Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
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(Address
and telephone number of principal executive offices)
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90 days. Yes
x No
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
State
the
number of shares outstanding of the issuer’s class of common equity, as of the
latest practicable date:
Preferred
stock; $0.001 par value; 25,000,000 shares authorized; 0 shares
issued and
outstanding in 2007 and 2006, respectively
-
-
Common
stock; $0.001 par value; 75,000,000 shares authorized; 36,595,686
and
34,371,462 shares issued and outstanding in September 30, 2007
and
December 31, 2006, respectively
36,596
34,372
Additional
paid in capital
15,755,492
14,064,249
Warrant
valuation
5,611,769
5,743,116
Accumulated
other comprehensive loss
(2,522,263
)
(480,780
)
Deficit
accumulated during development stage
(32,862,911
)
(26,181,879
)
TOTAL
STOCKHOLDERS’ DEFICIT
(13,981,317
)
(6,820,922
)
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
3,654,793
$
4,452,067
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
Unless
otherwise noted, (1) the term "Advance Nanotech" refers to Advance Nanotech,
Inc., a Delaware corporation, (2) the term "Advance Nanotech Holdings" refers
to
Advance Nanotech Holdings, Inc., a privately-held Delaware corporation, (3)
the
terms " the "Company,""we,""us," and "our," refer to the ongoing business
operations of Advance Nanotech and its subsidiaries, whether conducted through
Advance Nanotech or a subsidiary of the company, (4) “Advance Nanotech Limited”
refers to Advance Nanotech Limited, a wholly owned subsidiary organized in
the
United Kingdom, (5) the terms "common stock" and "stockholder(s)" refer to
Advance Nanotech's common stock and the holders of that stock, respectively,
and
(6) the term "warrant" refers to warrants to purchase Company common stock.
NOTE
A - ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION
On
June19, 2006, Advance Nanotech, Inc., a Colorado corporation ("Advance Nanotech
Colorado"), merged with and into its newly-formed, wholly owned subsidiary,
Advance Nanotech, Inc., a Delaware corporation ("Advance Nanotech Delaware")
in
order to reincorporate in the State of Delaware (the "Reincorporation Merger").
The Reincorporation Merger was approved by Advance Nanotech Colorado's
shareholders at its Annual Meeting held on May 11, 2006. As a result of the
Reincorporation Merger, the legal domicile of Advance Nanotech, Inc. (the
“Company”) is now Delaware.
Each
outstanding Advance Nanotech Colorado common share ("Colorado Common Stock")
was
automatically converted into one Advance Nanotech Delaware common share
("Delaware Common Stock"). As a result of the Reincorporation Merger, each
outstanding option, right or warrant to acquire shares of Colorado Common
Stock
converted into an option, right or warrant to acquire an equal number of
shares
of Delaware Common Stock, with no further action required by any party, under
the same terms and conditions as the original option, right or
warrant.
The
directors and officers of Advance Nanotech Colorado in office immediately
prior
to the Reincorporation Merger continue to serve as the directors and officers
of
the Company. None of the Company's subsidiaries changed their respective
state
or jurisdiction of incorporation in connection with the Reincorporation Merger,
although the Company’s previously existing Delaware subsidiary with the name
Advance Nanotech, Inc. changed its name to “Advance Nanotech Holdings, Inc.”
As
a
result of the consummation of the Reincorporation Merger, the Certificate
of
Incorporation and the Bylaws of Advance Nanotech Delaware in effect immediately
prior to the consummation of the Reincorporation Merger (the "Delaware Charter
and Bylaws") became the Certificate of Incorporation and Bylaws of the surviving
Delaware Corporation, Advance Nanotech Delaware. Delaware corporate law will
generally be applicable in the determination of the rights of stockholders
of
the Company under state corporate laws.
Prior
to
the Reincorporation Merger, on October 1, 2005, a Colorado corporation then
known as Artwork and Beyond, Inc. (“Artwork and Beyond”) acquired all of the
issued and outstanding securities of Advance Nanotech Holdings, Inc. ("Advance
Nanotech Holdings"), a Delaware corporation, pursuant to the terms and
conditions set forth in a “Share Exchange Agreement” originally entered into on
October 1, 2005 (the “Share Exchange”). As a result of this transaction (and
certain capital transactions including a reverse 100-to-1 stock split on
October5, 2005), control of Artwork and Beyond was changed, with the former
stockholders of Advance Nanotech Holdings acquiring approximately 99% of
Artwork
and Beyond’s outstanding common stock. In addition, all of the officers and
directors of Artwork and Beyond prior to the transaction were replaced by
designees of the former shareholders of Advance Nanotech Holdings and Artwork
and Beyond’s corporate name was changed to “Advance Nanotech, Inc.”
As
a
consequence of the change in control of Artwork and Beyond resulting from
these
transactions, all prior business activities of Artwork and Beyond were
completely terminated and Artwork and Beyond adopted the business and plan
of
operations that had been developed and was in the process of implementation
by
Advance Nanotech Holdings 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.”
As
of
September 30, 2007, Advance Nanotech owned 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.
ANL
owns 55.0% of Bio-Nano Sensium Technologies, Ltd (formerly Imperial Nanotech
Ltd), 75.0% of Nano Solutions Limited and all the outstanding shares of the
following UK companies: Nano Devices Limited, Intelligent Materials Limited,
Biostorage Limited, Nanolabs Limited, Nano Biosystems Limited, Cambridge
Nanotechnology Limited, Nano Photonics Limited, NanoFED 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. Advance Nanotech also owns 58.68% of the outstanding shares of Owlstone
Nanotech, Inc., a Delaware corporation. Advance Nanotech also owns 90.0%
of
Advance Nanotech (Singapore) Pte. Ltd., which in turn owns 8.80% of Singular
ID
Pte. Limited, a company incorporated in Singapore.
5
NATURE
OF BUSINESS
Advance
Nanotech is a leading provider of financing and support services to drive
the
commercialization of nanotechnology related products for homeland security
and
display technologies.
Advance
Nanotech is a development stage nanotechnology company specializing in the
acquisition and commercialization of new technologies focused in the areas
of
homeland security and displays. Nanotechnology is a science that involves
the
investigation and design of materials and devices at the atomic and molecular
levels that is expected to make most products lighter, stronger, less expensive
and more precise. The Company works closely with universities to source early
stage deals and to generate exclusive rights to intellectual property. The
Company's development network strives to create economic and time efficiencies
which can advance the development of university research programs to marketable
product lines in high-value markets. Advance Nanotech provides investment
funding to bridge patented innovation with the capital markets. The Company's
business strategy is to develop its interests in nanotechnology products,
acquire additional early and mid-stage product candidates in the display
and
homeland security sectors, selectively license its technology and establish
strategic collaborations to advance its product pipeline.
In
2006,
the Company completed a strategic realignment of its portfolio to more aptly
leverage the strengths of the portfolio to provide the greatest value to
shareholders. The Company currently possesses a critical mass of technologies
in
two core areas of activity: homeland security and displays.
Advance
Nanotech's Homeland Security segment includes nanotechnologies providing
solutions across two application areas: CBRNE Detection (Chemical, Biological,
Radiation, Nuclear, and Explosive), and Wireless Monitoring for cognitive
awareness, triage and first response therapy. According to Fredonia, the
market
opportunity for chemical sensing in the United States alone is worth $5.4
billion. Technologies within this division include the Owlstone Nanotech
chemical sensor and wireless technologies for simultaneous event detection
and
low-power transmission. This division launched its first product in August
2006
and currently has three product lines at market with a customer base across
the
defense and industrial process control industries.
Advance
Nanotech's Display Division segment includes nanotechnologies providing
nano-enabled materials and devices across three display applications areas:
flat
panel and projection displays, plastic electronics and flexible displays.
The
combined portfolio of technologies will aim to serve current unmet technology
needs while at the same time unlocking new display market opportunities in
areas
such as non-consumer large area projection displays. The US electronic display
industry is worth $11.6 billion and is forecast to grow 12.4% annually through
2008 (source: electronics.ca publications). Plastic electronics, including
flexible display applications, has the potential to create a true disruption
in
the semiconductor industry as well as the consumer electronics market in
the
next five to ten years.
