UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-08149
SCANNER TECHNOLOGIES CORPORATION
--------------------------------
(Name of small business issuer in its charter)
New Mexico 85-0169650
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14505 21st Avenue North, Suite 220, Minneapolis, MN 55447
---------------------------------------------------------
(Address of principal executive offices)
(763) 476-8271
--------------
(Issuer's telephone number)
The Registrant had 10,416,465 shares of Common Stock, no par value outstanding
as of July 31, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [x]
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB
Table of Contents
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submissions Of Matters To A Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 15
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------
REVENUES $ 332,022 $ 767,981 $ 560,642 $ 891,889
COST OF GOODS SOLD 96,577 210,002 177,023 272,209
------------ ------------ ------------ ------------
GROSS PROFIT 235,445 557,979 383,619 619,680
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 378,925 304,349 689,082 626,517
Research and development 180,570 118,433 361,213 255,639
Legal fees 190,797 187,995 351,762 221,327
------------ ------------ ------------ ------------
750,292 610,777 1,402,057 1,103,483
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (514,847) (52,798) (1,018,438) (483,803)
OTHER INCOME (EXPENSE)
Other income (expense), net (1,802) 240,033 523 239,995
Interest expense (10) (153,310) (10) (166,877)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (516,659) 33,925 (1,017,925) (410,685)
INCOME TAXES (BENEFIT) 78,000 300 (72,700) 2,800
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (594,659) $ 33,625 $ (945,225) $ (413,485)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ (0.08) $ 0.00 $ (0.13) $ (0.04)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.08) $ 0.00 $ (0.13) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC 7,061,196 10,229,798 7,061,196 10,126,386
WEIGHTED AVERAGE SHARES OUTSTANDING -
DILUTED 7,061,196 11,532,836 7,061,196 10,126,386
See notes to condensed consolidated financial statements.
3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2003
------------ ------------
(audited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,037 $ 179,147
Accounts receivable, less allowance of $40,000 168,008 344,546
Income taxes receivable 235,900 -
Inventory, less allowances of $32,000 and $52,000 827,857 846,567
Prepaid expenses 25,152 38,749
----------- ------------
TOTAL CURRENT ASSETS 1,287,954 1,409,009
PROPERTY AND EQUIPMENT, net 52,159 43,993
PATENTS RIGHTS, net 344,776 313,900
OTHER 16,939 9,590
----------- ------------
$ 1,701,828 $ 1,776,492
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ 570,000 $ 291,000
Notes payable to related parties 274,886 334,726
Accounts payable 647,521 691,909
Accrued expenses 119,885 124,713
----------- ------------
TOTAL CURRENT LIABILITIES 1,612,292 1,442,348
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 50,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, no par value, 50,000,000 shares authorized;
10,000,982 and 10,396,465 shares issued and outstanding 3,064,941 4,053,528
Warrants - 411,561
Deferred financing costs, net - (442,055)
Notes receivable for common stock - (300,000)
Accumulated deficit (2,975,405) (3,388,890)
----------- ------------
89,536 334,144
----------- ------------
$ 1,701,828 $ 1,776,492
=========== ============
See notes to condensed consolidated financial statements.
4
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
---------------------------
2002 2003
----------- -----------
OPERATING ACTIVITIES
Net loss $ (945,225) $ (413,485)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 12,154 11,169
Amortization of patent rights and deferred financing costs -- 163,492
Interest expense added to related party debt principal -- 9,808
Deferred taxes 163,200 --
Deferred stock option compensation 93,939 --
Changes in operating assets and liabilities:
Accounts receivable 162,240 (176,538)
Income taxes receivable 161,729 235,900
Inventory (78,103) (18,710)
Prepaid expenses and other (30,621) (6,248)
Accounts payable 312,667 44,388
Accrued expenses (107,678) 4,828
----------- -----------
Net cash used by operating activities (255,698) (145,396)
----------- -----------
INVESTING ACTIVITY
Purchases of property and equipment (12,800) (3,003)
----------- -----------
FINANCING ACTIVITIES
Net payments on bank line of credit -- (279,000)
Proceeds from related party debt -- 100,000
Payments on related party debt -- (49,968)
Proceeds from sale of common stock and exercise of warrants -- 525,477
Refund of stock options issued for cash (15,000) --
----------- -----------
Net cash provided (used) by financing activities (15,000) 296,509
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (283,498) 148,110
CASH AND CASH EQUIVALENTS
Beginning of period 366,750 31,037
----------- -----------
End of period $ 83,252 $ 179,147
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 10 $ 23,517
Income taxes -- 2,809
Noncash operating, financing and investing activities:
Warrants issued in connection with line of credit -- 574,671
Warrants exercised -- 163,110
Notes receivable issued for purchase of common stock -- 300,000
Unearned compensation forgiven and transferred to capital 1,254,575 --
Deferred tax asset related to forgiven unearned compensation 436,000 --
See notes to condensed consolidated financial statements.
