Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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Approximate
date of commencement of proposed sale to the public:
From
time to time after the effective date of this registration
statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, please check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filler, 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. (Check one): o
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer o
Smaller
reporting company x
(Do
not
check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
Amount to be
Registered(1)
Proposed Maximum
Offering Price per Share
Proposed
Maximum Aggregate
Offering Price
Amount of
Registration Fee
Common
Stock, par value $.001 per share, upon conversion of notes
10,913,678(2)
$
0.25(3)
$
2,728,420(3)
$
108(3)
(1)
The
number of shares of common stock registered hereunder represents
a good
faith estimate by us of the number of shares of common stock issuable
upon
conversion of the convertible notes and exercise of the
warrants.
(2)
In
addition to the shares of common stock set forth in the table above,
pursuant to Rule 416 under the Securities Act of 1933, we are registering
an indeterminate number of shares of common stock issuable in connection
with the shares of common stock set forth on the table above in
the event
of a stock split, stock dividend, recapitalization or similar
event.
(3)
Estimated
solely for the purpose of computing the amount of the registration
fee,
based on the average of the bid and asked prices for our common
stock on
the over-the-counter market on July 11, 2008, pursuant to Rule 457(c)
of the Securities Act.
The
Registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a),
may determine.
The
information in this prospectus is not complete and may be changed. The
selling
stockholders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not soliciting an offer
to
buy these securities in any state where the offer or sale is not
permitted.
This
prospectus relates to the resale of up to 10,913,678 shares of common stock,
$.001 par value, of Advance Nanotech, Inc. by the persons identified in this
prospectus who are, or will become, our stockholders and the persons to whom
such selling stockholders may transfer their shares. The shares of common
stock
include up to 10,913,678 shares of our common stock issuable upon the conversion
of our convertible notes.
The
selling stockholders may offer to sell the shares of common stock from time
to
time directly or through one or more broker-dealers, in one or more transactions
through the Over-The-Counter Bulletin Board system or otherwise
over-the-counter, in negotiated transactions or otherwise, or through a
combination of such methods, at fixed prices, which may be changed, at market
prices or at negotiated prices. We are not selling any shares of common stock
in
this offering, and we will not receive any of the proceeds from the sale
of any
shares by the selling stockholders. All expenses of registration of the shares
which may be offered hereby under the Securities Act of 1933 will be paid
by us
(other than selling commissions and fees and expenses of advisers to the
selling
stockholders).
Our
common stock is traded in the over-the-counter market and quoted on the
Over-The-Counter Bulletin Board under the symbol “AVNA.” The last quoted sales
price of our common stock on July 11, 2008 was $0.25.
INVESTING
IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. PLEASE REFER TO “RISK FACTORS”
BEGINNING ON PAGE 4.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
We
have
not authorized any dealer, salesperson or other person to give any information
or to make any representation other than those contained in this prospectus.
You
must not rely upon any information or representation not contained in this
prospectus as if we had authorized it. This prospectus does not constitute
an
offer to sell or the solicitation of an offer to buy any securities other
than
the registered securities to which they relate, nor does this prospectus
constitute an offer to sell or the solicitation of an offer to buy securities
in
any jurisdiction to any person to whom it is unlawful to make such offer
or
solicitation in such jurisdiction. You should not assume that the information
contained in this prospectus is correct on any date after its date, although
this prospectus is delivered or securities are sold on a later
date.
i
PROSPECTUS
SUMMARY
This
summary highlights some of the information contained elsewhere in this
prospectus. This summary may not contain all of the information you should
consider before investing in our securities. You should read this entire
prospectus carefully, especially the risks of investing in our securities
discussed under “Risk Factors” on page 4.
Unless
otherwise noted, the terms “Advance Nanotech,” the “Company,”“we,”“us,” and
“our” refer to the ongoing business operations of Advance Nanotech, Inc. and its
subsidiaries, whether conducted through Advance Nanotech or a subsidiary
of the
company.
The
Company
We
are
a
development stage company seeking to commercialize novel chemical sensor
products based on our proprietary and innovative gas sensing technology,
called
Owlstone, which offers an attractive combination of small size, high
sensitivity, low power consumption, reprogrammability, high chemical selectivity
and low cost. We operate in a $5.4 billion market in the United States alone,
and we have initially targeted the industrial and homeland defense markets.
In
later stages, we plan to commercialize sensing products for the consumer,
environmental monitoring and medical diagnostics markets. We are poised to
benefit from powerful trends driving the demand for improved technologies
within
the chemical sensing arena, including substantial government and private
sector
investment in homeland security, regulatory emphasis on safety, and increasingly
stringent environmental regulations.
The
market for chemical sensingfaces
unique challenges in detecting hazardous substances in various forms and
in a
myriad of operating environments. In homeland defense, chemical sensors are
used
to detect chemical warfare agents and explosives to protect military personnel,
government buildings and civilians. In industrial applications, chemical
sensors
monitor air quality for health and safety purposes and also provide vital
information during manufacturing and mining processes. The existing technologies
for chemical sensors in these industries are outdated and are typically limited
by physical size, sensitivity and/or reliability. We believe that these factors
have led to unacceptable sample collections, uninspired deployment scenarios,
high false positive rates and, subsequently, a call to action by the U.S.
Department of Defense for better solutions.
Our
chemical sensing technology was specifically designed to meet the specifications
set forth by the U.S. Department of Defense. The key element of the Owlstone
sensor is a silicon chip that provides a chemical-sensing mechanism using
Field
Asymmetric Ion Mobility Spectrometry, or FAIMS, a variant of conventional
Ion
Mobility Spectrometry, or IMS. Our technology enables unprecedented
miniaturization of sensors with superior analytical capability at a compelling
cost advantage, the ability to be programmed and reprogrammed to detect a
wide
range of substances, and high selectivity and sensitivity.
Business
Address
The
address of our principal executive office is 600 Lexington Avenue,
29th
Floor,
New York, New York10022, and our telephone number is
(212) 583-0080.
Risk
Factors
See
“Risk
Factors” on page 4 of this prospectus.
1
The
Offering
Common
stock offered by selling stockholders
This
prospectus relates to the resale by certain selling stockholders
of
Advance Nanotech of up to 10,913,678 shares of our common stock
issuable
upon conversion of convertible notes in the aggregate principal
amount of
$2,728,419.45 at a conversion price of $0.25 per share.
Common
stock outstanding before the offering
36,667,686
shares
Common
stock to be outstanding after the offering
Up
to 47,581,364 shares. The common stock to be outstanding after
the
offering is based on 36,667,686 shares of common stock outstanding
as of
July 11, 2008 plus the estimated shares offered pursuant to this
prospectus which are issuable upon the conversion of our convertible
notes
held by the selling stockholders. Thus, the number of shares stated
to be
outstanding after the offering assumes that $2,728,419.45 of convertible
notes issued in connection with the December 2007 private placement
are
converted.
Use
of proceeds
We
will not receive any proceeds from the sale of the common stock
by the
selling stockholders.
Over-the-Counter
Bulletin Board Symbol
AVNA
Unless
otherwise indicated or the context otherwise requires, the number of shares
of
common stock shown to be outstanding after this offering and other share-related
information in this prospectus does not include:
·
up
to 1,028,849 shares of our common stock issuable as of July 11,2008 upon
the exercise of outstanding warrants not issued in connection with
the
December 2007 private placement, which had an average exercise
price of
$0.89 per share;
·
up
to 10,900,000 shares of our common stock issuable as of July 11,2008 upon
the exercise of outstanding warrants issued in connection with
the
December 2007 private placement, which had an exercise price of
$0.30 per
share;
·
up
to 10,886,322 shares of our common stock issuable as of July 11,2008 upon
the exercise of additional outstanding convertible notes issued
in
connection with the December 2007 private placement, which had
an exercise
price of $0.25 per share;
·
up
to 1,063,825 shares of our common stock issuable as of July 11,2008 upon
exercise of outstanding stock options, which had an average exercise
price
of $2.10 per share;
·
up
to 14,023,639 shares of our common stock and 10,000,000 shares
of our
restricted common stock issuable to the Owlstone founders and executive
officers upon consummation of the Owlstone exchange
offer;
·
up
to 11,000,000 shares of our common stock issuable upon the exercise
of
stock options for shares of our common stock anticipated to be
granted,
upon consummation of the Owlstone exchange offer, to current holders
of
Owlstone stock options in exchange for their outstanding stock
options
exercisable for shares of Owlstone common
stock;
·
up
to 8,834,701 shares of our common stock anticipated to be issued
to the
remaining minority stockholders of Owlstone after consummation of the
Owlstone exchange offer in exchange for their outstanding shares
of
Owlstone common stock;
2
·
up
to 7,677,059 shares of our common stock issuable upon conversion
of
convertible promissory notes, at a conversion price of $1.00 per
share, in
the aggregate principal amount of $2,305,423 outstanding and held
by
noteholders of Owlstone;
·
up
to 9,448,881 shares of our common stock issuable upon exercise
of
warrants, at an exercise price of $0.30 per share, anticipated
to be
issued to the Owlstone noteholders after consummation of the Owlstone
exchange offer;
·
up
to 1,742,000 shares of our common stock issuable upon exercise
of
warrants, at an exercise price of $0.30 per share, anticipated
to be
issued to the placement agent in connection with the December 2007
private
placement; and
·
up
to a number of shares equal to 10% of our issued and outstanding
common
stock on a fully-diluted basis under a new equity incentive plan
anticipated to be adopted in the
future.
3
RISK
FACTORS
We
are a development stage company and we have limited historical operations.
We
urge you to consider our likelihood of success and prospects in light of
the
risks, expenses and difficulties frequently encountered by entities at similar
stages of development.
The
following is a summary of certain risks we face. They are not the only risks
we
face. Additional risks of which we are not presently aware or that we currently
believe are immaterial may also harm our business and results of operations.
The
trading price of our common stock could decline due to the occurrence of
any of
these risks, and investors could lose all or part of their investment. In
assessing these risks, investors should also refer to the other information
contained or incorporated by reference in our other filings with the Securities
and Exchange Commission.
CERTAIN
RISK FACTORS RELATING TO OUR BUSINESS
We
may need to raise additional capital in the near future, and, if we are unable
to secure adequate funds on acceptable terms, we may be unable to support
our
business plan and be required to suspend operations.
We
may
need to raise additional capital in the near-term, and may seek to do so
by
conducting one or more private placements of equity securities, selling
additional securities in a registered public offering, or through a combination
of one or more of such financing alternatives. There can be no assurance
that
any additional capital resources will be available to us as and when required,
or on terms that will be acceptable to us. If we are unable to raise the
capital
required on a timely basis, we may not be able to fund our research projects
and
the development of the businesses of our subsidiaries. In such event, we
may be
required to suspend our plan of operations. Moreover, even if the necessary
funding is available to us, the issuance of additional securities would dilute
the equity interests of our existing stockholders, perhaps
substantially.
We
have not generated significant revenue in the past and have not been profitable
historically.
Since
inception, we have generated revenue of only $1,689,290 as of March 31, 2008.
Given our strategy of developing unproven technologies in the chemical detection
business, we do not expect to realize significant revenue from operations
and
achieve profitability before the end of 2008, at the earliest. In addition,
during the first year following the issuance of the convertible notes, we
will
be required to make up to $1,340,000 of interest payments and liquidated
damages
to the holders of convertible notes that we issued in December 2007 and February
2008. Any delays beyond the expected development periods for our technologies
would prolong, and could increase the level of, our operating losses and
negative operating cash flow. Many factors (including factors beyond our
control) could result in a disparity between liquidity sources and cash needs,
including those discussed below.
We
are a development stage company, and our success is subject to the substantial
risks inherent in the establishment of a new business
venture.
As
a
consequence of the change in control that we experienced on October 1, 2004,
we
changed management, and all efforts that were previously initiated by prior
management were abandoned. At that time, our new management adopted a new
plan
of operations based on the strategy that was only formulated in 2004. In
December 2007, we further refined our strategy to focus solely on chemical
detection technologies. Implementation of this strategy is still in the
development stage.
Our
business and operations should be considered to be in the development stage
and
subject to all of the risks inherent in the establishment of a new business
venture. Accordingly, our intended business and operations may not prove
to be
successful in the near future, if at all. Any future success that we might
enjoy
will depend upon many factors, many of which may be beyond our control, or
which
cannot be predicted at this time. We may encounter unforeseen difficulties
or
delays in the implementation of our plan of operations, which could have
a
material adverse effect upon our financial condition, business prospects
and
operations and the value of an investment in our common stock.
4
We
will need to achieve commercial acceptance of the chemical detection
technologies that we develop to obtain revenue and achieve
profitability.
Chemical
detection technologies are evolving rapidly, product life cycles are short
and
technologies can become obsolete. Even if our research efforts are successful,
during the period before which our technology becomes commercially viable,
superior competitive technologies may be introduced or customer needs may
change, diminishing or extinguishing the commercial uses for our
technologies.
The
governmental and private sector markets into which we sell our products and
the
types of products sold in these markets are emerging. Our ability to grow
will
depend in part on the rate at which markets for our products develop and
on our
ability to adapt to emerging demands in these markets. Our ability to compete
will depend on our ability to design, develop, manufacture, assemble, test,
market, sell and support new products and enhancements quickly and cost
effectively. We may lose our competitive position if we fail to innovate
and
develop new products quickly. In addition, geopolitical developments, terrorist
attacks and government mandates may cause sharp fluctuations in the demand
for
our products. If, for any of these or other reasons, any of our technologies
fail to gain acceptance in the market, we will not recoup our development
costs,
and we will have to attempt to develop new technologies and products, which
could have a material adverse effect on our business, cash flows and results
of
operations.
We
may need approval from our customers, including governmental authorities
in the
U.S. and other countries, to successfully realize commercial value from our
activities.
In
order
to test, manufacture and market products for commercial use, we may need
to
satisfy mandatory procedures and safety and effectiveness standards established
by our customers, including various regulatory bodies. Any adverse event,
either
before or after approval, can result in product liability claims against
us,
which could significantly and adversely impact our business, results of
operations and the value of our common stock.
A
substantial portion of our revenues depends on sales to the U.S. government
and
could be affected by changes in federal funding levels.
Agencies
and departments of the U.S. government account for substantially all of our
revenues from research and development contracts and grants. We are counting
on
significant revenues from U.S. government contracts for the foreseeable future.
U.S. government programs are limited by budgetary constraints and are subject
to
uncertain future funding levels that could result in the termination of
programs. A decline in security-related government spending, or a shift away
from chemical detection programs that we address, could hurt our sales, put
pressure on our prices and reduce our revenues and margins.
The
U.S. government may terminate or modify its contracts with us.
We
must
comply with and are affected by laws and regulations relating to the formation,
administration and performance of U.S. government contracts, which affect
how we
do business as a contractor and which may impose additional expenses on our
business.
There
are
inherent risks in contracting with the U.S. government. The U.S. government
can
typically terminate, reduce orders under or otherwise modify any of its
contracts with us for its convenience (i.e., without cause) whether or not
we
have failed to perform under the terms of the applicable contract. In such
case,
the government would not be required to pay us for the lost profits for the
unperformed work. A termination arising out of our default could expose us
to
liability and harm our ability to compete for future contracts and orders.
In
addition to unfavorable termination provisions, our U.S. government contracts
and related regulations contain provisions that allow the U.S. government
to
unilaterally suspend us from receiving new contracts pending resolution of
alleged violations of procurement laws or regulations, reduce the value of
existing contracts, issue modifications to a contract and control and
potentially prohibit the export of our services and associated
materials.
5
We
have limited sales and marketing capabilities and ultimately may not be
successful in selling or marketing any technologies that we
develop.
The
creation of infrastructure to commercialize products is a difficult, expensive
and time-consuming process. We currently focus our business on identifying
and
funding chemical detection technologies, and we have limited sales and marketing
capabilities. We need to develop a stronger sales and marketing force with
technical expertise and distribution capability or rely upon third parties
to
produce, sell and market our technologies on our behalf. To the extent that
we
enter into co-promotion or other licensing arrangements, any revenues to
be
received by us will be dependent on the efforts of third parties if we do
not
undertake to develop our own sales and marketing capabilities. The efforts
of
third parties may not be successful. We may not be able to establish direct
or
indirect sales and distribution capabilities or be successful in gaining
market
acceptance for proprietary products or for other products. Our failure to
establish marketing and distribution capabilities or to enter into marketing
and
distribution arrangements with third parties could have a material adverse
effect on our revenue and cash flows.
The
lengthy sales cycles of our products may cause our revenues to fluctuate
substantially.
Customers
evaluating our products must often make very difficult choices about product
capabilities and costs. Many of our customers buy our products to implement
or
enhance large projects. Our larger customers take longer to evaluate our
products and place new orders. For these and other reasons, our products
have
long sales cycles. Sales are often delayed or cancelled for reasons that
we
cannot control. Delays and cancellations could significantly affect revenues
reported for any given financial quarter.
We
are dependent on third-party suppliers for component parts used in the assembly
of our products.
We
are
dependent on third parties to supply many materials used by the technicians
in
our facilities. Because we rely on outside parties to supply certain critical
components used in assembling our products, our business and financial viability
are dependent on the regulatory compliance and timely and effective performance
of these third parties. We depend on the quality of the products supplied
to us
over which we have limited control. We are also dependent on the strength,
validity and terms of our various contracts with third-party
suppliers.
We
are dependent on third parties for the manufacture of our products and,
therefore, will have limited control of the manufacturing process and related
costs.
Any
technologies that we successfully develop will require third-party assistance
in
manufacturing them. If we are unable to collaborate with outside parties
capable
of performing manufacturing operations, at acceptable costs, our effort to
commercialize a particular technology may not prove successful. The efforts
of
those third parties may not be successful. We may not be able to establish
relationships with third-parties to manufacture our products, or the cost
thereof may result in our not generating a profit from the product. Any
interruption or failure by these suppliers, distributors and collaboration
partners to meet their obligations pursuant to various agreements with us
could
have a material adverse effect on our business, profitability and cash flows.
Failure
to obtain and maintain approvals and permits from governmental and regulatory
agencies, including with respect to use of radioactive materials, could have
a
material adverse effect on us.
In
order
for us to operate our chemical detection business, we need to register with,
and
obtain licenses from, the Nuclear Regulatory Commission in order to distribute
and possess radioactive materials that we utilize in our products.We
have
no control over the outcome of the review and approval process. We do not
know
whether or when any such approvals, permits or licenses can be obtained,
or
whether or not any existing or potential interventions or other actions by
third
parties will interfere with our ability to obtain and maintain such permits,
licenses or approvals. Failure to obtain and maintain any of these approvals,
licenses and permits could have a material adverse effect on our business,
results of operations, financial condition and prospects.
6
We
face competitive business conditions that a small business issuer may struggle
with to gain a competitive position in the industry.
We
face
intense and ever-changing competition from other established companies in
the
chemical detection industry. Many of these companies are competitors who
possess
significantly greater financial, managerial, engineering, manufacturing and
marketing resources. For example, our competitors include very large and
experienced enterprises, including BAE Systems, plc, Canberra Industries,
Inc.,
DRS Technologies, Inc., FLIR Systems Inc., General Electric Company, Goodrich
Corporation, Honeywell International, Inc., ICX Technologies, Inc., L-3
Communications Holdings, Inc., RAE Systems, Inc., SAIC, Inc., Smiths Industries,
Ltd. and United Technologies Corporation. Our competitors may successfully
develop technologies that outperform our technologies, respond better to
customer requirements, cost less or otherwise gain greater market acceptance.
Our larger competitors may be able to better manage large or complex contracts,
maintain a broader geographic presence, compete more effectively on price,
or
provide a greater level of customer support. Any of these competitors may
be
able to respond more quickly to new technology, market developments or pursue
new sales opportunities more effectively than we can.
Given
our
small size, changing technology and our limited resources, the intensity
of
competition will likely continue for the foreseeable future. This may limit
our
ability to introduce and market our products, limit our ability to adequately
price our planned products and services and, ultimately, limit our ability
to
generate sufficient sales revenues that would allow us to achieve profitability
and positive cash flow.
Our
success depends on the attraction and retention of senior management and
technicians with relevant expertise.
Our
future success will depend to a significant extent on the continued services
of
its key employees. The Owlstone detector was conceived by Andrew Koehl who
began
the development of Owlstone’s fundamental technology in 2001. Mr. Koehl was
later joined by Paul Boyle and David Ruiz-Alonso and, together, they developed
the core technology. We do not maintain key man life insurance for any executive
officer. Our ability to execute our strategy also will depend on our ability
to
attract and retain qualified technicians and sales, marketing and additional
managerial personnel. If we are unable to find, hire and retain qualified
individuals, we could have difficulty implementing our business plan in a
timely
manner, or at all.
We
are subject to the attendant risks of conducting business in foreign
countries.
We
conduct some business with companies located outside the U.S. As a result,
we
are subject to the attendant risks of conducting business in foreign countries,
including:
·
difficulty
in managing and evaluating technical progress of projects funded
at
research facilities of our strategic partners and/or collaborators
internationally;
·
difficulty
in identifying, engaging, managing and retaining qualified local
employees;
·
difficulty
in identifying and in establishing and maintaining relationships
with
strategic partners, research collaborators and suppliers of finished
and
unfinished goods and services;
·
the
potential burden of complying with a variety of foreign laws, trade
standards and regulatory requirements, including import and export
control
laws, tariffs and other barriers;
·
limited
protection of our intellectual property and limited ability to
enforce
legal rights and remedies; and
·
general
geopolitical risks, such as political and economic instability
and changes
in diplomatic and trade relations.
Our
international operations expose us to risks associated with fluctuations
in
foreign currencies.
As
part
of our international operations, from time to time in the regular course
of
business, we convert dollars into foreign currencies and vice versa. The
value
of the dollar against other currencies is subject to market fluctuations,
and
the exchange rate may or may not be in our favor.
7
Our
business has inherent operational risks that cannot be adequately covered
by
insurance or indemnity, and our products and technologies may not qualify
for
protection under the SAFETY Act.
We
may
face unanticipated risks of legal liability for damages caused by the actual
or
alleged failure of technologies that we supply. Our products may be deployed
in
response to an emergency or terrorist attack, which may increase our exposure
to
third-party claims. Many of our technologies are unproven. We may face
liabilities related to these products. While we have attempted to secure
appropriate insurance coverage at appropriate cost, it is impossible to insure
against all risks that inhere in our industry or guarantee that insurers
may pay
a particular claim, or that we will be able to maintain coverage at reasonable
rates in the future. Substantial claims resulting from an accident in excess
or
not otherwise covered by indemnity or insurance could harm our financial
condition and operating results. Our insurance policies also contain
deductibles, limitations and exclusions which increase our costs in the event
of
a claim.
Under
the
“SAFETY Act” provisions of the Homeland Security Act of 2002, the U.S.
government provides liability limitations and the “government contractor”
defense applies if the Department of Homeland Security “designates” or
“certifies” technologies or products as “qualified anti-terrorism technologies,”
and if certain other conditions apply. We may seek to qualify some or all
of our
products and technologies under the SAFETY Act’s provisions in order to obtain
such liability protections, but there is no guarantee that the U.S. Department
of Homeland Security will designate or certify our products and technologies
as
a qualified anti-terrorism technology. To the extent we sell products without
such qualification, we will not be entitled to the benefit of the SAFETY
Act’s
cap on tort liability or U.S. government indemnification. Any indemnification
that the U.S. government may provide may not cover certain potential
claims.
Nanotechnology-enabled
products, such as those used in our chemical detection technologies, are
new and
may be viewed as being harmful to human health or the
environment.
There
is
increasing public concern about the environmental and ethical implications
of
nanotechnology which could impede or delay market acceptance of products
developed through these means. Nanotechnology-enabled products are mainly
composed of materials such as carbon, silicon, silicon carbide, germanium,
gallium arsenide, gallium nitride, cadmium selenide or indium phosphide.
Because
of the size, shape or composition of the nanostructures or because they may
contain harmful elements, nanotechnology-enabled products could pose a safety
risk to human health or the environment. The regulation and limitation of
the
kinds of materials used in or to develop nanotechnology-enabled products,
or the
regulation of the products themselves, could harm the commercialization of
nanotechnology-enabled products and impair our ability to achieve revenue
from
the license of nanotechnology applications.
If
export controls affecting our products are expanded, our business and operations
will be adversely affected.
The
U.S.
government regulates the sale and shipment of numerous technologies by U.S.
companies to foreign countries. We are developing products that might be
useful
for military and antiterrorism activities. Accordingly, U.S. government export
regulations could restrict sales in other countries of any products that
we
develop. If the U.S. government places expanded export controls on our
technology or products, our business, operations and results of operations
could
be materially and adversely affected. If the U.S. government determines that
we
have not complied with applicable export regulations with respect to products
that we sell outside the U.S., we may face civil or criminal penalties in
the
form of fines or other punishment.
Export
control laws may also inhibit the free interchange of technical discussions
among our employees. Absent license authorization from the appropriate agency,
technologies related to our military or dual-use products cannot be discussed
with our foreign national employees who are not permanent residents, nor
with
our foreign subsidiaries. Licensing requirements may delay product development
and other engineering or sales activities.
Our
ability to protect our patents and other proprietary rights is uncertain,
exposing us to the possible loss of a competitive
advantage.
We
have
filed for patents and will continue to file patent applications. If a particular
patent is not granted or we are unable to successfully prosecute a patent
application, the value of the invention described in the patent would be
diminished.
8
Furthermore,
even if these patents are granted, they may be difficult to enforce. Efforts
to
enforce our patent rights could be expensive, distracting for management,
unsuccessful, cause our patents to be invalidated and frustrate
commercialization of products. In addition, even if patents are issued and
are
enforceable, competitors may independently develop similar, superior or parallel
technologies to any technology developed by us, or our technology may prove
to
infringe upon patents or rights owned by others. Thus, the patents held by
or
licensed to us may not afford us any meaningful competitive advantage.
Our
inability to maintain our licenses and our intellectual property rights could
have a material adverse effect on our business, financial condition and ability
to implement our business plan. If we are unable to derive value from our
licensed or owned intellectual property, our operations and results of
operations could be materially and adversely affected.
The
U.S. government’s right to use technology developed by us limits our
intellectual property rights.
We
seek
to protect the competitive benefits we derive from our patents, proprietary
information and other intellectual property. However, we do not have the
right
to prohibit the U.S. government from using certain technologies developed
by us
or to prohibit third-party companies, including our competitors, from using
those technologies in providing products and services to the U.S. government.
The U.S. government has the right to royalty-free use of technologies that
we
have developed under U.S. government contracts. We are free to commercially
exploit those government-funded technologies and may assert our intellectual
property rights to seek to block other non-government users thereof, but
we may
not successfully do so.
Our
business may increasingly depend upon obtaining and maintaining required
security clearances.
We
may
bid for U.S. government contracts that require our employees to maintain
various
levels of security clearances and require us to maintain certain facility
security clearances in compliance with Department of Defense and other
government requirements. Obtaining and maintaining security clearances for
employees involves a lengthy process, and it is difficult to identify, recruit
and retain employees who already hold security clearances. If our employees
are
unable to obtain or retain security clearances, or if our employees who hold
security clearances stop working for us, we may face delays in fulfilling
contracts, or be unable to fulfill or secure new contracts, with any customer
involved in classified work. Any breach of security for which we are responsible
could seriously harm our business, damage our reputation and make us ineligible
to work on any classified programs.
We
may divest assets to reflect changes in our strategy.
We
have
begun divesting businesses and assets which we have determined no longer
fit our
strategy. For example, we sold an equity interest in a business in December
2007
to redirect our efforts away from the development of early-stage
nanotechnologies. We may undertake divestiture transactions when we believe
there is a financial or strategic benefit to us in doing so. Such divestitures,
should they occur, may result in losses. There may also be costs and liabilities
that we incur or retain in connection with these divestitures. We may be
unable
to successfully divest non-strategic assets and, if we incorrectly evaluate
the
strategic fit and valuation of divested businesses or assets, we may forego
opportunities that would otherwise have benefited our business.
A
number of factors may cause our consolidated operating results to fluctuate
on a
quarterly or annual basis, which may make it difficult to predict our future
operating results.
We
expect
our consolidated revenues and expenses to fluctuate, making it difficult
to
predict our future operating results. Factors that could cause our operating
results to fluctuate include:
·
demand
in the markets that we serve;
·
our
ability to define, design and release new products that meet customer
needs, and to do so quickly and cost effectively;
·
market
acceptance of new and enhanced versions of our products;
·
the
forecasting, scheduling, rescheduling or cancellation of orders
by our
customers;
9
·
the
timing, performance and pricing of new product introductions by
our
competitors;
·
variations
in the performance of our businesses;
·
the
timing and availability of adequate manufacturing capacity from
our
manufacturing suppliers;
·
our
ability to forecast demand in the markets that we serve;
·
the
mix of products that we sell;
·
the
length of our sales cycles;
·
the
lack of backlog of orders for our products;
·
general
economic conditions in the countries where we operate or our products
are
used; and
·
changes
in exchange rates, interest rates and tax rates.
Any
of
the above factors, many of which are beyond our control, could significantly
harm our business and results of operations. The results of a prior quarter
or
annual period should not be relied upon as an indicator of future operating
performance.
CERTAIN
RISK FACTORS RELATING TO OUR COMMON STOCK
The
market for common stock is limited, and you may not be able to sell the shares
of our common stock that you hold.
Our
common stock is currently traded on the Over-The-Counter Bulletin Board,
not on
a national securities exchange. Therefore, our common stock is thinly traded,
the market for purchases and sales of our common stock is limited and the
sale
of a limited number of shares could cause the price to fall significantly.
Accordingly, it may be difficult to sell shares of our common stock quickly
without significantly depressing the value of the stock. Unless we are
successful in developing continued investor interest in our stock, sales
of our
stock could continue to result in major fluctuations in the price of the
stock.
Stockholder
interest in us may be substantially diluted as a result of the sale or issuance
of additional securities pursuant to existing commitments and to fund our
plan
of operation.
Our
certificate of incorporation authorizes us to issue an aggregate of 200,000,000
shares of common stock, on such terms and at such prices as our Board of
Directors may determine. Issuances of additional shares of common stock would
result in dilution of the percentage interest in our common stock of all
stockholders ratably and might result in dilution in the tangible net book
value
of a share of our common stock, depending upon the price and other terms
on
which the additional shares are issued. In addition, the issuance of additional
shares of common stock upon exercise of the warrants or stock options, or
even
the prospect of such issuance, may have an affect on the market for our common
stock and may have an adverse impact on the price at which shares of our
common
stock trade.
As
of
July 11, 2008, we had 36,667,686 shares of common stock issued and outstanding.
We had also issued warrants to purchase approximately 16,100,000 shares of
our
common stock, notes convertible into approximately 26,800,000 shares of our
common stock and stock options exercisable into approximately 1,100,000 shares
of our common stock, all of which remained outstanding. The Company has also
accrued approximately 2,500,000 stock grants as a contingent liability remaining
from the 2005 equity incentive plan and certain employee employment contracts
which are scheduled to be issued and granted to certain employees and the
Company accrued for 1,742,000 in warrants to be issued to the placement agent
in
connection with the December 2007 private placement. In addition, if the
Owlstone exchange offer is consummated, additional warrants and stock options
to
acquire up to approximately 20,500,000 shares of our common stock are
anticipated to be issued, along with up to approximately 40,500,000 shares
of
our common stock. If all of these shares are issued and if all of our options
and warrants currently outstanding and anticipated to be issued are exercised
in
full, the number of our outstanding shares of common stock would increase
from
approximately 36,600,000 as of July 11, 2008 to approximately 145,000,000,
with
approximately 55,000,000 authorized common shares remaining available to
be
issued under our certificate of incorporation. None of these warrants or
stock
options are registered, and there is no public market for our warrants or
stock
options. Nonetheless, exercise of a significant number of warrants and stock
options, and the issuance of additional shares of our common stock, would
be
dilutive to existing stockholders.
10
If
securities or industry analysts do not publish research reports about our
business or if they make adverse recommendations regarding an investment
in our
common stock, our stock price and trading volume may
decline.
The
trading market for our common stock will be influenced by the research reports
that industry or securities analysts publish about our business. We do not
currently have, and may never obtain, research coverage by industry or
securities analysts. If no industry or securities analysts commence coverage
of
us, the trading price of our common stock could be negatively impacted. In
the
event we obtain industry or security analyst coverage, and if one or more
of the
analysts downgrade our stock or comment negatively on our prospects, our
stock
price would likely decline. If one or more of these analysts cease to cover
us
or our industry or fails to publish reports about us regularly, our common
stock
could lose visibility in the financial markets, which could also cause our
stock
price or trading volume to decline.
We
may be the subject of securities class action litigation due to future stock
price volatility.
Our
common stock price has fluctuated significantly since our inception in August
2004 and may continue to do so in the future. We expect that the market price
of
our common stock will likely continue to fluctuate significantly and remain
highly volatile. We will not have control over the factors that cause such
volatility. Historically, when the market price of a stock has been volatile,
holders of that stock have often initiated securities class action litigation
against the company that issued the stock. If any of our stockholders bring
a
similar lawsuit against us, we could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of our management
from the operation of our business.
We
do not intend to declare cash dividends on our common
stock.
We
will
not distribute any cash to our stockholders until and unless we can develop
sufficient funds from operations to meet our ongoing needs and implement
our
business plan. As a result, your only opportunity to achieve a return on
your
investment in us will be if the market price of our common stock appreciates
and
you sell your shares at a profit. The future market price for our common
stock
may never exceed the price that you pay for our common stock.
This
prospectus contains certain forward-looking statements of our intentions,
hopes,
beliefs, expectations, strategies, and predictions with respect to future
activities or other future events or conditions within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act
of 1934. These statements are usually identified by the use of words such
as
“believe,”“will,”“anticipate,”“estimate,”“expect,”“project,”“plan,”“intend,”“should,”“could,” or similar expressions. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under “Risk Factors,” and other sections
of this prospectus, that may cause our or our industry’s actual results, levels
of activity, performance or achievements to be materially different from
any
future results, levels, activity, performance or achievements, express or
implied by these forward-looking statements.
Although
we believe that the assumptions underlying the forward-looking statements
contained in this prospectus are reasonable, any of the assumptions could
be
inaccurate, and, therefore, there can be no assurance that the forward-looking
statements included in this prospectus will prove to be accurate. When
considering forward-looking statements, you should keep in mind the risk
factors
and other cautionary statements in this prospectus and any prospectus
supplement. We will not update these statements unless the securities laws
require us to do so. Accordingly, you should not rely on forward-looking
statements because they are subject to known and unknown risks, uncertainties,
and other factors that may cause our actual results to differ materially
from
those contemplated by the forward-looking statements.