Each
nanotechnology interest is further categorized into one of the following
four
distinct development phases:
·
At
Market:
Nano-enabled
products are now being sold to end customers.
·
Near-to-Market:
Technologies
with market entrance expected within 18 months.
·
Emerging:
Technologies
with market entrance expected within 18 to 36 months.
·
Research:
Early-stage,
pre-proof of concept technologies with market entrance expected
to be
greater than 36 months.
After
prototypes are proven within the lab and we develop a product roadmap and
business plan, we form majority-owned subsidiaries around the specific
technology, in which we own a majority share. Through our strong network
in
academia and industry, we seek to return value to our shareholders by reducing
the cost of commercializing nano-enabled products while providing an expedited
path to market; connecting advanced, innovative technology with potential
customers in order to rapidly build qualified business opportunities.
6
SIGNIFICANT
ACCOUNTING POLICIES
BASIS
OF PRESENTATION and USE OF ESTIMATES
The
unaudited consolidated financial statements included herein have been prepared
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. They do not include all information and notes required
by
generally accepted accounting principles for complete financial statements.
However, except as disclosed in the notes to the consolidated financial
statements included in the Annual Report on Form 10-KSB of Advance Nanotech,
Inc. for the year ended December 31, 2006. In the opinion of management,
all
adjustments (including normal recurring accruals) considered necessary for
a
fair presentation have been included. Operating results for the three and
nine
months ended September 30, 2007 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year. For
further information, these unaudited consolidated financial statements and
the
related notes should be read in conjunction with the Company’s audited
consolidated financial statements for the year ended December 31, 2006 included
in the Company’s Annual Report on Form 10-KSB.
The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States 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
unaudited 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 (25.0%) and Bio-Nano Sensium
(45.0%) 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 unaudited consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States, contemplate the continuation of the Company as a going concern.
The Company has been in the development stage since its inception (August17,2004), has 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; however, there
is no
assurance that the necessary funds will be realized by securing equity through
stock offerings or through additional debt. The unaudited consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty. Notwithstanding this uncertainty, the Company has a
conditional line of credit with Conquistador Investments Ltd. (“CIL”) and NAB
Ventures Ltd. (“NAB”) totaling approximately $19.5 million (GBP £9.5 million)
which may be drawn down in accordance with the agreement discussed in Note
G.
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
sufficient funding is in place. 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. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but
are
not limited to, the Company's ability to obtain acceptable financing in the
future, ability to successfully acquire new technologies, rising insurance
costs, the Company's ability to realize the value of intangible assets and
deferred tax assets, dependence on key personnel, government regulation,
competition, reliance on certain research agreements, and credit
risk.
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 September 30, 2007 were 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 September 30, 2007, the Company had uninsured cash deposits
in
excess of the Federal Deposit Insurance Corporation insurance limit of
$256,418.
7
CASH
AND CASH EQUIVALENTS
Cash
and
cash equivalents include investments in liquid instruments having maturity
of
three months or less at the time of purchase.
The
Company has restricted cash as a result of placing the security deposit related
to our principal executive offices in New York in a standby letter of credit
account. The Company is entitled to all of the interest earned on the account
and will have unrestricted access to both the cash and interest at the end
of
the lease term.
RESEARCH
AND DEVELOPMENT
Research
and development costs are clearly identified and are expensed as incurred
in
accordance with FASB statement No. 2, "Accounting for Research and Development
Costs."
FOREIGN
CURRENCY TRANSLATION
The
Company's primary functional currencies are the United States Dollar (USD$)
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 year ended December 31, 2006 and the nine months
ended
September 30, 2007, 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 material financial
instruments with off-balance sheet risk.
LONG-LIVED
ASSETS
The
Company accounts for its long-lived assets in accordance with SFAS No.
144,
“Accounting
for the Impairment or Disposal of Long-Lived Assets.”
SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical cost carrying
value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of an asset by estimating the future
net
cash flows expected to result from the asset, including eventual disposition.
If
the future net cash flows are less than the carrying value of the asset,
an
impairment loss is recorded equal to the difference between the asset’s carrying
value and fair value or disposable value. As of September 30, 2007, the
Company
did not deem any of its long-term assets to be impaired.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued FAS 159, (SFAS No. 159), “The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115.”
SFAS
159
permits
entities 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. This Statement is expected to expand
the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments. This Statement
is effective as of the beginning of an entity’s first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning
of a
fiscal year that begins on or before November 15, 2007, provided the entity
also
elects to apply the provisions of FASB Statement No. 157, “Fair
Value Measurements.” The
adoption of this accounting pronouncement is not expected to have a material
effect on our consolidated financial statements.
RECLASSIFICATIONS
Certain
reclassifications have been made to the 2006 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
September 30,
December
31,
Asset
Description
Useful
Life
2007
2006
Furniture
and Fixtures
3-5
years
$
63,114
$
60,986
Office
Equipment
3-5
years
56,076
54,760
Computers
3
years
105,731
99,327
Software
3
years
95,074
76,721
Plant
and Machinery
5
years
245,763
224,930
565,758
516,724
Less:
accumulated depreciation
(289,819
)
(166,001
)
Net
Property and equipment
$
275,939
$
350,723
8
The
Company recorded depreciation of $107,450 and $67,270 for the nine months
ended
September 30, 2007 and 2006, respectively.
Maintenance
and repairs are expensed as incurred and were $12,269 and $3,439 for the
nine
months ended September 30, 2007 and 2006, 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 September 30, 2007, the Company has
capitalized internally developed patents of $638,097. 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, which
are
all pending. As of September 30, 2007, the Company had zero patents issued
in
their 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 profit from our nanotechnology 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 for an investment
of SGD$300,000 or approximately $202,050. As a result of subsequent equity
financings in which the company declined to participate, Advance Nanotech
Singapore, Pte. Ltd.’s equity stake in Singular ID dropped to 8.8% as of
September 30, 2007. Singular ID is a high technology spin-off company from
the
Institute of Materials Research and Engineering (IMRE) in Singapore. Singular
ID
provides individually tailored tagging solutions designed to combat
counterfeiting and forgeries. The technology offers unique, irreproducible
tags
with nanoscale magnetic regions that act like fingerprints to identify each
tagged item. Under terms of the agreement, Advance Nanotech assumed a seat
on
Singular ID’s Board of Directors and owns 15,625 shares of preferred stock. The
total equity capitalization of Singular ID is comprised of 40,350 shares
of
preferred stock, 37,214 shares of preferred A stock and 100,000 shares of
common
stock.
On
July31, 2007, Singular ID, a company in which Advance Nanotech, Inc., holds a
minority interest, closed a "Series A" round of financing led by Innogest
SGR
and Upstream Ventures, to fund its growth. Innogest SGR is a start-up fund
of
the Torino Wireless group that has strong connections in the IT and electronics
industries as well as the manufacturing sector in northern Italy. Upstream
Ventures is an Asian venture capital firm that provides funding, expertise
and
networks to emerging companies across India, China and Singapore. Based on
the
terms of the "Series A" financing the value of Advance Nanotech's July 2005
investment of 300,000 Singaporean Dollars (approximately US $200,000) has
increased by more than 300% although the company continues to account for
this
investment at historical cost.
The
Company does not exercise significant influence over the entity and carries
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 have been no adjustments or impairment charges to the fair market value
from acquisition and the period ending September 30, 2007.
Minority
interest in subsidiaries represents the minority stockholders’ proportionate
share of the equity as of September 30, 2007 in the following
entities:
·
Owlstone
Nanotech, Inc. - the Company owned 58.68% of Owlstone’s outstanding
shares, which also represented its percentage of voting
control.
·
Advance
Display Technologies Plc- the Company owned 92.9% of Advance Display
Technologies’ outstanding shares, which also represented its percentage of
voting control.
9
·
Advance
Nanotech Singapore Pte. Ltd.- 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.- 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.- 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 interest in
subsidiary” in the consolidated balance sheets and consolidated statements of
operations.
