FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-19598-D
NANOPIERCE TECHNOLOGIES, INC.
-----------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 84-0992908
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Seventeenth Street, Suite 3580
Denver, Colorado 80202
(Address of principal executive offices)
Issuer's telephone number: (303) 592-1010
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--
As of May 2, 2000 there were 34,560,844 shares of the registrant's sole
class of common stock outstanding.
Transitional Small Business Disclosure Format Yes No X
--
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
PAGE
----
Independent Accountants' Report F-2
Condensed Consolidated Balance Sheet
March 31, 2000 F-3
Condensed Consolidated Statements of Operations
Three and nine months ended
March 31, 2000 and 1999 F-4
Condensed Consolidated Statements of Comprehensive
Income(Loss) - Three months and nine months ended
March 31, 2000 F-5
Condensed Consolidated Statement of Stockholders'
Equity (Deficit) Nine months ended March 31, 2000 F-6
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2000 and 1999 F-7 to F-8
Notes to Condensed Consolidated Financial Statements F-9 to F-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 1
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 4
ITEM 2. CHANGES IN SECURITIES 4
ITEM 6. EXHIBITS 7
SIGNATURES 8
LISTS OF EXHIBITS 9
F-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Nanopierce Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Nanopierce Technologies, Inc. and subsidiary as of March 31, 2000, and the
related condensed consolidated statements of operations and comprehensive income
(loss) for the three-month and nine-month periods then ended, and the
condensed consolidated statements of stockholders' equity (deficit) and cash
flows for the nine-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 9, 2000
F-2
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheet
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Current assets:
Cash $3,172,990
Prepaid expenses, advances and deposits 11,263
---------
Total current assets 3,184,253
---------
Property and equipment:
Equipment 28,662
Furniture and office equipment 38,439
---------
67,101
Less accumulated depreciation ( 6,606)
---------
Net property and equipment 60,495
Marketable securities 7,102
Intellectual property rights, net of accumulated
amortization of $209,315 790,685
---------
$4,042,535
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities:
Notes payable:
Related party $ 112,599
Accounts payable:
Related parties 4,727
Other 160,068
Accrued interest 34,504
---------
Total current liabilities 311,898
Convertible debentures 3,938,849
---------
Total liabilities 4,250,747
---------
Stockholders' equity (deficit):
Preferred stock, $.0001 par value; 5,000,000
shares authorized:
Series A; no shares issued and outstanding
Series B: maximum of 75,000 shares issuable; no
shares issued and outstanding
Series C: maximum of 700,000 shares issuable; no
shares issued and outstanding
Common stock, $.0001 par value; 100,000,000 shares
authorized, 34,435,791 shares issued and outstanding 3,444
Additional paid-in capital 7,774,578
Accumulated other comprehensive loss ( 9,611)
Deficit (7,852,812)
Receivable from Intercell Corporation ( 123,811)
---------
Total stockholders' equity (deficit) ( 208,212)
---------
$4,042,535
=========
<FN>
See notes to the condensed consolidated financial statements.
</TABLE>
F-3
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
Three and Nine Months Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31 March 31
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ - - - -
General and administrative:
Related parties - 19,303 - 124,303
Other 928,729 259,095 2,015,604 998,360
--------- ------- --------- ---------
Loss from operations ( 928,729) (278,398) (2,015,604) (1,122,663)
Other income(expenses):
Interest income and other 7,230 - 7,662 346
Interest expense:
Related party ( 1,396) ( 1,351) ( 8,882) ( 6,005)
Other ( 842,443) ( 1,243) ( 851,073) ( 3,765)
--------- ------- --------- ---------
Net loss (1,765,338) (280,992) (2,867,897) (1,132,087)
--------- ------- --------- ---------
Series A and B preferred
stock dividends - ( 70,216) - ( 160,842)
--------- ------- --------- ---------
Net loss applicable to
common shareholders $(1,765,338) (351,208) (2,867,897) (1,292,929)
========= ======= ========= =========
Net loss per share, basic
and diluted, applicable
to common shareholders $( .05) ( .02) ( .09) ( .10)
========= ======= ========= =========
Weighted average number of
common shares outstanding 34,217,425 15,414,955 32,030,727 13,487,172
========== ========== ========== ==========
<FN>
See notes to the condensed consolidated financial statements.
</TABLE>
F-4
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income(Loss)
Three and Nine Months Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
---------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(1,765,338) ( 280,992) (2,867,897) (1,132,087)
Unrealized gain on
securities 5,208 - 6,154 -
Foreign currency
translation
adjustments ( 16,713) - ( 16,713) -
--------- -------- --------- ---------
Comprehensive income(loss) $(1,776,843) ( 280,992) (2,878,456) (1,132,087)
========= ======== ========= =========
<FN>
See notes to the condensed consolidated financial statements.
