10QSB 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, For the Quarter Ended September 30, 2002 [ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, For the Quarter Ended September 30, 2002 Commission File No. 000-28459 ADVANCED PLANT PHARMACEUTICALS, INC. ----------------------------- (Exact name of Registrant as specified in its charter) Delaware 59-2762023 ------------------- ------------------- (State of other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 43 West 33rd Street, New York, New York 10001 ----------------------------------------- Address of principal executive offices Registrant's telephone number, including area code: 212-695-3334 Securities registered pursuant to Section 12(b) of the Act: NONE APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: December 18, 2002; 246,914,156 shares of common stock Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] ADVANCED PLANT PHARMACEUTICALS, INC. Form 10-QSB- Index For the Quarter Ended September 30, 2002 PART I Page Item 1. Consolidated Financial Statements F-1 Item 2. Management Discussion and Analysis 1 PART II Item 1. Legal Proceedings 4 Item 2. Change in Securities 4 Item 3. Defaults Upon Senior Securities 5 Item 4. Submission of Matters to a Vote of Security Holders Disclosures 5 Item 5. Other Information 5 Item 6. Exhibits and Reports on Form 8-K 5 Signatures 6 This Form 10-QSB contains forward looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, regarding future events and the future performance of the Company involve risks and uncertainties which may cause our actual results in future periods to be materially different from any future performance suggested herein. We believe that its business strategy that includes focus on future acquisitions is not unique. There can be no assurance that our strategy will be successful. There can be no assurance that sufficient capital can be obtained to market ourselves and increase our market share and our performance and actual results could differ materially from those projected in the forward looking statements contained herein. PART I ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Reports are contained starting Page F-1. ITEM 2. MANAGEMENT'S DISCUSSION AND ANAYSIS Background Our company was incorporated in the State of Delaware in1986, under the name Ventra Management, Inc. ("Ventra"). On July 20, 1994, we amended Ventra's Certificate of Incorporation to change our name to Advanced Plant Pharmaceuticals, Inc. DESCRIPTION OF BUSINESS: APPI continues to focus on the research and development of plant based dietary supplements. During July 1999, the Company acquired exclusive rights and interests to a thirteen-step process which utilizes virtually the whole of the nutrients found in plants to manufacture all natural herbal dietary supplements. The purchase price for the process was 12,000,000 shares of Common Stock. The shares were issued February 13, 2001. A further 6,000,000 shares will become due when marketing of the product commences. The Company intends to use this process to manufacture products that it hopes to distribute worldwide through various sales distribution contracts. On February 28, 2000, the Company entered into an Asset Purchase Agreement with Dr. Bielory to purchase his various allergy and nasal formulations. This Agreement was approved by the Board of Directors on September 6, 2000. Dr. Bielory was granted a five year option to purchase an aggregate of 18,000,000 shares of the Company's Common Stock, par value $0.0007 per share, at an exercise price of $180.00. Dr. Bielroy exercised an option for 12,000,000 shares in the first quarter of 2001. Sinusol , being one of the formulations purchased from Dr. Bielory, is a generalized base solution for the development of an extensive line of specialty products related to allergy and sinus conditions. The ingredients include a mixture of gently pH-balanced essential mineral oils that combat the various symptoms related to allergies and sinus disorders, including congestions, irritated nasal mucosa and bacterial and fungal infections. Specialized advanced formulations are being reviewed for patent submission. 1 APPI focuses on the research and development of plant based dietary supplements. During July 1999, the Company acquired exclusive rights and interests to a thirteen-step process, which utilizes virtually the whole of the nutrients found in plants to manufacture all natural herbal dietary supplements. The Company intends to use this process to manufacture products that it hopes to distribute worldwide through various sales distribution contracts. Management believes that it can continue to obtain additional capital. However, if additional financing is not obtained, the Company might be forced to cease operations. Since its inception, the Company has had significant operating losses and working capital deficits aggregating $9,693,940. The Company's continued existence has been dependant on cash proceeds received from the sale of its common stock and the willingness of vendors to accept stock in lieu of cash payments for their services. Employees have also accepted deferrals of wage payments. The Company hopes to reverse this trend by generating cash inflows through the sale of new products that they have developed. To accomplish this objective, the Company will require working capital to satisfy current