FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-0992908
------ ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
370 17th Street, Suite 3640
Denver, Colorado 80202
(Address of principal executive offices ) (Zip Code)
Issuer's telephone number, including area code: (303) 592-1010
Not applicable
(Former name, former address or former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of February 10, 2003 there were 63,480,580 shares of the registrant's sole
class of common shares outstanding.
Transitional Small Business Disclosure Format Yes No X
--- ---
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Independent Accountants' Report F-2
Condensed Consolidated Balance Sheet - December 31, 2002 F-3
Condensed Consolidated Statements of Operations -
Three months and six months ended
December 31, 2002 and 2001 F-4
Condensed Consolidated Statements of Comprehensive
Loss - Three months and six months ended
December 31, 2002 and 2001 F-5
Condensed Consolidated Statement of Changes in Stockholders'
Equity - Six months ended December 31, 2002 F-6
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2002 and 2001 F-7
Notes to Condensed Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis 1
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 4
Item 2. Changes in Securities 5
Item 4. Controls and Procedures 7
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
CERTIFICATIONS
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
Board of Directors
NanoPierce Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
NanoPierce Technologies, Inc. and subsidiaries as of December 31, 2002, the
related condensed consolidated statements of operations and comprehensive loss
for the three-month and six-month periods ended December 31, 2002 and 2001, the
condensed consolidated statement of changes in shareholders' equity for the
six-month period ended December 31, 2002, and the condensed consolidated
statements of cash flows for the six-month periods ended December 31, 2002 and
2001. These condensed consolidated financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
February 7, 2003
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
December 31, 2002
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 1,143,303
Accounts receivable 12,863
Prepaid expenses 202,436
-------------
Total current assets 1,358,602
-------------
Property and equipment:
Machinery 240,061
Office equipment and furniture 219,023
Leasehold improvements 138,776
-------------
597,860
Less accumulated depreciation (301,191)
-------------
296,669
-------------
Other assets:
Deposits and other 296,198
Intellectual property rights, net of accumulated
amortization of $484,315 515,685
Patent and trademark applications, net of accumulated
amortization of $43,277 283,102
-------------
1,094,985
-------------
Total assets $ 2,750,256
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 359,644
Accrued liabilities 63,922
-------------
Total liabilities - all current 423,566
-------------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity (Note 3):
Preferred stock; $0.0001 par value;
5,000,000 shares authorized:
Series A; no shares issued and outstanding
Series B; maximum of 75,000 shares issuable; no
shares issued and outstanding
Series C; maximum of 700,000 shares issuable; no
shares issued and outstanding
Common stock; $0.0001 par value; 200,000,000 shares authorized
63,398,580 shares issued and outstanding 6,340
Additional paid-in capital 21,078,865
Accumulated other comprehensive income 171,550
Accumulated deficit (18,930,065)
-------------
Total shareholders' equity 2,326,690
-------------
Total liabilities and shareholders' equity $ 2,750,256
=============
See notes to condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Six Months Ended December 31, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Revenues $ 46,580 36,097 105,754 60,163
------------ ----------- ----------- -----------
Operating expenses:
Research and development 145,752 94,896 314,929 202,348
General and administrative 607,905 1,291,106 1,364,656 2,236,010
Selling and marketing 150,633 22,151 306,918 40,142
------------ ----------- ----------- -----------
904,290 1,408,153 1,986,503 2,478,500
------------ ----------- ----------- -----------
Loss from operations ( 857,710) (1,372,056) (1,880,749) (2,418,337)
------------ ----------- ----------- -----------
Other income (expense):
Interest income 2,205 33,178 6,519 83,139
Interest expense - ( 5,923) - ( 5,923)
------------ ----------- ----------- -----------
2,205 27,255 6,519 77,216
------------ ----------- ----------- -----------
Net loss $ ( 855,505) (1,344,801) (1,874,230) (2,341,121)
============ =========== =========== ===========
Net loss per share,
basic and diluted $ ( 0.01) ( 0.02) ( 0.03) ( 0.04)
============ =========== =========== ===========
Weighted average number of common
shares outstanding 60,593,585 55,710,198 59,117,467 55,714,507
============ =========== =========== ===========
