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, 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 File (I.R.S. Employer
of Incorporation) 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)
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 November 11, 2004 was 185,857,375.
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2004 (unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and September 30, 2003 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the period ended September 30, 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 2004 and September 30, 2003 (unaudited) 6
Notes to the Condensed Consolidated Financial Statements 7
2
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
2004 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 12,089 $ 49,755
Account receivable 2,114 5,765
Inventory 20,034 16,211
Prepaid expenses 5,683 14,880
------------ ------------
Total current assets 39,920 86,611
------------ ------------
FIXED ASSETS, less accumulated depreciation
of $ 71,526 132,116 135,259
OTHER ASSETS
Security deposits 67,556 70,110
Intangible assets, less accumulated amortization
of $ 716,179 7,321,863 2,136,717
Goodwill 3,615,393 3,615,393
------------ ------------
Total other assets 11,004,812 5,822,220
------------ ------------
TOTAL ASSETS $ 11,176,848 $ 6,044,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 540,959 $ 752,600
Accrued compensation 245,247 46,658
Accrued expenses 419,332 320,979
Short-term note payable 46,300 90,000
Other liabilities 13,163 --
Stockholder loans -- 5,640,009
------------ ------------
Total current liabilities 1,265,001 6,850,246
CONTINGENCY (Notes 2, 6 and 7)) -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value, 250,000,000 shares authorized,
185,857,375 shares issued and outstanding at September 30, 2004
and 100,000,000 shares authorized and 99,968,840
shares issued and outstanding at December 31, 2003 22,384,655 4,233,788
Preferred stock, no par value, 1,000,000 shares authorized,
no shares issued and outstanding at September 30, 2004 and
794,569 shares issued and outstanding at December 31, 2003 -- 350,484
Stock subscription receivable (625,000) --
Due from option exercise -- (200,000)
Accumulated deficit (11,832,545) (5,174,790)
Accumulated other comprehensive loss (15,263) (15,638)
------------ ------------
Total stockholders' equity (deficit) 9,911,847 (806,156)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 11,176,848 $ 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 Nine Months Nine Months
ended ended ended ended
Sept 30, 2004 Sept 30, 2003 Sept 30, 2004 Sept 30, 2003
------------- ------------- ------------- -------------
REVENUE $ 118,141 $ 241,341 $ 224,090 $ 318,978
COST OF REVENUE 42,104 177,408 80,785 237,871
------------- ------------- ------------- -------------
GROSS PROFIT 76,037 63,933 143,305 81,107
------------- ------------- ------------- -------------
OPERATING EXPENSES
Sales, general and administrative 373,804 447,054 4,417,066 1,523,322
Research and development 409,667 185,420 1,507,957 207,151
Depreciation and amortization 219,069 96,483 587,608 117,612
------------- ------------- ------------- -------------
Total Operating Expenses 1,002,540 728,957 6,512,631 1,848,085
------------- ------------- ------------- -------------
OPERATING LOSS (926,503) (665,024) (6,369,326) (1,766,978)
NET OTHER EXPENSES
Interest expense (69,412) (14,380) (238,130) (17,760)
Other, net 1,639 165 6,969 3,822
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (994,276) (679,239) (6,600,487) (1,780,916)
PROVISION FOR INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
LOSS FROM CONTINUING OPERATIONS (994,276) (679,239) (6,600,487) (1,780,916)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (no
applicable income taxes) -- (249,991) (57,268) (851,063)
------------- ------------- ------------- -------------
NET LOSS $ (994,276) $ (929,230) $ (6,657,755) $ (2,631,979)
============= ============= ============= =============
LOSS FROM CONTINUING OPERATIONS
PER COMMON SHARE
Basic and Diluted $ (0.01) $ (0.01) $ (0.05) $ (0.02)
------------- ------------- ------------- -------------
NET LOSS PER COMMON SHARE
Basic and Diluted $ (0.01) $ (0.01) $ (0.05) $ (0.03)
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and Diluted 149,141,827 96,873,488 143,666,148 75,699,708
------------- ------------- ------------- -------------
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 NINE MONTHS ENDED SEPTEMBER 30, 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 5,000,000 5,712,500 -- --
Capital contribution associated
with sale of subsidiary to
affiliate -- 749,327 -- --
Conversion of liabilities to
shares of common stock 30,923,422 7,610,806 -- --
Sale of common stock 10,416,668 1,165,000 -- --
Comprehensive loss:
Net Loss -- -- -- --
Foreign currency translation
adjustment -- -- -- --
Comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2004 185,857,375 $ 22,384,655 -- $ --
============ ============ ============ ============
5
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited) & (Continued)
Accumulated
Stock Due from Other
Subscription Option Accumulated Comprehensive
Receivable 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 -- -- -- -- 5,712,500
Capital contribution associated
with sale of subsidiary to
affiliate -- -- -- -- 749,327
Conversion of liabilities to
shares of common stock -- -- -- -- 7,610,806
Sale of common stock (625,000) -- -- -- 540,000
Comprehensive loss:
Net Loss -- -- (6,657,755) -- (6,657,755)
Foreign currency translation
adjustment -- -- -- 375 375
------------
Comprehensive loss -- -- -- -- (6,657,380)
============
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2004 $ (625,000) $ -- $(11,832,545) $ (15,263) $ 9,911,847
============ ============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements
5(Con't)
NANOBAC PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
ended ended
Sept 30, 2004 Sept 30, 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(6,657,755) $(2,631,979)
