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 June 30, 2002
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, Illinois 60074
(Address of principal executive offices) (Zip Code)
(847) 358-4406
(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 X 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 August 14, 2002,
66,382,313 shares of the registrant's common stock, $.001 par value, was issued
and outstanding.
1
DAUPHIN TECHNOLOGY, INC.
Table of Contents
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six months and Three Months Ended
June 30, 2002 and 2001 4
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2001 and
Six Months Ended June 30, 2002 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 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
PART II OTHER INFORMATION 16
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 16
2
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(Unaudited)
=======================================================================================================
June 30, 2002 December 31, 2001
------------- -----------------
CURRENT ASSETS:
Cash $ 67,491 $ 725,364
Accounts receivable-
Trade, net of allowance for bad debt of $50,621
at June 30, 2002 and December 31, 2001 14,690 67,201
Employee receivables 3,248 3,248
Inventory, net of reserve for obsolescence of
$2,981,623 at December 31, 2001 189,189 518,452
Prepaid expenses 61,608 37,883
----------- ------------
Total current assets 336,226 1,352,148
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $578,818 at June 30, 2002 and
$475,899 at December 31, 2001 1,530,688 1,824,935
ESCROW DEPOSIT 56,545 368,181
ASSETS NOT USED IN BUSINESS - 75,017
INSTALLATION CONTRACTS, net of accumulated
amortization of $45,714 and $22,857 at
June 30, 2002 and December 31, 2001,
respectively 274,286 297,143
----------- ------------
Total assets $ 2,197,745 $ 3,917,424
=========== ============
CURRENT LIABILITIES:
Accounts payable $ 451,262 $ 477,716
Accrued expenses 46,433 103,792
Short-term borrowings 50,000 -
Current portion of long-term debt 9,795 82,507
Customer Deposits 433 7,741
----------- ------------
Total current liabilities 557,923 671,756
LONG-TERM DEBT 10,205 43,580
CONVERTIBLE DEBENTURES 1,904,029 1,153,197
----------- ------------
Total liabilities 2,472,157 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; 66,090,646 and 64,059,813
issued and outstanding at June 30, 2002 and
at December 31, 2001, respectively 66,091 64,061
Warrants 3,825,900 4,227,499
Paid-in capital 58,859,726 57,351,406
Accumulated deficit (63,026,129) (59,594,075)
----------- ------------
Total shareholders' (deficit) equity (274,412) 2,048,891
----------- ------------
Total liabilities and shareholders' (deficit)
equity $ 2,197,745 $ 3,917,424
=========== ============
3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six months and three months ended June 30, 2002 and 2001
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
----------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SALES $ 198,582 $ 10,435 $ 105,488 $ 5,869
DESIGN SERVICE REVENUE 76,875 816,806 17,500 376,218
----------- ----------- ----------- -----------
TOTAL REVENUE 275,457 827,241 122,988 382,087
COST OF SALES 116,402 4,041 60,486 1,819
COST OF SERVICES 494,679 639,359 46,186 312,996
----------- ----------- ----------- -----------
Gross (loss) profit (335,624) 183,841 16,316 67,272
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2,261,427 2,580,610 1,150,512 2,104,626
RESEARCH AND DEVELOPMENT EXPENSE 364,475 1,240,896 123,942 778,374
AMORTIZATION OF GOODWILL - 550,000 - 275,000
----------- ----------- ----------- -----------
Loss from operations (2,961,526) (4,187,665) (1,258,138) (3,090,728)
INTEREST EXPENSE 476,946 11,780 243,931 4,895
INTEREST INCOME 6,418 113,693 2,083 25,033
----------- ----------- ----------- -----------
Loss before income taxes (3,432,054) (4,085,752) (1,499,986) (3,070,590)
INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET LOSS $(3,432,054) $(4,085,752) $(1,499,986) $(3,070,590)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.05) $ (0.07) $ (0.02) $ (0.05)
=========== =========== =========== ===========
Weighted average number of shares of common stock
outstanding 65,127,202 62,364,461 65,743,979 62,930,854
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Year ended December 31, 2001 and six months ended June 30, 2002
(Unaudited)
Common Stock
------------ Paid-in
Shares Amount Capital Warrants
------ ------ ------- --------
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 1,973,333 1,973 1,392,763 (568,736)
Consulting fees - - - 167,137
Net loss - - - -
---------- ------- ----------- ----------
BALANCE, June 30, 2002 66,090,646 $66,091 $58,859,726 $3,825,900
========== ======= =========== ==========
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 - - - 826,000
Consulting fees - - - 167,137
Net loss - - (3,432,054) (3,432,054)
------ ------ ------------ ------------
BALANCE, June 30, 2002 - $ - $(63,026,129) $ (274,412)
====== ====== ============ ============
5
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
(Unaudited)
===============================================================================================================
