10-Q 1 v114650_10q.htm Unassociated Document
    
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
   
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
 
For the quarterly period ended March 31, 2008  
 
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Commission File Number: 000-10065
 
ADVANCE NANOTECH, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-1614256 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
600 Lexington Avenue, 29th Floor, New York, NY
10022
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
(212) 583-0080
 
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.    x Yes  ¨ 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


(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes   x No 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
36,667,686 shares as of May 12, 2008.
 

 
TABLE OF CONTENTS

 
 
Page (s)
 
 
 
PART I --
FINANCIAL INFORMATION
 
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007
1
 
 
 
 
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 from inception (August 17, 2004) through March 31, 2008 (unaudited)
2
 
 
 
 
Consolidated Statements of Stockholders’ Equity for the period from inception (August 17, 2004) through March 31, 2008 (unaudited)
3
 
 
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 and from inception (August 17, 2004) through March 31, 2008 (unaudited)
4
 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
5
 
 
 
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
18
 
 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
21
 
 
 
ITEM 4T
CONTROLS AND PROCEDURES
 21
   
 
PART II --
OTHER INFORMATION
 23
     
ITEM 1 
LEGAL PROCEEDINGS
23
     
ITEM 2 
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
23
     
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
24
     
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
24
     
ITEM 5
OTHER INFORMATION
24
     
ITEM 6
EXHIBITS
24
     
SIGNATURES
 
25
 
 
 
i


ITEM 1. FINANCIAL STATEMENTS
ADVANCE NANOTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)    
CONSOLIDATED BALANCE SHEETS

 
 
  March 31, 2008
 
December 31, 2007
 
ASSETS
 
  (Unaudited)
 
(a)
 
CURRENT ASSETS
 
  
 
 
 
Cash and cash equivalents
 
$
2,329,970
 
$
1,867,626
 
Restricted cash
   
77,843
   
77,557
 
Prepaid expenses and other current assets
   
327,443
   
162,622
 
Accounts receivable
   
770,480
   
1,325,080
 
Inventory
   
118,149
   
74,672
 
VAT tax refund receivable
   
91,035
   
3,902
 
Deferred financing costs, current position
   
800,735
   
801,618
 
               
TOTAL CURRENT ASSETS
   
4,515,655
   
4,313,077
 
 
         
Property plant and equipment, net
   
249,658
   
242,005
 
Patents
   
644,834
   
636,381
 
Deferred financing costs, net of current portion
   
600,553
   
801,620
 
               
TOTAL ASSETS 
 
$ 
 6,010,700  
$ 
 5,993,083  
 
         
   
CURRENT LIABILITIES
         
Accounts payable
 
$
1,298,968
 
$
1,291,882
 
Accrued expenses
   
1,535,274
   
1,369,538
 
Deferred equity compensation
   
411,395
   
345,268
 
Deferred revenue
   
-
   
38,279
 
Capital lease obligation, current portion
   
17,670
   
21,483
 
TOTAL CURRENT LIABILITIES
   
3,263,307
   
3,066,450
 
 
         
Loan payable
   
-
   
334,001
 
Convertible notes payable 
   
9,031,679
   
6,294,105
 
Common stock warrants
   
2,345,618
   
2,184,266
 
Capital lease obligation, net of current portion
   
11,802
   
13,879
 
TOTAL LIABILITIES
   
14,652,406
   
11,892,701
 
 
         
Minority interests in subsidiaries
   
7,187,471
   
6,854,191
 
 
         
STOCKHOLDERS' DEFICIT
         
Preferred stock; $0.001 par value; 25,000,000 shares authorized; 0 shares issued and outstanding
   
-
   
-
 
Common stock; $0.001 par value; 200,000,000 shares authorized; 36,667,686 and 36,595,686 shares issued and outstanding in March 31,2008 and December 31, 2007, respectively
   
36,668
   
36,596
 
Additional paid in capital
   
16,753,299
   
16,128,733
 
Warrant valuation
   
665,043
   
2,708,358
 
Accumulated other comprehensive loss
   
(1,372,437
)
 
(801,386
)
Deficit accumulated during development stage
   
(31,911,750
)
 
(30,826,109
)
TOTAL STOCKHOLDERS' DEFICIT
   
(15,829,177
)
 
(12,753,808
)
 
         
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
 
$
6,010,700
 
$
5,993,083
 
 
The accompanying notes are an integral part of these unaudited consolidated  financial statements.
(a) Derived from audited financial statements.

1

 
ADVANCE NANOTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)

 
 
Three months ended
March 31, 2008
 
Three months ended
March 31, 2007
 
Period from
August 17, 2004
(Date of inception)
to March 31, 2008
 
Revenue- product
 
$
126,079
 
$
86,973
 
$
571,960
 
Revenue- service
   
544,816
   
53,205
   
1,117,330
 
Total net revenue
   
670,895
   
140,178
   
1,689,290
 
 
             
Cost of sales
   
(399,721
)
 
(79,971
)
 
(676,661
)
Gross margin
   
271,174
   
60,207
   
1,012,629
 
 
             
Research and development
   
(550,202
)
 
(1,166,781
)
 
(16,689,146
)
Selling, general and administrative
   
(2,236,421
)
 
(1,919,694
)
 
(32,165,664
)
Total operating expenses
   
(2,786,623
)
 
(3,086,475
)
 
(48,854,810
)
 
             
Loss from operations
   
(2,515,449
)
 
(3,026,268
)
 
(47,842,180
)
 
             
Other income/ (expense)
             
Interest Income
   
12,953
   
24,400
   
430,372
 
Grant income
   
-
   
113,318
   
198,831
 
Gain on sale of investment
   
-
   
-
   
937,836
 
Forgiveness of accounts payable and other income
   
86,554
   
-
   
2,707,172
 
Interest expense
   
(165,649
)
 
(19,737
)
 
(406,823
)
Fair value of warrants gain
   
961,516
   
-
   
9,700,659
 
Accrued late registration costs
   
-
   
-
   
(2,325,193
)
 
             
Net loss before minority interest
 
$
(1,620,075
)
$
(2,908,287
)
$
(36,599,327
)
 
             
Minority interest in net loss of subsidiary
   
534,434
   
475,919
   
4,687,576
 
 
             
Net loss
 
$
(1,085,641
)
$
(2,432,368
)
$
(31,911,751
)
 
             
Foreign currency translation adjustment gain / (loss)
   
(571,051
)
 
(132,442
)
 
(1,372,437
)
 
             
Comprehensive loss
 
$
(1,656,051
)
$
(2,564,810
)
$
(33,284,188
)
 
             
Net loss per share- basic and diluted
 
$
(0.04
)
$
(0.08
)
$
(1.14
)
 
             
Net loss per share after minority interest- basic and diluted
 
$
(0.03
)
$
(0.07
)
$
(0.99
)
 
             
Comprehensive loss per share-basic and diluted
 
$
(0.05
)
$
(0.07
)
$
(1.04
)
 
             
Weighted average shares outstanding- basic and diluted
   
36,650,279
   
34,536,914
   
32,105,599
 
 
             
 
             
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
 
2

ADVANCE NANOTECH, INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/ (DEFICIT)
FROM INCEPTION (AUGUST 17, 2004) TO MARCH 31, 2008
(Unaudited)
 
     
Common
Stock
Shares
   
Amount 
   
Preferred
Stock 
   
Additional
Paid In
Capital
 
   
Warrant
Valuation 
   
Deficit
Accumulated
During
Development 
   
Accumulated
Other
Comprehensive
Income/Loss 
   
Total
Stockholders’
Equity 
 
Initial capitalization
   
200,000
 
$
200
     
$
(200
)
$
-
 
$
-
 
$
-
 
$
-
 
Acquisition shares, net of financing costs
   
19,352,778
   
19,353
       
(444,353
)
             
(425,000
)
Shares issued at $1/share
   
1,500,000
   
1,500
       
1,498,500
               
1,500,000
 
Shares issued for cash
   
112,500
   
112
       
224,888
               
225,000
 
Net loss
                       
(1,585,858
)
     
