TABLE OF CONTENTS
| HEADING | PAGE | |||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements | 3 | ||
| Condensed Balance Sheets – June 30, 2008 (Unaudited) and September 30, 2007 | 4 | |||
| Condensed Statements of Operations (Unaudited) – three months and nine months ended June 30, | ||||
| 2008 and 2007 and the period from inception on September 14, 1987 through | ||||
| June 30, 2008 | 5 | |||
| Condensed Statements of Cash Flows (Unaudited) – nine months ended June 30, 2008 | ||||
| and 2007 and the period from inception on September 14, 1987 through | ||||
| June 30, 2008 | 6 | |||
| Notes to Condensed Financial Statements | 8 | |||
| Item 2. | Management's Discussion and Analysis and Results of Operations | 12 | ||
| Item 3A(T). | Controls and Procedures | 15 | ||
| PART II. OTHER INFORMATION | ||||
| Item 1. | Legal Proceedings | 15 | ||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 | ||
| Item 3. | Defaults Upon Senior Securities | 15 | ||
| Item 4. | Submission of Matters to a Vote of Securities Holders | 15 | ||
| Item 5. | Other Information | 15 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
| Signatures | 16 | |||
PART I
ITEM 1. FINANCIAL STATEMENTS
The accompanying condensed balance sheet of Nanoscience Technologies, Inc. at June 30, 2008, related condensed statements of operations, and cash flows for the nine months ended June 30, 2008 and 2007 have been prepared by our management in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended June 30, 2008, are not necessarily indicative of the results that can be expected for the fiscal year ending September 30, 2008.
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
ASSETS
| JUNE 30, | SEPTEMBER 30, | |||||||
| 2008 | 2007 | |||||||
| (unaudited) | ||||||||
| Current assets | ||||||||
| Cash | $ | -- | $ | -- | ||||
| Prepaid Expenses | -- | -- | ||||||
| Total current assets | -- | -- | ||||||
| Total Assets | $ | -- | $ | -- | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 789,515 | $ | 777,874 | ||||
| Accrued interest | 379,623 | 262,123 | ||||||
| Notes payable - related parties | 22,750 | 22,750 | ||||||
| Convertible debentures - current portion | 52,071 | -- | ||||||
| Total current liabilities | 1,243,959 | 1,062,747 | ||||||
| Warrant liability | -- | 3,137 | ||||||
| Convertible debentures, net | 1,613,326 | 1,148,231 | ||||||
| Total Liabilities | 2,857,285 | 2,214,115 | ||||||
| Stockholders' deficit | ||||||||
| Common stock; $0.001 par value; authorized 100,000,000 shares, | ||||||||
| 12,005,755 shares issued and outstanding as of June 30, 2008 | ||||||||
| 11,886,707 shares issued and outstanding as of September 30, 2007 | 12,006 | 11,887 | ||||||
| Additional paid-in capital | 2,942,495 | 2,916,234 | ||||||
| Deficit accumulated during the development stage | (5,811,786 | ) | (5,142,236 | ) | ||||
| Total stockholders' deficit | (2,857,285 | ) | (2,214,115 | ) | ||||
| Total liabilities and stockholders' deficit | $ | -- | $ | -- | ||||
The accompanying notes are an integral part of these financial statements.
