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 September 30, 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
incorporation or organization) Identification No.)
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 October 31, 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 15
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURE 17
EXHIBIT INDEX 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
REVENUES $ 572,784 $ 355,280 $ 2,144,521 $ 1,310,618
COST OF GOODS SOLD 326,866 125,542 957,708 591,808
-------------- -------------- -------------- --------------
GROSS PROFIT 245,918 229,738 1,186,813 718,810
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Selling, general and administrative 406,653 385,802 1,439,946 1,479,258
Research and development 12,294 31,670 29,551 109,430
Legal fees 33,597 3,366 87,064 633,178
-------------- -------------- -------------- --------------
452,544 420,838 1,556,561 2,221,866
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS (206,626) (191,100) (369,748) (1,503,056)
OTHER INCOME (EXPENSE)
Interest expense (17,312) (19,857) (55,517) (34,292)
Miscellaneous 6,221 2,116 5,884 6,289
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES (217,717) (208,841) (419,381) (1,531,059)
INCOME TAXES - - 2,800 1,900
-------------- -------------- -------------- --------------
NET LOSS $ (217,717) $ (208,841) $ (422,181) $ (1,532,959)
============== ============== ============== ==============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.02) $ (0.02) $ (0.03) $ (0.13)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 12,216,068 12,216,068 12,216,068 12,127,207
See notes to condensed consolidated financial statements.
3
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2006 2005
------------------- --------------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 960,950 $ 1,168,532
Accounts receivable, less allowance of $18,000 285,098 331,085
Inventories, less allowances of $236,000 and $152,000 1,212,286 1,620,027
Prepaid expenses 28,462 29,174
----------------- ------------------
TOTAL CURRENT ASSETS 2,486,796 3,148,818
PROPERTY AND EQUIPMENT, net 18,222 29,763
PATENT RIGHTS, net 113,210 159,523
OTHER 7,199 7,199
----------------- ------------------
$ 2,625,427 $ 3,345,303
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank line of credit $ - $ 490,000
Accounts payable 130,773 107,643
Accrued expenses 99,566 45,177
----------------- ------------------
TOTAL CURRENT LIABILITIES 230,339 642,820
----------------- ------------------
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 6,436,116 6,434,551
Warrants 728,697 724,528
Stock options 86,221 29,103
Deferred financing costs, net - (51,934)
Note receivable for common stock (153,900) (153,900)
Accumulated deficit (4,702,046) (4,279,865)
----------------- ------------------
2,395,088 2,702,483
----------------- ------------------
$ 2,625,427 $ 3,345,303
================= ==================
See notes to condensed consolidated financial statements.
4
SCANNER TECHNOLOGIES CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30,
-----------------------------------------
2006 2005
------------------- --------------------
OPERATING ACTIVITIES
Net loss $ (422,181) $ (1,532,959)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation 11,782 15,738
Amortization of patent rights 46,313 46,313
Stock option and warrant compensation expense 62,852 62,103
Amortization of deferred financing costs 51,934 11,541
Changes in operating assets and liabilities:
Accounts receivable 45,987 1,363,034
Inventories 407,741 182,330
Prepaid expenses and other 712 29,531
Accounts payable 23,130 (349,537)
Accrued expenses 54,389 (49,149)
----------------- ------------------
Net cash provided (used) by operating activities 282,659 (221,055)
----------------- ------------------
INVESTING ACTIVITY
Purchases of property and equipment (241) (7,607)
----------------- ------------------
FINANCING ACTIVITIES
Payments on bank line of credit (490,000) -
Proceeds from the exercise of stock options and warrants - 398,500
----------------- ------------------
Net cash provided (used) by financing activities (490,000) 398,500
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (207,582) 169,838
CASH AND CASH EQUIVALENTS
Beginning of period 1,168,532 1,455,423
----------------- ------------------
End of period $ 960,950 $ 1,625,261
================= ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 3,583 $ 17,251
Income taxes 2,800 1,900
Noncash financing activities:
Warrants exercised and expired 1,565 219,424
Stock options exercised - 33,000
Warrants issued in connection with line of credit
for deferred financing costs - 80,878
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 and nine
month periods ended September 30, 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 may 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 inventory allowance and 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
6
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.
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. Stock-based employee compensation expense of $0 and $33,000 was
recognized in the three and nine month periods ended September 30, 2005,
respectively, as the vesting date on certain employee stock options granted
in 2004 was accelerated in the first quarter of 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."
