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, 2003
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.
-----------------------------------------
(Exact name of registrant as specified in
its charter)
Nevada 84-0992908
------------------------------- -------------------------------
(State of other jurisdiction of (I.R.S. employer identification
incorporation or organization) number)
370 Seventeenth Street, Suite 3640
Denver, Colorado 80202
----------------------------------------------------
(Address and zip code of principal executive office)
----------------------------------------------------
(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
-------------------------------------------------
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 26, 2003, there were 66,023,969
shares outstanding, 57,474,937 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 26, 2003, was approximately
$15,518,233.
The registrant's revenue for the fiscal year ended June 30, 2003 was
$37,017.
Transitional Small Business Disclosure Yes No X
--- ---
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, 2003, Intercell held
6,376,764 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)")
The Company, since the acquisition of NCS, has focused on providing the
electronics industry with possible solutions to their "connection" problems,
through not only know-how, but also products and services provided by either the
Company or its subsidiaries.
The Company has three wholly owned subsidiaries.
NANOPIERCE CARD TECHNOLOGIES, GMBH ("NANOPIERCE CARD" OR "NCT").
Established in January 2000, NanoPierce Card is 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, NCT filed
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 made a decision in April 2003 to discontinue
operations at NanoPierce Card and liquidate NanoPierce Card, through the German
courts or through self-liquidation. Subsequently, the Court rejected the
application for insolvency and the Company is, at this time, implementing a plan
of self-liquidation as provided by German law.
NANOPIERCE CONNECTION SYSTEMS, INC. ("NANOPIERCE CONNECTION" OR "NCOS").
NanoPierce Connection is a Nevada corporation, located in Colorado Springs,
Colorado, USA. Beginning business in January 2002, NanoPierce Connection is the
center of not only research and development activities, but also the development
of various applications of the NCS. In addition, NanoPierce Connection provides
the WaferPierce(TM) service to potential customers. In September 2003, the
Company entered into a joint venture with Scimaxx, LLC in order to further the
marketing of the services offered by NanoPierce Connection (See - Item 6
"Management's Discussion and Analysis").
EXYPNOTECH, GMBH ("EXYPNOTECH" OR "EPT"). ExypnoTech was organized in
February 2002. ExypnoTech produces inlay components used in the manufacturing
of, among other things, Smart Labels. ExypnoTech, in addition to the inlay
components, plans to manufacture and sell other types of RFID (Radio Frequency
Identification) components.
1
In September 2003, the Company signed a letter of intent with Meshed Systems,
GmbH, in which Meshed Systems, GmbH is to make an equity investment in
ExypnoTech in exchange for a 51% equity interest in ExypnoTech. (See - Item 6
"Management's Discussion and Analysis")
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. The Company has also filed trademark applications with
the U.S. Patent and Trademark Office to protect its name, logo and other
trademarks.
During the fiscal year ended June 30, 2003, the Company incurred an expense
of $200,000 in connection with the impairment of the original intellectual
property owned by the Company. The decision to record an impairment of the
intellectual property was based primarily on the overall age of the patents in
the intellectual property combined with the Company's current operational
status. This impairment is not indicative of the value of the technology and the
current value of the patent applications and trademark applications the Company
has filed both in the United States and internationally. (See - "Notes to the
Consolidated Financial Statements - Note 1")
2
BUSINESS STRATEGY
The Company has developed a business strategy to penetrate all possible
markets with its technology, with the ultimate plan to make NCS the preferred
technology in these markets. The Company currently provides potential customers
with three possible ways to gain access to the NCS technology.
1. WAFERPIERCE SERVICE. Through its subsidiary, NanoPierce Connection,
the Company is able to provide a WaferPiercing service to its
customers. NanoPierce Connection is currently providing this service
in developing samples for potential customers.
2. LICENSING. For those customers needing NCS or WaferPierce on a larger
scale than the Company is able to provide at this time through
NanoPierce Connection, the Company is willing to provide a license to
the customer, to transfer know-how in connection with various aspects
or applications of NCS and WaferPierce.
3. RFID COMPONENTS. The Company, through ExypnoTech currently has the
capability to provide RFID components, using NCS to potential
customers. In addition, ExypnoTech, in manufacturing the RFID
components, uses chips that have been treated using the WaferPierce
process. ExypnoTech has signed contracts with several customers to
provide RFID components. In the future, the Company plans to continue
to utilize the strategy of providing the final product to the user in
those markets where it is economically practical.
While there are numerous possible applications for NCS and WaferPierce, the
Company has decided to focus, at this time, on those specific applications that
are low cost and experience high volumes.
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 two
applications being focused on by the Company are Smart Labels and
Smart Cards. The Company currently offers RFID Components using NCS
through its subsidiary, ExypnoTech.
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.
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.
3
In addition to the development and marketing of NCS, the Company through
NanoPierce Card, has generated revenues during the last two fiscal years through
software development and project management for various customers in industries
with potential NCS applications.
For the fiscal year ended June 30, 2003, the Company recognized $128,947 in
revenue from its software development activities, which were discontinued
effective April 1, 2003.
RESEARCH AND DEVELOPMENT
Research and development activities are conducted through NanoPierce
Connection, with additional activities occurring at NanoPierce Card and
ExypnoTech. For the fiscal years ended June 30, 2003 and June 30, 2002,
NanoPierce Connections and ExypnoTech incurred $316,403 and $316,438 in research
and development expenses from continuing operations. NanoPierce Card incurred
$251,354 and $320,908 in 2003 and 2002, 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 competitors have
substantially greater financial and other resources than the Company. The
Company believes that each existing technology currently has unacceptable
limitations with regard to electrical/mechanical performance, manufacturability
or cost as compared to NCS. However, 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, 2003.
EMPLOYEES
On June 30, 2003, the Company and its subsidiaries had 10 employees.
Messrs. Metzinger, Neuhaus and Ms. Kampmann, key officers of the Company, have
signed employment agreements with the Company or its subsidiaries. (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.
4
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. Intercell maintains an administrative office on the premises.
NanoPierce Connection is located at 4180 Center Park Drive, Colorado
Springs, Colorado 80916. The Company currently has a 3-year lease on the
property, expiring in March 2006. From these facilities research and
development activities in connection with application development take place.
The facility also has a clean room for use in the WaferPierce process.
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 took place through March 31, 2003.
ExypnoTech leases production space located at
Professor-Hermann-Klare-Strasse 6, D-07407 Rudolstadt, Germany. ExypnoTech has
a 5-year lease on the facilities, expiring in March 2007. The lease can be
cancelled with a notice period of 6 months. ExypnoTech also used the facilities
of NanoPierce Card for certain administrative tasks.
ITEM 3. LEGAL PROCEEDINGS
DIFRANCESCO LITIGATION
The Company and Louis DiFrancesco, the inventor of the PI Technology, were
involved in litigation relating to NanoPierce's ownership of its intellectual
property and the rights as to who should receive royalty payments from licenses,
which were outstanding as of September 3, 1996. In October 2002, the Company
and DiFrancesco signed a settlement agreement enforced by Court Order. The
Court Order declares that the Company owns the entire, exclusive, incontestable
ownership, right, title and interest in the patents. The Court Order further
declares that Mr. DiFrancesco owns the sole, exclusive, and incontestable right
to receive and collect all royalties and other payments from all licenses
outstanding on September 3, 1996. Pursuant to the settlement agreement, Mr.
DiFrancesco was also granted a limited, two-year, non-transferable,
royalty-bearing license with no right to sublicense.
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. 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 counterclaims, in this proceeding, against the Company,
Mr. Metzinger, Ms. Kristi Kampmann, Dr. Herbert Neuhaus, Dr. Robert Shaw and
unrelated third parties in the United States District Court for the Southern
District of New York, New York City, New York. The suit alleges violations of
federal securities laws and common law fraud among other claims. Harvest Court
is seeking various forms of relief including compensatory and punitive damages.
The Company is preparing appropriate responsive pleadings.
5
In May 2001, Harvest Court, LLC filed suit against the Company in the
Supreme Court of the State of New York, County of New York. The suit alleges
that the Company breached an October 20, 2000 Stock Purchase Agreement, by not
issuing 7,418,895 free trading shares of the Company's common stock in
connection with the reset provisions of the Purchase Agreement due on the second
reset date and approximately 4,545,303 shares due in connection with the third
reset date. Harvest Court, LLC is seeking the delivery of such shares or
damages in the alternative. In August 2001, the Supreme Court of the State of
New York, County of New York issued a preliminary injunction ordering the
Company to reserve and not transfer the shares allegedly due to Harvest Court.
