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CTLE > SEC Filings for CTLE > Form 10-Q on 20-May-2014All Recent SEC Filings

Show all filings for NANO LABS CORP.

Form 10-Q for NANO LABS CORP.


20-May-2014

Quarterly Report


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

GENERAL

We were incorporated as Colorado Ceramic Tile Inc. in the State of Colorado on March 27, 1995 primarily to sell and install stone, tile and marble products used in residential and commercial buildings. During April 2012, we were reorganized by transferring all of our assets to CCT, Inc., our wholly-owned subsidiary ("CCT"). We subsequently sold CCT to Sandy Venezia, our former officer and director, for $500.00. On April 11, 2012, we filed an amendment to our articles of incorporation with the Colorado Secretary of State changing our name from "Colorado Ceramic Tile Inc." to "Nano Labs Corp."

Please note that throughout this Quarterly Report, and unless otherwise noted, the words "we," "our," "us," the "Company," or "Nano Labs" refers to Nano Labs Corp.

CURRENT BUSINESS OPERATIONS

We are a nanotechnology research and development company. We are able to access resources that encompass nearly thirty years of research and development in nanotechnology as well as hundreds of peer-reviewed and published research papers and other scholarly material. Our research and development team of scientists, designers, and engineers is focused on creating a portfolio of advanced products that could provide benefits to a variety of industries as further discussed below including: (i) consumer products, (ii) energy, (iii) materials, and (iv) healthcare. Through the use and integration of proprietary nano compounds, our goal is to evolve common products into new, revolutionary products in order to make the world a better place.

Rescission of Asset Purchase Agreement and Assignment

Previously, on October 10, 2012, we entered into that certain asset purchase agreement (the "Asset Purchase Agreement") with Dr. Victor Castano, our Chief Scientific and Technological Officer and a member of our Board of Directors ("Castano"). In accordance with the terms and provisions of the Asset Purchase Agreement, Castano sold, assigned and transferred to us all rights and assets related to Castano's Nano Coatings Technology (the "Nano Coating Technology") including, but not limited to: (i) all plans, specifications, drawings, concepts, designs, engineering studies and reports, test results, models, manufacturing processes and flowcharts; (ii) all raw materials, supplies, work in progress, finished product and lists of suppliers; (iii) all software programs and software codes relating thereto and all copies and tangible embodiments of the software programs and software code (in source and object code form) together with all documentation related to such programs and code;
(iv) all intellectual property rights including all intellectual property, patent applications, patents, trademarks, tradenames, copyrights, and the exclusive right for us to hold ourselves out to be the successor to the Nano Coatings Technology;(v) all licenses to the Nano Coatings Technology and properties of third parties (including licenses with respect to intellectual property rights owned by third parties); (vi) claims, royalty rights, deposits, and rights and claims to refunds; (vii) all Internet domain names and registrations held by Castano that relate to the Nano Coatings Technology;
(viii) all franchises, permits, licenses, agreements, waivers and authorizations from, issued or granted by any governmental authority; and (ix) copies of marketing and sales information, including pricing and customer lists. In consideration thereof and in further accordance with the terms and provisions of the Asset Purchase Agreement, we issued an aggregate 101,000,000 shares of our restricted common stock to Dr. Castano.


On December 13, 2013, we also entered into that certain universal assignment (the "Assignment") with Castano pertaining to an invention entitled "Nanotechnological Thermal Insulating Coating and Uses Thereof" for which a patent application was filed with the United States Patent, Copyright and Trademark Office on October 31, 2012, Serial Number 61/720,716 (the "Nanotechnology Patent"). In accordance with the terms and provisions of the Assignment, Castano transferred and assigned to us his whole right, title and interest for the United States and Canada and all other countries in and to the said Nanotechnology Patent.

Effective on March 4, 2014, our Board of Directors approved the execution of that certain rescission agreement dated March 4, 2014 (the "Rescission Agreement") with Castano. Our Board of Directors determined that consummation of the Asset Purchase Agreement was not in our best interests or our shareholders in light of certain difficulties pertaining to the testing of the Nano Coating Technology and thus determined that the Asset Purchase Agreement should be rescinded (the "Rescission") and that all right, title and interest in and to the Nano Coating Technology shall be returned to Castano.

