Filed On 3/30/04 4:40pm ET · SEC File 33-80612 · Accession Number 1000096-4-119
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/30/04 Nanobac Pharmaceuticals Inc 10KSB 12/31/03 10:136 Mitchell Fi..Printing/FA
Document/Exhibit Description Pages Size
1: 10KSB Form 10-Ksb (12-31-2003) 76 307K
2: EX-3.1 Amendment 2± 8K
3: EX-10.4 Agreement and Plan of Reorganization 33 77K
4: EX-10.10 Loan Agreement 2 11K
5: EX-10.11 Employment Agreement 16 76K
6: EX-21.1 List of Subsidiaries 1 5K
7: EX-23.1 Consent 1 6K
8: EX-23.2 Consent 1 6K
9: EX-31.A Certifications Required Under Section 302 2± 10K
10: EX-31.B Certifications Required Under Section 302 2± 10K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
fiscal year ended December 31 2003
Nanobac Pharmaceuticals, Incorporated
-------------------------------------
(Exact name of registrant as specified in its charter)
Florida 0-24696 59-3248917
------- ------- ----------
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification Number)
2727 W. Martin Luther King Blvd, Suite 850, Tampa, Florida 33607
----------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
(813) 264-2241
--------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for a shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [ ] No [X]
State issuer's revenue for its most recent fiscal year: $482,815
The approximate aggregate market value of voting and non-voting stock held by
non-affiliates of the registrant was $54,341,752 as of March 26, 2004. The
shares of Common Stock held by each current executive officer and director and
by each person who is known to the Company to own 5% or more of the outstanding
Common Stock have been excluded from this computation on the basis that such
persons may be deemed affiliates. The determination of affiliate status is not a
conclusive determination for other purposes.
As of March 26, 2004 there were 139,517,285 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on or about May
31, 2004 are incorporated by reference into Part III.
Nanobac Pharmaceuticals, Incorporated
Form 10-KSB
For the Year Ended December 31, 2003
Table of Contents
Page
Part I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of
the Security Holders 22
Part II
Item 5. Market for Registrant's Common Stock
and Related Shareholder Matters 23
Item 6. Selected Consolidated Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with
Independent Auditors on
Accounting and Financial Disclosure 48
Part III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions 49
Item 14. Controls and Procedures 50
Part IV
Part 15. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 51
2
PART I
Item 1. The Business
------------
Overview
Nanobac is a biolifescience company. Our business is the study and development
of therapeutic and diagnostic technologies related to the novel pleomorphic
pathogen known as nanobacterium sanguineum ("Nanobacteria"). Our primary purpose
is to use our discoveries, science and innovation to dramatically improve
people's lives. Our corporate goals are to launch a stream of products that will
impact the delivery of healthcare.
Business Applications
[Graphic Omitted]
Building a Leading Company in Nanobacteria Applications
Healthcare
Prevention, detection, treatment, and management of illness at the point of
patient care through the services offered by the medical and allied health
professions.
Biomedical
Application of biological and physiological principles to healthcare.
Bioindustrial
Application of biological and physiological principles to the biomedical
industry.
Healthcare Strategy
We are currently pursuing concurrent paths to provide earlier, easier and more
accurate diagnosis and treatment of degenerative and other pathologic
calcification diseases. Taking advantage of our diagnostic assays, combined with
our potential therapies, we will offer a change to the way pathological
calcifications are managed. The cost savings from our products occur at every
stage of the disease progression:
[GRAPHIC OMITTED]
o Earlier screening allows:
(a) Earlier diagnosis
(b) fewer physician office visits, less expensive, more accurate care
(c) medical management rather than surgical intervention
o Definitive nanobacterial diagnosis allows:
(a) earlier referral of diseased patients
(b) earlier initiation of the proper therapy
o Determination of nanobiotic therapy allows:
(a) more targeted and cost-effective therapy
(b) better clinical outcomes
o Monitoring nanobacterial progression/regression allows:
(a) optimization of therapeutic regimen for best clinical outcome
(b) prophylactic treatment and disease prevention
4
Initially, use of our diagnostic and therapeutic products will be adjunctive
with current procedures. Over time, as the value of the proprietary serological
tests are established and the product line expands to include further
serological and genetic diagnostic technology, our diagnostic work-ups may
reduce costly and time consuming protocols.
Market Positioning
Our products and services will be marketed as follows:
o Unique. We believe that our test for diagnosing nanobacteria is simpler and
more cost effective than our competitors.
o Expert Source. Remaining closely involved on a continuing basis with physician
and scientific thought leaders will be a cornerstone of our philosophy and
continued product development. We will support and present a broad number of
clinical studies which create publications and the adoption of products by the
physician results. The clinical results and patient reports will contain
in-depth analyses and discussion of the diagnoses as well as prescribed therapy
recommended by our medical advisory staff.
o Patented Technology. The initial test for diagnosing nanobacteria was
developed by two scientists in the area of bacteriology research. While the
underlying tests used to diagnose nanobacteria are relatively straight forward,
their application for disease states relies on the specificity of proprietary
reagents isolated and developed by Neva Ciftcioglu, PhD and Olavi Kajander, MD,
PhD. We own these patents as a result of our acquisition of Nanobac OY.
5
Products
[GRAPHIC OMITTED]
Diagnostic Development Strategy
Diagnostic - The Company's diagnostic products will be developed in three
phases:
Phase I: Nanobac has a commercially available serology test for the
identification of nanobacterial antibodies and antigens. Oxoid is the
distributor in the UK, Europe, Brazil and Australia. With combined research and
commercial results, Nanobac has established a database of serum specimens and
clinical data related to the diagnosis of nanobacteria. These technologies were
developed by Neva Ciftcioglu, PhD and Olavi Kajander, MD, PhD. at the University
of Kuopio in Finland, and Nanobac OY of Finland. Under Dr. Kajander's
supervision and using protocols he established, the Company utilizes its
database to provide a detailed diagnostic analysis. The analysis includes
reference to research studies, observations from similar and contrasting sets of
samples. The initial tests are the only simple blood serum tests commercially
available for clinicians and researchers for screening for Nanobacterium
sanguineum. Nanobac is consulting with a Contract Research Organization in order
to reach 510k status. 510k status is the premarket notification provisions of
the 1976 Medical Device Amendments to the Food, Drug, and Cosmetic (FD&C) Act as
amended by the Safe medical Devices Act of 1990 and is intended to serve as a
screening mechanism to allow for marketing of medical devices with a reasonable
assurance of safety and effectiveness.
Phase II: We will broaden the general cardiovascular serological products with
our proprietary serology product. Our diagnostic will become a key metric in the
work up of cardiovascular patients. The current serodiagnostic cardiovascular
market is expansive. and does not have a stand alone predictive or diagnostic
marker. Nanobac will pursue a pre-market approval (PMA) from the FDA specific to
the cardiac marker claim.
6
Phase III: Promotion in other disease sites. With a preeminent position in
defining nanobacteria clinical pathways of care, we will support and present a
broad number of clinical studies on other disease sites. This will lead to the
adoption of products by the appropriate physician specialist. We intend to
pursue the urology market with a strategy similar to cardiology.
We are fortunate to have an ISO 9000 facility, in Finland, that produces our
antibodies and antigens for the nanobacteria diagnostic serology test. The
components that are required to complete the Elisa test kit are commercially
available throughout the world. We are not dependent on any customer or vendor
at this time.
Therapeutic
[GRAPHIC OMITTED]
Therapeutic Development Strategy
We intend to capitalize on our patent for the eradication of nanobacteria. The
therapies that evolve from the patent to treat Nanobacterium Sanguineum
infection, may contribute to the treatment of cardiovascular, urologic, and
other degenerative diseases. The Nanobiotic therapy previously identified as
NanobacTx, Urobac, and Dermabac have been discontinued. NanobacTX was launched
by the predecessor company approximately three years ago. The previous
management team at Nanobaclabs reasoned that they were following the tenets of
Section 503a of the Federal Food, Drug and Cosmetic Act concerning "pharmacy
compounding", and that utilization of previously approved drugs was exempt from
the IND process. The new management, after legal, government, regulatory, and
industry consultations, voluntarily withdrew the aforementioned Nanobiotic
therapies from the market. New management regarded the previous management's
view as not supported by the FDA's current interpretation of section 503a.
NanobacTX had grown to 14,000 prescriptions since inception.
7
Licensing of late stage development compounds is also a strategy that we will
employ for compounds that require minimal development for filing to obtain FDA
approval. The lower cost and lower risk of this strategy coupled with the short
time to market for these compounds, is aligned with the overall Nanobac business
plan. We are also seeking better delivery methods that will improve patient
compliance.
Our ongoing therapeutic development strategy will include our proprietary
compounds as well as identification of compounds and projects that are in Phase
III (see government regulation for description of Phase III). Compounds and
projects can include mechanisms of action and mechanisms of drug delivery. We
provide unique opportunities for these companies to realize the significant
potential of their various antibiotic projects.
Healthcare Market
Market Size
Pathologic calcifications are treated in a number of ways, depending on the
seriousness of the disease. For example, Coronary Heart Disease (CHD),
Polycystic Kidney Disease (PKD), and Kidney Stone patients are managed with
lifestyle changes and medications. Others with severe CHD or PKD may need
surgery. In any case, once CHD or PKD develop, they require lifelong management.
Listed below are the costs associated with these disease states.
Health Dollars Spent
Disease Site (in millions of US$) Source
Coronary Heart Disease (CHD) 325,000,000,000 AHA
Kidney Stones 1,830,000,000 NIDDK
Polycystic Kidney Disease (PKD) 1,000,000,000 NIDDK
Prostatitus 1,330,000,000 NAMCS
------------------
329,160,000,000
==================
Additional biomedical research and clinical studies are planned or underway to
document nanobacteria's role in the development of Atherosclerosis, Gall Stones,
Chronic Prostatitis, Diabetes, Arthritic Spurs, Cataracts, Scleroderma, Kidney
Cysts and Kidney Stones, certain Breast Pathology, Polycystic Kidney Disease
(PKD), Solid Tumor Pathologies, Immunosuppressed Conditions, Dental Pulp Stone,
and Neurodegenerative Disease.
8
Cardiac
The most serious and widespread of the diseases caused by calcified plaque are
atherosclerosis (hardening of the arteries) and coronary heart disease (CHD).
Coronary artery disease (CAD) is CHD of the heart's arteries. Atherosclerosis in
the carotid arteries, the primary blood supply to the brain, affects more than
one-third of individuals 51 to 55 years old and over half of individuals 61-65
years of age. CAD begins as coronary artery calcification that leads to
atherosclerosis before developing into CAD. This process is generally slow and
can begin in childhood. Coronary artery disease remains the #1 killer of adult
males in the U.S. Cardiovascular diseases represent 26.7% of all physician
visits and 26.1% of all scripts in the United States. CAD is the most common
form of heart disease affecting approximately 1.3 million Americans. Over 50% of
the people who die suddenly of CAD had no symptoms. These major public health
issues, in the U.S. and worldwide, were chosen as the focus of our initial
research and development efforts.
Chest pain (angina) or shortness of breath may be the earliest signs of CAD. A
person may feel heaviness, tightness, pain, burning, pressure, or squeezing,
usually behind the breastbone but sometimes also in the arms, neck, or jaws.
These signs usually bring the patient to a doctor for the first time. In fact,
50% of the people having heart attacks, the heart attack was the first symptom
of heart disease. It is important to know that there is a wide range of severity
for CAD. Some people have no symptoms at all, some have mild intermittent chest
pain, and some have more pronounced and steady pain. Still others have CAD that
is severe enough to make normal everyday activities, like walking to the
mailbox, difficult. Because CAD varies so much from one person to another, the
way a doctor diagnoses and treats CAD will also vary a lot.
CAD is normally diagnosed using one or a combination of several diagnostic tests
Electron Beam Computed Tomographic Imaging (EBCT), Echocardiography,
Ventriculogram, Electrocardiogram (ECG or EKG), Coronary angiography, exercise
thallium test, or Positron emission tomography (PET) scanning. CAD can be
controlled or treated with various techniques: i) medication (beta blockers,
calcium channel blockers, or nitroglycerine), ii) transcatherter interventions
(Percutaneous transmyocardial revascularization (PTMR), Atherectomy,
Angioplasty, Stent, or Laser ablation), or iii) surgery (coronary artery bypass
or Transmyocardial laser revascularization (TMLR)). With nanobacteria being
present in atherosclerosis one may ask themselves if the current diagnostic
tools and therapeutic treatments available for CAD are insufficient to address
the problem. The nanobacterial blood test, NB2, may prove to be a new metric in
the diagnosis and treatment of CAD.
CAD is treated in a number of ways, depending on the seriousness of the disease.
For many people, CAD is managed with lifestyle changes and medications. Others
with severe CAD may need surgery. In any case, once CAD develops, it requires
lifelong management.
9
Urological
Kidney stones are one of the most common disorders of the urinary tract;
patients made more than 1.3 million visits to health care providers to have
their stones treated in 1997. In 1999, more than a quarter million hospitalized
patients had a diagnosis of kidney stones. An estimated 10 percent of people in
the United States will have a kidney stone at some point in their lives. Men
tend to be affected more frequently than women.
A kidney stone is a solid piece of material that forms in the kidney out of
substances in the urine. A stone may stay in the kidney or break loose and
travel down the urinary tract. A small stone may pass all the way out of the
body without causing too much pain. A larger stone may get stuck in a ureter,
the bladder, or the urethra. A problem stone can block the flow of urine and
cause great pain. Stone that will not pass by itself may require: extracorporeal
shockwave lithotripsy, tunnel surgery (percutaneous nephrolithotomy), or
ureteroscope extraction. Kidney stones are diagnosed by x ray, sonogram, or IVP
(intravenous pyelogram).
