================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - ---------- SECURITIES
----- EXCHANGE ACT OF 1934.
For the quarterly period ended SeptemberJune 30, 20022005
OR
- --------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Illinois 87-0455038
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60074Illinois 87-0455038
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1014 E. Algonquin Rd., Suite 111, Schaumburg, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 358-4406303-6566
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 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 No X
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
_____
-------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 15, 2002,
68,631,680June 30, 2006, 99,569,028
shares of the registrant's common stock, $.001 par value, were issued and
outstanding.
DAUPHIN TECHNOLOGY, INC.Dauphin Technology, Inc.
(A Development Stage Company)
Table of Contents
-----------------
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months and Three Months Ended September 30, 2002 and 2001 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 and
Nine Months Ended September 30, 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION 17
Item 1. Legal Proceedings
Item 2. Changes in the Rights of the Company's Security Holders
Item 3. Default by the Company on its Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K
SIGNATURE 17
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2005 and 2004, six
months ended June 30, 2005 and 2004 and cumulative
amounts since January 1, 2004 (Commencement of
development stage) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2005 and 2004, six
months ended June 30, 2005 and 2004 and cumulative
amounts since January 1, 2004 (Commencement of
development stage) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Item 3. Controls and Procedures 11
PART II OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Unregistered sale of equity securities and Use of Proceeds 12
Item 3. Default Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6(a). Exhibits 12
SIGNATURE 12
2
Dauphin Technology, Inc.
CONDENSED(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
SeptemberJune 30, 20022005 and December 31, 20012004
- --------------------------------------------------------------------------------
ASSETS
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
-------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
------------------ -----------------
CURRENT ASSETS:
Cash $ 48,251 $ 725,364
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at September
30, 2002 and December 31, 2001 58,947 67,201
Employee receivables 3,248 3,248
Inventory, net of reserve for obsolescence of $2,981,623 at
December 31, 2001 192,308 518,452
Prepaid expenses 76,631 37,883
------------- -------------
Total current assets 379,385 1,352,148
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $659,008 at September 30, 2002 and $475,899
at December 31, 2001 1,548,490 1,824,935
ESCROW DEPOSIT
- 368,181
ASSETS NOT USED IN BUSINESS - 75,017
INSTALLATION CONTRACTS, net of accumulated amortization
of $57,143 and $22,857 at September 30, 2002 and December
31, 2001, respectively 262,857 297,143
------------- -------------
Total assets $ 2,190,732 $ 3,917,424
============= =============
CURRENT LIABILITIES:
Accounts payable $ 720,772 $ 477,716
Accrued expenses 153,276 103,792
Short-term borrowings 179,395 -
Current portion of long-term debt 9,896 82,507
Customer Deposits 433 7,741
------------- -------------
Total current liabilities 1,063,772 671,756
LONG-TERM DEBT 7,693 43,580
CONVERTIBLE DEBENTURES 2,024,285 1,153,197
------------- -------------
Total liabilities 3,095,750 1,868,533
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized
but unissued - -
Common stock, $0.001 par value, 100,000,000 shares authorized;
68,127,313 and 64,059,813 issued and outstanding at
September 30, 2002 and at December 31, 2001, respectively 68,128 64,061
Warrants 3,438,494 4,227,499
Paid-in capital 59,958,520 57,351,406
Accumulated deficit (64,370,160) (59,594,075)
------------- -------------
Total shareholders' (deficit) equity (905,018) 2,048,891
------------- -------------
Total liabilities and shareholders'(deficit) equity $ 2,190,732 $ 3,917,424
============= =============
CURRENT ASSETS:
Cash $ 101,911 $ 7,829
Prepaid expenses - 2,500
Assets from discontinued operations - 8,832
------------ ------------
Total assets $ 101,911 $ 19,161
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 193,570 $ 68,602
Accrued expenses 294,488 323,838
Short-term borrowings 8,961 200,000
Current portion of long-term debt 13,515 13,515
Derivative liability 986,641 760,565
Convertible debentures 950,000 950,000
Liabilities from discontinued operations - 243,748
------------ ------------
Total current liabilities 2,447,175 2,560,268
CONVERTIBLE LOANS 2,656,078 2,405,078
------------ ------------
Total liabilities $ 5,103,253 $ 4,965,346
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 10,000,000
shares authorized, issued and outstanding
at June 30, 2005 100,000 -
Common stock, $0.001 par value, 100,000,000
shares authorized; 99,251,688 shares issued
and outstanding at June 30, 2005 and
98,501,688 shares issued and outstanding
at December 31, 2004 99,252 98,502
Additional paid-in capital 65,567,942 65,081,192
Accumulated deficit (70,768,536) (70,125,879)
------------ ------------
Total shareholders' deficit (5,001,342) (4,946,185)
------------ ------------
Total liabilities and shareholders' deficit $ 101,911 $ 19,161
============ ============
The accompanying notes are an integral
part of these balance sheets.consolidated financial statements.
3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months and three months ended September 30, 2002 and 2001
(Unaudited)
Nine MonthsDauphin Technology, Inc.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2005 and 2004, the six months
ended June 30, and 2004 and cumulative amounts since January 1, 2004
(Commencement of development stage)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Three Months Ended SeptemberJune 30, Six Months Ended SeptemberJune 30, -------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----Since
---------------------------- ---------------------------- January 1,
2005 2004 2005 2004 2004
------------ ------------ ------------ ------------ ------------
NET SALES $ 375,636- $ 79,074- $ 177,054- $ 68,639
DESIGN SERVICE REVENUE 76,875 1,169,711 - 352,905
------------ ----------- ----------- -----------
TOTAL REVENUE 452,511 1,248,785 177,054 421,544$ -
COST OF SALES 178,740 74,113 62,338 70,072
COST OF SERVICES 494,679 940,094 - 300,735- - - -
------------ ----------- ----------------------- ------------ ------------ ------------
Gross (loss) profit (220,908) 234,578 114,716 50,737
SELLING,- - - - -
GENERAL AND
ADMINISTRATIVE EXPENSES 3,389,635 3,332,042 1,128,208 751,432
RESEARCH AND DEVELOPMENT EXPENSE 473,873 1,760,140 109,398 519,244
AMORTIZATION OF GOODWILL - 825,000 - 275,000224,733 755,740 386,581 821,516 1,935,481
------------ ----------- ----------- ----------------------- ------------ ------------ ------------
Loss from operations (4,084,416) (5,682,604) (1,122,890) (1,494,939)(224,733) (755,756) (386,581) (821,516) (1,935,481)
Derivative (loss) gain (195,493) (68,289) (226,076) 295,252 1,121
INTEREST EXPENSE 698,605 16,744 221,659 4,964
INTEREST INCOME 6,936 208,217 518 94,524(15,000) (94,061) (30,000) (210,759) (367,238)
------------ ----------- ----------- ----------------------- ------------ ------------ ------------
Loss from continuing
operations before income
taxes (4,776,085) (5,491,131) (1,344,031) (1,405,379)and discontinued
operations (435,226) (918,090) (642,657) (737,023) (2,301,598)
INCOME TAXES - - - - -
------------ ----------- ----------- -----------
NET LOSS------------ ------------ ------------ ------------
Net loss from continuing
operations (435,226) (918,090) (642,657) (737,023) (2,301,598)
DISCONTINUED OPERATIONS
Loss from discontinued
operations - (93,183) - (173,948) (548,865)
------------ ------------ ------------ ------------ ------------
Net loss $ (4,776,085) $(5,491,131) $(1,344,031) $(1,405,379)(435,226) $ (1,011,273) $ (642,657) $ (910,971) $ (2,850,463)
============ =========== =========== ===========
BASIC AND DILUTED============ ============ ============ ============
LOSS PER SHARESHARE:
Continuing Operations $ (0.07)(0.00) $ (0.09)(0.01) $ (0.01) $ (0.01) $ (0.02)
Discontinued Operations (0.00) (0.00) (0.00) (0.00) (0.01)
------------ ------------ ------------ ------------ ------------
Total Basic and Diluted $ (0.02)(0.00) $ (0.01) $ (0.01) $ (0.01) $ (0.03)
============ =========== =========== ======================= ============ ============ ============
Weighted average number of
shares of common stock
outstanding
65,848,720 62,849,497 67,291,757 63,819,568
Basic 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000
Diluted 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000
The accompanying notes are an integral
part of these consolidated financial statements.