See notes to the condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
Three and Six Months Ended December 31, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net loss $ (855,505) (1,344,801) (1,874,230) (2,341,121)
Change in unrealized gain on
securities 47 83 (71) (154)
Change in foreign currency
translation adjustments 25,309 4,937 30,209 43,799
----------- ----------- ----------- -----------
Comprehensive loss $ (830,149) (1,339,781) (1,844,092) (2,297,476)
=========== =========== =========== ===========
See notes to the condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Six Months Ended December 31, 2002
(Unaudited)
Common Stock Additional Accumulated other Total
------------------------- paid-in comprehensive Accumulated shareholders'
Shares Amount capital income deficit equity
------------ ----------- ------------------ ----------------- -------------- -----------
Balances, July 1, 2002 57,637,002 $ 5,764 19,496,447 141,412 (17,055,835) 2,587,788
Common stock issued
for services 14,000 1 9,344 - - 9,345
Common stock and
warrants issued for
cash (net of offering
costs of $75,500) 5,691,190 569 1,569,890 - - 1,570,459
Common stock issued upon
exercise of warrant 56,388 6 (6) - - -
Warrants issued for
services - - 3,190 - - 3,190
Net loss - - - - (1,874,230) (1,874,230)
Other comprehensive
income:
Change in unrealized
gain on securities - - - (71) - (71)
Foreign currency
translation
adjustments - - - 30,209 - 30,209
------------ ----------- ------------------ ----------------- -------------- -----------
Balances,
December 31, 2002 63,398,580 $ 6,340 21,078,865 171,550 (18,930,065) 2,326,690
============ =========== ================== ================= ============== ===========
See notes to condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 2002 and December 2001
(Unaudited)
2002 2001
------------ -----------
Cash flows from operating activities:
Net loss $(1,874,230) (2,341,121)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization expense 66,316 57,698
Depreciation expense 76,265 107,866
Amortization of deferred legal costs - 500,000
Expenses incurred in exchange for
common stock and warrants 12,535 27,360
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 85,200 (12,814)
Increase in prepaid expense (139,950) (52,677)
Decrease (Increase) in deposits and other assets 14,010 (47,372)
Increase in accounts payable and
accrued liabilities 141,591 16,578
Increase in deferred revenue - 48,043
------------ -----------
Total adjustments 255,967 644,682
------------ -----------
Net cash used in operating activities (1,618,263) (1,696,439)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications (56,772) (70,653)
Increase in note receivable - (35,000)
Purchase of property and equipment (20,918) (174,063)
Payments received on notes receivable 170,779 399,590
------------ -----------
Net cash provided by investing activities 93,089 119,874
------------ -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 1,570,459 -
------------ -----------
Net cash provided by financing activities 1,570,459 -
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 4,941 2,490
------------ -----------
Net increase (decrease) in cash and cash equivalents 50,226 (1,574,075)
Cash and cash equivalents, beginning 1,093,077 3,384,536
------------ -----------
Cash and cash equivalents, ending 1,143,303 1,810,461
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - 5,923
============ ===========
See notes to condensed consolidated financial statements.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
1. Business, Organization and Summary of Significant Accounting
Policies:
Presentation of Interim Information:
The accompanying condensed consolidated financial statements include the
accounts of NanoPierce Technologies, Inc., a Nevada corporation (the Company),
its wholly owned subsidiary NanoPierce Connection Systems, Inc., a Nevada
corporation (NCOS) which was incorporated in 2002, and its wholly owned foreign
subsidiaries, NanoPierce Card Technologies GmbH, Hohenbrunn (NCT) and
ExypnoTech, GmbH (EPT), both German subsidiaries, which were incorporated in
2000 and 2002, respectively. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements include all material adjustments,
including all normal and recurring adjustments, considered necessary to present
fairly the financial position and operating results of the Company for the
periods presented. The financial statements and notes are presented as
permitted by Form 10-QSB, and do not contain certain information included in the
Company's last Annual Report on Form 10-KSB for the fiscal year ended June 30,
2002. It is the Company's opinion that when the interim statements are read in
conjunction with the June 30, 2002 Annual Report on Form 10-KSB, the disclosures
are adequate to make the information presented not misleading. Interim results
are not necessarily indicative of results for a full year or any future period.
