FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-0992908
------ ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
370 17th Street, Suite 3640
Denver, Colorado 80202
(Address of principal executive offices ) (Zip Code)
Issuer's telephone number, including area code: (303) 592-1010
Not applicable
(Former name, former address or former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 13, 2003 there were 66,023,969 shares of the registrant's sole
class of common shares outstanding.
Transitional Small Business Disclosure Format Yes No X
--- ---
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Independent Accountants' Report F-1
Condensed Consolidated Balance Sheet -September 30, 2003 F-2
Condensed Consolidated Statements of Operations -
Three months ended
September 30, 2003 and 2002 F-4
Condensed Consolidated Statements of Comprehensive
Loss - Three months ended
September 30, 2003 and 2002 F-5
Condensed Consolidated Statement of Changes in Shareholders'
Equity -Three months ended September 30, 2003 F-6
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2003 and 2002 F-7
Notes to Condensed Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis 1
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 4
Item 2. Changes in Securities 5
Item 4. Controls and Procedures 5
Item 6. Exhibits and Reports on Form 8-K 6
SIGNATURES 7
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
Board of Directors
NanoPierce Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
NanoPierce Technologies, Inc. and subsidiaries as of September 30, 2003, the
related condensed consolidated statements of operations and comprehensive loss
for the three-month periods ended September 30, 2003 and 2002, the condensed
consolidated statement of changes in shareholders' equity for the three-month
period ended September 30, 2003, and the condensed consolidated statements of
cash flows for the three-month periods ended September 30, 2003 and 2002. These
interim condensed consolidated financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying interim condensed consolidated financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 12, 2003
F-1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 2003
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 86,955
Accounts receivable 9,352
Inventory 39,787
Deferred consulting costs and other prepaid expenses 83,160
Assets of discontinued operations (Note 2) 26,364
-----------
Total current assets 245,618
-----------
Property and equipment:
Machinery 458,601
Office equipment and furniture 331,113
Leasehold improvements 138,776
-----------
928,490
Less accumulated depreciation (415,907)
-----------
512,583
-----------
Other assets:
Assets of discontinued operations (Note 2) 17,653
Deposits and other 19,958
Intellectual property rights, net of accumulated
amortization of $559,315 240,685
Patent and trademark applications, net of accumulated
amortization of $91,493 453,148
-----------
731,444
-----------
Total assets $1,489,645
===========
(Continued)
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 2003
(Unaudited)
(Continued)
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 620,100
Accrued liabilities 47,618
Notes payable - related parties (Note 4) 75,000
Liabilities of discontinued operations (Note 2) 408,098
-------------
Total liabilities - all current 1,150,816
-------------
Minority interest in joint venture (Note 5) 1,205
-------------
Commitments and contingencies (Notes 2, 4, 5 and 7)
Shareholders' equity (Note 6):
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
66,023,969 shares issued and outstanding 6,602
Additional paid-in capital 21,671,345
Accumulated other comprehensive income 188,161
Accumulated deficit (21,528,484)
-------------
Total shareholders' equity 337,624
-------------
Total liabilities and shareholders' equity $ 1,489,645
=============
See notes to condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2003 and 2002
(Unaudited)
-------------------------
2003 2002
------------ -----------
Revenues $ 25,051 -
------------ -----------
Operating expenses:
Research and development 46,655 95,173
General and administrative 414,075 634,173
Selling and marketing 24,180 66,953
------------ -----------
484,910 796,299
------------ -----------
Loss from operations ( 459,859) ( 796,299)
------------ -----------
