UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q/A1

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:                                     June 30, 2016                                     

  

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                                                  to                                                                 

 

Commission File Number:                                 000-49901                              

 

NATURALNANO, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		87-0646435
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
13613 Gulf Boulevard, Madeira Beach FL		33738
(Address of principal executive offices)		(Zip Code)

 

727-391-0378

(Registrant’s telephone number, including area code)

 

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

Yes x   No ¨

 

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

Yes x   No ¨

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,342,325 as of September 14, 2016

 

  

Table of Contents

 

PART I-FINANCIAL INFORMATION
	Item 1.	Financial Statements		4
		Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015		4
		Condensed Consolidated Statements of Operations (unaudited) for the three months and six months ended June 30, 2016 and 2015		5
		Condensed Consolidated Statements of Stockholders’ Deficiency (unaudited) for the six months ended June 30, 2016		6
		Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2016 and 2015		7
		Notes to Consolidated Financial Statements		8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Note Regarding Forward-Looking Statements		17
	Item 4.	Controls and Procedures		21
PART II-OTHER INFORMATION
	Item 1.	Legal Proceedings		22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
	Item 3.	Defaults Upon Senior Securities		23
	Item 4.	Mine Safety Disclosures		23
	Item 5.	Other Information		23
	Item 6.	Exhibits		24
SIGNATURES				25

 

  

EXPLANATORY NOTE

 

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016 of NaturalNano, Inc. (the “Company”), filed with the Securities and Exchange Commission on September 14, 2016 (the “Form 10-Q”), is for the following:

 

a.

To respond to the SEC Comment letter of September 27, 2016 to restate financial results given that Omni Shrimp, Inc. is the accounting acquirer of NaturalNano, Inc. As such, there is no operating activity prior to the acquisition of June 30, 2016. Financial statements represent the operating activity between June 24, 2016 through June 30, 2016.

b.

To correct the outstanding indebtedness and accrued interest balance as of June 30, 2016 to agree with the balances in the Surrender and Amendment Agreement of June 23, 2016. See our Form 8-K/A filed on July 21, 2016 for more detail

c.

To correct Footnote 2. Notes Payable to agree to the balances set forth in b. above

d.

To accurately reflect the Management’s Discussion and Analysis to take into the account the revised accounting treatment in order to be in compliance with the SEC Comment letter

 

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

 

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and otherwise are not subject to liability under those sections.

 

  

Item 1.  Financial Statements

 

Omni Shrimp, Inc.

Condensed Consolidated Balance Sheets

 

		(Unaudited)				(Audited)
		June 30, 2016				December 31, 2015
ASSETS
CURRENT ASSETS:
Cash		$	91,800			$
Accounts Receivable			221,697
Inventory			112,980
Prepaid and Other			2,867
Total Current Assets			429,344				-
Total Assets		$	429,344			$	-
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes Payable		$	1,935,533			$
Accounts Payable			670,664
Accrued Expenses			157,073
Accrued Interest			585,539
Accrued Payroll			343,720
Registration Rights Liability			12,324
Derivative liability			618,833
Total Current Liabilities			4,323,687				-
LONG-TERM LIABILITIES:
Convertible debentures, net							-
Derivative liability							-
Total Long-Term Liabilities			-				-
Total Liabilities			4,323,687				-
Preferred Series B
STOCKHOLDERS' DEFICIENCY:
Common stock at $0.001 par value: 800,000,000 shares authorized; 2,911,658 shares issued and outstanding at June 30, 2016			2,912				300
Preferred Series D
Preferred Series E			29
Additional paid-in capital			22,144,373				977
Accumulated deficit			(26,041,656	)			(1,277	)
Total Stockholders' Deficiency			(3,894,341	)			0
Total Liabilities and Stockholders' Deficiency		$	429,346			$	0

 

See accompanying notes to the condensed consolidated financial statements.

 

  

Omni Shrimp, Inc.