Therefore, in accordance with the terms and provisions of the Rescission Agreement: (i) we agreed with Castano to rescind, cancel and set aside the Asset Purchase Agreement, including the terms and provisions regarding the issuance of the 101,000,000 shares of restricted common stock by us to Castano in exchange for the transfer to Castano of all right, title and interest in and to the Nano Coating Technology; (ii) Castano agreed to return to us the share certificate evidencing the 101,000,000 shares of our restricted common stock issued to Castano; (iii) we agreed that all right, title and interest in and to the Nano Coating Technology shall be transferred to and in the name of Dr. Victor Castano; (iv) Castano agreed to resign as our Chief Scientific and Technological Officer and a member of the Board of Directors effective as of March 4, 2014;
(v) both parties agreed to release and discharge each other from any and all claims, manner of actions, whether at law or in equity suits, judgments, debts, liens, liabilities, demands, damages, losses, sums of money, expenses or disputes, known or unknown, fixed or contingent, which they now have or may have hereafter, directly or indirectly, individually or in any capacity against each other by reason of any act, omission, matter, cause, or thing whatsoever, from the beginning of time to, and including the date of the execution of the Rescission Agreement, relating to the aforesaid Asset Purchase Agreement and Rescission; and (vi) from and at all times after the date of the Rescission Agreement, both parties shall, to the fullest extent permitted by law and to the extent provided herein, indemnify and hold harmless each other against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorney's fees, costs and expenses) incurred by or asserted against either party from and after the date thereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any claim, demand, suit, action, or proceeding (including any inquiry or investigation) by any person relating to the Rescission Agreement, whether threatened or initiated, whether or not any such party is a party to any such action or proceeding, suit or the target of any such inquiry or investigation.


Termination of Provisional Patent

On October 31, 2012, filed an application for patent protection entitled "Nanotechnological Thermal Insulating Coating and Uses Thereof" with the United States Patent, Copyright and Trademark Office (the "Nanothermal Insulation Coating Patent"). The Nanothermal Insulation Coating Patent related to dispersion which provides paints, namely films. More specifically, the subject matter relates to ceramic and/or carbon nanoparticle dispersions containing ceramic and/or carbon nanoparticle having chemically functionalized surface dispersed in a polymeric matrix. Polymeric resin dispersions have been widely utilized as a starting material for paints or coating of film-forming agents,
i.e. a starting material for a paint or a coating agent for coating an outside and inside of an aircraft, automobile, external wall surface, a floor material, furniture, etc. On November 13, 2012, the United States Patent, Copyright and Trademark Office issued to Castano a provisional patent for the Nanothermal Coating Patent, which was assigned to us pursuant to the Asset Purchase Agreement.

A provisional patent is for the duration of twelve months from the date of filing with the United States Patent and Copyright Office. A provisional patent would have allowed us twelve months of protection of our intellectual property during testing, discussions on production formulations and improve and present our technology to potential clients. The provisional patent would further allow us to make improvements before filing its patent application prior to the expiration of the provisional patent. After the twelve month provisional patent term, we could have either proceeded to file the patent application or abandon the application if the product was not deemed commercially feasible.

We have made the recent decision to not move forward with filing for further patent application with the United States Patent and Copyright Office. We have been testing the Nano coating produced in a laboratory production over the past seventeen months. This testing has resulted in recent evidence that the Nano coating is inconsistent in production resulting in clumping of the Nano particle during larger scale production and installation. We received a written letter dated February 28, 2014 from the International Searching Authority with regards to their findings (the "Opinion"). We thus have made the recent decision to not proceed with further patent application of Castano's Nano system as it applied to the provisional patent applications. Resolving the issue would result in an increase in production costs from the original estimated cost of $9.00 per gallon to over $36.00 and management has determined that this is cost prohibitive. Management also considered other factors in its analysis regarding termination of the Asset Purchase Agreement including, but not limited to: (i) inconsistency in scaling up production from laboratory production to commercial scale; (ii) inconsistency in performance of the Nano coating product due to clumping of Nano particles; (iii) increase in production costs to compete in the marketplace; and (iii) uncertainty in obtaining patent protection due to the novelty, inventive steps and industrial applicability as outlined in the Opinion of prior patent claims and patents issued on Nano coating technology, which could lead to lawsuits for patent infringement.