</TABLE>
F-5
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
other Receivable Total
Additional comprehensive from stockholders'
Common stock paid-in income Accumulated equity
Shares Amount capital (loss) deficit Intercell (deficit)
------ ------ ------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
July 1, 1999 29,734,614 $2,973 5,452,255 948 (4,984,915) ( 69,182) 402,079
Common stock issued
for services 985,125 99 276,851 - - - 276,950
Common stock issued
for cash 1,369,911 137 332,613 - - - 332,750
Common stock issued
for note payable,
accrued interest
and accounts payable
due officers 565,934 57 152,745 - - - 152,802
Common stock issued
for exercised stock
options and warrants 1,156,207 116 49,804 - - - 49,920
Common stock issued
for notes payable
and convertible debt
and accrued interest 624,000 62 298,005 - - - 298,067
Warrants issued in
connection with notes
payable and financing - - 412,305 - - - 412,305
Beneficial conversion
feature of convertible
debentures - - 800,000 - - - 800,000
Increase in receivable
from Intercell - - - - - ( 54,629) ( 54,629)
Net loss - - - - (2,867,897) - (2,867,897)
Other comprehensive
income:
Change in unrealized
gain on securities - - - 6,154 - - 6,154
Foreign currency
translation
adjustments - - - (16,713) - - ( 16,713)
---------- ----- --------- ------ --------- ------- ---------
Balances,
March 31, 2000 34,435,791 $3,444 7,774,578 ( 9,611) (7,852,812) (123,811) ( 208,212)
========== ===== ========= ====== ========= ======= =========
<FN>
See notes to the condensed consolidated financial statements.
</TABLE>
F-6
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
---- ----
Cash flows from operating activities:
Net loss $(2,867,897) (1,132,087)
--------- ---------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Amortization expense 75,000 75,000
Depreciation 6,606 -
Amortization of discount on note receivable
and amortization of beneficial conversion feature 800,000 ( 345)
Expenses incurred in exchange for common
stock and warrants 698,622 312,000
Changes in operating assets and liabilities:
(Increase) decrease in prepaid expenses,
advances and deposits 428 ( 13,599)
Increase (decrease) in accounts payable
and accrued expenses:
Related parties 712 27,116
Other ( 7,372) 148,565
Increase in receivables from Intercell ( 54,629) ( 48,584)
--------- ---------
Total adjustments 1,519,367 500,153
--------- ---------
Net cash used in operating activities (1,348,530) ( 631,934)
--------- ---------
Cash flows from investing activities:
Increase in note receivable ( 44,100) ( 10,000)
Purchase of property and equipment ( 67,101) -
Advances to related party - ( 48,584)
Payments received on notes receivable 54,100 1,250
--------- ---------
Net cash used in investing activities ( 57,101) ( 57,334)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable and warrants:
Related party 9,787 -
Other 285,749 -
Proceeds from issuance of
convertible debentures and warrants 4,000,000 -
Payments on note payable ( 83,513) ( 169,000)
Proceeds from issuance of Series B
preferred stock - 660,000
Proceeds from exercise of stock options
and warrants 49,920 -
Proceeds from issuance of common stock 332,750 200,000
--------- ---------
Net cash provided by financing activities 4,594,693 691,000
--------- ---------
Effect of exchange rate changes on cash ( 16,713) -
--------- ---------
Net increase in cash 3,172,349 1,732
Cash, beginning of period 641 11
--------- ---------
Cash, end of period $3,172,990 1,743
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,553 -
========= =========
</TABLE>
(Continued)
F-7
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Supplemental disclosure of noncash investing and financing activities:
<S> <C> <C>
2000 1999
---- ----
Conversion of note payable and related
accruals - related party to common stock $ 152,802 -
Conversion of note payable and convertible debt
to common stock 298,067 -
<FN>
See notes to the condensed consolidated financial statements.
</TABLE>
F-8
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
1. Business, organization and summary of significant accounting policies:
- -------------------------------------------------------------------------
Presentation of Interim Information:
The accompanying consolidated financial statements include the accounts of
Nanopierce Technologies, Inc., a Nevada corporation (the Company), and its
wholly owned foreign subsidiary, Nanopierce Card Technologies GmbH, (NCT) which
was incorporated on January 19, 2000. All significant intercompany accounts and
transactions have been eliminated in consolidation. NCT activities through
March 31, 2000 consist primarily of marketing of the Company's technology.
