UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended :                                  March 31, 2014___________________

 

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                                                                        to

 

Commission File Number:                                  000-49901                            

 

NATURALNANO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		87-0646435
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
763 Linden Ave Rochester NY		14625
(Address of principal executive offices)		(Zip Code)

 

585-267-4848

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes x No ¨

 

Indicate by checkmark if the registrant has submitted electronically and posted on its Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x     No   ¨  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨		Accelerated filer	¨
Non-accelerated filer	¨		Smaller reporting company	x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 597,473,866 as of May 15, 2014

 

 

Table of Contents

 

PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets		3
		Consolidated Statements of Operations		4
		Consolidated Statement of Stockholders’ Deficiency		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements		7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
	Note Regarding Forward-Looking Statements
	Item 4.	Controls and Procedures		18
PART II—OTHER INFORMATION
	Item 1.	Legal Proceedings		19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
	Item 3.	Defaults Upon Senior Securities		19
	Item 4.	Mine Safety Disclosures		20
	Item 5.	Other Information		20
	Item 6.	Exhibits		20
SIGNATURES				21

  

 

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

 

NATURALNANO, INC.

CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,
		2014				2013
		(Unaudited)
Assets
Current assets:
Cash		$	7,753			$	-
Accounts Receivable			12,250				23,206
Inventory			18,725				13,246
Prepaid expenses and other current assets			7,040				7,040
Receivable due from MJ Enterprises			200,000				-
Total current assets			245,768				43,492
Total Assets		$	245,768			$	43,492
Liabilities and Stockholders' Deficiency
Liabilities
Current liabilities:
Notes Payable (See Note 2)		$	4,408,435			$	4,088,425
Accounts payable			414,510				448,127
Accrued expenses			94,752				100,331
Accrued interest			706,807				611,261
Accrued payroll			1,000,784				978,340
Deferred revenue			70,745				30,000
Registration rights liability (See Note 2)			82,489				82,489
Derivative liability (see Note 4)			58,727				32,419
Total current liabilities			6,837,249				6,371,392
Total Liabilities			6,837,249				6,371,392
Preferred Stock - $.001 par value, 10 million shares authorized
Series B – 5,000 issued and outstanding  with an aggregate liquidation preference of $10			248				425
Series C - issued and outstanding  2,587,674 and 2,857,266 respectively with an aggregate liquidation preference value of  $5,175 and $5,715,  respectively			128,295				242,940
Commitments and contingencies (See Note 7)
Stockholder’s Deficiency
Common Stock - $.001 par value 800,000,000 authorized with 597,473,866 and 554,339,146 issued and outstanding, respectively			597,474				554,339
Series D –issued and outstanding 100			-				-
Additional paid in capital			21,248,433				21,176,747
Accumulated deficit			(28,565,931	)			(28,302,351	)
Total stockholders' deficiency			(6,720,024	)			(6,571,265	)
Total liabilities and stockholders' deficiency		$	245,768			$	43,492

 

See notes to consolidated financial statements

 

 

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

		For the three months ended
		March 31,
		2014				2013
Income:
Revenue		$	3,640			$	5,898
Cost of goods sold			485				451
Gross profit			3,155				5,447
Operating expenses:
Research and development			10,735				14,930
General and administrative			94,145				70,301
Total operating expenses			104,880				85,231
Loss from Operations			(101,725	)			(79,784	)
Other expense:
Interest expense, net			(95,547	)			(90,122	)
Net loss on derivative liability			(26,308	)			(9,834	)
Loss on modification of debt			(40,000	)			(30,000	)
Other expense			(161,855	)			(129,956	)
Net loss from continuing operations			(263,580	)			(209,740	)
Net income from discontinued operations			-				9,093
Consolidated net loss		$	(263,580	)		$	(200,647	)
Continuing operations loss per common share - basic and diluted		$	(0.00	)		$	(0.00	)
Discontinued operations income per common share- basic and diluted		$	(0.00	)		$	(0.00	)
Weighted average shares outstanding			581,178,527				142,840,123

 

See notes to consolidated financial statements

  

 

NATURALNANO, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

(unaudited)

 

		Common Stock								Preferred Stock								Additional paid-in				Accumulated				Stockholders’
		Shares				Amount				Shares				Amount				Capital				Deficit				Deficiency
Balance at December 31, 2013			554,339,146			$	554,339				100				-			$	21,176,747			($	28,302,351	)		($	6,571,265	)
Series C preferred shares converted to common stock and change in value			43,134,720				43,135				-				-				71,686				-				114,821
Net loss for the three months ended March 31, 2014			-				-				-				-				-				(263,580	)			(263,580	)
Balance at March 31, 2014			597,473,866			$	597,474				100				-				21,248,433				(28,565,931	)		($	6,720,024	)

