Exhibit 99.3
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BIOFORCE NANOSCIENCES, INC.
FINANCIAL STATEMENTS AND
AUDIT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2005 and 2004
CONTENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 3
Balance Sheet 4
Statements of Operations 6
Statements of Stockholders' Equity 7
Statements of Cash Flows 8
Notes to Financial Statements 9
-2-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders
BioForce Nanosciences, Inc.
We have audited the accompanying balance sheet of BioForce Nanosciences, Inc. as
of December 31, 2005, and the related statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 2005 and 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the PCAOB (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, audits of its internal control over financial reporting. Our audits
included consideration on internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BioForce Nanosciences, Inc. as
of December 31, 2005 and the results of their operations and their cash flows
for the years ended December 31, 2005 and 2004 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 A to the
financial statements, the Company has incurred substantial losses from
operations and has limited sales of its product which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Chisholm, Bierwolf & Nilson, LLC
- ------------------------------------
Bountiful, Utah
May 10, 2006
-3-
BIOFORCE NANOSCIENCES, INC.
BALANCE SHEET
DECEMBER 31, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 362,997
Accounts receivable - trade, net 8,775
Prepaid expenses and other assets 8,933
----------
Total current assets 380,705
----------
PROPERTY AND EQUIPMENT
Computer equipment 51,575
Scientific and laboratory equipment 380,000
Leasehold improvements 598,968
Office furniture and fixtures 51,365
----------
Total 1,081,908
Less accumulated depreciation 495,066
----------
Net property and equipment 586,842
----------
INTANGIBLE ASSETS
Patent costs, net of accumulated amortization of $25,204 418,657
Trademark and branding costs, net of accumulated amortization of $2,960 35,978
----------
Total intangible assets 454,635
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TOTAL ASSETS $1,422,182
==========
The accompanying notes are an integral part
of these financial statements.
-4-
BIOFORCE NANOSCIENCES, INC.
BALANCE SHEET
DECEMBER 31, 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 89,217
Accrued interest 58,145
Accrued wages 66,613
Convertible debentures-related party, net 602,683
Current portion of notes payable 275,686
-----------
Total current liabilities 1,092,344
LONG-TERM DEBT
Notes payable 172,116
-----------
Total long-term debt 172,116
-----------
Total liabilities 1,264,460
-----------
COMMITMENTS and CONTINGENCIES --
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 1,000,000 shares
no shares issued and outstanding --
Common stock - $0.01 par value, 24,000,000 shares
authorized; 11,142,276 issued; 11,079,776 outstanding 111,423
Additional paid-in capital 5,915,024
Treasury stock - 62,500 shares, at cost (2,500)
Accumulated deficit (restated) (5,866,225)
-----------
Total stockholders' equity 157,722
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,422,182
===========
The accompanying notes are an integral part
of these financial statements.
-5-
BIOFORCE NANOSCIENCES, INC.
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
----------------------------
2005 2004
------------ ------------
(Restated) (Restated)
REVENUES
Sales, net of discounts $ 113,855 $ 131,192
Consulting income 25,915 6,400
------------ ------------
139,770 137,592
COST OF GOODS SOLD 116,662 99,173
------------ ------------
Gross profit 23,108 38,419
EXPENSES
Research and development 1,163,792 1,019,281
Sales and marketing 241,379 165,040
General and administrative 768,759 632,732
Reimbursement of grant expenses (361,491) (567,821)
------------ ------------
1,812,439 1,249,232
------------ ------------
Loss before other income (expense) (1,789,331) (1,210,813)
OTHER INCOME (EXPENSE)
Interest and other income 17,456 40,504
Interest expense (254,318) (109,831)
------------ ------------
Loss before income tax (236,862) (69,327)
------------ ------------
INCOME TAX EXPENSE -- --
------------ ------------
Net loss $ (2,026,193) $ (1,280,140)
============ ============
BASIC LOSS PER SHARE ($ 0.18) ($ 0.13)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,092,310 10,191,870
============ ============
The accompanying notes are an integral part
of these financial statements.
