FORM 10-QSB
UNITED STATES 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, 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 February 16, 2004 there were 86,058,435 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-1
Condensed Consolidated Balance Sheet -December 31, 2003 F-2
Condensed Consolidated Statements of Operations -
Six and three months ended
December 31, 2003 and 2002 F-3
Condensed Consolidated Statements of Comprehensive
Loss - Six and three months ended
December 31, 2003 and 2002 F-4
Condensed Consolidated Statement of Changes in Shareholders'
Equity -Six months ended December 31, 2003 F-5
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2003 and 2002 F-6
Notes to Condensed Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis 1
Item 3. Controls and Procedures 5
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 5
SIGNATURES 6
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, 2003, the
related condensed consolidated statements of operations and comprehensive loss
for the three-month and six-month periods ended December 31, 2003 and 2002, the
condensed consolidated statement of changes in shareholders' equity for the
six-month period ended December 31, 2003, and the condensed consolidated
statements of cash flows for the six-month periods ended December 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 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
February 13, 2004
F-1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
December 31, 2003
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 26,111
Prepaid expenses 6,785
Assets of discontinued operations (Note 2) 3,501
-------------
Total current assets 36,397
-------------
Property and equipment:
Office equipment and furniture 66,356
Leasehold improvements 138,776
-------------
205,132
Less accumulated depreciation (177,190)
-------------
27,942
-------------
Other assets:
Deposits and other 13,518
Intellectual property rights, net of accumulated
amortization of $584,315 215,685
Patent and trademark applications, net of accumulated
amortization of $110,652 446,165
Investments in affiliates (Notes 4 and 5) 381,051
-------------
1,056,419
-------------
Total assets $ 1,120,758
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 526,892
Accrued liabilities 12,843
Notes payable, related parties (Note 6) 175,000
Liabilities of discontinued operations (Note 2) 374,361
-------------
Total liabilities (all current) 1,089,096
-------------
Commitments and contingencies (Notes 5, 8 and 10)
Shareholders' equity (Note 7):
Preferred stock; $0.0001 par value; none issued and outstanding;
5,000,000 shares authorized
Common stock; $0.0001 par value; 200,000,000 shares authorized
66,023,969 shares issued and outstanding 6,602
Additional paid-in capital 21,671,345
Accumulated other comprehensive income 184,233
Accumulated deficit (21,830,518)
-------------
Total shareholders' equity 31,662
-------------
Total liabilities and shareholders' equity $ 1,120,758
=============
See notes to condensed consolidated financial statements.
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 3,398 9,227 28,449 9,227
------------ ------------ ------------ ------------
Operating expenses:
Research and development 6,398 92,876 53,053 184,787
General and administrative 284,055 535,259 694,338 1,165,981
Selling and marketing 15,529 67,458 39,709 134,411
------------ ------------ ------------ ------------
305,982 695,593 787,100 1,485,179
------------ ------------ ------------ ------------
Loss from operations ( 302,584) ( 686,366) ( 758,651) ( 1,475,952)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 4,781 1,368 8,199 4,948
Equity losses of affiliates ( 19,833) ( 19,833)
Interest expense ( 2,493) 0 ( 2,790) -
------------ ------------ ------------ ------------
( 17,545) 1,368 ( 14,424) 4,948
------------ ------------ ------------ ------------
Loss from continuing operations ( 320,129) ( 684,998) ( 773,075) ( 1,471,004)
------------ ------------ ------------ ------------
Discontinued operations, income (loss)
from operations of subsidiary 18,097 (170,507) 16,177 ( 403,226)
------------ ------------ ------------ ------------
Net loss $( 302,032) ( 855,505) ( 756,898) ( 1,874,230)
============ ============ ============ ============
Basic and diluted loss per share:
Loss from continuing operations ( *) ( 0.01) ( 0.01) ( 0.02)
------------ ------------ ------------ ------------
Loss from discontinued operations ( *) ( -) ( -) ( 0.01)
------------ ------------ ------------ ------------
Net loss per share, basic and diluted $( *) ( 0.01) ( 0.01) ( 0.03)
============ ============ ============ ============
Weighted average number of common
shares outstanding 66,023,929 60,593,585 65,912,263 59,117,467
============ ============ ============ ============
* Less than $(0.01) per share.