5
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Significant Accounting Policies -
The accompanying condensed consolidated financial statements
account for the merger between Scanner Technologies
Corporation (Scanner) and Southwest Capital Corporation
(Southwest) as a capital transaction in substance (and not a
business combination of two operating entities) that would be
equivalent to Scanner issuing securities to Southwest in
exchange for the net monetary liabilities of Southwest,
accompanied by a recapitalization (See Note 2). The combined
entity of Scanner and its subsidiary and Southwest are
referred to as the "Company."
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
for interim financial information. They do not include all of
the information and footnotes required by accounting
principles generally accepted in the United States of America
for complete 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 three-month and
six-month periods 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 for the year ended
December 31, 2002 included in our Annual Report on Form
10-KSB.
Nature of Business
The Company invents, develops and markets vision inspection
devices that are used in the semiconductor industry for the
inspection of integrated circuits. The Company's customer base
is small in numbers, but global in location.
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of Scanner Technologies Corporation and its wholly
owned subsidiary, Scanner Technologies Corporation
International, incorporated in the United States and
registered in Singapore. All significant intercompany balances
and transactions have been eliminated.
Revenue Recognition
Revenue is earned primarily through sales of test equipment to
third party customers and also to a distributor. For sales to
the distributor, revenue is recognized upon shipment as the
distributor has no acceptance provisions and title passes at
shipment. For sales to third party customers, title passes at
shipment; however, the customer has certain acceptance
provisions relating to installation and training. These
provisions require the Company to defer revenue recognition
until the equipment is installed and the customers' personnel
are trained. The Company provides the training but does not
install the equipment. As a result, revenue is recognized for
third party customers once the product has been shipped,
installed and customer personnel are trained. This process
typically is completed within two weeks to a month after
shipment.
Management Estimates
The preparation of these condensed consolidated 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 and disclosures in the condensed consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates. Significant management
estimates relate to the valuation allowance on deferred tax
assets and payables for legal fees (See Note 3).
6
Fair Value of Financial Instruments
The carrying amounts of financial instruments consisting of
cash and cash equivalents, receivables, bank line of credit,
notes payable, accounts payable and accrued liabilities
approximate their fair values.
Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Accounts Receivable
Accounts receivable arise from the normal course of selling
products on credit to customers. An allowance for doubtful
accounts has been provided for estimated uncollectable
accounts. Accounts receivable, historical bad debts, customer
concentrations, customer creditworthiness, current economic
trends and changes in customer payment terms and practices are
analyzed when evaluating the adequacy of the allowance for
doubtful accounts. Individual accounts are charged against the
allowance when collection efforts have been exhausted.
Inventory
Inventory is stated at the lower of cost or market with cost
determined on the first-in, first-out method. The Company has
provided an allowance for obsolescence for estimated excess
and obsolete inventory equal to the difference between the
cost of inventory and the estimated fair value based on
assumptions about future demand and market conditions.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using accelerated
methods. Leasehold improvements are amortized straight-line
over the lease term.
Patent Rights
Patent rights are stated at cost less accumulated
amortization. Amortization is provided using the straight-
line method over six years, the deemed useful lives of the
patents. Patent rights are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable. Determination
of recoverability is based on an estimate of discounted future
cash flows from the use of the asset. Measurement of an
impairment loss for patent rights that management expects to
use is based on the fair value of the assets as established
using a discounted cash flow model.
Options and Warrants Valuation
The Company estimates the fair value of options and warrants
at the grant date using the Black-Scholes option pricing
model. The model takes into consideration weighted average
assumptions related to the following: risk-free interest rate;
expected life years; expected volatility; and expected
dividend rate. Since the Company's stock is thinly traded, the
Company is essentially a nonpublic entity. Therefore,
volatility is set at 0% as permitted by SFAS 123. The costs
associated with the valuation of the warrants issued in
connection with the line of credit are recorded as deferred
financing costs. These costs are being amortized over the term
of the line of credit, and the net unamortized balance is
offset against stockholders' equity.
Product Warranty
The Company provides an accrual for estimated incurred but
unidentified product warranty issues based on historical
activity. The warranty accrual and related expenses were not
significant.