Other income (expense):
Interest income 3,418 10,288
Minority interest in joint
Venture loss (Note 5) 3,794 -
Interest expense ( 297) -
------------ -----------
6,915 10,288
------------ -----------
Loss from continuing operations ( 452,944) ( 786,011)
------------ -----------
Discontinued operations, loss from
operations of subsidiary (Note 2) ( 1,920) ( 232,714)
------------ -----------
Net loss $ ( 454,864) (1,018,725)
============ ===========
Basic and diluted loss per share:
Loss from continuing operations $ ( 0.01) ( 0.02)
Loss from discontinued operations ( -) ( -)
------------ -----------
Net loss per share, basic and diluted $ ( 0.01) ( 0.02)
============ ===========
Weighted average number of common
shares outstanding 62,404,043 57,643,545
============ ===========
See notes to condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended September 30, 2003 and 2002
(Unaudited)
------------------------
2003 2002
----------- -----------
Net loss $ (454,864) (1,018,725)
Change in unrealized gain on
securities (119) (118)
Change in foreign currency
translation adjustments ( 1,810) ( 4,900)
----------- -----------
Comprehensive loss $( 456,793) (1,023,743)
=========== ===========
See notes to condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Three Months Ended September 30, 2003
(Unaudited)
Accumulated
Common Stock Additional other Total
---------------------- paid-in comprehensive Accumulated shareholders'
Shares Amount capital income deficit equity
---------- ---------- ---------- -------------- ------------ --------------
Balances, July 1, 2003 65,054,738 $ 6,505 21,567,807 190,090 (21,073,620) 690,782
Common stock issued
for cash 769,231 77 99,923 - - 100,000
Common stock issued
in satisfaction of
payable 200,000 20 3,615 - - 3,635
Net loss - - - - (454,864) (454,864)
Other comprehensive
income:
Change in unrealized
gain on securities - - - (119) - (119)
Foreign currency
translation
adjustments - - - (1,810) - (1,810)
---------- ---------- ---------- -------------- ------------ --------------
Balances,
September 30, 2003 66,023,969 $ 6,602 21,671,345 188,161 (21,528,484) 337,624
========== ========== ========== ============== ============ ==============
See notes to condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $( 454,864) (1,018,725)
------------ -----------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
Loss from discontinued operations 1,920 232,714
Amortization expense 38,616 32,239
Depreciation expense 33,026 35,189
Amortization of deferred consulting costs 58,073 -
Minority interest in joint venture ( 3,794) -
Expenses incurred in exchange for
common stock, warrants and options - 12,535
Changes in operating assets and liabilities:
Decrease in accounts receivable 9,780 56,598
Decrease in prepaid expense 27,818 20,450
Increase in deposits and other assets ( 330) ( 683)
Increase in accounts payable and
accrued liabilities 44,764 78,053
------------ -----------
Total adjustments 209,873 467,095
------------ -----------
Net cash used in operating activities
from continuing operations ( 244,991) ( 551,630)
------------ -----------
Cash flows from investing activities:
Increase in patent and trademark applications (35,480) ( 19,973)
Purchase of property and equipment ( 1,575) ( 2,938)
Payments received on note receivable - 95,862
------------ -----------
Net cash (used in) provided by investing activities
from continuing operations (37,055) 72,951
------------ -----------
Cash flows from financing activities:
Issuance of common stock for cash 100,000 -
Cash received in conjunction with joint venture 5,000 -
Proceeds from notes payable 65,000 -
------------ -----------
Net cash provided by financing activities
from continuing operations 170,000 -
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents 2,359 (3,711)
------------ -----------
Net cash used in discontinued operations ( 4,097) ( 738)
------------ -----------
Net decrease in cash and cash equivalents (113,784) ( 483,128)
Cash and cash equivalents, beginning 200,739 679,209
------------ -----------
Cash and cash equivalents, ending $ 86,955 196,081
============ ===========
Supplemental disclosure of non-cash financing activities:
Issuance of common stock in satisfaction of payable $ 3,635 -
============ ===========
See notes to condensed consolidated financial statements.