See notes to condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 31, December 31,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss $( 302,032) ( 855,505) ( 756,898) ( 1,874,230)
Change in unrealized gain on
Securities - 47 ( 119) ( 71)
Change in foreign currency
translation adjustments ( 3,928) 25,309 ( 5,738) 30,209
------------ ------------ ------------ ------------
Comprehensive loss $( 305,960) ( 830,149) ( 762,755) ( 1,844,092)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Six Months Ended December 31, 2003
(Unaudited)
Common Stock Additional Accumulated other Total
------------------------- paid-in comprehensive Accumulated shareholders'
Shares Amount capital income deficit equity
------------ ----------- ------------- ----------------- ------------ -------------
Balances, July 1, 2003 65,054,738 $ 6,505 21,567,807 190,090 (21,073,620) 690,782
Common stock issued
for cash 769,231 77 99,923 - - 100,000
Common stock issued
in satisfaction of
payable 200,000 20 3,615 - - 3,635
Net loss - - - - (756,898) (756,898)
Other comprehensive
Income (loss):
Change in unrealized
gain on securities - - - (119) - (119)
Foreign currency
translation
adjustments - - - (5,738) - (5,738)
------------ ----------- ------------- ----------------- ------------ -------------
Balances,
December 31, 2003 66,023,969 $ 6,602 21,671,345 184,233 (21,830,518) 31,662
============ =========== ============= ================= ============ =============
See notes to condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 2003 and 2002
(Unaudited)
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $( 756,898) (1,874,230)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
Loss (income) from discontinued operations ( 16,177) 403,226
Amortization expense 82,775 66,316
Depreciation expense 17,485 70,819
Equity losses of affiliates 19,833
Amortization of deferred consulting costs 116,147 -
Stock-based compensation expense - 12,535
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,000 (90,929)
Decrease (increase) in prepaid expense 45,275 (55,529)
Decrease in deposits and other assets 7,295 9,309
Increase in accounts payable and
accrued liabilities 90,986 177,252
------------ -----------
Total adjustments 365,619 592,999
------------ -----------
Net cash used in operating activities
from continuing operations ( 391,279) (1,281,231)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications ( 47,654) ( 56,772)
Purchases of property and equipment ( 1,575) ( 13,003)
Payments received on notes receivable - 170,779
Cash effect of ExypnoTech deconsolidation ( 115,151) -
------------ -----------
Net cash (used in) provided by investing activities
from continuing operations ( 164,380) 101,004
------------ -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 100,000 1,570,459
Proceeds from notes payable 165,000 -
------------ -----------
Net cash provided by financing activities
from continuing operations 265,000 1,570,459
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 123,023 4,937
------------ -----------
Net cash used in discontinued operations ( 6,992) ( 2,239)
------------ -----------
Net (decrease) increase in cash and cash equivalents (174,628) 392,930
Cash and cash equivalents, beginning 200,739 679,209
------------ -----------
Cash and cash equivalents, ending $ 26,111 1,072,139
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - 5,923
============ ===========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock in satisfaction of payable $ 3,635 -
============ ===========
See notes to condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 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), its wholly-owned foreign subsidiary, NanoPierce Card
Technologies GmbH, Hohenbrunn (NCT), and ExypnoTech, GmbH (EPT, formed in
February 2002) through December 11, 2003 (Note 4). During the fiscal year ended
June 30, 2003, NCT effectively discontinued its operations (Note 2). 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,
2003. It is the Company's opinion that when the interim statements are read in
conjunction with the June 30, 2003 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, 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 $756,898 for the six months
ended December 31, 2003, and an accumulated deficit of $21,830,518 as of
December 31, 2003. The Company has not recognized any significant revenues from
its PI technology, the Company's subsidiary NCT is under a plan of
self-liquidation and in December 2003, the Company sold a controlling 51%
interest in EPT.
In January 2004, the Company entered into an equity financing agreement, of
which the Company received $2 million upon the issuance of restricted common
stock(Note 10). The Company intends to use these funds to support operations and
for possible business acquisitions.
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.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
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 ) 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 the licensing, sale and/or manufacturing
of certain electronic products using the NCS technology. Through December 31,
2003, NCOS activities have primarily consisted of research and development,
marketing and administrative functions. Prior to discontinuing operations, NCT
activities consisted primarily of providing software development and
implementation services, and performing administrative, research and
development, and selling and marketing activities. Through December 31, 2003,
EPT activities have primarily consisted of manufacturing 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.