In the opinion of the management of the Company, the accompanying unaudited
consolidated financial statements include all material adjustments, including
all normal recurring adjustments, considered necessary to present fairly the
financial position of and operating results for the periods presented. The
financial statements and notes are presented as permitted by Form 10-QSB, and do
not contain certain information included in the Company's last Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1999. It is the Company's
opinion that, when the interim statements are read in conjunction with the June
30, 1999 Annual Report on Form 10-KSB, the disclosures are adequate to make the
information presented not misleading. Interim results are not necessarily
indicative of results for a full year or any future period.
The Company's consolidated financial statements for the period ended March 31,
2000 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. For the nine months ended March 31, 2000, the
Company reported a net loss of $2,867,897 and a deficit of $7,852,812. The
Company has not recognized any revenues from its PI technology and the Company
has experienced difficulty and uncertainty in meeting its liquidity needs.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The independent auditors' report on the Company's financial
statements for the year ended June 30, 1999 included a "going concern"
explanatory paragraph, meaning the auditors also expressed 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.
To address its current cash flow concerns, during the three months ended March
31, 2000, the Company issued $4,000,000 of 6% Convertible debentures and
warrants to purchase 400,000 shares of the Company's common stock for an
aggregate purchase price of $4,000,000 (Note 4). On February 22, 2000 the
Company signed an agreement with an investment banker to act as exclusive agent
in a two year, $30,000,000 financing arrangement (Note 7). The Company is in
additional discussions with an investment broker and financial institutions
attempting to raise additional funds to support current and future operations.
This includes attempting to raise additional working capital through the sale of
additional capital stock or through the issuance of debt. Currently, 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 a further
issuance of debt or equity in the Company.
F-9
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
The Company believes that if additional financing can be completed, adequate
funding may then be available to support operations for the next twelve months.
The Company also believes that sales of its products and technology license
rights may provide sufficient funds to meet the Company's capital requirements.
Business:
The Company is engaged in the design, development and licensing of products
using its intellectual property, the PI Technology. The PI Technology consists
of patents, pending patent applications, patent applications in preparation,
trade secrets, trade names, and trademarks. The PI Technology improves
electrical, thermal and mechanical characteristics of electronic products. The
Company has designated and is commercializing its PI Technology as the
Nanopierce Connection System (NCS) and markets the PI Technology to companies in
various industries for a wide range of applications (Note 6). The intellectual
property is being amortized to expense using the straight-line method over 10
years. At each balance sheet date, management considers current market analysis
and appraisal of the PI Technology, along with projected operating information.
Based on its evaluation, management does not believe that there has been any
impairment through March 31, 2000.
Property and Equipment:
Property and equipment are stated at cost. Depreciation expense was provided by
use of the accelerated and straight-line methods over the estimated useful lives
of the assets, generally 3 to 10 years for equipment, furniture and office
equipment.
Business Risk:
The Company is subject to risks and uncertainties common to technology-based
companies, including rapid technological change, dependence on principle
products and third party technology, new product introductions and other
activities of competitors, dependence on key personnel, and limited operating
history.
Use of estimates in the financial statements:
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Foreign Currency Translation:
The financial statements of the Company's foreign subsidiary is measured using
the local currency (the Euro) as the functional currency. Assets and
liabilities of the subsidiary 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 stockholders' equity. Any foreign currency
transaction gains and losses are included in consolidated net income (loss).
F-10
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
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, warrants, convertible debt
and convertible preferred stock are not considered in the calculation, as the
impact of the potential common shares (18,034,713 shares at March 31, 2000 and
12,695,000 shares at March 31, 1999) would be to decrease loss per share.
Therefore, diluted loss per share is equivalent to basic loss per share.
Reclassification:
Certain amounts reported in the 1999 financial statements have been reclassified
to conform with the 2000 presentation.
2. Receivable from Intercell:
- -----------------------------
At March 31, 2000, the Company has a $123,811 receivable from Intercell
Corporation, a 26.7% shareholder of the Company, which is collateralized by
common stock of the Company owned by Intercell. Intercell has advised the
Company that it does not currently have the funds to repay the receivable.
Therefore, this receivable balance is classified as a reduction of shareholders'
equity at March 31, 2000.
3. Notes payable:
- -----------------
During the nine months ended March 31, 2000, the Company issued unsecured
promissory notes in the amount of $122,500. The notes were due in one year with
interest at ten percent. The Company issued detached warrants to purchase
857,500 shares of common stock in connection with the unsecured promissory notes
(Note 5). The detached warrants were valued at $18,400 using the Black-Scholes
pricing model and the resulting discount on the note of $18,400 was being
amortized to interest expense over one year until March 16, 2000 when all of the
notes were converted into 49,000 shares of common stock of the Company.
