UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
--------------------
For the Quarter Period Ended
March 31, 2004
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Nanobac Pharmaceuticals, Incorporated
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(Exact name of registrant as specified in its charter)
Florida 0-24696 59-3248917
------- ------- ----------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification Number)
2727 W. Martin Luther King Blvd, Suite 850, Tampa, Florida 33607
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(Address of Principal Executive Office) (Zip Code)
(813) 264-2241
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(Registrant's telephone number, including area code)
Former name if changed since last report: Nanobac Pharmaceuticals, Inc.
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):
Yes [ ] No [X]
The number of shares issued and outstanding of the Registrant's Common Stock, no
par value, as of May 14, 2004 was 149,517,285.
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2004 (unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and March 31, 2003 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the period ended March 31, 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and March 31, 2003 (unaudited) 6
Notes to the Condensed Consolidated Financial Statements 7
2
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 85,784 $ 49,755
Account receivable 16,954 5,765
Inventory 15,722 16,211
Other current assets 28,847 14,880
------------ ------------
Total current assets 147,307 86,611
------------ ------------
FIXED ASSETS, less accumulated depreciation 135,160 135,259
OTHER ASSETS
Security deposits 69,957 70,110
Intangible assets, less accumulated amortization
of $310,650 7,726,492 2,136,717
Goodwill 3,615,393 3,615,393
------------ ------------
Total other assets 11,411,842 5,822,220
------------ ------------
TOTAL ASSETS $ 11,694,309 $ 6,044,090
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 254,580 $ 752,600
Accrued expenses 402,789 367,637
Accrued compensation 189,309 --
Short-term note payable 20,000 90,000
Stockholder loans 6,658,622 5,640,009
------------ ------------
Total current liabilities 7,525,300 6,850,246
STOCKHOLDERS' DEFICIT
Common stock, no par value, 250,000,000 shares authorized,
149,517,285 shares issued and outstanding at March 31, 2004
and 100,000,000 shares authorized and 99,968,840
shares issued and outstanding at December 31, 2003 13,633,849 4,233,788
Preferred stock, no par value, 1,000,000 shares authorized,
no shares issued and outstanding at March 31, 2004 and
794,569 shares issued and outstanding at December 31, 2003 -- 350,484
Due from option exercise -- (200,000)
Accumulated deficit (9,454,030) (5,174,790)
Accumulated other comprehensive loss (10,810) (15,638)
------------ ------------
Total stockholders' deficit 4,169,009 (806,156)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 11,694,309 $ 6,044,090
============ ============
The accompanying notes are an integral part
of these financial statements
3
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months
ended ended
March 31, 2004 March 31, 2003
-------------- --------------
REVENUE $ 32,385 $ --
COST OF REVENUE 7,189 --
------------- -------------
GROSS PROFIT 25,196 --
------------- -------------
OPERATING EXPENSES
Sales, general and administrative 3,534,425 935,446
Research and development 478,325 --
Depreciation and amortization 158,113 --
------------- -------------
Total Operating Expenses 4,170,863 935,446
------------- -------------
OPERATING LOSS (4,145,667) (935,446)
NET OTHER EXPENSES
Interest expense (82,967) --
Other, net 6,662 --
------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (4,221,972) (935,446)
PROVISION FOR INCOME TAXES -- --
------------- -------------
LOSS FROM CONTINUING OPERATIONS (4,221,972) (935,446)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (no applicable
income taxes) (57,268) (298,637)
------------- -------------
NET LOSS $ (4,279,240) $ (1,234,083)
============= =============
NET LOSS PER COMMON SHARE
Basic and Diluted $ (0.03) $ (0.02)
------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and Diluted 140,750,887 58,927,898
------------- -------------
The accompanying notes are an integral part
of these financial statements
4
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
Common Stock Preferred Stock
---------------------------- ----------------------------
Shares Value Shares Value
------------ ------------ ------------ ------------
Balance, January 1, 2004 99,968,840 $ 4,233,788 794,569 $ 350,484
Conversion of preferred stock
to common stock 35,048,445 350,484 (794,569) (350,484)
Cash received from
option exercise -- -- -- --
Stock issued for services 4,500,000 2,562,750 -- --
Common stock issued in
acquisition of Nanobac OY 10,000,000 5,737,500 -- --
Capital contribution associated
with sale of subsidiary to
affiliate -- 749,327 -- --
Comprehensive loss:
Net Loss -- -- -- --
Foreign currency translation
adjustment -- -- -- --
Comprehensive loss
------------ ------------ ------------ ------------
Balance, March 31, 2004 149,517,285 $ 13,633,849 -- $ --
============ ============ ============ ============
Table continues on following page.