The Company has filed counterclaims seeking various forms of relief against
Harvest Court, LLC.
OTHER LITIGATION
In September 2001, litigation was filed by Thomson Kernaghan & Co., Ltd.
against the Company and certain officers/directors of the Company seeking
damages for defamation. Thomson Kernaghan & Co., subsequently filed for
protection under Canadian bankruptcy laws. In December 2002 this action was
dismissed by the Trustee.
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 common stock is presently traded on the over-the-counter market on the
OTC Bulletin Board maintained by the National Association of Securities Dealers,
Inc. (the "NASD") The NASDAQ symbol for the Common Stock is "NPCT". The common
stock of the Company is also traded on the Frankfurt Exchange and the Hamburg
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.
2002 FISCAL YEAR HIGH LOW
------------------ ----- -----
September 30, 2001 $0.70 $0.64
December 31, 2001 0.70 0.67
March 31, 2002 1.54 1.42
June 30, 2002 0.96 0.91
2003 FISCAL YEAR
------------------
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
6
As of June 30, 2003, there were approximately 339 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
The Company made the following unregistered sales of its securities from
March 31, 2003 through June 30, 2003.
TITLE OF NO. OF
------------ ---------
DATE SECURITIES SHARES CONSIDERATION PURCHASER
------- ------------ --------- ------------- -------------
4/3/03 Common Stock 1,333,334 Financing Neptune
Investment
Group, Ltd.
4/3/03 Warrant 1,333,334 Financing Neptune
Investment
Group, Ltd.
6/20/03 Common Stock 240,842 Financing John Provazek
EXEMPTION FROM REGISTRATION CLAIMED. The issuance by the Company of its
unregistered securities was made by Registrant in reliance upon Section 4(2) of
the Securities Act of 1933, as amended. The persons, who received the
unregistered securities, were employees of the Company. The persons were
provided access to all material information, which it requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with the issuance. The persons, who
received such 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 the securities that were
issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
ITEM 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, 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 2 to Notes to the Consolidated Financial Statements.
7
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 year ended June 30, 2003, NCT had losses of $882,718 compared to
losses of $782,858 during the year ended June 30, 2002. In September 2003, the
court rejected the application for insolvency and the Company is now under
self-liquidation in accordance with German law.
The Company recognized $37,017 of revenues from continuing operations
during the fiscal year ended June 30, 2003 compared to $4,737 in the fiscal year
ended June 30, 2002. Revenues recognized by discontinued operations were
$128,947 during the fiscal year ended June 30, 2003 and $151,392 for the fiscal
year ended June 30, 2002. The revenue generated from discontinued operations
was from various software development contracts generated by NanoPierce Card and
the remaining $37,017 was from the preparation of samples using WaferPierce for
potential customers by NanoPierce Connection ($3,900) and the sale of inlays by
ExypnoTech ($33,117). The Company expects to continue to generate revenues
through its subsidiaries, NanoPierce Connection and ExypnoTech.
The Company recognized $7,251 in interest income during the fiscal year
ended June 30, 2003 compared to $98,574 during the fiscal year ended June 30,
2002. The decrease of $91,323 is due primarily to the need for capital to
support operations throughout the year.
Total operating expenses from continuing operations during the fiscal year
ended June 30, 2003 were $3,179,297, compared to $4,049,525 for the fiscal year
ended June 30, 2002. The decrease of $870,228 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,
2003 were $2,414,077 compared to $3,516,534 for the fiscal year ended June 30,
2002. The decrease of $1,102,457 is mainly attributable to decreases in legal
expenses, payroll and investor relations. In April 2001, the Company issued
3,125,000 of its common shares, valued at $1,000,000 in connection with legal
costs related to the Harvest Court Litigation, as part of a Contingency Fee
Agreement, to cover expenses to be incurred on its behalf. The Company amortized
the value of the shares, over a one-year period. Prior to July 1, 2001, $175,343
was amortized. The remaining $824,657 was amortized during the fiscal year ended
June 30, 2002. Selling and marketing expenses during the fiscal year ended June
30, 2003 were $238,817 compared to $112,178 during the fiscal year ended June
30, 2002. The increase of $126,639 was due to an increase in marketing
activities, including appearances at various trade shows. Research and
development expenses during the fiscal year ended June 30, 2003 were $316,403
compared to $316,438 for the fiscal year ended June 30, 2002.
During the fiscal year ended June 30, 2003, the Company incurred an expense
of $200,000 in connection with the impairment of the original intellectual
property owned by the Company. The decision to record an impairment of the
intellectual property was based primarily on the overall age of the patents
underlying the intellectual property combined with the Company's current
operational status. This impairment is not indicative of the value of the
technology and the current value of the separate and independent patent
applications and trademark applications the Company has filed both in the United
States and internationally.
8
During the fiscal year ended June 30, 2003, the Company incurred an expense
of $10,000 in connection with the impairment of the WaferPierce System bought
and modified by Company for the application of NCS on wafers. This impairment
is not indicative to the value of the technology, nor does the Company believe
that it limits the Company's ability to market NCS. The Company does not
believe that there has been any impairment to other long-lived assets as of June
30, 2003.
During the fiscal year ended June 30, 2002, the Company incurred an expense
of $104,375 in connection with the impairment of equipment built by the Company
to develop the application of the NanoPierce Connection System (NCS(TM)) on
flexible substrates. Given the Company's focus on the application of NCS at the
wafer-level and based on management's operational plans and developments for the
future, it was decided that because the equipment had no resale value to the
Company, to write off the carrying value of the equipment. This write off is
not indicative to the value of the technology, nor does the Company believe that
it limits the Company's ability to market NCS in markets using flexible
substrates.
During the fiscal year ended June 30, 2003, the Company recognized a net
loss of $4,017,785 compared to a net loss of $4,729,072 during the fiscal year
ended June 30, 2002. The decrease of $711,287 is explained by the decrease of
$870,228 in operating expenses, offset by a $91,323 decrease in interest income
and a $99,860 increase in the loss from discontinued operations between 2003 and
2002.
LIQUIDITY AND FINANCIAL CONDITION
Net cash used in operating activities from continuing operations in 2003
was $1,754,247, compared to net cash used in operating activities from
continuing operations in 2002 of $2,777,705. 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, and changes in operating assets and liabilities
and other adjustments which net to $754,570.
In 2002, the net cash used represented a net loss of $4,729,072, adjusted
for the loss from discontinued operations of $782,858, amortization and
depreciation expense of $1,142,334, impairment charges of $104,375, and changes
in operating assets and liabilities and other adjustments which net to
($78,200).
During the 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 provision. The funds were raised to support operations.
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 is to act as the financial advisor to the Company and as its exclusive
placement agent for a private placement of equity securities during the
twelve-month term of the agreement. Compensation consists 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 includes a $10,000 monthly advisory fee, payable in cash
beginning in June 2003. In addition, the Company is exploring other financing
opportunities to support continuing operations.
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. At
June 30, 2003, the note balance was $10,000 and related accrued interest was
$38.
9
In April 2002, the Company entered into a $2,000,000 equity financing. The
Company received the first of two available tranches of $1,000,000 per tranche
($900,000 net of $100,000 of offering costs) and in return issued 800,000 free
trading common shares to the investor. In addition, the Company issued 1,073,000
of its free-trading common shares, which are being held by an escrow agent for
the potential issuance upon exercise of the warrants issued in connection with
the financing. Such warrants have a term of five years, with an exercise price
of $1.45 per share. The second tranche of $1,000,000 was made available to the
Company sixty days after the take down of the first. The Company declined to
take down the second tranche, due to depressed market conditions, at that time,
and possible dilutive effects on its stock. The second tranche is no longer
available to the Company, pursuant to terms of expiration.
During the fiscal year ended June 30, 2001, the Company loaned $500,000 to
an unrelated third party, Global Capital Partners, Inc. ("Global") in exchange
for a 12% note receivable due in November 2001. Through June 30, 2002, principal
payments of $230,291 were received. In October 2002 the remaining principal of
$144,709 was received in full.
In April 2002, the Company loaned $50,000 to a representative of the
unrelated third party, which had been assigned the Global note, in exchange for
a unsecured, 8% note receivable due in October 2002. In May 2002, the Company
received $23,930. In September 2002, the remaining principal balance of $26,859
was received.