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Year ended December 31, 2001 and nine months ended September 30, 2002
(Unaudited)
Common Stock
------------ Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2004
(Unaudited)
- -----------------------------------------------------------------------------------------
Cumulative
Amounts
Six Months Ended June 30, Since
-------------------------- January 1,
2005 2004 2004
----------- ----------- -----------
BALANCE, December 31, 2000 61,652,069 $ 61,653 $53,479,116 $ 3,321,810
Issuance of common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101
Beneficial conversion feature and
warrants - - 914,279 684,600
Stock Options exercised 35,600 36 28,528 -
Warrants exercised 285,000 285 242,025 (71,236)
Acquisition of business 766,058 766 1,125,339 -
Personal guarantee 1,032,118 1,032 1,240,709 -
Vendor payments 30,000 30 40,770 273,224
Net loss - - - -
------------ --------- ----------- ------------
BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499
Issuance of common stock in connection with:
Stock Options exercised 57,500 57 49,557 -
Beneficial conversion feature - - 66,000 -
Warrants exercised 3,710,000 3,710 2,391,857 (1,077,817)
Conversion of convertible note 300,000 300 99,700 -
Consulting fees - - - 288,812
Net loss - - - -
------------ --------- ----------- ------------
BALANCE, September 30, 2002 68,127,313 $ 68,128 $59,958,520 $ 3,438,494
============ ========= =========== ============
Treasury Stock
-------- ----- Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, December 31, 2000 - $ - $(46,341,715) $ 10,520,864
Issuance of common stock in connection with:
Stock purchase agreement - - - 300,000
Beneficial conversion feature and
warrants - - - 1,598,879
Stock Options exercised - - - 28,564
Warrants exercised - - - 171,074
Acquisition of business - - - 1,126,105
Personal guarantee - - - 1,241,741
Vendor payments - - - 314,024
Net loss - - (13,252,360) (13,252,360)
--------------- -------- ------------ ------------
BALANCE, December 31, 2001 - - (59,594,075) 2,048,891
Issuance of common stock in connection with:
Stock Options exercised - - - 49,614
Beneficial conversion feature - - - 66,000
Warrants exercised - - - 1,317,750
Conversion of convertible note - - - 100,000
Consulting fees - - - 288,812
Net loss - - (4,776,085) (4,776,085)
--------------- -------- ------------ ------------
BALANCE, September 30, 2002 - $ - $(64,370,160) $ (905,018)
=============== ======== ============ ============
The accompanying notes are an integral part of these statements.
5
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
(Unaudited)
- --------------------------------------------------------------------------------
2002 2001
------ ------
CASH FLOWS FROM OPERATING
ACTIVITIES
-
Net loss(loss) gain $ (4,776,085)(642,657) $ (4,085,752)(910,971) $(2,850,463)
Non-cash items included in net loss:
Depreciation and amortization 284,020 197,734
Amortization of goodwilldebt discount - 550,000
Interest expense on convertible notes 687,088 -
Warrants90,418 269,588
Convertible loans issued in lieu of
consulting fees 288,812 88,550
Gain on sale of building (33,014) - - 1,161,500
Common stock issued to vendorsin lieu of
convertible loans 37,500 - 40,80037,500
Common stock issued pursuant to personal guaranteefor consulting fees - 1,241,741
Loss on sale of assets 45,017 - Write off assets not used in business 60,000 -
Decrease in accounts435,000
Changes in:
Accounts receivable - trade 8,254 45,690
Decrease in accounts receivable(13,500) 3,248
Assets of discontinued operations 8,832 8,520 166,123
Prepaid expenses 2,500 - 2,500
Accounts payable 124,968 (43,810) 60,480
Accrued expenses (29,350) (160,713) (73,852)
Liabilities from employees - 3,342
Decrease (increase) in inventory 326,144 (21,492)
Increase in prepaid expenses (38,748) (63,412)
Decrease in escrow deposits 368,181 141,009
Increase (decrease) in accounts payable 243,056 (59,862)
Increase (decrease) in accrued expenses 49,484 (454)
Decrease in customer deposits (7,308) (2,756)
------------- -------------discontinued operations (243,748) (1,028,429) (1,188,240)
----------- ----------- -----------
Net cash used in operating activities (2,495,099) (1,924,862)
CASH FLOWS FROM INVESTING ACTIVITIES -
Proceeds from sale of building 431,389 -
Proceeds from sale of assets 30,000 -
Purchase of equipment (431,664) (61,341)
------------- -------------
Net cash provided by (used in) investing activities 29,725 (61,341)(741,955) (2,058,485) (1,976,616)
CASH FLOWS FROM FINANCING ACTIVITIES
-
Proceeds from issuance of restricted shares 49,614 106,300- 323,000 323,000
Proceeds from exerciseissuance of warrants 1,317,750preferred stock 550,000 - Repayment of long-term leases and other obligations (108,498) (46,652)550,000
Derivative liability 226,076 (295,251) 1,662
Issuance of convertible loans 251,000 2,420,136 1,494,578
Repayment of convertible debentures 350,000 - - (100,000)
Payments on short-term borrowings (200,000) (200,000) (200,000)
Increase in short-term borrowing 179,3958,961 - ------------- -------------8,961
----------- ----------- -----------
Net cash provided by financing activities 1,788,261 59,648
------------- -------------
Decrease836,037 2,247,885 2,078,201
----------- ----------- -----------
Net increase in cash (677,113) (1,926,555)94,082 189,400 101,585
CASH BEGINNING OF PERIOD 725,364 2,683,480
------------- -------------7,829 326 326
----------- ----------- -----------
CASH END OF PERIOD $ 48,251101,911 $ 756,925
============= =============
CASH PAID DURING THE PERIOD FOR -189,726 $ 101,911
=========== =========== ===========
Cash Paid During The Period FOR:
Interest $ 11,517- $ 11,7801,258 $ 18,262
NONCASH TRANSACTIONS:
Common stock issued in connection with:
Services $ 37,500 $ - $ 37,500
The accompanying notes are an integral
part of these consolidated financial statements
5
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying notesfinancial statements are unaudited, but in the opinion of the
management of the Company, contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position at June
30, 2005, the results of operations for the three months and six months ended
June 30, 2005 and 2004, and the cash flows for the six months ended June 30,
2005 and 2004 and cumulative amounts since January 1, 2004 (date of commencement
of development stage).