-6-
BIOFORCE NANOSCIENCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Period January 1, 2004 through December 31, 2005
(Restated)
Common Stock Additional Total
------------------------- Paid-In Treasury Accumulated Stockholders'
Shares Amount Capital Stock (Deficit) Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance at January 1, 2004 9,674,785 $ 96,748 $ 2,712,293 $ (2,500) $ 2,559,892) $ 246,649
Net loss for the year -- -- -- -- (1,280,140) (1,280,140)
Issuance of common stock
for cash at $1.25 per share
net of issuance costs of $71,457 1,159,170 11,591 1,365,915 -- -- 1,377,506
Value attributed to beneficial
conversion feature -- -- 550,000 -- -- 550,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 10,833,955 108,339 4,628,208 (2,500) (3,840,032) 894,015
Net loss for the year -- -- -- -- (2,026,193) (2,026,193)
Issuance of common stock
for cash at $1.25 per share 65,000 650 80,600 -- -- 81,250
Issuance of common stock
for cash at $2.25 per share
net of issuance costs of $38,823 243,321 2,434 506,216 -- -- 508,650
Value attributed to beneficial
conversion feature -- -- 700,000 -- -- 700,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2005 11,142,276 $ 111,423 $ 5,915,024 $ (2,500) $(5,866,225) $ 157,722
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
-7-
BIOFORCE NANOSCIENCES, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
--------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (Restated) (Restated)
Net loss $(2,026,193) $(1,280,140)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 172,638 95,440
Abandoned patent and trademark costs -- 36,279
Beneficial conversion interest 208,814 93,869
Change in:
(Increase) Decrease in accounts receivable 4,946 (12,642)
(Increase) Decrease in prepaid expenses (7,000) --
(Increase) Decrease in grant receivable 2,273 (4,206)
Increase (Decrease) in accounts payable (49,711) (114,859)
Increase (Decrease) in accrued expenses 105,545 (101,684)
----------- -----------
Net cash used by operating activities (1,588,688) (1,287,943)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (347,429) (54,973)
Patent, trademark, and branding costs (138,607) (80,519)
----------- -----------
Net cash used by investing activities (486,036) (135,492)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments made on shareholder loan -- (5,000)
Proceeds from issuance of long-term debt 1,350,000 550,000
Payments made on long-term debt (1,376) (822)
Proceeds from issuance of common stock, net of issuance costs 589,900 1,377,506
----------- -----------
Net cash provided by financing activities 1,938,524 1,921,684
----------- -----------
Net (decrease) increase in cash (136,200) 498,249
CASH AND CASH EQUIVALENTS - beginning of year 499,197 948
----------- -----------
CASH AND CASH EQUIVALENTS - end of year $ 362,997 $ 499,197
=========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest $ -- $ --
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
Non-cash Investing Activities:
None $ -- $ --
=========== ===========
The accompanying notes are an integral part
of these financial statements.
-8-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - CONTINUITY OF OPERATIONS
- ---------------------------------
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. Due to
the research and development nature of the Company, it has sustained
significant operating losses in recent years. As a result of these losses,
the Company is dependent upon continued grant receipts and debt and equity
financing to fund its future operations. The Company also anticipates
product sales of its NanoArrayerTM system will be used to fund future
operations.
Management's plans to continue as a going concern are to raise capital in a
private placement of the Company's common stock. Management intends to use
these funds to market the NanoArrayerTM system and increase its revenues to
the point that revenues cover operating expenses.
The ability of the Company to continue as a going concern is dependent upon
its ability to successfully accomplish the plan described in the preceding
paragraph and eventually attain profitable operations. The accompanying
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
BUSINESS ACTIVITY - The Company provides ultraminiaturized bioanalytical
devices and methods embodied in the NanoArrayerTM system. This technology
is applicable to drug discovery, proteomics, genomics, clinical
diagnostics, environmental testing, biodefense and health care. The Company
also provides a series of products to the Atomic Force Microscopy (AFM)
industry under the product category "AFM Solutions."