(1,585,858
)
Foreign currency translation
                                                               
     19,828
   
    19,828
Balance as of Dec 31, 2004
   
21,165,278
   
21,165
   
-
   
1,278,835
         
(1,585,858
)
 
19,828
   
(266,030
)
 
                                   
Shares issued in connection with private placement, net of financing costs
   
11,666,123
   
11,667
       
20,569,193
               
20,580,860
 
Shares issued as late registration penalty
   
384,943
   
386
       
2,324,807
               
2,325,193
 
Shares issued from cashless warrant conversions
   
71,549
   
71
       
(71
)
             
-
 
Shares issued for services
   
265,000
   
265
       
2,182,235
               
2,182,500
 
Common stock warrants
               
(10,140,471
)
 
10,140,471
           
-
 
Placement agent warrants
               
(1,925,996
)
 
1,925,996
           
-
 
Fair value of warrant loss
               
(8,739,143
)
             
(8,739,143
)
Net loss
                       
(8,367,182
)
     
(8,367,182
)
Foreign currency translation
                                                            
   (217,682
)
 
  (217,682
)
Balance as of Dec 31, 2005
   
33,552,893
   
33,554
   
-
   
5,549,389
   
12,066,467
   
(9,953,040
)
 
(197,854
)
 
7,498,516
 
 
                                 
Warrants issued for services
               
157,708
               
157,708
 
Shares issued for services
   
95,000
   
95
       
88,905
               
89,000
 
Shares issued to employees
   
723,569
   
723
       
982,354
               
983,077
 
Stock options issued (FAS 123R)
               
962,542
               
962,542
 
Common stock warrants
               
5,203,445
   
(5,203,445
)
         
-
 
Placement agent warrants
               
1,119,906
   
(1,119,906
)
         
-
 
Net loss
                       
(16,228,839
)
     
(16,228,839
)
Foreign currency translation
                                                
   (282,926
)
 
   (282,926
)
Balance as of December 31, 2006
   
34,371,462
   
34,372
   
-
   
14,064,249
   
5,743,116
   
(26,181,879
)
 
(480,780
)
 
(6,820,922
)
 
                                 
Warrants issued in connection with private placement
               
(2,184,266
)
             
(2,184,266
)
Placement costs relating to private placement
               
(567,755
)
               
(567,755
)
Shares issued to consultants for services
   
1,100,000
   
1,100
       
438,900
               
440,000
 
Shares issued to employees
   
1,124,224
   
1,124
       
593,946
                 
595,070
 
Stock options issued- FAS123R
               
748,901
               
748,901
 
Common stock warrants
               
3,034,758
   
(3,034,758
)
         
-
 
Net loss
                         
(4,644,230
)
     
(4,644,230
)
Foreign currency translation
                                                               
  (320,606
)
 
  (320,606
)
Balance as of December 31, 2007
   
36,595,686
   
36,596
   
-
   
16,128,733
   
2,708,358
   
(30,826,109
)
 
(801,386
)
 
(12,753,808
)
 
                                 
Warrants issued in connection with private placement
               
(849,708
)
             
(849,708
)
Placement costs relating to private placement
               
(772,869
)
               
(772,869
)
Shares issued to consultants for services
               
-
               
-
 
Shares issued to employees
   
72,000
   
72
       
15,768
                 
15,840
 
Stock options issued- FAS123R
               
188,060
               
188,060
 
Common stock warrants
               
2,043,315
   
(2,043,315
)
         
-
 
Net Loss
                         
(1,085,641
)
     
(1,085,641
)
Foreign currency translation
                                           
 (571,051
)
 
 (571,051
)
Balance as of March 31, 2008
   
36,667,686
 
$
36,668
   
-
 
$
16,753,299
 
$
665,043
 
$
(31,911,750
)
$
(1,372,437
)
$
(15,829,177
)
 
                                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
3

 
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months
Ended
March 31, 2008
 
Three Months
Ended
March 31, 2007
 
From Inception
(August 17, 2004)
To
March 31, 2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net loss
 
$
(1,085,641
)
$
(2,432,368
)
$
(31,911,750
)
Adjustments to reconcile net loss to cash flows used in operating activities
             
Depreciation
   
33,193
   
36,572
   
329,033
 
Fair value of warrant liability
   
(961,516
)
 
-
   
(9,700,659
)
Common stock issued for services
   
-
   
69,500
   
2,711,500
 
Common stock issued to employees
   
15,840
   
325,379
   
1,593,987
 
Stock options issued to employees
   
188,060
   
196,802
   
1,899,503
 
Warrants issued for services
   
-
   
-
   
157,708
 
Accrued late registration costs
   
-
   
-
   
2,325,193
 
Gain on sale of investment
   
-
   
-
   
(937,836
)
Forgiveness of accounts payable
   
(86,554
 
-
   
(2,707,172
)
 
             
Changes in operating assets and liabilities
             
Increase in restricted cash
   
(286
)
 
(285
)
 
(77,843
)
Increase in prepayments and other
   
(164,821
)
 
(11,745
)
 
(327,443
)
Increase in inventory
   
(43,477
)
 
(131
)
 
(118,149
)
Decrease (increase) in accounts receivable
   
554,600
   
116,106
   
(770,480
)
Decrease in grants receivable
   
-
   
113,318
       
Decrease (increase) in VAT receivable
   
(87,133
)
 
7,514
   
(91,035
)
Increase in accounts payable
   
93,640
   
723,004
   
4,006,140
 
Increase in accrued expenses
   
165,736
   
273,462
   
1,535,274
 
Decrease in deferred grant income
   
(38,279
)
 
(113,318
)
 
-
 
Increase (decrease) in deferred equity compensation
   
66,127
   
(151,460
)
 
411,395
 
NET CASH USED IN OPERATING ACTIVITIES
   
(1,350,511
)
 
(847,650
)
 
(31,672,634
)
 
             
             
Purchase of property plant and equipment
   
(34,656
)
 
(13,970
)
 
(572,502
)
Development of patent technology
   
(8,453
)
 
(106,685
)
 
(644,834
)
Investment
   
-
   
(2,130
)
 
937,836
 
Minority investment in subsidiary
   
333,280
   
401,133
   
7,187,471
 
NET CASH PROVIDED BY INVESTING ACTIVITIES
   
290,171
   
278,348
   
6,907,971
 
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Capital lease obligations, net
   
5,890
   
(5,417
)
 
41,252
 
Proceeds from (payments on) credit facility- NAB
   
(334,001
)
 
428,871
   
-
 
Amortization of deferred financing costs
   
201,950
   
192,819
   
(1,401,288
)
Proceeds from issuance of common stock ($1 round)
   
-
   
-
   
1,500,000
 
Proceeds from issuance of common stock
   
-
   
-
   
20,805,860
 
Proceeds from issuance of convertible notes
   
2,737,574
   
-
   
9,031,679
 
Financing fees from issuance of convertible notes
   
(517,678
)
 
-
   
(1,085,433
)
Financing fees on merger shares issued
   
-
   
-
   
(425,000
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
   
2,093,735
   
616,273
   
28,467,070
 
 
                       
Effect of exchange rates on cash and cash equivalents
   
   (571,051
)
 
  (132,442
)
 
    (1,372,437
)
 
             
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
$
462,344
 
$
(85,471
)
$
2,329,970
 
 
             
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
$
1,867,626
 
$
361,845
 
$
-
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
2,329,970
 
$
276,374
 
$
2,329,970
 
 
             
Supplemental disclosure of cash flow information:
             
Cash paid for interest and income taxes
 
$
203,253
 
$
1,035
 
$
251,593
 
Conversion of amounts due on related party credit facility to common stock
 
$
-
 
$
-
 
$
1,500,000
 
Convertible note issued in repayment of loan payable
 
$
246,000
 
$
-
 
$
600,000
 
Warrants to be issued for services - non-cash accrual
 
$
255,191
 
$
-
 
$
255,191
 
Warrants issued in connection with private placement
 
$
 849,708   $  -   $  3,033,974  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
4

 
ADVANCE NANOTECH, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited)

NOTE A - ORGANIZATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
CURRENT OPERATIONS
 
We are a development stage company seeking to commercialize novel chemical sensor products based on our proprietary and innovative gas sensing technology, called Owlstone, which offers an attractive combination of small size, high sensitivity, low power consumption, reprogrammability, high chemical selectivity and low cost. We have determined to progressively divest ourselves of our other technologies and their respective subsidiaries. We will, thereafter, become an operational business centered upon our Owlstone Nanotech, Inc. subsidiary and the ongoing commercialization of its products.
 