During the nine months ended March 31, 2000, the Company issued $130,000 of
promissory notes, convertible at $0.40 per share into common stock of the
Company. The conversion price represents the market price of the Company's
common stock on the date of issuance of the notes. The notes were converted on
January 20, 2000 into 325,000 shares of common stock.
F-11
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
4. Convertible Debentures:
- --------------------------
During the three months ended March 31, 2000, the Company issued $4,000,000 of
6% convertible debentures and warrants to purchase 400,000 shares of the
Company's common stock for an aggregate purchase price of $4,000,000. The
portion of the proceeds applicable to the warrants to purchase 400,000 shares
was $66,000. The debentures are due on January 10, 2002. The warrants expire
on January 10, 2003. The convertible debentures are convertible at the lessor
of $2.915 or 80% of the average of the three lowest daily closing bid prices of
the Company's common stock during the 30 trading days immediately preceding the
date on which the holder elects to convert the debentures. The intrinsic value
of the beneficial conversion feature of convertible debentures was $800,000 and
was charged to interest expense. In addition to the 400,000 warrants described
above, warrants to purchase 230,000 shares of the Company's common stock were
issued for services in connection with the debentures. The warrants to purchase
common stock are at an exercise price of $2.915 per share, the quoted market
price of the Company's common stock at the date of issue. The warrants to
purchase 230,000, exercisable over a ten-year period, shares were valued at
$37,950 and that amount has been included in general and administrative expense.
The convertible debentures place certain restrictions on the Company, including
the Company's ability to issue additional shares of common stock.
5. Common stock, stock options and warrants:
- --------------------------------------------
In October 1999, the Company increased its authorized common stock, $.0001 par
value, from 45,000,000 shares to 100,000,000 shares.
During the nine months ended March 31, 2000, the Company issued 985,125 shares
of common stock to third parties in exchange for services valued at $276,950,
based on the quoted market price of the Company's common stock on the date the
services were performed.
During the nine months ended March 31, 2000, the Company issued 1,369,911 shares
of common stock to accredited investors for $332,750. In October 1999, the
Company also issued 565,934 shares to two officers of the Company for partial
payment on a note payable in the amount of $94,602, accrued interest of $2,171
and accounts payable of $56,029.
During the nine months ended March 31, 2000, the Company issued 1,156,207 shares
of its common stock upon the exercise of stock options and warrants, and the
Company issued 624,000 shares of its common stock upon the conversion of notes
payable and convertible debt (including interest) in the amount of $298,067.
In September 1999, the Company issued 500,000 shares of its common stock as
collateral on a $50,000 loan. In March 2000, the Company cancelled 250,000 of
the 500,000 shares; the remaining 250,000 shares were in full payment of the
note and interest. The 250,000 shares issued are included in the 624,000 shares
described in the preceding paragraph.
During the nine months ended March 31, 2000, the Company granted stock options
to purchase 390,000 shares of common stock at exercise price of $0.40 to $6.00
per share to a director and employees of the Company. The option exercise
prices were based upon the quoted market prices on the dates of grant. The
stock options expire in the years 2009 and 2010.
F-12
<PAGE>
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Nine Months Ended March 31, 2000 and 1999
(Unaudited)
The Company issued warrants to acquire 857,500 shares of common stock at $0.40
to $1.50 per share in connection with $122,500 of unsecured promissory notes
issued during the nine months ended March 31, 2000 as described in Note 3. The
warrants may be exercised during a three-year period. The detached warrants
were valued at $18,400. In January 2000, the Company issued restricted finance
warrants to two entities for services in assisting the Company to obtain
financing. The restricted finance warrants cover 10,000,000 shares of common
stock, are exercisable at $0.51 per share and expire on December 10, 2004. The
exercise price represents the market price of common stock on the date of
issuance of the warrants. The restricted finance warrants were valued at
$290,000 using the Black-Scholes pricing model, and that amount was charged to
general and administrative expense. The Company issued warrants to acquire
630,000 shares of common stock at $2.915 per share in connection with the
$4,000,000 of convertible debentures as described in Note 4. The exercise price
represents the market price of the Company's common stock on the date of
issuance of the warrants. These warrants were valued at $103,905 using the
Black-Scholes pricing model, of which $37,950 was charged to general and
administrative expense.