operating expenses, and to produce inventory, during the interim period preceding such time as the revenue cycle begins generating cash. However, to date, sales have not been material and the Company has run out of capital. As of December 31, 2001, the Company has $7,316 in cash and total current liabilities exceeded current assets by $3,061,253. As of the beginning of December 2002 we did not have any cash on hand or accounts receivable. The Company's two employees have deferred payment of their salaries for the past eight weeks. While we are negotiating with potential investors to secure cash infusions into the Company, if we do not find any cash investors we will be unable to operate our business for any significant length of time. If we secure funds we intend to use our Process to expand our product line to include herbal dietary supplements such as St. John's Wort, Kava Kava, Ginko Biloba and Echinacea. We estimate that the initial production and preliminary marketing of these four herbal products to potential domestic and international distributors and wholesalers will cost approximately $60,000. We do not expect to purchase or sell any manufacturing facilities or significant equipment over the next twelve months. We do not foresee any significant changes in the number of employees we will employ over the next twelve months. Other products we are currently marketing are: 2 LO-CHOL ------- Born out of the latest scientific research, Lo-Chol's patented formula is derived from the "whole plant" parts ofsix selected plants that work in concert to help tip your lipid balance (good and bad cholesterol) towards a more normal level. These six plants (with exotic names like Cinnamomumzeylancium and Allium sativum) are synergistically combined using a proprietary "whole plant technology" (a special pharmaceutical-grade process) that delivers virtually all the natural phyto-chemicals and active ingredients in the plants. Unlike almost all other herbal supplements on the market, Lo-Chol does not contain any extracts. Instead, it utilizes the entire part of a specific plant that is processed and standardized to deliver optimum potency and nutritional benefits. This is a significant advantage that puts Lo-Chol and other APPI products in a class by themselves. ACA --- ACACaplets contain a carefully selected group of 11 natural plant substances, which work in harmony to help chronic fatigue and boost normal metabolicprocesses that support immune system function. These 11 plants (including Boswelliacaterii, Impatiens balaminia and Curcuma zedoria) have long and storied histories in ancient herbal medicine and folklore. Many are referred to in the Bible as well as Ayurveda, "India's natural science of life and well-being". Now, incorporated together in ACA, they offer the best of traditional herbal wisdom and modern science. SINUSOL ------- Developed in concert with a leading board certified Allergy and Sinus specialist, is a unique nasal and sinus solution that pleasantly cleanses and moisturizes the nasal and sinusmucosa. Sinusol thins nasal solutions to clear stuffy and blocked allergic nasal passages as well as relieves sneezing and sinus pressure. Sinusol , is the safe and natural alternative to over the counter nasal sprays and saline products that contain irritating preservatives and additives. On April 12, 2002, the Board of Directors executed a written consent of the Board of Directors whereby the Company will spin off its product LHM123, an "Alzheimer's " product (the "Product"). The Product is to be spun off into it's own separate company. The Board of Directors has approved a stock dividend of shares of the new company at the rate of six hundred (600) shares of APPI for each share in the new company. The record dividend date has been set as July 31, 2002, payable as soon thereafter as possible. In addition, the Company will receive an additional two million shares of common stock, which will be retained by the Company, as consideration for the Product being transferred to the new company. It is intended that the new company will file the necessary documents to become a separately traded entity on the OTC BB. It is also intended that the new company will file a registration statement on Form SB-2 to register shares to raise additional capital for the new company. There is no timetable for this spin off and the Board of Directors may choose to not do it. 3 On May 8, 2002, the Company incorporated AMAZING NUTRITIONALS, INC. This is intended to be a spin off company with one of the Registrant's products being sold to the new company for shares. It is the intention of the Registrant to seek private investment in the new company through a private placement, at the appropriate time declare a stock dividend and issue shares of the new company to the Registrant's shareholders, and retain a portion of the sale price as an asset in the Registrant. Subsequent Events On July 30, 2002, the Company announced that the proposed spin off of ANI has been modified to be September 30, 2002. It is anticipated that on or about that date, all shareholders of record on September 30, 2002 will then receive common stock of ANI. As of the filing of 10KSB common stock was not issued to the shareholders of APPI. PART II ITEM 1 - LEGAL PROCEEDINGS The registrant received notice of opposition to its trademark application for the SINUSOL