Scimaxx Solutions activities primarily represent research and development and
marketing functions.
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:
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-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(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 14,695,210 shares at December 31, 2003 and 14,003,852
shares at December 31, 2002) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
Stock Based Compensation:
SFAS No. 123, Accounting for Stock Based Compensation, allows companies to
choose whether to account for employee stock-based compensation on a fair value
method, or to continue accounting for such compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has chosen to
continue to account for employee stock-based compensation using APB 25.
Had compensation cost for the Company's stock plans been determined based on
fair value at the grant dates for awards under the plans consistent with the
method prescribed under SFAS No. 123, the Company's net loss and net loss per
share for the six months ended December 31, 2003 and 2002, respectively, would
have changed to the pro forma amounts indicated below:
December 31, December 31,
2003 2002
-------------- -------------
Net loss, as reported $ ( 756,898) ( 1,874,230)
Total stock-based employee compensation
expense determined under fair value
based method for all awards - ( 58,000)
-------------- -------------
Net loss, pro forma $ ( 756,898) ( 1,932,230)
============== =============
Net loss per share as reported $ ( 0.01) ( 0.03)
Net loss per share pro forma $ ( 0.01) ( 0.03)
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
The fair value of options granted during the six months ended December 31, 2002
(Note 7) was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Expected dividend yield 0%
Expected stock price volatility 105%
Risk-free interest rate 2.9%
Expected life of options 6.5 years
No options were granted during the six months ended December 31, 2003.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued SFAS
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"),
which changes the criteria by which one company includes another entity in its
consolidated financial statements. FIN 46 requires a variable interest entity
("VIE") to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual returns or both. In
December 2003, the FASB approved a partial deferral of FIN 46 along with various
other amendments. The effective date of this interpretation has been extended
until the first fiscal period ending after December 15, 2003.
2. Discontinued Operations:
-----------------------------
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany. The
insolvency filing was necessary in order to comply with specific German legal
requirements. In conjunction with the insolvency filing, management made a
decision in April 2003 to discontinue operations at NCT and liquidate NCT,
either though the German courts or through a self-liquidation. In September
2003, the German courts rejected the application for insolvency; therefore NCT
implemented a plan of self-liquidation as provided by German law. The Company
anticipates that liquidation will be completed by June 30, 2004.
At December 31, 2003, NCT's remaining asset is cash of $3,501, and its
liabilities consist of accounts payable of $374,361 (excluding intercompany
payables of approximately $179,495).
NCT's revenues for the six months ended December 31, 2003 and 2002 reported in
discontinued operations were $0 and $96,527, respectively. NCT recorded income
for the six months ended December 31, 2003 of $16,177, which was due to gains
recognized from the sale of equipment and the extinguishment of certain accrued
expenses. NCT recorded a loss for the six months ended December 31, 2002 of
$403,226. NCT did not incur any income taxes during these periods.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
3. Notes receivable:
----------------------
During the six months ended December 31, 2002, two notes receivable were paid.
The Company received $144,709 under a 5%, unsecured note receivable and $26,070
under an 8%, unsecured note receivable.
4. Investment in EPT:
------------------------
On December 11, 2003, an unrelated German entity agreed to purchase a
controlling 51% equity interest in EPT in exchange for $98,000, of which $62,787
was received as of December 31, 2003. As a result of the Company's reduced
ownership interest and loss of control of EPT, the Company deconsolidated EPT as
of December 11, 2003, and began accounting for its investment in EPT under the
equity method of accounting at that time. Under the equity method of
accounting, the carrying amount of the Company's investment in EPT ($270,876 at
December 31, 2003) is adjusted to recognize the Company's proportionate share of
EPT's income (loss) each period. Equity losses of EPT for the period from
December 11, 2003 through December 31, 2003 were not material.