Greater than 90% of human kidney stones are positive for nanobacteria. It is
interesting to note that astronauts have preponderance for kidney stone
formation. Lack of gravity causes bone loss causing increased calcium in the
blood therefore nanobacteria is an important catalyst for stone formation. Not
only in astronauts is nanobacteria important in stone formation but it has also
been shown to cause stone formation in rats. With further studies Nanobac
Pharmaceuticals intends to change the course of diagnosing and treating the many
patients with these painful kidney stones. Polycystic kidney disease (PKD) is a
genetic disorder characterized by the growth of numerous cysts in the kidneys.
The cysts are filled with fluid. PKD cysts can slowly replace much of the mass
of the kidneys, reducing kidney function and leading to kidney failure. PKD can
cause cysts in the liver and problems in other organs, such as the heart and
blood vessels in the brain. These complications help doctors distinguish PKD
from the usually harmless "simple" cysts that often form in the kidneys in later
years of life.
In the United States, about 500,000 people have PKD, and it is the fourth
leading cause of kidney failure. Medical professionals describe two major
inherited forms of PKD and a noninherited form. The signs of PKD include: pain
in the back and lower sides, headaches, urinary tract infections, blood in the
urine and cysts in the kidneys and other organs. Diagnosis of PKD is obtained
by: ultrasound imaging of kidney cysts, ultrasound imaging of cysts in other
organs, family medical history (genetic testing). PKD has no cure. Treatments
include: medicine and surgery to reduce pain, antibiotics to resolve infections,
dialysis and transplantation to replace functions of failed kidneys.
10
Studies have shown that in PKD patients 100% of kidney cyst fluids and urine
were positive for nanobacteria. Nanobacteria may cause damage to kidney cells
allowing cysts to form in these PKD patients that have defective tissue
regeneration. Again with nanobacteria being present in PKD patients one may ask
themselves if the current diagnostic tools and therapeutic treatments available
for PKD are insufficient to address the problem. Nanobac Pharmaceuticals plans
to initiate research trials that will evaluate the link between nanobacteria and
PKD. We are positioned to provide novel diagnostics and research potential
nanobacterial treatments for this disease with limited and costly treatment
options.
Prostatitis is a painful inflammation of the prostate gland. Prostatitis' cause
is not known, but can be classified as acute or chronic bacteria prostatitis.
Symptoms may include pain while urinating or ejaculating, chills or fever,
perineal, testicular, bladder or low back pain. Some common methods for
diagnosis are a digital rectal exam (DRE), transrectal ultrasound or a Prostate
Specific Antigen (PSA) test. Other methods are urine samples to determine
inflammation or infection, cystoscopy or urine flow studies to measure the
strength of the flow. Treatment usually includes prolonged antibiotic
treatments, alpha-blockers, anti-inflammatory drugs, vitamins, repetitive
prostatic massage or heat therapies. If antibiotic treatment is unsuccessful,
surgery (transurethral resection or TURP) may be done. This delicate surgery can
cause sterility, impotence, and/or incontinence. Prostatitis is difficult to
diagnose and is therefore difficult to treat. Some patients may never experience
relief and may have to cope with the condition for the remainder of their lives.
According to urologist Thomas Stamey, up to 50% of all men experience symptoms
of prostatitis during their lifetimes.
Competition
Competition in the biotechnology and pharmaceutical industries is intense and
comes from many and varied sources. We do not believe that any of the industry
leaders can be considered dominant in view of the rapid technological change in
the industry. Many of these companies have substantially greater financial,
marketing, research and development and human resources than us. Most large
pharmaceutical companies have considerable experience in undertaking clinical
trials and in obtaining regulatory approval to market pharmaceutical products.
The market for providing physicians and managed care organizations with
nanobacteria related disease management and services are just emerging, and we
are among the leaders in providing a comprehensive approach to managing
nanobacterial diseases.
The general market for providing primary care physicians, cardiologists, and
urologists with specialized serological diagnostic services for detection,
diagnosis, prognosis and monitoring is highly competitive and dominated by Quest
and Labcorp. Their competitive strength lies in their service capabilities, i.e.
to provide local couriers for specimen pickup and broad-based contracting
ability with managed care organizations.
11
The general market for providing primary care physicians, cardiologists, and
urologists with therapies for cardiovascular disease is also highly competitive
and includes both pharmaceutical and medical device companies. The treatment of
nanobacteria infection is a paradigm shift for these physicians as was h.Pylori
for the practicing gastroenterologist.
We believe that we will be able to grow and defend our specialized nanobacteria
related disease market niche due to our expertise in the field, our disease
management approach, and our technology leadership.
Patents and Intellectual Property
We have filed three patents, and received allowance on all three filings. We
intend to try to take steps to aggressively protect and expand our intellectual
property, which is a core strength. Our patents are summarized below.
Patent Antibody Extraction Protocol - Growth factor preparation of thymocyte
cell culture medium its production and use [US 5,776,778; WO9534317]
The present invention relates to a growth factor preparation derived from a
mixed lymphocyte culture, and a process for its production. The invention also
relates to a cell culture medium containing said growth factor preparation. The
invention further relates to a process for culturing plasma cells and producing
antibodies by using said cell culture medium.
12
Patent Diagnostic - Culture and detection method for sterile-filterable
autonomously replicating biological particles. [US 5,135,851,2008; EU 0460414,
(valid in 13 EU countries),2010]
Novel autonomously replicating biological particles resembling bacteria and
having most surprising properties were discovered from cell culture sera and
other biological samples alleged to be sterile according to the current testing
methods. These slowly growing agents named nanobacteria are smaller than any
known cell-walled bacteria. They pass through sterile filters, even with pore
sizes smaller than their diameter. They cannot be cultured on any standard
microbiological media. With the isolation and detection methods provided here
they are commonly detectable in animal or human serum. This patent holds for
methods of their culture, detection, purification, and elimination and described
the necessary reagents for that. Autonomously replicating particles can be
cultured in RPMI 1640, or in DMEM, or in other cell culture media. Optimal
growth can be obtained by supplementing the culture medium with 10-20% sterile
fetal bovine serum. Addition of small amounts of D,L or L selenomethionine
together with nucleotide precursors may improve growth. Culture is started by
addition of the test sample to the medium in a cell culture vial which is
thereafter incubated under standard mammalian cell culture conditions for at
least 15 days. Biological samples are preferably sterile-filtered before culture
through 0.22 micron filters. The growth of nanobacteria, if present, can be seen
using microscopy at high magnification. The organisms can be made more visible
by DNA staining and immunostaining done either separately or simultaneously to a
fixed preparation. Nanobacteria can be cultured without mammalian cells, but
co-culture together with an adherent cell line like 3T6 is useful because 3T6
cells can take nanobacteria inside the cells. This aids the staining of the
preparations. Intracellular agents are not lost during fixation and staining.
Nanobacterial antigens can be prepared by specific culture, harvest,
purification and solubilization methods. Immunization of rabbits with the
solubilized antigen (treatment with proteinase K and with 1 N HCI) produces
highly specific antibodies to nanobacteria. Gamma-irradiation of culture serum
at 2.5-4.0 megarads, preferably in addition with treatment using solid-phase
bound antibodies enables preparation of nanobacteria-free serum. Use of this
serum creates sterile culture medium for the culture and detection of
nanobacteria. Double staining combining Hoechst No. 33258 stain and
immunofluorescence specifically distinguishes nanobacteria from other cell
culture contaminants.
Patent Therapeutic - [US Patent 6,706,290; EP 1094711] Methods for eradication
of Nanobacteria
Nanobacteria contribute to pathological calcification in the human and animal
body, including diseases such as kidney stones, salivary gland stones, dental
pulp stones and atherosclerosis. The present invention provides methods for
sterilizing articles contaminated with nanobacteria. The present invention also
provides methods of treating patients infected with nanobacteria. In particular,
the present invention provides a method for preventing the recurrence of kidney
stones in a patient that has suffered from kidney stones, comprising
administration of an antibiotic, a bisphosphonate, or a calcium chelator, either
alone or in combination, in an amount effective to inhibit or prevent the growth
and development of nanobacteria.
13
Our Science
The term "nanobacteria" is short for its scientific name Nanobacterium
sanguineum, a Latin term for blood nanobacteria. Though the human body does not
recognize nanobacteria as harmful, it has been shown to be implicated in the
formation of disease-causing calcified plaque in the circulatory system and
vital organs. We conduct research of degenerative diseases stemming from
nanobacterial infections. We are developing unique technologies for early
accurate diagnoses of nanobacterial infection, and eradication methods which
allow physicians to effectively manage the clinical symptoms of the disease,
improve therapeutic results, and as an outcome, lower overall medical costs.
We have patents with respect to the identification and eradication of the
pathogen Nanobacterium Sanguineum. Although we possess intellectual property
with Bioindustrial, Biomedical and Healthcare implications, we will focus
initially on Healthcare.
We plan to leverage our intellectual property and proprietary technology to
establish value and credibility with clinicians and researchers specializing in
cardiovascular and other diseases. From that base, we will broaden our reach by
setting up a secured wide area network which will increase clinicians' access to
our extensive database of information and clinical experience for the management
of a full range of diseases. We believe our products and services can greatly
reduce the cost and increase the quality of life for the patients. To bring our
products to the market, Nanobac will form a proprietary reference laboratory
that offers physicians a comprehensive patient analysis and a Nanobiotic
therapeutic.
Nanobacterium Sanguineum Background and Description:
Nanobacterium sanguineum (nanobacteria) was discovered in 1988 by Finnish
researcher Olavi Kajander, M.D., Ph.D.. Dr. Kajander was carrying out mammalian
cell research when a routine mammalian cell culture experiment, using
commercially available fetal bovine serum as the growth media, just wasn't
getting off the ground. The cells weren't thriving and dividing like they
should; the cells were sickly and died off before any study could be done.
Strange vacuoles were forming up in many of the cells, and these cells
subsequently died. Dr. Kajander, like all basic cell researchers, had
encountered this problem before; sometimes their cell cultures worked, and
sometimes they didn't. Thankfully, Dr. Kajander researched this further and
after several weeks of culture, turbidity developed in one of the flasks. This
represented the first isolation of Nanobacterium sanguineum.
14
In 1991 Dr. Kajander was joined by microbiologist Neva Ciftcioglu, Ph.D. at the
University of Kuopio, Finland. Nanobacteria was the first nano-sized,
autonomous, self-replicating organism ever detected. Their research established
that the blood-borne nanobacteria forms slow-growing calcified colonies in
arteries and organs, much as coral reefs are formed. Nanobacteria have been
found in human and animal blood, urine and saliva. The name "nanobacteria" was
introduced and patented by Dr. Olavi Kajander as the name for very small
mineral-associated bacteria-like life forms. Nanobacteria produce apatite
minerals by building apatite envelopes or "castles" around themselves. They seem
to play a role in the formation of kidney stones and other calcification
diseases. Nanobacteria may be involved in biofilm formation, a common problem in
urinary stents and catheters. They may also cause chronic infections in humans
and animals.
Nanobacterium sanguineum is a small, slowly growing bacterium that can be found
in human blood, kidney stones, and arterial wall plaques. Nanobacteria are
10,000 to 100,000 times smaller than typical bacteria and, until recently, were
not detectable using conventional sterility testing methods. These bacteria tend
to cluster and form a protective calcium shell that shelters them from the
immune system and most antibiotics. Nanobacteria are cytotoxic (can cause damage
to cells), resistant to heat, hydrocholic acid, high-dose radiation, and most
antibiotics (See Table 1).
Nanobacteria are carbonate apatite forming bacteria and have the unique
capability to fix calcium and prothrombin upon their cell membrance, ultimately
forming a porous protective calcium encasement. Within this encasement, they
become semi-dormant (multiple slowly) and can build upon themselves somewhat
like a coral reef might enlarge upon itself. Their rate of replication is
approximately 44% annually. Nanobacteria are pleomorphic which means that they
have different physical forms and shapes during their life cycle. They can also
change appearance, form and alter function in response to various changing
environmental factors.
Nanobacteria in mammalian cells leads to abnormal cell growth, growth rates or
cell death and may lead to genetic alteration (mutations). Nanobacteria cannot
be grown in standard culture media but grow well in media supplemented with
mammalian blood or serum. Nanobacteria have been found in various mammalian
serum-derived or serum-supplemented products, such as fetal bovine serum and
vaccines. As these organisms pass through most sterilization filters in use
today, novel sterilization techniques are needed. These may include improved
filtration, radiation and chemical treatments. Due to their extremely small
size, nanobacteria can only be studied using scanning and transmission electron
microscopes or other recently developed high-resolution microscopes.