CASH AND CASH EQUIVALENTS - For the purposes of the statement of cash
flows, the Company considers all investments with original maturities of
three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE - Accounts receivable are uncollateralized customer
obligations due under normal trade terms requiring payment within thirty
days from the invoice date and are stated at the amount billed. Payments of
accounts receivable are allocated to the specific invoices identified on
the customer's remittance advice or, if unspecified, are applied to the
earliest unpaid invoices. Management periodically reviews accounts
receivable balances for uncollectible amounts. An allowance for
uncollectible amounts of $975 and $-0- was recorded at December 31, 2005
and 2004, respectively.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (usually 5 to 7 years).Depreciation expense for
the years ended December 31, 2005 and 2004, totaled $155,449 and $86,489,
respectively. Expenditures for maintenance and repairs are expensed when
incurred and betterments are capitalized. Management assesses the carrying
values of long-lived assets for impairment when circumstances warrant such
a review. In performing this assessment, management considers current
market analysis and appraisal of the property and equipment, along with
estimates of future cash flows and projected operating information. The
Company recognizes impairment losses when undiscounted cash flows estimated
to be generated from long-lived assets are less than the amount of
undepreciated assets. Based on its evaluation, the Company has determined
that no impairment charge to the property and equipment was necessary for
the years ended December 31, 2005 and 2004.
-9-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
- ---------------------------------------------------
INTANGIBLE ASSETS - Intangible assets consist primarily of patent costs.
Patent costs are costs incurred to develop and file patent applications.
Trademark and branding costs are costs incurred to develop trademark and
brand name applications. If the patents or trade names are approved, the
costs are amortized, using the straight-line method, over the estimated
lives of 7 years for patents and 10 years for trade names. Amortization
expense for the years ended December 31, 2005 and 2004 totaled $17,189 and
$8,951, respectively. Unsuccessful patent and trade name application costs
are expensed as incurred. During 2004, costs totaling $36,279 for
unsuccessful and abandoned patents and trademarks were expensed. Management
assesses the carrying values of long-lived assets for impairment when
circumstances warrant such a review. In performing this assessment,
management considers current market analysis and appraisal of the
technology, along with estimates of future cash flows and projected
operating information. The Company recognizes impairment losses when
undiscounted cash flows estimated to be generated from long-lived assets
are less than the amount of unamortized assets. Based on its evaluation,
the Company has determined that no impairment charge to the intangible
assets was necessary for the year ended December 31, 2005 and 2004.
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 certain
reported amounts and disclosures. Accordingly, actual results could differ
from those estimates.
INCOME TAXES - The Company has adopted FASB 109 to account for income
taxes. The Company currently has no issues that create timing differences
that would mandate deferred tax expense. Net operating losses would create
possible tax assets in future years. Due to the uncertainty as to the
utilization of net operating loss carry forwards an evaluation allowance
has been made to the extent of any tax benefit that net operating losses
may generate. No provision for income taxes has been recorded due to the
net operating loss carryforward of $5,365,867 as of December 31, 2005 that
will be offset against further taxable income. No tax benefit has been
reported in the financial statements.
Deferred tax assets and the valuation account as of December 31, 2005 and
2004 are as follows:
2005 2004
------------ -----------
Deferred tax asset:
Net operating loss carryforward $ 1,545,778 $ 837,005
Valuation allowance (1,545,778) (837,005)
----------- -----------
$ - $ -
=========== ===========
The components of income tax expense are as follows:
2005 2004
------------ ----------
Current Federal Tax $ - $ -
Current State Tax - -
Change in NOL benefit (708,778) (247,458)
Change in allowance 708,778 247,458
----------- ----------
$ - $ -
=========== ==========
-10-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
---------------------------------------------------------------
INCOME TAXES -Continued
-----------------------
The Company has incurred losses that can be carried forward to offset future
earnings if conditions of the Internal Revenue Codes are met. These losses are
as follows:
Expiration
Year of Loss Amount Date
------------ --------- ----------
2001 216,853 2021
2002 891,485 2022
2003 1,271,838 2023
2004 1,173,217 2024
2005 1,812,474 2025
CONCENTRATIONS OF RISK - During 2005 and 2004, a portion of the Company's
research and development costs were funded by various grants received from
the U.S. National Institute of Health. The grants were received as an
incentive for the Company to research and develop new technologies which
could benefit the medical community and create jobs. Accordingly the funds
received were accounted for as a reduction of costs. Federal grants during
2005 and 2004 totaled $361,491 and $567,821, respectively.
The Company occasionally maintains amounts on deposit with a local
financial institution which are in excess of the federally insured limit of
$100,000. Statement of Financial Accounting Standards No. 105 identifies
this as a concentration of credit risk requiring disclosure, regardless of
the degree of risk. The risk is managed by maintaining all deposits in high
quality financial institutions. Amounts in excess of federally insured
limits totaled approximately $262,000 at December 31, 2005.
