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AVNA.OB > SEC Filings for AVNA.OB > Form 10QSB on 14-Nov-2006All Recent SEC Filings

Show all filings for ADVANCE NANOTECH, INC.

Form 10QSB for ADVANCE NANOTECH, INC.


14-Nov-2006

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Statements contained in this interim report on 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, including those detailed in the "Risk Factors" contained in our Annual Report on Form 10-KSB for the year ended December 31, 2005 and elsewhere in this Quarterly Report on Form 10Q-SB. The forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ materially from those projected in the forward-looking statements. Accordingly, you should not unduly rely on forward-looking statements.

OVERVIEW

Advance Nanotech is dedicated to the successful commercialization of disruptive nanotechnologies. Our mission is to rapidly build businesses that transform academic nanotechnology platforms into nano-enabled products. We seek early-stage opportunities which will, within three years, deliver proof-of-concept devices or demonstrate manufacturability. There are many ways to group our nanotechnologies, including by application, theme, university partner or time to commercialization. However, generally we group our nanotechnologies into two broad domain-specific groups: Homeland Security and Displays. In addition to our financial support, we provide a 'tool-box' of support services to each of our research programs to ensure the technologies into which we invest achieve maximum market potential. This tool-box includes assistance such as commercialization guidance, project and infrastructure management, leadership assets, and counsel on intellectual property, licensing and regulatory issues. Advance Nanotech's diversified portfolio of over 20 nanotechnologies, of which the Company holds a majority stake in 17, impacts a range of applications including, but not limited to, sensors, medical therapeutics and composites. Advance Nanotech is forging partnerships with leading manufacturers and universities in Europe, Asia and North America to transform innovative nanotechnology concepts into practical solutions.

The Company's development network is expected to create economic and time efficiencies which can advance the development of successful university research-programs to marketable product lines in high-value markets. Leading universities across the world are generating pioneering research in the nanotechnology area, typically funded by government grants or by large industrial businesses. Many research projects offer the potential for commercialization yet are under resourced due to a lack of funding. The Company identifies opportunities to fund multiple, early-stage nanotechnology research programs within leading universities as the first and crucial step in developing and commercializing new products. This commitment to invest, bridges the gap between cutting-edge innovation and the capital markets.

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 three 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.

Build production capability, produce and sell the products made. This approach requires the most capital.

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.

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2006 Compared to Three and Nine Months Ended September 30, 2005

The Company has generated revenues of $30,459 in the three months ended September 30, 2006. Revenues generated were a direct result of our subsidiary, Owlstone Nanotech, Inc., shipping their Tourist Products and Vapor Generators as of September 30, 2006.

Research and development costs for the three months ended September 30, 2006, as compared to the same three months ended September 30, 2005 were $1,476,454 and $1,803,999, respectively, representing a decrease of $327,545 or 18.2%.


Research and development costs for the nine months ended September 30, 2006, as compared to the same nine months ended September 30, 2005 were $4,653,500 and $6,456,704, respectively, representing a decrease of $1,803,204 or 27.9%. Research and development costs include costs associated with the projects shown in the table below.

                                                      NINE MONTHS ENDED
                                                        SEPTEMBER 30,
                                                                                Change from
Project                                              2006           2005        prior year

Owlstone Nanotech, Inc. (1)                       $ 1,163,997     1,032,310          131,687
NanoFED Limited (2)                                   606,140       601,025            5,115
Bio-Nano Sensium Technologies Limited (3)                   -     1,472,750       (1,472,750 )
Cambridge Nanotechnology Limited (4)                  704,847     1,606,869         (902,022 )
Nano Solutions Limited (5)                          1,405,252     1,518,750         (113,498 )
Centre for Advanced Photonics & Electronics (6)       679,702       225,000          454,702
General                                                93,562             -           93,562

TOTAL                                             $ 4,653,500   $ 6,456,704   $   (1,803,204 )

(1) Developing one nanotechnology
(2) Developing two nanotechnologies
(3) Developing one nanotechnology
(4) Developing seven nanotechnologies
(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

Research and development costs have decreased as a result of the Company entering the straight-line quarterly payment phase of the collaboration agreements with the universities, compared to the initial one-time project start-up costs and miscellaneous overhead costs expensed in the first half of 2005. Other decreases are due to re-negotiations currently taking place on the Bio-Nano Sensium Technologies and Imperial College projects. At September 30, 2006, the Company was discussing a revision to this agreement with its partner, and, therefore had not yet funded this initiative in 2006.

