FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-0992908
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
370 17th Street, Suite 3640
Denver, Colorado 80202
(Address of principal executive offices)
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)
Check 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 past 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 11, 2004 there were 91,259,033 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 Page
----
Report of Independent Registered Public Accounting Firm F-1
Condensed Consolidated Balance Sheet - September 30, 2004 F-2
Condensed Consolidated Statements of Operations -
Three months ended September 30, 2004 and 2003 F-3
Condensed Consolidated Statements of Comprehensive
Loss -Three months ended September 30, 2004 and 2003 F-4
Condensed Consolidated Statement of Changes in Shareholders'
Equity -Three months ended September 30, 2004 F-5
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2004 and 2003 F-6
Notes to Condensed Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis 1
Item 3. Controls and Procedures 3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K 4
SIGNATURES 5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
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, 2004, the
related condensed consolidated statements of operations, comprehensive loss, and
cash flows for the three-month periods ended September 30, 2004 and 2003, and
the condensed consolidated statement of changes in shareholders' equity for the
three-month period ended September 30, 2004. These interim condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the express 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.
/s/ GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 8, 2004
F-1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 2004
(Unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 847,718
Accounts receivable, net 10,426
Prepaid expenses 2,948
-------------
Total current assets 861,092
-------------
Property and equipment:
Office equipment and furniture 66,356
Less accumulated depreciation 45,071
-------------
21,285
-------------
Other assets:
Deposits and other 19,415
Investments in affiliates (Note 3) 299,061
-------------
318,476
-------------
Total assets $ 1,200,853
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 124,191
Note payable (Note 4) 38,118
-------------
Total liabilities (all current) 162,309
-------------
Commitments and contingencies (Notes 6 and 8)
Shareholders' equity (Notes 5 and 6):
Preferred stock; $0.0001 par value; none issued and outstanding;
5,000,000 shares authorized
Common stock; $0.0001 par value; 200,000,000 shares authorized
90,059,033 shares issued and outstanding 9,006
Additional paid-in capital 23,744,891
Accumulated other comprehensive income 122,976
Accumulated deficit (22,838,329)
-------------
Total shareholders' equity 1,038,544
-------------
Total liabilities and shareholders' equity $ 1,200,853
=============
See notes to condensed consolidated financial statements.
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------- -----------
Revenues $ - 25,051
------------- -----------
Operating expenses:
General and administrative 213,843 414,075
Research and development - 46,655
Selling and marketing - 24,180
------------- -----------
213,843 484,910
------------- -----------
Loss from operations ( 213,843) ( 459,859)
------------- -----------
Other income (expense):
Other income 10,186 -
Interest income 1,936 3,418
Equity (losses) income of
affiliates (Note 3) ( 4,905) 3,794
Interest expense - ( 297)
------------- -----------
7,217 6,915
------------- -----------
Loss from continuing operations (206,626) ( 452,944)
------------- -----------
Discontinued operations; loss from
operations of subsidiary (Note 2) - ( 1,920)
------------- -----------
Net loss $ ( 206,626) ( 454,864)
============= ===========
Basic and diluted loss per share:
Loss from continuing operations $ * ( 0.01)
Loss from discontinued operations - -
------------- -----------
Net loss per share, basic and diluted $ * ( 0.01)
============= ===========
Weighted average number of common
shares outstanding 90,059,033 62,404,043
============= ===========
* Less than ($0.01) per share.