ADVERTISING - Advertising costs are expensed as incurred. Advertising
expenses totaled $7,230 and $17,892 for the years ended December 31, 2005
and 2004, respectively.
RESEARCH AND DEVELOPMENT COSTS - In accordance with SFAS No. 2, "Accounting
for Research and Development Costs," research and development costs are
expensed as incurred. Research and development costs were $1,163,792 and
$1,019,281 for the years ended December 31, 2005 and 2004, respectively.
REVENUE RECOGNITION - The Company applies the provisions of SEC Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition in Financial
Statements ("SAB 104"), which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with
the SEC. SAB 104 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosure related to revenue recognition
policies. In general, the Company recognizes revenue related to monthly
contracted amounts for services provided when (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been
rendered, (iii) the fee is fixed or determinable, and (iv) collectibility
is reasonably assured.
-11-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
- ---------------------------------------------------
STOCK OPTIONS - As permitted by FASB Statement No. 148 "Accounting for
Stock Based Compensation", the Company elected to measure and record
compensation cost relative to employee stock option costs in accordance
with Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees," and related interpretations and make proforma
disclosures of net income and earnings per share as if the fair value
method of valuing stock options had been applied. Under APB Opinion 25,
compensation cost is recognized for stock options granted to employees when
the option price is less than the market price of the underlying common
stock on the date of grant.
BASIC LOSS PER SHARE OF COMMON STOCK -The basic loss per share of common
stock is based on the weighted average number of shares issued and
outstanding at the date of the financial statements. Fully diluted loss per
share of common stock is not disclosed as the common stock equivalents are
antidilutive in nature.
For the Years Ended
December 31,
2005 2004
-------------------------------
Numerator:
Net Loss $(2,026,193) $(1,280,140)
Denominator -
weighted average shares 11,092,310 10,191,870
Basic loss per share $ (0.18) $ (0.13)
At December 31, 2005, the Company had convertible debentures and accrued
interest which could have been converted into approximately 1,800,000
shares of common stock, which have been excluded from loss per share
because the effect would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS -In May 2005, the Financial Accounting Standards
Board, issued Statement of Financial Accounting Standards ("SFAS, No. 154"),
"Accounting Changes and Error Corrections," which replaces Accounting Principles
Board Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements -- An Amendment of APB
Opinion No. 28". SFAS No. 154 provides guidance on accounting for and reporting
changes in accounting principle and error corrections. SFAS No. 154 requires
that changes in accounting principle be applied retrospectively to prior period
financial statements and is effective for fiscal years beginning after December
15, 2005. The Company does not expect SFAS No. 154 to have a material impact on
our consolidated financial position, results of operations, or cash flows.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion; however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for non
monetary asset exchanges incurred during fiscal years beginning after the date
of this statement is issued. Management believes the adoption of this statement
will have no impact on the financial statements of the Company.
-12-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
- ---------------------------------------------------
In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in Statement of
Financial Accounting Standards No. 123. This statement does not address the
accounting for employee share ownership plans, which are subject to AICPA
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." Management believes the adoption of this statement will have no impact
on the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs-- an
amendment of ARB No. 43, Chapter 4". This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and re-handling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management believes the adoption of this statement had no material impact on the
Company.
The implementation of the provisions of these pronouncements is not expected to
have a significant effect on the Company's consolidated financial statement
presentation.
Impairment of Long-Lived Assets - In accordance with Financial Accounting
Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company records impairment of long- lived assets to be
held and used or to be disposed of when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount.
Fair Value of Financial Instruments - The recorded amounts of financial
instruments, including cash equivalents, accounts receivable, accounts payable
and accrued expenses, and long-term debt approximate their market values as of
December 31, 2005 and 2004. The Company has no investments in derivative
financial instruments.
-13-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - LONG-TERM DEBT
- -----------------------
The Company received $100,000 during 2003 under a Community Economic
Betterment Account (CEBA) Venture project royalty agreement with the Iowa
Department of Economic Development. The agreement requires the Company to
pay an annual royalty equal to one percent of prior-year total gross
revenues, paid in equal semi-annual payments, until a total repayment of
$200,000 has been reached. The estimated total repayment for 2006 is
$1,400. Due to the nature of the repayments, future maturities beyond 2006
are undeterminable. The balance due at December 31, 2005 is $97,802.
