UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
Commission File Number: 000-08149
SCANNER TECHNOLOGIES CORPORATION
--------------------------------
(Exact name of small business issuer as specified 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)
Check whether the Issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [x] No [_]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [x]
The Issuer had 12,216,068 shares of Common Stock, no par value,
outstanding as of April 30, 2006.
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 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
SIGNATURE 15
EXHIBIT INDEX 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
------------------------------
2006 2005
------------ --------------
REVENUES $ 865,975 $ 504,219
COST OF GOODS SOLD 367,707 235,630
------------ --------------
GROSS PROFIT 498,268 268,589
------------ --------------
OPERATING EXPENSES
Selling, general and administrative 568,760 639,752
Research and development 8,659 46,090
Legal fees 15,379 490,390
------------ --------------
592,798 1,176,232
------------ --------------
LOSS FROM OPERATIONS (94,530) (907,643)
OTHER INCOME (EXPENSE)
Interest expense (20,450) (6,663)
Miscellaneous (1,570) 2,086
------------ --------------
LOSS BEFORE INCOME TAXES (116,550) (912,220)
INCOME TAXES 2,000 1,200
------------ --------------
NET LOSS $ (118,550) $ (913,420)
============ ==============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.08)
============= ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 12,216,068 12,028,735
See notes to condensed consolidated financial statements.
3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
----------- ------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 553,126 $ 1,168,532
Accounts receivable, less allowance of $18,000 571,571 331,085
Inventories 1,410,858 1,620,027
Prepaid expenses 28,212 29,174
----------- -----------
TOTAL CURRENT ASSETS 2,563,767 3,148,818
PROPERTY AND EQUIPMENT, net 26,553 29,763
PATENT RIGHTS, net 144,085 159,523
OTHER 34,437 7,199
----------- -----------
$ 2,768,842 $ 3,345,303
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ - $ 490,000
Accounts payable 56,987 107,643
Accrued expenses 88,856 45,177
----------- -----------
TOTAL CURRENT LIABILITIES 145,843 642,820
----------- -----------
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;
12,216,068 shares issued and outstanding 6,434,551 6,434,551
Warrants 724,528 724,528
Stock options 50,858 29,103
Deferred financing costs, net (34,623) (51,934)
Note receivable for common stock (153,900) (153,900)
Accumulated deficit (4,398,415) (4,279,865)
----------- -----------
2,622,999 2,702,483
----------- -----------
$ 2,768,842 $ 3,345,303
=========== ===========
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,
-----------------------------
2006 2005
------------ ------------
OPERATING ACTIVITIES
Net loss $ (118,550) $ (913,420)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation 4,162 5,229
Amortization of patent rights 15,438 15,438
Stock option compensation expense 21,755 33,000
Amortization of deferred financing costs 17,311 -
Changes in operating assets and liabilities:
Accounts receivable (240,486) 365,994
Inventories 209,169 (30,536)
Prepaid expenses and other (26,276) 19,487
Accounts payable (50,656) 244,419
Accrued expenses 43,679 (30,782)
------------ ------------
Net cash used by operating activities (124,454) (291,171)
------------ ------------
INVESTING ACTIVITY
Purchases of property and equipment (952) (5,638)
------------ ------------
FINANCING ACTIVITIES
Payments on bank line of credit (490,000) -
Proceeds from the exercise of stock options - 79,500
------------ ------------
Net cash provided (used) by financing activities (490,000) 79,500
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (615,406) (217,309)
CASH AND CASH EQUIVALENTS
Beginning of period 1,168,532 1,455,423
------------ ------------
End of period $ 553,126 $ 1,238,114
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 3,139 $ 6,663
Income taxes 2,000 1,200
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 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, 2006 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes for the year ended
December 31, 2005 included in our Annual Report on Form 10-KSB.
Nature of Business
The Company invents, develops and markets vision inspection products that
are used in the semiconductor industry for the inspection of integrated
circuits. The Company's customer base is small in numbers and 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 vision inspection products
to distributors and to third party customers. For sales to distributors,
revenue is recognized upon shipment as the distributors have 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. 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.
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.
Cash Equivalents
All highly liquid investments purchased with an original maturity of
three months or less are considered 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 balances,
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.
6
Fair Value of Financial Instruments
The carrying amounts of financial instruments consisting of cash and cash
equivalents, accounts receivable, bank line of credit, accounts payable
and accrued expenses approximate their fair values.
