granting Shrink intellectual property rights in
patent rights owned by the UC Regents and the rights under the license agreement
with UC Merced. In addition Shrink owns certain trademarks and other
intellectual property.
As
consideration for the acquisition of Shrink, the Company issued an aggregate of
44,444,440 shares of its common stock and 50 shares of its Series C Preferred
Stock, which has since been cancelled (approximately 1/3 of the
Company). In addition, the Company (i) assumed pursuant to the terms
of a note exchange agreement, the outstanding notes due to Noctua Fund LP, which
had an aggregate outstanding balance (at the time) of approximately $118,121,
(ii) agreed to issue 495,500 shares of common stock to the UC Regents as the
initial consideration under Shrink’s license agreement with it (iii) provided
the seller with one seat on the Company’s Board of Directors which went to Mr.
Marshall Khine, Esq., and (iv) agreed to comply with all outstanding commitments
made by Shrink and its consultants, including members of Shrink’s Scientific
Advisory Board and its Business Advisory Board. Additional
information relating the Shrink Acquisition and Shrink itself is contained in
our Current Report on Form 8-K, Filed on June 5, 2009, and exhibits thereto the
provisions of which are incorporated herein.
4
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. Throughout 2009,
the Company successfully and completely initiated transactions and agreements to
dispose of its investor relations and related internet business (i.e. the
AudioStocks business) software in its entirety and do not intend to continue
operations in that operating segment any longer. Any revenues,
expenses, assets or liabilities of the Audiostocks business presented in our
financial statements, currently and historically, have been disclosed or
restated as discontinued operations.
Nonetheless,
certain software and aspects of our remaining pre-existing business related to
our search engine platform (“Stockvert”) have been and will be relied upon for
certain internal accounting functions and may be monetized, either through sale
or license, to 3rd
parties in the future. The sale and/or license of this software is
not being actively pursued by management at this time. In accordance
with FASB ASC 205-20, aspects of the Stockvert business segment do not meet all
of the requirements to be reported in discontinued operations. In
particular, the Company’s use of the accounting functions derived from the
Stockvert business that have been uniquely customized, and therefore
operationally valuable, will not be eliminated from our ongoing
operations.
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 not necessarily be
appropriate or meaningful 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
We
recently obtained patent pending status relating to our StemDisc™ technologies
and for its rapid prototyping system for the manufacture of its LOC
devices. These patents are owned by the Regents of the University of
California and licensed to the Company pursuant to the Company’s existing
License Agreement with them.
A list of
the recently filed patents, patent filing numbers and applications is as
follows:
Patent Name
|
Patent Pending No.
|
Description
|
Honeycomb
Shrink Wells for
Stem
Cells Culture
|
US
61/161,338 and
US
61/177/871
|
Turnable
shrink-induced honeycomb microwell arrays for uniform embroid
bodies
|
Process
for Rapid Microfabrication Using Thermoplastics and
Devices
|
US
61/003,113 and
US
61/018,881
|
Low
cost biochip prototyping station which provides for rapid design,
fabrication and manufacture of customizable biological research
chips
|
We are
required by our license agreement with the California Regents, to pay the costs
of obtaining patents. The Company regularly reassesses the
technologies and applications we have, develop, or acquire an interest in, so as
to determine, in good faith, whether the benefits of obtaining a patent outweigh
the costs of obtaining it and the resulting public disclosure of our processes,
technologies or proprietary technologies. The Company regularly
revisits its patent prosecution and maintenance policies based on its budget
constraints and business goals.
No
assurance can be made that the Company will be able to assess the
patent-worthiness of all its products, or, if a patent is desirable, that the
Company will have sufficient funds or wherewithal to secure or prosecute its
intellectual property rights.
Certain
Foreign Patent Applications Abandoned and Waived
5
We
regularly review the cost-benefit analysis of our various patent applications,
and, depending on costs, capital on hand, and other resources necessary,
management may abandon one or more patent applications in one or more
jurisdictions, and/or, may apply for or prosecute similar or different patents
in different jurisdictions. Management determined, based on limited
need and substantial application and prosecution costs, to waive and abandon
Shrink’s rights to several patents pending. No assurance can be made
that the Company will have sufficient funds to patent or protect all of its
needed intellectual property.
We also
converted a provisional international patent application, for Aligning Cells on
Wrinkled Surface (Filed August 26, 2009) to a completed patent pursuant to 35
U.S.C. Sec. 111(a).
Management
also determined that the costs in converting certain provisional patent
applications to complete applications in the US and internationally outweighed
the benefits to the Company in pursuing the same at this time given the
Company’s limited resources and limited use for these patents at this time.
These abandoned applications include patent applications for our Quantum Dot
Solar Concentrator™, filed in October 2009; our Process for Fabrication of
Nanoholes, Related Structures, and Devices Thereof, filed in October, 2009; our
Quantum Dot Solar Concentrator, filed August 2009; our High Surface Area Micro
and Nano beads, filed September of 2009; and our High Resolution Light Emitting
Devices, filed August 27, 2009. As management believes that commercializing
these patent uses is not viable at this time, and since the Company intends to
focus its resources on maintaining its core technology patents, management
determined that the added extensive costs and resources in maintaining these
patent rights outweighed the benefits to the Company. Despite
abandonment of certain patents, we remain responsible for certain patent
prosecution costs for 90 days after abandonment.
Management
regularly revisits its patent application and prosecution process and may
re-elect to protect these rights (or others) or allow others to lapse from time
to time, depending on whether our needs necessitate the same and subject further
to available funding and technology resources. No assurance can be
made that we will not need these abandoned rights in the future or, that if
needed, that we will be able to re-assert our specific rights or
protections.
Proceeds
of Debt Financing
Between
January 1 through May 7, 2010, the Company issued, on a private basis, $535,000
(inclusive of amounts reported in our Annual Report on Form 10K, as previously
filed) in 12% convertible notes initially convertible (post forward split) at
$.10 per share, and 2,675,000 Series A Common Stock Purchase Warrants,
exercisable at $0.20 per share (or, “Series A Warrants”) as part of a
confidential private financing in exchange for $535,000. The notes are repayable
one year from issuance (with some of the earliest issued notes becoming due in
November 2010) and the warrants are exercisable commencing 6 months from
issuance and expire 36 months from issuance. In the event of a
default, or in certain other events, the notes become exercisable at 80% of the
then effective conversion price, and the Company may force conversion at the
discounted rate at such time.
When
combined with notes and warrants sold during late fiscal 2009 (and not including any prior 14%
convertible notes issued to Noctua Fund, L.P.) the following is a brief summary
of the notes and warrants outstanding:
·
|
$635,000
principal amount 12% convertible notes, currently convertible at $.10 per
share into an aggregate of 6,350,000 shares of common stock (plus shares
issuable as interest), payable one year from their respective issuance
dates, and
|
·
|
3,175,000
Series A Warrants, exercisable at $.20 per share, and expiring three years
from their respective issuance
dates.
|
The
foregoing is a summary only of the 12% note and Series A Warrant
financing. Details of the same may be found below in this Report and
in our Annual Report.