The Company's financial statements for the six months ended December 31, 2002
have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business. The Company reported a net loss of $1,874,230 for the six months
ended December 31, 2002, and an accumulated deficit of $18,930,065 as of
December 31, 2002. The Company has not recognized any significant revenues from
its PI technology, and expects to incur continued cash outflows. The Company
has also experienced difficulty and uncertainty in meeting its liquidity needs.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
relating to the recoverability and classification of assets or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
To address its current cash flow concerns, the Company issued 5,691,190 shares
of common stock and warrants in exchange for approximately $1.6 million cash
during the quarter ended December 31, 2002 (Note 3). The Company is in
discussions with investment bankers and financial institutions attempting to
raise additional funds to support current and future operations. This includes
attempting to raise additional working capital through the sale of additional
capital stock or through the issuance of debt (Note 4).
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
Currently, the Company does not have a revolving loan agreement with any
financial institution, nor can the Company provide any assurance it will be able
to enter into any such agreement in the future, or be able to raise funds
through a further issuance of debt or equity in the Company. The Company also
believes sales of its products and technology license rights may provide
additional funds to meet the Company's capital requirements.
Business:
The Company is engaged in the design, development and licensing of products
using its intellectual property, the PI Technology. The PI Technology consists
of patents, pending patent applications, patent applications in preparation,
trade secrets, trade names, and trademarks. The PI Technology improves
electrical, thermal and mechanical characteristics of electronic products. The
Company has designated and is commercializing its PI Technology as the
NanoPierce Connection System (NCS(TM)) and has begun to market the PI Technology
to companies in various industries for a wide range of applications.
NCOS business activities are to include licensing, sale and/or manufacturing of
certain electronic products using the NCS(TM) technology. Through December 31,
2002, NCOS activities consisted of research and development and administrative
functions. NCT activities through December 31, 2002 consisted primarily of
providing software development and implementation services, and performing
administrative, research and development, and selling and marketing activities.
EPT engages in the manufacturing of inlay components used in, among other
things, Smart Labels, which is a paper sheet holding a chip-containing module
that is capable of memory storage and/or processing.
Business Risk:
The Company is subject to risks and uncertainties common to technology-based
companies, including rapid technological change, dependence on principle
products and third party technology, new product introductions and other
activities of competitors, dependence on key personnel, and limited operating
history.
International Operations:
The Company's foreign subsidiaries (NCT and EPT) operations are located in
Germany. NCT and EPT transactions are conducted in currencies other than the
U.S. dollar, (the currency into which the subsidiaries' historical financial
statements have been translated) primarily the Euro. As a result, the Company
is exposed to adverse movements in foreign currency exchange rates. In
addition, the Company is subject to risks including adverse developments in the
foreign political and economic environments, trade barriers, managing foreign
operations and potentially adverse tax consequences. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's financial condition or results of operations in the future.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
Loss Per Share:
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
requires dual presentation of basic and diluted earnings or loss per share (EPS)
with a reconciliation of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Loss per share of common stock is computed based on the
average number of common shares outstanding during the period. Stock options
and warrants are not considered in the calculation, as the impact of the
potential common shares (14,003,852 shares at December 31, 2002 and 9,642,661
shares at December 31, 2001) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
2. Note receivable:
During the six months ended December 31, 2002, two notes receivable and related
accrued interest were paid. The Company received $144,709 under a 5%, unsecured
note receivable and $26,070 under an 8%, unsecured note receivable. The Company
received interest totaling $4,262.
3. Stockholders' Equity:
During the six months ended December 31, 2002, the Company issued 14,000 shares
of restricted common stock to third parties in exchange for services valued at
$9,345 based on the quoted market price of the Company's common stock on the
date the services were performed.