See notes to condensed consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss
Three Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Net loss $( 206,626) ( 454,864)
Change in unrealized gain on
securities ( 246) ( 119)
Change in foreign currency
translation adjustments - ( 1,810)
------------ ------------
Comprehensive loss $( 206,872) ( 456,793)
============ ============
See notes to condensed consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Shareholders' Equity
Three Months Ended September 30, 2004
(Unaudited)
Common stock Additional Accumulated other Total
---------------------- Paid-in comprehensive Accumulated shareholders'
Shares Amount capital income deficit equity
---------- ---------- ---------- ------------------ ------------ --------------
Balances, July 1, 2004 90,059,033 $ 9,006 23,744,891 123,222 (22,631,703) 1,245,416
Net loss - - - - (206,626) (206,626)
Other comprehensive
loss:
Change in unrealized
gain on securities - - - (246) - (246)
---------- ---------- ---------- ------------------ ------------ --------------
Balances,
September 30, 2004 90,059,033 $ 9,006 23,744,891 122,976 (22,838,329) 1,038,544
========== ========== ========== ================== ============ ==============
See notes to condensed consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 2004 and 2003
(Unaudited)
2004 2003
------------- ------------
Cash flows from operating activities:
Net loss $ ( 206,626) ( 454,864)
------------- ------------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
Loss from discontinued operations - 1,920
Amortization expense - 38,616
Depreciation expense 1,814 33,026
Equity losses (income) of affiliates 4,905 ( 3,794)
Changes in operating assets and liabilities:
Decrease in accounts receivable ( 4,617) 9,780
Decrease in prepaid expense 41,779 85,891
Increase in deposits and other assets ( 246) ( 330)
Increase in accounts payable and
accrued liabilities 15,583 44,764
------------- ------------
Total adjustments 59,218 209,873
------------- ------------
Net cash used in operating activities
from continuing operations ( 147,408) ( 244,991)
------------- ------------
Cash flows from investing activities:
Increase in patent and trademark applications - ( 35,480)
Purchases of property and equipment - ( 1,575)
------------- ------------
Net cash used in investing activities
from continuing operations - ( 37,055)
------------- ------------
Cash flows from financing activities:
Issuance of common stock and warrants for cash - 100,000
Cash received in conjunction with joint venture - 5,000
Proceeds from notes payable - 65,000
Payment of notes payable ( 23,282) -
------------- ------------
Net cash (used in) provided by financing activities
from continuing operations ( 23,282) 170,000
------------- ------------
Effect of exchange rate changes on cash
and cash equivalents - 2,359
------------- ------------
Net cash used in discontinued operations - ( 4,097)
------------- ------------
Net decrease in cash and cash equivalents ( 170,690) ( 113,784)
Cash and cash equivalents, beginning 1,018,408 200,739
------------- ------------
Cash and cash equivalents, ending $ 847,718 86,955
============= ============
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock in satisfaction of payable $ - 3,635
============= ============
See notes to condensed consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
1. BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Presentation of Interim Information:
The accompanying condensed consolidated financial statements include the
accounts of NanoPierce Technologies, Inc., a Nevada corporation (the Company),
its wholly-owned subsidiaries, NanoPierce Connection Systems, Inc., a Nevada
corporation (NCOS) which was incorporated in November 2001, ExypnoTech, LLC (ET
LLC), a Colorado limited liability company, which was formed in June 2004, and
through December 11, 2003, ExypnoTech, GmbH (EPT, formed in February 2002)(Note
3). Through June 30, 2004, the condensed consolidated financial statements also
included the wholly-owned foreign subsidiary, NanoPierce Card Technologies GmbH,
(NCT). NCT is presented as discontinued operations; NCT was dissolved in June
2004. 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,
2004. It is the Company's opinion that when the interim financial statements
are read in conjunction with the June 30, 2004 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.
In the Company's last Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2004, the Report of Independent Public Accounting Firm includes an
explanatory paragraph that describes substantial doubt about the Company's
ability to continue as a going concern. The Company's financial statements for
the three months ended September 30, 2004 have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
reported a net loss of $206,626 for the three months ended September 30, 2004,
and an accumulated deficit of $22,838,329 as of September 30, 2004. The Company
has not recognized any revenue from its business operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not contain 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-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
Management's Plans
To address its liquidity needs, the Company is relying on cash received from an
equity financing agreement that occurred in January 2004, of which the Company
received approximately $1.8 million, net of offering costs, upon the issuance of
restricted common stock. The Company intends to use these funds to support
operations and for possible business acquisitions.
Currently, the Company does not have a revolving loan agreement with any
financial institution, nor can the Company provide any assurance it will be able
to enter into any such agreement in the future, or be able to raise funds
through a further issuance of debt or equity in the Company.
Recent Events:
On October 1, 2004, the Company signed a Letter Agreement (the "Agreement") with
Xact Resources International, Inc. ("Xact Resources"). The Agreement provides
for the development of a joint venture between the Company and Xact Resources.
The purpose of the joint venture would be to produce, market and sell YBG-2000,
a biotech yeast beta glucan product which has been developed by Xact Resources.
YBG-2000 is a natural beta glucan immune system feed supplement refined from
bakers yeast. It is used to replace antibiotic fast growth additives which are
currently used by producers of feeds for the livestock, poultry and shrimp
industries.