Adjustments to reconcile net loss to cash
flow from operating activities:
Depreciation and amortization 587,608 117,612
Common stock issued for services 2,562,750 750,000
Minority interest in net loss -- (3,599)
Interest expense added to stockholder loan 236,792 --
Net (increase) decrease in assets:
Accounts receivable 3,651 8,981
Inventory (3,823) 1,204
Other assets 9,197 47,924
Net increase (decrease) in liabilities:
Accounts payable 266,940 200,553
Accrued compensation 309,404 --
Accrued expenses 94,099 48,019
Deferred revenue 13,163 --
----------- -----------
Total adjustments 4,079,781 1,170,694
----------- -----------
Net cash flows from operating activities (2,577,974) (1,461,285)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (26,531) (6,833)
Security deposits 2,500 (2,500)
Acquisition of subsidiary, net of cash received (900) 78,005
Cash received from exercise of stock option in subsidiary 200,000 --
----------- -----------
Net cash flows from investing activities 175,069 68,672
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from line of credit, net -- (36,453)
Proceeds from issuance of common stock 540,000 548,000
Proceeds from stockholder loans, net 1,873,190 1,237,871
Payment of notes payable, net (43,700) (310,662)
----------- -----------
Net cash flows from financing activities 2,369,490 1,438,756
----------- -----------
Effect of exchange rate changes (4,251) --
Net change in cash (37,666) 46,143
Cash balance, beginning of period 49,755 --
----------- -----------
Cash balance, end of period $ 12,089 $ 46,143
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest expense $ 1,338 $ 4,151
Supplemental schedule of non-cash investing and financing activities:
Common stock issued in acquisition $ 5,712,500 $ 1,392,920
Common stock issued for the conversion of debt $ 7,610,806 $ 728,800
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
SEPTEMBER 30, 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 nanobacterium sanguineum ("Nanobacteria").
Nanobacteria are believed to be small (10,000 to 100,000 times smaller than
typical bacteria), slowly growing bacterium that can be found in human blood,
kidney stones and arterial wall plaques.
Basis of Presentation
In the opinion of management, the accompanying financial statements include all
adjustments, consisting only of normal recurring items, necessary for their fair
presentation in conformity with generally accepted accounting principles. The
results of operations for the nine months ended September 30, 2004 and 2003 are
not necessarily indicative of the results for a full year.
The financial statements for the periods ended September 30, 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 September 30, 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.
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
SEPTEMBER 30, 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.
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
SEPTEMBER 30, 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.
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.
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 and for the periods
ended September 30, 2004 and 2003.
Loss per share for the three and nine months ended September 30, 2004 and 2003
is summarized as follows:
Three Months Three Months Nine Months Nine Months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Loss from continuing operations
per common share ($0.01) ($0.01) ($0.05) ($0.02)
Discontinued operations
per common share 0.00 0.00 0.00 (0.01)
--------------------------------------------------------------------------------
Net loss per common share ($0.01) ($0.01) ($0.05) ($0.03)
================================================================================
9
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. Nature of operations and summary of significant accounting polices
(continued)
Income taxes
NNBP records its federal and state tax liability in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes".
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Acquisitions
NanobacLabs Pharmaceuticals, Inc.
On June 4, 2003, NNBP acquired approximately 74.4% of LABS in exchange for
24,400,000 restricted shares of NNBP. From June 5, 2003 through December 31,
2003, NNBP acquired the remaining 25.6% of LABS from various stockholders in
exchange for 6,598,000 restricted shares and additional consideration of $4.1
million.
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
SEPTEMBER 30, 2004
(UNAUDITED)
2. Acquisitions (continued)
Nanobac OY
Nanobac OY is a Finnish company that performs similar research to that of the
Company in nanobacteria infection. On September 25, 2002, LABS entered into an
agreement to purchase 27% of Nanobac OY stock from three Finnish entities for
11,430 Euros. A separate agreement also required LABS to acquire convertible
promissory notes in Nanobac OY in the amount of 686,000 Euros plus interest. On
November 11, 2003, NNBP completed the acquisition of Nanobac OY when the final
payment was made and the Company exercised the conversion option in the
convertible promissory notes. Upon the conclusion of this transaction, the
Company owned 65% of OY.
During January through March 2004, NNBP acquired the remaining 35% of Nanobac OY
from Dr. Kajander and Dr. Ciftcioglu ("OY Minority Shareholders"). The purchase
price was (a) 5 million shares of NNBP's common stock, (b) 5 million warrants
convertible into NNBP's common stock at $.005 per share and (c) cash
consideration of 15,000 Euros. Total consideration is 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 6,688,043
Other assets 4,732
Current liabilities (11,883)
Advances from Nanobac (228,118)
-----------
$ 6,519,596
===========
Acquired identifiable intangible assets consist of patents for the detection and
treatment of Nanobacteria. The allocation of the purchase price was based, in
part, on third-party valuations of the fair values of identifiable intangible
assets. Amortization of this asset commenced as of the acquisition date.
