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 March 31, 2003 [ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 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 Identification Number) of incorporation or organization) 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: August 18, 2003; 488,165,632 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 June 30, 2003 PART I Page Item 1. Consolidated Financial Statements F-1 Item 2. Management Discussion and Analysis 1 Item 3. Controls and Procedures 4 PART II Item 1. Legal Proceedings 4 Item 2. Change in Securities 5 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 7 Certifications 8 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. On May 28, 2003, the Registrant entered into an agreement with Tele-V, LLC, a marketing company with in-house expertise in purchasing, manufacturing and marketing consumer products, and the ability to execute print and broadcast media buys. According to the terms of the agreement, Tele-V, LLC has the exclusive right to purchase a minimum of 100,000 bottles, through July 2003 of APPI's patented cholesterol reducing dietary supplement, Lo-Chol, for resale. In exchange for awarding Tele-V, LLC the exclusive rights for the marketing and distribution of Lo-Chol, Tele-V, LLC has agreed to bear all costs associated with the marketing, designs, and distribution etc. of Lo-Chol, including a significant commitment of media buys. Tele-V, LLC will produce and air a Lo-Chol radio commercial within 90 days of this agreement, followed by the production and airing of an infomercial on Lo-Chol within 120 days. Pursuant to the Agreement, Tele-V shall purchase a minimum of $2,000,000 worth of purchase orders per year after the date of the first purchase order. Sales for the last six months have totaled $64,673, with a total of $61,942. ITEM 3 - CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely altering them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Critical Accounting Policies ---------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. The Company considers its critical accounting policies to be those that require the more significant judgments and estimates in the preparation of the Company's financial statements, including the following: valuation of inventories and intangible assets, valuation of stock options and warrants, and valuation of all accrued liabilities including payroll taxes and other contingent liabilities. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making its judgment and estimates. Actual results could differ materially from those estimates. PART II ITEM 1 - LEGAL PROCEEDINGS The Company received a letter from the counsel for Warner-Lambert objecting to the trademark application the Company had flied with respect to its Sinusol product. Warner-Lambert felt that the Sinusol product would be too similar to the Warner-Lambert product they had trademarked, called ANUSOL. The parties have agreed to a settlement agreement whereby the opposition to the trademark application filed by the Company will be withdrawn and the Company shall be permitted to continue to market the Sinusol product. The Company agreed not to use or seek to register trademarks or service marks in the United States containing the suffix "-NUSOL", except for its pending application for SINUSOL and any other related application for SINUSOL or various permutations of SINUSOL, including without limitation SINUSOL-ES, SINUSOL PLUS or similar marks. Nothing in the settlement agreement shall prevent APPI from using the suffix "-USOL" in any trademark or service mark. 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 for filings on the EDGAR system. 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. The Company was sued by Airgate International Corp. ("Airgate") that provided services to the Company. These services involved importing certain items and supplies for the Company. The suit seeks the sum of$7,350.00 in unpaid invoices. 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 Airgate, and intends to file and answer to the complaint. The parties have reached an agreement for the payment of the outstanding amount. The agreement has not been reduced to writing, although the Company has commenced making payments. ITEM 2 - CHANGES IN SECURITIES None 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 On April 7, 2003, we filed a Current Report on Form 8-K, amending the disclosure contained in Item 4 of the Current Report on Form 8-K previously filed on March 18, 2003. On May 8, 2003, we filed a Current Report on Form 8-K, amending the disclosure contained in Item 4 of the Current Report on Form 8-K previously filed on March 18, 2003 and amended thereafter on April 7, 2003. On June 16, 2003, we filed a Current Report on Form 8-K, with respect to Item 5. Other Events and Regulation FD Disclosure, with respect to the Agreement with Tele-V LLC regarding marketing. 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: August 18, 2003 By: /s/ David Lieberman ---------------------------- David Lieberman, President and Sole Officer 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: August 18, 2003 By: /s/ David Lieberman ---------------------------- David Lieberman Sole Director I, David Lieberman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Advanced Plant Pharmaceuticals, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. August 18, 2003 /s/ David Lieberman -------------------------------- David Lieberman Sole Officer and Chief Financial Officer

