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, 2005
----------------------------------------
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
incorporation or organization) identification 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 October 3, 2005, there were 133,059,033
shares outstanding, 130,996,765 of which were held by non-affiliates. The
aggregate market value of the common shares held by non-affiliates, based on the
average closing bid and asked prices on October 3, 2005, was approximately
$10,938,230.
The registrant's revenue for the fiscal year ended June 30, 2005 was $0.
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.
The Company acquired the PI Technology in order to pursue a more focused,
strategic application and development of the PI Technology, subsequently
referred to as the NanoPierce Connection System ("NCS(TM)"). NCS is an
alternative method of providing temporary or permanent electrical connections
between different flexible, rigid, metallic and non-metallic surfaces. Through
the use of the particle technology, the Company can also attach semi-conductors
directly to various surfaces. The Company has trademarked this process as
WaferPierce(TM).
The Company does not plan, at this time, to continue efforts to manufacture
or develop products that utilize the Company's PI Technology. To date, the
Company has not successfully manufactured, marketed, sold products or licensed
companies to manufacture, develop and market products using the Company's PI
Technology.
TECHNOLOGY PLATFORM CHANGE
Beginning in October 2004, the Company instituted steps to change its
technology platform from a semiconductor based technology platform to a
biotechnology based platform. The formal change occurred on August 15, 2005,
when the Company purchased a 50% interest in BioAgra, LLC ("BioAgra"), a limited
liability company, organized under the laws of the State of Georgia.
CORPORATE RESTRUCTURING
Management of the Company has been authorized by the Board of Directors to
institute a plan for corporate restructuring. This plan includes (i) the
creation of a class of convertible preferred shares with super voting power;
(ii) the issuance of a subscription agreement for the convertible preferred
shares; (iii) a reverse stock split and a record date for such stock split to be
determined in the near future; (iv) an increase in authorized common shares
post-reverse split; and (v) a change of the name of the Company.
1
On September 26, 2005, the Company executed a Subscription Agreement to
sell the Company's Preferred Stock to Arizcan Properties, Ltd. ("Arizcan
Properties"). The Subscription Agreement provides for the purchase of 200,000
shares of a Class A 8% cumulative and participating preferred shares with a
sales price of $7.50 per share. The preferred shares are convertible into 60% of
the Company's issued and outstanding post-split shares of its common stock on
the date of conversion.
SUBSIDIARIES AND INVESTMENTS
BIOAGRA, LLC ("BIOAGRA"). In August 2005, the Company purchased a 50%
equity interest in BioAgra, a Georgia limited liability company for
approximately $905,000 in cash and a note payable of $595,000, which was paid in
full on September 15, 2005. BioAgra is located in Hinesville, Georgia. The
remaining 50% was purchased by Xact Resources International for the contribution
of rights, a license, intellectual properties, purchase orders and similar
items. The Company does not have a controlling interest on BioAgra. BioAgra
holds a license for the production of YBG-2000. The license, dated April 18,
2005, has a term expiring October 18, 2024. YBG-2000 is a natural beta glucan
feed additive used to replace artificial antibiotics, currently in use. Under
the license BioAgra has an exclusive right to manufacture and sell the licensed
products in the United States and a non-exclusive right to sell throughout the
rest of the world. BioAgra plans to manufacture and market YBG-2000, initially
for sale in the poultry industry, starting in January 2006.
Currently, BioAgra is in the process of constructing the production line.
BioAgra expects to begin producing and shipping product at the beginning of
2006. As the production line is being completed, management of BioAgra is
developing marketing plans for the sale and distribution of the product,
marketing strategies and hiring administrative and manufacturing staff.
NANOPIERCE CARD TECHNOLOGIES, GMBH ("NANOPIERCE CARD"). Established in
January 2000, NanoPierce Card was located in Hohenbrunn, Germany. NanoPierce
Card was responsible for the marketing of the Company's technology, services and
products on an international basis. On April 1, 2003, NanoPierce Card filed for
insolvency with the Courts of Munich, Germany. The insolvency was necessary in
order to comply with specific German legal requirements. The Company completed
a plan of self-liquidation and the German court legally dissolved NanoPierce
Card on June 8, 2004.
NANOPIERCE CONNECTION SYSTEMS, INC. ("NANOPIERCE CONNECTION"). NanoPierce
Connection, a Nevada corporation, was located in Colorado Springs, Colorado,
USA. Beginning business in January 2002, NanoPierce Connection was the center
for research and development activities. In September 2003, the Company entered
into a joint venture with Scimaxx, LLC in order to further the marketing of the
services previously offered by NanoPierce Connection. During the fiscal year
ended June 30, 2005, NanoPierce Connection had no operations.
2
EXYPNOTECH, GMBH ("EXYPNOTECH"). ExypnoTech was organized in February 2002.
ExypnoTech produces inlay components used in the manufacturing of, among other
things, smart labels (often referred to as radio frequency identification tags
or "RFID"). ExypnoTech, in addition to the inlay components, plans to
manufacture and sell other types of RFID components. In December 2003 ExypnoTech
sold a controlling 51% interest in ExypnoTech to TagStar Systems, GmbH for
$98,000 in cash. As a result of this sale, the Company does not have a
controlling interest in ExypnoTech and the Company is only entitled to 49% of
the net income generated by ExypnoTech if any, and shares in 49% of any net
losses. ExypnoTech, if able, will pay dividends on an annual basis. The Company
is entitled to 49% of the dividends, if any, paid as a result of any future
profits of ExypnoTech.
SCIMAXX SOLUTIONS, LLC ("SCIMAXX SOLUTIONS"). On September 15, 2003, the
Company entered into a joint venture with Scimaxx, LLC (Dr. Neuhaus, a director
of the Company is a part owner of Scimaxx, LLC - See Item 12). In April 2005,
Scimaxx Solutions, LLC discontinued operations. The purpose of the joint venture
was to provide the electronics industry with technical solutions to
manufacturing problems based on the need for electrical connectivity. The
Company received a 50% interest in the joint venture in exchange for a
contribution of the equipment owned by NanoPierce Connection. The Company also
granted Scimaxx Solutions a ten-year, non-exclusive, non-royalty bearing
worldwide license to use the Company's intellectual property. The Company and
Scimaxx, LLC intend to formerly terminate Scimaxx Solutions in the near future,
at which time the license will terminate.
EXYPNOTECH, LLC ("EXYPNOTECH, LLC"). On June 18, 2004, the Company
organized ExypnoTech, LLC as a wholly-owned subsidiary to market, primarily in
the United States of America, the RFID components manufactured by ExypnoTech,
GmbH. During the last 6-months of the fiscal year ended June 30, 2005,
ExypnoTech, LLC did not have active operations.
THE NCS(TM) 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 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.
3
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.
The Company currently holds 13 Patents with the U.S. Patent and Trademark
Office. Further, the Company has filed several patent applications both in the
United States and internationally in order to continue to protect its
intellectual property. To reduce expenses, during the fiscal years ended June
30, 2005 and 2004, the Company abandoned several of its patent applications. The
Company also holds several trademarks with the U.S. Patent and Trademark Office,
in connection with the Company's name, logo and services.
BUSINESS STRATEGY
The Company, through its investment in ExypnoTech and joint venture,
BioAgra, is targeting the following business activities:
1. RFID COMPONENTS. RFID components are used to identify objects, by
short-range radio over a few millimeters to distances as great as a
meter. RFID inlays consist of a small transponder chip bonded onto a
metal foil antenna on an exceptionally thin and small plastic or paper
sheet. NCS can be used to provide the connection between the
transponder chip and the antenna. In addition, NCS can be used to
connect the chip to the chip module in contact smart cards or the chip
module to the antenna in the case of contactless smart cards. There
are many different applications for RFID components, but the
application being focused on by the Company is smart labels.
ExypnoTech currently offers RFID components using the Company's
intellectual property.
2. BETA GLUCAN ADDITIVE. YBG-2000 is a beta glucan feed additive produced
from spent brewer's or baker's yeast. The additive is a combination of
bioactive nutrients and B-glucans that are extracted from the cell
walls of the yeast using steam injection and a centrifuging extraction
process. The beta glucan additive is an all natural, organic compound
that has been proven to stimulate immune systems, thereby eliminating
the usage of antibiotics and growth hormone supplements in animal,
poultry and other feeds. YBG-2000 is designed to achieve two purposes.
For example, in the poultry industry, the first is to enhance the
avian immune system to fight bacterial and viral infections more
effectively and efficiently, and secondly, to promote accelerated
growth. Currently, animals in the cattle, poultry, swine and shrimp
industries are fed artificial antibiotics, in order to prevent the
spread of bacterial and viral infections and steroids to promote
growth. BioAgra is initially targeting customers in the poultry
processing industry.
Currently, governments are urging, if not, directing producers to
remove artificial antibiotics from the human food chain supply to
reduce the development in humans of increasingly powerful and virulent
strains of antibiotic resistant bacteria, which makes treatment for
illnesses and diseases more difficult and expensive. In addition, food
service providers are demanding natural, organic, antibiotic free
foods.
4
As previously mentioned, BioAgra is developing marketing plans and
strategies for YBG-2000 while the construction of the production line
is being completed. The initial marketing strategy is to penetrate the
poultry producing industry and to that extent, contact has been made
with potential customers, though no formal contracts have been signed,
at this point. Assuming BioAgra can successfully sell product to the
poultry producing industry, BioAgra intends to market and sell to
other industries such as the swine and shrimp processing industries.
RESEARCH AND DEVELOPMENT
The Company's research and development activities were formerly conducted
through NanoPierce Connection, with additional activities occurring at
ExypnoTech. During the last year, minimal research and development activities
were conducted at Scimaxx Solutions. For the fiscal years ended June 30, 2005
and June 30, 2004, the Company incurred $0 and $41,849, respectively, in
research and development expenses.
The Company does anticipate that a substantial level of research and
development activities will occur at BioAgra.
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.
Competition, at present, for beta glucan products in the market targeted by
BioAgra is limited. The United States and many other countries in the world are
in the process of eliminating or plan to eliminate the usage of antibiotics in
the feed of animals in the human food chain supply. There are a limited number
of alternatives to antibiotics. Such alternatives include organic acids, plant
extracts (ex. oregano oil), and mannoproteins. These alternatives have not
experienced a great success rate.
Other potential competitors include those already producing beta glucan for
human consumption. This type of "purified" beta glucan is considered too
expensive to use in markets other than for direct human consumption. Other
competitors are those producing beta glucan with a 60% or less bioactivity level
for the markets addressed by BioAgra. Based upon data provided to the Company
beta glucan having less than 80% bioactivity is not effective in the markets
chosen by BioAgra. BioAgra intends to produce an 80% pure beta glucan.
5
Competition will also consist of established producers of artificial
antibiotic growth promotion products. These are large companies with vast
resources allocated to the protection of the brand recognition and market share
of their products.
SOURCES OF RAW MATERIALS
Production of the beta glucan additive requires spent brewer's or baker's
yeast. Brewer's yeast is used in the production of alcoholic beverages.
Arrangements are being made with commercial firms that purchase and distribute
these types of yeast. There is an adequate supply of these raw materials for
the foreseeable future for BioAgra's activities.
CUSTOMERS
BioAgra is in the initial stages of marketing and contacting potential
customers of its product, YBG-2000. Initial customers are expected to be poultry
producers located in the United States and abroad.
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, 2005.
To the knowledge of the Company, the YGB-2000 beta glucan product planned
to be produced by BioAgra is not subject to the regulations of either the U.S.
Food and Drug Administration ("FDA") or U.S. Department of Agriculture ("USDA")
because it is considered to satisfy the criteria set forth for products
"generally regarded as safe" ("GRAS").
EMPLOYEES
On June 30, 2005, the Company and its subsidiaries had two employees. Mr.
Metzinger and Ms. Kampmann, key officers of the Company and the only two
employees of the Company, have signed employment agreements with the Company.
(See- ITEM 9- "Directors and Officers of the Company") None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company believes that its relations with its employees
are excellent.
As previously mentioned, BioAgra intends to hire administrative staff and
production staff. It expects to have initially 12 production employees for a
two-shift production cycle.
6
FACTORS AFFECTING FUTURE OPERATING RESULTS
Our future results may be affected by various risks and uncertainties
including the following:
WE HAVE A HISTORY OF LOSSES
Developing our particle technology and its applications has been and we
expect will continue to be expensive. Our operating expenses have consistently
exceeded our revenues. We reported a net loss of $997,616, $1,558,083, and
$4,017,785 for the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
Our independent auditors' report of our consolidated financial statements
as of June 30, 2005, and for each of the years in the two year period then ended
includes an explanatory paragraph expressing substantial doubt about our ability
to continue as a going concern. If we are unable to secure significant
additional financing, we may be obligated to seek protection under the
bankruptcy laws and our shareholders may loose their investment.
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE MARKETPLACE
Our markets are highly competitive. Our success will depend in part on how
quickly competitors can design and develop competing products and technologies.
