UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Quarter Period Ended
September 30 2003
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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
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(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification Number)
2727 W. Martin Luther King Blvd, Suite 850, Tampa, Florida 33607
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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)
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 December 31, 2003 was 99,943,840.
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2003 3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the period ended September 30, 2003 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 6
Notes to the Condensed Consolidated Financial Statements 7
2
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash $ 46,143 $ --
Account receivable, net of allowance of $11,709 3,416 5,223
Inventory 67,454 --
Advances to Nanobac OY 193,293
------------ ------------
Total current assets 310,306 5,223
------------ ------------
FIXED ASSETS, at cost less accumulated depreciation 111,614 --
OTHER ASSETS
Investment in Nanobac OY 795,225
Security deposits 65,000 --
Goodwill 8,970,264 --
------------ ------------
Total other assets 9,830,489 --
------------ ------------
TOTAL ASSETS $ 10,252,409 $ 5,223
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 675,047 $ 263,916
Accrued expenses 438,747 82,229
Notes payable 276,973 --
Stockholder loan 809,071 --
Other current liabilities -- --
------------ ------------
Total current liabilities 2,199,838 346,145
MINORITY INTEREST (40,915) --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 100,000,000 12,027,572 1,134,377
shares authorized, 83,780,395 issued and outstanding
Preferred stock, no par value, 50,000,000 -- --
shares authorized, 0 issued and outstanding
Additional Paid in Capital -- --
Retained (deficit) (3,934,086) (1,475,299)
------------ ------------
Total stockholders' (deficit) 8,093,486 (340,922)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 10,252,409 $ 5,223
============ ============
The accompanying notes are an integral part of these financial statements.
3
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
February 22, 2002
Three Months ended September 30, Nine Months (date of inception)
------------------------------- ended through
2003 2002 September 30, 2003 September 30, 2002
------------ ------------ ------------------ ------------------
REVENUE $ 244,616 $ 3,565 $ 333,542 $ 6,565
COST OF REVENUE 206,113 (404) 294,627 3,092
------------ ------------ ------------ ------------
GROSS PROFIT 38,503 3,969 38,915 3,473
------------ ------------ ------------ ------------
OPERATING EXPENSES
Sales, general and administrative 760,447 240,883 2,157,741 623,972
Research and development 220,338 151,752 407,707 372,378
Depreciation and amortization 6,483 8,870
------------ ------------ ------------ ------------
Total Operating Expenses 987,268 392,635 2,574,318 996,350
------------ ------------ ------------ ------------
OPERATING LOSS (948,765) (388,666) (2,535,403) (992,877)
NET OTHER EXPENSES (INCOME)
Interest expense (14,380) (18,056)
Other income (expense), net 165 223
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES & MINORITY INTEREST (962,980) (388,666) (2,553,236) (992,877)
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (962,980) (388,666) (2,553,236) (992,877)
MINORITY INTEREST 49,200 94,449
------------ ------------ ------------ ------------
NET LOSS $ (913,780) $ (388,666) $ (2,458,787) $ (992,877)
============ ============ ============ ============
LOSS PER COMMON SHARE
Basic $ (0.01) $ (0.03) $ (0.04) $ (0.09)
------------ ------------ ------------ ------------
Fully Diluted $ (0.01) $ (0.03) $ (0.04) $ (0.09)
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 64,783,780 12,718,811 58,268,413 11,494,479
------------ ------------ ------------ ------------
Fully Diluted 64,783,780 12,718,811 58,268,413 11,494,479
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
4
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Common Stock Preferred Stock Additional
---------------------------- ---------------------------- Paid-in Retained
Shares Value Shares Value Capital (Deficit) Total
------------ ------------ ------------ ------------ ---------- ------------ ------------
December 31, 2002 Balance 19,982,965 $ 1,134,377 368,815 $ -- $ -- $ (1,475,299) $ (340,922)
Conversion of 16,268,430 -- (368,815) -- --
Preferred Stock to
Common Stock
Capital infusion by
affiliate 359,000 359,000
Conversion of shareholder
debt to shares of
common stock at
$0.20 per share 3,644,000 728,800 (359,000) 369,800
Sale of common stock at
$0.20 to $.40 per
share 1,690,000 548,000 548,000
Common stock issued
for services at
$0.20 to $.52 per
share 7,197,000 1,485,550 1,485,550
Common stock issued in
acquisition of
HealthCentrics 4,000,000 -- --
Common stock issued in
acquisition of
NanobacLabs
Pharmaceuticals,
Inc 30,998,000 8,130,845 8,130,845
Net Loss (2,458,787) (2,458,787)
------------ ------------ ------------ ------------ ---------- ------------ ------------
Balance, September 30,
2003 83,780,395 $ 12,027,572 $ -- $ -- $ -- $ (3,934,086) $ 8,093,486
============ ============ ============ ============ ========== ============ ============
The accompanying notes are an integral part of these financial statements.
