FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-0992908
------ ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
370 17th Street, Suite 3640
Denver, Colorado 80202
(Address of principal executive offices ) (Zip Code)
Issuer's telephone number, including area code: (303) 592-1010
Not applicable
(Former name, former address or former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
As of May 14, 2004 there were 87,209,033 shares of the registrant's sole class
of common shares outstanding.
Transitional Small Business Disclosure Format Yes No X
--- ---
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Independent Accountants' Report F-1
Condensed Consolidated Balance Sheet - March 31, 2004 F-2
Condensed Consolidated Statements of Operations -
Nine and three months ended
March 31, 2004 and 2003 F-3
Condensed Consolidated Statements of Comprehensive
Loss - Nine and three months ended
March 31, 2004 and 2003 F-4
Condensed Consolidated Statement of Changes in Shareholders'
Equity - Nine months ended March 31, 2004 F-5
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2004 and 2003 F-6
Notes to Condensed Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis 1
Item 3. Controls and Procedures 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 5
Item 2. Changes in Securities 6
Item 6. Exhibits and Reports on Form 8-K 6
SIGNATURES 8
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
Board of Directors
NanoPierce Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
NanoPierce Technologies, Inc. and subsidiaries as of March 31, 2004, the related
condensed consolidated statements of operations and comprehensive loss for the
three-month and nine-month periods ended March 31, 2004 and 2003, the condensed
consolidated statement of changes in shareholders' equity for the nine-month
period ended March 31, 2004, and the condensed consolidated statements of cash
flows for the nine-month periods ended March 31, 2004 and 2003. These interim
condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim condensed consolidated financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 13, 2004
F-1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
March 31, 2004
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 1,022,721
Prepaid expenses 2,000
Assets of discontinued operations (Note 2) 3,396
-------------
Total current assets 1,028,117
-------------
Property and equipment:
Office equipment and furniture 66,356
Less accumulated depreciation (40,836)
-------------
25,520
-------------
Other assets:
Deposits and other 19,806
Intellectual property rights, net of accumulated
amortization of $609,315 190,685
Patent and trademark applications, net of accumulated
amortization of $120,802 451,537
Investments in affiliates (Notes 4 and 5) 335,283
-------------
997,311
-------------
Total assets $ 2,050,948
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 199,350
Accrued liabilities 10,014
Liabilities of discontinued operations (Note 2) 363,057
-------------
Total liabilities (all current) 572,421
-------------
Commitments and contingencies (Notes 5 and 8)
Shareholders' equity (Note 7):
Preferred stock; $0.0001 par value; none issued and outstanding;
5,000,000 shares authorized
Common stock; $0.0001 par value; 200,000,000 shares authorized
86,209,033 shares issued and outstanding 8,621
Additional paid-in capital 23,397,326
Accumulated other comprehensive income 194,986
Accumulated deficit (22,122,406)
-------------
Total shareholders' equity 1,478,527
-------------
Total liabilities and shareholders' equity $ 2,050,948
=============
See notes to condensed consolidated financial statements.
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March31, March31,
------------ -----------
2004 2003 2004 2003
------------ ----------- ----------- -----------
Revenues $ - 8,475 28,449 19,102
------------ ----------- ----------- -----------
Operating expenses:
Research and development - 88,792 46,863 273,579
General and administrative 295,212 643,865 998,416 1,821,255
Selling and marketing - 68,833 37,033 203,244
------------ ----------- ----------- -----------
295,212 801,490 1,082,312 2,298,078
------------ ----------- ----------- -----------
Loss from operations (295,212) (793,015) (1,053,863) (2,278,976)
------------ ----------- ----------- -----------
Other income (expense):
Interest income 3,188 4,760 11,387 19,716
Extinguishment of liabilities 52,500 - 52,500 -
Equity losses of affiliates ( 48,539) - ( 68,372) -
Interest expense (909) - (3,699) -
------------ ----------- ----------- -----------
6,240 4,760 (8,184) 19,716
------------ ----------- ----------- -----------
Loss from continuing operations (288,972) (788,255) (1,062,047) (2,259,260)
------------ ----------- ----------- -----------
Discontinued operations; (loss) income
from operations of subsidiary (2,916) (200,045) 13,261 (603,270)
------------ ----------- ----------- -----------
Net loss $ (291,888) (988,300) (1,048,786) (2,862,530)
============ =========== =========== ===========
Basic and diluted loss per share:
Loss from continuing operations * ( 0.02) ( 0.01) ( 0.04)
(Loss) income from discontinued
operations * * * ( 0.01)
------------ ----------- ----------- -----------
Net loss per share, basic and diluted $ * ( 0.02) ( 0.01) ( 0.05)
============ =========== =========== ===========
Weighted average number of common
shares outstanding 81,663,563 63,464,958 71,139,776 60,548,492
============ =========== =========== ===========
* Less than $0.01 per share.
