UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
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Exact name of registrant as specified in
its charter
Nevada 84-0992908
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(State of other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
370 Seventeenth Street, Suite 3640
Denver, Colorado 80202
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(Address and zip code of principal executive office)
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(Former address of principal executive office)
Registrant's telephone number, including area code: (303) 592-1010
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class) Name of Each
Exchange On Which
Registered
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Common Stock, NASDAQ:BB
$0.0001 Par Value Frankfurt Exchange
Hamburg Exchange
Indicate by check mark whether the registrant: (1) 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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III or this Form 10-KSB or any amendment
hereto. [X]
As of the close of trading on September 27, 2004, there were 90,059,033
shares outstanding, 87,996,765 of which were held by non-affiliates. The
aggregate market value of the common shares held by non-affiliates, based on the
average closing bid and asked prices on September 27, 2004, was approximately
$10,559,612.
The registrant's revenue for the fiscal year ended June 30, 2004 was
$34,258.
Transitional Small Business Disclosure Yes No X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
NanoPierce Technologies, Inc. (the "Company") is a Nevada corporation that
was incorporated on June 22, 1996, as Sunlight Systems, Ltd. From June 22, 1996
through November 1996 the Company engaged in limited activities as a dealer and
distributor of sun tunnels. This business, however, was discontinued and
substantially all assets were sold in November of 1996. From that time until
February 1998, the Company was generally inactive and reported no significant
operating revenues.
On February 26, 1998, the Company acquired the intellectual property rights
related to the Company's patented Particle Interconnect Technology (the "PI
Technology") from Particle Interconnect Corporation ("PI Corp"), a Colorado
corporation, and a wholly owned subsidiary of Intercell Corporation (now known
as Intercell International Corporation, hereinafter "Intercell"), a Nevada
corporation. In exchange for the assets of PI Corp, the Company issued
7,250,000 shares of its common stock and 100 shares of the Company's Series A
preferred stock (convertible into 7,250,000 common shares) to Intercell.
Intercell, subsequently converted the 100 shares of the Series A preferred stock
in June 1999 for 7,250,000 common shares. As of June 30, 2004, Intercell held
464,870 common shares of the Company. The Company acquired the PI Technology in
order to pursue a more focused, strategic application and development of the PI
Technology, subsequently referred to as the NanoPierce Connection System
("NCS(TM)"). NCS is an alternative method of providing temporary or permanent
electrical connections between different flexible, rigid, metallic and
non-metallic surfaces. Through the use of the particle technology, the Company
can also attach semi-conductors directly to various surfaces. The Company has
trademarked this process as WaferPierce(TM).
The Company, since the acquisition of NCS, has focused on attempting to
provide the electronics industry with technologically advanced, cost-effective
electronic connection technology that utilizes less expensive materials, allows
for electronic connections to be made with and on flexible materials,
miniaturizes the components needed to make electronic connections, allows
lead-free connections and allows electronic connections to be made in an
environment where increased temperatures would not previously allow such
connections.
The Company does not currently plan to manufacture or develop products that
utilize the Company's particle technology and the Company has no prior
experience in taking technology to the manufacturing or production stage. The
Company expected to generate revenue by licensing companies to apply the
Company's particle technology to products that are brought to the market place
by those licensees or by entering into joint ventures with companies that
manufacture products using the particle technology. To date, the Company has
not successfully licensed companies to manufacture, develop and market products
using the Company's particle technology, and the Company does not currently have
licensing relationships in place.
During the fiscal year ended June 30, 2004, the Company minimized its
operations to conserve funds. After the completion of the financing described
below under "ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK
HOLDER MATTERS-Recent Sales of Unregistered Securities," the Company revised its
business strategy and intends to use the funds received or to be received from
such sale to support minimal operations while it investigates potential
acquisition targets. In addition, the Company dissolved a wholly-owned
subsidiary (NanoPierce Card), terminated operations of a wholly-owned subsidiary
(NanoPierce Connection),
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sold a majority interest in a subsidiary (ExypnoTech), entered into a joint
venture (Scimaxx Solutions) and formed a new wholly-owned subsidiary
(ExypnoTech, LLC), each as described below.
NANOPIERCE CARD TECHNOLOGIES, GMBH ("NANOPIERCE CARD"). Established in
January 2000, NanoPierce Card was located in Hohenbrunn, Germany. NanoPierce
Card was responsible for the marketing of the Company's technology, services and
products on an international basis. On April 1, 2003, NanoPierce Card filed for
insolvency with the Courts of Munich, Germany. The insolvency was necessary in
order to comply with specific German legal requirements. In conjunction, with
the insolvency filing, management decided in April 2003 to discontinue
operations at NanoPierce Card and to liquidate NanoPierce Card, through a
self-liquidation. The Company completed the plan of self-liquidation and the
German court legally dissolved NanoPierce Card on June 8, 2004.
NANOPIERCE CONNECTION SYSTEMS, INC. ("NANOPIERCE CONNECTION"). NanoPierce
Connection, a Nevada corporation, was located in Colorado Springs, Colorado,
USA. Beginning business in January 2002, NanoPierce Connection was the center
for research and development activities. In September 2003, the Company entered
into a joint venture with Scimaxx, LLC in order to further the marketing of the
services previously offered by NanoPierce Connection. In return for a 50%
ownership interest in the newly created joint venture (Scimaxx Solutions
described below), the Company contributed a license to utilize its technology
and the facilities and equipment of NanoPierce Connections. The Company has no
ongoing responsibilities to make any cash contributions to the joint venture.
EXYPNOTECH, GMBH ("EXYPNOTECH"). ExypnoTech was organized in February
2002. ExypnoTech produces inlay components used in the manufacturing of, among
other things, smart labels (often referred to as radio frequency identification
tags or "RFID"). ExypnoTech, in addition to the inlay components, plans to
manufacture and sell other types of RFID components. In December 2003
ExypnoTech sold a controlling 51% interest in ExypnoTech to TagStar Systems,
GmbH for $98,000 in cash. As a result of this sale, the Company does not have a
controlling interest in ExypnoTech and the Company is only entitled to 49% of
the net income generated by ExypnoTech. ExypnoTech, if able, will pay dividends
on an annual basis. The Company is entitled to 49% of the dividends, if any,
paid as a result of any future profits of ExypnoTech. The sale of the
controlling interest in ExypnoTech decreased the Company's revenues from
ExypnoTech.
SCIMAXX SOLUTIONS, LLC ("SCIMAXX SOLUTIONS"). On September 15, 2003, the
Company entered into a joint venture with Scimaxx, LLC (Dr. Neuhaus, a director
of the Company is a part owner of Scimaxx, LLC - See Item 12). 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 the equipment owned by NanoPierce Connection. 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 June 30,
2004. 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.
EXYPNOTECH, LLC ("EXYPNOTECH, LLC"). On June 18, 2004, the Company
organized ExypnoTech, LLC as a wholly-owned subsidiary to market, primarily in
the United States of America, the RFID components manufactured by ExypnoTech,
GmbH.
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THE TECHNOLOGY
NCS(TM) is a method where metallized, hard, microscopic particles are
deposited onto one of two contact surfaces, through electrolytic or electro-less
plating methods or other methods. When the two surfaces are pressed together,
the conductive particles penetrate the second contact surface and create an
electrical connection. Bonding of the contact surfaces can be achieved using
nonconductive adhesives or ultrasonic welding.
NCS can be used with many different substrates (flexible, rigid, metallic
and non-metallic), allowing NCS to replace more conventional methods of making
electrical contacts, such as soldering, spring-loading, pin-in-hole connections
and conventional "flip chip" attachment. In addition, NCS can be used to form
either temporary or permanent connections.
NCS provides several advantages to potential users among which are; lower
costs through the usage of less expensive materials; the elimination of
manufacturing steps; improved thermal and electrical properties; elimination of
special environments for application; decreased production time; easy
integration into existing production lines; increased design miniaturization;
adaptability for specific applications and RF (radio frequency) performance.
The Company has extended NCS to permit the direct attachment of
semiconductor chips to a substrate, a process called WaferPierce(TM).
WaferPierce is comprised of two parts: (1) the electroless application of NCS to
the contact pads of chips while still in wafer form; and (2) a proprietary chip
attachment process in which chips are bonded to a substrate face down using the
core NCS method.
WaferPierce offers both cost and performance benefits over the current
methods of chip attachment. These benefits include the simplification and
acceleration of chip assembly, reduction of substrate costs and economic wafer
preparation. In addition, WaferPierce has several functional advantages, such
as, good electrical and thermal conductivities, reliability, thinness and good
high frequency characteristics and the absence of lead.
The Company currently holds 12 Patents with the U.S. Patent and Trademark
Office. Further, the Company has filed several patent applications both in the
United States and internationally in order to continue to protect its
intellectual property. To reduce expenses, during the fiscal year ended June
30, 2004, the Company abandoned several of its patent applications. The Company
also holds several trademarks with the U.S. Patent and Trademark Office, in
connection with the Company's name, logo and services.
During the fiscal year ended June 30, 2004, the Company incurred an expense
of $608,061 in connection with the impairment of the original intellectual
property, patent applications and trademarks owned by the Company. The
impairment decreased the book value of the intellectual property, patent
applications and trademarks to $0. The decision to record an impairment of the
intellectual property was based on the overall age of the patents combined with
the Company's current inactive operational status relating to its core
technology and the Company's decision to consider potential acquisition targets
outside of the technology industry. (See - "Notes to the Consolidated Financial
Statements - Note 1")
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BUSINESS STRATEGY
The Company, through its various investments and joint ventures, is
targeting the following applications of its technology:
1. RFID COMPONENTS. RFID components are used to identify objects, by
short-range radio over a few millimeters to distances as great as a
meter. RFID inlays consist of a small transponder chip bonded onto a
metal foil antenna on an exceptionally thin and small plastic or paper
sheet. NCS can be used to provide the connection between the
transponder chip and the antenna. In addition, NCS can be used to
connect the chip to the chip module in contact smart cards or the chip
module to the antenna in the case of contactless smart cards. There
are many different applications for RFID components, but the
application being focused on by the Company is smart labels.
ExypnoTech currently offers RFID Components using the Company's
intellectual property. ExypnoTech, LLC is attempting to market RFID
components produced by ExypnoTech primarily in the United States. To
date these marketing efforts have met with limited commercial success.
2. WAFERPIERCE SERVICE. Wafers are 2, 4, 6, 8 or 12 -inch silicon or
other substrate material used in the process of making chips with
integrated circuits in the semiconductor industry. NCS can be used as
a method of a chip attachment to the actual substrate, replacing
conventional flip chip processes used to remove chips and attach them
to substrates. Scimaxx Solutions offers this service to potential
customers. To date, these services have met with limited commercial
success.
3. OTHER APPLICATIONS. The applications described above are not the only
possible applications for NCS; other viable applications include
connectors and sockets in both printed and flexible circuit boards.
Further applications include temporary applications, such as test
connectors, sockets and switches.
The Company's business strategy also includes making an acquisition of an
operational, revenue generating company, not necessarily in the technology
industry. At this time, the Company has reviewed several potential acquisitions,
but has not come to terms with an acquisition candidate.
RESEARCH AND DEVELOPMENT
The Company's research and development activities were formerly conducted
through NanoPierce Connection, with additional activities occurring at
ExypnoTech. Beginning in September 2003, the Company's limited research and
development activities were conducted indirectly through Scimaxx Solutions and
ExypnoTech. For the fiscal years ended June 30, 2004 and June 30, 2003,
NanoPierce Connections and ExypnoTech incurred $41,849 and $316,403,
respectively, in research and development expenses from continuing operations.
NanoPierce Card incurred $0 and $251,354 in 2004 and 2003, respectively, which
is classified as a component of loss from discontinued operations in the
Company's consolidated statements of operations.
COMPETITION
Competition in the electronic connector market is fierce. The principal
competitive factors are product quality, performance, price and service. The
Company and its licensees face competition from well-established firms with
other interconnect technologies.
The Company will face competition from the development of existing and
future competing technologies. There currently exists approximately 28
different technologies that can be used to create interconnect solutions,
including dendrite crystals, gold dot technology, anisotropic technology
(technologies using materials whose behavior differs in the up/down and
left/right directions), elastomerics (rubber-like synthetic materials) and
Z-axis conductive adhesives. These technologies currently are produced by
materials and chemical suppliers, flexible and rigid printed circuit board
manufacturers, as well as electronics manufacturers who produce their own
materials and interconnect systems. Many of these
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competitors have substantially greater financial and other resources than the
Company. Consequently, there are no assurances that the Company or the NCS can
successfully compete with current or future technologies.
GOVERNMENT REGULATION
The Company believes that it is in compliance with all federal and state
laws and regulations governing its limited operations. Further, the Company
believes that it is in compliance with all German laws and regulations governing
its limited operations in Germany. Compliance with federal and state
environmental laws and regulations did not have a material effect on the
Company's capital expenditures, earnings or competitive position during the
fiscal year ended June 30, 2004.
EMPLOYEES
On June 30, 2004, the Company and its subsidiaries had two employees. Mr.
Metzinger and Ms. Kampmann, key officers of the Company and the only two
employees of the Company, have signed employment agreements with the Company.