Reference is made to the Company's Form 10-K for the year ended December 31,
2004. The results of operations for the six months ended June 30, 2005 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2005.
Effective January 1, 2004, the Company is considered a development stage company
as defined in SFAS No. 7. The Company's development stage activities consist of
evaluating potential merger candidates and raising additional financing.
2. Related Party Transactions
During the second quarter of 2005, our CEO loaned $17,130 to the Company. The
loan bore no interest and was paid back in the same quarter.
3. Stock-Based Compensation
For stock options granted to employees prior to January 1, 2005, the Company
utilized the footnote disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 encourages entities to adopt a fair-value
based method of accounting for stock options or similar equity instruments.
However, it also allows an integral partentity to continue measuring compensation cost for
stock-based compensation using the intrinsic-value method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. The Company elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures required by SFAS
No. 123 as applicable. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for stock options granted to employees.
There have been no stock options granted during the second quarter of 2005 or
2004, nor since January 1, 2004.
4. Weighted Average Shares
The computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during each period.
The computation of diluted income (loss) per common share is based on the
weighted average number of common shares outstanding during the period, plus the
common stock equivalents that would arise from the exercise of stock options and
warrants outstanding, using the treasury stock method and the average market
price per share during the period. Options to purchase 20,000 shares and 626,666
shares at June 30, 2005 and 2004, respectively, at prices between $.12 and $2.75
and warrants to purchase 1,704,999 shares, 2,001,671 shares at June 30, 2005 and
2004, respectively, at prices between $.10 and $1.31 were outstanding but were
excluded for the calculations for diluted income (loss) per share as the effect
was antidilutive.
5. Supplemental Cash Flow Information
Interest in the amount of $18,262 has been paid during the period from January
1, 2004 to June 30, 2005. No amounts have been paid for income taxes during the
same period.
6. Liquidity
The Company is a development stage company and does not have revenues from
operations. In addition, the Company has a deficit in working capital and
stockholders' equity, and has incurred sustained losses.
The Company has funded losses from operations in the current quarter primarily
from the issuance of debt and the sale of the Company's restricted common stock
in private placement transactions, and will require additional funding from
these statements.sources to sustain its future operations. The Company anticipates that the
issuance of debt and the sale of the Company's restricted common stock will
continue to fund operating losses in the short-term; however, there can be no
assurance that it will be successful in doing so.
6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION7. Definitive Merger Agreement with GeoVax
On January 20, 2006, Dauphin entered into a Definitive Agreement and Plan of
Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax
Acquisition Corp., would merge with and into GeoVax. Upon completion of the
Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin.
GeoVax, Inc., a Georgia biotechnology company, was established to develop,
license and commercialize the manufacture and sale of human vaccines for
diseases caused by HIV-1 (Human Immunodeficiency Virus) and other infectious
agents. The Merger shall become effective upon, among other things, an
affirmative vote of approval from each companies' shareholders. If the Merger is
completed, there is no assurance that the surviving company will be economically
successful.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF BUSINESSFINANCIAL CONDITION AND BASISRESULTS
OF PRESENTATION
DescriptionOPERATIONS
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of BusinessSection 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are reasonable,
such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from these expectations. Such
risks and uncertainties include, without limitation, the following:
* financing of future operations, variations in our quarterly
results, the occurrence of unanticipated events and circumstances
and general economic conditions, including stock market
volatility, results of future operations, challenges in
establishing and/or managing joint ventures;
These risks and uncertainties are beyond our control and, in many cases; we
cannot predict the risks and uncertainties that could cause our actual results
to differ materially from those indicated by the forward-looking statements.
When used in this document, the words "assumptions," "believes," "plans,"
"expects," "anticipates," "intends," "continue," "may," "will," "could,"
"should," "future," "potential," "estimate," or the negative of such terms and
similar expressions as they relate to us or our management are intended to
identify forward-looking statements. We undertake no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the condensed consolidated financial statements and notes
thereto included in Item 1 of this Quarterly Report and the condensed
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations in our Forms 10-K
for the periods ending December 31, 2004 and 2005. Historical results and
percentage relationships among any amounts in the financial statements are not
necessarily indicative of trends in operating results for any future periods.
Critical accounting policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of these investments.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements and
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities (excluding non-deductible goodwill) and using enacted tax rates in
effect for the years in which the differences are expected to become recoverable
or payable.
7
Dauphin Technology, Inc.
("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top boxes
and provide interactive cable systems to the extended stay hospitality industry,
out of its main facility in northern Illinois, an office in central Florida and
its branch office in Piraeus, Greece. The Company, an Illinois corporation, was
formed on June 6, 1988 and became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARYMANAGEMENT'S DISCUSSION AND ANALYSIS OF MAJOR ACCOUNTING POLICIES
EarningsFINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
(Loss) Per Common Share
Basic earningsloss per common share areis calculated on income available to common
stockholders dividedby dividing net loss for the year by
the weighted-average number of shares outstanding during the period, which were
65,848,72099,127,000 and 95,086,000 for the nine-month period Septemberperiods ending June 30, 2002,
62,849,497 for the nine-month period September 30, 2001, 67,291,757 for the
three-month period ended September 30, 20022005 and 63,819,568 for the three-month
period ended September 30, 2001.2004
respectively. Diluted loss per common share is adjusted for the assumed conversion exercise
of stock options and warrants unless such adjustment would have an anti-dilutive
effect. Approximately 11 million
additional shares would be outstanding if all warrants and all stock options
were exercised as of September 30, 2002.
Unaudited Financial Statements
The accompanying statements are unaudited, but have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of results have been included. The interim
financial statements contained herein do not include all of the footnotes and
other information required by accounting principles generally accepted in the
United States of America for complete financial statements as provided at
year-end. For further information, refer to the consolidated financial
statements and footnotes thereto included in the registrant's annual report on
Form 10-K for the year ended December 31, 2001. No interim review, in accordance
with Statement on Auditing Standards No. 71, of these interim financial
statements was performed by an independent certified public accountant.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.effect
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
7
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of the derivative liability.
Fair Value of Financial Instruments
The Company financial instruments consist of cash, payables, and notes payable.
The carrying amount of cash and payables approximates fair value because of the
short-term nature of these items. The aggregate carrying amount of notes payable
approximates fair value as the individual notes bear interest at market interest
rates.
Strategic Direction
In November 2003, Dauphin's Board of Directors, as then constituted, considered
and approved a plan to discontinue all operations effective January 1, 2004, and
to seek out potential merger and or acquisition candidates. As a result the
Company is considered a development stage business since January 1, 2004 for
financial reporting purposes.