 

 

 

 

 

 

See notes to consolidated financial statements

  

 

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the three months ended
		March 31,
		2014				2013
Cash flows from operating activities:
Consolidated net loss		$	(263,580	)		$	(200,647	)
Adjustments to reconcile net loss to net cash used in operating activities:
Fair value adjustment of derivative liabilities			26,308				9,834
Issuance of warrants for services			-				3,077
Loss on modification of debt			40,000				30,000
Changes in operating assets and liabilities:
Increase in inventory			(5,479	)			(60	)
Decrease (increase) in accounts receivable			10,956				(15,500	)
Decrease in other current assets			-				1,173
Increase in accounts payable, accrued payroll and accrued expenses			78,803				115,141
Increase in deferred revenue			40,745				-
Net cash used in operating activities			(72,247	)			(56,982	)
Cash flows from investing activities:
Receivable due from MJ Enterprises			(200,000	)			-
Net cash used in investing activities			(200,000	)			-
Cash flows from financing activities:
Proceeds from senior secured Promissory Notes			280,000				56,005
Net cash provided by financing activities			280,000				56,005
Increase (decrease)  in cash and cash equivalents			7,753				(977	)
Cash at beginning of period			0				6,160
Cash at end of period		$	7,753			$	5,183
Schedule of non-cash investing and financing activities:
Common stock issued for Convertible notes		$	-			$	10,013
Common stock issued for accrued interest		$	-			$	17,325

 

 

 

See notes to consolidated financial statements

 

 

NaturalNano, Inc.

For the three months ended March 31, 2014 and 2013

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Statements

The consolidated financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 are unaudited. However, in the opinion of management of the Company, these financial statements reflect all material adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position and results of operations for such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies.  Accordingly, these financial statements do not include all of the information required by U.S. generally accepted accounting principles for complete financial statements.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Liquidity and Going Concern

Going Concern – The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the three months ended March 31, 2014 of approximately $264,000 and had negative working capital of approximately $6,591,000 and a stockholders’ deficiency of $6,720,024 at March 31, 2014. Since inception the Company’s growth has been funded through a combination of convertible and non-convertible debt from private investors and from cash advances from its former parent Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from the uncertainty.

 

As of March 31, 2014, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lenders waivers and maturity extensions received from the lenders.

 

Basis of Consolidation

The consolidated financial statements include the accounts of NaturalNano, Inc. (“NaturalNano” or the “Company”), a Nevada corporation, and its wholly owned subsidiary NaturalNano Research, Inc. (“NN Research”) a Delaware corporation. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Description of the Business

NaturalNano (the “Company”), located in Rochester, New York, is engaged in the development and commercialization of material science technologies with an emphasis on additives to polymers and other industrial and consumer products by taking advantage of technology advances developed in-house. The Company’s current activities are directed toward research, development, production and marketing of its proprietary technologies relating to the treatment and separation of nanotubes from halloysite clay and the development of related commercial applications for:

 

	•	cosmetics, health and beauty products
	•	polymers, plastics and composites

 

 

Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate such estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

 

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to March 2014 considering company specific factors including the changes in forward estimated revenues and market factors.  Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities in the Company’s capital structure.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Income Taxes

The Company accounts for income taxes in accordance with ASC 740 which requires the recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.  The Company recognizes penalties and accrued interest related to unrecognized tax benefits in income tax expense. Income tax expense was $0 for the three month periods ending March 31, 2014 and 2013.

 

Loss Per Share

Basic loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share gives effect to dilutive convertible preferred stock, convertible debt, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred.

 

As of March 31, 2014 and 2013 there were 2,016,101,890 and 4,394,378,211 shares, respectively, underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. These potentially dilutive shares have been limited by certain debt and equity agreements with Platinum, Platinum Advisors, Alpha Capital and Technology Innovations LLC. These agreements provide limitations on the conversion of the dilutive instruments such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such instruments shall be limited to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock. The Company does not have sufficient authorized shares to satisfy conversion of all the potentially dilutive instruments.

 

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted, would have a material effect on the accompanying financial statements.

 

2.