Unaudited condensed financial information of EPT as of December 31, 2003, and
for the six month periods ended December 31, 2003 and 2002 are as follows:
Assets:
Current assets $153,988
Other 352,837
--------
Total assets $506,825
========
Liabilities and members' equity:
Current liabilities $173,163
Members' equity 333,662
--------
Total liabilities and members' equity $506,825
========
Three Months Ended
December 31,
------------------------
2003 2002
----------- -----------
Revenues $ 28,449 $ 9,227
Costs and expenses (158,882) (199,906)
----------- -----------
Net loss $ (130,433) $ (190,679)
=========== ===========
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
Pro forma results of operations for the six months ended December 31, 2003 and
2002, assuming the deconsolidation of EPT occurred as of July 1, 2003 and 2002,
are as follows:
2003 2002
------------ -------------
Revenues $ - $ -
Operating expenses $( 138,347) $( 1,271,098)
Net loss $( 756,898) $( 1,874,230)
5. Investment in Joint Venture Interest:
------------------------------------------
On September 15, 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC, an entity related to the Company in that a member of Scimaxx, LLC
is an officer/director of the Company. The name of the joint venture is Scimaxx
Solutions, LLC. (Scimaxx Solutions, a Colorado Limited liability Company formed
in September 2003). The purpose of the joint venture is to provide the
electronics industry with technical solutions to manufacturing problems based on
the need for electrical connectivity.
The Company received a 50% interest in the joint venture in exchange for a
contribution of NCOS equipment with a carrying value of approximately $132,000
at September 15, 2003. The Company also granted Scimaxx Solutions a ten-year,
non-exclusive, non-royalty bearing worldwide license to use the Company's
intellectual property. Scimaxx, LLC is to invest $50,000 cash, of which $22,900
has been received as of December 31, 2003. The terms of the joint venture
provide for the Company to share in 50% of joint venture net profits, if any.
The Company is to share in 50% of joint venture net losses beyond the first
$50,000. The Company has a 49% voting interest in the joint venture. The Company
has determined that Scimaxx, LLC is the controlling financial interest holder at
December 31, 2003, and therefore the Company is accounting for its investment in
Scimaxx Solutions as an equity method investment. At December 31, 2003, Scimaxx
Solutions' assets consist of cash of $3,300 and machinery and equipment of
approximately $111,000; liabilities consist of $600 of accounts payable. Through
the six months ended December 31, 2003, Scimaxx Solutions recognized no revenue
and a loss of $42,733; $22,900 of which was allocated to Scimaxx, LLC.
6. Notes Payable - Related Parties:
----------------------------------------
In June 2003, an officer/director of the Company loaned $10,000 to the Company
in exchange for an unsecured, 7% promissory note due in December 2003. In
September 2003, the same officer/director loaned the Company an additional
$30,000 in exchange for an unsecured, 7% promissory note, due in September 2004.
In January 2004, the Company paid the $40,000 plus accrued interest of $1,247.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
In September 2003, Intercell International Corporation ("Intercell"), an
affiliate of the Company at the time, loaned the Company $35,000 in exchange for
an unsecured, 7% promissory note due in September 2004. In November 2003,
Intercell loaned the Company $100,000 in exchange for a 7% promissory note due
in November 2004. This promissory note was collateralized by an assignment of a
51% interest in the proceeds, if any, the Company may receive in connection with
the Financing Agreement litigation (Note 8). In January 2004, the Company paid
the $135,000, plus accrued interest of $2,493.
7. Shareholders' Equity:
--------------------------
During the six months ended December 31, 2003, the Company sold 769,231 shares
of restricted common stock for cash of $100,000. The Company also issued
200,000 shares of restricted common stock in satisfaction of a $3,635 payable.
During the six months ended December 31, 2003, warrants to purchase 592,500
shares of common stock with exercise price ranging from $0.30 to $2.81 per share
expired.
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 director of the Company.
In January and February 2004, warrants to purchase 136,666 shares of common
stock were exercised (cashless exercise election) in exchange for 34,466 shares
of common stock.
8. Commitments and Contingencies:
------------------------------------
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, which
expired in January 2004. Under the terms of the agreement, this placement agent
served 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.
Compensation to this placement agent consisted of a retainer fee (deferred
consulting costs) valued at approximately $230,400, which included a warrant to
purchase up to 450,000 shares of the Company's common stock. The cost of the
warrant has been amortized over the twelve-month period from the date of
issuance of the warrant. During the six months ended December 31, 2003,
$116,147 was expensed in connection with the warrant. Compensation also includes
a $10,000 monthly advisory fee, payable in cash, beginning in June 2003, of
which $60,000 has been expensed though December 31, 2003.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
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 July 2003,
Harvest Court, LLC filed suit against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw 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 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.
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.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
9. Foreign and Domestic Operations:
---------------------------------------
The Company's revenues from continuing operations during the six-month periods
ended December 31, 2003 and 2002 were generated solely in Germany. There was no
significant amount of transfers between geographic areas. Long-lived assets at
December 31, 2003 of $689,792 were located solely in the United States.