On January 20, 2006, Dauphin Technology,signed a definitive Agreement and Plan of Merger
(the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition
Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax
would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. RISKS AND UNCERTAINTIES,
a Georgia biotechnology company, was established to develop, license and
commercialize the manufacture and sale of human vaccines for diseases caused by
HIV-1 (Human Immunodeficiency Virus) and other infectious agents. The Merger
shall become effective upon, among other things, an affirmative vote of approval
from each companies' shareholders. If the Merger is completed, there is no
assurance that the surviving company will be economically successful.
Results of Operations
The Company was unsuccessful in its previous operations and terminated those
operations in December 2003. We were unsuccessful in generating income from or
positive cash flow from any of our operations. Currently, the Company is working
on the proposed transaction with GeoVax as described above. The loss of $642,657
for the six months ended June 30, 2005 is the result of employee wages, legal
and professional fees, and a loss pertaining to the derivative. The loss of
$910,971 for the six months ended June 30, 2004 is a result of employee wages,
professional fees and interest expense offset by a gain associated with the
derivative instrument. We anticipate that our general and administrative
expenses going forward will be approximately $90,000 per month.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since its founding
and as of SeptemberJune 30, 20022005, has an accumulated deficit of $64,370,160.$70,768,536. The Company
expects to incur operating losses over the near term.
The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to design and develop and market commercially acceptable
products. There can be no assurance thatAs of June 30, 2005 the Company will ever achieve a
profitable levelhad current liabilities in excess of operations or if profitability is achieved, that it can be
sustained.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United Statescurrent
assets of America, which
contemplate continuation of the Company as a going concern. However, the Company
has sustained substantial losses from operations in recent years, and such
losses have continued through the unaudited quarter ended September 30, 2002.
Revenues from the Company's design services have ceased. In addition, the
Company has used, rather than provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements: The Company has concentrated its efforts on marketing its set-top
boxes, halted all further development of the next generation Orasis and is
exploring alternative mobile hand-held computers and other peripheral products
through original equipment manufacturers. In January 2002 the management of the
Company began terminating employees who were not a critical part of the
marketing efforts. The facility in McHenry, which housed the RMS operations, has
been closed, all personnel have been terminated and the remaining inventory and
equipment were auctioned and sold. The building used by ADD to perform design
services has been sold and all engineers have been terminated.
The Company has also changed its primary focus and has begun concentrating its
efforts on becoming a reseller and distributor of mobile hand-held computer
products, pc monitors and TV displays, vehicle multimedia systems and various
accessories and peripherals. The Company has been working with several original
equipment manufactures in the Far East to provide the various products.approximately $2,345,000.
8
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. BUSINESS SEGMENTS
The Company has three reportable segments: Dauphin Technology, Inc. and RMS
("Dauphin"), Advanced Digital Designs, Inc. ("ADD") and Suncoast Automation,
Inc. ("Suncoast"). Dauphin is involved in the design and distribution of
hand-held pen-based computer systems and accessories and smartbox set-top boxes.
ADD performed design services, process methodology consulting and intellectual
property development. Suncoast provides private, interactive cable systems to
the hospitality industry.
September 30, 2002 September 30, 2001
------------------ ------------------
Revenue
Dauphin $ 24,330 $ 10,435
ADD 286,250 1,265,743
Suncoast 351,306 -
Inter-company elimination (209,375) (448,937)
------------ -------------
Total $ 452,511 $ 827,241
============ =============
Operating (Loss)
Dauphin $ (3,056,469) $ (4,049,983)
ADD (353,283) (137,682)
Suncoast (674,664) -
Inter-company elimination - -
------------ -------------
Total $( 4,084,416) $ (4,187,665)
============ =============
September 30, 2002 December 31, 2001
------------------ -----------------
Assets
Dauphin $ 18,614,459 $ 17,461,145
ADD 2,264,616 2,699,250
Suncoast 1,835,576 1,702,791
Inter-company elimination (20,524,119) (17,945,762)
------------ -------------
Total $ 2,190,732 $ 3,917,424
============ =============
5. COMMITMENTS AND CONTINGENCIES
The Company is an operating entity and in the normal course of business, from
time to time, may be involved in litigation. In management's opinion, any
current or pending litigation is not material to the overall financial position
of the Company.
6. CONVERTIBLE DEBT AND WARRANTS
In connection with a Securities Purchase Agreement entered into with Crescent
International Ltd., an institutional investor, on September 28, 2001, a
Convertible Note was funded on October 2, 2001 and is due September 28, 2004.
The Company is not required to pay interest on the Convertible Note unless the
Company fails to deliver shares upon conversion. In such event, the Note will
bear an interest rate of 8.0% per annum, payable in quarterly installments. The
Company has recorded a beneficial conversion feature on the Convertible Note and
Warrants based on the fair value of the common stock of $0.99 per share as of
the date of commitment. The Warrants with an exercise price of $1.3064 per
share, are valued using the Black-Scholes valuation method, and are recorded at
$684,600. The beneficial conversion feature is calculated to be $914,279 and has
been recorded as Additional Paid in Capital and a discount to the Convertible
Note. The beneficial conversion feature is being amortized over three years, the
life of the Note. For the nine month period ended September 30, 2002, the
Dauphin Technology, Inc.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. CONVERTIBLE DEBT AND WARRANTS - Continued
Company recognized $626,588 as interest expense on the amortization of the
beneficial conversion feature. At conversion, the Company may record an
additional beneficial conversion based on the market price of the stock at the
conversion date. During the third quarter of 2002, Crescent converted $100,000
of the convertible note in exchange for 300,000 shares of common stock of the
Company.
In April 2002, the Company entered into convertible note agreements with three
individuals for $350,000. These Convertible Notes are due in October 2002 and
bear an interest rate of 10.0% per annum, payable at the termination of the
Note. At the option of the holder, at any time until the Convertible Note is
paid in full, the Note may be converted, either in whole or in part, up to the
principal amount of the Note, into shares of Common Stock of the Company at a
conversion price of $0.50 per share. The beneficial conversion feature is
calculated to be $66,000 and has been recorded as Additional Paid in Capital and
a discount to the Convertible Note. The beneficial conversion feature is being
amortized over six months, the life of the Note. For the nine month period ended
September 30, 2002, the Company recognized $60,500 as interest expense on the
amortization of the beneficial conversion feature. The Company is currently
exploring alternative financing arrangements in order to repay these notes.
7. EQUITY TRANSACTIONS
2002 Events
During the first quarter of 2002, the Company received proceeds in the amount of
$410,000 for the exercise of 933,333 warrants. Additionally, employees exercised
57,500 stock options at prices ranging from $0.50 to $0.89 per share.
In March 2002, the Company re-priced approximately 1,023,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $2.00 to $5.00, and were re-priced with an
exercise price of $0.60 per share. The re-pricing created a charge to earnings
of approximately $27,218, which was calculated using the Black-Scholes pricing
model assuming 0% dividend yield, risk free interest rate of 5%, volatility
factor of 443% and an expected remaining life of 10 months.
During the second quarter of 2002, the Company received proceeds in the amount
of $416,000 for the exercise of 1,040,000 warrants.
In May 2002, the Company re-priced approximately 2,245,667 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $2.00 to $5.00, and were re-priced with an
exercise price of $0.40 per share. The re-pricing created a charge to earnings
of approximately $139,900, which was calculated using the Black-Scholes pricing
model assuming 0% dividend yield, risk free interest rate of 5%, volatility
factor of 443% and an expected remaining life of 7 months.