product from the owner of a trademark for ANUSOL, manufactured by Warner-Lambert Company. The registrant believes that its product and trademark application is distinguishable from the opposer's and that any opposition will eventually be denied and its trademark granted for the registrant's product. The matter has been resolved with Warner-Lambert Company, and a settlement agreement was executed by the parties. The agreement allows the Registrant to use the name SINUSOL for its current product without any opposition from Warner-Lambert Company. The Company is a party to an action in the Civil Court of the City of New York, County of New York, entitled, Bowne of New York City, LLC v. Advanced Plant Pharmaceuticals. This is an action for unpaid fees for filing the reports of the Company on EDGAR. The suit seeks $15,805.42 in unpaid fees. The Company disputes the total amount due. If the Company is unable to work out a resolution of this action, it could have a material affect upon the Company. Counsel for the Company has been in contact with the attorney's for Bowne, and it is likely that a resolution will be able to be reached. ITEM 2 - CHANGES IN SECURITIES None 4 ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION None ITEM 6 -EXHIBITS AND REPORTS OF FORM 8-K (a) The following documents are filed as part of this report: (1)(2) CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. A list of the Consolidated Financial Statements filed as part of this Report is set forth in Item 8 and appears at Page F-1 of this Report; which list is incorporated herein by reference. The Financial Statement Schedules and the Report of Independent Auditors as to Schedules follow the Exhibits. (a)(3) EXHIBITS. All of the items below are incorporated by reference to the Registrant's General Form 10SB and amendments for Registration of Securities as previously filed. EXHIBITS AND SEC REFERENCE NUMBERS Number Title of Document ------ ----------------------- 2(a) Certificate of Incorporation (2) 2(b) Agreement and Plan of Merger (2) 2(c) By-Laws (2) 99.1 Certification of the Chief Executive Officer of Advanced Plant Pharmaceuticals, Inc., pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) (1) Filed Herewith. (2) Filed as exhibits to Form 10-SB, dated, July 23, 1999 (b) Reports on Form 8-K None 5 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 18, 2002 By: /s/ David Lieberman ---------------------------- David Lieberman, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. DATE SIGNATURE / TITLE Date: December 18, 2002 By: /s/ Dr. Leonard Bielory ---------------------------- Dr. Leonard Bielory, Chairman of the Board of Directors Date: December 18, 2002 By: /s/ David Lieberman ---------------------------- David Lieberman Director 6 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ FINANCIAL STATEMENTS -------------------- FOR THE NINE MONTHS ENDED ------------------------- SEPTEMBER 30, 2002 ------------------ Table of Contents ----------------- Page ---- Balance Sheet F-1 Statements of Operations F-2 Statements of Cash Flows F-3 Notes to the Financial Statements F4-F13 ADVANCED PLANT PHARMACEUTICALS, INC ----------------------------------- BALANCE SHEET AS OF SEPTEMBER 30, 2002 (UNAUDITED)
ASSETS Current assets: Cash and cash equivalents $ 977 Accounts receivable 2,307 Inventory 59,587 -------------- Total current assets 62,871 -------------- Fixed assets (Net of Accumulated depreciation of $791) 126 -------------- Intangible Assets (Net of Accumulated Amortization of $991,519) 1,534,715 Other assets 8,544 -------------- 1,543,259 -------------- Total other assets $ 1,606,256 ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 216,895 Accrued expenses payable 2,429,868 Loans payable 402,847 Due to distributor 103,500 -------------- Total current liabilities 3,153,110 -------------- Shareholders' Equity: Common stock, $.0007 par value, 250,000,000 shares authorized and 247,111,013 shares issued 172,978 Capital in excess of par value 7,974,108 Accumulated deficit (9,693,940) -------------- Total shareholders' equity (1,546,854) -------------- $ 1,606,256 ==============
See accompanying notes to financial statements. F-1 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ------------ ---------- Net Sales $ 5,302 $ 15,585 $ 13,051 $ 32,825 Cost of goods sold 2,625 6,983 6,539 20,530 ---------- ---------- ------------ ---------- Gross profit 2,677 8,602 6,512 12,295 ---------- ---------- ------------ ---------- Operating expenses: Research and development . 400 0 1,900 General and administrative 371,390 280,114 1,208,716 691,655 ---------- ---------- ------------ ---------- Total operating expenses 371,390 280,514 1,208,716 693,555 ---------- ---------- ------------ ---------- Operating loss (368,713) (271,912) (1,202,204) (681,260) Other expense (income) - - - 655 ---------- ---------- ------------ ---------- Loss before provision for income taxes (368,713) (271,912) (1,202,204) (681,915) Provision for income taxes - - - - ---------- ---------- ------------ ---------- Net loss $(368,713) $(271,912) $(1,202,204) $(681,915) ========== ========== ============ ========== Loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00) ========== ========== ============ ==========
See accompanying notes to financial statements. F-2 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
