UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, d.c. 20549
FORM 10-QSB
Quarterly Report of Small Business Issuers under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2004
Commission File No. 333-42936
DND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Nevada 84-1405298
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
375 E. Elliot Rd., Bldg. 6
Chandler, Arizona 85225
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (480) 892-7020
-----------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report)
The issuer has (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) been subject to
such filing requirements for the past 90 days.
- --------------------------------------------------------------------------------
Number of shares outstanding of each of the issuer's classes of common equity:
Class Outstanding as of November 12, 2004
----- -----------------------------------
Common stock, $0.001 par value 23,000,000
- --------------------------------------------------------------------------------
The issuer is not using the Transitional Small Business Disclosure format.
DND TECHNOLOGIES, INC.
Table of Contents
Page
----
PART I FINANCIAL INFORMATION.............................................. 1
Item 1. Consolidated Unaudited Financial Statements........................ 1
Condensed Consolidated Unaudited Balance Sheet............................. 1
Condensed Consolidated Unaudited Statements of Operations.................. 3
Condensed Consolidated Unaudited Statements of Cash Flows.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 15
Item 3. Controls and Procedures............................................ 25
PART II OTHER INFORMATION.................................................. 25
Item 1. Legal Proceedings.................................................. 25
Item 6. Exhibits and Reports on Form 8-K................................... 25
SIGNATURES................................................................. 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 180,671
Accounts receivable, net of
allowance for doubtful accounts 1,521,993
Inventories, net of allowance for obsolescence 3,234,647
Prepaid expenses 213,246
----------
Total current assets 5,150,557
----------
PROPERTY AND EQUIPMENT, Net of
accumulated depreciation 300,139
----------
OTHER ASSETS:
License agreements 3,359,452
Loan fees 11,450
Deposits 25,366
----------
Total other assets 3,396,268
----------
TOTAL ASSETS $8,846,964
==========
(Continued)
1
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, current portion $ 489,350
Note payable, Merrill Lynch, current portion 299,549
Capital leases payable, current portion 22,789
Lawsuit payable, current portion 90,000
Accounts payable and accrued expenses 2,591,102
Deposits from customers 1,298,451
Accounts payable, Lam Research Corporation, current portion 451,487
License payable, Lam Research Corporation, current portion 508,453
License and royalty payable, Axcelis 517,227
Amounts due to related parties 417,565
-----------
Total current liabilities 6,685,973
-----------
COMMITMENTS AND CONTINGENCIES
LONG-TERM LIABILITIES, NET OF CURRENT PORTION:
Capital lease payable 17,601
Accounts payable, Lam Research Corporation 451,511
Note payable, Merrill Lynch 823,761
License payable, Lam Research Corporation 3,101,138
Lawsuit payable 30,000
-----------
Total long-term liabilities, net of current portion 4,424,011
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock 0
Common stock, par value, $.001 per share;
authorized, 50,000,000 shares;
issued and outstanding, 23,000,000 shares 23,000
Paid-in capital 1,957,160
Common stock subscribed 55,000
Accumulated deficit (4,298,180)
-----------
Total stockholders' deficit (2,263,020)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,846,964
===========
See accompanying notes.