5
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(Unaudited) (Continued)
Accumulated
Due from Other
Option Accumulated Comprehensive
Exercise Deficit Loss Total
------------ ------------ ------------ ------------
Balance, January 1, 2004 $ (200,000) $ (5,174,790) $ (15,638) $ (806,156)
Conversion of preferred stock
to common stock -- -- -- --
Cash received from
option exercise 200,000 -- -- 200,000
Stock issued for services -- -- -- 2,562,750
Common stock issued in
acquisition of Nanobac OY -- -- -- 5,737,500
Capital contribution associated
with sale of subsidiary to
affiliate -- -- -- 749,327
Comprehensive loss:
Net Loss -- (4,279,240) -- (4,279,240)
Foreign currency translation
adjustment -- -- 4,828 4,828
------------
Comprehensive loss (4,274,412)
============
------------ ------------ ------------ ------------
Balance, March 31, 2004 $ -- $ (9,454,030) $ (10,810) $ 4,169,009
============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements
5 (Continued)
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Three Months
ended ended
March 31, 2004 March 31, 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(4,279,240) $(1,234,083)
Adjustments to reconcile net loss to cash
flow from operating activities
Depreciation and amortization 158,113 --
Common stock issued for services 2,562,750 750,000
Interest expense added to stockholder loan 82,500 --
Net (increase) decrease in assets:
Accounts receivable (11,189) (3,587)
Inventory 489 --
Other assets (13,967) (1,290)
Net increase (decrease) in liabilities:
Accounts payable (19,439) 3,021
Accrued compensation 189,309 --
Accrued expenses 55,898 (56,813)
----------- -----------
Total adjustments 3,004,463 691,331
----------- -----------
Net cash flows from operating activities (1,274,777) (542,752)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (8,952) --
Cash received from exercise of stock option in subsidiary 200,000 --
----------- -----------
Net cash flows from investing activities 191,048 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholder loans, net 1,186,113 542,811
Payment of notes payable (70,000) --
----------- -----------
Net cash flows from financing activities 1,116,113 542,811
----------- -----------
Effect of exchange rate changes 3,645 --
Net change in cash 36,029 59
Cash balance, beginning of period 49,755 --
----------- -----------
Cash balance, end of period $ 85,784 $ 59
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest expense $ 467 $ --
Supplemental schedule of non-cash investing and financing activities:
Common stock issued for acquisition of Intangible assets $ 5,737,500 $ --
Common stock issued for the conversion of debt $ -- $ 538,800
Capital contribution associated with sale of subsidiary to affiliate
Reduction in stockholder loan $ 250,000 $ --
Assumption of accounts payable and accrued expenses $ 499,327 $ --
The accompanying notes are an integral part
of these financial statements
6
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. Nature of operations and summary of significant accounting polices
Nature of business
Nanobac Pharmaceuticals, Incorporated ("NNBP" or the "Company") announced a name
change from Nanobac Pharmaceuticals, Incorporated to Nanobac Life Sciences, Inc.
to become effective upon approval by the shareholders. Nanobac Pharmaceuticals,
Incorporated trades under the symbol "NNBP."
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.
Basis of Presentation
In the opinion of management, all adjustments necessary for a fair presentation
of the results of operations for the periods presented have been included. The
results of operations for the three months ended March 31, 2004 and 2003 are not
necessarily indicative of the results for a full year.
The financial statements for the quarters ended March 31, 2004 and 2003 and
notes thereto should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 2003 for NNBP as filed in the
annual report on Form 10-KSB, which information is included by reference.
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 March 31, 2004. The Company is
dependent on the continued financing from outside investors including additional
shareholder loans. All of these matters raise substantial doubt about the
ability of the Company to continue as a going concern. Management believes that
NNBP will need to raise additional capital in order to launch new clinical
trials, fund research and development for new treatment areas, and general
working capital requirements. Capital may be raised through further sales of
equity securities, which may result in dilution of the position of current
shareholders. At this time, there are no firm commitments to invest in NNBP.
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.
7
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. Nature of operations and summary of significant accounting polices
(continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. On June 4, 2003, the Company
acquired a majority interest in LABS and on November 11, 2003, the Company
acquired a majority interest 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 each period
presented, 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.
8
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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
acquisitions. 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".