Sponsored
Research Agreement with UC Regents (May 2010)
As of May
3, 2010, Shrink Parent entered into the Sponsored Research Agreement (or, the
“SRA Agreement”) with UC Regents on behalf of the Irvine campus
(“UCI”). The SRA Agreement is for a term of three years or such time
as the research is completed, whichever is longer. The SRA Agreement may be
terminated by the Company subject to satisfying appropriate notice requirements
required under the agreement.
The SRA
Agreement provides, among other things, that the Company will sponsor specified
research relating to development of (i) integrated, manufacturable,
nanostructured substrates for biosensing and testing of new bioassays as well as
assessing viability of other shrinkable materials, and (ii) stem cell tools that
use shrinkable plastic microfluidic technologies, each as more fully provided in
the SRA Agreement. The SRA Agreement provides that the Company shall
sponsor the research costs up to a budget of $632,051, of which $20,000 has been
paid to the California Regents. We have exclusive access to license
intellectual property from the SRA Agreement beginning from July 1, 2009 forward
according to the terms of the SRA Agreement.
6
The
Company’s research sponsorship obligations require it to provide funding (which
may be from the Company or other third parties) totaling $632,051 during the
three year term of the SRA Agreement. Of this amount $202,796 shall
be paid during the 12 month period ended April 30, 2011; $211,311 shall be paid
during the 12 month period ended April 30, 2012; and the remaining $217,944
shall be paid during the 12 month period ended April 30, 2013. The
foregoing payments are to be paid in quarterly installments of ¼ of the total
cash fees payable during such 12 month period.
No
assurance can be made that the Company will attain the funding necessary to
fulfill its funding obligations under the SRA Agreement or, that the research
performed will necessarily produce commercially viable new
inventions. In addition, in the event that discoveries are made, no
assurance can be made that the Company will be able to fund commercialization of
these technologies or that it will exercise its right to an exclusive license of
these products.
Matching
funds from DARPA Co-Funding Agreement
The
Company has become party to a Consortium Agreement (or, the “DARPA Co-Funding
Agreement”) among Academic Partners and Sponsors of the Micro/Nano Fluidics
Fundamentals Focus MF3 Center, which is headquartered at the University of
California, Irvine campus, which provides for partial “matched” funding from the
Defense Advanced Research Projects Agency (or, “DARPA”). The DARPA
Co-Funding Agreement becomes effective as of June 1, 2010. The terms
of the DARPA Co-Funding Agreement provides, among other things, that DARPA will
match the Company, dollar for dollar (i.e. will provide 50% of certain funding
on a “matched” dollar for dollar basis with third parties, if any), for funding
commitments made by the Company, through a sponsored research agreement that is
otherwise eligible for DARPA marching funds. We have not received any
capital commitments for fundings yet and no assurance can be made that we will
make or secure additional financing for research projects that qualify for DARPA
matching funds, or that we will remain eligible for the same.
The
foregoing are the material terms of the SRA Agreement and the DARPA Co-Funding
Agreement, which are both subject to risks and uncertainties, a copy
of which were filed as an exhibit to this report as incorporated from our
Current Report on Form 8-K, filed May 7, 2010.
Critical
Accounting Estimates
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). The preparation of our
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, expenses and related
disclosures. We base our estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates. The significant accounting
policies that are believed to be the most critical to fully understanding and
evaluating the reported financial results include revenue recognition,
recoverability of intangible assets and the recovery of deferred income tax
assets.
Our
intangible assets consist principally of intellectual properties such as
licensing rights and patents. We currently are amortizing certain intangible
assets using the straight line method based on an estimated legal life, of
fifteen years. We began amortization of the NanoShrink related patents in
June of 2008 since patent filings were first being filed. The Company
will re-evaluate its amortization practice once products related to these
patents are put into full production. When our products are placed in
full production we can better evaluate market demand for our
technology.
We
evaluate the recoverability of intangible assets periodically and take into
account events or circumstances that warrant revised estimates of useful lives
or indicate that impairment exists. Once our intellectual property is placed
into productive service, we expect to utilize a net present value of future cash
flows analysis to calculate carrying value after an impairment
determination.
7
As part
of the process of preparing our financial statements, we must estimate our
actual current tax liabilities together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the balance sheet. We must assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, a valuation allowance must be
established. To the extent we establish a valuation allowance or increase or
decrease this allowance in a period, the impact will be included in the tax
provision in the statement of operations.
Six Months Ended June 30,
2010Compared to the Six
months ended June 30, 2009 and the Three months ended June 30, 2010 compared to
the Three months ended June 30, 2009
Results
of Operations; Material Changes in Financial Condition
The most
significant event and change to our Company’s corporate structure during the six
months ended June 30, 2010, was the implementation of the 5-for-1 forward stock
split, the raising of $535,000 of Notes and Series A
Warrants and entry into various agreements with service providers in exchange
for stock compensation aggregating 19,472,500 shares issued during such
period. During this period, the Company also secured certain
additional patent pending applications.
During
the period ended June 30, 2009, the Company, prior to its acquisition of Shrink,
had implemented part of its capitalization restructuring and was still operating
portions of our StockVert business as more fully detailed herein to the extent
material.
Our
Shrink subsidiary is and was, prior to our acquisition, a research and
development company only and did not and does not, have revenues.
As Shrink
is a development stage company, in the health sciences technology industry, we
expect to incur substantial additional investment expenses in (i) supporting our
research obligations, which involves, among other things, further research and
development, and funding license agreement costs, (ii) 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. We have also
exercised our rights under our first license with the UC Regents and have funded
the patent filings thereunder.
During
the six months ended June 30, 2010, we expended approximately $131,141 towards research and
development, of which $61,034 was expended through March of 2010 and $72,107
through June of 2010.
Revenues
Our
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 until at least 2011. We have
disposed of most of our non-Shrink related business, other than StockVert which
has not had revenues in 2010 or 2009.
Operating
Expenses
We had
total operating expenses of $2,642,369 related to
our Shrink operating activities for the six months ended June 30, 2010, as
compared to operating expenses of
$398,469 by our Shrink subsidiary in the same period of 2009. For the
three months ended June 30, 2010 we had $1,221,626 total operating expenses, as
compared to operating expenses of $323,150 incurred during the three months
ended June 30, 2009.
We expect
operating expenses to continue as we invest further in research and development
activities. We do not have capital commitments yet to cover any of
our operating expenses and to date. To date, our capital needs for
Shrink have been funded by our principals, and, more recently, private
convertible debt financing.
Net
Loss From Operations
For the
six months ended June 30, 2010, we had a net loss of $2,919,126 from operations
as compared to a net loss of $412,555 from operations for the
period ended June 30, 2009. For the three months ended June 30,
2010 we had a net loss of $1,387,773, as compared to a net loss of $333,440
during three months ended June 30, 2009. Management attributes
the increase in net loss to, an increase in operational and research
activities relating to our Shrink business and, more recently to our funding
efforts for Shrink.
