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 March 31, 2003
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 May 14, 2003 there were 64,813,914 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 - March 31, 2003 F-3
Condensed Consolidated Statements of Operations -
Three months and nine months ended
March 31, 2003 and 2002 F-4
Condensed Consolidated Statements of Comprehensive
Loss - Three months and nine months ended
March 31, 2003 and 2002 F-5
Condensed Consolidated Statement of Changes in Stockholders'
Equity - Nine months ended March 31, 2003 F-6
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2003 and 2002 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 5
Item 2. Changes in Securities 6
Item 4. Controls and Procedures 7
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
CERTIFICATION
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 March 31, 2003, the related
condensed consolidated statements of operations and comprehensive loss for the
three-month and nine-month periods ended March 31, 2003 and 2002, the condensed
consolidated statement of changes in shareholders' equity for the nine-month
period ended March 31, 2003, and the condensed consolidated statements of cash
flows for the nine-month periods ended March 31, 2003 and 2002. These interim
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 generally accepted auditing standards, 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 interim 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
May 9, 2003
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
March 31, 2003
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 366,936
Accounts receivable 43,993
Inventory 39,405
Deferred consulting costs and other prepaid expenses 378,696
-------------
Total current assets 829,030
-------------
Property and equipment:
Machinery 222,770
Office equipment and furniture 221,807
Leasehold improvements 138,776
-------------
583,353
Less accumulated depreciation (323,621)
-------------
259,732
-------------
Other assets:
Deposits and other 338,509
Intellectual property rights, net of accumulated
amortization of $509,315 490,685
Patent and trademark applications, net of accumulated
amortization of $55,865 343,625
-------------
1,172,819
-------------
Total assets $ 2,261,581
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 575,573
Accrued liabilities 80,505
-------------
Total liabilities - all current 656,078
-------------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity (Note 4):
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
63,480,580 shares issued and outstanding 6,348
Additional paid-in capital 21,336,657
Accumulated other comprehensive income 180,863
Accumulated deficit (19,918,365)
-------------
Total shareholders' equity 1,605,503
-------------
Total liabilities and shareholders' equity $ 2,261,581
=============
See notes to the condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three and Nine Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Revenues $ 52,999 31,870 158,753 92,033
------------ ----------- ----------- -----------
Operating expenses:
Research and development 157,984 63,884 472,912 266,232
General and administrative 722,468 1,097,037 2,087,126 3,333,047
Selling and marketing 166,160 65,157 473,077 105,299
------------ ----------- ----------- -----------
1,046,612 1,226,078 3,033,115 3,704,578
------------ ----------- ----------- -----------
Loss from operations ( 993,613) (1,194,208) (2,874,362) (3,612,545)
------------ ----------- ----------- -----------
Other income:
Interest income 5,313 17,320 11,832 94,536
------------ ----------- ----------- -----------
Net loss $ ( 988,300) (1,176,888) (2,862,530) (3,518,009)
============ =========== =========== ===========
Net loss per share,
basic and diluted $ ( 0.02) ( 0.02) ( 0.05) ( 0.06)
============ =========== =========== ===========
Weighted average number of common
shares outstanding 63,464,958 55,748,652 60,548,492 55,723,095
============ =========== =========== ===========
See notes to the condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
Three and Nine Months Ended March 31, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---------- ----------- ----------- -----------
Net loss $(988,300) (1,176,888) (2,862,530) (3,518,009)
Change in unrealized gain on
securities (83) 331 (154) 177
Change in foreign currency
translation adjustments 9,396 ( 16,475) 39,605 27,324
---------- ----------- ----------- -----------
Comprehensive loss $(978,987) (1,193,032) (2,823,079) (3,490,508)
========== =========== =========== ===========
See notes to the condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Nine Months Ended March 31, 2003
(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) 5,766,190 576 1,594,883 - - 1,595,459
Common stock issued upon
cashless exercise of
warrants 56,388 6 (6) - - -
Common stock issued upon
cashless exercise of
option 7,000 1 (1) - - -
Warrants issued for
services - - 233,590 - - 233,590
Extension of term of
warrant - - 2,400 - - 2,400
Net loss - - - - (2,862,530) (2,862,530)
Other comprehensive
income:
Change in unrealized
gain on securities - - - (154) - (154)
Change in foreign
currency
translation
adjustments - - - 39,605 - 39,605
------------ ---------- -------------- ------------ -------------- -----------
Balances,
March 31, 2003 63,480,580 $ 6,348 21,336,657 180,863 (19,918,365) 1,605,503
============ ========== ============== ============ ============== ===========
See notes to the condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $(2,862,530) (3,518,009)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization expense 103,905 92,959