5
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
February 22, 2002
Nine Months (date of inception)
ended through
September 30, 2003 September 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(2,458,787) $ (992,877)
Adjustments to reconcile net loss to cash
(used) in operating activities
Depreciation and amortization 8,870 --
Common stock issued for services 685,550 --
Minority interest in net loss (94,449) --
Net (increase) decrease in assets:
Accounts receivable 8,981 (5,066)
Inventory 1,204 --
Other current assets 47,924 --
Net increase (decrease) in liabilities:
Accounts payable 200,553 177,476
Accrued expenses 138,869 45,048
----------- -----------
Total adjustments 997,502 217,458
----------- -----------
Net cash provided (used) in operating activities (1,461,285) (775,419)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (6,833) --
Long term deposits (2,500) --
Adavnces to Nanobac OY (66,770) --
Acquisition of subsidiary, net of cash received 144,775 --
----------- -----------
Net cash provided (used) in investing activities 68,672 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Line of credit, net (36,453) --
Advances from shareholders 1,237,871 --
Payment of notes payable - Nanobac OY (310,662) --
Common stock issued for cash 548,000 775,419
----------- -----------
Net cash provided (used) in financing activities 1,438,756 775,419
----------- -----------
Change in cash 46,143 --
Cash balance, beginning of period -- --
----------- -----------
Cash balance, end of period $ 46,143 $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest expense $ 4,447 $ --
Noncash items
Common stock issued for the conversion of debt $ 728,800 $ --
Common stock issued in acquisition $ 8,930,845 $ --
The accompanying notes are an integral part of these financial statements.
6
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Nature of operations and summary of significant accounting polices
Nature of business
Effective June 20, 2003, Nanobac Pharmaceuticals, Incorporated ("NNBP" or the
"Company") announced a name change from American Enterprise Corporation to
Nanobac Pharmaceuticals, Incorporated effective July 21, 2003, Nanobac
Pharmaceuticals, Incorporated began trading under the symbol "NNBP."
During June 2003, NNBP acquired a controlling interest of NanobacLabs
Pharmaceutical, Inc. ("LABS") in a stock for stock transaction accounted for
under the purchase method of accounting - see note 2, "Nanobac Acquisition".
As a result of the LABS acquisition, Nanobac Pharmaceuticals, Incorporated's
primary business is the study and development of therapeutic and diagnostic
technologies related to the novel plemorphic pathogen known as nanobacterium
sanguineum. Nanobac Pharmaceuticals has developed therapeutic treatments, for
the eradication or reduction of nanobacteria in the human body.
Prior to its acquisition of LABS, the Company's sole operating subsidiary was
HealthCentrics, Inc., a development-stage enterprise formed in February, 2002 to
organize, develop and market a suite of Web-based medical accounting, billing
and management information services to third party billing companies, practice
management and healthcare provider organizations.
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 nine months ended September 30, 2003 and 2002 are
not necessarily indicative of the results for a full year.
The financial statements for the quarters ended September 30, 2003 and 2002 and
notes thereto should be read in conjunction with the financial statements and
notes thereto for the year ended December 31, 2002 for NNBP as filed in the
annual report on Form 10-KSB, and the pro forma financial statements as filed on
Form 8-K/A dated September 3, 2003, which information is included by reference.
Principles of Consolidation
The consolidated financial statements include the accounts of NNBP and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
7
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
1. Nature of operations and summary of significant accounting polices
(continued)
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Financial instruments
The carrying value of NNBP's financial instruments, including cash, accounts
payable and notes payable approximate their fair market values.
Furniture and equipment
Furniture and equipment is depreciated using the straight-line method over the
estimated useful life of three to five years.
Research and development costs
Research and development costs are expensed in the period in which they occur.
Income taxes
NNBP records its federal and state tax liability in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes". The
deferred taxes payable 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 Company's common stock equivalents include the availability of
shares to the Chairman and CEO under the November 2002 bankruptcy plan (see Note
6) and the availability of additional shares to Minority Stockholders of LABS
(see Note 2). 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.
8
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
2. Acquisition of NanobacLabs Pharmaceuticals, Inc.
On June 4, 2003, NNBP acquired approximately 74.4% of LABS from Gary S. Mezo and
Nancy M. Schriewer-Mezo in exchange for 24,400,000 restricted NNBP no par value
common shares. 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 at September 30,
2003.
As of September 30, 2003, two entities ("Minority Stockholders") owned the
remaining 5.4% of LABS. These Minority Stockholders also have options to acquire
an additional 5.4% of LABS in exchange for a cash contribution of $500,000
("Minority Option"), which expires 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 acquired the
remaining 5.4% 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.
The remaining Minority Option was acquired by an entity controlled by the
Company's Chairman and CEO during December 2003.
As of September 30, 2003, NNBP has issued 30,998,000 shares of NNBP to the
former stockholders of LABS, which represents approximately 33% of NNBP's common
stock outstanding. If NNBP acquires the Minority Stockholders shares and the
Minority Option as described in the preceding paragraph, NNBP will have issued
36,638,000 shares of NNBP to the former stockholders of LABS, which represents
approximately 37% of NNBP's common stock outstanding.
The acquisition has been accounted for as a purchase business combination. Under
the purchase method of accounting, the assets acquired and liabilities assumed
from LABS are recorded at the date of acquisition, at their respective fair
values. Financial statements and reported results of operations of NNBP issued
after completion of the acquisition will reflect these values, but will not be
restated retroactively to reflect the historical financial position or results
of operations of LABS.
At September 30, 2003, the total consideration for LABS was approximately $8.9
million, which included the fair value of NNBP common stock issued as well as
direct transaction costs. In connection with this transaction. NNBP has recorded
approximately $9.0 million of goodwill in conjunction with the acquisition.
9
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
2. Acquisition of NanobacLabs Pharmaceuticals, Inc. (continued)
The following unaudited table compares NNBP's reported operating results to pro
forma information prepared on the basis that the acquisition had taken place at
the beginning of the fiscal year for each of the periods presented:
Three Months ended Nine Months ended
September 30, September 30,
---------------------- --------------------------
2003 2002 2003 2002
--------- --------- ----------- -----------
As Reported
Revenue $ 244,616 $ 3,565 $ 333,542 $ 6,565
Net loss $(913,780) $(388,666) $(2,458,787) $ (992,877)
Basic loss per share $ (0.01) $ (0.03) $ (0.04) $ (0.09)
Diluted loss per share $ (0.01) $ (0.03) $ (0.04) $ (0.09)
Proforma
Revenue $ 244,616 $ 695,469 $ 975,173 $ 2,054,130
Net loss $(913,780) $(453,241) $(3,504,256) $(1,125,667)
Basic loss per share $ (0.01) $ (0.01) $ (0.05) $ (0.03)
Diluted loss per share $ (0.01) $ (0.01) $ (0.05) $ (0.03)
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of 2002 or 2003 or of future
operations of the combined companies under the ownership and management of NNBP.