2
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Three Months Nine Months
------------------------------- -------------------------------
2004 2003 2004 2003
---- ---- ---- ----
REVENUE:
Systems and Chillers $ 2,013,849 $ 1,504,185 $ 5,821,950 $ 2,547,648
Parts, assemblies
and consumables 1,335,180 1,293,018 4,461,965 4,197,808
Field service and
training 104,387 90,085 197,810 293,470
------------ ------------ ------------ ------------
Total revenue 3,453,416 2,887,288 10,481,725 7,038,926
------------ ------------ ------------ ------------
COST OF REVENUE:
Cost of revenues -
recurring operations 1,866,856 1,888,294 6,323,324 4,533,527
Reserve for slow moving
and obsolete inventory (223) 2,322,330 (800,891) 2,256,128
------------ ------------ ------------ ------------
Total cost of revenue 1,866,633 4,210,624 5,522,433 6,789,655
------------ ------------ ------------ ------------
GROSS PROFIT 1,586,783 (1,323,336) 4,959,292 249,271
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development 32,759 13,928 64,602 44,036
Sales and marketing 715,251 244,409 1,683,111 738,281
General and
administrative 484,194 557,893 1,481,847 1,437,408
Lawsuit settlement 140,000
------------ ------------ ------------ ------------
Total operating expenses 1,232,204 816,230 3,369,560 2,219,725
------------ ------------ ------------ ------------
INCOME FROM
OPERATIONS 354,579 (2,139,566) 1,589,732 (1,970,454)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (83,115) (75,688) (261,571) (278,109)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE 271,464 (2,215,254) 1,328,161 (2,248,563)
INCOME TAX EXPENSE
(BENEFIT) 0 0 800 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 271,464 $ (2,215,254) $ 1,327,361 $ (2,248,563)
============ ============ ============ ============
(Continued)
3
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Three Months Nine Months
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
NET INCOME (LOSS)
PER COMMON SHARE:
Basic $ .01 $ (.10) $ .06 $ (.10)
========== ========== ========== ==========
Diluted $ .01 $ N/A $ .05 $ N/A
========== ========== ========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
AND SUBSCRIBED:
Basic 23,000,000 23,000,000 23,000,000 22,833,333
========== ========== ========== ==========
Diluted 26,637,016 N/A 26,637,016 N/A
========== ========== ========== ==========
See accompanying notes.
4
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,327,361 $(2,248,563)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation 134,608 151,150
Amortization 408,734 305,405
Provision for slow moving and
obsolete inventories 2,256,128
Allowance for doubtful accounts 25,000
Loss on disposal of fixed asset 2,349
Changes in operating assets
and liabilities:
Accounts receivable (468,432) (756,122)
Other receivables 0 (99)
Inventories (3,148,025) (355,314)
Prepaid expenses and other assets (41,472) (76,622)
Accounts payable and accrued expenses 1,029,481 512,147
Settlement of lawsuit 140,000
Deposits from customers 1,093,451
Accrued expenses and amounts due
to related parties (6,916) (5,377)
----------- -----------
Net cash provided by operating activities 471,139 (192,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (25,123) (4,227)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment on line of credit (4,963)
Proceeds from issuance of long-term debt 626,026
Principal payments on long-term debt (418,183) (427,238)
----------- -----------
Net cash used by financing
activities (423,146) 198,788
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALANTS 22,870 2,294
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 157,801 199,880
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 180,671 $ 202,174
=========== ===========
(Continued)
5
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENNSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $ 225,949 $ 297,092
========== ==========
Cash paid for taxes $ 0 $ 0
========== ==========
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued for
accounts payable $ 0 $ 160,000
========== ==========
Acquisition of equipment
through capital equipment $ 0 $ 11,330
========== ==========
Cancellation of capital lease
and return of asset to vendor $ 9,202 $ 0
========== ==========
See accompanying notes.
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6
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. GENERAL
Presentation - The interim consolidated financial statements of DND
Technologies, Inc. and Subsidiary (the "Company") are condensed and do not
include some of the information necessary to obtain a complete
understanding of the financial data. Management believes that all
adjustments necessary for a fair presentation of results have been
included in the unaudited consolidated financial statements for the
interim periods presented. Operating results for the nine months ended
September 30, 2004, are not necessarily indicative of the results that may
be expected for the year ended December 31, 2004. Accordingly, your
attention is directed to footnote disclosures found in the December 31,
2003 Annual Report and particularly to Note 1, which includes a summary of
significant accounting policies.
Nature of Business and History of Company - DND Technologies, Inc. was
organized on May 9, 1997, under the laws of the state of Nevada. The
Company operates as a holding company for subsidiary acquisitions. The
Company's operating subsidiary is Aspect Systems, Inc. (located in Arizona
and Texas; hereinafter referred to as "ASI").