During the six months ended December 31, 2002, the Company sold 5,691,190 shares
of restricted common stock along with warrants to purchase 4,616,191 shares of
common stock at exercise prices ranging from $0.30 to $0.60 per share for cash
of $1,570,459 (net of offering costs of $75,500). The common stock was issued at
a discount from the market prices. The warrants are exercisable immediately.
Warrants to purchase 1,176,191 shares of common stock have three-year terms;
warrants to purchase 3,440,000 shares of common stock have five-year terms. All
of the warrants contain cashless exercise provisions. In connection with the
issuance of 1,119,999 shares out of the 5,691,190 shares issued, the Company
extended the expiration dates of existing warrants to purchase 612,500 shares of
common stock, held by the purchasers. The warrants were scheduled to expire from
October 2002 through January 2003, and were extended for a one-year period.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
During the six months ended December 31, 2002, the Company granted stock options
to purchase 450,000 shares of common stock at exercise prices of $0.58 to $0.97
per share to employees and a officer/director of the Company. During the six
months ended December 31, 2001, the Company granted stock options to purchase
540,000 shares of common stock at exercise prices of $0.66 to $0.70 per share to
employees and a officer/director of the Company. The exercise prices of the
options granted in 2002 and 2001 were based upon the quoted market prices of the
Company's common stock on the dates of grant. The stock options expire in the
years 2012 and 2011.
During the six months ended December 31, 2002, the Company issued warrants to
purchase 20,000 shares of common stock at $1.25 per share for services received
from a third party. The warrants expire in 2005. The warrants were valued at
$3,190 using the Black-Scholes pricing model, which was charged to general and
administrative expense.
During the six months ended December 31, 2002, the Company issued 56,388 shares
of common stock upon the cashless exercise of warrants to purchase 105,000
shares of common stock.
In January 2003, the Company sold 75,000 shares of common stock along with
warrants to purchase 75,000 shares of common stock at exercise prices ranging
from $0.30 to $0.36 for $25,000. The warrants are exercisable through 2006 and
contain a cashless exercise provision.
In January 2003, options on 14,476 shares were exercised, (cashless exercise
election) in exchange for 7,000 shares of common stock.
In January 2003, the Company issued a warrant to purchase 450,000 shares of
common stock at $0.60 per share in connection with services to be received from
a third party (Note 4). The warrant expires in 2010. The warrant was valued at
approximately $230,000 using the Black-Scholes pricing model.
In January 2003, warrants to purchase 630,000 shares of common stock at an
exercise price of $2.92 per share expired.
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
4. Commitments and Contingencies:
Licensing Agreements:
The Company and Louis DiFrancesco, the inventor of the PI Technology, were
involved in litigation relating to NanoPierce's ownership of its intellectual
property and the rights as to who should receive royalty payments from licenses,
which were outstanding as of September 3, 1996. In October 2002, the Company
and DiFrancesco signed a settlement agreement enforced by Court Order. The
Court Order declares that the Company owns the entire, exclusive, incontestable
ownership, right, title and interest in the patents. The Court Order further
declares that Mr. DiFrancesco owns the sole, exclusive, and incontestable right
to receive and collect all royalties and other payments from all licenses
outstanding on September 3, 1996. Pursuant to the settlement agreement, Mr.
DiFrancesco was also granted a limited, two-year, non-transferable,
royalty-bearing license with no right to subissue.
Financing Agreement Suit:
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York.
In May 2001, Harvest Court, LLC filed suit against the Company in the Supreme
Court of the State of New York, County of New York. The suit alleges that the
Company breached an October 20, 2000 Stock Purchase Agreement, by not issuing
7,418,895 free trading shares of the Company's common stock in connection with
the reset provisions of the Purchase Agreement due on the second reset date and
approximately 4,545,303 shares due in connection with the third reset date.
Harvest Court, LLC is seeking the delivery of such shares or damages in the
alternative. In August 2001, the Supreme Court of the State of New York, County
of New York issued a preliminary injunction ordering the Company to reserve and
not transfer the shares allegedly due to Harvest Court. The Company has filed
counterclaims seeking various forms of relief against Harvest Court, LLC.
In January 2003, Harvest Court, LLC filed suit against the Company, Mr.