3. Investment in 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 in nanobacteria infection. A
separate agreement also requires LABS to acquire convertible promissory notes in
Nanobac OY in the amount of 686,000 Euros plus interest. The promissory notes
have a conversion feature that allows the promissory notes to convert into
17,723 shares of Nanobac OY. The title to the 4,500 shares does not transfer
until such time as LABS has fully paid for the convertible promissory notes. The
convertible promissory notes have a stated interest of 7.5% until the purchase
price has been paid.
10
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
3. Investment in Nanobac OY (continued)
Until the transaction is complete, the investment is being recorded under the
cost basis. Once the final payment is made, the stock is transferred and the
convertible notes are exercised, NNBP will own 65% of Nanobac OY. At that time
the acquisition will be treated as a purchase under Statement of Financial
Accounting Standard 141.
As of September 30, 2003, LABS has paid $548,515 to the Nanobac OY sellers. The
remaining liability at September 30, 2003 is included in current liabilities and
is summarized as follows (in US dollars):
Notes payable $228,638
Accrued interest $ 48,335
--------
$276,973
========
The Company paid the remaining liability and exercised the conversion option in
the convertible promissory notes on November 11, 2003. The Company is awaiting
the issuance of shares from the conversion of the convertible promissory notes.
Cost of revenue for the nine months ended September 30, 2003 includes
approximately $28,000 attributable to services purchased from Nanobac OY. In
addition, at September 30, 2003, LABS has made unsecured cash advances of
$193,000 to Nanobac OY to fund Nanobac OY's operations. This amount is included
in current assets.
4. Income taxes
NNBP has accumulated a loss of approximately $3.8 million for income tax
purposes, which can be used to offset future taxable income through 2022.
Estimated future tax benefit $ 1,330,000
Valuation allowance (1,330,000)
-----------
Estimated future tax benefit $ --
===========
As of September 30, 2003, no deferred income taxes were recorded in the
accompanying financial statements.
11
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
5. Segment Information
NNBP has the following two reporting segments which operate as two separate
business units in the United States of America
o Nanobac - Nanobiotechnology and pharmaceutical research and
development as described in the Nature of Business (Note 1).
o HealthCentrics - Development and marketing of Web-based medical
accounting, billing and management information services to third party
billing companies, practice management and healthcare provider
organizations. Management is currently reviewing its strategy for the
HealthCentrics segment.
The accounting policies of the individual segments are the same as those
described in the summary of significant accounting policies. Information
regarding the reporting segments is as follows:
Nanobac HealthCentrics Other Total
----------- -------------- ----------- -----------
Three months ended September 30, 2003
Revenue $ 241,340 $ 3,276 $ -- $ 244,616
Net loss $ (610,041) $ (303,739) $ -- $ (913,780)
Three months ended September 30, 2002
Revenue $ -- $ 3,565 $ -- $ 3,565
Net loss $ -- $ (388,666) $ -- $ (388,666)
Nine months ended September 30, 2003
Revenue $ 318,978 $ 14,564 $ -- $ 333,542
Net loss $ (741,544) $(1,106,243) $ (685,550) $(2,533,337)
February 22, 2002 (date of inception)
Through September 30, 2002
Revenue $ -- $ 6,565 $ -- $ 6,565
Net loss $ -- $ (992,877) $ -- $ (992,877)
Other represents expense incurred for the issuance of common stock for services
to certain affiliates of NNBP (see note 6).
NNBP has no individual customers which constitute a significant concentration.
12
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
6. Stockholders' deficit
Common stock
Effective March 1, 2003, NNBP issued 500,000 restricted common shares to an
officer in exchange for services. During June 2003, the Board members authorized
an issuance of 350,000 restricted common shares to its Corporate Secretary for
services and 2,205,000 restricted shares of its common stock to entities
controlled by its Chairman and Chief Executive Officer ("CEO") for services.
Theses shares were issued on July 11, 2003. An additional 142,000 shares were
issued to an entity controlled by the Chairman and CEO on September 17, 2003 for
services rendered. As a result of these issuances, an expense of $685,550 was
recorded for the nine months ended September 30, 2003.
During June 2003, the Board members authorized an issuance of 4,000,000
restricted common shares to its Chief Executive Officer and Chairman in
connection with the facilitation and bridge funding for the acquisition of LABS.
These shares were valued at $800,000 and are included in the LABS acquisition
cost.
An additional 4,000,000 restricted common shares were authorized to be issued to
the Chairman and CEO as part of the Bankruptcy Plan approved in December 2002 in
connection with the facilitation and bridge funding for the HealthCentrics
acquisition. These 4,000,000 shares are treated as being issued and outstanding
throughout the nine months ended September 30, 2003.
From May 2001 through November 2002, the Company was in bankruptcy. Throughout
bankruptcy, the Company's Chairman and CEO, Mr. John Stanton, funded the
Company's administrative costs and provided management to the Company. In
exchange for these services, Mr. Stanton received the right to obtain 75.0
million shares of the Company at his discretion. Through September 30, 2003,
23.7 million shares have been issued to Mr. Stanton or affiliates of Mr.
Stanton. An additional 16.1 million shares were issued to affiliates of Mr.