The Company received $350,000 in non-interest bearing loans during 2005
from the City of Ames, Iowa and the State of Iowa. The agreements require
the Company to perform certain services. Upon completion of those services
the note is convertible into a non repayable grant by the City and the
State. If the Company does not fulfill the requirements of the agreement it
will be required to repay the funds. As the Company has not completed all
of the requirements of the agreement as of December 31, 2005, the amount is
carried as a liability in the financial statements. Due to the nature of
the repayments, future maturities beyond 2006 are undeterminable.
In 2004 and 2005, the Company entered into several note and warrant
purchase agreements with a shareholder. The Company received funds totaling
$1,550,000 under the convertible note terms of this agreement. The first
convertible loan was delivered in two tranches of $350,000 and $200,000.
Both tranches required interest at three percent compounded annually, to be
repaid in quarterly payments beginning May 1, 2004. The principal and any
accrued interest were due upon the note maturity at January 15, 2009,
unless it had been voluntarily converted to securities by the shareholder
prior to the maturity date. No interest payments were made during 2004 and
2005, at the request of the shareholder. The second convertible loan was
delivered in two tranches of $500,000 and $500,000. Both tranches of the
second convertible loan require interest at twelve percent compounded
annually.
The notes will automatically convert to securities upon the Company's sale
or issuance of common stock, preferred stock or other securities
convertible to common stock for cash which results in receipt by the
Company of at least $2,500,000 in proceeds. The conversion rate of the
notes is $0.60 per share for the first convertible loan and $1.20 per share
for the second convertible loan. In addition, as an inducement for the
shareholder to convert the notes, but subject to certain exceptions, the
Company is required to issue to the shareholder upon such conversion, a
warrant to purchase the number of shares of common stock that is equal to
the product of the number of shares actually issued upon conversion of the
notes times 0.4. The exercise price per share for such warrant will be
$0.01. If the notes are not converted to shares prior to maturity, but
repaid in full by the Company, the principal amount accrues interest at an
additional five percent annually. As the Company anticipates that the notes
will convert to equity securities prior to the maturity date, no interest
expense has been recorded for the additional five percent contingent
interest. Accrued interest totaled $58,145 at December 31, 2005.
In conjunction with the above transactions, the Company recorded discounts
on the convertible debt totaling $550,000 and $700,000, in 2004 and 2005
respectively pursuant to EITF Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", and EITF Issue No. 00-27, "Application of EITF Issue
No. 98-5 to Certain Convertible Instruments." The entire Beneficial
Conversion Feature is expensed in the current period, because the notes are
convertible immediately, per the requirements of EITF 98-5.
-14-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - LONG-TERM DEBT - Continued
- -----------------------
The Company had the following debt obligations at December 31, 2005:
Note payable CEBA, due semi-annually, non interest bearing
unsecured. $ 97,802
Notes payable State of Iowa and City of Ames, no payments
due pending completion of research, non interest bearing,
unsecured and convertible to grant. 350,000
Convertible debt to shareholder, 3.00% interest rate,
quarterly payments due with interest, unsecured, net of
unamortized discount of $359,346. 190,654
Convertible debt to shareholder, 12.00% interest rate,
quarterly payments due with interest, unsecured, net of
unamortized discount of $587,972. 412,028
-----------
Total $ 1,050,484
===========
The estimated future principle payments under these notes payable are as
follows:
For the
Years Ending
December 31,
2006 $ 878,368
2007 25,946
2008 26,386
2009 28,842
2010 2,400
Thereafter 88,542
--------------
Total $ 1,050,484
==============
The terms of the notes payable do not provide for fixed repayments of the
principle. The preceding schedule is based upon management's estimate of
the timing of the payments.
NOTE D - COMMON STOCK WARRANTS AND OPTIONS
- ------------------------------------------
WARRANTS
--------
At December 31, 2005, the Company had outstanding warrants that allow the
holders to purchase up to 892,738 shares of the Company's common stock at
prices ranging from $0.30 to $2.25 per share. The warrants expire at
various dates from May 2006 to November 2010.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for common stock warrants and similar equity instruments
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities that elect to continue to account for
stock options using APB Opinion No. 25 are required to make pro-forma
disclosure of net earnings, as if the fair value-based method of accounting
defined in SFAS No. 123 had been implemented.