Accounting for Stock-Compensation
The Company accounts for employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provides the disclosures
required by Statement of
7
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Options and warrants to
non-employees are accounted for as required by SFAS No. 123.
Income Taxes
The Company is taxed as a domestic U.S. corporation under the
Internal Revenue Code. Income taxes are accounted for under
SFAS No. 109, "Accounting for Income Taxes." Deferred income
tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in
the consolidated financial statements or tax returns. Deferred
income tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of
assets and liabilities using currently enacted tax rates in
effect for the years in which the differences are expected to
reverse. Deferred tax assets are evaluated and a valuation
allowance is established if it is more likely than not that
all or a portion of the tax asset will not be utilized. Income
tax benefit is the current tax refundable for the period and
the change during the period in deferred tax assets and
liabilities.
Credit Risk
Significant concentrations of credit risk exist in accounts
receivable, which are due from customers located primarily in
the Far East and the United States.
Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing the net
income (loss) by the weighted-average common shares
outstanding for the reporting period. Diluted income (loss)
per share reflects the potential dilution that could occur if
holders of warrants and options that are not antidilutive
converted their holdings into common stock. The dilutive
effect of options and warrants included 1,303,038 warrants in
the three months ended June 30, 2003. Options and warrants for
831,750, 719,250, 306,765 and 2,750,537 shares were excluded
from the calculation of diluted outstanding shares for the
three and six months ended June 30, 2002 and 2003,
respectively because their effect was antidilutive.
2. Merger and Reorganization -
On January 16, 2002, the Company executed an Agreement and
Plan of Reorganization with Southwest Capital Corporation
(Southwest), a public company with no operations. The
agreement provided for the Company to merge into Southwest,
with Southwest continuing as the surviving corporation under
the name of Scanner Technologies Corporation. On July 31,
2002, the Company completed its merger with Southwest pursuant
to which the Company was merged with and into Southwest. This
merger was treated as a recapitalization.
At the effective date of the merger each of the 7,568,196
shares of Scanner's common stock outstanding was converted
into the right to receive 1.057 shares of the surviving
company's common stock and a five-year warrant to purchase
0.2642 shares of the surviving company's common stock. The
warrants are exercisable immediately at an exercise price of
$1.00 per share. The conversion ratio was based on the total
amount of Scanner's common stock outstanding at the effective
date of the merger. As a result, the surviving company issued
an additional 7,999,594 shares of its common stock and
warrants to purchase 1,999,543 shares of common stock. Each
share of common stock of Southwest issued and outstanding,
2,001,388 shares, remained issued and outstanding and
unaffected by the merger. Southwest had a deficiency in assets
of $27,019 at the date of the merger.
At the time of the merger, Scanner had outstanding warrants to
purchase 225,000 shares of its common stock at $2.75 per
share. At the time of the merger, these warrants were
converted into warrants to purchase a total of 59,445 units of
the surviving company's securities at $10.80 per unit, each
unit consisting of four shares of the surviving company's
common stock and a five-year warrant immediately exercisable
to purchase one share of the surviving company's common stock
at $1.00 per share. At the time of the merger, the Articles of
Incorporation were amended to authorize preferred stock,
increase the
8
number of shares the Company is authorized to issue and to
change the common stock from $.01 par value to no par value
stock.
Upon the consummation of the merger of Scanner into Southwest,
the Company became the owner of the licensed know-how in
exchange for a secured note payable to the licensor
(officer/stockholder) for $1.00 and all expenses incurred for
securing and maintaining the intellectual property patent
rights, totaling $370,505. The exclusive license agreement,
which was terminated, covered the operation, manufacturing,
testing and selling of Scanner products. The agreement
required a fee of 5% of the Company's sales. License expense
was $18,532 and $28,032 for the three and six months ended
June 30, 2002, respectively.
Pro forma information for prior periods is not presented since
the effect is insignificant.