6. License Agreements:
- ----------------------
The Company has license agreements with third parties, which allow the third
parties to utilize defined aspects of the intellectual property rights in return
for royalty fees. All but two license agreements are idle. Royalties and
maintenance payments from the two license agreements have been held in an escrow
account, outside of the Company's control, pending the resolution of certain
legal issues. On November 30, 1999, the Company obtained a Court Order of
Declaratory Judgment that it has incontestable and exclusive ownership of all
patents, patent applications, licenses, trade names, trademarks, trade secrets
and other intellectual properties relating to the PI Technology. As part of the
Court Order, the original inventor of the technology is to receive all accrued
and future royalty payments from the licenses which were outstanding as of
September 3, 1996. The Company also granted to the original inventor of the
technology a two-year, royalty bearing, non-exclusive license to use the PI
Technology for certain specified applications. The Company has not recorded any
receivables or revenues associated with the accrued royalty payments on licenses
which were outstanding as of September 3, 1996. The original inventor filed a
Motion of Appeal on March 29, 2000 regarding the Declaratory Judgment. The
Company believes that the resolution of this litigation will not have a material
adverse impact on either results of operations, financial position, or cash
flows.
7. Proposed Financing:
- ----------------------
On February 22, 2000, the Company signed an agreement with an investment broker
to act as exclusive agent in a two year $30,000,000 financing arrangement. The
terms of the financing are to be based on existing market conditions. The
Company cannot provide any assurance that the financing will be completed.
F-13
<PAGE>
Item 2 - Management's Discussion and Analysis
The statements contained in this Form 10-QSB, if not historical, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and involve risks and uncertainties that could
otherwise, or other expectations described in such forward-looking statements.
Any forward-looking statement or statements speak only as of the date on which
such statements were made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statements are made or reflect the occurrence of unanticipated
events. Therefore, forward-looking statements should not be relied upon as
prediction of actual future results.
The independent auditors' report on the Company's financial statements for
the year ended June 30, 1999 included a "going concern" explanatory paragraph,
meaning the auditors have expressed 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 of the audited financial statements contained in the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1999.
On January 11, 2000, the Company issued $1,500,000 of 6% convertible debentures
and warrants to purchase 150,000 shares of the Company's common stock. On
March 16, 2000, the Company issued $2,500,000 of 6% convertible debentures and
warrants to purchase 250,000 shares of the Company's common stock. The Company
issued 230,000 in warrants to EBI Securities, Inc. exercisable at $2.915 with a
term of 10 years for their services in raising the $4,000,000. The Company
filed a Registration Statement on Form S-3 registering such securities with the
SEC on February 21, 2000. The Registration Statement was declared effective on
March 16, 2000.
In February, 2000, the Company signed a letter agreement with Ladenburg,
Thalmann to raise $30,000,000. The $30,000,000 would be available to the
Company in amounts of $3,000,000 every twenty-two days. Common stock would
be used to pay for the funds, discounted at 10% of the five day close. The
Company has filed a Registration Statement on Form S-3 with the SEC on April 21,
2000 registering equity at the value of $30,000,000.
On January 19, 2000, the Company formed its wholly owned subsidiary Nanopierce
Card Technologies, GmbH, in Munich, Germany. The subsidiary will handle the
marketing of the Company's PI Technology in the international market. The
Company provided equity of $500,000 to its wholly owned subsidiary. During the
quarter ended March 31, 2000, the subsidiary has opened an office in Munich and
has purchased equipment. Through March 31, 2000, the subsidiary has only
incurred general and administrative expenses.
Results of operations
- ---------------------
The Company had no revenues for the three and nine months ended March 31,
2000 and 1999.
1
<PAGE>
General and administrative expenses increased to $928,729 for the three
months ended March 31, 2000 and to $2,015,604 for the nine months ended March
31, 2000, from $278,398 for the three months ended March 31, 1999 and $1,122,663
for the nine months ended March 31, 1999. This increase is due in part to the
following: (a) financing costs, including commissions, of approximately $831,000
in the nine months ended March 31, 2000 and approximately $458,000 for the three
months ended March 31, 2000 incurred in connection with the various financing
arrangements of the Company (there were no similar costs in the 1999 period);
(b) accounting and audit fees increased from $34,057 in the 1999 period to
$73,104 in the 2000 period; (c) payroll expense increased from approximately
$191,000 in the 1999 period to approximately $395,000 in the 2000 period as the
result of additional employees; (d) expense for the nine months ended March 31,
2000 of $36,116 related to the settlement of the DiFrancesco Litigation; and (e)
a general increase in most expenditures as a result of an increase in marketing
activities. Legal expenses decreased by approximately 19% ($19,000) from
approximately $183,000 for the nine months ended March 31, 1999 to approximately
$164,000 for the nine months ended March 31, 2000. Public relations expenses
decreased by approximately 44% ($144,000) from approximately $327,000 for the
nine months ended March 31, 1999 to approximately $183,000 for the nine months
ended March 31, 2000. Interest expense increased from the 1999 periods to the
2000 periods (an increase of $841,200 for the three month periods and $847,308
for the nine month periods) as a result of the additional debt of the Company
and the $800,000 intrinsic value of the beneficial conversion feature of the
convertible debentures.