At July 1, 2001, the Company also had a $300,000 loan receivable from a
third party. In September 2001, the outstanding amount was received.
At July 1, 2001, the Company had an unsecured note receivable from
Intercell of $92,500. During the year ended June 30, 2002, the Company advanced
an additional $35,000 to Intercell. The entire amount was collected by June 30,
2002.
During the fiscal year ended June 30, 2003, the Company made investments in
machinery and equipment of approximately $351,431 in continuing operations
($8,358 by NanoPierce Card, presented in discontinued operations) to support its
expanded activities at ExypnoTech, as compared to $188,755 in continuing
operations ($12,136 by NanoPierce Card, presented in discontinued operations)
during the fiscal year ended June 30, 2002. In August 2002, ExypnoTech accepted
delivery on machinery to begin the production of RFID components for usage in
Smart Labels.
During the fiscal year ended June 30, 2003, 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 June 30,
2003, the Company has patent and trademark applications costs of $431,286,
compared to $242,646 on June 30, 2002. The increase of $188,640 was due in part
to the filing of trademark applications at the international level and the
filing of new patent applications in connection with development and advancement
of the technology.
PLAN OF OPERATIONS
The Company has signed various nondisclosure and cooperation agreements
with companies both overseas and in the United States. The agreements are
applicable to the application of the Company's NCS technology and/or its
WaferPierce method for various products in the smart card/smart label
industries, the LED industry and in the semiconductor industry. Management is
pursuing the development of further similar agreements both nationally and
internationally with additional companies in not only these but other
industries. The Company is also involved in creating samples and testing in
connection with these agreements.
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC is to handle marketing of 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.
10
Effective September 22, 2003, the Company signed a letter of intent with
Meshed Systems, GmbH ("Meshed Systems"), in which Meshed Systems is to make a
100,000 Euro investment in ExypnoTech for a 51% equity interest. The letter of
intent provides for Meshed Systems to manage the operations of ExypnoTech and to
provide ExypnoTech with working capital on an as needed basis. The Company is to
grant ExypnoTech a non-exclusive, non-royalty bearing worldwide license to
practice its ultrasonic technology. Profit sharing is to based on the equity
ownership. The license will also allow ExypnoTech to sublicense the intellectual
property. Meshed Systems is managed by a former officer and director of the
Company.
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 May 2003, the Financial Accounting Standards Board ("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.
In December 2002, the 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.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 effective July 1, 2002, and has applied the provisions of
SFAS No. 144 in connection with its accounting for the impairment of long-lived
assets, discussed above. Management does not believe the application of SFAS
No. 144 resulted in a 2003 impairment charge different from that under previous
accounting standards. The provisions of SFAS No. 144 were also applied in
connection with the Company's accounting for discontinued operations.
11
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, amortization of intangible 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, the 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.
12
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, 2003,
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 both the original intellectual property
and the WaferPierce System located at NanoPierce Connections. During 2003, the
Company recognized an impairment of $200,000 on the intellectual property and an
impairment of $10,000 on the WaferPierce System. The Company does not believe
that there has been any other impairment to long-lived assets as of June 30,
2003.
International operations
The Company's two foreign subsidiaries (NanoPierce Card and 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.
The Company derived most of its revenue through discontinued operations of
its German subsidiary, NanoPierce Card, which 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
preformed and when no significant obligations remain related to implementation.
Revenues are deferred if significant future obligations are to be fulfilled or
if connection is not probable.
Litigation
The Company is involved in certain legal proceedings, as described in Note
8 and 9 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.
13
Contractual obligations
For more information on the Company's contractual obligations on operating
leases, refer to Note 10 of the Consolidated Financial Statements. At June 30,
2003, the Company's commitments under these obligations were as follows (in
thousands):
OPERATING LEASES
-----------------
Year ending June 30,
2004 $ 125
2005 91
2006 67
-----
283
=====
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.
14
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
NAME AND AGE POSITION PERIOD
--------------------------- -------------------------- --------------------------
Paul H. Metzinger (64) Director, President, Chief December 1998 to present
Executive Officer,
General Manager of January 2000 to present
NanoPierce Card
Dr. Herbert J. Neuhaus (44) Director, Executive Vice January 1999 to present
President of Technology &
Marketing,
President & Chief January 2002 to present
Executive Officer of
NanoPierce Connection
Dr. Michael E. Wernle (41) Director, Executive Vice November 1999 to
President of Strategic September 2003
Business Development,
President & Chief
Executive Officer of January 2000 to May 2003
NanoPierce Card,
President & Chief
Executive Officer of February 2002 to
ExypnoTech August 2003
Kristi J. Kampmann (30) Chief Financial Officer, October 1999 to present
Secretary February 1998 to present
Dr. Robert Shaw (63) Director October 2000 to present
Dr. Noel Eberhardt (65) Director November 2001 to present
John Hoback (63) Director April 2002 to present
Richard Lancaster (36) Chief Financial Officer of
NanoPierce Card & February 2002 to June 2003
ExypnoTech
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.
15
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 has served as the General Manager of
NanoPierce Card since January 19, 2000. In addition, he serves as the
President, Chief Executive Officer, Chief Financial Officer and a Director of
Intercell International Corporation. 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 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.
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 formerly Chief Operations Officer for Meinen, Ziegel & Co., GmbH, Munich,
Germany. He also served as the Director of Production for Mikron/Philips-Graz,
Graz, Austria. 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.
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. She has served as the 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.
16
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. Among others, he has held 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.
NOEL EBERHARDT. Mr. Eberhardt has been a Director of the Company since
November 28, 2001. 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.
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. Among others, he has held positions with CTS, Amoco Chemical,
Electro-Kinetic Systems, Inc. and EMCA/Rohm & Haas Company.
RICHARD LANCASTER. Mr. Lancaster served as the Chief Financial Officer of
NanoPierce Card from February 1, 2002 to June 30, 2003 and of ExypnoTech from
February 2002 to June 30, 2003. From 1995 to February 1, 2002 Mr. Lancaster was
with Booz, Allen & Hamilton Management consultants, focusing on managing key
financial programs for international technology companies. Mr. Lancaster also
served as a project leader with ICI Chemicals and Poymers, Plc and with EDS
(Electronic Data Systems) Consulting. Mr. Lancaster received his masters in
electrical and information engineering from the University of Cambridge, UK and
an MBA from INSEAD, France.
17
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, 2003
and 2002 (the "Named Executive Officers"):
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
NAME & PRINCIPAL YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER
POSITION ($) ($) ANNUAL STOCK UNDERLYING PAYOUTS COMPENSA-
COMPENSA- AWARDS ($) OPTIONS (#) ($) TION
TION
Paul H.
Metzinger,
Director, 2003 $ 132,500 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President & CEO(1) 2002 $ 190,750 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Dr. Herbert J.
Neuhaus,
Director, Ex. VP 2003 $ 148,333 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
of Technology & 2002 $ 190,750 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Marketing, Pre &
CEO of NanoPierce Connection (2)
Dr. Michael E.
Wernle, Director,
Ex. VP of 2003 $ 128,000 $ -0- $ -0- $ -0- 365,000 $ -0- $ -0-
Strategic 2002 $ 160,000 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Business Dvlpmt,
Pres & CEO of
ExypnoTech (3)
Kristi J.
Kampmann, Chief
Financial 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, resulting in a gross amount of $80,000.
(2) Dr. Neuhaus has served as the Executive Vice President of Technology and
Marketing since January 1999. He has served as the President and CEO of
NanoPierce Connection since January 2002. He is 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.
(3) Dr. Wernle served as the Executive Vice President of Strategic Business
Development till September 2003. He has served as the President & CEO of
NanoPierce Card since January 2000. He has served as the President & CEO of
ExypnoTech, since February 2002. He is 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 2203, 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 July
15, 2002, at an annual salary of $60,000. On July 15, 2002, Ms. Kampmann agreed
to take a 20% cut in the gross amount of her salary, resulting in an annual
salary of $60,000. In February 2003, she agreed to a further reduction in
salary, resulting in a gross amount of $52,500.
18
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain
non-monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION/SAR GRANTS TABLE
The following table provides information relating to the grant of stock
options to the Company's executive officers during the fiscal year ended June
30, 2003.