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $ (3,432,054) $ (4,085,752)
Non-cash items included in net loss:
Depreciation and amortization 192,401 197,734
Amortization of goodwill - 550,000
Interest expense on convertible notes 466,832 -
Warrants issued in lieu of consulting fees 167,137 88,550
Gain on sale of building (33,014) -
Common stock issued to vendors - 40,800
Common stock issued pursuant to personal guarantee - 1,241,741
Loss on sale of assets 45,017 -
Write off assets not used in business 60,000 -
Decrease in accounts receivable - trade 52,511 45,690
Decrease in accounts receivable from employees - 3,342
Decrease (increase) in inventory 329,263 (21,492)
Increase in prepaid expenses (23,725) (63,412)
Decrease in escrow deposits 311,636 141,009
Decrease in accounts payable (26,454) (59,862)
Decrease in accrued expenses (57,359) (454)
Decrease in customer deposits (7,308) (2,756)
------------- -------------
Net cash used in operating activities (1,955,117) (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 (333,672) (61,341)
------------- -------------
Net cash provided by (used in) investing activities 127,717 (61,341)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 49,614 106,300
Proceeds from exercise of warrants 826,000 -
Repayment of long-term leases and other obligations (106,087) (46,652)
Issuance of convertible debentures 350,000 -
Increase in short-term borrowing 50,000 -
------------- -------------
Net cash provided by financing activities 1,169,527 59,648
------------- -------------
Decrease in cash (657,873) (1,926,555)
CASH BEGINNING OF PERIOD 725,364 2,683,480
------------- -------------
CASH END OF PERIOD $ 67,491 $ 756,925
============= =============
Cash Paid During The Period For -
Interest $ 10,114 $ 11,780
6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top
boxes; provide interactive cable systems to the extended stay hospitality
industry; and perform design services, specializing in hardware and software
development, 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. SUMMARY OF MAJOR ACCOUNTING POLICIES
Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 65,127,202 for the six-month period June 30, 2002 and
62,364,461 for the six-month period June 30, 2001. 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 12.5
million additional shares would be outstanding if all warrants and all stock
options were exercised as of June 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.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.
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
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. RISKS AND UNCERTAINTIES
The Company has incurred a net operating loss in each year since its founding
and as of June 30, 2002 has an accumulated deficit of $63,026,129. 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
including its set-top box. 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.
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States 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 June 30, 2002.
Revenues from the Company's design services have declined. 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, which it believes are sufficient to provide the Company with the
ability to continue in existence: 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 computer
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.
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 design, manufacturing and distribution
of hand-held pen-based computer systems and accessories and smartbox set-top
boxes. ADD performs design services, process methodology consulting and
intellectual property development. Suncoast provides private, interactive cable
systems to the hospitality industry.
June 30, 2002 June 30, 2001
------------- -----------------
Revenue
Dauphin $ 17,070 $ 10,435
ADD 286,250 1,265,743
Suncoast 181,512 -
Inter-company elimination (209,375) (448,937)
------------ -------------
Total $ 275,457 $ 827,241
============ =============
Operating (Loss)
Dauphin $ (2,103,758) $ (4,049,983)
ADD (353,283) (137,682)
Suncoast (504,485) -
Inter-company elimination - -
------------ -------------
Total $ (2,961,526) $ (4,187,665)
============ =============
June 30, 2002 December 31, 2001
------------- -----------------
Assets
Dauphin $ 18,484,251 $ 17,461,145
ADD 2,325,253 2,699,250
Suncoast 1,717,481 1,702,791
------------ -------------
Inter-company elimination (20,329,240) (17,945,762)
------------ -------------
Total $ 2,197,745 $ 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 shall not be 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 six month period ended June 30, 2002, the Company
recognized $439,332 as interest expense on the amortization of the beneficial
conversion feature. At conversion,
9
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. CONVERTIBLE DEBT AND WARRANTS - Continued
-----------------------------------------
the Company may record an additional beneficial conversion based on the market
price of the stock at the conversion date.
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 six month period ended
June 30, 2002, the Company recognized $27,500 as interest expense on the
amortization of the beneficial conversion feature.
