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 March 31, 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 10,091,465 shares of Common Stock, no par value, outstanding
as of April 25, 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 15
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 16
CERTIFICATION 17
EXHIBIT INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
-----------------------------
2002 2003
------------ ------------
REVENUES $ 228,620 $ 123,908
COST OF GOODS SOLD 80,446 62,207
------------ ------------
GROSS PROFIT 148,174 61,701
------------ ------------
OPERATING EXPENSES
Selling, general and administrative 310,157 322,168
Research and development 180,643 137,206
Legal fees 160,965 33,332
------------ ------------
651,765 492,706
------------ ------------
LOSS FROM OPERATIONS (503,591) (431,005)
OTHER INCOME (EXPENSE)
Other income 2,325 2
Interest expense -- (13,567)
------------ ------------
LOSS BEFORE INCOME TAXES (BENEFIT) (501,266) (444,570)
INCOME TAXES (BENEFIT) (150,700) 2,540
------------ ------------
NET LOSS $ (350,566) $ (447,110)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 7,061,196 10,022,973
See notes to condensed consolidated financial statements.
3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2003
----------- -----------
(audited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,037 $ 209,431
Accounts receivable, less allowance of $40,000 168,008 137,339
Income taxes receivable 235,900 --
Inventory, less allowance of $32,000 and $28,000 827,857 856,648
Prepaid expenses 25,152 51,801
----------- -----------
TOTAL CURRENT ASSETS 1,287,954 1,255,219
PROPERTY AND EQUIPMENT, net 52,159 49,216
PATENT RIGHTS, net 344,776 329,338
OTHER 16,939 15,800
----------- -----------
$ 1,701,828 $ 1,649,573
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Bank line of credit $ 570,000 $ 791,000
Notes payable to related parties 274,886 271,168
Accounts payable 647,521 653,670
Accrued expenses 119,885 153,332
----------- -----------
TOTAL CURRENT LIABILITIES 1,612,292 1,869,170
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
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 10,056,465 shares issued and outstanding 3,064,941 3,202,918
Accumulated deficit (2,975,405) (3,422,515)
----------- -----------
89,536 (219,597)
----------- -----------
$ 1,701,828 $ 1,649,573
=========== ===========
See notes to condensed consolidated financial statements.
4
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
-----------------------
2002 2003
--------- ---------
OPERATING ACTIVITIES
Net loss $(350,566) $(447,110)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 4,963 5,003
Amortization of patent rights -- 15,438
Deferred taxes (150,700) --
Deferred stock option compensation 54,311 --
Changes in operating assets and liabilities:
Accounts receivable 79,078 30,669
Income taxes receivable 1,771 235,900
Inventory (27,588) (28,791)
Prepaid expenses and other (35,022) (25,510)
Accounts payable 109,095 6,149
Accrued expenses 3,922 33,447
--------- ---------
Net cash used by operating activities (310,736) (174,805)
--------- ---------
INVESTING ACTIVITY
Purchases of property and equipment (2,261) (2,060)
--------- ---------
FINANCING ACTIVITIES
Net proceeds on bank line of credit -- 221,000
Payments on related party debt -- (3,718)
Proceed from the exercise of warrants -- 477
Proceeds from sale of common stock -- 137,500
--------- ---------
Net cash provided by financing activities -- 355,259
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (312,997) 178,394
CASH AND CASH EQUIVALENTS
Beginning of period 366,750 31,037
--------- ---------
End of period $ 53,753 $ 209,431
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ -- $ 13,567
Income taxes 1,212 2,540
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
period ended March 31, 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 10KSB filed on
April 15, 2003.
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
6
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).
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 estimate 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.
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.
7
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 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 year and the change during the year 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 Loss Per Share
Net loss per share - basic is determined by dividing the net loss by the
weighted-average common shares outstanding. Net loss per share - diluted
normally includes common stock equivalents (options and warrants), but were
excluded since their effect was antidulitive. For this reason, options and
warrants of 606,750 and 2,301,867 shares were excluded from the calculation
of diluted outstanding shares for the three months ended March 31, 2002 and
2003, respectively.
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.
8
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 number of shares the Company can 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 $9,500 for the three months ended March 31, 2002.