Stanton on October 18, 2003 and November 18, 2003. It is at Mr. Stanton's
discretion as to whether the remaining 35.2 million shares will be issued.
Incentive stock option plan
NNBP has no incentive stock option plan.
7. Related Party
The Chief Executive Officer, who is the largest stockholder of NNBP, has loaned
NNBP $809,071 as of September 30, 2003 to fund the operating cash flow
requirements of NNBP. These loans bear interest at 3% and are due on demand.
Interest expense for the above loan for the three and nine months ended
September 30, 2003 was $3,750.
13
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
7. Related Party (continued)
The Company is party to a royalty agreement with the former majority owner of
LABS who also owns approximately 24% of NNBP as of September 30, 2003. Under the
terms of the royalty agreement, the following amounts are payable to this
individual:
o Annual fee of $50,000
o Royalty equal to 10% of gross sales from products
o A minimum annual royalty of $500,000 if licensed products are sold and
approved by the US Federal Food and Drug Administration or a
comparable foreign regulatory authority. As of September 30, 2003,
this provision is not applicable as the contingent events in this
provision have not occurred.
For the nine months ended, September 30, 2003, $15,995 has been expensed in
relation to this royalty agreement. As of September 30, 2003, accrued expenses
include approximately $113,000 payable to this stockholder for the current and
prior royalty agreements.
8. Going Concern
The accompanying financial statements have been prepared assuming that NNBP will
continue as a going concern. Both of NNBP's reportable segments are operating at
a loss and are dependent on the continued financing from outside investors
including additional shareholder loans. Management believes that NNBP will need
to raise additional capital in order to launch new clinical trials, fund
research and development for new treatment areas, and general working capital
requirements. Capital may be raised through further sales of equity securities,
which may result in dilution of the position of current shareholders. At this
time, there are no firm commitments to invest in NNBP. If NNBP is unable to
obtain such financing, the business might not attain profitability.
There can be no assurances that NNBP will be successful in obtaining debt or
equity financing in order to achieve its financial objectives and continue as a
going concern. The financial statements do not include any adjustments to the
carrying amount of assets and the amounts and classifications of liabilities
that might result from the outcome of this uncertainty.
9. Subsequent events
On October 27, 2003, in connection with the Minority Stockholders conversion of
stock and Minority Option in LABS, the Minority Stockholders were issued
3,240,000 shares of NNBP (see Note 2).
On October 18, 2003, 11.1 million shares were issued to affiliates of the
Company's Chairman and CEO. On November 18, 2003, an additional 5.0 million
shares were issued to affiliates of the Company's Chairman and CEO. These 16.1
million shares were issued as part of the rights due to the Chairman and CEO for
services provided when the Company was in bankruptcy (see Note 6). An expense of
approximately $9 million will be recorded in the fourth quarter of 2003 for
these share issuances.
14
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
Nanobac Pharmaceuticals, Incorporated, (f/k/a American Enterprise Corporation)
("we", "our", "us" the "Company", "AMER", "NNBP") was formed as a Florida
corporation during June, 1994. At that time, our corporate name was National
Diagnostics, Inc. and through our wholly-owned subsidiaries, we provided
diagnostic imaging services through several outpatient centers in Florida.
During 1998, we changed our corporate name to American Enterprise.Com, Corp.
On May 1, 2001, American Enterprise.Com, Corp filed for voluntary reorganization
under Chapter 11 of the Bankruptcy Code. On November 20, 2002, we emerged from
bankruptcy when the Middle District of Florida Court confirmed AMER's Plan of
Reorganization (the "Confirmed Plan" or "Plan"). At time of the Plan
confirmation, AMER had no assets and no liabilities. During the two-year period
of our bankruptcy we conducted no activities except those matters required to
complete the bankruptcy process. During 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.
HealthCentrics is a development-stage Florida corporation formed February, 2002
to organize, develop and market a suite of Web-based medical accounting, billing
and management information services to third party billing companies, practice
management and healthcare provider organizations. HealthCentrics has generated
virtually no revenue to date and has sustained losses in excess of $2 million
since its inception on February 22, 2002.
Current Developments
Acquisition of NanobacLabs Pharmaceuticals, Inc. - We acquired the majority
ownership of NanobacLabs Pharmaceuticals, Inc. ("LABS") on June 4, 2003 and the
remaining ownership over the next few months in transactions, which are
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
======== ==========
15
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
On October 27, 2003, in connection with the Minority Stockholders conversion of
stock and their Minority Option in LABS, the Minority Stockholders will receive
3,240,000 shares of NNBP. This conversion represents a 50% premium over the
conversion provided to the other LABS' stockholders due to the existence of the
Minority Option and anti-dilution provisions.
Approximately 34,238,000 shares of NNBP are attributable to the former
stockholders of LABS, which represents approximately 35% of NNBP's common stock
outstanding. If we acquire the remaining Minority Option as described in the
preceding paragraph, we will have issued 36,638,000 shares of NNBP to the former
stockholders of LABS, which represents approximately 37% of NNBP's common stock
outstanding.
The acquisition has been accounted for as a purchase business combination. Under
the purchase method of accounting, the assets acquired and liabilities assumed
from LABS are recorded at the date of acquisition, at their respective fair
values. Financial statements and reported results of operations of NNBP issued
after completion of the acquisition will reflect these values, but will not be
restated retroactively to reflect the historical financial position or results
of operations of LABS.