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 March 31, 2004 and 2003.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
9
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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.
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 were 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.
At the conclusion of the above transactions, NNBP owns 100% of LABS. The total
consideration for LABS was approximately $5.5 million, which included the fair
value of NNBP common stock issued, as well as direct transaction costs. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed as of the acquisition date:
Current assets $ 895,058
Investment in OY 693,778
Fixed assets 113,651
Identifiable intangible assets 1,350,000
Goodwill 3,615,393
Other assets 62,500
Current liabilities (768,280)
Note payable (486,188)
-----------
$ 5,475,912
===========
Acquired identifiable intangible assets consist of product rights for the
treatment of nanobacteria. The allocation of the purchase price was based, in
part, on third-party valuations of the fair values of identifiable intangible
assets. Amortization of this asset commenced as of the acquisition date.
10
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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. During January through March 2004, NNBP acquired the
remaining 35% of Nanobac OY from Dr. Kajander and Dr. Ciftcioglu ("OY Minority
Shareholders"). The purchase price was 10 million shares of NNBP's common stock
valued at $5.7 million. An additional $350,000 is payable to the OY Minority
Shareholders at the later of two years or when NNBP raises $5 million of
capital. In addition, as part of the above agreement, the OY Minority
Shareholders agreed to employment agreements with NNBP.
The total consideration to date for OY is $6.5 million, which included cash
payments (made before and after the acquisition of LABS), the fair value of NNBP
common stock issued, as well as direct transaction costs. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed as of the acquisition date:
Current assets $ 37,535
Fixed assets 29,287
Identifiable intangible assets 6,687,243
Other assets 4,732
Current liabilities (11,883)
Advances from Nanobac (228,118)
-----------
$ 6,518,796
===========
The Company has initially allocated $6.7 million to identifiable intangible
assets (primarily patents) related to the discovery of nanobacteria.
Amortization of this asset commenced as of the acquisition date.
11
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
2. Acquisitions (continued)
Proforma
The following unaudited table compares NNBP's reported operating results to pro
forma information prepared on the basis that the acquisitions had taken place at
the beginning of the fiscal year for each of the periods presented:
Three Months
March 31,
-----------------------------------
2004 2003
---- ----
As Reported
Revenue $ 32,385 $ --
Net loss $ (4,279,240) $ (1,234,083)
Basic loss per share $ (0.03) $ (0.02)
Diluted loss per share $ (0.03) $ (0.02)
Proforma
Revenue $ 32,385 $ 438,232
Net loss $ (4,359,165) $ (1,937,018)
Basic loss per share $ (0.03) $ (0.02)
Diluted loss per share $ (0.03) $ (0.02)
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of 2003 or of future operations
of the combined companies under the ownership and management of NNBP.
12
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
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 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's gain on
disposal was $749,326, which is accounted for as a capital contribution given
the related party nature of the arrangement. Summary operating results for the
discontinued operations for the three months ended March 31, 2004 and 2003 are
as follows:
2004 2003
---- ----
Revenue $ 5,301 $ 4,877
========= =========
Loss before income taxes ($ 57,268) ($298,637)
Provision for income taxes -- --
--------- ---------
Net loss ($ 57,268) ($298,637)
========= =========
4. Income taxes
NNBP has accumulated a loss of approximately $6.2 million for income tax
purposes, which can be used to offset future taxable income through 2023.
Estimated future tax benefit $ 2,400,000
Valuation allowance (2,400,000)
-------------
Estimated future tax benefit $ --
=============
5. 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.
13
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
5. Stockholders' deficit (continued)
Common stock:
During January 2004, 4.5 million shares were issued to affiliates of the
Company's Chairman and CEO as a bonus associated with the finalization of the
bankruptcy. The Company recognized an expense of $2.6 million in connection with
this stock issuance which is the approximate fair value of the stock on the
issuance date.
6. 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 $6.7 million as of March 31,
2004. These loans bear interest at 5% and are due on demand. Interest expense
for the above loans for the three months ended March 31, 2004 was $82,500.
License Agreement
- -----------------
During February 2004, NNBP entered into a licensing agreement with Pegasus
Worldwide, Inc. ("Pegasus") to market one of NNBP's over the counter products.
Affiliates of NNBP's chairman and CEO are creditors of Pegasus. The ownership of
Pegasus is independent of NNBP.
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 three months ended March 31, 2004, $17,000 has been expensed
in relation to this royalty agreement. As of March 31, 2004, accrued expenses
include approximately $138,000 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 will ultimately be due under the above royalty agreement.