Inventories
Inventories are 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 estimated excess and obsolete inventories equal to the
difference between the cost of inventories 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 using the straight-line method over the
shorter of the useful life or 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.
Long-Lived Assets
All long-lived assets are reviewed for impairment when events or changes
in circumstances indicate that the carrying amounts of such assets may
not be recoverable. This evaluation is performed at least annually. An
impairment loss is recognized when estimated undiscounted cash flows to
be generated by those assets are less than the carrying value of the
assets. When an impairment loss is recognized, the carrying amount is
reduced to its estimated fair value, based on appraisals or other
reasonable methods to estimate value.
Product Warranty
An accrual is provided for estimated incurred but unidentified product
warranty issues based on historical activity. The warranty accrual and
related expenses were not significant.
Accounting for Stock-Based Compensation
The Company has a stock-based employee compensation plan consisting of
stock options and warrants. Prior to January 1, 2006, the Company
accounted for its stock-based employee compensation plan in accordance
with the provisions of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," whereby the difference
between the exercise price and the fair value on the date of grant was
recognized as compensation expense. Under the intrinsic value method of
accounting, no compensation expense was recognized in the Company's
Consolidated Statement of Operations when the exercise price of the
Company's employee/director stock option and warrant grants equaled or
exceeded the market price of the underlying common stock on the date of
grant, and the measurement date of the option or warrant grant was
certain. The measurement date was certain when the date of grant was
fixed and determinable. Compensation cost for employee/director stock
options and warrants was measured as the excess, if any, of the quoted
market price of the Company's stock at the date of grant over the amount
that the employee/director was required to pay for the stock.
Compensation expense of $33,000 was recognized in the three months ended
March 31, 2005 as the vesting date on certain stock options granted in
2004 was accelerated in 2005 and the market price of the Company's stock
at that time exceeded the exercise price of the stock options. Options
and warrants issued to non-employee/non-directors were accounted for as
required by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." In addition, the pro forma
disclosures required by SFAS No. 123 for companies accounting for
stock-based compensation plans in accordance with APB No. 25 have been
included in the consolidated financial statements in prior periods.
7
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R, "Share-Based Payment - an amendment of
Financial Accounting Standards Board Statement No. 123," using the
modified prospective application method and the interpretations in SEC
Staff Accounting Bulletin No. 107, "Share-Based Payment". Among other
items, SFAS No. 123R eliminates the use of APB No. 25 and the intrinsic
value method of accounting for stock-based compensation, and requires
companies to recognize the cost of employee/director services received in
exchange for awards of equity instruments, based on the grant date fair
value of those awards, in the financial statements.
Under the modified prospective application method, awards that are
granted or modified after the date of adoption of SFAS 123R are measured
and accounted for in accordance with SFAS No. 123R. Compensation cost
for awards granted prior to, but not vested, as of the date SFAS No.
123R is adopted are based on the grant date attributes similar to those
originally used to value those awards for the pro forma purposes under
SFAS No.123. The unaudited Condensed Consolidated Statement of Operations
for the three months ended March 31, 2006, reflects share-based
compensation expense of $21,755 ($0.00 per basic and diluted share). At
March 31, 2006, unamortized share-based compensation expense related to
options currently outstanding of approximately $80,000 will be expensed
over the next seven quarters.
Results for the three months ended March 31, 2005 have not been restated.
If the Company recognized warrant and stock option compensation based on
fair value at date of grant, consistent with the methods prescribed in
SFAS No. 123, the net loss and per share data for the three months ended
March 31, 2005 would change to the pro forma amounts below:
Net loss:
As reported $(913,420)
Warrant and stock option amortization cost (12,454)
---------
Pro forma $(925,874)
=========
Net loss per share--basic and diluted:
As reported $(.08)
=====
Pro forma $(.08)
=====
The fair value of options and warrants granted in 2005 was estimated at
grant date using the Black-Scholes-Merton option pricing model with the
following weighted average assumptions:
Risk-free interest rate 4.17%
Dividend yield 0%
Volatility factor of expected market
price of common stock 176%
Weighted average expected life 3.0 years
Income Taxes
The Company is taxed as a domestic U.S. corporation under the Internal
Revenue Code. 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.
Credit Risk
The Company maintains cash and cash equivalents in bank accounts which
may exceed federally insured limits. The Company has not experienced any
losses on such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Significant concentrations of credit risk exist in accounts receivable,
which are due from customers located primarily in the Far East and the
United States.