F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
1. Business, Organization and Summary of Significant Accounting
Policies:
Presentation of Interim Information:
The accompanying condensed consolidated financial statements include the
accounts of NanoPierce Technologies, Inc., a Nevada corporation (the Company),
its wholly owned subsidiary, NanoPierce Connection Systems, Inc., a Nevada
Corporation (NCOS) which was incorporated in 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, and its joint venture Scimaxx
Solutions, LLC ("Scimaxx Solutions"), a Colorado limited liability company,
which was formed in September 2003 (Note 5). During the fiscal year ended June
30, 2003, NCT effectively discontinued its operations (Note 2). All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the management of the Company, the accompanying unaudited
condensed consolidated financial statements include all material adjustments,
including all normal and recurring adjustments, considered necessary to present
fairly the financial position and operating results of the Company for the
periods presented. The financial statements and notes are presented as
permitted by Form 10-QSB, and do not contain certain information included in the
Company's last Annual Report on Form 10-KSB for the fiscal year ended June 30,
2003. It is the Company's opinion that when the interim statements are read in
conjunction with the June 30, 2003 Annual Report on Form 10-KSB, the disclosures
are adequate to make the information presented not misleading. Interim results
are not necessarily indicative of results for a full year or any future period.
The Company's financial statements for the three months ended September 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 $454,864 for the three months
ended September 30, 2003, and an accumulated deficit of $21,528,484 as of
September 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, a letter of intent with Meshed Systems, GmbH ("Meshed
Systems"), in which Meshed Systems was to make a 100,000 Euro investment in EPT
for a 51% equity interest was cancelled in November 2003. The Company has also
experienced difficulty and uncertainty in meeting its liquidity needs. 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-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
To address its current cash flow concerns, the Company issued 769,231 shares of
common stock in exchange for $100,000 cash during the three months ended
September 30, 2003 (Note 6). The Company is in discussions with investment
bankers and financial institutions attempting to raise additional funds to
support current and future operations. This includes attempting to raise
additional working capital through the sale of additional capital stock or
through the issuance of debt (Note 7).
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.
Business:
The Company is engaged in the design, development and licensing of products
using its intellectual property, the PI Technology. The PI Technology consists
of patents, pending patent applications, patent applications in preparation,
trade secrets, trade names, and trademarks. The PI Technology improves
electrical, thermal and mechanical characteristics of electronic products. The
Company has designated and is commercializing its PI Technology as the
NanoPierce Connection System (NCS(TM)) and has begun to market the PI Technology
to companies in various industries for a wide range of applications.
NCOS business activities are to include the licensing, sale and/or manufacturing
of certain electronic products using the NCS technology. Through September 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 September 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.
Beginning in September 2003, Scimaxx Solutions activities primarily represent
research and development and marketing functions.
Business Risk:
The Company is subject to risks and uncertainties common to technology-based
companies, including rapid technological change, dependence on principle
products and third party technology, new product introductions and other
activities of competitors, dependence on key personnel, and limited operating
history.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
International Operations:
The Company's foreign subsidiaries (NCT and EPT) operations are located in
Germany. NCT and EPT transactions are conducted in currencies other than the
U.S. dollar, (the currency into which the subsidiaries' historical financial
statements have been translated) primarily the Euro. As a result, the Company
is exposed to adverse movements in foreign currency exchange rates. In
addition, the Company is subject to risks including adverse developments in the
foreign political and economic environments, trade barriers, managing foreign
operations and potentially adverse tax consequences. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's financial condition or results of operations in the future.