14
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
With the acquisitions of LABS and OY (see Background) and the disposition of
HealthCentrics (see Current Developments), we are exclusively 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.
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.
15
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Background
Nanobac Pharmaceuticals, Incorporated, (f/k/a Nanobac Pharmaceuticals, Inc.)
("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"). During the two-year period of
our bankruptcy we conducted no activities except those matters required to
complete the bankruptcy process. During the period May 1 2001 through November
20, 2002, administrative fees including legal, accounting and consulting
relating to the bankruptcy proceedings and maintenance of AMER were paid by our
Chairman of the Board and Chief Executive Officer.
During December 2002, we acquired HealthCentrics, Inc., a privately-held Florida
corporation in exchange for 17.7 million shares of stock. After this
acquisition, the former shareholders of HealthCentrics owned 88.7% of AMER. We
accounted for the acquisition of HealthCentrics using the reverse-merger
accounting method. Essentially this method of accounting mandates that the
financial statements of the acquired company, HealthCentrics, reflect our
financial position.
We acquired 100% of NanobacLabs Pharmaceuticals, Inc. ("LABS") in a series of
transactions which is summarized as follows:
Percentage Shares of NNBP
Date Acquired Exchanged
---- -------- ---------
June 4, 2003 74.4% 24,400,000
June 5, 2003 through July 21, 2003 20.2% 6,598,000
October 27, 2003 5.4% 3,240,000
------------------------------
100.0% 34,238,000
==============================
During November 2003, we acquired 65% of Nanobac OY ("OY"). The remaining 35%
was acquired in January 2004 and March 2004 in exchange for 10 million shares of
NNBP plus $500,000 to be paid in cash. 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 application No. 09/347,189 US printed expected in Feb
2004; EP 1094711].
16
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Current Developments
Disposition of HealthCentrics - Pursuant to a Share Purchase Agreement dated
March 30, 2004, we agreed to sell our entire interest in HealthCentrics, Inc. to
Escape Velocity of Tampa Bay, Inc. ("Escape Velocity") in exchange for
consideration of $250,000. We decided in October 2003 to divest our
HealthCentrics Business Unit to focus exclusively on the development of our
Nanobac business unit. We actively searched for a buyer of our HealthCentrics
business unit since October 2003 without success.
Escape Velocity is an affiliate of NNBP as it is controlled by our 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. We believe 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 $500,000
(primarily accounts payable and accrued expenses). As a result of the above
transaction, we realized a one-time gain of approximately $750,000. Given the
related party nature of the transaction, the gain is treated as a capital
contribution in 2004.
Acquisition of Minority Interest of Nanobac OY -Pursuant to a Closing Agreement
dated November 5, 2003, we acquired 65% of OY. During 2004, we entered into the
following employment agreements, which included provisions to acquire the
remaining 35% of OY in exchange for 10 million shares of NNBP valued at $5.7
million:
o Executive Employment Agreement between Nanobac Pharmaceuticals, Inc.,
and E. Olavi Kajander, MD, PhD, an individual dated January 15, 2004.
o Executive Employment Agreement between Nanobac Pharmaceuticals, Inc.
and Neva Ciftcioglu, PhD, an individual dated March 31, 2004.
An additional $350,000 is payable to the sellers at the later of two years or
when NNBP raises $5 million of capital. The issuance of the above shares is
included in our stockholder's deficit as of March 31, 2004. Upon the conclusion
of the above transaction, we own 100% of OY.
Valuation of LABS - During the three months ended March 31, 2004, we completed
our valuation of LABS. As a result, we reduced goodwill and deferred tax
liability by $2.2 million from the balances reported at December 31, 2003. This
reduction is based on the availability of net operating loss carryforwards
offsetting the impact of deferred tax liabilities related to the acquisition of
identifiable intangible assets.
17
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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 were 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. During 2004, 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.
During January 2004, 4.5 million shares were issued to affiliates of our
Company's Chairman and CEO as a bonus associated with the finalization of the
bankruptcy. We recognized an expense of $2.6 million in connection with this
stock issuance which is the approximate fair value of the stock on the issuance
date.
Change of Name - We announced a name change from Nanobac Pharmaceuticals,
Incorporated to Nanobac Life Sciences, Inc. to become effective upon approval by
the shareholders. Results of Operation The following table presents the
percentage of period-over-period dollar change for the line items in our
Condensed Consolidated Statements of Operations for the three month periods
ended March 31, 2004 and 2003. These comparisons of financial results are not
necessarily indicative of future results.