12
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sale of the common stock by the
selling
stockholders.
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
“AVNA.” The high and low bid information for each quarter for the years ending
December 31, 2006 and 2007, as quoted on the NASD Electronic Bulletin Board,
are
as follows:
Quarter
High
Bid
Low
Bid
First
Quarter 2006
$
2.23
$
1.31
Second
Quarter 2006
$
2.00
$
0.95
Third
Quarter 2006
$
1.20
$
0.62
Fourth
Quarter 2006
$
0.89
$
0.57
First
Quarter 2007
$
0.82
$
0.41
Second
Quarter 2007
$
0.52
$
0.25
Third
Quarter 2007
$
0.40
$
0.20
Fourth
Quarter 2007
$
0.38
$
0.20
The
quotations above reflect inter-dealer prices, without retail mark-up, markdown
or commissions and may not reflect actual transactions.
Holders
As
of
July 11, 2008, an aggregate of 36,667,686 shares of our common stock were
issued
and outstanding and were owned by approximately 2,500 stockholders of record,
based on information provided by our transfer agent.
Dividends
We
have
never paid dividends on our common stock and do not anticipate that we will
do
so in the foreseeable future.
13
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
and Plan of Operations
Our
efforts are principally focused on our most commercialized technology, namely
those products developed by Owlstone. Owlstone has developed a chemical detector
that has been incorporated into its lead product named Lonestar, which is
currently being used in the marketplace. This product was launched in July
2007
and has a growing customer base. Our plan of operations includes a strategic
mixture of selling completely integrated products and supplying component
parts
to original equipment manufacturers. We intend to both partner with market
leaders to integrate our technologies into existing commercial applications
and
partner with contract manufacturers to bring our products direct to market,
as
is the case with our Lonestar product. We believe that this dual strategy
positions us to best achieve the potential for our technologies in the most
effective and time-sensitive manner.
Liquidity
and Capital Resources
Cash
Flows
Our
operations have not historically generated positive cash flow. We do not
expect
that our business activities will begin to generate significant positive
cash
flows before the fourth quarter of 2008. We currently expect that our capital
requirements for the next twelve months will be financed in part through
the
following:
·
cash
on hand, which was $2,329,970 as of March 31, 2008;
·
issuances
of up to $3,000,000 of additional debt and/or equity; and
·
cash
flows from our operations.
Sources
of Cash
On
March31, 2006, Merrill Lynch extended a line of credit with loans to be secured
by
collateral. Amounts withdrawn under this facility bear interest at a variable
rate of 2.0% over the effective LIBOR rate. This loan management account
allows
us to pledge a broad range of eligible assets and accounts in various
combinations to maximize our borrowing capacity. Collateral may include cash
and
cash equivalents, debts, claims, securities, entitlements, financial assets,
investment property and other property. The amount of borrowings available
to us
under this facility increases proportionally to the assets pledged as security
for the loan. Accordingly, a decline in the value of collateral pledged to
secure a loan under this facility could force the sale of the underlying
collateral. As of March 31, 2008, we had not used this facility. As of March31,2008, we maintained a cash balance of $47 and a security balance of $0 in
Merrill Lynch investment accounts. We may cancel this agreement at any time
subject to being supported by a collateral account sufficient to support
an
outstanding loan balance, if any. At March 31, 2008, we had $47 of credit
available under this agreement.
On
November 6, 2006, our subsidiary, Advance Display Technologies plc, or ADT,
entered into a conditional Facility Agreement with NAB Ventures Limited,
or NAB.
We entered into the credit facility in part in order to allow the shares
of ADT
to be listed on the PLUS-quoted in London. NAB has agreed to provide us one
or
more loans, each called a drawdown, in the aggregate principal amount of
up to
approximately $7 million (GBP £3.5 million) subject to the terms and conditions
set forth in the agreement. As of March 31, 2008, the Company had repaid
this
facility in full and had $0 outstanding under the agreement. Any outstanding
principal amount bears interest per annum at an interest rate of 9.0%. In
the
event the agreement is not repaid on the maturity date of December 31, 2009,
the
unpaid principal amount and accrued interest thereon will also bear additional
interest at a default rate of 1.5% per month, or 18.0% annum. We may cancel
this
agreement at any time subject to having no outstanding loan balance. Before
each
drawdown, there must be a mutual written agreement between us and NAB upon
a
budget. There are no financial covenants under this agreement. As an inducement
to provide the facility under the agreement, NAB received 1,875,000 of ordinary
shares of ADT and a warrant to purchase an additional 1,875,000 ordinary
shares
of ADT at an exercise price per share equal to the share price that ADT’s
ordinary shares commenced trading on the PLUS-quoted market, or approximately
$1.00 (GBP £0.50). The warrants have a cashless exercise provision. In addition
to being the lender under the agreement, NAB also owns 950,000 shares, or
2.7%,
of our outstanding common stock. The NAB credit facility has resulted in
our
recording deferred financing costs, of which $1,401,288 was unamortized as
of
March 31, 2008. The financing costs resulted from the issuance of 1,875,000
ordinary shares of ADT and a warrant to purchase 1,875,000 additional ordinary
shares of ADT. These financings costs are amortized over the 37-month life
of
the NAB credit facility and will be fully expensed on December 31,2009.
14
Debt
Obligations
In
December 2007, the Company entered into subscription agreements (the
“Subscription Agreements”) with selected institutional and accredited investors
(the “Investors”) regarding the private placement of up to a maximum of
$8,800,000 principal amount of 8% Senior Secured Convertible Notes (the
“Notes”). Each Investor who subscribed to the Notes received 50% warrant
coverage at $0.30 per share as common stock warrants (the “Warrants”). The
private placement was made pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 because the transaction complied
with the requirements of Rule 506 of Regulation D promulgated under the
Securities Act of 1933.
In
connection with the transactions contemplated by the Subscription Agreements,
the Company received gross proceeds of an aggregate of $6,700,000. However,
because the Company did not have a sufficient number of authorized shares
of its
common stock, par value $0.001 par value per share (the “Common Stock”) to allow
for conversion of the Notes, and exercise of the Warrants, representing the
total amount of proceeds received, the Company issued Notes and Warrants
for
only that portion of the total proceeds that was allowed given the current
capital structure of the Company. As a result, the Company issued Notes in
December 2007 with an aggregate principal amount of $3,953,000 and Warrants
convertible into 7,906,000 shares of Common Stock. The remainder of the proceeds
received during the private placement was placed in escrow pending amendment
of
the Company’s certificate of incorporation to increase the number of authorized
shares of Common Stock from 75,000,000 to 200,000,000. Upon obtaining approval
of the charter amendment by the stockholders, on February 15, 2008, the Company
issued additional Notes with an aggregate principal amount of $2,747,000
and
Warrants convertible into 5,494,000 shares of Common Stock.
The
Notes
mature in December 2010, three years after their date of issuance, and are
convertible into shares of the Company’s Common Stock, at a price of $0.25 per
share. The Notes constitute senior indebtedness of the Company and provide
that
no other indebtedness of the Company (excluding an additional $3,000,000
in
debt, certain credit facility lines and trade payables incurred in the ordinary
course of business) shall be incurred without the consent of the note holders.
The Warrants are exercisable into shares of Common Stock until December 2012,
five years after their date of issuance, at a price of $0.30 per share. The
Notes and the Warrants each have anti-dilution provisions that provide for
conversion or exercise price adjustments under certain
circumstances.
We
generated revenues of $670,895 in the three months ended March 31, 2008 compared
to $140,178 for the three months ended March 31, 2007, representing an increase
of $530,717. Revenues generated were a direct result of our subsidiary,
Owlstone, shipping its Tourist, Lonestar and Vapor Generator products along
with
contracted, instructional and set-up services provided to customers as of
March31, 2008.
Research
and development costs for the three months ended March 31, 2008 compared
to the
same three months ended March 31, 2007 were $550,202 and $1,166,781,
respectively, representing a decrease of $616,579, or 52.8%. This decrease
is
attributable to the cancellation or suspension of a significant portion of
our
project portfolio involving our non-Owlstone subsidiaries. Research and
development costs include costs associated with the projects as shown in
the
table below.
15
THREE MONTHS ENDED
MARCH 31
Project
2008
2007
Change
From
Prior Year
Owlstone
Nanotech, Inc. (1)
$
550,202
$
559,376
$
(9,174
)
NanoFED
Ltd
—
—
—
Bio-Nano
Sensium Technologies Ltd
—
—
—
Cambridge
Nanotechnology Ltd
—
252,531
(252,531
)
Nano
Solutions Ltd
—
74,025
(74,025
)
Centre
of Advanced Photonics & Electronics
—
245,338
(245,338
)
Advance
Nanotech (2)
—
35,511
(35,511
)
Total
$
550,202
$
1,166,781
$
(616,579
)
_________________________________
(1)
Developing
three nanotechnologies
(2)
Management
expenses related to projects
Our
Singular ID technology was not included in the table above because our minority
interest in the entity owning the technology was accounted for using the
cost
method. On December 28, 2007, the Company sold its 8.8% equity interest in
Singapore-based Singular ID Pte. Ltd. for $1.19 million.
General
and administrative expenses for the three months ended March 31, 2008 compared
to the same three months ended March 31, 2007 were $2,236,421 and $1,919,694,
respectively, representing an increase of $316,727, or 16.5%. Non-cash related
expenses for the period ended March 31, 2008 were approximately $800,000.
Non-cash expenses include costs related to FAS123R options, employee and
Board
of Directors equity grants and deferred financing costs. The increase in
general
and administrative expenses for the three-month period ended March 31, 2008
was
a result of:
·
an
increase in non-cash expenses related to our equity and options
plans of
approximately $200,000;
·
an
increase in salaries, employee benefits and medical insurance relating
to
additional personnel of approximately $80,000;
·
an
increase in legal, accounting and SEC filing fees of approximately
$70,000;
·
an
increase in rents of approximately 20,000; and
·
a
decrease in marketing costs of approximately
$50,000.
Interest
and other income for the three months ended March 31, 2008 and for the three
months ended March 31, 2007 was $99,507 and $24,400, respectively, representing
an increase of $75,107 from 2007. The increase in other income of $86,554
resulted from the Company’s forgiveness of previously incurred accounts payable
that were canceled with our collaboration partners and vendors. Interest
income
decreased by $11,447 from 2007. This decrease was a result of our decreasing
cash and cash equivalents maintained in our short-term money market account,
which was invested as a result of the net proceeds raised in the 2005 private
placements. Cash decreased as a result of our need to continue funding
operations. All of our cash reserves had been invested in liquid securities
at
large financial institutions.
We
had a
net loss of $1,085,641 in the three months ended March 31, 2008 compared
to
$2,432,368 for the comparable period in 2007, representing a decrease of
$1,346,727, or 55%. In 2008, the Company had a net loss of $0.03 cents per
share, compared with a net loss of $0.07 cents per share, for the same quarter
in 2007. Revenue increased by $530,717 while operating expenses decreased
by
$299,852 and the Company had a gain of $534,434 from minority interest related
to subsidiaries’ losses
We
generated revenues of $512,350 in the year ended December 31, 2007 compared
to
$506,045 for the year ended December 31, 2006. Revenues generated were a
direct
result of our subsidiary, Owlstone, shipping its Tourist, Lonestar and Vapor
Generator products along with instructional and set-up services provided
to
customers as of December 31, 2007.
Research
and development costs for the year ended December 31, 2007, compared to the
year
ended December 31, 2006, were $2,399,979 and $6,105,311, respectively,
representing a decrease of $3,705,332, or 60.7%. This decrease is attributable
to the cancellation or suspension of a significant portion of our project
portfolio. Research and development costs include costs associated with the
projects as shown in the table below.
Project
2007
2006
Change From
Prior Year
Owlstone
Nanotech, Inc. (1)
$
2,252,022
$
1,626,886
$
625,136
NanoFED
Ltd (2)
—
737,180
(737,180
)
Bio-Nano
Sensium Technologies Ltd (1)
—
—
—
Cambridge
Nanotechnology Ltd (3)
—
952,476
(952,476
)
Nano
Solutions Ltd (4)
—
1,746,367
(1,746,367
)
Centre
of Advanced Photonics & Electronics (5)
—
914,091
(914,091
)
Advance
Nanotech (6)
147,957
128,311
19,646
Total
$
2,399,979
$
6,105,311
$
(3,705,332
)
__________________________________
(1)
Developing
three nanotechnologies
(2)
Developing
two nanotechnologies
(3)
Developing
seven nanotechnologies
(4)
Developing
five nanotechnologies
(5)
Developing
six nanotechnologies, one of which was exclusively funded by us
and five
of which were funded by us in partnerships with Dow Corning Limited,
Alps
Electric Company and Ericsson Marconi Corporation.
(6)
Management
expenses related to projects
Our
Singular ID technology was not included in the table above because our minority
interest in the entity owning the technology was accounted for using the
cost
method. On December 28, 2007, the Company sold its 8.8% equity interest in
Singapore-based Singular ID Pte Ltd. for $1.19 million.
General
and administrative expenses for the year ended December 31, 2007 and for
the
year ended December 31, 2006 were $7,615,276 and $13,356,539, respectively,
representing a decrease of $5,741,263, or 42.9%. The decrease in general
and
administrative expenses for the year was a result of:
·
a
decrease in consulting, marketing and legal expenses of approximately
$2
million dollars;
·
a
decrease in non-cash expenses related to our 2005 Equity Incentive
Plan
being fully issued of approximately $2.2 million;
·
an
increase in payroll and employee related expenses driven by additional
headcount at Owlstone of approximately $1 million;
·
an
increase in banking and lending costs of approximately $754,000
relating
to the NAB Ventures Credit Facility;
·
a
decrease in travel expenses of approximately $240,000 due to reduction
in
personnel;
·
decreases
in rent, office expenses, VAT taxes and other administrative expenses.
Interest
and other income for the year ended December 31, 2007 and for the year ended
December 31, 2006 was $2,643,714 and $151,412, respectively, representing
an
increase of $2,492,302 from 2006. The increase in other income of $2,620,618
resulted from the Company’s forgiveness of previously incurred accounts payable
for Research and Development programs that were canceled with our
collaboration partners. Interest Income decreased by $128,316 from 2006.
This
decrease was a result of our decreasing cash and cash equivalents maintained
in
our short-term money market account, which was invested as a result of the
net
proceeds raised in the 2005 private placements. Cash decreased as a result
of
our need to continue funding operations. All of our cash reserves had been
invested in liquid securities at large financial institutions.
The
Company has generated revenues of $506,045 in the year ended December 31,2006.
Revenues generated were a direct result of our subsidiary, Owlstone, shipping
their Tourist Products and Vapor Generators along with instructional and
set-up
services provided to customers as of December 31, 2006. We did not generate
any
revenue in 2005.
Research
and development costs for the year ended December 31, 2006, compared to the
year
ended December 31, 2005, were $6,105,311 and $6,898,247, respectively,
representing a decrease of $792,936, or 11.5%. Research and development costs
include costs associated with the projects are shown in the table
below.
Project
2006
2005
ChangeFrom
PriorYear
Owlstone
Nanotech, Inc. (1)
$
1,626,886
$
897,204
$
729,682
NanoFED
Ltd (2)
737,180
639,138
98,042
Bio-Nano
Sensium Technologies Ltd (1)
—
1,560,591
(1,560,591
)
Cambridge
Nanotechnology Ltd (3)
952,476
1,860,582
(908,106
)
Nano
Solutions Ltd (4)
1,746,367
1,483,688
262,679
Centre
of Advanced Photonics & Electronics (5)
914,091
457,044
457,047
Advance
Nanotech Ltd (6)
128,311
—
128,311
Total
$
6,105,311
$
6,898,247
$
792,936
______________________________
(1)
Developing
one nanotechnology
(2)
Developing
two nanotechnologies
(3)
Developing
seven nanotechnologies
(4)
Developing
five nanotechnologies
(5)
Developing
six nanotechnologies, one of which was exclusively funded by us
and five
of which were funded by us in partnerships with Dow Corning Limited,
Alps
Electric Company and Ericsson Marconi Corporation.
(6)
Management
expenses related to projects
Our
Singular ID technology was not included in the table above because our minority
interest in the entity owning the technology was accounted for using the
cost
method.
Research
and development costs have decreased as a result of our entering the
straight-line quarterly payment phase of the collaboration agreements with
the
universities, compared to the initial one-time project start-up costs and
miscellaneous overhead costs expensed in 2005. Other decreases are due to
renegotiations currently taking place on the Bio-Nano Sensium Technologies
and
Imperial College projects. As of December 31, 2006, we were discussing revisions
to these agreements with our partners and, therefore, had halted some funding
in
2006.
General
and administrative expenses for the year ended December 31, 2006 and for
the
year ended December 31, 2005 were $13,356,539 and $8,105,496, respectively,
representing an increase of $5,251,043, or 64.8%. The increase in general
and
administrative expenses for the year was a result of:
·
increases
in consulting, marketing and legal expenses;
·
an
increase in non-cash expenses related to our 2005 Equity Incentive
Plan;
·
an
increase in payroll and employee related expenses due to the growth
in
employee headcount;
·
an
increase in travel expenses related to ongoing project reviews
and
assessments and financing activities; and
·
an
increase in office rents and administrative
expenses.
18
Interest
income for the year ended December 31, 2006 and for the year ended December31,2005 was $151,412 and $222,661, respectively, representing a decrease of
$71,249
from 2005. The reduction in interest income was a result of our decreasing
cash
and cash equivalents maintained in our short-term money market account, which
was invested as a result of the net proceeds raised in the 2005 private
placements. Cash was decreasing as a result of needing to continue funding
operations. All of our cash reserves had been invested in liquid securities
at
large financial institutions.
Off-Balance
Sheet Arrangements
As
of
March 31, 2008, we had no off-balance sheet arrangements.
We
have
historically been a leading provider of financing and support services to
drive
the commercialization of nanotechnology related products for homeland security
and display technologies. Our historical business model sought to identify
patent-pending and proprietary nanotechnologies and fund the additional patent
development of such nanotechnologies in exchange for the exclusive rights
to
commercialize any resulting products. Our portfolios of nanotechnologies
have
been grouped into two categories of products: Displays and Homeland Security.
The Display product category includes the operations of our subsidiary Advance
Display Technologies plc (listed on the PLUS-quoted market in London under
the
ticker symbol “ADTP”) and its direct and indirect subsidiaries. The Homeland
Security product category includes the operations of our subsidiaries Advance
Homeland Security plc, Advance Nanotech Ltd., Advance Nanotech Singapore
Pte.
Ltd, and Owlstone Nanotech, Inc., and their respective direct and indirect
subsidiaries.
We
have
historically been dedicated to the identification, development and successful
commercialization of new and disruptive nano-enabled products. We had intended
to create value by reducing the cost of commercializing nano-enabled based
products. By partnering with universities and leveraging the infrastructure
and
multi-disciplinary human resources of our university partners, we sought
to
reduce our cost base otherwise associated with nano-enabled products. After
prototypes were proven within the lab and we had developed a product roadmap
and
business plan, we sought to incorporate the formation of majority-owned
subsidiaries around the specific technology. We intended to return value
to our
stockholders through the sale or licensing of the technology, by securing
additional financing for the subsidiary from either the venture capital
community or the capital markets, or by successfully executing our business
plan
and consolidating our income as the majority stockholder of the
subsidiary.
Current
Operations
In
December 2007, we decided to revise our strategy and to focus our efforts,
principally, on the commercialization of our chemical detection technology.
As a
result, we are currently a development stage company seeking to commercialize
novel chemical sensor products based on our proprietary and innovative gas
sensing technology, called Owlstone, which offers an attractive combination
of
small size, high sensitivity, low power consumption, reprogrammability, high
chemical selectivity and low cost. We have determined to progressively divest
ourselves of our other technologies and their respective subsidiaries. We
will,
thereafter, become an operational business centered upon our Owlstone Nanotech,
Inc. subsidiary and the ongoing commercialization of its products.
We
operate in a $5.4 billion market in the United States alone, and we have
initially targeted the industrial and homeland defense markets. In later
stages,
we plan to commercialize sensing products for the consumer, environmental
monitoring and medical diagnostics markets. We are poised to benefit from
powerful trends driving the demand for improved technologies within the chemical
sensing arena, including substantial government and private sector investment
in
homeland security, regulatory emphasis on safety, and increasingly stringent
environmental regulations.
The
market for chemical sensing faces unique challenges in detecting hazardous
substances in various forms and in a myriad of operating environments. In
homeland defense, chemical sensors are used to detect chemical warfare agents
and explosives to protect military personnel, government buildings and
civilians. In industrial applications, chemical sensors monitor air quality
for
health and safety purposes and also provide vital information during
manufacturing processes. The existing technologies for chemical sensors in
these
industries are outdated and are typically limited by physical size, sensitivity
and/or reliability. We believe that these factors have led to unacceptable
sample collections, uninspired deployment scenarios, high false positive
rates
and, subsequently, a call to action by the U.S. Department of Defense for
better
solutions.
20
Our
Solution
Our
sensing technology, Owlstone, was specifically designed to meet the
specifications set forth by the U.S. Department of Defense. The key element
of
the Owlstone sensor is a silicon chip that provides a chemical-sensing mechanism
using Field Asymmetric Ion Mobility Spectrometry, or FAIMS, a variant of
conventional Ion Mobility Spectrometry, or IMS. Our technology enables
unprecedented miniaturization of sensors with superior analytical capability
at
a compelling cost advantage, the ability to be programmed and reprogrammed
to
detect a wide range of substances, and high selectivity and sensitivity.
The
Owlstone detector was conceived by Andrew Koehl who began the development
of
Owlstone’s fundamental technology in 2001. Mr. Koehl was later joined by Paul
Boyle and David Ruiz-Alonso and, together, they developed the core
technology.
Miniaturization
and Standardization of Manufacturing
The
sheer
size of current chemical sensing units limits their deployment and provides
a
specific challenge in sample collection. The small size of our detector enables
flexible deployment and allows for the sensor to be moved into contact with
the
sample, a novel approach in many existing chemical sensing applications.
In
homeland defense, this means more comprehensive sensing through the use of
distributed networks of sensors. In industrial applications, this means a
sensor
or a sensor network can be integrated directly into process control providing
real-time monitoring of chemical composition, which saves companies both
time
and money. Our technology enables miniaturized and cost effective detectors
with
low power consumption through its proprietary chip. Despite the innovative
and
proprietary design of the chip, it is manufactured via standard silicon-based
microchip fabrication, which reduces its manufacturing cost. This increases
the
number of potential applications such as weaving the chip into the lapel
of
every military uniform, which provides local chemical sensing at the individual
troop level.
Software
Reprogrammable Sensor
Most
competing sensors are designed to detect a narrow set of substances and cannot
be reprogrammed once deployed, thereby limiting their scope of use. To update
a
deployed sensor, additional costs are incurred due to the need to physically
replace sensor modules that detect substances different than the ones they
were
originally intended to detect. The Owlstone sensor solves this problem through
the modularity of the components that comprise its sensing system. The
separation of the detector hardware from the software application containing
the
“intelligence” to distinguish chemical signatures allows the Owlstone sensor
system to be reprogrammed without having to replace hardware. Whether the
sensor
is programmed to detect benzene or sarin, the underlying hardware remains
the
same; when coupled with a wireless device, the sensor can be updated remotely
at
the direction of the end user. This enables an installed base of Owlstone
sensors to be remotely reprogrammed to detect additional substances or even
new
substances not yet developed. Given today’s dynamic terrorist threats, the
ability to quickly and cost-effectively adapt to new hazards will be invaluable
for applications in airports and subway systems. In comparison to competing
technologies, the Owlstone sensor allows for the specialization and mass
production of a single set of hardware devices for use across the spectrum
of
application. Owlstone’s approach creates a significant time-to-market advantage
for new product creation: as new products or applications are desired, the
fundamental hardware remains the same, thereby eliminating the need for
customization of manufacturing.
Vast
Reduction in False Positives
A
major
problem with most existing detection systems is their cross-sensitivity to
background interferants, which leads to false positives. False positives
resulting from seemingly normal background interferants, such as perfumes,
result in unnecessary and costly responses. The Owlstone sensor offers
significant selectivity advantages over other micro-sensors currently being
utilized by providing a more detailed chemical fingerprint, thereby resulting
in
a higher degree of confidence in the chemical identification process and
a lower
false positive rate. In addition, a distributed network provides more points
of
analysis and further reduces spurious responses. Current development
partnerships are focused on bringing to market chemical sensing devices for
gases like benzene and formaldehyde, known as volatile organic compounds,
or
VOCs, at detection levels many times more sensitive than other technologies
with
much lower corresponding false positive rates. These features of the Owlstone
sensor enable applications where false positive rates must be minimized.
For
example, it allows the deployment of sensors to mass transit systems or
government buildings where common interferants are difficult to predict and
control and currently result in disruptions in operations.
21
Our
Products
We
are
currently marketing two chemical sensing products: Tourist and Lonestar.
Tourist
is an evaluation platform currently being sold by Owlstone to select partners
and customers. Our recently launched Lonestar product is a fully functional
unit
for certain applications in industrial markets as well as a test platform
for
partners providing a fully integrated and deployable chemical detection system.
Lonestar was launched in July 2007, and we have commenced shipping units
to
end-users. In addition, we have also developed and shipped a third product
called the Owlstone OVG-4, which is a system for generating trace concentration
levels of chemicals and calibration gas standards.
We
intend
to keep our sales organization lean and are pursuing product-based strategies
within markets that are characterized by high-volume, centralized procurements.
In applications where procurement is fragmented, we intend to partner with
existing market leaders that already possess distribution networks and
infrastructure using either “component” supply or contract sales
strategies.
Industry
Overview
The
market for chemical sensors in the United States for existing technologies
is
forecast to reach approximately $4.2 billion in 2008, according to the Freedonia
Group. This market forecast excludes military applications. Chemical sensing
for
military applications using existing technologies is forecast at $1.2 billion
in
2008, according to Frost & Sullivan. This does not include markets formed by
the introduction of new innovative technologies that enable expanded deployment
scenarios. There are significant trends driving the demand for improved
technologies within the chemical sensing market, including substantial
government and private sector investment in homeland security, regulatory
emphasis on safety, and increasingly stringent environmental
regulations.
Unlike
a
product specifically tailored for a single vertical industry, chemical sensor
technology spans many industries and applications. Chemical sensors can be
found
in the heating and air conditioning systems of buildings, production lines
of
many manufacturing facilities, server rooms of computer hosting facilities,
on
battlefields, in airports, in hospitals, in residential homes and in
laboratories. They can be stand-alone devices whose sole purpose it is to
detect
a specific chemical or gas, or they can be integrated as a component into
other
products where chemical sensing is only one part of its mission.
Our
initial focus is in the homeland defense and industrial markets for chemical
sensing. Additional markets for potential growth include environmental, consumer
and medical industries, all of which we intend to pursue as our Owlstone
sensor
technology gains momentum in its initial markets.
Homeland
Defense Market
The
homeland defense market has an obvious need for comprehensive integrated
chemical sensing devices. Sensor technologies in the homeland defense market
are
commonly categorized by their end use application, falling within either
the
detection of chemicals, biologicals, radiation, nuclear or explosives, which
are
referred to as CBRNE. We are principally focused on the explosive and chemical
sensor technologies.
The
most mature market within CBRNE is the explosives market, which has wide
acceptance and deployment across government and civilian entities. Ion Mobility
Spectrometry, or IMS, is the technology of choice for explosives because
of its
significant sensitivity to defined explosive threats. However, IMS-based
technologies are bulky, costly and unreliable.
Chemical
sensing, while showing the greatest potential and garnering much of the
attention in homeland defense, has primarily been the domain of the military
and
first responders, leaving the general public and most government facilities
unprotected. The chemical sensing market consists of three major segments:
worn,
handheld and 24/7 monitoring.
·
Worn
Sensors
:
The worn sensor market has been redefined by U.S. military programs
such
as JCAD (Joint Chemical Agent Detector) and includes requirements
that
aggressively combine performance, size, weight and cost characteristics.
The objective of JCAD is to develop and provide military services
with a
lightweight portable monitoring and chemical agent detector for
ships,
aircraft and individual war-fighting
applications.
22
·
Handheld
Sensors
:
The handheld sensor market is predominately driven by the use of
chemical
detection systems within first responders and the military. A mature
marketplace with tens of thousands of systems currently deployed,
opportunities are currently driven by the naturally occurring replacement
cycle and the introduction of improved systems for use in mobile
applications. The push for improved solutions will be increasingly
driven
by the integration of multiple technologies (e.g., photoionization
detector and chemical detection) rather than the individual improvement
of
one detection technique. By combining chemical detection with an
existing,
established and standard first response instrument, we have the
opportunity to redefine the handheld systems currently in this
market and
create an immediate replacement cycle
opportunity.
·
24/7
Monitoring
:
24/7 monitoring includes sensing systems with the purpose of protecting
critical infrastructure on a continuous basis. The creation of
governmental programs for the purpose of protecting critical
infrastructure within mass transit systems and select government
facilities has exposed the deficiencies of existing chemical sensing
solutions. These deficiencies include ineffective sample collection,
nuisance alarms and significant cost. For example, the introduction
of
chemical sensing into building protection has created scenarios
where the
requirement for proper sampling includes the addition of complex
mechanical systems and the modification of building infrastructure.
The
result of these scenarios is a cost-prohibitive investment that
leaves the
market relegated to only the most high-profile facilities. Another
challenge facing chemical sensing solutions is the presence of
nuisance
alarms as a result of common cleaning agents, such as bleach- or
ammonia-based products. Current chemical sensing solutions offer
little to
no quantitative capabilities for the validation and management
of nuisance
alarms.
Industrial
Market
The
industrial market is divided into process control and health and safety
applications.
·
Process
Control
:
Process control involves the monitoring of manufacturing processes
to
ensure quality control and consistency in manufacturing operations.
For
example, chemical sensors can be used by pharmaceutical, food processing
and petrochemical companies to monitor manufacturing processes
and react
when inconsistencies are identified. In certain markets, there
is an
absence of detection-based process control sensors providing continuous
information on chemical presence and composition. As a result of
sample
collection limitations, existing technologies do not offer real-time,
continuous monitoring of process control and instead offer only
a single
“point-in-time” analysis. In-line monitoring provides companies with
continuous quality control, thereby allowing users to immediately
identify
and rectify deviations from the intended process and save companies
time
and money. Our sensor is uniquely positioned to capitalize on these
challenges through its flexible deployment and selectivity
characteristics.
·
Health
and Safety
:
Health and safety detection systems are intended to protect personnel
occupying industrial facilities from hazardous chemicals. There
is a known
deficiency with existing sensors in industrial environments with
respect
to the simultaneous detection of multiple gases and the detection
and
concurrent identification of specific substances (e.g., benzene).
Our
sensor has been demonstrated to detect a range of volatile organic
compounds, including benzene, and has done so in the presence of
complex
mixtures and common interferants.
Market
Opportunity
While
there are an array of chemical detection technologies to support a variety
of
markets and needs, available technologies often fall short of what is desired
by
end users. These technologies include IMS and sorbent materials
technology.
Miniature
sensors do exist in the market today, but they are limited based on their
underlying technology. For example, current miniature chemical sensors, such
as
sorbent materials sensors, provide low performance and have several limitations
such as:
23
·
they
typically proving a simple “yes/no” response to the identification of
individual gases;
·
measurements
can be adversely affected by slight changes in environmental variables,
like fluctuations in temperature;
·
the
presence of chemicals unrelated to the target chemicals of interest,
called interferants, can cause an erroneous
response;
·
they
are typically pre-functionalized, meaning they are built to detect
a
certain chemical and cannot be reprogrammed to detect other chemicals
if
needed after deployment in the field;
and
·
most
miniature sensors on the market today target simple gases with
a low
molecular weight, leaving few solutions to sense more complex substances
like benzene or formaldehyde.
Higher
performance instruments, such as those using IMS, also have their
limitations:
·
they
are large, costly and power hungry;
·
they
typically require high voltages and are difficult to assemble,
leading to
power, weight and cost deficiencies;
and
·
the
sheer size and cost of such instruments precludes their use in
many
scenarios. IMS is commonly used in security applications for the
detection
of explosives and dangerous chemical agents but is too big and
expensive
to be used in mass battlefield deployment
scenarios.
The
increasing emphasis on indoor air quality from government regulators and
other
organizations is leading to a need for innovative air quality monitoring
equipment. There are a numbers of chemicals that can be present in domestic
and
office air which are damaging to health, including volatile organic compounds.
While existing chemical sensors are capable of detecting volatile organic
compounds, they are generally unable to differentiate between different
chemicals and, therefore, cannot discriminate between harmful and harmless
volatile organic compounds. Legislation to enforce air quality standards
is
already in place in Hong Kong, Japan, Korea and Malaysia, with Europe and
the
U.S. anticipated to follow suit. Current technology has yet to keep up with
the
legislation, as there is not an effective deployable solution to monitor
air
quality to ensure compliance.
As
a result of limitations of existing technology solutions, there are several
current market needs that cannot be met and demand a new approach to chemical
sensing.
Benefits
of Our Sensor
While
the
market for chemical sensing has been defined by existing technologies, we
believe that the overall chemical sensing market will grow due to the
availability of novel sensing products such as those that we are developing.
Our
proprietary design and use of Field Asymmetric Ion Mobility Spectrometry,
or
FAIMS, enables our chemical sensor to be brought to the sample, an approach
that
existing technologies do not permit due to size limitations. Our flexibility
in
deployment enhances the ability to utilize networked sensor systems within
environments where it is difficult to obtain a proper sample for
analysis.
The
following outlines the combination of features that distinguish our technologies
from our competition:
·
Small
and Lightweight
:
Cutting-edge, micro-electromechanical systems and micro-fabrication
techniques are used to integrate the spectrometer (or sensor) onto
a
silicon microchip, thereby enabling a new class of detection solutions
with unprecedented analytical unit miniaturization
capability.
·
Cost
Effective
:
Use of standard, micro-fabrication techniques makes it possible
to
manufacture in volume accurately and repeatable at an extremely
low cost.
This affordability opens up the prospect of new applications and
deployment scenarios, including disposable use for selective volatile
chemical detection.
24
·
Customizable
and Reprogrammable
:
Because our technology relies on programmable intelligence rather
than
pre-functionalization, it is easily customized through software
updates
and can be dynamically reprogrammed remotely for new target applications
even after commissioning.