INDIVIDUAL GRANTS
-----------------
# OF % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO
GRANTED (#) EMPLOYEES IN EXERCISE OF BASE EXPIRATION
NAME FISCAL YEAR(1) PRICE ($/SHARE) DATE
Paul H.Metzinger 0 0% -0- -0-
Dr. Herbert J. 0 0% -0- -0-
Neuhaus
Dr. Michael E. 365,000 81% $ 0.61 2012
Wernle
Kristi J. 0 0 -0- -0-
Kampmann
-----------------
(1) Based on a total of 450,000 options granted to employees in the fiscal year
ended June 30, 2003.
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, 2003 by the Company's executive
officers and the 2003 fiscal year-end value of unexercised options.
SHARES
ACQUIRED ON VALUE # OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
EXERCISE REALIZED UNEXERCISED OPTIONS/SARS THE-MONEY OPTIONS/SAR AT
NAME (#) ($) AT FISCAL YEAR FY-END ($)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------------------- ---------------------------
Paul H. 0 0 2,500,000/0 $ 750,000/0
Metzinger
Dr. Herbert J. 0 0 1,350,000/0 $ 405,000/0
Neuhuas
Dr. Michael E. 0 0 1,350,000/0 $ 405,000/0
Wernle
Kristi 0 0 325,000/0 $ 97,500/0
J.Kampmann
-----------------
(1) The average of the closing bid and asked price of the Common Stock on June 30, 2003 ($0.30)
was used to calculate the option value.
19
EMPLOYMENT AGREEMENTS
On January 1, 2003, 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 December 31, 2005.
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.
On July 15, 2003, the Company entered into an employment agreement with
Kristi J. Kampmann to serve as the Chief Financial Officer. Such employment
agreement expires on July 15, 2004. Pursuant to her employment agreement Ms.
Kampmann receives an annual salary of $52,500.
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 Employee Agreement without cause, all of such
Employee's rights to compensation would cease upon the date of his termination.
If the Company terminates an Employment Agreement without cause, the Employee
terminates his Employment Agreement for cause, or in the event of a change in
control, the Company will pay to the Employee all compensation and other
benefits that would have accrued and/or been payable to the 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 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 noncompete
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,
2003, 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 8,787,542 options outstanding. A total of 8,322,524
options are exercisable at June 30, 2003, under these plans. During the fiscal
year ended June 30, 2003, the Company granted options pursuant to its registered
2000 Compensatory Stock Option Plan to purchase 450,000 shares of common stock
to directors, officers, and employees of the Company and its subsidiaries. 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.
20
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 common Stock as of June 30, 2003 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.
-------------------------------------------------------------------------------------------------
NAME, ADDRESS & NATURE OF
-------------------------
BENEFICIAL OWNER TITLE OF CLASS AMOUNT PERCENT OF CLASS (9)
-------------------------------------------------------------------------------------------------
The Paul H. Metzinger Trust
Paul H. Metzinger, President & Common Stock 4,543,188(1) 5.53%
CEO, Director
370 17th Street, Suite 3640 Denver, CO 80202
-------------------------------------------------------------------------------------------------
The Cheri L. Metzinger Trust
Cheri L. Metzinger, Wife of Common Stock 4,543,188(2) 5.53%
Paul H. Metzinger
3236 Jellison Street
Wheatridge, CO 80033
-------------------------------------------------------------------------------------------------
Dr. Herbert J. Neuhaus, Ex. VP
of Technology & Marketing, Common Stock 1,460,000(3) 1.78%
Director, President & CEO
NanoPierce Connection
770 Maroonglen Court
Colorado Springs, CO 80906
-------------------------------------------------------------------------------------------------
Dr. Michael E. Wernle, Ex VP
of Strategic Business Options 1,350,000(4) 1.64%
Development, Director,
President & CEO of ExypnoTech
Lise-Meitner-Strasse
1D-85662 Hohenbrunn
Germany
-------------------------------------------------------------------------------------------------
Kristi J. Kampmann, Chief
Financial Officer & Secretary Common Stock 344,080(5) 0.42%
370 17th Street, Suite 3640
Denver, CO 80202
-------------------------------------------------------------------------------------------------
Dr. Robert E. Shaw, Director Options 400,000(6) 0.49%
8 Nicklaus Court
Florham Park, NJ 07932
-------------------------------------------------------------------------------------------------
Dr. Noel Eberhardt, Director Options 400,000(7) 0.49%
21407 Krzich Place
Cupertino, CA 95014
-------------------------------------------------------------------------------------------------
John Hoback, Director Options 400,000(8) 0.49%
20 White Heron Lake
East Stroudsburg, PA 18301
-------------------------------------------------------------------------------------------------
Intercell International
Corporation Common Stock 6,376,764 7.76%
370 17th Street, Suite 3640
Denver, CO 80202
-------------------------------------------------------------------------------------------------
All Officers & Directors as a Common Stock 8,897,268 10.91%
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 500,000 shares exercisable at $2.125 per
share, 500,000 shares exercisable at $0.52 per share and 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 option owned beneficially by her husband.
(3) Based on 110,000 common shares and options consisting of 500,000 shares
exercisable at $2.125 per share, 100,000 shares exercisable at $2.75 per share,
250,000 shares exercisable at $0.52 per share and 500,000 shares exercisable at
$0.20 per share.
(4) Based on options consisting of 500,000 shares exercisable at $2.125 per
share, 160,000 shares exercisable at $2.75 per share, 25,000 shares exercisable
at $0.52 per share, 300,000 shares at $0.45 per share and 365,000 shares
exercisable at $0.60 per share.
(5) Based on 19,080 common shares and options; 100,000 shares exercisable at
$0.84 per share, 75,000 shares exercisable at $2.125 per share, 50,000 shares
exercisable at $2.75 per share, 50,000 shares exercisable at $0.52 per share and
50,000 shares exercisable at $0.3250 per share.
(6) Based on options consisting of 250,000 shares exercisable at $0.97 per
share, 50,000 shares exercisable at $0.67 per share, and 100,000 shares
exercisable at $2.00 per share.
(7) Based on options consisting of 300,000 shares exercisable at $0.70 per share
and 100,000 shares exercisable at $0.70 per share.
(8) Based on options consisting of 400,000 shares exercisable at $1.35 per
share.
(9) Based on 65,054,738 shares of common stock issued and outstanding on June
30, 2003 and assuming exercise of all 8,787,524 presently exercisable options
and exercise of 8,380,186 outstanding warrants, there would be 82,222,448 shares
outstanding. Mr. Metzinger's and Mrs. Metzinger's stock ownership are not
duplicated in this computation.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As previously stated a stock option was granted to Dr. Michael E. Wernle,
an officer and director of the Company, during the fiscal year ended June 30,
2003.
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. At June 30, 2003, the note
balance was $10,000 and related accrued interest of $38.
In September 2003, Mr. Metzinger, the President and Chief Executive Officer
and director of the Company, loaned the Company $30,000, in exchange for an
unsecured 7% note payable.
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC is to handle marketing of 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.
In September 2003, the Company signed a letter of intent with Meshed
Systems, GmbH to make an equity investment in ExypnoTech for a 51% equity
interest in ExypnoTech. The letter of intent provides for Meshed Systems to
take over the management of the operations of ET, make a cash contribution and
to provide ExpynoTech working capital on an as needed basis. The Company will
grant ET a non-exclusive, non-royalty bearing worldwide license to practice its
ultrasonic technology. Profit sharing will be based on the equity ownership.
The license will also allow ExypnoTech to sublicense the intellectual property.
Meshed Systems, GmbH is managed by a former officer and director of the Company.
22
PART IV
ITEM 13. EXHIBITS
(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 registrant,
Particle Interconnect Corporation and Intercell Corporation 6
2.02 Application and Development Agreement, dated April 15, 1999, by
and among the registrant and Multitape & Co., Gmbh, KG. 4
2.03 Technology Cooperation Agreement, dated May 17, 1999, by and
among the registrant and Meinen, Zeigel & Co. 4
2.04 Technology Development Agreement, dated June 11, 1999, by and
among the registrant and ORGA Kartensysteme, GmbH. 4
2.05 Agreement-In-Principle, dated May 18, 1999, by and among the
registrant and Cirrex Corporation. 4
4.01 The Articles of Incorporation of the Company 5
4.02 Amendment to the Articles of Incorporation of the Company 5
4.03 Certificate of Designation of Rights and Preferences of the
Series A Preferred Stock 6
4.04 Certificate of Designation of Rights and Preferences of the
Series B Preferred Stock 7
4.05 Certificate of Designation of Rights and Preferences of the
Series C Preferred Stock 7
4.06 Form of Common Stock Certificate 5
4.07 The By-laws of the Company 5
10.01 Employment and Non-Disclosure, Non-Competition Agreement, dated
January 1, 1999, between Paul H. Metzinger and the registrant 4
10.02 Employment and Non-Disclosure, Non-Competition Agreement, dated
January 1, 2002 between Dr. Herbert J. Neuhaus and the registrant2
10.03 Employment and Non-Disclosure, Non-Competition Agreement, dated
July 15, 2002, between Kristi J. Kampmann and the registrant 2
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 Registrant's Annual Report on Form 10-KSB
for the year ended June 30, 2001.