-----------------------------------
Three Months ended
-----------------------------------
2004 2003
---- ----
Revenue $32,385 $0 NM
Cost of revenue $7,189 $0 NM
---------------------------
Gross Profit 25,196 0 NM
Gross Profit percentage 78%
Selling, general and administrative 3,534,425 935,446 278%
Research and development 478,325 0 NM
Depreciation and amortization 158,113 0 NM
---------------------------
Operating loss (4,145,667) (935,446) 343%
Other income (Expense) (76,305) 0 NM
Discontinued Operations (57,268) (298,637) -81%
---------------------------
Net loss ($4,279,240) ($1,234,083) 247%
===========================
18
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Revenue
Revenue for the three months ended March 31, 2004 is summarized as follows:
License revenue $ 16,875
Diagnostic products 13,700
Other revenue 1,810
---------
$ 32,385
=========
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 was significantly
reduced from the level experienced in the last three quarters of 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.
There was no revenue for the three months ended March 31, 2003 as LABS and OY
were acquired after March 31, 2003 and HealthCentrics' revenue is included in
"Discontinued Operations".
Cost of revenue
Cost of revenue was 22% of revenue for the three months ended March 31, 2004.
There were no direct costs associated with license revenue. Excluding license
revenue, cost of revenue was 46% of revenue.
There was no cost of revenue for the three months ended March 31, 2003 as LABS
and OY were acquired after March 31, 2003 and HealthCentrics' cost of revenue is
included in "Discontinued Operations".
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include payroll, travel,
facility rental, insurance, professional fees and public company expenses
(primarily professional fees and investor relations costs).
SG&A expenses for the three months ended March 31, 2003 include a $750,000
charge for stock issuances to our officers associated with services performed
during the period of the bankruptcy. SG&A expenses for the three months ended
March 31, 2004 include a $2.6 million charge for stock issuances to our officers
and $150,000 of signing bonuses with the execution of employment agreements for
key scientific personnel. Excluding these one-time charges, SG&A expenses
increased $636,000 for the three months ended March 31, 2004 compared to 2003.
This increase reflects SG&A expenses for LABS and OY which were acquired
subsequent to March 31, 2003. SG&A expenses for HealthCentrics are included in
"Discontinued Operations".
19
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Research and Development
Research and development ("R&D") expenses were approximately $478,000 for the
three months ended March 31, 2004. R&D expenses include payroll, medical
director fees, patent costs and research studies.
There were no R&D expenses for the three months ended March 31, 2003 as LABS and
OY were acquired subsequent to March 31, 2003. R&D expenses for HealthCentrics
are included in "Discontinued Operations"
We intend to continue to expand our R&D investment in the coming year. We have
announced two 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.
Depreciation and amortization
Depreciation and amortization for are related to the June 2003 and November 2003
acquisitions of LABS and OY. Depreciation and amortization for the three months
ended March 31, 2004 is summarized as follows:
Amortization of patents $ 67,500
Amortization of product rights 80,224
Depreciation of property and equipment 10,389
---------
Total $ 158,113
=========
Other income (expense)
Other income (expense) includes $82,500 of interest expense on the stockholder
loan offset by $6,300 of foreign currency gain.
20
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Net Loss from Continuing Operations
Net loss from continuing operations for the three months ended March 31, 2004
was $4.1 million compared to $935,000 for the three months ended March 31, 2003.
Excluding one-time charges for stock issuances to our officers of $2.6 million
and $150,000 of signing bonuses for the quarter ended March 31, 2004 and
$750,000 for the quarter ended March 31, 2003, our net loss from continuing
operations was $1.6 million for the quarter ended March 31, 2004 and $185,000
for the quarter ended March 31, 2003.
We are experiencing significant losses as we conduct research and development
related to nanobacteria and launch our products and services. We believe it will
take several months before we will earn meaningful revenue to offset our
expenses and there is no assurance that we will be able to accomplish this goal.
As a result of the losses, we are dependent on our Chairman, CEO and other
investors to provide sufficient cash flow to fund our operations.
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 plus assumption of net liabilities of approximately $499,000. Our gain
on disposal of approximately $749,000 is accounted for as a capital contribution
given the related party nature of the arrangement.