2002 2001 ---------------- ------------------- Cash Flows from Operating Activities: Net Loss from operations $ (1,202,204) $ (681,915) Adjustments to reconcile net loss from operations to net cash used by operating activities: Depreciation and amortization expense 779,397 128,375 Services paid with common stock 398,221 545,200 (Increase) in accounts receivable (853) (2,653) (Increase) in Inventory 6,489 (70,372) Increase in accounts payable 3,317 85,007 (Increase) in other assets (4,400) (Decrease) increase in accrued expenses 145,672 (121,550) ---------------- ------------------- Net cash used by operations 125,639 (117,908) ---------------- ------------------- Cash Flows from Investing Activities: Purchase of computer equipment - - ---------------- ------------------- Net cash used by investing activities - - ---------------- ------------------- Cash Flows from Financing Activities: Proceeds from short-term loans payable 118,599 Payments on short-term loans payable (131,978) 0 ---------------- ------------------- Net cash provided by financing activities (131,978) 118,599 ---------------- ------------------- Net (decrease) in Cash and cash equivalents (6,339) 691 Cash and cash equivalents at beginning of period 7,316 - ---------------- ------------------- Cash and cash equivalents at end of period $ 977 $ 691 ================ =================== Supplemental Cash Flow Information: Cash Paid During the Period for: Interest - - ================ =================== Income Taxes - - ================ =================== Information about Noncash Activities: Common stock issued to satisfy loans $ - $ 100,000 ================ =================== Common stock issued for services $ 398,221 $ 545,200 ================ ===================
See accompanying notes to financial statements. F-3 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 1 BASIS OF PRESENTATION --------------------- The accompanying unaudited financial statements of Advanced Plant Pharmaceuticals, Inc. ("APPI" or the "Company") as of September 30, 2002 have been prepared in accordance with generally accepted accounting principles for interim information. Accordingly, certain information and footnote disclosures required under generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments of a recurring nature necessary for a fair presentation of the results for the interim periods presented have been included. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the entire year or any other period. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2001. NOTE 2 NATURE OF OPERATIONS -------------------- Advanced Plant Pharmaceuticals, Inc. ("the Company" or "APPI") focuses on the research and development of plant based dietary supplements. The Company owns the rights to a process, which utilizes whole plants to manufacture all natural dietary supplements. The Company intends to use this process to manufacture products that it hopes to distribute worldwide through various sales distribution contracts. The Company expects, in the near term, to finance these efforts through the sale of its common stock until such time, if ever, that the operations achieve a positive cash flow. There is no guarantee that the Company will accomplish this goal. See Note 10, "Financial Results and Liquidity." NOTE 3 GOING CONCERN -------------- Management believes that it can continue to obtain additional capital. However, if additional financing is not obtained, the Company might be forced to cease operations. Since its inception, the Company has had significant operating losses and working capital deficits. The Company's continued existence has been dependant on cash proceeds received from the sale of its common stock and the willingness of vendors to accept stock in lieu of cash payments for their services. Employees have also accepted deferrals of wage payments. The Company hopes to reverse this trend by generating cash inflows through the sale of new products. To accomplish this objective, the Company will require working capital to satisfy current operating expenses and to produce inventory until such time, if ever, that the revenue cycle begins generating cash. The Company's past attempts to establish a market for their products has so far been unsuccessful and resulted in minimal sales. There is no assurance that future efforts will result in a more favorable outcome. F-4 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------- Cash Equivalents ----------------- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Other Assets ------------- Other assets consist of security deposits and miscellaneous items ($8,544). Computer equipment is depreciated on a straight-line method using an estimated useful life of three years. Computer Equipment $1,000 Accumulated Depreciation 874 -------- $ 126 ======== Depreciation Expense for the nine months ended September 30, 2002, was $ 249. Inventory --------- Inventories are stated at the lower of cost or market. Actual cost is used to value raw materials and supplies. Inventories also include costs of processing and shipping. Intangible Assets-New Accounting Pronouncement ------------------ The Financial Standards Board has recently issued New Statement of Financial Accounting Standards. Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion 17 and related interpretations. Statement No. 142 establishes new rules on accounting for the acquisition of intangible assets not acquired in a business combination and the manner in which goodwill and all other intangibles should be accounted for subsequent to their initial recognition in a business accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should be recorded at fair value. Intangible assets with finite useful lives should be amortized. All intangible assets being amortized as well as those that are not, are both subject to review for potential impairment under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 142 also requires that goodwill arising in a business combination should not be amortized but is subject to impairment testing at the reporting unit level to which the goodwill was assigned to at the date of the business combination. SFAS No. 142 is effective for years beginning after December 15, 2001 and must be applied as of the beginning of such year to all goodwill and other intangible assets that have already been recorded in the balance sheet as of the first day in which SFAS No. 142 are initially applied, regardless of when such assets were acquired. Goodwill acquired in a business combination whose acquisition date is on or after July 1, 2001, should not be amortized, but should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No. 142 has not yet been adopted. However, previously acquired goodwill should continue to be amortized until SFAS No. 142 are first adopted. F-5 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30, 2002 ------------------ NOTE 4 (Continued) INTANGIBLE ASSETS- CONTINUED ------------------ Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset is considered impaired when estimated future cash flows related to the asset, undiscounted and without interest, are insufficient to recover the carrying amount of the asset. If deemed impaired, to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell. Intangible assets principally represent the exclusive rights and interest to the allergy and sinus formulations and a thirteen-step process for the manufacturing of the company's products. Such amounts were being amortized on a straight-line basis over 15 years, prior to December 31, 2001. Intangible Assets - Asset Purchase Agreement $2,526,234 Impairment of Assets (991,519) ------------ $1,534,715 ============ Intangible Assets were adjusted down by $ 991,519. Research & Development Costs ------------------------------- Research and development costs are expensed as incurred. Income Taxes ------------- APPI has incurred significant losses from operations. The Company has elected not to record any tax benefits relating to potential net operating loss carryforwards due to the uncertainty of realizing those benefits. The Company intends to follow Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" when either operations achieve profitability or the realization of net operating loss benefits can more readily be measured, whichever comes first. Earnings per Share -------------------- Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" discusses the computation and presentation of earnings per share ("EPS"). Basic EPS, as defined by SFAS No. 128, is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the reporting period, ignoring any potential effects of dilution. Diluted EPS reflects the potential dilution that would occur if securities, or other contracts to issue common stock, were exercised or converted into common stock that then shared in the earnings of the entity. F-6 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 4 (Continued) ----------- There were 5,500,000 common stock options outstanding as of September 30, 2002. As a result of the losses reported in the periods presented these options, if exercised, would be antidilutive. Accordingly, only Basic EPS is presented in these financial statements. The weighted-average number of shares used in the computation of per share data was 244,847,277 in 2002 and 165,372,198 in 2001. Stock-Based Compensation ------------------------- APPI has satisfied various loans, trade payables, employee back-wages and other liabilities through the issue of its common stock. The Company accounts for such stock-based compensation using the fair-value method as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has also issued stock options to key employees. As permissible under SFAS No. 123, the Company accounts for stock options using the intrinsic value method as prescribed under Accounting Principles Board Opinion No. 25 ("APB No. 25"). All disclosures required by SFAS No. 123 are presented in Note 4 "Stock Options." Use of Estimates ------------------ The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates. NOTE 5 RELATED-PARTIES TRANSACTIONS ----------------------------- On July 16, 1999, the Company entered into a Technology Purchase Agreement with C.J. Lieberman (brother of the current President) whereby the Company acquired exclusive rights and interests to a thirteen-step process, which utilizes virtually the whole of the nutrients found in plants to manufacture herbal dietary supplements. The purchase price for the process includes 18,000,000 shares of the Company's common stock issuable in two phases. As of December 2001, none of the stock related to this agreement has been issued. The Company accrued $1,440,000, in anticipation of issuing 12 million shares that became due in 2000 per the agreement. This