NANO MASK, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010, IS BEING FILED SUBSTANTIALLY LATE, ON OR ABOUT DECEMBER 28, 2011. SOME OF THE INFORMATION CONTAINED HEREIN REFERS TO HISTORICAL ACTIVITIES OF THE COMPANY FOR FISCAL 2009. SHAREHOLDER AND INVESTORS ARE ADVISED TO CONSULT THE COMPANY'S MORE RECENT FILINGS OF CURRENT REPORTS ON FORM 8-K AS WELL AS ADDITIONAL PERIODIC REPORTS FOR SUBSEQUENT PERIODS THAT THE COMPANY INTENDS TO FILE AS SOON AS POSSIBLE.

Cautionary Statement Regarding Forward-looking Statements

This report may contain "forward-looking" statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of our management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about us and our business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled "Risk Factors" below as well as those discussed elsewhere in this report.

  Overview                                           12     

We are a healthcare product development and distribution company providing emergency and critical care and infection control products to a variety of market segments within the healthcare industry. We also have been a distributor of a blood clotting device for surgery, trauma and burn wound management.

However, due to our decision in late 2006 to seek FDA clearance for the NanoMask™ and filters as a Class II medical device (as discussed in Item 1), we suspended all sales of this product. In addition, since we have limited financial resources, we have elected to postpone any further development or significant marketing of our products, except for the Nano Silver Technology and Nano Zyme products until adequate resources are available.

Since inception, we have been involved primarily in the development of our technologies, and most recently, the marketing of the various technologies to a limited extent. During this time, revenues have not been adequate to cover operating expenses. Accordingly, we have reported a loss in each of our years of existence. To date, we have funded our operations primarily by way of a series of private equity placements. We acquired the rights to a substantial portion of our intellectual property from our former president and chief executive officer (See Critical Accounting Policies and Estimates, below), which property includes title to the patent on a component of an emergency CPR assistance device, called a dual-filtered vapor isolation valve and the licensing rights to certain other technologies related to environmental masks. Rights pertaining thereto include the right to maintain, sell and improve the devices, and to license those rights.

   Results of Operations   

Revenues: There have been no revenues generated during 2010 and 2009, primarily due to three reasons: 1) the Company's election late in 2006 to suspend sales of the NanoMask™ and related filters until FDA clearance could be obtained which was anticipated as late as July, 2008; 2) the Company's efforts thereafter until March 1, 2010 to develop a new anti-viral, antibacterial and disposable mask; and 3) the Company's marketing efforts after March 1, 2010 to sell its new Nano Zyme and Nano Silver Hospital Products

The Company has remained a product development company until 2011 when sales of new products were begun.

Cost of Sales: Inasmuch as no revenues were generated in 2010 or 2009, cost of sales was not incurred.

Operating Expenses: General and administrative expenditures for 2010 as compared to 2009 increased by approximately $133,000 or 25%, primarily due to increased wages and officer compensation and insurance.

Depreciation and Amortization: No depreciation expense was recognized during 2009. During 2010, $178 was recognized as depreciation expense.

Research and Development (R&D) Costs: Early in 2009, management made a concerted effort to fund basic research and development on a new nano-particle mask including related FDA testing. Expenditures of $80,558 were incurred in 2009. Additional expenditures of $70,050 were incurred in 2010 with Intrinsiq Materials, Ltd., Alfred University and AlvaMed, LLC. If resources are available in the future, the Company intends to bring additional products to market, assuming those products are still viable at the time the resources are available. The significant components of the Company's research and development costs ordinarily include prototype development and materials, governmental filings and laboratory testing.

Liquidity and Capital Resources

We have not been able to generate sufficient net cash inflows from operations to sustain our business efforts as well as to accommodate our growth plans. Cash used by our operating activities for the years ended December 31, 2010 and 2009 was funded primarily by the sale of common stock for cash and from the issuance of short term notes payable. During 2009 the Company issued 2,594,597 units of common shares and warrants to purchase common shares at $.50 per share, exercisable for two years, for total proceeds of $479,000, settlement of $16,930 in expenses incurred by three key officers and the repayment of a $22,989 loan made by a key officer, including $2,989 accrued interest. Also during 2009, the Company issued 1,846,237 common shares and warrants to settle $250,000 of notes payable, plus accrued interest thereon of approximately $35,000. In July 2010, 196,078 shares were issued for the $10,000 cash received from an executive officer. Moreover, throughout 2010 management and board members continued to discuss other alternative financing options, but no definitive proposals or agreements were reached.