NOTES PAYABLE

 

Notes payable consisted of the following:

 

Notes Payable		March 31, 2014				December 31, 2013
Senior Secured Convertible Notes		$	3,124,403			$	3,124,403
Senior Secured Promissory Notes			972,932				692,922
Subordinated Secured Convertible Note			311,100				271,100
		$	4,408,435			$	4,088,425

 

Senior Secured Convertible Notes and Senior Secured Promissory Notes

As of March 31, 2014, Notes payable on the balance sheet includes $4,097,335 ($3,817,325 at December 31, 2013) for senior secured convertible and non-convertible promissory notes.  As further described below, the Company has defaulted on certain provisions of the notes. Platinum Long Term Growth and Merit Consulting, LLC (to whom Platinum Advisors has assigned their ownership interest in notes receivable from the Company) have granted waivers of default on their outstanding principal balance through June 30, 2014. Alpha Capital Anstalt (to whom Longview Special Finance has assigned its ownership interest in notes receivable to the Company) has granted a waiver of default on their outstanding principal through June 30, 2014.

 

The Loan and Security Agreement and the related underlying convertible notes issued in accordance with the Initial Note agreement had the original conversion price of $3.74 (as cited in the March 7, 2007 agreement) which was adjusted to a conversion price of $0.085 in accordance with the anti-dilution provisions of this loan and security agreement. This conversion price adjustment was triggered as a result of the issuance of the 2008 Promissory Notes (described below) on September 29, 2008 thereby resulting in a reset of (a) the conversion price of the Initial Notes, (b) the exercise price of the warrants related to the Initial Notes and (c) the number of shares that may be purchased by such warrants. As compensation for forbearance from the lenders in 2012, the conversion rate was further adjusted to 75% of the lowest VWAP for the 1, 5 or 10 days immediately prior to the conversion.

 

During the three month period ended March 31, 2013, the Company issued 9,500,000 shares of common stock to Alpha Capital Anstalt upon the conversion of $10,013 of outstanding principal due on the 8% Senior Secured Convertible Notes held by Longview Special Finance. Also during this period the Company issued 9,500,000 shares of common stock to Alpha Capital Anstalt upon the conversion of $8,550 of interest due on the 8% Senior Secured Convertible Notes held by Longview Special Finance.

 

2014 Senior Secured Promissory Notes

During the first quarter of 2014, the Company entered into various Senior Secured Promissory Notes aggregating to $280,000 with Platinum, Longview and Alpha (“the 2014 Senior Secured Promissory Notes”). The 2014 Senior Secured Promissory Notes are secured by, among other things, (i) the continuing security interest in certain assets of the Company pursuant to the terms of the Initial Notes dated March 7, 2007, (ii) the Pledge Agreement, as defined in the Initial Notes, and (iii) the Patent Security Agreement, dated as of March 6, 2007. The proceeds from the 2014 Senior Secured Promissory Notes are available for general working capital purposes and cannot be used to redeem or make any payment on account of any securities due to the Lenders.  The 2014 Senior Secured Promissory Notes bear interest, in arrears, at a rate of 8% per annum and are payable in cash as follows: $80,000 due on June 30, 2014, and $200,000 due on February 7, 2014.  The $200,000 note has been extended through a forbearance agreement and is now due and payable on June 30, 2014.

  

 

Subordinated Secured Convertible Note

 

Convertible Notes

On December 4, 2009, the Company received net proceeds of $197,500 pursuant to the terms of a subscription agreement dated as of November 30, 2009 with Cape One an accredited investor.  Pursuant to the terms of the Subscription Agreement the Company issued (i) a 10% Subordinated Secured Convertible Promissory Note (“the 10% Convertible Note”) in the principal amount of $225,000 and (ii) a five-year common stock purchase warrant to purchase 2,647,059 shares, subject to certain anti-dilution provisions in the agreement of the Company’s common stock, par value $0.001 per share at an exercise price of $0.425 per share. The balance of this note as of March 31, 2014 is $311,100, a net result of increases as consideration for forbearance and conversions of principal.

 

The 10% Convertible Note had a 15-month term, bears interest at 10% per annum and is secured by certain assets of the Company pursuant to a security agreement, dated November 30, 2009.  The 10% Convertible Note is convertible into Common Stock at any time prior to maturity (provided that such conversion does not result in the holder and its affiliates beneficially owning in excess of 4.99% (9.99% upon 61 days’ prior written notice) of the issued and outstanding Common Stock at $0.085 per share (the “Conversion Price”), subject to adjustment upon the occurrence of certain anti-dilution events.  Interest under the Note is due quarterly in cash or if registered, in the Company’s common stock at a 20% discount in accordance with a formula set forth in the 10% Note.  The 10% Note and security interest is subordinate to certain outstanding senior indebtedness of the Company held by Platinum Long Term Growth IV, LLC, Platinum Advisors LLC and Longview Special Finance Inc. (“Senior Lenders”). Upon the occurrence of Events of Default as set forth in the Note, the principal and interest due under the Note may be accelerated and the interest rate payable may be increased to 18%.  The company has entered into various forbearance agreements between Cape One and the Company which extended the due date of the outstanding principal and interest.  