4
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)
| From Inception of the | ||||||||||||||||||||
| Development Stage on | ||||||||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | September 14, 1987 | ||||||||||||||||||
| June 30, | June 30, | Through June 30, | ||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | ||||||||||||||||
| REVENUES | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
| OPERATING EXPENSES | ||||||||||||||||||||
| General and administrative | 27,042 | 8,896 | 63,713 | 39,663 | 2,281,908 | |||||||||||||||
| Research and development | -- | -- | -- | -- | 1,293,042 | |||||||||||||||
| Licensing fees | -- | -- | -- | -- | 96,248 | |||||||||||||||
| TOTAL OPERATING EXPENSES | 27,042 | 8,896 | 63,713 | 39,663 | 3,671,198 | |||||||||||||||
| LOSS FROM OPERATIONS | (27,042 | ) | (8,896 | ) | (63,713 | ) | (39,663 | ) | (3,671,198 | ) | ||||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||||||
| Other income | 97 | 518 | 3,137 | 31,679 | 89,516 | |||||||||||||||
| Interest expense | (204,160 | ) | (199,916 | ) | (608,974 | ) | (570,598 | ) | (2,230,104 | ) | ||||||||||
| TOTAL OTHER INCOME (EXPENSES) | (204,063 | ) | (199,398 | ) | (605,837 | ) | (538,919 | ) | (2,140,588 | ) | ||||||||||
| NET LOSS | $ | (231,105 | ) | $ | (208,294 | ) | $ | (669,550 | ) | $ | (578,582 | ) | $ | (5,811,786 | ) | |||||
| BASIC AND DILUTED LOSS | ||||||||||||||||||||
| PER COMMON SHARE | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.05 | ) | ||||||||
| BASIC AND DILUTED WEIGHTED AVERAGE | ||||||||||||||||||||
| NUMBER OF SHARES OUTSTANDING | 12,005,755 | 11,574,207 | 11,966,072 | 11,416,787 | ||||||||||||||||
The accompanying notes are an integral part of these financial statements.
5
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
| (A Development Stage Company) | ||||||||||||
| STATEMENTS OF CASH FLOWS | ||||||||||||
| From Inception of the | ||||||||||||
| Development Stage on | ||||||||||||
| For the Nine Months Ended | September 14, 1987 | |||||||||||
| June 30, | Through June 30, | |||||||||||
| 2008 | 2007 | 2008 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net loss | $ | (669,550 | ) | $ | (578,582 | ) | $ | (5,811,786 | ) | |||
| Adjustments to reconcile loss to net cash used by | ||||||||||||
| operating activities: | ||||||||||||
| Change in fair value of warrant liability | (3,137 | ) | (7,422 | ) | (46,720 | ) | ||||||
| Accrued interest contributed by shareholders | 24,380 | 24,380 | 135,549 | |||||||||
| Common stock issued for services and fees | -- | -- | 345,448 | |||||||||
| Common stock warrants granted for services | -- | -- | 75,430 | |||||||||
| Depreciation and amortization expense | -- | -- | 43,658 | |||||||||
| Amortization of marketing expense | -- | -- | 110,000 | |||||||||
| Contributed services | -- | -- | 290 | |||||||||
| Amortization of discount on debt | 465,093 | 435,811 | 1,738,687 | |||||||||
| Changes in operating assets and liabilities | ||||||||||||
| (Increase) Decrease in prepaid expenses | -- | -- | (4,000 | ) | ||||||||
| Increase (Decrease) in accounts payable and | ||||||||||||
| accrued expenses | 131,143 | 47,010 | 780,741 | |||||||||
| Net cash used in operating activities | (52,071 | ) | (78,803 | ) | (2,632,703 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Purchase of property and equipment | -- | -- | (4,931 | ) | ||||||||
| Patent costs | -- | -- | (38,727 | ) | ||||||||
| Net cash used in investing activities | -- | -- | (43,658 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Proceeds from notes payable - related parties | -- | 16,000 | 398,377 | |||||||||
| Proceeds from convertible debentures payable | 52,071 | 60,000 | 1,762,664 | |||||||||
| Proceeds from stock subscriptions payable | -- | -- | 130,000 | |||||||||
| Repayment of notes payable - related parties | -- | -- | (20,200 | ) | ||||||||
| Common stock issued for cash | -- | -- | 405,520 | |||||||||
| Net cash provided by financing activities | 52,071 | 76,000 | 2,676,361 | |||||||||
| NET INCREASE (DECREASE) IN CASH | -- | (2,803 | ) | -- | ||||||||
| CASH AT BEGINNING OF PERIOD | -- | 2,803 | -- | |||||||||
| CASH AT END OF PERIOD | $ | -- | $ | -- | $ | -- | ||||||
The accompanying notes are an integral part of these financial statements.