-15-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - COMMON STOCK WARRANTS AND OPTIONS - Continued
- ------------------------------------------
A summary of the status of the Company's stock option plans as of December
31, 2005 and 2004 and the changes during the years are presented below:
2005 2004
------------- --------------
Shares Shares
Unexercised warrants, beginning of year 856,515 608,057
Stock warrants granted during the year 36,223 248,458
Stock warrants expired -- -
Stock warrants exercised -- -
------------- --------------
Unexercised warrants, end of year 892,738 856,515
============= ==============
OPTIONS
-------
The Company has two active stock option incentive plans, the 2003 Stock
Option Plan and the 2000 Stock Option Plan. Under both plans, the option
exercise price must be at least 100% of the fair market value (as defined
by the Plan) of the share on the date of grant of option, however, in the
event the participant is an employee and owns stock representing more than
10% of the total combined voting power of all classes of stock of the
Company or any parent and subsidiary corporations immediately before the
grant, the purchase price can not be less than 110% of the fair market
value of a share on the grant date. The term of an option is fixed upon
issuance and cannot exceed 10 years.
Under the terms of the 2000 Stock Option Plan, options may be granted to
officers, directors and employees to purchase up to an aggregate of 850,000
shares of the Company's common stock. The Company previously granted
153,500 options under the 2000 Stock Option Plan to certain employees at an
exercise price of $1 per share. No options were issued under the 2000 Stock
Option Plan during 2005 and 2004. Stock options vest at a rate determined
by the Plan Administrator, generally over three years. There are
unexercised outstanding stock options for 153,500 shares at December 31,
2005. At December 31, 2005, options for 151,000 shares were vested. At
December 31, 2005, the weighted average remaining contractual life is 7
years for the outstanding unexercised options. Options for 696,500 shares
were available for future grants at December 31, 2005; however, management
does not anticipate granting any additional options from this Plan.
Under the terms of the 2003 Stock Option Plan, options may be granted to
officers, directors, advisory board members and employees to purchase up to
an aggregate of 1,000,000 shares of the Company's common stock. Options for
915,836 shares and 60,000 shares were issued during 2005 and 2004,
respectively. Stock options vest at a rate determined by the Plan
Administrator, generally over four years. There are unexercised outstanding
stock options for 975,836 shares at December 31, 2005, including vested
options for 67,508 shares. At December 31, 2005, the weighted average
remaining contractual life is 8.5 years for the outstanding unexercised
options. Options for 24,164 shares were available for future grants at
December 31, 2005.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that elect to continue to account for stock
options using APB Opinion No. 25 are required to make pro-forma disclosure
of net earnings, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. As the Company is a nonpublic entity, it is
permitted Under SFAS 123 to use the "minimum value" method to value stock
options. Under the "minimum value method expected volatility is effectively
zero.
-16-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - COMMON STOCK WARRANTS AND OPTIONS - Continued
- ------------------------------------------
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumption used: risk-free interest rates ranging from 2.72% to
4.875%, dividend yield of 0.00%, effective expected volatility of 0.00%,
and expected lives of 7 years. The effects of applying SFAS 123 may not be
representative of the effects on reported net earnings for future years.
A summary of the status of the Company's stock option plans as of December
31, 2005 and 2004 and the changes during the years are presented below:
2005 2004
----------- -----------
Shares Shares
Unexercised options, beginning of year 213,500 153,500
Stock options issued during the year 915,836 60,000
Stock options expired -- --
Stock options exercised -- --
----------- -----------
Unexercised options, end of year 1,129,336 213,500
=========== ===========
Had the Company determined compensation cost based on the fair value at the
grant date for its common stock warrants and options under SFAS 123, the
Company's net income would have been as indicated below:
2005 2004
------------ ------------
Net loss - as reported $ (2,026,193) $ (1,280,140)
Net loss - pro forma $ (2,201,342) $ (1,361,533)
NOTE F - COMMITMENTS
The Company leases its office and laboratory space under an agreement which
expires February 2007. Lease expense totaled $66,640 and $62,872 during
2005 and 2004, respectively. Future minimum lease payments are as follows
for the years ending December 31,:
2006 $ 63,000
2007 $ 5,250
The Company has agreed to make severance payments to two employees if the
Company terminates their employment. The total commitment under these
agreements, excluding benefits, was approximately $160,000 at December 31,
2005.