NOTE
F- REVENUE RECOGNITION
All
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;
•
collectability
is reasonably probable.
As
of
September 30, 2007, the Company has recognized revenue of $369,376 for the
nine
months ended. Revenues generated were a direct result of our subsidiary,
Owlstone Nanotech, Inc. Owlstone’s main sources of revenue were a result of
shipping their products, Tourist and Owlstone Vapor Generators (“OVG”), and from
contracted work from strategic partners. The Owlstone Tourist is the first
generation 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.
On
July
30 2007, Owlstone launched the “Lonestar” product, which incorporates Owlstone’s
revolutionary FAIMS sensor, is a stand alone device, designed to be deployed
into process control applications. “Lonestar” has also been designed to perform
advanced validation and application research for both Government and private
partners.
On
September 4, 2007, Owlstone launched the “OVG-4” product line of vapor
generators. The OVG-4 was developed to support in-house design and testing
of
Owlstone's core FAIMS technology. The OVG-4 is a system for generating trace
concentration levels of chemicals and calibration gas standards. It is easy
to
use, cost-effective and compact and produces a very pure, accurate and
repeatable output. The very precise control of concentration levels is achieved
using permeation tube technology, eliminating the need for multiple gas
cylinders and thus reducing costs, saving space and removing a safety hazard.
Complex gas mixtures can be accurately generated through the use of multiple
tubes. The OVG-4 is an ideal tool for numerous applications, ranging from
calibration of explosive detectors in military and homeland defense to
validation of personal monitors in industrial health and safety.
Owlstone
Nanotech, Inc. has obtained other purchase orders for its products and services.
As of September 30, 2007, Owlstone had a total backlog of product, service
and
contract sales of approximately $63,728. As a result of the launch of Lonestar,
Owlstone Nanotech, Inc. has made efforts over the past two quarters to phase
out
the sale of the Tourist, which has been superseded by the launch of Lonestar.
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
collateral. Amounts withdrawn under this facility
shall 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 September 30, 2007, the Company had not used this facility. As of September30, 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 September 30, 2007, the Company
had $47 of credit available under this agreement.
10
On
November 6, 2006, the Company’s subsidiary, Advance Display Technologies, plc
(“ADT”), entered into a conditional Facility Agreement (the “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
in
London. NAB shall provide the Company one or more loans, each called a drawdown,
in the aggregate principal amount of up to approximately USD $7.1M (GBP £3.5M)
subject to the terms and conditions. As of September 30, 2007, the Company
had
$1,762,972 outstanding under the Agreement. Any outstanding principal amount
shall bear interest per annum at an interest rate of 9.0%. In the event the
Agreement is not repaid on the maturity date, December 31, 2009, the unpaid
principal amount and accrued interest thereon also shall 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 Agreement, NAB received
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 commenced trading on the PLUS-quoted or approximately
$1.02 (GBP £0.50). The warrants have a cashless exercise provision. In addition
to being the lender under the Facility Agreement, NAB also owns 950,000 shares,
or 2.6%, of the Registrant’s common stock. The NAB credit facility has resulted
in the Company recording deferred financing costs of which $1,849,156 are
unamortized as of September 30, 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
life of the NAB credit facility of 37 months 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 (the “Agreement”) with
Conquistador Investments Limited(“CIL”).
CIL shall provide the Company one or more loans, each called a drawdown,
in the
aggregate principal amount of up to approximately USD $12.3M (GBP £6.0M) subject
to certain terms and conditions. Any outstanding principal amount shall bear
interest per annum at an interest rate of 9.0%. In the event the Agreement
is
not repaid on the maturity date, December 31, 2010, the unpaid principal
amount
and accrued interest thereon also shall bear 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 Agreement, CIL will receive 8,000,000 ordinary shares of AHS,
representing approximately 16% of the Company upon first draw-down of the
facility. As of September 30, 2007, the Company had $0 outstanding under
the
Agreement, no shares have been issued to CIL and no portfolio assets have
been
transferred to AHS. The CIL credit facility has resulted in the Company
recording deferred financing costs of which approximately $22,172 (GBP £10,828)
are unamortized as of September 30, 2007. The financing costs resulted from
the
accrued issuance of 8,000,000 ordinary shares of AHS. These financings costs
will be amortized over the life of the CIL credit facility of 45 months and
will
be fully expensed on December 31, 2010.
On
March30, 2007, the Company and Jano Holdings Ltd. (“Jano”) have 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 have simultaneously canceled the following agreements dated August14,2006: 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 any 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
and Preferred Stock
On
June19, 2006, the new Delaware Charter 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 September 30, 2007,
36,595,686 shares of common stock were outstanding.
11
2.
Preferred Stock
On
June19, 2006, the new Delaware Charter of 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 September 30, 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.
4.
Private Placements- Fiscal Year 2005
The
Company conducted two private equity placements during the fiscal year ended
December 31, 2005. The first placement comprised of three rounds and the
second
placement included two rounds of stock sales. Each placement is discussed
below:
On
February 2, 2005the 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. 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, 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 warrants to purchase,
in
aggregate, 895,775 shares of common stock at $2.00 per share.
On
March24, 2005the 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 the 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 March24,2005 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 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 10.10 in a Current
Report
on Form 8-K filed on March 4, 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'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.
12
On
June2, 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
March 31, 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.
At
March31, 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 December31,2005 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.
The
Company accepted consent letters up until the close of business on the
date of
the 2007
Annual Meeting which was held on June7,2007.
As
of
June 30, 2007, the Company re-priced additional Investor Warrants to purchase
61,250 shares to a new exercise price of $1.25. The revised exercise price
is
out of the money on the measurement date because the closing stock price
on June30, 2007, was $0.39. This resulted in a re-class 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. 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, 2007, the Company re-priced additional Investor Warrants to purchase
18,750 shares to a new exercise price of $1.25. The revised exercise price
is
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-class 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.
13
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 is out
of
the money on the measurement date because the closing stock price on December31, 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.
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 is out
of
the money on the measurement date because the closing stock price on December31, 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.
In
total,
the Company reclassified the total gain to date of $6,454,698 to additional
paid
in capital on the 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.
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
have
decided to re-price all of the issued investor and placement 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. This strategy determined by
management will re-price the majority of outstanding warrants the Company
has at
$1.25.
Prior
to
the anti-dilution re-pricing becoming effective, each investor and agent
had
been mailed a consent letter by the Company on October 13, 2006, that will
approve and consent to the amendment of its Warrant Agreement to change the
exercise price as set forth above. Once these letters are received, signed
and
returned to the Company, the amendment to the Warrant Agreement will become
effective. The Company accepted consent letters up until the close of business
on the date of the 2007 Annual Meeting, June 7, 2007.
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 a strike 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 has re-priced Investor Warrants
to
purchase 3,452,200 shares to a new exercise price of $1.25. As
of December31, 2006, the Company has re-priced Agent Warrants to purchase
720,815
shares to a new exercise price of $1.25. The revised exercise price
is 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.
(e)
As
of March 31, 2007, the Company has re-priced Investor Warrants
to purchase
18,750 shares to a new exercise price of $1.25. The revised exercise
price
is 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 has re-priced Investor Warrants to
purchase
61,250 shares to a new exercise price of $1.25. The revised exercise
price
is 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.
The Company accepted consent letters up until the close of business
on the
date of the 2007 Annual Meeting, June 7,2007.
NOTE
I – STOCK OPTION PLANS and STOCK BASED COMPENSATION
1.
2005
Equity Incentive Plan
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.
15
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 Director’s
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
a strike price of $2.03. On April 19, 2006, the Company issued another 20,000
stock options to a Director. As of September 30, 2007, the Company had recorded
a non-cash expense for the nine months ended of $341,904 related to the
implementation of FAS123(R), “Share Based Payments”.
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.
On August13, 2007, the Company issued 1,050,000 options to certain employees. The
Stock options were approved by the Board of Director's Compensation Committee
as
part of the employee's employment agreements. Term of the options include
a ten year expiration life, vesting quarterly over twelve months and a strike
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
September 30, 2007, 240,000 stock options were forfeited by terminated
employees.