8
We
anticipate 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.
Discontinued
Operations – Audiostocks Business Division
In 2008
and 2009, we continued to operate our AudioStocks business while selling off its
assets and winding it down through November of 2009.
We
anticipate that further gains and losses relating to previous non-Shrink related
businesses will diminish as we have wound down or sold these related operations
in between late 2008 and 2009. We do not currently incur material
expenses related to these businesses.
Because
we no longer operate in this segment, management believes that extensive
disclosure on this business is not material to an understanding of our Shrink
business. In addition, a comparison of our new research and
development activities to our previous internet and investor relations business
would not be meaningful to investors. Accordingly, the focus of this Report is
on our Shrink related research and development business and business plans and
the previous Shrink business, which is deemed the accounting acquirer after the
Shrink Acquisition in May 2009.
Liquidity
and Capital Resources
Our cash
on hand at June 30, 2010 was $126,762 as compared to $97,878 on hand on June 30,
2010. The recent increase as compared to last year is primarily
attributable to our recent financing activities. Between May and June
of 2010 we have not been actively pursuing any specific financing, but the
Company does intend to raise capital, if able, to continue its operations as
needed.
Given our
current commitments and working capital, we cannot support our operations for
the next 12 months without additional capital (See “Need for Additional Capital”
below and “Risk Factors” section below).
In early
May, 2010, through our entry into a Consortium Agreement with Micro/Nano
Fluidics Fundamentals Focus MF3 Center, as led by the
University of California at Irvine, our research qualified to receive
matched funding from Defense Advanced Research Projects Agency (or, “DARPA”), as
described above. Under the policies of the consortium agreement
the Company’s funded research projects are eligible to receive matched funding
on a dollar-for-dollar basis, for each dollar we invest in certain qualifying
projects. Since we are dependent on our ability to raise
additional capital for our research, no assurance can be made that we will be
able to utilize this funding source. Even if we do raise
additional capital, no assurance can be made that we will dedicate it towards
those same research projects that qualify for DARPA matching funds.
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
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.
9
As part
of the Company’s business plan and when feasible, it regularly elects to pay
consulting and professional fees in stock, as opposed to cash, so as to preserve
capital. In particular, between April and June 2010, the
Company issued an aggregate of 1,090,000 shares of restricted common stock to
three consultants and professional service providers for services rendered, some
of which covers services rendered through mid 2010. The Company
recognizes, however, that share issuances are highly dilutive to investors and
existing shareholders and, not all service providers are willing to accept share
compensation in lieu of cash. Accordingly, the Company is required to
expend funds regularly for services.
The
amount and timing of our future capital requirements will depend upon many
factors, including the level of cash needed to continue our research program,
fulfill our obligations under license agreements, or fund initial production
efforts.
We intend
to retain future earnings, if any, 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 through 2014 until sustained
potential profitability, and that substantial additional costs will be incurred
in order to commercialize its Shrink related technologies. The
Company is not aware as to how much, if any, of these funds will be obtainable
from government grants or offset by joint venturing development of our
products.
Operating
activities
Net cash
used in operating activities was $426,932 for the six months ended June 30,
2010, as compared to $50,650 used in operating activities during the same period
in 2009. The increase in net cash used in operating activities was
mainly due to an increase in business operations, research and development
activities and a lack of revenue.
Investing
activities
Net cash
used in investing activities for the six months ended June 30, 2010 was $39,845,
as compared to $11,912 net cash used in investing activities through June 2009.
The net cash used in investing activities was mainly attributable to patent
pending and other intangible asset acquisitions.
Financing
activities
Net cash
provided by financing activities for the six months ended June 30, 2010 was
$535,000, as compared to $122,500 net cash provided by financing activities for
the six months ended June 30, 2009. The increase of net cash provided by
financing activities was mainly attributable to financing efforts made by
management in order to obtain certain assets, maintain current business
operations and research and development activities.
Trends
To a
great extent, we expect government grants and university/academic funding to be
cyclical based on public policy (e.g. stem cell research limitations), the
amount allocated by governments and universities generally to commercial and
developmental research, and general economic trends. We expect that we will have
to compete diligently in order to secure grants and research funding from
universities. We also anticipate that, for the foreseeable future,
our ability to attain conventional bank or secured financing for our products
will be difficult as a result of our limited fungible assets and banking
constraints that limit commercial loans available to weaker balance sheet
companies like Shrink.
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
Regents. On May 7, 2010, pending a review by our executive and
management team, we requested that UC Merced temporarily halt all expenditures
under the UC Merced Research Agreement.
10
Our
Existing (April 2009) Exclusive License Agreement
The
underlying intellectual property and patent rights to Shrink’s proprietary
technologies are owned by the UC Regents. On April 29, 2009, and
pursuant to the terms of the Research Agreement, Shrink and the UC 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 are
the material terms of the agreement, 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.
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 UC 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.
In
accordance with the License Agreement, we will be required to pay royalties
based on net sales of each licensed product, licensed method or licensed service
by the Shrink, any of its affiliates or joint-ventures. The License
Agreement requires that we pay royalties from all income, which includes gross
proceeds of all income (other than certain royalties required to be paid by our
sub licensees, if any), whether in cash or other considerations and, whether
paid to Shrink or its affiliates or assigns, but explicitly excluding, among
other things, revenues or receipts from debt or equity financings, or
reimbursements for our R&D activities or actual patent prosecution
costs.
Our fees
to the UC Regents under the License Agreement include:
·
|
A $100,000
contract initiation fee paid to the Regents in the form of 495,500 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;
|
·
|
A $25,000
annual maintenance fee, unless, (i) by the time that such annual
maintenance fee is due, Shrink has already commercialized its principal
product and begun paying earned royalties; or (ii) the Company maintains
the Research Agreement or another research agreement at the University of
California, Merced.
|
·
|
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 UC Regents for similar research tools licensed to others.
If we
sublicense the licensed intellectual property, we are also required to pay
licensing fee of 30% of the gross income from the license, as well as earned
royalty payments on sublicensed sold.
Other
Limitations
The
license granted by the License Agreement is further subject to the obligations
to the U.S. government, under 35 U.S.C. Sections 200-212, including the
obligations to report on utilization of inventions under 37 CFR 401.14(h), and
is subject to the National Institute Of Health’s “Principals and Guidelines for
Recipients of NIH Research Grants and Contracts on Obtaining and Disseminating
Biomedical Research Resources” (64 F.R. 72090 Dec. 1999, as
amended).
No
assurance can be made that we will be able to continue developing or, if
developed successfully, commercialize our technologies licensed through UC
Merced. The foregoing are the material terms of the License Agreement
with UC Merced, a copy of which is filled as an exhibit to this Report as
incorporated from our Current Report on Form 8-K filed June 6,
2009.