(See- ITEM 9- "Directors and Officers of the Company") None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are excellent.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Our future results may be affected by various risks and uncertainties
including the following:
WE HAVE A HISTORY OF LOSSES
Developing our particle technology and its applications has been and we
expect will continue to be expensive. Our operating expenses have consistently
exceeded our revenues. We reported a net loss of $1,558,083, $4,017,785, and
$4,729,072 for the fiscal years ended June 30, 2004, 2003 and 2002,
respectively.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
Our independent auditors' report of our financial statements as of June 30,
2004 includes an explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern. If we are unable to secure significant
additional financing, we may be obligated to seek protection under the
bankruptcy laws and our shareholders may loose their investment.
OUR REVENUES DEPEND ON OUR ABILITY TO LICENSE COMPANIES TO APPLY OUR
PARTICLE TECHNOLOGY TO PRODUCTS THAT THEY BRING TO THE MARKETPLACE WHICH WE HAVE
BEEN UNABLE TO ACCOMPLISH TO DATE
We do not anticipate generating significant revenues until we are able to
license companies to apply our particle technology to products that are brought
to the marketplace. To date, we have not successfully licensed companies to
apply our particle technology to products that are brought to the marketplace.
Even if we are successful and products utilizing our particle technology are
brought to the marketplace, we may still not generate enough revenue to offset
our operating costs.
We do not have licensing relationships with manufacturers to develop and
market products using our particle technology in place, and if we are unable to
secure these agreements, we believe that we may not become profitable in the
future.
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We believe that our long-term profitability and growth depends on entering
into licensing or joint venture relationships with various manufacturers to
develop and market products using the particle technology or to successfully
enter into a business combination with a profitable company. We have not entered
into any formal agreements to date, and even if we do enter into agreements in
the future, we cannot assure that the agreements will be profitable.
CONSUMERS MAY USE ALTERNATIVE TECHNOLOGIES UNLESS WE ESTABLISH A MARKET
PRESENCE WITH OUR PARTICLE TECHNOLOGY
The interconnect market is subject to rapid technology changes. New
products are introduced, old products are enhanced and others become obsolete.
The entire interconnect market may be replaced by a newer form of technology.
To be competitive, we believe that we must develop, market and sell our products
on a timely and cost-effective basis and respond to the ever changing
requirements and demands of our customers, which in turn depends in part on our
capability to upgrade our products and quality control procedures and to adapt
to technological changes and advances in the electronics industry.
We cannot assure that we will be successful in selecting, developing, and
marketing new technologies or that compatibility issues with an evolving
generation of electronic components and manufacturing equipment and errors or
flaws in the new technologies will not prevent or delay market acceptance. Any
further delay in bringing our particle technology to the marketplace could cause
prospective customers to use alternative technologies and could result in our
inability to generate sufficient revenues to cover our operating costs.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE MARKETPLACE
The interconnect market is highly competitive. Our success will depend in
part on how quickly competitors can design and develop competing products and
technologies. We will compete with suppliers of other interconnect technologies
including Alien Technologies, Inc., Interconnect Technologies and major
electronic technology manufacturing leaders including Philips, Siemens, Infineon
and IBM. We are disadvantaged competing against these competitors in several
different areas, including:
- financial resources;
- technological resources;
- manufacturing capabilities;
- diversity of revenue sources and business opportunities;
- personnel and human resources; and
- research and development capabilities.
Our larger competitors have long term advantages over us in research and
new product development and have a greater ability to withstand periodic
downturns in the interconnect market because they have diverse product lines
that can provide revenue even when there is a downturn in the interconnect
market.
WE CANNOT GUARANTEE THE QUALITY, PERFORMANCE OR RELIABILITY OF OUR PRODUCTS
We have no prior experience in taking technology to the manufacturing or
production stage. We plan to have licensees or co-joint venturers manufacture
products using the particle technology. We expect that the customers of these
products will demand quality, performance and reliability. We cannot assure you
6
that our future licensees or co-joint venturers will be able to meet the quality
control standards that may be established by equipment manufacturers and other
customers of products utilizing the particle technology.
THERE MAY BE INSUFFICIENT DEMAND FOR OUR PARTICLE TECHNOLOGY
We must convince our potential customers that the particle technology is
technologically sound and can be manufactured efficiently and cost-effectively
before connector manufacturers and electronic equipment manufacturers will be
willing to use our technology. To create this consumer demand, we have to
successfully market and sell our technology. Even after these efforts, our
particle technology may not be viewed by consumers as an improvement over
existing technologies and may not achieve commercial acceptance.
WE MAY BE UNABLE TO MEET OUR ONGOING NEEDS FOR ADDITIONAL CAPITAL
We cannot accurately predict how much funding we will need to implement our
strategic business plan or to continue operations. Our future capital
requirements, the likelihood that we can obtain money and the terms of any
financing will be influenced by many different factors, including:
- our revenues,
- the status of competing products in the marketplace,
- our performance in the marketplace,
- our overall financial condition,
- our business prospects,
- the perception of our growth potential by the public, including
potential lenders,
- our ability to enter into joint venture or licensing relationships to
achieve a market presence and
- our progress in developing, marketing and selling the particle
technology.
If we cannot obtain adequate financing or if the terms on which we are able
to acquire financing are unfavorable, our business and financial condition could
be negatively affected. We may have to delay, scale back or eliminate some or
all of our development and marketing programs, if any. We may also have to go
to third parties to seek financing, and in exchange, we may have to give up
rights to some of our technologies, patents, patent applications, potential
products or other assets.
WE MAY BE UNABLE TO HIRE AND RETAIN KEY PERSONNEL
Our future success depends on our ability to attract qualified technical
personnel capable of working with our technology. We may be unable to attract
these necessary personnel. If we fail to attract or retain skilled employees,
or if a key employee fails to perform in his or her current position, we may be
unable
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to bring our particle technology to the marketplace and to generate sufficient
revenues to offset our operating costs.
WE MAY BE UNABLE TO OBTAIN AND RETAIN APPROPRIATE PATENT, COPYRIGHT AND
TRADEMARK PROTECTION OF OUR PRODUCTS
We protect our intellectual property rights through patents, trademarks,
trade names, trade secrets and a variety of other measures. However, these
measures may be inadequate to protect our intellectual property or other
proprietary information.
- TRADE SECRETS MAY BECOME KNOWN BY THIRD PARTIES. Our trade secrets or
proprietary technology may become known or be independently developed by
competitors.
- RIGHTS TO PATENTS AND TRADE SECRETS MAY BE INVALIDATED. Disputes may
arise with third parties over the ownership of our intellectual property rights.
Our patents may be invalidated, circumvented or challenged, and the rights
granted under those patents that provide us with a competitive advantage may be
nullified.
- PROBLEMS WITH FUTURE PATENT APPLICATIONS. Our pending or future
patent applications may not be approved, or the scope of the granted patent may
be less than the coverage sought.
- INFRINGEMENT CLAIMS BY THIRD PARTIES. Infringement, invalidity, right
to use or ownership claims by third parties or claims for indemnification may be
asserted by third parties in the future. If any claims or actions are asserted
against us, we can attempt to obtain a license for that third party's
intellectual property rights. However, the third party may not provide a
license under reasonable terms, or may not provide us with a license at all.
- THIRD PARTIES MAY DEVELOP SIMILAR PRODUCTS. Competitors may develop
similar products, duplicate our products or may design around the patents that
are owned by us.
- LAWS IN OTHER COUNTRIES MAY INSUFFICIENTLY PROTECT INTELLECTUAL
PROPERTY RIGHTS ABROAD. Foreign intellectual property laws may not adequately
protect our intellectual property rights abroad. Our failure to protect these
rights could adversely affect our business and financial condition.
- LITIGATION MAY BE REQUIRED TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
Litigation may be necessary to protect our intellectual property rights and
trade secrets, to determine the validity of and scope of the rights of third
parties or to defend against claims of infringement or invalidity by third
parties. This litigation could be expensive, would divert resources and
management's time from our sales and marketing efforts, and could have a
materially adverse effect on our business, financial condition and results of
operations and on our ability to enter into joint ventures or partnerships with
others.
LICENSE RIGHTS TO PARTICLE TECHNOLOGY MAY LIMIT OUR ABILITY TO COMPETE
Before we acquired the patents, patent applications and licenses from the
original owners of the particle technology, the inventor of the particle
technology granted five companies exclusive and non-exclusive licenses to use
the patents and patent applications relating to the particle technology. At
this time, only two of the original five licensees are using our technology and
none of these licenses relate to either smart card or smart label technology. A
non-exclusive, two year
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license was also granted to the inventor of the particle technology in October
2002 in connection with the settlement of certain litigation with the inventor.
Scimaxx Solutions was granted a ten year, non-exclusive, non-royalty bearing
world wide license to use the Company's intellectual property. In addition, the
Company assigned the U.S. Provisional Application for Ultrasonic Bonding of
Electronic Devices and the trademark Application for Smart Paper to ExypnoTech
on December 11, 2003, as part of the agreement wherein the Company sold 51% of
ExypnoTech to TagStar Systems, GmbH. These licenses restrict us as follows:
- EXCLUSIVE LICENSES PREVENT US FROM COMPETING AGAINST THE EXCLUSIVE
LICENSES. We cannot compete in the fields in which exclusive licenses have been
granted. An exclusive license was granted in the field of sockets for use in
the automated handling and testing of integrated circuits, a type of
semiconductor in which a number of transistors and other elements are combined
to form a more complicated circuit.
- NON-EXCLUSIVE LICENSES ALLOW LICENSEES TO COMPETE AGAINST US IN
CERTAIN AREAS. The licensees with non-exclusive licenses can compete directly
with us or our other future licensees. Non-exclusive licenses have been granted
to use the particle technology for electrically conductive components,
laminate-based and metal-based products and semiconductor products. Although we
are not currently aware of any proposed competition by any of our licensees, if
the present licensees decide to compete with us or our future licensees, this
competition could adversely affect our business.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never paid cash dividends on our common stock. We do not expect to
pay cash dividends on our common stock at any time in the foreseeable future.
The future payment of dividends directly depends upon our future earnings,
capital requirements, financial requirements and other factors that our board of
directors will consider. Since we do not anticipate paying cash dividends on
our common stock, return on your investment, if any, will depend solely on an
increase, if any, in the market value of our common stock.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters are located at 370 17th Street, Suite
3640, Denver, Colorado 80202. The Company moved into its current office space
on June 27, 2001 and has a 5-year lease on the property, expiring in September
2006. The base rent is $4,850 per month for the remaining term of the lease,
plus certain occupancy costs. Intercell maintains an administrative office on
the premises.
NanoPierce Connection was located at 4180 Center Park Drive, Colorado
Springs, Colorado 80916. NanoPierce Connection currently has a 3-year lease on
the property, expiring in March 2006. The base rent is $2,600 per month through
March 30th, with a $100 per month increase in base rent each year thereafter for
the remaining term of the lease, plus utilities and maintenance expenses. The
facility is approximately 4,800 square feet consisting of office space and a
small laboratory. The facility also has a clean room for use in the WaferPierce
process. In October 2003, as part of the joint venture signed with Scimaxx
Solutions, the joint venture operates in the former facilities of NanoPierce
Connections and has taken over responsibility for payment under the lease.
Scimaxx Solutions conducts research and development activities at this facility.
NanoPierce Card, during the fiscal year ended June 30, 2003, leased offices
located at Lise-Meitner-Strasse 1, D-85662 Hohenbrunn, Germany. From these
offices marketing, software development and additional research and development
activities
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took place through March 31, 2003. During the fiscal year ended June 30, 2004,
NanoPierce Card moved from the facility and implemented a plan of self
liquidation. As part of the self liquidation, the lessor was given first
priority on any funds received from the liquidation.
ExypnoTech leases production space located at
Professor-Hermann-Klare-Strasse 6, D-07407 Rudolstadt, Germany. ExypnoTech had a
5-year lease on the facilities, expiring in March 2007. The base rent was $821
per month for the remaining term of the lease, plus utilities, repairs,
maintenance and tax expenses. During the fiscal year ended June 30, 2004,
ExypnoTech terminated the lease and moved from the facility to the same facility
as its majority shareholder, TagStar Systems, GmbH.
ITEM 3. LEGAL PROCEEDINGS
HARVEST COURT LITIGATION
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. 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 this litigation, Harvest
Court, LLC filed counterclaims against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and a number of unrelated third parties. The
counterclaims allege violations of federal securities laws and other laws.
Harvest Court, LLC is seeking various forms of relief including compensatory and
punitive damages. Responsive pleadings have been filed and the litigation is
currently in the discovery stage.
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,
LLC. The Company has filed counterclaims seeking various forms of relief
against Harvest Court, LLC.
The Company intends to vigorously prosecute all litigation and does not
believe the outcome of the 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.
DEPOSITORY TRUST COMPANY
On May 4, 2004, the Company filed suit against the Depository Trust and
Clearing Corporation (DTCC), the Depository Trust Company (DTC), and the
National Securities Clearing Corporation (NSCC) in the Second Judicial District
Court of the County of Washoe, State of Nevada. The suit alleges multiple
claims under Nevada Revised Statutes 90.570, 90.580, 90.660 and 598A.060 and on
other legal bases. The
10
complaint alleges, among other things, that the DTCC, DTC and NSCC acted in
concert to operate the "Stock Borrow Program," originally created to address
short term delivery failures by sellers of securities in the stock market.