ADVANCED PLANT PHARMACEUTICALS, INC. CONDENSED BALANCE SHEET JUNE 30, 2003 (UNAUDITED) Assets Current assets Cash and cash equivalents $ 40,115 Accounts receivable 28,897 Inventory 47,801 --------------- Total current assets 116,813 --------------- Other assets Intangible assets - net 719,920 Other assets 8,544 --------------- Total other assets 728,464 --------------- Total assets $ 845,277 =============== Liabilities and Stockholders' Deficiency Current liabilities Accounts payable and accrued liabilities $ 277,126 Due to stockholder - asset acquisition 1,440,000 Loans payable - stockholders 1,076,162 Due to distributor 103,500 --------------- Total liabilities 2,896,788 --------------- Stockholders' deficiency Preferred - $.0007 par value, 10,000,000 shares authorized, 2,500,000 shares issued and outstanding 1,750 Common - $.0007 par value, 600,000,000 shares authorized; 488,166,060 shares issued and outstanding 341,716 Paid-in-capital 9,135,733 Deficit (11,530,710) ---------------- Total stockholders' deficiency (2,051,511) ---------------- Total liabilities and stockholders' deficiency $ 845,277 =============== The accompanying notes are an integral part of the condensed financial statements. 1

ADVANCED PLANT PHARMACEUTICALS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, ------- ------- 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $ 61,981 $ 5,961 $ 64,726 $ 7,749 Cost of goods sold 27,340 2,973 29,466 3,914 ------------ ------------ ------------ ------------ Gross profit 34,641 2,988 35,260 3,835 Operating expenses: General and administrative 611,225 399,661 815,372 837,326 ------------ ------------ ------------ ------------ Operating loss (576,584) (396,673) (780,112) (833,491) Provision for income taxes (245) - (687) - ------------ ------------ ------------ ------------ Net loss $ (576,829) $ (396,673) $ (780,799) $ (833,491) ============ ============ ============ ============== Loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00) ============ ============ ============ =============== The accompanying notes are an integral part of the condensed financial statements. 2

ADVANCED PLANT PHARMACEUTICALS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2003 2002 ---- ---- Cash flows from operating activities Net cash provided by (used in) operations $ 143,402 $ 151,683 -------------- ------------- Cash flows from financing activities Loans payable - stockholders - net (103,506) - Payments on short-term loans payable - net - (158,208) --------------- --------------- Net cash used in financing activities (103,506) (158,208) ---------------- --------------- Net increase (decrease) in cash and cash equivalents 39,896 (6,525) Cash and cash equivalents - beginning of period 219 7,316 --------------- --------------- Cash and cash equivalents - end of period $ 40,115 $ 791 =============== =============== Supplemental cash flow information: Cash paid during the year for: Interest $ - $ - =============== ============== Income taxes $ 687 $ - =============== ============== Non-cash transaction: Preferred stock issued for services $ 1,750 $ - =============== ============== Common stock issued for services $ 290,507 $ 374,221 =============== ============== The accompanying notes are an integral part of the condensed financial statements. 3

ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation SB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Form 10-KSB for the year ended December 31, 2002. 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Advanced Plant Pharmaceuticals, Inc. ("The Company" or "APPI") focuses on the sale of plant based dietary health supplements. The Company owns the rights to a thirteen step manufacturing 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. APPI was incorporated in November 1994 and had devoted most of its efforts since inception to 1999 conducting research and development and acquiring agreements to the rights of this process and one major sinus product. The Company's operations are located in Long Island, New York and its corporate offices are located in New York City. These financial statements have been prepared assuming that the Company will continue as a going concern. The Company presently has operating risks and liquidity concerns and has incurred an accumulated deficit of $11,530,710 and stockholder's deficiency of $2,051,511 as