Depreciation expense 124,452 171,209
Amortization of deferred legal costs - 750,000
Amortization of deferred consulting costs 50,500 -
Expenses incurred in exchange for
common stock, warrants and options 14,935 132,160
Changes in operating assets and liabilities:
Increase in accounts receivable (34,944) ( 4,665)
Increase in prepaid expenses (42,543) ( 41,664)
Increase in deposits and other assets (54,224) (106,398)
Increase in accounts payable and
accrued liabilities 351,883 48,509
Increase in deferred revenue - 24,181
------------ -----------
Total adjustments 513,964 1,066,291
------------ -----------
Net cash used in operating activities (2,348,566) (2,451,718)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications (129,884) (156,143)
Increase in note receivable - ( 35,000)
Purchases of property and equipment (31,058) (204,909)
Payments received on notes receivable 170,779 559,885
------------ -----------
Net cash provided by investing activities 9,837 163,833
------------ -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 1,595,459 -
------------ -----------
Net cash provided by financing activities 1,595,459 -
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 17,130 28,737
------------ -----------
Net decrease in cash and cash equivalents (726,140) (2,259,148)
Cash and cash equivalents, beginning 1,093,076 3,384,536
------------ -----------
Cash and cash equivalents, ending $ 366,936 1,125,388
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - 3,396
============ ===========
Supplemental disclosure of non-cash investing
and financing activities:
Warrant issued for deferred consulting services $ 230,400 -
See notes to the condensed consolidated financial statements.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(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 financial 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 nine months ended March 31, 2003 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 $2,862,530 for the nine months
ended March 31, 2003, and an accumulated deficit of $19,918,365 as of March 31,
2003. 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. In
addition, in April 2003, NCT filed for insolvency with the Courts of Munich,
Germany (Note 2). 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 5,766,190 shares
of common stock and warrants in exchange for approximately $1.6 million cash
during the nine months ended March 31, 2003 (Note 4). 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 5).
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(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. In addition, the
Company has implemented certain cost reduction plans, including reductions in
personnel at facilities in the United States and Germany.
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 March 31,
2003, NCOS activities consisted of research and development and administrative
functions. NCT activities through March 31, 2003 consisted primarily of
providing software development and implementation services, and performing
administrative, research and development, and selling and marketing activities.
In April 2003, NCT filed insolvency with the Courts of Munich, Germany and is
developing a plan of liquidation (Note 2). 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 principal
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.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
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.
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 (15,984,376 shares at March 31, 2003 and 9,987,661
shares at March 31, 2002) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
2. Subsidiary Insolvency Proceedings:
As a result of continued operating losses and working capital deficiencies, the
Company's wholly-owned subsidiary, NCT, filed insolvency with the Courts of
Munich, Germany, effective April 1, 2003. The insolvency filing was necessary
in order to comply with specific German legal requirements. NCT has been placed
in receivership while a plan of liquidation is developed and submitted to the
Court for its approval.
At March 31, 2003, NCT's assets and liabilities are as follows:
Cash $ 30,692
Receivables 48,971
Other 7,669
-----------
Total current assets 87,332
-----------
Property and equipment, net 20,953
Deposits 11,398
-----------
Total assets $ 119,683
===========
Accounts payable $ 112,767
Accrued liabilities 57,400
-----------
Total liabilities (all current)(1) $ 170,167
===========
(1) Liabilities presented above do not include
intercompany payables of approximately $187,389 at
March 31, 2003.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
During the nine-month periods ended March 31, 2003 and 2002, NCT incurred losses
from operations of approximately $603,270 and $657,830, respectively ($200,045
and $123,946 during the three-month periods ended March 31, 2003 and 2002,
respectively).
3. Note receivable:
During the nine months ended March 31, 2003, 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.
4. Shareholders' Equity:
During the nine months ended March 31, 2003, 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 nine months ended March 31, 2003, the Company sold 5,766,190 shares
of restricted common stock along with warrants to purchase 4,691,191 shares of
common stock at exercise prices ranging from $0.30 to $0.60 per share for cash
of $1,595,459 (net of offering costs of $75,500). The common stock was issued
at a discount from the market price. The warrants are exercisable immediately.