As used in these Notes to Consolidated Financial Statements, the terms “we”, “us”, “our” and “the Company” refer to Advance Nanotech, Inc. and its subsidiaries.
 
SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION and USE OF ESTIMATES
 
The unaudited financial statements included herein have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information disclosed in the notes to the financial statements included in the Company's report on Form 10-K for the year ended December 31, 2007. 1n the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008 ate not necessarily indicative of the results that may he expected for any other interim period or the entire year. For further information, these unaudited financial statements and the related notes should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2007 included in the Company's report on Form 10-K.
 
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION
 
The consolidated financial statements include the accounts of Advance Nanotech, Inc. and all of its subsidiaries (the "Company"). Minority stockholders of Owlstone Nanotech, Inc. (40% of shares outstanding or 47.31% fully diluted before acquisition by the Company of additional shares upon consummation of the Exchange Agreement), Nano Solutions Limited (25%) and Bio-Nano Sensium Limited (45%) are not required to fund losses; accordingly, no losses have been allocated to them.
 
All inter-company accounts and transactions have been eliminated in consolidation, and minority interests were accounted for in the consolidated statements of operations and the balance sheets.

GOING CONCERN
 
The accompanying 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. 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 and debt to fund activities. Continuation of the Company as a going concern is dependent upon establishing and achieving profitable operations. Such operations will require management to secure additional financing for the Company in the form of debt or equity. Management believes that actions currently being taken to address the Company’s funding requirements will allow the Company to continue its development stage operations. There is no assurance that the necessary funds will be realized by securing equity through stock offerings or through additional debt. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our operations have not historically generated positive cash flow. We do not expect that our business activities will begin to generate significant positive cash flows before the fourth quarter of 2008. We currently expect that our capital requirements for the next twelve months will be financed in part through the following:
 
  
·
cash on hand, which was $2,329,970 as of March 31, 2008;
  
·
issuances of up to $3,000,000 of additional debt and/or equity; and
 
·
cash flows from our operations.

5

 
Management is actively exploring various debt and equity financing transactions. Plans to generate additional revenue from operations could include co-development and co-funding of our products, licensing products for upfront and milestone payments, and applying for more government grants. We have initiated cost reduction programs and will continue to control and reduce expenses until funds from operations can support the growth of the business. While the Company is exploring all opportunities to improve its financial condition within the next several months, there is no assurance that these programs will be successful.

CONCENTRATION OF CREDIT RISK
 
The Company's future results of operations involve a number of risks and uncertainties, including those described in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007 under Item 1A. “Risk Factors.” The Company is potentially subject to concentrations of credit risk, which consist principally of cash and cash equivalents. The cash and cash equivalent balances at March 31, 2008 are principally held by two institutions in the US and two banks in the UK. Each US financial institution insures our aggregated accounts with the Federal Deposit Insurance Corporation ("FDIC"), up to $100,000. At March 31, 2008, the Company had uninsured cash deposits in excess of the Federal Deposit Insurance Corporation insurance limit of $954,607

CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents include investments in liquid instruments having maturity of three months or less at the time of purchase. The Company has restricted cash as a result of placing the security deposit related to our principal executive offices in New York in a standby letter of credit account. The Company is entitled to all of the interest earned on the account and will have unrestricted access to both the cash and interest at the end of the lease term.
 
RESEARCH AND DEVELOPMENT
 
Research and development costs are clearly identified and are expensed as incurred in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 2, "Accounting for Research and Development Costs."
 
FOREIGN CURRENCY TRANSLATION
 
The Company's primary functional currencies are the United States Dollar (USD$) and the Great Britain Pound (GBP£). Assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Expenses are translated at the average exchange rates in effect during the period. Translation gains and losses not reflected in earnings are reported in accumulated other comprehensive income/loss in stockholders' equity.

EARNINGS / LOSS PER SHARE
 
The Company computes basic earnings (loss) per share using the weighted average number of common shares outstanding during the period in accordance with Statement of Financial Standards No. 128, “Earnings Per Share” ("SFAS 128") which specifies the compilation, presentation, and disclosure requirements for income per share for entities with publicly held common stock or instruments which are potentially common stock. Under SFAS No. 128, diluted earnings (loss) per share are computed using the weighted average number of common shares outstanding and the dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of stock options and warrants issued by the Company. For the years ended December 31, 2007 and the three months ended March 31, 2008, the effect of the options and warrants were anti-dilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company's financial instruments include cash equivalents and accounts payable. Because of the short-term nature of these instruments, their fair value approximates their recorded value. The Company does not have any financial instruments with off-balance sheet risk.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”). The EITF finalized the definition of a collaborative arrangement and concluded that revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF 99-19 and other accounting literature. Based on the nature of the arrangement, payments to or from collaborators would be evaluated and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature would be presented.

6


Companies are also required to disclose the nature and purpose of collaborative arrangements along with the accounting policies and the classification of significant financial-statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however, required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. We do not expect this will have a significant impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect this will have a significant impact on our financial statements.

In December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), which amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the ownership interests in subsidiaries not held by the parent to be clearly identified, labeled and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. This statement also requires the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presented on the face of the consolidated statement of income. Changes in a parent’s ownership interest while the parent retains its controlling financial interest must be accounted for consistently, and when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment. The Statement also requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. This Statement applies prospectively to all entities that prepare consolidated financial statements and applies prospectively for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect this will have a significant impact on our financial statements.

In June 2007, the EITF of the FASB reached a consensus on Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007. This consensus is to be applied prospectively for new contracts entered into on or after the effective date. The pronouncement is not expected to have a material effect on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS No. 159”), which is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 permits the Company to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The Company adopted the provisions of this statement on January 1, 2008. The Company did not elect the Fair Value option for any of its financial assets or liabilities, and therefore, the adoption of SFAS 159 had no impact on the Company’s financial position, results of operations, or Cash Flows.
 
In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 157, "Fair Value Measurements" ("FAS 157")_ FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FAS 157 were adopted January 1, 2008. In February 2008, the FASB staff issued Staff Position No. 157-2 "Effective Date of FASB Statement No. 157" ("FSP FAS 157-2"). FSP FAS 157-2 delayed the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Company's fiscal year beginning January 1, 2009.
 
FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure 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). The three levels of the fair value hierarchy under FAS 157 are described below:

 
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
     
 
Level 2
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
     
 
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
 
RECLASSIFICATIONS
 
Certain reclassifications have been made to the 2007 financial statements in order to conform to the current presentation.
 
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NOTE B- PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, net of accumulated depreciation. Property and equipment are depreciated on a straight-line basis over their estimated useful lives, which range from 3 to 5 years.

 
 
Estimated
 
March 31,
 
December 31,
 
Asset Description
 
Useful Life
 
2008
 
2007
 
 
 
 
 
 
 
 
 
Furniture and Fixtures
   
3-5 years
 
$
68,862
 
$
62,444
 
Office Equipment
   
3-5 years
   
64,559
   
58,377
 
Computers
   
3 years
   
137,610
   
109,480
 
Software
   
3 years
   
59,387
   
59,387
 
Plant and Machinery
   
5 years
   
251,938
   
252,198
 
           
582,356
   
541,886
 
                     
Less: accumulated depreciation
         
(332,698
)
 
(299,881
)
                     
Net Property and equipment
       
$
249,658
 
$
242,005
 
 
The Company recorded depreciation of $33,193 and $36,572 for the three months ended March 31, 2008 and 2007, respectively.

Maintenance and repairs are expensed as incurred and were $8,462 and $3,772 for the three months ended March 31, 2008 and 2007, respectively.
 