8
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the
weighted-average common shares outstanding for the reported period.
Diluted net 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. All warrants and options were
antidulitive in the three months ended March 31, 2006 and 2005,
respectively.
Options and warrants to purchase 6,499,432 and 5,479,099 shares of common
stock with a weighted average exercise price of $1.59 and $1.91 were
excluded from the diluted computation for the three months ended March
31, 2006 and 2005, respectively, because they were antidulitive.
2. 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
of $1,254,575 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 will 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.
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 him 20% of the remaining
proceeds, if any, Scanner receives out of the current ongoing litigation,
and 25% of the remaining proceeds, if any, that Scanner may receive out
of any future litigation 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 ICOS Vision Systems
Corp. N.V., a Belgian corporation ("ICOS") for infringement of two of its
patents. The patents relate to three-dimensional ball array inspection
apparatus and methods. In June 2003, the Company reached a settlement
with ICOS concerning one-illumination source inspection systems. In 2003,
pursuant to the settlement agreement, ICOS made a one-time payment of
$400,000 to the Company, in 2003 to settle all issues with regard to
these one-light source inspection systems. The U.S. District Court for
the Southern District of New York found no infringement with regard to
the two-illumination source devices that ICOS sold. The Company agreed to
the settlement agreement with respect to one-light source devices in
order to allow it 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.
On April 23, 2004, the United States Court of Appeals ruled in the
Company's favor with regard to the two-illumination source devices,
finding that the claim terms "an illumination apparatus" and
"illuminating" in the Company's patents encompass one or more
illumination sources and overturned the District Court's entry of summary
judgment of no infringement. A trial, to be decided by the judge, was
held in March 2005 in the District Court regarding the Company's ongoing
litigation with ICOS. Scanner's prayer for relief includes requests for
damages in the form of lost profits, a trebling of damages pursuant to 35
USC 284, and attorneys' fees and costs. In its answer to the complaint,
ICOS included counterclaims alleging various forms of unfair competition
as well as seeking a declaration that the patents are invalid and not
infringed. In addition, ICOS is requesting attorneys' fees and costs. The
judge has not issued a decision on the case as of April 30, 2006. The
Company intends to continue to vigorously enforce its patent rights and
expects to incur significant additional expenses to pursue its claims.
The Company believes that any unfavorable decision will not have a
material adverse effect on its consolidated financial statements. Some of
the proceeds received or to be received by Scanner in connection with the
foregoing lawsuit or subsequent litigation with respect to patent
litigation will be distributed to it's President and Senior Vice
President in accordance with agreements noted previously.
9
In July 2005, ICOS Vision Systems Corp. N.V. and ICOS Vision Systems,
Inc. (collectively, "ICOS") filed a lawsuit against the Company in the
U.S. District Court for the Southern District of New York. ICOS is
seeking a declaratory judgment with respect to certain patents held by
Scanner finding that ICOS does not infringe such patents and that such
patents are invalid. ICOS is also seeking a declaratory judgment finding
that U.S. companies that purchase electronic components such as Ball Grid
Array devices inspected on ICOS systems in foreign countries are not
liable as infringers of such patents and injunctive relief enjoining
Scanner from threatening such purchasers with claims of infringement.
ICOS is seeking damages of unspecified amounts, as well as costs,
expenses and attorney's fees. The Company believes that this lawsuit is
without merit and intends to vigorously defend itself and the Company's
intellectual property rights.
In July 2005, American Arium ("Arium"), a Delaware corporation with a
principal office located in Tustin, California, filed a lawsuit against
the Company in the U.S. District Court for the Central District of
California. Arium is seeking a declaratory judgment with respect to
certain patents held by Scanner finding that Arium does not infringe such
patents and that such patents are invalid. Arium is also seeking
injunctive relief enjoining Scanner from threatening Arium and it
customers with claims of infringement. Arium is seeking its costs,
expenses and attorney's fees. The Company believes that this lawsuit is
without merit and intends to vigorously defend itself and the Company's
intellectual property rights.
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
("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 (Scanner) 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.
GENERAL
The Company generates revenues from the sale of machine-vision inspection
products used in the semiconductor industry for the inspection of
integrated circuits. The products include machine-vision modules sold to
original equipment manufacturers that use the modules as a component of
inspection systems they sell to end users, as well as complete
machine-vision inspection systems that the Company sells to end users.