Shares
Granted to Consultants
On
May31, 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
May24, 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
April24, 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
(“AHS”). In accordance with the Agreement, Mr. Miller shall be entitled to
receive a zero ($0.00) 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 shall 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
March20, 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
March2, 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
August17, 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 September 30,2007:
·
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)
16
·
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)
As
of
June 30, 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 September 30, 2007,
and
are pending the Board of Director’s Executive 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 have not been issued as of September30, 2007 and are pending the Board of Director’s Executive Compensation
Committee approval.
As
of
September 30, 2007, there were still 240 registered shares that have 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, October 31, 2010, and February 2, 2012,
respectively.
17
The
following tables summarize disclosure information regarding stock
options:
The
company currently leases 3,569 square feet of general office space at our
principal executive offices at 600 Lexington Avenue, 29th Floor, New York,
NewYork10022 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, 14th
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
May28, 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.
Owlstone
had maximized their credit facility of $3.0M 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 will 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 October 28, 2006. As compensation for this
new credit facility, Owlstone issued Advance Nanotech 40,000 warrants to
purchase shares of common stock. The warrants have an exercise price of $1.50
and expire in three years.
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.
19
On
May18, 2007, the Company entered into a Second Amendment to Facility Agreement
with
its subsidiary Owlstone Nanotech, Inc., which served to provide the Company
with
the ability to capitalize any outstanding amounts owed by Owlstone Nanotech,
Inc. 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 its subsidiary, Owlstone Nanotech,
Inc., into shares of common stock. The amount capitalized totaled $3,000,000
and
was converted into equity at a price of $1 per share. As a result, the Company
increased its ownership in Owlstone Nanotech, Inc to 63.27% and the founders
and
third party investors retain the other 36.73% of the total issued and
outstanding shares of Owlstone.
Owlstone
has closed one round of financing during the three months ended June 30, 2007.
Owlstone sold convertible promissory notes totaling $177,500. The notes are
unsecured and do not bear any interest until September 25, 2007. The rate of
interest post September 25, 2007 shall be 10% per annum. All unpaid principal
and accrued interest on the notes shall be due and payable in full upon the
date, which shall in no event be before September 25, 2008, on which the
Noteholders’ 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 at a conversion price equal to $1.00 per share.
On
July30, 2007the Company announced that its Owlstone Nanotech, Inc., subsidiary
had
launched its new Lonestar(TM) product line at the 16th Annual International
Society for Ion Mobility Spectrometry conference held July 22-27, 2007 in
Mikkeli, Finland.
Owlstone
has closed six rounds of financing during the three months ended September30,2007. Owlstone sold convertible promissory notes totaling $1,722,423. The notes
are unsecured and do not bear any interest until September 25, 2007. The rate
of
interest post September 25, 2007 shall be 10% per annum. All unpaid principal
and accrued interest on the notes shall be due and payable in full upon the
date, which shall in no event be before September 25, 2008, on which the
Noteholders’ 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 at a conversion price equal to $1.00 per share.
Advance Nanotech, Inc. did not participate in any of the 2007 rounds. The notes
shall be converted into equity following the successful raise by Owlstone
totaling $3,000,000 in the form of convertible promissory notes.
On
August15, 2007, Owlstone approved an amendment to the June 23, 2006 Private Placement
Memorandum to include an equitable adjustment to those investors who
participated in the offering before such amendment at a price of $2.50 per
share
of restricted common stock of Owlstone Nanotech, Inc so as to be deemed to
have
participated in the offering as amended at a price of $1.00 per share of
restricted common stock. On August 31, 2007, Owlstone issued 1,566,908 shares
of
restricted stock to investors who participated in the June 23, 2006 offering
prior to the amendment. As a result, the Company’s ownership in Owlstone
Nanotech, Inc was reduced from 63.27% to 58.68% and the founders and third
party
investors retain the other 41.32% of the total issued and outstanding shares
of
Owlstone.
On
September 4, 2007, Owlstone launched its new OVG-4TM product line of vapor
generators. The OVG-4 was developed to support in-house design and testing
of
Owlstone's core FAIMS technology. Demands for improved gas generation standards
led to the OVG-4 platform development and to date 22 units have been sold.
Partnering with Grant Instruments provides Owlstone with the ability to utilize
Grant's extensive expertise in areas such as standards testing and production
engineering and Grant will be manufacturing the OVG-4 in higher volumes to
support sales growth.
The
Owlstone OVG-4 is a system for generating trace concentration levels of
chemicals and calibration gas standards. It is easy to use, cost-effective
and
compact and produces a very pure, accurate and repeatable output. The very
precise control of concentration levels is achieved using permeation tube
technology, eliminating the need for multiple gas cylinders and thus reducing
costs, saving space and removing a safety hazard. Complex gas mixtures can
be
accurately generated through the use of multiple tubes. The OVG-4 is an ideal
tool for numerous applications, ranging from calibration of explosive detectors
in military and homeland defense to validation of personal monitors in
industrial health and safety.
NANO
SOLUTIONS
On
November 2, 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. Nano Solutions Limited
is not committed to providing any funding beyond $312,000 during the next 12
month period to fund five separate research projects. Nano Solutions Limited
has
the right to terminate any research project for convenience, but must provide
30
days notice and pay pro-rata up to the point of termination.
On
July13, 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
believes the projects were not aligned with the overall portfolio of the
Company.
20
On
February 22, 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 will 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
December 13, 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. At September 30, 2007, our remaining financial obligation was
approximately $204,770 (GBP £100,000).
The
Company is in discussion with the University with respect to the outstanding
amount owed and 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
December 24, 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 $1,772,000 (GBP £904,000) over the next 12
month period 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
May14, 2007, the Company and the University terminated the third party
collaboration agreement. Under the terms of the termination, the Company
previously transferred two projects, Ultratubes (formerly known as NanoOptics)
and Osputt (formerly know as Inovus Materials) to the CAPE strategic
partnerships, in which Advance Nanotech has an interest, and cancelled Cambridge
Nanotechnology, NanoPhotonics and Exiguus Technologies. Subsequent to the
transfer, (1) Ultratubes became a joint collaboration between the Company and
Dow Corning Limited and (2) Osputt became a joint collaboration between the
Company and the Alps Electric Company.
BIO-NANO
SENSIUM
On
January 24, 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. 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. If we do not agree on a
modification, our financial commitments over the next 12 month period would
be
$2,340,521 (GBP £1,143,000). Additionally, the Company transferred
45% ownership of Bio-Nano Sensium Technologies Limited to Toumaz Technologies
Limited and Professor Chris Toumazou.
CAPE
On
February 1, 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 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 has 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 are
due each quarter through October 2009. Advance Nanotech is committed to
providing approximately $1,791,738 (GBP £875,000) over the next 12 month
period. We have a right to terminate the agreement for convenience, but
must provide notice and pay pro-rata up to the point of termination. With
respect to the jointly-funded projects with other strategic partners, we cannot
withdraw unless we terminate the agreement.
21
From
July
30 through August 3, 2007, at the International Conference on Optical,
Optoelectronic and Photonic Materials and Applications in London, scientists
from the ULTRATUBE team reported significant progress in the realization of
a
compact and rugged fiber laser capable of delivering sub-picosecond (trillionth
of a second) optical pulses. The ULTRATUBE project is a collaboration with
Dow
Corning, a joint venture between Corning Inc., Dow Chemical Co., and the
University of Cambridge. Led by Dr. Andrea Ferrari and Prof. Bill Milne at
the
Centre for Advance Photonics and Electronics (CAPE) of the University of
Cambridge, ULTRATUBE is a CAPE partner project that has benefited from Advance
Nanotech's funding and commercialization resources as well as Dow Corning's
provision of high-performance photonic polymers. At this and other recent
conferences, the ULTRATUBE team has demonstrated the excellent robustness of
this packaged laser, which stems from the reduced sensitivity of the CNT-based
technology to optical misalignment and mechanical perturbations. The team has
shown how the laser module can be moved, shaken and tapped without affecting
the
laser output. Increased laser operating power will soon enable a wide range
of
applications and the ULTRATUBE team has started to collaborate with an
established European laser manufacturer for the custom development of CNT-based
components for commercial pulsed lasers.