Loss Per Share:
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share,
requires dual presentation of basic and diluted earnings or loss per share (EPS)
with a reconciliation of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Loss per share of common stock is computed based on the
average number of common shares outstanding during the period. Stock options
and warrants are not considered in the calculation, as the impact of the
potential common shares (17,097,710 shares at September 30, 2003 and 10,927,661
shares at September 30, 2002) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
Stock Based Compensation:
SFAS No. 123, Accounting for Stock Based Compensation, allows companies to
choose whether to account for employee stock-based compensation on a fair value
method, or to continue accounting for such compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has chosen to
continue to account for employee stock-based compensation using APB 25.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
Had compensation cost for the Company's stock plans been determined based on
fair value at the grant dates for awards under the plans consistent with the
method prescribed under SFAS No. 123, the Company's net loss and net loss per
share for the three months ended September 30, 2003 and 2002, respectively,
would have changed to the pro forma amounts indicated below:
September 30, September 30,
2003 2002
--------------- --------------
Net loss, as reported $ ( 454,864) (1,018,725)
Total stock-based employee compensation
expense determined under fair value
based method for all awards - ( 58,000)
--------------- --------------
Net loss, pro forma $ ( 454,864) (1,076,725)
=============== ==============
Net loss per share as reported $ ( 0.01) ( 0.02)
Net loss per share pro forma $ ( 0.01) ( 0.02)
The fair value of options granted during the three months ended September 30,
2002 (Note 6) is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
Expected dividend yield 0%
Expected stock price volatility 105%
Risk-free interest rate 2.9%
Expected life of options 6.5 years
No options were granted during the three months ended September 30, 2003.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued SFAS
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"),
which changes the criteria by which one company includes another entity in its
consolidated financial statements. FIN 46 requires a variable interest entity
("VIE") to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or is
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to VIE's created after
January 31, 2003, and apply in the first fiscal period beginning after December
15, 2003, for VIE's created prior to February 1, 2003. The Company is not a
party to any VIE's created prior to January 31, 2003. The Company has applied
the provisions of FIN 46 in connection with a September 15, 2003 investment in a
joint venture (Note 5).
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
2. Discontinued Operations:
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany. The
insolvency filing was necessary in order to comply with specific German legal
requirements. In conjunction with the insolvency filing, management made a
decision in April 2003, to discontinue operations at NCT and liquidate NCT,
either though the German courts, or through a self-liquidation. In September
2003, the German court rejected the application for insolvency; therefore NCT
implemented a plan of self-liquidation as provided by German law. The Company
anticipates that liquidation will be completed by June 30, 2004.
At September 30, 2003, the carrying amounts of NCT's assets and liabilities are
as follows:
Cash $14,502
Accounts receivable 9,890
Other assets 1,972
--------
Total current assets 26,364
--------
Machinery, net 12,885
Office equipment, net 4,768
--------
17,653
--------
Total assets $ 44,017
========
Accounts payable $385,168
Accrued liabilities 22,930
--------
Total liabilities
(all current)(1) $408,098
========
(1) Liabilities above do not include payables to the Company of approximately
$176,075 at September 30, 2003.
NCT's revenues for the three months ended September 30, 2003 and 2002 reported
in discontinued operations were $692 and $59,174, respectively. NCT incurred
losses in the three months ended September 30, 2003 and 2002, of $1,920 and
$232,714, respectively. NCT did not incur any income taxes during these
periods.
3. Note receivable:
During the three months ended September 30, 2002, the Company received $95,862
on an existing 5% unsecured loan receivable.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
4. Notes Payable - Related Parties:
In June 2003, an officer/director of the Company loaned $10,000 to the Company
in exchange for an unsecured 7% promissory note due in December 2003. In
September 2003, the same officer/director loaned the Company an additional
$30,000 in exchange for an unsecured, 7% promissory note, due in September 2004.
In September 2003, Intercell International Corporation, an affiliate of the
Company, loaned the Company $35,000 in exchange for an unsecured, 7% promissory
note due in September 2004. In November 2003, Intercell International
Corporation loaned the Company $100,000 in exchange for a 7% promissory note due
in November 2004. This promissory note is collateralized by an assignment of a
51% interest in the proceeds, if any, the Company may receive in connection with
the Financing Agreement litigation (Note 7).
5. Investment in Joint Venture Interest:
On September 15, 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC, an entity related to the Company in that a member of Scimaxx, LLC
is an officer/director of the Company. The name of the joint venture is Scimaxx
Solutions, LLC. The purpose of the joint venture is to provide the electronics
industry with technical solutions to manufacturing problems based on the need
for electrical connectivity.