The Company experienced net losses of $1,765,338 and $2,867,897 for the
three months ended and the nine months ended March 31, 2000, respectively,
compared to net losses of $280,992 and $1,132,087 for the three months ended and
nine months ended March 31, 1999.
Liquidity and financial condition
- ---------------------------------
The Company has working capital of $2,872,355 at March 31, 2000 compared to
a working capital deficit of $474,554 at June 30, 1999.
The Company's current liabilities decreased to $311,898 at March 31, 2000
compared to $486,886 at June 30, 1999. The decrease was due in part to the
conversion of approximately $298,000 of notes payable into common stock and a
reduction of accounts payable made possible by the proceeds from the sale of
$4,000,000 of convertible debentures and warrants. The debentures are due in
January, 2002. A $130,577 Promissory Note payable to the President and CEO of
the Company was partially paid, including interest, through the issuance of
358,420 shares of the Company's common stock.
2
<PAGE>
The Company's current operations are not generating positive cash flow. In
order to meet operating needs, the Company entered into the following financial
arrangements in the nine months ended March 31, 2000: (a) $332,750 was raised
through the issuance of 1,369,911 shares of the Company's common stock; (b)
$122,500 through the issuance of Promissory Notes with detached warrants
exercisable for 857,500 shares of the Company's common stock; (c) $130,000
through the issuance of promissory notes convertible at $0.40 per share into
common stock of the Company; (d) approximately $100,000 in connection with a
December 1999 agreement with a third party, who had originally agreed to
purchase from the Company up to $1,000,000 of previously unissued, restricted
common shares, in $50,000 increments, at the lesser of $1.00 per share or 77.5%
of the lowest closing bid price of the common stock during the five trading days
immediately preceding the conversion date; and (e) in January and March, 2000,
the Company issued $4,000,000 principal amount of the Company's 6% convertible
debentures and warrants to purchase 400,000 shares of the Company's common stock
for an aggregate purchase price of $4,000,000. The Company believes that
completion of the February, 2000 agreement for $30,000,000 of equity financing
will provide the Company with an adequate amount of cash reserves to fund the
Company's plan of operations for the ensuing twelve months.
The Company, in the Spring of 1999, signed various agreements with
companies both overseas and in the States. The agreements are to apply the
Company's NCS (Nanopierce Connection System) technology to various products,
mainly in the smart card/smart label industry. Management is pursuing the
development of further similar agreements both nationally and internationally
with companies not only in the smart card/smart label industry, but other
industries, as well. Further, the Company is working to advance the agreements
already in place.
The Company is continuing to look for additional financing through the
marketing of its intellectual property through the pursuit of licensing, joint
venture, co-manufacturing or other similar arrangement with connector
manufacturers. The failure to secure such a relationship will result in the
Company requiring substantial additional capital and resources to bring its
products to market. To the extent the Company's operations are not sufficient
to fund the Company's capital requirements, the Company may enter into a
revolving loan agreement with a financial institution or attempt to raise
capital through the sale of additional capital stock or through the issuance of
debt. At the present time, the Company does not have a revolving loan agreement
with any financial institution nor can the Company provide any assurance that it
will be able to enter into any such agreement in the future or be able to raise
funds through the further issuance of debt or equity in the Company. The
Company continues to evaluate additional merger and acquisition opportunities.
Recently issued accounting pronouncement:
- ----------------------------------------
In June 1998, the Financial Accounting Standard Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. this
statement, as amended by SFAS No. 137, is effective for fiscal years beginning
after June 15, 2000. Currently, the Company does not have any derivative
financial instruments and does not participate in hedging activities; therefore,
management believes that SFAS No. 133 will not impact the Company's financial
statements.
3
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company has license agreements with third parties, which allow the
third parties to utilize defined aspects of the intellectual property rights in
return for royalty fees. All but two license agreements are idle. Royalties
and maintenance payments from the two license agreements have been held in an
escrow account, outside the Company's control, pending the resolution of certain
issues. On November 30, 1999, the Company obtained a Court Order of Declaratory
Judgment that it has incontestable and exclusive ownership of all patents,
patent applications, licenses, trade names, trademarks, trade secrets and other
intellectual properties relating to the PI Technology. As part of the Court
Order, the original inventor of the technology is to receive all accrued and
future royalty payments from the licenses which were outstanding as of September
3, 1996. The Company also granted to the original inventor of the technology a
two-year, royalty bearing, non-exclusive license to use the PI Technology for
certain specified applications. The original inventor filed a Motion of Appeal
on March 29, 2000 regarding the Declaratory Judgment. The Company believes that
the ultimate disposition of legal matters will not have a material adverse
impact on results of operations, financial position, or cash flows.