6
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows (Continued)
(Unaudited)
| SUPPLEMENTAL DISCLOSURES OF CASH | |||||||||
| FLOW INFORMATION: | |||||||||
| Cash paid during the year for: | |||||||||
| Interest | $ | -- | $ | -- | $ | 487 | |||
| Income taxes | $ | -- | $ | -- | $ | -- | |||
| NON-CASH FINANCING AND INVESTING ACTIVITIES: | |||||||||
| Forgiveness of debt by related party | $ | -- | $ | -- | $ | 30,367 | |||
| Common stock warrants granted for services | $ | -- | $ | 15,000 | $ | 75,430 | |||
| Common stock issued for services and fees | $ | -- | $ | -- | $ | 360,198 | |||
| Accrued interest converted to debt | $ | -- | $ | -- | $ | 41,148 | |||
| Production costs contributed by shareholders | $ | -- | $ | -- | $ | 111,000 | |||
| Issuance of common stock for stock subscription payable | $ | -- | $ | -- | $ | 130,000 | |||
| Termination of derivative feature of debentures | $ | -- | $ | -- | $ | 113,418 | |||
| Allocation of convertible debt proceeds to beneficial | |||||||||
| conversion feature | $ | -- | $ | -- | $ | 1,587,284 | |||
| Conversion of convertible debentures to common stock | $ | 2,000 | $ | 7,259 | $ | 14,259 | |||
The accompanying notes are an integral part of these financial statements.
7
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Condensed Financial Statements
(Unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2007 audited financial statements. The results of operations for the periods ended June 30, 2008 and 2007 are not necessarily indicative of the operating results for the full years.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. Historically, the Company has incurred significant annual loses, which have resulted in an accumulated deficit of approximately $5,811,786 at June 30, 2008, which raises substantial doubt about the Company's ability to continue as a going concern. The Company ceased operations on December 1, 2006 and is considered to be a public shell.
Management’s plan is to merge with an operating company.
NOTE 3 - EQUITY ACTIVITY 2005 STOCK OPTION PLAN
The Company has made available an aggregate of 1,100,000 shares of its common stock for issuance to employees upon the exercise of options granted under the 2005 Stock Option Plan (the “Plan”). The purchase price per share deliverable upon the exercise of each option shall be 100% of the Fair Market Value per share on the date the option is granted. For purposes of the Plan, Fair Market Value (“Fair Market Value”) shall be the closing sales price as reported on the Nasdaq National Market or such other national securities exchange, inter-dealer quotation system or electronic bulletin board or over the counter market as the Company's Common Stock shall then be traded on the date in question, or, if the shares shall not have traded on such date, the closing sales price on the first date prior thereto on which the shares were so traded.
Options may be exercised only upon payment of the purchase price thereof in full. Such payment shall be made in cash or, unless otherwise determined by the Board, in shares, which shall have a Fair Market Value at least equal to the aggregate exercise price of the shares being purchased, or a combination of cash and shares.
8
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Condensed Financial Statements
(Unaudited)
NOTE 3 - EQUITY ACTIVITY (Continued)
2005 STOCK OPTION PLAN FOR INDEPENDENT AND NON-EMPLOYEE DIRECTORS
The Company has made available an aggregate of 500,000 shares of its common stock for issuance upon the exercise of options granted under the 2005 Stock Option Plan for Independent and Non-Employee Directors.
Options may be exercised only upon payment of the purchase price thereof in full. Such payment shall be made in cash or, unless otherwise determined by the Board, in shares, which shall have a Fair Market Value at least equal to the aggregate exercise price of the shares being purchased, or a combination of cash and shares.
No options have been issued under the plan.
In December 2006, the Company issued 250,000 shares of common stock and a warrant to purchase 500,000 shares of common stock to a consultant for arranging financing for the Company. The shares were valued at the fair value of the services performed of $15,000. The warrant was valued at fair value using the Black-Scholes pricing model at $23,905.