3. Contingencies and Uncertainty -
In an agreement dated April 19, 2002, the Company's President
and Chief Executive Officer (President) forgave the payment of
his accrued salary and released the Company, its successors,
its officers and directors from any liability in connection
with the accrued salary. In exchange, the Company agreed that
its President would receive certain proceeds, if any, that
Scanner may receive out of litigation involving patents that
Scanner had licensed. Under the agreement, the Company keeps
60% of any proceeds of the currently ongoing litigation and
pays its President 40% of such proceeds until the Company has
been reimbursed for all attorney fees and other expenses
incurred in connection with the current litigation, and its
President has received the total of $1,254,575. If one party
receives all the amounts owing to such party before the other
party's claim under this provision is satisfied, the other
party receives 100% of the proceeds until its claim is
satisfied. If any proceeds remain after such payment, the
Company's President receives 50% of such remainder. He also
has a right to receive part of the proceeds, if any, the
Company may receive out of any subsequent litigation involving
the licensed patents. The Company keeps 60% of any such
proceeds until its attorney fees and other expenses incurred
in connection with the current and any subsequent litigation
have been reimbursed, and its President receives 40% of any
such proceeds until he has received a total of $1,254,575 of
the proceeds of the currently ongoing and any subsequent
litigation. If any proceeds of the subsequent litigation
remain after such distribution, the Company will pay 25% of
such remaining proceeds to its President. The unearned
compensation forgiven ($1,254,575) less the related deferred
tax benefit ($436,000) was recorded as additional paid-in
capital in stockholders' equity.
To provide the Company's Senior Vice President with an
incentive to continue his employment with the Company, and to
compensate him for compensation in recent years which the
Company believes was less than he might have received in a
comparable position elsewhere, the Senior Vice President was
also a party to the agreement regarding the distribution of
litigation proceeds. The Company agreed to pay to him 20% of
the remaining proceeds, if any, Scanner receives out of any
subsequent litigation as described above involving the
licensed patents, and that remain after the aforesaid payments
to the Company and its President have been made out of such
proceeds.
In 2000, the Company instituted a lawsuit against a Belgian
corporation for infringement of two of its patents. The
patents related to three-dimensional ball array inspection
apparatus and method. Discovery was completed in the case and
a so-called Markman hearing was held in November 2001. In June
2003, the Company and the Belgian corporation reached a
settlement concerning one illumination source inspection
systems. Pursuant to the settlement agreement, the Belgian
corporation made a one-time payment of $400,000 to the Company
to settle all issues with regard to these one light source
inspection systems. The court found no infringement with
regard to the two illumination source devices that the Belgian
corporation sold. The Company agreed to the settlement
agreement in order to immediately appeal the court's ruling
concerning inspection systems involving two light sources,
eliminating the need, delay and expense of a trial with regard
to these systems at this stage. The Company intends to
continue to vigorously enforce its patent rights and expects
to incur significant additional expenses in 2003 to pursue
their appeal. The Company believes that any unfavorable
decision will not have a material or adverse effect on the
consolidated financial statements. In connection with the
settlement, the Company paid its President $160,000 pursuant
to the agreement noted above. The $400,000 settlement less the
$160,000 paid to the President is recorded at net in other
income in the condensed financial statements.
In 2002, the Company brought suit against two law firms that
previously represented the Company in the aforementioned
patent litigation. The Company demanded a full and complete
accounting for the fees and
9
expenses, the payment of which these firms demand in
connection with the patent litigation. The Company has paid
the law firms $558,652 in legal fees and costs. The law firms
claim that the Company owes them an additional $402,984. When
the Company brought the patent suit, the law firms estimated
that legal fees and costs through the discovery stage of the
patent litigation would be $447,000 to $585,000. The Company,
therefore, contends that it does not owe any further payments
to the defendants. At June 30, 2003 and December 31, 2002, the
$402,984 is included in accounts payable in the condensed
consolidated balance sheets.
4. Financing Arrangements -
In 2003, the Company renewed its previous bank line of credit
through May 1, 2004. The line was increased from $400,000 to
$1,300,000 with an interest rate at prime and the Company
provided the bank with a security interest in its general
business assets. The new line is guaranteed by individuals who
received for their financial support (a) five-year warrants to
purchase 325,000 shares of the Company's common stock at $2.75
per share and (b) thirty-day warrants to purchase an
additional 325,000 shares of the Company's common stock at
$2.00 per share. Provided the guarantor paid cash for at least
one half of the shares subject to the thirty-day warrant, such
guarantor was permitted to purchase the remainder of the
shares with a promissory note, collateralized by the shares
purchased, payable one year from the exercise date. The
guarantors exercised all such warrants in exchange for
aggregate cash payments to the Company of $350,000 and
one-year promissory notes issued to the Company with an
aggregate principal amount of $300,000. In connection with the
exercise of their thirty-day warrants, the guarantors were
granted two-year warrants to purchase an additional 650,000
shares of the Company's common stock at $2.00 per share. All
of the warrants issued to the guarantors had a market value of
$574,671 as determined by the Black-Scholes Model. These
costs, which are amortized over the term of the line of
credit, are recorded as deferred financing costs and offset
against stockholders' equity in the condensed consolidated
balance sheet.