According to the complaint, the DTCC, NSCC and DTC conspired to maintain
significant open fail deliver positions of millions of shares of the Company's
common stock for extended periods of time by using the Stock Borrow Program to
cover these open and unsettled positions. By permitting shares of the Company
to be borrowed through the program, DTCC, NSCC and DTC allegedly jointly
conspired to drive down the price of the Company's stock. The complaint also
alleges that the operation of the Stock Borrow Program allowed the manipulation
of the Company's stock by various sellers who failed to deliver shares to the
Company. By covering open fail to deliver positions with shares borrowed
through the Stock Borrow Program and delivering borrowed shares to the buyers,
the complaint contends that DTCC, NSCC and DTC artificially created
unregistered, free trading shares of the Company's common stock and increased
the supply of the Company's shares in the market place. The Company is seeking
damages in the amount of $25,000,000 and treble damages. Responsive pleadings
have been filed by the defendants.
OTHER LITIGATION
Other than the above mentioned lawsuits, to the knowledge of the management
of the Company, there are no material legal proceedings pending or threatened
(other than routine litigation incidental to business) to which the Company (or
any officer, director, affiliate of beneficial owner of more than 5% of the
Company's voting securities) is party, or to which property of the Company is
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no meetings of security holders during the period covered by
this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is presently quoted on the over-the-counter
bulletin board maintained by the National Association of Securities Dealers,
Inc. (the "NASD") under the symbol "NPCT." The common stock of the Company is
also traded on the Frankfurt Exchange and the Hamburg Stock Exchange under the
symbol "NPI."
The following table sets forth the range of high and low quotations for the
common stock of each full quarterly period during the fiscal year or equivalent
period for the fiscal periods indicated below. The quotations were obtained
from information published by the NASD and reflect interdealer prices, without
retail mark-up, markdown or commission and may not necessarily represent actual
transactions.
2003 FISCAL YEAR HIGH LOW
---------------- ----- -----
September 30, 2002 $0.60 $0.56
December 31, 2002 0.63 0.61
March 31, 2003 0.30 0.28
June 30, 2003 0.32 0.28
2004 FISCAL YEAR
----------------
September 30, 2003 0.27 0.21
December 31, 2003 0.29 0.25
March 31, 2004 0.34 0.31
June 30, 2004 0.17 0.15
11
As of June 30, 2004, there were approximately 326 holders of record of the
Company's common stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its common stock in the past
and does not anticipate paying any dividends in the foreseeable future.
Earnings, if any, are expected to be retained to fund future operations of the
Company. There can be no assurance that the Company will pay dividends at any
time in the future.
RECENT SALES OF UNREGISTERED SECURITIES
On January 12, 2004, the Company entered into a placement agent agreement
with Charleston Capital Corp. (now known as Clayton Dunning & Company, Inc.) in
connection with a proposed sale of our securities to a number of "accredited
investors" (as defined in the Securities Act of 1933, as amended), in a private
placement transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D promulgated under the
Securities Act of 1933. In connection with this agreement, on January 20, 2004,
the Company sold 20,000,000 units for a total of $2,000,000 to a limited number
of accredited investors in a private placement transaction exempt from
registration under Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated under the Securities Act of 1933 pursuant to a Securities Purchase
Agreement. Each unit consists of (i) one share of the Company's common stock,
(ii) a warrant to purchase one share of the Company's common stock at an
exercise price of $0.10 per share ("$.10 warrants") and (iii) and a warrant to
purchase two shares of the Company's common stock at an exercise price of $0.25
per share. All these warrants expire on January 20, 2009 unless exercised
earlier. As a result of the sale, the Company issued 20,000,000 shares of its
common stock, 20,000,000 warrants with an exercise price of $0.10 per share and
40,000,000 warrants with an exercise price of $0.25 per share.
Through June 30, 2004, 3,850,000 of the $0.10 warrants have been exercised
by the holders thereof and, as a result, the Company received a total of
$347,950 in proceeds.
In connection with the private placement, and in reliance on Section 4(2)
of the Securities Act of 1933, as amended and other applicable exemptions
thereunder, the Company compensated Charleston Capital Corp. (now known as
Clayton Dunning & Company, Inc.) as follows: a fee equal to 3% of the gross
proceeds received by the Company as a result of the issuance of the units
described above ($60,000); warrants to purchase 600,000 shares of the Company's
common stock at an exercise price of $0.10 per share that expire on January 20,
2009, unless exercised earlier; and a right of first refusal on any financing
that the Company enters into for a period of one year from the date of the
effectiveness of the selling shareholder registration statement filed by the
Company as required by the terms of the Securities Purchase Agreement referenced
in the prior paragraph. The Company was advised that Clayton Dunning & Company,
Inc. (f/k/a Charleston Capital Corp.) transferred 390,000 of the warrants
described above as compensation to Chris Messalas, one of Clayton Dunning &
Company's registered representatives.
Jason Lyons, unrelated to the Company, received a $200,000 finders fee for
introducing the Company to Charleston Capital Corp. (now known as Clayton
Dunning & Company, Inc.) and the purchasers and for consulting work done on
behalf of the Company. In reliance on Section 4(2) of the Securities Act of
1933, as amended and other applicable exemptions thereunder, the Company also
issued to Jason Lyons warrants to purchase 2,000,000 shares of the Company's
common stock. The warrants have an exercise price of $0.10 per share and expire
on January 20, 2009 unless
12
exercised earlier. The Company has been advised that Jason Lyons transferred
1,000,000 of these warrants as compensation to GRQ Consultants, Inc., unrelated
to the Company, for introducing the Company to Clayton Dunning & Company, Inc.
and for consulting work done on behalf of the Company.
On February 25, 2004, the Company filed a registration statement on Form
S-2 (Registration No. 333-113071)(the "Registration Statement") to register all
of the securities sold in the private placement transaction described above.
The Company made no unregistered sales of its securities from March 31,
2004 through June 30, 2004.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this Form 10-KSB 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, 2004, and for each of the years in the two-year period then ended,
includes a "going concern" explanatory paragraph, that describes substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to the factors prompting the explanatory paragraph are discussed
below and also in Note 2 to Notes to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
On April 1, 2003, NanoPierce Card filed insolvency with the Courts of
Munich, Germany. On June 8, 2004, NanoPierce Card was dissolved by the Courts of
Munich, Germany. NanoPierce Card is presented as discontinued operations in the
Company's consolidated financial statements. During the year ended June 30,
2004, NanoPierce Card had no income compared to a loss of $882,718 during the
year ended June 30, 2003. The decrease of $882,718 is due to the cessation of
operations in connection with the self-liquidation. The Company recognized a
gain of $454,882 on the disposal of NanoPierce Card during the year ended June
30, 2004.
The Company recognized $34,258 of revenues from continuing operations
during the fiscal year ended June 30, 2004 compared to $37,017 in the fiscal
year ended June 30, 2003. The revenue generated from continuing operations was
from the sale of inlays by ExypnoTech, $28,449 through December 2003, and $5,809
from services provided by the Company.
The Company recognized $2,550 in interest income during the fiscal year
ended June 30, 2004 compared to $7,251 during the fiscal year ended June 30,
2003. The decrease of $4,701 is due primarily to the need to utilize cash
equivalents to support operations throughout the year.
Total operating expenses from continuing operations during the fiscal year
ended June 30, 2004 were $1,999,462, compared to $3,179,297 for the fiscal year
13
ended June 30, 2003. The decrease of $1,179,835 is attributable to a decrease
in operational activities and spending over the year, as described below.
General and administrative expenses during the fiscal year ended June 30,
2004 were $1,312,519 compared to $2,414,077 for the fiscal year ended June 30,
2003. The decrease of $1,101,558 is mainly attributable to decreases in legal
expenses, payroll and press releases, website development and other investor
relations matters. Selling and marketing expenses during the fiscal year ended
June 30, 2004 were $37,033 compared to $238,817 during the fiscal year ended
June 30, 2003. The decrease of $201,784 was due to a decrease in marketing
activities, including appearances at various trade shows. Research and
development expenses during the fiscal year ended June 30, 2004 were $41,849
compared to $316,403 for the fiscal year ended June 30, 2003. The decrease of
$274,554 was primarily attributable to the reduction in research and development
activities over the previous fiscal year.
During the fiscal years ended June 30, 2004 and 2003, the Company incurred
an expense of $608,061 and $210,000, respectively in connection with the
impairment of the intellectual property, patent applications and trademarks
owned by the Company. The decision to record an impairment of the intellectual
property was based primarily on the overall age of the patents and patent
applications underlying the intellectual property combined with the Company's
current inactive operational status. After the impairment to the intellectual
property, patent applications and trademarks, the book value of the
aforementioned items is $0.
During the fiscal year ended June 30, 2004, the Company recognized a net
loss of $1,558,083 compared to a net loss of $4,017,785 during the fiscal year
ended June 30, 2003. The decrease of $2,459,702 mostly resulted from the
decrease of $1,179,835 in operating expenses and the decrease of $882,718 in
losses of NanoPierce Card and the gain from the disposal of NanoPierce Card of
$454,882 during the year ended June 30, 2004.
LIQUIDITY AND FINANCIAL CONDITION
Net cash used in operating activities from continuing operations in 2004
was $1,199,214, compared to net cash used in operating activities from
continuing operations in 2003 of $1,754,247. In 2004, the net cash used
represented a net loss of $1,558,083, adjusted for the income from discontinued
operations of $454,882, amortization and depreciation expense of $291,790,
impairment charges of $608,061, equity in losses of affiliates of $99,922, gain
on extinguishment of liabilities of $ 52,500, and provision for a doubtful
receivable of $58,074.
In 2003, the net cash used represented a net loss of $4,017,785, adjusted
for the loss from discontinued operations of $882,718, amortization and
depreciation expense of $416,250, impairment charges of $210,000, stock based
compensation expense of $14,935.
During the fiscal year ended June 30, 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 was engaged 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. Compensation was to consist of a
retainer fee (deferred consulting costs of approximately $230,400), which
consists of a warrant to purchase up to 450,000 shares of the Company's common
stock. Compensation also was to include a $10,000 monthly advisory fee, payable
in cash, beginning in June 30, 2003. The Company has accrued but not paid the
$10,000 monthly advisory fee, and the agreement expired by its terms on June 30,
2004.
During the fiscal year end June 30,2004, the Company advanced $50,000 to
Scimaxx, which was fully reserved for.
During the fiscal year ended June 30,2003, the Company received $170,770 of
payments on notes receivable.
During the fiscal year ended June 30, 2004, the Company made investments in
machinery and equipment of approximately $1,575. During the fiscal year ended
June 30, 2003, the Company made investments in machinery and equipment of
$351,431. During the fiscal year ended June 30, 2004, the Company contributed
fixed assets with a book value of $132,000 to the Scimaxx Solutions, LLC as part
of the terms of the joint venture.
During the fiscal year ended June 30, 2004 the Company sold 20,769,231
shares of common stock and granted warrants to purchase 600,000 shares of its
common stock
14
at exercise prices ranging from $0.10 to $0.25 for net proceeds of $1,828,000
(after deducting offering costs of $272,000). See "ITEM 5-MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Recent Sales of
Unregistered Securities." The warrants are exercisable through 2008 and contain
a cashless exercise provision. The funds were raised to support operations. In
addition, the Company issued 3,850,000 shares of common stock upon the exercise
of 3,850,000 warrants for $347,950 (net of offering costs of $37,050).
In June 2003, Mr. Metzinger, the President, Chief Executive Officer and a
director of the Company, loaned $10,000 to the Company in exchange for an
unsecured 7% note payable due in December 2003, the proceeds of which were
utilized for operational purposes. In January 2004, the Company paid Mr.
Metzinger the outstanding principal balance of this note, together with all
accrued interest, from the proceeds of the offering described in "ITEM 5-MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Recent Sales of
Unregistered Securities.".
During the fiscal year ended June 30, 2003, the Company sold 7,340,348
shares of common stock and granted warrants to purchase 6,024,525 shares of
common stock at exercise prices ranging from $0.15 to $0.60 for $1,826,766 (net
of offering costs of $75,500). The warrants are exercisable through 2008 and
contain a cashless exercise provisions. The funds were raised to support
operations.
In September 2003, Mr. Metzinger loaned the Company $30,000, in exchange
for an unsecured 7% note payable due in September 2004. In January, 2004 the
Company paid Mr. Metzinger the outstanding principal balance of this note,
together with all accrued interest, from the proceeds of the offering described
in "ITEM 5-- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS - Recent Sales of Unregistered Securities."
In September 2003, 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 have received in connection with the Financing Agreement litigation.
In January 2004, the Company paid the $135,000 note plus accrued interest of
$2,493.
In 2004, the Company converted an account payable of $92,100 into an
unsecured non-interest bearing note payable due in March 2005. Through June 30,
2004, the Company has repaid $30,700 on this note.