 Condensed Consolidated Statements of Operations

(Unaudited)

 

		Acquisition date (June 23,				For the Three
		2016) through				Months Ended
		June 30, 2016				6/30/2015*
INCOME:
Revenue		$	50,852			$	-
Cost of Goods Sold			44,388				-
Gross Profit			6,464				-
OPERATING EXPENSES:
General and Administrative Expense
Stock based compensation attributable to warrant grants
Total operating expenses			-				-
GAIN (LOSS) FROM OPERATIONS			6,464				-
OTHER INCOME (EXPENSE):
Interest expense			(135	)
Gain on forgiveness, conversions and modifications of debt							-
Gain on termination of Discontinued Operations
Gain  (loss) on change in derivative liability
Other Income			-				-
Other income (expense), net			(135	)			-
Loss before income tax provision			6,329				-
Income tax provision			-				-
Net Income (loss)		$	6,329			$	-
Basic Earnings; Gain (loss) per share		$	0.00			$
Diluted Earnings: Gain (loss) per share		$	0.00			$
Weighted average common shares outstanding
- Basic			2,894,684
- Diluted			7,150,185				-

 

*- Omni Shrimp was incorporated on September 22, 2015 so there was no operating history for the three or six months ended June 30, 2015

 

See accompanying notes to the condensed consolidated financial statements.

 

  

Omni Shrimp, Inc.

Consolidated Statement of Stockholders' Deficiency

For the Fiscal Years Ended June 30, 2015 and 2014

(Audited)

 

										Preferred Stock Series D, $0.001 Par								Preferred Stock Series E, $0.001 Par
		Common Stock, $0.001 Par Value								Value								Value								Additional								Total
		Number of								Number of								Number of								Paid-in				Accumulated				Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Deficiency
Balance at December 31, 2015			300			$	300							$	-				-			$	-			$	977			$	(1,277	)		$	-
Elimination of common stock of Omni Shrimp upon merger			(300	)			(300	)																			(977	)			1,277				-
Capital Contribution from Reverse Merger			2,911,658				2,912																				22,040,728				(26,047,985	)			(4,004,345	)
Issuance of Series E Preferred stock upon acquisition of Omni Shrimp																			28,500				29				103,645								103,674
Net income for six months ended June 30, 2016																															6,329				6,329
Balance June 30, 2016			2,911,658			$	2,912				-			$	-				28,500			$	29			$	22,144,373			$	(26,041,656	)		$	(3,894,342	)

 

See accompanying notes to the consolidated financial statements.

 

  

Omni Shrimp, Inc.

 Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Acquisition
		Date (June 29, 2016) through
		June 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)		$	6,329
Adjustments to reconcile net loss to net cash used in operating activities:
Cash overdraft at Natural Nano Inc.			(151	)
Changes in operating assets and liabilities:
Accounts Receivable			(2,094	)
Inventory			(38,839	)
Accounts Payable and Accrued Expenses			40,625
Accrued Interest			135
NET CASH USED IN OPERATING ACTIVITIES			6,005
CASH FLOWS FROM INVESTING ACTIVITIES:			-
CASH FLOWS FROM FINANCING ACTIVITIES:			-
NET CHANGE IN CASH			6,005
Cash at Acquisition Date			85,795
Cash at end of period		$	91,800
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest		$	-
Cash paid during the period for income taxes		$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for settlement of convertible debentures		$
Debt and accrued interest cancelled through forebearance agreeement		$	-

 

See accompanying notes to the condensed consolidated financial statements. 

 

  

NaturalNano, Inc.

For the six months ended June 30, 2016

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.

PRINCIPAL BUSINESS ACTIVITY, MATERIAL DEFINITIVE AGREEMENT AND SIGNIFICANT ACCOUNTING POLICIES

 

Interim Financial Statements

The condensed consolidated financial statements as of June 30, 2016 and for the three months and six months ended June 30, 2016 and 2015 are unaudited. However, in the opinion of management of the Company, these condensed consolidated financial statements reflect all material adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the consolidated financial position and results of operations for such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies.  Accordingly, these condensed consolidated financial statements do not include all of the information required by U.S. generally accepted accounting principles for complete financial statements.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

Liquidity and Going Concern

Going Concern - The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company generated net income for the six months ended June 30, 2016 of approximately $937,000 and had negative working capital and stockholders’ deficiency of approximately $3,628,000 at June 30, 2016. Since, inception the Company’s growth has been funded through a combination of convertible and non-convertible debt from private investors, issuances of common stock and from cash advances from its former parent Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from the uncertainty.