15
Table 1: Unique Properties of Nanobacteria
---------------------------- ---------------------------------------------------
Property Description
---------------------------- ---------------------------------------------------
Size: 0.05-0.5 nm
---------------------------- ---------------------------------------------------
Doubling Time: 3-6 days
---------------------------- ---------------------------------------------------
Morphology: Coccoid to coccobacillar
Cell wall 20-200nm
---------------------------- ---------------------------------------------------
Isolated From: Vaccines
Fetal Bovine Serum
Calcified carotid arteries
Aortic aneurysms
Cardiac valves
---------------------------- ---------------------------------------------------
Antibiotic Penicillin
sensitivity Macrolides
Quinolones
---------------------------- ---------------------------------------------------
Resistant to: Heat: 100(0)C for 1 hr
pH Change
UV radiation
Gamma-Irraditaion: 1 megarad
Formaldehyde, glutaraldehyde
---------------------------- ---------------------------------------------------
Sensitivity: 5-FU
Tetracycline HCl
Cytosine-arabinoside
Gamma-Irraditaion: >2.5 megarad
0.02 micron/20nm filter
1% Virkon(R) (disinfectant)
---------------------------- ---------------------------------------------------
Nanocteria may be a primitive life form. One recent study examining upper
urinary tract stones found particles resembling nanobacteria by scanning
electronic microscopy. A second study confirmed the existence of nanobacterial
particles isolated from human saliva and dental plaque that were culturable.
Some groups have confirmed the existence of nanobacteria by identification of
the organisms in polycystic kidney disease, in a North Carolina beef herd, in
human pineal tissue, in human atherosclerotic plaques, in calcified carotid
arteries, aortic aneurysms, caridac valves, cardiac stents, and ovarian cancer.
Nanobacteria are present in many isolates of pathological calcification (calcium
build ups in areas of the body where calcium should not be present). Therefore,
nanobacteria may be implicated in multiple diseases including but not limited
to: cardiac disease, kidney stones, polycystic kidney disease, arthritis,
ovarian cancer, and prostatitis.
16
Nanotechnology is the creation of useful, functional materials, devices, and
systems through controlling and manipulating matter on the nanometer-length
scale (1-100 nanometers), and exploiting novel phenomena and properties
(physical, chemical, biological, mechanical, electrical) at that length scale.
The prefix "nano" means a billionth - a nanosecond is one-billionth of a second,
a nanometer is one billionth of a meter, and so on. For comparison, the head of
a pin measures one million nanometers across. A red blood cell has a diameter in
the range of thousands of nanometers. Ten nanometers is 1,000 times smaller than
the diameter of a human hair. DNA molecules are about 2.5 nanometers wide. An
individual atom measures a few tenths of a nanometer in diameter.
There are medical professionals who assert that nanobacteria do not exist. They
contend that nanobacteria are artifacts, contaminants or crystalline growths. We
disagree with this contention. Our business model is based on the existence of
nanobacteria.
Research and Development
Our lead scientists Olavi Kajander, and Neva Ciftcioglu NASA/USRA, have formed
multidisciplinary alliances with renown researchers including: Hojatollah Vali,
McGill University, Canada; Mayo Clinic, Rochester; Garcia-Cuerpo, Spain; China
Changsha group; Sommer, Univ. of Ulm; Pretorius, South-Africa; G. Epstein/J.T.
Salonen; Tom & Marcia Hjelle, Univ. of Illinois; S. Epstein, Washington Hospital
Center, Washington DC; R. Berger, Miami Heart Institute, Miami FL; Y. Av-Gay,
University of British Columbia; and H. Gomez, Genbiomics.
To date, this collaboration has published over 80 articles, numerous abstracts
and book chapters. Example publications since 1998 include articles in Science,
Nature and Nature Medicine, Proceedings of the National Academy of Sciences,
Lancet, New Scientist, Molecular Medicine, PDA Journal, Kidney International,
Circulation, and American Society for Microbiology.
Biomedical Strategy
Potential biomedical applications include screening for and biosterilization of
nanobacterial contamination in products that will be used treating patients.
Injectable medical applications such as vaccines, blood products,
immunoglobulin, and IV fluids must be free of contaminants. Screening of
diagnostic support media such as culture media, and growth preparations is
critical in order to get the correct diagnosis. Biosterilization of Medical exam
equipment at the point of patient care and of implantable durable medical
devices such as hip replacements, cardiac valves, and stents will perhaps
mitigate or prolong the effectiveness of the device.
Bioindustrial Strategy
Potential bioindustrial applications include screening and biosterilization of
production line environments used for the preparation of cultures, vaccines, and
implantable durable medical equipment.
17
Government Regulation
Diagnostic laboratory operations are not regulated by the FDA. Our diagnostic
business is subject to regulation under the federal Clinical Laboratory
Improvement Act (CLIA). We will seek FDA guidance for our unique nanobiotic
therapeutic. We will comply with all FDA regulatory requirements.
Our contemplated activities and the products and processes that will result from
such activities will be subject to substantial government regulation.
Before new pharmaceutical products may be sold in the U.S. and other countries,
clinical trials of the products must be conducted and the results submitted to
appropriate regulatory agencies for approval. These clinical trial programs
generally involve a three-phase process.
Phase 1 includes the initial introduction of an investigational new drug into
humans. These studies are closely monitored and may be conducted in patients,
but are usually conducted in healthy volunteer subjects. These studies are
designed to determine the metabolic and pharmacologic actions of the drug in
humans, the side effects associated with increasing doses, and, if possible, to
gain early evidence on effectiveness. During Phase 1, sufficient information
about the drug's pharmacokinetics and pharmacological effects should be obtained
to permit the design of well-controlled, scientifically valid, Phase 2 studies.
Phase 1 studies also evaluate drug metabolism, structure-activity relationships,
and the mechanism of action in humans. These studies also determine which
investigational drugs are used as research tools to explore biological phenomena
or disease processes. The total number of subjects included in Phase 1 studies
varies with the drug, but is generally in the range of twenty to eighty.
In Phase 1 studies, CDER can impose a clinical hold (i.e., prohibit the study
from proceeding or stop a trial that has started) for reasons of safety, or
because of a sponsor's failure to accurately disclose the risk of study to
investigators. Although CDER routinely provides advice in such cases,
investigators may choose to ignore any advice regarding the design of Phase 1
studies in areas other than patient safety.
Phase 2 includes the early controlled clinical studies conducted to obtain some
preliminary data on the effectiveness of the drug for a particular indication or
indications in patients with the disease or condition. This phase of testing
also helps determine the common short-term side effects and risks associated
with the drug. Phase 2 studies are typically well-controlled, closely monitored,
and conducted in a relatively small number of patients, usually involving
several hundred people.
18
Phase 3 studies are expanded controlled and uncontrolled trials. They are
performed after preliminary evidence suggesting effectiveness of the drug has
been obtained in Phase 2, and are intended to gather the additional information
about effectiveness and safety that is needed to evaluate the overall
benefit-risk relationship of the drug. Phase 3 studies also provide an adequate
basis for extrapolating the results to the general population and transmitting
that information in the physician labeling. Phase 3 studies usually include
several hundred to several thousand people.
In both Phase 2 and 3, CDER can impose a clinical hold if a study is unsafe (as
in Phase 1), or if the protocol is clearly deficient in design in meeting its
stated objectives. Great care is taken to ensure that this determination is not
made in isolation, but reflects current scientific knowledge, agency experience
with the design of clinical trials, and experience with the class of drugs under
investigation.
The results of the preclinical and clinical testing of a biologic product are
then submitted to the FDA in the form of an Application to Market a New Drug,
Biologic or an Antibiotic Drug for Human Use (Title 21, Code of Federal
Regulations, 314 & 601) or Biologics Licensing Application (BLA). In response to
a BLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines the application does not provide adequate
basis for approval. The receipt of regulatory approval often takes a number of
years, involving the expenditure of substantial resources and depends on a
number of factors, including the severity of the disease in question, the
availability of alternative treatments and the risks and benefits demonstrated
in clinical trials. On occasion, regulatory authorities may require larger or
additional studies, leading to unanticipated delay or expense. Even after
initial FDA approval has been obtained, further clinical trials may be required
to provide additional data on safety and effectiveness and are required to gain
clearance for the use of a product as a treatment for indications other than
those initially approved. In addition, side effects or adverse events that are
reported during clinical trials can delay, impede, or prevent marketing
approval. Similarly, adverse events that are reported after marketing approval
can result in additional limitations being placed on the product's use and,
potentially, withdrawal of the product from the market. Any adverse event,
either before or after marketing approval, could result in product liability
claims against us.
In connection with the commercialization of products, it is necessary, in a
number of countries, to comply with certain regulations relating to the
manufacturing and marketing of such products and to the products themselves. For
example, the commercial manufacturing, marketing and exporting of pharmaceutical
products require the approval of the FDA in the U.S. and of comparable agencies
in other countries. The FDA has established mandatory procedures and safety
standards which apply to the manufacture, clinical testing and marketing of
pharmaceutical products in the U.S. An example of this is the FDA's current Good
Manufacturing Practices (or GMP). Before approval of a product, the FDA will
perform a pre-licensing inspection of the manufacturing facilities to determine
their compliance with GMP and other rules and regulations. In complying with
GMP, manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full compliance. After the
establishment is licensed for the manufacture of any product, manufacturers are
subject to periodic inspections by the FDA. Any determination by the FDA of
manufacturing related deficiencies could have a material adverse effect on our
business.
19
The regulatory requirements and approval processes for new products in the EU
and Canada operate under similar principles as those applied in the U.S. The
process of seeking and obtaining approval of the FDA or regulatory authorities
in the EU or other regulatory authorities worldwide for a new product and
licensing of the facilities in which the product is produced takes a number of
years and involves the expenditure of substantial resources. In addition, the
regulatory approval processes for products in the U.S., the countries of the EU
and other countries around the world are undergoing or may undergo changes. We
cannot determine what effect any changes in regulatory approval processes may
have on our business.
Environmental Matters
We have not been impacted financially or operationally by environmental laws.
HealthCentrics Business Unit
Prior to acquiring NanobacLabs Pharmaceuticals, Inc., our sole operating
business unit was HealthCentrics. This Business unit develops and markets
web-based medical accounting, billing and management information services to
third party billing companies, practice management and healthcare provider
organizations.
During October 2003 we decided to sell our HealthCentrics subsidiary, because of
our decision to focus on nanobacteria,. In addition, earlier plans to develop
multiple initiatives in healthcare, building products, and waste solutions will
not be pursued. We believe that a total focus on nanobacteria will maximize
shareholder value. During March 2004, HealthCentrics was sold to an affiliate of
the Chairman and CEO for $250,000.
Geographic
We will initially focus our business in the United States and Canada. To date,
over 95% of our revenue is from the United States. We also plan to develop our
markets in the European Union through the operations of our Finnish Subsidiary,
Nanobac OY.
Employees
We have seven employees in our corporate headquarters in Tampa, Florida and five
employees in Finland. There are currently no employees in the HealthCentrics
business unit.
Factors That May Affect NNBP
We operate in a rapidly changing environment that involves a number of risks,
uncertainties, and assumptions, many of which are beyond our control. For a
discussion of some of these risks, see "--Risk Factors" in the MD&A section of
this report included under Item 7. Other risks are discussed elsewhere in this
Form 10-K.
20
Investor Information
We are subject to the information requirements of the Securities Exchange Act of
1934 (the "Exchange Act"). Therefore, we file periodic reports, proxy
statements, and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, proxy statements, and other information may be
obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street,
NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet site (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically.
Financial and other information about NNBP is available on our website
(http://www.nanobaclabs.com). We make available on our website, through links to
the SEC website, copies of our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically or otherwise
furnishing it to the SEC.
21
Item 2. Properties
----------
The following table sets forth a description of our facilities:
Square Feet
Location (Approx) Lease Expiration Function
------------------ ----------- ------------------- ------------------
Tampa, Florida 7,700 June 2007 - Headquarters for Nanobac
June 2010 operations (approximately
50% occupied)
Tampa, Florida 1,600 January 2005 Vacant
Koupio, Finland 1,500 3 months notice Research and laboratory
facility
Item 3. Legal Proceedings
-----------------
During January 2003 we engaged in arbitration with a software outsourcing firm,
AdiTech, Inc. over disputes arising from programming services in our
HealthCentrics' business unit. As a result of arbitration, our liability to
AdiTech was determined to be approximately $160,000. This liability has been
accrued by the HealthCentrics segment at December 31, 2003.
On May 1, 2001, the Company (named American Enterprise.Com, Corp at the time)
filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. On
November 20, 2002, the Middle District of Florida Court confirmed our Plan of
Reorganization (the "Plan"). At the time of Plan confirmation (November 20,
2002), we had no assets and no liabilities. Administrative fees including legal,
accounting and consulting were paid by Mr. John Stanton, our Chairman of the
Board and Chief Executive Officer. There were no priority creditors. Equipment
leases were treated as unsecured creditors. Unsecured creditors determined to
represent approximately $7,000,000 were allowed to choose between (a) a cash
payment on a pro rata basis from a $50,000 unsecured claim fund, or (b) a stock
payment on a pro rata basis from a 4,500,000 common share unsecured claim
treasury stock fund. All unsecured creditors opted to receive a pro rata portion
of the $50,000 cash unsecured claim fund. None of the unsecured creditors opted
to accept any of the 4,500,000 shares allocated to the treasury stock fund. We
have filed objections to a number of the unsecured creditors seeking their pro
rata portion of the $50,000 cash unsecured claim fund. We are unable at this
time to predict the outcome of these objections. However, the $50,000 cash
unsecured claim fund has already been provided to an escrow account established
for these purposes and the outcome of the objections to claims will have no
further impact on us.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended December 31, 2003.
22
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
--------------------------------------------------------------------
Our common stock is traded under the symbol "NNBP".