See notes to condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ -------------------------
March 31, March 31,
------------------------ -------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net loss $( 291,888) ( 988,300) ( 1,048,786) (2,862,530)
Change in unrealized gain on
securities ( 177) ( 83) ( 296) ( 154)
Change in foreign currency
translation adjustments 10,930 9,396 5,192 39,605
----------- ----------- ------------ -----------
Comprehensive loss $ (281,135) ( 978,987) (1,043,890) (2,823,079)
=========== =========== ============ ===========
See notes to condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Nine Months Ended March 31, 2004
(Unaudited)
Common stock Additional Accumulated other Total
------------------- paid-in comprehensive Accumulated shareholders'
Shares Amount capital income deficit equity
---------- ------- ----------- ------------------ ------------ --------------
Balances, July 1, 2003 65,054,738 $ 6,505 21,567,807 190,090 (21,073,620) 690,782
Common stock and
warrants issued for
cash, net of $272,000
offering costs 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 for
cashless exercise of
warrants 185,064 19 (19) - - -
Net loss - - - - (1,048,786) (1,048,786)
Other comprehensive
income (loss):
Change in unrealized
gain on securities - - - (296) - (296)
Foreign currency
translation
adjustments - - - 5,192 - 5,192
---------- ------- ----------- ------------------ ------------ --------------
Balances,
March 31, 2004 86,209,033 $ 8,621 23,397,326 194,986 (22,122,406) 1,478,527
========== ======= =========== ================== ============ ==============
See notes to condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------ -----------
Cash flows from operating activities:
Net loss $(1,048,786) (2,862,530)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
(Income) loss from discontinued operations ( 13,261) 603,270
Amortization expense 117,926 103,905
Depreciation expense 16,900 115,099
Equity losses of affiliates 68,372 -
Amortization of deferred consulting costs 122,459 50,499
Stock-based compensation expense - 14,934
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 2,000 (216,868)
Decrease (increase) in prepaid expense 43,748 ( 30,546)
Decrease (increase) in deposits and other assets 7,860 ( 58,996)
(Decrease) increase in accounts payable and
accrued liabilities (245,825) 316,821
------------ -----------
Total adjustments 120,179 898,118
------------ -----------
Net cash used in operating activities
from continuing operations (928,607) (1,964,412)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications ( 63,178) (129,884)
Purchases of property and equipment (1,575) ( 22,941)
Payments received on notes receivable - 170,779
Cash effect of ExypnoTech deconsolidation (115,151) -
------------ -----------
Net cash (used in) provided by investing activities
from continuing operations (179,904) 17,954
------------ -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 1,828,000 1,595,461
Proceeds from notes payable 165,000 -
Payments of notes payable ( 175,000) -
------------ -----------
Net cash provided by financing activities
from continuing operations 1,818,000 1,595,461
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 119,588 17,127
------------ -----------
Net cash used in discontinued operations (7,095) (9,094)
------------ -----------
Net increase (decrease) in cash and cash equivalents 821,982 (342,964)
Cash and cash equivalents, beginning 200,739 679,209
------------ -----------
Cash and cash equivalents, ending $ 1,022,721 336,245
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - 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
============
Warrant issued for deferred consulting services - 230,400
============ ===========
See notes to condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
1. Business, Organization and Summary of Significant Accounting
----------------------------------------------------------------------
Policies:
---------
Presentation of Interim Information:
The accompanying condensed consolidated financial statements include the
accounts of NanoPierce Technologies, Inc., a Nevada corporation (the Company),
its wholly-owned subsidiary, NanoPierce Connection Systems, Inc., a Nevada
Corporation (NCOS), its wholly-owned foreign subsidiary, NanoPierce Card
Technologies GmbH, Hohenbrunn (NCT), and ExypnoTech, GmbH (EPT, formed in
February 2002) through December 11, 2003 (Note 4). During the fiscal year ended
June 30, 2003, NCT effectively discontinued its operations (Note 2). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements include all material adjustments,
including all normal and recurring adjustments, considered necessary to present
fairly the financial position and operating results of the Company for the
periods presented. The financial statements and notes are presented as
permitted by Form 10-QSB, and do not contain certain information included in the
Company's last Annual Report on Form 10-KSB/A for the fiscal year ended June 30,
2003. It is the Company's opinion that when the interim statements are read in
conjunction with the June 30, 2003 Annual Report on Form 10-KSB/A, the
disclosures are adequate to make the information presented not misleading.