11
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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:
Nine months ended September 30,
---------------------------------
2004 2003
---- ----
As Reported
Revenue $ 224,090 $ 318,978
Net loss $(6,657,755) $(2,631,979)
Basic loss per share $ (0.05) $ (0.03)
Diluted loss per share $ (0.05) $ (0.03)
Proforma
Revenue $ 224,090 $ 1,008,689
Net loss $(6,724,948) $(4,343,400)
Basic loss per share $ (0.04) $ (0.04)
Diluted loss per share $ (0.04) $ (0.04)
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 each period presented 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
SEPTEMBER 30, 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 non-affiliated 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 nine months ended September 30, 2004 and
2003 are as follows:
2004 2003
---- ----
Revenue $ 5,301 $ 14,563
========== ==========
Loss before income taxes ($ 57,268) ($ 851,063)
Provision for income taxes -- --
---------- ----------
Net loss ($ 57,268) ($ 851,063)
========== ==========
4. Income taxes
NNBP has accumulated a loss of approximately $8.3 million for income tax
purposes, which can be used to offset future taxable income through 2024.
Estimated future tax benefit $ 3,260,000
Valuation allowance (3,260,000)
-------------
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
SEPTEMBER 30, 2004
(UNAUDITED)
5. Stockholders' deficit (continued)
Common stock:
During January 2004, 4.5 million common 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.
During August and September 2004, the Company entered into two Subscription
Agreements with unaffiliated investors. Under the terms of the Subscription
Agreements, the company received cash of $570,000 (net of $85,000 of expenses)
during the three months ended September 30, 2004. The Company is to receive an
additional $625,000 cash within five days of registering the common shares and
warrants issued as a result of the Subscription Agreements. The number of common
shares to be issued is equal to the amount received divided by the lesser of
$.12 or 52% of the average closing bid price of the Company's common stock on
the five trading days immediately prior to the date on which the registration
statement is declared effective ("Fixed Price"). In addition, the Subscription
Agreements provide for the issuance of warrants equal to the number of common
shares issued. Fifty percent (50%) of the warrants are exercisable at 110% of
the Fixed Price and the remaining 50% of the warrants are exercisable at 150% of
the Fixed Price. Unexercised warrants will expire December 31, 2008. The Company
has agreed to use its best efforts to promptly register the common shares and
Warrants.
As a result of the above Subscription Agreements, at September 30, 2004, the
Company has recorded the issuance of 10,416,666 common shares at $1,165,000
($.12 per share less issuance costs). Stock subscription receivable has been
recorded for common shares for which cash had not been received at September 30,
2004.
Warrants:
As of September 30, 2004, in connection with the OY acquisition, 5,000,000
warrants were outstanding with an exercise price of $.005 per common share (see
Note 2).
At the finalization of the subscription agreements described above,
approximately 11,600,000 additional warrants will be issued with a weighted
average exercise price of $.16 per common share.
14
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
6. Related Party Transactions:
Stockholder Loan
- ----------------
An entity controlled by the Chairman and Chief Executive Officer (who are also
the largest stockholders of NNBP), had loaned NNBP approximately $7.5 million as
of September 30, 2004. These loans had interest at 5% and were due on demand.
Interest expense for the above loans for the nine months ended September 30,
2004 was approximately $237,000. On September 30, 2004, the $7.5 million loan
was converted into 29,999,964 shares of the Company's common stock.
Conversion of Debt into Equity
- ------------------------------
During August 2004, an employee and minority stockholder (less than 5% ownership
of the Company) converted an $111,000 liability due from the Company into
923,458 shares of the Company's common stock.
License Agreement
- -----------------
During February 2004, NNBP entered into a licensing agreement with Pegasus
Worldwide, Inc. ("Pegasus") to market one of NNBP's over the counter products.
NNBP's Chief Financial Officer is a director of Pegasus. Under the terms of the
license agreement, NNBP was due $75 for each unit of product sold. For the three
and nine months ended September 30, 2004, NNBP recognized revenue of $29,925 and
$46,800, respectively. Effective June 1, 2004, this license agreement was
cancelled and NNBP is selling this product directly to customers.
Royalty Agreement
- -----------------
The Company was a party to a royalty agreement with the former majority owner of
LABS who, along with his spouse, own approximately 24.4 million common shares of
NNBP. Under the terms of the royalty agreement, this stockholder would receive
an annual fee of $50,000 plus ten percent of gross sales from applicable
products. On March 16, 2004, the U.S. Patent Office printed Patent 6,706,290
"Methods for Eradication of Nanobacteria". With the approval of this patent,
management believes that the above royalty agreement is not valid and no amounts
will ultimately be due under the above royalty agreement. As of September 30,
2004, accrued expenses include approximately $150,000 as a contingency for the
settlement of the Royalty Agreement.
7. Contingency:
- ----------------
On September 24, 2004 a civil action was filed in United States District Court -
Southern District of California by World Health Products, LLC ("World Health")
broadly alleging that the Company, together with a customer of the Company
("Customer"), has infringed on its Patent Number 5,602,180 related to the sale
of suppositories included in the Company's supplement product. World Health
alleged additional complaints against the Customer to which the Company is not
liable. The Company believes that it has meritorious defenses to the claims in
the action and that the resolution of this matter will not have a material
adverse effect on the Company's business, financial condition or results of
operation; however, the results of the proceeding are uncertain and there can be
no assurance to that effect.