Metzinger and unrelated third parties in the United States District Court for
the Southern District of New York, New York City, New York. The suit alleges
violations of federal securities laws and common law fraud among other claims.
Harvest Court is seeking various forms of relief including compensatory and
punitive damages. The Company is preparing pleadings responsive to the
complaint.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
The Company intends to vigorously prosecute this litigation and does not believe
the outcome of this litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
In September 2001, litigation was filed by Thomson Kernaghan & Co., Ltd. against
the Company and certain officers/directors of the Company seeking damages for
defamation. Thomson Kernaghan & Co., subsequently filed for protection under
Canadian bankruptcy laws. In December 2002, the Company received notice from the
bankruptcy trustee of the Thomson Kernaghan & Co., that it would not pursue the
action and would move for dismissal of the litigation with the court.
Financial Advisory and Placement Agent Agreement:
Effective January 10, 2003, the Company entered into a 12-month financial
advisory and exclusive placement agent agreement with a third party (the
"Placement Agent"). Under the terms of the agreement, the Placement Agent is to
act as financial advisor to the Company and as its exclusive placement agent for
a private placement of equity securities during the twelve-month term of the
agreement. During the term of the agreement, the Company shall be prohibited
from directly or indirectly offering securities, except in connection with (a)
stock-based compensation issued to employees or other participants, as defined,
and (b) the Company's efforts in securing equity financing prior to January 10,
2003.
Compensation to the Placement Agent is to consist of a retainer fee, which
consists of a warrant to purchase up to 450,000 shares of the Company's common
stock, exercisable immediately, with an exercise price of $0.60 per share and a
term of seven years. The warrant provides for a cashless exercise. Compensation
is also to include a $10,000 monthly advisory fee, payable in cash, beginning in
June 2003. In addition, the Placement Agent is to receive a 6% fee based on the
proceeds raised from a successful offering, payable in cash, along with warrants
to purchase shares of the Company's common stock in an amount equal to 10% of
the number of common shares issued in an offering.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2002 and December 31, 2001
(Unaudited)
5. Foreign and Domestic Operations:
The Company's revenues during the three-month and six-month periods ended
December 31, 2002 and 2001 were generated solely in Germany. Operating results
for the three-month and six-month periods ended December 31, 2002 and 2001, by
geographic area, are presented in the table below. There was no significant
amount of transfers between geographic areas.
Three Months Ended Six Months Ended
December 31 December 31
------------------- ---------------
2002 2001 2002 2001
------- ---------- ------- ------
Revenues:
United States $ - - - -
Germany 46,580 36,097 105,754 60,163
------- ---------- ------- ------
Total $46,580 36,097 105,754 60,163
======= ========== ======= ======
Long-lived assets at
December 31, 2002:
United States $1,046,645
Germany 48,811
----------
Total $1,095,456
==========
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this Form 10-QSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties that could cause actual results to
differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. Any forward-looking
statement or statements speak only as of the date on which such statements were
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events.
Therefore, forward-looking statements should not be relied upon as prediction of
actual future results.
The independent auditors' report on the Company's financial statements as of
June 30, 2002, and for each of the years in the two-year period then ended,
includes a "going concern" explanatory paragraph, that describes substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to the factors prompting the explanatory paragraph are discussed
below and also in Note 2 to the Financial Statements.
RESULTS OF OPERATIONS
The Company recognized $105,754 in revenues during the six months ended
December 31, 2002 ($46,580 for the three months ended December 31, 2002)
compared to $60,163 in the six months ended December 31, 2001 ($36,097 for the
three months ended December 31, 2001). Of the $105,754 in revenues, $96,527 was
generated from various software development contracts generated by NanoPierce
Card, the remaining $9,227 was generated from the sale of inlay samples to
potential customers by ExypnoTech. The Company expects to continue to recognize
revenue from software development contracts currently in place and being
developed at this time. In addition, the Company expects to continue to
generate revenues in the future from the preparation of samples for those
potential customers for which it has non-disclosure agreements and cooperation
agreements and from the sale of inlays through ExypnoTech.
