PART
II
The
following selected consolidated financial data has been derived from our
consolidated financial statements. The information below should be read in
conjuncture with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our Consolidated Financial Statements and related
notes. The following information is presented as of and for the period from
February 22, 2002 (date of inception) through December 31, 2002 and as of
and
for the years ended December 31, 2003 and 2004.
| |
|
|
|
| |
|
|
|
2003
|
|
2002
|
|
| |
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital
|
|
($ |
($1,189,310
|
)
|
($ |
6,763,635
|
)
|
($ |
340,922
|
)
|
|
Total
assets
|
|
$
|
9,684,307
|
|
$
|
6,044,090
|
|
$
|
5,223
|
|
|
Total
liabilities
|
|
$
|
3,573,463
|
|
$
|
6,850,246
|
|
$
|
346,145
|
|
|
Shareholders'
equity (deficit)
|
|
$
|
6,110,844
|
|
($ |
806,156
|
)
|
($ |
340,922
|
)
|
|
Shares
outstanding at period end
|
|
|
187,240,093
|
|
|
99,968,840
|
|
|
19,982,965
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Operation Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
358,361
|
|
$
|
482,815
|
|
$
|
0
|
|
|
Gross
profit
|
|
$
|
257,891
|
|
$
|
149,693
|
|
$
|
0
|
|
|
Operating
loss
|
|
($ |
7,600,383
|
)
|
($ |
2,700,211
|
)
|
($ |
43,621
|
)
|
|
Loss
from continuing operations
|
|
($ |
8,461,140
|
)
|
($ |
2,761,133
|
)
|
($ |
43,621
|
)
|
|
Net
loss
|
|
($ |
8,518,408
|
)
|
($ |
3,699,491
|
)
|
($ |
1,475,299
|
)
|
|
Diluted
earnings per share
|
|
($ |
0.06
|
)
|
($ |
0.05
|
)
|
($ |
0.11
|
)
|
|
Cash
dividends
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
Cash
dividends per share
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
152,903,084
|
|
|
67,489,524
|
|
|
13,941,197
|
|
| |
(1)
|
Consolidated
Balance Sheet and Consolidated Statement of Operation data for
the years
ended December 31, 2004 and 2003 give effect to our acquisition
of
NanobacLabs Pharmaceuticals, Inc. in June 2003 and Nanobac OY in
November
2003.
|
| |
(2)
|
Consolidated
Statement of Operation data for the years ended December 31, 2004,
2003
and 2002 give effect for the October 2003 decision to dispose of
the
HealthCentrics business Unit. Accordingly, HealthCentrics’ operations for
2002 and 2003 have been removed from continuing operations.
|
During
calendar 2004, and for the foreseeable future, our primary focus is on the
research of the role Nanobacteria plays in human diseases in which pathologic
calcification deposits are found. Since the beginning of 2004, there have
been
an increasing number of studies linking Nanobacteria to serious health problems,
including cardiovascular diseases, peripheral vascular diseases, prostatitis,
kidney stones, and Polycystic Kidney Disease. These studies have provided
additional evidence of a relationship between Nanobacteria and these diseases
in
which pathological calcification is present. Our focus is in determining
how
Nanobacteria works and what countermeasures can be developed to better treat
these diseases.
Recently
we signed a collaborative agreement with the Mayo Foundation for Medical
Education and Research to conduct research relating to the prevalence and
treatment of nanobacteria in specific disease populations. The parties will
evaluate the role of nanobacteria through four studies utilizing diagnostic
test
kits developed by Nanobac.
We
continue with our collaborative efforts with scientists at NASA researching
the
effects of Nanobacteria in the formation of kidney stones under conditions
simulating space flight. We also signed a collaborative agreement with Iowa
State University to work with the Department of Geological and Atmospheric
Sciences to explore novel methodologies for detecting calcified nano-particles
which may be related to nanobacteria.
While
there remains significant work ahead, we are encouraged by the progress being
made in the study of Nanobacteria and the increasing level of acceptance
in the
medical community that there may be a relationship between the nano-particles
we
call Nanobacteria and the progression of certain diseases involving pathologic
calcification. Our continuing research and development efforts, along with
our
efforts in obtaining recognition by various regulatory agencies (e.g. the
FDA
and similar agencies throughout the world), will require significant additional
amounts of financing over the next several years.
We
are
attempting to protect the intellectual property rights to our discoveries
including our treatment therapies and our diagnostic methods by obtaining
patents. We currently have one issued patent and multiple patent applications
for treatment therapies including the combination of EDTA and tetracycline
to
treat nanobacteria infections and the formula mix and treatment regimen for
Nanobac Supplements, We also have one issued patent and multiple patent
applications related to our diagnostic products We are attempting to further
protect our intellectual property rights by obtaining additional patents
in
unique areas of research with respect to the role of Nanobacteria in pathologic
calcification. These efforts are ongoing and will require significant additional
infusions of financing to complete. It is also anticipated that additional
patents will be sought in the future as our research and development efforts
yield new discoveries.
We
began
direct sales of our Nanobac Supplements in June 2004. Nanobac Supplements
are
currently being marketed to the alternative medicine market and directly
to the
customer over the Internet. We anticipate that the Nanobac Supplements are
the
first generation of treatment therapies that we will develop and that the
portfolio of treatments will increase as a result of our continuing research
into the effect of Nanobacteria in numerous diseases.
During
calendar 2004, our two diagnostic tests have gained additional recognition
for
their ability to identify Nanobacteria. We plan to initiate marketing our
diagnostic testing kits in Europe during the first half of 2005.
During
April 2004, we announced a name change from Nanobac Pharmaceuticals,
Incorporated to Nanobac Life Sciences, Inc. to become effective upon approval
by
the shareholders.
Results
of Operation
The
following table presents the percentage of period-over-period dollar change
for
the line selected items in our Consolidated Statements of Operations for
the
years ended December 31, 2004 and 2003. These comparisons of financial
results are not necessarily indicative of future results.
| |
|
|
|
| |
|
Year
ended December
|
|
| |
|
2004
|
|
2003
|
|
%
Change
|
|
|
Revenue
|
|
$
|
358,361
|
|
$
|
482,815
|
|
|
-26
|
%
|
|
Cost
of revenue
|
|
|
100,470
|
|
|
333,122
|
|
|
-70
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
257,891
|
|
|
149,693
|
|
|
72
|
%
|
|
Gross
Profit percentage
|
|
|
72
|
%
|
|
31
|
%
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
4,765,841
|
|
|
2,128,375
|
|
|
124
|
%
|
|
Research
and development
|
|
|
2,375,363
|
|
|
540,426
|
|
|
340
|
%
|
|
Depreciation
and amortization
|
|
|
717,070
|
|
|
181,103
|
|
|
296
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(7,600,383
|
)
|
|
(2,700,211
|
)
|
|
181
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income (Expense)
|
|
|
(860,757
|
)
|
|
(60,922
|
)
|
|
256
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(8,461,140
|
)
|
|
(2,761,133
|
)
|
|
183
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
(57,268
|
)
|
|
(938,358
|
)
|
|
-94
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
($8,518,408
|
)
|
|
($3,699,491
|
)
|
|
113
|
%
|
2004
Compared to 2003
Revenue
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Nanobac
Supplements
|
|
$
|
230,321
|
|
$
|
0
|
|
|
License
revenue
|
|
|
46,800
|
|
|
0
|
|
|
Nanobac
TX
|
|
|
0
|
|
|
407,242
|
|
|
Diagnostic
Products
|
|
|
81,240
|
|
|
75,573
|
|
| |
|
|
|
|
|
|
|
| |
|
$
|
358,361
|
|
$
|
482,815
|
|
During
December 2003, we voluntarily discontinued offering NanobacTX, which accounted
for 84% of our revenue for the year ended December 31, 2003. Accordingly,
our
revenue for the first half of 2004 was significantly reduced from the level
experienced in the last half of 2003. During February 2004, we licensed a
new
product to an affiliated third party. Effective June 2004, the above license
agreement was cancelled and we initiated sales of this product directly to
customers under the name of Nanobac Supplements. We are in the process of
accelerating our research and developing new products for better patient
acceptance.
Revenue
for the last quarter of 2004 averaged approximately $45,000 per month. Revenue
for the year ended December 31, 2003 represents seven months of sales subsequent
to our acquisition of LABS in June 2003.
Cost
of revenue
Cost
of
revenue consists of direct materials, testing services (for diagnostic products)
and shipping. As a percentage of revenue, cost of revenue was 28% for the
year
ended December 31, 2004 compared to 69% for the year ended December 31, 2003.
Cost of revenue for 2003 included $150,000 of fixed lab fees for our diagnostic
products. Without this fee, our cost of revenue would have been approximately
38% as a percentage of revenue. This fixed lab fee was eliminated in October
2003 and replaced with a variable cost structure, which significantly decreased
cost of revenue.
In
addition, the lower cost of revenue in 2004 was due in part to the 2004 license
revenue having no direct costs. During June 2004, this licensing agreement
was
terminated and we initiated sales of Nanobac Supplements directly to customers,
which has resulted in higher revenue and cost of revenue.
2004
Compared to 2003 (continued)
Gross
Profit
Gross
profit as a percentage of revenue was 72%, for the year ended December 31,
2004
compared to 31% for the year ended December 31, 2003. The increase in gross
profit percentage is attributable to the 2004 license revenue having no costs
and the existence of $150,000 of fixed lab costs in 2003 which were not incurred
in 2004. We anticipate gross profit as a percentage of revenue to be between
65%
and 70% for 2005.