Cancellation of Purchase Order for 27,000 Liters

We previously announced receipt of a purchase order for twenty-seven thousand (27,000) liters of its nano coatings (the "Purchase Order"). The Purchase Order was issued to us and Atencio and Atencio by Urban del Golfo S.A. de CV, a supplier of products to Pemex. Atencio and Atencio is a certified maintenance partner of Pemex since 1991 and carried out the installation of the intumescent fire resistant coatings at Pemex's Francisco I. Madero Refinery. We further disclosed that management deemed the Purchase Order's value at approximately $630,000, had expected to receive the full amount of $630,000 and delivered the first 1,000 liters to Atencio and Atencio to test the production samples.

Subsequently, the buyer deemed the Nano coating to be inconsistent in production resulting in clumping of the nano particle during installation. We attempted to resolve this issue resulting in the increase of production costs from $9.00 per gallon to over $36.00 per gallon. Therefore, as of the date of this Quarterly Report, Urban Del Golfo has not paid for the product delivered and has refused to pay for any additional product until the problem is resolved. We have not been able to resolve this production issue and deliver the order and, therefore, has decided to abandon the Nano coatings market. Hence, the Purchase Order was cancelled.


RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited financial statements and the related notes that appear elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Quarterly Report. Our reviewed financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

We are a development stage company and have not generated any revenue. We have incurred recurring losses to date. Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation. We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.

Nine Month Period Ended March 31, 2014 Compared to Nine Month Period Ended March 31, 2013.

Our net loss for the nine month period ended March 31, 2014 was ($21,528,531) compared to a net loss of ($374,032) during the nine month period ended March 31, 2013, an increase of $21,154,499. We generated no revenue for the nine month periods ended March 31, 2014 and March 31, 2013, respectively.

During the nine month period ended March 31, 2014, we incurred operating expenses of $450,668 compared to $374,032 incurred during the nine month period ended March 31, 2013, an increase of $76,636. During the nine month period ended March 31, 2014, operating expenses consisted of: (i) consulting fees of $162,395 (2013: $-0-); (ii) general and administrative of $151,512 (2013: $374,032);
(iii) professional fees of $72,909 (2013: $-0-); (iv) travel of $33,238 (2013:
$-0-); and (v) wages of $30,614 (2014: $-0-). General and administrative expenses also generally include corporate overhead, financial and administrative contracted services, marketing, legal, auditor, edgarizing and transfer agent fees.

Loss from operations for the nine month period ended March 31, 2014 was ($450,668) compared to loss from operations of ($374,032) during the nine month period ended march 31, 2013. Operating expenses increased during the nine month period ended March 31, 2014 generally due to increased consulting and professional fees based upon an increase in scope and scale of business operations.

During the nine month period ended March 31,2014, we incurred other expense of $21,078,096 (2013: $-0-) relating to interest expense - derivative associated with the derivative liability on our outstanding convertible notes, which was offset by $233 in other income.

Therefore, our net loss and loss per share during the nine month period ended March 31, 2014 was ($21,528,531) or ($0.13) per share compared to a net loss and loss per share of ($374,032) or $0.00 per share during the nine month period ended March 31, 2013. Net loss increased substantially during the nine month period ended March 31, 2014 as compared to march 31, 2013 as a result of the derivative interest expense attributable to the outstanding convertible notes payable. The weighted average number of shares outstanding was 170,278,284 and 179,125,000 for the nine month periods ended March 31, 2014 and March 31, 2013, respectively.


Three Month Period Ended March 31, 2014 Compared to Three Month Period Ended March 31, 2013.