Because the Company sells relatively few of its devices each year, the
Company's business is characterized by uneven quarterly results that are
dependent on the timing of sales and revenue recognition.
During recent years, the Company's operations were adversely affected by
a lack of demand in the semiconductor marketplace, which caused many of
the Company's potential customers to cease or defer purchases of capital
equipment such as the inspection equipment offered by the Company.
According to information provided by Semiconductor Equipment and
Materials International ("SEMI"), a trade association of semiconductor
equipment and material manufacturers, sales of semiconductor equipment
for 2005 were expected to total $32.95 billion, a decline of
approximately 11.2% from sales levels in 2004. SEMI expects the market
for semiconductor equipment to recover in 2006 and to increase by
double-digits in 2007 and 2008, to reach approximately $46.63 billion in
2008. The Company believes that operations in 2006 and 2005 were
adversely affected by a lack of demand in the semiconductor marketplace.
The Company will continue to be subject to the cyclical nature of the
semiconductor marketplace.
10
In addition to general trends in the semiconductor marketplace, the
Company must compete for sales with other providers of machine-vision
inspection equipment, most of whom are larger, better financed and offer
a broader selection of products. The Company must compete on the basis of
price, product performance including speed and size of defects detected,
ease of use and technological advancement. The Company must continue
research and development to improve existing products and introduce new
products in order to compete effectively with other providers of
inspection equipment.
The Company is reviewing the possibility of licensing its technologies to
third parties to provide additional revenues. There is, however, no
assurance that the Company will be successful in obtaining licenses on
financially advantageous terms, and the Company may need to initiate
lawsuits, and incur legal fees and other costs, to force potential
licensees to acknowledge our proprietary rights and enter into
appropriate licenses.
During the three months ended March 31, 2006, the Company's working
capital position decreased primarily due to the net effect of the
operating loss. The Company believes that its working capital at March
31, 2006 is adequate for at least the next twelve months of operations
and does not currently anticipate a need for additional financing.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of financial condition and results of
operations is based upon the condensed 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 inventories, 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 condensed consolidated financial statements.
o Revenue recognition;
o Allowances for doubtful accounts and excess and obsolete
inventories;
o Patent rights;
o Accounting for income taxes;
o Accounting and valuation of options and warrants;
Revenue is earned primarily through sales of vision inspection products
to distributors and to third party customers. For sales to distributors,
revenue is recognized upon shipment as the distributors have 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. 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.
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 balances,
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.
11
Inventories are 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 estimated excess and obsolete inventories equal to the
difference between the cost of inventories and the estimated fair value
based on assumptions about future demand and market conditions.
Patent rights are stated at cost less accumulated amortization.
Amortization is provided using the straight-line method over six years.
Patent rights are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of such assets may not
be recoverable. This evaluation is performed at least annually. An
impairment loss is recognized when estimated cash flows to be generated
by those assets are less than the carrying value of the assets. When
impairment loss is recognized, the carrying amount is reduced to its
estimated fair value, based on appraisals or other reasonable methods to
estimate value.
The Company is taxed as a domestic U.S. corporation under the Internal
Revenue Code. 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.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards (SFAS) No.
123R, "Share-Based Payment - an amendment of Financial Accounting
Standards Board Statement No. 123," using the modified, prospective
application method. Among other items, SFAS No. 123R eliminated the use
of the intrinsic value method of accounting for stock-based compensation,
which was previously used by the Company, and requires companies to
recognize the cost of employee/director services received in exchange for
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. See Note 1 to the unaudited
condensed consolidated financial statements for additional information.
The Company estimates the fair value of warrants at the grant date using
the Black-Scholes-Merton 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2005
Sales for the three months ended March 31, 2006, were $865,975 compared
to $504,219 for the three months ended March 31, 2005. The sales increase
in 2006 relates primarily to increased sales of the Company's VisionFlex
robotic inspection systems.
Cost of goods sold increased by $132,077 to $367,707 in the three months
ended March 31, 2006, from $235,630 in 2005. Cost of goods sold as a
percentage of sales decreased by 4.2% to 42.5% in 2006 compared to 46.7%
in 2005. In 2006, material cost increased 12.1% as a percent of sales
because of lower margins on the sales of the Company's VisionFlex robotic
inspection systems. This increase was offset by a decrease in
manufacturing costs as a percent of sales primarily because of the large
increase in sales, which caused fixed manufacturing costs to be spread
over a larger base.