 

During the three month periods ended March 31, 2014 and March 31, 2013, the Company entered into forbearance agreements with Cape One which extended the due dates of certain outstanding notes and accrued interest.  As consideration for this forbearance, the lender increased its principal balance outstanding by $40,000 and $30,000 in the respectively periods cited above. These amounts were added to the principal balance of the Initial Notes and the Company recognized a loss on modification of debt of $40,000 and $30,000, respectively in the three month periods ended March 31, 2014 and March 31, 2013. This note has been extended through forbearance agreements and is now due and payable on May 30, 2014.

 

During three month period ended March 31, 2013, the Company issued 9,000,000 shares of common stock to Cape One in payment of $8,775 of interest expense obligations on the Subordinated Secured Convertible Note.

  

Registration Rights Agreement

On March 7, 2007, the Company entered into a Registration Rights Agreement with the Agent and the other investors, pursuant to which the Company agreed to prepare and file within 60 days of the March 7, 2007 agreement, a registration statement for resale under the Securities Act of 1933, the common stock issuable upon the exercise of the Warrants, in payment of interest on, or upon conversion of, the Notes. The Company further agreed to use its best efforts to cause the Registration Statement to be declared effective 120 days following the March 7, 2007 agreement date, or within 150 days if the Company receives a comment letter from the SEC, and to maintain such Registration Statement for the two year period following this date. This agreement allows for liquidated damages based on a daily amount of 0.0333% of the principal amount of the notes relating to the common stock issuable upon conversion of the Notes included in the Registration Statement.

 

As of March 31, 2014, the registration statement had not been updated with the requisite SEC filings and as such, the Company was in default of this provision of the Registration Rights Agreement. The lenders have provided the Company forbearance agreements related to this default through June 30, 2014. The Company recorded a total of $146,028 in such liquidated damages as of December 17, 2007, the date the registration statement was declared effective. As of December 31, 2007, $63,539 of this obligation was paid in cash and $82,489 was recorded as an accrued liability. The lender has the option to settle the liquidated damages in common stock valued at the average price for the five days prior to the end of a payment period. At March 31, 2014 and December 31, 2013 the outstanding balance for this obligation was $82,489.

 

 

3.

DERIVATIVE LIABILITY

 

For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending of the firm value from December 2006 to December 2013 considering company specific factors including the changes in forward estimated revenues and market factors.  Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative and other securities in the Company’s capital structure.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

The Company’s derivative liabilities as of March 31, 2014 are as follows:

 

	·	The debt conversion feature embedded in the 8% Senior Secured Convertible notes entered into in March 2007 which contains anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price (described in Note 2.)
	·	The debt conversion feature and the 2,647,059 warrants exercisable at $0.425 per share granted in connection with the 10% Subordinated Secured Convertible debt entered into in November 2009. These agreements contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below the exercise price (described in Note 2.)

·

Derivative liabilities related to outstanding warrants and options due to the Company having insufficient authorized shares to satisfy the exercise or conversion of all outstanding instruments as of March 31, 2014.

 

The fair value of the derivative liabilities as of March 31, 2014 and December 31, 2013 are as follows:

 

		March 31, 2014				December 31, 2013
Derivative Instrument
8% Notes conversion feature		$	44,137			$	18,045
10% Notes conversion feature			5,920				3,946
Warrant liability			8,670				10,428
Total		$	58,727			$	32,419

 

The increase in the fair value of the derivative liability of $26,308 was recognized as a loss on change in derivative liability in the statement of operations for the three months ended March 31, 2014.

 

Significant fluctuations in the variables used in calculating the value of the Company’s derivative liabilities could have significant impact on the fair market valuation.

 

Fair Value Valuation Hierarchy Measurement

ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.

 

	·	Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
	·	Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
	·	Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company’s derivative liability was determined utilizing Level 3 inputs.

 

 

 

4.

STOCKHOLDERS EQUITY

 

As of March 31, 2014 the Company was authorized to issue up to 800,000,000 shares of common stock and 10,000,000 shares of preferred stock.