ULTRATUBE
researchers have mixed polymers with carbon nanotubes (CNTs) to create very
low-cost, nano-composite films that interact with laser light to turn a
continuous light beam into a train of ultrashort pulses, with durations of
only
a few hundred femtoseconds (a femtosecond is one billionth of one millionth
of a
second). Short-pulse lasers are used for processing (drilling, cutting and
micromachining) a wide range of materials, as well as for medical imaging,
basic
research, instrumentation, inspection, measurement and control applications.
This market is currently served by diode-pumped solid state lasers and fiber
lasers. ULTRATUBE "plug-and-play" photonic components can be installed in
existing laser systems to enable or enhance the generation of high-quality,
ultrashort optical pulses.
In
recognition of their technical breakthroughs and the high commercial potential
of their work, Dr. Ferrari and his team were short-listed in February 2007
as
one of the four finalists for the $500,000 Royal Society Brian Mercer Award
for
Innovation 2007. This prestigious Royal Society award was set up in 2001 to
help
scientists develop already proven prototypes in the field of nanotechnology
through to market products for commercial exploitation.
The
ULTRATUBE investment is held by Advance Nanotech's subsidiary Advance Display
Technologies PLC and is traded on the PLUS market in London under the symbol
ADTP.
As
of
September 30, 2007, the Company has fully funded the costs of the CAPE partner
projects according to their contractual agreement and subsequently
terminated their strategic partnership agreement between the Company and CAPE
effective September 30, 2007. The Company benefits from a six month time
window 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.
RESEARCH
& DEVELOPMENT FUNDING OBLIGATIONS
As
of
September 30, 2007, the Company had research & development funding
obligations for the next twelve months as follows:
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 September 30, 2007.
22
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, 2006the 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 2025. 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
November 6, 2006, the Company’s subsidiary, Advance Display Technologies, plc
(“ADT”), entered into a conditional Facility Agreement (the “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 in
London. NAB shall provide the Company with one or more loans, each called a
drawdown, in the aggregate principal amount of up to approximately USD $7.1M
(GBP £3.5M) subject to the terms and conditions. As of September 30, 2007, the
Company had $1,762,972 outstanding under the Agreement. Any outstanding
principal amount shall bear interest per annum at an interest rate of 9.0%.
In
the event the Agreement is not repaid on the maturity date, December 31, 2009,
the unpaid principal amount and accrued interest thereon also shall 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 Agreement, NAB
received 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 commenced trading on the PLUS-quoted or
approximately $0.98 (GBP £0.50). The warrants have a cashless exercise
provision. In addition to being the lender under the Facility Agreement, NAB
also owns 950,000 shares, or 2.7%, of the Registrant’s common stock. 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 life of the NAB credit facility of
37
months and will be fully expensed on December 31, 2009.
On
March30, 2007, the Company and Jano Holdings Ltd. (“Jano”) have 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 have simultaneously canceled the following agreements dated August14,2006: 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 any principal and interest outstanding on
the
credit facility and there were no amounts outstanding as of the date of this
mutual cancellation.
On
February 1, 2007, the Company has subleased certain office space at the New
York
Corporate office located at 600 Lexington Avenue. The sublease tenant is an
affiliate of a Director of the Company. Under the terms of the sublease, the
sublease will run from February 1, 2007 through January 2008 and require monthly
rent payments of $8,000.
NOTE
M- SUBSEQUENT EVENTS
OWLSTONE
NANOTECH, INC.
On
October 11, 2007, Owlstone announced that it received registration for ISO
9001.
Certification was awarded in recognition of Owlstone's compliance with quality
process standards and effective quality management systems in the design and
manufacture of chemical detection products. The purpose of the standard is
to
create, maintain and improve a Quality Management System (QMS), which profitably
satisfies customers and ensures compliance with all relevant statutory
requirements now and in the future.
23
On
October 23, 2007, Owlstone announced that it has received a purchase order
for
test quantities of its Lonestar product from Kidde IP Holdings Limited, the
research subsidiary of UTC Fire & Security Corporation. The Lonestar product
line provides a powerful and adaptable chemical monitor in a self-contained,
compact portable unit that can be easily integrated into industrial settings.
Incorporating Owlstone's proprietary Field Asymmetric Ion Mobility Spectrometry
(FAIMS) technology, the instrument offers the flexibility to provide rapid
alerts and detailed sample analysis. Lonestar units can be "trained" by users
for different applications by "teaching" the unit normal operating parameters
against which Lonestar can detect anomalous events. It can be easily integrated
with other sensors and third party systems to provide a complete monitoring
solution, and is suitable for a broad variety of applications ranging from
online/at line process monitoring to laboratory based research and
development.
On
October 29, 2007, Owlstone was awarded an incremental $3.7 million contract
by
an agency of the U.S. Department of Defense to provide micro-miniature products
and related services for detection of chemical warfare agents, toxic industrial
chemicals and trace explosive vapors. The three-year contract begins in the
current fourth quarter 2007.
Owlstone
will develop, design and fabricate a customized variant of its miniaturized
chemical detector using Field Asymmetric Ion Mobility Spectrometry ("FAIMS").
This customized version of the sensor will be designed to detect substances
at
exceptionally low levels while dramatically reducing false alarms that are
typically associated with competing technologies. Initially, Owlstone will
conduct live agent testing and develop enhanced algorithms to take advantage
of
the increased data stream provided by the Owlstone sensor. Additionally, efforts
will include the development of micro-miniature elements which will enable
the
sensor to operate without the need for complex, power hungry ancillary systems
(pneumatics and electronics). The final stage of the contract will be the
delivery of a sensor module capable of being integrated into existing sensor
packages in order to augment their capabilities.
Owlstone's
proprietary FAIMS technology offers the flexibility to provide rapid alerts
and
detailed sample analysis with reduced flow and improved ion drive over current
conventional technology. The performances of existing systems, which largely
use
conventional Ion Mobility Spectrometry, worsen dramatically as they are reduced
in size. By contrast, the Owlstone FAIMS solution has improved sensitivity
and
improved selectivity at reduced power as it is miniaturized. It is not only
a
sensor, but a highly integrated system with the necessary electronic and
mechanical components squeezed into a compact footprint. Micro and
nano-fabrication techniques enable the detector to be manufactured in a
massively parallel fashion, achieving small form factor, economy of scale and
reduced unit cost. Unlike alternate miniature detectors, Owlstone's technology
does not rely on exotic materials, custom engineered for each application,
which
often degrade over time. It is easily customized to each application through
software updates and can be dynamically reprogrammed for new chemicals even
after deployment. Use of chemically inert materials ensures a long operational
and storage life.
24
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Statements
contained in this Form 10-QSB, which are not purely historical, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, including but not
limited to statements regarding the Company's expectations, hopes, beliefs,
intentions or strategies regarding the future. Actual results could differ
materially from those projected in any forward-looking statements as a result
of
a number of factors in this Form 10-QSB. In some cases, you can identify
forward-looking statements by the use of the words "may,""will,""should,""expects,""plans,""intends,""anticipates,""believes,""estimates,""predicts,""potential," or "continue" or the negative of those terms or other
comparable terminology. Although we believe that the expectations reflected
in
the forward-looking statements are reasonable, we cannot guarantee future
results, events, levels of activity, performance or achievements. We do not
assume responsibility for the accuracy and completeness of the forward-looking
statements. We do not intend to update any of the forward-looking statements
after the date of this report to conform them to actual results.
OVERVIEW
Advance
Nanotech is a leading provider of financing and support services to drive the
commercialization of nanotechnology related products for homeland security
and
display technologies.
We
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
are
grouped into two operating segments: Displays and Homeland Security. The Display
segment currently consists of Advance Display Technologies plc (listed on the
PLUS-quoted market in London, ticker: ADTP) and its direct and indirect
subsidiaries. The Homeland Security segment currently consists of the following
subsidiaries: Advance Homeland Security plc, Advance Nanotech Ltd., Advance
Nanotech Singapore Pte. Ltd, and Owlstone Nanotech, Inc., and their respective
direct and indirect subsidiaries.