In August and September 2002, the Company re-priced approximately 1,854,667
warrants it had previously issued to outside consultants. The warrants were
originally issued with an exercise price ranging from $1.50 to $0.50, and were
re-priced with an exercise price of $0.25 per share. The re-pricing created a
charge to earnings of approximately $121,700, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 5%, volatility factor of 443% and an expected remaining life ranging from 1
to 5 months.
During the third quarter of 2002, the Company received proceeds in the amount of
$491,750 for the exercise of 1,736,667 warrants.
During the third quarter of 2002, Crescent International Ltd. exercised $100,000
of the convertible note in exchange for 300,000 shares of common stock of the
Company.
10
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
8. SUBSEQUENT EVENT
During October 2002, the Company began discussions with UniversalGR, a company
offering applied software and hardware solutions around the world, including the
United States and Greece. It specializes in project management, consulting,
design, development, support services and installation of complete technological
solutions. These discussions resulted in a letter of intent being signed on
November 7, 2002 whereby the Company would acquire controlling interest of the
outstanding common stock of UniversalGR in exchange for approximately eight
million shares of common stock of the Company at the closing of the transaction,
an additional 3,500,000 shares of common stock of the Company upon UniversalGR
achieving revenues of $10,000,000 and an additional 3,500,000 shares of common
stock of the Company upon UniversalGR achieving another $10,000,000 in revenue
within the first fifteen months after closing the transaction. Preliminary due
diligence has begun and the potential closing is scheduled for early December,
2002.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2001
Total revenues for the three months ended September 30, 2002 and 2001 were
approximately $177,000 and $422,000, respectively. Net sales increased- CONTINUED
(Unaudited)
The Company has funded losses from $69,000 in 2001 to approximately $177,000 in 2002. Net sales generated by the
Company's interactive cable system subsidiary, Suncoast, accounted for
approximately $170,000 of these revenuesoperations in the third quarter of 2002 and
approximately $65,000 in the third quarter of 2001. The balance of sales is
parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues
in the third quarter of 2002 were $0 as compared to revenues of $353,000 in the
second quarter of 2001. This reduction in design service revenue is a cessation
in engineering projects available in the marketplace which the Company began
experiencing in 2001. The Company does not anticipate any further revenuescurrent year primarily from
design services for the remainder of fiscal year 2002. Cost of sales represents
costs associated with the Suncoast operations, which decreased from $70,000 in
2001 to approximately $62,000 in 2002. Cost of services decreased from $301,000
in 2001 to $0 in 2002. The decrease is a result of reduction in engineering
staff which began during the first quarter of 2002. Gross profit of $115,000 in
2002 is primarily attributable to the Suncoast operations. Gross profit of
$51,000 for the third quarter of 2001 was negatively affected by the decline in
engineering projects available to the Company.
Selling, general and administrative expenses increased to approximately
$1,128,000 in 2002 from $751,000 in 2001. The increase of approximately $377,000
is due to the increase in expenses of the Company's branch office in Piraeus,
Greece in the amount of $190,000, the increase in expenses of the interactive
cable system subsidiary, Suncoast, amounting to approximately $73,000, increase
in the corporate office expenses of $141,000 and offset by the decrease in
expenses of the design engineering subsidiary amounting to approximately
$27,000. The Company operated its branch office in Piraeus, Greece for the full
three month period in 2002, whereas in 2001, expenses were only for one month.
The Suncoast subsidiary incurred higher marketing, advertising and general
administrative expenses in 2002. Included in the Corporate office selling,
general and administrative expenses in 2002 is approximately $121,700 expense
associated with the repricing of warrants which had previously been issued to
outside consultants, travel costs of approximately $50,000, offset by a general
reduction in office expenses of approximately $30,000.
Amortization of goodwill in 2001 amounted to $275,000 in the third quarter. This
goodwill was a result of the acquisition of the net assets of Advanced Digital
Designs, Inc. in 2000. The remaining balance of the goodwill was written off in
the fourth quarter of 2001.
Research and Development expenses decreased to approximately $109,000 during the
third quarter ended September 30, 2002 from $519,000 for the corresponding
period in 2001. The set-top box design was substantially completed in the fourth
quarter of 2001 which is reflected in the decrease in Research and Development
expenses. In 2002, approximately 55% of Research and Development costs consisted
of costs related to the development of software for the set-top box, with 45%
related to further development of alternative mobile hand-held computer devices.
In 2001, the majority of Research and Development costs were for the set-top
box.
Interest expense increased to approximately $222,000 for the third quarter of
2002 from $5,000 for the third quarter of 2001. Included in interest expense in
the third quarter of 2002 is three months amortization of the debt discount
associated with the Convertible Notes, amounting to $220,000. The remaining
interest is related to other borrowings. Interest expense in the third quarter
of 2001 related to capital equipment leases and short term borrowings. Interest
income declined from $95,000 in 2001 to $500 in 2002 due to the reduction of
short-term funds held on deposit.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
Net loss
The consolidated loss after tax decreased for the third quarter ended September
30, 2002 to approximately ($1,344,000) or ($0.02) per share from ($1,405,000) or
($0.02) per share in 2001. The loss for 2002 was primarily attributed to the
decrease in revenues from design services, the increase in selling, general and
administrative costs generated by Suncoast and the branch office, the repricing
of warrants, and the increase in interest expense. The loss for 2001 was
primarily attributed to the amortization of goodwill associated with the
acquisition of Advanced Digital Designs, Inc., and research and development
costs regarding the set-top box. Loss per common share is calculated based on
the monthly weighted average number of common shares outstanding, which were
67,291,757 for the three-month period ended September 30, 2002, and 63,819,568
for the three-month period ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2001
Total revenues for the Company decreased from approximately $1,249,000 in the
first nine months of 2001 to $453,000 in the first nine months of 2002. Net
sales increased from $79,000 in 2001 to approximately $376,000 in 2002. Net
sales generated by the Company's interactive cable system subsidiary, Suncoast,
accounted for approximately $351,000 of these revenues with the balance being
parts and accessories for the Orasis(R) and OraLynx(TM). Design service revenues
in the first nine months of 2002 were approximately $77,000 as compared to
revenues of $1,170,000 in the first nine months of 2001. This reduction in
design service revenue is a continuation of the decline in engineering projects
available in the marketplace, which the Company began experiencing in 2001. The
Company does not anticipate any further revenues from design services for the
remainder of fiscal year 2002. Cost of sales represents costs associated with
the Suncoast operations for 2002, whereas cost of sales in 2001 related to the
costs of parts and accessories. Cost of services decreased from $940,000 in 2001
to $495,000 in 2002. The decrease is a result of reduction in engineering staff
which began during the first quarter of 2002. Included in the costs for 2002 are
termination and severance benefits paid to the engineering staff. Because of the
reduction in design services revenue and the additional termination and
severance benefits, gross profit margins were negatively affected and generated
a gross loss of $221,000 for the third quarter of 2002 compared to a gross
profit of $235,000 for the same period in 2001.