 

Increase in Authorized Common Stock: On July 1, 2013 the Company received a unanimous written consent in lieu of a meeting from the members of the Board of Directors and a written consent from the Series D stockholder to amend its articles of incorporation to increase the Company’s authorized common shares to 800,000,000 shares of common stock. As of March 31, 2014 there were 1,974,710,583 shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. The Company does not have sufficient authorized shares to satisfy conversion of all the potentially dilutive instruments.

  

Preferred Stock Issuances

On September 29, 2008 Platinum and Longview agreed to exchange detachable warrants to purchase 71,691,180 shares of common stock of the Company for $0.085 per share held by such Investors related to the March 6, 2007 convertible notes payable for 5,000,000 shares of preferred stock.

 

On October 7, 2008, the Company filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series C Preferred Stock (the “Series C Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Platinum Long Term Growth IV, LLC, evidencing 4,250,000 shares of Series C Convertible Preferred Stock of the Company (“Series C”).  On October 7, 2008, the Company also filed a Certificate of Designation of Rights, Preferences, Designations, Qualifications and Limitations of the Series B Preferred Stock (the “Series B Designation”) with the Secretary of State of the State of Nevada, and prepared a preferred stock certificate for delivery to Longview Special Funding, Inc., evidencing 750,000 shares of Series B Convertible Preferred Stock of the Company (“Series B”).  The Series B and Series C have an aggregate liquidation preference of $10,000 and participate in any dividends or distributions to the common shareholders on an as converted basis.

 

Each share of the Series B and Series C Convertible Preferred Stock is convertible into 160 shares of the Company’s common stock and votes on an as-converted basis (with each share having 160 votes).  The conversion rate was reduced to 9.41 as a result of the 2012 reverse split, but was subsequently changed back to 160 as part of the consideration related to 2012 forbearance agreements. Both the Series B and Series C designations limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to no more than 4.99% of the votes attributable to the total outstanding common shares.  Accordingly, the votes attributable to the Series B and Series C Convertible Preferred constitutes 4.99% of the aggregate votes attributable to the Company’s outstanding shares on an as converted basis and the votes Series B and Series C Convertible Preferred and the Series C Convertible Preferred, voting together represent approximately 9.98% of the aggregate votes attributable to the Company’s outstanding shares (on an as converted basis).  The Series B Convertible Preferred Stock has an aggregate liquidation value of $10 and the Series C Convertible Preferred Stock has an aggregate liquidation value of $5,175.

 

As a result of the Company not having sufficient authorized shares to satisfy the conversion of all outstanding convertible debt, convertible preferred stock, warrants and options, the Series B and C preferred shares have been moved into temporary equity classification on the balance sheet.

 

During first quarter of 2014, Platinum elected to convert 269,592 shares of their Series C preferred shares into 43,134,720 common shares at the conversion rate of 160 common shares per each Series C share.

 

 

 

During the first quarter of 2013, Alpha elected to convert 137,500 shares of Series B preferred shares owned by Longview into 22,000,000 common shares at the conversion rate of 160 common shares per each Series B share. During first quarter of 2013, Platinum elected to convert 508,022 shares of their Series C preferred shares into 81,283,520 common shares at the conversion rate of 160 common shares per each Series C share.

 

Common Stock Issuances

During the three months ended March 31, 2013, the Company issued an aggregate of 18,500,000 shares in satisfaction of $8,550 of interest obligations to Alpha Capital and $8,775 of interest obligations to Cape One. Also during this period, the Company issued an aggregate of 9,500,000 shares of its common stock in satisfaction of $10,013 of principal obligations to Alpha Capital.

  

Warrants Grants

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of March 31, 2014 and December 31, 2013 there were common stock warrants outstanding to purchase an aggregate of 118,235,294 shares of common stock pursuant to the warrant grant agreements.

 

A summary of the outstanding warrants is presented below: 

 

		2014
		Shares				Weighted Average Exercise Price				Weighted Average Remaining Life-years
Outstanding at January 1, 2014			118,235,294			$	0.0142				5.9
Granted during the first quarter of 2014			-
Cancelled or forfeited			-
Warrants outstanding at March 31, 2014			118,235,294			$	0.0142				5.65
Warrants exercisable at March 31, 2014			118,235,294			$	0.0142				5.65

 

5.