We are disadvantaged competing against these competitors in several different
areas, including:
- financial resources;
- technological resources;
- manufacturing capabilities;
- diversity of revenue sources and business opportunities;
- personnel and human resources; and
- research and development capabilities.
Our larger competitors have long term advantages over us in research and
new product development and have a greater ability to withstand periodic
downturns in the market because they have diverse product lines that can provide
revenue even when there is a downturn in the market.
WE CANNOT GUARANTEE THE QUALITY, PERFORMANCE OR RELIABILITY OF OUR PRODUCTS
We have no prior experience in taking technology to the manufacturing or
production stage. We expect that the customers of our products will demand
quality, performance and reliability.
7
THERE MAY BE INSUFFICIENT DEMAND FOR OUR TECHNOLOGY OR PRODUCT
We must convince our potential customers that our technology is
technologically sound and can be manufactured efficiently and cost-effectively.
To create consumer demand, we have to successfully market and sell our
technology and products. Even after these efforts, our technology and products
may not be viewed by consumers as an improvement over existing technologies and
products and may not achieve commercial acceptance.
WE MAY BE UNABLE TO MEET OUR ONGOING NEEDS FOR ADDITIONAL CAPITAL
We cannot accurately predict how much funding we will need to implement our
strategic business plan or to continue operations. Our future capital
requirements, the likelihood that we can obtain money and the terms of any
financing will be influenced by many different factors, including:
- our revenues,
- the status of competing products in the marketplace,
- our performance in the marketplace,
- our overall financial condition,
- our business prospects,
- the perception of our growth potential by the public, including
potential lenders,
- our ability to enter into joint venture or licensing relationships to
achieve a market presence and
- our progress in developing, marketing and selling our technology or
product.
If we cannot obtain adequate financing or if the terms on which we are able
to acquire financing are unfavorable, our business and financial condition could
be negatively affected. We may have to delay, scale back or eliminate some or
all of our development and marketing programs, if any. We may also have to go
to third parties to seek financing, and in exchange, we may have to give up
rights to some of our technologies, patents, patent applications, potential
products or other assets.
WE MAY BE UNABLE TO HIRE AND RETAIN KEY PERSONNEL
Our future success depends on our ability to attract qualified technical
personnel capable of working with our technology and product. We may be unable
to attract these necessary personnel. If we fail to attract or retain skilled
employees, or if a key employee fails to perform in his or her current position,
we may be unable to bring our technology or product to the marketplace and to
generate sufficient revenues to offset our operating costs.
8
WE MAY BE UNABLE TO OBTAIN AND RETAIN APPROPRIATE PATENT, COPYRIGHT AND
TRADEMARK PROTECTION OF OUR PRODUCTS
We protect our intellectual property rights through patents, trademarks,
trade names, trade secrets and a variety of other measures. However, these
measures may be inadequate to protect our intellectual property or other
proprietary information.
- TRADE SECRETS MAY BECOME KNOWN BY THIRD PARTIES. Our trade secrets
or proprietary technology may become known or be independently developed by
competitors.
- RIGHTS TO PATENTS AND TRADE SECRETS MAY BE INVALIDATED. Disputes may
arise with third parties over the ownership of our intellectual property rights.
Our patents may be invalidated, circumvented or challenged, and the rights
granted under those patents that provide us with a competitive advantage may be
nullified.
- PROBLEMS WITH FUTURE PATENT APPLICATIONS. Our pending or future
patent applications may not be approved, or the scope of the granted patent may
be less than the coverage sought.
- INFRINGEMENT CLAIMS BY THIRD PARTIES. Infringement, invalidity,
right to use or ownership claims by third parties or claims for indemnification
may be asserted by third parties in the future. If any claims or actions are
asserted against us, we can attempt to obtain a license for that third party's
intellectual property rights. However, the third party may not provide a
license under reasonable terms, or may not provide us with a license at all.
- THIRD PARTIES MAY DEVELOP SIMILAR PRODUCTS. Competitors may develop
similar products, duplicate our products or may design around the patents that
are owned by us.
- LAWS IN OTHER COUNTRIES MAY INSUFFICIENTLY PROTECT INTELLECTUAL
PROPERTY RIGHTS ABROAD. Foreign intellectual property laws may not adequately
protect our intellectual property rights abroad. Our failure to protect these
rights could adversely affect our business and financial condition.
- LITIGATION MAY BE REQUIRED TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
Litigation may be necessary to protect our intellectual property rights and
trade secrets, to determine the validity of and scope of the rights of third
parties or to defend against claims of infringement or invalidity by third
parties. This litigation could be expensive, would divert resources and
management's time from our sales and marketing efforts, and could have a
materially adverse effect on our business, financial condition and results of
operations and on our ability to enter into joint ventures or partnerships with
others.
9
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never paid cash dividends on our common stock. We do not expect to
pay cash dividends on our common stock at any time in the foreseeable future.
The future payment of dividends directly depends upon our future earnings,
capital requirements, financial requirements and other factors that our board of
directors will consider. Since we do not anticipate paying cash dividends on
our common stock, return on your investment, if any, will depend solely on an
increase, if any, in the market value of our common stock.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters are located at 370 17th Street, Suite
3640, Denver, Colorado 80202. The Company moved into its current office space
on June 27, 2001 and has a 5-year lease on the property, expiring in September
2006. The base rent is $4,850 per month for the remaining term of the lease,
plus certain occupancy costs.
NanoPierce Connection was located at 4180 Center Park Drive, Colorado
Springs, Colorado 80916. NanoPierce Connection currently has a 3-year lease on
the property, expiring in March 2006. The base rent is $2,600 per month through
March 30th, with a $100 per month increase in base rent each year thereafter for
the remaining term of the lease, plus utilities and maintenance expenses. The
facility is approximately 4,800 square feet consisting of office space and a
small laboratory. The facility also has a clean room. The facility has been
abandoned and NanoPierce Connection is in the process of negotiating with the
landlord to terminate the lease.
BioAgra is located at 103 Technology Drive, Hinesville, Georgia 31313.
BioAgra has leased the facility from the Liberty County Industrial Authority,
pursuant to an Industrial Lease Agreement, dated March 1, 2005 for a period of
120 calendar months. At the expiration of the lease term BioAgra has the option
to purchase the leased premises (real estate and improvement) for $500,000. The
facility is approximately 30,000 square feet which will consist of both office
space and a production area and a research and development laboratory. The
facility is located on approximately 7.29 acres.
ITEM 3. LEGAL PROCEEDINGS
HARVEST COURT LITIGATION
In connection with a financing obtained in October 2000, the Company filed
various actions in the United States District Court for the District of Colorado
against, among others, Harvest Court, LLC, Southridge Capital Investments, LLC,
Daniel Pickett, Patricia Singer and Thomson Kernaghan, Ltd. for violations of
federal and state securities laws, conspiracy, aiding and abetting and common
law fraud among other claims. As a result of various procedural rulings, in
January 2002, the United States District Court for the District of Colorado
transferred the case to the United States District Court for the Southern
District of New York, New York City, New York.
10
In this litigation, Harvest Court, LLC filed counterclaims against the Company,
Mr. Metzinger, Ms. Kampmann, Dr. Neuhaus, Dr. Shaw and a number of unrelated
third parties. The counterclaims allege violations of federal securities laws
and other laws. Harvest Court, LLC is seeking various forms of relief including
compensatory and punitive damages. Responsive pleadings have been filed and the
litigation is currently in the discovery stage.
In May 2001, Harvest Court, LLC filed suit against the Company in the
Supreme Court of the State of New York, County of New York. The suit alleges
that the Company breached an October 20, 2000 Stock Purchase Agreement, by not
issuing 7,418,895 free trading shares of the Company's common stock in
connection with the reset provisions of the Purchase Agreement due on the second
reset date and approximately 4,545,303 shares due in connection with the third
reset date. Harvest Court, LLC is seeking the delivery of such shares or
damages in the alternative. In August 2001, the Supreme Court of the State of
New York, County of New York issued a preliminary injunction ordering the
Company to reserve and not transfer the shares allegedly due to Harvest Court,
LLC. The Company has filed counterclaims seeking various forms of relief
against Harvest Court, LLC.
DEPOSITORY TRUST LAWSUIT
In May 2004, the Company filed suit against the Depository Trust and
Clearing Corporation ("DTCC"), the Depository Trust Company ("DTC"), and the
National Securities Clearing Corporation ("NSCC") in the Second Judicial
District Court of the County of Washoe, State of Nevada. The suit alleges
multiple claims under 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. The
Company was seeking damages in the amount of $25,000,000 and treble damages. On
April 27, 2005, the court granted a motion to dismiss the lawsuit. The Company
has filed an appeal to overturn the motion to dismiss the lawsuit.
The Company intends to vigorously prosecute all litigation and does not
believe the outcome of the litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
Other Litigation
Other than the above mentioned lawsuits, to the knowledge of the management
of the Company, there are no material legal proceedings pending or threatened
(other than routine litigation incidental to business) to which the Company (or
any officer, director, affiliate of beneficial owner of more than 5% of the
Company's voting securities) is party, or to which property of the Company is
subject.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no meetings of security holders and no matters submitted to a
vote of security holders during the period covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is presently quoted on the over-the-counter
bulletin board maintained by the National Association of Securities Dealers,
Inc. (the "NASD") under the symbol "NPCT." The common stock of the Company is
also traded on the Frankfurt Exchange and the Hamburg Stock Exchange under the
symbol "NPI."
The following table sets forth the range of high and low quotations for the
common stock of each full quarterly period during the fiscal year or equivalent
period for the fiscal periods indicated below. The quotations were obtained
from information published by the NASD and reflect interdealer prices, without
retail mark-up, markdown or commission and may not necessarily represent actual
transactions.
2004 FISCAL YEAR HIGH LOW
------------------ ----- -----
September 30, 2003 $0.27 $0.21
December 31, 2003 0.29 0.25
March 31, 2004 0.34 0.31
June 30, 2004 0.17 0.15
2005 FISCAL YEAR
------------------
September 30, 2004 0.12 0.11
December 31, 2004 0.17 0.16
March 31, 2005 0.11 0.10
June 30, 2005 0.10 0.09
As of June 30, 2005, 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.
12
RECENT SALES OF UNREGISTERED SECURITIES
Unregistered sales for the three years ended June 30, 2003, 2004 and 2005
are set forth below.
--------------------------------------------------------------------------------------
DATE TITLE NUMBER OF HOLDER CONSIDERATION
SHARES
--------------------------------------------------------------------------------------
8/1/2002 Common Stock 7,000 DJI Partners, LLC Inv Banking Services
--------------------------------------------------------------------------------------
9/4/2002 Common Stock 7,000 DJI Partners, LLC Inv Banking Services
--------------------------------------------------------------------------------------
10/2/2002 Common Stock 50,000 Neptune Investments, Ltd. $24,960
--------------------------------------------------------------------------------------
10/10/2002 Common Stock 220,000 Neptune Investments, Ltd. $100,000
--------------------------------------------------------------------------------------
10/17/2002 Common Stock 83,333 David Weilage $25,000
--------------------------------------------------------------------------------------
10/17/2002 Common Stock 383,333 Martin Ida $115,000
--------------------------------------------------------------------------------------
10/17/2002 Common Stock 383,333 Robert Ida $115,000
--------------------------------------------------------------------------------------
10/28/2002 Common Stock 18,796 John Krupa Exercise Warrant
--------------------------------------------------------------------------------------
10/28/2002 Common Stock 18,796 Mallory Smith Exercise Warrant
--------------------------------------------------------------------------------------
10/28/2002 Common Stock 18,796 Robert Lovell Exercise Warrant
--------------------------------------------------------------------------------------
11/18/2002 Common Stock 70,000 Patricia Shonebaum $21,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 50,000 Dennis Ferraro $15,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 166,667 Gerald Dooher $50,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 50,000 Paul Demott $15,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 50,000 Rodney Hock $15,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 50,000 Dennis McGuire $15,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 83,333 Larry S. Pisciotta $25,000
--------------------------------------------------------------------------------------
11/20/2002 Common Stock 33,333 Vail Valley Emergency Phys $10,000
Profit
--------------------------------------------------------------------------------------
11/21/2002 Common Stock 3,750,000 GrunesSchild, LLC $1 Million
--------------------------------------------------------------------------------------
11/26/2002 Common Stock 142,858 David Schulze $50,000
--------------------------------------------------------------------------------------
12/11/2002 Common Stock 125,000 John Provazek $50,000
--------------------------------------------------------------------------------------
1/10/2003 Common Stock 41,667 John Krupa $15,000
--------------------------------------------------------------------------------------
1/28/2003 Common Stock 33,333 William Fritz $10,000
--------------------------------------------------------------------------------------
4/3/2003 Common Stock 1,333,334 Neptune Investments $200,000
--------------------------------------------------------------------------------------
6/20/2003 Common Stock 240,824 John Provazek $31,307
--------------------------------------------------------------------------------------
7/21/2003 Common Stock 769,231 Neptune Investments $100,000
--------------------------------------------------------------------------------------
7/22/2003 Common Stock 100,000 Gary Thompson Outstanding Invoice
--------------------------------------------------------------------------------------
7/22/2003 Common Stock 100,000 Charles Lowe Outstanding Invoice
--------------------------------------------------------------------------------------
1/16/2004 Common Stock 16,565 Patricia Schonebaum Cashless Exercise of
Warrant
--------------------------------------------------------------------------------------
2/2/2004 Common Stock 17,901 Vail Valley Emergency Cashless Exercise of
Physicians Warrant
--------------------------------------------------------------------------------------
2/26/2004 Common Stock 150,598 Hamilton Fund, LLC Cashless Exercise of
Warrant
--------------------------------------------------------------------------------------
6/27/2005 Common Stock 1,000,000 Lyons Capital Consulting Agreement
--------------------------------------------------------------------------------------
6/27/2005 Common Stock 1,000,000 Davila Marketing & Capital $ 150,000
Group promissory note
--------------------------------------------------------------------------------------
13
Exemption From Registration Claimed
The above issuance by the Company of its unregistered securities was made
by the Company in reliance upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"). The entities/individuals that purchased the unregistered
securities were known to the Company and its management, through pre-existing
business relationships. The entities/individuals were provided access to all
material information which they requested, and all information necessary to
verify such information and was afforded access to management of the Company in
connection with the issuance. The holder 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 under the Act 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 consolidated financial
statements as of June 30, 2005, and for each of the years in the two-year period
then ended, includes a "going concern" explanatory paragraph, that describes
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to the factors prompting the explanatory paragraph
are discussed below and also in Note 2 to Notes to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
On April 1, 2003, NanoPierce Card filed insolvency with the Courts of
Munich, Germany. On June 8, 2004, NanoPierce Card was dissolved by the Courts of
Munich, Germany. NanoPierce Card is presented as discontinued operations in the
Company's consolidated financial statements. The Company recognized a gain of
$454,882 on the disposal of NanoPierce Card during the year ended June 30, 2004.