Interim results are not necessarily indicative of results for a full year or any
future period.
In the Company's last Annual Report on Form 10-KSB/A for the fiscal year ended
June 30, 2003, the Independent Auditors' Report includes an explanatory
paragraph that describes substantial doubt about the Company's ability to
continue as a going concern. The Company's financial statements for the nine
months ended March 31, 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 $1,048,786 for the nine months ended March 31, 2004, and an accumulated
deficit of $22,122,406 as of March 31, 2004. The Company has not recognized any
significant revenues from its PI technology, the Company's subsidiary NCT is
under a plan of self-liquidation, and in December 2003, the Company sold a
controlling 51% interest in EPT.
In January 2004, the Company entered into an equity financing agreement, of
which the Company received $2 million upon the issuance of restricted common
stock (Note 7). The Company intends to use these funds to support operations
and for possible business acquisitions.
Currently, the Company does not have a revolving loan agreement with any
financial institution, nor can the Company provide any assurance it will be able
to enter into any such agreement in the future, or be able to raise funds
through a further issuance of debt or equity in the Company.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
Business:
The Company is engaged in the design, development and licensing of products
using its intellectual property, the PI Technology. The PI Technology consists
of patents, pending patent applications, patent applications in preparation,
trade secrets, trade names, and trademarks. The PI Technology improves
electrical, thermal and mechanical characteristics of electronic products. The
Company has designated and is commercializing its PI Technology as the
NanoPierce Connection System (NCS(TM)) and has begun to market the PI Technology
to companies in various industries for a wide range of applications.
NCOS business activities are to include the licensing, sale and/or manufacturing
of certain electronic products using the NCS technology. Through March 31, 2004,
NCOS activities have primarily consisted of research and development, marketing
and administrative functions. Prior to discontinuing operations, NCT activities
consisted primarily of providing software development and implementation
services, and performing administrative, research and development, and selling
and marketing activities. Through March 31, 2004, EPT activities have primarily
consisted of manufacturing inlay components used in, among other things Smart
Labels, which is a paper sheet holding a chip-containing module that is capable
of memory storage and/or processing. Scimaxx Solutions, LLC, which is an equity
investment (Note 5) is primarily involved in research and development and
marketing functions.
Business Risk:
The Company is subject to risks and uncertainties common to technology-based
companies, including rapid technological change, dependence on principle
products and third party technology, new product introductions and other
activities of competitors, dependence on key personnel, and limited operating
history.
International Operations:
NCT and EPT operations are located in Germany. NCT and EPT transactions are
conducted in currencies other than the U.S. dollar, (the currency into which the
subsidiaries' historical financial statements have been translated) primarily
the Euro. As a result, the Company is exposed to adverse movements in foreign
currency exchange rates. In addition, the Company is subject to risks including
adverse developments in the foreign political and economic environments, trade
barriers, managing foreign operations and potentially adverse tax consequences.
There can be no assurance that any of these factors will not have a material
adverse effect on the Company's financial condition or results of operations in
the future.
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
Loss Per Share:
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
requires dual presentation of basic and diluted earnings or loss per share (EPS)
with a reconciliation of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Loss per share of common stock is computed based on the
weighted average number of common shares outstanding during the period. Stock
options and warrants are not considered in the calculation, as the impact of the
potential common shares (81,231,877 shares at March 31, 2004 and 15,984,376
shares at March 31, 2003) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
Stock Based Compensation:
SFAS No. 123, Accounting for Stock Based Compensation, allows companies to
choose whether to account for employee stock-based compensation on a fair value
method, or to continue accounting for such compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has chosen to
continue to account for employee stock-based compensation using APB 25.
Had compensation cost for the Company's stock plans been determined based on
fair value at the grant dates for awards under the plans consistent with the
method prescribed under SFAS No. 123, the Company's net loss and net loss per
share for the nine months ended March 31, 2004 and 2003, respectively, would
have changed to the pro forma amounts indicated below:
March 31, March 31,
2004 2003
------------ ------------
Net loss, as reported $(1,048,786) ( 2,862,530)
Total stock-based employee compensation
expense determined under fair value
based method for all awards - ( 58,000)
------------ ------------
Net loss, pro forma $(1,048,786) ( 2,920,530)
============ ============
Net loss per share, as reported $( 0.01) ( 0.05)
Net loss per share, pro forma $( 0.01) ( 0.05)
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
The fair value of options granted during the nine months ended March 31, 2003
(Note 7) was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Expected dividend yield 0%
Expected stock price volatility 105%
Risk-free interest rate 2.9%
Expected life of options 6.5 years
No options were granted during the nine months ended March 31, 2004.