PLAN OF OPERATIONS
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC was entered into for the purpose of
marketing 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, 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 will be provided by Scimaxx, LLC.
On December 11, 2003, TagStar Systems, GmbH, a German entity unrelated to
the Company, purchased a controlling 51% equity interest in ExypnoTech in
exchange for a capital contribution of $98,000, of which $62,787 has been
received as of June 30, 2004. No gain or loss was incurred by the Company as a
result of this transaction. As a result of this transaction, the Company does
not have a controlling interest in ExypnoTech and the Company is only entitled
to 49% of the revenues generated by ExypnoTech (and 49% of the dividends, if
any, paid by ExypnoTech). The sale of the controlling interest in ExypnoTech may
decrease the Company's revenues from ExypnoTech. As a result of the Company's
reduced ownership interest and loss of control of ExypnoTech, the Company
deconsolidated ExypnoTech as of December 11, 2003, and began accounting for its
investment in ExypnoTech under the equity method of accounting. Under the equity
method of accounting, the carrying amount of the Company's investment in
ExypnoTech ($203,654 at June 30, 2004) is adjusted to recognize the Company's
proportionate share of ExypnoTech's income (loss) each period.
15
The Company is continuing to look for additional financing through
marketing of its NCS though the pursuit of licensing, joint ventures,
co-manufacturing or other similar arrangements with industry partners. The
failure to secure such a relationship will result in the Company requiring
substantial additional capital and resources to bring its NCS to market. To the
extent the Company's operations are not sufficient to fund the Company's capital
requirements, the Company may enter into a revolving loan agreement with
financial institutions or attempt to raise capital through the sale of
additional capital stock or through the issuance of debt. At the present time
the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurance that it will be able to
enter into any such agreement in the future or be able to raise funds through
the further issuance of debt or equity in the Company. The Company continues to
evaluate additional merger and acquisition opportunities.
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 was extended until
the first interim or fiscal period that ends after March 15,2004. The adoption
of FIN 46 did not impact the Company's financial position or results of
operations.
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes new standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Under previous guidance, issuers could account for many of those instruments as
equity. SFAS No. 150 requires that those instruments be classified as
liabilities in statements of financial position. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company believes that the adoption of SFAS No. 150
will not have a material impact on its results of operations or financial
condition.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to deferred revenues; depreciation or fixed
assets, valuation of intangible
16
assets such as our intellectual property, financing operations, currency
valuations and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes that the following are some of the more significant
accounting policies and methods used by the Company:
- stock based compensation;
- valuation of intellectual property, patent and trademark
applications and other long-lived assets;
- international operations;
- revenue recognition and deferred revenue;
- litigation; and
- contractual obligations.
Stock-based compensation
SFAS No. 123, Accounting for Stock Based Compensation, defines a
fair-value-based method of accounting for stock-based employee compensation
plans and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value.
The Company has chosen to account for employee stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, employee compensation cost for stock
options is measured as the excess, if any, of the estimated fair value of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
In December 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This statement amends SFAS No. 123,
Accounting for Stock Based Compensation, and establishes two alternative methods
of transition for the intrinsic value method to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
requires prominent disclosure about the effects on reported net income (loss)
and requires disclosure for these effects in interim financial information. The
Company adopted the disclosure only provisions of SFAS No. 148 in 2003 and plans
to continue accounting for stock-based compensation under APB 25.
Valuation of intellectual property, patent and trademark applications and other
long-lived assets
The Company assesses the impairment of long-lived assets and intangible
assets such as intellectual property and patent and trademark applications
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors the Company considers important which could trigger
an impairment review include negative projected operating performance by the
Company and significant negative industry or economic trends. At June 30, 2004,
management assessed the carrying value of intellectual and other long-lived
assets for impairment, and based on this assessment the Company believed that
impairment was necessary in the case of the original intellectual property, the
patent applications and the trademarks. During 2004, the Company recognized an
impairment of $608,061 on the intellectual property, patent applications and
trademarks. The
17
Company does not believe that there has been any other impairment to long-lived
assets as of June 30, 2004.
International operations
The Company's foreign subsidiary (NanoPierce Card) and foreign equity
investment (ExypnoTech) operations are located in Germany. NanoPierce Card and
ExypnoTech 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, foreign
political and economic environment, trade barriers, managing foreign operations
and potentially adverse tax consequences. Any of these factors could have a
material adverse effect on the Company's financial condition or results of
operations in the future.
Revenue recognition and deferred revenue
The Company's revenue recognition policy is significant because future
revenue could be a key component of its results or operations. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause operating results to vary significantly.
Litigation
The Company is involved in certain legal proceedings, as described in Note
8 to the consolidated financial statements included in this report.
The Company intends to vigorously prosecute these legal proceedings and
does not believe the outcome of these proceedings 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.
Contractual obligations
For more information on the Company's contractual obligations on operating
leases, refer to Note 9 of the consolidated financial statements. At June 30,
2004, the Company's commitments under these obligations were as follows:
OPERATING LEASES
----------------
Year ending June 30,
2005 58,200
2006 58,200
2007 14,550
----------------
$130,950
================
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information
required to be filed are indexed on page F-1 and are incorporated herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
18
Within 90 days prior to the date of this Form 10-KSB, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's President and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Based upon such
evaluation, such officers have concluded that the Company's disclosure controls
and procedures are effective in alerting them, on a timely basis, to material
information relating the Company required to be included in this Form 10-KSB.
There have been no significant changes to the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially effect, the Company's internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
FINANCIAL EXPERT
The Company's Board of Directors does not have a designated Financial
Expert, as defined by the SEC, due to factors including the Company's
operational status, and the limited number of transactions, accounts and
balances that the Company maintains. In addition, the estimates of cost that
the Company would be required to incur in identifying and designating a
Financial Expert are deemed not to be in the best interest of the Company.
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
19
NAME AND AGE POSITION PERIOD
--------------------------- -------------------------- -------------------------
Paul H. Metzinger (65) Director, President, and December 1998 to present
Chief Executive Officer,
General Manager of January 2000 to June 2003
NanoPierce Card
Dr. Herbert J. Neuhaus (45) Director, Former Executive January 1999 to present
Vice President of
Technology & Marketing,
President & Chief January 2002 to September
Executive Officer of 2003
NanoPierce Connection
Kristi J. Kampmann (31) Chief Financial Officer, October 1999 to present
Secretary February 1998 to present
Dr. Robert Shaw (64) Director October 2000 to present
John Hoback (64) Director April 2002 to present
Dr. Michael E. Wernle (42) Former Director, Former November 1999 to
Executive Vice President September 2003
of Strategic Business
Development,
Former President & Chief January 2000 to May 2003
Executive Officer of
NanoPierce Card,
Former President & Chief February 2002 to August
Executive Officer of 2003
ExypnoTech
Dr. Noel Eberhardt (66) Former Director November 2001 to December
9, 2003
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Board of
Directors elects the officers at its annual meeting immediately following the
shareholders annual meeting and hold office until they resign or are removed
from office. There are no family relationships that exist between any director,
executive officer, significant employee or person nominated or chosen by the
Company to become a director of executive officer. The Company has established
audit, incentive compensation and nominating committees, consisting of the
independent directors.
BIOGRAPHICAL INFORMATION ON OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
PAUL H. METZINGER. Mr. Metzinger was President and Chief Executive Officer
of the Company from February 26, 1998 to May 6, 1998 and has served in that same
capacity from December 1, 1998 to present. He has been a director of the
Company since February 26, 1998. He served as the General Manager of NanoPierce
Card from January 2000 to June 2003. In addition, he served as the President,
Chief Executive Officer and a Director of Intercell International Corporation
from June 1996 to October 2003. Prior to becoming a director and officer of the
Company and Intercell International Corporation, Mr. Metzinger served as
Intercell's General Counsel and practiced securities law in Denver, Colorado for
over 32 years. Mr. Metzinger received his J.D. degree in 1967 from Creighton
University Law School and his L.L.M. from Georgetown University in 1969.
HERBERT J. NEUHAUS, PH.D. Dr. Neuhaus has been the Executive Vice
President of Marketing and Technology and a Director of the Company since
January 1, 1999. He has been the President and Chief Executive Officer of
NanoPierce Connection since January 2002. Dr. Neuhaus previously served as the
Managing Director of Particle Interconnect Corporation from August 18, 1997 to
November 1, 1997. From August 1989 to August 1997, he was associated with the
Electronic Material Venture Group
20
in the New Business Development Department of Amoco Chemical Company,
Naperville, Illinois. While associated with Amoco Chemical Company he held among
other positions: Business Development Manger/Team Leader; Project Manager --High
Density Interconnect; Product Manager MCM Products and as a research scientist.
Dr. Neuhaus received his Ph.D. degree in Physics form the Massachusetts
Institute of Technology, Cambridge, Massachusetts in 1989 and his BS in Physics
from Clemson University, Clemson, South Carolina in 1980.
KRISTI J. KAMPMANN. Ms. Kampmann was appointed the Chief Financial Officer
of the Company on October 15, 1999. Ms. Kampmann has been Secretary of the
Company since February 1998. Ms. Kampmann has served as a manager of ExypnoTech,
LLC since June 2004. She has served as the Chief Financial Officer of Intercell
International Corporation since October 1, 2003 and as Secretary of Intercell
International Corporation since July 28, 1999. Since June 1997, she has been
the administrative assistant to the Chief Executive Officer and Chief Financial
Officer; in addition, during the same period she served in the same capacity to
the Chief Executive Officer of Intercell. From April 1996 to June 1997, she
served as a paralegal and administrative assistant for Paul H. Metzinger, P.C.
Ms. Kampmann received an MBA from the University of Colorado, Denver in December
2001. Ms. Kampmann graduated from the Denver Paralegal Institute in 1996 and
received a B.A. from the University of Minnesota in Morris in 1995, majoring in
Political Science with a minor in Business Management.
DR. ROBERT SHAW. Dr. Shaw has been a director of the Company since October
31, 2000. Dr. Shaw currently is an Assistant Professor of Physics at Farleigh
Dickinson University where he has served on the faculty since September 1988.
Dr. Shaw also performs professional research in his academic areas of specialty,
and has held, among others, the positions of Research Chemist at the American
Cyanamid Research Laboratories, Stamford; Senior Research Physicist at Exxon
Research and Engineering Company; Manager of New Business Development at Exxon
Enterprises, Exxon Corporation, New York, NY; and President of Robert Shaw
Associates, Inc., Chatham, NJ.
Dr. Shaw received his Ph.D. in Solid State Physics form Cambridge
University, Cambridge, England. He was among the first to conduct academic
research on electronic conduction mechanisms in amorphous semiconductors. He
received a B.S. in Inorganic Chemistry with a minor in Nuclear Physics from
North Carolina State University, Raleigh, NC.
JOHN HOBACK. Mr. Hoback has been a director of the Company since April
2002. Mr. Hoback currently serves as the President of Z&H Enterprises
Solutions, Ltd., which position he has held since 2000. Among other positions,
Mr. Hoback was the Director of Marketing and Sales of CTS from 1999 to 2000 and
was the Venture Manager of Electronics with Amoco Chemical from 1998 to 1999.
DR. MICHAEL E. WERNLE. Dr. Wernle served as the Executive Vice President
for Strategic Business Development and a Director of the Company, from November
1999 to September 2003. He was the President and Chief Executive Officer of
NanoPierce Card from January 2000 to May 2003. He was the President and Chief
Executive Officer of ExypnoTech from February 2002 to August 2003. Dr. Wernle
was the Chief Operations Officer for Meinen, Ziegel & Co., GmbH, Munich, Germany
from 1997 to 1999. He also served as the Director of Production for
Mikron/Philips-Graz, Graz, Austria from 1994 to 1996. Where he was responsible
for the development and production of RFID and Contactless Smart Card Systems.
Dr. Wernle received his Ph.D. in Applied Physics from the Technical
University of Vienna in 1990 and his Masters Degree in Industrial Electronics in
1988.
21
NOEL EBERHARDT. Mr. Eberhardt was a director of the Company from November
28, 2001 until December 9, 2003. Mr. Eberhardt's 35 year career has focused on
the design, development, process development and manufacturing of electronic
packages. He has held positions with Motorola WSSD (Worldwide Smartcard Systems
Division), Indala Corporation and Hytek Microsystems, among a few, throughout
his career.
22
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid by the Company to the Chief Executive Officer and the Company's three most
highly compensated executive officers for the fiscal years ended June 30, 2004,
2003 and 2002 (the "Named Executive Officers"):
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ ------------------------------------------------
AWARDS PAYOUTS
------------------------- ---------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME & PRINCIPAL SALARY BONUS COMPENSA- STOCK OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR ($) ($) TION AWARDS ($) SARS (#) ($) TION
Paul H.
Metzinger, 2004 $ 114,583 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Director, 2003 $ 132,500 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President & 2002 $ 190,750 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
CEO(1)
Dr. Herbert J.
Neuhaus,
Director, Ex. VP 2004 $ 16,668 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
of Technology & 2003 $ 148,333 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Marketing, Pre & 2002 $ 190,750 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
CEO of
NanoPierce
Connection (2)
Dr. Michael E.