Acquisition of Nanobac OY - Pursuant to a Share Purchase Agreement dated
September 25, 2002, a Convertible Promissory Note Loans Purchase Agreement dated
September 25, 2002 (collectively, the "Acquisition Agreements"), LABS, agreed to
acquire a majority ownership of Nanobac Oy (a Finnish company) for approximately
697,000 Euros plus interest calculated at 7% per annum. Majority ownership would
only be obtained upon the conversion of the convertible promissory notes. The
payment of the purchase proceeds was initially scheduled over a one-year period
from September 25, 2002. In accordance with the terms of the agreements, the
ownership of the stock and convertible notes would not be transferred until all
payments were remitted by Nanobac.
Pursuant to a Closing Agreement dated November 5, 2003, the final payment for
Nanobac Oy was remitted on November 11, 2003. Immediately after the final
payment was received, Nanobac exercised its conversion rights under the
convertible notes. Once Nanobac receives the Nanobac OY common stock as a result
of the above conversion, Nanobac will own 65% of Nanobac Oy.
Nanobac Oy's assets consist of cash, property and equipment, and other tangible
and intangible assets. Nanobac Oy's liabilities consist primarily of trade
payables and other accruals. The purchase price and associated charges will be
allocated among the identifiable tangible and intangible assets of Nanobac Oy
based on their fair market value at the acquisition date under the purchase
method of accounting for business combinations. The cost of purchased research
and development, if any, for that portion of the acquired technology that has
not reached technological feasibility and has no alternative future use will be
written off against NNBP earnings in its fiscal quarter ending December 31,
2003.
Nanobac OY is located in Kuopio, Finland and was created in partnership with the
Finnish government. Prior to the acquisition, Nanobac OY provided scientific
research and diagnostic technology for nanobacteria. Nanobac OY holds US and EU
patents for methods for eradication of nanobacteria [US Patent 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)
Stock Issuances to Officers - On March 6, 2003, we issued 500,000 restricted
shares of our common stock to Alex Edwards, who is an Executive Officer. On
September 17, 2003, we issued 142,000 restricted shares to an entity controlled
by our Chairman and CEO for services rendered. On July 11, 2003 we issued
350,000 restricted shares of our common stock to our Corporate Secretary for
services rendered. On the same date we issued 12,000,000 restricted shares of
our common stock to entities controlled by our Chairman and CEO for the
following:
Conversion of paid-in capital 1,759,000
Shares allocated to the Chairman in the
December 2002 Bankruptcy plan related
To the acquisition of HealthCentrics 4,000,000
Shares issued to the Chairman for services
In connection with the June 2003 acquisition of NanobacLabs
Pharmaceuticals, Inc. (included as a cost of acquisition) 4,000,000
Shares issued to the Chairman and CEO for services
(included as an expense as of June 2003) 2,205,000
----------
Total 12,000,000
==========
Common stock issued for services were valued at $.20 to $.42 per share, which
resulted in the recognition of a one-time charge of $685,550 for the nine months
ended September 30, 2003. An additional amount of $800,000 was included in our
June 2003 acquisition costs of LABS for the 4 million shares issued to our CEO
and Chairman in connection with the LABS acquisition. The Chairman and CEO
located, facilitated and provided bridge funding for the HealthCentrics and LABS
acquisitions.
From May 2001 through November 2002, the Company was in bankruptcy. Throughout
bankruptcy, the Company's Chairman and CEO, Mr. John Stanton, funded the
Company's administrative costs and provided management to the Company. In
exchange for these services, Mr. Stanton received the right to obtain 75.0
million shares of the Company at his discretion.
Through September 30, 2003, 23.7 million shares have been issued to Mr. Stanton
or affiliates of Mr. Stanton, including the 12 million shares described above.
An additional 16.1 million shares were issued to affiliates of Mr. Stanton on
October 18, 2003 and November 18, 2003. It is at Mr. Stanton's discretion as to
whether the remaining 35.2 million shares will be issued.
Change of Name - Effective June 20, 2003, we changed our name from American
Enterprise Corporation to Nanobac Pharmaceuticals, Incorporated Effective July
21, 2003, Nanobac Pharmaceuticals, Incorporated, began trading under the symbol
"NNBP."
17
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Current Operations
As a result of the LABS and Nanobac OY acquisitions, our primary business is the
study and development of therapeutic and diagnostic technologies related to the
novel plemorphic pathogen known as nanobacterium sanguineum. We specialize in
the following areas, utilizing clinical and scientific researchers, physicians
and scientific collaborators:
o Innovative pharmaceuticals
o Medical diagnostics
o Medical nanobiotechnology
We have developed therapeutic treatments, for the eradication or reduction of
nanobacteria in the human body. Our subsidiary, Nanobac OY has also developed
Nanobac TEST-S(TM), which is used to determine the presence of nanobacterial
antigens (active infection) and antibodies (exposure to or dormant bacteria) in
blood.
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 Nobel Prize nominees 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.
18
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operation
The following table presents the percentage of period-over-period dollar change
for the line items in our Condensed Consolidated Statements of Operations for
the three month periods ended September 30, 2003 and 2002 and the nine month
period ended September 30, 2003 and the period from February 22, 2002 (date of
inception) through September 30, 2002. Due to the significance of the LABS
acquisition, we are also presenting the proforma percentage of total revenue and
the proforma percentage of period-over-period dollar change for the line items
in our Condensed Consolidated Statements of Operations on the basis that the
LABS acquisition had taken place at the beginning of the each period presented.
These comparisons of financial results are not necessarily indicative of future
results.