From October 12, 1994 through August 18, 1997, the Company's Common Shares were
traded in the NASDAQ SmallCap Market under the symbol "NATD". Beginning August
18, 1997 the Company's Common Shares were traded on the Over The Counter
Bulletin Board. Effective March 27, 2000, the trade symbol was changed to
"AMER". Effective July 21, 2003, the trade symbol was changed to "NNBP". Since
March, 2001, our Common Shares have traded through the Over The Counter Pink
Sheets. The following table sets forth the high and low bid prices for Common
Shares as reported by NASDAQ and OTC Pink Sheets for the periods indicated.
Quotations on the NASDAQ OTC Pink Sheets reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
High Low
---- ---
2002(1)
-------
First Quarter $0.05 $0.05
Second Quarter $0.04 $0.02
Third Quarter $0.17 $0.12
Fourth Quarter $2.15 $0.40
2003
----
First Quarter $1.70 $0.50
Second Quarter $0.69 $0.24
Third Quarter $1.34 $0.62
Fourth Quarter $1.05 $0.49
(1) On May 21, 2001, the Company filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code. On November 20, 2002, the Company emerged
from bankruptcy when the Middle District of Florida Court confirmed the
Company's Plan of Reorganization. On March 26, 2004, the closing bid quote for
the Common Shares was $.61 per share, and there were 217 holders of record of
Common Shares.
We have not paid cash dividends on our Common Shares and we do not anticipate
doing so in the foreseeable future. The Company intends to retain earnings, if
any, for future growth and expansion opportunities. Payment of cash dividends in
the future, as to which there can be no assurance, will be dependent upon the
Company's earnings, financial condition, capital requirements and other factors
determined by the Board of Directors.
23
Changes in Securities
From May 2001 through November 2002, the Company was in bankruptcy. Throughout
bankruptcy, the Chairman, Secretary and CEO (collectively "NNBP Officers")
funded the Company's administrative costs and provided management to the
Company. During 2003, 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 75.0 million shares of the Company's stock. The 75.0
million shares was based on the $750,000 at the then value of the stock ($.01
per share average price during the bankruptcy period). 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) as the authorized shares of the Company did not permit such issuance.
Subsequent to December 31, 2003, the number of authorized shares was increased
to 250,000,000, at which time preferred stock was converted to 35,048,445 shares
of Common stock.
As discussed in Note 2, an aggregate 30,998,000 shares were issued in connection
with the LABS acquisition. In addition, $159,200 of acquisition costs for LABS
relates to an issuance of 4.0 million common shares to an entity controlled by
the Chief Executive Officer and Chairman in connection with the facilitation and
bridge funding for the acquisition of LABS.
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. On November 18,
2003, we issued 25,000 shares of NNBP to an attorney in exchange for services.
The shares were valued at $.60 per share. On December 21, 2003, we issued 25,000
shares of NNBP to a medical professional in exchange for services. The shares
were valued at $.61 per share.
In addition, 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.
In June 2003, we issued 24,400,000 shares in connection with the acquisition of
approximately 74.4% of NanobacLabs Pharmaceuticals, Inc. From June5, 2003
through July 21, 2003, we acquired an additional 20.2% in exchange for 6,598,000
shares of common stock.
24
Selected Quarterly Financial Data
· Download Table
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
2003 Quarter ended
------------------
Revenue $0 $77,637 $241,340 $163,838
Net loss ($1,234,083) ($468,666) ($929,230) ($1,067,512)
Loss per share:
Basic ($0.03) ($0.01) ($0.01) ($0.01)
Diluted ($0.03) ($0.01) ($0.01) ($0.01)
Mar 31 Jun 30 Sep 30 Dec 31
------ ------ ------ ------
2002 Quarter ended
------------------
Revenue $0 $0 $0 $0
Net loss ($31,301) ($572,910) ($388,666) ($482,422)
Loss per share:
Basic $0.00 ($0.05) ($0.03) ($0.03)
Diluted $0.00 ($0.05) ($0.03) ($0.03)
The 2003 results include the acquisition of LABS in June 2003. The 2003 and 2002
results reflect the removal of HealthCentrics' operations from continuing
operations based on the October 2003 decision to dispose of this business
segment.
25
ITEM 6. Selected Financial Data
-----------------------
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 year ended December 31, 2003.
2003 2002
---- ----
Consolidated Balance Sheet Data:
Working Capital (6,763,635) (340,922)
Total assets 8,244,089 5,223
Long-term debt, net of current -- --
Shareholders' equity (deficit) (806,156) (340,922)
Shares outstanding at period end 99,968,840 19,982,965
Consolidated Statement of Operation Data:
Revenue 482,815 --
Gross profit 149,693 --
Operating loss (2,700,211) (43,621)
Net loss (3,699,491) (1,475,299)
Diluted earnings per share (0.05) (0.11)
Cash dividends -- --
Cash dividends per share -- --
Weighted average common shares 67,489,524 13,941,197
(1) Consolidated Balance Sheet and Consolidated Statement of Operation data for
the year ended December 31, 2003 give effect to our acquisition of
NanobacLabs Pharmaceuticals, Inc. in June 2003 and Nanobac OY in November
2003. Revenue for the year ended December 31, 2003 attributable to these
acquisitions was approximately $483,000.
(2) Consolidated Statement of Operation data for the year ended December 31,
2003 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.
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
------------------------------------------------------------------------
Overview
With the June 2003 and November 2003 acquisitions of NanobacLabs
Pharmaceuticals, Inc. ("LABS") and Nanobac OY ("OY"), our business is the study
and development of therapeutic and diagnostic technologies related to the novel
plemorphic pathogen known as nanobacterium sanguineum ("Nanobacteria").
Background
A schematic of our background is as follows:
----------------------------------------------------------------
November 2002
Emerged from Bankruptcy
as American Enterprise Corporation
(trading symbol: AMER)
----------------------------------------------------------------
I
----------------------------------------------------------------
December 2002
Acquired HealthCentrics, Inc.
(Reverse merger accounting used)
----------------------------------------------------------------
I
----------------------------------------------------------------
June 2003
Acquired majority interest in
NanobacLabs Pharmaceuticals, Inc. ("LABS")
----------------------------------------------------------------
I
----------------------------------------------------------------
June 2003 - July 2003
Changed name to Nanobac Pharmaceuticals, Incorporated
Changed trading symbol to NNBP
----------------------------------------------------------------
I
----------------------------------------------------------------
July 2003 - December 2003
Acquisition of minority shareholders
of LABS
----------------------------------------------------------------
I
----------------------------------------------------------------
November 2003
Acquired majority interest in
Nanobac OY
----------------------------------------------------------------
I
----------------------------------------------------------------
January 2004 - March 2004
Acquisition of minority shareholders
Of Nanobac OY
----------------------------------------------------------------
I
----------------------------------------------------------------
March 2004
Disposition of HealthCentrics
to affiliates of Chairman and CEO
----------------------------------------------------------------
27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Background
Nanobac Pharmaceuticals, Incorporated, (f/k/a American Enterprise Corporation)
("we", "our", "us" the "Company", "AMER", "NNBP") was formed as a Florida
corporation during June 1994. At that time, our corporate name was National
Diagnostics, Inc. and through our wholly-owned subsidiaries, we provided
diagnostic imaging services through several outpatient centers in Florida.
During 1998, we changed our corporate name to American Enterprise.Com, Corp.
On May 1, 2001, American Enterprise.Com, Corp filed for voluntary reorganization
under Chapter 11 of the Bankruptcy Code. On November 20, 2002, we emerged from
bankruptcy when the Middle District of Florida Court confirmed AMER's Plan of
Reorganization (the "Confirmed Plan" or "Plan"). At time of the Plan
confirmation, AMER had no assets and no liabilities. During the two-year period
of our bankruptcy we conducted no activities except those matters required to
complete the bankruptcy process.
During December 2002, we acquired HealthCentrics, Inc., a privately-held Florida
corporation in exchange for 17.7 million share of stock. After this acquisition,
the former shareholders of HealthCentrics owned 99.7% of AMER. Since
HealthCentrics is considered the acquirer for accounting and financial reporting
purposes, the transaction has been accounted for in accordance with reverse
acquisition accounting principles as though it were a recapitalization of
American Enterprise.Com, Corp. and a sale of shares by HealthCentrics, Inc. in
exchange for the net assets of the Company. The financial statements include the
historical results of operations and cash flows of HealthCentrics, Inc. from
inception.
HealthCentrics is a development-stage Florida corporation formed February 22,
2002 to organize, develop and market a suite of Web-based medical accounting,
billing and management information services to third party billing companies,
practice management and healthcare provider organizations. HealthCentrics has
generated less than $100,000 revenue to date and has sustained losses in excess
of $2 million since its inception. Because of the decision to focus on
nanobacteria, the company decided to sell HealthCentrics during October 2003.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
----------------------------------------------------------------------
Current Developments
Acquisition of NanobacLabs Pharmaceuticals, Inc. - On June 4, 2003, we acquired
approximately 74.4% of LABS from Gary S. Mezo and Nancy M. Schriewer-Mezo in
exchange for 24,400,000 restricted shares of NNBP. From June 5, 2003 through
July 21, 2003, we acquired an additional 20.2% of LABS from various stockholders
in exchange for 6,598,000 shares of NNBP, bringing our total ownership to 94.6%
of LABS.
Two entities ("Minority Stockholders") owned the remaining 5.4% of LABS. These
two entities also had options to acquire an additional 5.4% of LABS in exchange
for a cash contribution of $500,000 ("Minority Option"), which expired on March
31, 2004. Except for their stock ownership, these Minority Stockholders are not
affiliated with the Company. During October 2003, the Minority Stockholders
exercised $100,000 of their Minority Option. Simultaneously with this
transaction, we agreed to acquire the remaining outstanding shares of LABS from
the Minority Stockholders plus the stock issued for the $100,000 Minority Option
exercise in exchange for 3,240,000 shares of NNBP. On December 31, 2003, the
Minority Stockholders exercised the remaining $400,000 of their Minority
Options. After further negotiations, the Minority shareholders agreed to sell
the LABS' stock received for this option exercise in exchange for an additional
2,820,000 shares of NNBP. After the conclusion of these transactions, the total
shares due to the Minority Stockholders was 6,060,000 shares of NNBP. The
obligation to issue the Minority Stockholders 6,060,000 shares of NNBP was
settled by an entity controlled by the our Chairman and CEO ("Escape Velocity").
In exchange for the above, Escape Velocity was due $4.1 million which is
included in shareholder loans at December 31, 2003.
As of December 31, 2003, we owned 100% of LABS and the former stockholders of
LABS have received 37,058,000 shares of NNBP, which represents approximately 37%
of our common stock outstanding as of December 31, 2003.
The acquisition has been accounted for as a purchase business combination. Under
the purchase method of accounting, the assets acquired and liabilities assumed
from LABS are recorded at the date of acquisition, at their respective fair
values. Financial statements and reported results of operations of NNBP issued
after completion of the acquisition will reflect these values, but will not be
restated retroactively to reflect the historical financial position or results
of operations of LABS.
Acquisition of Nanobac OY - Pursuant to a Share Purchase Agreement dated
September 25, 2002, a Convertible Promissory Note Loans Purchase Agreement dated
September 25, 2002 (collectively, the "Acquisition Agreements"), LABS, agreed to
acquire a majority ownership of Nanobac Oy (a Finnish company) for approximately
697,000 Euros plus interest calculated at 7% per annum. Majority ownership would
only be obtained upon the conversion of the convertible promissory notes. In
accordance with the terms of the agreements, the ownership of the stock and
convertible notes would not be transferred until all payments were remitted by
Nanobac.
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Acquisition of Nanobac OY(continued)
Pursuant to a Closing Agreement dated November 5, 2003, the final payment for
Nanobac Oy was remitted on November 11, 2003. Immediately after the final
payment was received, we exercised our conversion rights under the convertible
notes. As a result of the above conversion, we owned 65% of Nanobac Oy. The
remaining 35% was acquired from Dr. Kajander and Dr. Ciftcioglu in January 2004
and March 2004 in exchange for 10 million shares of NNBP.
Nanobac Oy's assets consist of cash, property and equipment, and other tangible
and intangible assets. Nanobac Oy's liabilities consist primarily of trade
payables and other accruals. The purchase price and associated charges have been
allocated among the identifiable tangible and intangible assets of Nanobac Oy
based on their fair market value at the acquisition date under the purchase
method of accounting for business combinations.
Nanobac OY is located in Kuopio, Finland and was created in partnership with the
Finnish government. Prior to the acquisition, Nanobac OY provided scientific
research and diagnostic technology for nanobacteria. Nanobac OY holds US and EU
patents for methods for eradication of nanobacteria [US Patent No. 6,706,290
printed on March 16, 2004; EP 1094711].
Disposition of HealthCentrics
Pursuant to a Share Purchase Agreement dated March 30, 2004, ("Agreement"),
Nanobac Pharmaceuticals, Incorporated ("NNBP"), agreed to sell its entire
interest in HealthCentrics, Inc. to Escape Velocity of Tampa Bay, Inc. ("Escape
Velocity") in exchange for consideration of $250,000. NNBP decided in October
2003 to divest its HealthCentrics Business Unit to focus exclusively on the
development of its Nanobac business unit. NNBP has actively search for a buyer
of its HealthCentrics business unit since October 2003 without success.
Escape Velocity is an affiliate of NNBP as it is controlled by NNBP's Chairman
and CEO. The consideration to be paid by Escape Velocity will be in the form of
a reduction of its loan currently due from NNBP. It is management's belief that
the sale price of $250,000 is an arm's length transaction. At December 31, 2003,
the book value of HealthCentrics' assets was less than $10,000 (primarily cash
and receivables), while HealthCentrics liabilities to non-affiliates were
approximately $450,000 (primarily accounts payable and accrued wages). As a
result of the above transaction, NNBP is expected to recognize a one-time gain
of approximately $690,000. Given the related party nature of the transaction,
any gain will be treated as a capital contribution in 2004.