DEBT CONVERTED TO EQUITY
In January 2007, the Company issued 108,980 shares of common stock upon the conversion of $4,359 of debt. In March 2007, the Company issued 113,281 shares of common stock upon the conversion of $2,900 of debt. In July 2007, the Company issued 312,500 shares of common stock upon the conversion of $5,000 of debt. In November, 2007, the Company issued 119,048 shares of common stock upon the conversion of $2,000 of debt.
NOTE 4- RELATED PARTY TRANSACTIONS
As of June 30, 2008, related parties had loaned the Company $325,060. The loans are non interest bearing, due upon demand and unsecured. The Company has imputed interest on the loans at 10% per annum. This interest was recorded as contribution to capital by the shareholders.
NOTE 5 - SIGNIFICANT EVENTS
CONVERTIBLE DEBENTURES
On December 13, 2004, the Company entered into a Securities Purchase Agreement with Highgate House, LP and Montgomery Equity Partners, LP, each a Delaware limited partnership. Pursuant to the Agreement, the Company issued $500,000 in convertible debentures dated December 13, 2004. The debentures were convertible into shares of the Company's common stock at the holder's option any time up to maturity at a conversion price equal to the lower of (i) 120% of the closing bid price of the common stock on the date of the debentures or (ii) 80% of the lowest closing bid price of the common stock for the five trading days immediately preceding the conversion date. The debentures were secured by the assets of the Company. The debentures had a three-year term and accrued interest at 5% per year. At maturity, the outstanding principal and accrued and unpaid interest under the debentures are, at the Company's option, to be either repaid by the Company in cash or converted into shares of common stock. In addition, the related Securities Purchase Agreement requires the Company to register the underlying shares of common stock with the US Securities and Exchange Commission.
On April 28, 2005, $500,000 of convertible debentures along with $9,247 of accrued interest were exchanged for amended convertible debentures having a fixed conversion price of $1.20 at a time when the market value of the Company's common stock was $1.15 per share of common stock. Accordingly, there was no beneficial conversion amount related to these amended convertible debentures. All other terms and conditions of the amended convertible debentures remained substantially the same as the original convertible debentures with the three-year term recommencing on April 28, 2005.
9
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Condensed Financial Statements
(unaudited)
NOTE 6 - SIGNIFICANT EVENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
Also on April 28, 2005, and in accordance with terms of the Securities Purchase Agreement, the Company issued an additional $500,000 of convertible debentures based on the terms of the amended convertible debentures.
The Company recorded a liability of $141,852 for the value of the embedded derivative related to the conversion option of the convertible debenture. The Company recomputed the value of the embedded derivative quarterly and recorded the decrease in the value as other income of $28,371. Upon the refinancing of the $500,000 convertible debenture, the Company recorded contributed capital of $113,481 for the remaining balance of the embedded derivative liability for the conversion feature. The newly issued debenture included the interest accrued on the prior debenture. A total liability of $1,009,347 has been recorded as of April 28, 2005.
On December 14, 2005, the $1,009,347 of convertible debentures along with $31,801 of accrued interest were exchanged pursuant to a new Securities Purchase Agreement with the same investors (the “December Debenture Holders”) including new net proceeds of $530,593 for the sale of $1,690,359 of Secured Convertible Debentures (the “December Convertible Debentures”) and warrants to purchase up to 100,000 shares of the Company’s common stock. The December Convertible Debentures bear interest at 8% and have a maturity date of three years from the date of issuance. The Company is not required to make any principal payments during the term of the December Convertible Debentures. The December Convertible Debentures are convertible into shares of the Company’s common stock at the December Debenture Holders’ option as described in the agreement. The full principal amount of the December Convertible Debentures is due upon the occurrence of an event of default. The warrants are exercisable for a period of three years from the date of issuance and have an exercise price of $0.01 per share. In addition, the Company has granted the December Debenture Holders registration rights and a security interest in substantially all of the Company’s assets.