·
Rapid
Analysis and Continuous Monitoring
:
Analysis and results are obtained in a fraction of a second, with
the
ability to measure the presence, absence or concentration of chemicals
accurately, rapidly and continuously in
real-time.
·
Sensitive
:
Ion-based detection offers the highest level of sensitivity, thereby
enabling the detection of minute traces of targeted substances
down to
parts-per-billion levels so that compounds can be identified before
they
reach significant levels. This is especially important in prognostics
and
health management systems.
·
Low
Power
:
Integration onto a chip leads to low power consumption, which allows
for
battery operation. The “instant on” capability of our sensor means that it
can be quickly cycled on and off to maximize battery
lifetime.
·
Reduced
False-Positive Rate
:
By creating a complete “fingerprint” of a chemical and by operating in a
distributed network environment, it is possible to dramatically
reduce
anomalous false positives.
·
Networkable
:
The addition of a drop-in wireless capability provides a networked
sensor
solution. This eases installation and facilitates deployment in
an ad-hoc
manner for remote monitoring applications. Networked sensors also
provide
greater coverage in obtaining samples from various locations within
a
desired environment.
·
Durable
:
A semi-permeable membrane on the sensor excludes dust and dirt
and allows
continued operation in environments with high traffic, humidity
or
contamination.
·
Long
Life
:
There are no degradable materials used in manufacturing our sensor
that
would otherwise limit the lifetime of the sensor, thereby reducing
overall
maintenance costs.
Our
chemical sensing technology can be used wherever there is the need for a
small,
low power, low cost, yet highly sensitive and selective method of detection.
The
following outlines potential applications of our sensors in various markets.
While our initial focus is on the homeland defense and industrial markets,
we
believe that there is significant growth potential within these markets for
novel deployments of chemical sensors.
In
the homeland defense market, we believe that the following are some of the
uses
of our chemical sensors:
·
“temporary”
battlefield detection network - air-dropping hundreds of disposable,
small devices across a battlefield which would provide an intelligent,
wireless network of chemical sensors that could alert central command
about a chemical threat to protect
troops;
·
chemical
sensor “button” - a small, button-sized sensor sewn in the uniforms of
troops to create an immediate sensing device for soldiers to save
time in
seeking shelter or dawning chemical protection gear if needed;
and
·
border
security through shipping container security - embedding small,
inexpensive detectors in the approximately 250 million shipping
containers
moving through major seaports every year to detect narcotics, dangerous
chemicals and/or explosives, all linked via a wireless network
that alerts
the port of dangers before a ship arrives in
port.
In
the
industrial market, we believe that the following are some of the uses of
our
chemical sensors:
·
industrial
process control monitor - ensuring quality control in the manufacture
of
products;
·
hydrocarbon
monitor - analysis of hydrocarbons in engine exhaust for better
control of
engine functions to maximize performance and minimize emissions
through
small, inexpensive sensing
components;
25
·
nitrogen
oxides monitor - monitoring of nitrogen oxides (NOx) concentrations
in
exhaust gas to ensure values do not exceed permissible limits;
and
·
cabin
air quality sensor - detection of volatile organic compounds and
other
pollutants inside a car for cabin air quality
management.
In
the
consumer market, we believe that the following are some of the uses of our
chemical sensors:
·
next
generation smoke detectors for the home - smoke detectors that
detect
pre-combustion chemical signatures (i.e., “the smoke before the smoke
before the fire”) to help alert occupants about fire dangers, thereby
possibly preventing a fire before it occurs;
and
·
integrated
gas monitors - the detection of smoke, carbon monoxide, radon,
volatile
organic compounds and other gases could all be integrated into
a home
network of sensors protecting
families.
In
the
environmental applications market, we believe that the following are some
of the
uses of our chemical sensors:
·
emissions
monitor - monitor the emission of harmful industrial gases into
the
atmosphere that may damage the
environment;
·
detection
of toxic industrial compounds - test for the release of toxic compounds,
monitor decontamination efforts and confirm effective remediation
of the
chemical agent; and
·
water
quality monitor - monitor for contamination and toxicity to ensure
the
safety of drinking water supplies.
In
the
medical applications market, we believe that the following are some of the
uses
of our chemical sensors:
·
diagnostic
instrument - analysis of breath or bodily fluids for non-invasive
diagnosis or monitoring of disease;
·
treatment
monitor - analysis of breath or bodily fluids for non-invasive
monitoring
of treatment efficacy and progress;
and
·
anaesthesia
and respiratory monitor - detect exhaled anaesthesia agents and
other
relevant indicators in the breath to minimize the response time
of
clinicians to vital signs.
Our
Technology
Hardware
Component
The
microchip sensor sits at the center of each of our products. It enables quicker
and more accurate chemical detection and analysis. The sensor has the ability
to
measure the presence, absence or concentration of chemicals accurately, rapidly
and continuously for real-time analysis at the point of need. The silicon
sensor
can be tuned to detect a wide range of airborne or dissolved chemical agents
in
extremely small quantities. It works by using a proprietary form of Field
Asymmetric Ion Mobility Spectrometry, or FAIMS, which is a sensitive and
proven
method of trace detection in which a chemical fingerprint is generated for
each
threat and is identified and classified using software. FAIMS is the evolution
of IMS, which is the current method of choice for the detection of chemical
warfare agents and explosives in the field.
26
In
addition to our proprietary use of FAIMS, the Owlstone microchip chemical
detection technology differs from previous generations of instrumentation
in
that micro- and nano-fabrication methods are used to integrate the spectrometer
onto a silicon microchip. This leads to the following advantages: reduced
size,
lower cost, lower power consumption, and unprecedented performance-to-size
ratio. Because standard semiconductor fabrication methods are used, parts
can be
mass produced at low cost, opening up opportunities for many exciting new
applications for chemical detection such as mass deployment of sensors in
“distributed network” configurations for military and industrial
applications.
Unlike
other miniature chemical sensor technologies that use pre-functionalization,
our
technology does not rely on exotic materials that must be custom-engineered
for
each application and degrade over time. Our sensor is easily customized to
each
application through software updates and can be dynamically reprogrammed
for new
signatures even after deployment. In addition, the use of chemically inert
materials ensures a long shelf life.
Software
Component
Our
technology relies on software intelligence to analyze the chemical fingerprint
detected by the spectrometer on the microchip. The technology does not require
pre-functionalization, a common requirement of other sensor technologies
where
the actual sensor is built only to detect a single substance. The sensor
is a
platform technology that can be used for many applications in many markets.
It
is adapted to each use through software rather than hardware changes. Thus,
the
core of the system remains the same between applications, but the software
programmed into the device is different, thereby making it easy and quick
to
redevelop for new products in new markets. Our products can be updated for
new
chemical targets even after deployment in the field through software
updates.
Because
our technology uses multiple parameters to generate a spectrum, the resultant
spectra, or fingerprints, are rich in information and allow a more accurate
readout. Our technology can generate multidimensional spectroscopic images
for
analysis by using powerful image processing algorithms.
The
market for chemical sensors is highly competitive, complex and fragmented,
with
many applications and many different competing technologies. Some companies
are
focused around specific industry niches, while others are focused around
specific sensor types. Owlstone’s competitors can be segmented in two
categories. First, chemical sensors relating to the technical methodology
of
detection; and second, direct corporate competitors in the FAIMS sensing
space,
which is the chosen technology deployment of Owlstone.
Intellectual
Property
Our
ability to successfully commercialize our products and technologies is
significantly enhanced by our ability to secure strong intellectual property
rights-generally patents-covering these products and technologies. The
development and protection of intellectual property and proprietary technology
is a key priority in our current and ongoing activities. As of December 31,2007, we had been issued one U.S. patent. In addition, we had eleven patent
applications pending with the United States Patent and Trademark Office and
seven patent applications pending with European patent offices covering the
key
functional and operational features of our chemical detection
technologies.
Government
Approvals
In
order
to test, manufacture and market products for commercial use, we may need
to
satisfy mandatory procedures and safety and effectiveness standards established
by our customers, including various regulatory bodies. Any adverse event,
either
before or after approval, can result in product liability claims against
us,
which could significantly and adversely impact our business, results of
operations and the value of our common stock.
27
Corporate
History
We
were
originally formed as Colorado Gold & Silver, Inc., a Colorado corporation,
on March 3, 1980, and subsequently changed our name to Dynamic I-T, Inc.
and
then in January 2004, changed our name to Artwork & Beyond, Inc., or
Artwork. On October 1, 2004, Artwork entered into a share exchange agreement
to
acquire all of the issued and outstanding common stock of Advance Nanotech
Holdings, Inc. pursuant to the terms and conditions set forth in the share
exchange agreement. The acquisition transaction closed simultaneously with
the
execution of the share exchange agreement. Artwork and its affiliates were
unrelated to the stockholders of us or Advance Nanotech Holdings, Inc. prior
to
the execution, delivery and performance of the share exchange agreement.
As a
result of this transaction (and certain capital transactions, including a
reverse 100-to-1 stock split on October 5, 2005), control of Artwork was
changed, with the former stockholders of Advance Nanotech Holdings, Inc.
acquired approximately 99% of Artwork’s outstanding common stock. In addition,
all of the officers and directors of Artwork prior to the transaction were
replaced by designees of the former shareholders of Advance Nanotech Holdings,
Inc., and Artwork’s corporate name was changed to “Advance Nanotech, Inc.” As a
consequence of the change in control of Artwork resulting from these
transactions, all prior business activities of Artwork were completely
terminated, and Artwork adopted the business plan developed by Advance Nanotech
Holdings, Inc. prior to the transaction. On October 5, 2004, the new Board
of
Directors approved the change of the issuer’s name to “Advance Nanotech, Inc. (a
Colorado corporation),” or Advance Nanotech Colorado.
On
June 19, 2006, Advance Nanotech Colorado merged with and into its newly-formed,
wholly-owned subsidiary, Advance Nanotech, Inc., a Delaware corporation,
or
Advance Nanotech Delaware, in order to reincorporate in the State of Delaware.
The reincorporation was approved by Advance Nanotech Colorado's shareholders
on
May 11, 2006. As a result of the reincorporation, our legal domicile is now
Delaware. Each outstanding Advance Nanotech Colorado common share was
automatically converted into one Advance Nanotech Delaware common share.
As a
result of the reincorporation, each outstanding option, right or warrant
to
acquire shares of Advance Nanotech Colorado common stock converted into an
option, right or warrant to acquire an equal number of shares of Advance
Nanotech Delaware common stock, with no further action required by any party,
under the same terms and conditions as the original option, right or
warrant.
On
December 19, 2007, the Company entered into an exchange agreement (the “Exchange
Agreement”) with its majority owned subsidiary Owlstone Nanotech, Inc.
(“Owlstone”), and certain stockholders of Owlstone (consisting of all of the
founders and executive officers of Owlstone, who are hereafter called the
“Owlstone Founders”) to increase the Company's ownership interest in Owlstone by
issuing newly issued shares of our common stock to the Owlstone Founders
in
exchange for Owlstone common shares at an exchange rate of 3.33 shares of
our
common stock for each share of Owlstone common stock. The Owlstone Founders
currently own an aggregate of 4,211,303 shares of Owlstone common stock,
consisting of 22.26% of the total number of shares of common stock of Owlstone
outstanding. The Exchange Agreement also contemplates (a) that the Company
will,
following consummation of the exchange with the Owlstone Founders, offer
to
acquire the remaining shares of Owlstone common stock then outstanding (the
“Minority Stockholders”, which hold approximately 26.21% of the currently
outstanding Owlstone shares) on terms and conditions identical to those offered
to the Owlstone Founders and (b) the issuance to the Minority Stockholders
of
one warrant to purchase 0.33 shares of our common stock at a purchase price
of
$0.30 per share.
On
December 28, 2007, the Company sold its 8.8% equity interest in Singapore-based
Singular ID Pte Ltd. for $1.19 million.
Employees
As
of
March 31, 2008, we had 29 employees, including 25 full-time employees, on
a
consolidated basis.
Legal
Proceedings
On
May 6,2008, Mr. Magnus Gittins, a director of the Company and former President
and
Executive Chairman, filed a complaint with the Department of Labor styled
Magnus
R. E. Gittins v. Advance Nanotech, Inc., Case No. 2-4173-08-048. Mr. Gittins
alleges Sarbanes-Oxley Act retaliatory termination of employment with the
Company resulting from his informing the Audit Committee about purportedly
inadequate and inaccurate disclosures provided by the Company’s majority-owned
subsidiary, Owlstone Nanotech, Inc. Mr. Gittins requests relief in the form
of
reinstatement of employment and damages in the amount of not less than
$10,000,000, the issuance of 650,000 shares of Company common stock, the
issuance of 350,000 stock options, salary and benefits through September10,2008, attorneys’ fees and costs. The Company does not believe that the complaint
made by Mr. Gittins will result in any material liability or have any material
adverse effect on the Company. The information allegedly provided by Mr.
Gittins
and upon which he bases his complaint was not new or previously undisclosed,
as
the Company had previously disclosed the matter in its Annual Report on Form
10-K for the year ended December 31, 2007, and discloses in Part I, Item
4T of
this Form 10-Q. It was identified in the fourth quarter of 2007 that as a
result
of the growth of Owlstone’s business a new business process had been established
and implemented between Owlstone and a subsidiary of Owlstone without adjusting
existing systems to provide adequate documented controls and procedures required
as a result of this growth for external reporting by management. As a
consequence, a material deficiency existed, and continues to exist, regarding
Owlstone’s disclosure process, which the Company and its Owlstone subsidiary
have been and continue to be working to remedy by improving certain controls
and
procedures.
28
We
are
also involved from time to time in various other lawsuits which are incidental
to our business. In management’s opinion, the adverse determination of such
other lawsuits currently pending would not have a material adverse effect
on our
liquidity, financial position or results of operations.
29
PROPERTIES
We
do not
own any interest in real property. We lease 3,569 square feet of general
office
space at our principal executive offices at 600 Lexington Avenue, 29th Floor,
New York, New York10022 for base rent of approximately $14,917 per month.
These
facilities are the center for all of our administrative functions in the
United
States. The lease expires on September 13, 2010. Management believes that
the
office space is adequate for our current needs. On February 1, 2007, we
subleased some of this office space to an affiliate of a director of the
Company, Lee Cole. The sublease had a term from February 1, 2007 through
January
2008 and required monthly rental payments of $8,000. The sublease has been
extended on a month-to-month basis.
Our
directly owned subsidiary, Owlstone Nanotech, Inc., leases office facilities
at
Park 80 West Plaza 2, Saddle Brook, New Jersey, for monthly rent of
approximately $2,000. The lease is on a month-to-month basis, and either
party
can terminate at any time with a 30-day notification. The office is utilized
as
an executive office for Owlstone.
Our
indirectly owned subsidiary, Owlstone Limited, has three leased offices in
Cambridge (UK). The Cambridge (UK) offices are located at St. John’s Innovation
Centre, Cowley Road, Cambridge, CB4 0WS. All three leases are on a
month-to-month basis, and either party can terminate at any time with a 30-day
notification. The following is a breakdown of the three leases and their
other
terms:
·
Unit
17 - 1,280 square feet and monthly rent payments of approximately
$8,800
(GBP £4,500), which commenced on October 13, 2006;
·
Unit
33 - 1,280 square feet and monthly rent payments of approximately
$7,700
(GBP £3,950), which commenced on February 14, 2005; and
·
Unit
47 - 205 square feet and monthly rent payments of approximately
$1,500
(GBP £786), which commenced on January 13,2006.
30
MANAGEMENT
Our
directors and executive officers as of July 11, 2008, were as
follows:
Lee
J. Cole, Interim Chief Executive Officer and Director
Mr.
Cole
has served as our director since October 2005 and formerly served as Chairman
of
the Board from October 2004 to April 2006. On April 28, 2008, Mr. Cole was
appointed the interim Acting Chief Executive Officer of the Company. Mr.
Cole is
the Chairman of Gardant Pharmaceuticals, Inc., an OTC-traded pharmaceutical
development organization, and has served in that position since September
2004.
Since 1998, Mr. Cole has been a principal with Tech Capital Group, a technology
consulting and investment firm that has investments in private and public
information and healthcare technology companies. Mr. Cole has also been a
director since June 2004 of Enhance Biotech, Inc., an OTC-traded developer
of
lifestyle drug pharmaceuticals, a director since November 2002 of Neuro
Bioscience, Inc., an OTC-traded biopharmaceutical developer focusing on diseases
and disorders affecting the central nervous system, and a director since
December 2002 of Electronic Game Card, Inc., an OTC-traded developer and
designer of gaming devices, and is currently the interim Chief Executive
Officer
of Electronic Game Card, Inc.
Peter
Rugg, Interim Chairman of the Board and Director
Mr.
Rugg
has served as our director since October 2005 and currently serves as interim
Chairman of the Board. Mr. Rugg, a Senior Partner of Tatum, LLC, an executive
services firm, has been employed as a partner of that firm for the last three
years and has been with Tatum, LLC for over five years. Mr. Rugg has more
than
30 years of diversified business experience with special competence in capital
structure, and creative financing alternatives and general management of
small
and medium sized companies. At Tatum, Mr. Rugg managed public company financial
reporting, investor relations, tax compliance and audit, budget and planning,
and information technology systems, human resources, operations, and business
development.
Thomas
P. Finn, Chief Financial Officer and Secretary
Thomas
Finn has served as our Chief Financial Officer since October 2005, having
joined
us in February 2005 as our Financial Controller. Prior to joining us, Mr.
Finn
worked for Purdue Pharmaceutical L.P. and its independent associated companies
in various capacities but most recently as an internal auditor from January
2004
to February 2005. Mr. Finn worked as an independent consultant, from May
2000 to
January 2004, as interim CFO and controller and auditor for various start-up
companies where he has always focused on improving controls and procedures.
Mr.
Finn also worked for over six years with IBM Corporation until May 2000.
Mr.
Finn holds a Bachelor of Business Administration in Finance from the University
of Massachusetts at Amherst and a Masters of Business Administration in
International Business from the Helsinki School of Economics in Helsinki,
Finland.
Virgil
E. Wenger, Director
Mr.
Wenger has served as our director since October 2005. Mr. Wenger, a CPA and
former partner in Ernst & Young LLP, retired in 1990 after a 37-year career
with Ernst & Young LLP and Arthur Young & Company. Since 1990, Mr.
Wenger has continued his business activities as an independent consultant
and
financial advisor. Since 1992, Mr. Wenger has served as a Trustee of the
Pittsburgh & West Virginia Railroad, an American Stock Exchange listed
company. Since 2003, Mr. Wenger has served as a director of Enhanced Technology
Financial Services, Inc., a provider of information about loans, and as Chief
Financial Officer of Stockholder Intelligence Services, LLC, a provider to
companies of consolidated information about their stockholders. Mr. Wenger
is
the father-in-law of our CFO and Secretary, Thomas P. Finn.
31
Joseph
Peters, Director
Mr.
Peters has served as our director since January 2008. Mr. Peters served
President George W. Bush as the Assistant Deputy Director for State and Local
Affairs of the White House’s Drug Policy Office (commonly referred to as the
Drug Czar’s Office), where his duties included supervision of the country’s High
Intensity Drug Trafficking Area (HIDTA) Program. Mr. Peters also served as
the
Drug Czar’s Liaison to the White House Office of Homeland Security and Governor
Tom Ridge. Previously, Mr. Peters joined the Clinton White House to direct
the
country’s 26 HIDTAs, with an annual budget of a quarter billion dollars. Mr.
Peters also represented the White House Drug Czar’s office with police,
prosecutors, governors, mayors and many non-governmental organizations. Mr.
Peters was named as a special organized crime prosecutor with the U.S.
Department of Justice and received its “John Marshall Award” from U.S. Attorney
General Dick Thornburg. Mr. Peters began his career as a State prosecutor
when
he joined the Pennsylvania Attorney General’s office in 1983. He later served as
a Chief Deputy Attorney General of the Organized Crime Section, and in 1989
was
named the first Executive Deputy Attorney General of the newly created Drug
Law
Division. In that capacity, Mr. Peters oversaw the activities of 56 operational
drug task forces throughout the State, involving approximately 760 local
police
departments with 4,500 law enforcement officers. Mr. Peters consults to national
and international law enforcement organizations on narco-terrorism and related
intelligence and prosecution issues. He is a member of the International
Association of Chiefs of Police (IACP), where he sits on their Terrorism
Committee. Mr. Peters serves as President and Director of MSGI Security
Solutions, Inc (MSGI.OB) since 2004. Mr. Peters also serves on the Board
of
Directors of Vigicomm Inc. since 2007.
Douglas
Zorn, Director
Mr.
Zorn
has served as our director since March 2007. Mr. Zorn is the founder of three
start-up companies. Mr. Zorn is the founder and a director of US Wireless
Data,
Inc. (d/b/a StarVox Communications), a Voice-Over-Internet-Protocol (VoIP)
communication company, where he has also served as the Chairman and President
since June 2004 to the present. Mr. Zorn also founded and served as President,
CEO and Chairman of Appiant Technologies, Inc., a communications software
company from April 1994 to February 2003, and as COO of Monterey
Telecommunications Corporation, an OEM wireless switch manufacturer from
March
1992 to March 1994. Mr. Zorn also served as Vice President and CFO of Centigram
Communications Corporation, a designer, manufacturer and marketer of integrated
systems, from April 1985 to February 1992. Mr. Zorn is a certified public
accountant who holds a Masters in Business Administration from Santa Clara
University.
CORPORATE
GOVERNANCE
Our
Board
of Directors and management are committed to responsible corporate governance
to
ensure that we are managed for the long-term benefit of our stockholders.
To
that end, our Board of Directors and management periodically review and update,
as appropriate, our corporate governance policies and practices. In doing
so,
our Board and management review published guidelines and recommendations
of
institutional stockholder organizations and current best practices of similarly
situated public companies. Our Board and management also regularly evaluate
and,
when appropriate, revise our corporate governance policies and practices
in
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the
rules
and listing standards issued by the SEC and The NASDAQ Stock Market, Inc.,
or
NASDAQ.
Corporate
Governance Policies and Practices
The
following is a summary of our corporate governance policies and
practices:
·
A
majority of the members of our Board of Directors are independent
directors, as defined by NASDAQ. Our Board of Directors has determined
that all of our directors are independent, other than Virgil Wenger
and
Lee Cole. Independent directors do not receive consulting, legal
or other
fees from us other than Board of Directors
compensation.
·
All
of our employees, officers and directors are subject to our Code
of
Business Conduct and Ethics Policy, which is available on our website
at
www.advancenanotech.com. The ethics policy meets the code of ethics
requirements of the SEC. If any material provisions of our Code
of
Business Conduct and Ethics Policy are waived for our Chief Executive
Officer or senior financial officers, or if any substantive changes
are
made to our policy as they relate to any director or executive
officer, we
will disclose that fact on our website within four (4) business
days. In
addition, any other material amendment of our Code of Business
Conduct and
Ethics Policy will be so disclosed.
32
·
Our
Board’s current policy is to separate the roles of Chairman of the Board
and Chief Executive Officer.
·
The
Audit Committee and Governance Committee each consist entirely
of
independent directors.
·
Our
Board reviews at least annually our business initiatives, capital
projects
and budget matters.
·
The
Audit Committee reviews and approves all related-party
transactions.
·
As
part of our Code of Business Conduct and Ethics Policy, we have
made a
“whistleblower” hotline available to all employees for anonymous reporting
of financial or other concerns. The Audit Committee receives directly,
without management participation, all hotline activity reports,
including
complaints on accounting, internal controls and auditing
matters.
Stockholder
Communications with Directors
Stockholders
who want to communicate with the Board or with a particular director may
send a
letter to the Secretary of the Company at Advance Nanotech, Inc., 600 Lexington
Avenue, 29th Floor, New York, New York10022. The mailing envelope should
contain a clear notation indicating that the enclosed letter is a “Board
Communication” or “Director Communication.” All such letters should state
whether the intended recipients are all members of the Board or just certain
specified individual directors. The Secretary will circulate the communications
(with the exception of commercial solicitations) to the appropriate director
or
directors. Communications marked “Confidential” will be forwarded
unopened.
Board
Meetings and Committees
Our
Board
consists of a majority of independent directors, consisting of Messrs. Peters,
Rugg and Zorn. Each director attended at least 75% of the meetings of the
Board
of Directors and Board committees on which such director served during 2007.
The
Board has four standing committees: an Audit Committee, a Compensation
Committee, a Governance Committee and an Executive Committee. Current committee
members are listed below. Each committee has a charter which is available
on our
website at www.advancenanotech.com.
The
committee memberships of our directors as of July 11, 2008 were as
follows:
Committee Membership
Name
Director Since
Audit
Compensation
Governance
Executive
Lee
J. Cole
2005
Chair
Chair
Peter
Rugg
2005
Chair
Chair
Virgil
E. Wenger
2005
X
X
Joseph
Peters
2008
Douglas
Zorn
2007
X
X
Audit
Committee:
The
functions of the Audit Committee are to recommend selection of independent
public accountants to our Board of Directors, to review the scope and results
of
the year-end audit with management and the independent auditors, to review
our
accounting principles and our system of internal accounting controls and
to
review our annual and quarterly reports before filing with the SEC. Our Board
of
Directors has determined that all members of the Audit Committee are independent
directors under the rules of NASDAQ. Our Board of Directors has determined
that
all members of the Audit Committee are financially literate, as that term
is
defined by NASDAQ and by applicable SEC rules, and that Doug Zorn, CPA, is
an
“Audit Committee Financial Expert” who is independent of management in
accordance with applicable regulations. The Audit Committee currently consists
of Messrs. Rugg (Chairman), Cole and Zorn. The Audit Committee met four times
during 2007 and all members of the Audit Committee attended those meetings.
Prior to his appointment as interim Principal Executive Officer of the Company
on April 28, 2008, Mr. Cole was a member of the Audit Committee.
33
Compensation
Committee:
The
Compensation Committee reviews and approves salaries, bonuses and other benefits
payable to the executive officers and administers the 2005 Equity Incentive
Plan, as amended, and will administer the 2008 Equity Incentive Plan. All
members of the Compensation Committee, except Mr. Cole, are (1) “non-employee
directors” (within the meaning of Rule 16b-3 of the Exchange Act), and (2)
“outside directors” (within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended). None of the members of the Compensation
Committee have interlocking relationships as defined by the SEC. During 2007,
one member of the Compensation Committee did not meet the definition of
“independent” under the rules of NASDAQ. Virgil Wenger is the father-in-law of
our Chief Financial Officer, Thomas P. Finn. As such, Mr. Wenger abstains
from
any vote or resolution specifically related to the compensation for his
son-in-law. The Compensation Committee is specifically responsible for
determining the compensation of the Chief Executive Officer. As a result
of his
appointment as interim Principal Executive Officer of the Company on April28,2008, Mr. Cole no longer meets the definition of “independent” under the rules
of the NASDAQ. Mr. Cole abstains from any vote or resolution specifically
related to his own compensation as an executive officer of the Company. The
Compensation Committee currently consists of Messrs. Cole (Chairman) and
Wenger.
The Compensation Committee met three times in 2007.
Governance
Committee:
The
Governance Committee is responsible for proposing a list of directors for
election by the stockholders at each annual meeting and for proposing candidates
to fill any vacancies. The Governance Committee currently consists of Messrs.
Rugg (Chairman) and Zorn. The Governance Committee met one time in
2007.
The
Governance Committee manages the process for evaluating current Board members
at
the time they are considered for re-nomination. After considering the
appropriate skills and characteristics required on the Board of Directors,
the
current makeup of the Board, the results of the evaluations, and the wishes
of
the Board members to be re nominated, the Governance Committee recommends
to the
Board of Directors whether those individuals should be
re-nominated.
The
Governance Committee meets at least on an annual basis and will review with
the
Board of Directors whether it believes the Board would benefit from adding
any
new member(s), and if so, the appropriate skills and characteristics required
for the new member(s). If the Board of Directors determines that a new member
would be beneficial, the Governance Committee solicits and receives
recommendations for candidates and manages the process for evaluating
candidates. All potential candidates, regardless of their source, are reviewed
under the same process. The Governance Committee (or its chairman) screens
the
available information about the potential candidates. Based on the results
of
the initial screening, interviews with viable candidates are scheduled with
Governance Committee members, other members of the Board of Directors and
senior
members of management. Upon completion of these interviews and other due
diligence, the Governance Committee may recommend to the Board of Directors
the
election or nomination of a candidate.
Candidates
for independent Board members have typically been found through recommendations
from directors or others associated with the Company. Stockholders may also
recommend candidates by sending the candidate’s name and resume to the
Governance Committee under the provisions set forth above for communication
with
the Board of Directors.
The
Governance Committee has no predefined minimum criteria for selecting Board
nominees, although it believes that all independent directors should share
qualities such as independence; experience at the corporate, rather than
divisional level, in multi-national organizations larger than us; relevant
non-competitive experience; and strong communication and analytical skills.
In
any given search, the Governance Committee may also define particular
characteristics for candidates to balance the overall skills and characteristics
of the Board of Directors and the perceived needs of the Company. For example,
we have previously sought a nominee with significant financial expertise
and a
nominee with significant relevant operating experience. The Governance Committee
believes that it is necessary for at least one independent Board member to
possess each of these skills. However, during any search the Governance
Committee reserves the right to modify its stated search criteria for
exceptional candidates.
Executive
Committee:
The
Executive Committee meets and takes action on behalf of the full Board of
Directors between regularly scheduled meetings in the event that it is not
practical or timely to convene a full meeting of the Board of Directors.
The
Executive Committee currently consists of Messrs. Cole (Chairman) and Wenger.
The Executive Committee met three times during 2007.
34
Non-Employee
Director Compensation
Members
of the Board of Directors who are not employees of the Company receive a
retainer of $5,000 per quarter and a fee of $1,000 for attending each Board
or
stockholder meeting held in person. Directors who are employees do not receive
compensation for serving as directors or for attending Board of Directors,
committee or stockholder meetings. In addition, Mr. Cole does not receive
any
compensation for serving as a director or for attending Board of Directors,
committee or stockholder meetings because he received a special grant of
stock
options in 2006 to acknowledge his role as a founder of the Company. We maintain
a written compensation policy for our non-employee directors. We do not provide
additional compensation for service on any of our Board committees. There
is one
family relationship between a director and an executive officer of the Company,
which was disclosed on the day the director was elected: Virgil Wenger, a
director of the Company, is the father-in-law of Thomas Finn, Chief Financial
Officer.
The
following table provides information on compensation awarded or paid to our
non-employee directors for the fiscal year ended December 31, 2007.
Name
Fees Earned
or Paid in Cash
($)
Option
Awards
($)
Total
($)
Lee
J. Cole (1)
$
-
$
-
$
-
Peter
Rugg (2)
$
27,500
$
-
$
27,500
Virgil
E. Wenger (3)
$
28,500
$
-
$
28,500
John
Robertson (4)
$
27,500
$
-
$
27,500
Douglas
Zorn (5)
$
17,500
$
-
$
17,500
(1)
As of
December 31, 2007, there were 120,000 stock options granted to Mr. Cole that
were still outstanding.
(2)
As of
December 31, 2007, there were 20,000 stock options granted to Mr. Rugg that
were
still outstanding.
(3)
As of
December 31, 2007, there were 20,000 stock options granted to Mr. Wenger
that
were still outstanding.
(4)
As of
December 31, 2007, there were 20,000 stock options granted to Mr. Robertson
that
were still outstanding. Mr. Robertson resigned as a director on January 22,2008. Mr. Peters became a director on January 22, 2008.
(5)
As of
December 31, 2007, there were zero stock options granted to Mr. Zorn that
were
still outstanding.
35
EXECUTIVE
COMPENSATION
SummaryCompensation
Table
The
following table sets forth a summary of annual and long-term compensation
awarded to, earned by, or paid for the fiscal years ended December 31, 2006
and
2007 to our Chief Executive Officer and each of the next two most highly
compensated executive officers (as defined in Rule 3b-7 under the Exchange
Act)
serving at the end of 2007 (referred to as the named executive
officers):
Principal Position
Year
Salary
($)
(1)
Bonus
($)
(2)
Stock
Awards
($)
(3)
Option
Awards
($)
(4)
Non-Equity
Incentive Plan
Compensation
($)
(5)
All Other
Compensation
($)
(6)
Total
($)
Magnus
R. E. Gittins (7)
2007
$
158,144
$
-
$
37,779
$
38,723
$
-
$
64,666
$
299,312
Executive
Chairman and
2006
$
183,333
$
-
$
114,178
$
255,613
$
-
$
71,320
$
624,444
Chairman
of the Board
Antonio
Goncalves (8)
2007
$
252,083
$
-
$
22,433
$
38,723
$
-
$
73,116
$
386,355
Chief
Executive Officer
2006
$
109,145
$
-
$
167,127
$
-
$
-
$
3,864
$
280,136
Thomas
P. Finn
2007
$
240,833
$
-
$
52,134
$
38,723
$
-
$
73,116
$
404,806
Chief
Financial Officer
2006
$
195,000
$
-
$
137,537
$
76,684
$
-
$
10,700
$
419,921
and
Secretary
(1)
Per
SEC rules, the salary column represents the amount of actual gross
wages
paid in 2006 and 2007 to the named executive
officer.
(2)
The
Company did not pay discretionary cash bonuses during 2006 and
2007. Any
bonuses paid were performance-based and paid through our 2005 Equity
Incentive Plan and included in the “Stock Awards”
column.
(3)
For
2007, reflects awards of our common stock on May 17, 2007 to Messrs.
Gittins, Goncalves and Finn who received 104,941, 62,313
and 144,817 stock awards, respectively. Each stock award is reflected
as the dollar amount recognized for financial statement reporting
purposes
with respect to the fiscal year in accordance with SFAS No. 123
(revised
2004), “Share-Based Payment.” Under the terms of the 2005 Equity Incentive
Plan, which was implemented on December 30, 2005, 3,000,000 shares
of
common stock were reserved for issuance upon stock awards and stock
options to be granted. The 2005 Equity Incentive Plan is a non-qualified
plan and will expire on December 22, 2010, but options may remain
outstanding past this date. The Board authorizes the grant of options
to
purchase stock as well as the grant of shares of stock under this
plan.
Grants cancelled or forfeited are available for future grants.