On April 10, 2003, the Company issued a $100,000 4.25% note
payable in exchange for cash. The note is due April 8, 2004. A
warrant, which expires on April 11, 2006, to purchase 25,000
shares of the Company's common stock at $2.75 per share was
issued in connection with the note. The warrant had no market
value as determined by the Black-Scholes Model.
5. Private Placement Offering/Subsequent Event -
Between January 1, 2003 and June 30, 2003, the Company sold
70,000 shares of common stock at $2.50 per share, for an
aggregate amount of $175,000, under a private placement
offering. Warrants to purchase an additional 17,500 shares of
common stock at $3.00 per share were issued in connection with
these sales. The warrants expire three years after issuance
and had no market value as determined by the Black-Scholes
Model.
Subsequent to June 30, 2003, the Company sold an additional
20,000 shares of common stock at $2.50 per share under the
private placement offering. Warrants to purchase an additional
5,000 shares of common stock at $3.00 per share were issued in
connection with these sales. The warrants expire three years
after issuance and had no market value as determined by the
Black-Scholes Model.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Quarterly Report on Form 10-QSB includes forward-looking
statements within the meaning of the Securities Exchange Act of 1934,
as amended, or the Exchange Act. These statements are based on our
beliefs and assumptions and on information currently available to us.
Forward-looking statements include, among others, the information
concerning possible or assumed future results of operations of Scanner
Technologies Corporation and its subsidiary set forth under the heading
"Management's Discussion and Analysis or Plan of Operation."
Forward-looking statements also include statements in which words such
as "may," "will," "should," "could," "expect," "anticipate," "intend,"
"plan," "believe," "estimate," "predict," "potential," or similar
expressions are used. Forward-looking statements are not guarantees of
future performance. Our future results and shareholder values may
differ materially from those expressed in these forward-looking
statements. We caution you not to put undue reliance on any
forward-looking statements included in this document.
10
GENERAL
The Company's revenues have been adversely affected by the continuing
lack of demand in the semiconductor marketplace, which has caused many
potential customers to cease or defer purchases of capital equipment
such as that offered by the Company. Although the Company has made
efforts to manage expenses during this downturn, the Company is
confronted with working capital shortages due to ongoing operating
expenses and the Company's ongoing patent litigation. To address these
working capital shortages, the Company is attempting to raise
additional equity capital through a private placement offering and has
extended and increased its bank line of credit. These efforts are
discussed in more detail below. Assuming the availability of sufficient
working capital, the Company's success will be dependent upon its
ability to develop and commercialize new products, meet the demands of
its customers, respond quickly to changes in its market, and control
expenses and cash usage.
In connection with efforts to raise capital or obtain additional
financing, the Company may be obligated to issue additional shares of
Common Stock or warrants or other rights to acquire Common Stock on
terms that will result in dilution to existing shareholders or place
restrictions on operations. The Company may also be unsuccessful in
obtaining additional equity capital or financing on any terms and in
that event may be obligated to cease operations and/or attempt to
negotiate with its creditors to delay payments or compromise the
amounts of its indebtedness. If the Company is unable to reach
satisfactory arrangements with its creditors, the Company will
responsibly evaluate alternatives including the possibility of seeking
protection from creditors under the bankruptcy laws. Creditors may also
take action that would force the Company into proceedings under the
bankruptcy laws.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of
operations is based upon the consolidated financial statements, which
have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. The Company
evaluates, on an on-going basis, its estimates and judgments, including
those related to bad debts, excess inventory, warranty obligations,
income taxes, contingencies and litigation. Its estimates are based on
historical experience and assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
o Revenue recognition;
o Allowances;
o Inventories;
o Patent rights;
o Accounting for income taxes;
o Accounting and valuation of options and warrants;
Revenue is earned primarily through sales of test equipment to third
party customers and also to a distributor. For sales to the
distributor, revenue is recognized upon shipment as the distributor has
no acceptance provisions and title passes at shipment. For sales to
third party customers, title passes at shipment, however the customer
has certain acceptance provisions relating to installation and
training. These provisions require the Company to defer revenue
recognition until the equipment is installed and the customers'
personnel are trained. The Company provides the training but does not
install the equipment. As a result, revenue is recognized for third
party customers once the product has been shipped, installed and
customer personnel are trained. This process typically is completed
within two weeks to a month after shipment.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required
payments. Accounts receivable, historical bad debts, customer
11
concentrations, customer creditworthiness, current economic trends and
changes in customer payment terms and practices are analyzed when
evaluating the adequacy of the allowance for doubtful accounts. If the
financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances and charges against earnings may be required.