Since October 2003, the operations of HealthCentrics have been minimized until a
buyer was found. NNBP and/or Escape Velocity contributed approximately $5,000
per month to fund the reduced operations of HealthCentrics.
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Stock Issuances to Officers - From May 2001 through November 2002, the Company
was in bankruptcy. Throughout bankruptcy, the Chairman, Secretary and CEO
(collectively "NNBP Officers") funded the Company's administrative costs and
provided management to the Company. During 2003, 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 75.0 million shares of
the Company's stock. The 75.0 million shares was based on the $750,000 at the
then value of the stock ($.01 per share average price during the bankruptcy
period). 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) as the authorized shares of the
Company did not permit such issuance. Subsequent to December 31, 2003, the
number of authorized shares was increased to 250,000,000, at which time
preferred stock was converted to 35,048,445 shares of Common stock.
The $750,000 value of the above issuances is included in general and
administrative expenses for the year ended December 31, 2003.
In addition, 4.0 million common shares were issued to entities controlled by the
Chief Executive Officer and Chairman in connection with the facilitation and
bridge funding for the acquisition of LABS.
Change of Name - Effective June 20, 2003, we changed our name from American
Enterprise Corporation to Nanobac Pharmaceuticals, Incorporated Effective July
21, 2003, Nanobac Pharmaceuticals, Incorporated, began trading under the symbol
"NNBP."
Authorized Shares - Effective January 5, 2004, we increased our authorized
shares of common stock from 100,000,000 shares to 250,000,000 shares. This
increase in authorized shares was done in anticipation of approval from our
stockholders at our annual meeting in May 2004.
31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Current Operations
As a result of the LABS and Nanobac OY acquisitions and the HealthCentrics
disposition, our business is the study and development of therapeutic and
diagnostic technologies related to the novel plemorphic pathogen known as
nanobacterium sanguineum. We specialize in the following areas, utilizing
clinical and scientific researchers, physicians and scientific collaborators:
o Healthcare
>> Medical diagnostics
>> Innovative therapeutics
o Bio-medical
o Bio-industrial
The term "nanobacteria" is short for its scientific name Nanobacterium
sanguineum, a Latin term for blood. Nanobacteria are "nano"-sized in that they
are from 20-200 nanometers in size, which is 1/100th to 1/1,000th the size of
regular bacteria. Compared to other bacteria, nanobacteria grow very slowly,
only reproducing every three to six days. Consequently, it often takes many
years for nanobacterial disease effects to develop. As a result of their
extremely small size and slow growth rate, Nanobacteria had avoided detection
and scientific study until they were discovered by Neva Ciftcioglu, PhD and
Olavi Kajander, MD, PhD. Nanobacteria form a calcium coating around themselves
that provides protection, and prevents them from being recognized as foreign
substances or pathogens by the human body. Dr. Kajander has theorized 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. This theory has been disputed by several members in
the scientific community. The Company is conducting studies to determine the
extent, if any, that this theory is correct.
32
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
------------------------------------------------------------------------
Results of Operation
The following table presents the
percentage of period-over-period dollar change for the line items in our
Condensed Consolidated Statements of Operations for the year ended December 31,
2003 and the period from February 22, 2002 (date of inception) through December
31, 2002. Due to the significance of the LABS and OY acquisitions, we are also
presenting the proforma percentage of total revenue and the proforma percentage
of period-over-period dollar change for the line items in our Condensed
Consolidated Statements of Operations on the basis that the LABS and OY
acquisitions had taken place at the beginning of the each period presented.
These comparisons of financial results are not necessarily indicative of future
results.
· Enlarge/Download Table
Year ended December 31, 2003
------------------------------------------------------------------------------------
Proforma Proforma
2003 2002 2003 2002 % change
---- ---- ---- ---- --------
Revenue $482,815 $0 $1,193,770 $2,712,366 -56%
Cost of revenue 333,122 0 741,897 839,871 -12%
------------------------------- ---------------------------------
Gross Profit 149,693 0 451,873 1,872,495 -76%
Gross Profit percentage 31% 38% 69%
Bankruptcy-related stock based
compensation 750,000 750,000
Selling, general and administrative 1,378,375 43,621 2,807,752 2,337,953 20%
Research and development 540,426 0 761,406 99,744 663%
Depreciation and amortization 181,103 0 430,535 369,909 16%
------------------------------- ---------------------------------
Operating loss from continuing
operations ($2,700,211) ($43,621) ($4,297,819) ($935,111) 360%
=============================== =================== =============
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Year ended December 31, 2003 Compared to February 22, 2002 (date of inception)
Through December 31, 2002
Revenue
Revenue for the year ended December 31, 2003 reflects the acquisition of LABS in
June 2003 and OY in November 2003. On a proforma basis (assuming LABS and OY
were acquired on the first date of each reporting period), Revenue decreased 56%
for the year ended December 31, 2003 compared to 2002. During the fourth quarter
of 2002, LABS decided to concentrate their resources on scientific research to
provide validation and further credibility to our nanobacteria products. As a
result of this change in focus, several revenue sources significantly declined.
During December 2003, we voluntarily discontinued offering NanobacTX(TM), which
accounted for approximately 80% of our revenue for the year ended December 31,
2003. Accordingly, our revenue for the first quarter of 2004 will be
significantly reduced from the level experienced in 2003. During February 2004,
we licensed an over the counter product that is similar to Nanobac TX except
that tetracycline (prescription drug component in Nanobac TX) has been removed
from the product we are licensing. While we anticipate that the license revenue
from this new product will replace the revenue we lost from discontinuance of
Nanobac TX, we are not able to determine if this will actually occur during
2004. We are also in the process of accelerating our research and developing new
products for better patient acceptance and compliance with governmental
regulations.
Cost of revenue
Virtually all of the cost of revenue for the year ended December 31, 2003
reflects the acquisition of LABS on June 4, 2003. Cost of revenue was
approximately 69% of revenue for the year ended December 31, 2003. This compares
to a proforma cost of revenue of 31% of revenue for 2002 (assuming LABS and OY
were acquired in the first date of each reporting period). The increase of cost
of revenue as a percentage of revenue primarily reflects fixed costs of $37,500
per month for lab work from July 2003 through October 2003. This contract was
terminated in October 2003 so that future lab work will be more of a variable
cost.
Gross Profit
Gross profit is 31% for the year ended December 31, 2003. Proforma gross profit
(assuming LABS and OY were acquired at the beginning of each reporting period)
decreased to 38% for the year ended December 31, 2003 compared to 69% in 2002.
The decrease reflects lower sales volume and $37,500 of fixed lab costs from
July 2003 through October 2003.
34
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include a $750,000 charge
for stock issuances to our officers associated with services performed during
the period of the bankruptcy. Excluding these one-time charges, SG&A expenses
increased $1.3 million for the year ended December 31, 2003 compared to 2002.
This increase reflects the June 4, 2003 acquisition of LABS.
On a proforma basis (assuming LABS and OY were acquired on the first date of
each reporting period) and excluding one-time charges, SG&A expenses increased
20% for the year ended December 31, 2003 compared 2002. This increase reflects
LABS plan of marketing its pharmaceutical products to the medical community.
Research and Development
Proforma research & development ("R&D"), assuming LABS and OY were acquired on
the first date of each reporting period, for the years ended December 31, 2003
and 2002 is summarized as follows:
2003 2002 % change
---- ---- --------
Research and Development $761,406 $99,744 663%
As demonstrated above, we are increasing our investment in nanobacteria R&D.
We intend to continue to expand our nanobacteria R&D investment in the coming
year. We have recently announced two new epidemiological research studies on
nanobacteria that we are conducting with Stephen E. Epstein, MD, Director of the
Cardiovascular Research Institute, Washington Hospital Center, Washington, D.C.
and E. Olavi Kajander, MD, Phd, Director of research and science for NNBP in
Finland and the United States.
35
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Minority Interest
The minority interest gain represents that portion of the LABS loss that is
allocated to minority stockholders of LABS and OY. The gain is limited to the
amount of minority interest recorded in the initial acquisition. During October
2003, we acquired the remaining ownership of LABS. During January through March,
2004, we acquired the remaining interest of OY. Accordingly, minority interest
will be eliminated in the future unless another acquisition takes place.
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 the Chairman and CEO for consideration of
$250,000. We expect to recognize a gain of approximately $690,000 in the first
quarter of 2004 as a result of this disposition, which will be accounted for as
a capital contribution given the related party nature of the contract.
As a result of our decision to dispose of the HealthCentrics business unit, the
operations of HealthCentrics are retroactively removed from continuing
operations and disclosed as a single line item on the statements of operations.
The loss from discontinued operations for the period from February 22, 2002
(date of inception) through December 31, 2002 and the year ended December 31,
2003 is summarized as follows:
2003 2002
---- ----
Revenue $ 19,970 $ 11,555
Cost of revenue 62,570 4,316
----------- -----------
Gross profit (loss) (42,600) 7,239
Selling, general & administrative 692,407 994,999
Research and development 203,351 443,918
----------- -----------
Net loss ($ 938,358) ($1,431,678)
=========== ===========
Net Loss
Our net loss was $3.7 million for the year ended December 31, 2003. Excluding
the one-time charge for the bankruptcy-related common stock issuances and
discontinued operations, our net loss was approximately $2.0 million for the
year ended December 31, 2003.
36
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Liquidity and Capital Resources
Since emerging from Chapter 11, we have financed our activities primarily from
advances from affiliates of our Chairman and CEO, and from other shareholders,
and from private placements of NNBP's common stock. As of December 31, 2003 the
stockholder loan was approximately $5.6 million, which is due to Escape
velocity, an affiliate of our Chairman and CEO. For the year ended December 31,
2003, $728,800 of shareholder advances were converted into 3,644,000 shares of
common stock. An additional $548,000 of cash was received for the direct sale of
1,690,000 shares of restricted common stock to outside investors.
As of December 31, 2003, we had total assets of $8.2 million of which $287,000
were current assets. At December 31, 2003, we had total current liabilities of
$6.9 million and no long-term liabilities other than deferred taxes. Our working
capital deficit at December 31, 2003 was $6.8 million and we had a retained
deficit of $17.2 million.
Net cash used in operations was $2.2 million for the year ended December 31,
2003. The negative cash flow from operations reflects the $3.7 million net loss
for the period offset by the one-time non-cash charge of $780,000 for common
stock issued to our affiliates of our officers, depreciation and amortization of
$181,000 and an increase in accounts payable and accrued expenses of
approximately $424,000.
Net cash provided by investing activities was approximately $198,000 for the
year ended December 31, 2003 which reflects the receipt of $300,000 from the
exercise of the Minority Options in Labs by the Minority Stockholders offset by
our purchase of fixed assets of $18,000 and our acquisition of Nanobac OY (net
of the cash balance in LABS and OY as of the acquisition dates).
Net cash provided by financing activities was $2.0 million for the year ended
December 31, 2003. This primarily reflects advances and capital contributions by
stockholders of $2.5 million offset by $486,000 of payments on the Nanobac OY
note payable.
We are dependent on raising additional funding necessary to implement its
business plan as outlined above. Should we not be successful in raising cash
from our Chairman and CEO and other investors, we are unlikely to continue as a
going concern.
37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-----------------------------------------------------------------------
Recent Accounting Pronouncements
In December 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Valuable Interest Entities(Amended). This interpretation clarifies rules
relating to consolidation where entities are controlled by means other than a
majority voting interest and instances in which equity investors do not bear the
residual economic risks. This interpretation was originally effective
immediately for variable interest entities created after January 31, 2003 and
for interim periods beginning after June 15, 2003 for interests acquired prior
to February 1, 2003. However, the FASB is reviewing certain provisions of the
standard and has deferred the effective date for public companies to periods
ending after December 15, 2003. The Company currently has no ownership in
variable interest entities and therefore adoption of this standard currently has
no financial reporting implications.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which is
generally effective for contracts entered into or modified after June 30, 2003,
did not have impact on The Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. At December 31, 2003, The Company had no
such financial instruments outstanding and therefore adoption of this standard
had no financial reporting implications.
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.
38
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-----------------------------------------------------------------------
Contractual obligations
At December 31, 2003, the Company's contractual cash obligations, with initial
or remaining terms in excess of one year, were as follows:
Amount of Commitment ($)
Expired by Year Ended December 31,
----------------------------------
Long-term Operating Annual
Debt Leases Total
-------- -------- --------
Less than 1 year $ -- $192,099 $192,099
2 - 3 years -- 341,040 341,040
3 - 5 years -- 155,513 155,513
5 - 7 years -- 81,134 81,134
-------- -------- --------
Total $ -- $769,787 $769,787
======== ======== ========
39
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Forward Looking Statements
This report contains certain forward-looking statements that are based on
current expectations. 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 NNBP or any other person that the objectives or plans of NNBP
will be achieved. NNBP may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to market
its products and services; competitive conditions within the industry may change
adversely; NNBP may be unable to retain existing key management personnel;
NNBP's forecasts may not accurately anticipate market demand; and there may be
other material adverse changes in NNBP's operations or business. Certain
important factors affecting the forward looking statements made herein include,
but are not limited to (i) accurately forecasting capital expenditures and (ii)
obtaining new sources of external financing and (iii) 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 NNBP to alter its capital
expenditure or other budgets, which may in turn affect NNBP'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. Investors should carefully consider all of such 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.