Advance
Nanotech is dedicated to the identification, development and successful
commercialization of new and disruptive nano-enabled products. We 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 reduce our
cost base otherwise associated with nano-enabled products. After prototypes
are
proven within the lab and we develop a product roadmap and business plan, we
form majority owned subsidiaries around the specific technology. We seek to
return value to our shareholders 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 its income as the majority
shareholder.
Advance
Nanotech provides a "tool-box" to ensure the technologies into which we invest
reach maximum market potential. This tool-box includes financing and support
services, such as commercialization guidance, project and infrastructure
management, leadership assets, and counsel on intellectual property, licensing
and regulatory issues. We work closely with universities to source early stage
deals and to generate rights to intellectual property which enables us to forge
partnerships with leading global manufacturers to transform innovative
nanotechnology concepts into practical solutions.
The
Company groups its pipeline of technologies into the following developmental
phases:
·
At
Market: Nano-enabled products are now being sold to end
customers.
·
Near-to-Market
Technologies: Technologies with market entrance expected within 18
months.
·
Emerging
Technologies: Technologies with market entrance expected within 18
to 36
months.
·
Research
Technologies: Early-stage, pre-proof of concept technologies. The
Company
is developing research technologies in partnership with leading academic
institutions. The market entrance is expected to be greater than
36
months.
As
Advance Nanotech's technologies evolve from research technologies into emerging
technologies, the Company forms businesses around the funded technology
programs. This provides us with a structured business entity in which we can
invest additional resources to commercialize the technology being developed,
while retaining, in most cases, a controlling position in order that we maintain
the flexibility to commercialize the technology in the most value-generating
manner for our stockholders. We provide our subsidiaries with financial,
administrative, project management, corporate, intellectual property and
strategic resources. We believe that this business model will enable each
research team at each university partner to maintain focus on the specific
technology they are developing and each management team to focus on specific
markets, increasing the likelihood of successful technological development
and
commercialization, in a cost effective way so as to reduce the risk for our
stockholders.
25
PLAN
OF OPERATIONS
The
Company's strategy is to leverage technology which has been developed at
universities. The Company benefits from work done at those universities by
establishing majority-owned subsidiaries to commercialize promising
technologies. Although the Company is likely to produce prototypes and develop
manufacturing processes, it may not ultimately manufacture the products
developed. The Company has two main ways to potentially generate more product
sales revenue:
·
License
the processes and products to a third party for a royalty or other
payment. By licensing, the Company does not have to commit resources
to
build a sales or a production infrastructure.
·
Retain
the rights but contract with a third party for production. The Company
might then sell the finished products. This approach requires either
the
establishment of a sales and distribution network or collaboration
with a
supplier who has an established sales and distribution network.
The
decision as to which approach to take will be dictated by which approach will,
in the opinion of management, generate the highest return for the Company.
This
approach may vary from product to product.
The
Company generated revenues of $100,589 in the three months ended September30,2007 as compared to $30,459 in the three months ended September 30, 2006. The
Company generated revenues of $369,376 in the nine months ended September 30,2007 as compared to $30,459 in the nine months ended September 30, 2006.
Revenues generated were a direct result of our subsidiary, Owlstone Nanotech,
Inc., shipping their Tourist Products and Vapor Generators beginning in the
third quarter of 2006. As a result of the pending launch of Lonestar, Owlstone
Nanotech, Inc. made efforts over the past two quarters to phase out the sale
of
the Tourist, which was superseded by the launch of Lonestar in July 2007. The
Company previously announced on May 1, 2007 that it expected consolidated
revenues of four million dollars for 2007. As a result of the delay in
completing a financing which would have provided necessary funds to build out
infrastructure in order to meet that target, management anticipates that
consolidated revenue and grant income for 2007 will approximate $585,000.
Research
and development costs for the three months ended September 30, 2007, as compared
to the same three months ended September 30, 2006, were $671,279 and $1,476,454,
respectively, representing a decrease of $805,175 or 54.5%. Research and
development costs for the nine months ended September 30, 2007, as compared
to
the same nine months ended September 30, 2006, were $2,668,860 and $4,653,500,
respectively, representing a decrease of $1,984,640 or 42.6%. Research and
development costs have decreased as a result of the Company’s NanoFED and
Nanolight projects reaching conclusion in the laboratory per the contractual
agreement and re-negotiating the Bio-Nano Sensium Technologies and Imperial
College projects. These reductions are offset by the increase in research
spending at Owlstone. At September 30, 2007, the Company was in negotiations
with certain partners to refocus portfolio technologies towards the homeland
security and display sectors. As a result, some technologies were
not funded in 2007 and may be terminated depending upon the results of this
refocus. Research and development costs include costs associated with the
projects shown in the table below. Adetailed list of each project's status
is
referenced in Table 1 on Page 30.
NINE MONTHS ENDED
SEPTEMBER 30,
Project
2007
2006
Change from prior year
Owlstone
Nanotech, Inc. (1)
$
1,715,749
$
1,163,997
$
551,752
NanoFED
Limited (2)
-
606,140
(606,140
)
Bio-Nano
Sensium Technologies Limited (3)
-
-
-
Cambridge
Nanotechnology Limited (4)
261,143
704,847
(443,704
)
Nano
Solutions Limited (5)
76,550
1,405,252
(1,328,702
)
Centre
for Advanced Photonics & Electronics (6)
494,788
679,702
(184,914
)
General
120,630
93,562
27,068
TOTAL
$
2,668,860
$
4,653,500
$
(1,984,640
)
(1)
Developing one nanotechnology
(2)
Developing two nanotechnologies
(3)
Developing one nanotechnology
(4)
Developing seven nanotechnologies
26
(5)
Developing five nanotechnologies
(6)
Developing six nanotechnologies, one of which is exclusively funded by Advance
Nanotech and five of which are funded by Advance Nanotech in partnerships with
Dow Corning Corporation, Alps Electric Company and Ericsson Marconi
Corporation.
(*Note)
The other Company technology not included on the table above is Singular ID;
which the consolidated R&D activity does not include since the minority
interest is accounted for using the cost method.
General
and administrative expenses for the three months ended September 30, 2007 and
for the three months ended September 30, 2006 were $1,808,376 and
$1,618,167, respectively,
representing an increase of $190,209 or 11.8%. The increase in general and
administrative expenses for the three month periods is a result of increased
payroll and additional operational expenses within Owlstone Nanotech as they
prepared for the launch of the Lonestar product.
General
and administrative expenses for the nine months ended September 30, 2007 and
for
the nine months ended September 30, 2006 were $5,805,869 and
$5,892,128, respectively,
representing a decrease of $86,259 or 1.5%. The decrease in general and
administrative expenses for the six month periods is a result of a decrease
at
the Advance Nanotech parent level in payroll and employee related expenses
including headcount, benefits and equity compensation as well as a decrease
in
facilities cost, including rent due to sublet of portion of office space. The
decrease was partially offset by increases in payroll and employee related
expenses at Owlstone Nanotech.
Interest
and other income for the three months ended September 30, 2007 and for the
three
months ended September 30, 2006 was $19,253 and $33,283, respectively,
representing a decrease of $14,030 from 2006. Interest and other income
for the nine months ended September 30, 2007 and for the nine months ended
September 30, 2006 was $81,737 and $148,592, respectively, representing a
decrease of $66,855 from 2006. The reduction in interest income is 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 is decreasing as a result of continuing to fund
operations. All of our cash reserves have been invested in liquid securities
at
large financial institutions. This is offset by sublease income because 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 of the Company. Under the terms of the sublease, the
sublease will run from February 1, 2007 through January 2008 and require monthly
rent payments of $8,000.
Interest
and other expenses for the three months ended September 30, 2007 and for the
three months ended September 30, 2006 was $42,378 and $0, respectively,
representing an increase of $42,378 from 2006. Interest and other expenses
for the nine months ended September 30, 2007 and for the nine months ended
September 30, 2006 was $91,113 and $0, respectively, representing an increase
of
$91,113 from 2006. The increase is a result of borrowing funds through the
NAB
credit facility at an interest rate of 9.0%. The Company accrues the interest
monthly.