Selling,
General and Administrative
Selling,
general and administrative (“SG&A”) expenses for the years ended December
31, 2004 and 2003 are summarized as follows:
| |
|
Year
ended December
|
|
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Charges
for stock issuances
|
|
$
|
2,562,750
|
|
$
|
750,000
|
|
|
Other
SG&A
|
|
|
2,203,091
|
|
|
1,378,375
|
|
| |
|
|
|
|
|
|
|
|
Total
SG&A
|
|
$
|
4,765,841
|
|
$
|
2,128,375
|
|
The
charges for stock issuances relate to stock issued as part of the Plan of
Reorganization as confirmed by the Bankruptcy Court. There will be no further
charges for stock issuances related to this bankruptcy.
For
2004,
64% of the Other SG&A expenses are comprised of payroll, travel and
professional fees. Expenses to operate as a public company (primarily
professional fees and investor relations costs) comprise an additional 18%
of
the remaining SG&A expense. Other significant SG&A expenses include
facility rental and insurance.
The
increase in SG&A for the year ended December 31, 2004 over December 31, 2003
(net of charges for stock issuances) is primarily attributable to the timing
of
the acquisition of LABS in June 2003. Only seven months of SG&A for LABS is
included in the above SG&A expenses for 2003 compared to twelve months of
expenses in 2004.
SG&A
expenses for HealthCentrics are included in “Discontinued Operations”.
2004
Compared to 2003 (continued)
Research
and Development
For
the
year ended December 31, 2004, approximately 65% of research and development
(“R&D“) expenses are for payroll and medical director fees and approximately
25% of R&D expenses are for research studies. Expenses for research studies
fluctuate from year to year as these expenses are dependent on specific
initiatives and funding sources. Remaining R&D expenses include patents, our
Finland lab and travel.
R&D
expenses for the year ended December 31, 2004 increased 340% compared to
the
year ended December 31, 2003. The increase in R&D for the year ended
December 31, 2004 over December 31, 2003 is primarily attributable to the
acquisitions of LABS and OY. LABS was acquired in June 2003 and OY was acquired
in November 2003 and includes our laboratory in Koupio Finland. Accordingly,
only seven months of R&D for LABS and one and one-half months of R&D for
OY are included in the above expenses for the year ended December 31, 2003
compared to twelve months for 2004. This increase also reflects our emphasis
on
R&D subsequent to the June 2003 acquisition of LABS. Specific increases
include increased payroll, initiation of research studies, expansion of our
patents and $500,000 of signing bonuses with the execution of employment
agreements for key scientific personnel.
R&D
expenses for HealthCentrics are included in “Discontinued Operations”. We intend
to continue to our R&D investment in the coming year.
Depreciation
and amortization
Approximately
95% of depreciation and amortization are related to the amortization of
intangible assets acquired in the 2003 and 2004 acquisitions of LABS and
OY.
2004
Compared to 2003 (continued)
Other
income (Expense)
| |
|
2004
|
|
2003
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Stockholder
loan
|
|
|
($237,957
|
)
|
|
($23,703
|
)
|
|
Other
|
|
|
(10,096
|
)
|
|
(19,231
|
)
|
|
Derivative
loss
|
|
|
(643,630
|
)
|
|
0
|
|
|
Foreign
currency exchange gain
|
|
|
32,021
|
|
|
0
|
|
|
Other,
net
|
|
|
(1,095
|
)
|
|
(17,988
|
)
|
| |
|
|
|
|
|
|
|
| |
|
|
($860,757
|
)
|
|
($60,922
|
)
|
The
derivative loss is the difference in the derivative instruments’ value at the
issue date compared to the value at December 31, 2004. The 2004 subscription
agreement transactions are derivatives as the actual number of shares to
be
issued under these agreements is based on the future trading price of the
Company’s shares and is therefore indeterminable at December 31, 2004.
Foreign
currency gain results from exchange rate changes between the U.S. dollar
and the
Euro on intercompany advances between our U.S. subsidiary and our Finland
subsidiary.
Loss
from continuing operations
Loss
from
continuing operations for the year ended December 31, 2004 was $8.5 million
compared to $2.8 million for the year ended December 31, 2003. This increase
reflects $1.8 million increase in charge for common stock issuances included
in
SG&A, $536,000 of additional amortization and depreciation, $1.8 million of
additional R&D costs, $643,000 derivative loss and an additional five months
of LABS SG&A expenses in 2004 compared to 2003.
We
are
experiencing significant losses as we conduct research and development related
to nanobacteria and launch our products and services. We believe it will
take
significant time before we will earn meaningful revenue to offset our expenses
and there is no assurance that we will be able to accomplish this goal. As
a
result of the losses, we are dependent on affiliates of our CEO and other
investors to provide sufficient cash sources to fund our operations.
2004
Compared to 2003 (continued)
Discontinued
Operations
During
October 2003, we decided to divest our HealthCentrics’ business unit to focus
exclusively on our nanobacteria business unit. We were unsuccessful in finding
a
buyer in 2003 for this business unit. During March 2004, this business unit
was
sold to an affiliate of our CEO for consideration of $250,000 plus assumption
of
net liabilities of approximately $499,000. Our gain on disposal of approximately
$749,000 is accounted for as a capital contribution given the related party
nature of the arrangement.
As
a
result of our decision to dispose of the HealthCentrics business unit, the
operations of HealthCentrics were retroactively removed from continuing
operations and disclosed as a single line item on the statements of operations.
The loss from discontinued operations for the years ended December 31, 2004
and
2003 is summarized as follows:
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Revenue
|
|
$
|
5,301
|
|
$
|
19,970
|
|
|
Cost
of revenue
|
|
|
9,208
|
|
|
62,570
|
|
| |
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
(3,907
|
)
|
|
(42,600
|
)
|
| |
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
|
53,361
|
|
|
692,407
|
|
|
Research
and development
|
|
|
-
|
|
|
203,351
|
|
| |
|
|
|
|
|
|
|
|
Net
loss
|
|
|
($57,268
|
)
|
|
($938,538
|
)
|
Liquidity
and Capital Resources
As
of
December 31, 2004, we had total assets of $9.7 million of which only $115,000
were current assets. At December 31, 2004, we had total current liabilities
of
$1.3 million and a working capital deficit of $1.2 million.
Since
the
United States Bankruptcy Court confirmed a plan of reorganization that allowed
the Company to emerge from Chapter 11 during calendar 2002, the Company has
financed its activities primarily through loans made by entities affiliated
with
our current Chief Executive Officer (referred to herein as “the Affiliated
Entities”). These loans were made as funding was needed and were extremely
advantageous to the Company in that the amounts were funded as the Company
needed financial infusions and allowed the Company to avoid the costs and
distractions of attempting to raise these amounts from unrelated parties.
It is
unrealistic to believe that unrelated parties would have offered terms as
generous as those obtained from the Affiliated Entities, and it is also unlikely
that any financing could have been obtained under any terms without the
financing of the Affiliated Entities.
Liquidity
and Capital Resources (continued)
As
discussed in Item 5, from time to time the Affiliated Entities have agreed
to
allow a portion of the loan balances to be converted into shares of the
Company’s common stock. On September 30, 2004, $7,500,000 of the loan balance
was converted into 29,999,964 shares of our common stock at a price of $.25
per
share. There is no obligation on the part of the Affiliated Entities to make
additional loans to the Company. The Affiliated Entities are also under no
obligation to convert any portion of the loan balances owed to it into
additional shares of the Company’s stock.
As
is
also discussed in Item 5, since August of 2004, the Company has received
$1.4
million (net of $125,000 of expenses) from three unaffiliated investors and
one
affiliate for shares of the Company’s stock and an equal amount of warrants to
acquire additional shares of the Company’s stock. The exact number of shares to
be issued is dependent upon the average closing bid price of the Company’s stock
on the five trading days immediately prior to the date on which a registration
statement for these shares is declared effective. The purchase price of the
shares is equal to the lesser of (1) $.12 or (2) 52% of the average closing
price described above. An additional $1.5 million is to be received from
these
investors within five days of registering the common shares and warrants.
A
registration statement has not yet been declared effective for these shares.
Successful registration of the shares contemplated under the agreements
discussed above will provide significant amounts of needed capital into the
Company. However, there are no assurances that the SEC will declare a
registration statement effective.
Net
cash
used in operations was $3.4 million for the year ended December 31, 2004.
The
negative cash flow from operations reflects the $8.5 million net loss for
the
year offset by the non-cash charge for common stock issuances of $2.6 million,
depreciation and amortization of $717,000, interest expense added to the
principal balance of the stockholder loan of $238,000, and an increase in
liabilities of approximately $1.7 million ($1.0 million of current liabilities
and $0.7 million in stock settlement liability).
As
noted
above, the deferral of $1.0 million of current liabilities, reduced the cash
used for operations for the year ended December 31, 2004, However, most,
if not
all, of these current liabilities will likely be settled with cash in future
accounting periods.
Net
cash
provided by investing activities was approximately $165,000 for the year
ended
December 31, 2004, which reflects the receipt of $200,000 from a common stock
option exercise related to the acquisition of LABS offset by our purchase
of
fixed assets of approximately $37,000.
Net
cash
provided by financing activities was $3.2 million for the year ended December
31, 2004, which is attributable to stockholder loans of $2.1 million and
$1.2
million from common stock Subscription Agreements as described in the preceding
paragraphs.
We
are
dependent on raising additional funding necessary to implement our business
plan
as outlined above. Should we not be successful in raising cash from the
Affiliated Entities and other investors, we are unlikely to continue as a
going
concern.