The Company received a 50% interest in the joint venture in exchange for the
contribution of NCOS fixed assets with a carrying value of approximately
$132,000 at September 15, 2003. The Company also granted Scimaxx Solutions a
ten-year, non-exclusive, non-royalty bearing worldwide license to use the
Company's intellectual property. Scimaxx, LLC is to invest $50,000 cash, of
which $5,000 has been received as of September 30, 2003. The terms of the joint
venture provide for the Company to share in 50% of joint venture net profits, if
any. The Company is to share in 50% of joint venture net losses beyond the
first $50,000. The Company has a 49% voting interest in the joint venture.
Scimaxx Solutions is considered to be a VIE based on criteria established under
FIN 46. The Company has consolidated this VIE based on a determination that the
Company is the primary beneficiary. Minority interest at September 30, 2003,
represents Scimaxx, LLC's proportionate share of the joint venture equity.
Through the three months ended September 30, 2003, Scimaxx Solutions recognized
a loss of $3,794.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
6. Shareholders' Equity:
During the three months ended September 30, 2003, the Company sold 769,231
shares of restricted common stock for cash of $100,000. The Company also issued
200,000 shares of restricted common stock in satisfaction of a $3,635 payable.
During the three months ended September 30, 2003, warrants to purchase 70,000
shares of common stock at an exercise price of $2.81 per share expired.
During the three months ended September 30, 2002, the Company granted stock
options to purchase 85,000 shares of common stock at exercise prices of $0.58 to
$0.97 per share to employees of the Company.
7. Commitments and Contingencies:
Financial Advisory and Placement Agent Agreement:
Effective January 10, 2003, the Company entered into a 12-month financial
advisory and exclusive placement agent agreement with a third party (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. The cost of the
warrant is being amortized over a twelve-month period from the date of issuance
of the warrant. During the three months ended September 30, 2003, $58,073 was
expensed in connection with the warrant. 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.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
Financing Agreement Suit:
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York. In July 2003,
Harvest Court, LLC filed suit against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and unrelated third parties in the United States District
Court for the Southern District of New York, New York City, New York. The suit
alleges violations of federal securities laws and common law fraud among other
claims. Harvest Court is seeking various forms of relief including compensatory
and punitive damages. The Company is preparing pleadings responsive to the
complaint.
In May 2001, Harvest Court, LLC filed suit against the Company in the Supreme
Court of the State of New York, County of New York. The suit alleges that the
Company breached an October 20, 2000 Stock Purchase Agreement, by not issuing
7,418,895 free trading shares of the Company's common stock in connection with
the reset provisions of the Purchase Agreement due on the second reset date and
approximately 4,545,303 shares due in connection with the third reset date.
Harvest Court, LLC is seeking the delivery of such shares or damages in the
alternative. In August 2001, the Supreme Court of the State of New York, County
of New York issued a preliminary injunction ordering the Company to reserve and
not transfer the shares allegedly due to Harvest Court. The Company has filed
counterclaims seeking various forms of relief against Harvest Court, LLC.
The Company intends to vigorously prosecute this litigation and does not believe
the outcome of this litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
F-15
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended September 30, 2003 and September 30, 2002
(Unaudited)
8. Foreign and Domestic Operations:
The Company's revenues from continuing operations during the three-month period
ended September 30, 2003 were generated solely in Germany. There were no
revenues from continuing operations during the three-month period ended
September 20, 2002. There was no significant amount of transfers between
geographic areas. Long-lived assets at September 30, 2003, by geographic area
are as follows:
United States $ 855,458
Germany 350,958
----------
Total $1,206,416
==========
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this Form 10-QSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties that could cause actual results to
differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. Any forward-looking
statement or statements speak only as of the date on which such statements were
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events.
Therefore, forward-looking statements should not be relied upon as prediction of
actual future results.
The independent auditors' report on the Company's financial statements as
of June 30, 2003, and for each of the years in the two-year period then ended,
includes a "going concern" explanatory paragraph, that describes substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to the factors prompting the explanatory paragraph are discussed
below and also in Note 1 to the quarterly Financial Statements.
RESULTS OF OPERATIONS
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany.
The insolvency filing was necessary, in the view of the Company, in order to
comply with specific German legal requirements. NCT is presented as
discontinued operations in the Company's consolidated financial statements.