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 expenses. The Company does not contract its research and development
work, nor does it, at this time, perform research and development work for
others.
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 fiscal period ending after December 15, 2003. The adoption of FIN 46
did not impact the Company's financial position or results of operations.
2. Discontinued Operations:
-----------------------------
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany. The
insolvency filing was necessary in order to comply with specific German legal
requirements. In conjunction with the insolvency filing, management made a
decision in April 2003 to discontinue operations at NCT and liquidate NCT,
either though the German courts or through a self-liquidation. In September
2003, the German courts rejected the application for insolvency; therefore NCT
implemented a plan of self-liquidation as provided by German law. The Company
anticipates that liquidation will be completed by June 30, 2004.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
At March 31, 2004, NCT's remaining asset is cash of $3,396, and its liabilities
consist of accounts payable of $363,057 (excluding intercompany payables of
approximately $182,982).
NCT's revenues for the nine months ended March 31, 2004 and 2003 reported in
discontinued operations were $0 and $139,651, respectively ($0 and $43,124 for
the three months ended March 31, 2004 and 2003, respectively). NCT recorded
income for the nine months ended March 31, 2004 of $13,261 (a net loss of $2,916
for the three months ended March 31, 2004), which was due to gains recognized
from the sale of equipment and the extinguishment of certain accrued expenses.
NCT recorded a loss for the nine months ended March 31, 2003 of $603,270 (a loss
of $200,045 for the three months ended March 31, 2003). NCT did not incur any
income taxes during these periods.
3. Notes receivable:
----------------------
During the nine months ended March 31, 2003, two notes receivable were paid.
The Company received $144,709 under a 5%, unsecured note receivable and $26,070
under an 8%, unsecured note receivable.
4. Investment in EPT:
------------------------
On December 11, 2003, an unrelated German entity agreed to purchase a
controlling 51% equity interest in EPT in exchange for $98,000, of which $62,787
was received as of March 31, 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 ($231,069 at March 31,
2004) is adjusted to recognize the Company's proportionate share of EPT's income
(loss) each period.
Unaudited condensed financial information of EPT as of March 31, 2004, and for
the nine month periods ended March 31, 2004 and 2003 are as follows:
Assets:
Current assets $ 78,205
Equipment 315,882
--------
Total assets $394,087
========
Liabilities and members' equity:
Current liabilities $150,381
Members' equity 243,706
--------
Total liabilities and members' equity $394,087
========
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
Nine Months Ended
March 31,
------------------------
2004 2003
----------- -----------
Revenues $ 34,885 $ 17,201
Costs and expenses (246,556) (364,420)
----------- -----------
Net loss $ (211,671) $ (347,219)
=========== ===========
Pro forma results of the Company's operations for the nine months ended March
31, 2004 and 2003, assuming the deconsolidation of EPT occurred as of July 1,
2003 and 2002, are as follows:
2004 2003
------------ -------------
Revenues $ - $ -
Operating expenses $ (922,910) $( 1,855,094)
Net loss $ (918,353) $( 2,515,311)
5. Investment in Joint Venture Interest:
---------------------------------------------
On September 15, 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC, an entity related to the Company in that a member of Scimaxx, LLC
is an officer/director of the Company. The name of the joint venture is Scimaxx
Solutions, LLC (Scimaxx Solutions, a Colorado Limited Liability company formed
in September 2003). The purpose of the joint venture is to provide the
electronics industry with technical solutions to manufacturing problems based on
the need for electrical connectivity.
The Company received a 50% interest in the joint venture in exchange for a
contribution of NCOS equipment with a carrying value of approximately $132,000
at September 15, 2003. The Company also granted Scimaxx Solutions a ten-year,
non-exclusive, non-royalty bearing worldwide license to use the Company's
intellectual property. Scimaxx, LLC is to invest $50,000 cash, of which $22,900
has been received as of March 31, 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 has
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 March 31, 2004, the Company's investment in
Scimaxx Solutions is $104,214. At March 31, 2004, Scimaxx Solutions' assets
consist of cash of $3,142, accounts receivable of $2,015, and machinery and
equipment of approximately $98,800; liabilities consist of $6,602 of accounts
payable. Through the nine months ended March 31, 2004, Scimaxx Solutions
recognized revenues of $7,579 and a net loss of $54,898; $29,104 of which was
allocated to Scimaxx, LLC.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
In April 2004, the Company advanced Scimaxx Solutions $25,000 to support
continuing operations.