Wernle,
Director, Ex. VP 2004 $ -0- $ -0- $ -0- $ -0- -0- $ -0- $ -0-
of Strategic 2003 $ 128,000 $ -0- $ -0- $ -0- 365,000 $ -0- $ -0-
Business Dvlpmt, 2002 $ 160,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Pres & CEO of
ExypnoTech (3)
Kristi J.
Kampmann, Chief
Financial 2004 $ 37,492 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Officer & 2003 $ 58,125 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Secretary(4) 2002 $ 67,500 $ -0- $ -0- $ -0- 100,000 $ -0- $ -0-
---------------
1 Paul Metzinger has served as President & CEO since December 1998. He is
compensated pursuant to a written Employment Agreement, dated January 1, 2003 at
an annual salary of $200,000. At July 15, 2002, Mr. Metzinger agreed to take a
30% cut in the gross amount of his salary, resulting in an annual salary of
$140,000. In February 2003, Mr. Metzinger agreed to a further reduction in his
salary to $80,000. In March 2004, Mr. Metzinger salary was increased to
$150,000 per year.
2 Dr. Neuhaus has served as the Executive Vice President of Technology and
Marketing since January 1999. He served as the President and CEO of NanoPierce
Connection from January 2002 to September 2003. He was compensated pursuant to a
written Employment Agreement, dated January 2002 at an annual salary of
$200,000. On August 1, 2002, Dr. Neuhaus agreed to take a cut of 20% of his
annual salary, resulting in an annual salary of $160,000. In March 2003, Dr.
Neuhaus agreed to a further reduction in his salary resulting in a gross amount
of $80,000. This employment agreement was terminated in September 2003 and Dr.
Neuhaus is no longer a paid employee of the Company and/or its subsidiaries.
3 Dr. Wernle served as the Executive Vice President of Strategic Business
Development until September 2003. He served as the President & CEO of
NanoPierce Card from January 2000 until May 2003. He served as the President &
CEO of ExypnoTech, from February 2002 to August 2003. He was compensated
pursuant to a written Employment Agreement with NanoPierce Card, dated February
1, 2000, at an annual salary of $160,000 (181,000 Euros). On August 1, 2002, Dr.
Wernle agreed to take a 20% cut in the gross amount of his salary, resulting in
an annual salary of $128,000. As of August 2003, Dr. Wernle no longer is a paid
employee of the Company and/or its subsidiaries.
4 Kristi Kampmann has served as the Chief Financial Officer since October 1999.
She is compensated pursuant to a written Employment Agreement, dated March 31,
2004, at an annual salary of $45,000. On July 15, 2002, Ms. Kampmann agreed to
take a 20% cut in the gross
23
amount of her salary, resulting in an annual salary of $60,000. In February
2003, she agreed to a further reduction in the annual gross amount of her salary
to $52,500.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain
non-monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION/SAR GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended June
30, 2004.
INDIVIDUAL GRANTS
-----------------
# OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED (#) FISCAL YEAR(1) PRICE ($/SHARE) DATE
Paul H.Metzinger -0- 0% -0- -0-
Dr. Herbert J.
Neuhaus -0- 0% -0- -0-
Dr. Michael E.
Wernle -0- 0% -0- -0-
Kristi J.
Kampmann -0- 0% -0- -0-
_______________
1 Based on a total of 0 options granted to employees in the fiscal year ended
June 30, 2004.
24
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
The following table provides information relating to the exercise of stock
options during the fiscal year ended June 30, 2004 by the Company's executive
officers and the 2004 fiscal year-end value of unexercised options.
SHARES VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON REALIZED UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SAR
NAME EXERCISE (#) ($) AT FY-END AT FY-END ($)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------- ---------------------------
Paul H. 0 0 2,500,000/0 $ 400,000/0
Metzinger
Dr. Herbert 0 0 1,350,000/0 $ 216,000/0
J. Neuhaus
Dr. Michael 0 0 1,350,000/0 $ 216,000/0
E. Wernle
Kristi 0 0 325,000/0 $ 52,000/0
J.Kampmann
---------------
1 The average of the closing bid and asked price of the Common Stock on June 30,
2004 ($0.16) was used to calculate the option value.
EMPLOYMENT AGREEMENTS
On March 15, 2004, the Company entered into an employment agreement with
Paul H. Metzinger to serve as President and Chief Executive Officer of the
Company. The employment agreement with Mr. Metzinger expires March 14, 2008.
Pursuant to his employment agreement, the Company agreed to pay Mr. Metzinger an
annual salary of $150,000.
On January 1, 2002, NanoPierce Connection entered into an employment
agreement with Dr. Herbert J. Neuhaus to serve as the Chief Executive Officer
and President of NanoPierce Connection. The employment agreement expires
December 31, 2005. The agreement with Dr. Neuhaus was terminated in September
2003.
On March 15, 2004, the Company entered into an employment agreement with
Kristi J. Kampmann to serve as the Chief Financial Officer of the Company. The
employment agreement with Ms. Kampmann expires on March 14, 2008. Pursuant to
her employment agreement, the Company agreed to pay Ms. Kampmann an annual
salary of $30,000.
In connection with the Employment Agreements, generally, the Company or the
employee may terminate the Employment Agreement at any time with or without
cause. In the event the Company terminates an Employment Agreement for cause or
the employee terminates his or her Employee Agreement without cause, all of such
employee's rights to compensation would cease upon the date of such termination.
If the Company terminates an Employment Agreement without cause, the such
employee terminates his or her Employment Agreement for cause, or in the event
of a change in control, the Company is required to pay to such employee all
compensation and other benefits that would have accrued and/or been payable to
that employee during the full term of the Employment Agreement.
A change of control is considered to have occurred when, as a result of any
type of corporate reorganization, execution of proxies, voting trusts or similar
arrangements, a person or group of persons (other than incumbent officers,
directors and principal shareholders of the Company) acquires sufficient control
to
25
elect more than a majority of the Company's Board of Directors, acquires 50% or
more of the voting shares of the Company, or the Company adopts a plan of
dissolution of liquidation. The Employment Agreement also include a non-compete
and nondisclosure provisions in which each employee agrees not to compete with
or disclose confidential information regarding the Company and its business
during the term of the Employment Agreement and for a period of one year
thereafter.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS. The Company has two Stock Option Plans. As of June
30, 2004, 7,047,524 options are outstanding under the 1998 Compensatory Stock
Option Plan and 1,740,000 options are outstanding under the 2000 Compensatory
Stock Option Plan, for a total of 8,787,524 options outstanding. A total of
8,322,524 options are exercisable at June 30, 2004, under these plans. During
the fiscal year ended June 30, 2004, the Company did not grant any options. The
Company has reserved 7,500,000 shares of common stock for issuance under the
1998 Compensatory Stock Option Plan. In January 2002, the Company's Board of
Directors passed a resolution closing the 1998 Compensatory Stock Option Plan
for issuance of new options. The Company has reserved 5,000,000 shares of
common stock for issuance under the 2000 Compensatory Stock Option Plan.
During the fiscal year ended June 30, 2004, there was no action taken to
reprice any options or warrants held by any officers, directors or employees.
COMPENSATION OF DIRECTORS
The Company holds quarterly meetings of the board of directors. Although
the Company does not have any standard arrangements pursuant to which our
directors are compensated for any services provided as a director or for
attendance at meetings of the board of directors, if the financial situation of
the Company is adequate, the Company compensates directors $1,000 per meeting,
plus reasonable travel expenses.
During the fiscal year ended June 30, 2004, the officers and directors were
not compensated for attendance at board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of the Company's common stock as of June 30,
2004 on a fully diluted basis, by (a) each person known by the Company to own
beneficially 5% or more of the outstanding shares of common stock, (b) the
Company's directors, Chief Executive Officer and executive officers whose total
compensation exceeded $100,000 for the last fiscal year, and (c) all directors
and executive officers of the Company as a group.
26
NAME, ADDRESS & NATURE OF
BENEFICIAL OWNER TITLE OF CLASS AMOUNT PERCENT OF CLASS9
---------------------------------- --------------- ------------ ------------------
The Paul H. Metzinger Trust Common Stock 4,543,188(1) 2.71%
Paul H. Metzinger, President &
CEO, Director 370 17th Street,
Suite 3640 Denver, CO 80202
---------------------------------- --------------- ------------ ------------------
The Cheri L. Metzinger Trust Common Stock 4,543,188(2) 2.71%
Cheri L. Metzinger, Wife of Paul
H. Metzinger
3236 Jellison Street Wheatridge,
CO 80033
---------------------------------- --------------- ------------ ------------------
Dr. Herbert J. Neuhaus, Director, Common Stock 1,350,000(3) 0.81%
770 Maroonglen Court
Colorado Springs, CO 80906
---------------------------------- --------------- ------------ ------------------
Dr. Michael E. Wernle, Former Ex Options to 1,350,000(4) 0.81%
VP of Strategic Business purchase Common
Development, Former Director, Stock
President & CEO of ExypnoTech
Lise-Meitner-Strasse 1D-85662
Hohenbrunn Germany
---------------------------------- --------------- ------------ ------------------
Kristi J. Kampmann, Chief Common Stock 344,080(5) 0.21%
Financial Officer & Secretary
370 17th Street, Suite 3640
Denver, CO 80202
---------------------------------- --------------- ------------ ------------------
Dr. Robert E. Shaw, Director Options to 400,000(6) 0.24%
8 Nicklaus Court purchase Common
Florham Park, NJ 07932 Stock
---------------------------------- --------------- ------------ ------------------
Dr. Noel Eberhardt, Former Options to 400,000(7) 0.24%
Director 21407 Krzich Place purchase Common
Cupertino, CA 95014 Stock
---------------------------------- --------------- ------------ ------------------
John Hoback, Director 20 White Options to 400,000(8) 0.24%
Heron Lake purchase Common
East Stroudsburg, PA 18301 Stock
---------------------------------- --------------- ------------ ------------------
All Officers & Directors as a Common Stock 8,787,268 5.25%
Group (7 persons)
---------------------------------- --------------- ------------ ------------------
---------------
1 Includes 1,072,937 common shares held directly and beneficially; 970,251
common shares that Mr. Metzinger owns beneficially though his wife and options
held by Mr. Metzinger consisting of options to purchase 500,000 shares
exercisable at $2.125 per share, options to purchase 500,000 shares exercisable
at $0.52 per share and options to purchase 1,500,000 shares exercisable at
$0.3250 per share.
2 Cheri L. Metzinger is the wife of Mr. Paul H. Metzinger, the Chief Executive
Officer and President of the Company. This includes 970,251 shares held
directly and beneficially and 1,072,937 common shares and 2,000,000 common
shares subject to options owned beneficially by her husband.
3 Based on options to purchase 500,000 shares exercisable at $2.125 per share,
options to purchase 100,000 shares exercisable at $2.75 per share, options to
purchase 250,000 shares exercisable at $0.52 per share and options to purchase
500,000 shares exercisable at $0.20 per share.
4 Based on options to purchase 500,000 shares exercisable at $2.125 per share,
options to purchase 160,000 shares exercisable at $2.75 per share, options to
purchase 25,000 shares exercisable at $0.52 per share, options to purchase
300,000 shares at $0.45 per share and options to purchase 365,000 shares
exercisable at $0.60 per share.
5 Based on 19,080 common shares and options to purchase 100,000 shares
exercisable at $0.84 per share, options to purchase 75,000 shares exercisable at
$2.125 per share, options to
27
purchase 50,000 shares exercisable at $2.75 per share, options to purchase
50,000 shares exercisable at $0.52 per share and options to purchase 50,000
shares exercisable at $0.3250 per share.
6 Based on options to purchase 250,000 shares exercisable at $0.97 per share,
options to purchase 50,000 shares exercisable at $0.67 per share, and options to
purchase 100,000 shares exercisable at $2.00 per share.
7 Based on options to purchase 300,000 shares exercisable at $0.70 per share and
options to purchase 100,000 shares exercisable at $0.70 per share.
8 Based on options to purchase 400,000 shares exercisable at $1.35 per share.
9 Based on 90,059,033 shares of common stock issued and outstanding on June 30,
2004, assuming exercise of all 8,787,524 presently exercisable options and
exercise of 68,594,353 outstanding warrants, there would be 167,440,910 shares
outstanding. Mr. Metzinger's and Mrs. Metzinger's stock ownership are not
duplicated in this computation.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of June 30, 2004 regarding
compensation plans (including individual compensation arrangements) under which
shares of our common stock are authorized for issuance. No class of our
securities other than our common stock or options to purchaser our common stock
is authorized for issuance under any of our equity compensation plans.
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
Plan Category outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a)
(a) (b) (c)
------------------- --------------------- ------------------- --------------------------
Equity
compensation plans
approved by
security holders 0 - 0
------------------- --------------------- ------------------- --------------------------
Equity
compensation plans
not approved by
security holders(1) 8,787,524 $ 1.00 3,712,476
------------------- --------------------- ------------------- --------------------------
Total 8,787,524 $ 1.00 3,712,476
------------------- --------------------- ------------------- --------------------------
(1) The material features of the plans not approved by the security holders are
described herein under "ITEM 10-EXECUTIVE COMPENSATION-Compensation Pursuant to
Plans."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2004, the Company entered into employment agreements, as
previously discussed, with Mr. Metzinger, the President and Chief Executive
Officer and a Director of the Company, and with Ms. Kampmann, the Chief
Financial Officer and Secretary of the Company.