In accordance with Emerging Issues Task Force 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company allocated the proceeds from the sale of $1,690,359 of December Convertible Debentures on December 14, 2005, between the relative fair values of the warrants and the debt. The fair value of the warrants was calculated using the Black-Scholes valuation model with the following assumptions: market price of common stock on the date of grant of $0.45, exercise price of warrants of $0.01, risk free interest rate of 3.5%, expected volatility of 124% and expected life of three years. The resulting fair value of the warrants of $44,457 was recorded as a debt discount. The Company also recorded $118,618 of fees withheld by the lender as an additional debt discount. The Company calculated a beneficial conversion feature related to the remaining proceeds allocated to the debt portion of the December Convertible Debentures. This calculation resulted in a beneficial conversion feature which was greater than the amount of the allocated proceeds of $1,527,284. Accordingly, the Company recorded an additional debt discount of $1,527,284. The total debt discount of $1,690,359 is being amortized to interest expense over the three year term of the December Convertible Debentures.
Similarly, the Company allocated the proceeds from the sale of $120,000 of secured convertible debentures on July 28, 2006 (the “July Convertible Debentures”), between the relative fair values of the warrants and the debt. The fair value of the warrants was calculated using the Black-Scholes valuation model with the following assumptions: market price of common stock on the date of grant of $0.17, exercise price of warrants of $0.20, risk free interest rate of 3.5%, expected volatility of 106% and expected life of two years. The resulting fair value of the warrants of $44,457 was recorded as a debt discount. The Company also recorded $20,000 of fees withheld by the lender as an additional debt discount. The Company calculated a beneficial conversion feature related to the remaining proceeds allocated to the debt portion of the July Convertible Debentures. This calculation resulted in a beneficial conversion feature which was greater than the amount of the allocated proceeds of $100,000. Accordingly, the Company recorded an additional debt discount of $100,000. The total debt discount of $120,000 is being amortized to interest expense over the two year term of the July Convertible Debentures. The July Convertible Debentures bear interest at 8% and have a maturity date of two years from the date of issuance. The Company is not required to make any principal payments during the term of the July Convertible Debentures. The July Convertible Debentures are convertible into shares of the Company’s common stock at the option of the holders of the July Convertible Debentures (the “July Debenture Holders”) as described in the agreement. The full principal amount of the July Convertible Debentures is due upon the occurrence of an event of default. The warrants are exercisable for a period of five years from the date of issuance and have an exercise price of $0.20 per share. In addition, the Company has granted the July Debenture Holders registration rights and a security interest in substantially all of the Company’s assets.
Also, the Company allocated the proceeds from the sale of $60,000 of secured convertible debentures in December 2006 (the “December 2006 Debentures”) between the relative fair values of the warrants and the debt. The sale occurred by means of an amendment to the July Convertible Debenture that increased the amount of the July Convertible Debenture from $120,000 to $180,000, but did not change any other terms. The fair value of the warrants was calculated using the Black-Scholes valuation model with the following assumptions: market price of common stock on the date of grant of $0.06, exercise price of warrants of $0.06, risk free interest rate of 4.35%, expected volatility of 219%
10
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Condensed Financial Statements
(unaudited)
NOTE 6 - SIGNIFICANT EVENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
and expected life of one and one half years. The resulting fair value of the warrants of $23,905 was recorded as a debt discount. The Company also recorded $20,000 of fees withheld by the lender as an additional debt discount. The Company calculated a beneficial conversion feature related to the remaining proceeds allocated to the debt portion of the December 2006 Debentures. This calculation resulted in a beneficial conversion feature which was greater than the amount of the allocated proceeds of $60,000. Accordingly, the Company recorded an additional debt discount of $60,000. The total debt discount of $60,000 is being amortized to interest expense over the two year term of the December 2006 Debentures. The December 2006 Debentures bear interest at 8% and have a maturity date of July 28, 2008. The Company is not required to make any principal payments during the term of the December 2006 Debentures. The December 2006 Debentures are convertible into shares of the Company’s common stock at the holders’ option as described in the agreement. The full principal amount of the December 2006 Debentures is due upon the occurrence of an event of default. The warrants are exercisable for a period of five years from the date of issuance and have an exercise price of $0.06 per share. In addition, the Company has granted the holders of the December 2006 Debentures registration rights and a security interest in substantially all of the Company’s assets.