3 Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended June 30, 2000.
4 Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended June 30, 1999.
5 Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended June 30, 1998.
6 Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 26, 1998.
7 Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 23, 1998
23
(b) REPORTS ON FORM 8-K.
The Registrant filed the following reports on Form 8-K during the fourth
quarter of the year ended June 30, 2003:
(i) Current Report on Form 8-K filed with the Securities and Exchange
Commission April 1, 2003
ITEM 14. CONTROLS AND PROCEDURES
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 effectives 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 affective 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 change is the Company's internal controls or
in other factors, which could significantly affect such controls.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 TECHNOLGIES, INC.
(a Nevada corporation)
Date: September 26, 2003 By: /s/ Paul H. Metzinger
------------------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: September 26, 2003 By: /s/ Kristi J. Kampmann
------------------------------------------
Kristi J. Kampmann, Chief
Financial Officer & Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and the capacities and on the dates indicated.
Date: September 26, 2003 By: /s/ Paul H. Metzinger
------------------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: September 26, 2003 By: /s/ Herbert J. Neuhaus
------------------------------------------
Herbert J. Neuhaus, Director &
Executive Vice-President of
Technology & Marketing
Date: September 26, 2003 By: /s/ Robert Shaw
------------------------------------------
Robert Shaw, Director
Date: September 26, 2003 By: /s/ Noel Eberhardt
------------------------------------------
Noel Eberhardt, Director
Date: September 26, 2003 By: /s/ John Hoback
------------------------------------------
John Hoback, Director
25
NANOPIERCE TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheet - June 30, 2003 F-3
Consolidated Statements of Operations -
Years ended June 30, 2003 and 2002 F-5
Consolidated Statements of Comprehensive Loss -
Years ended June 30, 2003 and 2002 F-6
Consolidated Statements of Shareholders' Equity -
Years ended June 30, 2003 and 2002 F-7
Consolidated Statements of Cash Flows -
Years ended June 30, 2003 and 2002 F-9
Notes to Consolidated Financial Statements F-11
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
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, 2003, and the related
consolidated statements of operations, comprehensive loss, shareholders' equity
and cash flows for each of the years in the two-year period ended June 30, 2003.
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 auditing standards generally accepted
in the United States of America. 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, 2003, and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 2003, 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
$4,017,785 for the year ended June 30, 2003, and an accumulated deficit of
$21,073,620 as of June 30, 2003. 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 22, 2003
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2003
Assets
------
Current assets:
Cash and cash equivalents $ 200,741
Accounts receivable 21,235
Inventory 39,259
Deferred consulting costs and other prepaid expenses 168,687
Assets of discontinued operations (Note 3) 21,977
-----------
Total current assets 451,899
-----------
Property and equipment:
Machinery 431,125
Office equipment and furniture 328,386
Leasehold improvements 138,776
-----------
898,287
Less accumulated depreciation (353,413)
-----------
544,874
-----------
Other assets:
Assets of discontinued operations (Note 3) 20,287
Deposits and other 19,510
Intellectual property rights, net of accumulated
amortization of $534,315 265,685
Patent and trademark applications, net of accumulated
amortization of $77,877 431,286
-----------
736,768
-----------
Total assets $1,733,541
===========
(continued)
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2003
(Continued)
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 576,561
Accrued liabilities 53,230
Note payable - related party (Note 6) 10,000
Liabilities of discontinued operations (Note 3) 402,968
-------------
Total liabilities - all current 1,042,759
-------------
Commitments and contingencies (Notes 4, 8 and 10)
Shareholders' equity (Note 7):
Preferred stock; $0.0001 par value;
5,000,000 shares authorized:
Series A; no shares issued and outstanding
Series B; maximum of 75,000 shares issuable; no
shares issued and outstanding
Series C; maximum of 700,000 shares issuable; no
shares issued and outstanding
Common stock; $0.0001 par value; 200,000,000 shares authorized
65,054,738 shares issued and outstanding 6,505
Additional paid-in capital 21,567,807
Accumulated other comprehensive income 190,090
Accumulated deficit (21,073,620)
-------------
Total shareholders' equity 690,782
-------------
Total liabilities and shareholders' equity $ 1,733,541
=============
See notes to the consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30, 2003 and 2002
2003 2002
------------ -----------
Revenues $ 37,017 4,737
------------ -----------
Operating expenses:
Research and development 316,403 316,438
General and administrative 2,414,077 3,516,534
Selling and marketing 238,817 112,178
Impairment of intellectual property
and equipment(Note 1) 210,000 104,375
------------ -----------
3,179,297 4,049,525
------------ -----------
Loss from operations (3,142,280) (4,044,788)
------------ -----------
Other income (expense):
Interest income 7,251 98,574
Interest expense (38) -
------------ -----------
7,213 98,574
------------ -----------
Loss from continuing operations (3,135,067) (3,946,214)
------------ -----------
Discontinued operations, loss from
operations of subsidiary (Note 3) (882,718) (782,858)
------------ -----------
Net loss $(4,017,785) (4,729,072)
============ ===========
Basic and diluted loss per share:
Loss from continuing operations $ (0.05) (0.07)
Loss from discontinued operations (0.02) (0.01)
------------ -----------
Net loss per share, basic and diluted $ (0.07) (0.08)
============ ===========
Weighted average number of common
shares outstanding 61,647,688 56,194,682
============ ===========
See notes to the consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years Ended June 30, 2003 and 2002
2003 2002
------------ -----------
Net loss $(4,017,785) (4,729,072)
Change in unrealized gain on
securities (237) (261)
Change in foreign currency
translation adjustments 48,915 135,408
------------ -----------
Comprehensive loss $(3,969,107) (4,593,925)
============ ===========
See notes to the consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 2003 and 2002
Common stock Accumulated other Total
------------------- Additional comprehensive Accumulated shareholders'
Shares Amount paid-in capital income(loss) deficit equity
---------- ------- ----------------- ------------------- ------------- -----------------
Balances, July 1, 2001 55,701,398 $ 5,570 $ 18,451,781 $ 6,265 $(12,326,763) $ 6,136,853
Common stock issued for cash in
connection with financing
agreement, net of $100,000
of offering costs 1,873,000 187 899,813 - - 900,000
Common stock issued for services 46,000 5 40,055 - - 40,060
Common stock issued upon exercise
of stock options 16,604 2 (2) - - -
Warrants issued for services - - 104,800 - - 104,800
Net loss - - - - (4,729,072) (4,729,072)
Other comprehensive income:
Change in unrealized gain on
securities - - - (261) - (261)
Foreign currency translation
adjustments - - - 135,408 - 135,408
---------- ------- ----------------- ------------------- ------------- -----------------
Balances, June 30, 2002 57,637,002 $ 5,764 $ 19,496,447 $ 141,412 $(17,055,835) $ 2,587,788
========== ======= ================= =================== ============= =================
(continued)
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended June 30, 2003 and 2002
(Continued)
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
========== ======= ============ =================== ============= ===============
See notes to the consolidated financial statements.