Three months ended September 30,
---------------------------------------------------------------
Proforma
2003 2002 % change 2002 % change
--------- --------- --------- --------- ---------
Revenue $ 244,616 $ 3,565 6762% $ 695,469 -65%
Cost of revenue 206,113 (404) 262,163 -21%
--------- --------- ---------
Gross Profit 38,503 3,969 870% 433,306 -100%
Gross Profit percentage 16% 111% 62%
One-time expense -- -- --
Selling, general and administrative 760,447 240,883 216% 676,480 1%
Research and development 220,338 151,752 45% 210,067 5%
Depreciation and amortization 6,483 -- --
--------- --------- ---------
Operating loss ($948,765) ($388,666) 144% ($453,241) 93%
========= ========= =========
Period ended September 30,
----------------------------------------------------------------------------------
Proforma Proforma
2003 2002 % change 2003 2002 % change
----------- ----------- --------- ----------- ----------- --------
Revenue $ 333,542 $ 6,565 4981% $ 975,173 $ 2,054,130 -53%
Cost of revenue $ 294,627 $ 3,092 9429% 597,176 783,628 -24%
----------- ----------- ----------- -----------
Gross Profit 38,915 3,473 1021% 377,997 1,270,502 -70%
Gross Profit percentage 12% 53% 39% 62%
One-time expense 685,550 -- 685,550 --
Selling, general and administrative 1,472,191 623,972 136% 2,606,946 1,898,376 37%
Research and development 407,707 372,378 9% 619,111 497,793 24%
Depreciation and amortization 8,870 -- 21,665 --
----------- ----------- ----------- -----------
Operating loss ($2,535,403) ($ 992,877) 155% ($3,555,275) ($1,125,667) 216%
=========== =========== =========== ===========
19
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Revenue
Virtually all of the revenue for the three and nine months ended September30,
2003 reflects the acquisition of LABS on June 4, 2003. Revenue for
HealthCentrics was approximately $15,000 for the nine months ended September 30,
2003 and 2002. On a proforma basis (assuming LABS was acquired on the first date
of each reporting period), Revenue decreased 65% and 53% for the three and nine
months ended September 30, 2003 compared to 2002. During the fourth quarter of
2002, we decided to concentrate our resources on scientific research to provide
validation and further credibility to our nanobacteria products. As a result of
this change in focus, several revenue sources have significantly declined.
During December 2003, we voluntarily discontinued offering NanobacTX(TM), which
accounted for approximately 80% of our revenue for the three and nine months
ended September 30, 2003. We are in the process of accelerating our research and
developing new products for better patient acceptance and compliance with
governmental regulations.
Cost of revenue
Virtually all of the cost of revenue for the three and nine months ended
September 30, 2003 reflects the acquisition of LABS on June 4, 2003. Excluding
HealthCentrics, cost of revenue was approximately 84% and 61% of revenue for the
three and nine months ended September 30, 2003. This compares to a proforma cost
of revenue of 38% of revenue for 2002 (assuming LABS was acquired in the first
date of each reporting period). The increase of cost of revenue as a percentage
of revenue primarily reflects fixed costs of $37,500 per month for lab work
beginning in July 2003. We terminated this fixed cost arrangement in October
2003.
Gross Profit
Gross profit is 16% and 12% for the three and nine months ended September 30,
2003 reflecting a gross profit loss by HealthCentrics and approximately 25%
profit for LABS. Proforma gross profit (assuming LABS was acquired at the
beginning of each reporting period) decreased to 39% for the nine months ended
September 30, 2003 compared to 62% in 2002. Proforma gross profit decreased to
16% for the three months ended September 30, 2003 compared to 62% in 2002. The
decrease reflects lower sales volume, a loss in the HealthCentrics' gross profit
and the introduction of the $37,500 of fixed lab costs in July 2003.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses include a $685,550 charge
for stock issuances to our officers. Excluding these one-time charges, SG&A
expenses increased 185% and 136%, respectively for the three and nine months
ended September 30, 2003 compared to 2002. This increase reflects the June 4,
2003 acquisition of LABS.
On a proforma basis (assuming LABS was acquired on the first date of each
reporting period), SG&A expenses increased 37% for the nine months ended
September 30, 2003 compared to the nine months ended September 30, 2002. This
increase reflects LABS plan of marketing its pharmaceutical products to the
medical community. On a proforma basis, SG&A increased 1% for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
20
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Research and Development
We conduct research and development ("R&D") in both of or business segments. The
Nanobac R&D is focused on pharmaceuticals and the HealthCentrics R&D is focused
on software development. Proforma R&D (assuming LABS was acquired on the first
date of each reporting period) for the three and nine months ended September 30,
2003 and 2002 is summarized as follows:
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Sep 30, 2003 Sep 30, 2002 % change Sep 30, 2003 Sep 30, 2002 % change
------------ ------------ -------- ------------ ------------ --------
Research and Development
Pharmaceuticals $185,420 $ 58,315 218% $418,555 $125,415 234%
Software 34,918 151,752 -77% 200,556 372,378 -46%
-------- -------- -------- --------
$220,338 $210,067 5% $619,111 $497,793 24%
======== ======== ======== ========
As demonstrated above, we are increasing our investment in Pharmaceutical R&D
while we are decreasing our software R&D.
We intend to continue to expand our pharmaceutical R&D investment in the coming
year. We have recently announced two new epidemiological research studies on
nanobacteria that we are conducting with Stephen E. Epstein, MD, Director of the
Cardiovascular Research Institute, Washington Hospital Center, Washington, D.C.
and E. Olavi Kajander, MD, Phd, Director of research and science for NNBP in
Finland and the United States.
Minority Interest
The minority interest gain represents that portion of the LABS loss that is
allocated to minority stockholders of LABS. During October 2003, we acquired the
remaining ownership of LABS. Accordingly, minority interest from the LABS
acquisition will be eliminated subsequent to October 2003.
Net Loss
Excluding the one-time charge for the common stock issuances to the Company
officers, our net loss was approximately $839,000 for the three months ended
September 30, 2003 and approximately $1.8 million for the nine months ended
September 30, 2003.