Our net loss for the three month period ended March 31, 2014 was ($3,842,323) compared to a net loss of ($251,270) during the three month period ended March 31, 2013, an increase of $3,591,053. We generated no revenue for the three month periods ended March 31, 2014 and March 31, 2013, respectively.

During the three month period ended March 31, 2014 we incurred operating expenses of $132,917 compared to $251,270 incurred during the three month period ended March 31, 2013, a decrease of $118,353. During the three month period ended March 31, 2014, operating expenses consisted of: (i) consulting fees of $25,430 (2013: $-0-); (ii) general and administrative of $60,782 (2013:
$251,270); (iii) professional fees of $27,542 (2013: $-0-); (iv) travel of $11,281 (2013: $-0-); and (v) wages of $7,882 (2013: $-0-). General and administrative expenses also generally include corporate overhead, financial and administrative contracted services, marketing, legal, auditor, edgarizing and transfer agent fees.

Loss from operations for the three month period ended March 31, 2014 was ($132,917) compared to loss from operations of ($251,270) during the three month period ended March 31, 2013. Operating expenses decreased during the three month period ended March 31, 2014 generally due to decreased general and administrative expenses based upon the cessation of operations concerning Castano's nano technology.

During the three month period ended March 31, 2014, we incurred other expense of $3,709,639 relating to interest expense - derivative associated with the derivative liability on our outstanding convertible notes, which was offset by interest income of $233.

Therefore, our net loss and loss per share during the three month period ended March 31, 2014 was ($3,842,323) or ($0.02) per share compared to a net loss and loss per share of ($251,270) or $0.00 per share during the three month period ended March 31, 2013. Net loss increased substantially during the three month period ended March 31, 2014 as compared to March 31, 2013 as a result of the derivative interest expense attributable to the outstanding convertible notes payable. The weighted average number of shares outstanding was 191,780,556 and 179,125,000 for the three month periods ended March 31, 2014 and March 31, 2013, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2014, our current assets were $101,884 and our current liabilities were $31,824,425, which resulted in a working capital deficit of $31,722,541. As of March 31, 2014, current assets were comprised of $1,651 in cash and $100,233 in loan receivable. As of march 31, 2014, current liabilities were comprised of: (i) $94,888 in accounts payable; (ii) $1,203,000 in convertible notes payable; and (iii) $30,526,537 in derivative liability. See " -- Material Commitments".

As of March 31, 2014, our total assets were $101,884 comprised of current assets. The increase in total assets during the nine month period ended March 31, 2014 from fiscal year ended June 30, 2013 was primarily due to the recording of the loan receivable of $100,233.

As of March 31, 2014, our total liabilities were $31,824,425 comprised entirely of current liabilities. The increase in liabilities during the nine month period ended March 31, 2014 from fiscal year ended June 30, 2013 was primarily due to the increase in the derivative liability of $30,526,537.

Stockholders' deficit increased from ($10,194,010) as of June 30, 2013 to ($31,722,541) as of March 31, 2014.


Cash Flows from Operating Activities

We have not generated positive cash flows from operating activities. For the nine month period ended March 31, 2014, net cash flows used in operating activities was ($463,545) compared to ($165,800) for the nine month period ended March 31, 2013. Net cash flows used in operating activities consisted primarily of a net loss of $21,528,531 (2013: ($374,032), which was adjusted by $21,078,096 (2012: $-0-) of derivative interest calculated from the outstanding convertible notes. Net cash flows used in operating activities was further changed by an increase of $87,123 (2013: $-0-) of accounts payable and accrued expenses, an increase of $100,233 (2013: $-0-) in notes receivable, and $-0- (2013: $208,142) in related party payables.

Cash Flows from Investing Activities

For the nine month period ended March 31, 2014 and March 31, 2013, net cash flows used in investing activities was $0.