of June 30, 2003 and current liabilities exceeded current assets by $2,779,975. There can be no assurance that the Company will be able to successfully acquire the necessary capital to mitigate their operating risks and continue their on-going development efforts and bring their products to the commercial market. These factors, among others, create a substantial uncertainty about the Company's ability to continue as a going concern. CONTROL BY PRINCIPAL STOCKHOLDERS The director, executive officers and other related parties own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the preferred stock and common stock of the Company. Accordingly, the director, executive officers and related parties, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of APPI and the dissolution, merger or sale of all of the Company's assets. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents. 4 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair market value because of the short maturity of those instruments. It is not practicable to estimate the fair value of the loans payable to stockholders due to the fact that they are related party transactions. INVENTORIES Inventories are stated at the lower of cost or market. The Company intends to determine cost on a first-in, first-out basis. At June 30, 2003, inventories consisted of $47,401 of raw materials and $400 of finished goods, which are stated at estimated cost. REVENUE RECOGNITION Product revenue is recognized upon shipment to customers. The Company has adopted Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. During the quarter ended June 30, 2003, the Company received an order for 10,500 units of its Lo-Chol cholesterol reducing supplement and sold 10,500 units as of June 30, 2003 to one customer. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally using the straight-line method, based on the estimated useful lives of the assets (machinery and computer equipment, 3-10 years). LONG LIVED ASSETS TO BE DISPOSED OF AND IMPAIRMENT OF LONG LIVED ASSETS The Company adopted SFAS No.144 in 2002. SFAS 144 retains the fundamental provisions of SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. INTANGIBLE ASSETS The Company accounts for intangible assets in accordance with SFAS 142. Such assets with useful lives are amortized on a straight-line basis over the estimated useful life of the asset. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the fair value is less than the carrying amount of the asset, an impairment loss is then recognized. 5 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) STOCK ISSUED FOR SERVICES The value of stock issued for services are based on management's estimate of the fair value of the Company's stock at the date of issue or the fair value of the services received, whichever is more reliably measurable. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes as required by Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting For Income Taxes. SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of certain assets and liabilities. Since its inception, the Company has incurred net operating losses. The Company has a carryforward federal net operating tax loss carry forwards expiring in the years 2010 to 2023. The potential tax benefit of this net operating loss has been offset by a full valuation allowance. The utilization of the net operating loss may be subject to a substantial limitation due to the "Change of ownership provisions" under Section 382 of the Internal Revenue Code and similar state provisions. Such limitation may result in the expiration of the net operating loss before its full utilization. LOSS PER SHARE The Company computed basic and diluted loss per share amounts for June 30, 2003 and 2002 pursuant to the Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share." No dilution resulted from the 9,000,000 and 5,500,000 employee stock options outstanding at June 30, 2003 and 2002, respectively, because of the net loss. Basic loss per common share ("LPS") is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive stock options. The numerator and denominator used in the basic and diluted LPS of common stock computations are presented in the following table: 6 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) LOSS PER SHARE (Continued) NUMERATOR FOR BASIC AND DILUTED LPS 2003 2002 ---- ---- Net loss to common shareholders $ (780,799) $ (436,818) ============== ============ DENOMINATOR FOR BASIC AND DILUTED LPS Weighted average shares of common stock Outstanding 314,186,041 242,869,255 ============= ============ LPS - basic and diluted $ (.00) $ (.00) ============== ============ 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 disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SIGNIFICANT ESTIMATES Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates relate to the valuation of inventory, intangible assets, all accrued liabilities and the valuation of the stock options and stock issued for debt and services provided by related parties. EQUITY BASED COMPENSATION The Company accounts for employee stock options in accordance with Accounting Principles Board Option No. 25 (APB), "Accounting for Stock Issued to Employees." Under APB No.25 the Company recognizes compensation expense related to employee stock options, when options are granted at a price below the market price, on the day of grant. SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes the recognition of compensation expense based on the fair value of options on the grant date and allows companies to continue applying APB No. 25 if certain pro forma disclosures are made assuming the hypothetical fair value method application. 