 

As of June 30, 2016, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lender waivers and maturity extensions received from the lenders.

 

Basis of Consolidation  

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

 

Accounting for Reverse Capitalization

 

The Company follows the guidelines set forth in Topic 12: Reverse Acquisitions and Reverse Capitalizations of the SEC Financial Reporting Manual (“SEC Manual”) for the acquisition of Omni Shrimp, Inc. (“Omni”) (See Material Definitive Agreement below.) For both accounting and legal purposes, Omni Shrimp, Inc. (“Omni”) has been deemed the acquiring entity due to the fact that the owners of Omni have effective voting and operating control of the combined company. The Company believes it was not a shell company

 

  

On July 5, 2016, the staff of the Securities and Exchange Commission’s Division of Corporation Finance advised the Company that in light of the information set forth in the Form 8-K filed on June 29, 2016, the Staff was of the opinion that the Company was a “shell company” as defined in Rule 405 under the Securities Act of 1933 and Rule 12b-2 of the Exchange Act. The Company replied with a letter to the Staff contesting the factual basis of such determination, and the Staff replied with a subsequent letter affirming its prior determination.

 

The Company intends to have further communications with the Staff regarding their determination as to the Company’s shell company status.

 

The financial statements enclosed herewith were prepared on the assumption that the Company was not a shell company on June 23, 2016 and is not a shell company at the present time.

 

Pursuant to the SEC Manual, the Company filed a form 8-K/A on September 1, 2016. In Item 9.01 of that filing, the Company reported the required financial statements, including audited financial statements of Omni and pro forma financial information.

 

Material Definitive Agreement

 

The Company announced on June 23, 2016 (the “Effective Date”) , it entered into a Share Exchange Agreement (the "Exchange Agreement") with all of the shareholders of Omni Shrimp, Inc., a Florida corporation ("Omni"), pursuant to which the shareholders exchanged with the Company all of the outstanding shares of stock of Omni and Omni thereupon became a wholly owned subsidiary of the Company. In consideration for the exchange of those Omni shares, the Company issued 28,500 shares of a newly created Series E Preferred Stock of the Company (the "Series E Preferred Stock"). Omni is deemed to be the accounting acquirer under the Share Exchange Agreement.

 

As a result of their ownership of the Series E Preferred Stock, the Omni shareholders acquired the right to vote 95% of the voting control of the Company. The Series E Preferred Stock is also convertible into common stock which, in the aggregate, would represent up to 95% of the outstanding common stock after the conversion. In addition, on the Effective Date, the holders of all of the Company's outstanding Series B and Series D Preferred Stock, including James Wemett, who is a director of the Company and was an officer and principal shareholder of the company prior to the effective date, as the holder of the Series D shares, surrendered those shares to the Company.

 

Additionally, on the Effective Date the Company entered into an Asset Purchase Agreement with James Wemett, the former President and CEO, pursuant to which Mr. Wemett acquired all right, title and interest to the existing business activities of the Company prior to that date; specifically, those activities were (i) developing and commercializing material additives based on a technology utilizing halloysite nanotubes and (ii) reselling Ebola personal protective equipment and ancillary supplies, and assumed the related liabilities. In connection with that transaction, Mr. Wemett waived all accumulated compensation due to him from the Company.

 

  

In connection with the Asset Purchase Agreement, the Company and Mr. Wemett exchanged releases, and the Company issued to Mr. Wemett a six year divisible Warrant with cashless exercise to purchase up to 2,000,000 shares of the Company's common stock at a purchase price of $0.05 per share.