During the year ended June 30, 2005, the Company did not have any income or loss
from discontinued operations.
During the year ended June 30, 2005, the Company did not recognize any
revenues from continuing operations. The Company recognized $34,258 of revenues
from continuing operations during the fiscal year ended June 30, 2004. The
revenue generated from continuing operations was from the sale of inlays by
ExypnoTech ($28,449 through December 2003), and $5,809 from services provided by
the Company.
14
The Company recognized $17,672 in interest income during the fiscal year
ended June 30, 2005 compared to $2,550 during the fiscal year ended June 30,
2004. The increase of $15,122 is due primarily to the interest earned on funds
loaned to a unrelated third party.
Total operating expenses from continuing operations during the fiscal year
ended June 30, 2005 were $872,203, compared to $1,999,462 for the fiscal year
ended June 30, 2004. The decrease of $1,127,259 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,
2005 were $872,203 compared to $1,312,519 for the fiscal year ended June 30,
2004. The decrease of $440,316 is mainly attributable to decreases in
amortization expenses, consulting expenses, legal expenses and accounting
expenses. Selling and marketing expenses during the fiscal year ended June 30,
2005 were $0 compared to $37,033 during the fiscal year ended June 30, 2004.
The decrease of $37,033 was due to a decrease in marketing activities. Research
and development expenses during the fiscal year ended June 30, 2005 were $0
compared to $41,849 for the fiscal year ended June 30, 2004. The decrease of
$41,849 was primarily attributable to the reduction in research and development
activities over the previous fiscal year.
During the fiscal year ended June 30, 2004, the Company incurred an expense
of $608,061 in connection with the impairment of the intellectual property,
patent applications and trademarks owned by the Company. The decision to record
an impairment of the intellectual property was based primarily on the overall
age of the patents and patent applications underlying the intellectual property
combined with the Company's current inactive operational status. After the
impairment to the intellectual property, patent applications and trademarks, the
book value of the aforementioned items was $0.
During the fiscal year ended June 30, 2005, the Company recognized a net
loss of $997,616 compared to a net loss of $1,558,083 during the fiscal year
ended June 30, 2005. The decrease of $560,467 mostly resulted from the decrease
of $1,127,259 in operating expenses offset by the gain of $454,882 on the
disposal of NanoPierce Card during the fiscal year ended June 30, 2004.
LIQUIDITY AND FINANCIAL CONDITION
Net cash used in operating activities from continuing operations in 2005
was $544,194, compared to net cash used in operating activities from continuing
operations in 2004 of $1,199,214. In 2005, the net cash used represented a net
loss of $997,616, adjusted for the depreciation expense of $7,258, equity in
losses of affiliates of $144,323, provision for losses on notes receivable of
$35,000, and amortization of discount on note payable of $7,272.
In 2004, the net cash used represented a net loss of $1,558,083, adjusted
for the income from discontinued operations of $454,882, amortization and
depreciation expense of $169,331, impairment charges of $608,061, equity in
losses of affiliates of $99,922, gain on extinguishment of liabilities of
$52,500, and provision for a doubtful receivable of $58,074.
15
During the fiscal year ended June 30, 2005, the Company loaned $314,000 to
a unrelated third party and received a payment of $50,000, which included
interest or $11,442 during the same period. During the fiscal year ended June
30, 2005, the Company loaned Intercell $35,000. In March 2005, Intercell filed
for protection under Chapter 11 of the US Bankruptcy Code. The Company has
recorded a provision for this note receivable of $35,000.
During the fiscal year ended June 30, 2005, in connection with an
investment in BioAgra, the Company advanced Xact Resources International
$405,000 to be used for the purchase of a 50% equity interest in BioAgra, LLC.
for $1.5 million cash. The purchase was completed in August 2005.
During the fiscal year ended June 30, 2004, the Company advanced $50,000 to
Scimaxx, which was fully reserved for.
During the fiscal year ended June 30, 2004, the Company made investments in
machinery and equipment of $1,575. During the fiscal year ended June 30, 2004,
the Company contributed fixed assets with a book value of $132,000 to the
Scimaxx Solutions, LLC as part of the terms of the joint venture.
During the fiscal year ended June 30, 2005, the Company received $112,800
(net of $7,200 of offering costs) in connection with the exercise of warrants
for 1,200,000 shares of the Company's common stock.
During the fiscal year ended June 30, 2005, the Company received $41,000 in
exchange for an unsecured 5% note payable from Mr. Metzinger, an officer and
director of the Company. In August 2005, the note was paid in full.
During the fiscal year ended June 30, 2005, the Company received $150,000
in exchange for an unsecured 15% per quarter, note payable from an unrelated
third party. In connection with the note the Company issued 2,000,000 shares of
its restricted common stock (1,000,000 shares were issued in June 2005 and the
remaining 1,000,000 shares were issued in July 2005) with a relative fair value
of $81,718, to be amortized over the term of the note. The note was repaid in
full in September 2005.
During the fiscal year ended June 30, 2005, the Company received $25,000 in
exchange for an unsecured %8 per annum note payable, from an unrelated third
party. In connection with the note the Company issued 1,500,000 shares of its
restricted common stock (issued in July 2005) with a relative value of $21,428,
to be amortized over the term of the note. The note was paid in full in August
2005.
During the fiscal year ended June 30, 2004 the Company sold 20,769,231
shares of common stock and granted warrants to purchase 600,000 shares of its
common stock at exercise prices ranging from $0.10 to $0.25 for net proceeds of
$1,828,000 (net of offering costs of $272,000). The warrants are exercisable
through 2008 and contain a cashless exercise provision. The funds were raised
to support operations. In addition, the Company issued 3,850,000 shares of
common stock upon the exercise of 3,850,000 warrants for $347,950 (net of
offering costs of $37,050).
In June 2003, Mr. Metzinger loaned $10,000 to the Company in exchange for
an unsecured 7% note payable due in December 2003, the proceeds of which were
utilized for operational purposes. In January 2004, the Company paid Mr.
Metzinger the outstanding principal balance of this note, together with all
accrued interest.
16
In September 2003, Mr. Metzinger, the President, Chief Executive Officer
and director of the Company loaned the Company $30,000, in exchange for an
unsecured 7% note payable due in September 2004. In January, 2004 the Company
paid Mr. Metzinger the outstanding principal balance of this note, together with
all accrued interest, in full.
In September 2003, Intercell, an affiliate of the Company at the time,
loaned the Company $35,000 in exchange for an unsecured, 7% promissory note due
in September 2004. In November 2003, Intercell loaned the Company $100,000 in
exchange for a 7% promissory note due in November 2004. This promissory note
was collateralized by an assignment of a 51% interest in the proceeds, if any,
the Company may have received in connection with the Financing Agreement
litigation. In January 2004, the Company paid the $135,000 note plus accrued
interest of $2,493.
In 2004, the Company converted accounts payable of $92,100 into an
unsecured non-interest bearing note payable due in March 2005. During the
fiscal year ended June 30, 2005, the Company paid the note in full, $61,737 in
2005 and $30,363 in 2004.
PLAN OF OPERATIONS
During the year ended June 30, 2005, the Company did not recognize any
revenues or income from its equity investment. The Company did not have
operations and management of the Company spent a majority of the fiscal year
securing funds to purchase a 50% ownership in BioAgra.
In August 2005, the Company was able to raise $1,535,000 cash through the
exercise of 30,700,000 warrants with an exercise price of $0.05 per share. The
Company subsequently completed its purchase of a 50% equity investment in the
BioAgra, LLC joint venture for $1.5 Million in cash.
In August 2005, the Company purchased a 50% equity interest in BioAgra (a
Georgia limited liability company) for $905,000 cash (which includes the
$405,000 advanced to Xact Resources as of June 30, 2005) and a note payable of
$595,000 which was paid in full in September 2005. BioAgra plans to manufacture
and sell a beta glucan product, YBG-2000, to be used as a replacement for
hormone growth steroids and antibiotics in products such as poultry feed.
BioAgra is currently constructing a production line and expects to finish such
construction by the end of December 2005. BioAgra anticipates, beginning
production and sale of the beta glucan product YBG-2000 in January 2006. The
Company anticipates, but cannot be sure, that prior to the end of the fiscal
year 2006 it will receive cash disbursements from BioAgra.
Additonally, the Company entered into an agreement with Arizcan Properties,
Ltd. ("Arizcan") by which the Company will pay to Arzcan 20% of the cash
distributions paid to the Company by and from BioAgra, until such time as
Arizcan shall be paid $800,000.
In September 2005, the Company executed a Subscription Agreement to sell
shares of the Company's Preferred Stock with Arizcan Properties. The
Subscription Agreement provides for the sale of 200,000 shares of a Class A 8%
cumulative and participating preferred shares with a sales price of $7.50 per
share. The Preferred Shares are convertible into 60% of the Company's issued and
outstanding post-split shares of the Company's common stock on the date of
conversion.
17
In September 2003, the Company formed a joint venture with Scimaxx, LLC.
The joint venture, Scimaxx Solutions, LLC was entered into for the purpose of
marketing the Company's technology. Scimaxx LLC, is owned by an officer and
director of the Company and two former employees of the Company. In return for
50% ownership of the Scimaxx Solutions, LLC, the Company contributed a license
to utilize its technology and the facilities and equipment of NanoPierce
Connections. In April 2005, Scimaxx ceased operations and during the third
quarter of the fiscal year ended June 30, 2005, the Company impaired the value
of its investment to $0. The Company recognized an impairment charge of $63,544
in equity losses from affiliates.
On December 11, 2003, TagStar Systems, GmbH, a German entity unrelated to
the Company, purchased a controlling 51% equity interest in ExypnoTech in
exchange for a capital contribution of $98,000, of which $62,787 has been
received as of June 30, 2005. As a result of this transaction, the Company does
not have a controlling interest in ExypnoTech and the Company is only entitled
to 49% of the revenues generated by ExypnoTech (and 49% of the dividends, if
any, paid by ExypnoTech). As a result of the Company's reduced ownership
interest and loss of control of ExypnoTech, the Company deconsolidated
ExypnoTech as of December 11, 2003, and began accounting for its investment in
ExypnoTech under the equity method of accounting. Under the equity method of
accounting, the carrying amount of the Company's investment in ExypnoTech
($159,642 at June 30, 2005) is adjusted to recognize the Company's proportionate
share of ExypnoTech's income (loss) each period.
The Company intends to raise additional funds to support operations of the
Company during the 2006 fiscal year. Such funds are to be raised through an
offering of convertible preferred stock, the terms of which are in the process
of being finalized. Additionally, the Company intends to change its corporate
name and most likely to institute a reverse split in connection with recent
business events.
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.
18
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Share-Based Payment, which addresses the accounting for
share-based payment transactions. SFAS No. 123(R) eliminates the ability to
account for share-based compensation transactions using APB 25, and generally
requires instead that such transactions be accounted and recognized in the
statement of operations based on their fair value. SFAS No. 123(R) will be
effective for public companies that file as small business issuers as of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently evaluating the provisions of this standard. Depending
upon the number of and terms of options that may be granted in future periods,
the implementation of this standard could have a significant impact on the
Company's financial position and results of operations in future periods.