On October 11, 2007 the Company issued $15,250 in convertible debentures which were convertible into shares of the Company’s common stock at the holder’s option any time and from time to time, after the Original Issue Date. The convertible debentures bear interest at The Wall Street Journal Prime Rate, plus two and one-quarter percent (2.25%) (“Interest Rate”), and have a maturity date of six months, maturing on April 11, 2008.
On March 24, 2008 the Company issued $36,821 in convertible debentures which were convertible into shares of the Company’s common stock at the holder’s option, in whole or in part at any time and from time to time, after the Original Issue Date. The convertible debentures bear interest at 14%, and have a maturity date on or before December 31, 2008. The conversion price in effect on any conversion date shall be, at the sole option of the Holder, equal to either (a) $0.009 (the “Fixed Conversion Price”) or (b) eighty percent (80%) of the lowest Volume Weighted Average Price (“VWAP”) of the Common Stock during the thirty (30) trading days immediately preceding the conversion date as quoted by Bloomberg, LP (the “Market Conversion Price”). The Fixed Conversion Price and the Market Conversion Price are collectively referred to as the “Conversion Price”.
A summary of the secured convertible debentures at June 30, 2008:
| Convertible secured debentures: 8% per annum | ||||
| due December 14, 2008 | $ | 1,690,359 | ||
| Convertible secured debentures: 8% per annum | ||||
| due July 28, 2008 | 180,000 | |||
| Convertible secured debentures: Wall Street Journal | ||||
| Prime rate plus 2.25% per annum | ||||
| Due April 11, 2008 | 15,250 | |||
| Convertible secured debentures: 14% per annum | ||||
| Due December 17, 2008 | 36,821 | |||
| Less: conversion into common stock | (14,259 | ) | ||
| Discount on debt, net of accumulated | ||||
| amortization of | (242,774 | ) | ||
| Net convertible secured debentures | $ | 1,665,397 |
Pursuant to the terms of a registration rights agreement entered into with the December Debenture Holders on December 14, 2005, the Company is obligated to register for resale, within a defined time period, the shares underlying the December Convertible Debentures and warrants that were issued to the December Debenture Holders under the Securities Act of 1933, as amended. The terms of the registration rights agreement provide that in the event that the registration statement does not become effective within 90 days after the date filed, the Company is required to pay to the December Debenture Holders as liquidated damages, an amount equal to 2% per 30-day period of the outstanding principal amount of the December Convertible Debentures outstanding. The Company has not filed a registration statement with respect to the shares underlying the December Convertible Debentures and warrants that were issued to the December Debenture Holders.
Pursuant to the terms of a registration rights agreement entered into with the July Debenture Holders on July 28, 2006 (which agreement the December 2006 Debentures subsequently became subject to) the Company is obligated to register for resale, within a defined time period, the shares underlying the July Convertible Debentures (as increased by the December 2006 Debentures) and warrants that were issued to the holders of such debentures under the Securities Act of 1933, as amended. The terms of the registration rights agreement provide that in the event that a registration statement is not filed by August 27, 2006 or is not declared effective by the SEC on or before October 26, 2006, the Company is required to pay to the holders of the July Convertible Debentures (as increased by the December 2006 Debentures) as liquidated damages, an amount equal to 2% of the liquidated value of the July Convertible Debentures (as increased by the December 2006 Debentures) outstanding for each 30 day period after August 27, 2006. The Company has not filed a registration statement with respect to the shares underlying the debentures and warrants that were issued to the holders of such debentures. At the time of this filing, the Company is in default on all its convertible debentures. However, no formal legal notice has been received from the convertible debenture holders.