amount, which represents the fair market value of the stock when it became due under the agreement, is included in "Research and development" costs in 2000 and "Accrued expenses payable" at December 31, 2001 and 2000. F-7 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 5 (Continued) --------- In addition, the Company agrees to pay to C.J. Lieberman a royalty payment of $.01 per bottle with respect to each product manufactured with the process, 1% (one percent) of the Company's suggested retail price of each product manufactured with the process and 10% (ten percent) of the Company's net profits from the sale of products manufactured with the process. In the event that the Company enters into an agreement with a third party for the sale of products manufactured with the process, which agreement unconditionally provides for payment to the Company of not less than $20,000,000 upon receipt by the Company of such $20,000,000 from such third party, the Company shall issue to C.J. Lieberman five million shares for each $20,000,000 paid to the Company, not to exceed twenty five million shares. During 2000, the Company issued 5,000,000 shares of its common stock to C.J. Lieberman as payment of accrued salary payable of approximately $250,000 that was still outstanding since his resignation as President in 1996. Upon his resignation as President in 1996, the Company retained C.J. Lieberman as a consultant. His current consultant's agreement, dated June 10, 1999, provides for monthly consulting fees of $9,000 ($108,000 annually), reimbursement of all direct expenses incurred while providing services to the Company and a five-year option to purchase 750,000 shares of the Company's common stock at an exercise price of $.02 per share. The employment contract period is through June 10, 2002. At June 30, 2002, the Company had an outstanding balance of unpaid consulting fees due C.J. Lieberman of $33,150 relating to this consulting contract. This balance is included in "Accrued expenses payable" at September 30, 2002. Due to the absence of revenues, cash flow has been unpredictable and often non-existent. As a result, C.J Lieberman frequently lent the Company funds or directly paid expenses on behalf of the Company. These transactions were accounted for in a loan account. When funds were available, Mr. Lieberman would take advances against this loan account. As of September 30, 2002 the loan account had a balance payable to Mr. Lieberman of $27,778, which is included in "Loans Payable" at September 30, 2002. The President, David Lieberman, has also lent the Company funds, or paid expenses on behalf of the Company. The balance owed to David Lieberman relating to these transactions was $74,783 at September 30, 2002 and is included in "Loans payable" on the balance sheet. The Company also owed the President unpaid salary of $525,750 at September 30, 2002, which is included in "Accrued expenses payable". F-8 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 5 (Continued) -------- On February 28, 2000 the Company entered into an Asset Purchase Agreement with Dr. Leonard Bielory (Chairman of the Board of Directors of APPI) whereby the company acquired the exclusive rights and interest to allergy and sinus formulations ("Assets"). The purchase price includes options to purchase 18,000,000 shares of the company's common stock at an aggregate exercise price of $180. The options are to be issued in two phases. The first phase was completed in 2000 and the required options to purchase 12 million shares were issued during the fourth quarter of 2000. The fair value of the 12 million share options was $1,079,880 and is included in "Intangible Assets" on the 2000 balance sheet. Additionally, the Company agrees to pay Dr. Bielory a royalty payment of $.01 per bottle with respect to each product manufactured with these Assets, 1% (one percent) of the suggested retail price of each product sold that was manufactured with the Assets and 10% (ten percent) of the company's net profits before taxes from such sales (net profits to be determined by the Company's regularly retained independent public accountants using generally accepted accounting principles). In the event that the Company enters into an agreement with a third party for the sale of products manufactured with these Assets, which agreement unconditionally provides for payments to the Company of not less than $20,000,000, whether in lump sum or over a period of four years, from such third party, the Company shall issue to Dr. Bielory 5 million shares for each $20,000,000 required to be paid to the Company, not to exceed twenty five million shares. On March 15, 2000 the company entered into a two-year employment agreement with Dr. Leonard Bielory whereby Dr. Bielory will serve as the Company's Scientific Director and its Chairman of the Board of Directors. Under the terms of the agreement, the Company is required to pay Dr. Bielory wages of $500 per month for the first twelve months and up to $2,500 per month thereafter, contingent on the Company achieving specified net profit levels. Commencing on March 15, 2000 and each January 1 thereafter, Dr. Bielory is to receive options to purchase 750,000 shares of the Company's common stock as additional compensation under this agreement. As of June 30, 2002, none of the stock options required under this agreement have been issued. On