NOTE G - PENSION PLAN
- ---------------------
The Company sponsors a 401(k) defined contribution plan for employees
meeting certain age and service requirements. Employer contributions to the
plan are made on a discretionary basis. No employer contributions were made
to the plan during 2005.
NOTE H - COMMON STOCK
- ---------------------
During the year ended December 31, 2004, the Company issued 1,159,170
shares of its common stock for cash at $1.25 per share for total proceeds
of $1,448,963.
On January 20, 2005, the Company issued 65,000 shares of its common stock
for cash at $1.25 per share for total proceeds of $81,250.
During the year ended December 31, 2005, the Company issued an aggregate
243,321 shares of common stock for cash at $2.25 per share for total
proceeds of $547,473.
-17-
BIOFORCE NANOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - SUBSEQUENT EVENTS
- --------------------------
On February 24, 2006, the Company closed an Agreement and Plan of Merger,
dated as of November 30, 2005 (the "Merger Agreement") with BioForce
Nanosciences Holdings, Inc., (BioForce) formerly known as Silver River
Ventures, Inc., a Nevada corporation and with Silver River Acquisitions,
Inc., a Nevada corporation and wholly- owned subsidiary of BioForce
("Merger Sub"). To facilitate the acquisition, Merger Sub was merged with
and into BioForce, with the Company surviving as the wholly-owned
subsidiary of BioForce (the "Merger"). In anticipation of the Merger,
BioForce changed its name to BioForce Nanosciences Holdings, Inc. on
February 1, 2006. BioForce also effected a forward stock split of its
outstanding shares of common stock on a 2 shares for 1 share basis,
effective January 31, 2006, which resulted in 3,999,950 shares being issued
and outstanding.
Pursuant to the terms of the Merger Agreement, BioForce issued 16 million
shares of its authorized but previously unissued common stock to the
Company's stockholders in exchange for all of the issued and outstanding
common stock of the Company. BioForce also issued options and warrants for
the purchase of an aggregate of approximately 2,537,565 shares of its
common stock to the holders of the Company's options and warrants, in
consideration for the cancellation of such options and warrants.
As a result of the merger the $1,550,000 of convertible loans were
converted to shares of the Company's common stock. The table below details
the shares and warrants issued at the conversion date of February 24, 2006.
Conversion Interest Note Issue Conversion Accrued Total Shares Warrants
Loan Amount Rate Rate Date Date Interest Amount Issued Granted
----------- ---------- -------- ---------- ---------- --------- -------- -------- --------
$350,000 $0.60 0.03 1/15/04 2/24/06 $22,550 $372,550 620,917 248,367
$200,000 $0.60 0.03 4/30/04 2/24/06 $11,066 $211,066 351,777 140,711
$500,000 $1.20 0.12 7/29/05 2/24/06 $33,688 $533,688 444,740 88,948
$500,000 $1.20 0.12 10/31/05 2/24/06 $18,337 $518,337 431,947 64,792
--------- ---------
Total 1,849,380 542,817
========= =========
Under the terms of the agreement the shareholders of the Company became the
controlling shareholders of the combined entity, accordingly the historical
financial statements of the Company will be presented as the historical
financial statements of the combined entity, i.e. reverse merger
accounting.
NOTE J - RESTATED FINANCIAL STATEMENTS
- --------------------------------------
The Company's financial statements as of December 31, 2005 and 2004 have
been restated to reflect the value of the beneficial conversion feature
determined to be attached to the Convertible Debt to Shareholders. The
restatement resulted in the following adjustments to the financial
statements:
Original Adjustment Restated
- --------------------------------------------------------------------------------
Convertible debentures-related party $1,550,000 $ (947,317) $ 602,683
---------------------------------------------------------------------------
Additional paid-in capital 4,665,024 1,250,000 5,915,024
-------------------------------------------------------------------------
Interest Expense - 2004 15,962 93,869 109,831
-------------------------------------------------------------------------
Interest Expense - 2005 45,504 208,814 254,318
---------------------------------------------------------------------------
-18-