INCENTIVE STOCK PLANS

 

A summary of the status of the outstanding incentive stock plans is presented below at March 31, 2014:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Life-years
Options outstanding at January 1, 2014			709,020			$	3.57				2.11
Options granted/exercises/cancelled/forfeited			-
Options outstanding at March 31, 2014			709,020			$	3.57				1.86
Options exercisable at March 31, 2014			709,020			$	3.57				1.86

 

All compensation costs for the above options have been previously recognized in operations. 

 

6.

DISCONTINUED OPERATIONS

 

In the second quarter of 2013, the Company ceased all activities associated with the Medical Board business segment. The Company assessed this segment and determined that inadequate income had been generated relative to the efforts of production and administrative support. The Statement of Operations for the three month period ended March 31, 2013 reflects the Medical Board business as a discontinued operation. The first quarter of 2013 included revenues from this discontinued operation of $13,000, cost of goods sold of $3,907 and gross margin of $9,093. In connection with this decision to exit the Medical Board business, the Company filed a Certificate of Dissolution on May 10, 2013 with the state of New York under section 1003 of the Business Corporation Law in connection with the unanimous written consent of the shareowners of Combotexs. The Nanotechnology business remains as the Company’s only reportable operating segment.

 

 

7.

SUBSEQUENT EVENTS

 

Purchase Agreement with MJ Enterprises

On January 30, 2014, NaturalNano, Inc. entered into a purchase agreement to acquire all the issued and outstanding membership units of MJ Enterprises (“MJE”) from Jackson August Holdings, LLC, JFish, LLC and Adventure CNY LLC. MJE is in the business of developing, manufacturing, marketing, distributing and selling plating products through GSP LLC. a wholly owned subsidiary. In May 2014 the Company determined that the transaction should not proceed after due diligence was completed. MJE has committed to return proceeds advanced by NNAN which includes a loan of $200,000 collateralized with assets of the MJE and Personal Guarantees.

 

8% Convertible Promissory Note- Marlin Capital Investments LLC

On May 8, 2014, the Company entered into $45,000 convertible promissory note with Marlin Capital Investments LLC. The note is due on June 30, 2014, bears interest at 8% per annum and the note and interest accrued on the note are convertible into the Company’s common stock at any time prior to maturity (provided that such conversion does not result in the holder and its affiliates beneficially owning in excess of 4.99% of the issued and outstanding Common Stock) at $0.22 per share subject to adjustment upon the occurrence of certain anti-dilution events.  

 

Grant of Warrants

On May 8, 2014, the Company granted 48 million warrants to certain employees and consultants with an exercise price of $0.0014 per share, a term of 5 years and which allow for cashless exercise. The Company’s stock price was $.0022 per share on the date the warrants were granted.

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q and other reports that we file with the SEC contain statements that are considered forward-looking statements that involve risks and uncertainties. These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar expressions. Such forward looking statements include statements addressing operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to revenue realization, revenue growth, earnings, earnings per share, or similar projections. These statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this report. You should not place undue reliance on these forward-looking statements.

 

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors such as:

 

	·	the ability to raise capital to fund our operations until we generate adequate cash flow internally;
	·	the terms and timing of product sales and licensing agreements;
	·	our ability to enter into strategic partnering and joint development agreements;
	·	our ability to competitively market our controlled release and filled tube products;
	·	the successful implementation of research and development programs;
	·	our ability to attract and retain key personnel;
	·	general market conditions.

 

Our actual results may differ materially from management’s expectations. The following discussion and analysis should be read in conjunction with our financial statements included herewith.  This discussion should not be construed to imply that the results discussed herein will necessarily continue in the future, or that any conclusion reached herein will necessarily be indicative of actual operating performance in the future. Such discussion represents only the best present assessment of our management.

 

The forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The Company

 

NaturalNano, Inc. (the “Company”), located in Rochester, New York, is engaged in the development and commercialization of material additives based on nanomaterials technology utilizing halloysite nanotubes (HNTs). The Company provides additives designed to improve the processing characteristics and mechanical properties of engineering thermoplastics and additives designed to optimize release of active agent such as vitamins and fragrance in cosmetics products. NaturalNano holds patents relating to the commercial use of HNTs in composite materials as well as specialized techniques used in the refinement and processing of HNTs and intermediaries that it ships to customers. HNT materials used as a surface treatment have also shown promise in medical research in stem cell collection and in trapping circulating cancer cells. The Company is also exploring surface treatments related to improved adhesion of protective coatings for polymer components used in several commercial applications.

 

NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc., (“CMI”), which was completed on November 29, 2005.