The amounts
shown above reflect the value of the stock award based on the grant
date
fair value of the stock expensed at the time of the appropriate
service
period during the year. In addition, Messrs. Gittins, Goncalves
and Finn
were each awarded 650,000 shares of restricted common stock to
be vested
quarterly, pro rata, over two years commencing on August 13, 2007.
These
shares have not yet been issued because a sufficient number of
authorized
shares are not available under the 2005 Equity Incentive
Plan.
For
2006,
each named executive officer received stock awards as follows as accounted
for
in the financial statements for fiscal year end December 31, 2007:
Of
the total shares received, 24,406 shares represented a performance
based
bonus.
(b)
Of
the total shares received, 9,064 shares represented a performance
based
bonus.
(c)
Of
the total shares received, 44,186 shares represented a performance
based
bonus.
(4)
The
values shown reflect the dollar amounts relating to option awards
recognized for financial statement reporting purposes for the fiscal
years
ended December 31, 2006 and 2007, as applicable, in accordance
with SFAS
No. 123 (revised 2004), “Share-Based Payment.” Assumptions used in the
calculation of these amounts for the fiscal year ended December31, 2006
are included in Note I to our audited financial statements for
the fiscal
year ended December 31, 2006, included in our Annual Report on
Form 10-KSB
filed with the SEC on March 30, 2007.
For
2007, these values include amounts from options awarded on August13,2007; however, these options have not yet been issued because a
sufficient
number of authorized shares are not available under the 2005 Equity
Incentive Plan. Assumptions used in the calculation of these amounts
for the fiscal year ended December 31, 2007 are included in Note
I to our
audited financial statements for the fiscal year ended December31,2007.
(5)
The
Company did not pay any cash bonuses in 2006 or
2007.
(6)
All
Other Compensation consists of commuting allowance, gross-up for
payment
of taxes, housing allowance and fees for serving as a director
of one of
the Company's majority-owned subsidiaries as
follows:
Name
Commuting
Allowance
($)
Housing
Allowance
($)
Gross-up
for
taxes
($)
Director
Fees
($)
Total
Other
Compensation
($)
Magnus
R. E. Gittins
2007
$
2,250
$
-
$
-
$
62,416
$
64,666
2006
$
-
$
44,400
$
26,920
$
-
$
71,320
Antonio
Goncalves
2007
$
6,000
$
-
$
4,700
$
62,416
$
73,116
2006
$
2,167
$
-
$
1,697
$
-
$
3,864
Thomas
P. Finn
2007
$
6,000
$
-
$
4,700
$
62,416
$
73,116
2006
$
6,000
$
-
$
4,700
$
-
$
10,700
(7)
Mr.
Gittins’ employment with the Company was terminated by the Board of
Directors on May 2, 2008.
Each
of
the above named executive officers entered into Amended and Restated Employment
Agreements with the Company on August 13, 2007. The following describes the
terms of the agreements that Mr. Gittins and Mr. Goncalves had with the Company
prior to their termination of employment and that Mr. Finn continues to have
with the Company. The terms of the agreements are identical except as described
herein. The base salary for Mr. Gittins was $270,000 per annum; Mr. Goncalves’
base salary was $260,000; and Mr. Finn’s base salary is $250,000. The initial
term of their employment agreements is for two years and continues during
such
time until terminated by either party pursuant to the terms summarized under
“Employment, Termination and Change-in-Control Arrangements” on page 38. Each
employment agreement renews automatically for a one-year period at the end
of
its term unless either party provides notice to the other party at least
90 days
prior to the expiration date. Each named executive officer receives a $500
commuting allowance as a non-accountable reimbursement for commuting
expenses. Each named executive officer is entitled according to their
employment agreements to receive options for 350,000 shares of our common
stock
with a cashless exercise provision, an exercise price of $0.25 and a vesting
schedule of 87,500 options per quarter commencing on August 13, 2007. Each
named
executive officer is also entitled according to their employment agreements
to
650,000 shares of restricted common stock which vest quarterly pro-rata over
two
years commencing on August 13, 2007. These options and restricted shares
have
not yet been issued because a sufficient number of authorized shares are
not
available under the 2005 Equity Incentive Plan. The Company accrues these
equity
awards accordingly until such time as a new equity plan is approved and
implemented by the Board of Directors. Each employment agreement contains
a
provision prohibiting the named executive officer from competing with the
Company for a period of at least six months after his employment is terminated.
The foregoing descriptions of the employment agreements are qualified in
their
entirety by the actual agreements, copies of which have previously been filed
with the SEC.
37
OutstandingEquity
Awards at 2007 Fiscal Year-End
The
following table provides certain information as of December 31, 2007, concerning
unexercised options and stock awards including those that had been granted
but
not yet vested as of such date for each of the named executive
officers.
Option Awards(2)
Stock Awards(2)
Number of
Securities
Underlying
Un-exercised
Options
(#) (1)
Number of
Securities
Underlying
Unexercised
Options
(#)
Number of
Securities
Underlying
Unexercised
Unearned
Option
Exercise
Price
Option
Expiration
Number
of
Shares
or
Units of
Stock
That
Have
Not
Vested
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
Number of
Unearned
Shares,
Units
or Other
Rights
That
Have Not
Vested
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
Name
Exercisable
Un-exercisable
Options
(#)
($)
Date
(#)
($)
(#)
($)
Magnus
R. E. Gittins
400,000
-
-
$
2.03
1/5/2011
-
-
-
$
-
Antonio
Goncalves
-
-
-
$
-
-
-
-
-
$
-
Thomas
P. Finn
120,000
-
-
$
2.03
1/5/2011
-
-
-
$
-
(1)
Represents
the number of options to purchase shares of our common stock. The
options
were issued on January 5, 2006 and have a five-year term. The options
were
immediately vested 100% on the date of grant. The options were
issued at
fair market value determined by the closing stock price on the
day
preceding the grant date. We record the straight-line expense of
the
options over a three-year service period.
(2)
These
numbers do not include stock options and stock awards that were
awarded on
August 13, 2007, which have not been issued because we do not have
sufficient shares available under our 2005 Equity Incentive
Plan.
Each
of
Messrs. Gittins, Goncalves and Finn have two-year employment agreements with
us
dated August 13, 2007, which provide for payments by us under various
circumstances after termination of their employment as described
below.
Termination
by Executive Without Good Reason.
An
executive may terminate his employment with us for any reason or no reason
by
giving us at least 180 days prior written notice. We, at our election, may
either require the executive to continue to perform his duties for the full
180-day notice period or terminate his employment at any time during such
180-day notice period. An election by us to terminate an executive’s employment
at any time during such 180-day notice period will not be deemed to be a
termination of the executive’s employment by us without cause or a termination
of the executive’s employment by us for cause, but will be treated as a
termination of employment by the executive without good reason. If an
executive’s employment is terminated by us before the 180-day notice period has
expired without cause, the executive shall continue to receive his base salary
and bonus, and we will continue to provide medical and dental benefits for
the
executive and the executive’s family, by paying the premium for health insurance
continuation coverage under COBRA to the extent he elects COBRA coverage
(or
continue to contribute the employer portion of the premium normally paid
by us
for our current employees), for the unexpired balance of the 180-day notice
period.
38
Termination
by Executive for Good Reason.
Upon
180 days’ written notice to us of an executive’s intent to terminate his
employment agreement, the executive has the right to terminate his employment
for “good reason,” which is one the following reasons: either our material
breach of his employment agreement or relocation of our headquarters and/or
the
executive’s regular work address to a location which is more than 40 miles from
the current principal address at which he is required to perform his duties
without his prior written consent. If an executive terminates his employment
for
good reason, he will continue to receive his base salary and bonus, and we
will
continue to provide medical and dental benefits for him and his family, by
paying the premium for health insurance continuation coverage under COBRA
to the
extent he elects COBRA coverage (or continue to contribute the employer portion
of the premium normally paid by us for our current employees), for period
of the
lesser of 180 days from the earlier to occur of the date notice of termination
is given or the date on which employment actually terminates.
Termination
by Us for Cause.
If the
executive’s employment is terminated for “cause,” the executive will not be
entitled to and shall not receive any compensation or benefits of any type
following the effective date of termination, except such benefits as may
be
required to be extended under applicable state or federal law. The term “cause”
includes, but is not limited to, (i) conviction of a felony or a crime involving
moral turpitude; (ii) engagement in conduct which has the effect, or might
reasonably be expected to have the effect of bringing disrepute to our
reputation or hold us or the executive up to public ridicule; (iii) fraud
on or
misappropriation of any funds or property of us, any affiliate, customer
or
vendor; (iv) wilful violation of any securities law, rule or regulation (other
than minor traffic violations or similar offenses); (v) personal dishonesty,
or
breach of fiduciary duty which involves personal profit; (vi) gross incompetence
in the performance of the executive’s duties; (vii) wilful misconduct in
connection with the executive’s duties; (viii) habitual absenteeism or
inattention to the executive’s duties; (ix) chronic use of alcohol, drugs or
other similar substances (other than pursuant to medical prescriptions and
under
doctors’ supervision for treatment of legitimate illnesses or conditions) which
affects the executive’s work performance; (x) wilful violation of any of our
rules, regulations, procedures or policies which has, or may reasonably be
expected to have, a material adverse effect on us; (xi) engaging in behavior
that would constitute grounds for liability for harassment (as proscribed
by the
U.S. Equal Employment Opportunity Commission Guidelines or any other applicable
state or local regulatory body) or other egregious conduct that violates
laws
governing the workplace; or (xii) material breach of any material provision
of
any employment, non-disclosure, non-competition, non-solicitation or other
similar agreement executed by the executive for our benefit or of any of
our
material policies, all as determined by the Board, which determination will
be
conclusive. Notwithstanding anything to the contrary, employment may not
be
terminated for “cause” in the event that the executive becomes permanently
disabled.
Termination
by Us Without Cause.
We
retain the right to terminate an executive without cause or prior written
notice, in which case he will continue to receive his base salary and bonus,
and
we will continue to provide medical and dental benefits for him and his family,
by paying the premium for health insurance continuation coverage under COBRA
to
the extent he elects COBRA coverage (or continue to contribute the employer
portion of the premium normally paid by us for our current employees), for
period of the lesser of 180 days from the earlier to occur of the date notice
of
termination is given or the date on which employment actually
terminates.
Termination
by Virtue of a Change in Control.
An
executive may elect in writing to declare that he has been terminated as
a
result of a “change in control” (as hereafter defined), at which time he shall
be entitled to a lump sum severance payment equal to his base salary earned
over
the preceding twelve-month period and a sum sufficient to pay for the
continuation of his medical and dental insurance with all of his then-current
benefits for a like twelve-month period. The term “change in control” includes:
(i) a buy-out of us whereby more than 50% in the aggregate of our ownership
interests becomes beneficially owned by persons not now holding an ownership
interest; (ii) our liquidation or dissolution; or (iii) the sale or other
disposition of all or substantially all of our assets.
Termination
for Executive’s Permanent Disability.
To the
extent permissible under applicable law, in the event an executive becomes
permanently disabled during employment, we may terminate his employment
agreement by giving 30 days notice to the executive of our intent to terminate,
and unless the executive resumes performance of his duties within five days
of
the date of the notice and continues performance for the remainder of the
notice
period, his employment agreement will terminate at the end of the 30- day
period. “Permanently disabled” means the inability, due to physical or mental
ill health, to perform the essential functions of the executive’s job, with a
reasonable accommodation, for 90 days during any one employment year
irrespective of whether such days are consecutive. If an executive’s employment
is terminated by us because of his permanent disability, the executive shall
continue to receive his base salary and bonus, and we will continue to provide
medical and dental benefits for him and his family, by paying the premium
for
health insurance continuation coverage under COBRA to the extent the executive
elects COBRA coverage (or continue to contribute the employer portion of
the
premium normally paid by us for our current employees), for 180 days from
the
date on which employment actually terminates.
39
Termination
Due to Executive’s Death.
An
executive’s employment agreement will terminate immediately upon his death, and
we shall not have any further liability or obligation to him, his executors,
heirs, assigns or any other person claiming under or through his estate,
except
as set forth in this paragraph. We will pay any accrued but unpaid salary
or
bonuses through the date of termination to the executive’s estate. If the
executive’s employment is terminated by us because of the executive’s death, his
estate will continue to receive the executive’s base salary and bonus, and we
will continue to provide medical and dental benefits for the executive’s family,
by paying the premium for health insurance continuation coverage under COBRA
to
the extent the executive’s estate elects COBRA coverage (or continue to
contribute the employer portion of the premium normally paid by us for our
current employees), for 180 days from the date on which employment actually
terminates.
40
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
November 6, 2006, our subsidiary, Advance Display Technologies plc, or ADT,
entered into a conditional Facility Agreement with NAB Ventures Limited,
or NAB.
NAB will provide us one or more loans; each called a drawdown, in the aggregate
principal amount of up to approximately $7 million (GBP £3.5M) subject to the
terms and conditions. In addition to being the lender under the Facility
Agreement, NAB also owned 950,000 shares, or 2.6%, of our common stock
outstanding as of January 4, 2008. As of December 31, 2007, we had approximately
$334,001 outstanding under the Facility Agreement. Any outstanding principal
amount bears interest per annum at an interest rate of 9.0%. In the event
the
Facility Agreement is not repaid on the maturity date of December 31, 2009,
the
unpaid principal amount and accrued interest thereon also bears additional
interest at a default rate of 1.5% per month or 18% annum. We may cancel
this
agreement at any time subject to having no outstanding loan balance. Before
each
drawdown, there must be a mutual written agreement between us and NAB upon
a
budget. There are no financial covenants under this agreement. As an inducement
to provide the Facility Agreement, NAB will receive 1,875,000 of ordinary
shares
and a warrant to purchase an additional 1,875,000 ordinary shares of ADT
at an
exercise price per share equal to the share price that ADT’s ordinary shares
commence trading on the Plus-quoted or other similar public exchange. The
warrants have a cashless exercise provision.
On
February 1, 2007, we subleased certain office space at the New York corporate
office located at 600 Lexington Avenue. The sublease tenant is an affiliate
of
Mr. Cole, a director and the Acting Chief Executive Officer of the Company.
Under the terms of the sublease, the sublease ran from February 1, 2007 through
January 2008 and required monthly rent payments of $8,000. On March 1, 2008,
the
Company renewed certain office space at the New York corporate office located
at
600 Lexington Avenue on a month-to-month term.
41
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth the beneficial ownership of our common stock as
of
July 11, 2008 by each person known by us to be the beneficial owner of more
than
five percent (5%) of our common stock, by each director, by each named executive
officer, and by all directors and executive officers as a group. As of July11,2008, we had 36,667,686 shares of common stock outstanding.
Except
as
otherwise indicated in the footnotes to the table, we believe that each of
the
persons or entities named in the table exercises sole voting and investment
power over the shares of common stock that each of them beneficially owns,
subject to community property laws where applicable. A person is deemed to
be
the beneficial owner of securities owned or which can be acquired by such
person
within 60 days of the measurement date upon the exercise of stock options
or
warrants. Each person’s percentage ownership is determined by assuming that
stock options, or warrants, beneficially owned by such person (but not those
owned by any other person) have been exercised.
Shares of Common Stock Beneficially Owned
Percentage
of Total
Shares
Outstanding
Name and Address of Owner (1)
Shares
Options/
Warrants
Total
5%
or Greater Stockholders:
LC
Capital Master Fund, Ltd. (2)
—
6,000,000
6,000,000
14.1
%
Ingalls
& Snyder LLC (3)
—
6,000,000
6,000,000
14.1
%
Michael
E. Hildesley (4)
—
3,600,000
3,600,000
8.9
%
BEME
Capital Limited (5)
—
3,600,000
3,600,000
8.9
%
MacBay
Partners, LP (6)
—
4,500,000
4,500,000
12.3
%
MacBay
Partners, LLC (6)
—
4,500,000
4,500,000
12.3
%
Provco
Ventures I, LP (7)
—
3,000,000
3,000,000
7.6
%
The
Black Diamond Fund (8)
—
3,000,000
3,000,000
7.6
%
Alpha
Capital Anstaldt (9)
—
3,000,000
3,000,000
7.6
%
Harborview
Master Fund LP (10)
—
2,100,000
2,100,000
5.4
%
Directors:
Lee
Cole (11)
—
120,000
120,000
*
Virgil
Wenger (12)
38,379
20,000
58,379
*
Peter
Rugg (13)
19,190
20,000
39,190
*
Douglas
Zorn (14)
—
—
—
*
Joseph
Peters (15)
—
—
—
*
Named
Executive Officers:
Magnus
Gittins (16)
331,537
—
331,537
*
Antonio
Goncalves, Jr. (17)
246,325
—
246,325
*
Thomas
Finn (18)
231,191
382,500
613,691
1.7
%
Directors
and executive officers as a group (6 persons)
288,760
542,500
831,260
2.2
%
*
Less than 1%
(1)
Unless
otherwise indicated in the footnotes below, the address of each
stockholder is c/o Advance Nanotech, Inc., 600 Lexington Avenue,
29th
Floor, New York, New York10022.
(2)
Represents
(1) 4,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $1,000,000
and
(2) 2,000,000 shares of common stock issuable upon exercise of
warrants. The stockholder shares voting and dispositive power with
others,
including MacBay Partners, LP and MacBay Partners, LLC, under accounts
that it manages under investment advisory contracts. The address
of the
stockholder is 680 Fifth Avenue, 12th Floor, New York, New York10019.
(3)
Represents
(1) 4,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $1,000,000
and
(2) 2,000,000 shares of common stock issuable upon exercise of
warrants. H. Shepard Boone exercises voting and dispositive power
with
respect to the shares of common stock. The address of the stockholder
is
61 Broadway, 31st
Floor, New York, New York10006.
42
(4)
Represents
(1) 2,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $600,000
and
(2) 1,200,000 shares of common stock issuable upon exercise of
warrants. The address of the stockholder is 23 Woodlands Rd., London
SW13
0JZ, UK.
(5)
Represents
(1) 2,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $600,000
and
(2) 1,200,000 shares of common stock issuable upon exercise of
warrants. Angela Harris exercises voting and dispositive power
with
respect to the shares of common stock. The address of the stockholder
is
Suite 834, P.O. Box 1419, Europort, Gibraltar.
(6)
Represents
(1) 3,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $750,000
and
(2) 1,500,000 shares of common stock issuable upon exercise of
warrants. The stockholder has shared voting and dispositive power
over all
of the shares. MacBay Partners, LP, is an investment partnership
managed
under an investment advisory contract by Ingalls & Snyder LLC, a
registered broker dealer and a registered investment advisor. MacBay
Partners, LLC, is the general partner of MacBay Partners, LP, the
address
of the stockholder is c/o Ingalls & Snyder, LLC, 61 Broadway, New
York, New York, 10006.
(7)
Represents
(1) 2,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $500,000
and (2)
1,000,000 shares of common stock issuable upon exercise of warrants.
Gary
R. Dilella exercises on behalf of the stockholder voting and dispositive
power with respect to the shares of common stock. The address of
the
stockholder is 79 E. Lancaster Ave., Suite 200, Villanova, Pennsylvania19085.
(8)
Represents
(1) 2,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $500,000
and (2)
1,000,000 shares of common stock issuable upon exercise of warrants.
Brandon S. Goulding exercises on behalf of the stockholder voting
and
dispositive power with respect to the shares of common stock. The
address
of the stockholder is 155 Revere Drive, Suite 10, Northbrook, Illinois60062.
(9)
Represents
(1) 2,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $500,000
and (2)
1,000,000 shares of common stock issuable upon exercise of warrants.
Konrad Ackerman exercises on behalf of the stockholder voting and
dispositive power with respect to the shares of common stock. The
address
of the stockholder is 160 Central Park South, Suite 2701, New York,
NewYork10019.
(10)
Represents
(1) 1,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $350,000
and
(2) 700,000 shares of common stock issuable upon exercise of
warrants. Harborview Master Fund L.P. is a master fund in a
master-feeder structure whose general partner is Harborview
Advisors LLC. Richard Rosenblum and David Stefansky are the managers
of Harborview Advisors LLC and have ultimate
responsibility for trading with respect to Harborview Master
Fund L.P. Messrs. Rosenblum and Stefansky disclaim beneficial
ownership of the shares. The address of the stockholder is 850 Third
Avenue, Suite 1801, New York, New York10022.
(11)
Includes
120,000 shares of common stock issuable upon exercise of stock
options
that are immediately exercisable at an exercise price of $2.03
per share.
These stock options were granted to Mr. Cole in his role as a founder
of
the Company.
43
(12)
Includes
12,500 shares of common stock issuable upon exercise of warrants
that are
immediately exercisable at $1.25. The Company issued these warrants
to Mr.
Wenger in connection with his participation in a private placement
by us
in 2005. Also includes an option to purchase 20,000 shares of common
stock
at $3.50 for participation on the Board of Directors.
(13)
Includes
6,450 shares of common stock issuable upon exercise of warrants
that are
immediately exercisable at an exercise price of $1.25 per share.
The
Company issued these warrants to Mr. Rugg in connection with his
participation in a private placement by us in 2005. Also includes
an
option to purchase 20,000 shares of common stock at $3.50 for
participation on the Board of Directors.
(14)
Douglas
Zorn joined the Board of Directors on March 6, 2007 and did not
beneficially own common stock as of the date of the
table.
(15)
Joseph
Peters joined the Board of Directors on January 22, 2008 and did
not
beneficially own common stock as of the date of the
table.
(16)
Mr.
Gittins’ employment with the Company was terminated by the Board of
Directors on May 2, 2008. The address of the stockholders is 301
East
47th
Street, Apt 8J, New York, NY10017.
(17)
Mr.
Goncalves resigned from his employment with the Company as of April28,2008. The address of the stockholders is 72 Old Dairy Lane, Shelton,
CT06484.
(18)
Includes
295,000 shares of common stock options, 120,000 of which are issuable
upon
exercise of stock options that are immediately exercisable at an
exercise
price of $2.03 per share and 262,500 shares of common stock that
are
immediately exercisable at an exercise price of $0.25 per share.
The
120,000 stock options were granted to Mr. Finn in his role as an
early
employee of the Company and the 262,500 stock options were granted
to Mr.
Finn as part of his employment
agreement.
44
SELLING
STOCKHOLDERS
The
following table sets forth the name of each selling stockholder, the number
of
shares of common stock beneficially owned by the selling stockholders as
of July11, 2008, the number of shares of common stock to be offered for such selling
stockholder’s account and the amount and (if one percent or more) the percentage
of the class owned by such selling stockholder after the offering is complete.
Except as set forth in the footnotes below, none of the selling stockholders
has
or had within the past three years any position, office or other material
relationship with us or any of our predecessors or affiliates, other than
as a
result of the ownership of our securities.
Beneficial
ownership is determined in accordance with SEC rules and includes voting
or
investment power with respect to securities. This includes shares which a
person
or entity has a right to acquire in the next 60 days upon conversion of the
convertible notes and upon exercise of the warrants. The percentage of shares
owned is based on 36,667,686shares
outstanding as of July 11, 2008.
Pursuant
to the terms of the notes and warrants, none of a holder’s notes or warrants may
be converted or exercised, as applicable, to the extent that, after such
conversion or exercise, the holder and its affiliates would beneficially
own
(other than through the right to convert the notes or exercise the warrants)
more than 4.99% of our outstanding shares of common stock, unless there is
a
tender offer outstanding for all of our shares of common stock or the holder
provides at least 65 days advance written notice to us.
Shares of common stock
owned prior to the offering123
Number of
shares of
common
stock to be
Shares of common stock
to be owned after offering4
Name
Number
Percentage
offered123
Number
Percentage
Chestnut
Ridge Capital, LP
1,800,000
5
4.7
%
600,753
1,199,247
3.3
%
David
W. Raisbeck
853,513
6
2.3
%
250,314
603,199
1.6
%
MHJ
Holdings Co
729,391
7
2.0
%
200,251
529,140
1.4
%
Provco
Ventures I, LP
3,000,000
8
7.6
%
1,001,255
1,998,745
5.5
%
Richard
Molinsky
377,635
9
1.0
%
100,125
277,510
*
Michael
H. Weiss
1,501,757
10
3.9
%
500,627
1,001,130
2.7
%
Michael
E. Hildesley
3,600,000
11
9.0
%
1,201,506
2,398,494
6.5
%
Iroquois
Master Fund Ltd.
600,000
12
1.6
%
200,251
399,749
1.1
%
Harborview
Master Fund LP
2,100,000
13
5.4
%
700,878
1,399,122
3.8
%
LC
Capital Master Fund, Ltd.
6,000,000
14
14.1
%
2,002,510
3,997,490
10.9
%
The
Black Diamond Fund, LLLP
3,000,000
15
7.6
%
1,001,255
1,998,745
5.5
%
Scot
Cohen
600,000
16
1.6
%
200,251
399,749
1.1
%
Alpha
Capital Anstaldt
3,000,000
17
7.6
%
1,001,255
1,998,745
5.5
%
Mariner
Tricadia Credit Strategies Master Fund Ltd.
1,200,000
18
3.2
%
400,502
799,498
2.2
%
Mariner
LDC
300,000
19
*
100,125
199,875
*
BEME
Capital Limited
3,600,000
20
9.0
%
1,201,506
2,398,494
6.5
%
Alla
Pasternack
429,391
21
1.2
%
100,125
329,266
*
Leon
Frenkel
429,391
22
1.2
%
100,125
329,266
*
Robert
& Rosalyn Brody
150,000
23
*
50,063
99,937
*
*Indicates
less than one percent.
1Includes
a good faith estimate of the shares issuable upon conversion of the convertible
notes and a good faith estimate of the shares issuable upon exercise of the
warrants.
2As
indicated in the footnotes below, certain of the shares beneficially owned
and
offered by this prospectus are shares underlying convertible notes issued,
and
issuable, by us. Convertible notes in the aggregate principal amount of
$6,700,000 may be converted at any time until December 2010 or February 2011,
as
applicable, at a conversion price of $0.25 per share (subject to adjustment
in
accordance with customary anti-dilution protection).
45
3As
indicated in the footnotes below, certain of the shares of common stock
beneficially owned are shares underlying common stock purchase warrants.
Such
common stock purchase warrants may be exercised with respect to all or any
portion of the underlying shares of common stock at any time until December
2012
or February 2013, at an exercise price of $0.30 or $0.25 per share.
4Assumes
that all shares of common stock registered will be sold.
5Represents
(1) 1,200,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $300,000 and (2) 600,000 shares
of common stock issuable upon exercise of warrants. Kenneth Holz exercises
on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 50 Tice Boulevard,
Woodcliff Lake, New Jersey07677.
6Represents
(1) 500,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $125,000 and (2) 250,000 shares
of
common stock issuable upon exercise of warrants. The address of the selling
stockholder is 26640 Edgewood Road, Shorewood, Minnesota55331.
7Represents
(1) 400,000 shares of common stock issuable upon conversion of convertible
notes
in the aggregate principal amount of $100,000 and (2) 200,000 shares of common
stock issuable upon exercise of warrants and (3) 129,391 shares of common
stock owned prior to the offering. Michael H. Jordan exercises voting and
dispositive power with respect to the shares of common stock registered hereby
for the account of the selling stockholder. The address of the selling
stockholder is 1357 Prospect Road, Pittsburgh, Pennsylvania15227.
8Represents
(1) 2,000,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $500,000 and (2) 1,000,000 shares
of
common stock issuable upon exercise of warrants. Gary R Dilella exercises
on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 79 E. Lancaster Ave.,
Suite 200, Villanova, Pennsylvania19085.
9Represents
(1) 200,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $50,000, (2) 100,000 shares of
common
stock issuable upon exercise of warrants and (3) 77,635 shares of common
stock owned prior to the offering. The address of the selling stockholder
is 51
Lords Hwy E., Weston, Connecticut06883.
10Represents
(1) 1,000,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $250,000, (2) 500,000 shares of
common stock issuable upon exercise of warrants and (3) 1,757 shares of
common stock owned prior to the offering. The address of the selling stockholder
is 11 White Drive, Cedarhurst, New York11516.
11Represents
(1) 2,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $600,000 and (2)
1,200,000 shares of common stock issuable upon exercise of warrants. The
address
of the selling stockholder is 23 Woodlands Rd., London SW13 0JZ,
UK.
12Represents
(1) 400,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $100,000 and (2) 200,000 shares
of
common stock issuable upon exercise of warrants. Joshua Silverman exercises
on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 641 Lexington Ave.,
26th
Fl., New York, New York10022.
13Represents
(1) 1,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $350,000 and (2) 700,000
shares of common stock issuable upon exercise of warrants. Harborview Master
Fund L.P. is a master fund in a master-feeder structure whose general partner
is
Harborview Advisors LLC. Richard Rosenblum and David Stefansky are the managers
of Harborview Advisors LLC and have ultimate responsibility for trading with
respect to shares held by the selling stockholder. Messrs. Rosenblum and
Stefansky disclaim beneficial ownership of the shares being registered
hereunder. The address of the selling stockholder is 850 Third Avenue, Suite
1801, New York, New York10022.
14Represents
(1) 4,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $1,000,000 and (2)
2,000,000 shares of common stock issuable upon exercise of warrants. Richard
F.
Conway exercises on behalf of the selling stockholder voting and dispositive
power with respect to the shares of common stock registered hereby for the
account of the selling stockholder. The address of the selling stockholder
is
680 Fifth Avenue, 12th Floor, New York, New York10019.
46
15Represents
(1) 2,000,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $500,000 and (2)
1,000,000 shares of common stock issuable upon exercise of warrants. Brandon
S.
Goulding exercises on behalf of the selling stockholder voting and dispositive
power with respect to the shares of common stock registered hereby for the
account of the selling stockholder. The address of the selling stockholder
is
155 Revere Drive, Suite 10, Northbrook, Illinois60062.
16Represents
(1) 400,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $100,000 and (2) 200,000 shares
of
common stock issuable upon exercise of warrants. The address of the selling
stockholder is 641 Lexington Ave., 26th Fl., New York, New York10022.
17Represents
(1) 2,000,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $500,000 and (2) 1,000,000 shares
of
common stock issuable upon exercise of warrants. Konrad Ackerman exercises
on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 160 Central Park South,
Suite 2701, New York, New York10019.
18Represents
(1) 800,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $200,000 and (2) 400,000 shares
of
common stock issuable upon exercise of warrants. Charles Howe exercises on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 767 Third Avenue,
11th
Floor, New York, New York10017.
19Represents
(1) 200,000 shares of common stock issuable upon conversion of convertible
notes in the aggregate principal amount of $50,000 and (2) 100,000 shares
of
common stock issuable upon exercise of warrants. Charles Howe exercises on
behalf of the selling stockholder voting and dispositive power with respect
to
the shares of common stock registered hereby for the account of the selling
stockholder. The address of the selling stockholder is 500 Mamaroneck Avenue,
Suite 101, Harrison, New York10528.
20Represents
(1) 2,400,000 shares of common stock issuable upon conversion of
convertible notes in the aggregate principal amount of $600,000 and (2)
1,200,000 shares of common stock issuable upon exercise of warrants. Angela
Harris exercises on behalf of the selling stockholder voting and dispositive
power with respect to the shares of common stock registered hereby for the
account of the selling stockholder. The address of the selling stockholder
is
Suite 834, P.O. Box 1419, Europort, Gibraltar.
21Represents
(1) 200,000 shares of common stock issuable upon conversion of convertible
notes
in the aggregate principal amount of $50,000, (2) 100,000 shares of common
stock
issuable upon exercise of warrants and (3) 129,393 shares of common stock
owned prior to the offering. The address of the selling stockholder is 1028
Spring Mill Road, Villanova, Pennsylvania19085.
22Represents
(1) 200,000 shares of common stock issuable upon conversion of convertible
notes
in the aggregate principal amount of $50,000, (2) 100,000 shares of common
stock
issuable upon exercise of warrants and (3) 129,391 shares of common stock
owned prior to the offering. The address of the selling stockholder is 1600
Flat
Rock Road, Penn Valley, Pennsylvania19072.
23Represents
(1) 100,000 shares of common stock issuable upon conversion of convertible
notes
in the aggregate principal amount of $25,000 and (2) 50,000 shares of common
stock issuable upon exercise of warrants. The address of the selling stockholder
is 10040 E. Happy Valley Rd, #779, Scottsdale, Arizona 89255.
47
DESCRIPTION
OF SECURITIES
The
following description of the material terms of our capital stock includes
a
summary of specified provisions of our certificate of incorporation, as amended,
and our bylaws. This description is subject to the relevant provisions of
Delaware General Corporation Law and is qualified by reference to our
certificate of incorporation and bylaws, copies of which are filed with the
registration statement of which this prospectus forms a part.
Authorized
and Outstanding Capital Stock
Our
Certificate of Incorporation, as amended, authorizes the issuance of 200,000,000
shares of common stock, $0.001 par value per share, of which 36,667,686 shares
were outstanding on July 11, 2008. All of the outstanding shares of common
stock
are fully paid and non-assessable.
Common
Stock
Holders
of shares of common stock are entitled to one vote for each share on all
matters
to be voted on by the stockholders. Holders of common stock have no cumulative
voting rights. Accordingly, the holders of in excess of 50% of the aggregate
number of shares of common stock outstanding will be able to elect all of
our
directors and to approve or disapprove any other matter submitted to a vote
of
all stockholders.
Holders
of common stock have no preemptive rights to purchase our common stock. There
are no conversion rights or redemption or sinking fund provisions with respect
to our common stock.
Shares
of
common stock are registered at the transfer agent and are transferable at
such
office by the registered holder (or duly authorized attorney) upon surrender
of
the common stock certificate, properly endorsed. No transfer shall be registered
unless we are satisfied that such transfer will not result in a violation
of any
applicable federal or state securities laws.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the trading
symbol “AVNA.”
Preferred
Stock
Our
authorized preferred stock currently consists of 25,000,000 shares of preferred
stock, $0.001 par value. No shares of our preferred stock are
outstanding.
Transfer
Agent
Our
transfer agent is Computershare Trust Company, N.A., PO Box 43070, Providence,
RI02940-3070
48
Disclosure
of Commission Position
on
Indemnification for Securities Act Liabilities
Our
certificate of incorporation provides that our directors and officers will
be
indemnified to the fullest extent permitted under the laws of the State of
Delaware. Pursuant to the Delaware General Corporation law, a Delaware
corporation may, under specified circumstances, indemnify any person who
was or
is a party or is threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason
of the fact that he is or was a director, officer, employee or agent of us,
or
is or was serving at our request as a director, officer, employee or agent
of
another corporation, partnership, joint venture, trust or other enterprise;
provided, that such provision shall not eliminate or limit the liability
of an
individual applying for indemnification if, unless otherwise ordered by a
court,
a final adjudication establishes that (i) his acts or omissions involved
intentional misconduct, fraud, or a knowing violation of the law, and (ii)
the
act or omission was material to the cause of action.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, we have been advised
that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable.