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision to SFAS Interpretation No. 46, Consolidation of Variable Interest
Entities. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain
entities from its requirements. FIN 46R requires a variable interest entity 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 entitled to
receive a majority of the entity's residual returns or both. FIN 46R also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46R became effective for variable interest entities or potential variable
interest entities for periods ending after December 15, 2003 for public
companies (other than small business issuers), and became effective by the end
of the first annual reporting period ending after December 15, 2004 for
companies that are small business issuers. FIN 46R did not have an impact on the
Company's financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to deferred revenues; depreciation or fixed
assets, valuation of intangible 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.
19
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;
- equity method investments;
- 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 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Share-Based Payment, which addresses the accounting for
share-based payment transactions. SFAS No. 123(R) eliminates the ability to
account for share-based compensation transactions using APB 25, and generally
requires instead that such transactions be accounted and recognized in the
statement of operations based on their fair value. SFAS No. 123(R) will be
effective for public companies that file as small business issuers as of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently evaluating the provisions of this standard. Depending
upon the number of and terms of options that may be granted in future periods,
the implementation of this standard could have a significant impact on the
Company's financial position and results of operations in future periods.
Valuation of intellectual property, patent and trademark applications and other
long-lived assets
The Company assesses the impairment of long-lived assets and intangible
assets such as intellectual property and patent and trademark applications
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors the Company considers important which could trigger
an impairment review include negative projected operating performance by the
Company and significant negative industry or economic trends. At June 30, 2004,
management assessed the carrying value of intellectual and other long-lived
assets for impairment, and based on this assessment the Company believed that
impairment was necessary in the case of the original intellectual property, the
patent applications and the trademarks.
20
During 2004, the Company recognized an impairment charge of $608,061 on the
intellectual property, patent applications and trademarks. The Company does not
believe that there has been any other impairment to long-lived assets as of June
30, 2005.
Equity method investments
Entities where the Company can exercise significant influence, but not
control, are accounted for under the equity method of accounting. Whether or not
the Company exercises significant influence with respect to a company depends on
an evaluation of several factors including, among others, representation on the
company's board of directors and ownership level, generally 20% to 50% interest
in the voting securities of the company including voting rights associated with
the Company's holdings in common, preferred and other convertible instruments in
the company. Under the equity method of accounting, the Company's share of the
earnings or losses of these companies is include in the equity income (loss)
section of the consolidated statements of operations.
A loss in value of an investment that is other than a temporary decline is
recognized as a charge to operations. Evidence of a loss in value might include,
but would not necessarily be limited to, absence of an ability to recover the
carrying amount of the investment or inability of the investee to sustain an
earnings capacity that would justify the carrying amount of the investment.
During the year ended June 30, 2005, the Company recorded an impairment charge
of approximately $64,000 related to one of its equity method investments
(Note 6).
International operations
The Company's foreign equity investee (ExypnoTech) operations are located
in Germany. ExypnoTech transactions are conducted in currencies other than the
U.S. dollar, (the currency into which the subsidiaries' historical financial
statements have been translated) primarily the Euro. As a result, the Company
is exposed to adverse movements in foreign currency exchange rates. In
addition, foreign political and economic environment, trade barriers, managing
foreign operations and potentially adverse tax consequences. Any of these
factors could have a material adverse effect on the Company's financial
condition or results of operations in the future.
Revenue recognition and deferred revenue
The Company's revenue recognition policy is significant because future
revenue could be a key component of its results or operations. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause operating results to vary significantly.
Litigation
The Company is involved in certain legal proceedings, as described in Item
3 of this report and Note 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.
Contractual obligations
For more information on the Company's contractual obligations on operating
leases, refer to Note 9 of the consolidated financial statements included in
this report. At June 30, 2005, the Company's commitments under these obligations
were as follows:
OPERATING LEASES
-----------------
Year ending June 30,
2006 83,401
2007 14,550
-------------------- -----------------
$ 97,951
=================
21
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements and related financial information
required to be filed are indexed on page F-1 and are incorporated herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-KSB,
the Company carried out an evaluation, under the supervision and with the
participation of the Company's President and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon
such evaluation, such officers have concluded that the Company's disclosure
controls and procedures are effective in alerting them, on a timely basis, to
material information relating to the Company required to be included in this
Annual Report on Form 10-KSB.
There have been no significant changes to the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially effect, the Company's internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
FINANCIAL EXPERT
The Company's Board of Directors does not have a designated Financial
Expert, as defined by the SEC, due to factors including the Company's
operational status, and the limited number of transactions, accounts and
balances that the Company maintains. In addition, the estimates of cost that
the Company would be required to incur in identifying and designating a
Financial Expert are deemed not to be in the best interest of the Company.
22
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 (66) Director, President, and December 1998 to present
Chief Executive Officer,
General Manager of January 2000 to June 2003
NanoPierce Card
Dr. Herbert J. Neuhaus (44) Director, Former Executive January 1999 to present
Vice President of
Technology & Marketing,
President & Chief January 2002 to September
Executive Officer of 2003
NanoPierce Connection
Kristi J. Kampmann (32) Chief Financial Officer, October 1999 to present
Secretary February 1998 to present
Dr. Robert Shaw (65) Director October 2000 to present
John Hoback (65) Director April 2002 to present
The directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Board of
Directors elects the officers at its annual meeting immediately following the
shareholders annual meeting and hold office until they resign or are removed
from office. There are no family relationships that exist between any director,
executive officer, significant employee or person nominated or chosen by the
Company to become a director of executive officer. The Company has established
audit, incentive compensation and nominating committees, consisting of the
independent directors.
BIOGRAPHICAL INFORMATION ON OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
PAUL H. METZINGER. Mr. Metzinger was President and Chief Executive Officer
of the Company from February 26, 1998 to May 6, 1998 and has served in that same
capacity from December 1, 1998 to present. He has been a director of the
Company since February 26, 1998. He served as the General Manager of NanoPierce
Card from January 2000 to June 2003. In addition, he served as the President,
Chief Executive Officer and a Director of Intercell International Corporation
from June 1996 to October 2003 and from September 30, 2004 to March 16, 2005.
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.
23
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.
KRISTI J. KAMPMANN. Ms. Kampmann was appointed the Chief Financial Officer
of the Company on October 15, 1999. Ms. Kampmann has been Secretary of the
Company since February 1998. Ms. Kampmann has served as a manager of ExypnoTech,
LLC since June 2004. She has served as the Chief Financial Officer of Intercell
International Corporation since October 1, 2003 and as Secretary of Intercell
International Corporation since July 28, 1999. Since June 1997, she has been
the administrative assistant to the Chief Executive Officer and Chief Financial
Officer; in addition, during the same period she served in the same capacity to
the Chief Executive Officer of Intercell. From April 1996 to June 1997, she
served as a paralegal and administrative assistant for Paul H. Metzinger, P.C.
Ms. Kampmann received an MBA from the University of Colorado, Denver in December
2001. Ms. Kampmann graduated from the Denver Paralegal Institute in 1996 and
received a B.A. from the University of Minnesota in Morris in 1995, majoring in
Political Science with a minor in Business Management.
DR. ROBERT SHAW. Dr. Shaw has been a director of the Company since October
31, 2000. Dr. Shaw currently is an Assistant Professor of Physics at Farleigh
Dickinson University where he has served on the faculty since September 1988.
Dr. Shaw also performs professional research in his academic areas of specialty,
and has held, among others, the positions of Research Chemist at the American
Cyanamid Research Laboratories, Stamford; Senior Research Physicist at Exxon
Research and Engineering Company; Manager of New Business Development at Exxon
Enterprises, Exxon Corporation, New York, NY; and President of Robert Shaw
Associates, Inc., Chatham, NJ.
Dr. Shaw received his Ph.D. in Solid State Physics form Cambridge
University, Cambridge, England. He was among the first to conduct academic
research on electronic conduction mechanisms in amorphous semiconductors. He
received a B.S. in Inorganic Chemistry with a minor in Nuclear Physics from
North Carolina State University, Raleigh, NC.
24
JOHN HOBACK. Mr. Hoback has been a director of the Company since April
2002. Mr. Hoback currently serves as the President of Z&H Enterprises
Solutions, Ltd., which position he has held since 2000. Among other positions,
Mr. Hoback was the Director of Marketing and Sales of CTS from 1999 to 2000 and
was the Venture Manager of Electronics with Amoco Chemical from 1988 to 1999.
CODE OF ETHICS
The Company in January 2004 adopted a Code of Ethics that applies to the
Chief Executive Officer, Chief Financial Officer, Controller, Principal
Accounting Officer and those employees performing similar functions.
25
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, 2005,
2004 and 2003 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
------ -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME & PRINCIPAL SALARY BONUS COMPENSA- STOCK OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR ($) ($) TION AWARDS ($) SARS (#) ($) TION
Paul H.
Metzinger, 2005 $ 136,785 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Director, 2004 $ 114,583 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President & 2003 $ 132,500 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
CEO(1)
Dr. Herbert J.
Neuhaus,
Director, Ex. VP
of Technology & 2005 $ -0- $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Marketing, Pre & 2004 $ 16,668 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
CEO of 2003 $ 148,333 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
NanoPierce
Connection (2)
Dr. Michael E.
Wernle,
Director, Ex. VP 2005 $ -0- $ -0- $ -0- $ -0- -0- $ -0- $ -0-
of Strategic 2004 $ -0- $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Business Dvlpmt, 2003 $ 128,000 $ -0- $ -0- $ -0- 365,000 $ -0- $ -0-
Pres & CEO of
ExypnoTech (3)
Kristi J.
Kampmann, Chief
Financial 2005 $ 80,625 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Officer & 2004 $ 37,492 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Secretary(4) 2003 $ 58,125 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
--------------
1 Paul Metzinger has served as President & CEO since December 1998. He is
compensated pursuant to a written Employment Agreement, dated March 15, 2004 at
an annual salary of $150,000. Over the three year period Mr. Metzinger has taken
salary cuts when necessary.
2 Dr. Neuhaus has served as the Executive Vice President of Technology and
Marketing since January 1999. He served as the President and CEO of NanoPierce
Connection from January 2002 to September 2003. He was compensated pursuant to a
written Employment Agreement, dated January 2002 at an annual salary of
$200,000. This employment agreement was terminated in September 2003 and Dr.
Neuhaus is no longer a paid employee of the Company and/or its subsidiaries.
3 Dr. Wernle served as the Executive Vice President of Strategic Business
Development until September 2003. He served as the President & CEO of NanoPierce
Card from January 2000 until May 2003. He served as the President & CEO of
ExypnoTech, from February 2002 to August 2003. He was compensated pursuant to a
written Employment Agreement with NanoPierce Card, dated February 1, 2000, at an
annual salary of $160,000 (181,000 Euros). As of August 2003, Dr. Wernle no
longer is a paid employee of the Company and/or its subsidiaries.
4 Kristi Kampmann has served as the Chief Financial Officer since October 1999.
She is compensated pursuant to a written Employment Agreement, dated March 15,
2004. During the year ended June 30, 2005, Ms. Kampmann received a gross monthly
salary of $7,500 for 7 months, in March 2005 it was reduced to $6,250 per month.
26
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all Company employees such as
group health insurance, dental insurance, long-term disability insurance,
vacation and sick leave. In addition, the Company makes available certain
non-monetary benefits to its executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. The Company
considers such benefits to be ordinary and incidental business costs and
expenses. The aggregate value of such benefits in the case of each executive
officer listed in the above table, which cannot be precisely ascertained but
which is less than 10% of the cash compensation paid to each such executive
officer, is not included in such table.
OPTION/SAR GRANTS TABLE
There were no grants of stock options to the Company's executive officers
during the fiscal year ended June 30, 2005.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
The following table provides information relating to the exercise of stock
options during the fiscal year ended June 30, 2005 by the Company's executive
officers and the 2005 fiscal year-end value of unexercised options.
SHARES VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON REALIZED UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SAR
NAME EXERCISE (#) ($) AT FY-END AT FY-END ($)
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------- ---------------------------
Paul H. 0 0 2,500,000/0 $ 237,500/0
Metzinger
Dr. Herbert 0 0 1,350,000/0 $ 128,250/0
J. Neuhaus
Kristi 0 0 325,000/0 $ 30,875/0
J.Kampmann
---------------
1 The average of the closing bid and asked price of the Common Stock on June 30,
2005 ($0.095) was used to calculate the option value.
EMPLOYMENT AGREEMENTS
On March 15, 2004, the Company entered into an employment agreement with
Paul H. Metzinger to serve as President and Chief Executive Officer of the
Company. The employment agreement with Mr. Metzinger expires March 14, 2008.
Pursuant to his employment agreement, the Company agreed to pay Mr. Metzinger an
annual salary of $150,000. In March 2005, Mr. Metzinger took a salary cut to
receive an annual salary of $105,000.