40
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Risk Factors (continued)
Reliance on our Chairman of the Board, Chief Executive Officer and Majority
Shareholder; Possible Future Dilution
We have limited working capital and are primarily relying upon borrowed funds to
operate. The operations of Nanobac and HealthCentrics are generating a financial
and cash loss. Throughout 2003, affiliates of our Chairman of the Board, Chief
Executive Officer and major shareholders, Mr. John Stanton and Mr. Alexander
Edwards III, have provided our capital needs through loans to both of these
business segments. While our Chairman and CEO continue to provide for the
majority of our capital requirements, they are under no obligation to continue
such financing and/or strategic guidance. In the event our Chairman and CEO
should discontinue his support, we may have difficulty in continuing our
operations. In such an event, shareholders could lose their investment in its
entirety. Historically, our Chairman and CEO 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, our Chairman and CEO may
contribute some or all of our requirements. We anticipate that as a part of any
such loan, our Chairman and CEO would have rights to convert into additional
shares of our common stock. In such an event and to the degree of which we
require our Chairman and CEO's support, shareholders may experience dilution. At
present, we do not maintain key man insurance for our Chairman and CEO.
Liquidity and Working Capital Risks; Need for Additional Capital to Finance
Growth and Capital Requirements
In addition to the financial support we may receive from our Chairman and 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.
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (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 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 pharmaceutical 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.
Data Obtained Through Clinical Trials.
Data already obtained, or in the future 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 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.
42
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (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.
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 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.
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (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.
44
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
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.
Potential Fluctuations in Quarterly Operating Results
Our quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside of our control,
including: the demand for our software; seasonal trends in purchasing; the
amount and timing of capital expenditures and other costs relating to the
development of our software; price competition or pricing changes in the
industry; technical difficulties or system downtime; general economic
conditions, and economic conditions specific to the healthcare industry. Our
quarterly results may also be significantly impacted by the accounting treatment
of acquisitions, financing transactions or other matters. Particularly at our
early stage of development, such accounting treatment can have a material impact
on the results for any quarter. Due to the foregoing factors, among others, it
is likely our operating results will fall below our expectations or those of
investors in some future quarter.
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 NNBP and its stockholders generally and the controlling officers,
stockholders or directors.
45
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
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 NNBP, 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 own approximately 50% of the outstanding
shares of Common Stock, and are in a position to elect all of our Directors and
otherwise control NNBP, including, without limitation, authorizing the sale of
equity or debt securities of NNBP, the appointment of officers, and the
determination of officer's salaries. Shareholders have no cumulative voting
rights.
46
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Limited Market Due To Penny Stock
NNBP'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 NNBP'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
NNBP'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 NNBP's stockholders to resell their shares to third parties or to
otherwise dispose of them.
47
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation (continued)
-----------------------------------------------------------------------
Item 7a: Quantitative and Qualitative Risk
---------------------------------
Virtually all of our operations are conducted in the United States. However, the
acquisition of Nanobac OY, which was concluded in November 2003, is structured
in Euros. Accordingly, we are exposed to market risk from changes in exchange
rates between the U.S. dollar and the Euro on the balance sheet of Nanobac OY
and on future transactions of Nanobac OY.
We do not engage in hedging transactions and are not a party to any leveraged
derivatives.
ITEM 8. Financial Statements and Supplementary Data
-------------------------------------------
The information required by this item is incorporated herein by reference to
the financial statements listed in Item 15(a) of Part IV of this Form 10-K
Annual Report.
ITEM 9. Changes in and Disagreements with Independent Auditors on Accounting
and Financial Disclosures
-----------------------------------------------------------------------
There have been no disagreements with any of our accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure. On January 30, 2004, we appointed Aidman Piser & Company as
the independent accounting firm engaged as the principal accounting firm to
audit our financial statements for the year ended December 31, 2003. The
decision to change the principal accounting firm was approved by our Board of
Directors on January 30, 2004. For further information relating to our change in
certifying accountants, please refer to our Current Report on Form 8-K dated
January 30, 2004 on file with the Commission.
48
PART III
We will file with the Securities and Exchange Commission a definitive Proxy
Statement, pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended, not later than 120 days after the end of its fiscal year.
Accordingly, certain information required by Part III has been omitted under
Item G of the general Instructions for Form 10-K. Only these sections of the
definitive Proxy Statement which specifically address the items set forth herein
are incorporated by reference.
ITEM 10. Directors and Executive Officers of the registrant
--------------------------------------------------
The sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in our definitive proxy statement for our 2004
Annual Meeting of Stockholders, which we intend to file with the Securities and
Exchange Commission ("SEC") no later than April 30, 2004, are incorporated by
reference into this Annual Report on Form 10-K. Information concerning our
Executive Officers is set forth in Item 1 of Part I of this Annual Report on
Form 10-K.
ITEM 11. Executive Compensation
----------------------
The section entitled "Executive Compensation" in our definitive proxy statement
for our 2004 Annual Meeting of Stockholders, which we intend to file with the
SEC no later than April 30, 2004, is incorporated by reference into this Annual
Report on Form 10-K.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
------------------------------------------------------------------
The section entitled "Share Ownership" in our definitive proxy statement for our
2004 Annual Meeting of Stockholders, which we intend to file with the SEC no
later than April 30, 2004, are incorporated by reference into this Annual Report
on Form 10-K.
ITEM 13. Certain Relationships and Related Transactions
----------------------------------------------
The sections entitled "Executive Compensation" and "Related Party Transactions"
in our definitive proxy statement for our 2004 Annual Meeting of Stockholders,
which we intend to file with the SEC no later than April 30, 2004, are
incorporated by reference into this Annual Report on Form 10-K.
49
ITEM 14. Controls and Procedures
-----------------------
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this report, and,
based on their evaluation, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls.
Accordingly, no corrective actions were required or undertaken.
50
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
---------------------
The following Financial Statements are included herein:
Page
Number
------
o Report of Aidman Piser & Company, Independent Auditors F-1
o Report of Baumann, Raymondo & Company, P.A. F-2
o Consolidated Statements of Operations for the year
ended December 31, 2003 and the period from February 22, 2002
(date of inception) through December 31, 2002 F-3
o Consolidated Balance Sheets at December 31, 2003 and 2002 F-4
o Consolidated Statements of Stockholders' Equity (Deficit)
for the year ended December 31, 2003 and the period from
February 22, 2002 (date of inception) through December 31, 2002 F-5
o Consolidated Statements of Cash Flows for the year ended
December 31, 2003 and the period from February 22, 2002
(date of inception) through December 31, 2002 F-6
o Notes to Consolidated Financial Statements F-7-F-20
(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.
(b) Form 8-K
--------
(1) Reports on Form 8-K filed during the quarter ended December 31, 2003:
The Registrant filed a report on Form 8-KA on November 26, 2003 under
Item 2 and Item 7 announcing its conclusion of the acquisition of
Nanobac OY.
(c) Exhibits
--------
The following exhibits are filed as a part of, or are incorporated by
reference into, this Report on Form 10-K:
51
EXHIBIT INDEX
Exhibit
Number Description
------- ---------------------------------------------------------------------
3.1 Restated Articles of Incorporation
3.2 By-Laws (Previously filed with the SEC as an exhibit to the
Registrant's Annual Report on Form 10-KSB fore the year ended
December 31, 2002)
10.1 First Amended Plan of Reorganization of American Enterprise.com Corp.
(Previously filed with the SEC as an exhibit to the Registrant's
Current Report on Form 8-K dated December 10, 2002, and incorporated
herein by reference)
10.2 Acquisition Agreement dated December 6, 2002, between American
Enterprise Corporation and HealthCentrics, Inc. and its shareholders
(Previously filed with the SEC as an exhibit to the Registrant's
Current Report on Form 8-K dated December 13, 2002, and incorporated
herein by reference)
10.3 License agreement dated February 1, 2002 between HealthCentrics, Inc.
and MRX-NET.COM (Previously filed with the SEC as an exhibit to the
Registrant's Annual Report on Form 10-KSB fore the year ended
December 31, 2002)
10.4 Agreement and Plan of Reorganization dated June 1, 2003 between
Nanobac Pharmaceuticals, Inc. and NanobacLabs Pharmaceuticals, Inc.
10.5 Share Purchase Agreement dated September 25, 2002 between
NanobacLabs, L.L.C. and selected shareholders of Nanobac OY
(Previously filed with the SEC as an exhibit to the Registrant's
Current Report on Form 8-K dated November 26, 2003, and incorporated
herein by reference)
10.6 Convertible Promissory Note Loans Purchase Agreement dated
September 25, 2002 between NanobacLabs, L.L.C. and selected
shareholders of Nanobac OY (Previously filed with the SEC as an
exhibit to the Registrant's Current Report on Form 8-K dated November
26, 2003, and incorporated herein by reference)
10.7 Closing Agreement dated November 5, 2003 between NanobacLabs, L.L.C.
and selected shareholders of Nanobac OY (Previously filed with the
SEC as an exhibit to the Registrant's Current Report on Form 8-K
dated November 26, 2003, and incorporated herein by reference)
52
10.10 Loan Agreement dated December 31, 2003 between Nanobac
Pharmaceuticals, Inc. and Escape Velocity, Inc.
10.11 Employment by and between Nanobac Pharmaceuticals, Inc. and Alex H.
Edwards III dated January 26, 2004
16.1 Baumann, Raymondo & Company, P.A. letter to the Securities and
Exchange Commission dated February 3, 2004 (Previously filed with
the SEC as an exhibit to the Registrant's Current Report on Form 8-K
dated January 30, 2004, and incorporated herein by reference)
21.1 List of Subsidiaries
23.1 Consent of Aidman Piser & Company
23.2 Consent of Baumann, Raymondo and Company, P.A.
31(a) Certifications pursuant to 29 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chairman and Chief Executive Officer
31(b) Certifications pursuant to 29 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
52
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 this 31st day of March,
2004.
Nanobac Pharmaceuticals, Incorporated
By: /s/ Alexander Edwards III
-----------------------------------
Alexander Edwards III
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 March 31, 2004.
Signature Title
--------- -----
/s/ John D. Stanton Chairman of the Board of Directors
------------------------------- (Principal Financial and Accounting
John D. Stanton Officer)
/s/ Alexander Edwards III Chief Executive Officer (Principal
------------------------------- Executive Officer) and Director
Alexander Edwards III
/s/ Jan Egberts Director
-------------------------------
Jan Egberts, M.D.
/s/ Stephan Rechtschaffen Director
-------------------------------
Stephan Rechtschaffen, M.D.
54
Independent Auditors' Report
----------------------------
Board of Directors
Nanobac Pharmaceuticals, Incorporated and Subsidiaries
Tampa, Florida
We have audited the accompanying consolidated balance sheet of Nanobac
Pharmaceuticals, Inc. and Subsidiaries (F/K/A American Enterprise Corporation)
(the "Company"), as of December 31, 2003, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the 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. 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 audit provides 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, Inc. and Subsidiaries, at December 31, 2003, and the
consolidated results of their operations and their cash flows for the year 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.
/s/ Aidman, Piser & Company, P.A.
---------------------------------
Aidman, Piser & Company, P.A.
March 26, 2004, except for Note 3, for which
the date is March 30, 2004
Tampa, Florida
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
American Enterprise Corporation (A Development Stage Company)
Tampa, Florida
We have audited the accompanying consolidated balance sheet of American
Enterprise Corporation (formerly American Enterprise.Com Corporation) as of
December 31, 2002, and the related consolidated statements of operations, cash
flows and stockholders' (deficit) for the period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of American Enterprise
Corporation at December 31, 2002, and the result of its operations, and its cash
flows for the period then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1, the Company has been in the development stage since its
inception on February 22, 2002. Realization of a major portion of the assets is
dependent upon the Company's ability to meet its future financing requirements,
and the success of future operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern
/s/ BAUMANN, RAYMONDO & COMPANY, P.A.
-------------------------------------
BAUMANN, RAYMONDO & COMPANY, P.A.
Tampa, Florida
January 31, 2003
F-2
· Enlarge/Download Table
NANOBAC PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2003
-----------------
ASSETS
CURRENT ASSETS
Cash $ 49,755
Account receivable 5,765
Inventory 16,211
Other current assets 14,880
-----------
Total current assets 86,611
-----------
FIXED ASSETS, less accumulated depreciation 135,259
OTHER ASSETS
Security deposits 70,110
Intangible assets, less accumulated amortization
of $162,926 2,136,717
Goodwill 5,815,393
-----------
Total other assets 8,022,220
-----------
TOTAL ASSETS $ 8,244,090
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 752,600
Accrued expenses 367,637
Short-term note payable 90,000
Stockholder loans 5,640,009
-----------
Total current liabilities 6,850,246
OTHER LIABILITIES
Deferred tax liability 2,200,000
-----------
TOTAL LIABILITIES 9,050,246
-----------
COMMITMENTS (Note 12) --
STOCKHOLDERS' DEFICIT
Common stock, no par value, 100,000,000
shares authorized, 99,968,840 issued and outstanding 4,233,788
Preferred stock, no par value, 1,000,000
shares authorized, 794,569 shares issued and outstanding 350,484
Due from option exercise (Note 2) (200,000)
Accumulated deficit (5,174,790)
Accumulated other comprehensive loss (15,638)
-----------
Total stockholders' deficit (806,156)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,244,090
===========
The accompanying notes are an integral part of these financial statements.