11
Our
Recent Sponsorship Agreement With the UC Regents and Rights to Enter into an
Additional License Agreement
In May
2010, we entered into a Sponsored Research Agreement (the “SRA Agreement”) with
the UC Regents on behalf of the Irvine campus (“UCI”). The SRA
Agreement is for a term of three years or such time as the research is
completed, whichever is longer. The SRA Agreement may be terminated by the
Company subject to satisfying appropriate notice requirements required under the
agreement.
Sponsorship
Costs. The SRA Agreement provides, among other things, that
the Company will sponsor specified research relating to development of (i)
integrated, manufacturable, nonstructured substrates for biosensing and testing
of new bioassays as well as assessing viability of other shrinkable materials,
and (ii) stem cell tools that use shrinkable plastic microfluidic technologies,
each as more fully provided in the SRA Agreement. The SRA Agreement
provides that the Company shall sponsor the research costs up to a budget of
$632,051, of which $20,000 has been paid to the California Regents.
The
Company’s research sponsorship obligations require it to provide funding (which
may be from the Company or other third parties) totaling $632,051 during the
three year term of the SRA Agreement. Of this amount $202,796 shall
be paid during the 12 month period ended April 30, 2011; $211,311 shall be paid
during the 12 month period ended April 30, 2012; and the remaining $217,944
shall be paid during the 12 month period ended April 30, 2013. The
foregoing payments are to be paid in quarterly installments of ¼ of the total
cash fees payable during such 12 month period.
No
assurance can be made that the Company will attain the funding necessary to
fulfill its funding obligations under the SRA Agreement or, that the research
performed will necessarily produce commercially viable new
inventions. In addition, in addition to other risks and uncertainties
discussed by the Company in its reports, no assurance can be made that the
Company will be able to fund the patent application of new inventions, if any,
or that it will be able to prosecute its patent rights.
Rights to Enter Into Additional
License. In the event that research under the SRA
Agreement yields additional inventions and intellectual property, we have the
right to enter into an additional exclusive license agreement with the UC
Regents (see “Our Existing
(April 2009) Exclusive License Agreement” above). In order to
exercise its rights, we must not be in default of any payment or funding
obligation under the SRA Agreement and, must notify the UC Regents of its intent
to license the additional intellectual property within nine (9) months of
receipt of notice from the UC Regents of the invention. In addition,
among other conditions and limitations, we would be required to pay for patent
application and filing costs relating to additional patents licenses and, to
prosecute its rights as against third parties.
The
license we have the right to enter into under the SRA Agreement, is
substantially similar to the previously disclosed license rights we have with
the UC Regents above, except that we are not required to pay an initial license
issue fee, or initial legal fee reimbursement of $35,000, and the terms of the
annual license fee has changed to a fee of $5,000 for rights to each patent
license acquired by us, with an overall license maintenance fee of $10,000 per
annum commencing the fourth year after entry into the license (the “License
Date”). In addition, we are required to pay a fee of 30% of certain
income generated from third party sublicenses of the additional intellectual
property we license as well as royalty payments of: 2.5% of net sales where the
first sale occurs within three years after the License Date; 4% of net sales
where the first sale occurs between three and six years after the License Date;
and 5% of net sales where the first sale occurs beyond six years after the
License Date. In each case, the minimum earned royalty payment paid
shall be $15,000 commencing the year of the first commercial sale of the
licensed technology, subject to increase, if and as we expand the SRA
License to include additional patents from time to time. A copy of
the prospective license is included as an annex to the SRA Agreement, filed as
an exhibit to our Current Report Form 8-K, filed May 7, 2010, and is
incorporated by reference herein.
As with
other our other intellectual property licenses, even after the Company’s
exercise of its exclusive patent rights with respect to any patent, the UC
Regents reserves the right to utilize such intellectual property in connection
for educational and research purposes, including research conducted for other
sponsors.
The
foregoing are the material terms of the SRA Agreement (which includes the form
of SRA License annexed thereto), which is filed as an exhibit to this Report,
the provisions of which are incorporated by reference herein.
12
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.
FIGATM
Ownership
The
trademark FIGATM and
the domain name www.figa.org are owned by Noctua Fund Manager, LLC, an entity
equally owned by Mark L. Baum, Esq. and James B. Panther, II, both directors and
majority shareholders of the Company. The Company presently does not
pay for the use of the FIGATM
trademark. The branding of Shrink as a “FIGA business” has been
widely used and the Company believes important to explaining Shrink’s business
model of using an “expert network” in order to develop Shrink’s operational
activities. In the future, the Company may be required to pay for the
use of the FIGATM
brand.
Contractual
Obligations
The
Company (on its own or through its subsidiary) is a party to the License
Agreements, Research Agreement and more recent SRA Agreement 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 does not have all of the funds necessary to fund its Research Agreement,
License Agreement or SRA Agreement or to commercialize its products and no
assurance can be made that it will raise the capital necessary to do
so. If we do not fund the Research Agreement or SRA Agreement we will
also risk loss of the licenses. The Company also enters into
agreements with science consultants and professional service providers calling
for payment by issuance of stock in leiu of cash, where able. Some of
these agreements call for cash payments at hourly rates as well, if and as
needed and with prior consent of the Company.
The
Company has not yet, approved hourly cash payments to consultants, but intends
on doing so if and as our cash availability increases.
Sublease
with Business Consulting Group Unlimited, Inc.
The
Company subleases space from Business Consulting Group Unlimited, Inc., an
entity owned by two of our directors and majority stockholders, 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. expired April 30, 2010, and is continuing as a
month to month tenancy. For the six months ended June 30, 2010,
$36,000 had been paid to Business Consulting Group Unlimited, Inc and nothing
was owed to Business Consulting Group Unlimited, Inc.
Operating
Agreement and Services with BGCU, LLC
On May
29, 2009, the Company signed an operating agreement (the “Operating Agreement”)
with 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. During October 2009, the Company amended the Operating
Agreement with BCGU, LLC. The amended Operating Agreement (“the “Amended
Operating Agreement”) allows us to retain certain day-to-day administrative
services and management in consideration of a monthly fee of $30,000 per
month. The Amended Operating Agreement also included a $270,000 signature
bonus. The Amended Operating Agreement expires October 1,
2012. For the six months ended June 30, 2010 $84,000 had been paid to
BCGU, LLC and there was $442,000 owed to BCGU, LLC. This liability is
recorded in accounts payable and accrued expenses on our balance
sheets. There is an option within the Amended Operating Agreement
that allows BCGU, LLC to convert outstanding payables related to the Operating
Agreement into a 10% convertible note. Because BCGU, LLC is (i)
substantially managing the affairs of the company, (ii) is familiar with the
affairs of the Company and its strategic direction, (iii) is receiving minimal
cash compensation for its efforts and is deferring most payments, the Company
believes that the transactions are no less favorable to the Company than would
otherwise be available from independent third parties, 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.