Pro forma information is not presented for prior periods 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 Belgian corporation has filed
counterclaims alleging unfair competition. Discovery has been completed in
the case and a so-called Markman hearing was held in November 2001. Based on
the Markman hearing, the court will determine the scope of the patent claims
at issue. The parties filed motions for summary judgment in May 2002. No
trial date has been set. At this point, the
9
Company will vigorously defend the counterclaim and believes that any
unfavorable decision will not have a material or adverse effect on the
consolidated financial statements. The Company expects to incur significant
additional expenses in 2003 to pursue this lawsuit.
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 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 March 31,
2003 and December 31, 2002, the $402,984 is included in accounts payable in
the condensed consolidated balance sheets.
4. Financing Arrangements/Subsequent Events
In April 2003, the bank line of credit was renewed through March 31, 2004.
The line was increased by $200,000 to $1,100,000 with an interest rate at
prime and the Company provided the bank with a security interest in its
general business assets. The line is guaranteed by individuals who received
for their financial support (a) five-year warrants to purchase 275,000
shares of the Company's common stock at $2.75 per share and (b) thirty-day
warrants to purchase an additional 275,000 shares of the Company's common
stock at $2.00 per share. Provided the guarantor pays cash for at least one
half of the shares subject to their thirty-day warrant, the guarantor may
provide a promissory note payable one year from the exercise day for the
remainder of the shares. Prior to May 15, 2003, the expiration date of the
thirty-day warrants, all such warrants were exercised in exchange for
aggregate cash payments of $300,000 and one-year promissory notes totaling
$250,000. In connection with the exercise of their thirty-day warrants, the
guarantors were granted two-year warrants to purchase an additional 550,000
shares of the Company's common stock at $2.00 per share. The Company intends
to further extend the credit line by providing additional individual
guarantees to its bank. Any such guarantor would receive the same or similar
warrant coverage as the current guarantors.
Between January 1, 2003 and April 14, 2003, the Company sold 65,000 shares
of common stock at $2.50, for an aggregate amount of $162,500, under a
private placement offering. Warrants to purchase an additional 16,250 shares
of common stock at $3.00 per share were issued in connection with these
sales. The warrants expire three years after issuance.
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.
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.
10
We caution you not to put undue reliance on any forward-looking statements
included in this document.
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, combined with
additional expenses relating to the merger of the Company with Scanner
Technologies Corporation, a Minnesota Corporation ("Scanner Minnesota") 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 offering and extend and increase 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 bank
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 bank 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 and allowances;
o Inventories;
o Patent rights;
o Accounting for income taxes;
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
11
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 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-downs,
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002
Sales for the three months ended March 31, 2003, were $123,908 compared to
$228,620 for the three months ended March 31, 2002. The decrease in sales is
due to the continued slowness in the semiconductor industry resulting in
reduced spending by semiconductor manufactures for capital equipment such as
that offered by the Company.
Cost of goods sold decreased by $18,239 to $62,207 in the three months ended
March 31, 2003, from $80,446 in 2002. Cost of goods sold as a percentage of
sales increased by 15.0% to 50.2% in 2003 compared to 35.2% in 2002. The
increase in the cost of goods percentage resulted from the decrease in sales
while manufacturing expenses were approximately the same in both periods.
12
Selling, general and administrative expenses increased by $12,011 to
$322,168 for the three months ended March 31, 2003, compared to $310,157 in
the prior period. Increases in salaries, professional costs and patent
rights amortization were partially offset by decreases in amortization of
deferred stock option compensation and license fees.
Research and development expenses were $137,206 in the three months ended
March 31, 2003 compared to $180,643 for the three months ended March 31,
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 being
completed in 2003 and the first unit was sold in April 2003.
Legal fees decreased by $127,633 to $33,332 in the three months ended March
31, 2003, from $160,965 in 2002. Legal fees related to the patent
infringement claim brought by the Company against a competitor were less in
2003 than 2002.
Other income (expense) was ($13,565) in the three months ended March 31,
2003, compared to $2,325 in 2002. The change is primarily due to reduced
cash investments and increased debt.
The Company recognized no income tax benefit to offset the loss before
income taxes in the three months ended March 31, 2003, as no tax benefit is
available to the Company. The $2,540 of taxes provided in the three months
ended March 31, 2003 represented minimum state tax payments. A benefit of
$150,700 was recognized in the three months ended March 31, 2002.