In September 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC to support the marketing of the Company's technology. The owners of
Scimaxx, LLC include Dr. Neuhaus, a director and a former officer of the Company
and several former employees of the Company.
In June 2003, Mr. Metzinger, the President and Chief Executive Officer and
a director of the Company loaned the Company $10,000, in exchange for an
unsecured 7% note payable due in December 2003. In January 2004, the Company
paid Mr. Metzinger
28
the outstanding principal balance of this note and all accrued interest thereon
in full.
In September 2003, Mr. Metzinger loaned the Company $30,000, in exchange
for an unsecured 7% note payable due in September 2004. In January, 2004 the
Company paid Mr. Metzinger the outstanding principal balance of this note,
together with all accrued interest, in full.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report.
(i) Financial Statements. See Index to Financial Statements and Schedule
on page F-2 of this Report.
(ii) Exhibits. The following is a complete list of exhibits filed as part
of this Form 10-KSB. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-B.
EXHIBIT NO. DESCRIPTION
2 Agreement dated February 26, 1998, by and among the Company, Particle
Interconnect Corporation and Intercell Corporation 4
2.02 Application and Development Agreement, dated April 15, 1999, by and
among the Company and Multitape & Co., Gmbh, KG. 2
2.03 Technology Cooperation Agreement, dated May 17, 1999, by and among the
Company and Meinen, Zeigel & Co. 2
2.04 Technology Development Agreement, dated June 11, 1999, by and among the
Company and ORGA Kartensysteme, GmbH. 2
2.05 Agreement-In-Principle, dated May 18, 1999, by and among the Company and
Cirrex Corporation. 2
4.01 The Articles of Incorporation of the Company 3
4.02 Amendment to the Articles of Incorporation of the Company filed with the
Nevada Secretary of State on March 20, 2002 3
4.03 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on March 20, 2002
4.04 Certificate of Designation of Rights and Preferences of the Series A
Preferred Stock 4
4.05 Certificate of Designation of Rights and Preferences of the Series B
Preferred Stock 5
4.06 Certificate of Designation of Rights and Preferences of the Series C
Preferred Stock 5
4.07 Form of Common Stock Certificate 3
4.08 The Amended and Restated By-laws of the Company 6
10.01 Employment Agreement, dated March 15, 2004, between Paul H. Metzinger
and the Company 7
10.02 Employment Agreement, dated March 15, 2004, between Kristi J. Kampmann
and the Company 7
11 Statement regarding Computation of Per Share Earnings 1
21 Subsidiaries of the Company 1
23 Consent of Independent Certified Public Accountants 1
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act 1
32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act 1
_________________
1 Filed herewith.
2 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1999.
29
3 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1998.
4 Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 26, 1998.
5 Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 23, 1998.
6 Incorporated by reference to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2003.
7 Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended March 31, 2004.
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of the
year ended June 30, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by Gelfond Hochstadt Pangburn, P.C., the
Company's independent auditors, for professional services in the fiscal years
ended June 30, 2004 and 2003 are as follows:
Services Rendered 2004 2003
------------------ ------- -------
Audit Fees $57,060 $49,800
Audit Related Fees 0 0
All Other Fees 0 0
The Company's corporate tax returns are prepared by the firm of Thompson &
Lowe, P.C. Fees for the fiscal year ended June 30, 2004 and 2003 were $10,000
and $13,610, respectively.
The engagement of the auditors was approved by the Company's Board of
Directors prior to the start of the audit for the fiscal year ended June 30,
2004.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(a Nevada corporation)
Date: September 30, 2004 By: /s/ Paul H. Metzinger
--------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: September 30, 2004 By: /s/ Kristi J. Kampmann
---------------------------
Kristi J. Kampmann, Chief Financial
Officer & Chief Accounting Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: September 30, 2004 By: /s/ Paul H. Metzinger
--------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: September 30, 2004 By: /s/ Herbert J. Neuhaus
---------------------------
Herbert J. Neuhaus, Director &
Executive Vice-President of Technology
& Marketing
Date: September 30, 2004 By: /s/ Robert Shaw
-------------------
Robert Shaw, Director
Date: September 30, 2004 By: /s/ John Hoback
-------------------
John Hoback, Director
31
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report covering the Company's fiscal year ended June 30, 2004,
nor any proxy material, has been sent to security holders of the Company.
1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheet - June 30, 2004 F-3
Consolidated Statements of Operations -
Years ended June 30, 2004 and 2003 F-4
Consolidated Statements of Comprehensive Loss -
Years ended June 30, 2004 and 2003 F-5
Consolidated Statements of Shareholders' Equity -
Years ended June 30, 2004 and 2003 F-6
Consolidated Statements of Cash Flows -
Years ended June 30, 2004 and 2003 F-8
Notes to Consolidated Financial Statements F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Nanopierce Technologies, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Nanopierce
Technologies, Inc. and subsidiaries as of June 30, 2004, and the related
consolidated statements of operations, comprehensive loss, changes in
shareholders' equity and cash flows for each of the years in the two-year period
ended June 30, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nanopierce
Technologies, Inc. and subsidiaries as of June 30, 2004, and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 2004, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company reported a net loss of $1,558,083
for the year ended June 30, 2004, and an accumulated deficit of $22,631,703 as
of June 30, 2004. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
September 24, 2004
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2004
Assets
------
Current assets:
Cash and cash equivalents $ 1,018,408
Accounts receivable, net 5,809
Prepaid expenses 44,727
-------------
Total current assets 1,068,944
-------------
Property and equipment:
Office equipment and furniture 66,356
Less accumulated depreciation (43,257)
-------------
23,099
-------------
Other assets:
Deposits and other 19,663
Investments in affiliates (Note 6) 303,966
-------------
323,629
-------------
Total assets $ 1,415,672
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable, including $6,116 payable to affiliate (Note 6) $ 108,856
Note payable (Note 7) 61,400
-------------
Total liabilities (all current) 170,256
-------------
Commitments and contingencies (Notes 4, 9 and 12)
Shareholders' equity (Note 8):
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
90,059,033 shares issued and outstanding 9,006
Additional paid-in capital 23,744,891
Accumulated other comprehensive income 123,222
Accumulated deficit (22,631,703)
-------------
Total shareholders' equity 1,245,416
-------------
Total liabilities and shareholders' equity $ 1,415,672
=============
See notes to consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30, 2004 and 2003
2004 2003
------------ -----------
Revenues $ 34,258 37,017
------------ -----------
Operating expenses:
General and administrative 1,312,519 2,414,077
Research and development 41,849 316,403
Selling and marketing 37,033 238,817
Impairment of intellectual property
and equipment (Note 1) 608,061 210,000
------------ -----------
1,999,462 3,179,297
------------ -----------
Loss from operations (1,965,204) (3,142,280)
------------ -----------
Other income (expense):
Interest income 2,550 7,251
Extinguishment of liabilities (Note 7) 52,500 -
Equity losses of affiliates (Note 6) (99,922) -
Interest expense (2,889) (38)
------------ -----------
(47,761) 7,213
------------ -----------
Loss from continuing operations (2,012,965) (3,135,067)
------------ -----------
Discontinued operations; income(loss)
from operations of subsidiary (Note 3) 454,882 (882,718)
------------ -----------
Net loss $(1,558,083) (4,017,785)
============ ===========
Basic and diluted loss per share:
Loss from continuing operations $ (0.03) (0.05)
Income (loss) from discontinued
operations 0.01 (0.02)
------------ -----------
Net loss per share, basic and diluted $(0.02) (0.07)
============ ===========
Weighted average number of common
shares outstanding 75,116,717 61,647,688
============ ===========
See notes to consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years Ended June 30, 2004 and 2003
2004 2003
------------ -----------
Net loss $(1,558,083) (4,017,785)
Change in unrealized gain on
securities (141) (237)
Change in foreign currency
translation adjustments (66,727) 48,915
------------ -----------
Comprehensive loss $(1,624,951) (3,969,107)
============ ===========
See notes to consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 2004 and 2003
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
Warrants issued for
services - - 3,190 - - 3,190
Common stock and
warrants issued for
cash (net of offering
costs of $75,500) 7,340,348 734 1,826,032 - - 1,826,766
Common stock issued
upon cashless exercise
of warrants 56,388 5 (5) - - -
Common stock issued upon
cashless exercise of
option 7,000 1 (1) - - -
Warrant issued in
exchange for deferred
consulting costs - - 230,400 - - 230,400
Extension of term of
warrant - - 2,400 - - 2,400
Net loss - - - - (4,017,785) (4,017,785)
Other comprehensive
income:
Change in unrealized
gain on securities - - - (237) - (237)
Foreign currency
translation
adjustments - - - 48,915 - 48,915
------------ ----------- ------------------- ------------- --------------- ------------
Balances,
June 30, 2003 65,054,738 $ 6,505 21,567,807 190,090 (21,073,620) 690,782
============ =========== =================== ============= =============== ============
(Continued)
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 2004 and 2003
(Continued)
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 and
warrants issued for
cash (net of offering
costs of $272,000)
20,769,231 2,077 1,825,923 - - 1,828,000
Common stock issued
in satisfaction of
payable 200,000 20 3,615 - - 3,635
Common stock issued upon
exercise of
warrants (net of
offering costs
of $ 37,050) 3,850,000 385 347,565 - - 347,950
Common stock issued upon
cashless exercise of
warrants 185,064 19 (19) - - -
Net loss - - - - (1,558,083) (1,558,083)
Other comprehensive
Loss:
Change in unrealized
gain on securities - - - (141) - (141)
Foreign currency
translation
adjustments - - - (66,727) - (66,727)
------------ ----------- ------------------ ------------ -------------- -----------
Balances,
June 30, 2004 90,059,033 $ 9,006 23,744,891 123,222 (22,631,703) 1,245,416
============ =========== ================== ============ ============== ===========
See notes to consolidated financial statements.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Years Ended June 30, 2004 and 2003
2004 2003
------------- -----------
Cash flows from operating activities:
Net loss $ (1,558,083) (4,017,785)
------------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
(Income) loss from discontinued operations ( 454,882) 882,718
Amortization expense 158,674 150,916
Depreciation expense 10,657 157,393
Equity losses of affiliates 99,922 -
Gain on extinguishment of liabilities (52,500) -
Amortization of deferred consulting costs 122,459 107,941
Impairment of intellectual property and equipment 608,061 210,000
Provision for doubtful receivable 58,074 -
Stock-based compensation expense - 14,935
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ( 11,883) 29,139
Decrease in prepaid expense 8,646 4,001
Decrease in deposits and other assets - 240,013
(Decrease) increase in accounts payable and
accrued liabilities ( 188,359) 466,482
------------- -----------
Total adjustments 358,869 2,263,538
------------- -----------
Net cash used in operating activities
from continuing operations (1,199,214) (1,754,247)
------------- -----------
Cash flows from investing activities:
Advances to equity investee ( 50,000) -
Increase in patent and trademark applications ( 68,189) ( 239,556)
Purchases of property and equipment ( 1,575) ( 351,431)
Payments received on notes receivable - 170,779
Cash effect of ExypnoTech deconsolidation ( 115,151) -
------------- -----------
Net cash used in investing activities
from continuing operations ( 234,915) ( 420,208)
------------- -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 2,175,950 1,826,766
Proceeds from notes payable 165,000 10,000
Payments of notes payable ( 205,700) -
------------- -----------
Net cash provided by financing activities
from continuing operations 2,135,250 1,836,766
------------- -----------
Effect of exchange rate changes on cash
and cash equivalents 127,038 44,098
------------- -----------
Net cash used in discontinued operations (10,492) ( 184,877)
------------- -----------
Net increase (decrease) in cash and cash equivalents 817,667 ( 478,468)
Cash and cash equivalents, beginning 200,741 679,209
------------- -----------
Cash and cash equivalents, ending $ 1,018,408 200,741
============= ===========
(Continued)
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2004 and 2003
(Continued)
2004 2003
----------- -------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 2,851 5,923
=========== =======
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock in satisfaction of payable $ 3,635 -
=========== =======
Investment in joint venture in exchange for equipment $ 132,000
=========== =======
Issuance of note payable in exchange for accounts payable $ 92,100 -
=========== =======
Patent costs incurred on behalf of equity investee in
exchange for receivable $ 8,074 -
=========== =======
Warrant issued in exchange for deferred consulting costs - 230,400
=========== =======
See notes to consolidated financial statements.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
1. BASIS OF PRESENTATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
NanoPierce Technologies, Inc., a Nevada corporation (the Company), its wholly
owned subsidiaries, NanoPierce Connection Systems, Inc., a Nevada corporation
(NCOS) which was incorporated in November 2001, and its wholly-owned foreign
subsidiaries, NanoPierce Card Technologies GmbH, Hohenbrunn (NCT), and through
December 11, 2003, ExypnoTech, GmbH (EPT, formed in February 2002) (Note 6).