Selling, general and administrative expenses increased to approximately
$3,390,000 for the first nine months ended September 30, 2002 as compared to
$3,332,000 for 2001. Included in selling, general and administrative expenses in
2001 is approximately $1,242,000 attributable to
the issuance of common stock
for reimbursement pursuant to a personal guarantee. Selling, generaldebt and
administrative expenses of the design engineering subsidiary for the nine months
ended September 30, 2001, were approximately $124,000 as compared to $8,000 in
2002. This reduction is offset by the expenses of the Company's interactive
cable system subsidiary, Suncoast, amounting to approximately $847,000, and the
Company's branch office in Piraeus, Greece which amounted to approximately
$767,000. The Company acquired the net assets of Suncoast in July 2001 and
opened the branch office in August 2001. In the nine months ended September 30,
2002, approximately $289,000 of additional costs were incurred in connection
with the repricing of warrants which had previously been issued to outside
consultants.
Amortization of goodwill in 2001 amounted to $825,000 for the nine months ended
September 30, 2001. This goodwill was a result of the acquisition of the net
assets of Advanced Digital Designs, Inc. in 2000. The remaining balance of the
goodwill was written off in the fourth quarter of 2001.
Research and Development expenses decreased to approximately $474,000 for the
nine months ended September 30, 2002 from $1,760,000 for the corresponding
period in 2001. The set-top box design was substantially completed in the fourth
quarter of 2001 which is reflected in the decrease in Research and Development
expenses. In 2002, approximately 68% of Research and Development costs consisted
of costs related to the development of software
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
for the set-top box, with 32% related to further development of alternative
mobile hand-held computer devices. In 2001, the majority of Research and
Development costs were for the set-top box.
Interest expense for the nine months ended September 30, 2002 increased to
approximately $699,000 as compared to $17,000 for the same period in 2001.
Included in interest expense for 2002 is nine months amortization of the debt
discount associated with the Convertible Notes, amounting to $687,000. The
remaining interest is related to capital equipment leases, mortgage note and
other borrowings. Interest expense for the nine months ended September 30, 2001
related to capital equipment leases and short term borrowings. Interest income
declined from $208,000 for the nine months ended September 30, 2001 to $7,000
for the nine months ended September 30, 2002 due to the reduction of short-term
funds held on deposit.
Balance Sheet
Total assets for the Company at September 30, 2002 were approximately
$2,191,000, a decrease of approximately $1,726,000 from December 31, 2001. The
decrease was primarily attributable to the net cash used in operations of
approximately $2,495,000, the purchase of equipment of $432,000, offset by the
proceeds from the sale of the buildingCompany's restricted common stock in
private placement transactions, and will require additional funding from these
sources to sustain its future operations. The Company anticipates that the
issuance of debt and the sale of the Company's restricted common stock will
continue to fund operating losses in the short-term. There is no assurance that
the Company will be successful in raising the needed amounts of capital and debt
needed to sustain the Company.
When used in this Form 10-Q, the words "expects," "anticipates," "estimates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties, including those set forth
under the "Risks and Uncertainties" set forth below that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. Dauphin expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based. This discussion should be read
together with the financial statements and other assetsfinancial information included
in this Form 10-Q.
We are a development stage company as defined in SFAS No. 7 effective January 1,
2004. The Company's development stage activities consist of $460,000, exercise of
stock warrantsevaluating potential
merger candidates and stock options of $1,368,000raising additional financing.
Risks and Uncertainties
Readers should carefully consider the increaserisks described below in borrowings of
$529,000.
LIQUIDITY AND CAPITAL RESOURCESevaluating the
Company's business. The Company hasfollowing risks and uncertainties are not the only risks
and uncertainties facing the Company.
We have an accumulated deficit due to substantial losses incurred a net operating loss in each year since it's foundingover the last
nine years
Since July 1996 we have operated with substantial losses from operations and
as of September 30, 2002 hashave an accumulated deficit of approximately
$64,370,000 and a deficit in shareholders equity$70,768,536 as of approximately $905,000.June 30, 2005. The Company
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
ability to procure and market commercially acceptable products. There can be no
assurance that the Company will ever achieve a profitable level of operations or
if profitability is achieved, that it can be sustained. ForOur financial
performance may make it difficult for potential sources of capital to evaluate
the nine months ended September 30, 2002,viability of our business to date and to assess its future viability.
We currently have no operations.
The Company was unsuccessful in its operations and terminated those operations
in December 2003. Our previous business operations were limited and did not
result in (i) significant revenues, (ii) the Company used $2,495,000accumulation of casha significant
dollar amount of assets, or (iii) in operating activities, and generated $29,000earnings. Because of cash from investing
activities and $1,788,000a lack of cash from financing activities that produced a
decrease in cashresources,
we were unable to fund the costs of $677,000 for the nine months. The net loss of $4,726,000 was
partially offset by the non-cash items of depreciation and amortization,
repricing of warrants issued in lieu of consulting fees, decrease in inventory
and amortizationcomplying with our filing requirements under
Section 13 of the Securities Exchange Act of 1934, as amended. In November 2003,
Dauphin's Board of Directors, as then constituted, considered and approved a
plan to discontinue all operations effective January 1, 2004, and to seek out
potential merger and or acquisition candidates.
The Company's ability to continue as a going concern is questionable
Because of recurring operating losses, the excess of current liabilities over
current assets, the stockholders' deficit, and negative cash flows from
operations, there is substantial doubt about the Company's ability to continue
as a going concern. The Company's continuation as a going concern is dependent
on attaining profitable operations, restructuring its debt discount associated withobligations, and
obtaining additional outside financing. The Company has funded losses from
operations in the Convertible Note.
Investing activities consistedcurrent year primarily from the issuance of the purchase of equipment for installations
associated with the interactive cable systemsdebt and proceeds from the sale
of the Company's restricted common stock in private placement transactions, and
will require additional funding from these sources to sustain its future
operations. The Company anticipates that the issuance of debt and the sale of
the Company's restricted common stock will continue to fund operating losses in
the short-term but there is no assurance that the Company will be successful in
obtaining additional capital or financial resources.
Planned transaction with GeoVax may not be completed
On January 20, 2006, Dauphin signed a buildingdefinitive Agreement and Plan of Merger
(the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition
Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax
would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc.,
a Georgia biotechnology company, was established to develop, license and
commercialize the manufacture and sale of human vaccines for diseases caused by
HIV-1 (Human Immunodeficiency Virus) and other assets. Financing activities consistedinfectious agents. The Merger
shall become effective upon, among other things, an affirmative vote of the exercise of
options and warrants, increase in convertible notes and the increase in
short-term borrowings. As of September 30, 2002, the Company had current
liabilities in excess of current assets, whereas at December 31, 2001, the
Company had a current asset to current liabilities ratio of 2:1. The Condensed
Consolidated Statements of Cash Flows, included in this report, detail the other
sources and uses of cash and cash equivalents.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., ("Crescent") an institutional
investor. Under the Securities Purchase Agreement, the Company issued a
Convertible Note for $2.5 million. Although the Company had the option to issue
further convertible notes to Crescent subject to certain conditions precedent,
such option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The Stock
Purchase Agreement further permits the Company to sell to Crescent up to $7.5
million in common stock of the Company over a 24-month period. Additionally, the
Company agreed not to exercise any draw downs against its existing common stock
purchase agreement with Techrich International Ltd. ("Techrich"), which expired
on January 28, 2002.