The Company writes down inventory for estimated excess and obsolete
inventory equal to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand and
market conditions. Any significant unanticipated changes in demand or
competitive product developments could have a significant impact on the
value of the Company's inventory, and its reported results. If actual
market conditions are less favorable than those projected, additional
inventory write-down, and charges against earnings may be required.
Patent rights are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not
be recoverable. Determination of recoverability is based on an estimate
of discounted future cash flows from the use of the asset. Measurement
of an impairment loss for patent rights that management expects to use
is based on the fair value of the asset as established using a
discounted cash flow model.
The Company accounts for income taxes using the asset and liability
approach in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." The asset and liability
approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of assets
and liabilities. The effect on deferred taxes of a change in tax rates
is recognized in operations in the period that includes the enactment
date. Additionally, deferred tax assets are evaluated and a valuation
allowance is established if it is more likely than not that all or a
portion of the tax asset will not be utilized.
The Company accounts for employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and provides the disclosures required by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." Options and warrants to non-employees are
accounted for as required by SFAS No. 123.
The Company estimates the fair value of warrants at the grant date
using the Black-Scholes option pricing model. The model takes into
consideration weighted average assumptions related to the following:
risk-free interest rate; expected life years; expected volatility; and
expected dividend rate. Since the Company's stock is thinly traded, the
Company is essentially a nonpublic entity. Therefore, volatility is set
at 0% as permitted by SFAS 123. The costs associated with the valuation
of the warrants issued in connection with the line of credit are
recorded as deferred financing costs. These costs are being amortized
over the term of the line of credit, and the net unamortized balance is
offset against stockholders' equity.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE
30, 2002
Sales for the three months ended June 30, 2003, were $767,981 compared
to $332,022 for the three months ended June 30, 2002. The Company's
revenues continue to be adversely affected by the lack of demand in the
semiconductor industry which has caused reduced spending by
semiconductor manufacturers for capital equipment such as that offered
by the Company. The sales increase in 2003 relates primarily to the
sale of the Company's first robotic inspection system to an end user
and a slight improvement in the purchases of capital equipment by
customers in the semiconductor industry.
Cost of goods sold increased by $113,425 to $210,002 in the three
months ended June 30, 2003, from $96,577 in 2002. Cost of goods sold as
a percentage of sales decreased by 1.8% to 27.3% in 2003 compared to
29.1% in 2002. In 2003, manufacturing expenses decreased as a percent
of sales primarily because of the increase in sales. This decrease was
partially offset by an increase in material cost as a percent of sales.
Selling, general and administrative expenses decreased by $74,576 to
$304,349 for the three months ended June 30, 2003, compared to $378,925
in the prior period. Decreases in professional costs, amortization of
12
deferred stock option compensation and license fees were partially
offset by increases in salaries and related expenses, marketing
expenses and amortization of patent rights.
Research and development expenses were $118,433 in the three months
ended June 30, 2003 compared to $180,570 for the three months ended
June 30, 2002. The research and development activities related to the
Company's development of its own line of robotic inspection systems for
sale to end users was in its early stages in 2002. The development
process is continuing in 2003 with the first unit being sold in April
2003.
Legal fees decreased by $2,802 to $187,995 in the three months ended
June 30, 2003, from $190,797 in 2002. A significant portion of the
legal fees in both periods related to the patent infringement claim
brought by the Company against a competitor.
Other income (expense) was $86,723 in the three months ended June 30,
2003, compared to ($1,812) in 2002. In 2003, the Company settled a
portion of its litigation relating to its patent infringement claim for
$400,000. In connection with the settlement and a prior agreement, the
Company paid its President $160,000. Interest expense was $153,300
higher in 2003 than it was in 2002 due primarily to the $132,616
amortization of the warrant valuation related to the renewal of the
line of credit and additional debt outstanding.
The income taxes provided in the three months ended June 30, 2003
represented minimum state taxes. The Company provided no additional
income tax provision for the period because the income recognized will
be offset by operating loss carryforwards for which the Company
previoiusly recorded a full valuation allowance against. A tax
provision of $78,000 was provided in the three months ended June 30,
2002.
The net income for the three months ended June 30, 2003 was $33,625, or
$.00 per share, compared to a net loss of ($594,659), or ($.08) per
share, in 2002. The change was the result of an increase in gross
margin of $322,534, decreased operating expenses of $139,515, increased
net nonoperating income of $88,535 and decreased income taxes of
$77,700.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30,
2002
Sales for the six months ended June 30, 2003, were $891,889 compared to
$560,642 for the six months ended June 30, 2002. The Company's revenues
continue to be adversely affected by the lack of demand in the
semiconductor industry which has caused reduced spending by
semiconductor manufacturers for capital equipment such as that offered
by the Company. The sales increase in 2003 relates primarily to the
sale of the Company's first robotic inspection system to an end user
and a slight improvement in the purchases of capital equipment by
customers in the semiconductor industry.