27
On March 15, 2004, the Company entered into an employment agreement with
Kristi J. Kampmann to serve as the Chief Financial Officer of the Company. The
employment agreement with Ms. Kampmann expires on March 14, 2008. Pursuant to
her employment agreement, the Company agreed to pay Ms. Kampmann an annual
salary of $30,000. During the year ended June 30, 2005, Ms. Kampmann received a
salary increase for an annual salary of $90,000, but in March 2005 took a salary
cut to receive an annual salary of $75,000.
In connection with the Employment Agreements, generally, the Company or the
employee may terminate the Employment Agreement at any time with or without
cause. In the event the Company terminates an Employment Agreement for cause or
the employee terminates his or her Employee Agreement without cause, all of such
employee's rights to compensation would cease upon the date of such termination.
If the Company terminates an Employment Agreement without cause, the such
employee terminates his or her Employment Agreement for cause, or in the event
of a change in control, the Company is required to pay to such employee all
compensation and other benefits that would have accrued and/or been payable to
that employee during the full term of the Employment Agreement.
A change of control is considered to have occurred when, as a result of any
type of corporate reorganization, execution of proxies, voting trusts or similar
arrangements, a person or group of persons (other than incumbent officers,
directors and principal shareholders of the Company) acquires sufficient control
to elect more than a majority of the Company's Board of Directors, acquires 50%
or more of the voting shares of the Company, or the Company adopts a plan of
dissolution of liquidation. The Employment Agreement also include a non-compete
and nondisclosure provisions in which each employee agrees not to compete with
or disclose confidential information regarding the Company and its business
during the term of the Employment Agreement and for a period of one year
thereafter.
COMPENSATION PURSUANT TO PLANS
STOCK OPTION PLANS. The Company has two Stock Option Plans. As of June
30, 2005, 7,047,524 options are outstanding under the 1998 Compensatory Stock
Option Plan and 1,740,000 options are outstanding under the 2000 Compensatory
Stock Option Plan, for a total of 8,787,524 options outstanding. A total of
8,637,524 options are exercisable at June 30, 2005, under these plans. During
the fiscal year ended June 30, 2005, the Company did not grant any options. The
Company has reserved 7,500,000 shares of common stock for issuance under the
1998 Compensatory Stock Option Plan. In January 2002, the Company's Board of
Directors passed a resolution closing the 1998 Compensatory Stock Option Plan
for issuance of new options. The Company has reserved 5,000,000 shares of
common stock for issuance under the 2000 Compensatory Stock Option Plan.
During the fiscal year ended June 30, 2005, there was no action taken to
reprice any options held by any officers, directors or employees.
28
COMPENSATION OF DIRECTORS
The Company holds quarterly meetings of the board of directors. Although
the Company does not have any standard arrangements pursuant to which our
directors are compensated for any services provided as a director or for
attendance at meetings of the board of directors, if the financial situation of
the Company is adequate, the Company compensates directors $1,000 per meeting,
plus reasonable travel expenses.
During the fiscal year ended June 30, 2005, the officers and directors were
not compensated for attendance at board meetings.
29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER MATTERS
BENEFICIAL OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of outstanding shares of the Company's common stock as of June 30,
2005 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 (7)
---------------------------------------------------------------------------------------
The Paul H. Metzinger Trust Common Stock 4,543,188(1) 2.68%
Paul H. Metzinger, President &
CEO, Director 370 17th Street,
Suite 3640 Denver, CO 80202
---------------------------------------------------------------------------------------
The Cheri L. Metzinger Trust Common Stock 4,543,188(2) 2.68%
Cheri L. Metzinger, Wife of Paul
H. Metzinger
3236 Jellison Street Wheatridge,
CO 80033
---------------------------------------------------------------------------------------
Dr. Herbert J. Neuhaus, Director, Common Stock 1,350,000(3) 0.80%
770 Maroonglen Court
Colorado Springs, CO 80906
---------------------------------------------------------------------------------------
Kristi J. Kampmann, Chief Common Stock 344,080(4) 0.20%
Financial Officer & Secretary
370 17th Street, Suite 3640
Denver, CO 80202
---------------------------------------------------------------------------------------
Dr. Robert E. Shaw, Director Options to 400,000(5) 0.24%
8 Nicklaus Court purchase Common
Florham Park, NJ 07932 Stock
---------------------------------------------------------------------------------------
John Hoback, Director 20 White Options to 400,000(6) 0.24%
Heron Lake purchase Common
East Stroudsburg, PA 18301 Stock
---------------------------------------------------------------------------------------
All Officers & Directors as a Common Stock 7,037,268 4.15%
Group (7 persons)
---------------------------------------------------------------------------------------
---------------
1 Includes 1,072,937 common shares held directly and beneficially; 970,251
common shares that Mr. Metzinger owns beneficially though his wife and options
held by Mr. Metzinger consisting of options to purchase 500,000 shares
exercisable at $2.125 per share, options to purchase 500,000 shares exercisable
at $0.52 per share and options to purchase 1,500,000 shares exercisable at
$0.3250 per share.
2 Cheri L. Metzinger is the wife of Mr. Paul H. Metzinger, the Chief Executive
Officer and President of the Company. This includes 970,251 shares held directly
and beneficially and 1,072,937 common shares and 2,000,000 common shares subject
to options owned beneficially by her husband.
30
3 Based on options to purchase 500,000 shares exercisable at $2.125 per share,
options to purchase 100,000 shares exercisable at $2.75 per share, options to
purchase 250,000 shares exercisable at $0.52 per share and options to purchase
500,000 shares exercisable at $0.20 per share.
4 Based on 19,080 common shares and options to purchase 100,000 shares
exercisable at $0.84 per share, options to purchase 75,000 shares exercisable at
$2.125 per share, options to purchase 50,000 shares exercisable at $2.75 per
share, options to purchase 50,000 shares exercisable at $0.52 per share and
options to purchase 50,000 shares exercisable at $0.3250 per share.
5 Based on options to purchase 250,000 shares exercisable at $0.97 per share,
options to purchase 50,000 shares exercisable at $0.67 per share, and options to
purchase 100,000 shares exercisable at $2.00 per share.
6 Based on options to purchase 300,000 shares exercisable at $0.70 per share and
options to purchase 100,000 shares exercisable at $0.70 per share.
7 Based on 93,259,033 shares of common stock issued and outstanding on June 30,
2005, assuming exercise of all 8,787,524 presently exercisable options and
exercise of 67,394,353 outstanding warrants, there would be 169,440,910 shares
outstanding. Mr. Metzinger's and Mrs. Metzinger's stock ownership are not
duplicated in this computation.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of June 30, 2005 regarding
compensation plans (including individual compensation arrangements) under which
shares of our common stock are authorized for issuance. No class of our
securities other than our common stock or options to purchase our common stock
is authorized for issuance under any of our equity compensation plans.
-------------------------------------------------------------------------------------------
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
Plan Category warrants and rights and rights reflected in column (a)
(a) (b) (c)
-------------------------------------------------------------------------------------------
Equity
compensation plans
approved by
security holders 0 - 0
-------------------------------------------------------------------------------------------
Equity
compensation plans
not approved by
security holders(1) 8,787,524 $ 1.00 3,712,476
-------------------------------------------------------------------------------------------
Total 8,787,524 $ 1.00 3,712,476
-------------------------------------------------------------------------------------------
(1) The material features of the plans not approved by the security holders are described
herein under "ITEM 10-EXECUTIVE COMPENSATION-Compensation Pursuant to Plans."
-------------------------------------------------------------------------------------------
31
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In June 2005, Mr. Metzinger loaned the Company $41,000, in exchange for an
unsecured 5% note payable due December 31, 2005. In August 2005, the Company
paid the outstanding principal balance of this note and all accrued interest
thereon in full.
In March 2004, the Company entered into employment agreements, as
previously discussed, with Mr. Metzinger, the President and Chief Executive
Officer and a Director of the Company, and with Ms. Kampmann, the Chief
Financial Officer and Secretary of the Company.
In September 2003, the Company entered into a joint venture agreement with
Scimaxx, LLC to support the marketing of the Company's technology. The owners
of Scimaxx, LLC include Dr. Neuhaus, a director and a former officer of the
Company and several former employees of the Company.
In June 2003, Mr. Metzinger loaned the Company $10,000, in exchange for an
unsecured 7% note payable due in December 2003. In January 2004, the Company
paid Mr. Metzinger the outstanding principal balance of this note and all
accrued interest thereon in full.
In September 2003, Mr. Metzinger, the President, Chief Executive Officer
and director of the Company loaned the Company $30,000, in exchange for an
unsecured 7% note payable due in September 2004. In January, 2004 the Company
paid Mr. Metzinger the outstanding principal balance of this note, together with
all accrued interest, in full.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
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.
32
EXHIBIT NO. DESCRIPTION
2 Agreement dated February 26, 1998, by and among the Company,
Particle Interconnect Corporation and Intercell Corporation (4)
2.02 Application and Development Agreement, dated April 15, 1999, by and
among the Company and Multitape & Co., Gmbh, KG. (2)
2.03 Technology Cooperation Agreement, dated May 17, 1999, by and among
the Company and Meinen, Zeigel & Co. (2)
2.04 Technology Development Agreement, dated June 11, 1999, by and among
the Company and ORGA Kartensysteme, GmbH. (2)
2.05 Agreement-In-Principle, dated May 18, 1999, by and among the
Company and Cirrex Corporation. (2)
4.01 The Articles of Incorporation of the Company (3)
4.02 Amendment to the Articles of Incorporation of the Company filed
with the Nevada Secretary of State on March 20, 2002 (3)
4.03 Amendment to Articles of Incorporation filed with the Nevada
Secretary of State on March 20, 2002
4.04 Certificate of Designation of Rights and Preferences of the Series
A Preferred Stock (4)
4.05 Certificate of Designation of Rights and Preferences of the Series
B Preferred Stock (5)
4.06 Certificate of Designation of Rights and Preferences of the Series
C Preferred Stock (5)
4.07 Form of Common Stock Certificate (3)
4.08 The Amended and Restated By-laws of the Company (6)
10.01 Employment Agreement, dated March 15, 2004, between Paul H.
Metzinger and the Company (7)
10.02 Employment Agreement, dated March 15, 2004, between Kristi J.
Kampmann and the Company (7)
10.03 Operating Agreement, dated August 15, 2005, between the Company and
Xact Resources International, Inc. for BioAgra, LLC.(8)
11 Statement regarding Computation of Per Share Loss (1)
21 Subsidiaries of the Company (1)
23 Consent of Independent Registered Public Accounting Firm (1)
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act (1)
32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act (1)
---------------
1 Filed herewith.
2 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1999.
3 Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1998.
4 Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 26, 1998.
5 Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 23, 1998.
6 Incorporated by reference to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2003.
7 Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended March 31, 2004.
8 Incorporated by reference to the Company's Current Report on Form 8-K,
dated August 12, 2005.
33
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by GHP Horwath, P.C. (previously known as Gelfond
Hochstadt Pangburn, P.C.), the Company's independent registered public
accounting firm, for professional services in the fiscal years ended June 30,
2005 and 2004 are as follows:
----------------------------------------------
Services Rendered 2005 2004
----------------------------------------------
Audit Fees $50,660 $57,060
----------------------------------------------
Audit Related Fees 0 0
----------------------------------------------
All Other Fees 0 0
----------------------------------------------
The Company's corporate tax returns are prepared by the firm of Thompson &
Lowe, P.C. Fees for the fiscal years ended June 30, 2005 and 2004 were $15,280
and $10,000, respectively.
The engagement of the Company's independent registered public accounting
firm was approved by the Company's Board of Directors prior to the start of the
audit for the fiscal year ended June 30, 2005.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(a Nevada corporation)
Date: October 3, 2005 By: /s/ Paul H. Metzinger
-----------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: October 3, 2005 By: /s/ Kristi J. Kampmann
-----------------------------------
Kristi J. Kampmann, Chief Financial
Officer & Chief Accounting Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date: October 3, 2005 By: /s/ Paul H. Metzinger
----------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer & President
Date: October 3, 2005 By: /s/ Herbert J. Neuhaus
----------------------------------
Herbert J. Neuhaus, Director &
Executive Vice-President of
Technology & Marketing
Date: October 3, 2005 By: /s/ Robert Shaw
----------------------------------
Robert Shaw, Director
Date: October 3, 2005 By: /s/ John Hoback
----------------------------------
John Hoback, Director
35
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report covering the Company's fiscal year ended June 30, 2005,
nor any proxy material, has been sent to security holders of the Company.
NANOPIERCE TECHNOLOGIES , INC. AND SUBSIDARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-1
Consolidated Financial Statements:
Consolidated Balance Sheet - June 30, 2005 F-2
Consolidated Statements of Operations-
Years ended June 30, 2005 and 2004 F-3
Consolidated Statements of Comprehensive Loss -
Years ended June 30, 2005 and 2004 F-4
Consolidated Statements of Changes in Shareholders' Equity -
Years ended June 30, 2005 and 2004 F-5
Consolidated Statements of Cash Flows - F-7
Years ended June 30, 2005 and 2004
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Nanopierce Technologies, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Nanopierce
Technologies, Inc. and subsidiaries as of June 30, 2005, and the related
consolidated statements of operations, comprehensive loss, changes in
shareholders' equity and cash flows for each of the years in the two-year period
ended June 30, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nanopierce
Technologies, Inc. and subsidiaries as of June 30, 2005, and the results of
their operations and their cash flows for each of the years in the two-year
period ended June 30, 2005, 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 $997,616
for the year ended June 30, 2005, and an accumulated deficit of $23,629,319 as
of June 30, 2005. 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.