F-3
NANOBAC PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
February 22, 2002
Year (date of inception)
ended through
December 31, 2003 December 31, 2002
----------------- -----------------
REVENUE $ 482,815 $ --
COST OF REVENUE 333,122 --
------------ ------------
GROSS PROFIT 149,693 --
------------ ------------
OPERATING EXPENSES
Sales, general and administrative 2,128,375 43,621
Research and development 540,426 --
Depreciation and amortization 181,103
------------ ------------
Total Operating Expenses 2,849,904 43,621
------------ ------------
OPERATING LOSS (2,700,211) (43,621)
NET OTHER EXPENSES
Interest expense (42,934) --
Other, net (21,533) --
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES & MINORITY INTEREST (2,764,678) (43,621)
PROVISION FOR INCOME TAXES -- --
------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST (2,764,678) (43,621)
MINORITY INTEREST 3,545 --
------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,761,133) (43,621)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (no applicable
income taxes) (938,358) (1,431,678)
------------ ------------
NET LOSS $ (3,699,491) $ (1,475,299)
============ ============
NET LOSS PER COMMON SHARE
Basic $ (0.05) $ (0.11)
------------ ------------
Diluted $ (0.05) $ (0.11)
------------ ------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 67,489,524 13,941,197
------------ ------------
Diluted 67,489,524 13,941,197
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-4
NANOBAC PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIODS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Preferred Stock Additional
---------------------------- ---------------------------- Paid-in
Shares Value Shares Value Capital
------------ ------------ ------------ ------------ ------------
Balance, February 22, 2002 -- $ -- -- $ -- $ --
Common stock issued for cash
upon incorporation 11,373,642 11,374 -- -- 363,295
Sale of common stock at $0.10
to $.20 per share 5,802,240 5,802 -- -- 671,198
Common stock issued
for services at
$0.10 to $.20 per share 557,083 557 -- -- 64,151
Capital contribution -- -- -- -- 18,000
Issuance of common shares
pursuant to exchange of
preacquisition shares 2,250,000 1,116,644 368,815 -- (1,116,644)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
December 31, 2002 Balance 19,982,965 1,134,377 368,815 -- --
------------ ------------ ------------ ------------ ------------
Conversion of preferred stock
to common stock 16,268,430 -- (368,815) --
Stock issued for services in
connection with bankruptcy 23,335,445 399,516 794,569 350,484 --
Stock issues for other services 50,000 30,175 -- -- --
Conversion of stockholder
loans to shares of common
stock at $0.20 per share 3,644,000 728,800 -- -- --
Sale of common stock at $0.20
to $.40 per share 1,690,000 548,000 -- -- --
Common stock issued in
acquisition of NanobacLabs
Pharmaceuticals, Inc. 34,998,000 1,392,920 -- -- --
Comprehensive loss:
Net Loss -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 99,968,840 $ 4,233,788 794,569 $ 350,484 $ --
============ ============ ============ ============ ============
Table continues on following page.
F-5
NANOBAC PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIODS ENDED DECEMBER 31, 2003 AND 2002 (Continued)
Accumulated
Due from Other
Option Accumulated Comprehensive
Exercise Deficit Loss Total
------------ ------------ ------------ ------------
Balance, February 22, 2002 $ -- $ -- $ -- $ --
Common stock issued for cash
upon incorporation -- -- -- 374,669
Sale of common stock at $0.10
to $.20 per share -- -- -- 677,000
Common stock issued
for services at
$0.10 to $.20 per share -- -- -- 64,708
Capital contribution -- -- -- 18,000
Issuance of common shares
pursuant to exchange of
preacquisition shares -- -- -- --
Net loss -- (1,475,299) -- (1,475,299)
------------ ------------ ------------ ------------
December 31, 2002 Balance -- (1,475,299) -- (340,922)
------------ ------------ ------------ ------------
Conversion of preferred stock
to common stock -- --
Stock issued for services in
connection with bankruptcy -- -- -- 750,000
Stock issues for other services -- -- -- 30,175
Conversion of stockholder
loans to shares of common
stock at $0.20 per share -- -- -- 728,800
Sale of common stock at $0.20
to $.40 per share -- -- -- 548,000
Common stock issued in
acquisition of NanobacLabs
Pharmaceuticals, Inc. (200,000) -- -- 1,192,920
Comprehensive loss:
Net Loss -- (3,699,491) -- (3,699,491)
Foreign currency translation
adjustment -- -- (15,638) (15,638)
------------
Comprehensive loss ($ 3,715,129)
============
------------ ------------ ------------ ------------
Balance, December 31, 2003 $ (200,000) $ (5,174,790) $ (15,638) $ (806,156)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-5 (Continued)
NANOBAC PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
February 22, 2002
Year (date of inception)
ended through
December 31, 2003 December 31, 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(3,699,491) $(1,475,299)
Adjustments to reconcile net loss to cash
(used) in operating activities
Depreciation and amortization 181,103 --
Loss on disposition of assets 7,659
Common stock issued for services 780,175 64,708
Minority interest in net loss (3,545) --
Net (increase) decrease in assets:
Accounts receivable 9,125 (5,223)
Inventory 67,286 --
Other assets 78,383 --
Net increase (decrease) in liabilities:
Accounts payable 278,107 263,916
Accrued expenses 145,876 82,228
----------- -----------
Total adjustments 1,544,169 405,629
----------- -----------
Net cash flows from operating activities (2,155,322) (1,069,670)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (18,157) --
Security deposits (2,932) --
Acquisition of subsidiaries, net of cash received (81,022) --
Cash received from exercise of stock option in subsidiary 300,000 --
----------- -----------
Net cash flows from investing activities 197,889 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of line of credit, net (36,453) --
Proceeds from stockholder loans 1,997,467 --
Payment of notes payable (486,188) --
Proceeds from issuance of common stock 548,000 1,069,670
----------- -----------
Net cash flows from financing activities 2,022,826 1,069,670
----------- -----------
Effect of exchange rate changes (15,638) --
Net change in cash 49,755 --
Cash balance, beginning of period -- --
----------- -----------
Cash balance, end of period $ 49,755 $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest expense $ 42,934 $ --
Supplemental schedule of non-cash investing and financing activities:
Common stock issued for the conversion of debt $ 728,800 $ --
Common stock issued in acquisition $ 1,392,920 $ --
Shareholder loan used for acquisition $ 4,071,342 $ --
The accompanying notes are an integral part of these financial statements.
F-6
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. Nature of operations and summary of significant accounting polices
Nature of business
Effective June 20, 2003, Nanobac Pharmaceuticals, Incorporated ("NNBP" or the
"Company") announced a name change from American Enterprise Corporation ("AMER")
to Nanobac Pharmaceuticals, Incorporated. Effective July 21, 2003, Nanobac
Pharmaceuticals, Incorporated began trading under the symbol "NNBP."
During June 2003, NNBP acquired a controlling interest of NanobacLabs
Pharmaceutical, Inc. ("LABS") and during November 2003, NNBP acquired a
controlling interest in Nanobac OY ("OY") - see note 2, "Acquisitions".
As a result of the above acquisitions, NNBP's primary business is the study and
development of therapeutic and diagnostic technologies related to the novel
plemorphic pathogen known as nanobacterium sanguineum. NNBP has developed
therapeutic treatments, for the eradication or reduction of nanobacteria in the
human body.
Prior to the above acquisitions, the Company's sole operating subsidiary was
HealthCentrics, Inc., a development-stage enterprise formed on February 22, 2002
to organize, develop and market a suite of Web-based medical accounting, billing
and management information services to third party billing companies, practice
management and healthcare provider organizations. The Company emerged from the
development stage in the third quarter of 2003.
During December 2002, NNBP acquired HealthCentrics in exchange for 17.7 million
share of stock. After this acquisition, the former shareholders of
HealthCentrics owned 99.7% of AMER. Since HealthCentrics is considered the
acquirer for accounting and financial reporting purposes, the transaction has
been accounted for in accordance with reverse acquisition accounting principles
as though it were a recapitalization of NNBP and a sale of shares by
HealthCentrics in exchange for the net assets of the Company. The financial
statements include the historical results of operations and cash flows of
HealthCentrics from inception.
During October 2003, management decided to divest itself of its HealthCentrics
business unit (see Note 3).
Liquidity and Management Plans
The accompanying financial statements have been prepared assuming that NNBP will
continue as a going concern. The Company has incurred recurring losses and has
equity and working capital deficiencies at December 31, 2003. 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.
F-7
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. Nature of operations and summary of significant accounting polices
(continued)
Liquidity and Managements' Plans (continued):
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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries as well as affiliated companies in which the
Company has a controlling financial interest and exercises control over their
operations. All material intercompany transactions and balances have been
eliminated in consolidation. On June 4, 2003, the Company acquired a majority
interest in LABS and on November 11, 2003, the Company acquired 65% of OY (see
Note 2, "Acquisitions"). In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations", NNBP has included in its
results of operations for the year ended December 31, 2003, the results of
operations of LABS from June 4, 2003 and the results of operations of OY from
November 11, 2003.
Revenue Recognition
Sales of the Company's products are recognized when shipped and title has
passed. Revenue is recorded net of reserves for estimated discounts and
incentives.
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.
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. Inventory is shown
net of applicable reserves and allowances.
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.
F-8
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. Nature of operations and summary of significant accounting polices
(continued)
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:
Patents 12 years
Product rights 5 years
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is not amortized, but is subject to periodic impairment tests.
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, allocated overhead
and occupancy costs, clinical trial and related clinical manufacturing costs,
contract services, and other outside costs. Research and development costs are
expensed as incurred.
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.
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, 2003 and
2002.
Concentration of credit risk
NNBP has no individual customers which constitute a significant concentration
F-9
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
1. Nature of operations and summary of significant accounting polices
(continued)
Recent accounting pronouncements
In December 2003, the FASB issued Interpretation No. 46, Consolidation of
Valuable Interest Entities (Amended). This interpretation clarifies rules
relating to consolidation where entities are controlled by means other than a
majority voting interest and instances in which equity investors do not bear the
residual economic risks. The Company currently has no ownership in variable
interest entities and, therefore, adoption of this standard currently has no
financial reporting implications.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. This
statement is designed to improve financial reporting such that contracts with
comparable characteristics are accounted for similarly. The statement, which was
generally effective for contracts entered into or modified after June 30, 2003,
is not anticipated to have a significant effect on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company currently has no such
financial instruments outstanding or under consideration and therefore adoption
of this standard currently has no financial reporting implications.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 July 21, 2003,
NNBP acquired an additional 20.2% of LABS from various stockholders in exchange
for 6,598,000 shares of NNBP, bringing its total ownership to 94.6% of LABS.
F-10
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. Acquisitions (continued):
NanobacLabs Pharmaceuticals, Inc. (continued):
Two entities ("Minority Stockholders") owned the remaining 5.4% of LABS. These
two entities also had options to acquire an additional 5.4% of LABS in exchange
for a cash contribution of $500,000 ("Minority Option"), which expired on March
31, 2004. Except for their stock ownership, these Minority Stockholders are not
affiliated with the Company. During October 2003, the Minority Stockholders
exercised $100,000 of their Minority Option. Simultaneously with this
transaction, NNBP agreed to acquire the remaining outstanding shares of LABS
from the Minority Stockholders plus the stock issued for the $100,000 Minority
Option exercise in exchange for 3,240,000 shares of NNBP. On December 31, 2003,
the Minority Stockholders exercised the remaining $400,000 of their Minority
Options ($200,000 was collected in 2003 and the remaining $200,000 was collected
in 2004). After further negotiations, the Minority shareholders agreed to sell
the LABS' stock received for this option exercise in exchange for an additional
2,820,000 shares of NNBP. After the conclusion of these transactions, the total
shares due to the Minority Stockholders was 6,060,000 shares of NNBP. The
obligation to issue the Minority Stockholders 6,060,000 shares of NNBP was
settled by an entity controlled by the Company's Chairman and CEO ("Related
Entity"). In exchange for the above settlement on behalf of the Company, the
Related Entity was due $4.1 million which is included in shareholder loans at
December 31, 2003.
As of December 31, 2003, NNBP owned 100% of LABS and the former stockholders of
LABS have received 37,058,000 shares of NNBP (including shares issued by the
Related Entity discussed above), which represents approximately 37% of NNBP's
common stock outstanding as of December 31, 2003.
The total consideration for LABS was approximately $5.5 million, which included
the fair value of NNBP common stock issued, approximately $4.1 million due to
funding provided by the entity controlled by the Company's Chairman of the Board
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 5,815,393
Other assets 62,500
Current liabilities (768,280)
Note payable (486,188)
Deferred tax liability (2,200,000)
-----------
$ 5,475,912
===========
Acquired identifiable intangible assets consist of product rights for the
treatment of nanobacteria. Amortization of this asset commenced as of the
acquisition date. Amortization expense for the year ended December 31, 2003 was
$157,500.
F-11
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
2. Acquisitions (continued)
Nanobac OY
On September 25, 2002, LABS entered into an agreement to purchase 4,500 shares
or 27% of Nanobac OY from three Finnish entities for 11,430 Euros. Nanobac OY is
a Finnish company that performs similar research to that of the Company in
nanobacteria infection. A separate agreement also required LABS to acquire
convertible promissory notes in Nanobac OY in the amount of 686,000 Euros plus
interest. The promissory notes had a conversion feature that allows the
promissory notes to convert into 17,723 shares of Nanobac OY. The title to the
4,500 shares did not transfer until such time as LABS had fully paid for the
convertible promissory notes. The convertible promissory notes had a stated
interest of 7.5% until the purchase price had been paid. Until the transaction
was completed, the investment was recorded under the cost basis.