6. Notes Payable - Related Parties:
----------------------------------------
In June 2003, an officer/director of the Company loaned $10,000 to the Company
in exchange for an unsecured, 7% promissory note due in December 2003. In
September 2003, the same officer/director loaned the Company an additional
$30,000 in exchange for an unsecured, 7% promissory note, due in September 2004.
In January 2004, the Company paid the $40,000 plus accrued interest of $1,247.
In September 2003, Intercell International Corporation ("Intercell"), an
affiliate of the Company at the time, loaned the Company $35,000 in exchange for
an unsecured, 7% promissory note due in September 2004. In November 2003,
Intercell loaned the Company $100,000 in exchange for a 7% promissory note due
in November 2004. This promissory note was collateralized by an assignment of a
51% interest in the proceeds, if any, the Company may receive in connection with
the Financing Agreement litigation (Note 8). In January 2004, the Company paid
the $135,000, plus accrued interest of $2,493.
7. Shareholders' Equity:
--------------------------
On January 20, 2004, the Company sold 20,000,000 units at a price of $0.10 per
unit for an aggregate amount of $2,000,000 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, 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.
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 $200,00 finders fee to a third party and issued warrants
to purchase 2,000,000 shares of common stock with an exercise price of $0.10 per
share. 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. The Company also incurred an additional $12,000
of offering costs, primarily legal costs. The warrants expire on January 20,
2009.
During the nine months ended March 31, 2004, the Company sold 769,231 shares of
restricted common stock for cash of $100,000. The Company also issued 200,000
shares of restricted common stock in satisfaction of a $3,635 payable.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
During the nine months ended March 31, 2004, warrants to purchase 403,333 shares
of common stock were exercised (cashless exercise election) in exchange for
185,064 shares of common stock.
During the nine months ended March 31, 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 nine months ended March 31, 2003, the Company granted stock options
to purchase 450,000 shares of common stock at exercise prices of $0.58 to $0.97
per share to employees and a director of the Company.
In May 2004, a warrant to purchase 1,000,000 shares of common stock was
exercised for $100,000.
8. Commitments and Contingencies:
------------------------------------
Depository Trust Suit:
On May 4, 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 Company is
seeking for damages in the amount of $25,000,000 and treble damages.
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 has
been expensed though March 31, 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 nine months ended March 31, 2004, $122,459
was expensed in connection with the warrant.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2004 and March 31, 2003
(Unaudited)
Financing Agreement Suit:
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings, in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York. In July 2003,
Harvest Court, LLC filed suit against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and unrelated third parties in the United States District
Court for the Southern District of New York, New York City, New York. The suit
alleges violations of federal securities laws and common law fraud among other
claims. Harvest Court, LLC is seeking various forms of relief including
compensatory and punitive damages. The Company is preparing pleadings
responsive to the complaint.
In May 2001, Harvest Court, LLC filed suit against the Company in the Supreme
Court of the State of New York, County of New York. The suit alleges that the
Company breached an October 20, 2000 Stock Purchase Agreement, by not issuing
7,418,895 free trading shares of the Company's common stock in connection with
the reset provisions of the Purchase Agreement due on the second reset date and
approximately 4,545,303 shares due in connection with the third reset date.
Harvest Court, LLC is seeking the delivery of such shares or damages in the
alternative. In August 2001, the Supreme Court of the State of New York, County
of New York issued a preliminary injunction ordering the Company to reserve and
not transfer the shares allegedly due to Harvest Court, LLC. The Company has
filed counterclaims seeking various forms of relief against Harvest Court, LLC.
The Company intends to vigorously prosecute this litigation and does not believe
the outcome of this litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
9. Foreign and Domestic Operations:
---------------------------------------
The Company's revenues from continuing operations during the nine-month periods
ended March 31, 2004 and 2003 were generated solely in Germany. There was no
significant amount of transfers between geographic areas. Long-lived assets at
March 31, 2004 of $667,742 were located solely in the United States.
F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this Form 10-QSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties that could cause actual results to
differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. Any forward-looking
statement or statements speak only as of the date on which such statements were
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events.
Therefore, forward-looking statements should not be relied upon as prediction of
actual future results.