/s/ GHP HORWATH, P.C.
Denver, Colorado
September 26, 2005
F-1
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2005
Assets
------
Current assets:
Cash and cash equivalents $ 25,835
Interest receivable 3,823
Notes receivable, net (Note 5) 275,442
Prepaid expenses 91,306
-------------
Total current assets 396,406
-------------
Property and equipment:
Office equipment and furniture 66,356
Less accumulated depreciation (50,514)
-------------
15,842
-------------
Other assets:
Advances receivable (Note 5) 405,000
Deposits and other 19,285
Investments in affiliates (Note 6) 159,642
-------------
583,927
-------------
Total assets $ 996,175
=============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 214,891
Accrued liabilities 18,227
Other liability (Note 8) 90,000
Notes payable, net of discount of $95,874 (Note 7) 119,690
-------------
Total liabilities (all current) 442,808
-------------
Commitments and contingencies (Notes 4,7 and 9)
Shareholders' equity (Notes 7 and 8):
Preferred stock; $0.0001 par value; 5,000,000 shares authorized;
none issued and outstanding
Common stock; $0.0001 par value; 200,000,000 shares authorized;
93,259,033 shares issued and outstanding 9,326
Additional paid-in capital 24,050,517
Accumulated other comprehensive income 122,843
Accumulated deficit (23,629,319)
-------------
Total shareholders' equity 553,367
-------------
Total liabilities and shareholders' equity $ 996,175
=============
See notes to consolidated financial statements.
F-2
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30, 2005 and 2004
2005 2004
------------ -----------
Revenues $ - 34,258
------------ -----------
Operating expenses:
General and administrative 872,203 1,312,519
Research and development - 41,849
Selling and marketing - 37,033
Impairment of intellectual property
(Note 1) - 608,061
------------ -----------
872,203 1,999,462
------------ -----------
Loss from operations (872,203) (1,965,204)
------------ -----------
Other income (expense):
Other income 10,618 -
Interest income 17,672 2,550
Extinguishment of liabilities (Note 7) - 52,500
Equity losses of affiliates (Note 6) (144,323) (99,922)
Interest expense (9,301) (1,683)
Interest expense, related party (79) (1,206)
------------ -----------
(125,413) (47,761)
------------ -----------
Loss from continuing operations (997,616) (2,012,965)
------------ -----------
Discontinued operations; income from
operations of subsidiary (Note 3) - 454,882
------------ -----------
Net loss $ (997,616) (1,558,083)
============ ===========
Basic and diluted loss per share:
Loss from continuing operations $ (0.01) (0.03)
Income from discontinued operations - 0.01
------------ -----------
Net loss per share, basic and diluted $ (0.01) (0.02)
============ ===========
Weighted average number of common
shares outstanding 90,899,581 75,116,717
============ ===========
See notes to consolidated financial statements.
F-3
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years Ended June 30, 2005 and 2004
2005 2004
------------ ------------
Net loss $ (997,616) (1,558,083)
Change in unrealized loss on
securities (379) (141)
Change in foreign currency
translation adjustments - (66,727)
------------ ------------
Comprehensive loss $ (997,995) (1,624,951)
============ ============
See notes to consolidated financial statements.
F-4
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 2005 and 2004
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 and
warrants issued for
cash (net of offering
costs of $272,000) 20,769,231 2,077 1,825,923 - - 1,828,000
Common stock issued
in satisfaction of
payable 200,000 20 3,615 - - 3,635
Common stock issued upon
exercise of
warrants (net of
offering costs of
$37,050) 3,850,000 385 347,565 - - 347,950
Common stock issued upon
cashless exercise of
warrants 185,064 19 (19) - - -
Net loss - - - - (1,558,083) (1,558,083)
Other comprehensive
loss:
Change in unrealized
gain on securities - - - (141) - (141)
Foreign currency
translation
adjustments - - - (66,727) - (66,727)
------------- -------------- -------------- -------------- -------------- --------------
Balances,
June 30, 2004 90,059,033 $ 9,006 23,744,891 123,222 (22,631,703) 1,245,416
============= ============== ============== ============== ============== ==============
See notes to consolidated financial statements.
F-5
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
Years Ended June 30, 2005 and 2004
Accumulated
Common stock Additional 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
Common stock issued upon
exercise of warrants
(net of offering costs
of $7,200) 1,200,000 120 112,680 - - 112,800
Common stock issued for
deferred consulting
costs 1,000,000 100 89,900 - - 90,000
Common stock issued upon
issuance of note
payable 1,000,000 100 102,796 - - 102,896
Common stock to be
issued - - 250 - - 250
Net loss - - - - (997,616) (997,616)
Other comprehensive
loss:
Change in unrealized
gain on securities - - - (379) - (379)
------------- -------------- ------------- -------------- -------------- --------------
Balances,
June 30, 2005 93,259,033 $ 9,326 24,050,517 122,843 (23,629,319) 553,367
============= ============== ============= ============== ============== ==============
See notes to consolidated financial statements.
F-6
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2005 and 2004
2005 2004
------------- ------------
Cash flows from operating activities:
Net loss $ (997,616) (1,558,083)
------------- ------------
Adjustments to reconcile net loss to net cash used
in operating activities from continuing operations:
Income from discontinued operations - (454,882)
Amortization expense 7,500 158,674
Depreciation expense 7,258 10,657
Equity losses of affiliates 144,323 99,922
Gain on extinguishment of liabilities - (52,500)
Provision for losses on receivables 35,000 58,074
Amortization of discount on note payable 7,272 -
Amortization of deferred consulting costs - 122,459
Impairment of intellectual property and equipment - 608,061
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,986 (11,883)
Decrease in prepaid expenses 35,921 8,646
Increase (decrease) in accounts payable 105,935 (188,359)
Increase in accrued liabilities 18,227 -
Increase in other liability 90,000 -
------------- ------------
Total adjustments 453,422 358,869
------------- ------------
Net cash used in operating activities
from continuing operations (544,194) (1,199,214)
------------- ------------
Cash flows from investing activities:
Advances to equity investee - (50,000)
Increase in notes receivable (349,000) -
Repayment of note receivable 38,558 -
Increase in advances receivable (405,000) -
Increase in patent and trademark applications - (68,189)
Purchases of property and equipment - (1,575)
Cash effect of ExypnoTech deconsolidation - (115,151)
------------- ------------
Net cash used in investing activities
from continuing operations (715,442) (234,915)
------------- ------------
Cash flows from financing activities:
Exercise of warrants and common stock issued for cash 112,800 2,175,950
Payment of notes payable (61,737) (205,700)
Proceeds from issuance of notes payable and common stock 216,000 165,000
------------- ------------
Net cash provided by financing activities
from continuing operations 267,063 2,135,250
------------- ------------
Effect of exchange rate changes on cash
and cash equivalents - 127,038
------------- ------------
Net cash used in discontinued operations - (10,492)
------------- ------------
Net (decrease) increase in cash and cash equivalents (992,573) 817,667
Cash and cash equivalents, beginning 1,018,408 200,741
------------- ------------
Cash and cash equivalents, ending $ 25,835 1,018,408
============= ============
(Continued) F-7
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2005 and 2004
Continued
2005 2004
------------- ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 17 2,851
============= ============
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock and common stock to be issued
in connection with notes payable $ 103,146 -
============= ============
Issuance of common stock in exchange for deferred
consulting costs $ 90,000 -
============= ============
Offering costs recorded in accounts payable $ 7,200 -
============= ============
Issuance of common stock in satisfaction of payable $ - 3,635
============= ============
Investment in joint venture in exchange for equipment $ - 132,000
============= ============
Issuance of note payable in exchange for accounts
payable $ - 92,100
============= ============
Patent costs incurred on behalf of equity investee in
exchange for receivable $ - 8,074
============= ============
See notes to consolidated financial statements.
F-8
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
1. BASIS OF PRESENTATION, BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
NanoPierce Technologies, Inc., a Nevada corporation (the Company), its
wholly-owned subsidiaries, NanoPierce Connection Systems, Inc., a Nevada
corporation (NCOS) which was incorporated in November 2001, 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
6). Through June 30, 2004, the consolidated financial statements also included
the wholly-owned foreign subsidiary, NanoPierce Card Technologies GmbH, (NCT).
NCT was dissolved in June 2004, and is presented as discontinued operations
(Note 3). All significant intercompany accounts and transactions have been
eliminated in consolidation.
BUSINESS:
The Company was engaged in the design, development and licensing of products
using its intellectual property, the PI Technology through its subsidiaries and
joint venture arrangements. The PI Technology consists of patents, pending
patent applications, patent applications in preparation, trade secrets, trade
names, and trademarks. The Company has designated its PI Technology as the
NanoPierce Connection System (NCS(TM)) and marketed the PI Technology to
companies in various industries for a wide range of applications, specifically
RFID applications. As discussed below, the Company made a decision to abandon
its PI Technology during the year ended June 30, 2004.
Through June 30, 2005, NCOS had no operational activities. Through June 30,
2005, EPT, an equity investment, had activities primarily consisting of
manufacturing inlay components used in, among other things, Smart Labels, which
is a paper sheet holding a chip-containing module that is capable of memory
storage and/or processing. Scimaxx Solutions, LLC, which is an equity investment
(Note 6), was primarily involved in research and development and marketing
functions through April 2005, at which time it ceased operations. ET LLC
business activities included the marketing and sales of RFID (Radio Frequency
Identification) products in North America. ET LLC had no revenues or operations
through June 30, 2005.
In August 2005, the Company entered into a joint venture with Xact Resources
International, Inc. ("Xact Resources"), a privately held company. The Company
purchased a 50% equity interest in the joint venture, BioAgra, LLC ("BioAgra")
(a Georgia limited liability company) for $905,000 in cash (which includes the
$405,000 advanced to Xact Resources as of June 30, 2005) and a note payable of
$595,000, which was paid in full on September 15, 2005. BioAgra is to
manufacture and sell a beta glucan product, YBG-2000, to be used as a
replacement for hormone growth steroids and antibiotics in products such as
poultry feed.
Currently, BioAgra is in the process of constructing the production line.
BioAgra expects to begin producing and shipping product at the beginning of
2006. As the production line is being completed, management of BioAgra is
developing marketing plans for the sale and distribution of the product,
marketing strategies and hiring administrative and manufacturing staff.
Additionally, the Company entered into an agreement with Arizcan Properties,
Ltd. ("Arizcan") by which the Company will pay to Arizcan 20% of the cash
distributions paid to the Company by and from BioAgra, until such time as
Arizcan shall be paid $800,000.
F-9
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS:
The preparation of the 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of the Company's cash and cash equivalents, notes receivable,
accounts payable, other liabilities and notes payable approximate their carrying
amounts due to the short maturities of these instruments.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
DEFERRED CONSULTING COSTS:
In June 2005, the Company entered into a twelve-month consulting services
agreement with a third party, in which this party agreed to provide public and
investor relation services and general business services for the twelve-month
term of the agreement. Compensation consisted of 1,000,000 shares of the
Company's restricted common stock with a market value of approximately $90,000
(based on the closing market price of $0.09 per share at the date the
transaction was entered into). The deferred cost is being amortized on a
straight-line basis over the twelve-month period from the date of the agreement.
During the year ended June 30, 2005, $7,500 was expensed.
AVAILABLE FOR SALE SECURITIES
Available for sale securities consist of 1,180 shares of common stock of
Intercell International Corporation ("Intercell"). These securities are carried
at estimated fair value ($12 at June 30, 2005) based upon quoted market prices,
and are included in other long-term assets in the Company's June 30, 2005
consolidated balance sheet. Unrealized gains and losses are computed on the
basis of specific identification and are reported as a separate component of
comprehensive income (loss), included as a separate item in shareholders'
equity. The Company reported a decrease in the unrealized loss on available for
sale securities of $379 in 2005 and $141 in 2004. At June 30, 2005, the
unrealized loss on available for sale securities was $12. Realized gains,
realized losses, and declines in value, judged to be other-than-temporary, are
included in other income (expense). During the years ended June 30, 2005 and
2004, the Company did not sell any available for sale securities.
F-10
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
IMPAIRMENT OF INTELLECTUAL PROPERTY RIGHTS AND PATENT AND TRADEMARK
APPLICATIONS:
During the year ended June 30, 2004, the Company had recorded intellectual
property rights and patent and trademark applications. During the year ended
June 30, 2004, the intellectual property was amortized using a useful life of
2.5 years, which was consistent with the remaining average patent protection
period of the remaining intellectual property.