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 John D. Stanton, our Chairman and CEO, and from other
shareholders, and from private placements of NNBP's common stock. A portion of
Mr. Stanton's advances were converted to common stock. As of September 30, 2003
the stockholder loan was approximately $809,000, which is entirely due to Mr.
Stanton or affiliates of Mr. Stanton. For the period of January 1, 2003 through
September 30, 2003, $728,800 of shareholder advances were converted into
3,644,000 shares of common stock. An additional $548,000 of cash was received
for the direct sale of restricted common stock to outside investors.
As of September 30, 2003, NNBP had total assets of $10.3 million of which
$310,000 were current assets. At September 30, 2003, NNBP had total current
liabilities of $2.2 million and no long-term liabilities. NNBP's working capital
deficit at September 30, 2003 was $1.9 million and NNBP had a retained deficit
of $3.9 million.
Net cash used in operations was $1.5 million for the nine months ended September
30, 2003. The negative cash flow from operations reflects the $2.5 million net
loss for the period offset by the one-time non-cash charge of $685,550 for
common stock issued to our officers and an increase in accounts payable and
accrued expenses of approximately $339,000.
Net cash provided by investing activities was approximately $69,000 for the nine
months ended September 30, 2003 which reflects the cash balance in LABS as of
the acquisition date of $145,000 primarily offset by our advances to Nanobac OY
of $67,000.
Net cash provided by financing activities was $1.4 million for the nine months
ended September 30, 2003. This primarily reflects advances and capital
contributions by stockholders of $1.8 million offset by $311,000 of payments on
the Nanobac OY note payable.
NNBP is dependent on raising additional funding necessary to implement its
business plan as outlined above. Should NNBP not be successful in raising cash
from its Chairman and CEO and other investors, NNBP is unlikely to continue as a
going concern.
22
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) accurately forecasting capital expenditures and (ii)
obtaining new sources of external financing and (iii) conducting successful
clinical trials supporting Dr. Kajander's theories that the human body does not
recognize nanobacteria as harmful, and accordingly, nanobacteria could be the
cause of pathological disease causing calcification found in multiple diseases.
Assumptions relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause NNBP to alter its capital
expenditure or other budgets, which may in turn affect NNBP's financial position
and results of operations.
Risk Factors
Trends, Risks and Uncertainties
We have sought to identify what we believe to be the most significant risks to
our business. However, we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
Cautionary Factors that may Affect Future Results
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
23
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Reliance on our Chairman of the Board, Chief Executive Officer and Majority
Shareholder; Possible Future Dilution
We have limited working capital and are primarily relying upon borrowed funds to
operate. The operations of Nanobac and HealthCentrics are generating a financial
and cash loss. Throughout 2003, our Chairman of the Board, Chief Executive
Officer and majority shareholder Mr. John Stanton has provided our capital needs
through loans to both of these business segments. While Mr. Stanton continues to
provide for the majority of our capital requirements, he is under no obligation
to continue such financing and/or strategic guidance. In the event Mr. Stanton
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, Mr. Stanton has provided his capital to us on a debt
basis after which he may convert his debt into shares of our common stock. If,
in the future we require additional capital, Mr. Stanton may contribute some or
all of our requirements. We anticipate that as a part of any such loan, Mr.
Stanton would have rights to convert into additional shares of our common stock.
In such an event and to the degree of which we require Mr. Stanton's support,
shareholders may experience dilution. At present, we do not maintain key man
insurance for Mr. Stanton.
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 Mr. Stanton, 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.
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 pharmaceutical
research and software programs and methods 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.
24
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Federal Food and Drug Administration
Some or all of our pharmaceutical products may be governed by rules and
regulations established by the United States Food and Drug Administration
("FDA"). Changes in FDA regulations and the enforcement thereof may affect the
Company's pharmaceutical 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.
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.
25
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Government Regulation
Healthcare in general and the pharmaceuticals industry in particular are highly
regulated markets, subject to both federal and a multitude of state regulations
and guidelines. The majority of our business is still in clinical research
applications and is governed by the medical community. NanobacTX(TM) is a
prescription compound which is governed by the normal rules of pharmacy
compounding regulations. 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.
Exclusive License
We have executed a royalty-bearing, worldwide exclusive license and have
obtained the use of all "patent rights" of Gary Mezo, which relate to the
trademarks, manufacture, compounding, use or sale of Anti-Nanobacterial
Treatment Agents or Nanobacterial Diagnostics. There are risks inherent in any
intellectual property rights in that they may be challenged as being invalid or
not original. Additionally, other parties may abuse such intellectual rights,
causing the Company to defend its rights.
Dependency Upon Key Technical and Scientific Personnel Who May Terminate
Employment at Any Time.
Our success will depend to a significant degree upon the continued services of
key technical and scientific personnel, including but not limited to E. Olavi
Kajander, MD, PhD. In addition, our success may depend on our ability to attract
and retain other highly skilled personnel. Competition for qualified personnel
is intense, and the process of hiring and integrating such qualified personnel
is often lengthy. We may be unable to recruit personnel on a timely basis, if at
all. All of the Company's management and other employees may voluntarily
terminate their employment with us at any time. The loss of the services of key
personnel, or the inability to attract and retain additional qualified
personnel, could result in delays to development, loss of sales, and/or
diversion of management resources that could have a material adverse affect on
the Company.
Competition
The markets in which we compete include successful and well-capitalized
competitors that vary in size and scope. Principal competitors include Pfizer,
Merck and other pharmaceutical companies having unique treatments for
cardiovascular disease. All of these competitors are more established, benefit
from greater name recognition and have substantially greater resources than us.