Pursuant to the Agreement, the Company advanced $75,000 to Xact Resources on
October 1, 2004 as temporary financing. In return, the Company has been
provided the exclusive right for a 30-day period to raise $1,500,000 in order to
purchase a 50% ownership interest in the joint venture. On November 3, 2004,
Xact Resources agreed to extend the 30-day period for an additional 60 days. In
return for the extension, the Company agreed to advance an additional $75,000 to
Xact Resources. The $150,000 is to be applied against the purchase of the 50%
ownership or is to be refunded to the Company, should the Company not be able to
raise the funds.
Business:
ET LLC business activities include the marketing and sales of RFID (Radio
Frequency Identification) products in North America. EPT (an equity
investment; Note 3) business activities primarily consist of manufacturing inlay
components used in, among other things Smart Labels, which is a paper sheet
holding a chip-containing module that is capable of memory storage and/or
processing. Scimaxx Solutions, LLC, (an equity investment; Note 3) is primarily
involved in research and development and marketing functions.
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
International Operations:
EPT operations are located in Germany. Through June 2004, prior to its
dissolution, NCT operations were located in Germany (Note 2). EPT transactions
are and, prior to its dissolution, NCT transactions were 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
weighted average number of common shares outstanding during the period. Stock
options and warrants are not considered in the calculation, as the impact of the
potential common shares (77,381,877 shares at September 30, 2004 and 17,097,710
shares at September 30, 2003) would be to decrease loss per share. Therefore,
diluted loss per share is equivalent to basic loss per share.
Stock-Based Compensation:
SFAS No. 123, Accounting for Stock Based Compensation, allows companies to
choose whether to account for employee stock-based compensation on a fair value
method, or to continue accounting for such compensation under the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company has chosen to
continue to account for employee stock-based compensation using APB 25.
No options were granted to employees during the three months ended September 30,
2004 or 2003.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
Research and Development:
The Company includes in research and development expense: payroll, facility
rent, lab supplies and other expense items directly attributable to research and
development. The Company does not contract its research and development work,
nor does it, at this time, perform research and development work for others.
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 NCT operations and liquidate NCT,
pursuant to a plan of self-liquidation as provided by German law. In June 2004,
NCT completed its plan of self-liquidation, and the German court legally
dissolved NCT.
NCT's revenues for the three months ended September 30, 2003 reported in
discontinued operations were $692. NCT incurred losses in the three months
ended September 30, 2003 of $1,920. NCT did not incur any taxes during this
period.
3. INVESTMENTS IN AFFILIATES:
Investment in EPT:
On December 11, 2003, a German entity, formed by former employees of EPT,
purchased a controlling 51% equity interest in EPT in exchange for $98,000, of
which $62,787 has been received through September 30, 2004. No gain or loss was
incurred by the Company as a result of this transaction. As a result of the
Company's reduced ownership interest and loss of control of EPT, the Company
deconsolidated EPT as of December 11, 2003, and began accounting for its
investment in EPT under the equity method of accounting at that time. Under the
equity method of accounting, the carrying amount of the Company's investment in
EPT ($207,611 at September 30, 2004) is adjusted to recognize the Company's
proportionate share of EPT's income (loss) each period.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
Unaudited financial information of EPT as of September 30, 2004, and for the
three months ended September 30, 2004 is as follows:
September 30,
2004
--------------------
Assets:
Current assets(1) $ 158,424
Equipment 274,659
--------------------
Total assets $ 433,083
====================
Liabilities and members' equity:
Current liabilities(2) $ 168,786
Members' equity $ 264,297
--------------------
Total liabilities and members' equity $ 433,083
====================
Three months ended
September 30, 2004
--------------------
Revenues $ 84,425
Expenses ( 76,352)
--------------------
Net income $ 8,073
====================
(1) Current assets include receivables in the amount of $9,562 due from
the 51% owner of EPT.
(2) Current liabilities include a payable of $19,070 to the 51% owner of
EPT.
Investment in Joint Venture Interest:
On September 15, 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC, an entity related to the Company in that a member of Scimaxx, LLC
is an officer/director of the Company. The name of the joint venture is Scimaxx
Solutions, LLC (Scimaxx Solutions). The purpose of the joint venture is to
provide the electronics industry with technical solutions to manufacturing
problems based on the need for electrical connectivity.
The Company received a 50% interest in the joint venture in exchange for a
contribution of NCOS equipment with a carrying value of approximately $132,000
at September 15, 2003. The Company also granted Scimaxx Solutions a ten-year,
non-exclusive, non-royalty bearing worldwide license to use the Company's
intellectual property. Scimaxx, LLC was to invest $50,000 cash, of which
$22,900 has been received as of September 30, 2004. The terms of the joint
venture provide for the Company to share in 50% of joint venture net profits, if
any. The Company is to share in 50% of joint venture net losses beyond the
first $50,000. The Company has a 49% voting interest in the joint venture. The
Company is accounting for its investment in Scimaxx Solutions as an equity
method investment. At September 30, 2004, the Company's investment in Scimaxx
Solutions is $91,450.