NOTE C- INTANGIBLE ASSETS

The Company capitalizes internally developed assets related to certain costs associated with patents. These costs include legal and registration fees needed to apply for and secure patents. As of March 31, 2008, the Company had capitalized internally developed patents of $644,834 and amortization expense of $474 relating to issued patents. Intangible assets are amortized in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” ("SFAS 142") using the straight-line method over the shorter of their estimated useful lives or remaining legal life. The Company expenses any administrative costs related to the legal work on these patents. Intangible assets acquired from other enterprises or individuals in an “arms length” transaction are recorded at cost.

The Company has filed 30 of its own US and foreign patent applications. As of March 31, 2008, the Company had one patent issued in its own name or the name of a majority owned subsidiary. The Company intends to obtain and defend patents which will give us an exclusive right to commercially exploit our inventions for a certain period of time from the filing date of the patent application.

NOTE D - INVESTMENT IN SUBSIDIARY

On July 28, 2005, Advance Nanotech Singapore Pte. Ltd., a subsidiary of Advance Nanotech, Inc., acquired a 12.08% equity stake in Singular ID Pte. Ltd. for an investment of SGD$300,000, or approximately $207,510. As a result of subsequent equity financings, Advance Nanotech Singapore Pte. Ltd.’s equity stake in Singular ID was reduced to 8.8% prior to its sale in December 2007. On December 28, 2007, the Company sold its 8.8% equity interest in Singapore-based Singular ID Pte. Ltd. for $1.19 million and, as a result, realized a gain of $937,836.

The Company did not exercise significant influence over the entity and carried the investment at cost. The Company recorded its investment in Singular ID in accordance with FASB No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, using the cost method.   The original investment under the cost method is accounted for in the same manner as marketable equity securities and recorded on the parent company’s balance sheet at original cost measured by the fair market value of the consideration given. There were no adjustments or impairment charges to the fair market value from acquisition through the period ended March 31, 2008.
 
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NOTE E - MINORITY INTERESTS IN SUBSIDIARIES

Minority interest in subsidiary represents the minority stockholders’ proportionate share of the equity of:

 
·
Owlstone Nanotech, Inc. - At March 31, 2008, the Company owned 60% of Owlstone’s outstanding shares, which also represented its percentage of voting control before acquisition by the Company of additional shares upon consummation of the Exchange Agreement.
 
·
Advance Display Technologies plc- At March 31, 2008, the Company owned 92.9% of Advance Display Technologies’ outstanding shares, which also represented its percentage of voting control.
 
·
Advance Nanotech Singapore Pte. Ltd.- At March 31, 2008, the Company owned 90.0% of Advance Nanotech Singapore Pte. Ltd.’s outstanding shares, which also represented its percentage of voting control.
 
·
Bio-Nano Sensium Technologies Ltd.- At March 31, 2008, the Company owned 55.0% of Bio-Nano Sensium Technologies Ltd.’s outstanding shares, which also represented its percentage of voting control.
 
·
Nano Solutions Ltd.- At March 31, 2008, the Company owned 75.0% of Nano Solutions Ltd.’s outstanding shares, which also represented its percentage of voting control.

The Company’s percentage of controlling interest requires that operations be included in the consolidated financial statements. The percentage of equity interest that is not owned by the Company is shown as “Minority interests in subsidiaries” in the consolidated balance sheets and “Minority interest in net loss of subsidiary” in the consolidated statements of operations.
 
NOTE F- REVENUE RECOGNITION
 
Revenue from product sales, net of estimated provisions, will be recognized when the merchandise is shipped to an unrelated third party, as provided in Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB104). Accordingly, revenue is recognized when all four of the following criteria are met:
 
  
·
persuasive evidence that an arrangement exists;
  
·
delivery of the products has occurred;
  
·
the selling price is both fixed and determinable; and
  
·
collectability is reasonably assured.
 
During the three months ended March 31, 2008 and 2007, the Company recognized revenue of $670,895 and $140,178, respectively.

Revenues generated were a direct result of our subsidiary, Owlstone Nanotech, Inc., shipping their Lonestar and Owlstone Vapor Generators (“OVG”) products, along with instructional and set-up services provided to customers as of March 31, 2008.

Owlstone Nanotech, Inc. has obtained other purchase orders for its products and contracted services. Owlstone revenues include both product sales and service revenue from industrial partners. Service revenue includes contracted research and development or engineering work for specific customers.

Our customers consist primarily of governmental agencies and large manufacturers and wholesalers who sell directly into retail channels. Provisions for sales discounts and estimates for damaged product returns and exchanges will be established as a reduction of product sales revenues at the time revenues are recognized. 
 
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NOTE G - REVOLVING CREDIT FACILITIES

On March 31, 2006, Merrill Lynch extended a line of credit with loans to be secured by certain collateral. Amounts withdrawn under this facility bear interest at a variable rate of 2.0% over the effective LIBOR rate. This loan management account allows the Company to pledge a broad range of eligible assets and accounts in various combinations to maximize the Company’s borrowing capacity. Collateral may include cash and cash equivalents, debts, claims, securities, entitlements, financial assets, investment property and other property. The amount of borrowings available to the Company under this facility increases proportionally to the assets pledged as security for the loan. Accordingly, a decline in the value of collateral pledged to secure the loan under this facility could force the sale of the underlying collateral. As of March 31, 2008, the Company had not used this facility. As of March 31, 2008, the Company maintained a cash balance of $47 and a security balance of $0 in Merrill Lynch investment accounts. The Company may cancel this agreement at any time subject to being supported by a collateral account sufficient to support an outstanding loan balance, if any. At March 31, 2008, the Company had $47 of credit available under this agreement.

On November 6, 2006, the Company’s subsidiary, Advance Display Technologies, plc (“ADT”), entered into a conditional Facility Agreement with NAB Ventures Limited (“NAB”). The Company entered into the credit facility in part in order to allow the shares of ADT to be listed on the PLUS-quoted market in London. NAB has agreed to provide the Company one or more loans, each called a drawdown, in the aggregate principal amount of up to approximately USD $7 million (GBP £3.5 million) subject to the terms and conditions set forth in the agreement. As of March 31, 2008, the Company had repaid this facility in full and had $0 principal amount outstanding. As of March 31, 2008, the Company owed $52,199.68 in accrued interest payable. Any outstanding principal amount bears interest per annum at an interest rate of 9.0%. In the event the agreement is not repaid on the maturity date of December 31, 2009, the unpaid principal amount and accrued interest thereon will bear additional interest at a default rate of 1.5% per month, or 18.0% annum. The NAB credit facility has resulted in the Company recording deferred financing costs, of which $1,401,288 was unamortized as of March 31, 2008. The financing costs resulted from the issuance of 1,875,000 ordinary shares of ADT and a warrant to purchase 1,875,000 additional ordinary shares of ADT. These financings costs are amortized over the 37-month life of the NAB credit facility and will be fully expensed on December 31, 2009.

On March 30, 2007, the Company and Jano Holdings Ltd. (“Jano”) mutually agreed to cancel, effective immediately, the $20.0 million amended and restated senior secured grid note (the “Note”) dated August 14, 2006. In addition, the Company and Jano simultaneously canceled the following agreements dated August 14, 2006: associated security agreement, amended facility letter and amended warrant to purchase 6,666,666 shares of the Company’s common stock at the exercise price of $1.25. The Company has repaid all principal and interest outstanding on the credit facility and there were no amounts outstanding as of the date of this mutual cancellation.
 
NOTE H - STOCKHOLDERS' EQUITY

1. Common Stock
 
On June 19, 2006, the Company created a new class of "blank check" preferred stock (discussed below at 2) which converted 25,000,000 shares of authorized common stock into preferred stock. As a result, the 100,000,000 shares of previously authorized common stock were reduced to 75,000,000 million shares of authorized common stock, par value $0.001. At March 31, 2008, 36,667,686 shares of common stock were outstanding.