Selling, general and administrative expenses decreased by $70,992 to
$568,760 for the three months ended March 31, 2006, compared to $639,752
in the same quarter of 2005. The decrease in expenses related primarily
to decreases in marketing related expenses of approximately $84,000
consisting primarily of trade show and travel expenses and to reduced
stock option compensation expense of approximately $11,000 offset by
increases in salaries and related expenses of approximately $38,000
related primarily to personnel whose salaries were included in research
and development expenses in prior periods and by an increase in
commission expense of approximately $16,000. The Company closed its
Singapore office during the first quarter of 2006. The impact on
operations during the quarter was not significant.
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Research and development expenses were $8,659 in the three months ended
March 31, 2006 compared to $46,090 for the three months ended March 31,
2005. The research and development activities related to the Company's
development and improvement of its own line of robotic inspection
systems. The decrease in expenses was related primarily to reduced
personnel costs. As noted above, certain salaries and related costs that
were previously included in research and development expenses are now
included in selling, general and administrative expenses as the
responsibilities of certain employees were changed.
Legal fees decreased by $475,011 to $15,379 in the three months ended
March 31, 2006, from $490,390 in the same quarter of 2005. A significant
portion of the legal fees in 2005 related to the patent infringement
claims brought by the Company against a competitor, which claims went to
trial in March 2005.
Other expense was $22,020 in the three months ended March 31, 2006,
compared to $4,577 in the same quarter of 2005. Interest expense was
$13,787 higher in the first quarter of 2006 than it was in the first
quarter of 2005. Interest expense increased primarily due to amortization
of the warrant costs related to the line of credit.
The Company recognized no income tax benefit to offset the loss before
income taxes in the three months ended March 31, 2006 and 2005,
respectively, as no tax benefit was available to the Company. The taxes
provided in both periods represented minimum state taxes.
The net loss for the three months ended March 31, 2006 was $118,550, or
$.01 per share, compared to a net loss of $913,420, or $.08 per share in
the same quarter of 2005. The change was primarily the result of
increased gross profit of $229,679 and decreased operating expenses of
$583,434 being partially offset by increased nonoperating expenses of
$17,443.
LIQUIDITY AND CAPITAL RESOURCES (FOR THE THREE MONTHS ENDED
MARCH 31, 2006)
The Company has a $500,000 bank line of credit with an interest rate at
prime (7.75% at March 31, 2006) through October 1, 2006. The Company
provided the bank with a security interest in its general business assets
and the line is guaranteed by four individual stockholders. The Company
had no outstanding indebtedness under the line at March 31, 2006.
The Company believes that its existing working capital will be adequate
to satisfy projected operating and capital requirements for the next 12
months.
Net cash used by operating activities for the three months ended March
31, 2006 totaled $124,454. Negative operating cashflows resulted
primarily from the net loss of $118,550 for the period being offset by
net non-cash adjustments of $58,666 relating to stock option compensation
expense and depreciation and amortization and increased by net changes in
operating assets and liabilities of $64,570 relating primarily to an
increase in receivables being partially offset by a decrease in
inventories.
Net cash used by investing activities for the three months ended March
31, 2006 totaled $952. The funds were used to purchase property and
equipment.
Net cash used by financing activities for the three months ended March
31, 2006 totaled $490,000. The amount relates to payments made on the
bank line of credit.
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 participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, regarding the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Rules 13a-15(b) of the Exchange Act. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective to ensure that
information that is required to be disclosed by the Company in reports
that it files under the Exchange Act is recorded, processed, summarized
and reported within the time period specified in the rules of the
Securities Exchange Commission. There were no changes in the Company's
internal control 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.
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The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, does not expect that the disclosure controls
and procedures will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. The
design of any system of controls also is based in part upon assurance
that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Due to the lack of sufficient accounting personnel, there was an
ineffective segregation of duties in the preparation of the financial
statements to prevent or detect errors. This control deficiency could
result in material misstatements to annual or interim financial
statements that would not be prevented or detected if left unremediated.
Accordingly, management determined that this control deficiency
constitutes a material weakness. Because of this material weakness,
management believes that, as of March 31, 2006, we did not maintain
effective internal control over financial reporting based on the criteria
proposed by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index on page following signature page.
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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
Dated: May 5, 2006 By: /s/ Elwin M. Beaty
------------------------------------------
Elwin M. Beaty
Chief Executive Officer and
Chief Financial Officer
(Principal executive officer and principal
financial and accounting officer)
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EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 2006
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
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.
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