Cost of goods sold increased by $95,186 to $272,209 in the six months
ended June 30, 2003, from $177,023 in 2002. Cost of goods sold as a
percentage of sales decreased by 1.1% to 30.5% in 2003 compared to
31.6% in 2002. In 2003, manufacturing expenses decreased as a percent
of sales primarily because of the increase in sales. This decrease was
partially offset by an increase in material cost as a percent of sales.
Selling, general and administrative expenses decreased by $62,565 to
$626,517 for the six months ended June 30, 2003, compared to $689,082
in the prior period. Decreases in professional costs, amortization of
deferred stock option compensation and license fees were partially
offset by increases in salaries and related expenses and amortization
of patent rights.
Research and development expenses were $255,639 in the six months ended
June 30, 2003 compared to $361,213 for the six months ended June 30,
2002. The research and development activities related to the Company's
development of its own line of robotic inspection systems for sale to
end users was in its early stages in 2002. The development process is
continuing in 2003 with the first unit being sold in April 2003.
Legal fees decreased by $130,435 to $221,327 in the six months ended
June 30, 2003, from $351,762 in 2002. A significant portion of the
legal fees in both periods related to the patent infringement claim
brought by the Company against a competitor.
13
Other income was $73,118 in the six months ended June 30, 2003,
compared to $513 in 2002. In 2003, the Company settled a portion of its
litigation relating to its patent infringement claim for $400,000. In
connection with the settlement and a prior agreement, the Company paid
its President $160,000. Interest expense was $166,867 higher in 2003
than it was in 2002. The increase relates primarily to the $132,616
amortization of the warrant valuation related to the renewal of the
line of credit and additional debt outstanding.
The Company recognized no income tax benefit to offset the loss before
income taxes in the six months ended June 30, 2003, as no tax benefit
is available to the Company. The $2,800 of taxes provided in the six
months ended June 30, 2003 represented minimum state taxes. A benefit
of $72,700 was recognized in the six months ended June 30, 2002.
The net loss for the six months ended June 30, 2003 was ($413,485), or
($.04) per share, compared to a net loss of ($945,225), or ($.13) per
share, in 2002. The decrease in the net loss was the result of an
increase in gross margin of $236,061, decreased operating expenses of
$298,574, and increased net nonoperating income of $72,605 offset by
increased income taxes of $75,500.
LIQUIDITY AND CAPITAL RESOURCES (FOR THE SIX MONTHS ENDED JUNE 30,
2003)
The Company is attempting to raise $1,500,000 of additional capital by
offering shares of its Common Stock and warrants to purchase common
stock through an offering conducted in reliance on an exemption from
registration under the Securities Act of 1933, as amended (the
"Offering"). As of July 31, 2003, the Company had received proceeds of
$225,000 from investors in the Offering. As described above, there is
no assurance that the Company will be successful in its efforts to
complete the Offering. If adequate funds are not available or are not
available on acceptable terms, the ability to take advantage of
unanticipated opportunities, develop or enhance products and services
or otherwise respond to competitive pressures would be significantly
limited.
In 2003, the Company renewed its previous bank line of credit through
May 1, 2004. The line was increased from $900,000 to $1,300,000 with an
interest rate at prime and the Company provided the bank with a
security interest in its general business assets. The new line is
guaranteed by individuals who received for their financial support (a)
five-year warrants to purchase 325,000 shares of the Company's common
stock at $2.75 per share and (b) thirty-day warrants to purchase an
additional 325,000 shares of the Company's common stock at $2.00 per
share. Provided the guarantor paid cash for at least one half of the
shares subject to their thirty-day warrant, that guarantor was
permitted to purchase the remainder of the shares with a promissory
note, collateralized by the shares purchased, payable one year from the
exercise date. The guarantors exercised all such warrants in exchange
for aggregate cash payments to the Company of $350,000 and one-year
promissory notes issued to the Company with an aggregate principal
amount of $300,000. In connection with the exercise of their thirty-day
warrants, the guarantors were granted two-year warrants to purchase an
additional 650,000 shares of the Company's common stock at $2.00 per
share. All of the warrants issued to the guarantors had a market value
of $574,671 as determined by the Black-Scholes Model. These costs,
which are amortized over the term of the line of credit, are recorded
as deferred financing costs in the condensed consolidated balance sheet
The Company believes that this line of credit, existing working capital
and anticipated cash flows from operations and equity investments will
be adequate to satisfy projected operating and capital requirements for
the next year.