The independent auditors' report on the Company's financial statements as
of June 30, 2003, and for each of the years in the two-year period then ended,
includes a "going concern" explanatory paragraph, that describes substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to the factors prompting the explanatory paragraph are discussed
below and also in Note 1 to the quarterly Financial Statements.
RESULTS OF OPERATIONS
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany.
The insolvency filing was necessary, in the view of the Company, in order to
comply with specific German legal requirements. NCT is presented as
discontinued operations in the Company's consolidated financial statements.
During the nine months ended March 31, 2004, NCT recognized net income of
$13,261 compared to losses of $603,270 during the nine months ended March 31,
2003. In September 2003, the court rejected the application for insolvency, and
the Company is now under self-liquidation in accordance with German law. In
compliance with the self-liquidation, NCT sold its fixed assets to an unrelated
third-party in December 2003.
The Company recognized $28,449 in revenues from continuing operations
during the nine months ended March 31, 2004 compared to $19,102 for the nine
months ended March 31, 2003($0 and $8,475 for the three months ended March 31,
2004 and 2003, respectively). The $28,449 in revenues was generated from the
sale of inlay components to customers by ExypnoTech.
The Company recognized $11,387 in interest income during the nine months
ended March 31, 2004 compared to $19,716 during the nine months ended March 31,
2003 ($3,188 and $4,760 for the three months ended March 31, 2004 and 2003,
respectively).
Total operating expenses from continuing operations during the nine months
ended March 31, 2004 were $1,082,312 compared to $2,298,078 for the nine months
ended March 31, 2003 ($295,212 compared to $801,490 for the three months ended
March 31, 2004 and 2003, respectively). The decrease of $1,215,766 is primarily
attributable to a decrease in general and administrative expenses, as described
below.
1
General and administrative expenses during the nine months ended March 31,
2004 were $998,416 compared to $1,821,255 for the nine months ended March 31,
2003 ($295,212 compared to $643,865 for the three months ended March 31, 2004
and 2003, respectively). The decrease of $822,839 is primarily attributable to a
$594,428 decrease in payroll expenses and a $56,669 decrease in legal expenses.
Selling and marketing expenses during the nine months ended March 31, 2004 were
$37,033 compared to $203,244 during the nine months ended March 31, 2003 ($0 and
$68,833 for the three months ended March 31, 2004 and 2003, respectively). The
decrease of $166,211 was due to a decrease in marketing activities throughout
the Company. Research and development expenses during the nine months ended
March 31, 2004 were $46,863 compared to $273,579 for the nine months ended March
31, 2003 ($0 and $88,792 for the three months ended March 31, 2004 and 2003).
The decrease of $226,716 was due to a decrease in activities at the Company's
subsidiaries in connection with the further development and expansion of the
NCS(TM) technology.
During the nine months ended March 31, 2004, the Company recognized a net
loss of $1,048,786 compared to a net loss of $2,862,530 during the nine months
ended March 31, 2003 ($291,888 and $988,300 for the three months ended March 31,
2004 and 2003, respectively). The decrease of $1,813,744 is primarily
attributable to the decrease of $1,215,766 in operating expenses and income of
$13,261 from discontinued operations during the nine month period ended March
31, 2004, compared to a loss from discontinued operations of $603,270 during the
nine months ended March 31, 2003.
LIQUIDITY AND FINANCIAL CONDITION
The Company's continuing operations are not generating positive cash flows.
On January 20, 2004 (the "Closing Date"), the Company sold a total of 20,000,000
units at $0.10 per unit for an aggregate of $2,000,000 (net of $272,000 of
offering costs), pursuant to a Securities Purchase Agreement dated as of the
Closing Date (the "Securities Purchase Agreement"). For each unit purchased, the
investors received (i) one share of the Company's common stock, par value $.0001
per share, (ii) a warrant to purchase one share of common stock at an exercise
price of $0.10 per share ("the $0.10 warrants") and (iii) an additional warrant
to purchase two shares of common stock at an exercise price of $0.25 per share
(the "$0.25 warrants"). The $0.10 warrants and the $0.25 warrants expire on
January 20, 2009 unless exercised earlier.
On the Closing Date, the Placement Agent received a fee consisting of a
cash payment equal to 3% ($60,000) of gross proceeds from the transaction and
warrants to purchase 3% of the total number of shares of Common Stock issued to
the investors on the Closing Date. The warrants have an exercise price of $0.10
per share and expire on January 20, 2009 unless exercised earlier. The
Placement Agent is also entitled to receive an additional cash payment equal to
3% of the gross proceeds, if any, received by the Company as a result of the
exercise of the $0.10 warrants and additional warrants to purchase 3% of the
total number of shares issued as a result of the exercise of the $0.10 warrants.