15
NANOBAC PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Business
We are dedicated to improving people's health through the detection and
eradication of Nanobacterium sanguineum (Nanobacteria). Our research is
establishing the pathogenic role of Nanobacteria in calcification, particularly
in coronary artery heart disease and vascular disease. We have identified two
biomarkers of nanobacterial infection, and expect to file for FDA approval of
our NB2(TM) ELISA assays to detect nanobacterial antigen ad IgG antibody. We are
also leveraging our proprietary knowledge and intellectual property to develop
the first FDA approved therapeutic to treat nanobacterial infection. We
currently market a patented nanobiotic regimen that we developed.
Our intellectual property covers methods for the detection, growth and treatment
of Nanobacteria and is being leveraged to develop novel companion diagnostic and
therapeutic products to detect and treat nanobacterial infections. We are also
exploring commercialization opportunities in the bio-industrial and bio-medical
markets.
About Nanobacteria - Nanobacteria are cell-walled microorganisms with a diameter
of 50 to 500 nanometers, 1/100th the size of the smallest previously known
bacteria. We believe that they are the smallest self-replicating organism ever
detected. Nanobacteria were first discovered in 1988 by a Finnish researcher,
and Nanobac co-Founder Olavi Kajander, M.D., Ph.D. Dr. Neva Ciftcioglu joined
his team in 1991 and their corroborated work with Nanobacterium sanguineum has
put them at the forefront of research into this medically important pathogen.
Their research was the first to establish that blood-borne Nanobacteria forms
slow-growing calcified colonies in arteries and organs.
The existence of Nanobacteria has been disputed by several members in the
scientific community. We are continuing to conduct studies to support the
existence of Nanobacteria.
16
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Business (Continued)
Commercialization Strategy- We are continuing efforts to fully characterize
Nanobacteria and clarify its role in disease. We are also working on the
following portfolio of diagnostic and therapeutic products focused on
Nanobacteria and diseases of pathological calcification.
1. Diagnostics - We have developed two blood tests to detect the presence
of nanobacterial infection. We expect to file a 510k or PMA with the
US Federal Food and Drug Administration (FDA) for our Nano-Capture
Antigen and Nano-Sero IgG ELISA assays, and are in the process of
transferring manufacturing to a North American based cGMP ISO 9001
manufacturing facility. Recent studies have shown a statistically
significant correlation between the presence of antibodies to
nanobacteria and coronary artery calcification (CAC). CAC is the
deposition of calcium plaque in the arteries of the heart. High CAC
scores are associated with increased risk of coronary artery disease
(CAD).
2. Therapeutics - We are in the process of implementing a clinical
strategy to develop novel therapies against nanobacterial infections.
Currently, we offer a combination of supplements that are designed to
help break down the hydroxylapatite shell that encapsulates
Nanobacteria, which may make the pathogen more susceptible to
antimicrobial therapy. Preliminary results demonstrate that our
combination of supplements, along with the antibiotic Tetracycline
HCL, may reduce coronary calcium scores and "bad" cholesterol (LDL)
while increasing "good" cholesterol (HDL). However, further studies
are required and the preliminary results may be incorrect. To date, no
drugs have demonstrated the ability to significantly decrease coronary
calcium scores.
3. Other Applications - Since Nanobacteria have been isolated from
biologics and bio-medical devices, we are also exploring commercial
opportunities to detect and eradicate nanobacterial infection or
contamination in the bio-medical and bio-industrial markets as
follows:
o Bio Medical: Vaccines and blood products
o Bio-industrial: Implantable durable medical devices and
medical exam equipment.
Disease Markets - Nanobacteria may be implicated in a variety of human diseases
associated with pathological calcification including coronary artery disease,
kidney stones, polycystic kidney disease, prostatitis and cancers with calcium.
Treatment costs associated with these diseases represent over $350 billion of
total healthcare spending. Most significant amongst this list is cardiovascular
disease. Cardiovascular disease represents 27% of all physician visits and 26%
of all physician scripts in the United States. Coronary artery disease (CAD) is
the most common form of heart disease. CAD begins as coronary artery
calcification that leads to atherosclerosis before developing into CAD.
17
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Current Developments
Stock Subscription Agreements - During August and September 2004, the Company
entered into two Subscription Agreements with unaffiliated investors. Under the
terms of the Subscription Agreements, the company received cash of $570,000 (net
of $85,000 of expenses) during the three months ended September 30, 2004. The
Company is to receive an additional $625,000 cash within five days of
registering the common shares and warrants issued as a result of the
Subscription Agreements. The number of common shares to be issued is equal to
the amount received divided by the lesser of $.12 or 52% of the average closing
bid price of the Company's common stock on the five trading days immediately
prior to the date on which the registration statement is declared effective
("Fixed Price"). In addition, the Subscription Agreements provide for the
issuance of warrants equal to the number of common shares issued. Fifty percent
(50%) of the warrants are exercisable at 110% of the Fixed Price and the
remaining 50% of the warrants are exercisable at 150% of the Fixed Price.