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2003 and 2002
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $(4,017,785) (4,729,072)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
Loss from discontinued operations 882,718 782,858
Amortization expense 150,916 126,961
Depreciation expense 157,393 190,716
Amortization of deferred legal and consulting costs 107,941 824,657
Impairment of intellectual property and equipment 210,000 104,375
Expenses incurred in exchange for
common stock, warrants and options 14,935 144,860
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 29,139 (37,570)
Decrease (increase) in prepaid expenses 4,001 (21,807)
Decrease (increase) in deposits and other assets 240,013 (220,867)
Increase in accounts payable and
accrued liabilities 466,482 57,184
------------ -----------
Total adjustments 2,263,538 1,951,367
------------ -----------
Net cash used in operating activities
from continuing operations (1,754,247) (2,777,705)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications (239,556) (186,297)
Purchases of property and equipment (351,431) (188,755)
Increase in notes receivable - (85,000)
Payments received on notes receivable 170,779 681,721
------------ -----------
Net cash (used in) provided by investing activities
from continuing operations (420,208) 221,669
------------ -----------
Cash flows from financing activities:
Issuance of common stock and warrants for cash 1,826,766 900,000
Issuance of note payable - related party 10,000 -
------------ -----------
Net cash provided by financing activities
from continuing operations 1,836,766 900,000
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 44,098 117,625
------------ -----------
Net cash used in discontinued operations (184,877) (458,899)
------------ -----------
Net decrease in cash and cash equivalents (478,468) (1,997,310)
Cash and cash equivalents, beginning 679,209 2,676,519
------------ -----------
Cash and cash equivalents, ending $ 200,741 679,209
============ ===========
(continued)
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2003 and 2002
(Continued)
2003 2002
-------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest $ - 120
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Warrant issued in exchange for deferred consulting costs $230,400 -
======== ========
See notes to the consolidated financial statements.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
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 subsidiary, 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
ExypnoTech, GmbH (EPT), both German subsidiaries, which were incorporated in
January 2000 and February 2002, respectively. During the quarter ended June 30,
2003, NCT effectively discontinued its operations (Note 3). All significant
intercompany accounts and transactions have been eliminated in consolidation.
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 markets 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 June 30, 2003,
NCOS activities have primarily consisted of research and development, marketing
and administrative functions. Prior to discontinuing operations, NCT activities
consisted primarily of providing software development and implementation
services, and performing administrative, research and development, and selling
and marketing activities. Through June 30, 2003, EPT activities have primarily
consisted of manufacturing inlay components used in, among other things Smart
Labels, which is a paper sheet holding a chip-containing module that is capable
of memory storage and/or processing.
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-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of the Company's cash and cash equivalents, accounts receivable
and accounts payable approximate their carrying amounts due to the short
maturities of these instruments. The fair value of the Company's note
payable-related party is not practicable to estimate, due to the related party
nature of the underlying transaction.
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.
INVENTORY:
Inventory consists primarily of chips and antennas for use in the production of
inlays by EPT and is stated at the lower of cost (first-in, first-out) or market
value.
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 acts
as financial advisor to the Company and serves as its exclusive placement agent
for a private placement of equity securities during the twelve-month term of the
agreement. Compensation includes a non-refundable retainer fee, which consists
of a warrant to purchase up to 450,000 shares of the Company's common stock
(Notes 7 and 8). The warrant was valued at approximately $230,000 using the
Black-Scholes pricing model. The deferred cost is being amortized on a
straight-line basis over a twelve-month period from the date of issuance, which
represents the estimated period the expenses are expected to be incurred.
Through June 30, 2003, $107,941 was expensed in connection with the warrant.
In April 2001, the Company recorded deferred legal costs in exchange for the
issuance of 3,125,000 shares of common stock valued at $1,000,000 ($0.32 per
share). The shares were issued as a non-refundable retainer for legal services
to be performed. The Company amortized these deferred costs to general and
administrative expense on a straight-line basis over a one-year period ending in
April 2002, which represented the estimated period the benefits of the legal
costs were expected to be received. The Company amortized remaining legal costs
of $824,657 during the year ended June 30, 2002.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
INTELLECTUAL PROPERTY RIGHTS AND PATENT AND TRADEMARK APPLICATIONS:
The PI Technology was acquired upon the issuance of 7,250,000 shares of common
stock and 100 shares of Series A preferred stock of the Company and was valued
at the estimated fair value of the PI Technology at the date of acquisition
based on a written cash offer from an outside third party. This third party is a
manufacturer in a field, which uses the intellectual property. The intellectual
property has been amortized using the straight-line method over 10 years, which
was based in an average protection period of underlying patents. In conjunction
with the Company's assessment of its long-lived assets, discussed below, the
Company reviewed the estimated remaining useful life of the intellectual
property and made a determination in the fourth quarter ended June 30, 2003 to
prospectively utilize a remaining useful life of 2-5 years, which is consistent
with the remaining average patent protection period of the remaining
intellectual property.
Costs incurred to establish patents and trademarks are 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
are amortized over a period of 10 years. Unsuccessful patent and trademark
application costs are expensed as incurred.
Estimated amortization expense for each of the five succeeding fiscal years is
as follows:
Year Amount
---- --------
2004 $178,000
2005 178,000
2006 144,000
2007 78,000
2008 78,000
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. Based on its evaluation, in the fourth quarter ended June 30, 2003, the
Company determined that a $200,000 impairment charge to the intellectual
property was necessary. The decision to record an impairment of the intellectual
property was based primarily on the remaining life of the patents underlying the
intellectual property and the Company's assessment of current operational and
marketing activities.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
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. Leasehold improvements are depreciated over the shorter of the
useful lives of the assets or the length of the respective leases, whichever
period is shorter. The estimated useful lives of property and equipment are as
follows:
Machinery 7 years
Office equipment and furniture 5-7 years
Leasehold improvements 3 years
In the fourth quarter ended June 30, 2003, the Company made a decision to record
an impairment charge of $10,000 to the net carrying amount of certain equipment
of NCOS in Colorado Springs, Colorado. The decision to record an impairment of
the equipment was based primarily on current and projected NCOS operations data.
In the fiscal year ended June 30, 2002, the Company made a decision to abandon
certain NCS equipment located in Colorado Springs, Colorado and wrote off the
$104,375 carrying amount of this equipment. The decision to abandon this NCS
equipment was based primarily on NCOS's focus on WaferPierce applications of the
NCS technology.
REVENUE RECOGNITION:
Revenues from the sales of product are recognized at time of shipment. During
each of the two years ended June 30, 2003, NCT 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, 2003, there were no deferred revenues
related to contract services in progress.
RESEARCH AND DEVELOPMENT:
Research and development costs are expensed as incurred.
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.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
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:
2003 2002
------------ -----------
Net loss, as reported $(4,017,785) (4,729,072)
Total stock-based employee compensation
expense determined under fair value
based method for all awards ( 233,000) ( 445,000)
------------ -----------
Net loss, pro forma $(4,250,785) (5,174,072)
============ ===========
Net loss per share as reported $( 0.07) ( 0.08)
Net loss per share pro forma $( 0.07) ( 0.09)
The fair value of options granted during 2003 and 2002 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
2003 2002
---------- ----------
Expected dividend yield 0% 0%
Expected stock price volatility 105% 53%
Risk-free interest rate 2.9% 5.0%
Expected life of options 6.5 years 6.5 years
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.
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, 2003 and 2002.
F-15
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
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 available-for-sale securities and 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
(17,167,710 shares at June 30, 2003 and 10,822,661 shares at June 30, 2002)
would be to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In May 2003, the Financial Accounting Standards Board ("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.
F-16
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
In December 2002, the 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.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 effective July 1, 2002, and has applied the provisions of
SFAS No. 144 in connection with its accounting for the impairment of long-lived
assets, discussed above. Management does not believe the application of SFAS
No. 144 resulted in a 2003 impairment charge different from that under previous
accounting standards. The provisions of SFAS No. 144 were also applied in
connection with the Company's accounting for discontinued operations (Note 3).
RECLASSIFICATIONS:
Certain amounts reported in the 2002 financial statements have been reclassified
to conform to the 2003 presentation.
2. GOING CONCERN, RESULTS OF OPERATIONS, AND MANAGEMENT'S PLANS:
The Company's financial statements for the year ended June 30, 2003 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company reported a net loss of $4,017,785 for the year ended June
30, 2003, and an accumulated deficit of $21,073,620 as of June 30, 2003. The
Company has not recognized any significant revenues from its PI technology, and
the Company expects to use cash in operations during the next year. In
addition, during the quarter ended June 30, 2003, NCT discontinued its
operations (Note 3).
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-17
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
To address its current cash flow concerns, the Company is performing certain
activities and considering certain strategies, as follows:
(a) The Company is in discussions with investment bankers and
financial institutions attempting to raise funds to support
current and future operations. This includes attempting to raise
additional working capital through the sale of additional capital
stock or through the issuance of debt. 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.