During the year ended June 30, 2003, NCT discontinued its operations, and in
June 2004, NCT was dissolved (Note 3). In June 2004, the Company formed
ExypnoTech, LLC (ET LLC), as a wholly-owned subsidiary to market, primarily in
the United States, RFID (Radio Frequency Identification) components manufactured
by EPT. All significant intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS:
The Company has been engaged in the design, development and licensing of
products using its intellectual property, the PI Technology through its
subsidiaries and joint venture arrangements. 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 its PI Technology as the NanoPierce Connection System (NCS ) and has
marketed the PI Technology to companies in various industries for a wide range
of applications. As discussed below, the Company made a decision to abandon its
PI technology in the fourth quarter ended June 30, 2004.
Through June 30, 2004, NCOS activities primarily consisted of research and
development, marketing and administrative functions. Through June 30, 2004, EPT
activities 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,
LLC, which is an equity investment (Note 6), is primarily involved in research
and development and marketing functions.
ET LLC business activities are to include the marketing and sales of RFID
products in North America. ET LLC had no revenues or operations through June
30, 2004.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of the Company's cash and cash equivalents, accounts receivable,
accounts payable and note payable approximate their carrying amounts due to the
short maturities of these instruments.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
DEFERRED CONSULTING AND LEGAL COSTS:
In January 2003, the Company entered into a twelve-month financial advisory and
exclusive placement agent agreement with a third party, in which this party
acted as financial advisor to the Company and served as its exclusive placement
agent for a private placement of equity securities during the twelve-month term
of the agreement. Compensation included a non-refundable retainer fee, which
consisted of a warrant to purchase up to 450,000 shares of the Company's common
stock (Note 8). The warrant was valued at approximately $230,400 using the
Black-Scholes pricing model. The deferred cost was amortized on a straight-line
basis over a twelve-month period from the date of issuance, which represented
the estimated period the expenses were incurred. During the years ended June 30,
2004 and 2003, $122,459 and $107,941 were expensed in connection with the
warrant.
AVAILABLE FOR SALE SECURITIES
Available for sale securities consist of 1,180 shares of the common stock of
Intercell International Corporation (Intercell). These securities are carried at
fair value ($391 at June 30, 2004) based upon quoted market prices, and are
included in other long-term assets in the Company's June 30, 2004 consolidated
balance sheet. Unrealized gains and losses are computed on the basis of
specific identification and are reported as a separate component of
comprehensive income (loss), included as a separate item in shareholders'
equity. The Company reported a decrease in the unrealized loss on available for
sale securities of $141 in 2004 and $237 in 2003. At June 30, 2004, the
unrealized loss on available for sale securities was $24. Realized gains,
realized losses, and declines in value, judged to be other-than temporary, are
included in other income (expense). During the years ended June 30, 2004 and
2003, the Company did not sell any available for sale securities.
IMPAIRMENT OF INTELLECTUAL PROPERTY RIGHTS AND PATENT AND TRADEMARK
APPLICATIONS:
Through the third quarter of the year ended June 30, 2004, the Company had
recorded intellectual property rights and patent and trademark applications.
Through June 30, 2003 the intellectual property was amortized using the
straight-line method over 10 years, which was based on an average protection
period of underlying patents. As discussed below, in conjunction with the
Company's 2003 assessment of long-lived assets, the Company made a decision to
utilize a remaining useful life of 2.5 years beginning July 1, 2003, which was
consistent with the remaining average patent protection period of the remaining
intellectual property.
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
Costs incurred to establish patents and trademarks were capitalized and
amortized beginning at the time of the application over the shorter of the
estimated useful life of the technology or patent term. Patent and trademark
applications were amortized over a period of 10 years. Unsuccessful patent and
trademark application costs were expensed when determined to be unsuccessful.
Management assesses the carrying values of long-lived assets for impairment when
circumstances warrant such a review. In performing this assessment, management
considers current market analysis and appraisal of the PI Technology, along with
estimates of future cash flows and projected operating information. The Company
recognizes impairment losses when undiscounted cash flows estimated to be
generated from the long-lived assets are less than the amount of unamortized
assets.
During the fourth quarter ended June 30, 2004, the Company made a decision to
abandon its intellectual property rights, patents and patent applications, and
trademarks. This decision was based on factors including the Company's
evaluation of past and current operating results, and potential changes in the
Company's business plan, which involve investigating potential acquisition
candidates outside of the technology industry (Note 2). As a result of this
decision, the Company recorded an impairment charge of $608,061 in the fourth
quarter ended June 30, 2004.
During the fourth quarter ended June 30, 2003, the Company determined that an
impairment charge of $210,000 to intellectual property, patents, trademarks and
certain fixed assets was necessary. The decision to record this impairment was
based primarily on the remaining life of the patents underlying the intellectual
property and the Company's assessment of existing operational and marketing
activities.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation expense is provided by
use of accelerated and straight-line methods over the estimated useful lives of
the assets, which range from five to seven years.
REVENUE RECOGNITION:
Revenues from the sales of product are recognized at time of shipment. NCT
periodically performed various software development and implementation services
for third parties. These services are substantially unrelated to the development
and marketing of the PI Technology. Revenues from these services are generally
recorded as the services are provided and when no significant obligations remain
related to implementation. Revenues are deferred if significant future
obligations are to be fulfilled or if collection is not probable. At June 30,
2004, there were no deferred revenues related to contract services in progress.
The Company grants credit, without collateral, to its customers. Management
reviews trade receivables on an ongoing basis to determine if any receivables
will potentially be uncollectible. The Company includes trade receivable
balances that are determined to be uncollectible in an overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. At June 30, 2004, no allowance
for trade receivables was considered necessary; however an allowance of $58,074
was established for receivables from affiliates (Note 6).
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
RESEARCH AND DEVELOPMENT:
The Company includes in research and development expense: payroll, facility
rent, lab supplies and other expense items directly attributable to research and
development. The Company does not contract its research and development work,
nor does it, at this time, perform research and development work for others.
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (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 would have changed to the pro forma amounts indicated below:
2004 2003
------------ -----------
Net loss, as reported $(1,558,083) (4,017,785)
Total stock-based employee compensation
expense determined under fair value
based method for all awards - ( 233,000)
------------ -----------
Net loss, pro forma $(1,558,083) (4,250,785)
============ ===========
Net loss per share as reported $( 0.02) ( 0.07)
Net loss per share pro forma $( 0.02) ( 0.07)
The fair value of options granted during 2003 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 year ended June 30, 2004.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
FOREIGN CURRENCY TRANSLATION:
The financial statements of the Company's foreign subsidiaries are measured
using the local currency (the Euro) as the functional currency. Assets and
liabilities of the subsidiaries are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at average rates of
exchange in effect during the period. The resulting cumulative translation
adjustments have been recorded as a component of comprehensive income (loss),
included as a separate item in shareholders' equity.
The cumulative translation adjustment was approximately $190,000 at July 1, 2003
and approximately $123,000 at June 30, 2004. In June 2004, a $74,814 reduction
to other comprehensive income was recorded and recognized as a component of gain
on discontinued operations as a result of the liquidation of NCT.
FOREIGN CURRENCY TRANSACTIONS:
Gains and losses from foreign currency transactions are included in net income
(loss). Foreign currency transaction gains and losses were not significant
during the years ended June 30, 2004 and 2003.
COMPREHENSIVE INCOME:
SFAS No. 130, Reporting Comprehensive Income, requires the reporting and display
of comprehensive income and its components. SFAS No. 130 requires unrealized
gains and losses on the Company's foreign currency translation adjustments to be
included in comprehensive income (loss).
LOSS PER SHARE:
SFAS No. 128, Earnings per Share, requires dual presentation of basic and
diluted earnings or loss per share (EPS) with a reconciliation of the numerator
and denominator 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 year. Stock options and warrants are not
considered in the calculation, as the impact of the potential common shares
(77,381,877 shares at June 30, 2004 and 17,167,710 shares at June 30, 2003)
would be to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 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 for certain VIE's
created before February 2003 to the first interim or annual reporting period
that ends after March 15, 2004. The adoption of FIN 46 did not impact the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
establishes new standards on how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Under previous guidance, issuers could account for many of those instruments as
equity. SFAS No. 150 requires that those instruments be classified as
liabilities in statements of financial position. SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the
Company's results of operations or financial condition.
2. GOING CONCERN AND MANAGEMENT'S PLANS:
The Company's financial statements for the year ended June 30, 2004 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company reported a net loss of $1,558,083 for the year ended June
30, 2004, and an accumulated deficit of $22,631,703 as of June 30, 2004. The
Company did not recognize any significant revenues from its PI technology during
the year ended June 30, 2004, the Company's subsidiary NCT was dissolved in June
2004, and in December 2003, the Company sold a controlling 51% interest in EPT.
In addition, the Company has abandoned and recorded an impairment to its
intellectual property and is now considering non-technology based alternatives
in connection with its ongoing business plan.
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.
F-15
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
To address its liquidity needs, the Company is relying on cash received from a
January 2004, equity financing agreement, of which the Company initially
received $1.8 million, net offering costs, upon the issuance of restricted
common stock (Note 8). 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.
3. 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 NCT operations and liquidate NCT,
pursuant to a plan of self-liquidation as provided by German law. In June 2004,
NCT completed its plan of self-liquidation, and the German court legally
dissolved NCT.
At June 30, 2004, NCT has no remaining assets or liabilities. NCT's revenues for
the years ended June 30, 2004 and 2003 reported in discontinued operations were
$0 and $128,947, respectively. The Company recorded a $454,882 gain on the
disposal of NCT in 2004, which was primarily due to the extinguishment of NCT
liabilities and gains recognized from the sales of equipment. In 2003, NCT
incurred a loss of $882,718. NCT did not incur any income taxes in 2004 or 2003.
4. RISK CONSIDERATIONS:
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 subsidiary (NCT) operations and foreign equity investment
(EPT) operations are located in Germany. NCT and EPT transactions are conducted
in currencies other than the U.S. dollar (the currency into which NCT's and
EPT's 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 environment, 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-16
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
5. NOTES RECEIVABLE:
In October 2002, the remaining balance ($144,709) of an unsecured, 12% note
receivable and related interest from a third party investment group involved in
assisting the Company with its financing efforts were received in full.
Prior to July 1, 2002, the Company loaned $50,000 to a representative of the
investment group described above in exchange for an unsecured, 8% note
receivable due in October 2002. A payment of $23,930 was received in May 2002.
In September 2002, the remaining balance of the note ($26,070) and related
interest was received in full.
6. INVESTMENTS IN AFFILIATES:
INVESTMENT IN EPT:
On December 11, 2003, a German entity formed, by former employees of EPT,
purchased a controlling 51% equity interest in EPT in exchange for $98,000, of
which $62,787 has been received through June 30, 2004. No gain or loss was
incurred by the Company as a result of this transaction. 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 ($203,654 at June 30, 2004) is adjusted to recognize the Company's
proportionate share of EPT's income (loss) each period.
Unaudited financial information of EPT as of June 30, 2004, and for the period
from December 11, 2003 through June 30, 2004 is as follows:
Assets:
Current assets(1) $ 93,497
Equipment 295,859
----------
Total assets $ 389,356
==========
Liabilities and members' equity:
Current liabilities(2) $ 172,370
Members' equity 216,986
----------
Total liabilities and members' equity $ 389,356
==========
F-17
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
December 11, 2003
through
June 30, 2004
-------------------
Revenues(3) $ 42,143
Expenses ( 144,094)
-------------------
Net loss $ (101,951)
===================
(1) Current assets include receivables in the amount of $9,562 due from the 51%
owner of EPT.
(2) Current liabilities include a payable of $19,070 to the 51% owner of EPT.
(3) Revenues include $32,180 of sales to the 51% owner of EPT.
At June 30, 2004, the Company has an $8,074 receivable from EPT. The Company has
recorded an allowance for this receivable due to uncertainty as to collection.
Pro forma results of the Company's operations for the fiscal years ended June
30, 2004 and 2003, assuming the deconsolidation of EPT occurred as of July 1,
2003 and 2002, are as follows:
2004 2003
------------ -------------
Revenues $ 5,809 $ -
Operating expenses $(1,869,029) $( 2,602,791)
Net loss $(1,427,650) $( 3,474,396)
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 was to invest $50,000 cash, of which
$22,900 has been received as of June 30, 2004. 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 determined that Scimaxx LLC is the controlling financial interest holder
and therefore, the Company is accounting for its investment in Scimaxx Solutions
as an equity method investment. At June 30, 2004, the Company's investment in
Scimaxx Solutions is $100,312.
F-18
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
Unaudited financial information of Scimaxx Solutions as of June 30, 2004, and
for the period from September 15, 2003 (inception) through June 30, 2004, is as
follows:
Assets:
Current assets $ 11,027
Equipment 96,262
--------
Total assets $107,289
========
Liabilities and members' equity:
Current liabilities $ 41,616
Members' equity 65,673
--------
Total liabilities and members' equity $107,289
========
September 15, 2003
through
June 30, 2004
--------------------
Revenues $ 17,458
Expenses (245,850)
--------------------
Net loss $ (228,392)
====================
During the quarter ended June 30, 2004, the Company advanced Scimaxx Solutions
$50,000 to support continuing operations. Based on uncertainty regarding the
ultimate collection of this receivable, the Company has fully allowed for the
receivable balance as of June 30, 2004.