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
Unaudited financial information of Scimaxx Solutions as of September 30, 2004,
for the three months ended September 30, 2004 and for the period from September
15, 2003 (inception) through September 30, 2003, is as follows:
Assets:
Current assets $ 10,332
Equipment 87,660
--------------------
Total assets $ 97,992
====================
Liabilities and members' equity:
Current liabilities $ 56,405
Members' equity 41,587
--------------------
Total liabilities and members' equity $ 97,992
====================
September 15, 2003
Three Months Ended through
September 30, 2004 September 30,2003
-------------------- ------------------
Revenues $ 5,773 -
Expenses ( 74,943) ( 3,794)
-------------------- ------------------
Net loss $ ( 69,170) ( 3,794)
==================== ==================
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% note payable due in December 2003. In September
2003, the same officer/director loaned the Company an additional $30,000 in
exchange for an unsecured, 7% promissory note, due in September 2004. In
January 2004, the Company paid the $40,000 plus accrued interest of $1,247.
In September 2003, Intercell International Corporation, an affiliate of the
Company at the time, loaned the Company $35,000 in exchange for an unsecured, 7%
promissory note due in September 2004. In November 2003, Intercell loaned the
Company $100,000 in exchange for a 7% promissory note due in November 2004. In
January 2004, the Company paid the $135,000, plus accrued interest of $2,493.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
Other:
In February 2004, the Company converted vendor payables of $92,100 into an
unsecured, non-interest bearing note payable due in March 2005. Through
September 30, 2004, the Company has repaid $53,982 on this note, of which
$23,282 was paid during the three months ended September 30, 2004.
5. SHAREHOLDERS' EQUITY:
COMMON STOCK:
Current Year Transactions:
The Company did not issue any shares of common stock during the three months
ended September 30, 2004.
Prior Year Transactions:
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.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION:
Depository Trust Suit:
In May 2004, the Company filed suit against the Depository Trust and Clearing
Corporation, the Depository Trust Company, and the National Securities Clearing
Corporation in the Second Judicial District Court of the County of Washoe, State
of Nevada. The suit alleges multiple claims under the Nevada Revised Statutes
90.570, 90.580, 90.660 and 598A.060 and on other legal bases. The complaint
alleges, among other things, that the DTCC, DTC and NSCC acted in concert to
operate the "Stock Borrow Program," originally created to address short term
delivery failures by sellers of securities in the stock market. According to
the complaint, the DTCC, NSCC and DTC conspired to maintain significant open
fail deliver positions of millions of shares of the Company's common stock for
extended periods of time by using the Stock Borrow Program to cover these open
and unsettled positions.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
By permitting shares of the Company to be borrowed through the program, DTCC,
NSCC and DTC allegedly jointly conspired to drive down the price of the
Company's stock. The complaint also alleges that the operation of the Stock
Borrow Program allowed the manipulation of the Company's stock by various
sellers who failed to deliver shares to the Company.
By covering open fail to deliver positions with shares borrowed through the
Stock Borrow Program and delivering borrowed shares to the buyers, the complaint
contends that DTCC, NSCC and DTC artificially created unregistered, free trading
shares of the Company's common stock and increased the supply of the Company's
shares in the market place. The Company is seeking damages in the amount of
$25,000,000 and treble damages. Responsive pleadings have been filed by the
defendants.
Financing Agreement Suit:
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. As a result of various procedural rulings, in
January 2002, the United States District Court for the District of Colorado
transferred the case to the United States District Court for the Southern
District of New York, New York City, New York. In this litigation, Harvest
Court, LLC filed counterclaims against the Company, Mr. Metzinger, Ms. Kampmann,
Dr. Neuhaus, Dr. Shaw and a number of unrelated third parties. The
counterclaims allege violations of federal securities laws and other laws.
Harvest Court, LLC is seeking various forms of relief including compensatory and
punitive damages. Responsive pleadings have been filed and the litigation is
currently in the discovery stage.
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 4,500,225 shares due in connection with the third reset date.