(b) Effective September 15, 2003, the Company entered into a joint
venture with Scimaxx, LLC, a limited liability company owned by
an officer and director of the Company and two former employees
of NCOS. The Company has a 50% interest in the joint venture
company, Scimaxx Solutions, LLC. In exchange for a 50% interest,
the Company contributed the rights to utilize a license to use
the technology of the Company and to utilize the facility and
equipment of NCOS. Scimaxx, LLC is to contribute $50,000 in cash
over a specified period of time.
(c) Effective September 22, 2003, the Company signed a letter of
intent with Meshed Systems, GmbH ("Meshed Systems"), in which
Meshed System's to make a 100,000 Euro investment in EPT in
exchange for a 51% equity interest in EPT. The letter of intent
provides for Meshed Systems to manage the operations of EPT and
to provide EPT with working capital on an as needed basis. The
Company is to grant EPT a non-exclusive, non-royalty bearing
worldwide license to utilize its ultrasonic technology. Profit
sharing is to be based on the proportionate equity ownership. The
license will also allow EPT to sublicense the intellectual
property. Meshed Systems is managed by a former officer and
director of the Company.
(d) The Company believes sales of its products and technology license
rights may provide additional funds to meet the Company's capital
requirements.
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 operations at NCT and liquidate NCT,
either though the German courts, or through a self-liquidation. In September
2003, the German court rejected the application for insolvency; therefore NCT
implemented a plan of self-liquidation as provided by German law. The Company
anticipates that a liquidation will be completed by June 30, 2004.
F-18
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
At June 30, 2003, the carrying amounts of NCT's assets and liabilities are as
follows:
Cash $ 10,492
Accounts receivable 6,345
Other assets 5,140
-------------
Total current assets 21,977
-------------
Machinery, net 14,957
Office equipment, net 5,330
-------------
20,287
-------------
Total assets $ 42,264
=============
Accounts payable $ 360,122
Accrued liabilities 42,846
-------------
Total liabilities
(all current)(1) $ 402,968
=============
(1) Liabilities above do not include payables to the Company of approximately
$172,719 at June 30, 2003.
NCT's revenues for the years ended June 30, 2003 and 2002 reported in
discontinued operations were $128,947 and $151,392, respectively. NCT incurred
losses in 2003 and 2002, of $882,718 and $782,858, respectively. NCT did not
incur any income taxes in 2003 or 2002.
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 subsidiaries' (NCT and EPT) operations are located in
Germany. NCT and EPT transactions are conducted in currencies other than the
U.S. dollar (the currency into which 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-19
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
5. NOTES RECEIVABLE:
RELATED PARTY:
At July 1, 2001, the Company had an unsecured, 5.75% note receivable from
Intercell International Corporation (Intercell) of $92,500, due on demand.
Intercell is a company that owns 9.8% of the Company's outstanding common stock
at June 30, 2003. During the year ended June 30, 2002, the Company advanced an
additional $35,000 to Intercell under this note receivable. The entire amount
was collected during the year ended June 30, 2002.
OTHER:
Prior to July 1, 2001, the Company loaned $500,000 to an unrelated third party -
Global Capital Partners, Inc. ("Global") in exchange for a 12% note receivable
due in November 2001. At July 1, 2001, the note balance was $375,000, of which
$100,000 was received in August 2001. The note was not paid in November 2001,
and therefore, in January 2002, the Company agreed to the assignment of the note
($275,000), and related accrued interest ($14,630), by Global, to a third party.
This third party was an investment group involved in assisting the Company with
its financing efforts. Through June 30, 2002, principal payments of $130,291
along with accrued interest of $19,300 were received. In October 2002, the
remaining balance of the note ($144,709) and related interest were received in
full.
In April 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 were received
in full.
At July 1, 2001, the Company also had a $300,000 loan receivable from a third
party, which was unsecured and non-interest bearing. In September 2001, the
outstanding amount was received in full.
6. NOTE PAYABLE - RELATED PARTY
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, an officer/director loaned the Company $30,000 in exchange for an
unsecured, 7% promissory note.
F-20
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
7. SHAREHOLDERS' EQUITY:
COMMON STOCK:
During the quarter ended December 31, 2002, the Company sold 5,691,190 shares of
restricted common stock along with warrants to purchase 4,616,191 shares of
common stock at exercise prices ranging from $0.30 to $0.60 per share for cash
of $1,570,459 (net of offering costs of $75,500). In connection with the
issuance of 1,119,999 shares out of the total 5,691,190 issued during the
quarter, 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.
During the quarter ended March 31, 2003, the Company 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.
During the quarter ended June 30, 2003, 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.
Subsequent to June 30, 2003, the Company issued 969,231 shares of common stock
for cash of $100,000 and for services valued at $7,600.
In March 2002, the Company increased its authorized common shares from
100,000,000 to 200,000,000.
On March 29, 2002, the Company entered into a $2,000,000 financing agreement,
which consisted of two tranches of $1,000,000 each. In April 2002, the Company
issued 800,000 units at $1.25 per unit under the first tranche and received
$1,000,000. The closing bid price of the Company's common stock on the date of
issuance was $1.31 per share. Each unit consists of one share of the Company's
common stock and a warrant to purchase 1.1 shares of common stock at $1.45 per
share. The warrants have a term of five years and exercise of the warrants can
be cashless under certain circumstances. The Company incurred transaction
costs, which were settled through a cash payment of $100,000 and the issuance of
warrants to purchase 113,000 shares of the Company's common stock at $1.45 per
share and warrants to purchase 80,000 shares of common stock at $1.25 per share.
These warrants have a term of five years and the exercise of the warrants can be
cashless under certain circumstances. The Company issued 1,073,000 common
shares, which are being held by an escrow agent for the potential issuance upon
the exercise of the warrants. The second tranche is no longer available to the
Company, pursuant to the terms of expiration.
F-21
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
Prior to July 1, 2001, the Company entered into a $15,000,000 equity financing
agreement with a third party. Under the first installment of the agreement, the
Company received $7,500,000 cash, net of $507,989 in offering costs, in exchange
for 4,531,613 shares of the Company's common stock (approximately $1.66 per
share, before offering costs), a warrant ("the Initial Warrant") to purchase an
additional 453,161 shares of the Company's common stock, and a separate warrant
to purchase shares of the Company's common stock ("the Vesting Warrant"). The
$1.66 per share amount was based upon 80% of the average market price of the
Company's common stock prior to the closing, as defined in the agreement. The
Initial Warrant is exercisable immediately through October 2005 at an exercise
price of $2.586 per share. Under the Vesting Warrant, on defined dates, the
warrant shall vest with respect to a defined number of shares that are
exercisable at $0.001 per share immediately and through October 2005. The
defined dates are the 65th, 130th, and 195th trading days following the closing
of the $7,500,000 transaction. The defined number of shares is equal to
one-third of the initial shares (4,531,613) multiplied by an amount equal to the
initial purchase price multiplied by an initial percentage (the initial
percentage is equal to 115%, 125% and 140% from the 65th, 130th, and 190th days,
respectively, from the initial closing date), less the reset price, which is
equal to the average market value of the Company's common stock at those dates.
This amount is then divided by the reset price and equals the number of shares
issuable under the Vesting Warrant. For the 65th trading day, 2,143,975 shares
were issued in March, 2001 for the first one-third installment under the vesting
warrant.
The companies and individuals that provided the equity financing have stated
that 7,418,895 shares are due for the second one-third installment under the
vesting warrant and 4,545,303 shares are due for the third one-third installment
under the vesting warrant. The Company does not intend to issue the shares, but
has reserved the shares pursuant to a court order (Note 8). As a result of
lawsuits filed, the second installment of the equity financing has not be
completed.
During the years ended June 30, 2003 and 2002, the Company issued shares of
common stock in exchange for services. The shares were issued for the following
services and were valued at the quoted market price of the Company's common
stock at the date the services were performed:
2003 2002
---- ----
Shares Amount Shares Amount
------ -------- ------ ----------
Third parties, investment-
related services 14,000 $ 9,345 36,000 $ 27,360
Employees - - 10,000 12,700
------ -------- ------ ----------
14,000 $ 9,345 46,000 $ 40,060
====== ======== ====== ==========
During the year ended June 30, 2003, the Company issued 7,000 shares of common
stock in connection with an exercised stock option, and issued 56,388 shares of
common stock in connection with exercised warrants.
F-22
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
During the year ended June 30, 2002, the Company issued 16,604 shares of common
stock in connection with exercised stock options.