 

 

Liquidity

 

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the three months ended March 31, 2014 of approximately $264,000 and had negative working capital of approximately $6,591,000 and a stockholders’ deficiency of $6,720,024 at March 31, 2014. Since inception the Company’s growth has been funded through a combination of convertible debt from private investors and from cash advances from its former parent Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from the uncertainty.

 

 

As of March 31, 2104 the company owed $5,115,242 to lenders in the form of notes payable and accrued interest. Much of this debt is convertible into the Company’s common stock at terms beneficial to the lenders compared to the market price of the Company’s common stock. The Company continues to rely on these lenders to provide additional loans to cover Company expenses and to provide forbearance agreements extending the due dates of the various notes. As March 31, 2014, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 of the consolidated financial statements for lenders waivers and maturity extensions received.

 

Operating activities

Net cash used in operating activities in the three months ended March 31, 2014 and 2013 was $72,247 and $56,982, respectively. The net loss generated in the first three months of 2014 was $62,933 more than the prior year period.  The Company continues to actively monitor spending and cash outflows in an effort to reduce costs until continuing revenue sources are developed. The Company continues to evaluate opportunities to reduce expenses and improve its liquidity position. We expect that total consolidated spending in 2014 to be comparable to the 2013 levels, although we will continue to invest in product and commercialization efforts as our cash position and liquidity allow.

 

Total non-cash adjustments to reconcile the net loss to the cash used in operations aggregated $66,308 in the first three months of 2014 versus $42,911 in first three months of 2013. The change in these non-cash items reflects, the increase in the fair market value of the derivative liabilities and the first quarter loss on debt modification compared to the first quarter of 2013.

 

Investing activities

During the first quarter of 2014, the Company entered into a purchase agreement to acquire all the issued and outstanding membership interest in MJ Enterprises (“MJE”). In connection with this purchase agreement, the Company advanced $200,000 to MJE. The Company has decided not to pursue this acquisition. This advance is receivable from MJE due on June 30, 2014 and accrues interest at 8%.

 

Financing Activities

Net cash provided from financing activities in the three months ended March 31, 2014 and 2013 was $280,000 and $56,005, respectively. The cash flows from financing activities in the first three months of 2014 include the receipt of an aggregate of $68,000 in proceeds from Platinum Long Term Growth IV and $212,000 in proceeds from Alpha. The cash flows from financing activities in the three months of 2013 reflect a receipt of $47,500 in proceeds from Platinum Long Term Growth IV and $8,505 in proceeds from Alpha.

 

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Our actual results may differ from these estimates.

 

 

Refer to the Company’s December 31, 2013 report on Form 10K for a complete discussion of the critical accounting policies which have not changed during the three months ended March 31, 2014.

 

Comparison of Statement of Operations for the three months ended March 31, 2014 and 2013

 

Revenue and Gross Profit

During the three months ended March 31, 2014 and 2013, the Company recorded $3,640 and $5,898, respectively in revenue from continuing operations. Cost of goods sold was $485 and $451 for the shipments of nanotechnology formulations completed in the respective quarters. Gross margin of $3,155 and $5,447 was realized for the three months ended March 31, 2014 and 2013, respectively.

 

Fluctuations in products sales year over year is a result of the unique market application of these products. The Company expects that it will experience significant variations in sales and gross margins with its Nanotechnology products as it continues to introduce to market and develop new products and related applications. Gross margin realized in the three months ended March 31, 2014 was 87% compared to 92% for three months ended March 31, 2013. In the second quarter of 2013, the Company exited the Medical Board segment operations (See Note 6 “Discontinued Operations”).

 

Operating Expenses

Research and development expenses for the three months ended March 31, 2014 were $10,735 compared to $14,930 for the three months ended March 31, 2013.  Future research and development expenditure levels will be largely depend upon the availability of discretionary cash flow which is anticipated to be limited.

 

		For the three months ended								Variance
		March 31,								increase
Research and Development		2014				2013				(decrease)
Consulting services		$	-			$	6,443			$	(6,443	)
Patent costs			-				134				(134	)
Rent & utilities			7,046				8,296				(1,250	)
All other			3,689				57				3,632
		$	10,735			$	14,930			$	(4,195	)

 

Total general and administrative expenses for the three months ended March 31, 2014 was $94,145 as compared to expenses of $70,301 for the three months ended March 31, 2013. The increase is a result of fees incurred in connection with the assessment of a potential acquisition target. Management continues to actively assess the Company’s operating structure with the objective align cash expenditures and expenses with growth in total revenue.