General and administrative expenses for the three months ended September 30, 2006 and for the three months ended September 30, 2005 were $1,618,167 and $2,020,683, respectively, representing a decrease of $402,516 or 19.9%. The decrease in general and administrative expenses for the three month period is a result of:
Decreases in consulting and legal expenses

A decrease in payroll and employee related expenses through reduction of corporate employee headcount. At September 30, 2006, we had 7 full time employees, compared to 9 employees in 2005.

Decrease in office administrative expenses

General and administrative expenses for the nine months ended September 30, 2006 and for the nine months ended September 30, 2005 were $5,892,128 and $5,084,235, respectively, representing an increase of $807,893 or 15.9 %. The nine month increases are primarily due to:
An increase in marketing expenses

An increase in the payroll and employee related expenses through average growth in employee headcount. In the nine months ended September 30, 2006, we averaged 10 full time employees, compared to an average of 8 employees in the same period in 2005.

An increase in travel expenses related to ongoing project reviews and assessments

Interest income for the three months ended September 30, 2006 and for the three months ended September 30, 2005 was $33,283 and $63,111, respectively, representing a decrease of $29,828 from 2005. Interest income for the nine months ended September 30, 2006 and for the nine months ended September 30, 2005 was $148,592 and $151,483, respectively, representing a decrease of $2,891 from 2005. These reductions 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.

FINANCIAL RESOURCES

At September 30, 2006, the Company had a line of credit with Jano Holdings Ltd. ("Jano") and a line of credit with Merrill Lynch. Under the Jano line of credit, the Company may draw up to $20.0 million upon certification of covenants, approval of a budget and other typical deliveries. Under the Merrill Lynch line of credit, the Company may drawdown cash based on pledged collateral. As of September 30, 2006, the Company had no outstanding balances drawn on either credit facility.


The Company raised approximately $23.5 million in gross proceeds through two private placements in the first half of 2005. Net proceeds from the private placement transactions, after issuance costs and placement fees, were $20.8 million. As of September 30, 2006, the Company had $1.3 million in cash and cash equivalents. As of the same date, the Company had balance sheet liabilities aggregating approximately $3.3 million and contractual research obligations of $7.0 million due in the next 12 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. Since it is anticipated that the Company will not internally generate significant revenue or profits in the near term, the Company anticipates raising additional capital to meet commitments made to date. The accompanying consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America, contemplates the continuation of the Company as a going concern. However, the Company has been in the development stage since its inception (August 17, 2004), sustained losses and has used capital raised through the issuance of stock to fund activities. Continuation of the Company as a going concern is contingent 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 taken to revise the Company's funding requirements will allow the Company to continue its development stage operations. There is no assurance that the necessary funds will be realized by securing equity through stock offerings. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management is actively exploring various debt and equity financing transactions. Plans to generate revenue from operations could include co-development and co-funding of our products, licensing our products for upfront and milestone payments, and Government grants. We have initiated cost reduction programs and will continue to control and reduce expenses until sufficient funding is in place. The Company is also evaluating strategic funding initiatives in Europe, the Middle East and Southeast Asia regions. 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.

PORTFOLIO AND SUBSIDIARY RESEARCH AND DEVELOPMENT AGREEMENTS

As of September 30, 2006, we possessed controlling interests in the companies listed below. With the exception of Owlstone Nanotech, Inc. and Advance Nanotech Singapore, Pte. Ltd., all of these companies are incorporated in the UK and are operated as majority-owned subsidiaries. Owlstone Nanotech, Inc. is incorporated in the state of Delaware and Advance Nanotech owns 56.1% of the capital stock of Owlstone. Advance Nanotech owns 90% of the capital stock of Advance Nanotech Singapore Pte. Ltd., a company incorporated in Singapore. Advance Nanotech Singapore Pte. Ltd. in turn owns 11.45% of Singular ID Pte. Limited, a separate company incorporated in Singapore.

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 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. Advance Nanotech has the right to re-assign those research programs to any of its existing or newly formed subsidiaries. This allows Advance Nanotech to apply additional resources to assist in the development and commercialization of the technology, while retaining flexibility. 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.