During the fourth quarter ended June 30, 2004, the Company made a decision to
abandon its intellectual property rights, patents and patent applications, and
trademarks. This decision was based on factors including the Company's
evaluation of past and current operating results, and potential changes in the
Company's business plan, which involve investigating potential acquisition
candidates outside of the technology industry (Note 2). As a result of this
decision, the Company recorded an impairment charge of $608,061 in the fourth
quarter ended June 30, 2004.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation expense is provided by
use of accelerated and straight-line methods over the estimated useful lives of
the assets, which range from five to seven years.
REVENUE RECOGNITION:
Revenues from the sales of product are recognized at time of shipment. Revenues
are deferred if significant future obligations are to be fulfilled or if
collection is not probable. At June 30, 2005, there were no deferred revenues
related to contract services in progress.
The Company grants credit, without collateral, to its customers. Management
reviews trade receivables on an ongoing basis to determine if any receivables
will potentially be uncollectible. The Company includes trade receivable
balances that are determined to be uncollectible in an overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
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.
F-11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, allows companies to choose whether to account for employee
stock-based compensation on a fair value method, or to continue accounting for
such compensation under the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The Company has chosen to continue to account for employee stock-based
compensation using APB 25.
Had compensation cost for the Company's stock plans been determined based on
fair value at the grant dates for awards under the plans consistent with the
method prescribed under SFAS No. 123, the Company's net loss and net loss per
share would have changed to the pro forma amounts indicated below:
2005 2004
----------- -----------
Net loss, as reported $ (997,616) (1,558,083)
Total stock-based employee compensation
expense determined under fair value
based method for all awards - -
----------- -----------
Net loss, pro forma $( 997,616) (1,558,083)
=========== ===========
Net loss per share as reported $ (0.01) (0.02)
Net loss per share pro forma $ (0.01) (0.02)
No options were granted during the years ended June 30, 2005 and 2004.
FOREIGN CURRENCY TRANSLATION:
The financial statements of the Company's foreign equity investments
(subsidiaries in 2004) are measured using the local currency (the Euro) as the
functional currency. Assets and liabilities of the entities are translated at
exchange rates as of the balance sheet date. Revenues and expenses are
translated at average rates of exchange in effect during the period. The
resulting cumulative translation adjustments have been recorded as a component
of comprehensive income (loss), included as a separate item in shareholders'
equity.
The cumulative translation adjustment was approximately $123,000 at June 30,
2005 and 2004. In June 2004, a $74,814 reduction of other comprehensive income
to net income was recorded and recognized as a component of gain on discontinued
operations as a result of the liquidation of NCT.
FOREIGN CURRENCY TRANSACTIONS:
Gains and losses from foreign currency transactions are included in net income
(loss). Foreign currency transaction gains and losses were not significant
during the years ended June 30, 2005 and 2004.
F-12
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
COMPREHENSIVE INCOME (LOSS):
SFAS No. 130, Reporting Comprehensive Income, requires the reporting and display
of comprehensive income and its components. SFAS No. 130 requires unrealized
gains and losses on the Company's foreign currency translation adjustments to be
included in comprehensive income (loss).
LOSS PER SHARE:
SFAS No. 128, Earnings per Share, requires dual presentation of basic and
diluted earnings or loss per share (EPS) with a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Loss per share of common stock is computed based on the average number of common
shares outstanding during the year. Stock options and warrants are not
considered in the calculation, as the impact of the potential common shares
(76,181,777 shares at June 30, 2005 and 77,381,777 shares at June 30, 2004)
would be to decrease loss per share. Therefore, diluted loss per share is
equivalent to basic loss per share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), Share-Based Payment, which addresses the accounting for share-based
payment transactions. SFAS No. 123(R) eliminates the ability to account for
share-based compensation transactions using APB 25, and generally requires
instead that such transactions be accounted and recognized in the statement of
operations based on their fair value. SFAS No. 123(R) will be effective for
public companies that file as small business issuers as of the first interim or
annual reporting period that begins after December 15, 2005. The Company is
currently evaluating the provisions of this standard. Depending upon the number
and terms of options that may be granted in future periods, the implementation
of this standard could have a significant impact on the Company's financial
position and results of operations in future periods.
F-13
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision
to SFAS Interpretation No. 46, Consolidation of Variable Interest Entities. FIN
46R clarifies some of the provisions of FIN 46 and exempts certain entities from
its requirements. FIN 46R requires a variable interest entity 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. FIN 46R also requires disclosures
about variable interest entities that a company is not required to consolidate
but in which it has a significant variable interest. FIN 46R became effective
for variable interest entities or potential variable interest entities for
periods ending after December 15, 2003 for public companies (other than small
business issuers), and became effective by the end of the first annual reporting
period ending after December 15, 2004 for companies that are small business
issuers. FIN 46R did not have an impact on the Company's financial position or
results of operations.
2. GOING CONCERN AND MANAGEMENT'S PLANS:
The Company's financial statements for the year ended June 30, 2005 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 $997,616 for the year ended June
30, 2005, and an accumulated deficit of $23,629,319 as of June 30, 2005. The
Company did not recognize any revenues from its PI technology during the year
ended June 30, 2005. The Company's subsidiary NCT was dissolved in June 2004 and
in December 2003, the Company sold a controlling 51% interest in EPT. In
addition, the Company has abandoned and recorded an impairment to its
intellectual property.
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.
In August 2005, the Company was able to raise $1,535,000 through the exercise of
30,700,000 warrants with an exercise price of $0.05 per share. The Company
subsequently purchased a 50% equity investment in the BioAgra joint venture for
$905,000 (which includes the $405,000 advanced to Xact Resources as of June 30,
2005) cash and a note payable of $595,000, which was paid in full in September
2005. The Company also entered into an agreement with Arizcan Properties, Ltd.
("Arizcan") by which the Company will pay to Arizcan 20% of the cash
distributions paid to the Company by and from BioAgra, until such time as
Arizcan shall be paid $800,000.
In September 2005, the Company executed a subscription agreement to sell shares
of the Company's preferred stock with Arizcan. The sole director of Arizcan is
related to a board member of Intercell. The Subscription Agreement provides for
the sale of 200,000 shares of a Class A 8% cumulative and participating
preferred shares with a sale's price of $7.50 per share. The preferred shares
are to be convertible into 60% of the Company's issued and outstanding
post-split shares of the Company's common stock on the date of conversion.
Additionally, the Company intends to change its corporate name and most likely
to institute a reverse split in connection with recent business events.
F-14
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
Currently, the Company does not have a revolving loan agreement with any
financial institution, nor can the Company provide any assurance it will be able
to enter into any such agreement in the future, or be able to raise funds
through a further issuance of debt or equity in the Company.
3. DISCONTINUED OPERATIONS:
On April 1, 2003, NCT filed insolvency with the Courts of Munich, Germany. The
insolvency filing was necessary in order to comply with specific German legal
requirements. In June 2004, NCT completed its plan of self-liquidation, and the
German court legally dissolved NCT.
At June 30, 2005, NCT has no remaining assets or liabilities. NCT's revenues
for the years ended June 30, 2005 and 2004 as reported in discontinued
operations, were $0. The Company recorded a $454,882 gain on the disposal of
NCT in 2004, which was primarily due to the extinguishment of NCT liabilities
and gains recognized from the sales of equipment. NCT did not incur any income
taxes during the periods presented.
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 equity investment (EPT) operations are located in Germany.
EPT transactions are conducted in currencies other than the U.S. dollar (the
currency into which 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.
5. NOTES AND ADVANCES RECEIVABLE:
Through June 30, 2005, the Company advanced a total of $405,000 to Xact
Resources, which was applied to the August 2005 purchase of the 50% equity
interest in the joint venture, BioAgra with Xact Resources.
F-15
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
In December 2004, the Company loaned $35,000 to Intercell in return for an
unsecured, 7% promissory note, due in December 2005. The loan was made in order
to assist Intercell in its efforts to support operations. From September 30,
2004 to March 17, 2005, Mr. Metzinger, the President and Chief Executive Officer
of the Company, served as the Chief Executive Officer of Intercell. The
Company's Chief Financial Officer also serves as the Chief Financial Officer of
Intercell. On March 16, 2005, Intercell filed for protection under Chapter 11
of the U.S. Bankruptcy Laws. The Company does not believe that it will be able
to fully collect this receivable and during the third quarter of the year ended
June 30, 2005, recorded an allowance of $35,000 in connection with the note
receivable.
In November 2004, the Company loaned $314,000 to Arizcan. In exchange for the
loan, the Company received an unsecured, 7% promissory note, due on October 31,
2005. The funds were loaned to facilitate Arizcan's purchase of an option from
certain of the Company's warrant holders, to initiate the exercise of certain
existing warrants to purchase up to 15,700,000 shares of the Company's common
stock. The warrants were initially issued as part of a January 2004 equity
placement (Note 8). In June 2005, the Company received a payment of $50,000,
which included interest of $11,442. In August 2005, Arizcan exercised its option
on all 15,700,000 shares (Note 8).
6. INVESTMENTS IN AFFILIATES:
INVESTMENT IN EPT:
On December 11, 2003, a German entity, formed by former employees of EPT,
purchased a controlling 51% equity interest in EPT in exchange for $98,000, of
which $62,787 has been received through June 30, 2005. 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 ($159,642 at June 30, 2005) is adjusted to recognize the Company's
proportionate share of EPT's income (loss) each period.
F-16
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
Financial information of EPT as of June 30, 2005, and for the year ended June
30, 2005 and the period from December 11, 2003 through June 30, 2004 is as
follows:
June 30, 2005
--------------
Assets:
Current assets(1) $ 302,189
Equipment 188,622
--------------
Total assets $ 490,811
==============
Liabilities and members' equity:
Current liabilities(2) $ 362,496
Members' equity 128,315
--------------
Total liabilities and members' equity $ 490,811
==============
(1) Current assets include receivables in the amount of $177,372 due
from the 51% owner of EPT.
(2) Current liabilities include a payable of $60,723 to the 51% owner
of EPT.
December 11, 2003
Year ended through
June 30,2005 June 30, 2004
-------------- -------------------
Revenues(1) $ 586,480 $ 42,143
Expenses(2) (676,222) (144,094)
-------------- -------------------
Net loss $ (89,742) $ (101,951)
============== ===================
(1)Revenues include $570,584 and $32,180, respectively, of sales to
the 51% owner of EPT for each period presented.
(2)Expenses include $60,723 and $0, respectively, of charges paid to
the 51% owner of EPT for each period presented.
Pro forma results of the Company's operations for the fiscal year ended June 30,
2004, assuming the deconsolidation of EPT occurred as of July 1, 2003, are as
follows:
Revenues $ 5,809
Operating expenses $(1,869,029)
Net loss $(1,427,650)
F-17
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
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 a director of the Company. The name of the joint venture was Scimaxx
Solutions, LLC (Scimaxx Solutions, a Colorado Limited Liability company formed
in September 2003). The purpose of the joint venture was 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
was received. The Company has a 49% voting interest in the joint venture. The
Company determined that Scimaxx LLC was the controlling financial interest
holder and therefore, the Company has accounted for its investment in Scimaxx
Solutions as an equity method investment.
During the third quarter of the fiscal year ended June 30, 2005, the Company
made the decision to impair the value of its investment in Scimaxx Solutions to
$0. In performing the quarterly assessment, management considered the
operational history and status of the joint venture, combined with cash flow
projections and other operating information. As a result of this decision, the
Company recorded an impairment charge of $63,544, which is included in equity
losses of affiliates.
Unaudited financial information of Scimaxx Solutions as of June 30, 2005, and
for the year ended June 30, 2005 and the period from September 15, 2003
(inception) through June 30, 2004, is as follows:
June 30, 2005
---------------
Assets:
Current assets $ 76
Equipment 70,455
---------------
Total assets $ 70,531
===============
Liabilities and members' equity:
Current liabilities $ 73,295
Members' equity (2,764)
---------------
Total liabilities and members' equity $ 70,531
===============
F-18
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
September 15, 2003
Year ended through
June 30, 2005 June 30, 2004
----------------- --------------------
Revenues $ 5,773 $ 17,458
Expenses (80,781) (245,850)
----------------- --------------------
Net loss $ (75,008) $ (228,392)
================= ====================
7. NOTES PAYABLE:
Related Parties:
In June 2005, an officer/director of the Company loaned $41,000 to the Company
in exchange for an unsecured, 5% note payable due in December 2005. In June
2005, the Company paid $336 plus accrued interest of $17. In August 2005, the
Company paid the remaining $40,664 plus accrued interest of $298.
In June 2003, an officer/director of the Company loaned $10,000 to the Company
in exchange for an unsecured, 7% note payable due in December 2003. In
September 2003, the same officer/director loaned the Company $30,000 in exchange
for an unsecured, 7% promissory note, due in September 2004. In January 2004,
the Company paid the $40,000 plus accrued interest of $1,247.
In September 2003, Intercell, an affiliate of the Company at the time, loaned
the Company $35,000 in exchange for an unsecured, 7% promissory note due in
September 2004. In November 2003, Intercell loaned the Company $100,000 in
exchange for a 7%, promissory note due in November 2004. This promissory note
was collateralized by an assignment of a 51% interest in the proceeds, if any,
the Company may have received in connection with the Financing Agreement
litigation (Note 9). In January 2004, the Company paid the $135,000, plus
accrued interest of $2,493.