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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
Revenues for the three months ended June 30, 2002 and 2001 were approximately
$123,000 and $382,000, respectively. Net sales increased from $6,000 in 2001 to
approximately $105,000 in 2002. Sales generated by the Company's interactive
cable system subsidiary, Suncoast, accounted for approximately $103,000 of these
revenues with the balance being parts and accessories for the Orasis(R) and
OraLynx(TM). Design service revenues in the second quarter of 2002 were
approximately $17,000 as compared to revenues of $376,000 in the second quarter
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 $376,000 in 2001 to $46,000 in 2002. The decrease is a result of
reduction in engineering staff which began during the first quarter of 2002.
Because of the reduction in design services revenue, gross profit margins were
negatively affected and generated a gross profit of $16,000 for the second
quarter of 2002 compared to a gross profit of $67,000 for the same period in
2001.
Selling, general and administrative expenses decreased to approximately
$1,151,000 in 2002 from $2,105,000 in 2001. The decrease is primarily due to the
issuance of common stock for reimbursement pursuant to a personal guarantee
which was recorded in the second quarter of 2001 in the amount of $1,242,000.
The reduction of selling, general and administrative expenses of the design
engineering subsidiary, which amounted to approximately $318,000 in 2001, were
offset by the expenses of the Company's interactive cable system subsidiary,
Suncoast, amounting to approximately $250,000, and the Company's branch office
in Piraeus, Greece which amounted to approximately $254,000. We acquired the net
assets of Suncoast in July 2001 and opened the branch office in August 2001.
Included in both years are costs totaling approximately $85,000 associated with
the Company's 2001 Annual Report and Shareholders Meeting. In the second quarter
of 2002, approximately $140,000 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 $275,000 in the second 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 $124,000 during the
second quarter ended June 30, 2002 from $778,000 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 78% of Research and Development costs consisted of costs
related to the development of software for the set-top box, with 12% 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 $244,000 for the second quarter of
2002 from $5,000 for the second quarter of 2001. Included in interest expense in
the second quarter of 2002 is three months amortization of the debt discount
associated with the Convertible Notes, amounting to $236,000. The remaining
interest is related to capital equipment leases, mortgage note and other
borrowings. Interest expense in the second quarter of 2001 related to capital
equipment leases and short term borrowings. Interest income declined from
$25,000 in 2001 to $2,000 in 2002 due to the reduction of short-term funds held
on deposit.
11
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 second quarter ended June 30,
2002 to approximately ($1,500,000) or ($0.02) per share from ($3,070,000) or
($0.05) 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, costs associated with the Annual Report and Shareholders Meeting
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., research and development costs regarding the set-top box,
issuance of common stock for reimbursement pursuant to a personal guarantee and
general administrative expenses associated with the Annual Report and
Shareholders Meeting. Loss per common share is calculated based on the monthly
weighted average number of common shares outstanding, which were 65,743,979 for
the three-month period ended June 30, 2002, and 62,930,854 for the three-month
period ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
Revenues for the Company decreased from approximately $827,000 in the first six
months of 2001 to $275,000 in the first six months of 2002. Net sales increased
from $10,000 in 2001 to approximately $199,000 in 2002. Sales generated by the
Company's interactive cable system subsidiary, Suncoast, accounted for
approximately $182,000 of these revenues with the balance being parts and
accessories for the Orasis(R) and OraLynx(TM). Design service revenues in the
first six months of 2002 were approximately $77,000 as compared to revenues of
$817,000 in the first six 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 $639,000 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 $336,000 for the second quarter of 2002 compared to a gross profit of
$184,000 for the same period in 2001.
Selling, general and administrative expenses decreased to approximately
$2,261,000 for the first six months ended June 30, 2002 as compared to
$2,581,000 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, general and
administrative expenses of the design engineering subsidiary for the six months
ended June 30, 2001, were approximately $635,000 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 $569,000, and the
Company's branch office in Piraeus, Greece which amounted to approximately
$491,000. The Company acquired the net assets of Suncoast in July 2001 and
opened the branch office in August 2001. In the six months ended June 30, 2002,
approximately $167,000 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 $550,000 for the six months ended
June 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 $364,000 for the
six months ended June 30, 2002 from $1,241,000 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 74% of Research and Development costs consisted of costs
related to the development of software
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (Continued)
---------------------------------
for the set-top box, with 16% related to further development of alternative
mobile hand-held computer devices. In 2001, the majority of Research and
Development was costs were for the set-top box.
Interest expense for the six months ended June 30, 2002 increased to
approximately $477,000 as compared to $12,000 for the same period in 2001.
Included in interest expense for 2002 is six months amortization of the debt
discount associated with the Convertible Notes, amounting to $467,000. The
remaining interest is related to capital equipment leases, mortgage note and
other borrowings. Interest expense for the six months ended June 30, 2001
related to capital equipment leases and short term borrowings. Interest income
declined from $114,000 for the six months ended June 30, 2001 to $6,000 for the
six months ended June 30, 2002 due to the reduction of short-term funds held on
deposit.