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The
statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory
Pricing,” to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. ARB No. 43 previously
stated that these costs must be “so abnormal as to require treatment as
current-period charges.” SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this statement requires that allocation
of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005,
with
earlier application permitted for fiscal years beginning after the issue
date of
the statement. The adoption of SFAS No. 151 is not expected to have
any
significant impact on our current financial condition or results of operations.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29.” APB Opinion No. 29,
“Accounting for Nonmonetary Transactions,” is based on the opinion that
exchanges of nonmonetary assets should be measured based on the fair value
of
the assets exchanged. SFAS No. 153 amends Opinion No. 29 to
eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets
whose
results are not expected to significantly change the future cash flows of
the
entity. The adoption of SFAS No. 153 is not expected to have any impact
on
our current financial condition or results of operations.
In
December 2004, the FASB revised its SFAS No. 123 (“SFAS
No. 123R”), “Accounting for Stock Based Compensation.” The revision
establishes standards for the accounting of transactions in which an entity
exchanges its equity instruments for goods or services, particularly
transactions in which an entity obtains employee services in share-based
payment
transactions. The revised statement requires a public entity to measure the
cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost is to be recognized
over the period during which the employee is required to provide service
in
exchange for the award. Changes in fair value during the requisite service
period are to be recognized as compensation cost over that period. In addition,
the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to
require that excess tax benefits be reported as a financing cash flow rather
than as a reduction of taxes paid. The provisions of the revised statement
are
effective for financial statements issued for the first interim or annual
reporting period beginning after June 15, 2005, with early adoption
encouraged. We are currently evaluating the impact that this statement will
have
on our financial condition or results of operations.
In
March
2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”),
which requires an entity to recognize a liability for the fair value of a
conditional asset retirement obligation when incurred if the liability’s fair
value can be reasonably estimated. FIN 47 is effective for fiscal years ending
after December 15, 2005. The Company is currently evaluating the effect that
the
adoption of FIN 47 will have on its consolidated results of operations and
financial condition but does not expect it to have a material impact.
Recent
Accounting Pronouncements (continued)
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections
(“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle
and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first quarter
of
fiscal 2006. The Company is currently evaluating the effect that the adoption
of
SFAS 154 will have on its consolidated results of operations and financial
condition, but does not expect it to have a material impact.
Critical
accounting policies
Use
of estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Contractual
obligations
| |
|
Amount
of Commitment
|
|
| |
|
Expired
by year ending December 31,
|
|
| |
|
Other
|
|
Operating
|
|
|
|
| |
|
Liability
|
|
Leases
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
Less
than 1 year
|
|
$
|
-
|
|
$
|
174,281
|
|
$
|
174,281
|
|
|
1
-
2 years
|
|
|
350,000
|
|
|
287,633
|
|
|
637,633
|
|
|
3
-
4 years
|
|
|
-
|
|
|
112,063
|
|
|
112,063
|
|
|
5
-
7 years
|
|
|
-
|
|
|
27,234
|
|
|
27,234
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
350,000
|
|
$
|
601,211
|
|
$
|
951,211
|
|
Forward
Looking Statements
Our
disclosure and analysis in this 2004 Form 10-KSB/A contains some forward-looking
statements, within the meaning of the Private Securities Litigation Reform
Act
of 1995 (“the Act”), that set forth anticipated results based on our plans and
assumptions. From time to time, we also provide forward-looking statements
in
other materials we release to the public as well as oral forward-looking
statements. Such statements give our current expectations or forecasts of
future
events; they do not relate strictly to historical and current facts. We have
tried wherever possible to identify such statements by using words such as
“anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”,
“will” and similar expressions in connection with any discussion of future
operating or financial performance.
In
light
of the important factors that can materially affect results, including those
set
forth above and elsewhere in this report, the inclusion of forward-looking
information herein should not be regarded as a representation by us or any
other
person that our objectives or plans will be achieved. We may encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to market our products and services;
competitive conditions within our industry may change adversely; we may be
unable to retain existing key management personnel; our forecasts may not
accurately anticipate market demand; and there may be other material adverse
changes in our operations or business. Certain important factors affecting
the
forward looking statements made herein include, but are not limited to (i)
accurately forecasting capital expenditures; (ii) obtaining new sources of
external financing; (iii) serving as the nexus for nanobacteria research
and
(iv) conducting successful clinical trials supporting Dr. Kajander’s theories
that the human body does not recognize nanobacteria as harmful, and accordingly,
nanobacteria could be the cause of pathological disease causing calcification
found in multiple diseases. Assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based
on
actual experience and business developments, the impact of which may cause
the
Company to alter its capital expenditure or other budgets, which may in turn
affect the Company's financial position and results of operations.
Risk
Factors
Trends,
Risks and Uncertainties
We
have
sought to identify what we believe to be the most significant risks to our
business. However, we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. You should not consider the risks and assumptions
identified in this report to be a complete discussion of all potential risks
and
uncertainties affecting the Company. Investors should carefully consider
all
risk factors before making an investment decision with respect to our Common
Stock.
Cautionary
Factors that may affect Future Results
We
provide the following cautionary discussion of risks, uncertainties and possible
inaccurate assumptions relevant to our business and our products. These are
factors that we think could cause our actual results to differ materially
from
expected results. Other factors besides those listed here could adversely
affect
us.
Risk
Factors (continued)
We
require additional financing in order to continue in business as a going
concern, the availability of which is uncertain. We may be forced by business
and economic conditions to accept financing terms which will require us to
issue
our securities at a discount, which could result in further dilution to our
existing stockholders.
As
discussed under the heading, "Management's Discussion and Analysis - Liquidity
and Capital Resources," we require additional financing to fund our operations.
There can be no assurance that additional financing will be available to
us when
needed or, if available, that it can be obtained on commercially reasonable
terms. In addition, any additional equity financing may involve substantial
dilution to our stockholders. If we fail to raise sufficient financing to
meet
our immediate cash needs, we will be forced to scale down or perhaps even
cease
the operation of our business, which may result in the loss of some or all
of
your investment in our common stock.
In
addition, in seeking debt or equity private placement financing, we may be
forced by business and economic conditions to accept terms which will require
us
to issue our securities at a discount from the prevailing market price or
face
amount, which could result in further dilution to our existing
stockholders.
Liquidity
and Working Capital Risks; Need for Additional Capital to Finance
Growth
and Capital Requirements
Throughout
2004 and 2003, affiliates of our Chief Executive Officer have provided our
capital needs through loans and capital contributions. While these affiliates
continue to provide for the majority of our cash requirements, they are under
no
obligation to continue such financing and/or strategic guidance. In the event
these affiliates should discontinue their support, we may have difficulty
in
continuing our operations. In such an event, shareholders could lose their
investment in its entirety. Historically, these affiliates have provided
capital
to us on a demand debt basis after which they may convert debt into shares
of
our common stock. If, in the future we require additional capital, these
affiliates may contribute some or all of our requirements. We anticipate
that as
a part of any such loan, these affiliates would have rights to convert into
additional shares of our common stock. In such an event and to the degree
of
which we require these affiliates’ support, shareholders may experience
dilution. At present, we do not maintain key man insurance for our CEO.
In
addition to the financial support we may receive from affiliates of our CEO,
we
may continue to seek to raise capital from public or private equity or debt
sources to provide working capital to meet our general and administrative
costs
until net revenues make the business self-sustaining. We cannot guarantee
that
we will be able to raise any such capital on terms acceptable to us or at
all.
Such financing may be upon terms that are dilutive or potentially dilutive
to
our stockholders. If alternative sources of financing are required, but are
insufficient or unavailable, we will be required to modify our growth and
operating plans in accordance with the extent of available funding.
Risk
Factors (continued)
We
have a history of operating losses and fluctuating operating results, which
raise substantial doubt about our ability to continue as a going
concern.
Since
inception through December 31, 2004, we have incurred aggregate losses of
$13.0
million. Our net loss for the year ended December 31, 2004 and 2003 was $7.9
million and $3.7 million, respectively. There is no assurance that we will
operate profitably or will generate positive cash flow in the future. In
addition, our operating results in the future may be subject to significant
fluctuations due to many factors not within our control, such as the
unpredictability of when customers will order products, the size of customers'
orders, the demand for our products, and the level of competition and general
economic conditions.
Although
we are confident that revenues will increase, we also expect an increase
in
research and development costs and operating costs. Consequently, we expect
to
incur operating losses and negative cash flow until our products gain market
acceptance sufficient to generate a commercially viable and sustainable level
of
sales, and/or additional products are developed and commercially released
and
sales of such products made so that we are operating in a profitable manner.
Potential
Incorrect Conclusions on the Detection and Eradication of
Nanobacteria
Most
of
our future revenue is based on our ability to detect and eradicate Nanobacteria.
If it is ultimately proved that our diagnostic methodologies and treatment
regimens as covered by our patents are ineffective or based upon incorrect
scientific conclusions, our existing patents and product lines may lose most
or
all of their value. Further, if we are unsuccessful in leveraging our diagnostic
and therapeutic products to detect and treat nanobacterial diseases, we may
not
generate sufficient revenue to offset our expenses.
Acceptance
of Products in the Marketplace is Uncertain.
Our
future financial performance will depend, at least in part, upon the
introduction and customer acceptance of our proposed treatments and products.
Our treatments and products may not achieve market acceptance, and such adverse
marketing results could materially harm the Company.