                                          13     

Beginning in the third quarter of 2008, the United States has been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, and is also engaged in war, all of which are likely to continue to have far reaching effects on economic activity in the country for an indeterminate period. The effects and probable duration of these conditions and related risks and uncertainties on the Company's ability to obtain financing, success in its marketing efforts and ultimately, profitable operations and positive cash flows, cannot be estimated at this time. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

In 2004, we adopted a stock option and award plan (the "Plan") under which options to acquire our common stock or bonus stock may be granted from time to time to employees, including officers and directors and/or subsidiaries. As of December 31, 2010, 1,479,000 shares of our common stock were issued pursuant to the Plan for the services of various individuals. A balance of 1,021,000 shares remains to be issued under the Plan subject to approval of the Board of Directors or of a Plan administrator.

At the filing date of this report, we do not believe that we currently have sufficient capital to sustain our business efforts for the next twelve months.

Accordingly, we will need to raise additional capital during 2012 to sustain operations. These funds will be required to sustain our development and marketing efforts to sell our Nano Silver Technology and Nano Zyme products. We will then need working capital to maintain our operations once the product sales are initiated. We are also working on minimizing operating expenses, to the extent possible, by reducing overhead costs, salaries, and other consulting and professional fees, in order to conserve our available cash pending sales of the new products mentioned above.

Consequently, our ability to continue as a going concern may be dependent upon the success of our new business plan which, as explained above, includes a) generating sales of the new products noted above, b) continuing efforts to increase our product sales internationally through our broad network of distributors, and c) obtaining additional equity or debt financing. We do not know if such additional capital will be available or available on terms acceptable to us. We do not know if we will sustain operations long enough to generate revenues, to obtain additional equity or debt financing or otherwise execute our long-term business plans. Accordingly, for these and other reasons, in their report on our 2010 financial statements, our auditors expressed substantial doubt as to our ability to continue as a going concern.

Effect of Inflation and Interest Rates

At this time, we do not expect that either inflation or interest rate variations will be among the economic factors likely to have a material effect on our future operations. However, as discussed elsewhere in this report, general economic factors may likely have a significant effect on the demand for the Company's products and its ability to raise funds to conduct it operations.

Critical Accounting Policies and Estimates

Except as follows, we do not employ any critical accounting policies or estimates that are either selected from among available alternatives or require the exercise of significant management judgment to apply or that if changed are likely to materially affect future periods.

Impairment of long-lived assets. Management reviews the carrying value of the Company's inventories, property and equipment and technology assets annually based on its current marketing activities, plans and expectations, and the perceived effects of competitive and other market factors (i.e., lower of cost or market adjustments), such as declines in replacement value and obsolescence and impairment, to determine whether any write-downs should be taken or whether the estimated useful lives should be shortened.

Share-based compensation. Effective January 1, 2009, all compensation to key officers has been awarded in common stock of the Company. Shares issued in 2009 were priced at the closing price on the day that the Board of Directors authorized it. However, effective January 1, 2010, the Board of Directors authorized issuance of its common stock to key officers and directors based on a trailing thirty-day average of its closing prices. The Board of Directors reserves the right to either pay in cash or in restricted common stock at its option.

                                          14     

Fair Value Measurements. The carrying values of prepaid expenses, accounts payable, accrued expenses and short term notes payable generally approximate the respective fair values of these instruments due to their current nature. The Company values its warrants and non cash common stock transactions under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements (ASC 820), which defines fair value and the criteria for its determination.

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.

The Company uses Level 3 inputs to value warrants issued, and Level 1 inputs to value its common stock transactions.

See Note 4, Warrants, in the Notes to the Financial Statements, for additional information regarding fair value measurements.

Off Balance Sheet Arrangements

Not applicable.

Recent Accounting Pronouncements

While there have been FASB pronouncements made effective subsequent to the issuance of these financial statements, none would have required restatement of the financial statements herein nor have they had any significant effect on future financial statements of the Company.