13
The
Company has also incurred debt in order to fund its operations, as discussed
above and elsewhere in this report in respect of $635,000 of 12% convertible
notes issued between November 2009 and May 2010 (with $535,000 of Notes issued
during the six month period ended June 30, 2010), and $218,121 of debt funded by
Noctua Fund L.P. to the Company or its Shrink subsidiary since 2008, as
evidenced by the two 14% Convertible notes, in the aggregate principal amount of
$118,121 and $100,000, respectively, specifically, some of our notes and related
obligations include, in aggregate:
·
|
$635,000
principal amount of unsecured 12% convertible notes, initially convertible
at $.10 per share, into an aggregate of 6,350,000, in addition to shares
that may be issued in respect of interest payments,
and
|
·
|
3,175,000 shares issuable
upon exercise of Series A Common Stock Purchase Warrants issued between
November 2009 and May of 2010, at $.20 per share,
and
|
·
|
$118,121.28
principal amount of 14% convertible promissory note, issued to Noctua
Fund, L.P. in May 2009, an affiliate of Messers Baum and Panther, II,
convertible at $.04 per share into an aggregate of 2,953,032 shares (or
3,386,143 inclusive of 433,111 shares underlying $17,324 of accrued
interest, through July 31, 2010, which note is currently in
default,
|
·
|
$100,000
principal amount of 14% convertible promissory Note issued to Noctua Fund,
L.P., an affiliate of Messers Baum and Panther, II, reflecting loans made
by it in 2008 and 2009, convertible at $0.04 per share into an aggregate
of 2,500,000 shares (or 2,866,667 shares inclusive of 366,667 shares
underlying $14,667 of accrued interest, through July 31, 2010), which note
is also currently in default,
|
The notes
to Noctua Fund, L.P. are currently in default. While Noctua Fund, L.P. has
waived certain anti dilution provisions due to unenforceability and intent, the
Notes are otherwise enforceable, with interest and reimbursement of enforcement
costs. The holder of this Note, or its future assigns, may seek to
enforce repayment of the note and all enforcement costs in court, which would
likely result in a judgment against the company which, among other remedies,
could be enforced by levying against our assets or bank
accounts. To the extent we lose some or all of our assets, we
would be unable to operate, function and raise capital. In addition,
the mere existence of an event of default could hinder our ability to raise
capital or enter into joint ventures or similar obligations.
Moreover,
the notes held by Noctua Fund, L.P. are convertible into over 6,250,000 shares
as of the date hereof, at $.04 per share, which would be highly dilutive to
persons buying our shares in the open market or who have invested in shares or
convertible securities of the Company and higher conversion or exercise
prices. Accordingly, the conversion of the Notes and resale of
the shares could have a material adverse affect on the company and its share
price.
Agreements
for Consulting Services
The
Company strives to save liquid capital by paying for services or satisfying
liabilities, whenever able, by issuance of stock to consultants, services
providers and consultants. The issuance of restricted stock in lieu
of cash payment sometimes requires that the company pay a premium for such
services. Management believes, nonetheless, that given credit crisis,
and difficulty in raising capital for R&D companies such as our own, that
the benefits of issuing restricted stock for services outweigh the downside in
that it leaves cash available to satisfy debts with vendors where
able. Below is a list material agreements entered into with
consultants for services, all of which consultants are independent
parties.
In March
of 2010, we issued 7,250,000 shares valued at $1,232,500 to a consultant in
satisfaction of a one year consulting agreement originally entered into in
January, 2010 for assistance in developing the Company’s biotech and related
products and, in providing research, prototype and product development
assistance on our life sciences related products as well instructional videos
and materials for use in academic and corporate laboratories. The
agreement is renewable by the parties for successive one-year periods and
provides, among other things, for cash compensation at $250.00 per hour
commencing only after June 4, 2010, for services if and as requested and agreed
to by the Company. This agreement also provides that any inventions
or intellectual property created or discovered by the consultant during the
course of providing services for the Company shall belong to the Company and
also provides for indemnification by the consultant for damages from claims
brought as a result of the consultants violation of law or fraudulent
misrepresentations or breach of the agreement.
In March
of 2010, we issued 8,700,000 shares valued at $1,479,000 to a consultant in
satisfaction of a consulting agreement entered into in January of 2010, for
public relations, assistance with press releases and branding, marketing
awareness programs, procurement of third party research and web/statistical
content and investor relations. The
agreement provides, among other things, that any inventions or intellectual
property created or discovered by the consultant during the course of providing
services for the Company shall belong to the Company and also provides for
indemnification by the consultant for damages from claims brought as a result of
the consultants violation of law or fraudulent misrepresentations or breach of
the agreement.
In March
of 2010, we issued 1,500,000 shares valued at $255,000 to a consultant in
satisfaction of a consulting agreement entered into in February of 2010, for
services relating to marketing of our medical device products, and marketing to
researches, academia and medical professionals. The
agreement is renewable by the parties for successive one-year periods and
provides, among other things, for cash compensation at $250.00 per hour
commencing only after July 15, 2010, for services if and as requested and agreed
to by the Company. This agreement also provides that any inventions
or intellectual property created or discovered by the consultant during the
course of providing services for the Company shall belong to the Company and
also provides for indemnification by the consultant for damages from claims
brought as a result of the consultants violation of law or fraudulent
misrepresentations or breach of the agreement.
14
In March
of 2010, we issued 600,000 shares, subject to lock-up and release restrictions
based on continued services over a 3 year period ended March 1, 2013, valued at
$102,000 to an accounting professional for previous and ongoing accounting, SEC
compliance and financial statement preparation and compilation and related
services. These shares vest as to 125,000 shares on each of the date
of the agreement, March 1, 2011 and March 1, 2012, with the remaining 225,000
vesting on March 1, 2013.
In March
of 2010, we issued 180,000 restricted shares valued at $30,600 to a consultant
in satisfaction of a consulting agreement entered into in March 2010, for
services rendered.
In March
of 2010, we issued 112,500 restricted shares valued at $19,125 to a member of
the Scientific Advisory Board, pursuant to an agreement dated as of March 1,
2010.
In March
of 2010, we issued 40,000 restricted shares valued at $6,800 (in addition to
60,000 shares issued in November 2010) as payment for professional services
rendered.
In May of
2010, we issued 40,000 shares valued at $8,000 as payment for professional
services rendered.
In May of
2010, we issued 50,000 shares valued at $10,500 as payment for marketing
services related to press releases and branding.
In May of
2010, we issued 1,000,000 restricted shares valued at $204,000 to Dr. Sayatani
Ghosh, a member of the Scientific Advisory Board (“SAB”) since 2009, pursuant to
her SAB agreement dated March 1, 2009. This agreement has expired by
its terms.
In July
of 2010, we issued 40,000 restricted shares valued at $6,400 as full payment for
professional services rendered during the months of June and July.