Risk
Factors (continued)
Limited
Operating History Anticipated Losses; Uncertainty of Future
Results
We
have a
limited operating history upon which an evaluation of our Company and our
prospects can be based. Our prospects must be evaluated with a view to the
risks
encountered by companies in early stages of development, particularly in
light
of the uncertainties relating to the new and evolving biolife science research
which we intend to develop and market, and the acceptance of our business
model.
We will be incurring costs to: (i) perform research studies to prove the
effectiveness of our pharmaceutical products, (ii) further develop and market
our products; (iii) establish distribution relationships; and (iv) build
an
organization. To the extent that such expenses are not subsequently followed
by
commensurate revenues, our business, results of operations and financial
condition will be materially adversely affected. We, therefore, cannot insure
that we will be able to immediately generate sufficient revenues. We expect
negative cash flow from operations to continue for at least the next 12 months
as we continue to develop and market our business. If cash generated by
operations is insufficient to satisfy our liquidity, we may be required to
sell
additional equity or debt securities. The sale of additional equity or
convertible debt securities would result in additional dilution to our
stockholders. Our initial operations may not be profitable, since time will
be
required to build our business to the point that our revenues will be sufficient
to cover our total operating costs and expenses. Our reaching a sufficient
level
of sales revenues will depend upon a large number of factors, including
availability of sufficient working capital, the number of customers we are
able
to attract and the costs of continuing development of our product
line.
Federal
Food and Drug Administration
Some
or
all of our products may be governed by rules and regulations established
by the
United States Food and Drug Administration (“FDA”). Changes
in FDA regulations and the enforcement thereof may affect our biolife science
business. Furthermore, we may not be successful in filing and obtaining approval
of our 510K or PMA filings with the FDA for our Nano-Capture Antigen and
Nano-Sero IgG ELISA assays.
Data
Obtained Through Clinical Trials.
Data
obtained from pre-clinical studies and clinical trials do not necessarily
predict results that will be obtained from later pre-clinical studies and
clinical trials. Moreover, pre-clinical and clinical data is susceptible
to
varying interpretations, which could delay, limit or prevent regulatory
approval. A number of companies in the pharmaceutical industry have suffered
significant setbacks in advanced clinical trials, even after experiencing
promising results in earlier trials. The failure to adequately demonstrate
the
safety and/or effectiveness of an intended product under development could
delay
or prevent regulatory clearance of the potential drug or treatment, resulting
in
delays to commercialization, and could materially harm the
business.
Risk
Factors (continued)
Competitors
in the Pharmaceutical Industry May Develop Competing
Technologies
Drug
companies and/or other health care companies may seek to develop and market
technologies which may compete with our Company’s technology. While we believe
that our technology regarding the prescription treatment of nanobacterial
infections caused by nanobacterium sanguineum is unique, other competitors
may
develop similar or different treatments which may become more accepted by
the
marketplace.
Regulations
may Inhibit our Ability to Sell Nanobac Supplements
Codex
is
a joint body comprising government representatives
and non-governmental organizations, jointly managed by the United
Nation's (U.N.) Food and Agriculture Organization (FAO) and the World
Health Organization (WHO) of the U.N. The Codex Committee on Nutrition and
Foods
for Special Dietary Uses (CCNFSDU) has been attempting to develop international
guidelines for vitamins and minerals since 1991. In November 2004, these
guidelines were finalized and a vote to ratify will take place in July,
2005.
There
is
a school of thought within the dietary supplement community that
buying vitamins and other dietary supplements will be severely limited
by
this CODEX. Passage of the above guidelines may inhibit our ability
to sell
Nanobac Supplement outside of the United States. We do not believe that the
passage will impact United State revenue as the
U.S.
draft position states that "The United States supports consumer choice and
access to dietary supplements that are safe and are labelled in a truthful
and
non-misleading manner." Further, the CODEX Draft notes that the Codex
Guidelines for Vitamin and Mineral Supplements will not adversely affect
the
availability of safe and truthfully labelled supplement products in the U.S.
marketplace or to U.S. consumers. If our interpretation is not correct passage
of the international guidelines may inhibit the sales of Nanobac Supplement
inside and outside of the United States
Risk
of Third Party Lawsuits.
We
are
exposed to potential product liability risks that are inherent in the testing,
manufacturing and marketing of pharmaceutical products. We cannot assure
potential investors that such claims will not be asserted against the Company.
A
successful liability claim or series of claims brought against us could have
a
material adverse effect on our financial condition. In addition, we may be
sued
by third parties who claim that our products and treatments infringe upon
the
intellectual property rights of others or that we have misappropriated trade
secrets of others. This risk is exacerbated by the fact that the validity
and
breadth of claims covered in medical technology patents and the breadth and
scope of trade secret protection involve complex legal and factual questions
for
which important legal principles are unresolved. Any litigation or claims
against us, whether or not valid, could result in substantial costs, could
place
a significant strain on our financial resources, and could harm our
reputation.
Risk
Factors (continued)
Government
Regulation
Healthcare
in general and the pharmaceuticals industry in particular are highly regulated
markets, subject to both federal and a multitude of state regulations and
guidelines. The majority of our business is still in clinical research
applications and is governed by the medical community. There can be no assurance
that changes to state or federal laws will not materially restrict our ability
to sell our products or develop new product lines.
Intellectual
Property Rights
We
have a
family of patents encompassing the detection and eradication of nanobacteria.
There are risks inherent in any intellectual property rights in that they
may be
challenged as being invalid or not original. Additionally, other parties
may
abuse such intellectual rights, causing the Company to defend its rights.
Dependency
upon Key Technical and Scientific Personnel Who May Terminate Employment
at Any
Time.
Our
success will depend to a significant degree upon the continued services of
key
technical and scientific personnel, including but not limited to E. Olavi
Kajander, MD, PhD. In addition, our success may depend on our ability to
attract
and retain other highly skilled personnel. Competition for qualified personnel
is intense, and the process of hiring and integrating such qualified personnel
is often lengthy. We may be unable to recruit personnel on a timely basis,
if at
all. All of the Company’s management and other employees may voluntarily
terminate their employment with us at any time. The loss of the services
of key
personnel, or the inability to attract and retain additional qualified
personnel, could result in delays to development, loss of sales, and/or
diversion of management resources that could have a material adverse affect
on
the Company.
Competition
The
markets in which we compete include successful and well-capitalized competitors
that vary in size and scope. Principal competitors include Pfizer, Merck
and
other pharmaceutical companies having unique treatments for cardiovascular
disease. All of these competitors are more established, benefit from greater
name recognition and have substantially greater resources than us. Moreover,
we
could face additional competition as other established and emerging companies
enter the market and new products and technologies are introduced. Increased
competition could result in price reductions, fewer customer subscriptions,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and operating results.
In
addition, current and potential competitors may make strategic acquisitions
or
establish cooperative relationships among themselves or with third-parties,
thereby increasing the ability of their products to address the needs of
our
prospective consumers. While we believe we can differentiate our product
from
these current and future competitors, focusing on the products' functionality,
flexibility, adaptability and features, there can be no assurance that we
will
be able to compete successfully against current and future competitors. The
failure to effectively compete would have a material adverse effect upon
our
business, financial condition and operating results.
Risk
Factors (continued)
Lack
of Independent Directors
We
cannot
guarantee our Board of Directors will have a majority of independent directors
in the future. In the absence of a majority of independent directors, our
executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review
and
approval thereof. This could present the potential for a conflict of interest
between the Company’s stockholders and the controlling officers and/or
directors.
Limitation
of Liability and Indemnification of Officers and Directors
Our
officers and directors are required to exercise good faith and high integrity
in
our management affairs. Our Articles of Incorporation and By Laws provide,
however, that our officers and directors shall have no liability to our
shareholders for losses sustained or liabilities incurred which arise from
any
transaction in their respective managerial capacities unless they violated
their
duty of loyalty, did not act in good faith, engaged in intentional misconduct
or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our Articles and By-Laws
also provide for the indemnification by us of the officers and directors
against
any losses or liabilities they may incur as a result of the manner in which
they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner they
reasonably believe to be in, or not opposed to, the best interests of the
Company, and their conduct does not constitute gross negligence, misconduct
or
breach of fiduciary obligations.
Continued
Control by Current Officers and Directors
The
present officers and directors control approximately 50% of the outstanding
shares of Common Stock, and are in a position to elect all of our Directors
and
otherwise control the Company, including, without limitation, authorizing
the
sale of equity or debt securities of the Company, the appointment of officers,
and the determination of officer's salaries. Shareholders have no cumulative
voting rights.
Risk
Factors (continued)
Limited
Market Due To Penny Stock
The
Company's stock differs from many stocks, in that it is a "penny stock."
The
Securities and Exchange Commission has adopted a number of rules to regulate
penny stocks. These rules include, but are not limited to, Rules 3a5l-l,
15g-1,
15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange
Act of 1934, as amended. Because our securities probably constitute penny
stock
within the meaning of the rules, the rules would apply to us and our securities.
The rules may further affect the ability of owners of our stock to sell their
securities in any market that may develop for them. There may be a limited
market for penny stocks, due to the regulatory burdens on broker-dealers.
The
market among dealers may not be active. Investors in penny stock often are
unable to sell stock back to the dealer that sold them the stock. The mark-ups
or commissions charged by the broker-dealers may be greater than any profit
a
seller may make. Because of large dealer spreads, investors may be unable
to
sell the stock immediately back to the dealer at the same price the dealer
sold
the stock to the investor. In some cases, the stock may fall quickly in value.