At the Company's Special Meeting of Stockholders held on February 12, 2008, the stockholders of the Company voted in favor of an amendment to the Certificate of Incorporation of the Company to increase the number of authorized shares of the Company's common stock from 75,000,000 to 200,000,000.

2. Preferred Stock
 
On June 19, 2006, the Company created a class of "blank check" preferred stock, par value $0.001 per share, consisting of 25,000,000 shares. The term "blank check" preferred stock refers to stock for which the designations, preferences, conversion rights, and cumulative, relative, participating, optional or other rights, including voting rights, qualifications, limitations or restrictions thereof, are determined by the Board of Directors (“Board”). As such, the Board will be entitled to authorize the creation and issuance of 25,000,000 shares of preferred stock in one or more series with such limitations and restrictions as may be determined in the sole discretion of the Board, with no further authorization by stockholders required for the creation and issuance of the preferred stock. Any preferred stock issued would have priority over the common stock upon liquidation and might have priority rights as to dividends, voting and other features. Accordingly, the issuance of preferred stock could decrease the amount of earnings and assets allocable to or available for distribution to holders of common stock and adversely affect the rights and powers, including voting rights, of the common stock. As of March 31, 2008, there were no shares of preferred stock issued or outstanding.
 
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3. Fiscal Year 2007 Stockholders’ Equity Transactions (See NOTE I for stock-based compensation equity transaction disclosure)

Restricted stock, stock options and warrants issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123, “Share-Based Payments” and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction With Selling Goods or Services,” and recognized over the related service period.
  
4. Warrant Re-pricing

  As of February 15, 2008, the Company automatically re-priced warrants issued in 2005 to investors and placement agents as a result of the third closing of the 8% Convertible Note financing that closed on February 15, 2008 as follows:
 
 
 
# Warrants
 
Price
 
Investor Warrants-Original Price (Expired as of March 31, 2008)
   
2,382,125
 
$
1.67
 
Investor Warrants-Re-priced (Expired as of March 31, 2008)
   
3,507,200
 
$
0.67
 
Agent Warrants-Original Price
   
192,502
 
$
1.07
 
Agent Warrants-Re-priced
   
720,815
 
$
0.67
 

     As of March 31, 2008, the above re-pricing was a result of anti-dilution provisions in the 2005 investor and agent warrants. The revised exercise price was out-of-the money on the measurement date because the closing stock price on March 31, 2008 was $0.18. There have been no other adjustments to the warrants’ original terms as discussed above. Subsequent to the February 15, 2008 re-pricing, as of March 31, 2008, all the 2005 investor warrants expired. These warrants were issued to the investors based upon arms-length negotiations and accounted for as part of the equity transaction related to the private placements in 2005 as discussed above.

     As of March 31, 2008, the Company reclassified a gain of $2,043,315 to additional paid in capital on the February 15, 2008 re-pricing of the warrant valuation. The gain was a result of using a Black Scholes pricing model to determine the fair value. There is no income statement effect for the re-pricing of the warrants because they were priced “out-of-the-money” and as such would not contain a beneficial conversion feature to record.  The reclassification remained in stockholders’ equity.
 
     As of December 31, 2007, the Company had automatically re-priced the 2005 investor and agent warrants as a result of the first and second closings of the 8% Convertible Note financing that closed in December 2007 as follows:
 
 
 
# Warrants
 
Price
 
Investor Warrants-Original Price
 
 
2,382,125
 
$
1.94
 
Investor Warrants-Re-priced
 
 
3,507,200
 
$
0.81
 
Agent Warrants-Original Price
 
 
192,502
 
$
1.29
 
Agent Warrants-Re-priced
 
 
720,815
 
$
0.81
 

     As of December 31, 2007, the above re-pricing was a result of anti-dilution provisions in the 2005 investor and agent warrants. The revised exercise price was out-of-the money on the measurement date because the closing stock price on December 31, 2007 was $0.29.

     As of December 2007, the Company reclassified a gain for 2007 of $3,034,758 to additional paid in capital on the December re-pricing of the warrant valuation. The gain was a result of using a Black Scholes pricing model to determine the fair value. There was no statement of operations effect for the re-pricing of the warrants because they were priced “out-of-the-money” and as such would not contain a beneficial conversion feature to record.  The reclassification remained in stockholders’ equity.
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5. Warrants

The following table summarizes information about our warrants:
 
 
  Warrants 
Summary
 
  
 
Weighted Average
Exercise Price
 
August 2004 (Inception)
 
 
-
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
6,666,666
 
 
(a)
 
 
2.00
 
Exercised
 
 
-
 
 
 
 
 
-
 
Cancelled or Forfeited
 
 
-
 
 
 
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2004
 
 
6,666,666
 
 
 
 
 
2.00
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
6,874,190
 
 
(c)
 
 
2.86
 
Exercised
 
 
(71,549
)
 
(d)
 
 
2.00
 
Cancelled or Forfeited
 
 
-
 
 
 
 
 
-
 
 
 
 
    
 
 
 
 
 
 
 
December 31, 2005
 
 
13,469,307
 
 
 
 
 
2.45
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
10,955,213
 
 
(a) (b) (c)
 
 
1.26
 
Exercised
 
 
-
 
 
 
 
 
-
 
Cancelled or Forfeited
 
 
(10,839,681
)
 
(a) (c)
 
 
2.32
 
 
 
 
   
 
 
 
 
 
 
 
December 31, 2006
 
 
13,584,839
 
 
 
 
 
1.58
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
7,986,000
 
 
(e) (f) (g)
 
 
0.31
 
Exercised
 
 
-
 
 
 
 
 
-
 
Cancelled or Forfeited
 
 
(6,746,666
)
 
(a) (e) (f)
 
 
1.27
 
                     
December 31, 2007
 
 
14,824,173
 
 
 
 
 
0.73
 
 
 
 
 
 
 
 
 
 
 
 
Granted
 
 
5,494,000
 
 
(h)
 
 
0.30
 
Exercised
 
 
-
 
 
 
 
 
-
 
Cancelled or Forfeited
 
 
(5,889,325
)
 
(i)
 
 
1.18
 
 
 
 
   
 
 
 
 
 
 
 
March 31, 2008
 
 
14,428,848
 
 
 
 
 
0.34
 
                     
 
 
(a)
The Company’s predecessor, in June 2004, issued Jano Holdings Ltd. (“Jano”) warrants to purchase 6,666,666 shares of common stock of Advance Nanotech, Inc. The warrants were cancelled on March 30, 2007.
 
 
 
 
 
(b)
During 2005, the Company settled with investors in Artwork and Beyond with respect to certain corporate actions effected prior to a corporate share exchange conducted on October 1, 2005. The Company agreed to convert principal and interest due on the debentures issued on November 10, 2003 into warrants to purchase common stock. The Board of Directors approved the transaction on December 22, 2005, to issue warrants to purchase 19,300 shares of common stock. The warrants were issued in January 2006. The new warrants have an exercise price of $2.07 and expire on December 22, 2010. The awards vested 100% on the day they were finalized. The Company valued the warrants by using the Black-Scholes option pricing model and valued the warrants at $1.95 each. The Company recorded a non-cash expense of $37,635 related to the debenture settlement in 2005.
 
 
 
12

 
 
 
 
 
 
(c)
As of December 31, 2006, the Company had re-priced investor warrants to purchase 3,452,200 shares to a new exercise price of $1.25. As of December 31, 2006, the Company had re-priced agent warrants to purchase 720,815 shares to a new exercise price of $1.25. The revised exercise price was out-of-the money on the measurement date because the closing stock price on December 31, 2006 was $0.71.
 
 
 
 
(d)
Agent warrants exercised in 2005.
 
(e)
As of March 31, 2007, the Company had re-priced investor warrants to purchase 18,750 shares to a new exercise price of $1.25. The revised exercise price was out-of-the money on the measurement date because the closing stock price on March 31, 2007 was $0.48.
 
 
 
 
(f)
As of June 30, 2007, the Company had re-priced investor warrants to purchase 61,250 shares to a new exercise price of $1.25. The revised exercise price was out-of-the money on the measurement date because the closing stock price on June 30, 2007 was $0.39.
 