April 10, 2000, Dr. Bielory received 225,000 restricted shares of the Company's common stock as a signing bonus. The stock had an aggregate fair market value of $96,749 on the day of issue. NOTE 6 CAPITAL STOCK -------------- The Company is authorized to issue 250 million shares of it common stock, par value $.0007 per share. The holders of common stock are entitled to one vote for each share held on all matters to be voted on by stockholders. The Company is also authorized to issue 5 million shares of preferred stock, par value $.0007 per share. There is currently no preferred stock outstanding and the company has no current plans to issue preferred stock. F-9 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 6 (Continued) During the first, second, and third quarter ending September 30,2002, the Company issued 41,420,400 shares of its common stock to satisfy various liabilities and professional services. NOTE 7 STOCK OPTIONS -------------- In accordance with various employment and consulting contracts the Company has issued stock options to its President, employees and a key consultant. On June 10, 1999 the Company entered into new employment agreements with the President and two employees and a new consulting contract with a key consultant. Pursuant to these agreements, the Company granted each of these individuals options to purchase 750,000 shares of the Company's common stock. These options, which expire on June 10, 2004, have a weighted average exercise price of approximately $.02, which was below the then current market price for the stock. The Company recorded compensation expense of $97,500 in 1999 to recognize the intrinsic value of these options as defined in APB No. 25. During June 1999, the Company agreed to cancel a prior stock option agreement, that granted 400,000 options to an employee in 1997, and replace it with a new option agreement. Pursuant to the new option agreement, the Company replaced the 400,000 cancelled options with 1,000,000 options to purchase common stock at $.05 per share. The new options expire on June 30, 2002. There was no compensation costs attributed to these options since the exercise price equaled the market price as of the grant date. The weighted average fair value of all options granted in 1999 was $.05 per option share. The fair value of options granted in 1999 was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.61%, expected option life of 4.4 years, expected dividend yield of zero and expected volatility of 160.86%. During October 2000, the Company granted options to purchase 12 million shares of the Company's common stock to Dr. Leonard Bielory as required by the Asset Purchase agreement. These options, which expire in October 2005, have an exercise price of $.00001 per share, which was below the then current fair market value of $.09 per share. The Company recorded compensation expense of $1,079,880 in 2000 to recognize the intrinsic value of these options as defined in APB No. 25. The fair value of the options granted in 2000 was estimated using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 6%, expected option life of 4 months, expected dividend yield of zero and expected volatility of 146.89%. F-10 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 7 (Continued) Had compensation expense been recognized using the fair value method prescribed in SFAS No. 123, the Company's net loss in 2001 would not have been affected. The effect on net loss per share would have been negligible in both years. The following table summarizes stock option activity for 2002 and 2001:
Weighted Weighted average average exercise Options exercise Options price exercisable price ----------- ------- ----------- ------ Balance at December 31, 1998 1,900,000 $ .09 1,800,000 $ .09 Granted 4,000,000 .03 - - Exercised - - - - Cancelled (400,000) .25 - - ----------- ------- ----------- ------ Balance at December 31, 1999 5,500,000 $ .03 5,500,000 $ .03 Granted 12,000,000 .00001 - - Exercised - - - - Cancelled - .25 - - ----------- ------- ----------- ------ Balance at December 31, 2000 17,500,000 $ .01 17,500,000 $ .01 =========== ======= =========== ======
As of December 31, 2000, there were 17,500,000 common stock options outstanding with a weighted-average remaining life of 4.5 years and a weighted average exercise price of $.01 per share. During the first quarter of fiscal 2001, Dr. Bielory exercised the 12 million options granted to him in 2000. Accordingly, the outstanding balance as of December 31, 2001 is $5,500,000. NOTE 8 LOANS PAYABLE -------------- Loans Payable consists of unsecured, non-interest bearing short-term loans typically of less than three months duration. The loan agreements provide the Company with the option of repaying the loans with either cash or restricted shares of the Company's common stock. On February 28, 2001, the Company entered into a loan agreement with Sam Berkowitz, an employee and shareholder of the Company. The agreement is for a maximum loan amount of $100,000. As of September 30, 2002 the company has borrowed $56,449 on this loan. The loan is interest free and includes the option to be paid in Company stock. If the loan is paid in Company stock, the stock conversion price is $.0165 per share. F-11 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 9 COMMITMENTS AND CONTINGENCIES ------------------------------- The Company has