Moreover, we could face additional competition as other established and emerging
companies enter the market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer
subscriptions, reduced gross margins and loss of market share, any of which
could materially adversely affect our business, financial condition and
operating results. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third-parties, thereby increasing the ability of their products to
address the needs of our prospective consumers. While we believe we can
differentiate our product from these current and future competitors, focusing on
the products' functionality, flexibility, adaptability and features, there can
be no assurance that we will be able to compete successfully against current and
future competitors. The failure to effectively compete would have a material
adverse effect upon our business, financial condition and operating results.
26
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
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 25% 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.
27
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.
28
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 the filing date of this quarterly
report, and, based on their evaluation, our principal executive officer and
principal financial officer have concluded that these controls and procedures
are effective. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
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 this transaction (approximately
$277,000 outstanding as of September 30, 2003) and on the future transactions of
Nanobac OY when it is a subsidiary of NNBP.
We do not engage in hedging transactions and is not a party to any leveraged
derivatives.
29
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
During January 2003 we engaged in arbitration with a software outsourcing firm,
AdiTech, Inc. over disputes arising from programming services in our
HealthCentrics' business unit. As a result of arbitration, our liability to
AdiTech was determined to be approximately $158,000. This liability has been
accrued by the HealthCentrics segment at September 30, 2003.
On May 1, 2001, the Company (named American Enterprise.Com, Corp at the time)
filed for voluntary reorganization under Chapter 11 of the Bankruptcy Code. On
November 20, 2002, the Middle District of Florida Court confirmed our Plan of
Reorganization (the "Plan"). At the time of Plan confirmation (November 20,
2002), we had no assets and no liabilities. Administrative fees including legal,
accounting and consulting were paid by Mr. John Stanton, our Chairman of the
Board and Chief Executive Officer. There were no priority creditors. Equipment
leases were treated as unsecured creditors. Unsecured creditors determined to
represent approximately $7,000,000 were allowed to choose between (a) a cash
payment on a pro rata basis from a $50,000 unsecured claim fund, or (b) a stock
payment on a pro rata basis from a 4,500,000 common share unsecured claim
treasury stock fund. All unsecured creditors opted to receive a pro rata portion
of the $50,000 cash unsecured claim fund. None of the unsecured creditors opted
to accept any of the 4,500,000 shares allocated to the treasury stock fund. We
have filed objections to a number of the unsecured creditors seeking their pro
rata portion of the $50,000 cash unsecured claim fund. We are unable at this
time to predict the outcome of these objections. However, the $50,000 cash
unsecured claim fund has already been provided to an escrow account established
for these purposes and the outcome of the objections to claims will have no
further impact on us.
30
Item 2: Changes in Securities and Use of Proceeds
(a) Not Applicable.
(b) Not Applicable.
(c) During the period from July 1, 2003 through September 30, 2003, NNBP issued
1,690,000 shares of its common stock for $548,000 cash in private placements.
The shares were issued at a price of $0.20 to $.40 per share and are restricted.
Also the period from July 1, 2003 through September 30, 2003, NNBP issued
6,598,000 shares of its common stock to effect the purchase of an additional
20.2% of NanobacLabs Pharmaceuticals, Inc. The shares were issued at prices of
approximately $0.49 per share and are restricted.
On July 11, 2003, we issued 350,000 restricted shares of our common stock at a
price of $.20 per share to our Corporate Secretary for services rendered. On the
same date we issued 12,000,000 restricted shares of our common stock to entities
controlled by its Chairman and Chief Executive Officer for the following:
Conversion of paid-in capital 1,759,000
Shares allocated to the Chairman in the
December 2002 Bankruptcy plan related
To the acquisition of HealthCentrics 4,000,000
Shares issued to the Chairman for services
In connection with the June 2003 acquisition of NanobacLabs
Pharmaceuticals, Inc. (included as a cost of acquisition) 4,000,000
Shares issued to the Chairman and CEO for services
(included as an expense in June 2003) 2,205,000
----------
Total 12,000,000
==========
On September 17, 2003, we issued 142,000 restricted shares to an entity
controlled by our Chairman and CEO for services rendered.
On October 27, 2003, in connection with the Minority Stockholders conversion of
stock and Minority Option in LABS, the Minority Stockholders were issued
3,240,000 shares of NNBP.
(d) Not Applicable
Item 3: Defaults upon Senior Securities
None.
Item 4: Submission of Matters to a Vote of Security Holders
On June 20, 2003, we changed our name from American Enterprise Corporation
to Nanobac Pharmaceuticals, Incorporated in accordance with the consent of the
major stockholders.
Item 5: Other Information
None
31
Item 6: Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
99.1 Certification pursuant to 18 U.S.C. Section 1350
99.2 Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on July 18, 2003 under Item 5
disclosing that Nanobac Pharmaceuticals, Incorporated will trade under
the symbol "NNBP."
The Registrant filed a report on Form 8-KA on September 3, 2003 under
Item 7 providing financial statements for its acquisition of
NanobacLabs Pharmaceuticals, Inc.
The Registrant filed a report on Form 8-KA on November 26, 2003 under
Item 2 and Item 7 announcing its conclusion of the acquisition of
Nanobac OY.
32
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: January 27, 2004 NANOBAC PHARMACEUTICALS, INCORPORATED
By: /s/ John D. Stanton
---------------------------------------
John D. Stanton, President and Chief
Executive Officer
By: /s/ John D. Stanton
---------------------------------------
John D. Stanton, Chief Financial Officer
33
Nanobac Pharmaceuticals, Incorporated
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
31(a) Certifications pursuant to 29 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chairman and Chief Executive Officer 35
31(b) Certifications pursuant to 29 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - Chief Financial Officer 36
34