11
NANOSCIENCE TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to the Condensed Financial Statements
(unaudited)
NOTE 6 - SIGNIFICANT EVENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock," the fair value of the warrants amounting to $45,457 was recorded as a liability on the closing date of December 14, 2005. The fair value of the warrants was calculated using the Black-Scholes valuation model with the following assumptions: market price of common stock on the date of grant of $0.45, exercise price of warrants of $0.01, risk free interest rate of 3.5%, expected volatility of 124% and expected life of three years. The Company is required to re-measure the fair value of the warrants at each reporting period until the registration statement is declared effective. Accordingly, the Company measured the fair value of the warrants at December 31, 2005 using the Black-Scholes valuation model with the following assumptions: market price of common stock on the date of grant of $0.45, exercise price of warrants of $0.01, risk free interest rate of 3.5%, expected volatility of 185% and expected life of 2.96 years. The decrease in the fair market value of the warrants from $44,457 to $3,137 resulted in non-cash other income of $41,320 as at September 30, 2007. For the period ended June 30, 2008 the fair market value of the warrants decreased to $0, resulting in non-cash other income of $3,137. Upon the Company meeting its obligations to register the securities, the fair value of the warrants on that date will be reclassified to equity.
NOTE 7 - SUBSEQUENT EVENTS
CONVERTIBLE DEBENTURE
On July 31, 2008, the Company issued a convertible debenture in the principal amount of $61,000 in a private placement transaction to YA Global Investments, L.P. The convertible debenture is convertible into shares of the Company’s common stock at the holder’s option. The conversion price in effect on any conversion date is equal to either (a) $0.009 or (b) 80% of the lowest volume weighted average price of the Company’s common stock during the 30 trading days immediately preceding the conversion date as quoted by Bloomberg, L.P. Generally, except under certain specified circumstances, the holder of the convertible debenture may not convert such debenture into shares of the Company’s common stock to the extent that such conversion would cause the holder to beneficially own in excess of 4.99% of the Company’s outstanding shares after giving effect to such conversion. The convertible debenture bears interest at 14% and has a maturity date on or before July 31, 2009. The maturity date may be accelerated upon the occurrence of an event of default under the debenture.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS FORM 10-QSB.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This report contains certain forward-looking statements. These statements relate to future events or our future performance and involve known and unknown risks and uncertainties. Actual results may differ substantially from such forward-looking statements, including, but not limited to, the following:
o our ability to meet our cash and working capital needs;
o our ability to maintain our corporate existence as a viable entity; and
o other risks detailed in our periodic report filings with the SEC.
In some cases, you can identify forward-looking statements by terminology such as "may," "will" "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
PLAN OF OPERATION
CESSATION OF OPERATIONS
As disclosed previously in our September 30, 2007 Form 10-KSB, we have experienced a chronic working capital deficiency, which has severely handicapped our ability to meet our business objectives. At the date hereof, our liabilities exceeded our assets by approximately $2,857,285. We recorded no revenues during the nine months ended June 30, 2008.
We have expended efforts to secure additional capital from both our principal creditor and other third parties, but such efforts have been unsuccessful. Currently, we have a severe working capital deficiency of $1,243,959.
We were a party to an Amended and Restated Research and License Agreement, dated September 12, 2003, (the "License Agreement") with New York University ("NYU") that was further amended on November 11, 2003. The License Agreement was terminated in October, 2007.
Accordingly, we determined on December 1, 2006 to cease operations immediately and, at the request of such creditor appointed a director designated by such creditor to our Board of Directors. Immediately following such appointment, our existing directors resigned effective immediately and terminated their association with us.
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SHELL COMPANY STATUS
As a result of our cessation of operations and the termination of the License Agreement, we became a "blank check" or "shell company" whose sole purpose at this time is to locate and consummate a merger or acquisition with a private entity. Many states have enacted statutes, rules and regulations limiting the sale of securities of "blank check" companies in their respective jurisdictions. Management does not believe it will undertake any efforts to cause a market to develop in our securities until such time as we have successfully implemented our business plan described herein. However, if we intend to facilitate the eventual creation of a public trading market in our outstanding securities, we must consider that our securities, when available for trading, will be subject to a Securities and Exchange Commission rule