  

Surrender and Amendment Agreement (“Surrender and Amendment”)

 

Concurrent with the Material Definitive Agreement on the Effective Date, owners of the Senior Secured Convertible Notes and Promissory Notes agreed to surrender the following back to the Company:

 

·

$150,436 of face value debt, and

 

·

$79,411 of related accrued interest.

 

The Company did not issue any additional consideration for these securities. Fro purposes of these financial statements, the total forgiveness of $229,847 was recorded as part of additional paid in capital of NaturalNano on the Equity section of these financial statements

In addition, the Company retired the following owned by its former Chief Executive Officer

 

·

5,000 shares of Series B Preferred Stock

 

·

100 shares of Series D Preferred stock

 

Concurrent with this retirement, the Company issued 2,000,000 warrants at $.05 per share for a period of six years. The related stock based compensation has been recorded as a charge against additional paid in capital of NaturalNano, Inc. as a part of these financial statements.

 

Description of the Business

 

Omni Shrimp (“Omni”) is a subsidiary of the Company and was incorporated on September 22, 2015 in the State of Florida. Omni is a provider of shrimp in the United States. According to Marine Science Today Magazine, shrimp is the most eaten seafood within the United States. Shrimps come in many varieties which are differentiated by their color.

 

The highest quality shrimp are called “pinks” and are primarily located in American waters off the Florida coast. The Company specializes in these “Key West pinks” which are enjoyed as “peel and eat” or in a wide variety of recipes. The harvesting season for pinks is from November through June. Throughout the year, Omni also harvests “brown” and “white” shrimp.

 

Omni believes that it differentiates itself from its competitors not only by the quality of its product but its relationships with distributors allowing it to get its product to market as quickly as possible in order to guarantee freshness and taste. Our contacted vessels have refrigeration units on board which lock in freshness, and we use a processor in Louisiana which allows our haul to get out to the dining public within two to three days of catch resulting in as tasty a dining experience as possible.

 

Most consumers in the United States are not aware of the origin of their store-bought shrimp or that which they consume in restaurants.   Omni’s shrimp product is free of pesticide, chemicals and antibiotics, a fact that we believe is highly attractive and beneficial in terms of our eventual marketing success.

 

Estimates

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

 

  

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurement Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include: 

 

·

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

·

Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

·

Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The carrying amounts reported in the balance sheet of cash, accounts receivable, inventory, prepaid assets, accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes payable approximates their carrying value as the terms of this debt reflects market conditions. The Company’s derivative liability was determined utilizing Level 3 inputs.

 

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. For stock based derivative financial instruments, the Company estimated the total enterprise value based upon trending the firm value from December 2006 to June 2016 considering company specific factors including the changes in forward estimated revenues and market factors, market multiples for comparable companies, and the Company’s market share price, all equally weighted.  Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative securities in the Company’s capital structure.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

 

Reclassifications

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

 

Discontinued Operations

 

We classified our Nanotechnology and Viral Protec businesses as discontinued operations. The Balance sheet, Statements of Operations and Statements of Cash flows for these businesses are separately reported as discontinued operations for all periods presented.

 

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740 which requires recognition of estimated income taxes payable or refundable on income tax returns for the current year and for the estimated future tax effect attributable to temporary differences and carry-forwards. Measurement of deferred income tax items is based on enacted tax laws including tax rates, with the measurement of deferred income tax assets being reduced by available tax benefits not expected to be realized.  The Company recognizes penalties and accrued interest related to unrecognized tax benefits in income tax expense. Income tax expense was $0 for the three and six month periods ending June 30, 2016 and 2015.

 

Net income/ (Loss) Per Share

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

 

As of June 30, 2016 and 2015 there were 139,561,843 and 25,940,237 shares, respectively, underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. In addition to these potentially dilutive shares as of June 30, 2015 were an additional 6,666,667 reserved shares underlying the July 23, 2014 Exchange and Right to Shares Agreement with Cape One Master Fund II LLP further described in Note 2 below.