7
Compensation expense for options granted to non-employee/non directors was
$29,103 in the three and nine month periods ended September 30, 2005. 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.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R, "Share-Based Payment (as amended)," 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 No. 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 was
adopted is 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
and nine months ended September 30, 2006, reflects share-based compensation
expense of $14,805 ($0.00 per basic and diluted share) and $62,852 ($0.01
per basic and diluted share), respectively. At September 30, 2006,
unamortized share-based compensation expense related to options currently
outstanding of approximately $42,500 will be expensed over the next four
quarters.
Results for the three and nine months ended September 30, 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 and nine months ended September 30, 2005 would change to the pro
forma amounts below:
Periods Ended September 30, 2005
--------------------------------
Three Months Nine Months
------------ -----------
Net loss:
As reported $(208,841) $(1,532,959)
Warrant and stock option amortization cost (286,683) (431,972)
------------ -----------
Pro forma $(495,524) $(1,964,931)
============ ===========
Net loss per share - basic and diluted:
As reported $(.02) $(.13)
Warrant and stock option amortization cost (.02) (.03)
------------ -----------
Pro forma $(.04) $(.16)
============ ===========
The fair value of options and warrants granted in 2006 and 2005 was
estimated at grant date using the Black-Scholes-Merton option pricing model
with the following weighted average assumptions:
2006 2005
---- ----
Risk-free interest rate 4.93% 4.17%
Dividend yield 0% 0%
Volatility factor of expected market price
of common stock 139% 176%
Weighted average expected life 2.5 years 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.
8
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.
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 and nine month periods ended September 30, 2006 and 2005.
Options and warrants to purchase 6,361,182 and 5,275,749 shares of common
stock with a weighted average exercise price of $1.59 and $1.86 were
excluded from the diluted computation for the three months ended September
30, 2006 and 2005, respectively, because they were antidulitive. Options
and warrants to purchase 6,416,068 and 5,327,982 shares of common stock
with a weighted average exercise price of $1.59 and $1.90 were excluded
from the diluted computation for the nine months ended September 30, 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. 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
9
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 October 31, 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 have been or will be distributed to its President and Senior
Vice President in accordance with agreements noted previously.
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.
In September 2006, the Company filed a lawsuit in the United States
District Court, Eastern District of Texas against nVidia Corporation
claiming willful and deliberate infringement of U.S. Patents numbered
7,079,678 and 7,085,411 which disclose methods of three-dimensional
inspection that allow ball grid array ("BGA") devices to be manufactured
more precisely and efficiently. The complaint alleges that nVidia has sold
and/or is presently selling throughout the United States infringing BGA
devices that are covered by one or more claims of the Company's Patents.
The complaint also alleges that nVidia has induced others to infringe.
These BGA devices are a component in graphics cards, motherboards,
computers, video game consoles, cell phones and handheld devices that are
sold in the United States. In addition to requesting preliminary and
permanent injunctions, the complaint asks the court to award the Company
all damages it is entitled to recover, including reasonable royalties on
infringing products, treble damages and attorneys' fees
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
10
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 value 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, nature and mix of sales.
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 totaled
$32.88 billion, a decline of approximately 11.3% 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.
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 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 nine months ended September 30, 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 September 30, 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.
11
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 deferred 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.
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.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2005
Sales for the three months ended September 30, 2006, were $572,784 compared
to $355,280 for the three months ended September 30, 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 $201,324 to $326,866 in the three months
ended September 30, 2006, from $125,542 in 2005. Cost of goods sold as a
percentage of sales increased by 21.8% to 57.1% in 2006 compared to 35.3%
in 2005. In 2006, material costs increased 25.1% as a percent of sales
because of a change in the sales mix. This increase was reduced 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 increased by $20,851 to
$406,653 for the three months ended September 30, 2006, compared to
$385,802 in the same quarter of 2005. The increase in expenses related
primarily to increases of salaries and related expenses of approximately
$72,000 related primarily to additional personnel and to personnel whose
salaries were included in research and development expenses in the prior
year, offset by a decrease in stock based compensation expense of
approximately $14,000 and by a decrease in expenses related to the
Singapore office which was closed during the first quarter of 2006 of
approximately $40,000.
Research and development expenses were $12,294 in the three months ended
September 30, 2006 compared to $31,670 for the three months ended September
30, 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 increased by $30,231 to $33,597 in the three months ended
September 30, 2006, from $3,366 in the same quarter of 2005. A significant
portion of the legal fees in both periods related to the patent
infringement claims brought by the Company against a competitor and others.
Other expense was $11,091 in the three months ended September 30, 2006,
compared to $17,741 in the same quarter of 2005. Interest expense was
approximately $3,000 lower in the third quarter of 2006 than it was in the
third quarter of 2005.
The Company recognized no income tax benefit to offset the loss before
income taxes in the three months ended September 30, 2006 and 2005, as no
tax benefit was available to the Company.