49
PLAN
OF DISTRIBUTION
Each
selling stockholder and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the over-the-counter market or any other stock exchange,
market or trading facility on which the shares are traded, or in private
transactions. These sales may be at fixed or negotiated prices. A selling
stockholder may use any one or more of the following methods when selling
shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal
to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
settlement
of short sales entered into after the date of this prospectus;
·
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
·
a
combination of any such methods of
sale;
·
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
·
any
other method permitted pursuant to applicable
law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts
from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating
to
its sales of shares to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or
more
derivative securities which require the delivery to such broker-dealer or
other
financial institution of shares offered by this prospectus, which shares
such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of
the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed
us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
50
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may
be sold
under Rule 144 rather than under this prospectus. Each selling stockholder
has
advised us that it has not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of
the
shares. There is no underwriter or coordinating broker acting in connection
with
the proposed sale of the shares by the selling stockholders.
We
agreed
to keep this prospectus effective until the earlier of (1) the date on which
the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (2) all of the shares
have
been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any
other rule of similar effect. The shares will be sold only through registered
or
licensed brokers or dealers if required under applicable state securities
laws.
In addition, in certain states, the shares may not be sold unless they have
been
registered or qualified for sale in the applicable state or an exemption
from
the registration or qualification requirement is available and is complied
with.
The
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which
may limit the timing of purchases and sales of shares of our common stock
by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need
to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
51
EXPERTS
The
financial statements of Advance Nanotech, Inc. for the year ended
December 31, 2007 have been incorporated herein by reference in reliance on
the report of Mendoza Berger & Company, L.L.P., independent registered
public accounting firm, appearing elsewhere herein, given on the authority
of
said firm as experts in auditing and accounting.
The
validity of the shares offered has been passed upon by Andrews Kurth LLP,
New
York, New York.
Neither
Mendoza Berger & Company, L.L.P. nor Andrews Kurth LLP were hired on a
contingent basis, nor will either receive a direct or indirect interest in
the
business of the registrant. Furthermore, neither was nor will be a promoter,
underwriter, voting trustee, director, officer, or employee of the
registrant.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered by this prospectus.
This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and
its
exhibits and schedules, certain parts of which are omitted in accordance
with
the rules and regulations of the SEC. For further information regarding our
common stock and us, please review the registration statement, including
exhibits, schedules and reports filed as part of the registration statement.
Statements in this prospectus about the contents of any contract or other
document filed as an exhibit to the registration statement, set forth the
material terms and contracts or other documents but are not necessarily
complete, and in each instance reference is made to the copy of that document
filed or incorporated as an exhibit to the registration statement, and each
of
these statements are qualified in all respects by such reference.
We
are a
reporting company under the Exchange Act. We file an annual report on
Form 10-K and quarterly statements on Form 10-Q with the SEC. We must
also file other reports, such as Form 8-K, as applicable. In addition, we
submit a proxy statement for our annual stockholders meeting (and, if
applicable, any special meetings). We make our periodic reports and other
information filed with or furnished to the SEC available, free of charge,
through our website, http://www.advancenanotech.com as soon as reasonably
practicable after those reports and other information are electronically
filed
with or furnished to the SEC. Information on our website or any other website
is
not incorporated by reference into this prospectus and does not constitute
a
part of this prospectus.
Investors
may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549 on
official business days during the hours of 10:00 a.m. to 3:00 p.m. Investors
may
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
52
INDEX
TO FINANCIAL STATEMENTS
Annual
Consolidated Financial Statements of Advance Nanotech, Inc.
:
Report
of Independent Registered Public Accounting Firm
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Advance
Nanotech, Inc.
We
have
audited the accompanying consolidated balance sheets of Advance Nanotech,
Inc.,
as of December 31, 2007 and 2006, and the related consolidated statements
of
operations and comprehensive loss, changes in stockholders’ equity (deficit) and
cash flows for the years then ended and for the period from inception (April17,2004) through December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Advance Nanotech, Inc.
as of
December 31, 2007 and 2006, and the results of its operations and its cash
flows
for the years then ended and for the period from inception (August 17, 2004)
through December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note A. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
NOTE
A - ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Corporate
History
We
were
originally formed as Colorado Gold & Silver, Inc., a Colorado corporation,
on March 3, 1980, and subsequently changed our name to Dynamic I-T, Inc.
and
then in January 2004, changed our name to Artwork & Beyond, Inc., or
Artwork. On October 1, 2004, Artwork entered into a share exchange agreement
to
acquire all of the issued and outstanding common stock of Advance Nanotech
Holdings, Inc. pursuant to the terms and conditions set forth in the share
exchange agreement. The acquisition transaction closed simultaneously with
the
execution of the share exchange agreement. Artwork and its affiliates were
unrelated to the stockholders of us or Advance Nanotech Holdings, Inc. prior
to
the execution, delivery and performance of the share exchange agreement.
As a
result of this transaction (and certain capital transactions, including a
reverse 100-to-1 stock split on October 5, 2005), control of Artwork was
changed, with the former stockholders of Advance Nanotech Holdings, Inc.
acquired approximately 99% of Artwork’s outstanding common stock. In addition,
all of the officers and directors of Artwork prior to the transaction were
replaced by designees of the former shareholders of Advance Nanotech Holdings,
Inc., and Artwork’s corporate name was changed to “Advance Nanotech, Inc.” As a
consequence of the change in control of Artwork resulting from these
transactions, all prior business activities of Artwork were completely
terminated, and Artwork adopted the business plan developed by Advance Nanotech
Holdings, Inc. prior to the transaction. On October 5, 2004, the new Board
of
Directors approved the change of the issuer’s name to “Advance Nanotech, Inc. (a
Colorado corporation),” or Advance Nanotech Colorado.
On
June19, 2006, Advance Nanotech Colorado merged with and into its newly-formed,
wholly-owned subsidiary, Advance Nanotech, Inc., a Delaware corporation,
or
Advance Nanotech Delaware, in order to reincorporate in the State of Delaware.
The reincorporation was approved by Advance Nanotech Colorado's shareholders
on
May 11, 2006. As a result of the reincorporation, our legal domicile is now
Delaware. Each outstanding Advance Nanotech Colorado common share was
automatically converted into one Advance Nanotech Delaware common share.
As a
result of the reincorporation, each outstanding option, right or warrant
to
acquire shares of Advance Nanotech Colorado common stock converted into an
option, right or warrant to acquire an equal number of shares of Advance
Nanotech Delaware common stock, with no further action required by any party,
under the same terms and conditions as the original option, right or
warrant.
On
December 19, 2007, the Company entered into an exchange agreement (the “Exchange
Agreement”) with its majority owned subsidiary Owlstone Nanotech, Inc.
(“Owlstone”), and certain stockholders of Owlstone (consisting of all of the
founders and executive officers of Owlstone, who are hereafter called the
“Owlstone Founders”) to increase the Company's ownership interest in Owlstone by
issuing newly issued shares of our common stock to the Owlstone Founders
in
exchange for Owlstone common shares at an exchange rate of 3.33 shares of
our
common stock for each share of Owlstone common stock. The Owlstone Founders
currently own an aggregate of 4,211,303 shares of Owlstone common stock,
consisting of 22.26% of the total number of shares of common stock of Owlstone
outstanding. The Exchange Agreement also contemplates (a) that the Company
will,
following consummation of the exchange with the Owlstone Founders, offer
to
acquire the remaining shares of Owlstone common stock then outstanding (the
“Minority Stockholders”, which hold approximately 26.21% of the currently
outstanding Owlstone shares) on terms and conditions identical to those offered
to the Owlstone Founders and (b) the issuance to the Minority Stockholders
of
one warrant to purchase 0.33 shares of our common stock at a purchase price
of
$0.30 per share.
As
of
December 31, 2007, Advance Nanotech owns all the issued and outstanding shares
of Advance Homeland Security plc and Advance Nanotech Limited ("ANL"), both
UK
companies. Advance Nanotech owns 92.9% of Advance Display Technologies plc
(“ADT”), a UK public company listed on the PLUS Market. ADT owns 100% of
Cambridge Nanotechnology Limited and 100% of NanoFED Limited. Advance Nanotech
owns 58.6% of the outstanding shares of Owlstone Nanotech, Inc., a Delaware
corporation. Advance Nanotech also owns 90% of Advance Nanotech (Singapore)
Pte
Ltd. ANL owns 55% of Bio-Nano Sensium Technologies, Ltd (formerly Imperial
Nanotech Ltd), 75% of Nano Solutions Limited and all the outstanding shares
of
the following dormant UK companies: Nano Devices Limited, Intelligent Materials
Limited, Biostorage Limited, Nanolabs Limited, Nano Biosystems Limited, Nano
Photonics Limited, , Inovus Materials Limited, Advance Proteomics Limited,
Nano
Diagnostics Limited, Exiguus Technologies Limited, Visus Nanotech Limited,
Intelligent Biosensors Limited, Econanotech Limited, Nanocomposites Limited,
Nanovindex Limited, Nano Optics Limited.
F-7
Current
Operations
In
December 2007, we decided to revise our strategy and to focus our efforts,
principally, on the commercialization of our chemical detection technology.
As a
result, we are currently a development stage company seeking to commercialize
novel chemical sensor products based on our proprietary and innovative gas
sensing technology, called Owlstone, which offers an attractive combination
of
small size, high sensitivity, low power consumption, reprogrammability, high
chemical selectivity and low cost. We have determined to progressively divest
ourselves of our other technologies and their respective subsidiaries. We
will,
thereafter, become an operational business centered upon our Owlstone Nanotech,
Inc. subsidiary and the ongoing commercialization of its products.
We
operate in a $5.4 billion market in the United States alone, and we have
initially targeted the industrial and homeland defense markets. In later
stages,
we plan to commercialize sensing products for the consumer, environmental
monitoring and medical diagnostics markets. We are poised to benefit from
powerful trends driving the demand for improved technologies within the chemical
sensing arena, including substantial government and private sector investment
in
homeland security, regulatory emphasis on safety, and increasingly stringent
environmental regulations.
The
market for chemical sensing faces unique challenges in detecting hazardous
substances in various forms and in a myriad of operating environments. In
homeland defense, chemical sensors are used to detect chemical warfare agents
and explosives to protect military personnel, government buildings and
civilians. In industrial applications, chemical sensors monitor air quality
for
health and safety purposes and also provide vital information during
manufacturing processes. The existing technologies for chemical sensors in
these
industries are outdated and are typically limited by physical size, sensitivity
and/or reliability. We believe that these factors have led to unacceptable
sample collections, uninspired deployment scenarios, high false positive
rates
and, subsequently, a call to action by the U.S. Department of Defense for
better
solutions.
Our
Solution
Our
sensing
technology, Owlstone, was specifically designed to meet the specifications
set
forth by the U.S. Department of Defense. The key element of the Owlstone
sensor
is a silicon chip that provides a chemical-sensing mechanism using Field
Asymmetric Ion Mobility Spectrometry, or FAIMS, a variant of conventional
Ion
Mobility Spectrometry, or IMS. Our technology enables unprecedented
miniaturization of sensors with superior analytical capability at a compelling
cost advantage, the ability to be programmed and reprogrammed to detect a
wide
range of substances, and high selectivity and sensitivity. The Owlstone detector
was conceived by Andrew Koehl who began the development of Owlstone’s
fundamental technology in 2001. Mr. Koehl was later joined by Paul Boyle
and
David Ruiz-Alonso and, together, they developed the core
technology.
Our
Products
We
are
currently marketing two chemical sensing products: Tourist and Lonestar.
Tourist
is an evaluation platform currently being sold by Owlstone to select partners
and customers. Our recently launched Lonestar product is a fully functional
unit
for certain applications in industrial markets as well as a test platform
for
partners providing a fully integrated and deployable chemical detection system.
Lonestar was launched in July 2007, and we have commenced shipping units
to
end-users. In addition, we have also developed and shipped a third product
called the Owlstone OVG-4, which is a system for generating trace concentration
levels of chemicals and calibration gas standards.
We
intend
to keep our sales organization lean and are pursuing product-based strategies
within markets that are characterized by high-volume, centralized procurements.
In applications where procurement is fragmented, we intend to partner with
existing market leaders that already possess distribution networks and
infrastructure using either “component” supply or contract sales
strategies.
F-8
SIGNIFICANT
ACCOUNTING POLICIES
BASIS
OF PRESENTATION and USE OF ESTIMATES
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses
during
the reporting period. Actual results could differ from those
estimates.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Advance Nanotech,
Inc.
and all of its subsidiaries (the "Company"). Minority stockholders of Owlstone
(41.32%), Nano Solutions (25%) and Bio-Nano Sensium (45%) are not required
to
fund losses; accordingly no losses have been allocated to them.
All
inter-company accounts and transactions have been eliminated in consolidation
and minority interests were accounted for in the consolidated statements
of
operations and the balance sheets.
GOING
CONCERN
The
accompanying consolidated financial statements, which have been prepared
in
conformity with accounting principles generally accepted in the United States
of
America, contemplates the continuation of the Company as a going concern.
The
Company has been in the development stage since its inception (August 17,2004),
sustained losses and has used capital raised through the issuance of stock
and
debt to fund activities. Continuation of the Company as a going concern is
dependent upon establishing and achieving profitable operations. Such operations
will require management to secure additional financing for the Company in
the
form of debt or equity. Management believes that actions currently being
taken
to address the Company’s funding requirements will allow the Company to continue
its development stage operations. There is no assurance that the necessary
funds
will be realized by securing equity through stock offerings or through
additional debt. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our
operations have not historically generated positive cash flow. We do not
expect
that our business activities will begin to generate significant positive
cash
flows before the fourth quarter of 2008. We currently expect that our capital
requirements for the next twelve months will be financed in part through
the
following:
·
cash
on hand, which was $1,867,626 as of December 31, 2007, plus the
gross
proceeds of $2,393,000 released from escrow in February 2008 in
connection
with a December 2007 private placement.;
·
issuances
of up to $3,000,000 of additional debt and/or equity;
and
·
cash
flows from our operations.
Management
is actively exploring various debt and equity financing transactions. Plans
to
generate additional revenue from operations could include co-development
and
co-funding of our products, licensing products for upfront and milestone
payments, and applying for more government grants. We have initiated cost
reduction programs and will continue to control and reduce expenses until
funds
from operations can support the growth of the business. While the Company
is
exploring all opportunities to improve its financial condition within the
next
several months, there is no assurance that these programs will be successful.
CONCENTRATION
OF CREDIT RISK
The
Company's future results of operations involve a number of risks and
uncertainties, including those described in the Company’s annual report on Form
10-K under Item 1A. “Risk Factors.”The Company is potentially subject to
concentrations of credit risk, which consist principally of cash and cash
equivalents. The cash and cash equivalent balances at December 31, 2007 are
principally held by two institutions in the US and one bank in the UK. Each
US
financial institution insures our aggregated accounts with the Federal Deposit
Insurance Corporation ("FDIC"), up to $100,000. At December 31, 2007, the
Company had uninsured cash deposits in excess of the Federal Deposit Insurance
Corporation insurance limit of $1,667,573.
CASH
AND CASH EQUIVALENTS
Cash
and
cash equivalents include investments in liquid instruments having maturity
of
three months or less at the time of purchase. The Company has restricted
cash as
a result of placing the security deposit related to our principal executive
offices in New York in a standby letter of credit account. The Company is
entitled to all of the interest earned on the account and will have unrestricted
access to both the cash and interest at the end of the lease term.
At
December 31, 2007, the Company had an escrow account with HSBC Bank for investor
deposits held in relation to the December 2007 8% Convertible Note offering.
The
account was a non-interest bearing account and had a cash balance as of December31, 2007 of $2,443,000.
RESEARCH
AND DEVELOPMENT
Research
and development costs are clearly identified and are expensed as incurred
in
accordance with FASB statement No. 2, "Accounting for Research and Development
Costs."
F-9
FOREIGN
CURRENCY TRANSLATION
The
Company's primary functional currencies are the United States Dollar (USD$)
and
the Great Britain Pound (GBP£). Assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Expenses are translated
at
the average exchange rates in effect during the period. Translation gains
and
losses not reflected in earnings are reported in accumulated other comprehensive
income/loss in stockholders' equity.
EARNINGS
/ LOSS PER SHARE
The
Company computes basic earnings (loss) per share using the weighted average
number of common shares outstanding during the period in accordance with
Statement of Financial Standards No. 128, “Earnings Per Share” ("SFAS 128")
which specifies the compilation, presentation, and disclosure requirements
for
income per share for entities with publicly held common stock or instruments
which are potentially common stock. Under SFAS No. 128, diluted earnings
(loss)
per share are computed using the weighted average number of common shares
outstanding and the dilutive potential common shares outstanding during the
period. Dilutive potential common shares primarily consist of stock options
and
warrants issued by the Company. For the years ended December 31, 2007 and
2006,
the effect of the options and warrants were anti-dilutive.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company's financial instruments include cash equivalents and accounts payable.
Because of the short-term nature of these instruments, their fair value
approximates their recorded value. The Company does not have any financial
instruments with off-balance sheet risk.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the EITF of the FASB reached a consensus on Issue No. 07-1,
Accounting for Collaborative Arrangements (EITF 07-1). The EITF concluded
on the
definition of a collaborative arrangement and that revenues and costs incurred
with third parties in connection with collaborative arrangements would be
presented gross or net based on the criteria in EITF 99-19 and other accounting
literature. Based on the nature of the arrangement, payments to or from
collaborators would be evaluated and its terms, the nature of the entity’s
business, and whether those payments are within the scope of other accounting
literature would be presented. Companies are also required to disclose the
nature and purpose of collaborative arrangements along with the accounting
policies and the classification and amounts of significant financial-statement
amounts related to the arrangements. Activities in the arrangement conducted
in
a separate legal entity should be accounted for under other accounting
literature; however required disclosure under EITF 07-1 applies to the entire
collaborative agreement. This Issue is effective for financial statements
issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years, and is to be applied retrospectively to all periods
presented for all collaborative arrangements existing as of the effective
date.
We do not expect this will have a significant impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS
No.
141(R)), which replaces SFAS No. 141, Business Combinations, requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured
at
their fair values as of that date, with limited exceptions. This Statement
also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the non-controlling interest
in the acquiree, at the full amounts of their fair values. SFAS No. 141(R)
makes
various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this Statement. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008. We
do not
expect this will have a significant impact on our financial statements.
In
December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (SFAS No. 160), which amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to improve the
relevance, comparability, and transparency of the financial information that
a
reporting entity provides in its consolidated financial statements. SFAS
No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position
within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the face
of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The Statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests of
the
parent and the interests of the non-controlling owners. This Statement applies
prospectively to all entities that prepare consolidated financial statements
and
applies prospectively for fiscal years, and interim periods within those
fiscal
years, beginning on or after December 15, 2008. We do not expect this will
have
a significant impact on our financial statements.
F-10
In
June
2007, the EITF of the FASB reached a consensus on Issue No. 07-3, Accounting
for
Nonrefundable Advance Payments for Goods or Services Received for Use in
Future
Research and Development Activities (EITF 07-3). EITF 07-3 requires that
non-refundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred
and
capitalized. As the related goods are delivered or the services are performed,
or when the goods or services are no longer expected to be provided, the
deferred amounts would be recognized as an expense. This Issue is effective
for
financial statements issued for fiscal years beginning after December 15,2007
and earlier application is not permitted. This consensus is to be applied
prospectively for new contracts entered into on or after the effective date.
The
pronouncement is not expected to have a material effect on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 (SFAS No. 159), which is effective for fiscal years beginning after November15, 2007. SFAS No. 159 permits the Company to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 is effective
for fiscal year 2008 but early adoption is permitted. We are currently
evaluating the impact, if any, that the adoption of SFAS No. 159 will have
on
our financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No.
157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing guidance as
to
whether or not an instrument is carried at fair value. SFAS No. 157 is effective
as of the beginning of the Company’s 2008 fiscal year. We do not expect this
will have a significant impact on our financial statements.
RECLASSIFICATIONS
Certain
reclassifications have been made to the 2004 financial statements in order
to
conform to the current presentation.
NOTE
B- PROPERTY AND EQUIPMENT
Property
and equipment are stated at cost, net of accumulated depreciation. Property
and
equipment are depreciated on a straight-line basis over their estimated useful
lives, which range from 3 to 5 years.
Estimated
December
31,
December
31,
Asset
Description
Useful
Life
2007
2006
Furniture
and Fixtures
3-5years
$
62,444
$
60,986
Office
Equipment
3-5years
58,377
54,760
Computers
3years
109,480
99,327
Software
3years
59,387
76,719
Plant
and Machinery
5years
252,198
224,930
541,886
517,722
Less:
accumulated depreciation
(299,881
)
(166,001
)
Net
Property and equipment
$
242,005
$
350,721
The
Company recorded depreciation of $131,206 and $102,827 for the years ended
December 31, 2007 and 2006, respectively.
Maintenance
and repairs are expensed as incurred and were $14,161 and $2,004 for the
years
ended December 31, 2007 and 2006, respectively.
F-11
NOTE
C- INTANGIBLE ASSETS
The
Company capitalizes internally developed assets related to certain costs
associated with patents. These costs include legal and registration fees
needed
to apply for and secure patents. As of December 31, 2007 and 2006, the Company
had capitalized internally developed patents of $636,381 and $475,034,
respectively. The Company has not yet recorded amortization expense related
to
the patents because the patents are not subject to amortization until issued
and
placed in use. Intangible assets will be amortized in accordance with Statement
of Financial Accounting Standards No. 142, “ Goodwill and Other Intangible
Assets,” ("SFAS 142") using the straight-line method over the shorter of their
estimated useful lives or remaining legal life. The Company expenses any
administrative costs related to the legal work on these patents. Intangible
assets acquired from other enterprises or individuals in an “arms length”
transaction are recorded at cost.
The
Company has filed 30 of its own US and foreign patent applications. As of
December 31, 2007, the Company had one patent issued in its own name or the
name
of a majority owned subsidiary. The Company intends to obtain and defend
patents
which will give us an exclusive right to commercially exploit our inventions
for
a certain period of time from the filing date of the patent
application.
NOTE
D - INVESTMENT IN SUBSIDIARY
On
July28, 2005, Advance Nanotech Singapore Pte Ltd., a subsidiary of Advance Nanotech,
Inc., acquired a 12.08% equity stake in Singular ID Pte Ltd for an investment
of
SGD$300,000 or approximately $207,510. As a result of subsequent equity
financings, Advance Nanotech Singapore Pte Ltd.’s equity stake in Singular ID
was reduced to 8.8% prior to its sale in December 2007. On December 28, 2007,
the Company sold its 8.8% equity interest in Singapore-based Singular ID
Pte
Ltd. for $1.19 million and
as a
result, realized a gain of $937,836.
The
Company did not exercise significant influence over the entity and carried
the
investment at cost. The Company recorded its investment in Singular ID in
accordance with FASB No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”,
using
the cost method.
The
original investment under the cost method is accounted for in the same manner
as
marketable equity securities and recorded on the parent company’s balance sheet
at original cost measured by the fair market value of the consideration given.
There were no adjustments or impairment charges to the fair market value
from
acquisition through the period ending December 31, 2007.
Minority
interest in subsidiary represents the minority stockholders’ proportionate share
of the equity of:
·
Owlstone
Nanotech, Inc. - At December 31, 2007, the Company owned 58.68%
of
Owlstone’s outstanding shares, which also represented its percentage of
voting control.
·
Advance
Display Technologies plc- At December 31, 2007, the Company owned
92.9% of
Advance Display Technologies’ outstanding shares, which also represented
its percentage of voting control.
·
Advance
Nanotech Singapore Pte. Ltd.- At December 31, 2007, the Company
owned
90.0% of Advance Nanotech Singapore Pte. Ltd.’s outstanding shares, which
also represented its percentage of voting control.
·
Bio-Nano
Sensium Technologies Ltd.- At December 31, 2007, the Company owned
55.0%
of Bio-Nano Sensium Technologies Ltd.’s outstanding shares, which also
represented its percentage of voting control.
·
Nano
Solutions Ltd.- At December 31, 2007, the Company owned 75.0% of
Nano
Solutions Ltd.’s outstanding shares, which also represented its percentage
of voting control.
The
Company’s percentage of controlling interest requires that operations be
included in the consolidated financial statements. The percentage of equity
interest that is not owned by the Company is shown as “Minority interests in
subsidiaries” in the consolidated balance sheets and “Minority interest in net
loss of subsidiary” in the consolidated statements of operations.
F-12
NOTE
F- REVENUE RECOGNITION
Revenue
from product sales, net of estimated provisions, will be recognized when
the
merchandise is shipped to an unrelated third party, as provided in Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”
(SAB104”). Accordingly, revenue is recognized when all four of the following
criteria are met:
·
persuasive
evidence that an arrangement exists;
·
delivery
of the products has occurred;
·
the
selling price is both fixed and determinable; and
Revenues
generated were a direct result of our subsidiary, Owlstone Nanotech, Inc.,
shipping their Tourist products and Odor Vapor Generators (“OVG”) along with
instructional and set-up services provided to customers as of December 31,2007.
The Owlstone Tourist is the first production model sensor offered by Owlstone
and reflects the company's rapid progress in developing leading-edge micro
and
nano fabrication techniques. The Tourist represents chemical detection
technology that is significantly smaller and less expensive than existing
technology currently available. In addition to offering its own products,
Owlstone plans to partner with market leaders to integrate its technology
into a
wide range of commercial applications to allow the efficient and accurate
detection of various chemical agents including contaminants, chemical warfare
agents and potentially harmful gases.
Owlstone
Nanotech, Inc. has obtained other purchase orders for its products and
contracted services. As of December 31, 2007, Owlstone had a total backlog
of
product, service and contract sales of approximately $43,341. Owlstone revenues
include both product sales and service revenue from industrial partners.
Service
revenue includes contracted research and development or engineering work
for
specific customers.
Our
customers consist primarily of governmental agencies and large manufacturers
and
wholesalers who sell directly into retail channels. Provisions for sales
discounts and estimates for damaged product returns and exchanges will be
established as a reduction of product sales revenues at the time revenues
are
recognized.
NOTE
G - REVOLVING CREDIT FACILITIES
On
March31, 2006, Merrill Lynch extended a line of credit with loans to be secured
by
certain collateral. Amounts withdrawn under this facility bear interest at
a
variable rate of 2.0% over the effective LIBOR rate. This loan management
account allows the Company to pledge a broad range of eligible assets and
accounts in various combinations to maximize the Company’s borrowing capacity.
Collateral may include cash and cash equivalents, debts, claims, securities,
entitlements, financial assets, investment property and other property. The
amount of borrowings available to the Company under this facility increases
proportionally to the assets pledged as security for the loan. Accordingly,
a
decline in the value of collateral pledged to secure the loan under this
facility could force the sale of the underlying collateral. As of December31,2007, the Company had not used this facility. As of December 31, 2007, the
Company maintained a cash balance of $47 and a security balance of $0 in
Merrill
Lynch investment accounts. The Company may cancel this agreement at any time
subject to being supported by a collateral account sufficient to support
an
outstanding loan balance, if any. At December 31, 2007, the Company had $47
of
credit available under this agreement.
On
November 6, 2006, the Company’s subsidiary, Advance Display Technologies, plc
(“ADT”), entered into a conditional Facility Agreement with NAB Ventures Limited
(“NAB”). The Company entered into the credit facility in part in order to allow
the shares of ADT to be listed on the PLUS-quoted market in London.
F-13
NAB
has
agreed to provide the Company one or more loans, each called a drawdown,
in the
aggregate principal amount of up to approximately USD $7 million (GBP £3.5
million) subject to the terms and conditions set forth in the agreement.
As of
December 31, 2007, the Company had $334,001 outstanding under the agreement.
Any
outstanding principal amount bears interest per annum at an interest rate
of
9.0%. In the event the agreement is not repaid on the maturity date of December31, 2009, the unpaid principal amount and accrued interest thereon will bear
additional interest at a default rate of 1.5% per month, or 18.0% annum.
The
Company may cancel this agreement at any time subject to having no outstanding
loan balance. Before each drawdown, there must be a mutual written agreement
between the Company and NAB upon a budget. There are no financial covenants
under this agreement. As an inducement to provide the facility, NAB received
1,875,000 of ordinary shares of ADT and a warrant to purchase an additional
1,875,000 ordinary shares of ADT at an exercise price per share equal to
the
share price that ADT’s ordinary shares commenced trading on the PLUS-quoted
market or approximately $1.00 (GBP £0.50). The warrants have a cashless exercise
provision. In addition to being the lender under the agreement, NAB also
owns
950,000 shares, or 2.7%, of the Company’s outstanding common stock. The NAB
credit facility has resulted in the Company recording deferred financing
costs,
of which $1,603,238 was unamortized as of December 31, 2007. The financing
costs
resulted from the issuance of 1,875,000 ordinary shares of ADT and a warrant
to
purchase 1,875,000 additional ordinary shares of ADT. These financings costs
are
amortized over the 37-month life of the NAB credit facility and will be fully
expensed on December 31, 2009.
On
March30, 2007, the Company’s subsidiary, Advance Homeland Security, plc (“AHS”),
entered into a conditional Facility Agreement with Conquistador Investments
Limited (“CIL”). CIL has agreed to provide the Company one or more loans, each
called a drawdown, in the aggregate principal amount of up to approximately
USD
$12 million (GBP £6.0 million), subject to certain terms and conditions. Any
outstanding principal amount bears interest per annum at a rate of 9.0%.
In the
event the agreement is not repaid on the maturity date of December 31, 2010,
the
unpaid principal amount and accrued interest thereon also bears additional
interest at a default rate of 1.5% per month or 18% annum. Before each drawdown,
there must be a mutual written agreement between the Company and CIL upon
a
budget. There are no financial covenants under this agreement. As an inducement
to provide the facility, CIL will receive 8,000,000 ordinary shares of AHS,
representing approximately 16%. As of December 31, 2007, the Company had
$0
outstanding under the agreement, no shares had been issued to CIL and no
portfolio assets had been transferred to AHS. The Company does not anticipate
requesting a borrowing under this facility and is considering canceling this
facility due to the recent financing of the senior secured 8% convertible
note
offering.
On
March30, 2007, the Company and Jano Holdings Ltd. (“Jano”) mutually agreed to cancel,
effective immediately, the $20.0 million amended and restated senior secured
grid note (the “Note”) dated August 14, 2006. In addition, the Company and Jano
simultaneously canceled the following agreements dated August 14, 2006:
associated security agreement, amended facility letter and amended warrant
to
purchase 6,666,666 shares of the Company’s common stock at the exercise price of
$1.25. The Company has repaid all principal and interest outstanding on the
credit facility and there were no amounts outstanding as of the date of this
mutual cancellation.
NOTE
H - STOCKHOLDERS' EQUITY
1.
Common Stock
On
June19, 2006, the Company created a new class of "blank check" preferred stock
(discussed below at 2) which converted 25,000,000 shares of authorized common
stock into preferred stock. As a result, the 100,000,000 shares of previously
authorized common stock were reduced to 75,000,000 million shares of authorized
common stock, par value $0.001. At December 31, 2007, 36,595,686 shares of
common stock were outstanding.
At
the
Company's Special Meeting of Stockholders held on February 12, 2008, the
stockholders of the Company voted in favor of an amendment to the Certificate
of
Incorporation of the Company to increase the number of authorized shares
of the
Company's common stock from 75,000,000 to 200,000,000.
2.
Preferred Stock
On
June19, 2006, the Company created a class of "blank check" preferred stock, par
value $0.001 per share, consisting of 25,000,000 shares. The term "blank
check"
preferred stock refers to stock for which the designations, preferences,
conversion rights, and cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof, are determined by the Board of Directors (“Board”). As such, the Board
will be entitled to authorize the creation and issuance of 25,000,000 shares
of
preferred stock in one or more series with such limitations and restrictions
as
may be determined in the sole discretion of the Board, with no further
authorization by stockholders required for the creation and issuance of the
preferred stock. Any preferred stock issued would have priority over the
common
stock upon liquidation and might have priority rights as to dividends, voting
and other features. Accordingly, the issuance of preferred stock could decrease
the amount of earnings and assets allocable to or available for distribution
to
holders of common stock and adversely affect the rights and powers, including
voting rights, of the common stock. As of December 31, 2007, there were no
shares of preferred stock issued or outstanding.
3.
Fiscal Year 2007 Stockholders’ Equity Transactions
(See
NOTE I for stock-based compensation equity transaction disclosure)
Restricted
stock, stock options and warrants issued to non-employees are recorded at
their
fair value as determined in accordance with SFAS No. 123, “Share-Based
Payment”
and
Emerging Issues Task Force (EITF) No. 96-18, “Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring
or
in Conjunction With Selling Goods or Services”,
and
recognized over the related service period.
F-14
4.
Private Placements-
Fiscal
Year 2007
On
December 19 and 21, 2007, we entered into subscription agreements with selected
institutional and accredited investors regarding the private placement of
up to
a maximum of $8,800,000 principal amount of 8% senior secured convertible
notes.
Each investor who subscribed to the notes received 50% warrant coverage at
$0.30
per share as common stock warrants. The notes mature on the date that is
three
years from the date of issuance and are convertible into shares of our common
stock at a price of $0.25 per share. The notes constitute our senior
indebtedness and provide that we can not incur other indebtedness (excluding
an
additional $3,000,000 in debt, certain credit facility lines and trade payables
incurred in the ordinary course of business) without the consent of the
noteholders. The notes are secured by all of our intellectual property, books
and records and proceeds of the sale of our intellectual property, as well
as
all of the equity interests in our subsidiaries. The warrants are exercisable
into shares of our common stock for a period of five years from the date
they
are issued at a price of $0.30 per share.
In
connection with the private placement, we received gross proceeds of an
aggregate of $6,700,000. However, because we did not have a sufficient number
of
authorized shares of our common stock to allow for conversion of the notes
and
exercise of the warrants, representing the total amount of proceeds received,
we
issued notes and warrants in December 2007 for only that portion of the total
proceeds that was allowed given our current capital structure. As a result,
we
issued notes with a principal face amount of $3,953,000 and warrants convertible
into 7,906,000 shares of our common stock. The remainder of the proceeds
received during the private placement was held in escrow as of December 31,2007
pursuant to the terms of an escrow agreement, pending amendment of our
certificate of incorporation to increase the number of our authorized shares
of
common stock from 75,000,000 to 200,000,000. This charter amendment was approved
by our stockholders in February 2008.