Unexercised warrants will expire December 31, 2008. The Company has agreed to
use its best efforts to promptly register the common shares and Warrants.
Conversion of Debt into Equity - On September 30, 2004, the $7.5 million
stockholder loan was converted into 29,999,964 shares of our common stock.
During August 2004, an employee and minority stockholder (less than 5%) of the
Company converted an $111,000 liability due from the Company into 923,458 shares
of the Company's common stock.
In addition, during October 2004, we converted an additional $115,000 of current
liabilities into 951,925 shares of the Company's common stock.
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 (a) 5 million shares of NNBP's common stock,
(b) 5 million warrants convertible into NNBP's common stock (c) cash
consideration of 15,000 Euros:
o Executive Employment Agreement between Nanobac Pharmaceuticals, Inc.,
and E. Olavi Kajander, MD, PhD, an individual dated January 15, 2004
and amended August 30, 2004.
o Executive Employment Agreement between Nanobac Pharmaceuticals, Inc.
and Neva Ciftcioglu, PhD, an individual dated March 31, 2004 and
amended September 9, 2004.
Total consideration is valued at $5.7 million. 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 September 30, 2004. Upon the conclusion of the above transaction,
we own 100% of OY. 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 March 2004; EP 1094711].
18
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Current Developments
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.
Disposition of HealthCentrics - Pursuant to a Share Purchase Agreement dated
March 30, 2004, we sold 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 from October
2003 through March 2004 without success.
Escape Velocity is an affiliate of NNBP as it is controlled by our Chairman and
CEO. The consideration paid by Escape Velocity was in the form of a reduction of
its loan 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.
Valuation of LABS - During March 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.
Management Changes - On July 23, 2004, Alexander Edwards resigned as Chief
Executive Officer and John Stanton assumed the role of Chief Executive Officer.
Mr. Edwards will continue as a member of the Board of Directors. Mr. Stanton
also continues to serve as the Chairman of the Board of Directors and Chief
Financial Officer.
Change of Name - During April 2004, we announced a name change from Nanobac
Pharmaceuticals, Incorporated to Nanobac Life Sciences, Inc. to become effective
upon approval by the shareholders.
19
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 and nine month periods ended September 30, 2004 and 2003. These
comparisons of financial results are not necessarily indicative of future
results.
-------------------------------------- ----------------------------------------
Three Months ended September Nine Months ended September
-------------------------------------- ----------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue $118,141 $241,341 -51% $224,090 $318,978 -30%
Cost of revenue 42,104 177,408 -76% 80,785 237,871 -66%
----------------------------- ------------------------------
Gross Profit 76,037 63,933 19% 143,305 81,107 77%
Gross Profit percentage 64% 26% 64% 25%
Selling, general and administrative 373,804 447,054 -16% 4,417,066 1,523,322 190%
Research and development 409,667 185,420 121% 1,507,957 207,151 628%
Depreciation and amortization 219,069 96,483 127% 587,608 117,612 400%
----------------------------- ------------------------------
Operating loss (926,503) (665,024) 39% (6,369,326) (1,766,978) 260%
Other income (Expense) (67,773) (14,215) 377% (231,161) (13,938) 1558%
---------------------------- ------------------------------
Loss from continuing operations (994,276) (679,239) 46% (6,600,487) (1,780,916) 271%
Discontinued Operations 0 (249,991) 100% (57,268) (851,063) -93%
---------------------------- ------------------------------
Net loss ($994,276) ($929,230) 7% ($6,657,755) ($2,631,979) 153%
============================ ==============================
20
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Revenue
Revenue for the three and nine months ended September 30, 2004 is summarized as
follows:
------------------------------- ------------------------------
Three Months ended September Nine Months ended September
------------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Nanobac Supplement $82,374 $0 $107,585 $0
License revenue 0 0 46,800 0
Nanobac TX 0 205,560 0 273,246
Diagnostic Products 35,767 35,781 69,705 45,732
------------------------------ ------------------------------
$118,141 $241,341 $224,090 $318,978
============================== ==============================
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 half of 2004 was significantly
reduced from the level experienced in the last three quarters of 2003. During
February 2004, we licensed a new product to a third party. Effective June 2004,
the above license agreement was cancelled and we initiated sales of this product
directly to customers under the name of Nanobac Supplement. While we anticipate
that revenue from Nanobac Supplement 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.
Revenue for the nine months ended September 30, 2003 represent four months of
sales of Nanobac TX and diagnostic products subsequent to our acquisition of
LABS in June 2003.
Cost of revenue
Cost of revenue consists of direct materials, testing services (for diagnostic
products) and shipping. As a percentage of revenue, cost of revenue was
approximately 36% for the three and nine months ended September 30, 2004
compared to approximately 75% for the three and nine months ended September 30,
2003. Cost of revenue for 2003 included a $30,000 fixed lab fee for our
diagnostic products. This fee significantly increased our cost of revenue as a
percentage of revenue. This fixed lab fee was eliminated in October 2003 and
replaced with a variable cost structure.
In addition, the lower cost of revenue in 2004 was due in part to the 2004
license revenue having no direct costs. During June 2004, this licensing
agreement was terminated and we initiated sales of Nanobac Supplement directly
to customers, which has resulted in higher revenue and cost of revenue.