In July
of 2010, pursuant to a consulting agreement entered into as of June 1, 2010, we
issued 76,364 restricted shares valued at $12,000 as payment for solar research
and film manufacturing related consulting services rendered during the months of
June and July. The consulting agreement is for a one year term and
requires payment of a monthly fee of $6,000 to be paid in shares of common stock
of the Company for the duration of the term unless terminated
early.
In July
of 2010, we issued 395,833 restricted shares valued at $92,625
as payment for financial advisory related services, and development
of financial models and due diligence research between December 2009 through May
of 2010. In addition, the Consultant was paid cash compensation of
$27,708 in 2010.
Some of
the agreements under which these shares were issued have not been committed to a
writing and were entered into based on an oral agreement between the independent
contractor(s) and a company representative and subsequently memorialized. These
shares are cancellable based on performance of said independent
contractor.
The
foregoing agreements do not require us to make further issuances (except for the
issuances for professional services which continue insofar as such persons
continue to provide services and agree to accept shares in lieu of cash
payment. The foregoing are the material terms of the foregoing
agreements, copies of which, to the extent material, are annexed as exhibits to
this Report.
All stock
issuances are subject to Board approval.
Recent
Accounting Pronouncements
We are
not aware of any additional pronouncements that materially affect our financial
position or results of operations.
Research
and Development
15
The
Company estimates that at least $133,141 was spent during six months ended June
30, 2010, as compared to $73,554 during the same period in 2009 on R&D
activities. During the three months ended June 30, 2010 the
Company estimates it spent $72,107, as compared to $33,062 during the same
period in 2009 on R&D activities.
Employees
We
currently do not have any full time employees. We obtain most of our
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 $30,000 per month pursuant to an operating agreement and lease
space through an affiliated entity, the Business Consulting Group Unlimited,
Inc. on a month to month bases (see “Properties” below). The
foregoing are certain material terms of our amended operating agreement with
BCGU, LLC, a copy of which is provided as an exhibit to this Report as
incorporated from our Form 10-Q, filed November 25, 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. expired April 30, 2010 and the company currently leases the
space based on a month to month tenancy. The foregoing are the
material terms of our sublease with Business Consulting Group Unlimited, Inc., a
copy of which is attached as an Exhibit to our Current Report Form 8-K, Filed
June 5, 2009, the provisions of which are incorporated by reference
herein.
Hedging
and Derivative Activities
As at
June 30, 2010, and, at August 10, 2010, 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.
16
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 March 31, 2010, 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 of internal control over
financial reporting is not effective at the reasonable assurance level based on
those criteria, due to the following weakness described below.
Insufficient segregation of duties
in our finance and accounting functions due to limited personnel.
Insufficient corporate governance
policies.
We intend
to take appropriate and reasonable steps to make the necessary improvements to
remediate these deficiencies and we intend to consider the results of our
remediation efforts and related testing as part of our next year-end assessment
of the effectiveness of our internal control over financial
reporting.
During
our most recently completed quarter ended June 30, 2010, 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.
17
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors
We
have not yet commercialized products from our ShrinkChip™ related technologies
and therefore have not attained revenues from them. The nature of our
business activities subjects us to certain hazards and risks and
uncertainties. We are a research and development stage company that
will need substantial additional capital and development to be able to
commercialize and gain market acceptance for our innovative
products. You should carefully consider the risk factors and all of
the other information included in, or incorporated by reference into, this
Report or any supplement, including those included in our most recent Reports or
documents provided as exhibits to this Report or other Reports as may be
incorporated from time to time.
Our
independent accounting firm and our board of directors, given the present
resources and condition of the company agree that our internal controls are
ineffective and that we may not be able to continue as a going
concern. We are taking steps to correct our internal controls and are
also moving to improve the financial condition of the company.
General
Risks:
You
will suffer immediate and subsequent dilution; and the costs of the securities
you may purchase significantly 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. In addition, the Company currently is indebted to Noctua
Fund, LP for loans made to the Company or Shrink since 2008, as reflected on two
14% convertible promissory notes in the aggregate initial principal amounts of
$118,121 and $100,000, respectively, plus interest, which are convertible at
$.04 per share based on conversion prices at the times of the loans
(approximately 6,250,000 shares, in aggregate as of July 31, 2010), both of
which are currently in default. Therefore, the shareholders will bear
a substantial portion of the risk of dilution and losses.
Some
of our debt is in default and could result in us losing some or all of our
assets.
The
“default” status with respect to the notes owned by Noctua Fund L.P., an
affiliate of certain management, provides them with the right to take
potentially aggressive actions, including levying on some or all of our assets,
in order to recover monies owed. This default could result in an
action against us, including, one for enforcement of their rights byh levying
our assets. The existence of a default also hinders our ability to
raise additional capital or enter into long term contractual
commitments.
If
we do not have funds to fund our Research Agreement, License Agreement and SRA
Agreement, we would likely lose some or all of the underlying
assets.
The UC
Regents contracts specifically provide for budgets which we are required to
fund. If we do not maintain our obligations to fund this research we
could lose one or more of our rights under these agreements, including, without
limitation, the right to license or sublicense additional or existing patents
and intellectual property rights.
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 UC
Regents, and to a lesser extent, CIRM and, we do not have any capital
commitments at this time.
Our
independent auditors have expressed doubt about ability to continue as a going
concern. Shrink is currently a research and development company
only. We do not have grant or capital commitments at this time and
previous Shrink research has been funded by the UC Regents and
CIRM. We do not believe that the sale of our remaining AudioStocks
business related assets or from recent capital raises will be sufficient to fund
our operations or research to any material degree. Nonetheless, we
have no further commitments for grants and grant funds cannot, generally, be
used towards commercialization and manufacturing
efforts. Accordingly, the corporation will be dependent on obtaining
additional external sources of capital in order to fund its operations or even
continue as a going concern.
18
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.
Certain
members of management collectively own or have the right to acquire at low
rates, 85% of our Common Stock. In addition to other risks relating
to control by such persons of the Company and conflicts of interest, the sale of
such shares by management from time to time, will likely have an adverse affect
on our stock price.
Our
common stock only recently began trading, and trades at fluctuating rates,
prices and volumes. Certain members of Management, namely, Messrs.
Baum, Panther and Khine, directly and indirectly own, or have the right to
acquire within 60 days, approximately 144,000,000 shares of our common stock
constituting approximately 85% of our company after issuance to
them. The holding period on most of these securities under Rule 144
of the Securities Act, has accrued or is nearly accrued and many of these shares
are or will be eligible for resale from time to time, subject to volume
limitations. The sale of even a portion of these shares by management
will likely have a material adverse affect on our stock price and, will be
highly dilutive to shareholders.
In
addition to the above risks, the ownership and control by management of such a
large block of shares creates inherent conflicts of interest and, results in
control of the Company by such persons, as discussed elsewhere in these risk
factors. No person should consider an investment in the Company
unless they fully understand the adverse effect that sales by management could
have on our stock price and, further, should only invest if they understand the
risks associated with control by management.