The Company recognized $6,519 in interest income during the six months
ended December 31, 2002 ($2,205 during the three months ended December 31, 2002)
compared to $83,139 during the six months ended December 31, 2001 ($33,178
during the three months ended December 31, 2001). The decrease of $76,620 is due
primarily to the use of cash to support operations.
Total operating expenses during the six months ended December 31, 2002 were
$1,986,503 ($904,290 for the three months ended December 31, 2002) compared to
$2,478,500 for the six months ended December 31, 2001 ($1,408,153 for the three
months ended December 31, 2001). The decrease of $491,997 is primarily
attributable to a decrease in general and administrative expenses, as described
below.
General and administrative expenses during the six months ended December
31, 2002 were $1,364,656 ($607,905 for the three months ended December 31, 2002)
compared to $2,236,010 for the six months ended December 31, 2001 ($1,291,106
for the three months ended December 31, 2001). The decrease of $871,354 is
primarily attributable to a $605,968 decrease in legal expenses. Selling and
marketing expenses during the six months ended December 31, 2002 were $306,918
($150,633 for the three months ended December 31, 2002) compared to $40,412
during the six months ended December 31, 2001 ($22,151 for the three months
ended December 31, 2001). The increase of $266,506 was due to an increase in
marketing activities throughout the Company.
1
Research and development expenses during the six months ended December 31, 2002
were $314,929 ($145,752 for the three months ended December 31, 2002) compared
to $202,348 for the six months ended December 31, 2001 ($94,896 for the three
months ended December 31, 2001). The increase of $112,581 was due to an increase
in activities at the Company's subsidiaries in connection with the further
development and expansion of the NCS(TM) technology.
During the six months ended December 31, 2002 the Company recognized a net
loss of $1,874,230 ($855,505 for the three months ended December 31, 2002)
compared to a net loss of $2,341,121 during the six months ended December 31,
2001 ($1,344,801 for the three months ended December 31, 2001). The decrease of
$466,891 is explained by the decrease of $597,751 in operating expenses and an
increase of $45,591 in revenues, offset by a decrease of $76,620 in interest
income.
LIQUIDITY AND FINANCIAL CONDITION
The Company's current operations are not generating positive cash flows.
During the six months ended December 31, 2002, the Company sold 5,691,190 shares
of common stock and granted warrants to purchase 4,616,191 shares of common
stock at exercise prices ranging from $0.30 to $0.50 for $1,570,459 (net of
offering costs of $75,500). The warrants are exercisable through 2007 and
contain a cashless exercise provision. The funds were raised to support
operations.
On January 10, 2003, the Company entered into a 12-month financial advisory
and exclusive placement agent agreement with a third party (the "Placement
Agent"). Under the terms of the agreement, the Placement Agent is to act as the
financial advisor to the Company and as its exclusive placement agent for a
private placement of equity securities during the twelve-month term of the
agreement. In addition, the Company is exploring other financing opportunities
to support continuing operations.
In March 2002, the Company entered into a $2,000,000 Equity Financing. In
April 2002, the Company received the first of two available tranches of
$1,000,000 per tranche and in return issued 800,000 free trading common shares
to the investor. In addition, the Company issued 1,073,000 of its free-trading
common shares, which are being held by an escrow agent for the potential
issuance upon exercise of the warrants issued in connection with the financing.
Such warrants have a term of five years, with an exercise price of $1.45 per
share. The second tranche of $1,000,000 was made available to the Company sixty
days after the take down of the first. The Company declined to take down the
second tranche, due to depressed market conditions, at that time, and possible
dilutive effects on its stock. The second tranche is no longer available to the
Company, pursuant to terms of expiration.
Prior to June 30, 2001, the Company loaned $500,000 to an unrelated third
party, Global Capital Partners, Inc. ("Global") in exchange for a 12% note
receivable due in November 2001. During the six months ended December 31, 2002,
the remaining principal balance of $144,709 and accrued interest on the note of
$3,474 was paid in full.
In April 2002, the Company loaned $50,000 to a representative of the
unrelated third party, which had been assigned the Global note, in exchange for
an unsecured, 8% note receivable due in October 2002. During the six months
ended December 31, 2002, the outstanding balance of the note, $26,858, of which
$788 was accrued interest, was paid in full.