21
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Gross Profit
Gross profit as a percentage or revenue was 64%, respectively for the three and
nine months ended September 30, 2004 compared to approximately 25% for the three
and nine months ended September 30, 2003. The increase in gross profit
percentage is attributable to the 2004 license revenue having no costs and the
existence of $30,000 of fixed lab costs in 2003 which were not incurred in 2004.
We anticipate gross profit as a percentage of revenue to be approximately 60% in
the future.
Selling, General and Administrative
Approximately 65% of selling, general and administrative ("SG&A") expenses are
comprised of payroll, travel and professional fees. Other significant SG&A
expenses include facility rental, insurance, and public company expenses
(primarily professional fees and investor relations costs).
SG&A expenses for the nine months ended September 30, 2004 and September 30,
2003 include a $2.6 million charge and a $750,000 charge, respectively for stock
issuances to our officers associated with services performed during the period
of the bankruptcy. SG&A expenses, excluding the above charges, are summarized as
follows:
------------------------------- ------------------------------
Three Months ended September Nine Months ended September
------------------------------- ------------------------------
2004 2003 2004 2003
---- ---- ---- ----
SG&A as reported $373,804 $447,054 $4,417,066 $1,523,322
Less charges for stock
issuances - - (2,562,750) (750,000)
------------------------------ ------------------------------
SG&A expenses net of
charges for stock
issuances $373,804 $447,054 $1,854,316 $773,322
============================== ==============================
SG&A expenses decreased approximately $74,000 for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003. The
primary reason for this decrease was that approximately $75,000 of public
company expenses were incurred in July through September 2003 in connection with
the June 2003 acquisition of LABS. Similar public company expenses (annual
audit, annual reporting and other public company costs) were incurred in the
first quarter of 2004 after the close of the Company's fiscal year.
The increase in SG&A for the nine months ended September 30, 2004 over September
30, 2003 (net of charges for stock issuances) is primarily attributable to the
acquisitions of LABS and OY. LABS was acquired in June 2003 and OY was acquired
in November 2003. Accordingly, only four months of SG&A for LABS and no months
of SG&A for OY are included in the above expenses for the nine months ended
September 30, 2003. In addition, SG&A expenses for the nine months ended
September 30, 2004 include $150,000 of signing bonuses with the execution of
employment agreements for key scientific personnel and $225,000 for professional
fees in connection with our annual audit, annual reporting and other public
company costs compared to approximately $75,000 for the nine months ended
September 30, 2003.
SG&A expenses for HealthCentrics are included in "Discontinued Operations".
22
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Research and Development
For the three and nine months ended September 30, 2004, approximately 60% of R&D
expenses are for payroll and medical director fees and between 25% to 35% of R&D
expenses are for research studies. Expenses for research studies fluctuate on a
quarter over quarter basis as these expenses are dependent on specific
initiatives and funding sources. Remaining R&D expenses include patents,
facilities, travel and other lab expenses.
R&D expenses for the three months ended September 30, 2004 increased 121%
compared to the three months ended September 30, 2003. This increase reflects
our emphasis on R&D subsequent to the June 2003 acquisition of LABS. Specific
increases include increased payroll, initiation of research studies, expansion
of our patents and the November 2003 acquisition of OY, which included our
laboratory In Koupio, Finland.
R&D expenses for the nine months ended September 30, 2004 increased 628%
compared to the nine months ended September 30, 2003. In addition to our
expansion of R&D as described in the preceding paragraph, LABS was acquired in
June 2003 and OY was acquired in November 2003. Accordingly, only four months of
R&D for LABS and no months of R&D for OY are included in the above expenses for
the nine months ended September 30, 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.
Depreciation and amortization
Approximately 95% of depreciation and amortization are related to the
amortization of Product Rights and Patents acquired in the June 2003 acquisition
of LABS and the November 2003 acquisition of OY.
Interest Expense
Interest expense for the three and nine months ended September 30, 2004 includes
$91,000 and $237,000, respectively of interest expense on the stockholder loan.
23
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Loss from Continuing Operations
Loss from continuing operations for the three months ended September 30, 2004
was $1.0 million compared to $679,000 for the three months ended September 30,
2003. The increase in the loss is primarily attributable to the $206,000 of
additional R&D expenses and $368,000 of additional intangible asset amortization
expenses.
Loss from continuing operations for the nine months ended September 30, 2004 was
$6.6 million compared to $1.8 million for the nine months ended September 30,
2003. Excluding one-time charges for stock issuances to our officers and
executives of $2.6 million in 2004 and $750,000 in 2003, the loss from
continuing operations increased approximately $2.9 million for the nine months
ended September 30, 2004 compared to the nine months ended September 30, 2003.
This increase reflects $1.3 million of additional R&D costs, $470,000 of
additional intangible asset amortization costs and an additional five months of
LABS SG&A expenses in 2004 compared to 2003.