 

These potentially dilutive shares have been limited by certain debt and equity agreements with lenders. These agreements provide limitations on the conversion of the dilutive instruments such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such instruments shall be limited to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock. The Company does not have sufficient authorized shares to satisfy conversion of all the potentially dilutive instruments. 

 

Shares associated with the issuance of Series E Preferred stock are reported on an as converted basis

 

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-011 to Topic 330, Inventory. This ASU requires entities using inventory costing methods other than last-in-first-out and retail inventory method to value their inventory at the lower of cost and net realizable value. This ASU is effective for fiscal years beginning after December 15, 2016 and is to be applied prospectively. Early adoption of this ASU is permitted. The Company does not expect adoption of this ASU to have a material impact on its Consolidated Financial Statements.

 

  

2.

NOTES PAYABLE

 

Notes payable at June 30, 2016 consisted of the following:

 

Notes Issued Under Surrender and Amendment Agreement		$	1,430,005
Cape One Master Notes			344,000
Bridge loans			161,528
Total		$	1,935,533

 

Notes Issued Under Surrender and Amendment Agreement

 

 On the Effect tive date, the Company entered into the Surrender and Amendment Agreement. Pursuant to this agreement, the Company entered into certain modificiations of outstanding indebtedness to four bondholders.

 

In total, the Company retired $150, 436 and $79,411 of accrued interest. See Surrender and Amendment Agreement in Note 1. above,

 

Each Amending Holder waives any reset, repricing or ratchet right such Amending Holder may have related to the Retained Notes for any issuances of the Company's common stock or common stock equivalents that have occurred prior to the date of this Agreement.

 

b. The issuance of the Series E Preferred Shares pursuant to the Share Exchange Agreement shall be an Exempt Issuance (as define in the Retained Notes) and shall not trigger any reset, repricing or ratchet right such Amending Holder may have related to the Retained Notes.

 

c. The Conversion Price of the Retained Notes is amended to be the lower of: (i) the conversion price as would be in effect pursuant to the terms of the Retained Notes as currently in effect; or (ii) 50% of the lowest closing bid price of the Company's common stock on its principal trading market as reported by Bloomberg LP, for the twenty trading days prior to the date of conversion.

 

d. The Maturity Date of the Retained Notes is hereby extended to one year from the date of this Agreement.

 

e. Except for the notes held by Oscaleta Partners LLC All interest that has accrued through the date hereof is waived and all interest that will accrue on the Retained Notes will be payable on the Maturity Date.

 

 

The following lists the creditors and the amounts owed to each

 

Alpha Anstalt Capital		$	900,000
Marlin Capital Investments LLC			210,000
Bull Hunter LLC			140,000
Oscaleta Partners LLC			180,005
Total  Convertible debt		$	1,430,005

 

Cape One Master Notes

 

On December 15, 2015, NaturalNano Corp. exchanged 6,666,667 shares for Notes totaling $344,000. These notes are due on June 30, 2017 and are convertible at $.02 per share

 

Surrender and AmendmentSurrender and Amendment 

 

Bridge Loans

 

Bridge loans are short term notes taken on demand. They totaled $161,528 at June 30, 2016 as follows:

 

Omni Shrimp, Inc.		$	133,743
Parent company			27,785
Total		$	161,528

 

The $133,743 at Omni Shrimp, Inc. was as follows:

 

Date Issued		Amount				Interest Rate				Holder
February 12, 2016		$	85,000				5.25	%		Madeira Beach Seafood, Inc.
April 7, 2016			48,743				5.25	%		Madeira Beach Seafood, Inc.
Total		$	133,743

 

3.

SEGMENT INFORMATION

 

Subsequent to the Acquisition of Omni and the disposition of the Nanotechnology and Viral Protec businesses, the Company operates in only segment, Shrimp. Therefore, Segment data is not required.

 

  

4.