Net cash used by operating activities for the six months ended June 30,
2003 totaled $145,396. Negative operating cashflows resulted primarily
from the net loss of $413,485 for the period that was partially offset
by non-cash adjustments relating primarily to depreciation and
amortization of $184,469 and by net changes in operating assets and
liabilities of $83,620.
Net cash used by investing activities for the six months ended June 30,
2003 totaled $3,003. The funds were used to purchase property and
equipment.
Net cash provided by financing activities for the six months ended June
30, 2003 totaled $296,509. Positive financing cashflows related to the
proceeds from the sale of common stock and new borrowings offset by
payments under the bank line of credit and on existing debt.
14
Item 3. Controls and Procedures
As of the end of the period covered by 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, who is also the Company's 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-15(b). Based
upon the evaluation, the Chief Executive Officer, who is also the
Company's Chief Financial Officer, concluded that the Company's
disclosure controls and procedures are effective.
There were no changes in the Company's internal controls over financial
reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In July 2000, Scanner instituted a lawsuit against a Belgian
corporation in the U.S. District Court for the Southern District of New
York for infringement of two of its patents. The patents relate to
three-dimensional ball array inspection apparatus and method. In June
2003, Scanner and the Belgian corporation reached a settlement
concerning one illumination source inspection systems. Pursuant to the
settlement agreement, the Belgian corporation made a one-time payment
of $400,000 to Scanner to settle all issues relating to these one light
source inspection systems. The court found no infringement with regard
to the two illumination source devices that the Belgian corporation
sold. Scanner agreed to the settlement agreement in order to allow
Scanner to immediately appeal the court's ruling concerning inspection
systems involving two light sources, eliminating the need, delay and
expense of a trial with regard to these systems at this stage. Scanner
intends to continue to vigorously enforce its patent rights.
Item 2. Changes in Securities
In the three months ended June 30, 2003, the Company renewed its
previous line of credit. The new line is guaranteed by individuals who
received for their financial support (a) five-year warrants to purchase
325,000 shares of the Company's common stock at $2.75 per share and (b)
thirty-day warrants to purchase an additional 325,000 shares of the
Company's common stock at $2.00 per share. Provided the guarantor paid
cash for at least one half of the shares subject to their thirty-day
warrant, they may provide a promissory note, secured by the shares
purchased, payable one year from the exercise day for the remainder of
the shares. All such thirty-day warrants were exercised in exchange for
aggregate cash payments of $350,000 and one-year promissory notes
totaling $300,000. In connection with the exercise of their thirty-day
warrants, the guarantors were granted two-year warrants to purchase an
additional 650,000 shares of the Company's common stock at $2.00 per
share.
In April 2003, the Company issued three-year warrants to purchase
25,000 shares of the Company's common stock at $2.75 per share in
connection with the issuance of a $100,000 note payable in exchange for
cash.
In the three months ended June 30, 2003, the Company sold 15,000 shares
of its common stock at $2.50 per share to three individuals through a
private placement offering. The shares were issued as follows: 10,000
in April 2003 and 5,000 in June 2003.
The individuals purchasing the above common stock were issued
three-year warrants to purchase one share of common stock at $3.00 per
share for each four shares purchased. Warrants to purchase 3,750 common
shares at $3.00 per share were issued in the three months ended June
30, 2003.
The above common stock was issued in reliance on the exemption from
registration provided by Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933. The certificates
representing the securities bear a restrictive securities legend.
15
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Laurence Zipkin resigned from the Company's Board of Directors on
June 10, 2003.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
See Exhibit Index on page following signature page.
Reports on Form 8-K:
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Scanner Technologies Corporation
DATE: August 14, 2003 By: /s/ Elwin M Beaty
-----------------
Elwin M. Beaty
Its Chief Executive Officer
and Chief Financial Officer
16
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB FOR QUARTER ENDED JUNE 30, 2003
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant--incorporated by reference to Exhibit 2.3 to the
Registrant's Current Report on Form 8-K filed on August 15,
2002
3.2 Amended and Restated Bylaws of the Registrant--incorporated by
reference to Exhibit 2.4 to the Registrant's Current Report on
Form 8-K filed on August 15, 2002
11* Statement Regarding Computation of Earnings Per Share
31* Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32* Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
*Filed herewith.
17