14approval
9
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Securities Purchase Agreement permits- CONTINUED
(Unaudited)
from each companies' shareholders. There is no assurance that we will be
successful in finalizing this transaction. If the Company to sell to Crescent and
requires Crescent to purchase fromtransaction is completed,
there is no assurance that the Company, at the Company's sole
discretion, common stocksurviving company will be economically
successful. Regardless of the Company for up to $7.5 million over a 24-month
period. Individual salesoutcome with GeoVax, we may not be successful in
finding any suitable merger or acquisition candidate. If we are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subjectnot successful
in finding any suitable candidate, it would raise substantial doubt as to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2)ability to continue any operations.
Funding Requirements
In order to continue its planned transaction, the Company must obtain additional
funding. The Company has no source of working capital except the prospect of
obtaining new equity or debt financing. We have oneno revenues and therefore rely
solely on obtaining either equity or more currently effective
registrationdebt financing. The Company must continue
to sell equity or find another source of operating capital until its operations
are profitable. While the Company's financial statements coveringhave been prepared
under the resale by Crescent of all shares issued in
prior salesassumption that the Company will continue as a going concern, the
independent registered public accounting firm's report on the Company's 2004 and
2005 financial statements, included an explanatory paragraph relating to Crescent and issuable upon the
conversion of the Convertible
Note, (3) there must be no disputesubstantial doubt as to the adequacy of disclosures made in any
such registration statement, (4) such registration statements must not be
subjectCompany's ability to any stop order, suspension or withdrawal, (5) thecontinue as a going concern.
The Company must have
performed its covenants and obligations under the Securities Purchase Agreement,
(6) no statute, rule, regulation, executive order, decree, ruling or injunction
may have been enacted, entered, promulgated or adopted by any court of
governmental authority that would prohibit the Company's performance under the
Securities Purchase Agreement, (7) the Company's common stock mustdoes not have been
delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number ofsufficient shares of common stock authorized to meet
its obligations
Currently, we do not have enough authorized shares of common stock to issue to
holders of options and warrants, as well obligations pursuant to our convertible
loans and convertible debentures. This deficiency in the number of authorized
shares of common stock can only be rectified by an affirmative vote of the
majority of our shareholders to amend our Articles of Incorporation to reflect
an increased number of authorized shares of common stock. There can be no
assurance that our shareholders will approve an amendment to our Articles of
Incorporation.
Shareholders may suffer dilution from the exercise of existing options, warrants
and convertible notes; the terms upon which we will be able to obtain additional
equity capital could be adversely affected
Our common stock may become diluted if any of the outstanding warrants to
purchase our common stock are exercised. The total number of shares that may be
issued pursuant to the outstanding warrants is 1,704,999 at June 30, 2005 and is
presently 700,000.
It is likely that our shares will be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control
The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of and
development-stage companies have been especially volatile. Market volatility and
other market conditions could reduce the market price for our shares. Our stock
price has fluctuated in the past and could continue to do so in the future. Your
investment in the Company's stock could lose value. Some of the factors that
could significantly affect the market price of the Company's stock are discussed
in these Risk Factors and elsewhere in this report, and also include: variations
in quarterly financial results; changes in political, economic and market
conditions either generally or specifically to particular industries; and
fluctuations in stock prices generally, particularly with respect to the applicable sale must not
violatestock
prices for other biotechnology companies. A significant drop in our stock price
could expose us to the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amountrisk of securities issued to Crescent equals or exceeds $5 million, the Company shall
issue to Crescentclass action lawsuits. Defending
against such lawsuits could result in substantial costs and divert management's
attention and resources. An unfavorable outcome of such a subsequent incentive warrant exercisable to purchase 400,000
shares of common stock atmatter may have a
price equal to the bid pricematerial adverse impact on the date the
incentive warrant is issued.business, results of operations, financial
position, or liquidity.
General Economic and Other Conditions
The Company cannot currently access these funds
because it does not have a current effective registration statement with the
SecuritiesCompany's business may be adversely affected from time to time by such
matters as changes in general economic, business and Exchange Commission covering shares available to sell to
Crescent.
The Company elected to pursue the above financing arrangements with Crescent
International because the Company's previous financing arrangement with Techrich
contained certain limitations as it related to the market price of our common
stock, the average volume of shares traded on a daily basisinternational conditions,
prices and costs, technological developments and other such
factors which wouldof a general
nature.
We have not generate the greatest benefit to the Company's
shareholders. In addition, the financing arrangement with Techrich expired at
the endpaid any dividends and have no expectation of January 2002. Because of the changes in circumstances and the current
financial conditions of the Company, management decided to explore alternatives.
Several were reviewed, including private placements, various long-term debt
arrangements with different investment bankers and other equity lines similar to
the one with Techrich. Management felt that the financing offered by Crescent
was the best alternative and waspaying dividends in
the best interest offoreseeable future
We have not declared, paid, or distributed any cash dividends on our shares in
the Company and its
shareholders. The Company expectspast, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to rely on the above financing arrangements in
order to continue its development and procurement of products and to continue
its ongoingpay cash dividends. Even if profits are generated through operations in the
short-term. The long-term cash needs of the
Company will be dependent on the successfulfuture, our present intent is to retain any such profits for acquisitions,
product development, production and procurement of the
Company's productsmarketing, and their success in the market place. At the current rate,
the Company is not able to internally generate sufficient funds for operations
and will be required to rely on outside sources for continued funding until such
time as the Company's operations generate a profit and cash is generated from
operations. The Company has historically issued and may continue, if the
circumstances warrant, common stock to vendors and suppliers in lieu of cash for
products and services provided to the Company.
In order to provide additional cash for operations, in April 2002, the Company
entered into convertible note agreements with three individuals for $350,000.
These Convertible Notes are due in October 2002 and bear an interest rate of
10.0% per annum, payable at the termination of the Note. At the option of the
holder, at any time until the Convertible Note is paid in full, the Note may be
converted, either in whole or in part, up to the principal amount of the Note,
into shares of Common Stock of the Company at a conversion price of $0.50 per
share. As of November 12, 2002, these notes had not been converted into common
stock of the Company, and the Company had not repaid the loans. The Company is
currently exploring alternative financing arrangements in order to repay these
notes.
15general working capital
requirements.
10
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS RISK FACTORS
We operate- CONTINUED
(Unaudited)
Our shares are not widely traded
There is only a limited market for our shares. If a large portion of the shares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such shares. This could result in a highly competitivesignificant reduction in
current market prices. There can be no assurance that investors will be able to
resell shares at the price they paid for the shares or at any price.