2
During the six months ended December 31, 2002, the Company expanded the
scope of its patent and trademark applications. The intellectual property is
being amortized using the straight-line method over ten years. On December 31,
2002, the Company has net patent and trademark applications costs of $283,102,
compared to $146,265 on December 31, 2001. The increase of $136,837 was due to
the Company's efforts to increase patent and trademark protection overseas.
PLAN OF OPERATIONS
The Company has signed various nondisclosure and cooperation agreements
with companies both overseas and in the United States. The agreements are
applicable to the application of the Company's NCS technology and/or its
WaferPierce method for various products in the smart card/smart label
industries, the LED industry and in the semiconductor industry. Management is
pursuing the development of further similar agreements both nationally and
internationally with additional companies in not only these but other
industries. The Company is also involved in creating samples and testing in
connection with these agreements.
The Company is continuing to look for additional financing through
marketing of its NCS though the pursuit of licensing, joint ventures,
co-manufacturing or other similar arrangements with industry partners. The
failure to secure such a relationship will result in the Company requiring
substantial additional capital and resources to bring its NCS to market. To the
extent the Company's operations are not sufficient to fund the Company's capital
requirements, the Company may enter into a revolving loan agreement with
financial institutions or attempt to raise capital through the sale of
additional capital stock or through the issuance of debt. At the present time
the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurance that it will be able to
enter into any such agreement in the future or be able to raise funds through
the further issuance of debt or equity in the Company. The Company continues to
evaluate additional merger and acquisition opportunities.
3
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
License Agreements
The Company and Louis DiFrancesco, the inventor of the PI Technology were
involved in litigation relating to the Company's ownership of its intellectual
property and the rights as to who should receive royalty payments from licenses,
which were outstanding as of September 3, 1996. On October 8, 2002, the Company
and DiFrancesco signed a settlement agreement enforced by Court Order. The
Court Order, among other things, declares that NanoPierce owns the entire,
exclusive, incontestable ownership, right, title and interest in the Patents.
The Court Order further declares Mr. DiFrancesco owns the sole, exclusive, and
incontestable right, to receive and collect all royalties and other payment from
all licenses outstanding on September 3, 1996. Pursuant to the settlement
agreement, Mr. DiFrancesco was granted a limited two year, non-transferable,
with no right to subissue, royalty-bearing license.
Financing Agreement
In connection with a financing obtained in October 2000, the Company filed
various actions in the Untied States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York.
In May 2001, Harvest Court, LLC filed suit against the Company in the
Supreme Court of the State of New York, County of New York. The suit alleges
that the Company breached an October 20, 2000 Stock Purchase Agreement, by not
issuing reset shares. Harvest Court, LLC is seeking the delivery of such shares
or damages in the alternative. In August 2001, the Supreme Court of the State
of New York, County of New York issued a preliminary injunction ordering the
Company to reserve and not transfer the shares allegedly due to Harvest Court.
The Company has filed counterclaims seeking various forms of relief against
Harvest Court, LLC.
4
In January 2003, Harvest Court, LLC filed suit against the Company, Mr.
Metzinger and unrelated third parties in the United States District Court for
the Southern District of New York, New York City, New York. The suit alleges
violations of federal securities laws and common law fraud among other claims.
Harvest Court is seeking various forms of relief including compensatory and
punitive damages. The Company is preparing pleadings responsive to the
complaint.
In September 2001, a suit was filed by Thomson Kernaghan & Co., Ltd.
against the Company and certain officers/directors of the Company seeking
damages for defamation. Thomson Kernaghan & Co., Ltd., subsequently filed for
protection under Canadian bankruptcy laws. In December 2002, the Company
received notice from the trustee in such proceedings that it would not pursue
the action and would move for dismissal of the litigation.
The Company is also involved in other various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of the matter discussed above and other matters will not
have a material adverse impact either individually or in the aggregate on either
results of operations, financial position or cash flows of the Company.