Investors may be unable to reap any profit from any sale of the stock, if
they
can sell it at all. Stockholders should be aware that, according to the
Securities and Exchange Commission Release No. 34- 29093, the market for
penny
stocks has suffered in recent years from patterns of fraud and abuse. These
patterns include: - Control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; - Manipulation
of prices through prearranged matching of purchases and sales and false and
misleading press releases; - "Boiler room" practices involving high pressure
sales tactics and unrealistic price projections by inexperienced sales persons;
- Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and - The wholesale dumping of the same securities by promoters
and broker- dealers after prices have been manipulated to a desired level,
along
with the inevitable collapse of those prices with consequent investor losses.
Furthermore, the penny stock designation may adversely affect the development
of
any public market for the Company's shares of common stock or, if such a
market
develops, its continuation. Broker-dealers are required to personally determine
whether an investment in penny stock is suitable for customers. Penny stocks
are
securities (i) with a price of less than five dollars per share; (ii) that
are
not traded on a "recognized" national exchange; (iii) whose prices are not
quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must
still
meet requirement (i) above); or (iv) of an issuer with net tangible assets
less
than $2,000,000 (if the issuer has been in continuous operation for at least
three years) or $5,000,000 (if in continuous operation for less than three
years), or with average annual revenues of less than $6,000,000 for the last
three years. Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors
in
the Company's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Rule
15g-9 of the Commission requires broker-dealers in penny stocks to approve
the
account of any investor for transactions in such stocks before selling any
penny
stock to that investor. This procedure requires the broker-dealer to (i)
obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable
for
the investor and that the investor has sufficient knowledge and experience
as to
be reasonably capable of evaluating the risks of penny stock transactions;
(iii)
provide the investor with a written statement setting forth the basis on
which
the broker-dealer made the determination in (ii) above; and (iv) receive
a
signed and dated copy of such statement from the investor, confirming that
it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it
more
difficult for the Company's stockholders to resell their shares to third
parties
or to otherwise dispose of them.
PART
IV
(a)
The
following documents are filed as part of this report:
The
following Financial Statements are included herein:
|
|
(2) |
Financial
Statement Schedules
|
Financial
Statement Schedules have been omitted because they are not applicable or
are not
required or the information required to be set forth therein is included
in the
consolidated financial statements or notes thereto.
EXHIBIT
INDEX
|
Exhibit
|
|
|
Number
|
Description
|
| |
|
| |
|
|
31.1
|
Certification
to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive
Officer
|
| |
|
|
31.2
|
Certification
to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial
Officer
|
| |
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of
the Sarbanes-Oxley Act of 2002 - Chief Executive Officer
|
| |
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of
the Sarbanes-Oxley Act of 2002 - Chief Financial Officer
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by
the undersigned; thereunto duly authorized, on August 4, 2005.
| |
|
|
| |
Nanobac
Pharmaceuticals,
Incorporated
|
|
|
|
| |
By: |
/s/ John
D. Stanton |
| |
John
D. Stanton |
| |
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of Registrant and in
the
capacities indicated on August 4, 2005.
|
Signature
|
|
Title
|
| |
|
|
/s/ John
D. Stanton
John
D. Stanton
|
|
Chairman
of the Board of Directors
Chief
Executive Officer and Chief Financial Officer (Principal Executive
and
Financial Officer)
|
| |
|
|
/s/ Alexander
Edwards III
Alexander
Edwards III
|
|
Director
|
| |
|
|
/s/ Jan
Egberts
Jan
Egberts, M.D.
|
|
Director
|
| |
|
|
/s/ Stephan
Rechtschaffen
Stephan
Rechtschaffen, M.D.
|
|
Director
|
| |
|
|
/s/ Michael
J Dean
Michael
J Dean
|
|
Vice
President - Finance and Controller (Principal Accounting
Officer)
|
Board
of
Directors
Tampa,
Florida
We
have
audited the accompanying consolidated balance sheet of Nanobac Pharmaceuticals,
Incorporated and Subsidiaries (F/K/A American Enterprise Corporation) (the
“Company”), as of December 31, 2004, and the related consolidated statements of
operations, stockholders’ deficit and cash flows for the two years then ended.
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 audit in accordance with standards of the Public Accounting
Oversight Board (United States of America). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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 consolidated financial position of Nanobac
Pharmaceuticals, Incorporated and Subsidiaries, at December 31, 2004, and
the
consolidated results of their operations and their cash flows for the two
years
then ended in conformity with accounting principles generally accepted
in the
United States of America.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations,
has
working capital and net capital deficiencies and is dependent upon continued
financing from stockholders and outside investors, all of which raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
As
discussed in Note 10, the accompanying consolidated financial statements
have
been restated.
Tampa,
Florida
of
these
financial statemets
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature
of operations and summary of significant accounting
polices
Nature
of business
Nanobac
Pharmaceuticals, Incorporated and subsidiaries, ("Nanobac”, the "Company", or
"NNBP") trades under the symbol "NNBP."
NNBP’s
primary business is the study and development of therapeutic and diagnostic
technologies related to nanobacterium sanguineum (“Nanobacteria”). Nanobacteria
are believed to be small, slowly growing nano-particles that can be found
in
human blood, kidney stones and arterial wall plaques.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiaries. All material intercompany transactions and balances
have been eliminated in consolidation. On June 4, 2003, the Company acquired
a
majority interest in NanobacLabs Pharmaceuticals, Inc. and on November
11, 2003,
the Company acquired 65% of Nanobac OY (see Note 2, “Acquisitions”). In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
“Business Combinations”, NNBP has included the results of operations of LABS
from June 4, 2003 and the results of operations of OY from November 11,
2003.
Where
losses applicable to the minority interest in a subsidiary exceed the minority
interest in the equity capital of the subsidiary, such excess and any further
losses applicable to the minority interest shall be charged against the
majority
interest, as there is no obligation of the minority interest to make good
such
losses.
Liquidity
and Management Plans
The
accompanying consolidated financial statements have been prepared assuming
that
NNBP will continue as a going concern. The Company has incurred recurring
losses
and has a working capital deficiency at December 31, 2004. The Company
is
dependent on the continued financing from outside investors including additional
shareholder loans. All of these matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management believes
that
NNBP will need to raise additional capital in order to launch new clinical
trials, fund research and development for new treatment areas, and general
working capital requirements. Capital may be raised through further sales
of
equity securities, which may result in dilution of the position of current
shareholders. At this time, there are no firm commitments to invest in
NNBP. If
NNBP is unable to obtain such financing, the business might not attain
profitability.
There
can
be no assurances that NNBP will be successful in obtaining debt or equity
financing in order to achieve its financial objectives and continue as
a going
concern. The financial statements do not include any adjustments to the
carrying
amount of assets and the amounts and classifications of liabilities that
might
result from the outcome of this uncertainty.
Revenue
Recognition
Revenue
is recognized when the Company’s products are shipped and title has passed or
when diagnostic results are provided to the customer. Revenue is recorded
net of
reserves for estimated discounts and incentives.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of operations and summary of significant accounting polices
(continued)
Financial
instruments
The
carrying value of NNBP’s financial instruments, including cash, accounts
receivable, accounts payable, short-term note payable and stockholder loans
approximate their fair market values.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined in a manner
which
approximates the first-in, first-out (FIFO) method. Inventory consists
of raw
materials for currently marketed products and materials and processing
costs for
antibodies and antigens used in our Finland laboratory. Inventory is shown
net
of applicable reserves and allowances. Shipping costs are expensed as incurred
and are included in cost of revenue.
Fixed
Assets
Fixed
assets consist of furniture, fixtures, computers and lab equipment and
are
recorded at cost. Fixed assets are depreciated using the straight-line
method
over the estimated useful lives of three to seven years.
Intangible
assets and goodwill
Intangible
assets are recorded at cost, less accumulated amortization. Intangible
assets
consist of acquired technology rights obtained in the acquisition of LABS
and OY
(see Note 2). Amortization of intangible assets is provided over the following
estimated useful lives on a straight-line basis:
In
accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”), and Statement of Financial
Accounting Standards, No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable
long-lived assets, including intangible assets and goodwill for impairment
annually, or sooner whenever events or changes in circumstances indicate
the
carrying amounts of such assets may not be recoverable. Other depreciable
or
amortizable assets are reviewed when indications of impairment exist. Upon
such
an occurrence, recoverability of these assets is determined as follows.
For
long-lived assets that are held for use, the Company compares the forecasted
undiscounted net cash flows to the carrying amount. If it is determined
that the
long-lived asset will be unable to recover its carrying amount, then it
is
written down to fair value. For long-lived assets held for sale, assets
are
written down to fair value. Fair value is determined based on discounted
cash
flows, appraised values for management’s estimates, depending upon the nature or
the assets. Impairment within goodwill is tested using a two step method.
The
first step is to compare the fair value of the reporting unit to its book
value,
including goodwill. If the fair value of the unit is less than its book
value,
the Company than determines the implied fair value of goodwill by deducting
the
fair value of the reporting unit’s net assets from the fair value of the
reporting unit. If the book value of goodwill is greater than its implied
fair
value, the Company writes down goodwill to its implied fair value. The
Company’s
goodwill and intangible assets relate to the acquisition of NanobacLabs
Pharmaceuticals, Inc. and Nanobac OY. Goodwill
and intangible asset amortization is not deductible for income tax purposes.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of operations and summary of significant accounting polices
(continued)
Use
of estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Net
loss per share
Net
loss
per share represents the net loss attributable to common stockholders divided
by
the weighted average number of common shares outstanding during the period.