7 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) RECLASSIFICATION Certain prior year's amounts have been reclassified to conform to the 2003 presentation. 2. RELATED-PARTIES STOCK AND ASSET TRANSACTIONS On July 16, 1999, the Company entered into a Technology Purchase Agreement ("agreement") with Mr. C.J. Lieberman (brother of the current President and Director of the Company) whereby the Company acquired exclusive rights and interests to a thirteen-step manufacturing process, which utilizes virtually all of the nutrients found in certain plants needed to manufacture herbal dietary health supplements. The purchase price for the thirteen-step process was the issuance to Mr. C.J. Lieberman of 18 million shares of the Company's common stock, which was to be issued to him in two phases. In 2001, the agreement called for 12 million shares of the Company's stock to be issued at the first phase. As of June 30, 2003, none of the stock related to this agreement had been issued. The Company, therefore, accrued and included in the caption "due to stockholder - asset acquisition" in 2000, $1,440,000, which was managements' determination of the common stock value of the 12 million shares at the time of the agreement, in anticipation of issuing the common stock shares to Mr. C.J. Lieberman. Due to the asset impairment, discussed below, no further liability was recorded on the remaining value of the 6,000,000 shares not issued and therefore not recorded in "due to stockholder - asset acquisition". This agreement, entered into in 1999 was initially recorded in 2000 as a transfer between entities under common control and was therefore recorded on the Company's records as research and development expenses and a liability in accrued expenses. In 2001 management concluded that this transaction was recorded in error and made a correction to the 2000 financial statements, in 2001, by recording a prior period adjustment. The prior period adjustment (correction) made to the Company's records was to record an intangible asset, totaling $ 1,440,000, on the balance sheet and an increase to retained earnings. Due to the lack of sales for the approximate three year period ending December 31, 2002, and based on management's current projection of the future present value of cash flows from its products sales, an impairment loss in the amount of $909,600 was recorded in 2002. The accumulated impairment loss which includes prior years' amortization totaled $1,029,600 at June 30, 2003. The estimated fair value of the intangible asset estimated by management at December 31, 2002 was $410,400 and is included under the caption "Intangible assets-net", at June 30, 2003. Unless future sales are generated, this intangible asset is subject to future impairment loss provisions. 8 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. RELATED-PARTIES STOCK AND ASSET TRANSACTIONS (Continued) In addition, the Company agrees to pay to C.J. Lieberman a royalty payment of $.01 per bottle plus, 1% of the Company's suggested retail price plus 10% 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, the agreement must unconditionally provide for payment to the Company of not less than $20 million. Upon receipt of the sale proceeds by the Company, the Company shall issue to Mr. C.J. Lieberman 5 million shares for each $20 million paid to the Company, not to exceed 25 million shares. Upon his resignation as President in 1996, the Company retained Mr. 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 President and sole director of the Company, Mr. David Lieberman, lent the Company his personal funds to pay expenses on behalf of the Company. As of June 30, 2003, included on the balance sheet in "Loans payable - stockholders" are accrued salaries, consulting and other expenses paid on behalf of the Company by Mr. David Lieberman. The balance due was $487,033 at June 30, 2003. On February 28, 2000 the Company entered into an Asset Purchase Agreement with Dr. Leonard Bielory (Chairman of the Board of Directors of APPI who resigned in January 2003) whereby the Company acquired the exclusive rights and interest to allergy and sinus formulations he developed ("Assets"). The purchase price includes options