Pursuant
to the terms of the registration rights agreements entered into in connection
with the December 2007 8% Convertible Note offering, the Company is required
to
pay a cash penalty if it fails to file with the SEC a registration statement
under the Securities Act of 1933, as amended, covering the common stock
underlying the Notes purchased and the common stock underlying the issued
warrants. The fair value of the 7,906,000 warrants issued in connection with
the
December 2007 offering was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividend yield, risk-free interest
rate
of 4.46%, the contractual life of 5 years and volatility of 138%. I n accordance
with EITF No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in
a
Company’s Own Stock”,
the
estimated fair value of the warrants, in the amount of $2,184,266, was recorded
as a liability, with an offsetting charge to additional paid-in capital.
Exchange
Offer
On
December 19, 2007, we entered into an exchange agreement with our majority-owned
subsidiary Owlstone Nanotech, Inc., or Owlstone, and certain stockholders
of
Owlstone (consisting of all of the founders and executive officers of Owlstone)
to increase our ownership interest in Owlstone by issuing newly issued shares
of
our common stock to the Owlstone founders and executive officers in exchange
for
Owlstone common shares at an exchange rate of 3.33 shares of our common stock
for each share of Owlstone common stock. The Owlstone founders and executive
officers currently own an aggregate of 4,211,303 shares of Owlstone common
stock, consisting of 22.26% of the total number of shares of common stock
of
Owlstone outstanding.
The
exchange agreement also contemplates that we will, following consummation
of the
exchange with the Owlstone founders and executive officers, offer to acquire
from the minority stockholders the remaining shares of Owlstone common stock
then outstanding, which represent approximately 26.21% of the currently
outstanding Owlstone shares, on terms and conditions identical to those offered
to the Owlstone founders and executive officers. In addition, the exchange
agreement contemplates the issuance to the minority stockholders of one warrant
to purchase 0.33 shares of our common stock at a purchase price of $0.30
per
share.
Fiscal
Year 2005
The
Company
conducted two private equity placements during the fiscal year ended December31, 2005. The first placement comprised of three rounds and the second placement
included two rounds of stock sales. Each placement is discussed
below:
On
February2, 2005, the Company completed a final closing of the sale of, in aggregate,
9,960,250 shares of its common stock to investors in a private placement
of
securities. The Company sold the shares at a gross price of $2.00 per share,
or
$19,920,500 in the aggregate. The Company also issued one warrant to purchase
one share of the common stock to each investor for every two shares of common
stock purchased in the private placement, resulting in an aggregate of 4,980,125
warrants being issued to investors at an exercise price of $3.00 per share.
The
February 2, 2005 private placement closed in three steps: the first step
on
January 20, 2005, at which closing 4,698,750 shares were sold, the second
step
on January 26, 2005, at which closing 2,390,000 shares were sold and finally
on
February 2, 2005 when the remaining 2,871,500 were sold. In connection with
the
closing of the sale of shares, the Company paid a cash fee to placement agents
in the amount of $2,232,835, and the Company issued to placement agents warrants
to purchase, in aggregate, 895,775 shares of common stock at $2.00 per
share.
F-15
On
March 24,2005, the Company completed a final closing of the sale of, in aggregate,
1,818,400 shares of its common stock to investors in a private placement
of
securities. The Company sold the shares at a gross price of $2.00 per share,
or
$3,636,800 in the aggregate. The Company also issued one warrant to purchase
one
share of common stock to each investor for every two shares of common stock
purchased in the private placement, resulting in an aggregate of 909,200
warrants being issued to investors at an exercise price of $3.00 per share.
The
March 24, 2005 private placement closed in two steps: the first step on February28, 2005, at which closing 1,768,400 shares were sold and finally on March24,2005, at which closing the remaining 50,000 shares were sold. In connection
with
the closing of the sale of shares, the Company paid a cash fee to placement
agents in the amount of $417,134, and the Company issued to placement agents
warrants to purchase, in aggregate, 89,090 shares of common stock at $2.00
per
share.
In
summary,
in March 2005, the Company completed its two private placements resulting
in the
issuance of an aggregate of 11,778,650 shares of its common stock for aggregate
gross proceeds of $23,557,300. Net proceeds from the transactions, after
issuance costs and placement fees, were $20,805,610. In connection with these
transactions, the Company also issued one warrant to purchase one share of
common stock to each investor for every two shares of common stock purchased
in
the private placement, resulting in an aggregate of 5,889,325 warrants
("Investor Warrants") being issued to investors at an exercise price of $3.00
per share. The Company also issued warrants to the placement agent ("Agent
Warrants") to purchase 984,866 shares of its common stock at $2.00 per share.
Pursuant
to
the terms of the Registration Rights Agreement entered into in connection
with
the two 2005 private placements, the failure of the Company to file a required
registration statement prior to the required filing date, or to cause either
of
the effectiveness actions to occur prior to the required effectiveness date,
shall be deemed to be a "Non-Registration Event". The Company failed to file
the
registration statement on time, and a Non-Registration Event occurred. For
each
thirty (30) day period during such Non-Registration Event, the Company was
required to deliver to each purchaser, as liquidated damages, an amount equal
to
one and one-half percent (1.5%) of the aggregate purchase price (as such
term is
defined in the Securities Purchase Agreement) paid by such purchaser for
securities (as such term is defined in the Securities Purchase Agreement).
The
Company had at its sole discretion to pay the Non-Registration Event penalty
payment in cash or in shares of its common stock. On November 23, 2005, the
Company issued 384,970 shares of its common stock to the purchasers. When
the
Company was in a penalty position for the quarter ended September 30, 2005,
in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-19, "
Accounting
for Derivative Financial Instruments Indexed To, and Potentially Settled
In a
Company's Own Stock,"
the
fair value of the warrants were accounted for as a liability, with an offsetting
reduction to additional paid-in capital. The warrant liability was reclassified
to equity as additional paid-in capital on the date that the registration
statement was deemed effective, which is the same date the potential for
a
penalty ceased.
On
June 2,2005the Company filed a registration statement on SEC Form SB-2 to register
26,305,374 shares of common stock. This total number includes 9,960,250 shares
issued in a first private placement, 5,875,902 shares underlying warrants
issued
in conjunction with the first private placement, 1,818,400 shares issued
in a
second private placement, 998,290 shares underlying warrants issued in
conjunction with a second private placement, and 7,652,532 additional shares
with "piggy-back" registration rights. The Company filed an amendment to
this
Form SB-2 on October 28, 2006, and, on November 3, 2005, the Company was
verbally informed by the Securities and Exchange Commission that the SB-2
Registration Statement filed on June 2, 2005, and amended on October 28,2005,
was effective.
The
Company
has been re-valuing the warrants on a quarterly reporting basis since March31,2005 in accordance with EITF 00-19. The Company has also adopted FASB 150,
“Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity.”
The
warrants
have remained classified in equity as the Company has settled the
"Non-Registration Event" penalty by settlement in shares of common stock
in
accordance with the penalty provisions. As of the period ending March 31,2006,
the Company has reassessed the classification of the warrant contracts as
required by EIFT 00-19 and determined that under no circumstance or future
event, the warrants will be subject to a re-classification back to the
liabilities section of the balance sheet. The Company has determined that
the
registration statement has been effective and on file with the SEC and is
satisfied that no other obligations will arise from these contracts. As a
result
of this re-assessment, the Company will account for the warrants as permanent
equity as defined in accordance with EITF 00-19. The Company last re-valued
the
warrants for the period ended December 31, 2005, in accordance with EITF
00-19.
The
fair
value of the Investor Warrants was estimated at $10,140,471 for the period
ending December 31, 2005 using the Black-Scholes option pricing model. The
fair
value of the Agent Warrants was estimated at $1,925,996 for the period ending
December 31, 2005 using the Black-Scholes option pricing model.
F-16
At
March 31,2005, the difference between the fair value of the warrants (Investor and
Agent
Warrants) of $23,883,077 and the net proceeds from the offering of $20,805,610
was classified as a non-operating expense in the amount of $3,077,467 in
the
Company's statement of operations. The warrant valuation was then re-measured
at
December 31, 2005 and estimated to be $12,066,467 coinciding with the decrease
in the market value of the Company's common stock. The change in fair value
of
the warrants of $8,739,143 from March 31, 2005 to December 31, 2005 was recorded
as non-operating income in the Company's respective statement of operations.
The
offset in the fair value of the warrants is recorded in additional paid in
capital. As of December 31, 2006, 6,802,642 shares were reserved for issuance
upon exercise of outstanding investor and placement agent warrants.
5.
Warrant Re-pricing
As
of
December 31, 2007, the Company did a subsequent re-pricing to the 2005 Investor
and Agent Warrants automatically as a result of the 8% Convertible Note
financing that closed in December 2007 as follows:
#
Warrants
Price
Investor
Warrants-Original Price
2,382,125
$
1.94
Investor
Warrants-Re-priced with Consent
3,507,200
$
0.81
Agent
Warrants-Original Price
192,502
$
1.29
Agent
Warrants-Re-priced with Consent
720,815
$
0.81
As
of
December 31, 2007, the above re-pricing was a result of anti-dilution provisions
for the 2005 Investor and Agent Warrants. The revised exercise price was
out-of-the money on the measurement date because the closing stock price
on
December 31, 2007 was $0.29. There have been no other adjustments to the
warrants original terms as discussed above. These warrants were issued to
the
investors based upon arms-length negotiations and accounted for as part of
the
equity transaction related to the private placements in 2005 as discussed
above.
As
of
December 2007, the Company reclassified a gain for 2007 of $3,034,758 to
additional paid in capital on the re-pricing of the warrant valuation in
relation to the closing of the 8% Convertible note offering triggered
anti-dilution provisions of the 2005 Investor and Agent warrants. The gain
was a
result of using a Black Scholes pricing model to determine the fair value.
There
is no income statement effect for the re-pricing of the warrants because
they
were priced “out-of-the-money” and as such would not contain a beneficial
conversion feature to record. The reclassification remained in
stockholders’ equity.
As
of June30, 2007, the Company re-priced Investor Warrants to purchase 61,250 shares
to a
new exercise price of $1.25. The revised exercise price was out-of-the money
on
the measurement date because the closing stock price on June 30, 2007, was
$0.39. This resulted in a re-classification of $100,563 among equity accounts
warrant valuation and additional paid in capital. There have been no other
adjustments to the warrants’ original terms as discussed above. The Company
accepted consent letters up until the close of business on the date of the
2007
Annual Meeting which was held on June 7, 2007.
As
of March31, 2007, the Company re-priced Investor Warrants to purchase 18,750 shares
to a
new exercise price of $1.25. The revised exercise price was out-of-the money
on
the measurement date because the closing stock price on March 31, 2007, was
$0.48. This resulted in a re-classification of $30,784 among equity accounts
warrant valuation and additional paid in capital. There have been no other
adjustments to the warrants’ original terms as discussed above. These warrants
were issued to the investors based upon arms-length negotiations and accounted
for as part of the equity transaction related to the private placements in
2005
as discussed above. The Company accepted consent letters up until the close
of
business on the date of the 2007 Annual Meeting which was held on June 7,2007.
As
of
December 31, 2006, the Company re-priced Investor Warrants to purchase 3,452,200
shares to a new exercise price of $1.25. The revised exercise price was
out-of-the money on the measurement date because the closing stock price
on
December 31, 2006, was $0.71. There have been no other adjustments to the
warrants’ original terms as discussed above. These warrants were issued to the
investors based upon arms-length negotiations and accounted for as part of
the
equity transaction related to the private placements in 2005 as discussed
above.
The Company accepted consent letters up until the close of business on the
date
of the 2007 Annual Meeting which was held on June 7, 2007.
As
of
December 31, 2006, the Company re-priced Agent Warrants to purchase 720,815
shares to a new exercise price of $1.25. The revised exercise price was
out-of-the money on the measurement date because the closing stock price
on
December 31, 2006, was $0.71. There have been no other adjustments to the
warrants’ original terms as discussed above. These warrants were issued to the
agents based upon arms-length negotiations and accounted for as part of the
equity transaction related to the private placements in 2005 as discussed
above.
The Company accepted consent letters up until the close of business on the
date
of the 2007 Annual Meeting which was held on June 7, 2007.
In
total, the
Company reclassified a total gain to date of $9,358,109 to additional paid
in
capital on the re-pricing of the warrant valuation for the 2005 Investor
and
Placement Agent warrants. The gain was a result of using Black Scholes pricing
model to determine the fair value. There is no income statement effect for
the
re-pricing of the warrants because they were priced “out-of-the-money” and as
such would not contain a beneficial conversion feature to record. The
reclassification remained in stockholders’ equity.
F-17
The
reason
why the warrants were re-priced related to the issuance of the new warrants
to
Jano Holdings Ltd. as a result of the Company’s credit facility. These warrants
triggered the anti-dilution adjustment in Section 2.1(c) of the Investor
and
Placement Agent Warrant Agreements and would have re-priced the Investor
Warrants from $3.00 to $2.71 per share and the Agent Warrants from $2.00
to
$1.88 per share. However, the Company and the Board of Directors decided
to
re-price all of the issued Investor and Agent Warrants pursuant to the
Securities and Purchase Agreement dated as of December 31, 2004, with a new
exercise price of $1.25 per share.
6.
Warrants
The
following table summarizes information about warrants:
The
Company’s predecessor, in June 2004, issued Jano Holdings Ltd. (“Jano”)
warrants to purchase 6,666,666 shares of common stock of Advance
Nanotech.
The warrants were cancelled on March 30, 2007.
(b)
During
2005, the Company settled with investors in Artwork and Beyond
with
respect to certain corporate actions effected prior to the corporate
share
exchange conducted on October 1, 2005 as explained in Note A.
The Company
agreed to convert principal and interest due on the debentures
issued on
November 10, 2003 into warrants to purchase common stock. The
Board of
Directors approved the transaction on December 22, 2005, to issue
warrants
to purchase 19,300 shares of common stock. The warrants were
issued in
January 2006. The new warrants have an exercise price of $2.07
and expire
on December 22, 2010. The awards vested 100% on the day they
were
finalized. The Company valued the warrants by using the Black-Scholes
option pricing model and valued the warrants at $1.95 each. The
Company
recorded a non-cash expense of $37,635 related to the debenture
settlement
in 2005.
(c)
As
of December 31, 2006, the Company had re-priced Investor Warrants
to
purchase 3,452,200 shares to a new exercise price of $1.25. As
of December31, 2006, the Company had re-priced Agent Warrants to purchase
720,815
shares to a new exercise price of $1.25. The revised exercise
price was
out-of-the money on the measurement date because the closing
stock price
on December 31, 2006 was $0.71. There have been no other adjustments
to
the warrants’ original terms. These warrants were issued to the investors
based upon arms-length negotiations and accounted for as part
of the
equity transaction related to the private placements in
2005.
(d)
Agent
Warrants exercised in 2005.
F-18
(e)
As
of March 31, 2007, the Company had re-priced Investor Warrants
to purchase
18,750 shares to a new exercise price of $1.25. The revised
exercise price
was out-of-the money on the measurement date because the closing
stock
price on March 31, 2007 was $0.48. There have been no other
adjustments to
the warrants’ original terms. These warrants were issued to the investors
based upon arms-length negotiations and accounted for as part
of the
equity transaction related to the private placements in
2005.
(f)
As
of June 30, 2007, the Company had re-priced Investor Warrants
to purchase
61,250 shares to a new exercise price of $1.25. The revised
exercise price
was out-of-the money on the measurement date because the closing
stock
price on June 30, 2007 was $0.39. There have been no other
adjustments to the warrants’ original terms. These warrants were issued to
the investors based upon arms-length negotiations and accounted
for as
part of the equity transaction related to the private placements
in 2005.
(g)
As
of December 31, 2007, the Company issued 7,906,000 investor
warrants in
relation to the 8% Convertible Note offering. The fair value
of the
warrants issued was estimated using the Black-Scholes option
pricing model
with the following assumptions: no dividend yield, risk-free
interest rate
of 4.46%, the contractual life of 5 years and volatility of
138%. In
accordance with EITF No. 00-19, "ACCOUNTING FOR DERIVATIVE
FINANCIAL
INSTRUMENTS INDEXED TO AND POTENTIALLY SETTLED IN A COMPANY'S
OWN COMMON
STOCK", the estimated fair value of the warrants, in the amount
of
$2,184,266, was recorded as a liability, with an offsetting
charge to
additional paid-in capital.
On
December 30, 2005, 3,000,000 shares of common stock were reserved for issuance
upon bonus grants and exercise of options granted under Advance Nanotech’s 2005
Equity Incentive Plan. This non-qualified plan will expire on December 22,2010,
but options may remain outstanding past this date. The Board authorizes the
grant of options to purchase stock as well as the grant of shares of stock
under
this plan. Grants cancelled or forfeited are available for future
grants.
Stock
Options
On
January 5,2006, the Company issued 1,040,000 stock options to certain employees and
directors. The stock options were approved by the Board of Directors’
Compensation Committee under the 2005 Equity Incentive Plan. Terms of the
options include a 5 year expiration life, 100% vesting on the date of grant
and
an exercise price of $2.03. On April 19, 2006, the Company issued another
20,000
stock options to a director. The total cost of $2,029,895 will be recognized
over the period during which each employee or director is required to provide
service in exchange for the respective award - the requisite service period
(usually the vesting period). No compensation cost was recognized for equity
instruments for which employees do not render the requisite service. As of
December 31, 2007, 240,000 stock options were forfeited by terminated
employees.
On August13,2007, the Company issued 1,050,000 stock options to certain employees. The
stock options were approved by the Board of Directors’ Compensation Committee as
part of the employees’ employment agreements. Terms of the stock options
include a ten-year expiration life, vesting quarterly over twelve months
and a
exercise price of $0.25. The total expense to record over the service
period is $304,500 and is recorded in accordance with SFAS No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123(R)"). As of December 31, 2007, the
Company had recorded a non-cash expense for the twelve months then ended
of
$697,201 related to the implementation of FAS123(R), “Share Based
Payments”.
F-19
Shares
Granted to Consultants
On
May 31,2007, the Company issued 100,000 shares of common stock at the closing price
on
the date of grant to an individual consultant in connection with a consulting
contract for marketing services. The shares were issued from the Company’s 2005
Equity Incentive Plan. During the quarter ended June 30, 2007, the
Company recorded a consulting expense of $33,000 related to the
contract.
On
May 24,2007, the Company issued 500,000 shares of restricted common stock at the
closing price on the date of grant to a consultant in connection with a
consulting contract dated April 10, 2007 for investor relations and public
relation services. During the quarter ended June 30, 2007, the Company recorded
a consulting expense of $190,000 related to the contract.
On
April 24,2007, the Company issued 250,000 shares of restricted common stock at the
closing price on the date of grant to a consultant in connection with a
consulting contract dated April 10, 2007 for investor relations and public
relation services. During the quarter ended June 30, 2007, the Company recorded
a consulting expense of $102,500 related to the contract.
Effective
April 1, 2007, Mr. Paul Miller began serving the Company as special consultant
to the Chief Executive Officer and as the non-executive Chairman of the Board
of
Directors of the Company’s wholly owned subsidiary, Advance Homeland Security
plc (“AHS”). In accordance with the agreement, Mr. Miller will not receive an
annual salary. On April 14, 2007, Mr. Miller received 100,000 shares of
restricted common stock of the Company for commencement of his services.
Mr.
Miller will receive equity compensation based on the completion of milestones
determined by the Company. There are a total of six milestones where Mr.
Miller
may earn up to 1,200,000 shares of restricted common stock. This agreement
may
be terminated by either party upon thirty (30) days’ written notice to the other
party. Any termination of this agreement will not adversely affect any rights
or
obligations that may have accrued to either party prior to the date of
termination, including without limitation, obligations to pay all amounts
due
and payable. During the quarter ended June 30, 2007, the Company recognized
a
non-cash expense of $45,000 related to the contract.
On
March 20,2007, the Company issued 100,000 shares of common stock at the closing price
on
the date of grant to an individual consultant in connection with a consulting
contract for marketing services. The shares were issued from the Company’s 2005
Equity Incentive Plan. During the quarter ended March 31, 2007, the Company
recorded a consulting expense of $46,000 related to the contract.
On
March 2,2007, the Company issued 50,000 shares of common stock at the closing price
on
the date of grant to an individual consultant in connection with software
license rights for use of an online share intelligence service for the period
of
one year. The shares were issued from the Company’s 2005 Equity Incentive Plan.
These shares were issued pursuant to the license agreement dated January16,2007. During the quarter ended March 31, 2007, the Company recognized a non-cash
expense of $23,500 related to the contract.
On
August 17,2006, the Company issued 70,000 shares of common stock at the closing price
on
the date of grant in connection with a consulting contract for investor
services. The shares were issued from the Company’s 2005 Equity Incentive
Plan.
Shares
Granted to Employees
The
following
bonus grants were approved by the Board of Director’s Compensation Committee
under the 2005 Equity Incentive Plan through during the fiscal years ended
December 31, 2006 and 2007:
·
69,094
shares on January 5, 2006 (related to service in 2005 and accrued
for a
non-cash compensation expense related to the fair market value
of stock
compensation of $207,109)
·
95,416
shares on April 13, 2006 (related to service in the first quarter
of 2006
and recorded a non-cash compensation expense related to the fair
market
value of stock compensation of $259,298)
·
146,201
shares on July 31, 2006 (related to service in the second quarter
of 2006
and recorded a non-cash compensation expense related to the fair
market
value of stock compensation of $169,799)
·
412,831
shares on November 28, 2006 (related to service in the third quarter
of
2006 and recorded a non-cash compensation expense related to the
fair
market value of stock compensation of $346,771)
·
458,280
shares on February 2, 2007 (related to service in the fourth quarter
of
2006 and recorded a non-cash compensation expense related to the
fair
market value of stock compensation of $339,127)
·
134,382
shares on April 26, 2007 (related to service in 2006 and recorded
a
non-cash compensation expense related to the fair market value
of stock
compensation of $52,409)
·
401,197
shares on June 1, 2007 (related to service in the first quarter
of 2007
and recorded a non-cash compensation expense related to the fair
market
value of stock compensation of $144,431)
·
202,365
shares on June 6, 2007 (related to service in the first quarter
of 2007
and recorded a non-cash compensation expense related to the fair
market
value of stock compensation of
$72,851)
F-20
As
of June30, 2007, the Company has accrued for a bonus grant of $213,854 for shares
to be
issued to certain employees of the Company for their performance related
to
service in the second quarter of 2007 and accrued for a non-cash compensation
expense related to the fair market value of the stock compensation including
applicable taxes. These awards were not yet issued as of December 31, 2007,
and
are pending the Board of Directors’ Compensation Committee
approval.
As
of
September 30, 2007, the Company accrued an additional bonus grant of $16,516
for
shares to be issued to certain employees of the Company for their performance
related to service in the third quarter of 2007 and accrued for a non-cash
compensation expense related to the fair market value of the stock compensation
including applicable taxes. These awards were not yet issued as of December31,2007 and are pending the Board of Directors’ Compensation Committee
approval.
As
of
December 31, 2007, the Company accrued an additional bonus grant of $44,211
for
shares to be issued to certain employees of the Company for their performance
related to service in the fourth quarter of 2007 and accrued for a non-cash
compensation expense related to the fair market value of the stock compensation
including applicable taxes. These awards were not yet issued as of December31,2007 and are pending the Board of Directors’ Compensation Committee
approval.
As
of
December 31, 2007, the Company accrued Executive Equity Grants totaling $105,024
for shares to be issued to certain executives of the Company according to
their
employment contracts related to service in the fourth quarter of 2007 and
accrued for a non-cash compensation expense related to the fair market value
of
the stock compensation. These awards were not yet issued as of December 31,2007
and are pending the Board of Directors’ Compensation Committee approval and the
approval of a new 2008 Equity Incentive Plan.
As
of
December 31, 2007, there were 240 shares that had not been issued under the
2005
Equity Incentive Plan.
The
Company
accounts for employee stock option grants in accordance with SFAS No. 123
(revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes
standards for the accounting for transactions in which an entity exchanges
its
equity instruments for goods or services. SFAS 123(R) requires a public entity
to measure the cost of employee services received in exchange for an award
of
equity instruments based on the grant-date fair value of the award. That
cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite
service.
In
December
2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)”). This statement revises SFAS No. 123, “Accounting for
Stock-Based Compensation,” which provided alternative methods of disclosure for
stock-based employee compensation. It also supersedes APB Opinion No. 25
“Accounting for Stock Issued to Employees,” (“APB 25”) and its related
implementation guidance. SFAS 123(R) establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods
or services. SFAS 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments
based
on the grant-date fair value of the award (with limited exceptions). That
cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. SFAS
123(R)
eliminates the alternative to use APB 25’s intrinsic value method of accounting
that was provided in SFAS 123 as originally issued. Under APB 25, issuing
stock
options to employees generally resulted in recognition of no compensation
cost.
The effective date for SFAS 123(R) for public entities that file as small
business issuers began on January 1, 2006 (the next fiscal year that begins
after December 15, 2005 and applies to all awards granted after the
required effective date and to awards modified, repurchased or cancelled
after
that date). Compensation cost is recognized on or after the required effective
date for the portion of outstanding awards for which the requisite service
has
not yet been rendered, based on the grant-date fair value of those awards
calculated under SFAS 123(R) for either recognition or pro forma disclosures.
The Company accounts for stock options in accordance with SFAS 123 and has
also
elected to adopt the disclosure only provisions of SFAS No. 148, “Accounting for
Stock Based Compensation-Transition and Disclosure.”
A
predecessor
entity of Artwork and Beyond, Inc., Dynamic IT, was a party to certain stock
option plans. There are stock options remaining under the 2001, 2002, and
2003
Dynamic IT Stock Option Plans. These stock options were previously granted
by
other management and subsequently assumed by Advance Nanotech as a result
of the
reverse merger discussed in Note A. The Company acknowledges and accounts
for
these options. No future grants may be made under these plans. The 2001,
2002,
and 2003 Dynamic IT Stock Option Plans will expire on August 31, 2009, October31, 2010, and February 2, 2012, respectively.
F-21
The
following tables summarize disclosure information regarding stock
options:
The
Company
currently leases 3,569 square feet of general office space at its principal
executive offices at 600 Lexington Avenue, 29th Floor, New York, New York10022
for base rent of approximately $14,917 per month. These facilities are the
center for all of our administrative functions in the United States. The
lease
expires on September 13, 2010. Management believes the office space is adequate
for the Company’s current needs.
The
Company’s
indirectly owned subsidiary Owlstone Nanotech, Ltd. has three leased offices
in
Cambridge (UK). The Cambridge (UK) offices are located at St. John’s Innovation
Centre, Cowley Road, Cambridge, CB4 0WS. All three leases are on a
month-to-month basis and either party can terminate at any time with a 30-day
notification. The following is a breakdown of the three leases and their
other
terms:
·
Unit
17- 1,280 square feet and monthly rent payments of approximately
$9,200
(GBP £4,500) which commenced on Oct. 13, 2006
·
Unit
33- 1,280 square feet and monthly rent payments of approximately
$8,100
(GBP £3,950) which commenced on Feb. 14, 2005
·
Unit
47- 205 square feet and monthly rent payments of approximately
$1,600 (GBP
£786) which commenced on Jan. 13,2006
Effective
August 14, 2006, the Company’s directly owned subsidiary Owlstone Nanotech, Inc.
began leasing office facilities at Park 80 West Plaza 2, Saddle Brook, NJ,
for
monthly rent of $2,000. The lease is on a month-to-month basis and either
party
can terminate at any time with a 30-day notification. The office is utilized
as
an executive office for Owlstone Nanotech Inc.
Effective
August 14, 2006, the Company’s directly owned subsidiary Owlstone Nanotech, Inc.
began leasing office facilities at Cambridge Innovation Center, Jacksonville
Room, One Broadway, 14 th
Floor,
Cambridge, MA for monthly rent of $1,300. The lease is on a month-to- month
basis and either party can terminate at any time with a 30-day notification.
The
office is utilized as Owlstone Nanotech Inc.’s laboratory for research and
development activities. The Company does not own and has no plans to own
any
real estate and all facility leases will be structured as operating
leases.
2.
Collaboration Agreements with Subsidiaries and Sponsored Research
OWLSTONE
On
May 28,2004, Advance Nanotech acquired 60.0% of Owlstone Limited in consideration
for
which Advance Nanotech provided a $2.0 million credit facility over two years
for the development of a chemical detection sensor. On October 5, 2005,
stockholders of Owlstone Limited agreed to exchange their shares on a
one-for-one basis for shares in the newly incorporated Owlstone Nanotech,
Inc.
("Owlstone"), a Delaware corporation. All operations, intellectual property,
and
commitments of Owlstone Limited were transferred to Owlstone, its new parent
company. Around the same time, the facility provided to Owlstone was increased
to $3 million. The facility bears no interest and, in exchange for the facility
increase, Advance Nanotech received 6,000,000 common stock shares of
Owlstone.
F-23
Owlstone
had
maximized their credit facility of $3 million and we were not obligated to
provide any additional funding as of September 30, 2006. However, on July28, 2006, the Company agreed to provide Owlstone with a $400,000 credit facility
that would further fund Owlstone operations.
As of August 3, 2006, the Company advanced Owlstone a total of $200,000 under
this new credit facility. The credit facility was convertible into shares
of
common stock at Advance Nanotech’s discretion; however Owlstone repaid the
entire outstanding amount, plus interest, on September 6, 2006. The $400,000
facility accrued interest at an annual rate of 10.0% and matured on October28,2006. As compensation for this new credit facility, Owlstone issued Advance
Nanotech 40,000 warrants to purchase shares of its common stock. The warrants
have an exercise price of $1.50 and expire three years after
issuance.
Owlstone
had
closed four rounds of financing during the year ended December 31, 2006.
Owlstone sold shares of common stock with a purchase price of $2.50 per share.
On September 6, 2006, Owlstone closed round one, raising $1,250,500, and
issued
500,200 shares of common stock. Advance Nanotech, Inc. participated in the
round
and invested $380,200 and received 152,080 shares in return. On the subsequent
three rounds, Owlstone raised an additional $675,000 and issued 270,000
shares.
Owlstone
has
closed five rounds of financing during the three months ended March 31, 2007.
Owlstone sold shares of common stock with a purchase price of $2.50 per share.
Advance Nanotech, Inc. did not participate in any of the 2007 rounds. On
the
subsequent five rounds, Owlstone raised an additional $662,500 and issued
265,000 shares.
On
May 18,2007, the Company entered into a Second Amendment to Facility Agreement with
Owlstone, which served to provide the Company with the ability to capitalize
any
outstanding amounts owed by Owlstone to the Company at a price of $1 per
share.
On May 18, 2007, the Company elected to convert all of the loans owed by,
Owlstone into shares of common stock. The amount capitalized totaled $3,000,000
and was converted into equity at a price of $1 per share.
Owlstone
closed ten rounds of financing during the fiscal year ended December 31,2007.
In these 10 rounds, unlike the first five rounds in 2007, Owlstone sold
convertible promissory notes totaling $2,305,423. The notes are unsecured
and
bear interest on September 25, 2007 at a rate of 10% per annum. All unpaid
principal and accrued interest on the notes are due and payable in full upon
the
date, which shall in no event be before September 25, 2008, on which the
note
holders’ supermajority makes demand for repayment of all of the notes. The
principal on these notes may at the option of the holder be converted at
any
time into shares of common stock of Owlstone at a conversion price equal
to
$1.00 per share.
F-24
NANO
SOLUTIONS
On
November2, 2004, the Company announced a research collaboration agreement between
Nano
Solutions Limited and Imperial College, London, to provide approximately
$6.25
million for the development of eight bio-nanotechnologies, predominantly
in the
healthcare devices sector. Payments of approximately $490,000 were due quarterly
through October 2007.
On
July 13,2006, the Company provided notice of termination of three of the original
eight
research projects at Nano Solutions Limited, which is located at Imperial
College, London. The three projects terminated were Econanotech, Nano Composites
and Visus Nanotech. Management decided to terminate these projects after
18
months of their 36-month (three-year) research agreements because management
believed the projects were not aligned with the overall portfolio of the
Company.
On
February22, 2007, the Company and Imperial College mutually agreed to terminate and
cancel the original collaboration agreement. The Company cancelled all projects
associated with the original agreement in order to refocus the projects’
technical and commercial milestones and place them in-line with our overall
Homeland Security segment objectives. The Company may work together with
the
College to form a new collaboration agreement which will include the
intellectual property rights as background intellectual property for any
new
project started. It is the Company’s intention to better align the Nano
Solutions projects with other programs in the portfolio.
NANOFED
(including NanoLight)
On
December13, 2004, NanoFED Limited entered into an approximate $2.0 million development
contract with the University of Bristol, to further develop the existing
technologies the university has generated in the area of field emission
displays. Payments were due quarterly through contract expiration on November30, 2006. The Company is in discussion with the University with respect to
intellectual property rights resulting from the original collaboration
agreement. Subject to final resolution, the Company will negotiate to extend
the
NANOFED and NANOLIGHT programs with a view to their
commercialization.
CAMBRIDGE
NANOTECHNOLOGY
On
December24, 2004, Cambridge Nanotechnology Limited entered into a collaboration
agreement with the University of Cambridge to provide $5.25 million for the
development of nanotechnologies, predominantly in the displays and optical
sector. Payments are due quarterly through December 2008. The Company was
obligated to provide approximately $1,808,000 (GBP £904,000) to fund seven
separate research projects. Cambridge Nanotechnology Limited has the right
to
terminate any research project for convenience, but must provide notice and
pay
pro-rata up to the point of termination. The termination of any research
project
would not relieve Cambridge Nanotechnology Limited from its total funding
obligations to the University of Cambridge but would, however, reduce Cambridge
Nanotechnology Limited’s financial commitment during the next 12
months.
On
May 14,2007, the Company and the University terminated the third-party collaboration
agreement. Under the terms of the termination, the Company transferred two
projects, Ultratubes (formerly known as NanoOptics) and Osputt (formerly
know as
Inovus Materials) to the CAPE strategic partnerships, in which Advance Nanotech
had an interest, and cancelled the Cambridge Nanotechnology, NanoPhotonics
and
Exiguus Technologies projects. Subsequent to the transfer, Ultratubes became
a
joint collaboration between the Company and Dow Corning Limited and Osputt
became a joint collaboration between the Company and the Alps Electric
Company.