Balance Sheet
Total assets for the Company at June 30, 2002 were approximately $2,198,000, a
decrease of approximately $1,720,000 from December 31, 2001. The decrease was
primarily attributable to the net cash used in operations of approximately
$1,955,000, the purchase of equipment of $334,000, offset by the proceeds from
the sale of the building and other assets of $460,000, exercise of stock
warrants and stock options of $876,000 and the increase in borrowings of
$400,000.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has incurred a net operating loss in each year since its founding
and as of June 30, 2002 has an accumulated deficit of approximately $63,026,000
and a deficit in shareholders equity of approximately $274,000. 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 including its
set-top box. 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.
For the six months ended June 30, 2002, the Company used $1,955,000 of cash in
operating activities, and generated $128,000 of cash from investing activities
and $1,170,000 of cash from financing activities that produced a decrease in
cash of $658,000 for the six months. The net loss of $3,432,000 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
amortization of the debt discount associated with the Convertible Note.
Investing activities consisted of the purchase of equipment for installations
associated with the interactive cable systems and proceeds from the sale of a
building and other assets. Financing activities consisted of the exercise of
options and warrants, increase in convertible notes and the increase in
short-term borrowings. As of June 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 2.0. 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
-------------------------------------------
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject 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) the Company must have one or more currently effective
registration statements covering the resale by Crescent of all shares issued in
prior sales to Crescent and issuable upon the conversion of the Convertible
Note, (3) there must be no dispute as to the adequacy of disclosures made in any
such registration statement, (4) such registration statements must not be
subject to any stop order, suspension or withdrawal, (5) 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 must 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 of shares of common stock with respect to the applicable sale must not
violate 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 amount of
securities issued to Crescent equals or exceeds $5 million, the Company shall
issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000
shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
The Company elected to pursue the above financing arrangements with Crescent
International because the Company's previous financing arrangements 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 basis and other
such factors which would not generate the greatest benefit to the Company's
shareholders. In addition, the financing arrangement with Techrich expired at
the end of January 2002. Because of the changes in circumstances and the current
economic 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 was in the best interest of the Company and its
shareholders.
The Company expects to rely on the above financing arrangements in order to
continue its development and procurement of products and to continue its ongoing
operations in the short-term. The long-term cash needs of the Company will be
dependent on the successful development and procurement of the Company's
products 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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS
RISK FACTORS
------------
We operate in a highly competitive and volatile industry. We are faced with
aggressive pricing by competitors; competition for necessary parts, components
and supplies; continually changing customer demands and rapid technological
developments; and risks that buyers may encounter difficulties in obtaining
governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessary 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 discussed 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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in the Rights of the Company's Security Holders. None
Item 3. Default by the Company on its Senior Securities. None
Item 4. Submission of Matters to a Vote of Securities Holders. None
An annual meeting of shareholders of the Company was held on June 25, 2002. At
that meeting:
a) Management's nominees listed in the proxy statement pertaining to the
meeting were elected directors for the ensuing year. Of the 60,095,059
shares present in person or represented by proxy at the meeting, the
number of shares voted for and the number of shares to which authority
to vote in the election was withheld, were as follows with respect to
each of the nominees:
Name Shares Voted for Election Shares as to Which Authority Withheld
- ---- ------------------------- -------------------------------------
Andrew J. Kandalepas 57,535,768 2,559,291
Gary E. Soiney 58,000,688 2,094,371
Mary Ellen Conti, MD 58,011,588 2,083,471
Dr. Daniel D. Kiddy 58,172,788 1,922,271
b) A proposal to ratify the appointment of Grant Thornton LLP as
independent auditors of the Company for the year ended December 31,
2002 was approved. Of the 60,095,059 shares present or represented by
proxy at the meeting, 59,466,842 shares were voted for the proposal,
267,056 shares were voted against the proposal, and 361,161 shares
abstained form voting with respect to the proposal.
Item 5. Other Information. None
Item 6(a). Exhibits.
Exhibit 99.1 Chief Executive Officer Certification under Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Chief Financial Officer Certification under Section 906
of the Sarbanes-Oxley Act of 2002
Item 6(b). Reports on Form 8-K. None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
(Registrant)
Date: August 14, 2002 By: /s/ Andrew J. Kandalepas
------------------------------------------
Andrew J. Kandalepas
Chief Executive Officer
Date: August 14, 2002 By: /s/ Harry L. Lukens, Jr.
-------------------------------------------
Harry L. Lukens, Jr.
Chief Financial Officer
16