10. Subsequent Event:
-----------------------
Effective January 12, 2004, the Company entered into a Placement Agent Agreement
with a third party (the "Placement Agent") in connection with a proposed sale of
the Company's restricted common stock to a number of accredited investors in a
private placement transaction exempt from registration pursuant to Section 4(2)
of the 1933 Act and Rule 506 of Regulation D of the Securities Act of 1933.
On January 20, 2004 (the "Closing Date"), the Company sold a total of 20,000,000
units at $0.10 per unit for an aggregate of $2,000,000 pursuant to a Securities
Purchase Agreement (the "Securities Purchase Agreement"). For each unit
purchased, the investors received (i) one share of the Company's common stock,
(ii) a warrant to purchase one share of common stock at an exercise price of
$0.10 per share ("the $0.10 warrants") and (iii) an additional warrant to
purchase two shares of common stock at an exercise price of $0.25 per share (the
"$0.25 warrants"). The $0.10 warrants and the $0.25 warrants expire on January
20, 2009.
On the Closing Date, the Placement Agent received a fee consisting of a cash
payment equal to 3% of the gross proceeds from the transaction ($60,000) and
warrants to purchase 3% of the total number of shares of common stock issued to
the investors on the Closing Date. The warrants have an exercise price of $0.10
per share and expire on January 20, 2009. The Placement Agent is also entitled
to receive an additional cash payment equal to 3% of the gross proceeds, if any,
received by the Company as a result of the exercise of the $0.10 warrants and
additional warrants to purchase 3% of the total number of shares issued as a
result of the exercise of the $0.10 warrants. The additional warrants have an
exercise price of $0.10 per share and expire on January 20, 2009, unless
exercised earlier.
F-15
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Six Months Ended December 31, 2003 and December 31, 2002
(Unaudited)
An unrelated third party ("the "Finder") received a fee for the introduction of
the Company to the Placement Agent and the investors and for consulting
services. The fee consisted of a cash payment equal to 10% of the gross
proceeds from the transaction ($200,000) and warrants to purchase 10% of the
total number of shares of common stock issued to the investors on the Closing
Date (warrants to purchase 2,000,000 shares). The warrants have an exercise
price of $0.10 per share and expire on January 20, 2009. The Finder is also
entitled to receive an additional cash payment of 10% of the gross proceeds, if
any, received by the Company as a result of the exercise of the $0.10 warrants
by the investors and additional warrants to purchase 10% of the total number of
shares, if any, issued as a result of the exercise of the $0.10 warrants. The
additional warrants have an exercise price of $0.10 per share and expire on
January 20, 2009.
The Securities Purchase Agreement requires the Company to file within 45 days of
the Closing Date a registration statement with the Securities and Exchange
Commission registering (i) the shares of common stock sold, (ii) the shares of
common stock issuable upon exercise of the warrants and (iii) if any shares of
common stock issued as a dividend or other distribution with respect to or in
replacement of the common stock. If the registration statement is not filed
within 45 days of the Closing Date, the Company is to pay the Investor, as
liquidated damages, 1% of the purchase price of the units for every 30 calendar
day period that the Registration Statement is not filed.
If all of the warrants issued to the investors, the Placement Agent and the
Finder are exercised, the Company will be required to issue an additional
85,200,000 shares of common stock, and the Company, on a fully diluted basis
(including the reservation of 11,919,120 shares as required by the court in the
Financing Agreement Litigation (Note 8)), will have 179,524,864 shares of common
stock issued and outstanding.
F-16
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, 2003, 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
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany.
The insolvency filing was necessary, in the view of the Company, in order to
comply with specific German legal requirements. NCT is presented as
discontinued operations in the Company's consolidated financial statements.
During the six months ended December 31, 2003, NCT recognized net income of
$16,177 compared to losses of $403,226 during the six months ended December 31,
2002. In September 2003, the court rejected the application for insolvency, and
the Company is now under self-liquidation in accordance with German law. In
compliance with the self-liquidation, NCT sold its fixed assets to an unrelated
third-party in December 2003.
The Company recognized $28,449 in revenues from continuing operations
during the six months ended December 31, 2003 ($3,398 for the three months ended
December 31, 2003). The $28,449 in revenues was generated from the sale of
inlay components to customers by ExypnoTech. The Company expects to continue to
generate revenues in the future from the preparation of inlays for those
customers for which it has non-disclosure agreements and cooperation agreements
and from the sale of inlays through ExypnoTech.