BIO-NANO
SENSIUM
On
January24, 2005, the Company's subsidiary, Bio-Nano Sensium Technologies Limited,
entered into a collaboration agreement with Toumaz Technology Limited. Under
the
terms of the agreement, Bio-Nano Sensium Technologies Limited is to fund
the
development of an implantable blood-glucose sensor in even quarterly payments.
The project is currently suspended and there are no further payment obligations
under the agreement. We are currently in discussions with our collaboration
partner to revise the Company’s rights to intellectual property and the
financial obligations under this contract. The Company transferred 45% ownership
of Bio-Nano Sensium Technologies Limited to Toumaz Technologies Limited and
Professor Chris Toumazou.
CAPE
On
February1, 2005, the Company entered into a strategic partnership with the new Centre
for Advanced Photonics and Electronics (“CAPE”) along with the University of
Cambridge, Alps Electric Company, Dow Corning Limited and Ericsson Marconi
Corporation. CAPE is housed within the newly constructed Electrical Engineering
building at the University of Cambridge and includes over 22 academics, 70
post-doctoral researchers and 170 researchers. The CAPE building was completed
in early 2006. Advance Nanotech, as a strategic partner to CAPE, will
provide additional and innovative commercialization opportunities for the
technologies developed in CAPE, with a particular emphasis on nanotechnology.
In
addition, each strategic partner and the University of Cambridge nominates
representatives to the Steering Committee, which is responsible for the overall
research objectives of CAPE, its areas of technical focus and arising
intellectual property arrangements.
Advance
Nanotech committed $4.95 million over five years for the funding of specific
projects within CAPE, which may include jointly-funded collaborations with
the
other strategic partners. Payments were due each quarter through October
2007. Advance Nanotech and CAPE terminated the agreement in September
2007. With respect to the jointly-funded projects with other strategic
partners, we cannot withdraw unless we terminate the
agreement.
F-25
As
of
December 31, 2007, the Company had fully funded the costs of the CAPE partner
projects according to its contractual agreements and subsequently
terminated its strategic partnership agreement between the Company and CAPE
effective September 30, 2007. The Company benefits from a six month
timeframe during which the Company can exercise its commercial
exploitation rights over the intellectual properties generated by the
funded projects. The Company is currently involved in
the creation of a spin-out company based on one of the
funded projects. The spin-out company is being coordinated in syndication
with
external investors, and investment and technical due diligence
is currently being performed.
3.
Defined Contribution Plan
The
Company
has a defined contribution 401(k) Plan whereby the Company can make
discretionary matches to employee contributions. The Company has not made
any
contributions to the 401(k) Plan as of December 31, 2007.
NOTE
K -INCOME TAXES
Income
taxes
are recorded in accordance with SFAS No. 109, “Accounting for Income Taxes.”
This statement requires the recognition of deferred tax assets and liabilities
to reflect the future tax consequences of events that have been recognized
in
the financial statements or tax returns. Measurement of the deferred items
is
based on enacted tax laws. In the event the future consequences of differences
between financial reporting bases and tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated
by
such assets. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or the entire deferred
tax
asset will not be realized.
The
Company
is subject to income taxes in the United States of America and the United
Kingdom. As of December 31, 2007the Company had net operating loss carry
forwards for income tax reporting purposes of approximately $8,312,393
that may
be offset against future taxable income through 2027. Current tax laws limit
the
amount of loss available to be offset against future taxable income when
a
substantial change in ownership occurs. Therefore, the amount available to
offset future taxable income may be limited. No tax benefit has been reported
in
the financial statements because the Company believes there is no assurance
the
carry-forwards will be used. Potential tax benefits of the loss carry-forwards
are offset by a valuation allowance of the same amount.
NOTE
L - RELATED PARTY TRANSACTIONS
On
February1, 2007, the Company subleased certain office space at the New York corporate
office located at 600 Lexington Avenue. The sublease tenant is an affiliate
of a
director, Lee Cole, of the Company. Under the terms of the sublease, the
sublease ran from February 1, 2007 through January 2008 and required monthly
rent payments of $8,000.
Note
M - Convertible Notes Payable
On
December 19 and 21, 2007, we entered into subscription agreements with
selected
institutional and accredited investors regarding the private placement
of up to
a maximum of $8,800,000 principal amount of 8% senior secured convertible
notes.
Each investor who subscribed to the notes received 50% warrant coverage
at $0.30
per share as common stock warrants. The notes mature on the date that is
three
years from the date of issuance and are convertible into shares of our
common
stock at a price of $0.25 per share. The notes constitute our senior
indebtedness and provide that we can not incur other indebtedness (excluding
an
additional $3,000,000 in debt, certain credit facility lines and trade
payables
incurred in the ordinary course of business) without the consent of the
noteholders. The notes are secured by all of our intellectual property,
books
and records and proceeds of the sale of our intellectual property, as well
as
all of the equity interests in our subsidiaries. The warrants are exercisable
into shares of our common stock for a period of five years from the date
they
are issued at a price of $0.30 per share.
In
connection with the private placement, we received gross proceeds of an
aggregate of $6,700,000. However, because we did not have a sufficient
number of
authorized shares of our common stock to allow for conversion of the notes
and
exercise of the warrants, representing the total amount of proceeds received,
we
issued notes and warrants in December 2007 for only that portion of the
total
proceeds that was allowed given our current capital structure. As a result,
we
issued notes with a principal face amount of $3,953,000 and warrants convertible
into 7,906,000 shares of our common stock. The remainder of the proceeds
received during the private placement was held in escrow as of December31, 2007
pursuant to the terms of an escrow agreement, pending amendment of our
certificate of incorporation to increase the number of our authorized shares
of
common stock from 75,000,000 to 200,000,000. This charter amendment was
approved
by our stockholders in February 2008.
Pursuant
to the terms of the registration rights agreements entered into in connection
with the December 2007 8% Convertible Note offering, the Company is required
to
pay a cash penalty if it fails to file with the SEC a registration statement
under the Securities Act of 1933, as amended, covering the common stock
underlying the Notes purchased and the common stock underlying the issued
warrants. The fair value of the 7,906,000 warrants issued in connection
with the
December 2007 offering was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividend yield, risk-free interest
rate
of 4.46%, the contractual life of 5 years and volatility of 138%. I n accordance
with EITF No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled
in a
Company’s Own Stock”,
the
estimated fair value of the warrants, in the amount of $2,184,266, was
recorded
as a liability, with an offsetting charge to additional paid-in capital.
NOTE
N - SUBSEQUENT EVENTS
Effective
January 22, 2008, the Board of Directors of the Company elected Mr. Joseph
C. Peters as a member of the Board of Directors. Mr. Peters filled the vacancy
created from the resignation of Mr. John Robertson, who resigned from the
Board
of Directors as of January 22, 2008. Mr. Joseph Peters was unanimously elected
as an independent Director to the Board of Directors of the Company. Mr.
Peters
served President George W. Bush as the Assistant Deputy Director for State
and
Local Affairs of the White House's Drug Policy Office - commonly referred
to as
the Drug Czar's Office. There his duties included supervision of the country's
High Intensity Drug Trafficking Area (HIDTA) Program. Mr. Peters also served
as
the Drug Czar's Liaison to the White House Office of Homeland Security and
Governor Tom Ridge. Previously, Mr. Peters joined the Clinton White House,
to
direct the country's 26 HIDTAs, with an annual budget of a quarter billion
dollars. Mr. Peters also represented the White House Drug Czar’s office with
police, prosecutors, governors, mayors and many non-governmental organizations.
Mr. Peters was named as a special organized crime prosecutor with the US
Department of Justice and received its “John Marshall Award” from US Attorney
General Dick Thornburg. Mr. Peters began his career as a State prosecutor
when
he joined the Pennsylvania Attorney General's office in 1983. He later served
as
a Chief Deputy Attorney General of the Organized Crime Section, and in 1989
was
named the first Executive Deputy Attorney General of the newly created Drug
Law
Division. In that capacity, Mr. Peters oversaw the activities of 56 operational
drug task forces throughout the State, involving approximately 760 local
police
departments with 4,500 law enforcement officers. Mr. Peters consults to national
and international law enforcement organizations on narco-terrorism and related
intelligence and prosecution issues. He is a member of the International
Association of Chiefs of Police (IACP), where he sits on their Terrorism
Committee. Mr. Peters serves as President and Director of MSGI Security
Solutions, Inc (MSGI.OB) since 2004. Mr. Peters also serves on the Board
of
Directors of Vigicomm Inc. since 2007.
Upon
obtaining stockeholder approval of the amendment to the Company’s certificate of
incorporation, the escrowed funds described in Note H.4 were released on
February15, 2008, and the
Company issued Notes with a principal face amount of $2,747,000 and Warrants
convertible into 5,494,000 shares of Common Stock.
On
March 1,2008, the Company renewed certain office space at the New York Corporate
office
located at 600 Lexington Avenue on a month–to–month
term. The
sublease tenant is an affiliate of a director, Lee Cole, of the
Company.
On
March 14,2008the Company received notice from Magnus Gittins, the President and
Executive Chairman of the Company, that he intends to terminate his employment
relationship with the Company one hundred and eighty (180) days from the
date of such notice, pursuant to the terms of his Amended and Restated
Employment Agreement with the Company dated August 13, 2007.
On
March 15,2008, the Company received notice from Antonio Goncalves Jr., the
Chief Executive Officer of the Company, that he intends to terminate
his employment relationship with the Company one hundred and eighty (180)
days
from the date of such notice, pursuant to the terms of his Amended and Restated
Employment Agreement with the Company dated August 13, 2007.
Preferred
stock; $0.001 par value; 25,000,000 shares authorized; 0 shares
issued and
outstanding
-
-
Common
stock; $0.001 par value; 200,000,000 shares authorized; 36,667,686
and
36,595,686 shares issued and outstanding in March 31,2008 and
December 31,2007, respectively
36,668
36,596
Additional
paid in capital
16,753,299
16,128,733
Warrant
valuation
665,043
2,708,358
Accumulated
other comprehensive loss
(1,372,437
)
(801,386
)
Deficit
accumulated during development stage
(31,911,750
)
(30,826,109
)
TOTAL
STOCKHOLDERS' DEFICIT
(15,829,177
)
(12,753,808
)
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
$
6,010,700
$
5,993,083
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
NOTE
A - ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
CURRENT
OPERATIONS
We
are a
development stage company seeking to commercialize novel chemical sensor
products based on our proprietary and innovative gas sensing technology,
called
Owlstone, which offers an attractive combination of small size, high
sensitivity, low power consumption, reprogrammability, high chemical selectivity
and low cost. We have determined to progressively divest ourselves of our
other
technologies and their respective subsidiaries. We will, thereafter, become
an
operational business centered upon our Owlstone Nanotech, Inc. subsidiary
and
the ongoing commercialization of its products.
As
used
in these Notes to Consolidated Financial Statements, the terms “we”, “us”, “our”
and “the Company” refer to Advance Nanotech, Inc. and its subsidiaries.
SIGNIFICANT
ACCOUNTING POLICIES
BASIS
OF PRESENTATION and USE OF ESTIMATES
The
unaudited financial statements included herein have been prepared in
conformity
with accounting principles generally accepted in the United States for
interim
financial
information and pursuant to the rules and regulations of
the
Securities and Exchange Commission. They do not include all information
and
notes required by generally
accepted accounting principles for complete financial statements. However,
except as
disclosed
herein, there has been no
material
changes in the information disclosed
in the notes to the financial statements included in the Company's report
on
Form 10-K
for
the
year
ended December 31,
2007.
1n
the
opinion of management, all adjustments (including
normal
recurring accruals) considered necessary for a
fair
presentation have been included. Operating results for the
three
months ended March 31, 2008
ate
not
necessarily indicative of the results that may he
expected
for any other interim period or the entire year. For
further
information,
these unaudited financial statements and the related notes should be
read in
conjunction with the Company's audited financial statements for the year
ended
December31,2007
included
in the Company's report on
Form
10-K.
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenue and expenses
during
the reporting period. Actual results could differ from those
estimates.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Advance Nanotech,
Inc.
and all of its subsidiaries (the "Company"). Minority stockholders of Owlstone
Nanotech, Inc. (40% of shares outstanding or 47.31% fully diluted before
acquisition by the Company of additional shares upon consummation of the
Exchange Agreement), Nano Solutions Limited (25%) and Bio-Nano Sensium
Limited
(45%) are not required to fund losses; accordingly, no losses have been
allocated to them.
All
inter-company accounts and transactions have been eliminated in consolidation,
and minority interests were accounted for in the consolidated statements
of
operations and the balance sheets.
GOING
CONCERN
The
accompanying consolidated financial statements, which have been prepared
in
conformity with accounting principles generally accepted in the United
States of
America, contemplates the continuation of the Company as a going concern.
The
Company has been in the development stage since its inception (August 17,2004),
sustained losses and has used capital raised through the issuance of stock
and
debt to fund activities. Continuation of the Company as a going concern
is
dependent upon establishing and achieving profitable operations. Such operations
will require management to secure additional financing for the Company
in the
form of debt or equity. Management believes that actions currently being
taken
to address the Company’s funding requirements will allow the Company to continue
its development stage operations. There is no assurance that the necessary
funds
will be realized by securing equity through stock offerings or through
additional debt. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our
operations have not historically generated positive cash flow. We do not
expect
that our business activities will begin to generate significant positive
cash
flows before the fourth quarter of 2008. We currently expect that our capital
requirements for the next twelve months will be financed in part through
the
following:
·
cash
on hand, which was $2,329,970 as of March 31, 2008;
·
issuances
of up to $3,000,000 of additional debt and/or equity;
and
·
cash
flows from our operations.
F-32
Management
is actively exploring various debt and equity financing transactions. Plans
to
generate additional revenue from operations could include co-development
and
co-funding of our products, licensing products for upfront and milestone
payments, and applying for more government grants. We have initiated cost
reduction programs and will continue to control and reduce expenses until
funds
from operations can support the growth of the business. While the Company
is
exploring all opportunities to improve its financial condition within the
next
several months, there is no assurance that these programs will be
successful.
CONCENTRATION
OF CREDIT RISK
The
Company's future results of operations involve a number of risks and
uncertainties, including those described in the Company’s annual report on Form
10-K for the fiscal year ended December 31, 2007 under Item 1A. “Risk Factors.”The Company is potentially subject to concentrations of credit risk, which
consist principally of cash and cash equivalents. The cash and cash equivalent
balances at March 31, 2008 are principally held by two institutions in
the US
and two banks in the UK. Each US financial institution insures our aggregated
accounts with the Federal Deposit Insurance Corporation ("FDIC"), up to
$100,000. At March 31, 2008, the Company had uninsured cash deposits in
excess
of the Federal Deposit Insurance Corporation insurance limit of
$954,607
CASH
AND CASH EQUIVALENTS
Cash
and
cash equivalents include investments in liquid instruments having maturity
of
three months or less at the time of purchase. The Company has restricted
cash as
a result of placing the security deposit related to our principal executive
offices in New York in a standby letter of credit account. The Company
is
entitled to all of the interest earned on the account and will have unrestricted
access to both the cash and interest at the end of the lease term.
RESEARCH
AND DEVELOPMENT
Research
and development costs are clearly identified and are expensed as incurred
in
accordance with Financial Accounting Standards Board (“FASB”) Statement No. 2,
"Accounting for Research and Development Costs."
FOREIGN
CURRENCY TRANSLATION
The
Company's primary functional currencies are the United States Dollar (USD$)
and
the Great Britain Pound (GBP£). Assets and liabilities are translated using the
exchange rates in effect at the balance sheet date. Expenses are translated
at
the average exchange rates in effect during the period. Translation gains
and
losses not reflected in earnings are reported in accumulated other comprehensive
income/loss in stockholders' equity.
EARNINGS
/ LOSS PER SHARE
The
Company computes basic earnings (loss) per share using the weighted average
number of common shares outstanding during the period in accordance with
Statement of Financial Standards No. 128, “Earnings Per Share” ("SFAS 128")
which specifies the compilation, presentation, and disclosure requirements
for
income per share for entities with publicly held common stock or instruments
which are potentially common stock. Under SFAS No. 128, diluted earnings
(loss)
per share are computed using the weighted average number of common shares
outstanding and the dilutive potential common shares outstanding during
the
period. Dilutive potential common shares primarily consist of stock options
and
warrants issued by the Company. For the years ended December 31, 2007 and
the
three months ended March 31, 2008, the effect of the options and warrants
were
anti-dilutive.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
Company's financial instruments include cash equivalents and accounts payable.
Because of the short-term nature of these instruments, their fair value
approximates their recorded value. The Company does not have any financial
instruments with off-balance sheet risk.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a
consensus on Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF
07-1”). The EITF finalized the definition of a collaborative arrangement and
concluded that revenues and costs incurred with third parties in connection
with
collaborative arrangements would be presented gross or net based on the
criteria
in EITF 99-19 and other accounting literature. Based on the nature of the
arrangement, payments to or from collaborators would be evaluated and its
terms,
the nature of the entity’s business, and whether those payments are within the
scope of other accounting literature would be presented.
F-33
Companies
are also required to disclose the nature and purpose of collaborative
arrangements along with the accounting policies and the classification
of
significant financial-statement amounts related to the arrangements. Activities
in the arrangement conducted in a separate legal entity should be accounted
for
under other accounting literature; however, required disclosure under EITF
07-1
applies to the entire collaborative agreement. This Issue is effective
for
financial statements issued for fiscal years beginning after December 15,2008,
and interim periods within those fiscal years, and is to be applied
retrospectively to all periods presented for all collaborative arrangements
existing as of the effective date. We do not expect this will have a significant
impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”), which replaces SFAS No. 141, “Business Combinations”, and requires
an acquirer to recognize the assets acquired, the liabilities assumed,
and any
non-controlling interest in the acquiree at the acquisition date, measured
at
their fair values as of that date, with limited exceptions. This Statement
also
requires the acquirer in a business combination achieved in stages to recognize
the identifiable assets and liabilities, as well as the non-controlling
interest
in the acquiree, at the full amounts of their fair values. SFAS No. 141(R)
makes
various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this Statement. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the
first annual reporting period beginning on or after December 15, 2008.
We do not
expect this will have a significant impact on our financial
statements.
In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements”, to improve the
relevance, comparability, and transparency of the financial information
that a
reporting entity provides in its consolidated financial statements. SFAS
No. 160
establishes accounting and reporting standards that require the ownership
interests in subsidiaries not held by the parent to be clearly identified,
labeled and presented in the consolidated statement of financial position
within
equity, but separate from the parent’s equity. This statement also requires the
amount of consolidated net income attributable to the parent and to the
non-controlling interest to be clearly identified and presented on the
face of
the consolidated statement of income. Changes in a parent’s ownership interest
while the parent retains its controlling financial interest must be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary must be initially
measured at fair value. The gain or loss on the deconsolidation of the
subsidiary is measured using the fair value of any non-controlling equity
investment. The Statement also requires entities to provide sufficient
disclosures that clearly identify and distinguish between the interests
of the
parent and the interests of the non-controlling owners. This Statement
applies
prospectively to all entities that prepare consolidated financial statements
and
applies prospectively for fiscal years, and interim periods within those
fiscal
years, beginning on or after December 15, 2008. We do not expect this will
have
a significant impact on our financial statements.
In
June
2007, the EITF of the FASB reached a consensus on Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use
in
Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires
that non-refundable advance payments for goods or services that will be
used or
rendered for future research and development activities should be deferred
and
capitalized. As the related goods are delivered or the services are performed,
or when the goods or services are no longer expected to be provided, the
deferred amounts would be recognized as an expense. This Issue is effective
for
financial statements issued for fiscal years beginning after December 15,2007.
This consensus is to be applied prospectively for new contracts entered
into on
or after the effective date. The pronouncement is not expected to have
a
material effect on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS No. 159”), which is effective for fiscal years
beginning after November 15, 2007. SFAS No. 159 permits the Company to
choose to
measure many financial instruments and certain other items at fair value.
The
objective is to improve financial reporting by providing entities with
the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. SFAS No. 159 is expected to expand the use of fair
value
measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. The
Company adopted the provisions of this statement on January 1, 2008. The
Company
did not elect the Fair Value option for any of its financial assets or
liabilities, and therefore, the adoption of SFAS 159 had no impact on the
Company’s financial position, results of operations, or Cash
Flows.
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
FASB
Statement
No. 157, "Fair Value Measurements" ("FAS 157")_ FAS 157 defines fair
value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands
disclosures about fair value measurements. The provisions of FAS 157
were
adopted January1, 2008. In February 2008, the FASB staff issued Staff Position No.
157-2
"Effective Date of
FASB
Statement No. 157" ("FSP FAS 157-2"). FSP FAS 157-2 delayed the effective
date
of FAS
157
for nonfinancial assets and nonfinancial liabilities, except for items
that are
recognized or
disclosed at fair value in the financial statements on a recurring
basis (at
least annually). The provisions
of FSP FAS 157-2 are effective for the Company's fiscal year beginning
January1, 2009.
FAS
157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used
to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active
markets for identical assets or liabilities (Level 1 measurements)
and the
lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under FAS
157
are described below:
Unadjusted
quoted prices in active markets that are accessible at
the measurement
date for identical, unrestricted assets or
liabilities;
Level
2
Quoted
prices in markets that are not active, or inputs that are
observable,
either directly
or indirectly, for substantially the full term of the asset
or
liability;
Level
3
Prices
or valuation techniques that require inputs that are both
significant to
the fair value measurement and unobservable (supported
by little or no
market activity).
RECLASSIFICATIONS
Certain
reclassifications have been made to the 2007 financial statements in order
to
conform to the current presentation.
F-34
NOTE
B- PROPERTY AND EQUIPMENT
Property
and equipment are stated at cost, net of accumulated depreciation. Property
and
equipment are depreciated on a straight-line basis over their estimated
useful
lives, which range from 3 to 5 years.
Estimated
March
31,
December
31,
Asset
Description
Useful
Life
2008
2007
Furniture
and Fixtures
3-5
years
$
68,862
$
62,444
Office
Equipment
3-5
years
64,559
58,377
Computers
3
years
137,610
109,480
Software
3
years
59,387
59,387
Plant
and Machinery
5
years
251,938
252,198
582,356
541,886
Less:
accumulated depreciation
(332,698
)
(299,881
)
Net
Property and equipment
$
249,658
$
242,005
The
Company recorded depreciation of $33,193 and $36,572 for the three months
ended
March 31, 2008 and 2007, respectively.
Maintenance
and repairs are expensed as incurred and were $8,462 and $3,772 for the
three
months ended March 31, 2008 and 2007, respectively.
NOTE
C- INTANGIBLE ASSETS
The
Company capitalizes internally developed assets related to certain costs
associated with patents. These costs include legal and registration fees
needed
to apply for and secure patents. As of March 31, 2008, the Company had
capitalized internally developed patents of $644,834 and amortization expense
of
$474 relating to issued patents. Intangible assets are amortized in accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets” ("SFAS 142") using the
straight-line method over the shorter of their estimated useful lives or
remaining legal life. The Company expenses any administrative costs related
to
the legal work on these patents. Intangible assets acquired from other
enterprises or individuals in an “arms length” transaction are recorded at
cost.
The
Company has filed 30 of its own US and foreign patent applications. As
of March31, 2008, the Company had one patent issued in its own name or the name
of a
majority owned subsidiary. The Company intends to obtain and defend patents
which will give us an exclusive right to commercially exploit our inventions
for
a certain period of time from the filing date of the patent
application.
NOTE
D - INVESTMENT IN SUBSIDIARY
On
July28, 2005, Advance Nanotech Singapore Pte. Ltd., a subsidiary of Advance
Nanotech, Inc., acquired a 12.08% equity stake in Singular ID Pte. Ltd.
for an
investment of SGD$300,000, or approximately $207,510. As a result of subsequent
equity financings, Advance Nanotech Singapore Pte. Ltd.’s equity stake in
Singular ID was reduced to 8.8% prior to its sale in December 2007. On
December28, 2007, the Company sold its 8.8% equity interest in Singapore-based
Singular
ID Pte. Ltd. for $1.19 million and, as a result, realized a gain of
$937,836.
The
Company did not exercise significant influence over the entity and carried
the
investment at cost. The Company recorded its investment in Singular ID
in
accordance with FASB No. 115, “Accounting for Certain Investments in Debt and
Equity Securities”, using the cost method.
The
original investment under the cost method is accounted for in the same
manner as
marketable equity securities and recorded on the parent company’s balance sheet
at original cost measured by the fair market value of the consideration
given.
There were no adjustments or impairment charges to the fair market value
from
acquisition through the period ended March 31, 2008.
Minority
interest in subsidiary represents the minority stockholders’ proportionate share
of the equity of:
·
Owlstone
Nanotech, Inc. - At March 31, 2008, the Company owned 60% of
Owlstone’s
outstanding shares, which also represented its percentage of
voting
control before acquisition by the Company of additional shares
upon
consummation of the Exchange Agreement.
·
Advance
Display Technologies plc- At March 31, 2008, the Company owned
92.9% of
Advance Display Technologies’ outstanding shares, which also represented
its percentage of voting control.
·
Advance
Nanotech Singapore Pte. Ltd.- At March 31, 2008, the Company
owned 90.0%
of Advance Nanotech Singapore Pte. Ltd.’s outstanding shares, which also
represented its percentage of voting control.
·
Bio-Nano
Sensium Technologies Ltd.- At March 31, 2008, the Company owned
55.0% of
Bio-Nano Sensium Technologies Ltd.’s outstanding shares, which also
represented its percentage of voting control.
·
Nano
Solutions Ltd.- At March 31, 2008, the Company owned 75.0% of
Nano
Solutions Ltd.’s outstanding shares, which also represented its percentage
of voting control.
The
Company’s percentage of controlling interest requires that operations be
included in the consolidated financial statements. The percentage of equity
interest that is not owned by the Company is shown as “Minority interests in
subsidiaries” in the consolidated balance sheets and “Minority interest in net
loss of subsidiary” in the consolidated statements of operations.
NOTE
F- REVENUE RECOGNITION
Revenue
from product sales, net of estimated provisions, will be recognized when
the
merchandise is shipped to an unrelated third party, as provided in Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements”
(SAB104). Accordingly, revenue is recognized when all four of the following
criteria are met:
·
persuasive
evidence that an arrangement exists;
·
delivery
of the products has occurred;
·
the
selling price is both fixed and determinable; and
·
collectability
is reasonably assured.
During
the three months ended March 31, 2008 and 2007, the Company recognized
revenue
of $670,895 and $140,178, respectively.
Revenues
generated were a direct result of our subsidiary, Owlstone Nanotech, Inc.,
shipping their Lonestar and Owlstone Vapor Generators (“OVG”) products, along
with instructional and set-up services provided to customers as of March31,2008.
Owlstone
Nanotech, Inc. has obtained other purchase orders for its products and
contracted services. Owlstone revenues include both product sales and service
revenue from industrial partners. Service revenue includes contracted research
and development or engineering work for specific customers.
Our
customers consist primarily of governmental agencies and large manufacturers
and
wholesalers who sell directly into retail channels. Provisions for sales
discounts and estimates for damaged product returns and exchanges will
be
established as a reduction of product sales revenues at the time revenues
are
recognized.
F-36
NOTE
G - REVOLVING CREDIT FACILITIES
On
March31, 2006, Merrill Lynch extended a line of credit with loans to be secured
by
certain collateral. Amounts withdrawn under this facility bear interest
at a
variable rate of 2.0% over the effective LIBOR rate. This loan management
account allows the Company to pledge a broad range of eligible assets and
accounts in various combinations to maximize the Company’s borrowing capacity.
Collateral may include cash and cash equivalents, debts, claims, securities,
entitlements, financial assets, investment property and other property.
The
amount of borrowings available to the Company under this facility increases
proportionally to the assets pledged as security for the loan. Accordingly,
a
decline in the value of collateral pledged to secure the loan under this
facility could force the sale of the underlying collateral. As of March31,2008, the Company had not used this facility. As of March 31, 2008, the
Company
maintained a cash balance of $47 and a security balance of $0 in Merrill
Lynch
investment accounts. The Company may cancel this agreement at any time
subject
to being supported by a collateral account sufficient to support an outstanding
loan balance, if any. At March 31, 2008, the Company had $47 of credit
available
under this agreement.
On
March30, 2007, the Company and Jano Holdings Ltd. (“Jano”) mutually agreed to cancel,
effective immediately, the $20.0 million amended and restated senior secured
grid note (the “Note”) dated August 14, 2006. In addition, the Company and Jano
simultaneously canceled the following agreements dated August 14, 2006:
associated security agreement, amended facility letter and amended warrant
to
purchase 6,666,666 shares of the Company’s common stock at the exercise price of
$1.25. The Company has repaid all principal and interest outstanding on
the
credit facility and there were no amounts outstanding as of the date of
this
mutual cancellation.
NOTE
H - STOCKHOLDERS' EQUITY
1.
Common Stock
On
June19, 2006, the Company created a new class of "blank check" preferred stock
(discussed below at 2) which converted 25,000,000 shares of authorized
common
stock into preferred stock. As a result, the 100,000,000 shares of previously
authorized common stock were reduced to 75,000,000 million shares of authorized
common stock, par value $0.001. At March 31, 2008, 36,667,686 shares of
common
stock were outstanding.
At
the
Company's Special Meeting of Stockholders held on February 12, 2008, the
stockholders of the Company voted in favor of an amendment to the Certificate
of
Incorporation of the Company to increase the number of authorized shares
of the
Company's common stock from 75,000,000 to 200,000,000.
2.
Preferred Stock
On
June19, 2006, the Company created a class of "blank check" preferred stock,
par
value $0.001 per share, consisting of 25,000,000 shares. The term "blank
check"
preferred stock refers to stock for which the designations, preferences,
conversion rights, and cumulative, relative, participating, optional or
other
rights, including voting rights, qualifications, limitations or restrictions
thereof, are determined by the Board of Directors (“Board”). As such, the Board
will be entitled to authorize the creation and issuance of 25,000,000 shares
of
preferred stock in one or more series with such limitations and restrictions
as
may be determined in the sole discretion of the Board, with no further
authorization by stockholders required for the creation and issuance of
the
preferred stock. Any preferred stock issued would have priority over the
common
stock upon liquidation and might have priority rights as to dividends,
voting
and other features. Accordingly, the issuance of preferred stock could
decrease
the amount of earnings and assets allocable to or available for distribution
to
holders of common stock and adversely affect the rights and powers, including
voting rights, of the common stock. As of March 31, 2008, there were no
shares
of preferred stock issued or outstanding.
F-37
3.
Fiscal Year 2007 Stockholders’ Equity Transactions
(See
NOTE I for stock-based compensation equity transaction disclosure)
Restricted
stock, stock options and warrants issued to non-employees are recorded
at their
fair value as determined in accordance with SFAS No. 123, “Share-Based Payments”
and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Conjunction With Selling Goods or Services,”
and recognized over the related service period.
4.
Warrant Re-pricing
As
of February 15, 2008, the Company automatically re-priced warrants issued
in
2005 to investors and placement agents as a result of the third closing
of the
8% Convertible Note financing that closed on February 15, 2008 as
follows:
#
Warrants
Price
Investor
Warrants-Original Price (Expired as of March 31, 2008)
2,382,125
$
1.67
Investor
Warrants-Re-priced (Expired as of March 31, 2008)
3,507,200
$
0.67
Agent
Warrants-Original Price
192,502
$
1.07
Agent
Warrants-Re-priced
720,815
$
0.67
As of March 31, 2008, the above re-pricing was a result of anti-dilution
provisions in the 2005 investor and agent warrants. The revised exercise
price
was out-of-the money on the measurement date because the closing stock
price on
March 31, 2008 was $0.18. There have been no other adjustments to the warrants’
original terms as discussed above. Subsequent to the February 15, 2008
re-pricing, as of March 31, 2008, all the 2005 investor warrants expired.
These
warrants were issued to the investors based upon arms-length negotiations
and
accounted for as part of the equity transaction related to the private
placements in 2005 as discussed above.
As of March 31, 2008, the Company reclassified a gain of $2,043,315 to
additional paid in capital on the February 15, 2008 re-pricing of the warrant
valuation. The gain was a result of using a Black Scholes pricing model
to
determine the fair value. There is no income statement effect for the re-pricing
of the warrants because they were priced “out-of-the-money” and as such would
not contain a beneficial conversion feature to record. The
reclassification remained in stockholders’ equity.
As of December 31, 2007, the Company had automatically re-priced the
2005
investor and agent warrants as a result of the first and second closings
of the
8% Convertible Note financing that closed in December 2007 as
follows:
#
Warrants
Price
Investor
Warrants-Original Price
2,382,125
$
1.94
Investor
Warrants-Re-priced
3,507,200
$
0.81
Agent
Warrants-Original Price
192,502
$
1.29
Agent
Warrants-Re-priced
720,815
$
0.81
As of December 31, 2007, the above re-pricing was a result of
anti-dilution provisions in the 2005 investor and agent warrants. The revised
exercise price was out-of-the money on the measurement date because the
closing
stock price on December 31, 2007 was $0.29.
As of December 2007, the Company reclassified a gain for 2007 of
$3,034,758 to additional paid in capital on the December re-pricing of
the
warrant valuation. The gain was a result of using a Black Scholes pricing
model
to determine the fair value. There was no statement of operations effect
for the
re-pricing of the warrants because they were priced “out-of-the-money” and as
such would not contain a beneficial conversion feature to record. The
reclassification remained in stockholders’ equity.
F-38
5.
Warrants
The
following table summarizes information about our warrants:
The
Company’s predecessor, in June 2004, issued Jano Holdings Ltd. (“Jano”)
warrants to purchase 6,666,666 shares of common stock of Advance
Nanotech,
Inc. The warrants were cancelled on March 30, 2007.
(b)
During
2005, the Company settled with investors in Artwork and Beyond
with
respect to certain corporate actions effected prior to a corporate
share
exchange conducted on October 1, 2005. The Company agreed to
convert
principal and interest due on the debentures issued on November10, 2003
into warrants to purchase common stock. The Board of Directors
approved
the transaction on December 22, 2005, to issue warrants to purchase
19,300
shares of common stock. The warrants were issued in January 2006.
The new
warrants have an exercise price of $2.07 and expire on December22, 2010.
The awards vested 100% on the day they were finalized. The Company
valued
the warrants by using the Black-Scholes option pricing model
and valued
the warrants at $1.95 each. The Company recorded a non-cash expense
of
$37,635 related to the debenture settlement in 2005.