F-19
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
Other:
In June 2005, an unrelated third party loaned the Company $150,000 in exchange
for an unsecured, promissory note due in September 2005 with interest at 15% per
quarter and 2,000,000 shares of the Company's restricted common stock (1,000,000
shares were issued in June 2005 and the remaining 1,000,000 shares were issued
in July 2005). At the date of issuance, the common stock had a market value of
$180,000 (based on the closing market price of $0.09 per share on the date of
the transaction). The relative fair value of the common stock ($81,718) was
accounted for as a discount applied against the face amount of the note. The
discount is being amortized over the term of the promissory note. The effective
interest rate on this note is 54%. On June 30, 2005, the Company recognized
$2,000 of accrued interest and amortized $7,272 of the discount as additional
interest expense. On September 8, 2005, the Company paid the $150,000, plus
accrued interest of $22,500. At that time the remaining discount of $74,446 was
fully amortized to interest expense.
On June 30, 2005, an unrelated third party loaned the Company $25,000 in
exchange for an unsecured, 8% promissory note due in December 2005 and 1,500,000
shares of the Company's restricted common stock which were issued in July 2005.
At the date of issuance, the common stock had a market value of $150,000 (based
on the closing market price of $0.10 per share on the date of the transaction).
The relative fair value of the common stock ($21,428) was accounted for as a
discount against the face amount of the note. The discount is being amortized
over the term of the promissory note as additional interest expense. The
effective interest rate on this note is 85%. As the promissory note was issued
on June 30, 2005, the Company did not recognize any interest expense. On August
8, 2005, the Company paid the $25,000, plus accrued interest of $208. At that
time the discount of $21,428 was fully amortized to interest expense.
In July and August 2005, unrelated parties loaned the Company a total of
$150,000 in exchange for unsecured, 8% promissory notes due in December 2005 and
6,600,000 shares of the Company's restricted common stock. The common stock had
an aggregate market value of $574,000 (based on the closing market prices which
ranged from $0.08 to $0.09 per share at the date of the transaction). The
relative fair value of the common stock ($117,786) was accounted for as a
discount applied against the face amount the promissory notes and is to be
amortized over the terms of the notes. On August 8, 2005, the Company paid the
$150,000 plus accrued interest of $1,132. At that time the discounts totaling
$117,786 were fully amortized to interest expense. The approximate effective
interest rate on these notes is 79%.
F-20
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
In 2004, the Company converted vendor payables of $92,100 into an unsecured,
non-interest bearing note payable which was repaid in March 2005. This vendor
along with one other vendor agreed to forgive $52,500 of the liabilities owed,
and as a result the Company recognized a gain on the extinguishment of
liabilities in 2004.
8. SHAREHOLDERS' EQUITY:
COMMON STOCK:
2005 Transactions:
In November 2004, the Company issued 1,200,000 shares of common stock upon the
exercise of warrants. The Company received cash proceeds of $112,800 (net of
$7,200 of offering costs).
In June 2005, the Company issued 1,000,000 shares of its restricted common stock
as consideration for a twelve-month consulting agreement. These shares of
common stock had a market value of $90,000.
In June 2005, in connection with the issuance of a $150,000 promissory note, the
Company agreed to issue 2,000,000 shares of its restricted common stock, valued
at $81,718, of which 1,000,000 shares were issued in June 2005, and 1,000,000
shares were issued in July 2005.
In June 2005, in connection with the issuance of a $25,000 promissory note, the
Company agreed to issue 1,500,000 shares of its restricted common stock, which
were issued in July 2005. The shares were valued at $21,428.
In June 2005, in connection with the Company's financing efforts, the Company
committed to issuing 1,000,000 shares of its restricted common stock to an
unrelated third party. The market value of the shares was $90,000 (based on a
closing market price of $0.09 per share at the date of the transaction). The
Company recognized $90,000 of expense in June 2005 and recorded a liability of
$90,000 at June 30, 2005. The shares were issued in July 2005.
In July and August 2005, the Company issued a total of 6,600,000 shares of its
restricted common stock in connection with the issuance of promissory notes
totaling $150,000. These shares were valued at $117,786.
In August 2005, the Company issued 30,700,000 shares of its common stock in
connection with the exercise of warrants for $1,535,000 in cash. (Note 8 -
Warrants).
F-21
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
2004 Transactions:
On January 20, 2004, the Company sold 20,000,000 units at a price of $0.10 per
unit for $1.8 million in cash, pursuant to a Securities Purchase Agreement (net
of $272,000 of offering costs, discussed below). A unit consists of (i) one
share of the Company's common stock, (ii) a warrant to purchase one share of
common stock at an exercise price of $0.10 per share, and (iii) a warrant to
purchase two shares of the Company's common stock at an exercise price of $0.25
per share. All warrants have an expiration date of January 20, 2009. As a
result of the sale, the Company issued 20,000,000 shares of its common stock,
warrants to purchase 20,000,000 shares of common stock at an exercise price of
$0.10 per share, and warrants to purchase 40,000,000 shares of common stock at
an exercise price of $0.25 per share.
In connection with the sale of the units, the placement agent received a fee
consisting of a cash payment equal to 3% of the gross proceeds from the
transaction ($60,000) and warrants to purchase 3% of the total number of shares
of common stock issued to the investors on the closing date. The Company issued
to the placement agent warrants to purchase 600,000 shares of common stock with
an exercise price of $0.10 per share. The warrants expire on January 20, 2009.
The placement agent is also entitled to receive an additional cash payment equal
to 3% of the gross proceeds, if any, received by the Company as a result of the
exercise of the $0.10 warrants and additional warrants to purchase 3% of the
total number of shares issued as a result of the exercise of the $0.10 warrants.
The Company also paid a $200,000 finders fee to a third party (the "finder") and
issued warrants to purchase 2,000,000 shares of common stock with an exercise
price of $0.10 per share. The warrants expire on January 20, 2009. This third
party is also entitled to receive an additional cash payment of 10% of the gross
proceeds, if any, received by the Company as a result of the exercise of the
$0.10 warrants and additional warrants to purchase 10% of the total number of
shares issued as a result of the exercise of the $0.10 warrants. The Company
also incurred an additional $12,000 of offering costs, primarily legal costs.
During the year ended June 30, 2004, the Company issued 3,850,000 shares of its
common stock upon the exercise of 3,850,000 warrants, which included 1,000,000
of the warrants issued to the finder as described above. The Company received
$347,950 cash (net of $37,050 of offering costs, of which $11,050 is accrued at
June 30, 2004) for the exercise. As described above, the Company granted to the
placement agent and finder, warrants purchasing an additional 370,500 shares.
The warrants are exercisable at $0.10 per share and expire January 20, 2009. The
Company also issued 185,064 of its common stock upon the cashless exercise of
403,333 warrants.
During the year ended June 30, 2004, the Company also sold 769,231 shares of
restricted common stock for cash of $100,000, and the Company issued 200,000
shares of restricted common stock in satisfaction of a $3,635 payable.
F-22
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
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:
2005 2004
--------------------- ---------------------
Weighted Weighted-
average average
exercise exercise
Shares price Shares price
--------- ---------- --------- ----------
Outstanding, beginning of
Year 8,787,524 $ 1.00 8,787,524 $ 1.00
Granted - - - -
Expired - - - -
Exercised - - - -
--------- ---------- --------- ----------
Outstanding, end of year 8,787,524 $ 1.00 8,787,524 $ 1.00
========= ========== ========= ==========
Options exercisable at
end of year 8,637,524 $ 1.00 8,537,524 $ 1.00
========= ========== ========= ==========
The following table summarizes information about stock options outstanding as of
June 30, 2005:
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 3.37 $ 0.32 3,255,000 $ 0.32
0.51 - 1.00 2,495,524 7.11 0.67 2,555,524 0.64
1.01 - 2.00 860,000 5.45 1.53 650,000 1.58
2.01 - 3.00 2,167,000 3.74 2.28 2,167,000 2.28
5.01 - 6.00 10,000 4.67 6.00 10,000 6.00
--------- ------------ --------------- --------- ----------
8,787,524 5.67 $ 1.00 8,637,524 $ 1.00
========= ============ =============== ========= ==========
F-23
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
Warrants:
At June 30, 2005, the following warrants to purchase common stock were
outstanding:
Number of common Exercise Expiration
shares covered by warrants price date
--------------------------- ------------ -----------------------
20,000 $ 1.25 August - September 2005
1,526,019 0.30 - 2.58 October - December 2005
75,000 0.30 - 0.36 January 2006
200,000 0.65 May 2006
200,000 1.25 January 2007
3,440,000 0.50 - 0.60 October - November 2007
1,333,334 0.15 April 2008
17,550,000 0.10 January 2009
40,000,000 0.15 January 2009
450,000 0.60 January 2010
---------------------------
64,794,353 (1)
===========================
(1) Does not include 2,600,000 of warrants that are issuable pursuant to the
securities purchase agreement described above.
No warrants were issued during the year ended June 30, 2005.
During the year ended June 30, 2005, warrants to purchase 1,200,000 shares of
common stock were exercised for net cash proceeds of $112,800 (net of commission
of $7,200).
In August 2005, warrants to purchase 30,700,000 shares of common stock were
exercised for cash proceeds of $1,535,000 in exchange for 30,700,000 shares of
common stock. The proceeds were used to purchase a 50% equity interest in the
BioAgra joint venture. The warrants exercise price was lowered from $0.10 and
$0.15 per share to $0.05 per share in connection with the exercise.
In August and September 2005, warrants to purchase 20,000 shares of common stock
expired.
During the year ended June 30, 2004, warrants to purchase 3,850,000 shares of
common stock were exercised for net cash proceeds of $347,950 (net of commission
of $37,050) in exchange for 3,850,000 shares of common stock. In addition,
warrants to purchase 403,333 shares of common stock were exercised on a cashless
basis in exchange for 185,064 shares of common stock.
F-24
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
During the year ended June 30, 2004, warrants to purchase 732,500 shares of
common stock with exercise prices ranging from $0.30 to $2.81 per share expired.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION:
Depository Trust Suit:
In May 2004, the Company filed suit against the Depository Trust and
Clearing Corporation ("DTCC"), the Depository Trust Company ("DTC"), and the
National Securities Clearing Corporation ("NSCC") in the Second Judicial
District Court of the County of Washoe, State of Nevada. The suit alleges
multiple claims under 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. The
Company was seeking damages in the amount of $25,000,000 and treble damages.
Responsive pleadings were filed by the defendants. On April 27, 2005, the court
granted a motion to dismiss the lawsuit. The Company has filed an appeal to
overturn the motion to dismiss the lawsuit.
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 and certain officers and
former board members of the Company, and a number of unrelated third parties.
The counterclaims allege violations of federal securities laws and other laws.
Harvest Court, LLC is seeking various forms of relief including compensatory and
punitive damages. Responsive pleadings have been filed and the litigation is
currently in the discovery stage.
F-25
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
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 all litigation and does not believe
the outcome of the litigation will have a material adverse effect on the
financial condition, results of operations or liquidity of the Company.
However, it is too early at this time to determine the ultimate outcome of these
matters.
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
----------- --------
2006 $ 83,401
2007 14,550
--------
$ 97,951
========
Aggregate rental expense in continuing operations under operating leases was
$113,380 and $96,969 for the years ended June 30, 2005 and 2004, respectively.
F-26
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Years Ended June 30, 2005 and 2004
10. INCOME TAXES:
The Company and its subsidiaries did not incur income tax expense for the years
ended June 30, 2005 and 2004. The reconciliation between taxes computed at the
statutory federal tax rate of 34% applied to the loss from continuing operations
and the effective tax rate for the years ended June 30, 2004 and 2003 is as
follows:
2005 2004
----------- ------------
Expected income tax benefit $ (339,000) (684,000)
Increase in valuation allowance 339,000 684,000
----------- ------------
$ - -
=========== ============
The tax effects of temporary differences that give rise to substantially all
deferred tax assets at June 30, 2005 are as follows:
Deferred tax assets:
Net operating loss $ 4,623,000
Intangible assets 207,000
Allowance for receivables 32,000
Less valuation allowance (4,862,000)
------------
Net deferred tax assets $ -
============
As of June 30, 2005, the Company has net operating loss carry forwards of
approximately $14,300,000, which expire between 2013 and 2025. 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.
11. FOREIGN AND DOMESTIC OPERATIONS:
Operating results and long-lived assets of continuing operations as of June 30,
2005 and for the years ended June 30, 2005 and 2004, by geographic area, are
presented in the table below. There were no revenues in 2005 from continuing
operations and no significant amounts of transfers between geographic areas in
2005 or 2004.
UNITED STATES GERMANY TOTAL
-------------- ------- -------
Revenues for year
ended June 30, 2004 $ 5,809 28,449 34,258
============== ======= =======
Long-lived assets at
June 30, 2005 $ 15,842 - 15,842
============== ======= =======
F-27