7. 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% note payable due in December 2003. In September
2003, the same officer/director loaned the Company $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.
In September 2003, 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 have received in connection with the Financing Agreement litigation
(Note 9). In January 2004, the Company paid the $135,000, plus accrued interest
of $2,493.
OTHER:
In February 2004, the Company converted vendor payables of $92,100 into an
unsecured, non-interest bearing note payable due in March 2005. This vendor
along with one other vendor, agreed to forgive $52,500 of the liabilities owed,
and as a result, the Company recognized a gain on the extinguishment of
liabilities in 2004.
F-19
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
8. SHAREHOLDERS' EQUITY:
COMMON STOCK:
2004 Transactions:
On January 20, 2004, the Company sold 20,000,000 units at a price of $0.10 per
unit for $ 1.8 million cash, pursuant to a Securities Purchase Agreement (net of
$272,000 of offering costs, discussed below). A unit consists of (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, and (iii) a warrant to purchase
two shares of the Company's common stock at an exercise price of $0.25 per
share. All warrants have an expiration date of January 20, 2009. As a result of
the sale, the Company issued 20,000,000 shares of its common stock, warrants to
purchase 20,000,000 shares of common stock at an exercise price of $0.10 per
share, and warrants to purchase 40,000,000 shares of common stock at an exercise
price of $0.25 per share.
In connection with the sale of the units, 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 Company issued
to the placement agent warrants to purchase 600,000 shares of common stock with
an exercise price of $0.10 per share. The warrants 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 Company also paid a $200,000 finders fee to a third party (the "finder")
and issued warrants to purchase 2,000,000 shares of common stock with an
exercise price of $0.10 per share. The warrants expire on January 20, 2009. This
third party 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 and additional warrants to purchase 10% of the total number
of shares issued as a result of the exercise of the $ 0.10 warrants. The Company
also incurred an additional $12,000 of offering costs, primarily legal costs.
During the year ended June 30, 2004, the Company issued 3,850,000 shares of its
common stock upon the exercise of 3,850,000 warrants, which included 1,000,000
of the warrants issued to the finder as described above. The Company received
$347,950 cash (net of $37,050 of offering costs, of which $11,050 is accrued at
June 30, 2004) for the exercise. As described above, the Company also granted to
the placement agent and finder, warrants to purchase an additional 370,500
shares. The warrants are exercisable at $0.10 per share and expire January 20,
2009. The Company also issued 185,064 of its common stock upon the cashless
exercise of 403,333 warrants.
During the year ended June 30, 2004, the Company also sold 769,231 shares of
restricted common stock for cash of $100,000, and the Company issued 200,000
shares of restricted common stock in satisfaction of a $3,635 payable.
F-20
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
2003 Transactions:
During the year ended June 30, 2003, the Company sold 5,691,190 shares of
restricted common stock along with warrants to purchase 4,616,191 shares of
common stock at exercise prices ranging from $0.30 to $0.60 per share for cash
of $1,570,459 (net of offering costs of $75,500). In connection with the
issuance of 1,119,999 shares out of the total 5,691,190 issued during the year,
the Company extended the expiration dates of existing warrants to purchase
612,500 shares of common stock held by the purchasers. These warrants were
scheduled to expire from October 2002 through January 2003, and were extended
for a one-year period. These warrants expired in January 2004.
During the year ended June 30, 2003, the Company also sold 75,000 shares of
restricted common stock along with warrants to purchase 75,000 shares of common
stock at exercise prices ranging from $0.30 to $0.36 per share for cash of
$25,000. In addition, the Company sold 1,574,158 shares of 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 cash of $231,307.
The warrants issued are exercisable immediately and include a cashless exercise
provision. Warrants to purchase 1,251,191 shares of common stock have a
three-year term, and warrants to purchase 4,773,334 shares of common stock have
a five-year term.
During the year ended June 30, 2003, the Company issued 14,000 shares of common
stock in exchange for investment related services. The shares were valued at
$9,345, the quoted market price of the Company's common stock at the date the
services were performed.
During the year ended June 30, 2003, the Company also issued 7,000 shares of
common stock in connection with the cashless exercise of a stock option, and
issued 56,388 shares of common stock in connection with the cashless exercise of
warrants.
F-21
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
Stock Options and Warrants:
Stock Options:
The Company has established two Compensatory Stock Option Plans (the Option
Plans) and has reserved 12,500,000 shares of common stock for issuance under the
Option Plans. Vesting provisions are determined by the Board of Directors. All
stock options expire 10 years from the date of grant.
A summary of the Option Plans is as follows:
2004 2003
---- ----
Weighted Weighted-
average average
exercise exercise
Shares price Shares price
--------- --------- ----------- ----------
Outstanding, beginning of
Year 8,787,524 $ 1.00 8,502,000 $ 1.06
Granted - - 450,000 0.62
Expired - - ( 150,000) 2.06
Exercised - - ( 14,476) 0.66
--------- --------- ----------- ----------
Outstanding, end of year 8,787,524 $ 1.00 8,787,524 $ 1.00
========= ========= =========== ==========
Options exercisable at
end of year 8,537,524 $ 1.00 8,322,524 $ 1.00
========= ========= =========== ==========
Weighted-average fair value of
options granted during the
year at market $ - $ 0.52
========= ==========
The following table summarizes information about stock options outstanding as of
June 30, 2004:
Options Outstanding Options Exercisable
--------------------------- --------------------
Weighted-
average Weighted-
Range of remaining Weighted- average
exercise Number of contractual average Number of exercise
prices options life (years) exercise price options price
------------ --------- ------------ --------------- --------- ----------
$0.20 - 0.50 3,255,000 4.37 $ 0.32 3,255,000 $ 0.32
0.51 - 1.00. 2,495,524 8.30 0.67 2,455,524 0.64
1.01 - 2.00. 860,000 6.34 1.53 650,000 1.58
2.01 - 3.00. 2,167,000 4.53 2.28 2,167,000 2.28
5.01 - 6.00. 10,000 5.67 6.00 10,000 6.00
--------- ------------ --------------- --------- ----------
8,787,524 6.74 $ 1.00 8,537,524 $ 1.00
========= ============ =============== ========= ==========
F-22
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
Warrants:
At June 30, 2004, the following warrants to purchase common stock were
outstanding:
Number of common Exercise Expiration
shares covered by warrant price date
------------------------- ------------ -------------------------
20,000 $ 1.25 August - September 2005
1,526,019 0.30 - 2.58 October - December 2005
75,000 0.30 - 0.36 January 2006
200,000 0.65 May 2006
200,000 0.60 - 1.25 January 2007
3,440,000 0.50 - 0.60 October - November 2007
1,333,334 0.15 April 2008
19,120,500 0.10 January 2009
40,000,000 0.25 January 2009
450,000 $ 0.60 January 2010
-------------
66,364,853 (1)
=============
(1) Does not include 2,229,500 of warrants that are issuable pursuant to the
securities purchase agreement described above.
During the year ended June 30, 2004, warrants to purchase 3,850,000 shares of
common stock were exercised for net cash proceeds of $347,950 (net of commission
expenses of $37,050, of which $ 11,050 is accrued at June 30, 2004) in exchange
for 3,850,000 shares of common stock, and warrants to purchase 403,333 shares of
common stock were exercised on a cashless basis in exchange for 185,064 shares
of common stock.
During the year ended June 30, 2004, warrants to purchase 732,500 shares of
common stock with exercise prices ranging from $0.30 to $2.81 per share expired.
During the year ended June 30, 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.
In January 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. The warrant was
fully vested, exercisable and non-forfeitable upon issuance and expires in
January 2010. The warrant provides for a cashless exercise and was valued at
approximately $230,400 using the Black-Scholes pricing model.
During the year ended June 30, 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
remained 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.
The Company utilized the Black - Scholes pricing model to value warrants that
were issued by the company during 2003 for services in which expense was
incurred ( none were issued in 2004 ) and utilized the following significant
assumptions in using the model.
CURRENT
RISK-FREE
INTEREST
RATE
EXPECTED EXPECTED
VOLATILITY FOR THE
OF THE PRICE LIFE OF EXPECTED EXPECTED
FISCAL NUMBER OF OF COMMON THE LIFE DIVIDEND
YEAR WARRANTS STOCK WARRANTS (YEARS) YIELD
------ --------- ------------ ---------- --------- --------
2003 10,000 56 4.5% 3 0
2003 10,000 59 4.5 3 0
2003 450,000 91 2.3 5.5 0
F-23
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
During the year ended June 30, 2003, warrants to purchase 630,000 shares of
common stock at an exercise price of $2.92 per share expired.
9. COMMITMENTS AND CONTINGENCIES
Litigation:
Depository Trust Suit:
In May 2004, the Company filed suit against the Depository Trust and Clearing
Corporation, the Depository Trust Company, and the National Securities Clearing
Corporation in the Second Judicial District Court of the County of Washoe, State
of Nevada. The suit alleges multiple claims under the Nevada Revised Statutes
90.570, 90.580, 90.660 and 598A.060 and on other legal bases. The complaint
alleges, among other things, that the DTCC, DTC and NSCC acted in concert to
operate the "Stock Borrow Program," originally created to address short term
delivery failures by sellers of securities in the stock market. According to
the complaint, the DTCC, NSCC and DTC conspired to maintain significant open
fail deliver positions of millions of shares of the Company's common stock for
extended periods of time by using the Stock Borrow Program to cover these open
and unsettled positions. By permitting shares of the Company to be borrowed
through the program, DTCC, NSCC and DTC allegedly jointly conspired to drive
down the price of the Company's stock. The complaint also alleges that the
operation of the Stock Borrow Program allowed the manipulation of the Company's
stock by various sellers who failed to deliver shares to the Company. By
covering open fail to deliver positions with shares borrowed through the Stock
Borrow Program and delivering borrowed shares to the buyers, the complaint
contends that DTCC, NSCC and DTC artificially created unregistered, free trading
shares of the Company's common stock and increased the supply of the Company's
shares in the market place. The Company is seeking damages in the amount of
$25,000,000 and treble damages. Responsive pleadings have been filed by the
defendants.
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. 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 this litigation, Harvest
Court, LLC filed counterclaims against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and a number of unrelated third parties. The
counterclaims allege violations of federal securities laws and other laws.
Harvest Court, LLC is seeking various forms of relief including compensatory and
punitive damages. Responsive pleadings have been filed and the litigation is
currently in the discovery stage.
F-24
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
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, LLC. The Company has
filed counterclaims seeking various forms of relief against Harvest Court, LLC.
The Company intends to vigorously prosecute all litigation and does not believe
the outcome of the 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.
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 also included a $10,000 monthly advisory fee, payable
in cash, beginning in June 2003, and ending in January 2004, of which $60,000
was expensed though June 30, 2004.
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 fiscal years ended June 30, 2004
and 2003, $122,459 and $107,941, respectively, was expensed in connection with
the warrant.
F-25
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
Leases:
The Company has entered into certain facilities and equipment leases. The
leases are non-cancelable operating leases that expire through September 30,
2006. Future minimum lease payments under these operating leases are as
follows:
Year ending
June 30, Amount
------------ --------
2005 $ 58,200
2006 58,200
2007 14,550
--------
$130,950
========
Aggregate rental expense in continuing operations under operating leases was
$96,969 and $211,095 for the years ended June 30, 2004 and 2003, respectively.
10. INCOME TAXES:
The Company and its subsidiaries did not incur income tax expense for the years
ended June 30, 2004 and 2003. The reconciliation between taxes computed at the
statutory federal tax rate of 34% applied to the loss from continuing operations
and the effective tax rate for the years ended June 30, 2004 and 2003 is as
follows:
2004 2003
---------- -----------
Expected income tax benefit $(684,000) (1,066,000)
Increase in valuation allowance 684,000 1,066,000
---------- -----------
$ - -
========== ===========
The tax effects of temporary differences that give rise to substantially all
deferred tax assets at June 30, 2004 are as follows:
Deferred tax assets:
Net operating loss $ 4,296,000
Intangible assets 207,000
Allowance for receivables 20,000
Less valuation allowance (4,523,000)
------------
Net deferred tax assets. $ -
============
As of June 30, 2004, the Company has net operating loss carry forwards of
approximately $13,300,000, which expire between 2013 and 2024. The Company's
net operating loss carry forwards may be subject to annual limitations, which
could reduce or defer the utilization of the losses as a result of an ownership
change as defined in Section 382 of the Internal Revenue Code.
F-26
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2004 and 2003
11. FOREIGN AND DOMESTIC OPERATIONS:
Operating results and long-lived assets of continuing operations as of June 30,
2004 and for the years ended June 30, 2004 and 2003, by geographic area, are
presented in the table below. There were no significant amounts of transfers
between geographic areas.
UNITED STATES GERMANY TOTAL
-------------- ------- ------
Revenues for year
ended June 30, 2004 $ 5,809 28,449 34,258
============== ======= ======
Revenues for year
ended June 30, 2003 $ 3,900 33,117 37,017
============== ======= ======
Long-lived assets at
June 30, 2004 $ 23,099 - 23,099
============== ======= ======
F-27