The net loss for the three months ended September 30, 2006 was $217,717, or
$.02 per share, compared to a net loss of $208,841, or $.02 per share in
the same quarter of 2005. The change was primarily the result of increased
operating expenses of $31,706 being partially offset by an increase in
gross profit of $16,180 and by a decrease in nonoperating expenses of
$6,650.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2005
Sales for the nine months ended September 30, 2006, were $2,144,521
compared to $1,310,618 for the nine months ended September 30, 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 $365,900 to $957,708 in the nine months
ended September 30, 2006, from $591,808 in 2005. Cost of goods sold as a
percentage of sales decreased by 0.5% to 44.7% in 2006 compared to 45.2% in
2005. In 2006, material costs increased 10.3% as a percent of sales because
of a change in the sales mix. 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.
13
Selling, general and administrative expenses decreased by $39,312 to
$1,439,946 for the nine months ended September 30, 2006, compared to
$1,479,258 in the same period of 2005. The decrease in expenses related
primarily to decreases in expenses related to the Singapore office which
was closed during the first quarter of 2006 of approximately $144,000, a
decrease in professional fees of approximately $65,000 and decreases in
marketing related expenses of approximately $74,000 consisting primarily of
trade show and travel expenses, offset by increases of salaries and related
expenses of approximately $235,000 related primarily to additional
personnel and to personnel whose salaries were included in research and
development expenses in the prior year, and by an increase in commission
expense of approximately $26,000.
Research and development expenses were $29,551 in the nine months ended
September 30, 2006 compared to $109,430 for the nine months ended September
30, 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 $546,114 to $87,064 in the nine months ended
September 30, 2006, from $633,178 in the same period 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 $49,633 in the nine months ended September 30, 2006,
compared to $28,003 in the same period of 2005. Interest expense was
approximately $21,000 higher in the first nine months of 2006 than it was
in the first nine months 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 nine months ended September 30, 2006 and 2005, as no
tax benefit was available to the Company. The taxes provided in both
periods represented minimum state taxes.
The net loss for the nine months ended September 30, 2006 was $422,181, or
$.03 per share, compared to a net loss of $1,532,959, or $.13 per share in
the same period of 2005. The change was primarily the result of increased
gross profit of $468,003 and decreased operating expenses of $665,305 being
partially offset by increased nonoperating expenses of $21,630.
LIQUIDITY AND CAPITAL RESOURCES (FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2006)
The Company has a $500,000 bank line of credit with an interest rate at
prime (8.25% at September 30, 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 stockholders. The Company had no
outstanding indebtedness under the line at September 30, 2006. The Company
is currently negotiating a new bank line of credit.
The Company believes that its existing working capital will be adequate to
satisfy projected operating and capital requirements for the next twelve
months.
Net cash provided by operating activities for the nine months ended
September 30, 2006 totaled $282,659. Positive operating cashflows resulted
primarily from the net loss of $422,181 for the period being more than
offset by net non-cash adjustments of $172,881 relating to stock option and
warrant compensation expense and depreciation and amortization and by net
changes in operating assets and liabilities of $531,959 relating primarily
to decreases in inventories and receivables and increases in accounts
payable and accrued expenses.
14
Net cash used by investing activities for the nine months ended September
30, 2006 totaled $241. The funds were used to purchase property and
equipment.
Net cash used by financing activities for the nine months ended September
30, 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, except as
set forth in the final paragraph of this Item 3, 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.
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 September 30, 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). Management
believes that the control deficiency discussed above presents only a small
and manageable risk of errors or misstatements in the financial statements
and that the cost of remediating this control deficiency exceeds the
benefits that would be obtained by such remediation. Management has
therefore elected not to hire the additional personnel that would be
required to remediate the control deficiency.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 18, 2006, the Company filed a lawsuit in the United States
District Court, Eastern District of Texas against nVidia Corporation,
claiming willful and deliberate infringement of U.S. Patents numbered
7,079,678 and 7,085,411 which disclose methods of three-dimensional
inspection that allow ball grid array ("BGA") devices to be manufactured
more precisely and efficiently. The complaint alleges that nVidia has sold
and/or is presently selling throughout the United States infringing BGA
devices that are covered by one or more claims of the Company's Patents.
The complaint also alleges that nVidia has induced others to infringe.
These BGA devices are a component in graphics cards, motherboards,
computers, video game consoles, cell phones and handheld devices that are
sold in the United States. In addition to requesting preliminary and
permanent injunctions, the complaint asks the court to award the Company
all damages it is entitled to recover, including reasonable royalties on
infringing products, treble damages and attorneys' fees.
15
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.
16
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: November 10, 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)
17
EXHIBIT INDEX
SCANNER TECHNOLOGIES CORPORATION
FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 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.
18