DERIVATIVE LIABILITY

 

For stock based derivative financial instruments, the Company estimated the total enterprise value based upon a combination of the trending of the firm value from December 2006 to June 2016, market comparables, and the market value of the Company’s stock, considering company specific factors including the changes in forward estimated revenues and market factors.  Once the enterprise value was determined an option pricing model was used to allocate the enterprise value to the individual derivative and other securities in the Company’s capital structure.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

 

The Company’s derivative liabilities as of June 30, 2016 and December 31, 2015 are as follows:

 

·

The debt conversion feature embedded in the various Convertible Promissory Notes which contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price (described in Note 2.)

 

·

Derivative liabilities related to outstanding warrants and options due to the Company having insufficient authorized shares to satisfy the exercise or conversion of all outstanding instruments as of June 30, 2016 and December 31, 2015.

 

The fair value of the derivative liabilities as of June 30, 2016 and December 31, 2015 are as follows:

 

		June 30, 2016				December 31, 2015
Note conversion feature liabilities		$	615,243			$	686,255
Warrant liability			3,590				759
Total			618,833				687,014

 

 

5.

STOCKHOLDERS EQUITY

 

Authorized Common Stock: In 2013 the Company received a unanimous written consent in lieu of a meeting from the members of the Board of Directors and a written consent from the Series D stockholder to amend its articles of incorporation to increase the Company’s authorized common shares to 800,000,000 common shares. As of June 30, 2016 there were approximately 140 million shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. The company does not have sufficient authorized shares to facilitate conversion of all the potentially dilutive instrument.

 

Preferred Stock Issuances

The Series E Convertible Preferred Stock is convertible into 95% of the Company’s common stock and votes on an as-converted basis.  The Series E designation limits the holders’ rights to convert its Convertible Preferred Stock, and the aggregate voting powers, to no more than 4.99% of the votes attributable to the total outstanding common shares. As a result of the Company not having sufficient authorized shares to satisfy the conversion of all outstanding convertible debt, share rights, convertible preferred stock, warrants and options, the Series B preferred shares have been moved into temporary equity classification on the balance sheet.

 

Preferred Stock Cancellations

 

As a part of the Surrender and Amendment agreement, 5,000 shares of Series B Preferred stock and 100 shares of Series D Preferred stock were also cancelled.

 

Warrants Grants

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of June 23, 2016 and December 31, 2015 there were common stock warrants outstanding to purchase an aggregate of 2,917,941 and 1,217,941 shares of common stock, respectively, pursuant to the warrant grant agreements.

 

On February 15, 2015, the Company granted a total of 300,000 warrants to the Company’s board members. These warrants, included in the summary below, grant the right to purchase one share of common stock at an exercise price of $0.10 per share. The warrants were fully vested as of the grant date and contain a cashless exercise provision. The fair value of the warrants on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $61,106.  An expected volatility assumption of 140% was used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.62% which was derived from the U.S. treasury yields on the date of grant.  The market price of the Company’s common stock on the grant date was $0.22 per share.  The expiration date used in the valuation model aligns with the warrant life of five years as indicated in the agreements.  The dividend yield was assumed to be zero.

 

On January 6, 2016, the Company granted a total of 450,000 warrants to the Company’s board members and one consultant. These warrants, included in the summary below, grant the right to purchase one share of common stock at an exercise price of $0.02 per share. The warrants were fully vested as of the grant date and contain a cashless exercise provision. The fair value of the warrants on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $25,292.  An expected volatility assumption of 140% was used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.00% which was derived from the U.S. treasury yields on the date of grant.  The market price of the Company’s common stock on the grant date was $0.06 per share.  The expiration date used in the valuation model aligns with the warrant life of five years as indicated in the agreements.  The dividend yield was assumed to be zero

 

On June 23, 2016, the Company granted a total of 2,000,000 warrants to the Company’s former Chief Executive Officer. These warrants, included in the summary below, grant the right to purchase one share of common stock at an exercise price of $0.05 per share. The warrants were fully vested as of the grant date and contain a cashless exercise provision. The fair value of the warrants on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $.031.  An expected volatility assumption of 140% was used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 1.00% which was derived from the U.S. treasury yields on the date of grant.  The market price of the Company’s common stock on the grant date was $0.034 per share.  The expiration date used in the valuation model aligns with the warrant life of six years as indicated in the agreements.  The dividend yield was assumed to be zero.