As a result of our decision to dispose of the HealthCentrics business unit, the
operations of HealthCentrics 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 three months ended March 31, 2004
and 2003 is summarized as follows:
2004 2003
---- ----
Revenue $5,301 $4,877
Cost of revenue 9,208 7,499
---------------------------
Gross profit (loss) (3,907) (2,622)
Selling, general & administrative 53,361 206,491
Research and development - 89,524
---------------------------
Net loss ($ 57,268) ($ 298,637)
===========================
21
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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 March 31, 2004 the
stockholder loan was approximately $6.7 million, which is due to Escape
Velocity, an affiliate of our Chairman and CEO.
As of March 31, 2004, we had total assets of $11.7 million of which $147,000
were current assets. At March 31, 2004, we had total current liabilities of $7.5
million, a working capital deficit of $7.4 million and a retained deficit of
$9.3 million.
Net cash used in operations was $1.3 million for the three months ended March
31, 2004. The negative cash flow from operations reflects the $4.3 million net
loss for the period offset by the non-cash charge of $2.6 million for common
stock issued to our affiliates of our officers, depreciation and amortization of
approximately $157,000 and an increase in current liabilities of approximately
308,000.
Net cash provided by investing activities was approximately $191,000 for the
three months ended March 31, 2004, which reflects the receipt of $200,000 from
the exercise of the Minority Options in LABS by the Minority Stockholders offset
by our purchase of fixed assets of approximately $9,000.
Net cash provided by financing activities was $1.1 million for the three months
ended March 31, 2004. This primarily reflects net advances from stockholder
loans of $1.2 million offset by a $70,000 payment of a 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.
23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin ("ARB") No. 51" ("FIN 46"). FIN
46 was revised with FIN 46(R) in December 2003. It requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46(R) is effective for all entities subject to
this interpretation no later than the end of the first period that ends after
March 15, 2004. The Company has reviewed the applicability of FIN 46(R) and does
not currently have any entities that require consolidation under this
pronouncement.
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.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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) achieving meaningful revenue growth to offset our
expenses and (ii) accurately forecasting capital expenditures and (iii)
obtaining new sources of external financing and (iv) conducting successful
clinical trials supporting Dr. Kajander's theories that the human body does not
recognize nanobacteria as harmful, and accordingly, nanobacteria could be the
cause of pathological disease causing calcification found in multiple diseases.
Assumptions relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause NNBP to alter its capital
expenditure or other budgets, which may in turn affect NNBP's financial position
and results of operations.
23
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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 are generating a financial and cash loss.
Throughout 2004 and 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.
24
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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 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.
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.
25
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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.
26
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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.
27
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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.
28
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (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.
29
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Item 3: Controls and Procedures
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 March 31, 2004, 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.
Item 4: 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.
30
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
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.
31
Item 2: Changes in Securities and Use of Proceeds
(a) Not Applicable.
(b) Not Applicable.
(c)
o During January 2004, 794,569 shares of preferred stock were converted
into 35,048,445 shares of common stock in accordance with the terms of
the preferred stock.
o During January 2004, 4,500,000 shares of common stock were issued to
affiliates of our Chairman and CEO pursuant to Section 6.3 of the
bankruptcy plan. A compensation charge of $2.6 million was recorded in
connection with this stock issuance.
o During January 2004 and March 2004, NNBP agreed to issue 10,000,000
shares of common stock for the remaining 35% ownership interest of
Nanobac OY.
(d) Not Applicable
Item 3: Defaults upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Security Holders
On January 26, 2004, NNBP filed Articles of Amendment increasing authorized
shares from 100,000,000 to 250,000,000 with the consent of the major
stockholders.
Item 5: Other Information
None
32
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
Exhibit 31.1 - Certification to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
Exhibit 31.2 - Certification to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on February 2, 2004 under
Item 4 disclosing a change in auditors.
The Registrant filed a report on Form 8-K on February 6, 2004 under
Item 5 disclosing new officers and directors of the Registrant.
The Registrant filed a report on Form 8-K on April 2, 2004 under Item 2
announcing its disposition of HealthCentrics.
The Registrant filed a report on Form 8-K on April 2, 2004 under Item 2
announcing the acquisition of the remaining 35% of Nanobac OY and the
disclosure of employment agreements with key employees.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: May 17, 2004 NANOBAC PHARMACEUTICALS, INCORPORATED
By: /s/ Alex H. Edwards III
---------------------------------------
Alex H. Edwards III, President and Chief
Executive Officer
34
Nanobac Pharmaceuticals, Incorporated
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------
31.1 Certification to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Executive Officer
31.2 Certification to Section 302 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
35