During the three months ended September 30, 2003, NCT had losses of $1,920
compared to losses of $232,714 during the three months ended September 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 $25,051 in revenues from continuing operations
during the three months ended September 30, 2003. The $25,051 in revenues was
generated from the sale of inlay components to customers by ExypnoTech. The
Company expects to continue to generate revenues in the future from the
preparation of inlays for those customers for which it has non-disclosure
agreements and cooperation agreements and from the sale of inlays through
ExypnoTech.
The Company recognized $3,418 in interest income during the three months
ended September 30, 2003 compared to $10,288 during the three months ended
September 30, 2002. The decrease of $6,870 is due primarily to the use of cash
to support operations.
Total operating expenses from continuing operations during the three months
ended September 30, 2003 were $484,910 compared to $796,299 for the three months
ended September 30, 2002. The decrease of $311,389 is primarily attributable to
a decrease in general and administrative expenses, as described below.
1
General and administrative expenses during the three months ended September
30, 2003 were $414,075 compared to $634,173 for the three months ended September
30, 2002. The decrease of $220,098 is primarily attributable to a $75,990
decrease in legal expenses and a $221,993 decrease in payroll expenses, offset
by an increase of $52,173 in consulting expenses. Selling and marketing
expenses during the three months ended September 30, 2003 were $24,180 compared
to $66,953 during the three months ended September 30, 2002. The decrease of
$42,773 was due to a decrease in marketing activities throughout the Company.
Research and development expenses during the three months ended September 30,
2003 were $46,655 compared to $95,173 for the three months ended September 30,
2002. The decrease of $48,518 was due to an decrease in activities at the
Company's subsidiaries in connection with the further development and expansion
of the NCS(TM) technology.
During the three months ended September 30, 2003, the Company recognized a
net loss of $454,864 compared to a net loss of $1,018,725 during the three
months ended September 30, 2002. The decrease of $563,861 is primarily
attributable to the decrease of $311,389 in operating expenses and a decrease
in the loss from discontinued operations of $230,794.
LIQUIDITY AND FINANCIAL CONDITION
The Company's current operations are not generating positive cash flows.
During the three months ended September 30, 2003, the Company sold 769,231
shares of common stock for $100,000. The funds were raised to support
operations.
As a result of continued operational losses and working capital
deficiencies and in order to comply with specific German legal requirements, in
April 2003, the Company's wholly owned subsidiary NanoPierce Card Technologies,
Gmbh (NCT) filed for insolvency with the Courts of Munich, Germany. NCT has
been placed in receivership while a plan of liquidation is developed.
During the 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. In addition, the Company is exploring other
financing opportunities to support continuing operations.
During the three months ended September 30, 2003, an officer and director
of the Company loaned $30,000 to the Company in exchange for an unsecured 7%
promissory note due in September 2004. During the fiscal year ended June 30,
2003, the same officer and director of the Company loaned $10,000 to the Company
in exchange for an unsecured 7% promissory note due in December 2003. At
September 30, 2003, the note balances were $40,000.
During the three months ended September 30, 2003, Intercell International
Corporation, an affiliate of the Company, loaned the Company $35,000 in exchange
for an unsecured 7% promissory note due in September 2004. At September 30,
2003, the note balance was $35,000.
2
In November 2003, Intercell International Corporation loaned the Company
$100,000 in exchange for a 7% promissory note due in November 2004. The
promissory note is collateralized by an assignment of a 51% interest in and to
the proceeds, if any, that the Company may receive as a result of the Financing
Agreement litigation.
During the three months ended September, 2003, the Company expanded the
scope of its patent and trademark applications. The intellectual property is
being amortized using the straight-line method over ten years. On September 30,
2003, the Company has net patent and trademark applications costs of $453,148,
compared to $255,380 on September 30, 2002. The increase of $195,768 was
primarily due to the Company's efforts to increase patent and trademark
protection overseas.
PLAN OF OPERATIONS
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC is to market the Company's technology.