 

A summary of the outstanding warrants is presented below:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Life-years
Outstanding at January 1, 2016			1,217,941			$	.35				4.07
Issued			2,450,000			$	.05				5.98
Exercised			(750,000	)		$	.05				4.75
Warrants outstanding at June 23, 2016			2,917,941			$	.17				4.75

 

  

6.

INCENTIVE STOCK PLANS

 

A summary of the status of the outstanding incentive stock plans is presented below:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Life-years
Options outstanding at January 1, 2016			1,099			$	2,008				1.32
Options exercisable at June 30, 2016			1,099			$	2,008				.82

 

All compensation costs for the above options have been previously recognized in operations.  As of June 30, 2016, the aggregate intrinsic value of the stock options outstanding and exercisable was $0. There were no option grants made in the three month periods ended June 30, 2016 and 2015.

 

7.

SUBSEQUENT EVENTS

 

Issuance of Common shares and Conversion of debt

 

On July 6, 2016, the Company issued 142,811 shares due to the conversion of $1,000 of notes payable plus $785 of accrued interest.

 

On August 9, 2016, the Company issued 143,602 shares due to the conversion of $230 of notes payable plus $653 of accrued interest.

 

On August 23, 2016, the Company issued 144,254 shares due to the conversion of $125 of notes payable plus $100 of accrued interest.

 

Change in Independent Registered Public Accounting Firm 

 

On August 3, 2016, the Board of Directors of the Company notified Freed Maxick CPAs, P.C (“Freed Maxick”) that it had determined to dismiss them as the Company’s independent registered public accounting firm, effective as of August 3, 2016. Also on August 3, 2016, the Board determined to engage Scrudato & Co., PA as its new independent registered public accounting firm to replace Freed Maxick. Please see our form 8-K filed on August 3, 2016 for more detail.

 

Issuance of Debt

 

On August 8, 2016, the Company borrowed $15,000 from a third party. The convertible promissory note bears interest at 10% per annum and matures on August  1, 2017. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion.

 

On August 29, 2016, the Company borrowed $15,000 from a third party. The convertible promissory note bears interest at 10% per annum and matures on September 1, 2017. The third party has the option to convert all or a portion of the note plus accrued interest into common stock at a conversion price equal to 50% of the lowest closing bid price for the twenty days prior to the conversion.

 

New Lease

 

Commencing August 1, 2016, the Company entered into a lease for a period of twelve months for its Madeira Beach location. The monthly rent will be $1,500.

 

  

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·

the ability to raise capital to fund our operations until we generate adequate cash flow internally;

·

the terms and timing of product sales and licensing agreements;

·

our ability to enter into strategic partnering and joint development agreements;

·

our ability to competitively market our controlled release and filled tube products;

 

  

·

the successful implementation of research and development programs;

·

our ability to attract and retain key personnel;

·

general market conditions.

 

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

 

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

 

The Company

 

Omni Shrimp

On June 23, 2016, the Company announced a new business line, Omni Shrimp, located in Madeira Beach, Florida on the Gulf of Mexico. It is a fast growing seller of wild American shrimp. It is a wholesaler of locally caught shrimp, predominantly the highly popular Key West pink variety, to large distributors in the US, who then resell the product to grocery store chains, restaurants and other retail stores in the Florida, Boston and New York markets. According to Marine Science Today Magazine, shrimp is the most eaten seafood within the United States. Shrimps come in many varieties which are differentiated by their color.

 

Omni believes that it differentiates itself from its competitors not only by the quality of its product but its relationships with distributors allowing it to get its product to market as quickly as possible in order to guarantee freshness and taste.

 

  

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

 

Liquidity

 

Going Concern - The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company generated net income for the six months ended June 30, 2016 of approximately $936,000,but used approximately $520,000 in cash from operations had negative working capital and stockholders’ deficiency of approximately $3,627,000 at June 30, 2016. Since inception the Company’s growth has been funded through a combination of convertible and non-convertible debt from private investors and sales of common stock. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain. The financial statements do not include any adjustments that might result from the uncertainty. 