The Company recognized $8,199 in interest income during the six months
ended December 31, 2003 compared to $4,948 during the six months ended December
31, 2002.
Total operating expenses from continuing operations during the six months
ended December 31, 2003 were $787,100 compared to $1,485,179 for the six months
ended December 31, 2002 ($305,982 compared to $695,593 for the three months
ended December 31, 2003 and 2002, respectively). The decrease of $698,079 is
primarily attributable to a decrease in general and administrative expenses, as
described below.
1
General and administrative expenses during the six months ended December
31, 2003 were $694,338 compared to $1,165,981 for the six months ended December
31, 2002 ($284,055 compared to $535,259 for the three months ended December 31,
2003 and 2002, respectively). The decrease of $471,643 is primarily
attributable to a $279,231 decrease in payroll expenses and a $141,365 decrease
in legal expenses. Selling and marketing expenses during the six months ended
December 31, 2003 were $39,709 compared to $134,411 during the six months ended
December 31, 2002 ($15,529 and $67,458 for the three months ended December 31,
2003 and 2002, respectively). The decrease of $94,702 was due to a decrease in
marketing activities throughout the Company. Research and development expenses
during the six months ended December 31, 2003 were $53,053 compared to $184,787
for the six months ended December 31, 2002 ($6,398 and $92,876 for the three
months ended December 31, 2003 and 2002). The decrease of $131,734 was due to a
decrease in activities at the Company's subsidiaries in connection with the
further development and expansion of the NCS technology.
During the six months ended December 31, 2003, the Company recognized a net
loss of $756,898 compared to a net loss of $1,874,230 during the six months
ended December 31, 2002 ($302,032 and $855,505 during the three months ended
December 31, 2003 and 2002, respectively). The decrease of $1,117,332 is
primarily attributable to the decrease of $683,795 in operating expenses and
income from discontinued operations during the six month period ended December
31, 2003 versus a loss from discontinued operations of $403,226 in 2002.
LIQUIDITY AND FINANCIAL CONDITION
The Company's continuing operations are not generating positive cash flows.
During the six months ended December 31, 2003, the Company sold 769,231 shares
of common stock for $100,000. The funds were raised to support operations.
As a result of continued operating 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. In September 2003, the
German courts rejected the application for insolvency; therefore NCT implemented
a plan of self-liquidation as provided by German law. The Company anticipates
that liquidation will be completed by June 30, 2004.
Effective January 12, 2004, the Company entered into a Placement Agent
Agreement in connection with a proposed sale of the Company's restricted common
stock to a number of accredited investors in a private placement transaction
exempt from registration pursuant to Section 4(2) of the 1933 Act and Rule 506
of Regulation D of the Securities Act of 1933.
2
On January 26, 2004 ("Closing Date"), the Company sold a total of
20,000,000 units at $0.10 per unit for an aggregate of $2,000,000, pursuant to a
Securities Purchase Agreement dated as of the Closing Date (the "Securities
Purchase Agreement"). For each unit purchased, the Investors received (i) one
share of the Company's common stock, par value $.0001 per share, (ii) a warrant
to purchase one share of common stock at an exercise price of $0.10 per share
("the $0.10 warrants") and (iii) an additional warrant to purchase two shares of
common stock at an exercise price of $0.25 per share (the "$0.25 warrants").
The $0.10 warrants and the $0.25 warrants expire on January 20, 2009 unless
exercised earlier.
On the Closing Date, the Placement Agent received a fee consisting of a
cash payment equal to 3% ($60,000) of Gross Proceeds from the Transaction and
warrants to purchase 3% of the total number of shares of Common Stock issued to
the Investors on the Closing Date. The warrants have an exercise price of $0.10
per share and expire on January 20, 2009 unless exercised earlier. The
Placement Agent is also entitled to receive an additional cash payment equal to
3% of the gross proceeds, if any, received by the Company as a result of the
exercise of the $0.10 warrants and additional warrants to purchase 3% of the
total number of shares issued as a result of the exercise of the $0.10 warrants.
The additional warrants have an exercise price of $0.10 per share and expire on
January 20, 2009.