The additional warrants have an exercise price of $0.10 per share and expire on
January 20, 2009.
2
An unrelated third party ("the Finder") received a fee for the introduction
of the Company to the Placement Agent and the purchasers and for various
consulting work done on behalf of the Company. The fee consisted of a cash
payment equal to 10% of the gross proceeds from the Transaction ($200,000) and
warrants to purchase 10% of the total number of shares of common stock issued to
the investors on the Closing Date (2,000,000 shares). The warrants have an
exercise price of $0.10 per share and expire on January 20, 2009 unless
exercised earlier. The Finder is also entitled to receive an additional cash
payment of 10% of the gross proceeds, if any, received by the Company as a
result of the exercise of the $0.10 warrants by the investors and additional
warrants to purchase 10% of the total number of shares, if any, issued as a
result of the exercise of the $0.10 warrants. The additional warrants have an
exercise price of $0.10 per share and expire on January 20, 2009 unless
exercised earlier. The Company also incurred $12,000 of additional offering
costs, primarily legal costs, at the closing date.
If all of the warrants from the transaction issued to the investors, the
Placement Agent and the Finder are exercised, the Company will be required to
issue an additional 85,200,000 shares of common stock, and the Company, on a
fully diluted basis (including the reservation of 11,919,120 shares as required
by the court in the Financing Agreement Litigation), would have 179,360,030
shares of Common Stock issued and outstanding.
During the nine months ended March 31, 2004, the Company also sold 769,231
shares of common stock for $100,000. The funds were raised to support
operations.
As a result of continued operating losses and working capital deficiencies
and in order to comply with specific German legal requirements, in April 2003,
the Company's wholly owned subsidiary NanoPierce Card Technologies, Gmbh (NCT)
filed for insolvency with the Courts of Munich, Germany. In September 2003, the
German courts rejected the application for insolvency; therefore NCT implemented
a plan of self-liquidation as provided by German law. The Company anticipates
that liquidation will be completed by June 30, 2004.
During the nine months ended March 31, 2004, Mr. Metzinger, the President
and CEO of the Company loaned $30,000 to the Company in exchange for an
unsecured 7% promissory note due in September 2004. During the fiscal year ended
June 30, 2003, Mr. Metzinger loaned $10,000 to the Company in exchange for an
unsecured 7% promissory note due in December 2003. At December 31, 2003, the
note balances were $40,000. In January 2004, the notes were paid in full.
During the nine months ended March 31, 2004, Intercell International
Corporation, an affiliate of the Company, loaned the Company $35,000 in exchange
for an unsecured 7% promissory note due in September 2004. At September 30,
2003, the note balance was $35,000. In November 2003, Intercell International
Corporation loaned the Company $100,000 in exchange for a 7% promissory note due
in November 2004. The promissory note is collateralized by an assignment of a
51% interest in and to the proceeds, if any, that the Company may receive as a
result of the Financing Agreement litigation. At December 31, 2003, the note
balances were $135,000. In January 2004 the notes were paid in full.
3
During the nine months ended March 31, 2004, the Company expanded the scope
of its patent and trademark applications. The patent and trademark applications
are being amortized using the straight-line method over ten years. On March 31,
2004, the Company has a remaining unamortized carrying value of patent and
trademark applications totaling $451,537, compared to $431,286 on June 30, 2003.
The net increase of $20,251 was primarily due to cash expenditures of $63,178
for patent and trademark applications, which reflect the Company's efforts to
increase patent and trademark protection overseas.
PLAN OF OPERATIONS
In December 2003, the Company's wholly-owned subsidiary ExypnoTech signed
an Investment agreement with an unrelated third party. The investor made a
$62,787 investment in ExypnoTech in return for an issuance of a controlling, 51%
equity interest in ExypnoTech. After the issuance, the Company holds 49% of the
outstanding equity of ExypnoTech. Effective December 11, 2003, the Company
deconsolidated ExypnoTech and is now accounting for ExypnoTech under the equity
method of accounting.
In December 2003, Noel Eberhardt, a director of the Company, resigned his
position on the Board of Directors.
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC is to market the Company's technology.
Scimaxx LLC, is owned by an officer and director of the Company and two former
employees of the Company. In return for 50% ownership of the Scimaxx Solutions,
LLC (49% voting interest), the Company contributed a license to utilize its
technology and the facilities and equipment of NanoPierce Connections. The
Company is not required to make any cash contributions to the joint venture.