Management
owns a controlling interest of our stock, including, without limitation, our
Series A Preferred Stock; the existence of these derivative securities, may
adversely affect your stock price and our ability to raise capital or into
business ventures and transactions.
Currently,
twenty million shares (20,000,000) of Series A Preferred Stock are issued
and outstanding and held by certain principal shareholders or their affiliates,
namely Messrs. Baum and Panther, II. These shares are all convertible
and contain 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.
|
19
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. Specifically, these members of management are Marshall
Khine, Esq., Mark L. Baum and James B. Panther, II (director
only). 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. Accordingly,
investors should not invest in the Company’s securities without being willing to
entrust the Company’s business decisions to such persons.
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.
There are
a variety of conflicts of interests and related party transactions with members
of management, which control the vast majority of our shares and our
board. 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.
We
have a significant amount of preferred stock, convertible debt and warrants
outstanding. If we issue additional shares or derivative securities
as we raise capital, the notes are converted or the warrants are exercised, you
will suffer immediate and substantial dilution to your common
stock.
The
bylaws allow the board to issue common shares without stockholder
approval. Currently, the board is authorized to issue a total of
475,000,000 common shares, of which less than 45% have been issued or reserved
for issuance as of April 2010. In addition, the board is authorized
to issue up to 25,000,000 preferred shares of which 20,000,000 are already
designated and issue and an addition 5,000,000 “blank check” preferred may be
issued. Currently, 193,371,640 shares of common stock are issued and
outstanding and, the following securities are outstanding:
·
|
20,000,000
shares of Series A Preferred Stock, owned primarily by Messers Baum and
Panther, II, convertible on a one-for-one basis into common
stock,
|
·
|
$635,000
principal amount of unsecured 12% convertible notes, initially convertible
at $.10 per share, into an aggregate of 6,350,000, in addition to shares
that may be issued in respect of interest payments,
and
|
·
|
3,175,000 shares issuable
upon exercise of Series A Common Stock Purchase Warrants issued between
November 2009 and April of 2010, at $.20 per share,
and
|
·
|
$118,121
principal amount of 14% convertible promissory note, issued to Noctua
Fund, L.P. in May 2009, an affiliate of Messers Baum and Panther, II,
convertible at $.04 per share into an aggregate of 2,953,032 shares (or
3,386,143 inclusive of 433,111 shares underlying $17,324 of accrued
interest, through July 31, 2010, which note is currently in
default,
|
·
|
$100,000
principal amount of 14% convertible promissory Note issued to Noctua Fund,
L.P., an affiliate of Messers Baum and Panther, II, reflecting loans made
by it in 2008 and 2009, convertible at $0.04 per share into an aggregate
of 2,500,000 shares (or 2,866,667 shares inclusive of 366,667 shares
underlying $14,667 of accrued interest, through July 31, 2010), which note
is also currently in default,
|
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.
In
addition, it is not likely that we will be able to raise convertible debt or
equity financing without issuing shares at or below market rates, which would
cause further dilution to shareholders. 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
prices and on such terms and conditions as are determined by the Board in our
sole discretion.
Moreover,
cashless exercise provisions in warrants may have an additional adverse effect
on the Company in that we would be required to reflect the value of such
warrants as a potential liability to the Company. No assurance can be
made, therefore, that we will be able to raise capital, or, if we do, that the
same will not have a material adverse effect on our capitalization or to our
balance sheet.
20
If
additional funds are raised through the issuance of equity securities, the
percentage of equity ownership of the existing stockholders will be reduced. The
issuance of additional shares of capital stock by us would materially dilute the
stockholders’ ownership in us.
Presently,
we have under-qualified management operating the company.
The
present management team is not experienced enough and sufficient in number to
realize the potential of Shrink, especially with respect to developing
commercial diagnostic device products and solar technologies. 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, 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.
Risks
Relating to an Investment in Our Securities:
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 20 million shares of Series A Preferred Stock outstanding (post
Forward Split) and owned primarily by management, all of which contain
significant anti-takeover and change of control
deterrents. Additionally, our certificate of incorporation
authorizes our board of directors to designate any special priority or
preference or other rights of, and issue up to 5,000,000 additional shares
of “blank check” 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.
|
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.
21
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 not be able to raise
capital from certain sources, or list on exchanges or the NASDAQ and
investors could lose confidence in our reported financial information, which
could have a negative effect on the trading price of our stock.
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. Even if we do attain revenues
and become profitable, we intend on reinvesting profits, if any. 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. Our common stock may be
less valuable because a return on your investment will only occur if our stock
price appreciates.
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 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:
22
·
|
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.
|
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.
Risks
Related To Development And Commercialization Of Our Products:
23
Our
technologies are unproven and new. No assurance can be made that our
technologies will work as anticipated, or, even if they do work, will be
commercially accepted.
We are a
primarily R&D company with a newly developing and novel manufacturing
technology. We do not have agreements with purchasers yet and no
assurance can be made that we will be able to make our technology
viable. Even if we are able to continue to fund our research and
development and make our technologies viable, no assurance can be made that our
chips will attain market acceptance in light of the larger, more established
competitors in the life sciences and solar industries. If we are
unable to raise sufficient capital or commercialize our unproven products, our
stock price will decline and you will be adversely affected.
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.
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 agreement for employment or
consulting with Dr. Khine. We 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.
Some
of the processes we require in order to commercialize our products are in short
supply which may delay commercialization and hinder our development of
products.
As an
example, we use a process called hot embossing. The machines that do
commercial scale hot embossing are in short supply and are very
expensive. Therefore, we rely on third party contractors in order to
assist us with prototype commercial scale production and will also perhaps rely
on these same parties for larger scale production, assuming there is market
acceptance. The costs of using these parties may significantly reduce
our profit margins, and to the extent we decide to purchase our own equipment to
build a manufacturing line, such an effort will not only take time, but will
also amount to a significant risk of capital to the Company given our limited
resources.
24
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.
|
We
rely in part, on UC Merced and the UC Regents to file and secure our
patents.
In
addition to the option agreement with the UC 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 UC 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 UC 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.
Shrink
has substantial risk in being sued with respect to its intellectual property
rights.
The
world of intellectual property rights is very murky and it is often very
difficult to determine the specific abilities of a business to use and exploit
intellectual property rights. Moreover even to the extent a business
has solid rights, there could be substantial costs involved in defending ones
rights. Shrink has not completed nor sought any “freedom to operate”
opinions from competent intellectual property counsel with respect to its
related intellectual property rights and it is reasonably to assume that as the
market for Shrink’s products evolves and we produce products for these markets,
Shrink will be a target for such lawsuits. Given our limited
resources to defend ourselves, this may be, from a corporate perspective, a
“life threatening” scenario.
25
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.