Warrants to purchase 1,251,191 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 5,766,190 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.
During the nine months ended March 31, 2003, 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 director of the Company. During the nine months
ended March 31, 2002, 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 director of the Company. The exercise prices of the options
granted during the nine-month periods ended March 31, 2003 and 2002 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 nine months ended March 31, 2003, 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.
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
During the nine months ended March 31, 2003, the Company issued a warrant to
purchase 450,000 shares of common stock with an exercise price of $0.60 per
share in consideration for deferred consulting services to be received from a
third party (Note 5). The warrant expires in 2010, and is exercisable
immediately. The warrant provides for a cashless exercise and was valued at
approximately $230,400 using the Black-Scholes pricing model. The deferred
consulting cost is being amortized over a twelve-month period from the date of
issuance of the warrant. During the quarter ended March 31, 2003, $50,500 was
expensed.
During the nine months ended March 31, 2003, the Company issued 56,388 shares of
common stock upon the cashless exercise of warrants to purchase 105,000 shares
of common stock.
During the nine months ended March 31, 2003, options on 14,476 shares were
exercised, (cashless exercise election) in exchange for 7,000 shares of common
stock.
During the nine months ended March 31, 2003, the Company extended the term of an
existing warrant, held by an unrelated third party, to purchase 300,000 shares
of common stock at an exercise price of $0.25 per share. The warrant was to
expire on February 24, 2003. The Company agreed to extend the term of the
warrant by one year, through February 24, 2004. All other terms of the warrant
remain unchanged. In connection with the extension of the term of the warrant,
the Company recorded a $2,400 expense, using the Black-Scholes pricing model.
During the nine months ended March 31, 2003, warrants to purchase 630,000 shares
of common stock at an exercise price of $2.92 per share expired.
In April 2003, the Company sold 1,333,334 shares of its restricted common stock,
along with warrants to purchase 1,333,334 shares of common stock at an exercise
price of $0.15 per share for $200,000. The warrant is exercisable through 2008
and contains a cashless exercise provision.
In April 2003, an option to purchase 100,000 shares of the Company's common
stock expired.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
5. 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 sublicense.
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 & Co., 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.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
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.
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., Ltd. subsequently filed for protection
under Canadian bankruptcy laws. In December 2002, the Company received notice
from the bankruptcy trustee of 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 February 15,
2003.
Compensation to the Placement Agent consists of a retainer fee (deferred
consulting costs valued at approximately $230,400), which consists of a warrant
to purchase up to 450,000 shares of the Company's common stock. 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-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2003 and March 31, 2002
(Unaudited)
6. Foreign and Domestic Operations:
The Company's revenues during the three-month and nine-month periods ended March
31, 2003 and 2002 were primarily generated in Germany. Operating results as of
and for the three-month and nine-month periods ended March 31, 2003 and 2002, by
geographic area, are presented in the table below. There was no significant
amount of transfers between geographic areas.
Three Months Ended Nine Months Ended
March 31 March 31
-------- --------
2003 2002 2003 2002
------- ---------- ------- ------
Revenues:
United States $ 1,900 - 1,900 -
Germany 51,099 31,870 156,853 92,033
------- ---------- ------- ------
Total $52,999 31,870 158,753 92,033
======= ========== ======= ======
Long-lived assets at
March 31, 2003:
United States $1,045,393
Germany 48,649
----------
Total $1,094,042
==========
F-15
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 1 to the quarterly Financial Statements.
RESULTS OF OPERATIONS
The Company recognized $158,753 in revenues during the nine months ended
March 31, 2003 ($52,999 for the three months ended March 31, 2003) compared to
$92,033 in the nine months ended March 31, 2002 ($31,870 for the three months
ended March 31, 2002). Of the $158,753 in revenues, $139,651 was generated from
various software development contracts generated by NanoPierce Card, $17,201 was
generated from the sale of inlay samples to potential customers by ExypnoTech
and the remaining $1,900 from services provided by NanoPierce Connections. 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. In addition the Company expects to generate revenues through
NanoPierce Connections work on various small projects within the industry.
The Company recognized $11,832 in interest income during the nine months
ended March 31, 2003 ($5,313 during the three months ended March 31, 2003)
compared to $94,536 during the nine months ended March 31, 2002 ($17,320 during
the three months ended March 31, 2002). The decrease of $82,704 is due primarily
to the use of cash to support operations.