We
had a
net loss of $1,889,194 in the three months ended September 30, 2007 compared
to
$2,793,308 for the comparable period in 2006. The Company lost 5 cents per
share, compared with a loss of 8 cents per share for the comparible three month
period in 2006.
We
had a
net loss of $6,681,032 in the nine months ended September 30, 2007 compared
to a
net loss of $10,129,006 for the comparable period in 2006. Advance Nanotech
lost
19 cents per share, compared with a loss of 30 cents per share for the
comparable nine month period in 2006. Revenue increased by $338,917 while
operating expenses decreased $2,070,899, and the Company had a gain of
$1,221,157 from minority interest related to subsidiaries’ losses for the nine
months ending September 30, 2007 compared to the comparable period in
2006.
FINANCIAL
RESOURCES
On
March31, 2006, Merrill Lynch extended a line of credit with loans to be secured
by
collateral. Amounts withdrawn under this facility shall 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 September30,2007, the Company had not used this facility. As of September 30, 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 September 30, 2007, the Company had $47
of
credit available under this agreement.
27
On
November 6, 2006, the Company’s subsidiary, Advance Display Technologies, plc
(“ADT”), entered into a conditional Facility Agreement (the “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 in
London. NAB shall provide the Company one or more loans, each called a drawdown,
in the aggregate principal amount of up to approximately USD $7.1M (GBP £3.5M)
dollars subject to the terms and conditions. As of September 30, 2007, the
Company had $1,762,972 outstanding under the Agreement. Any outstanding
principal amount shall bear interest per annum at an interest rate of 9.0%.
In
the event the Agreement is not repaid on the maturity date, December 31, 2009,
the unpaid principal amount and accrued interest thereon also shall 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 Agreement, NAB
received 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 commenced trading on the PLUS-quoted or
approximately $1.02 (GBP £0.50). The warrants have a cashless exercise
provision. In addition to being the lender under the Facility Agreement, NAB
also owns 950,000 shares, or 2.7%, of the Registrant’s common stock. The NAB
credit facility has resulted in the Company recording deferred financing costs
of which $1,849,156 are unamortized as of September 30, 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 life of the NAB credit facility of
37
months 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 (the “Agreement”) with
Conquistador Investments Limited(“CIL”).
CIL shall provide the Company with one or more loans, each called a drawdown,
in
the aggregate principal amount of up to approximately USD $12.3M (GBP £6.0M),
subject to the terms and conditions. Any outstanding principal amount shall
bear
interest per annum at a rate of 9.0%. In the event the Agreement is not
repaid on the maturity date, December 31, 2010, the unpaid principal amount
and
accrued interest thereon also shall bear 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 Agreement, CIL will receive 8,000,000 ordinary shares of AHS,
representing approximately 16% of the Company. As of September 30, 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 CIL credit facility
has
resulted in the Company recording deferred financing costs of which
approximately $16,382 (GBP £8,000) were unamortized as of September 30, 2007.
The financing costs resulted from the accrued issuance of 8,000,000 ordinary
shares of AHS. These financings costs will be amortized over the life of the
CIL
credit facility of 45 months and will be fully expensed on December 31, 2010.
Were
the
Company not to secure funds from CIL or NAB according to the current facility
agreements or raise additional capital, the Company’s current financial
resources would not be sufficient to meet the Company’s budgetary expenses for
the next twelve months. The Company's cash requirements for the next twelve
months are based upon existing agreements and do not assume agreements to
finance additional research. It is not anticipated that the Company may
internally generate significant revenues to produce an operating profit in
the
near term, so if the Company does not raise additional capital to meet 2007
budgetary needs, the Company may not be able to sustain business
operations.
SUBSIDIARY
AND PORTFOLIO AGREEMENTS
As
of
September 30, 2007, Advance Nanotech, Inc. possessed controlling interests
in
five direct and six indirect subsidiaries and a minority interest in one
company, as outlined below. With the exception of Owlstone Nanotech, Inc. and
Advance Nanotech Singapore, Pte. Ltd., all of these companies are incorporated
in the UK. Owlstone Nanotech, Inc. is incorporated in the State of Delaware.
Advance Nanotech Singapore Pte. Ltd. is incorporated in Singapore.
Subsidiary
Structure (ownership % is based on the direct level
above)
·
Advance
Nanotech, Inc.
o Advance
Display Technologies plc (92.9%
owned)*
§ NanoFED
Ltd. (100%
owned)
§ Cambridge
Nanotechnology Ltd.
(100%
owned)
o Advance
Homeland Security
plc (100%
owned)^
o Advance
Nanotech Ltd.
(100%
owned)
§ NanoSolutions
Ltd.
(75.0%
owned)
§ Bio-Nano
Sensium Tech. Ltd.
(55.0%
owned)
o Advance
Nanotech Singapore Pte.
Ltd. (90.0%
owned)
§ Singular
ID Pte. Ltd.
(8.8%
owned)
o Owlstone
Nanotech Inc. (58.68
%
owned)
§ Owlstone
Ltd.
(100%
owned)
*
Advance
Display Technologies plc is listed on the PLUS-quoted market in London
(ADTP).
^
Advance
Homeland Security plc is obligated to issue 8,000,000 shares in the future
to
the credit facility provider pending the conclusion of the entities share
authorization approvals.
28
With
the
exception of Owlstone Nanotech, Inc., Bio-Nano Sensium Technologies Limited
and
Singular ID Pte. Limited, each subsidiary has been specifically incorporated
with the purpose of commercializing technologies within a particular university
collaborative program. The collaborative agreements which Advance Nanotech
strikes with a particular university will often include multiple research
programs around a particular theme. This allows Advance Nanotech to apply
additional resources to assist in the development and commercialization of
the
technology. Additionally, the incorporation of these entities allows Advance
Nanotech to build out management teams for each subsidiary as the development
of
the technology proves successful within the university environment.
29
The
following table summarizes Advance Nanotech, Inc.'s portfolio technologies
as of
September 30, 2007:
R&D
PORTFOLIO
%
FUNDING as
DEVELOPMENT
TECHNOLOGY
COUNT
OWNERSHIP
of 6/30/2007
PROJECT DESCRIPTION
PHASE
SEGMENT
Centre
for Advanced Photonics & Electronics (CAPE)
$
1,865,922
1
EPI
CNT
1
&
100.00%
Chirality
control of nanotubes by epitaxial growth on solid
catalysts
Research
Technologies
Displays
2
BI-MAT
2
&
100.00%
Integrated
low cost and disposable sensors and sensor arrays
Research
Technologies
Homeland
Security
(CAPE
partner projects with Dow Corning Ltd., ALPS Electric
Company Ltd.,
and Marconi Communications Ltd.)
1
HIMO
3
*
&
25.00%
High
mobility oxides
Research
Technologies
Displays
2
NOTICE
4
*
&
25.00%
Next
generation communications infrastructure for broadband
Research
Technologies
Homeland
Security
3
ANTS
5
*
&
25.00%
Artificial
nanoscale threshold switching in phase-change materials
Research
Technologies
Homeland
Security
4
ROMP
6
*
&
25.00%
Reconfigurable
optical modes in plastic fibers and waveguides
Research
Technologies
Homeland
Security
5
RANTED
7
*
&
33.00%
Re-orientable
aligned carbon nanotube devices
Research
Technologies
Homeland
Security
Cambridge
Nanotechnology Limited (University of Cambridge)
$
3,074,200
1
Cambridge
Nanotechnology
8
^
100.00%
Indium
tin oxide replacement
Emerging
Technology
Displays
2
Ultratubes
(formerly known as NanoOptics)
9
+
&
100.00%
Nanotubes
for ultra-fast optical components
Emerging
Technology
Displays
3
Nano
Photonics
10
^
100.00%
Liquid
crystal structures over nanotube array
Emerging
Technology
Displays
4
Nano
Devices I
11
^
100.00%
Silicon
nanowires for optical applications
Emerging
Technology
Homeland
Security
5
Nano
Devices II
12
^
100.00%
Silicon
nanowires for high mobility transistors
Emerging
Technology
Homeland
Security
6
Osputt
(formerly known as Inovus Materials)
13
+ &
100.00%
Carbon
nanotube/liquid crystal mixtures
Emerging
Technology
Displays
7
Exiguus
Technologies
14
^
100.00%
Silicon
nanowires conductivity enhancers in organic conductors
Research
Technologies
Displays
Singular
ID Pte Limited
15*
8.8%
$
202,050
Magnetic
nanoparticles for security and authentication
At
Market
Homeland
Security
Owlstone
Nanotech, Inc.