Operating capital is to be provided by Scimaxx, LLC, of which $22,900 has been
received through March 31, 2004. In April 2004, the Company advanced $25,000 to
Scimaxx Solutions to support continuing operations.
During the nine months ended March 31, 2004, the Company continued its
efforts to raise capital to continue its operations. In January 2004, the
Company received $2 million in proceeds (net of $272,000 of offering costs) from
a private placement of units that each consisted of a single share of the
Company's common stock and warrants to purchase two shares of the Company's
common stock as described herein under "MANAGEMENT'S DISCUSSION AND
ANALYSIS-Liquidity and Financial Condition." After the completion of the
financing, the Company made the following cash disbursements: $181,238 to pay in
full several outstanding promissory notes, and approximately $239,000 to pay
outstanding accounts payable. The Company expects to utilize the remaining
$1,307,762 to support operations and business activities of the Company,
including but not limited to such things as the filing of a registration
statement registering the common stock and shares of common stock underlying the
warrants issued as a part of the private placement that closed in January 2004,
salaries and the other day-to-day business activities of the Company. The
Company believes that it has enough capital to meet its operating costs for the
next twelve months. The Company is not currently actively seeking financing.
4
As a result of the Company's limited revenues, lack of liquidity and going
concern issues, the Company has revised its business plan to focus on the
licensing of its technology to or entering into joint ventures with companies to
utilize its technology rather than the development by the Company of its own
products utilizing its technology. The Company expects to utilize the cash
received from the private placement described above to continue to pursue the
development and marketing of its technology through the joint venture
arrangement with Scimaxx Solutions and its ownership interest in ExypnoTech and
to continue to develop relationships with companies which it enters into
licensing agreements or joint venture agreements with. At this time, the
Company does not have any other operations.
If the warrants issued to investors in the private placement described
above are all exercised, the Company expects to receive an additional
$12,500,000. However, no assurance can be given that any of these warrants will
be exercised. If the warrants are exercised, the Company has decided to use
the additional funds received from the exercise of these warrants to acquire
a revenue generating company or to acquire technology complementary to the
current technology of the Company, to be marketed through the Company's
joint venture arrangement with Scimaxx Solutions, its ownership interest in
ExypnoTech and any other licensing agreements or joint venture agreements that
the Company may enter in the future.
The Company continues to evaluate additional merger and acquisition
opportunities.
ITEM 3. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation,
the CEO and CFO have concluded that the Company's current disclosure controls
and procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls subsequent to the date of
their evaluation. There were no significant material weaknesses identified in
the course of such review and evaluation and, therefore, no corrective measures
were taken by the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 4, 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 Nevada Revised
Statutes 90.570, 90.580, 90.660 and 598A.060 and on other legal bases. The
Company is seeking damages in the amount of $25,000,000 and treble damages.
5
ITEM 2. CHANGES IN SECURITIES
During the period of January 1, 2004 to March 31, 2004 the Company made the
following issuances of its securities:
(a) The Company issued 185,064 restricted common shares on the cashless
exercise of warrants by investors.
Exemption From Registration Claimed
All of the above sales by the Company of its unregistered securities were
made by the Company in reliance upon Section 4(2) of the Act. All of the
individuals and/or entities that purchased the unregistered securities were all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates, friends, and investors.
All purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
6
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following is a complete list of exhibits filed as part
of this Form 10-QSB. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-B.
Exhibit 11 Computation of Net Loss Per Share
Exhibit 10.1 Employment Agreement of Paul H. Metzinger
Exhibit 10.2 Employment Agreement of Kristi J. Kampmann
Exhibit 31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act
(B) REPORTS ON FORM 8-K. The registrant filed the following reports
on Form 8-K during the quarter ended March 31, 2004:
- Current Report on Form 8-K dated, January 20, 2004, filed
with the Securities and Exchange Commission on January 26,
2004 (Regarding a $2,000,000 Private Placement in the
Company.)
- Amendment to Current Report on Form 8-K dated, January 20,
2004, filed with the Securities and Exchange Commission on
January 30, 2004 (Regarding a $2,000,000 Private Placement
in the Company.)
7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(REGISTRANT)
Date: May 17, 2004 /s/Paul H. Metzinger
--------------------------------------
Paul H. Metzinger, President & CEO
Date: May 17, 2004 /s/Kristi J. Kampmann
--------------------------------------
Kristi J. Kampmann,
Chief Financial Officer
8