Total operating expenses during the nine months ended March 31, 2003 were
$3,033,115 ($1,046,612 for the three months ended March 31, 2003), compared to
$3,704,578 for the nine months ended March 31, 2002 ($1,226,078 for the three
months ended March 31, 2002). The decrease of $671,463 is primarily attributable
to a decrease in general and administrative expenses, as described below.
General and administrative expenses during the nine months ended March 31,
2003 were $2,087,126 ($722,468 for the three months ended March 31, 2003)
compared to $3,333,047 for the nine months ended March 31, 2002 ($1,097,037 for
the three months ended March 31, 2002).
1
The decrease of $1,245,921 is primarily attributable to a $814,518 decrease in
legal expenses and a $118,521 decrease in investor relation expenses. Selling
and marketing expenses during the nine months ended March 31, 2003 were $473,077
($166,160 for the three months ended March 31, 2003) compared to $105,299 during
the six months ended March 31, 2002 ($65,157 for the three months ended March
31, 2002). The increase of $367,778 was due to an increase in marketing
activities throughout the Company. Research and development expenses during the
nine months ended March 31, 2003 were $472,912 ($157,984 for the three months
ended March 31, 2003) compared to $266,232 for the nine months ended March 31,
2002 ($63,884 for the three months ended March 31, 2002). The increase of
$206,680 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 nine months ended March 31, 2003 the Company recognized a net
loss of $2,862,530 ($988,300 for the three months ended March 31, 2003) compared
to a net loss of $3,518,009 during the nine months ended March 31, 2002
($1,176,888 for the three months ended March 31, 2002). The decrease of $655,479
is explained by the decrease of $671,463 in operating expenses and an increase
of $66,720 in revenues, offset by a decrease of $82,704 in interest income.
LIQUIDITY AND FINANCIAL CONDITION
The Company's current operations are not generating positive cash flows.
During the nine months ended March 31, 2003, the Company sold 5,766,190 shares
of common stock and granted warrants to purchase 4,691,191 shares of common
stock at exercise prices ranging from $0.30 to $0.50 for $1,595,459 (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.
As a result of continued operational losses and working capital
deficiencies and in order to comply with specific German legal requirements, in
April 2003, the Company's wholly owned subsidiary NanoPierce Card Technologies,
Gmbh (NCT) filed for insolvency with the Courts of Munich, Germany. NCT has been
placed in receivership while a plan of liquidation is developed.
During the nine months ended March 31, 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 January 2003, the Company entered into a Cooperation Agreement (the
"Avery Agreement") with Avery Dennison Corporation to explore the application of
WaferPierce(TM) and NCS(TM) in the production of reliable low-cost RFID labels.
The Avery Agreement called for a three-phase project that will explore a variety
of approaches to producing smart labels. In May 2003, the Company received
notice of Avery Dennison Corporation's decision to terminate the Avery
Agreement.
2
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 nine months ended March 31, 2003,
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 nine months
ended March 31, 2003, the outstanding balance of the note, $26,858, of which
$788 was accrued interest, was paid in full.
During the nine months ended March 31, 2003, 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 March 31, 2003, the
Company has net patent and trademark applications costs of $343,625, compared to
$221,494 on March 31, 2002. The increase of $122,131 was primarily 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(TM) technology and/or its
WaferPierce(TM) 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(TM) technology through 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 technology 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.
3
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.
4
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 sublicense, royalty-bearing license.
Financing Agreement
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 & Co., 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.
5
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
January 1, 2003 to March 31, 2003.
DATE OF TITLE OF NO. OF
SALE SECURITIES SHARES CONSIDERATION PURCHASER
------- ------------ ------- ------------- ---------
1/10/03 Common Stock 41,667 Financing John Krupa
1/10/03 Warrant 41,667 Financing John Krupa
1/10/03 Common Stock 33,333 Financing William Fritz
1/10/03 Warrant 33,333 Financing William Fritz
Gerard, Klauer,
1/10/03 Warrant 450,000 Services Mattison
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.
6
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.
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 Section 1350 Certification
(B) FORM 8-K
April 1, 2003 - Regarding the filing of insolvency by
NanoPierce Card Technologies, Gmbh
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: May 14, 2003 /s/ Paul H. Metzinger
------------------------------------
Paul H. Metzinger, President & CEO
Date: May 14, 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 may 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: May 14, 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 may 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: May 14, 2003
/s/ Kristi J. Kampmann
-----------------------------------
Kristi J. Kampmann,
Chief Financial Officer