 

As of June 30, 2016 the Company owed approximately $2,520,000 to lenders in the form of notes payable, lines of credit and accrued interest. Much of this debt is convertible into the Company’s common stock at terms beneficial to the lenders compared to the market price of the Company’s common stock. The Company continues to rely on these lenders to provide additional loans to cover Company expenses and to provide forbearance agreements extending the due dates of the various notes. As of June 30, 2016, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Certain of these lenders have increased the interest rate on the June 30 2016.

 

Operating activities

Net cash generated in operating activities from period of Acquisition (June 23, 2016) through the June 30, 2016 was $6,005.

  

Investing activities

From date of Acquisition (June 23, 2016) through the June 30, 2016, there were no cash flows from investing activities.

 

Financing Activities

From date of Acquisition (June 23, 2016) through June 30, 2016 there were no cash flows from financing activities.

 

Critical Accounting Policies and Estimates 

Refer to the Company’s December 31, 2015 report on Form 10K for a complete discussion of the critical accounting policies which have not changed during the three months ended June 30, 2016.  

 

Comparison of Statement of Operations for the three months and six months ended June 30, 2016 and 2015

 

Revenue and Gross Profit

 

Revenues and Cost of goods sold for the three months and six months ended June 30, 2016 were $50,852 and $44,388, respectively. These represent revenues for the period of June 24 through June 30 for Omni Shrimp, Inc. Gross profit was $6,464 or 13% of sales.

 

  

There were no revenues and gross margin in the three months and six months ended June 30, 2015.

 

Operating Expenses

 

There were no General and Administrative Expenses from the date of acquisition (June 23, 2016) through June 30, 2016.

 

Other Income (expense), net for the June 30, 2016

 

Other income (expense) for the date of acquisition (June 23, 2016) through June 30, 2016 was ($135) aand represented interest expense on the outstanding indebtedness of Omni Shrimp from from the date of acquisition through June 30, 2016.

There was no interest expense for the period ended June 30, 2015.

  

Consolidated net (loss) income for the period from Acquisition (June 23, 2016) through June 30, 2016

 

From the date of acquisition through June 30, 2016 the Company recorded consolidated net income of $6,329. There were no operations for the period ended June 30, 2015. There were no operations for the period ended June 30, 2015. 

 

   

Item 4. - Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Based on this evaluation, and in light of the material weaknesses in our internal control over financial reporting that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties and ineffective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles.

 

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

 

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

 

  

Changes in Internal Control over Financial Reporting

 

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

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material developments to the legal proceeding disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

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

 

Recent Sales of Unregistered Securities

 

None

 

  

Item 3. Defaults Upon Senior Securities

 

The Company entered into Forbearance Agreements with Alpha Capital Anstalt, Marlin Capital Investments and Bull Hunter LLC effective on January 1, 2015 and March 5, 2015, and June 30, 2016 relating to the Company’s default on various terms and conditions with borrowing agreements. The lenders agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Senior Secured Convertible and Promissory Notes until November 30, 2015. The lenders increased the interest rate on certain of these debt agreements to 18% during the forbearance period.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

  

Item 6. Exhibits

 

Exhibit No.		Description
31.1		Certification of principal executive officer and principal accounting officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002		*
32.1		Certification of principal executive officer and principal accounting officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002		*
101		Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders’ Deficiency, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements		*
101.INS		XBRL Instance Document		*
101.SCH		XBRL Taxonomy Extension Schema Document		*
101CAL		XBRL Taxonomy Extension Calculation Linkbase Document		*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document		*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document		*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document		*

 

*	Filed herewith

 

  

SIGNATURES

 

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

 

			NaturalNano, Inc.
Date:	November 15, 2016		/s/ Colm Wrynn
			Colm Wrynn
			President and Chief Executive Officer
			(Principal Executive, Financial and Accounting Officer)