Our shares are subject to special trading rules relating to "penny stocks" which
restrict trading
Our shares are covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and volatile industry. We are faced with
aggressive pricing by competitors; competition for necessary parts, componentsobtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and supplies; continually changing customer demands and rapid technological
developments; and risks that buyersalso may encounter difficulties in obtaining
governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessaryaffect your ability to use our products or to offer them
to end users. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ significantly
from those set forth herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein, as well as
those discussedsell
shares in the Company's fiscal year 2001 Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any revision
to these forward-looking statements, which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
During October 2002, the Company began discussions with UniversalGR, a company
offering applied software and hardware solutions around the world, including the
United States and Greece. It specializes in project management, consulting,
design, development, support services and installation of complete technological
solutions. These discussions resulted in a letter of intent being signed on
November 7, 2002 whereby the Company would acquire controlling interest of the
outstanding common stock of UniversalGR in exchange for approximately eight
million shares of common stock of the Company at the closing of the transaction,
an additional 3,500,000 shares of common stock of the Company upon UniversalGR
achieving revenues of $10,000,000 and an additional 3,500,000 shares of common
stock of the Company upon UniversalGR achieving another $10,000,000 in revenue
within the first fifteen months after closing the transaction. UniversalGR has
recently signed a $43.5 million contract with Tihovatis, AE to provide
technology equipment, consulting, maintenance and support services for a housing
and resort development currently under construction. Preliminary due diligence
has begun and the potential closing is scheduled for early December, 2002. The
pending acquisition will create a vehicle for the Company to sell its products
through. UniversalGR currently has a contract for approximately $43.5 million
for the installation of security equipment, appliances, computers, cameras and
other technology equipment in a housing development and hotel. The successful
completion of the pending acquisition is critical to the Company's future
success.secondary market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Substantially all of the Company's liquid investments and long-term debt are at
fixed rates; therefore, the fair value of these instruments is affected by
changes in market interest rates. The Company believes that the market risk
arising from its holdings of liquid investments is minimal as substantially all
of the Company's investments mature within one year.
Dauphin is exposed to foreign exchange risks through its branch operation in
Greece. The Company does not believe that the potential exposure is significant
in light of the current size of its operations in Greece. We do not currently
and do not intend in the future to utilize derivative financial instruments for
trading purposes, unless the operations of the branch facility in Greece become
significant. At that time, the Company will initiate a risk management policy to
monitor interest rate and foreign exchange risks.
Item 4. Controls and Procedures.CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing of this Quarterly Report on Form 10-Q,
the Company's principal executive officer and principal financial
16
officer have concluded that the Company'sprocedures
We maintain disclosure controls and procedures (as
defineddesigned to ensure that financial
information required to be disclosed in Rules 13a-14(c) and 15d-14(c)our reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange ActAct), is recorded, processed,
summarized, and reported within the required time periods, specifiedand that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding disclosure.
In connection with the completion of its audit of, and issuance of its report
on, our consolidated financial statements for the year ended December 31, 2004,
Tanner LC identified deficiencies that existed in Securitiesthe design or operation of our
internal control over financial reporting that it considered to be "significant
deficiencies" or "material weaknesses." The Public Company Accounting Oversight
Board ("PCAOB") has defined "significant deficiency" as a control deficiency, or
a combination of control deficiencies, that adversely affects the company's
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles such
that there is more than a remote likelihood that the misstatement of the
company' annual or interim financial statements that is more than
inconsequential will not be detected. The PCAOB has defined a "material
weakness" as a "significant deficiency or combination of significant
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial will not be prevented or
detected."
In connection with the completion of its audit of, and Exchange Commission rulesissuance of its report
on, our consolidated financial statements for the year ended December 31, 2005,
Porter Keadle Moore, LLP ("PKM") considered our internal controls in order to
determine their auditing procedures for the purpose of expressing their opinion
on the financial statements and forms.not to provide assurance on our internal
controls. PKM noted certain matters involving our internal controls and our
operation that they consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters relating to significant deficiencies in
the design or operation of the internal control that, in PKM's judgment, could
adversely affect our ability to record, process, summarize, and report financial
data consistent with the assertions of management in our financial statements.
The significant deficiencies or material weakness in our internal controls
relate to segregation of incompatible duties, the timely reconciliation of
general ledger accounts, controls over inventory, property and equipment, debt
documentation and derivative transactions and accounting for acquisitions and
disposals. Additionally, significant deficiencies or material weakness in our
internal control over accounting for derivative transactions, certain
disclosures in the footnotes to the financial statements was related to the
stock option disclosures required by SFAS No. 123R. We have disclosed these
significant deficiencies and material weaknesses to our Board of Directors.
Additional effort is needed to fully remedy these significant deficiencies and
material weaknesses and we are continuing our efforts to improve and strengthen
our internal controls over financial reporting. Our management and Board of
Directors will continue to work with our management and outside advisors with
the goal to implement internal controls over financial reporting that are
adequate and effective.
11
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
(b) Changes in internal controls.controls and procedures
There werehas been no significant changeschange in our internal control over financial reporting during
the Company'ssecond quarter ended June 30, 2005, that has materially affected, or is
reasonably likely to materially affect, our internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.control over financial
reporting.
PART II -II. OTHER INFORMATION
Item 1. Legal Proceedings NoneLEGAL PROCEEDINGS
On March 7, 2006, the Company filed legal action against preferred shareholders
Stavros N. Papageorgiou and Nikolaos S. Papageorgiou, their advisor, Miltos
Louizidis, and the investment banking firm of Crescent International, Ltd. (the
"Defendants"). The complaint alleges, among other things, breaches of various
agreements, fraud, tortious interference, conspiracy, and breaches of fiduciary
duties by the Defendants. Specifically, Dauphin alleges that the Defendants
embarked upon a scheme to defraud, tortiously interfere with contracts and
business relationships, and to breach fiduciary duties in order to steal from
Dauphin and its shareholders certain critical business opportunities, including
its current efforts to merge with GeoVax, Inc.
On May 15, 2006, the Company and the preferred shareholders agreed to settle all
legal actions between them. The settlement confirms the parties' agreement to
proceed with the GeoVax merger, based upon a conversion and exchange of
preferred shares upon closing of the merger, on the basis of a
1-preferred-for-2-common share exchange, as anticipated by the Merger Agreement.
In addition, a convertible note representing a Company liability of
approximately $1.3 million has been cancelled. On May 16, 2006, an agreed order
was entered in the Circuit Court of Cook County, Illinois, dismissing all
claims.
Item 2. Changes in the Rights of the Company's Security Holders. NoneUNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS - None.
Item 3. Default by the Company on its Senior Securities. NoneDEFAULTS UPON SENIOR SECURITIES - None.
Item 4. Submission of Matters to a Vote of Securities Holders. NoneSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
Item 5. Other Information. NoneOTHER INFORMATION - None.
Item 6(a)6 (a). Exhibits.
Exhibit 99.1EXHIBITS
31. Certifications
31.1 Certification of Chief Executive Officer Certification
Exhibit 99.2and Chief Financial Officer in accordance
with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification Item 6(b). Reports on Form 8-K. Noneof the Principal Executive and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrantregistrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
(Registrant)
Date: November 18, 2002 By:BY: /s/ Andrew J. Kandalepas
--------------------------------------------------------------
Andrew J. Kandalepas,
President, Chief Executive Officer
Date: November 18, 2002 By: /s/ Harry L. Lukens, Jr.
------------------------------
Harry L. Lukens, Jr.and Chief Financial Officer
17
(Principal Executive and Financial Officer)
Date: June 30, 2006
12
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