Scimaxx LLC, is owned by an officer and director of the Company and two former
employees of the Company. In return for 50% ownership of the Scimaxx Solutions,
LLC, the Company contributed a license to utilize its technology and the
facilities and equipment of NanoPierce Connections. The Company is not required
to make any cash contributions to the joint venture. Operating capital is to be
provided by Scimaxx, LLC.
On September 22, 2003, the Company signed a letter of intent with Meshed
Systems, GmbH ("Meshed Systems"), in which Meshed Systems was to make a 100,000
Euro investment in ExypnoTech for a 51% equity interest. The letter of intent
provided for the transaction to close on November 7, 2003. This transaction did
not close on November 7, 2003, and the letter of intent has been cancelled.
The Company is continuing to look for additional financing through
marketing of its NCS(TM) technology through the pursuit of licensing, joint
ventures, co-manufacturing or other similar arrangements with industry partners.
The failure to secure such a relationship will result in the Company requiring
substantial additional capital and resources to bring its NCS technology to
market. To the extent the Company's operations are not sufficient to fund the
Company's capital requirements, the Company may enter into a revolving loan
agreement with financial institutions or attempt to raise capital through the
sale of additional capital stock or through the issuance of debt.
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.
3
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Financing Agreement
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. The Company is seeking various forms of relief
including actual, exemplary and treble damages. As a result of various
procedural rulings in January 2002, the United States District Court for the
District of Colorado transferred the case to the United States District Court
for the Southern District of New York, New York City, New York. In July 2003,
Harvest Court, LLC filed suit against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and unrelated third parties in the United States District
Court for the Southern District of New York, New York City, New York. The suit
alleges violations of federal securities laws and common law fraud among other
claims. Harvest Court is seeking various forms of relief including compensatory
and punitive damages. The Company is preparing pleadings responsive to the
complaint.
In May 2001, Harvest Court, LLC filed suit against the Company in the
Supreme Court of the State of New York, County of New York. The suit alleges
that the Company breached an October 20, 2000 Stock Purchase Agreement, by not
issuing 7,418,895 free trading shares of the Company's common stock in
connection with the reset provisions of the Purchase Agreement due on the second
reset date and approximately 4,545,303 shares due in connection with the third
reset date. Harvest Court, LLC is seeking the delivery of such shares or
damages in the alternative. In August 2001, the Supreme Court of the State of
New York, County of New York issued a preliminary injunction ordering the
Company to reserve and not transfer the shares allegedly due to Harvest Court.
The Company has filed counterclaims seeking various forms of relief against
Harvest Court, LLC.
The Company is also involved in other various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of the matter discussed above and other matters will not
have a material adverse impact either individually or in the aggregate on either
results of operations, financial position or cash flows of the Company.
4
ITEM 2. CHANGES IN SECURITIES
The Company made the following unregistered sales of its securities from
July 1, 2003 to September 30, 2003.
DATE OF TITLE OF NO. OF
SALE SECURITIES SHARES CONSIDERATION PURCHASER
------- ------------ ------- ----------------------- -------------------
7/21/03 Common Stock 769,231 Financing Neptune Investment
Group
7/22/03 Common Stock 200,000 Payment in satisfaction Thompson & Lowe, PC
of payable
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by
the Company in reliance upon Section 4(2) of the Act. All of the individuals
and/or entities listed above that purchased the unregistered securities were all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates, friends, and employees.
All purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
ITEM 4. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation,
the CEO and CFO have concluded that the Company's current disclosure controls
and procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls subsequent to the date of
their evaluation. There were no significant material weaknesses identified in
the course of such review and evaluation and, therefore, no corrective measures
were taken by the Company.
5
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11 Computation of Net Loss Per Share
Exhibit 31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) FORM 8-K
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(REGISTRANT)
Date: November 14, 2003 /s/ Paul H. Metzinger
-------------------------------
Paul H. Metzinger, President & CEO
Date: November 14, 2003 /s/ Kristi J. Kampmann
---------------------------------
Kristi J. Kampmann,
Chief Financial Officer
7