 
 
 
(g)
 
 
 
 
 
 
(h)
 
 
 
 
(i)
As of December 31, 2007, the Company had issued 7,906,000 investor warrants in relation to the 8% Convertible Note offering. The fair value of the warrants issued was estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.46%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Common Stock", the estimated fair value of the warrants, in the amount of $2,184,266, was recorded as a liability, with an offsetting charge to additional paid-in capital. The fair value of the 7,906,000 warrant liability was re-valued according to EITF No. 00-19 as of the end of the current period. The Company recorded a gain for the period of $961,516 which was recorded as non-operating income in the Company's statement of operations.
 
As of March 31, 2008, the Company issued 5,494,000 investor warrants in relation to the 8% Convertible Note offering. The fair value of the warrants issued was estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.31%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, the estimated fair value of the warrants, in the amount of $849,708, was recorded as a liability, with an offsetting charge to additional paid-in capital.
 
As of March 31, 2008, the 2005 Investor warrants totaling 5,889,325 expired according to the terms of the warrants.
 
NOTE I - STOCK OPTION PLANS AND STOCK BASED COMPENSATION
 
On December 30, 2005, 3,000,000 shares of common stock were reserved for issuance upon bonus grants and exercise of options granted under Advance Nanotech, Inc.’s 2005 Equity Incentive Plan. This non-qualified plan will expire on December 22, 2010, but options may remain outstanding past this date. The Board authorizes the grant of options to purchase stock as well as the grant of shares of stock under this plan. Grants cancelled or forfeited are available for future grants.
 
Shares Granted to Employees

As of March 31, 2008, the Company accrued a bonus grant of $6,907 for shares to be issued to certain employees of the Company for their performance related to service in the first quarter of 2008 and accrued a non-cash compensation expense related to the fair market value of the stock compensation including applicable taxes. These awards were not yet issued as of March 31, 2008 and are pending the Compensation Committee approval and the approval of a new 2008 Equity Incentive Plan.

     As of March 31, 2008, the Company accrued Executive Equity Grants totaling $70,094 for shares to be issued to certain executives of the Company according to their employment contracts related to service in the first quarter of 2008 and accrued a non-cash compensation expense related to the fair market value of the stock compensation. These awards were not yet issued as of March 31, 2008 and are pending the Compensation Committee approval and the approval of a new 2008 Equity Incentive Plan.

     As of March 31, 2008, there were 240 shares that had not been issued under the 2005 Equity Incentive Plan.

     The Company accounts for employee stock option grants in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

13


     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This statement revises SFAS No. 123, “Accounting for Stock-Based Compensation,” which provided alternative methods of disclosure for stock-based employee compensation. It also supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and its related implementation guidance. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. SFAS 123(R) eliminates the alternative to use APB 25’s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no compensation cost. The effective date for SFAS 123(R) for public entities that file as small business issuers began on January 1, 2006. Compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123(R) for either recognition or pro forma disclosures. The Company accounts for stock options in accordance with SFAS 123 and has also elected to adopt the disclosure only provisions of SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure.”

     A predecessor entity of Artwork and Beyond, Inc., Dynamic IT, was a party to certain stock option plans. There are stock options remaining under the 2001, 2002, and 2003 Dynamic IT Stock Option Plans. These stock options were previously granted by other management and subsequently assumed by Advance Nanotech as a result of a reverse merger. The Company acknowledges and accounts for these options. No future grants may be made under these plans. The 2001, 2002, and 2003 Dynamic IT Stock Option Plans will expire on August 31, 2009, October 31, 2010, and February 2, 2012, respectively.
 
The following tables summarize disclosure information regarding stock options:
 
  Number of
Options
 
Weighted Average
Exercise Price
 
Balance, November 30, 2004,
 
 
 
 
 
(Inherited Options Post Reverse merger)
 
 
7,027
 
$
171.11
 
 
Granted
 
 
-
 
 
-
 
Exercised
 
 
-
 
 
-
 
Cancelled or forfeited
 
 
-
 
 
-
 
Balance, December 31, 2004
 
 
7,027
 
 
171.11
 
 
Granted
 
 
-
 
 
-
 
Exercised
 
 
-
 
 
-
 
Cancelled or forfeited
 
 
-
 
 
-
 
Balance, December 31, 2005
 
 
7,027
 
 
171.11
 
 
Granted
 
 
1,060,000
 
 
2.11
 
Exercised
 
 
-
 
 
-
 
Cancelled or forfeited
 
 
(240,000
)
 
2.03
 
Balance, December 31, 2006
 
 
827,027
 
 
3.58
 
  
Granted
 
 
525,000
 
 
0.25
 
Exercised
 
 
-
 
 
-
 
Cancelled or forfeited
 
 
-
 
 
-
 
Balance, December 31, 2007
 
 
1,352,027
 
 
2.29
 
 
Granted
 
 
262,500
 
 
0.25
 
Exercised
 
 
-
 
 
-
 
Cancelled or forfeited
 
 
-
 
 
-
 
Balance, March 31, 2008
 
 
1,614,527
 
 
1.96
 
 
14

 
Range of
Exercise Prices
 
Number Outstanding as of March 31, 2008
 
Average Remaining Contractual Life
 
Weighted Average
Exercise Price
 
Compensation Cost Recorded as of   
March 31, 2008
 
Compensation
Cost Yet to be
Recorded
 
$0.25
   
787,500
       
9.51
       
$
0.25
       
$
152,178
       
$
89,322
 
$2.03-$3.50
   
820,000
       
2.81
       
2.14
       
1,723,160
       
306,735
 
$20.00-80.00
   
4,913
       
1.09
       
27.23
       
-
       
-
 
$100.00-200.00
   
762
       
1.08
       
160.30
       
-
       
-
 
$700.00
   
1,352
       
1.44
       
700.00
       
-
       
-
 
 
NOTE J- FAIR VALUE ACCOUNTING
 
The following table sets forth the Company's financial assets and liabilities measured at fair value by level. within the fair value hierarchy. As required by FAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

                   
   
Total
 
Level 1
 
Level 2
 
Level 3
 
Assets
                 
Cash equivalents
 
$
-
 
$
-
 
$
-
 
$
-
 
 
 
$
-  
$
-
 
$
-
 
$
-
 
                           
Liabilities
                         
Detachable warrants
 
$
2,345,618
 
$
-
 
$
-
 
$
2,345,618
 
                           
   
$
2,345,618
 
  
   
  
 
$
2,345,618
 
 
The Company had no financial assets that were classified within the fair value hierarchy as of the period ending March 31, 2008.
 
The Company's detachable warrants are valued using pricing models and the Company generally uses similar models to value similar instruments. Where possible, the Company verifies the values produced by its pricing models to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs. These financial liabiloities do not trade in liquid markets, and as such, model inputs cannot generally be verified and do involve significant management judgment. Such instruments are typically classified within Level 3 of the fair value hierarchy.
 
The table below sets forth a summary of changes in the fair value of the Company's Level 3 financial liabilities (detachable warrants) for the three months ended March 31, 2008.

Balance at beginning of period
 
$
2,184,266
 
Change in fair value of warrants
 
 
(961,516
)
Fair value of warrants issued or accrued during the period
 
 
1,122,868
 
Balance at end of period
 
$
2,345,618
 
 
The total amount of the changes in fair value for the period was included in net loss as a result of changes in the Company's stock price from December 31, 2007.
 