The following table summarizes Advance Nanotech, Inc.'s portfolio of technologies as of September 30, 2006:


                                                            CUMULATIVE
                                                               R&D
                               PORTFOLIO          %         FUNDING as                           Development
SUBSIDIARY    TECHNOLOGY         COUNT        OWNERSHIP    of 9/30/2006       Description           Phase     Division

Centre for Advanced                                           $ 852,560
Photonics & Electronics
(CAPE)
         1 EPI CNT                 1           100.00%                  Chirality control of     Research     Displays
                                                                        nanotubes by epitaxial   Technologies
                                                                        growth on solid
                                                                        catalysts

Centre for Advanced Photonics & Electronics                   $ 284,186
(CAPE)
(CAPE partner projects with Dow Corning,
ALPS, and Marconi)
         1 HIMO                   2 *           25.00%                  High mobility oxides     Research     Displays
                                                                                                 Technologies
         2 NOTICE                 3 *           25.00%                  Next generation          Research     Homeland
                                                                        communications           Technologies Security
                                                                        infrastructure for
                                                                        broadband
         3 ANTS                   4 *           25.00%                  Artificial nanoscale     Research     Homeland
                                                                        threshold switching in   Technologies Security
                                                                        phase-change materials
         4 ROMP                   5 *           25.00%                  Reconfigurable optical   Research     Homeland
                                                                        modes in plastic fibers  Technologies Security
                                                                        and waveguides
         5 RANTED                 6 *           33.00%                  Re-orientable aligned    Research     Homeland
                                                                        carbon nanotube devices  Technologies Security

Cambridge Nanotechnology Limited                            $ 2,565,429
(University of Cambridge)
         1 Cambridge               7           100.00%                  Indium tin oxide         Emerging     Displays
           Nanotechnology                                               replacement              Technology
         2 NanoOptics              8           100.00%                  Nanotubes for ultra-fast Emerging     Displays
                                                                        optical components       Technology
         3 Nano Photonics          9           100.00%                  Liquid crystal           Emerging     Displays
                                                                        structures over nanotube Technology
                                                                        array
         4 Nano Devices I         10#          100.00%                  Silicon nanowires for    Emerging     Homeland
                                                                        optical applications     Technology   Security
         5 Nano Devices II        11#          100.00%                  Silicon nanowires for    Emerging     Homeland
                                                                        high mobility            Technology   Security
                                                                        transistors
         6 Inovus Materials        12          100.00%                  Carbon nanotube/liquid   Emerging     Displays
                                                                        crystal mixtures         Technology
         7 Exiguus                 13          100.00%                  Silicon nanowires        Research     Displays
           Technologies                                                 conductivity enhancers   Technologies
                                                                        in organic conductors

Singular ID Pte Limited           14 *          11.45%        $ 183,632 Magnetic nanoparticles                Homeland
                                                                        for security and         Near to      Security
                                                                        authentication           Market

(a minority interest of Advance Nanotech Singapore Pte. Ltd. which is owned 90% by Advance Nanotech)

Owlstone Nanotech, Inc.           15 ^          56.10%      $ 3,375,871 FAIMS chemical sensor    Near to      Homeland
                                                                                                 Market       Security

Bio-Nano Sensium                  16 ^          55.00%      $ 1,560,591 Low-power processing and              Homeland
Technologies Limited                                                    wireless communication   Near to      Security
                                                                        for bio-sensors          Market

NanoFED Limited (University                                 $ 1,245,278
of Bristol)
         1 Nano FED               17 ^         100.00%                  Lithiated microdiamond   Near to      Displays
                                                                        emitter for displays     Market
         2 Nano Light             18 ^         100.00%                  Zinc oxide nanorods for  Emerging     Displays
                                                                        enhancement of phosphors Technology