An unrelated third party ("the Finder") received a fee for the introduction
of the Company to the Placement Agent and the purchasers and for various
consulting work done on behalf of the Company. The fee consisted of a cash
payment equal to 10% of the gross proceeds from the Transaction and warrants to
purchase 10% of the total number of shares of common stock issued to the
investors on the Closing Date. The warrants have an exercise price of $0.10 per
share and expire on January 20, 2009 unless exercised earlier. The Finder is
also entitled to receive an additional cash payment of 10% of the gross
proceeds, if any, received by the Company as a result of the exercise of the
$0.10 warrants by the investors and additional warrants to purchase 10% of the
total number of shares, if any, issued as a result of the exercise of the $0.10
warrants. The additional warrants have an exercise price of $0.10 per share and
expire on January 20, 2009 unless exercised earlier.
If all of the warrants from the Transaction issued to the investors, the
Placement Agent and the Finder are exercised, the Company will be required to
issue an additional 85,200,000 shares of common stock, and the Company, on a
fully diluted basis (including the reservation of 11,919,120 shares as required
by the court in the Financing Agreement Litigation), would have 179,524,864
shares of Common Stock issued and outstanding.
During the six months ended December 31, 2003, Mr. Metzinger, the President
and CEO of the Company loaned $30,000 to the Company in exchange for an
unsecured 7% promissory note due in September 2004. During the fiscal year ended
June 30, 2003, Mr. Metzinger loaned $10,000 to the Company in exchange for an
unsecured 7% promissory note due in December 2003. At December 31, 2003, the
note balances were $40,000. In January 2004, the notes were paid in full.
3
During the six months ended December 31, 2003, Intercell International
Corporation, an affiliate of the Company, loaned the Company $35,000 in exchange
for an unsecured 7% promissory note due in September 2004. At September 30,
2003, the note balance was $35,000. In November 2003, Intercell International
Corporation loaned the Company $100,000 in exchange for a 7% promissory note due
in November 2004. The promissory note is collateralized by an assignment of a
51% interest in and to the proceeds, if any, that the Company may receive as a
result of the Financing Agreement litigation. At December 31, 2003, the note
balances were $135,000. In January 2004 the notes were paid in full.
During the six months ended December 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 December 31,
2003, the Company has net patent and trademark applications costs of $446,165,
compared to $283,102 on December 31, 2002. The increase of $163,063 was
primarily due to the Company's efforts to increase patent and trademark
protection overseas.
PLAN OF OPERATIONS
In December 2003, the Company's wholly-owned subsidiary ExypnoTech signed
an Investment agreement with an unrelated third party. The investor made a
$62,787 investment in ExypnoTech in return for an issuance of a controlling, 51%
equity interest in ExypnoTech. After the issuance, the Company holds 49% of the
outstanding equity of ExypnoTech. Effective December 11, 2003, the Company
deconsolidated ExypnoTech and is now accounting for ExypnoTech under the equity
method of accounting.
In December 2003, Noel Eberhardt, a director of the Company, resigned his
position on the Board of Directors.
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC is to market the Company's technology.
Scimaxx LLC, is owned by an officer and director of the Company and two former
employees of the Company. In return for 50% ownership of the Scimaxx Solutions
(49% voting interest), LLC, the Company contributed a license to utilize its
technology and the facilities and equipment of NanoPierce Connections. The
Company is not required to make any cash contributions to the joint venture.
Operating capital is to be provided by Scimaxx, LLC, of which $22,900 has been
received through January 31, 2003.
The Company is continuing to look for additional financing through
marketing of its NCS 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.
The Company continues to evaluate additional merger and acquisition
opportunities.
4
ITEM 3. 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following is a complete list of exhibits filed as part
of this Form 10-QSB. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-B.
Exhibit 11 Computation of Net Loss Per Share
Exhibit 14 Code of Ethics
Exhibit 31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) REPORTS ON FORM 8-K. The registrant filed the following reports on
Form 8-K during the quarter ended December 31, 2003:
- Current Report on Form 8-K dated, December 11, 2003, filed with the
Securities and Exchange Commission on December 15, 2003 (Regarding the
Investment Agreement signed by the Company's wholly-owned subsidiary,
ExypnoTech, GmbH).
5
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 17, 2004 /s/Paul H. Metzinger
----------------------------------
Paul H. Metzinger, President & CEO
Date: February 17, 2004 /s/Kristi J. Kampmann
----------------------------------
Kristi J. Kampmann,
Chief Financial Officer
6