The
effect of incremental shares from common stock equivalents is not included
in
the calculation of net loss per share as the inclusion of such common stock
equivalents would be anti-dilutive. Accordingly, fully dilutive shares
outstanding equal basic shares outstanding as of December 31, 2004 and
2003.
Accumulated
Other Comprehensive Loss
Accumulated
other comprehensive loss consists of foreign currency translation adjustment
related to our Finland operations. Accumulated other comprehensive income
has no
applicable income tax.
Derivative
financial instruments
The
Company accounts for derivative financial instruments indexed to and potentially
settled in, its own stock in accordance with Emerging Issues Task Force
00-19,
which provides that if the number of shares deliverable in a transaction
be
indeterminable, that said shares be presented as a liability in the balance
sheet. Further, the liability is to be measured at fair value until
such
time as the obligation is settled. The shares issued in connection
with
the 2004 Subscription Agreement transactions discussed in Note 10 are derivative
transactions and as such have been presented in the accompanying balance
sheets
as liabilities and in the accompanying statements of operations as derivative
loss. The derivative loss represents the difference in the share
value as
issued and the value of said shares at the balance
sheet date based on the trading value of the stock
at December
31, 2004.
At settlement, accumulated derivative losses will be charged to retained
earnings as a constructive dividend.
Research
and development expenses
Research
and development expenses are comprised of the following types of costs
incurred
in performing R&D activities: salaries and benefits, occupancy costs of our
Finland laboratory, professional fees, clinical trial and related clinical
manufacturing costs. Research and development costs are expensed as incurred.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of operations and summary of significant accounting polices
(continued)
Income
taxes
NNBP
records its federal and state tax liability in accordance with Financial
Accounting Standards Board Statement No. 109 “Accounting for Income Taxes”. The
deferred taxes are recorded for temporary differences between the recognition
of
income and expenses for tax and financial reporting purposes, using current
tax
rates. Deferred assets and liabilities represent the future tax consequences
of
those differences, which will either be taxable or deductible when the
assets
and liabilities are recovered or settled.
Recent
accounting pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The
statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory
Pricing,” to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. ARB No. 43 previously
stated that these costs must be “so abnormal as to require treatment as
current-period charges.” SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this statement requires that allocation
of fixed production overhead to the costs of conversion be based on the
normal
capacity of the production facilities. The statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005,
with
earlier application permitted for fiscal years beginning after the issue
date of
the statement. The adoption of SFAS No. 151 is not expected to have
any
significant impact on the Company’s current financial condition or results of
operations.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets - An Amendment of APB Opinion No. 29.” APB Opinion No. 29,
“Accounting For Nonmonetary Transactions,” is based on the opinion that
exchanges of nonmonetary assets should be measured based on the fair value
of
the assets exchanged. SFAS No. 153 amends Opinion No. 29
to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets
whose
results are not expected to significantly change the future cash flows
of the
entity. The adoption of SFAS No. 153 is not expected to have any
impact on
the Company’s current financial condition or results of operations.
In
December 2004, the FASB revised its SFAS No. 123 (“SFAS
No. 123R”), “Accounting for Stock Based Compensation.” The revision
establishes standards for the accounting of transactions in which an entity
exchanges its equity instruments for goods or services, particularly
transactions in which an entity obtains employee services in share-based
payment
transactions. The revised statement requires a public entity to measure
the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost is to be recognized
over the period during which the employee is required to provide service
in
exchange for the award. Changes in fair value during the requisite service
period are to be recognized as compensation cost over that period. In addition,
the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to
require that excess tax benefits be reported as a financing cash flow rather
than as a reduction of taxes paid. The provisions of the revised statement
are
effective for financial statements issued for the first interim or annual
reporting period beginning after June 15, 2005, with early adoption
encouraged. The Company is currently evaluating the impact that this statement
will have on its financial condition or results of operations.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of operations and summary of significant accounting polices
(continued)
Recent
accounting pronouncements (continued)
In
March
2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”),
which requires an entity to recognize a liability for the fair value of
a
conditional asset retirement obligation when incurred if the liability’s fair
value can be reasonably estimated. FIN 47 is effective for fiscal years
ending
after December 15, 2005. The Company is currently evaluating the effect
that the
adoption of FIN 47 will have on its consolidated results of operations
and
financial condition but does not expect it to have a material impact.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections
(“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle
and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December
15, 2005 and is required to be adopted by the Company in the first quarter
of
fiscal 2006. The Company is currently evaluating the effect that the adoption
of
SFAS 154 will have on its consolidated results of operations and financial
condition, but does not expect it to have a material impact.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
2.
Acquisitions
NanobacLabs
Pharmaceuticals, Inc.
On
June
4, 2003, NNBP acquired approximately 74.4% of LABS in exchange for 24,400,000
restricted shares of NNBP. From June 5, 2003 through December 31, 2003,
NNBP
acquired the remaining 25.6% of LABS from various stockholders in exchange
for
6,598,000 restricted shares and additional consideration (in addition,
see Note
10 for stock issued in connection with bridge funding for this acquisition).
The
total
consideration for LABS was approximately $5.5 million, which included
the
fair value of NNBP common stock issued, as well as direct transaction costs.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed as of the acquisition date:
|
Current
assets
|
|
$
|
895,058
|
|
|
Investment
in OY
|
|
|
693,778
|
|
|
Fixed
assets
|
|
|
113,651
|
|
|
Identifiable
intangible assets
|
|
|
1,350,000
|
|
|
Goodwill
|
|
|
3,615,393
|
|
|
Other
assets
|
|
|
62,500
|
|
|
Current
liabilities
|
|
|
(768,280
|
)
|
|
Note
payable
|
|
|
(486,188
|
)
|
| |
|
|
|
|
| |
|
$
|
5,475,912
|
|
Acquired
identifiable intangible assets consist of product rights for the treatment
of
Nanobacteria. The
allocation of the purchase price was based, in part, on third-party valuations
of the fair values of identifiable intangible assets. Amortization
of this asset commenced as of the acquisition date.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
2.
Acquisitions (continued)
Nanobac
OY
Nanobac
OY is a Finnish company that performs similar research to that of the Company
in
nanobacteria infection. On September 25, 2002, LABS entered into an agreement
to
purchase 27% of Nanobac OY stock from three Finnish entities for 11,430
Euros. A
separate agreement also required LABS to acquire convertible promissory
notes in
Nanobac OY in the amount of 686,000 Euros plus interest. On November 11,
2003,
NNBP completed the acquisition of Nanobac OY when the final payment was
made and
the Company exercised the conversion option in the convertible promissory
notes.
Upon the conclusion of this transaction, the Company owned 65% of OY.
During
January through March 2004, NNBP acquired the remaining 35% of Nanobac
OY from
Dr. Kajander and Dr. Ciftcioglu (“OY Minority Shareholders”). The purchase price
was (a) 5 million shares of NNBP’s common stock, (b) 5 million warrants
convertible into NNBP’s common stock at $.005 per share and (c) cash
consideration of 15,000 Euros. Total consideration to the OY Minority
Stockholders is valued at $4.3 million.
The
total
consideration to date for OY is $5.1 million, which included cash payments
(made
before and after the acquisition of LABS), the fair value of NNBP common
stock
issued, as well as direct transaction costs. The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed as of the acquisition date:
|
Current
assets
|
|
$
|
37,534
|
|
|
Fixed
assets
|
|
|
29,286
|
|
|
Identifiable
intangible assets
|
|
|
5,243,048
|
|
|
Other
assets
|
|
|
4,731
|
|
|
Current
liabilities
|
|
|
(11,884
|
)
|
|
Advances
from Nanobac
|
|
|
(228,119
|
)
|
| |
|
|
|
|
| |
|
$
|
5,074,596
|
|
Acquired
identifiable intangible assets consist of patents for the detection and
treatment of Nanobacteria. The
allocation of the purchase price was based, in part, on third-party valuations
of the fair values of identifiable intangible assets. Amortization
of this asset commenced as of the acquisition date.
In
addition, as part of the above agreement, the OY Minority Shareholders
agreed to
employment agreements with NNBP. These agreements included $500,000 of
signing
bonuses of which $150,000 was paid in 2004 and the remaining $350,000 (earned
upon certain triggering events that occurred in 2004) is payable two years
from
the agreement dates (January and March 2006) and is included in long-term
liabilities.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
2.
Acquisitions (continued)
The
following unaudited table compares NNBP’s reported operating results to pro
forma information prepared on the basis that the above acquisitions had
taken
place at January 1, 2003. In management’s opinion, the unaudited pro forma
combined results of operations are not indicative of the actual results
that
would have occurred had the acquisitions been consummated at the beginning
of
2003 or 2004 or of future operations of the combined companies under the
ownership and management of NNBP.
| |
|
|
|
| |
|
|
|
2003
|
|
|
As
Reported
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
358,361
|
|
$
|
482,815
|
|
|
Net
loss
|
|
$
|
(8,518,408
|
)
|
$
|
(3,699,491
|
)
|
|
Basic
loss per share
|
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
|
Diluted
loss per share
|
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
| |
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
358,361
|
|
$
|
1,183,210
|
|
|
Net
loss
|
|
$
|
(8,555,553
|
)
|
$
|
(5,454,572
|
)
|
|
Basic
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
|
Diluted
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
3.