 

		For the three months ended								Variance
		March 31,								Increase
General and Administrative		2014				2013				(decrease)
Salaries & benefits		$	47,513			$	43,596			$	3,917
Consulting Services			9,123				6,956				2,167
Legal & professional fees			17,598				4,000				13,598
Insurance expense			1,695				1,174				521
Shareholder and Board expense			9,067				6,722				2,345
State tax			104				1,049				(945	)
All other			9,045				6,804				2,241
		$	94,145			$	70,301			$	23,844

 

 

Other Expense

Other expense consists of interest expense on convertible and promissory notes outstanding and other debt related financing and amortization expenses considered components of interest expense for financial reporting.

 

		For the three months ended								Variance
		March 31,								increase
Other Expense		2014				2013				(decrease)
Interest to Senior convertible and promissory notes		$	(83,347	)		$	(77,872	)		$	5,475
Interest to 10% Subordinated secured convertible notes			(12,200	)			(12,250	)			(50	)
		$	(95,547	)		$	(90,122	)		$	5,425
Net loss on derivative liability		$	(26,308	)		$	(9,834	)		$	16,474
Loss on forgiveness/modification of debt		$	(40,000	)		$	(30,000	)		$	10,000

 

The increase in interest expense for the first quarter of 2014 as compared to the first quarter of 2013 is due to incremental borrowing in the first quarter of 2014.

 

The loss on derivative liability in the first quarter of 2014 is the result of updated valuations performed for the Company on instruments that, due to the nature of the instruments and the Company’s current number of authorized common shares being insufficient to facilitate conversion or exercise of all outstanding instruments, result in derivative liabilities.

 

The Company regularly received forbearance agreements from lenders due to the Company being in default of loan requirements. From time to time the lenders, as consideration for the forbearance agreements, add amounts to the principal of the outstanding notes. These amounts are recorded as losses on modification of debt in the income statement. During the three months ended March 31, 2014 and March 31, 2013, $40,000 and $30,000, respectively, was added to the outstanding principal owed to Cape One in exchange for forbearance. 

 

 

Item 4. - Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management is responsible for establishing and maintaining effective disclosure controls and procedures. Our Chief Executive Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the CEO as appropriate, to allow timely decisions regarding required disclosure.

 

Based on this evaluation, and in light of the material weaknesses in our internal control over financial reporting that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties and ineffective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles.

 

 

The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with the segregation of duties were ineffective. Notwithstanding these material weaknesses, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.

 

There can be no assurance, however, that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material developments to the legal proceeding disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

Recent Sales of Unregistered Securities

  

I.

During the first quarter of 2014, the Company issued shares of common stock in transactions exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4 (2) of such Act. We issued these shares in connection with a Notice of Conversion received from Platinum Long Term Growth IV as specified under the terms and conditions of the Preferred C shareholder agreement. These shares were converted at 160 shares for each preferred share:

 

February 3, 2014     43,134,720 shares in conversion of 269,592 shares of Preferred C shares

 

Item 3. Defaults Upon Senior Securities

 

The Company entered into various Forbearance Agreements with Platinum Long Term Growth IV LLC, Alpha Capital Anstalt, Merit Consulting LLC and Cape One LLC effective September 30, 2013 for Platinum, effective June 30, 2013 for Alpha, effective August 20, 2013 for Merit, and effective March 31, 2014 for Cape One (collectively referred to as “the Lenders”) relating to the Company’s default on various terms and conditions with borrowing agreements. The lenders agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Notes until June 30, 2014 for the debt outstanding from Platinum Long Term Growth, Alpha and Merit Consulting and until May 30, 2014 for the debt outstanding from Cape One unless extended by the lenders in their discretion.

 

These Forbearance Agreements also extend to the Registration Rights Agreement entered into by the Company on March 7, 2007. Platinum Long Term Growth and Merit Consulting agreed to forbear from demanding payments defined in these agreements until June 30, 2014.  Alpha Capital Anstalt agreed to forbear from demanding payments defined in these agreements until June 30, 2014.

 

 

 

Item 4. Mine Safety Disclosures

 

 Not applicable.

 

Item 5. Other Information

 

None.

  

Item 6. Exhibits

 

Exhibit No.		Description
10.167		8% Senior Secured Promissory Note dated as of February 5, 2014 in the original principal amount of $9,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. Alpha Capital.
10.168		Forbearance Cape One
31.1		Certification of principal executive officer and principal accounting officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of principal executive officer and principal accounting officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

  

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			NaturalNano, Inc.
Date:	May 20, 2014		/s/ James Wemett
			James Wemett
			President and Director (Principal Executive, Financial and Accounting Officer)