Item 2 - Changes in Securities
The Company made the following unregistered sales of its securities from
June 30, 1999, to March 31, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date Title of Amount of
of Sale Securities Securities Consideration Purchaser
- ------- ---------- ---------- ------------- ---------
7/14/99 Common Stock 300,000 Financing Mallory Smith, CPA
7/15/99 Common Stock 15,000 Services Kathy B. Leigh
7/20/99 Common Stock 30,000 Financing Terrence E. Dooher
7/20/99 Common Stock 15,000 Financing Dennis Ferraro
7/20/99 Common Stock 10,000 Financing David Ferraro
7/20/99 Common Stock 25,000 Financing Dennis S. McGuire
7/22/99 Common Stock 25,000 Financing Paul DeMott
7/22/99 Common Stock 25,000 Financing Ronald J. Damiana
7/22/99 Common Stock 55,000 Services Stan Richards
8/01/99 Common Stock 25,000 Financing Eric Foster
8/01/99 Common Stock 25,000 Financing Michael A. Curran
8/06/99 Common Stock 50,000 Services Thompson & Lowe, P.C.
8/17/99 Common Stock 10,000 Financing Leslie Smith
8/17/99 Common Stock 25,000 Financing R. Mark Richards
9/02/99 Common Stock 500,000 Collateral Nanopierce
Technologies, Inc.
9/15/99 Common Stock 25,000 Services Gemini Investments,
Ltd.
9/24/99 Common Stock 15,000 Services Kathy B. Leigh
10/18/99 Common Stock 455,934 Loan, Interest and Paul H. Metzinger
Other Advances
10/18/99 Common Stock 110,000 Compensation Due Dr. Herbert J. Neuhaus
10/26/99 Warrant to Acquire 140,000 Financing Gemini Investments
Common Stock
10/26/99 Warrant to Acquire 105,000 Financing SLK Joint Venture$
Common Stock
</TABLE>
4
<PAGE>
Item 2 - Changes in Securities (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date Title of Amount of
of Sale Securities Securities Consideration Purchaser
- ------- ---------- ---------- ------------- ---------
10/27/99 Warrant to Acquire 525,000 Financing Dennis Ferraro
Common Stock
10/27/99 Warrant to Acquire 70,000 Financing Kelly Pitts
Common Stock
10/27/99 Warrant to Acquire 70,000 Financing Dennis McGuire
Common Stock
10/29/99 Common Stock 40,000 Services Thompson & Lowe, P.C.
11/01/99 Stock Option 300,000 Service of Dr. Michael Wernie
Employee
11/01/99 Stock Option 15,000 Service of Michael Kober
Employee
11/01/99 Stock Option 15,000 Service of Karl-Heinz Kuhn
Employee
11/03/99 Common Stock 105,125 Financing Stanley Richards
Commissions
11/08/99 Warrant to Acquire 140,000 Financing Rodney Hock
Common Stock
11/22/99 Warrant to Acquire 70,000 Financing Larry Pisciotta
Common Stock
12/10/99 Stock Option 50,000 Service of K. Knight-McConnell
Employee
12/10/99 Warrant to Acquire 5,000,000 Financing Standard Financial
Common Stock Commissions Group
12/10/99 Warrant to Acquire 5,000,000 Financing Gemini Investments
Common Stock Commissions Ltd.