We are experiencing significant losses as we conduct research and development
related to nanobacteria and launch our products and services. We believe it will
take 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 sources 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 nine months ended September 30,
2004 and 2003 is summarized as follows:
2004 2003
---- ----
Revenue $5,301 $14,563
Cost of revenue 9,208 56,755
------------------------------------
Gross profit (loss) (3,907) (42,192)
Selling, general & administrative 53,361 605,315
Research and development - 203,556
------------------------------------
Net loss ($57,268) ($851,063)
====================================
24
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
Since emerging from Chapter 11 in 2002, 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. This financing
included the stockholder loan of approximately $7.5 million, which was converted
to shares of our common stock on September 30, 2004.
As of September 30, 2004, we had total assets of $11.2 million of which only
$40,000 were current assets. At September 30, 2004, we had total current
liabilities of $1.3 million, a working capital deficit of $1.2 million and a
retained deficit of $11.8 million.
Net cash used in operations was $2.6 million for the nine months ended September
30, 2004. The negative cash flow from operations reflects the $6.7 million net
loss for the period offset by the non-cash charge of $2.6 million for common
stock issued to executives and affiliates of our officers, depreciation and
amortization of approximately $588,000, interest expense added to the principal
balance of the stockholder loan of $237,000, and an increase in current
liabilities of approximately $684,000.
Net cash provided by investing activities was approximately $175,000 for the
nine months ended September 30, 2004, which reflects the receipt of $200,000
from an option exercise related to the acquisition of LABS offset by our
purchase of fixed assets of approximately $27,000.
Net cash provided by financing activities was $2.4 million for the nine months
ended September 30, 2004, which is attributable to stockholder loans of $1.9
million and $540,000 for common stock sales.
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.
25
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.
26
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 Directors and Chief Executive
Officer have provided our capital needs through loans and capital contributions.
While our Directors 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 Directors and CEO should discontinue their
support, we may have difficulty in continuing our operations. In such an event,
shareholders could lose their investment in its entirety. Historically, our
Directors 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 Directors and CEO may contribute some or all of
our requirements. We anticipate that as a part of any such loan, our Directors
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 Directors and CEO's
support, shareholders may experience dilution. At present, we do not maintain
key man insurance for our Directors 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.
27
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Potential Incorrect Conclusions on the Existence, Detection and Eradication of
Nanobacteria
Most of our future revenue is based on the existence of Nanobacteria and our
ability to detect and eradicate Nanobacteria. The existence of Nanobacteria has
been disputed by several members in the scientific community. If it is
ultimately proved that Nanobacteria as defined by Dr. Kajander and Dr.
Ciftcioglu does not exist, our existing patents and product lines may lose most
of their value. Further, if Nanobacteria is proven to exist, but we are
unsuccessful in leveraging our diagnostic and therapeutic products to detect and
treat nanobacterial diseases, we may not generate sufficient revenue to offset
our expenses.
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.
Furthermore, we may not be successful in filing and obtaining approval of our
510K or PMA filings with the FDA for our Nano-Capture Antigen and Nano-Sero IgG
ELISA assays.
Data Obtained Through Clinical Trials.
Data obtained from pre-clinical studies and clinical trials do not necessarily
predict results that will be obtained from later pre-clinical studies and
clinical trials. Moreover, pre-clinical and clinical data is susceptible to
varying interpretations, which could delay, limit or prevent regulatory
approval. A number of companies in the pharmaceutical industry have suffered
significant setbacks in advanced clinical trials, even after experiencing
promising results in earlier trials. The failure to adequately demonstrate the
safety and/or effectiveness of an intended product under development could delay
or prevent regulatory clearance of the potential drug or treatment, resulting in
delays to commercialization, and could materially harm the business.
28
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.
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.
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.
29
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
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.
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.
30
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Lack of Independent Directors
We cannot guarantee our Board of Directors will have a majority of independent
directors in the future. In the absence of a majority of independent directors,
our executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between NNBP's stockholders and the controlling officers and/or directors.
Limitation of Liability and Indemnification of Officers and Directors
Our officers and directors are required to exercise good faith and high
integrity in our management affairs. Our Articles of Incorporation and By Laws
provide, however, that our officers and directors shall have no liability to our
shareholders for losses sustained or liabilities incurred which arise from any
transaction in their respective managerial capacities unless they violated their
duty of loyalty, did not act in good faith, engaged in intentional misconduct or
knowingly violated the law, approved an improper dividend or stock repurchase,
or derived an improper benefit from the transaction. Our Articles and By-Laws
also provide for the indemnification by us of the officers and directors against
any losses or liabilities they may incur as a result of the manner in which they
operate our business or conduct the internal affairs, provided that in
connection with these activities they act in good faith and in a manner they
reasonably believe to be in, or not opposed to, the best interests of 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.
31
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 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.
32
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Item 3: Quantitative and Qualitative Risk
Virtually all of our operations are conducted in the United States. However, the
acquisition of Nanobac OY, which was concluded in November 2003, is structured
in Euros. Accordingly, we are exposed to market risk from changes in exchange
rates between the U.S. dollar and the Euro on the balance sheet of Nanobac OY
and on future transactions of Nanobac OY.
We do not engage in hedging transactions and are not a party to any leveraged
derivatives.
Item 4: 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 September 30, 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.