Harvest Court, LLC is seeking the delivery of such shares or damages in the
alternative. In August 2001, the Supreme Court of the State of New York, County
of New York issued a preliminary injunction ordering the Company to reserve and
not transfer the shares allegedly due to Harvest Court, LLC. The Company has
filed counterclaims seeking various forms of relief against Harvest Court, LLC.
The Company intends to vigorously prosecute this litigation and does not believe
the outcome of this litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
Three Months Ended September 30, 2004 and 2003
(Unaudited)
7. 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 three month period ended September
30, 2004. There was no significant amount of transfers between geographic
areas. Long-lived assets at September 30, 2004 with a net carrying value of
$21,285 were located solely in the United States.
8. SUBSEQUENT EVENTS
Note Receivable:
On November 5, 2004, the Company loaned $314,000 to an unrelated third party in
return for an unsecured, 7% promissory note, due December 30, 2004. The funds
were loaned in connection with the Company's efforts to secure the $1.5 Million
financing for the purchase of the 50% equity ownership interest in the joint
venture with Xact Resources.
Common Stock:
In October 2004, warrants to purchase 1,000,000 shares of common stock were
exercised for net cash proceeds of $94,000 (net of $6,000 of costs) in exchange
for 1,000,000 shares of common stock.
In November 2004, warrants to purchase 200,000 shares of common stock were
exercised for net cash proceeds of $18,800 (net of $1,200 of costs) in exchange
for 200,000 shares of common stock.
F-15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this Form 10-QSB contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties that could cause actual results to
differ materially from the results, financial or otherwise, or other
expectations described in such forward-looking statements. Any forward-looking
statement or statements speak only as of the date on which such statements were
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statements are made or reflect the occurrence of unanticipated events.
Therefore, forward-looking statements should not be relied upon as prediction of
actual future results.
The independent auditors' report on the Company's financial statements as
of June 30, 2004, and for each of the years in the two-year period then ended,
includes a "going concern" explanatory paragraph, that describes substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to the factors prompting the explanatory paragraph are discussed
below and also in Note 1 to the quarterly Financial Statements.
RESULTS OF OPERATIONS
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany.
NCT is presented as discontinued operations in the accompanying condensed
consolidated financial statements. The insolvency filing was made for purposes
of complying with specific German legal requirements. In June 2004, NCT
completed a plan of self-liquidation, and the German court legally dissolved
NCT. As a result, NCT had no income during the three months ended September 30,
2004 compared to a loss of $1,920 during the three months ended September 30,
2003.
The Company recognized $0 in revenues from continuing operations during the
three months ended September 30, 2004 compared to $25,051 for the three months
ended September 30, 2003. The $25,051 in revenues during the three months ended
September 30, 2003 was generated from the sale of inlay components to customers
by EPT.
The Company recognized $10,186 of other income, as a payment of a license
fee during the three months ended September 30, 2004. The Company recognized
$1,936 in interest income during the three months ended September 30, 2004
compared to $3,418 during the three months ended September 30, 2003. The
decrease of $1,482 is due to the reduction in cash equivalents used to support
operations.
Total operating expenses from continuing operations during the three months
ended September 30, 2004 were $213,843 compared to $484,910 for the three months
ended September 30, 2003. The decrease of $271,067 is primarily attributable to
a decrease in general and administrative expenses, as described below.
Three Months Ended
September 30,
------------------
Operating Expenses 2004 2003 Decrease
-------------------------- -------- -------- ----------
General and administrative $213,843 $414,075 $(200,232)
Research and development $ 0 $ 46,655 $( 46,655)
Sales and marketing $ 0 $ 24,180 $( 24,180)
1
The decrease of $200,232 in general administrative expenses is primarily
attributable to a $67,020 decrease in consulting fees, a $38,616 decrease in
amortization expense and a $23,788 decrease in auditing fees. Such decreases
include the decrease in research and development expenses and sales and
marketing expenses which were a result of the Company's abandonment of its PI
technology in the fourth quarter ended June 30, 2004.
During the three months ended September 30, 2004, the Company recognized a
net loss of $206,626 compared to a net loss of $454,864 during the three months
ended September 30, 2003. The decrease of $248,238 is primarily attributable to
the decrease of $271,067 in operating expenses, as explained above, combined
with a decrease of $25,051 in revenues.
LIQUIDITY AND FINANCIAL CONDITION
During the three months ended September 30, 2004, the Company used $147,408
in operating activities from continuing operations and $23,282 was used to pay a
note payable. The Company had $847,718 of cash and cash equivalents at
September 30, 2004, which is being used to support operations. During the three
months ended September 30, 2003, the Company used $244,991 in operating
activities from continuing operations and $37,055 was used in investing
activities from continuing operations. During the three months ended September
30, 2003, the Company was provided $170,000 by financing activities from
continuing operations.