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. The acquisition has been accounted for as a purchase
business combination.
The total consideration for OY was $781,196, which included cash payments (made
before and after the acquisition of LABS) 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 $ 37,535
Fixed assets 29,287
Identifiable intangible assets 949,643
Other assets 4,732
Current liabilities (11,883)
Advances from the Company (228,118)
---------
$ 781,196
=========
Acquired identifiable intangible assets primarily are patents related to the
discovery of nanobacteria. Amortization of this asset commenced as of the
acquisition date. Amortization expense for the year ended December 31, 2003 was
$5,426.
F-12
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
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, 2002. 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
2002 or 2003 or of future operations of the combined companies under the
ownership and management of NNBP.
Year ended December 31,
------------------------------
2003 2002
------------- -------------
As Reported:
Revenue $ 482,815 $ --
Net loss $ (3,699,491) $ (1,475,299)
Basic loss per share $ (0.05) $ (0.11)
Diluted loss per share $ (0.05) $ (0.11)
Proforma:
Revenue $ 1,193,770 $ 2,712,366
Net loss $ (5,319,465) $ (2,229,126)
Basic loss per share $ (0.07) $ (0.16)
Diluted loss per share $ (0.07) $ (0.16)
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 buyer in 2003 for this Business Unit. During March 2004, this business
unit was sold to an affiliate of the Chairman and CEO for consideration of
$250,000 (a reduction in amounts otherwise owed to the affiliate). NNBP expects
to recognize a gain on disposal of approximately $690,000, which will be
accounted for as a capital contribution given the related party nature of the
arrangement. Summary operating results for the discontinued operations for the
periods ended December 31, 2003 and 2002 are as follows:
2003 2002
----------- -----------
Revenue $ 19,970 $ 11,555
=========== ===========
Loss before income taxes ($ 938,358) ($1,431,678)
Provision for income taxes -- --
----------- -----------
Net loss ($ 938,358) ($1,431,678)
=========== ===========
F-13
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
4. Fixed Assets
Fixed assets at December 31, 2003 are summarized as follows:
2003
---------
Computer equipment $ 18,645
Computer software 16,666
Lab equipment 43,588
Office equipment 25,605
Furniture and fixtures 21,728
Leasehold improvements 47,385
---------
173,617
Accumulated Depreciation (38,358)
---------
$ 135,259
=========
Depreciation expense for the year ended December 31, 2003 was $18,177.
5. Intangible Assets
Intangible assets as of December 31, 2003 are summarized as follows:
Product rights $ 1,350,000
Patents 949,643
-----------
2,299,643
Accumulated amortization (162,926)
-----------
$ 2,136,717
===========
Expected future amortization is summarized as follows:
Year ending December 31,
------------------------
2004 $ 349,137
2005 349,137
2006 349,137
2007 349,137
2008 349,137
2009 79,137
Thereafter 311,895
----------
$2,136,717
==========
F-14
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
6. Accrued Expenses
Accrued expenses as of December 31, 2003 are summarized as follows:
2003
--------
Accrued professional fees $156,077
Accrued royalty 120,718
Accrued payroll and payroll taxes 46,658
Employee expense reports 13,018
Other 31,166
--------
$367,637
========
7. Short-term note payable:
Short-term note payable consists of unsecured, non-interest bearing advances due
on demand.
8. Segment Information
With the disposition of its HealthCentrics business unit (see Note 3), NNBP
operates a single business segment.
Virtually all of the Company's operations are within the United States for the
years ended December 31, 2003 and 2002. The geographic classification of revenue
was based upon the domicile of the entity from which the revenues were earned:
Period ended December 31,
-------------------------
2003 2002
---------- ----------
Revenue:
United States $ 472,735 $ --
Foreign countries 10,080 --
---------- ----------
$ 482,815 $ --
========== ==========
Assets:
United States $5,026,630
Foreign countries (Finland) 1,017,460
----------
$6,044,090
==========
F-15
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
9. Income taxes
There was no current or deferred provision or benefit for income taxes for the
years ended December 31, 2003 and 2002. The components of deferred tax asset as
of December 31, 2003 and 2002 are as follows:
2003 2002
----------- -----------
Deferred tax asset:
Net operating loss carryforwards $ 2,487,000 $ 443,000
Valuation allowance (287,000) (443,000)
Deferred tax liability (a) (2,200,000)
----------- -----------
Deferred tax asset net of valuation allowance $ -- $ --
=========== ===========
(a) Deferred tax liabilities are associated with the acquisition of intangible
assets and goodwill.
As of December 31, 2003, the Company had approximately $6.4 million of net
operating loss carryovers which expire between 2016 and 2023.
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 35% to the loss from continuing operations before income taxes and
minority interest:
2003 2002
--------- ---------
Statutory tax benefit $ 967,000 $ 443,000
State taxes, net of federal benefit 72,000 --
Nondeductible expense for
common stock issued for Services (292,000) --
Increase in valuation allowance (715,000) (443,000)
Other, net (32,000) --
--------- ---------
Provision for taxes $ -- $ --
========= =========
Changes in the valuation allowance during the year were as follows:
2003 2002
----------- -----------
Valuation allowance, beginning of year ($ 443,000) $ 0
Acquired deferred tax liability 1,237,000 0
Discontinued operations (366,000) (430,000)
Increase from continuing operations (715,000) (13,000)
----------- -----------
Valuation allowance, end of year ($ 287,000) ($ 443,000)
=========== ===========
F-16
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
10. Stockholders' deficit
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 fifty percent of the authorized members
of the board of directors.
Common stock and preferred stock issuances:
Issuances in 2003:
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.
As discussed in Note 2, an aggregate 30,998,000 shares were issued in connection
with the LABS acquisition. In addition, $159,200 of acquisition costs for LABS
relates to an issuance of 4.0 million common shares to an entity controlled by
the Chief Executive Officer and Chairman in connection with the facilitation and
bridge funding for the acquisition of LABS.
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 addition to the bankruptcy-related services discussed above
aggregated 50,000 shares valued at $30,175.
In addition, 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.
F-17
NANOBAC PHARMACEUTICALS, INCRPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
10. Stockholders' deficit (continued)
Common stock and preferred stock issuances (continued):
Issuances in 2002:
During 2002, the Company issued common shares for services: a) 90,000 shares
valued at $18,000 ($.20 per share) and b) 467,083 shares valued at $46,708 ($.10
per share).
The Company also issued common shares for cash in the following denominations:
(a) 11,373,642 shares issued during incorporation for $374,669; (b) 4,115,990
shares issued for $399,750 ($.10 per share); (c) 600,000 shares issued for
$60,000 ($.10 per share); and (d) 1,086,250 shares issued for $217,250 ($.20 per
share)
11. Related Party Transactions:
Stockholder Loan
----------------
An entity controlled by the Chairman and Chief Executive Officer (who are also
the largest stockholders of NNBP), has loaned NNBP $1.6 million as of December
31, 2003 to fund the operating cash flow requirements of NNBP. In addition, $4.1
million is due to this same entity in connection with the acquisition of the
Minority Stockholders equity interests in the LABS acquisition (see Note 2).
These loans bear interest at 5% and are due on demand. Interest expense for the
above loans for the year ended December 31, 2003 was $23,703.
Royalty Agreement
-----------------
The Company was a party to a royalty agreement with the former majority owner of
LABS who, along with his spouse, owns approximately 24% of NNBP as of December
31, 2003. 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. For the year ended, December 31, 2003, $24,000 has been expensed in
relation to this royalty agreement. As of December 31, 2003, accrued expenses
include approximately $121,000 payable to this stockholder for current and prior
royalty agreements. 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 are due under the above royalty agreement.
Stock Transactions
------------------
Of the 17,732,965 common shares the Company issued to acquire HealthCentrics,
Mr. John Stanton, Chief Executive Officer and Chairman of the Board of
Directors, directly owned 8,601,299 (through Escape Velocity) or 48.5% and Mr.
Chuck Broes, Vice-Chairman of the Board of Directors, owned 2,143,179 (through
TB, LLC) or 12.1%. On an equal basis with all other HealthCentrics shareholders
of record, Mr. Stanton and Mr. Broes received a share for share exchange in the
course of the Company acquiring HealthCentrics.
F-18
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
11. Related Party Transactions (continued):
MRX - NET.com License Agreement
-------------------------------
The Company had an irrevocable perpetual license agreement with a company
affiliated with certain of its directors/shareholders. The license agreement
grants an irrevocable, perpetual license for any and all Intellectual Property
Rights owned or otherwise assertable by the licensor to use the licensed
materials.
The licensed materials consist of a suite of web-native and browser-based
practice management applications and include all HTML, XML, other Source Code,
Object Code, database architectures and system documentation related to the
MedBillRx medical billing and practice management application, and ComplyMD, a
physician monitoring program to meet compliance issues, as well as any rights
the licensor has to SnaPPnet, a credentialing system.
The terms of the license agreement stipulate a one-time license fee plus a
percentage of the gross revenues derived from the use of the licensed materials.
The Company held a secured note from the licensor that was assigned to it from
certain shareholders/directors of the Company. The Company has forgiven the note
as payment for the one-time license fee and all future royalties. The basis of
this note to the Company is considered to be zero, and consequently there have
been no amounts booked to the financial statements as a result of this
transaction.
XBZ Consulting Agreement
------------------------
The Company entered into a consulting agreement in April 2002 with a company
affiliated with certain of its directors/shareholders. This agreement required
services to be provided by the consulting firm consisting of technical and
architectural support, design and development of the Company's products and
services. The fees for these services were $10,000 per month plus expenses
approved by the Company in advance, for a term of one year, automatically
renewable upon mutual consent of the parties. This agreement was cancelled in
December 2002 by the mutual consent of both parties.
EliteCorp Consulting Agreement
------------------------------
The Company entered into a consulting agreement in 2002 with a company
affiliated with certain of its directors/shareholders. This agreement required
those services generally performed by a chief executive officer to be provided
to the Company by the consulting firm. The fees for these services were $11,000
per month plus expenses approved by the Company in advance, for a term of one
year, automatically renewable upon mutual consent of the parties. This agreement
was cancelled in 2003.
F-19
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
11. Related Party Transactions (continued):
Taina Broes Consulting Agreement
--------------------------------
The Company entered into a consulting agreement in July 2002 with an individual
affiliated with certain of it directors/shareholders. This agreement required
services to be provided by the individual consisting of customer training and
deployments, customer support, system testing, and miscellaneous healthcare
domain consulting. The fees for these services were $25/hour plus expenses
approved by the Company in advance, for a term of one year, automatically
renewable upon mutual consent of the parties. This agreement was cancelled in
2003.
Patient Care Technologies Lease
-------------------------------
The Company leased office space from a company affiliated with certain of its
directors/shareholders from February 1, 2002 through July 31, 2002 for an amount
of $2,124 per month, which is a fair rental value for the space leased.
On July 26, 2002, the Company renewed this lease for a six-month period for the
same amount as above. The lease commenced on August 1, 2002 and ends on January
31, 2003. Upon maturity, the term may be extended for additional six-month
periods with mutual written consent of both parties. This lease was cancelled in
2003.
12. Commitments
The Company leases certain administrative and laboratory facilities under
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, 2003:
Year ending December 31,
------------------------
2004 $192,099
2005 169,109
2006 171,931
2007 102,748
2008 52,765
2009 53,900
2010 27,235
--------
$769,787
========
Rental expense on operating leases for the years ended December 31, 2003 and
2002 was $167,000 and $0, respectively.
F-20
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
13. Subsequent events
On January 26, 2004, NNBP filed Articles of Amendment increasing authorized
shares from 100,000,000 to 250,000,000.
During January through March 2004, NNBP acquired the remaining 35% of Nanobac OY
in exchange for 10 million shares of common stock valued at $3.8 million. The
purchase price will be allocated to intangible assets.
On March 30, 2004, NNBP sold its HealthCentrics business unit to an affiliate
controlled by the Chairman and CEO for consideration of $250,000 (see Note 3 -
Discontinued Operations).
F-21
· Enlarge/Download Table
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
14. Quarterly Data
Mar 31 Jun 30 Sep 30 Dec 31
----------- ----------- ----------- -----------
2003 Quarter ended
------------------
Revenue $ 0 $ 77,637 $ 241,340 $ 163,838
Gross profit $ 0 $ 17,174 $ 63,932 $ 68,587
Net loss ($1,234,083) ($ 468,666) ($ 929,230) ($1,067,512)
Loss per share:
Basic ($ 0.03) ($ 0.01) ($ 0.01) ($ 0.01)
Diluted ($ 0.03) ($ 0.01) ($ 0.01) ($ 0.01)
2002 Quarter ended
------------------
Revenue $ 0 $ 0 $ 0 $ 0
Gross profit $ 0 $ 0 $ 0 $ 0
Net loss ($ 31,301) ($ 572,910) ($ 388,666) ($ 482,422)
Loss per share:
Basic $ 0.00 ($ 0.05) ($ 0.03) ($ 0.03)
LABS was acquired during June 2003 - See Note 2.
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)
=========== =========== ===========
F-22
Dates Referenced Herein and Documents Incorporated By Reference
Filing Submission - Alternative Formats (Word / Rich Text, HTML, Plain Text, SGML, XML, et al.)
Copyright © 2009 Fran Finnegan & Company. All Rights Reserved.
About – Privacy – Redactions – Help —
Sat, 4 Jul 18:32:36.11 GMT 