employment agreements with four employees and a consulting contract with a key consultant to the Company. At December 31, 2001, the Company was committed under these agreements to wages and fees of approximately $175,916 for 2002. On February 17, 2000 the Company retained the services of First Madison Securities, Inc. ("FMS"). FMS will act as consultant and non-exclusive financial advisor and investment banker to the Company in connection with strategic planning, securities transactions, valuations, mergers & acquisitions, alternative financing structures and capital formation. FMS will also act as placement agent for the Company. As compensation for these services, the Company will issue FMS 6,000,000 restricted shares of its common stock as follows; 1,700,000 shares upon signing the agreement, 1,700,000 shares within three months of signing the agreement and 2,600,000 shares within six months of signing the agreement. The restricted shares shall be registered with the Securities and Exchange Commission to become free trading shares as soon as possible with FMS bearing all registration costs. The Company will also pay FMS a placement fee for any transactions consummated, directly or indirectly, through FMS during the term of the agreement or within two years thereafter. The placement fee will consist of a payment equal to 10% of the gross proceeds raised from the sale of applicable securities, reimbursement of non-accountable expenses equal to 3% of the gross proceeds from the sale of any applicable securities plus warrants to purchase common stock equal to 10% of the applicable shares sold. Additionally, the Company will reimburse FMS for all reasonable out-of-pocket expenses incurred in the performance of this agreement, up to a maximum of $25,000. Through December 31, 2001 this contract has not been exercised or terminated. On January 22, 2001, the Company entered into a consulting agreement with Summa Capital, Inc., which is owned by the son of a current employee and shareholder of the Company. In accordance with the agreement, Summa Capital will provide consulting services in the area of investor relations, public relations, marketing and capital markets. The agreement is renewable every three months but may be cancelled by either party on a monthly basis. Compensation payable to Summa Capital under this agreement includes $3,000 per month payable in advance, 300,000 shares of Company stock at the end of each three month period and a percentage of the net proceeds of any money raised by the Company from sources introduced by Summa Capital. Additionally, at the beginning of every three month renewal period Summa Capital is to receive two-year warrants convertible into 300,000 shares of the Company's common stock and five-year warrants to purchase an additional 300,000 shares of the Company's stock. On March 16, 2001, the Company entered into an agreement whereby the Company appointed National Brokers Associates (NBA) as their exclusive sales management organization. The agreement is for a one year term. Compensation under the agreement involves percentage of sales volume and includes minimum payments of $5,000 per month of which 80% can be paid with Company stock at a discounted conversion rate. The agreement calls for the issuance of additional shares of the Company's stock if certain sales levels are achieved. F-12 ADVANCED PLANT PHARMACEUTICALS, INC. ------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- SEPTEMBER 30,2002 ----------------- NOTE 9 (Continued) In addition to the shares that may potentially be issued for the agreements previously discussed, the Company is currently considering issuing approximately 8,730,000 shares of common stock to pay off various payables existing at December 31, 2001 and incurred in the subsequent 2001 period. The fair market value of these shares at December 31, 2001 is approximately $87,300. NOTE 10 FINANCIAL RESULTS AND LIQUIDITY ---------------------------------- As of September 30, 2002, the Company had a cash balance of $977, which is $3,152,133 less than it's current liabilities of $3,153,110. Since its inception, the Company has had significant operating losses and working capital deficits aggregating $9,693,940. The Company's continued existence has been dependant on cash proceeds received from the sale of its common stock and the willingness of vendors to accept stock in lieu of cash payments for their services. Employees have also accepted deferrals of wage payments. The Company hopes to reverse this trend by generating cash inflows through the sale of new products. To accomplish this objective, the Company will require working capital to satisfy current operating expenses, and to produce inventory, during the interim period preceding such time, if ever, that the revenue cycle begins generating cash. The impact of any current or future distribution agreements on the Company's cash flow is uncertain. There is no guarantee that cash generated from new product sales will occur, or be sufficient to fund operating costs which can be expected to increase as the Company "ramps up" for manufacturing and distribution activities. There also is no assurance that the Company will continue to be able to finance operations through the sale of its common stock, the exchange of stock for services or from the proceeds of unsecured loans with private lenders. F-13