12/17/99 Warrant to Acquire 70,000 Financing Dennis McGuire
Common Stock
12/31/99 Common Stock 680,000 Services Standard Financial
Group
12/31/99 Common Stock 252,558 $50,000 Gemini Investments
12/31/99 Common Stock 252,558 $50,000 Gemini Investments
12/31/99 Common Stock 85,000 $29,750 Gemini Investments
12/31/99 Common Stock 132,397 $50,000 William J. Tannaz
1/04/00 Warrant to Acquire 70,000 Financing William Fitz
Common Stock
1/04/00 Warrant to Acquire 70,000 Financing Dennis McGuire
Common Stock
1/06/00 Common Stock 132,398 $50,000 William J. Tannaz
1/11/00 Warrant to Acquire 400,000 Financing Equinox Investors LLC
Common Stock
1/11/00 Warrant to Acquire 230,000 Financing EBI Securities
Common Stock Commissions Corporation
1/12/00 Common Stock 787,899 Option Exercise Zenith Petroleum Group
1/13/00 Common Stock 185,308 Option Exercise Barbara J. Drew
1/20/00 Common Stock 200,000 Promissory Note Growth International
Conversion
1/20/00 Common Stock 125,000 Promissory Note J Paul Consulting Corp
Conversion
2/29/00 Stock Option 10,000 Service of Bernhard Maier
Employee
</TABLE>
5
<PAGE>
Item 2 - Changes in Securities (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Date Title of Amount of
of Sale Securities Securities Consideration Purchaser
- --------------------------------------------------------------------------------------
3/14/00 Common Stock ( 500,000) Cancel Shares used for
Security on Promissory
Note
3/14/00 Common Stock 250,000 Promissory Note Gemini Investments
Conversion
3/16/00 Common Stock 4,000 Promissory Note William Fitz
Conversion
3/16/00 Common Stock 4,000 Promissory Note Dennis McGuire
Conversion
3/16/00 Common Stock 6,000 Promissory Note SLK Joint Venture
Conversion
3/16/00 Common Stock 8,000 Promissory Note Gemini Investments
Conversion
3/16/00 Common Stock 3,000 Promissory Note Dennis Ferraro
Conversion
3/16/00 Common Stock 4,000 Promissory Note Dennis McGuire
Conversion
3/16/00 Common Stock 4,000 Promissory Note Dennis McGuire
Conversion
3/16/00 Common Stock 4,000 Promissory Note Larry F. Pisciotta
Conversion
3/16/00 Common Stock 4,000 Promissory Note Kelly S. Pitts
Conversion
3/16/00 Common Stock 8,000 Promissory Note Rodney Hock
Conversion
3/23/00 Common Stock 133,000 Exercise Warrant Gemini Investments
3/29/00 Common Stock 50,000 Exercise Warrant Berliner Freiverkehr
</TABLE>
Exemptions from Registration Claimed
All of the sales by the Company of its unregistered securities were made by
the Company in reliance upon Section 4(2) of the Act. All of the individuals
and/or entities listed above that purchased the unregistered securities were all
known to the Company and its management, through pre-existing business
relationships, as long standing business associates, friends, and employees.
All purchasers were provided access to all material information, which they
requested, and all information necessary to verify such information and were
afforded access to management of the Company in connection with their purchases.
All purchasers of the unregistered securities acquired such securities for
investment and not with a view toward distribution, acknowledging such intent to
the Company. All certificates or agreements representing such securities that
were issued contained restrictive legends, prohibiting further transfer of the
certificates or agreements representing such securities, without such securities
either being first registered or otherwise exempt from registration in any
further resale or disposition.
6
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 11 Computation on net loss per share
Exhibit 27 Financial Data Schedule
(b) Reports:
None
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NANOPIERCE TECHNOLOGIES, INC.
(Registrant)
May 9, 2000 /s/ Paul H. Metzinger
---------------------
Paul H. Metzinger, President & CEO
May 9, 2000 /s/ Kristi J. Kampmann
----------------------
Kristi J. Kampmann, Chief Financial
Officer
8
<PAGE>
LIST OF EXHIBITS
PAGE
---
Exhibit 11 Computation of Net Loss Per Share 10
Exhibit 27 Financial Data Schedule 11
9
<PAGE>
EXHIBIT 11
NANOPIERCE TECHNOLOGIES, INC. AND SUBSIDIARY
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ---
<S> <C> <C> <C> <C>
Net loss $(1,765,338) ( 280,992) (2,867,897) (1,132,087)
Dividends on Series A and
B preferred stock - ( 70,216) - ( 160,842)
--------- --------- --------- ---------
Net loss applicable to
common shareholders $(1,765,338) ( 351,208) (2,867,897) (1,292,929)
========= ========= ========= =========
Weighted average number of
common shares outstanding 34,217,425 15,414,955 32,030,727 13,487,172
Common equivalent shares
representing shares issuable
upon exercise of outstanding
options and warrants - - - -
---------- ---------- ---------- ----------
34,217,425 15,414,955 32,030,727 13,487,172
========== ========== ========== ==========
Basic and diluted loss per
share applicable to common
shareholders $( .05) ( .02) ( .09) ( .10)
========= ========= ========= =========
</TABLE>
Stock options and warrants are not considered in the calculations as the impact
of the potential common shares (18,034,713 shares at March 31, 2000 and
12,695,000 shares at March 31, 1999) would be to decrease net loss per share.
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,172,990
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,184,253
<PP&E> 67,101
<DEPRECIATION> 6,606
<TOTAL-ASSETS> 4,042,535
<CURRENT-LIABILITIES> 311,898
<BONDS> 0
0
0
<COMMON> 3,444
<OTHER-SE> ( 211,656)
<TOTAL-LIABILITY-AND-EQUITY> 4,042,535
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,015,604
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 859,955
<INCOME-PRETAX> (2,867,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,867,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,867,897)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