Nano Solutions Limited (Imperial College,                   $ 2,888,940
London)
         1 Advanced               19 ^          75.00%                  Engineered nanoparticles Emerging     Homeland
           Proteomics                                                   for proteomics           Technology   Security
         2 Intelligent            20 ^          75.00%                  Nano-powered sensors for Emerging     Homeland
           Biosensors I                                                 new therapies in         Technology   Security
                                                                        epilepsy
         3 Intelligent            21 ^          75.00%                  Implantable nerve cuff   Emerging     Homeland
           Biosensors II                                                for monitoring the vagus Technology   Security
                                                                        nerve for epilepsy
         4 NanoVindex             22 ^          75.00%                  Nanoparticle-hydrogel    Emerging     Homeland
                                                                        composites for drug      Technology   Security
                                                                        delivery
         5 Nano Diagnostics       23 ^          75.00%                  Detection of hemorrhagic Emerging     Homeland
                                                                        stroke using wideband    Technology   Security
                                                                        microwaves
           Visus Nanotech         ^ #                                   Visual restoration by    Emerging     Homeland
                                                                        nanoparticle stimulation Technology   Security
                                                                        of retinal cells
           Econanotech            ^ #                                   Environmentally friendly Research     Homeland

nanocomposites Technologies Security Nanocomposites ^ # Titanium oxide Research Homeland nanocomposites Technologies Security

* Represents a minority interest within the portfolio
^ Represents that the collaboration agreement is held by Advance Nanotech Ltd. (A wholly owned subsidiary of Advance Nanotech Inc.) # Represents that the research project is terminated.


NEAR-TO-MARKET TECHNOLOGIES

Owlstone Nanotech, Inc. ("Owlstone")

Owlstone was founded to commercialize miniaturized chemical detection technology developed at the University of Cambridge. Using micro and nanotechnology, Owlstone strives to bring about a paradigm shift in the way chemical and explosive threats are detected both at home and abroad. If successfully developed, Owlstone's technology will drive down the cost and size of point detection systems and improve performance. Owlstone's vision is to have its detection systems in every train, financial institution, government building, airport, stadium and any target at risk from chemical or explosive attack.

On May 28, 2004, Advance Nanotech provided Owlstone Limited ("Owlstone Ltd.") with a $2 million secured facility and entered into an agreement with Messrs. Paul Boyle, Andrew Koehl and David Ruiz-Alonso ("the founders") under which the founders assigned their intellectual property concerning the Owlstone technology to Owlstone Ltd. and were issued shares totaling 40% of the issued and outstanding shares capital of Owlstone Ltd. The facility was provided to continue technological development of Owlstone Ltd.'s sensing product.

In the third quarter of 2005, stockholders of Owlstone Ltd. 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 Ltd. 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. Following this additional share issuance, Advance Nanotech now holds 56.10% of Owlstone. The founders and third party investors retain the other 43.99% of the total issued and outstanding capital of Owlstone.

In the fourth quarter of 2005, the Company announced its intention to dividend approximately 6,000,000 shares of common stock of Owlstone in a distribution covered by a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended. Subsequently, on February 9, 2006, Owlstone voluntarily filed an application to withdraw this registration statement. Owlstone withdrew this registration statement in order to pursue alternative opportunities to create stockholder value.

Owlstone's website, www.owlstonenanotech.com, provides information regarding the detection technology, future product applications, the Owlstone management team, and the latest Owlstone news.

Technology

Owlstone is striving to shrink the full functionality of chemical agent detectors using emerging nanofabrication techniques. The Owlstone team believes that it has adapted and extended these techniques to overcome the theoretical limitations and practical considerations that prevent conventional chemical detection products from being made smaller. Owlstone anticipates generating production level volumes of miniaturized chemical sensors that can quickly and accurately carry out trace analysis of chemical warfare agents. If successfully developed, the device will be approximately the size of a dime and cost approximately 100 times less than the current commercially successful products. It is a 'black box' system that can be directly embedded into current systems to extend their range of capabilities and it is small and inexpensive enough to be used in entirely new deployment scenarios. The device under development has the capability to be flexibly updated with emerging chemical threats, and its generic detection capability will allow it to be used in a wide range of additional detection applications such as a diagnostic breath analyzer or an exhaust emissions controller.

Owlstone has filed 13 patent applications in the US and UK, with approximately 10 more in the pipeline. Owlstone recognizes the need to aggressively protect its unique design and innovations, thereby increasing the barriers to competition.

Market Opportunity

Homeland security is a major focus for governments across the globe. Management believes there is a current and growing demand for sensors to detect and hence protect against chemical and explosive threats. With current systems costing upwards of several thousand dollars each, it is not economically viable to secure every government building and every train carriage. Nanotechnology is the enabling technology that can drive down the cost and size of integrated detection systems for widespread deployment. The chemical detection market is . . .

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