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; and
|
·
|
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 from developing potential
products; or
|
·
|
obtain
regulatory approval for the commercialization of our products more rapidly
or effectively than we do.
|
26
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. We are negotiating with third parties for the
development and manufacture of our products initially. However, even
if we are able to develop our products, and penetrate the drug and life science
industries, we may have to construct or acquire a manufacturing facility or
utilize third parties, both of which would require us to train appropriate
personnel. 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, the recent financial crisis has
made it extremely difficult to obtain commercial property or industrial
financing. 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. These and other
unanticipated difficulties or delays in manufacturing our products during
commercialization, in sufficient quantities to meet customer demand could
diminish future demand for our products, cause us to incur greater debt and
materially harm our business.
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.
27
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.
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:
28
·
|
the
pending patent applications we have filed or to which we have exclusive
rights may not result in 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 patents licensed 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 our customers;
|
·
|
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.
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.
29
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. 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.
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.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
In June
and July of 2010, we issued 40,000 shares valued at $6,400 as payment for
professional services rendered pursuant to an existing, month to month
agreement
In July
of 2010, we issued 76,364 shares valued at $12,000 as payment for solar research
related consulting services rendered. There are no further liabilities or
amounts owed to the consultant under this agreement.
In July
of 2010, we issued 395,833 shares valued at $92,625 as payment for consulting
services related to capital raising efforts.
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.
30
We are in
default on payment of interest and principal upon the following
notes: 14% Convertible Note with a principal amount of $100,000 owed
to Noctua Fund, LP and 14% Convertible Note with a principal amount of $118,121
owed to Noctua Fund, LP, a copy of the notes which were filed as an exhibits to
this report as incorporated from our Current Report on Form 8-K, filed May 8,
2009 and our Current Report on Form 8-K, filed June 5, 2009. During
the default period repayment of these notes are accelerated accrue interest at
18% with a total of approximately $251,740 of principal and interest due as at
August 13, 2010.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
None.
Item
6. Exhibits.
The
Following Exhibits are filed herewith
3.1
|
Certificate
of Amendment to Articles of Incorporation (Incorporated by reference from
Annual Report on Form 10K for year ended December 31,
2009)
|
4.1
|
Form
of Convertible Note 12% (Incorporated by reference from Annual Report on
Form 10K for year ended December 31, 2009)
|
4.2
|
Form
of Series A Warrant (Incorporated by reference from Annual Report on Form
10K for year ended December 31, 2009)
|
10.1
|
Subscription
Agreement (Incorporated by reference from Annual Report on Form 10K for
year ended December 31, 2009)
|
10.2
|
Exclusive
License Agreement for Processes for Microfluidic Fabrication and other
Inventions, dated as of April 29, 2009, between Shrink Technologies, Inc.,
a California corporation and the California Regents of the University of
California. (Incorporated by reference from Exhibit 10.2 to Current Report
on Form 8-K, filed June 5, 2009)
|
10.3
|
Research
Agreement between Shrink Technologies, Inc. and the Regents of the
University of California. (Incorporated by reference from Exhibit 10.3 to
Current Report on Form 8-K, filed June 5, 2009)
|
10.4
|
Office
space sublease between Shrink Technologies, Inc., a California corporation
as Tenant and Business Consulting Group Unlimited, Inc. as sublessor,
dated as of May 1, 2009. (Incorporated by reference from
Exhibit 10.4 to Current Report on Form 8-K, filed June 5,
2009)
|
10.5
|
Operating
Agreement, dated as of May 1, 2009 between Shrink Technologies, Inc., a
California corporation, and BCGU, LLC, a Nevada limited liability company.
(Incorporated by reference from Exhibit 10.4 to Current Report on Form
8-K, filed June 5, 2009)
|
10.6
|
First
Amended Operating Agreement. (Incorporated by reference from Exhibit 10.1
to Current Report on Form 10Q, For the Quarter Ended September 30,
2009)
|
10.7
|
Debt
Consolidation Agreement effective as of April 20, 2009 between
AudioStocks, Inc. and Noctua Fund LP, and Form of 14% Notes Issued to
Noctua (incorporated by reference to Exhibit 10.1 and Exhibit 10.2 of
Current Report on Form 8-K dated May 8, 2009)
|
10.8
|
Note
Exchange Agreement, dated as of May 29, 2009. (Incorporated by reference
from Exhibit 10.7 to Current Report on Form 8-K, filed June 5,
2009)
|
10.9
|
Consulting
Agreement with Dr. Michelle Khine (Incorporated by reference from Exhibit
10.7 to Current Report on Form 8-K, filed June 5,
2009).
|
10.10
|
Consulting
agreement Heiner Dreismann (Incorporated by reference from Exhibit 10.1 to
Current Report on Form 8-K, filed June 25,
2009).
|
31
10.11
|
Sponsored
Research Agreement between the Company and The Regents of the University
of California on behalf of Irvine campus, dated as of May 3,
2010. (Incorporated by reference from Exhibit 10.1 to Current
Report on Form 8-K, filed May 7, 2010)
|
10.12
|
Consortium
Agreement among Academic Partners and Sponsors of the Micro/Nano Fluidics
Fundamentals Focus MF3 Center, effective as of June 1, 2010. (Incorporated
by reference from Exhibit 10.2 to Current Report on Form 8-K, filed May 7,
2010)
|
10.13
|
Consulting
Agreement dated as of January 4, 2010, between the Company and Justin
Heit. (Incorporated by reference from Exhibit 10.12 to Quarterly Report on
Form 10Q for period ended March 31, 2010, filed May 24,
2010)
|
10.14
|
Consulting
Agreement dated January 4, 2010, between the Company and OTC Investor
Source, Inc. (Incorporated by reference from Exhibit 10.13 to Quarterly
Report on Form 10Q for period ended March 31, 2010, filed May 24,
2010)
|
10.15
|
Consulting
Agreement dated as of February 15, 2010, between the Company and Andrew
Simon. (Incorporated by reference from Exhibit 10.14 to Quarterly Report
on Form 10Q for period ended March 31, 2010, filed May 24,
2010)
|
10.16
|
Consulting
Agreement dated as of March 1, 2010, between the Company and Andrew Boll.
(Incorporated by reference from Exhibit 10.15 to Quarterly Report on Form
10Q for period ended March 31, 2010, filed May 24,
2010)
|
10.17
|
Consulting
Agreement, dated April 23, 2010, between the Company and Bruce Peterson.
(Incorporated by reference from Exhibit 10.16 to Quarterly Report on Form
10Q for period ended March 31, 2010, filed May 24,
2010)
|
10.18
|
Scientific
Advisory Board Consulting Agreement between the Company and Dr. Sayantani
Ghosh.
|
10.19
|
Agreement
between the Company and Labrum Capital Advisors, L.L.C.
|
10.20
|
Consulting
Agreement dated as of June 1, 2010 between the Company and Equire, LLC.
|
31.1
|
Certification
by Principal Executive Officer pursuant to Sarbanes Oxley Section
302.
|
31.2
|
Certification
by Principal Executive Officer pursuant to 18 U.S.C. Section
1350
|
32
SIGNATURES
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 June 30, 2010, to be signed on its
behalf by the undersigned on August 13, 2010 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)
|
33