Discontinued Operations
During
October 2003, NNBP decided to divest its HealthCentrics business unit to
focus
exclusively on its nanobacteria business unit. NNBP was unsuccessful in
finding
a non-affiliated buyer for this business unit. During March 2004, this
business
unit was sold to an affiliate of the current CEO for consideration of $250,000
(a reduction in amounts otherwise owed to the affiliate). NNBP’s gain on
disposal was $749,326, which is accounted for as a capital contribution
given
the related party nature of the arrangement. Summary operating results
for the
discontinued operations for the years ended December 31, 2004 and 2003
are as
follows:
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Revenue
|
|
$
|
5,301
|
|
$
|
19,970
|
|
| |
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
($
57,268
|
)
|
|
($
938,358
|
)
|
|
Provision
for income taxes
|
|
|
--
|
|
|
--
|
|
| |
|
|
|
|
|
|
|
|
Net
loss
|
|
|
($
57,268
|
)
|
|
($
938,358
|
)
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
4.
Fixed Assets
| |
|
Dec
2004
|
|
| |
|
|
|
|
Computer
equipment
|
|
$
|
44,683
|
|
|
Computer
software
|
|
|
17,982
|
|
|
Lab
equipment
|
|
|
49,008
|
|
|
Office
equipment
|
|
|
20,769
|
|
|
Furniture
and fixtures
|
|
|
21,729
|
|
|
Leasehold
improvements
|
|
|
54,967
|
|
| |
|
|
|
|
| |
|
|
209,138
|
|
|
Accumulated
Depreciation
|
|
|
(84,143
|
)
|
| |
|
|
|
|
| |
|
$
|
124,995
|
|
Depreciation
expense for the years ended December 31, 2004 and 2003 was $47,295 and
$18,177,
respectively.
5.
Intangible Assets
|
Product
rights
|
|
$
|
1,350,000
|
|
|
Patents
|
|
|
5,243,043
|
|
| |
|
|
|
|
| |
|
|
6,593,043
|
|
|
Accumulated
amortization
|
|
|
(832,701
|
)
|
| |
|
|
|
|
| |
|
$
|
5,760,342
|
|
Amortization
expense for the years ended December 31, 2004 and 2003 was $669,775 and
$162,926, respectively. Expected future amortization is summarized as
follows:
|
|
|
|
|
|
|
|
$
|
706,920
|
|
|
2006
|
|
|
706,920
|
|
|
2007
|
|
|
706,920
|
|
|
2008
|
|
|
549,420
|
|
|
2009
|
|
|
436,920
|
|
|
Thereafter
|
|
|
2,653,242
|
|
| |
|
|
|
|
| |
|
$
|
5,760,342
|
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
6.
Accrued Expenses
|
Accrued
professional fees
|
|
$
|
79,500
|
|
|
Royalty
|
|
|
150,479
|
|
|
Employee
expense reports
|
|
|
19,843
|
|
|
Payroll
taxes and benefits
|
|
|
18,507
|
|
|
Other
|
|
|
67,532
|
|
| |
|
|
|
|
| |
|
$
|
335,861
|
|
7.
Segment Information
With
the
disposition of its HealthCentrics business unit (see Note 3), NNBP operates
a
single business segment. Geographic information is summarized as
follows:
| |
|
|
|
| |
|
|
|
2003
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
343,444
|
|
$
|
472,735
|
|
|
Finland
|
|
|
14,917
|
|
|
10,080
|
|
| |
|
|
|
|
|
|
|
| |
|
$
|
358,361
|
|
$
|
482,815
|
|
|
Assets
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
3,281,026
|
|
|
|
|
|
Finland
|
|
|
6,403,281
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
$
|
9,684,307
|
|
|
|
|
The
geographic classification of revenue was based upon the domicile of the
entity
from which the revenues were earned. Approximately 98% of Finland assets
relate
to patents recorded as a result of the acquisition of OY (see Note 2).
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
8.
Income taxes
| |
|
2004
|
|
2003
|
|
|
Deferred
tax asset:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,690,000
|
|
$
|
2,487,000
|
|
|
Valuation
allowance
|
|
|
(3,690,000
|
)
|
|
(2,487,000
|
)
|
| |
|
|
|
|
|
|
|
|
Deferred
tax asset net of valuation allowance
|
|
$
|
-
|
|
$
|
-
|
|
The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the statutory U.S. federal income
tax rates
of 34% to the loss from continuing operations before income taxes and minority
interest:
| |
|
2004
|
|
2003
|
|
| |
|
|
|
|
|
|
Statutory
tax benefit
|
|
$
|
2,981,000
|
|
$
|
967,000
|
|
|
State
taxes, net of federal benefit
|
|
|
335,000
|
|
|
72,000
|
|
|
Nondeductible
expense for common
|
|
|
|
|
|
|
|
|
stock
issued for services
|
|
|
(999,000
|
)
|
|
(292,000
|
)
|
|
Amortization
of intangible assets
|
|
|
(261,000
|
)
|
|
(57,000
|
)
|
|
Nontaxable
income in connection
|
|
|
|
|
|
|
|
|
with
HealthCentrics' disposition
|
|
|
305,000
|
|
|
-
|
|
|
Nontaxable
derivative loss
|
|
|
(251,000
|
)
|
|
-
|
|
|
Increase
in valuation allowance
|
|
|
(2,116,000
|
)
|
|
(715,000
|
)
|
|
Other,
net
|
|
|
6,000
|
|
|
25,000
|
|
| |
|
|
|
|
|
|
|
|
Provision
for taxes
|
|
$
|
-
|
|
$
|
-
|
|
Changes
in the valuation allowance during the year ended December 31, 2004 were
as
follows:
|
Valuation
allowance, beginning of year
|
|
$
|
2,487,000
|
|
| |
|
|
|
|
|
Discontinued
operations
|
|
|
(913,000
|
)
|
|
Increase
from continuing operations
|
|
|
2,116,000
|
|
| |
|
|
|
|
|
Valuation
allowance, end of year
|
|
$
|
3,690,000
|
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
9.
Related Party Transactions
Stockholder
Loan
An
entity
controlled by the Chief Executive Officer (who is also the largest stockholder
of NNBP), had loaned NNBP approximately $8.2 million from June 2003 through
December 2004. This loan had interest at 5% and is due on demand. On September
30, 2004, $7.5 million of the above loan was converted into 29,999,964
shares of
the Company’s common stock. On December 13, 2004 an additional $500,000 of the
above loan was converted into 4,166,667 shares of the of the Company’s common
stock, which is included in the Stock Settlement Liability at December
31, 2004
(see Note 10). The remaining loan balance at December 31, 2004 was approximately
$194,000.
Interest
expense for the above loans for the years ended December 31, 2004 and 2003
was
approximately $238,000 and $23,000, respectively.
Short-Term
Notes Payable
Short-term
notes payable consist of unsecured advances from employees of the Company.
These
notes bear interest at 5% and are due on demand.
Conversion
of Debt into Equity
During
August 2004, an employee and minority stockholder (less than 5% ownership
of the
Company) converted an $111,000 liability due from the Company into 923,458
shares of the Company’s common stock.
License
Agreement
During
February 2004, NNBP entered into a licensing agreement with Pegasus Worldwide,
Inc. (“Pegasus”) to market one of NNBP's over the counter products. NNBP’s Chief
Executive Officer is a director of Pegasus. Under the terms of the license
agreement, NNBP was due $75 for each unit of product sold. For the year
ended
December 31, 2004, NNBP recognized revenue of $46,800 under this license
agreement. Effective June 1, 2004, this license agreement was cancelled
and NNBP
is selling this product directly to customers.
Royalty
Agreement
The
Company was a party to a royalty agreement with the former majority owner
of
LABS who, along with his spouse, own approximately 24.4 million common
shares of
NNBP. Under the terms of the royalty agreement, this stockholder would
receive
an annual fee of $50,000 plus ten percent of gross sales from applicable
products. On March 16, 2004, the U.S. Patent Office printed Patent 6,706,290
“Methods for Eradication of Nanobacteria”. With the approval of this patent,
management believes that the above royalty agreement is not valid and no
amounts
will ultimately be due under the above royalty agreement.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
10.
Stockholders' equity
Preferred
stock
The
holder(s) of preferred shares are entitled to receive non-cumulative dividends
not to exceed $.10 per share when and as declared by the Board of Directors.
In
the event of any liquidation, dissolution or winding down of the company,
either
voluntary or involuntary, the holder(s) of each preferred share shall be
entitled to be paid on an amount equal to $4.00 per share. In the event
that the
Company authorizes the redemption of all or any preferred shares, the redemption
price shall be $4.30 per share. The preferred shares are convertible at
any time
into common at the ratio of 44.11 common shares to one preferred share.
Holders
of preferred shares have a right to cast eight votes per preferred share
and the
right to elect 50% of the authorized members of the board of
directors.
Common
stock, preferred stock and warrant issuances
During
2004, creditors of the Company converted $7.8 million of liabilities into
32,097,808 shares of the Company’s common stock as follows:
|
Shareholder
loan (Note 9)
|
|
|
29,999,964
|
|
$
|
7,499,990
|
|
|
Employee
(Note 9)
|
|
|
923,458
|
|
|
110,815
|
|
|
Unaffiliated
vendors
|
|
|
1,174
385
|
|
|
158,724
|
|
| |
|
|
32,097,807
|
|
$
|
7,769,529
|
|
During
2004, the Company issued 5.0 million shares of its common stock and 5.0
million
warrants with an exercise price of $0.005 per share in connection with
the
acquisition of the minority interest in OY (see Note 2). The value of these
stock and stock equivalent issuances was $4.3 million.