Cash Flows from Financing Activities

We have financed our operations primarily from debt or the issuance of equity instruments. For the nine month period ended March 31, 2014, net cash flows provided from financing activities was $437,000 compared to $332,000 for the nine month period ended March 31, 2013. Cash flows from financing activities for the nine month period ended March 31, 2014 consisted of $437,000 in proceeds from convertible notes payable compared to $350,000 in proceeds from convertible notes payable offset by $18,000 in repayment of notes payable for the nine month period ended March 31, 2013.

PLAN OF OPERATION AND FUNDING

We expect that future working capital requirements will to be funded through a combination of our existing funds, debt and equity, and potential generation of revenues. Our working capital requirements are expected to increase in line with the growth of our business.

Our principal demands for liquidity are to increase research and development, capacity for developing products, inventory purchase, potential sales distribution, and general corporate purposes. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of equipment and/or inventory, and the expansion of our business, through cash flow provided by funds raised through proceeds from the issuance of debt or equity.

Existing working capital, further advances and debt instruments, and anticipated cash flow are expected to be adequate to fund our operations over the next six months. We have no lines of credit or other bank financing arrangements. We may finance expenses with further issuances of securities and debt issuances. Any additional issuances of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all.

MATERIAL COMMITMENTS

Convertible Note Payable

On December 30, 2012, we entered into a convertible promissory note with Globe Financial Corp. for $201,000 bearing no interest and convertible at a 50% discount to market. The note is payable on demand. Since the conversion rate is discounted to market, we calculated a derivative liability of $7,895,254 at March 31, 2014 using the Black Scholes Model.

On December 31, 2012, we entered into a convertible promissory note with Globe Financial Corp. for $90,000 bearing no interest and convertible at a 50% discount to market. The note is payable on demand. Since the conversion rate is discounted to market, we calculated a derivative liability of $3,779,515 at March 31, 2014 using the Black Scholes Model.

On January 31, 2013 and March 31, 2013, we entered into a convertible promissory note with Asus Global Holdings Inc. for $100,000 and $375,000, respectively, bearing no interest and convertible at a 50% discount to market. The note are payable on demand. Since the conversion rate is discounted to market, we calculated a derivative liability of $17,233,174 at March 31, 2014 using the Black Scholes Model.


In the three months ended September 30, 2013, we entered into a new convertible note agreement with Asus Global Holdings for $150,000 with the same terms as previously noted. We recorded a derivative liability of $856,720 at March 31, 2014 using the Black Scholes Model.

During the three month period ended December 31, 2013, we further entered into similar convertible note agreements for $130,000 with the same terms as previously noted. We recorded a derivative liability of $404,068 at March 31, 2014 using the Black Scholes Model.

During the three month period ended March 31, 2014, we entered into similar convertible notes in the principal amount of $32,000 and $125,000, respectively, with the same terms as previously noted. We recorded a derivative liability of $73,096 and $284,640 at March 31, 2014, respectively.

At March 31,. 2014, the balance due against these convertible notes was $1,203,000. In connection with the issuance of these convertible notes we recorded a derivative liability of $30,526,537 as of March 31, 2014.

Consulting Agreements

On October 10,2012, we executed a three year consulting agreement with Castano (the "Castano Agreement"). In accordance with the terms and provisions of the Castano Agreement, we were to pay Castano a monthly fee of $15,000 plus reimbursement for travel related expenses. As of the date of this Quarterly Report, we have terminated the Castano Agreement.

On January 1, 2013, we executed a three year consulting agreement with Felipe Estevan Samario Nino (the "Nino Agreement"). In accordance with the terms and provisions of the Nino Agreement, we shall pay Mr. Nino a monthly fee of $5,000 plus reimbursement for travel related expenses.

PURCHASE OF SIGNIFICANT EQUIPMENT

We do not intend to purchase any significant equipment during the next twelve months.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this Quarterly Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

GOING CONCERN

The independent auditors' report accompanying our June 30, 2013 and June 30, 2012 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been prepared "assuming that we will continue as a going concern," which contemplates that we will realize our assets and satisfy our liabilities and commitments in the ordinary course of business. We have suffered recurring losses from operations, have a working capital deficit and are currently in default of the payment terms of certain note agreements. These factors raise substantial doubt about our ability to continue as a going concern.


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