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:
2003 2002
----------- -----------
Weighted Weighted-
average average
exercise exercise
Shares price Shares price
----------- --------- ----------- ----------
Outstanding, beginning of
Year 8,502,000 $ 1.06 6,852,000 $ 1.08
Granted 450,000 0.62 1,675,000 0.98
Expired ( 150,000) 2.06 - -
Exercised ( 14,476) 0.66 ( 25,000) 0.45
----------- --------- ----------- ----------
Outstanding, end of year 8,787,524 $ 1.00 8,502,000 $ 1.06
=========== ========= =========== ==========
Options exercisable at
end of year 8,322,000 $ 1.00 7,502,000 $ 1.07
=========== ========= =========== ==========
Weighted-average fair value of
options granted during the
year at market $ 0.52 $ 0.27
========= ==========
F-23
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
The following table summarizes information about stock options outstanding as of June
30, 2003:
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 5.37 $ 0.32 3,255,000 $ 0.32
0.51 - 1.00 2,495,524 9.48 0.67 2,240,524 0.64
1.01 - 2.00 860,000 7.23 1.53 650,000 1.58
2.01 - 3.00 2,167,000 5.28 2.28 2,167,000 2.28
5.01 - 6.00 10,000 6.67 6.00 10,000 6.00
--------- ------------ --------------- ------------------- ----------
8,787,524 7.80 $ 1.00 8,322,524 $ 1.00
========= ============ =============== =================== ==========
During 2003, options to purchase 450,000 shares of the Company's common stock at
exercise prices ranging from $0.61 to $0.97 per share were granted to four
employees of the Company, one of whom is an officer and director of the Company.
The exercise prices were equal to the market value of the Company's common stock
at the date of grant and expire through 2013.
During 2002, options to purchase 1,675,000 shares of the Company's common stock,
at exercise prices ranging from $0.65 to $1.47 per share, were granted to 21
employees of the Company, six of whom are or were officers and/or directors of
the Company. The exercise prices were equal to the market value of the
Company's common stock at the date of grant and expire through 2012.
WARRANTS:
At June 30, 2003, the following warrants to purchase common stock were outstanding:
Number of common Exercise Expiration
shares covered by warrants price date
-------------------------- ------------ -----------------------
70,000 $ 2.81 July 2003
522,500 0.30 - 2.17 October - December 2003
440,000 0.25 - 1.50 January - February 2004
20,000 1.25 August - September 2005
1,629,352 0.30 - 2.58 October - December 2005
75,000 0.30 - 0.36 January 2006
200,000 0.65 May 2006
650,000 0.60 - 1.25 January 2007
3,440,000 0.50 - 0.60 October - November 2007
1,333,334 0.15 April 2008
---------
8,380,186
=========
F-24
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
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
expires in January 2010, and is exercisable immediately. The warrant provides
for a cashless exercise and was valued at approximately $230,400 using the
Black-Scholes pricing model (Note 8).
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
remain unchanged. In connection with the extension of the term of the warrant,
the Company recorded a $2,400 expense, using the Black-Scholes pricing model
(Note 8).
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.
During the year ended June 30, 2002, the Company issued warrants to purchase
200,000 shares of common stock at $1.25 per share for services received from a
third party. The warrants expire in January 2007. The warrants were valued at
$104,800 using the Black-Scholes pricing model, and that expense was charged to
general and administrative expense.
During the year ended June 30, 2002, warrants to purchase 50,000 shares of
common stock at $3.52 per share expired.
8. COMMITMENTS AND CONTINGENCIES
LICENSE AGREEMENTS:
The Company and Louis DiFrancesco, the inventor of the PI Technology, were
involved in litigation relating to NanoPierce's ownership of its intellectual
property and the rights as to who should receive royalty payments from licenses,
which were outstanding as of September 3, 1996. In October 2002, the Company
and DiFrancesco signed a settlement agreement enforced by Court Order. The
Court Order declares that the Company owns the entire, exclusive, incontestable
ownership, right, title and interest in the patents. The Court Order further
declares that Mr. DiFrancesco owns the sole, exclusive, and incontestable right
to receive and collect all royalties and other payments from all licenses
outstanding on September 3, 1996. Pursuant to the settlement agreement, Mr.
DiFrancesco was also granted a limited, two-year, non-transferable,
royalty-bearing license with no right to sublicense.
F-25
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
FINANCIAL ADVISORY AND PLACEMENT AGENT AGREEMENT:
Effective January 10, 2003, the Company entered into a 12-month financial
advisory and exclusive placement agent agreement with a third party (the
"Placement Agent"). Under the terms of the agreement, the Placement Agent is to
act as financial advisor to the Company and as its exclusive placement agent for
a private placement of equity securities during the twelve-month term of the
agreement. During the term of the agreement, the Company is prohibited from
directly or indirectly offering securities, except in connection with (a)
stock-based compensation issued to employees or other participants, (b)
securities sold prior to February 15, 2003, and (c) securities sold in
connection with bridge financing, as defined in the agreement.
Compensation to the Placement Agent consists of a retainer fee (deferred
consulting costs) valued at approximately $230,400, which consists of a warrant
to purchase up to 450,000 shares of the Company's common stock. Compensation
also includes a $10,000 monthly advisory fee, payable in cash, beginning in June
2003. In addition, the Placement Agent is to receive a 6% fee based on the
proceeds raised from a successful offering, payable in cash, along with warrants
to purchase shares of the Company's common stock in an amount equal to 10% of
the number of common shares issued in an offering.
FINANCING AGREEMENT SUIT:
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York. In July 2003,
Harvest Court, LLC filed suit against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and unrelated third parties in the United States District
Court for the Southern District of New York, New York City, New York. The suit
alleges violations of federal securities laws and common law fraud among other
claims. Harvest Court is seeking various forms of relief including compensatory
and punitive damages. The Company is preparing pleadings responsive to the
complaint.
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NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
In May 2001, Harvest Court, LLC filed suit against the Company in the Supreme
Court of the State of New York, County of New York. The suit alleges that the
Company breached an October 20, 2000 Stock Purchase Agreement, by not issuing
7,418,895 free trading shares of the Company's common stock in connection with
the reset provisions of the Purchase Agreement due on the second reset date and
approximately 4,545,303 shares due in connection with the third reset date.
Harvest Court, LLC is seeking the delivery of such shares or damages in the
alternative. In August 2001, the Supreme Court of the State of New York, County
of New York issued a preliminary injunction ordering the Company to reserve and
not transfer the shares allegedly due to Harvest Court. The Company has filed
counterclaims seeking various forms of relief against Harvest Court, LLC.
The Company intends to vigorously prosecute this litigation and does not believe
the outcome of this litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
In September 2001, litigation was filed by Thomson Kernaghan & Co., Ltd. against
the Company and certain officers/directors of the Company seeking damages for
defamation. Thomson Kernaghan & Co., subsequently filed for protection under
Canadian bankruptcy laws. In December 2002, the Company received notice from the
bankruptcy trustee of the Thomson Kernaghan & Co., that it would not pursue the
action and would move for dismissal of the litigation with the court.
9. INCOME TAXES:
The Company and its subsidiaries did not incur income tax expense for the years
ended June 30, 2003 and 2002. 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, 2003 and 2002 is as
follows:
2003 2002
------------ -----------
Expected income tax benefit $(1,066,000) (1,342,000)
Increase in valuation allowance 1,066,000 1,342,000
------------ -----------
$ - -
============ ===========
The tax effects of temporary differences that give rise to substantially all of
deferred tax assets at June 30, 2003 are as follows:
Deferred tax assets:
Net operating loss $ 4,010,000
Less valuation allowance (4,010,000)
------------
Net deferred tax assets $ -
============
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NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2003 and 2002
As of June 30, 2003, the Company has net operating loss carry forwards of
approximately $11,800,000, which expire between 2012 and 2023. 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.
10. 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
----------- --------
2004 $124,743
2005 90,901
2006 66,601
--------
$282,245
========
Aggregate rental expense in continuing operations under operating leases was
$211,095 and $227,226 for the years ended June 30, 2003 and 2002, respectively.
11. FOREIGN AND DOMESTIC OPERATIONS:
Operating results and long-lived assets of continuing operations as of June 30,
2003 and for the years ended June 30, 2003 and 2002, 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, 2003 $ 3,900 33,117 37,017
============== ======= =========
Revenues for year
ended June 30, 2002 $ 4,737 - 4,737
============== ======= =========
Long-lived assets at
June 30, 2003 $ 870,831 371,014 1,241,845
============== ======= =========
F-28