As of September 30, 2004, if all existing outstanding warrants issued in a
January 2004 private placement were exercised, the Company will be required to
issue an additional 61,350,000 shares of common stock, and the Company, on a
fully diluted basis (including the reservation of 11,919,120 shares as required
by the court in the Financing Agreement Litigation), would have 179,360,030
shares of common stock issued and outstanding.
As of September 30, 2004, if the warrants issued to investors in the
private placement described above are all exercised, the Company would
receive approximately an additional $12,525,000. However, no assurance can be
given that any of these warrants will be exercised. If the warrants are
exercised, the Company has decided that it may use the additional funds
received from the exercise of these warrants to acquire a revenue generating
company or to acquire technology complementary to the current technology of the
Company, to be marketed through the Company's joint venture arrangement
with Scimaxx Solutions, its ownership interest in ExypnoTech and any other
licensing agreements or joint venture agreements that the Company may enter in
the future.
As a result of the Company's limited revenues, lack of liquidity and going
concern issues, the Company has revised its business plan to focus on
licensing its technology to, or entering into joint ventures with companies that
may utilize the technology rather than the development by the Company of its
own products utilizing its technology.
2
The Company expects to utilize the cash received from a January 2004
private placement to continue to pursue the development and marketing of its
technology through the joint venture arrangement with Scimaxx Solutions and
its ownership interest in EPT and to continue to develop relationships with
companies which it enters into licensing agreements or joint venture
agreements with. At this time, the Company does not have any other operations.
On October 1, 2004, the Company signed a Letter Agreement (the "Agreement")
with Xact Resources International, Inc. ("Xact Resources"). The Agreement is to
provide for the development of a joint venture between the Registrant and Xact
Resources. The purpose of the joint venture would be to produce, market and
sell YBG-2000, a biotech yeast beta glucan product which has been developed by
Xact Resources. YBG-2000 is a natural beta glucan immune system feed
supplement refined from bakers yeast. It is used to replace antibiotic fast
growth additives which are currently used by producers of feeds for the
livestock, poultry and shrimp industries.
Pursuant to the Agreement, the Company advanced $75,000 to Xact Resources
on October 1, 2004 as temporary financing. In return, the Company has been
provided the exclusive right for a 30-day period to raise $1,500,000 in order to
purchase a 50% ownership interest in the joint venture. On November 3, 2004,
Xact Resources agreed to extend the 30-day period for an additional 60 days. In
return for the extension, the Company agreed loan an additional $75,000 to Xact
Resources. Such funds are to be applied against the purchase of the 50%
ownership or are to be refunded to the Company, should the Company not be able
to raise the funds.
On November 5, 2004, the Company loaned $314,000 to an unrelated third
party in return for an unsecured, 7% promissory note, due December 30, 2004.
The funds were loaned in connection with the Company's efforts to secure the
$1.5 Million financing for the purchase of the 50% equity ownership interest in
the joint venture with Xact Resources.
The Company continues to evaluate additional merger and acquisition
opportunities.
ITEM 3. CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management,
including the Company's Chief Executive Officer (the "CEO") and Chief Financial
Officer (the "CFO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing of this quarterly report. Based on that review and evaluation,
the CEO and CFO have concluded that the Company's current disclosure controls
and procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls subsequent to the date of
their evaluation. There were no material weaknesses identified in the course of
such review and evaluation and, therefore, no corrective measures were taken by
the Company.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
(a) EXHIBITS. The following is a complete list of exhibits filed as part
of this Form 10-QSB. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-B.
Exhibit 11 Computation of Net Loss Per Share
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification of Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
Exhibit 32.2 Certification of Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act
(b) CURRENT REPORTS ON FORM 8-K. The registrant filed the following
current reports on Form 8-K during the quarter ended September 30,
2004:
- Current Report on Form 8-K dated, October 1, 2004, filed with the
Securities and Exchange Commission on October 5, 2004 (Item 8.01
Other Events, regarding a Letter Agreement to form a joint
venture.)
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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 12, 2004 /s/ Paul H. Metzinger
----------------------
Paul H. Metzinger,
President & CEO
Date: November 12, 2004 /s/ Kristi J. Kampmann
-----------------------
Kristi J. Kampmann,
Chief Financial Officer
5