16
58.68%
$
4,975,245
FAIMS
chemical sensor
At
Market
Homeland
Security
Bio-Nano
Sensium Technologies Limited
17
@
55.00%
$
1,560,591
Low-power
processing and wireless communication for bio-sensors
Near
to Market
Homeland
Security
NanoFED
Limited (University of Bristol)
$
1,496,748
1
Nano
FED
18
&
100.00%
Lithiated
microdiamond emitter for displays
Near
to Market
Displays
2
Nano
Light
19
&
100.00%
Zinc
oxide nanorods for enhancement of phosphors
Emerging
Technology
Displays
Nano
Solutions Limited (Imperial College, London)
$
3,306,605
1
Advanced
Proteomics
20
#
75.00%
Engineered
nanoparticles for proteomics
Emerging
Technology
Homeland
Security
2
Intelligent
Biosensors I
21
#
75.00%
Nano-powered
sensors for new therapies in epilepsy
Emerging
Technology
Homeland
Security
3
Intelligent
Biosensors II
22
#
75.00%
Implantable
nerve cuff for monitoring the vagus nerve for epilepsy
Emerging
Technology
Homeland
Security
4
NanoVindex
23
#
75.00%
Nanoparticle-hydrogel
composites for drug delivery
Emerging
Technology
Homeland
Security
5
Nano
Diagnostics
24
#
75.00%
Detection
of hemorrhagic stroke using wideband microwaves
Emerging
Technology
Homeland
Security
6
Visus
Nanotech
25
#
75.00%
Visual
restoration by nanoparticle stimulation of retinal cells
Emerging
Technology
Homeland
Security
7
Econanotech
26
#
75.00%
Environmentally
friendly nanocomposites
Research
Technologies
Homeland
Security
8
Nanocomposites
27
#
75.00%
Titanium
oxide nanocomposites
Research
Technologies
Homeland
Security
*
Represents a minority interest within the portfolio
@
Represents that the research project is suspended pending further negotiation
with the collaboration parter.
&
Represents that the research project phase has completed. The Company is in
discussion with the respective University with respect to the outstanding amount
owed and intellectual property rights resulting from the original collaboration
agreement. Subject to final resolution the Company will negotiate to extend
the
programs with a view to their commercialization.
#
Represents that the research project is terminated. On February 22, 2007, the
Company and Imperial College mutually agreed to terminate and cancel the
original collaboration agreement in full. The Company will 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.
^
Represents that the projects have been terminated as of May 14,2007.
+
Represents that the projects have been transferred to the CAPE collaboration
agreement.
Note:
Advance Nanotech Limited has incurred research and development costs to date
that are in addition to the above projects.
30
ITEM
3. CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on
this
evaluation, the Company's Chief Executive Officer and Financial Officer
concluded that the Company's disclosure controls and procedures were effective
in ensuring that (i) information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and (ii) information required to be disclosed in the reports the
Company files or submits under the Securities Exchange Act of 1934, as amended,
is accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
CHANGES
IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There
have been no significant changes in the Company's internal controls over
financial reporting that occurred during the period from inception (August17,2004) to September 30, 2007, that have materially affected, or are reasonably
likely to materially affect our internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
We
are
not aware of any pending or threatened litigation against us that we expect
will
have a material adverse effect on our business, financial condition, liquidity,
or operating results. However, legal claims are inherently uncertain and we
cannot assure you that we will not be adversely affected in the future by legal
proceedings.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Form
of Investor Warrant (incorporated by reference to Exhibit 10.7
to Form 8-K dated January 20, 2005 and filed January 26, 2005, and to
Exhibit 10.12 to Form 8-K dated February 28, 2005 and filed March4, 2005.
Please note that the Forms of Investor Warrant for all private placements
of the Company described in this Form 10-QSB are virtually identical.
Only
the names of investors, number of shares, and the dedicated use of
proceeds change from investor to investor).
4.3
Form
of Placement Agent Warrant (incorporated by reference to Exhibit
10.8 to
Form 8-K dated January 20, 2005 and filed January 26, 2005, and to
Exhibit
to 10.13 to Form 8-K dated February 28, 2005 and filed March 4, 2005.
Please note that the Forms of Placement Agent Warrant for all private
placements of the Company described in this Form 10-KSB are virtually
identical. Only the names of investors, number of shares, and the
dedicated use of proceeds change from investor to
investor).
$20,000,000
Senior Secured Credit Facility Letter Agreement dated May 3, 2004
by and
between Jano Holdings Limited and Advance Nanotech Limited including
the
related Senior Secured Grid Note dated May 3, 2004 issued by Advance
Nanotech Limited in favor of Jano Holdings Limited (canceled)
(incorporated by reference to Exhibit 10.1 to Form 10-QSB filed by
the
Company on May 15, 2006).
Warrant
to Purchase 6,666,666 Shares of Ordinary Shares of Advance Nanotech
Limited dated as of May 27, 2004 issued to Jano Holdings Limited
(canceled) (incorporated by reference to Exhibit 10.3 to the Form
10-QSB
filed by the Company on May 15, 2006).
10.7
Amended
Warrant dated September 1, 2004 to Purchase 6,666,666 Shares of Ordinary
Shares of Common Stock of Advance Nanotech, Inc., a Delaware corporation,
issued to Jano Holdings Limited (canceled) (incorporated by reference
from
Exhibit 10.4 to Form 10-QSB filed by the Company on May 15,2006).
10.8
Second
Amended Warrant dated October 25, 2004, to Purchase 6,666,666 Shares
of
Ordinary Shares of Common Stock of Advance Nanotech, Inc., a Colorado
corporation, issued to Jano Holdings Limited (canceled) (incorporated
by
reference from Exhibit 10.5 to Form 10-QSB filed by the Company on
May 15,2006).
10.9
Jano
Holdings Limited waiver letter dated May 9, 2006 (canceled) (incorporated
by reference to Exhibit 10.21 to Form 10-QSB filed by the Company on
August 11, 2006).
Third
Amended Warrant dated October 13, 2006, to Purchase 6,666,666 Shares
of
Ordinary Shares of Common Stock of Advance Nanotech, Inc., a Delaware
corporation, issued to Jano Holdings Limited (canceled) (incorporated
by
reference to Exhibit 10.22 to Form 10-QSB filed by the Company on
November14, 2006).
Copy
of the Company’s Non-employee Director Compensation Policy (incorporated
by reference to Exhibit 10.12 to Form 10-KSB filed by the Company on
March 31, 2006).
10.18*
Service
Agreement dated November 13, 2006 by and between the Company’s subsidiary
Advance Display Technologies plc and Magnus Gittins (incorporated
by
reference to Exhibit 10.3 to Form 8-K filed by the Company on
December 1, 2006).
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).
Debenture
Agreement dated March 30, 2007, by and between Conquistador Investments
Limitedand Advance Homeland Security plc 2006
(incorporated by reference to Exhibit 10.25 to Form 10-KSB filed by
the
Company on March 30, 2007).
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)
31.1
Certification
of Chief Executive Officer (Principal Executive Officer) pursuant
to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended (filed
herewith).
31.2
Certification
of Chief Financial Officer (Principal Financial Officer) pursuant
to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act, as amended (filed
herewith).
32
Certification
by Principal Executive Officer and Principal Financial Officer pursuant
to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
*
Management contract or compensation plan, contract or
arrangement.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Issuer has duly caused this Quarterly Report on Form 10-QSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