to purchase 18 million 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 options required to purchase the Assets, 12 million shares, were issued during the fourth quarter of 2000. The fair value of the 12 million shares, as determined by management, was $1,079,880 and is included in "Intangible assets - net" on the balance sheet. Due to the lack of sales for the approximate three year period ending December 31, 2002, and based on management's current projection of the future anticipated present value of cash flows from this product's sales, an impairment loss in the amount of $684,344 was recorded in 2002. The accumulated impairment loss, which includes prior years' amortization, totaled $770,360 at June 30, 2003. The net intangible asset, as shown on the balance sheet under the caption "Intangible assets-net", at June 30, 2003 was $309,520. Unless future sales are generated, this intangible asset is subject to future impairment provision losses. 9 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. RELATED-PARTIES STOCK AND ASSET TRANSACTIONS (Continued) Additionally, the Company agrees to pay Dr. Bielory a royalty payment of $.01 per bottle, plus 1% of the suggested retail price of each product sold, plus 10% of the Company's net profits before taxes from such sales of products manufactured with these assets. 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 million 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 million required to be paid to the Company, not to exceed twenty-five million shares. In March 2003, the Company issued 1,250,000 shares of Series A Preferred Stock to David Lieberman, sole director and stockholder and 1,250,000 shares of Series A Preferred Stock to C.J. Lieberman, a shareholder of the Company for services rendered. The stock was issued at par value, $.0007 per share. These two stockholders own 100% of the outstanding Series A Preferred Stock. During the three months ended June 30, 2003, the Company had issued 110,226,110 shares of its common stock in lieu of payments in cash for services rendered, some to related parties. Included in this total are 10,000,000 million shares issued to Consulting Solutions Group, per a consulting agreement as entered into as of May 12, 2003. These shares represent $290,507 of expenses in lieu of cash to the Company as of June 30, 2003. During the three months ended June 30, 2003, the Company issued 131,000,000 shares of its common stock to its existing stockholders in repayment of their outstanding loans to the company. These shares represent repayments of $611,500 to existing shareholders which is reflected on the balance sheet under the caption "Loans payable - shareholders". 3. INTANGIBLE ASSETS Intangible assets consist of the above mentioned agreement with Mr. C.J. Lieberman to purchase the thirteen-step manufacturing process, to manufacture herbal dietary supplements and the agreement with Dr. Bielory for the exclusive rights and interest to his allergy and sinus formulations. Such intangible assets, which have indefinite lives, are not subject to amortization, in accordance with SFAS 142. These assets are recorded on the balance sheet, net of the accumulated impairment provisions and were $ 719,920 at June 30, 2003. 4. CAPITAL STOCK In 2003, The Board of Directors of the Company elected and the stockholders voted to amend the Certificate of Incorporation of the Company to change authorized number of shares from 250,000,000 million shares of common stock and 5,000,000 shares of preferred stock to 600,000,000 million shares of common stock and 10,000,000 shares of preferred stock by 10 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 2. RELATED-PARTIES STOCK AND ASSET TRANSACTIONS (Continued) CAPITAL STOCK (Continued) means of an amendment to the Company's Certificate of Incorporation. The preferred shares voting rights are equivalent to 150 shares of common stock for each share of preferred stock. The Board of Directors determined that it was in the best interests of the Company to make this change at this time, due to the fact that the Company has issued almost the entire authorized amount permitted under the Certificate of Incorporation. This would limit the ability of the Company to issue shares to raise capital, pay for various services and other related activities. 5. STOCK OPTIONS The Company has adopted an employee, directors, consultants, and advisors compensatory stock compensation and performance based stock option plans which allows for the issuance of shares of common stock of the Company. The exercise price of each option is generally less than or equal to the market price of the Company's stock on the date of grant. The exercise price for options granted is determined by the board of directors. The maximum term of the options and the vesting period will be determined by the Board and are set forth in each option agreement. In accordance with various employment and consulting contracts the Company has issued stock options to its officers, employees and key consultants. 