From
August 2004 through November 2004, the Company entered into Subscription
Agreements with two unaffiliated investors. Under the terms of the Subscription
Agreements, the Company received cash of $677,500 (net of $97,500 of expenses)
during the year ended December 31, 2004. The Company is to receive additional
cash of $775,000 within five days of registering the common shares and
warrants
issued as a result of the Subscription Agreements. The number of common
shares
to be issued is equal to the amount received divided by the lesser of $.12
or
52% of the average closing bid price of the Company’s common stock on the five
trading days immediately prior to the date on which the registration statement
is declared effective (“Fixed Price”). These amounts are classified as Stock
Settlement Liability at December 31, 2004. In addition, the Subscription
Agreements provide for the issuance of warrants equal to the number of
common
shares issued. Fifty percent (50%) of the warrants are exercisable at 110%
of
the Fixed Price and the remaining 50% of the warrants are exercisable at
150% of
the Fixed Price. Unexercised warrants will expire December 31, 2008. The
Company
has agreed to use its best efforts to promptly register the common shares
and
warrants.
During
December 2004, the Company entered into a Subscription Agreement with an
affiliate of the Company’s Chief Executive Officer. Under the terms of the
Subscription Agreement, the Company received cash of $500,000 during the
year
ended December 31, 2004. The Company is to receive additional cash of $500,000
within five days of registering the common shares and warrants issued as
a
result of the Subscription Agreement. All other terms of the Subscription
Agreement are substantially the same as the Subscription Agreements to
the
unaffiliated investors described in the preceding paragraph. This amount
is
classified as Stock Settlement Liability at December 31, 2004.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
10.
Stockholders' equity (continued)
As
a
result of the above Subscription Agreements, at December 31, 2004, the
Company
has issued 10,625,000 shares of common shares, which represents the minimum
number of shares to be issued under the Subscription Agreements in exchange
for
cash received through December 31, 2004. If the price of the Company’s stock is
less than $0.23 per share when the Company’s registration statement is declared
effective, the Company will be required to issue additional shares under
the
above Subscription Agreements equal to a price of 52% of the average closing
bid
price of the Company’s common stock on the five trading days immediately prior
to the date on which the registration statement is declared effective.
The
ultimate number of shares to be issued is indeterminate as the number of
shares
is dependent on NNBP’s closing bid price when a registration statement is
declared effective. As a result, the $1,275,000 of cash received under
the
Subscription Agreements through December 31, 2004 is included in long-term
liabilities.
At
December 31, 2004, the Company measured the value of the shares to be issued
under the Subscription Agreements through December 31, 2004 based on the
Company’s closing bid price at December 31, 2004 compared to the actual shares
issued. As a result of this measurement, an additional $643,630 long-term
liability was initially recorded as of December 31, 2004 with a charge
to Other
Comprehensive Income. The financial statements have been restated to record
this
charge against current earnings.
From
May
2001 through November 2002, the Company was in bankruptcy. Throughout the
bankruptcy proceedings, the Chairman, Secretary and CEO (collectively “NNBP
Officers”) funded the Company’s administrative costs and provided management to
the Company. During January 2003, the Company’s Board of Directors authorized
compensation to these NNBP Officers in the aggregate amount of $750,000
for
services rendered during the bankruptcy. Further, the Board of Directors
authorized the issuance of stock in satisfaction of the $750,000 liability.
The
liability was to be settled through the issuance of up to 75 million shares
of
the Company’s stock ($.01 per share fair value at the date of the award). This
obligation has been recorded at $750,000 (based on the value at the measurement
date) although shares were issued periodically throughout 2003. Certain
shares
were issued as preferred shares (at an equivalent value based on the conversion
ratio of 44.11 per share). Subsequent to December 31, 2003, the number
of
authorized shares was increased to 250,000,000, at which time the previously
issued preferred stock was converted to 35,048,445 shares of Common stock.
During
January 2004, a remaining Bankruptcy obligation was satisfied when the
Company
issued 4.5 million common shares to an entity that is an affiliate of the
Company’s CEO. The Company recognized an expense of $2.6 million in 2004 in
connection with this 4.5 million stock issuance which is the approximate
fair
value of the stock on the issuance date.
During
2003, a total of 34,998,000 shares of the Company’s common stock were issued for
the acquisition of LABS (see Note 2) including 4.0 million common shares
to an
affiliate of the Company’s Chief Executive Officer in connection with the
facilitation and bridge funding for this acquisition. The value of these
share
issuances was approximately $1.4 million.
An
aggregate of 3,644,000 shares of stock were issued during 2003 in connection
with the conversion of $728,800 in related party debt to equity. Stock
issued
for services in 2003 aggregated 50,000 shares valued at $30,175. In addition,
during 2003, the Company sold 1,690,000 shares of stock at prices ranging
from
$.20 to $.40 for aggregate proceeds of $548,000 and 368,815 shares of preferred
stock were converted to 16,268,430 shares of common stock.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
10.
Stockholders' equity (continued)
Warrants
As
of
December 31, 2004, in connection with the OY acquisition, 5,000,000 warrants
were outstanding with an exercise price of $.005 per common share and an
expiration date of August 31, 2009 (see Note 2).
At
the
finalization of the Subscription Agreements described above, approximately
23.4
million additional warrants will be issued with an estimated weighted average
exercise price of $.16 per common share and an expiration date of five
years
from the date of issuance.
Stock
Option Plan
11.
Commitments
The
Company leases administrative and laboratory facilities and office equipment
under cancelable and non-cancelable operating leases that expire through
June
2010. The following table summarizes the minimum future rental commitments
under
non-cancelable operating leases at December 31, 2004:
| Year
ending December 31, |
|
|
|
|
|
|
$
|
174,281
|
|
|
2006
|
|
|
178,408
|
|
|
2007
|
|
|
109,225
|
|
|
2008
|
|
|
58,163
|
|
|
2009
|
|
|
53,900
|
|
|
2010
|
|
|
27,234
|
|
| |
|
|
|
|
| |
|
$
|
601,211
|
|
Rent
expense on operating leases for the years ended December 31, 2004 and 2003
was
approximately $222,000 and $167,000, respectively.
13.
Contingency
On
September 24, 2004 a civil action was filed in United States District Court
-
Southern District of California by World Health Products, LLC (“World Health”)
broadly alleging that the Company, together with a customer of the Company
(“Customer”), has infringed on its Patent Number 5,602,180 related to the sale
of suppositories included in the Company’s supplement product. World Health
alleged additional complaints against the Customer to which the Company
is not
liable. During February 2005, World Health dropped the Company from their
lawsuit as their tests of the Company’s suppositories determined that World
Health’s patents were not being infringed upon.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
15.
Quarterly Data
| |
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
Dec
31
|
|
|
2004
Quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
32,385
|
|
$
|
73,564
|
|
$
|
118,141
|
|
$
|
134,271
|
|
|
Gross
profit
|
|
$
|
25,196
|
|
$
|
42,072
|
|
$
|
76,037
|
|
$
|
114,586
|
|
|
Loss
from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
($4,221,972
|
)
|
|
($1,384,238
|
)
|
|
($994,276
|
)
|
|
($1,860,654
|
)
|
|
Net
loss
|
|
|
($4,279,240
|
)
|
|
($1,384,238
|
)
|
|
($994,276
|
)
|
|
($1,860,654
|
)
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
($0.03
|
)
|
|
($0.01
|
)
|
|
($0.01
|
)
|
|
($0.02
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
Quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
0
|
|
$
|
77,637
|
|
$
|
241,340
|
|
$
|
163,838
|
|
|
Gross
profit
|
|
$
|
0
|
|
$
|
17,174
|
|
$
|
63,932
|
|
$
|
68,587
|
|
|
Loss
from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
($935,446
|
)
|
|
($166,229
|
)
|
|
($679,241
|
)
|
|
($980,217
|
)
|
|
Net
loss
|
|
|
($1,234,083
|
)
|
|
($468,666
|
)
|
|
($929,230
|
)
|
|
($1,067,512
|
)
|
|
Loss
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
($0.03
|
)
|
|
($0.01
|
)
|
|
($0.01
|
)
|
|
($0.01
|
)
|
Reconciliation
of 2003 Quarterly Data to Forms 10-QSB as filed
| |
|
Mar
31
|
|
Jun
30
|
|
Sep
30
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
as reported on Form 10Q
|
|
$
|
5,812
|
|
$
|
84,049
|
|
$
|
244,616
|
|
|
Discontinued
operations
|
|
|
(5,812
|
)
|
|
(6,412
|
)
|
|
(3,276
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenue
per above
|
|
$
|
0
|
|
$
|
77,637
|
|
$
|
241,340
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit as reported on Form 10Q
|
|
|
($10,300
|
)
|
$
|
3,034
|
|
$
|
38,503
|
|
|
Discontinued
operations
|
|
|
10,300
|
|
|
14,140
|
|
|
25,429
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
profit per above
|
|
$
|
0
|
|
$
|
17,174
|
|
$
|
63,932
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss as reported on Form 10Q
|
|
|
($595,222
|
)
|
|
($449,924
|
)
|
|
($913,780
|
)
|
|
Amortization
of intangible assets
|
|
|
-
|
|
|
(18,742
|
)
|
|
(90,000
|
)
|
|
Charge
or reversal thereof for stock issuances to affiliates of
officers
|
|
|
(650,000
|
)
|
|
|
|
|
74,550
|
|
|
Other
|
|
|
11,139
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss per above
|
|
|
($1,234,083
|
)
|
|
($468,666
|
)
|
|
($929,230
|
)
|