ITEM 2. CHANGES IN SECURITIES
The Company made the following unregistered sales of its securities from
October 1, 2002 to December 31, 2002.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION PURCHASER
------------ ------------------- ------------- ---------------------------- -------------------------------
10/2/02 Common Stock 50,000 Financing Neptune Investments Group, Ltd.
10/2/02 Warrant 100,000 Financing Neptune Investments Group, Ltd.
10/10/02 Common Stock 220,000 Financing Neptune Investments Group, Ltd.
10/10/02 Warrant 440,000 Financing Neptune Investments Group, Ltd.
10/17/02 Common Stock 83,333 Financing David Weilage
10/17/02 Common Stock 383,333 Financing Martin Ida
10/17/02 Common Stock 383,333 Financing Robert Ida
10/17/02 Warrant 25,000 Financing David Weilage
10/17/02 Warrant 115,000 Financing Martin Ida
10/17/02 Warrant 115,000 Financing Robert Ida
10/28/02 Common Stock 18,796 Cashless Exercise of Warrant John Krupa
10/28/02 Common Stock 18,796 Cashless Exercise of Warrant Mallory Smith
10/28/02 Common Stock 18,796 Cashless Exercise of Warrant Robert Lovell
5
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION PURCHASER
------------ ------------------- ------------- ------------- --------------------------------------
11/18/02 Common Stock 70,000 Financing Patricia Schoebaum
11/18/02 Warrant 70,000 Financing Patricia Schoebaum
11/20/02 Common Stock 50,000 Financing Dennis Ferraro
11/20/02 Common Stock 166,667 Financing Gerald Dooher
11/20/02 Common Stock 50,000 Financing Paul Demott
11/20/02 Common Stock 50,000 Financing Rodney Hock
11/20/02 Common Stock 50,000 Financing Dennis McGuire
11/20/02 Common Stock 83,333 Financing Larry S. Pisciotta
11/20/02 Common Stock 33,333 Financing Vail Valley Emergency Physician Profit
11/20/02 Warrant 50,000 Financing Dennis Ferraro
11/20/02 Warrant 166,667 Financing Gerald Dooher
11/20/02 Warrant 50,000 Financing Paul Demott
11/20/02 Warrant 50,000 Financing Rodney Hock
11/20/02 Warrant 50,000 Financing Dennis McGuire
11/20/02 Warrant 83,333 Financing Larry S. Pisciotta
11/20/02 Warrant 33,333 Financing Vail Valley Emergency Physician Profit
11/21/02 Common Stock 3,750,000 Financing GruneSchild, LLC
11/21/02 Warrant 3,000,000 Financing GruneSchild, LLC
11/26/02 Common Stock 142,858 Financing David Schulze
11/26/02 Warrant 142,858 Financing David Scholze
12/11/02 Common Stock 125,000 Financing John Provazek
12/11/02 Warrant 125,000 Financing John Provazek
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by
the Company in reliance upon Section 4(2) of the Act. All of the individuals
and/or entities listed above that purchased the unregistered securities were all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates, friends, and employees.
All purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
6
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation,
the CEO and CFO have concluded that the Company's current disclosure controls
and procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls subsequent to the date of
their evaluation. There were no significant material weaknesses identified in
the course of such review and evaluation and, therefore, no corrective measures
were taken by the Company.
7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11 Computation of Net Loss Per Share
Exhibit 99.1 Certification of Principal Executive Officer
Exhibit 99.2 Certification of Principal Financial Officer
(b) FORM 8-K
None.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(REGISTRANT)
Date: February 13, 2003 /s/ Paul H. Metzinger
------------------------------------
Paul H. Metzinger, President & CEO
Date: February 13, 2003 /s/ Kristi J. Kampmann
------------------------------------
Kristi J. Kampmann,
Chief Financial Officer
9
CERTIFICATION
-------------
I, Paul H. Metzinger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of NanoPierce
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Paul H. Metzinger
------------------------
Paul H. Metzinger,
Chief Executive Officer & President
CERTIFICATION
-------------
I, Kristi J. Kampmann, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of NanoPierce
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Kristi J. Kampmann
-------------------------
Kristi J. Kampmann,
Chief Financial Officer