33
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
On September 24, 2004 a civil action was filed in United States District Court -
Southern District of California by World Health Products, LLC ("World Health")
broadly alleging that the Company, together with a customer of the Company
("Customer"), has infringed on its Patent Number 5,602,180 related to the sale
of suppositories included in the Company's supplement product. World Health
alleged additional complaints against the Customer to which the Company is not
liable. We believe that we have meritorious defenses to the claims in the action
and that the resolution of this matter will not have a material adverse effect
on our business, financial condition or results of operation; however, the
results of the proceeding are uncertain and there can be no assurance to that
effect.
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.
34
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(a) Stock Subscriptions
On August 13, 2004, we executed a Subscription Agreement with The Nutmeg Group,
LLC ("Nutmeg"), an accredited investor. Nutmeg paid us $500,000 during August
2004 and an additional $500,000 is due within five days that a registration
statement is declared effective for the common shares that are being issued to
Nutmeg. In exchange for the cash consideration, we are to issue Nutmeg shares of
our common stock equal to the amount paid by Nutmeg divided by the lesser of (a)
$0.12 or (b) fifty-two percent of the average closing bid price for our common
stock on the five days immediately prior to the date on which a registration
statement is declared effective.
On September 7, 2004, we executed a Subscription Agreement with Jaytern
Associates, Inc. ("Jaytern"), an accredited investor. Jaytern paid us $125,000
during September 2004 and an additional $125,000 is due within five days that a
registration statement is declared effective for the common shares that are
being issued to Jaytern. In exchange for the cash consideration, we are to issue
Jaytern shares of our common stock equal to the amount paid by Jaytern divided
by the lesser of (a) $0.12 or (b) fifty-two percent of the average closing bid
price for our common stock on the five days immediately prior to the date on
which a registration statement is declared effective.
In addition, Nutmeg and Jaytern will be issued an equivalent number of warrants
that are convertible into common stock. The exercise price for 50% of these
warrants is 110% of the price per share paid by Nutmeg for the common stock. The
exercise price for the remaining 50% of the warrants is 150% of the price per
share paid by Nutmeg and Jaytern for the common stock. The warrants expire
December 31, 2008. We agreed to register the common shares and warrants in a
registration statement.
The above securities are being issued in reliance upon Section 4(2) of the
Securities Act, because the investors were knowledgeable, sophisticated and had
access to comprehensive information about us. We will place legends on the
common share sand warrant agreements stating the securities were not registered
under the Securities Act and set forth the restrictions on their transferability
and sale.
No underwriters were employed with respect to the sale of these securities.
Hartsfield Capital Securities (Hartsfield) is due a 10% success fee for the
Nutmeg subscription. To date, Hartsfield has received $50,000 or 10% of the
first traunch of cash received from Nutmeg. An additional $50,000 or 10% will be
payable to Hartsfield when the second traunch of $500,000 is received from
Nutmeg. In addition, Hartsfield is to receive warrants equal to 20% of the value
of the Nutmeg transaction based on 100% of the market price of our stock at the
final closing of the Nutmeg transaction. We estimate that the number of warrants
to be issued to Hartsfield will be approximately 1,300,000.
35
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds (continued)
Conversion of Debt into Equity
On August 30, 2004, we executed an agreement for the issuance of 923,458 common
shares to Dr. E Olavi Kajander in exchange for the cancellation of $110,815 of
current liabilities due to Dr. Kajander.
On August 30, 2004, our employment and acquisition agreement with Dr. E. Olavi
Kajander, originally dated January 16, 2004, was amended resulting in the
issuance of 5,000,000 warrants convertible into shares of our common stock and
with an exercise price of $.005 per share and an expiration date of December 31,
2008. Our previous issuance of 5,000,000 common shares to Dr. Kajander was
cancelled.
The above securities are being issued in reliance upon Section 4(2) of the
Securities Act, because the investor was knowledgeable, sophisticated and had
access to comprehensive information about us. We will place legends on the
common shares and warrants stating the securities were not registered under the
Securities Act and set forth the restrictions on their transferability and sale.
We agreed to register the common shares and warrants in a registration
statement. No underwriters were employed with respect to the sale of these
securities.
On September 30, 2004, we executed an agreement with Escape Velocity of Tampa
Bay, Inc. ("Escape Velocity") for the issuance of 30,180,408 common shares in
exchange for the cancellation of $7,521,649 of debt due to Escape Velocity. The
loan was primarily a result of cash advances to NNBP and settlement of NNBP's
liabilities plus accrued interest. Escape velocity is controlled by our Chairman
and CEO. The above securities are being issued in reliance upon Section 4(2) of
the Securities Act, because the investors were knowledgeable, sophisticated and
had access to comprehensive information about us. We will place legends on the
common shares and warrant agreements stating the securities were not registered
under the Securities Act and set forth the restrictions on their transferability
and sale. We agreed to register the common shares in a registration statement
subject to security law limitations. No underwriters were employed with respect
to the sale of these securities.
(b) Not Applicable.
(c) Not Applicable
36
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
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 September 13, 2004 under
Item 1.01 announcing the entry into a Space Act agreement with NASA.
37
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: November 11, 2004 NANOBAC PHARMACEUTICALS, INCORPORATED
/s/ John D Stanton
-------------------------------------
John D Stanton
Chief Executive Officer
38
Nanobac Pharmaceuticals, Incorporated
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- ------------- ----
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