F-39
(c)
As
of December 31, 2006, the Company had re-priced investor warrants
to
purchase 3,452,200 shares to a new exercise price of $1.25. As
of December31, 2006, the Company had re-priced agent warrants to purchase
720,815
shares to a new exercise price of $1.25. The revised exercise
price was
out-of-the money on the measurement date because the closing
stock price
on December 31, 2006 was $0.71.
(d)
Agent
warrants exercised in 2005.
(e)
As
of March 31, 2007, the Company had re-priced investor warrants
to purchase
18,750 shares to a new exercise price of $1.25. The revised exercise
price
was out-of-the money on the measurement date because the closing
stock
price on March 31, 2007 was $0.48.
(f)
As
of June 30, 2007, the Company had re-priced investor warrants
to purchase
61,250 shares to a new exercise price of $1.25. The revised exercise
price
was out-of-the money on the measurement date because the closing
stock
price on June 30, 2007 was $0.39.
(g)
(h)
(i)
As
of December 31, 2007, the Company had issued 7,906,000 investor
warrants
in relation to the 8% Convertible Note offering. The fair value
of the
warrants issued was estimated using the Black-Scholes option
pricing model
with the following assumptions: no dividend yield, risk-free
interest rate
of 4.46%, the contractual life of 5 years and volatility of
138%. In
accordance with EITF No. 00-19, "Accounting for Derivative
Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Common
Stock", the estimated fair value of the warrants, in the amount
of
$2,184,266, was recorded as a liability, with an offsetting
charge to
additional paid-in capital. The fair value of the 7,906,000
warrant
liability was re-valued according to EITF No. 00-19 as of the
end of the
current period. The Company recorded a gain for the period
of $961,516
which was recorded as non-operating income in the Company's
statement of
operations.
As
of March 31, 2008, the Company issued 5,494,000 investor warrants
in
relation to the 8% Convertible Note offering. The fair value
of the
warrants issued was estimated using the Black-Scholes option
pricing model
with the following assumptions: no dividend yield, risk-free
interest rate
of 4.31%, the contractual life of 5 years and volatility of 138%.
In
accordance with EITF No. 00-19, the estimated fair value of the
warrants,
in the amount of $849,708, was recorded as a liability, with
an offsetting
charge to additional paid-in capital.
As
of March 31, 2008, the 2005 Investor warrants totaling 5,889,325
expired
according to the terms of the warrants.
NOTE
I - STOCK OPTION PLANS AND STOCK BASED COMPENSATION
On
December 30, 2005, 3,000,000 shares of common stock were reserved for issuance
upon bonus grants and exercise of options granted under Advance Nanotech,
Inc.’s
2005 Equity Incentive Plan. This non-qualified plan will expire on December22,2010, but options may remain outstanding past this date. The Board authorizes
the grant of options to purchase stock as well as the grant of shares of
stock
under this plan. Grants cancelled or forfeited are available for future
grants.
Shares
Granted to Employees
As
of
March 31, 2008, the Company accrued a bonus grant of $6,907 for shares
to be
issued to certain employees of the Company for their performance related
to
service in the first quarter of 2008 and accrued a non-cash compensation
expense
related to the fair market value of the stock compensation including applicable
taxes. These awards were not yet issued as of March 31, 2008 and are pending
the
Compensation Committee approval and the approval of a new 2008 Equity Incentive
Plan.
As of March 31, 2008, the Company accrued Executive Equity Grants totaling
$70,094 for shares to be issued to certain executives of the Company according
to their employment contracts related to service in the first quarter of
2008
and accrued a non-cash compensation expense related to the fair market
value of
the stock compensation. These awards were not yet issued as of March 31,2008
and are pending the Compensation Committee approval and the approval of
a new
2008 Equity Incentive Plan.
As of March 31, 2008, there were 240 shares that had not been issued under
the 2005 Equity Incentive Plan.
The Company accounts for employee stock option grants in accordance with
SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS
123(R) establishes standards for the accounting for transactions in which
an
entity exchanges its equity instruments for goods or services. SFAS 123(R)
requires a public entity to measure the cost of employee services received
in
exchange for an award of equity instruments based on the grant-date fair
value
of the award. That cost will be recognized over the period during which
an
employee is required to provide service in exchange for the award - the
requisite service period (usually the vesting period). No compensation
cost is
recognized for equity instruments for which employees do not render the
requisite service.
F-40
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”). This statement revises SFAS No. 123,
“Accounting for Stock-Based Compensation,” which provided alternative methods of
disclosure for stock-based employee compensation. It also supersedes APB
Opinion
No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and its
related implementation guidance. SFAS 123(R) establishes standards for
the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. SFAS 123(R) requires a public entity to measure
the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
That
cost will be recognized over the period during which an employee is required
to
provide service in exchange for the award - the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. SFAS
123(R)
eliminates the alternative to use APB 25’s intrinsic value method of accounting
that was provided in SFAS 123 as originally issued. Under APB 25, issuing
stock
options to employees generally resulted in recognition of no compensation
cost.
The effective date for SFAS 123(R) for public entities that file as small
business issuers began on January 1, 2006. Compensation cost is recognized
on or
after the required effective date for the portion of outstanding awards
for
which the requisite service has not yet been rendered, based on the grant-date
fair value of those awards calculated under SFAS 123(R) for either recognition
or pro forma disclosures. The Company accounts for stock options in accordance
with SFAS 123 and has also elected to adopt the disclosure only provisions
of
SFAS No. 148, “Accounting for Stock Based Compensation-Transition and
Disclosure.”
A predecessor entity of Artwork and Beyond, Inc., Dynamic IT, was a party
to certain stock option plans. There are stock options remaining under
the 2001,
2002, and 2003 Dynamic IT Stock Option Plans. These stock options were
previously granted by other management and subsequently assumed by Advance
Nanotech as a result of a reverse merger. The Company acknowledges and
accounts
for these options. No future grants may be made under these plans. The
2001,
2002, and 2003 Dynamic IT Stock Option Plans will expire on August 31,2009,
October 31, 2010, and February 2, 2012, respectively.
The
following tables summarize disclosure information regarding stock
options:
The
following table sets forth the Company's financial assets and liabilities
measured at fair value
by
level. within the fair value hierarchy. As required by FAS 157, assets
and
liabilities are classified
in their entirety based on the lowest level of input that is significant
to the
fair value measurement.
Total
Level
1
Level
2
Level
3
Assets
Cash
equivalents
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Liabilities
Detachable
warrants
$
2,345,618
$
-
$
-
$
2,345,618
$
2,345,618
$
2,345,618
The
Company had no financial assets that were classified within the fair
value
hierarchy as of the period ending March 31, 2008.
The
Company's detachable warrants are valued using pricing models
and the Company generally uses similar models to value similar instruments.
Where possible, the Company verifies the values produced by its pricing
models
to market prices. Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit spreads, measures
of
volatility, and correlations of such inputs. These financial liabiloities
do not trade in liquid markets, and as such, model inputs cannot generally
be
verified and
do
involve significant management judgment. Such instruments are typically
classified within Level 3 of the fair value hierarchy.
The
table
below sets forth a summary of changes in the fair value of the Company's
Level 3
financial
liabilities (detachable warrants) for the three months ended
March 31, 2008.
Balance
at beginning of period
$
2,184,266
Change
in fair value of warrants
(961,516
)
Fair
value of warrants issued or accrued during the period
1,122,868
Balance
at end of period
$
2,345,618
The
total
amount of the changes in fair value for the period was included in
net loss as a
result
of
changes in the Company's stock price from December 31, 2007.
The Company currently leases 3,569 square feet of general office space
at
its principal executive offices at 600 Lexington Avenue, 29th Floor, NewYork,
New York10022 for base rent of approximately $15,706 per month. These
facilities are the center for all of our administrative functions in the
United
States. The lease expires on September 13, 2010. Management believes the
office
space is adequate for the Company’s current needs. On February 1, 2007,
the Company subleased certain office space at the New York corporate office
located at 600 Lexington Avenue. The sublease tenant is an affiliate of
a
director, Lee Cole, of the Company. Under the terms of the sublease, the
sublease ran from February 1, 2007 through January 2008 and required monthly
rent payments of approximately $8,000. On March 1, 2008, the Company
renewed the sublease agreement at the New York Corporate office located
at 600
Lexington Avenue on a month- to-month term with required monthly payments
of
approximately $9,500.
The Company’s indirectly owned subsidiary, Owlstone Nanotech, Ltd., has
four leased offices in Cambridge (UK). The Cambridge (UK) offices are located
at
St. John’s Innovation Centre, Cowley Road, Cambridge, CB4 0WS. All four leases
are on a month-to-month basis. Under one lease, either party can terminate
at
any time with a 30-day notification. The remaining three leases require
a 90-day
notification. The following is a breakdown of the four leases and their
other
terms:
-
Unit
67- 460 square feet and monthly rent payments of approximately
$3,308 (GBP
£1,700) which commenced on Oct. 15, 2007
-
Unit
33- 1,280 square feet and monthly rent payments of approximately
$8,925
(GBP £4,587) which commenced on Feb. 14, 2005
-
Unit
47- 205 square feet and monthly rent payments of approximately
$1,568 (GBP
£786) which commenced on Jan. 13, 2006
-
2
Dirac House- 1,815 square feet and monthly rent payments of approximately
$12,658 (GBP £6,500) which commenced on March 28, 2008
Effective August 14, 2006, the Company’s directly owned subsidiary,
Owlstone Nanotech, Inc., began leasing office facilities at Park 80 West
Plaza
2, Saddle Brook, NJ, for monthly rent of $2,000. The lease is on a
month-to-month basis and either party can terminate at any time with a
30-day
notification. The office is utilized as an executive office for Owlstone
Nanotech, Inc.
F-42
2.
Defined Contribution Plan
The Company has a defined contribution 401(k) Plan whereby the Company
can
make discretionary matches to employee contributions. The Company has not
made
any contributions to the 401(k) Plan as of March 31, 2008.
NOTE L
-INCOME TAXES
Income taxes are recorded in accordance with SFAS No. 109, “Accounting for
Income Taxes.” This statement requires the recognition of deferred tax assets
and liabilities to reflect the future tax consequences of events that have
been
recognized in the financial statements or tax returns. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases
of
the Company's assets and liabilities result in a deferred tax asset, SFAS
No.
109 requires an evaluation of the probability of being able to realize
the
future benefits indicated by such assets. The
components of the deferred tax assets and liabilities are classified as
current
and non-current based on their characteristics. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than
not that
some portion or the entire deferred tax asset will not be realized.
The Company is subject to income taxes in the United States of America
and
the United Kingdom. As of December 31, 2007, the Company had net operating
loss
carry forwards for income tax reporting purposes of approximately $8,312,393
that may be offset against future taxable income through 2027. Current
tax laws
limit the amount of loss available to be offset against future taxable
income
when a substantial change in ownership occurs. Therefore, the amount available
to offset future taxable income may be limited. No tax benefit has been
reported
in the financial statements because the Company believes there is no assurance
the carry-forwards will be used. Potential tax benefits of the loss
carry-forwards are offset by a valuation allowance of the same
amount.
NOTE M
- RELATED PARTY TRANSACTIONS
On February 1, 2007, the Company subleased certain office space at the
New
York corporate office located at 600 Lexington Avenue. The sublease tenant
is an
affiliate of a director, Lee Cole, of the Company. Under the terms of the
sublease, the sublease ran from February 1, 2007 through January 2008 and
required monthly rent payments of approximately $8,000. On March 1, 2008,
the Company renewed certain office space at the New York Corporate office
located at 600 Lexington Avenue on a month- to-month term with required
monthly
payments of approximately $9,500.
NOTE N
- CONVERTIBLE NOTES PAYABLE
On
December 19 and 21, 2007, we entered into subscription agreements with
selected
institutional and accredited investors regarding the private placement
of up to
a maximum of $8,800,000 principal amount of 8% senior secured convertible
notes.
Each investor who subscribed to the notes received 50% warrant coverage
at $0.30
per share as common stock warrants. The notes mature on the date that is
three
years from the date of issuance and are convertible into shares of our
common
stock at a price of $0.25 per share. The notes constitute our senior
indebtedness and provide that we can not incur other indebtedness (excluding
an
additional $3,000,000 in debt, certain credit facility lines and trade
payables
incurred in the ordinary course of business) without the consent of the
noteholders. The notes are secured by all of our intellectual property,
books
and records and proceeds of the sale of our intellectual property, as well
as
all of the equity interests in our subsidiaries. The warrants are exercisable
into shares of our common stock for a period of five years from the date
they
are issued at a price of $0.30 per share.
In
connection with the private placement, we received gross proceeds of an
aggregate of $6,700,000. However, because we did not have a sufficient
number of
authorized shares of our common stock to allow for conversion of the notes
and
exercise of the warrants, representing the total amount of proceeds received,
we
issued notes and warrants in December 2007 for only that portion of the
total
proceeds that was allowed given our current capital structure. As a result,
we
issued notes with a principal face amount of $3,953,000 and warrants convertible
into 7,906,000 shares of our common stock. The remainder of the proceeds
received during the private placement was held in escrow as of December31, 2007
pursuant to the terms of an escrow agreement, pending amendment of our
certificate of incorporation to increase the number of our authorized shares
of
common stock from 75,000,000 to 200,000,000. This charter amendment was
approved
by our stockholders in February 2008. Upon obtaining approval of the charter
amendment by the stockholders on February 15, 2008, the Company issued
notes
with a principal face amount of $2,747,000 and warrants convertible into
5,494,000 shares of common stock. As of March 31, 2008, in connection with
the
closings of the sale of convertible notes, the Company paid cash fees to
certain
placement agents in the amount of $610,500, and the Company accrued placement
agents warrants to purchase, in aggregate, 1,742,000 shares of common stock
at
$0.25 per share.
F-43
Pursuant
to the terms of the registration rights agreements entered into in connection
with the December 2007 8% Convertible Note offering, the Company is required
to
pay a cash penalty if it fails to file with the SEC a registration statement
under the Securities Act of 1933, as amended, covering the common stock
underlying the Notes purchased and the common stock underlying the issued
warrants. The fair value of the 7,906,000 warrants issued in connection
with the
December 2007 offering was estimated using the Black-Scholes option pricing
model with the following assumptions: no dividend yield, risk-free interest
rate
of 4.46%, the contractual life of 5 years and volatility of 138%. In accordance
with EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed
to
and Potentially Settled in a Company’s Own Stock, ” the estimated fair value of
the warrants, in the amount of $2,184,266, was recorded as a liability,
with an
offsetting charge to additional paid-in capital. The fair value of the
5,494,000
warrants issued upon obtaining approval of the charter amendment in connection
with the December 2007 offering was also estimated using the Black-Scholes
option pricing model with the following assumptions: no dividend yield,
risk-free interest rate of $4.31%, the contractual life of 5 years and
volatility of 138%. In accordance with EITF No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in
a
Company’s Own Stock,” the estimated fair value of the 5,494,000 investor
warrants, in the amount of $849,708, was recorded as a liability, with
an
offsetting charge to additional paid-in capital. As of March 31, 2008,
the fair
value of the 7,906,000 warrant liability was re-valued according to EITF
No.
00-19 as of the end of the current period. The company recorded a gain
for the
period of $961,516 which was recorded as non-operating income in the Company's
respective statement of operations. The 1,742,000 un-issued placement agent
warrants’ fair value was also estimated using the Black-Scholes options pricing
model as of March 31, 2008, and the Company accrued an estimated value
of
$273,161 as a liability. Once the placement agent warrants are issued,
the
accrual will be reversed with an off-setting charge to additional
paid-in-capital.
NOTE O
- SUBSEQUENT EVENTS
On
March 15, 2008, Antonio Goncalves, Jr., the Chief Executive Officer
of Advance
Nanotech, Inc., tendered his resignation to be effective 180 days
after the date
of such notice. Effective as of April 28, 2008, the Board of Directors
of the
Company accepted Mr. Goncalves’ resignation from the Company effective as of
such date.
On
March14, 2008, Magnus R.E. Gittins, the President and Executive Chairman
of the
Company, tendered his resignation to be effective 180 days after
the date of
such notice. On May 2, 2008, the Board of Directors terminated Mr.
Gittins
employment with the Company pursuant to the terms of his Amended
and Restated
Employment Agreement with the Company dated August 13, 2007.
Effective
as
of April 28, 2008, Mr. Peter Rugg was appointed acting Chairman of the
Board and
Mr. Lee Cole was appointed the acting Principal Executive Officer of
the
Company.
F-44
ADVANCE
NANOTECH, INC.
10,913,678
Shares
Common
Stock
PROSPECTUS
,
2008
Dealer
Prospectus Delivery Obligation. Until
,
2008, all dealers that effect transactions in these securities, whether or
not
participating in this offering, may be required to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions. No dealer, salesman or other person has been authorized to
give
any information or to make any representations other than contained in this
Prospectus in connection with the offering described herein, and if given
or
made, such information or representations must not be relied upon as having
been
authorized by the Company. This Prospectus does not constitute an offer to
sell,
or the solicitation of an offer to buy, the securities offered hereby to
any
person in any state or other jurisdiction in which such offer or solicitation
is
unlawful. Neither the delivery of this Prospectus nor any sale hereunder
shall,
under any circumstances, create any implication that there has been no change
in
the affairs of the Company since the date hereof.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
We
will
bear no expenses in connection with any sale or other distribution by the
selling stockholders of the securities being registered other than the expenses
of preparation and distribution of this registration statement and the
prospectus included in this registration statement. Such expenses are set
forth
in the following table. All of the amounts shown are estimates except the
SEC
registration fee.
SEC
registration fee
$
108
Legal
fees and expenses
30,000
Accounting
fees and expenses
15,000
Printing
and other expenses
10,000
Total
$
55,108
Item
14. Indemnification of Directors and Officers
We
are a
Delaware corporation. Section 145 of the General Corporation Law of the State
of
Delaware authorizes us to indemnify under certain circumstances current or
former directors, officers, employees or agents in connection with actions,
suits or proceedings, by reason of the fact that the person is or was a
director, officer, employee or agent, against expenses and liabilities actually
and reasonably incurred in such actions, suits or proceedings so long as
they
acted in good faith and in a manner the person reasonable believed to be
in, or
not opposed to, the best interests of the company, and with respect to any
criminal action if they had no reasonable cause to believe their conduct
was
unlawful. With respect to suits by or in the right of such corporation, however,
indemnification is generally limited to attorneys’ fees and other expenses
actually and reasonably incurred and is not available if such person is adjudged
to be liable to such corporation unless the court determines that
indemnification is appropriate.
To
the
extent permitted by the Delaware General Corporation Law, our certificate
of
incorporation includes a provision that eliminates the personal liability
of our
directors to us or our stockholders for monetary damages for breach of fiduciary
duty as a director. As permitted by Delaware law, our certificate of
incorporation provides that we are required to indemnify our directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law. The indemnification provisions in our certificate of incorporation may
be
sufficiently broad to permit indemnification of our directors and officers
for
liabilities arising under the Securities Act.
The
foregoing discussion of our certificate of incorporation and Delaware law
is not
intended to be exhaustive and is qualified in its entirety by such certificate
of incorporation, bylaws, indemnification agreements, or law.
Advance
Nanotech maintains director’s and officers’ liability insurance.
Insofar
as indemnification of liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of Advance Nanotech
pursuant to the foregoing provisions, or otherwise, we have been advised
that,
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in such Act and is, therefore,
unenforceable.
Item
15. Recent Sales of Unregistered Securities.
(1)
On
February 2, 2005, the Company issued 9,960,250 shares of its common stock
to
investors in a private placement and received $19,920,500 in the aggregate.
The
Company also issued an aggregate of 4,980,125 warrants to the investors at
an
exercise price of $3.00 per share. The February 2, 2005 private placement
closed
in three steps: the first step on January 20, 2005, at which closing 4,698,750
shares were sold, the second step on January 26, 2005, at which closing
2,390,000 shares were sold and finally on February 2, 2005 when the remaining
2,871,500 were sold. The shares and warrants were sold by the Company to
investors on the terms and conditions set forth in the Securities Purchase
Agreement filed as Exhibit 10.5 in a Current Report on Form 8-K filed on
January26, 2005, which is specifically incorporated herein by reference. In connection
with the closing of the sale of shares, the Company paid a cash fee to placement
agents in the amount of $2,232,835, and the Company issued to placement agents
and warrants to, in aggregate, 895,775 shares of common stock at $2.00 per
share.
II-1
(2)
On
March 24, 2005, the Company issued 1,818,400 shares of its common stock to
investors in a private placement and received $3,636,800 in the aggregate.
The
Company also issued an aggregate of 909,200 warrants to the investors at
an
exercise price of $3.00 per share. The March 24, 2005 private placement closed
in two steps: the first step on February 28, 2005, at which closing 1,768,400
shares were sold and finally on March 24, 2005, at which closing the remaining
50,000 shares were sold. The shares and warrants were sold by the Company
to
investors on the terms and conditions set forth in the Securities Purchase
Agreement filed as Exhibit 10.10 in a Current Report on Form 8-K filed on
March4, 2005, which is specifically incorporated herein by reference. In connection
with the closing of the sale of shares, the Company paid a cash fee to placement
agents in the amount of $417,134, and the Company issued to placement agents
warrants to purchase, in aggregate, 89,090 shares of common stock at $2.00
per
share.
In
summary, in March 2005, the Company completed its two private placements
resulting in the issuance of an aggregate of 11,778,650 shares of its common
stock for aggregate gross proceeds of $23,557,300. Net proceeds from the
transactions, after issuance costs and placement fees, were $20,805,610.
in
connection with these transactions, the Company also issued one warrant to
purchase one share of common stock to each investor for every two shares
of
common stock purchased in the private placement resulting in an aggregate
of
5,889,325 warrants (“investor Warrants”) being issued to investors at an
exercise price of $3.00 per share. The Company also issued warrants to the
placement agent (“Agent Warrants”) to purchase 984,866 shares of its common
stock at $2.00 per share. The shares and the warrants were sold by the Company
to the investors on the terms and conditions set forth in the Securities
Purchase Agreement filed as Exhibit 10.5 in a Current Report on Form 8-K
filed
on January 26, 2005, and as Exhibit 10.10 in a Current Report on Form 8-K
filed
on March 4, 2005 which is specifically incorporated herein by reference.
Pursuant
to the terms of the Registration Rights Agreement entered into in connection
with the transaction, the failure of the Company to file a required registration
statement prior to the required filing date, or to cause either of the
effectiveness actions to occur prior to the required effectiveness date,
shall
be deemed to be a “Non-Registration Event”. The Company failed to file their
registration statement on time per the required filing date, and a
Non-Registration Event occurred. For each thirty (30) day period during the
period of such Non-Registration Event, the Company was required to deliver
to
each purchaser, as liquidated damages, an amount equal to one and one-half
percent (1.5%) of the aggregate purchase price (as such term is defined in
the
Securities Purchase Agreement) paid by such purchaser for securities (as
such
term is defined in the Securities Purchase Agreement). The Company had at
its
sole discretion to pay the non-registration event penalty payment in cash
or in
shares of its common stock. On November 23, 2005, the Company issued 384,970
shares of its common stock to the purchasers. When the Company was in a penalty
position for the quarter ended September 30, 2005, in accordance with Emerging
Issues Task Force (EITF) Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed To, and Potentially Settled In a Company c Own Stock,
“the
fair value of the warrants were accounted for as a liability, with an offsetting
reduction to additional paid-in capital. The warrant liability was reclassified
to equity as additional paid-in capital on the date that the registration
statement was deemed effective, which is the same date the potential for
a
penalty ceased.
(3)
On
June 3, 2005, the Company issued 250,000 shares of restricted common stock
to a
consultant per a consulting agreement dated May 1, 2005. The Company recorded
consulting expense of $2,099,750 at the time of the issuance of shares at
the
market closing price of $8.40 per share on June 3, 2005.
(4)
On
September 9, 2005, the Company issued 15,000 shares of restricted common
stock
to consultant per a consulting agreement dated February 28, 2005. The Company
recorded consulting expense of $82,485 at the time of the issuance of shares
at
the market closing price of $5.50 per share on September 9, 2005.
(5)
On
January 2, 2006, the Company issued warrants to a recruitment agency to purchase
36,232 shares of common stock, at an exercise price of $2.07. During the
first
quarter of 2006, the Company recorded a non-cash expense of $74,638 related
to
the fair value of the warrants.
II-2
(6)
On
February 3, 2006, the Company issued 10,000 shares of its common stock at
the
closing price on the date of grant in connection with software license rights
for use of an online share intelligence service for the period of one year.
These shares were issued pursuant to the license agreement dated October1,2005. During the first quarter of 2006, the Company recognized a non-cash
expense of $18,500 related to the contract.
(7)
In
March 2006, the Company settled a debenture by former investors of the Company
and issued them warrants to purchase 19,300 shares of common stock, with
an
exercise price of $2.07. The Company recorded an expense of $37,635 related
to
the debenture settlement.
(8)
On
April 21, 2006, the Company issued a second and final instalment of 15,000
shares of restricted common stock to a consultant per a consulting agreement
dated February 28, 2005. The Company recorded a consulting expense of $26,400
at
the time of the issuance of shares at the market closing price of $1.76 per
share on April 21, 2006.
(9)
On
June 24, 2006, the Company issued warrants to an investor relations agency
to
purchase up to 60,000 shares of common stock, with each one-quarter of them
having an exercise price of $1.25, $1.50, $2.00 and $3.00. The
Company recorded a non-cash expense of $45,400 related to the fair value
of the
warrants.
(10)
On
April 14, 2007, the Company issued 100,000 shares of restricted common stock
to
a consultant pursuant to a consulting agreement. During the second quarter
of
2007, the Company recognized a non-cash expense of $45,000 related to the
contract.
(11)
On
April 24, 2007, the Company issued 250,000 shares of restricted common stock
at
the closing price on the date of grant to a consultant in connection with
a
consulting contract dated April 10, 2007 for investor relations and public
relation services. During the second quarter of 2007, the Company recorded
a
consulting expense of $102,500 related to the contract.
(12)
On
May 24, 2007, the Company issued 500,000 shares of restricted common stock
at
the closing price on the date of grant to a consultant in connection with
a
consulting contract dated April 10, 2007 for investor relations and public
relation services. During the second quarter of 2007, the Company recorded
a
consulting expense of $190,000 related to the contract.
(13)
On
December 19 and December 21, 2007, the Company issued an aggregate principal
amount of $3,953,000 of 8% senior secured convertible notes due three years
from
the date of issue, convertible into 15,812,000 shares of the Company’s common
stock at a conversion price of $0.25 per share. The Company also issued warrants
to purchase 7,906,000 shares of its common stock, at an exercise price of
$0.30
per share. On February 15, 2008, the Company issued an additional
$2,747,000 of notes and warrants to purchase 5,494,000 shares of common stock.
In connection with the private placement, the Company paid $435,500 in cash
fees
to Axiom Capital Management, Inc. and has agreed to issue such placement
agent
warrants to purchase 1,742,000 shares of the Company’s common
stock.
(14)
On
April 14, 2008, the Company issued warrants to Greg Osborn c/o Indigo Securities
L.L.C. to purchase up to 1,650,000 shares of common stock at an exercise
price
of $0.30. The Company will record a non-cash expense of $255,191 in 2008
related
to the fair value of the warrants.
(15)
In
2006, the Company issued to directors, officers and employees options to
purchase 720,000 shares of common stock with per share exercise prices ranging
from $2.03 to $3.50, and has issued no shares of common stock upon exercise
of
such options.
The
issuance of securities described in paragraphs (1) through (14) above were
exempt from registration under the Securities Act of 1933 in reliance on
Section
4(2) of the Securities Act of 1933 as transactions by an issuer not involving
any public offering. The purchasers of the securities in these transactions
represented that they were accredited investors or qualified institutional
buyers and they were acquiring the securities for investment only and not
with a
view toward the public sale or distribution thereof. Such purchasers received
written disclosures that the securities had not been registered under the
Securities Act of 1933 and that any resale must be made pursuant to a
registration statement or an available exemption from registration. All
purchasers either received adequate access, through their relationship with
the
registrant, to financial statement or non-financial statement information
about
the registrant or had adequate access, through their relationship with the
registrant, to financial statement or non-financial statement information
about
the registrant. The sale of these securities was made without general
solicitation or advertising.
II-3
The
issuances of securities described in paragraph (15) above were exempt from
registration under the Securities Act of 1933 in reliance on Section 4(2)
and
Rule 701 of the Securities Act of 1933 pursuant to compensatory benefit plans
approved by the registrant’s board of directors.
Item
16. Exhibits and Financial Statement Schedules.
Exchange
Agreement, dated December 19, 2007, by and among Bret Bader, Mark
Brennan,
Paul Boyle, Andrew Koehl, David Ruiz-Alonso and the Company (incorporated
by reference to Exhibit 2.2 to Form 10-K filed by the Company on
March 31,2008).
2.3
Exchange
Agreement Amendment No. 1, dated May 28, 2008, by and among Bret
Bader,
Mark Brennan, Paul Boyle, Andrew Koehl, David Ruiz-Alonso and the
Company
(incorporated by reference to Exhibit 10.1 to Form 8-K filed by
the
Company on May 28, 2008)
Form
of Investor and Placement Agent Warrant Agreement consent letter
to amend
the exercise price pursuant to the Securities and Purchase Agreement
dated
as of October 13, 2006 (incorporated by reference to Exhibit 10.22
to Form
10-KSB filed by the Company on March 30, 2007).
Amended
and Restated Senior Secured Grid Note, dated August 14, 2006, by
the
Company in favor of Jano Holdings Limited (cancelled) (incorporated
by
reference to Exhibit 10.2 to Form 8-K filed by the Company
on August 16, 2006).
Amended
and Restated 2005 Equity Incentive Plan and related agreements
(incorporated by reference to Exhibit 10.8 to Form 10-QSB filed
by the
Company on May 15, 2006).
10.7*
Company’s
Director Compensation and Confidential Information Agreement (incorporated
by reference to Exhibit 10.1 to Form 8-K dated March 6, 2007 and
filed by the Company on March 9, 2007).
Form
of Subscription Agreement, dated December 19 and 21, 2007, between
the
Company and the subscribers thereto (incorporated by reference
to Exhibit
10.14 to Form 10-K filed by the Company on March 31,2008).
II-5
Exhibit
No.
Document
Description
10.15
Escrow
Agreement, dated December 19, 2007, between the Company, Axiom
Capital
Management, Inc. and HSBC Bank USA, National Association (incorporated
by
reference to Exhibit 10.15 to Form 10-K filed by the Company on
March 31,2008).
Advance
Display Technologies plc (a UK corporation)
Advance
Nanotech Limited (a UK corporation)
Advance
Nanotech Singapore Pte. Limited (a Singapore corporation)
Owlstone
Nanotech, Inc. (a Delaware corporation)
Owlstone
Limited (a UK corporation)
Bio-Nano
Sensium Technologies Limited (a UK corporation)
Cambridge
Nanotechnology Limited (a UK corporation)
Nano
Solutions Limited (a UK corporation)
NanoFed
Limited (a UK corporation)
23.1
Consent
of Mendoza Berger & Company, L.L.P.
23.2
Consent
of Andrews Kurth LLP (included in Exhibit 5.1).
24.1+
24.2
Power
of Attorney (included on the signature page).
Power
of Attorney of Joseph Peters
* Management
contract or compensation plan, contract or arrangement.
+ Previously
filed
(b) Financial
Statement Schedules. None.
Item
17. Undertakings.
a.
Advance
Nanotech, Inc. hereby undertakes to:
1.
File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
i.
Include
any prospectus required by section 10(a)(3) of the Securities Act;
ii.
Reflect
in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration
statement; and notwithstanding the forgoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may
be
reflected in the form of prospects filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate, the changes in the volume and
price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the
effective registration statement.
II-6
iii.
Include
any additional or changed material information on the plan of
distribution.
2.
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered,
and
the offering of the securities at that time to be the initial bona
fide
offering.
3.
File
a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
b.
Insofar
as indemnification for liabilities arising under the Securities
Act of
1933 (the “Act”) may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing
provisions,
or otherwise, the small business issuer has been advised that in
the
opinion of the Securities and Exchange Commission such indemnification
is
against public policy as expressed in the Act and is, therefore,
unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer
or controlling person in connection with the securities being registered,
the
small business issuer will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-1 and has authorized this registration
statement to be signed on its behalf by the undersigned on the 14th day of
July,
2008.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and
the
dates indicated.
Exchange
Agreement, dated December 19, 2007, by and among Bret Bader, Mark
Brennan,
Paul Boyle, Andrew Koehl, David Ruiz-Alonso and the Company (incorporated
by reference to Exhibit 2.2 to Form 10-K filed by the Company on
March 31,2008).
2.3
Exchange
Agreement Amendment No. 1, dated May 28, 2008, by and among Bret
Bader,
Mark Brennan, Paul Boyle, Andrew Koehl, David Ruiz-Alonso and the
Company
(incorporated by reference to Exhibit 10.1 to Form 8-K filed by
the
Company on May 28, 2008)
Form
of Investor and Placement Agent Warrant Agreement consent letter
to amend
the exercise price pursuant to the Securities and Purchase Agreement
dated
as of October 13, 2006 (incorporated by reference to Exhibit 10.22
to Form
10-KSB filed by the Company on March 30, 2007).
Amended
and Restated Senior Secured Grid Note, dated August 14, 2006, by
the
Company in favor of Jano Holdings Limited (cancelled) (incorporated
by
reference to Exhibit 10.2 to Form 8-K filed by the Company
on August 16, 2006).
Amended
and Restated 2005 Equity Incentive Plan and related agreements
(incorporated by reference to Exhibit 10.8 to Form 10-QSB filed
by the
Company on May 15, 2006).
10.7*
Company’s
Director Compensation and Confidential Information Agreement (incorporated
by reference to Exhibit 10.1 to Form 8-K dated March 6, 2007 and
filed by the Company on March 9, 2007).
Form
of Subscription Agreement, dated December 19 and 21, 2007, between
the
Company and the subscribers thereto (incorporated by reference
to Exhibit
10.14 to Form 10-K filed by the Company on March 31,2008).
10.15
Escrow
Agreement, dated December 19, 2007, between the Company, Axiom
Capital
Management, Inc. and HSBC Bank USA, National Association (incorporated
by
reference to Exhibit 10.15 to Form 10-K filed by the Company on
March 31,2008).