The net loss for the three months ended March 31, 2003 was $447,110, or $.04
per share, compared to a net loss of $350,566, or $.05 per share, in 2002.
The increase in the net loss was the result of a decrease in gross margin of
$86,473, increased net nonoperating expenses of $15,890 and increased income
taxes of $153,240 offset by a decrease in operating expenses of $159,059.
LIQUIDITY AND CAPITAL RESOURCES (FOR THE THREE MONTHS ENDED MARCH 31, 2003)
The Company is attempting to raise additional capital by offering to sell
up to 600,000 shares of its Common Stock at $2.50 per share through an
offering conducted in reliance on an exemption from registration under the
Securities Act of 1933, as amended (the "Offering"). Each investor will
receive for each four shares purchased one three-year warrant to purchase
one share of Common Stock at an exercise price of $3. As of April 14, 2003,
the Company had received proceeds of $162,500 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 March 2002, the Company obtained a line of credit from a bank. The line
had a maximum lending limit of $900,000, an interest rate based on the prime
interest rate, and a term of one year, renewable at the discretion of the
bank. At March 31, 2003, $791,000 was outstanding under this line of credit.
The line was guaranteed by certain shareholders of the Company who pledged
collateral to secure their guarantees. In April 2003, the line of credit was
renewed through March 31, 2004 and the Company provided the bank with a
security interest in its general business assets. The line was increased
from $900,000 to $1,100,000, with an interest rate at prime. The new line is
guaranteed by certain individuals who have pledged collateral to secure
their guarantees. In exchange for these guarantees, the individuals received
five-year warrants to purchase an aggregate of 275,000 shares of the
Company's common stock at an exercise price of $2.75 per share and 30-day
warrants to purchase an aggregate of 275,000 shares of the Company's common
stock at an exercise price of $2.00 per share.
13
The guarantors have exercised the 30-day warrants to purchase a total of
275,000 shares of the Company's common stock by paying $300,000 in cash and
$250,000 in one-year notes. The Company intends to further extend the credit
line by providing additional individual guarantees to its bank. Any such
guarantor would receive the same or similar warrant coverage as the current
guarantors.
The Company believes that the line of credit of up to $1,100,000, 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 three months ended March 31,
2003 totaled $174,805. Negative operating cashflows resulted primarily from
net operating loss for the period that was partially offset by non-cash
adjustments relating to depreciation and amortization and by changes in
operating assets and liabilities.
Net cash used by investing activities for the three months ended March 31,
2003 totaled $2,060. The funds were used to purchase property and equipment.
Net cash provided by financing activities for the three months ended March
31, 2003 totaled $355,259. Positive financing cashflows related to the
proceeds from borrowings under the bank line of credit and from the sale of
common stock offset by payments on debt.
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, 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-14. 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 significant changes in the Company's internal
controls, or in other factors that could significantly affect these controls
subsequent to the date of his evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Issuance of Common Stock and Warrants
In the three months ended March 31, 2003, the Company sold 55,000 shares of
its common stock at $2.50 per share to seven individuals through a private
placement offering. The shares were issued as follows: 25,000 in January
2003; 15,000 in February 2003; and 15,000 in March 2003.
The individuals purchasing the above common stock were issued warrants to
purchase one share of common stock at $3.00 per share for each four shares
purchased. Warrants to purchase 13,750 common shares at $3.00 per share were
issued in the three months ended March 31, 2003.
In addition, the Company issued 477 shares of common stock in January 2003
upon the exercise of warrants at $1.00 per share.
14
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.
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 on Form 8-K
Exhibits:
See Exhibit Index on page following Certification Under Section 302 of
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
None.
15
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: May 7, 2003 By: /s/ Elwin M Beaty
-----------------
Elwin M. Beaty
Its Chief Executive Officer
and Chief Financial Officer
16
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Elwin M. Beaty, the Chief Executive Officer and Chief Financial Officer
of Scanner Technologies Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Scanner
Technologies Corporation;
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. I am responsible for the establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and 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 me 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 my conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. 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 functions):
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. 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.
By: /s/Elwin M. Beaty
-----------------
Dated: May 7, 2003 Elwin M. Beaty
Chief Executive Officer and
Chief Financial Officer
17
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 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
99* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
*Filed herewith.
18