NOTE K- COMMITMENTS AND CONTINGENCIES

1. Leases

As of March 31, 2008, the Company had the following lease commitments:

 
 
Operating
 
Capital
 
Year ending December 31,
 
Leases
 
Leases
 
 
 
 
 
 
 
2008
   
147,221
   
16,903
 
2009
   
196,295
   
9,361
 
2010
   
139,043
   
5,460
 
2011
   
-
   
-
 
Thereafter
   
-
   
-
 
 
             
Amounts representing interest
   
-
   
(2,252
)
 
             
Total principal payments
 
$
482,559
 
$
29,472
 
 
     The Company currently leases 3,569 square feet of general office space at its principal executive offices at 600 Lexington Avenue, 29th Floor, New York, New York 10022 for base rent of approximately $15,706 per month. These facilities are the center for all of our administrative functions in the United States. The lease expires on September 13, 2010. Management believes the office space is adequate for the Company’s current needs.  On February 1, 2007, the Company subleased certain office space at the New York corporate office located at 600 Lexington Avenue. The sublease tenant is an affiliate of a director, Lee Cole, of the Company. Under the terms of the sublease, the sublease ran from February 1, 2007 through January 2008 and required monthly rent payments of approximately $8,000.  On March 1, 2008, the Company renewed the sublease agreement at the New York Corporate office located at 600 Lexington Avenue on a month- to-month term with required monthly payments of approximately $9,500.

     The Company’s indirectly owned subsidiary, Owlstone Nanotech, Ltd., has four leased offices in Cambridge (UK). The Cambridge (UK) offices are located at St. John’s Innovation Centre, Cowley Road, Cambridge, CB4 0WS. All four leases are on a month-to-month basis. Under one lease, either party can terminate at any time with a 30-day notification. The remaining three leases require a 90-day notification. The following is a breakdown of the four leases and their other terms:
 
 
-
Unit 67- 460 square feet and monthly rent payments of approximately $3,308 (GBP £1,700) which commenced on Oct. 15, 2007
 
-
Unit 33- 1,280 square feet and monthly rent payments of approximately $8,925 (GBP £4,587) which commenced on Feb. 14, 2005
 
-
Unit 47- 205 square feet and monthly rent payments of approximately $1,568 (GBP £786) which commenced on Jan. 13, 2006
 
-
2 Dirac House- 1,815 square feet and monthly rent payments of approximately $12,658 (GBP £6,500) which commenced on March 28, 2008
     
     Effective August 14, 2006, the Company’s directly owned subsidiary, Owlstone Nanotech, Inc., began leasing office facilities at Park 80 West Plaza 2, Saddle Brook, NJ, for monthly rent of $2,000. The lease is on a month-to-month basis and either party can terminate at any time with a 30-day notification. The office is utilized as an executive office for Owlstone Nanotech, Inc.
 
15

 
2. Defined Contribution Plan

     The Company has a defined contribution 401(k) Plan whereby the Company can make discretionary matches to employee contributions. The Company has not made any contributions to the 401(k) Plan as of March 31, 2008.
 
NOTE L -INCOME TAXES

     Income taxes are recorded in accordance with SFAS No. 109, “Accounting for Income Taxes.” This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
 
     The Company is subject to income taxes in the United States of America and the United Kingdom. As of December 31, 2007, the Company had net operating loss carry forwards for income tax reporting purposes of approximately $8,312,393 that may be offset against future taxable income through 2027. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited. No tax benefit has been reported in the financial statements because the Company believes there is no assurance the carry-forwards will be used. Potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.
 
NOTE M - RELATED PARTY TRANSACTIONS

     On February 1, 2007, the Company subleased certain office space at the New York corporate office located at 600 Lexington Avenue. The sublease tenant is an affiliate of a director, Lee Cole, of the Company. Under the terms of the sublease, the sublease ran from February 1, 2007 through January 2008 and required monthly rent payments of approximately $8,000.  On March 1, 2008, the Company renewed certain office space at the New York Corporate office located at 600 Lexington Avenue on a month- to-month term with required monthly payments of approximately $9,500.

NOTE N - CONVERTIBLE NOTES PAYABLE

On December 19 and 21, 2007, we entered into subscription agreements with selected institutional and accredited investors regarding the private placement of up to a maximum of $8,800,000 principal amount of 8% senior secured convertible notes. Each investor who subscribed to the notes received 50% warrant coverage at $0.30 per share as common stock warrants. The notes mature on the date that is three years from the date of issuance and are convertible into shares of our common stock at a price of $0.25 per share. The notes constitute our senior indebtedness and provide that we can not incur other indebtedness (excluding an additional $3,000,000 in debt, certain credit facility lines and trade payables incurred in the ordinary course of business) without the consent of the noteholders. The notes are secured by all of our intellectual property, books and records and proceeds of the sale of our intellectual property, as well as all of the equity interests in our subsidiaries. The warrants are exercisable into shares of our common stock for a period of five years from the date they are issued at a price of $0.30 per share.
   
In connection with the private placement, we received gross proceeds of an aggregate of $6,700,000. However, because we did not have a sufficient number of authorized shares of our common stock to allow for conversion of the notes and exercise of the warrants, representing the total amount of proceeds received, we issued notes and warrants in December 2007 for only that portion of the total proceeds that was allowed given our current capital structure. As a result, we issued notes with a principal face amount of $3,953,000 and warrants convertible into 7,906,000 shares of our common stock. The remainder of the proceeds received during the private placement was held in escrow as of December 31, 2007 pursuant to the terms of an escrow agreement, pending amendment of our certificate of incorporation to increase the number of our authorized shares of common stock from 75,000,000 to 200,000,000. This charter amendment was approved by our stockholders in February 2008. Upon obtaining approval of the charter amendment by the stockholders on February 15, 2008, the Company issued notes with a principal face amount of $2,747,000 and warrants convertible into 5,494,000 shares of common stock. As of March 31, 2008, in connection with the closings of the sale of convertible notes, the Company paid cash fees to certain placement agents in the amount of $610,500, and the Company accrued placement agents warrants to purchase, in aggregate, 1,742,000 shares of common stock at $0.25 per share.

16


Pursuant to the terms of the registration rights agreements entered into in connection with the December 2007 8% Convertible Note offering, the Company is required to pay a cash penalty if it fails to file with the SEC a registration statement under the Securities Act of 1933, as amended, covering the common stock underlying the Notes purchased and the common stock underlying the issued warrants. The fair value of the 7,906,000 warrants issued in connection with the December 2007 offering was estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of 4.46%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, ” the estimated fair value of the warrants, in the amount of $2,184,266, was recorded as a liability, with an offsetting charge to additional paid-in capital. The fair value of the 5,494,000 warrants issued upon obtaining approval of the charter amendment in connection with the December 2007 offering was also estimated using the Black-Scholes option pricing model with the following assumptions: no dividend yield, risk-free interest rate of $4.31%, the contractual life of 5 years and volatility of 138%. In accordance with EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock,” the estimated fair value of the 5,494,000 investor warrants, in the amount of $849,708, was recorded as a liability, with an offsetting charge to additional paid-in capital. As of March 31, 2008, the fair value of the 7,906,000 warrant liability was re-valued according to EITF No. 00-19 as of the end of the current period. The company recorded a gain for the period of $961,516 which was recorded as non-operating income in the Company's respective statement of operations. The 1,742,000 un-issued placement agent warrants’ fair value was also estimated using the Black-Scholes options pricing model as of March 31, 2008, and the Company accrued an estimated value of $273,161 as a liability. Once the placement agent warrants are issued, the accrual will be reversed with an off-setting charge to additional paid-in-capital.

NOTE O - SUBSEQUENT EVENTS

   On March 15, 2008, Antonio Goncalves, Jr., the Chief Executive Officer of Advance Nanotech, Inc., tendered his resignation to be effective 180 days after the date of such notice. Effective as of April 28, 2008, the Board of Directors of the Company accepted Mr. Goncalves’ resignation from the Company effective as of such date.

On March 14, 2008, Magnus R.E. Gittins, the President and Executive Chairman of the Company, tendered his resignation to be effective 180 days after the date of such notice. On May 2, 2008, the Board of Directors terminated Mr. Gittins employment with the Company pursuant to the terms of his Amended and Restated Employment Agreement with the Company dated August 13, 2007.
 
    Effective as of April 28, 2008, Mr. Peter Rugg was appointed acting Chairman of the Board and Mr. Lee Cole was appointed the acting Principal Executive Officer of the Company.
 
17


 
This report contains certain forward-looking statements of our intentions, hopes, beliefs, expectations, strategies, and predictions with respect to future activities or other future events or conditions within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are usually identified by the use of words such as “believe,” “will,” “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “should,” “could,” or similar expressions. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Item 1A. “Risk Factors” in our Form 10-K for the period ended December 31, 2007 and other sections of this report, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements, express or implied by these forward-looking statements.
 
Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report and any amendments to this report. We will not update these statements unless the securities laws require us to do so. Accordingly, you should not rely on forward-looking statements because they are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

Unless otherwise noted, the terms "Advance Nanotech", the "Company", "we", "us", and "our" refer to the ongoing business operations of Advance Nanotech, Inc. and its subsidiaries, whether conducted through Advance Nanotech or a subsidiary of the company.

Overview and Plan of Operations
 
 Our efforts are principally focused on our most commercialized technology, namely those products developed by Owlstone. Owlstone has developed a chemical detector that has been incorporated into its lead product named Lonestar, which is currently being used in the marketplace. This product was launched in July 2007 and has a growing customer base. Our plan of operations includes a strategic mixture of selling completely integrated products and supplying component parts to original equipment manufacturers. We intend to both partner with market leaders to integrate our technologies into existing commercial applications and partner with contract manufacturers to bring our products direct to market, as is the case with our Lonestar product. We believe that this dual strategy positions us to best achieve the potential for our technologies in the most effective and time-sensitive manner.

Liquidity and Capital Resources 

Cash Flows
 
Our operations have not historically generated positive cash flow. We do not expect that our business activities will begin to generate significant positive cash flows before the fourth quarter of 2008. We currently expect that our capital requirements for the next twelve months will be financed in part through the following:
 
 
·
cash on hand, which was $2,329,970 as of March 31, 2008;
  
·
issuances of up to $3,000,000 of additional debt and/or equity; and
 
·
cash flows from our operations.
 
Sources of Cash

On March 31, 2006, Merrill Lynch extended a line of credit with loans to be secured by collateral. Amounts withdrawn under this facility bear interest at a variable rate of 2.0% over the effective LIBOR rate. This loan management account allows us to pledge a broad range of eligible assets and accounts in various combinations to maximize our borrowing capacity. Collateral may include cash and cash equivalents, debts, claims, securities, entitlements, financial assets, investment property and other property. The amount of borrowings available to us under this facility increases proportionally to the assets pledged as security for the loan. Accordingly, a decline in the value of collateral pledged to secure a loan under this facility could force the sale of the underlying collateral. As of March 31, 2008, we had not used this facility. As of March 31, 2008, we maintained a cash balance of $47 and a security balance of $0 in Merrill Lynch investment accounts. We may cancel this agreement at any time subject to being supported by a collateral account sufficient to support an outstanding loan balance, if any. At March 31, 2008, we had $47 of credit available under this agreement.
 
18


On November 6, 2006, our subsidiary, Advance Display Technologies plc, or ADT, entered into a conditional Facility Agreement with NAB Ventures Limited, or NAB. We entered into the credit facility in part in order to allow the shares of ADT to be listed on the PLUS-quoted in London. NAB has agreed to provide us one or more loans, each called a drawdown, in the aggregate principal amount of up to approximately $7 million (GBP £3.5 million) subject to the terms and conditions set forth in the agreement. As of March 31, 2008, the Company had repaid this facility in full and had $0 outstanding under the agreement. Any outstanding principal amount bears interest per annum at an interest rate of 9.0%. In the event the agreement is not repaid on the maturity date of December 31, 2009, the unpaid principal amount and accrued interest thereon will also bear additional interest at a default rate of 1.5% per month, or 18.0% annum. We may cancel this agreement at any time subject to having no outstanding loan balance. Before each drawdown, there must be a mutual written agreement between us and NAB upon a budget. There are no financial covenants under this agreement. As an inducement to provide the facility under the agreement, NAB received 1,875,000 of ordinary shares of ADT and a warrant to purchase an additional 1,875,000 ordinary shares of ADT at an exercise price per share equal to the share price that ADT’s ordinary shares commenced trading on the PLUS-quoted market, or approximately $1.00 (GBP £0.50). The warrants have a cashless exercise provision. In addition to being the lender under the agreement, NAB also owns 950,000 shares, or 2.7%, of our outstanding common stock. The NAB credit facility has resulted in our recording deferred financing costs, of which $1,401,288 was unamortized as of March 31, 2008. The financing costs resulted from the issuance of 1,875,000 ordinary shares of ADT and a warrant to purchase 1,875,000 additional ordinary shares of ADT. These financings costs are amortized over the 37-month life of the NAB credit facility and will be fully expensed on December 31, 2009.

Debt Obligations

In December 2007, the Company entered into subscription agreements (the “Subscription Agreements”) with selected institutional and accredited investors (the “Investors”) regarding the private placement of up to a maximum of $8,800,000 principal amount of 8% Senior Secured Convertible Notes (the “Notes”). Each Investor who subscribed to the Notes received 50% warrant coverage at $0.30 per share as common stock warrants (the “Warrants”). The private placement was made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 because the transaction complied with the requirements of Rule 506 of Regulation D promulgated under the Securities Act of 1933.
 
In connection with the transactions contemplated by the Subscription Agreements, the Company received gross proceeds of an aggregate of $6,700,000. However, because the Company did not have a sufficient number of authorized shares of its common stock, par value $0.001 par value per share (the “Common Stock”) to allow for conversion of the Notes, and exercise of the Warrants, representing the total amount of proceeds received, the Company issued Notes and Warrants for only that portion of the total proceeds that was allowed given the current capital structure of the Company. As a result, the Company issued Notes in December 2007 with an aggregate principal amount of $3,953,000 and Warrants convertible into 7,906,000 shares of Common Stock. The remainder of the proceeds received during the private placement was placed in escrow pending amendment of the Company’s certificate of incorporation to increase the number of authorized shares of Common Stock from 75,000,000 to 200,000,000. Upon obtaining approval of the charter amendment by the stockholders, on February 15, 2008, the Company issued additional Notes with an aggregate principal amount of $2,747,000 and Warrants convertible into 5,494,000 shares of Common Stock.
 

19


Results of Operations
 
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 
We generated revenues of $670,895 in the three months ended March 31, 2008 compared to $140,178 for the three months ended March 31, 2007, representing an increase of $530,717. Revenues generated were a direct result of our subsidiary, Owlstone, shipping its Tourist, Lonestar and Vapor Generator products along with contracted, instructional and set-up services provided to customers as of March 31, 2008.
 
Research and development costs for the three months ended March 31, 2008 compared to the same three months ended March 31, 2007 were $550,202 and $1,166,781, respectively, representing a decrease of $616,579, or 52.8%. This decrease is attributable to the cancellation or suspension of a significant portion of our project portfolio involving our non-Owlstone subsidiaries. Research and development costs include costs associated with the projects as shown in the table below.
   
THREE MONTHS ENDED MARCH 31
     
Project
 
2008
 
2007
 
Change  From
Prior Year
 
Owlstone Nanotech, Inc. (1)
 
$
550,202
 
$
559,376
 
$
(9,174
)
NanoFED Ltd
   
   
   
 
Bio-Nano Sensium Technologies Ltd
   
   
   
 
Cambridge Nanotechnology Ltd
   
   
252,531
   
(252,531
)
Nano Solutions Ltd
   
   
74,025
   
(74,025
)
Centre of Advanced Photonics & Electronics
   
   
245,338
   
(245,338
)
Advance Nanotech (2)
   
   
35,511
   
(35,511
)
Total
 
$
550,202
 
$
1,166,781
 
$
(616,579
)
 
______________________________________________
(1)
Developing three nanotechnologies
(2)
Management expenses related to projects
 
Our Singular ID technology was not included in the table above because our minority interest in the entity owning the technology was accounted for using the cost method. On December 28, 2007, the Company sold its 8.8% equity interest in Singapore-based Singular ID Pte. Ltd. for $1.19 million.

General and administrative expenses for the three months ended March 31, 2008 compared to the same three months ended March 31, 2007 were $2,236,421 and $1,919,694, respectively, representing an increase of $316,727, or 16.5%. Non-cash related expenses for the period ended March 31, 2008 were approximately $800,000. Non-cash ex