6. LOANS PAYABLE - STOCKHOLDERS Loans payable - stockholders consists of unsecured, non-interest bearing short-term loans. 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 Mr. Berkowitz, an employee and shareholder of the Company. The agreement is for a maximum loan amount of $100,000. As of June 30, 2003, the Company has borrowed $56,449 on this loan. The loan is interest free and includes the option to be paid back in Company stock. If the loan is paid in Company stock, the stock conversion price is $.0165 per share. During 2002, 2 million shares of the common stock were issued to Mr. Berkowitz as partial repayment of the loan. 7. COMMITMENTS AND CONTINGENCIES The Company has employment agreements with four employees and consulting contracts with individuals who are also stockholders of the Company. At June 30, 2003,, the Company has a total liability for accrued salaries to stockholders of $524,546. There are certain accrued payroll tax liabilities owed to the IRS on some of the salaries to stockholders that were paid in prior years, pursuant to these agreements. 11 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES (Continued) 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. During 2002, 5 million shares of common stock were issued to Summa Capital, Inc. On April 15, 2003, the Company entered into a consulting agreement with Consulting Solutions Group. The agreement is for a one year term. Compensation under the agreement is for the Company to issue 10,000,000 shares of its common stock. The stock was issued to Consulting Solutions Group as of May 12, 2003. On May 28, 2003 the Company entered into a consulting agreement with Tele. V LLC whereas Tele. V LLC will provide consulting, advice and assistance to the Company in the areas of marketing and promotion. Tele. V LLC has assisted the company in reaching sales distribution agreement with IGIA, Inc., a New York City based full service direct response marketing and merchandising company. The agreement grants Tele V. the exclusive right to purchase a minimum of 100,000 units of the Company's cholesterol reducing dietary supplement, Lo-Chol. Tele V. will bear all the related costs of marketing and distribution, including the creation and production of an infomercial. The Company per the agreement is required to issue 30 million shares of common stock upon execution of the agreement. Tele.V LLC will produce an infomercial for the Company at which time the Company is required to issue 2,500,000 preferred shares, representing 25% of the voting rights of the Company; in addition, the Company is required to issue an additional 100 million common shares to Tele. V LLC, for a total of 130 million common shares. The Company is required to maintain Tele. V LLC at 50% of the issued and outstanding preferred shares and 25% of the total issued and outstanding common shares; at not time can Tele V. LLC's share drop below these percentages, respectively. The Company will be required to issue to Tele V. LLC an additional 20% of the then issued and outstanding common shares upon the Company achieving $2,000,000 in sales of its products. At no time can Tele V. LLC's total share of the Company for both preferred shares and common shares be reduced below 50% and 25%, respectively. The agreement with IGIA, Inc., ("IGIA") is an exclusive agreement whereby the Company has agreed to sell substantially all of its products solely to IGIA and IGIA has the exclusive right to 12 ADVANCED PLANT PHARMACEUTICALS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES (Continued) market the product on a worldwide basis. There is also a covenant not to compete for the length of the agreement plus one year after termination of the agreement. IGIA will be responsible for the marketing and promotion of the dietary supplements, and IGIA has agreed to purchase a minimum of $2,000,000 per annum of the Company's supplements. On May 12, 2003, the Company entered into an agreement with Dr. Gerard Armand to serve as the Company's Director of Clinical Research and Manufacturing. The agreement is for a one year term, and requires the Company to issue to Dr. Armand 500,000 shares of common stock and a monthly stipend of $150.00 for services rendered. LITIGATION The Company is a defendant in several lawsuits arising in the normal course of business and involves claims for damages. The Company is contesting the actions but is unable to predict the ultimate outcome. Included in accounts payable and accrued liabilities is a reserve against such claims for damages. The Company is in negotiations to settle all matters. CONCENTRATION OF CREDIT RISK The Company has one major customer that provided 93% of the total sales for the six months ended June 30, 2003. The loss of this customer would further hamper the Company's efforts to bring its products to the commercial market. 13