ASI also owns 100% of ASI Team Asia Ltd. ASI Team Asia Ltd. is inactive
and has no significant assets or liabilities and has not had any revenue
or expenses.
ASI is a supplier of semiconductor manufacturing equipment and also
supplies complete after market support of the aforementioned equipment,
which currently includes Lam AutoEtch, Rainbow, and TCP plasma etch
systems, plus a variety of plasma etch and strip products manufactured on
the ASI MX and ASI MD platforms (formerly Matrix System One and Ten), and
the Arista and Arista Dual platforms (formerly Matrix Bobcat and Cheetah).
Elements of support include spare parts and assemblies, and various
engineering services.
7
Going Concern - These consolidated financial statements are presented on
the basis that the Company is a going concern. Going concern contemplates
the realization of assets and the satisfaction of liabilities in the
normal course of business over a reasonable length of time. The Company
incurred significant operating losses in 2003 and 2002 and has negative
working capital and a stockholders' deficit. These factors raise
uncertainty as to the Company's ability to continue as a going concern.
Significant Customers - For the nine months ended September 30, 2004 and
2003, the Company had two customers and one customer, respectively, whose
revenues exceeded 10% of total revenues (2004 - 13% and 12%; 2003 - 24%).
Revenues in 2004 outside the United States include Europe (21%) and Asia
(20%).
Significant Suppliers - For the nine months ended September 30, 2004,
approximately 23% of gross inventory purchases were purchased from Lam
Research Corp. The Company expects to have significant purchases of
inventory from Lam in the coming year.
Recently Issued Accounting Standards Not Yet Adopted - There are no
accounting standards with pending adoptions that have any applicability to
the Company.
Reclassifications - Certain 2003 amounts have been reclassified to conform
to 2004 presentations.
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful accounts is as
follows:
Accounts receivable $ 1,555,993
Allowance for doubtful accounts 34,000
-----------
Net accounts receivable $ 1,521,993
===========
3. INVENTORIES
The inventories are comprised of the following:
Parts and materials $ 4,117,057
Work-in-process 1,201,717
Allowance for obsolescence (2,084,127)
-----------
$ 3,234,647
===========
8
4. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation at September 30, 2004
consist of:
Office, furniture, fixtures and equipment $ 354,344
Leasehold improvements 440,151
Machinery and equipment 323,938
Laboratory tools 29,600
----------
1,148,033
Less accumulated depreciation 847,894
----------
Total property and equipment $ 300,139
==========
5. LICENSE AGREEMENT AND PAYABLE, LAM RESEARCH CORPORATION
In November 2002, ASI entered into an asset purchase and licensing
agreement with Lam. Under the agreement, ASI purchased approximately $2.1
million of inventory (see Note 10) from Lam and entered into a licensing
agreement requiring payments totaling $5,376,000 (payable in 96 equal
monthly installments of $56,000). ASI has recorded the payable after
imputing interest at 6%.
6. LICENSE AND ROYALTY PAYABLE, AXCELIS TECHNOLOGIES, INC.
In November 2003, the Company entered into an agreement with Axcelis
Technologies, acquiring an exclusive license to all future manufacturing,
sales, service, and parts support for certain dry strip semi-conductor
manufacturing equipment marketed under the trade names "System One" and
"System Ten". The agreement provides for the one time payment of a License
fee of $150,000 plus 18% of net revenues (from these sales) per quarter
until a $2,750,000 fee has been paid and a declining royalty on related
sales ranging from 10% to 2% through December 31, 2010.
The license and royalty payable at September 30, 2004 consisted of the
following:
License payable $ 332,503
Royalty payable 184,724
----------
Total License and Royalty Payable $ 517,227
==========
In addition, on August 2, 2004, the Company entered into an additional
agreement with Axcelis Technologies, Inc., acquiring an exclusive license
to manufacture, sell and
9
provide services and parts support for certain reactive ion etch
semiconductor manufacturing equipment for wafer sizes up to 200mm formerly
marketed by Matrix Integrated Systems, Inc. and Axcelis Technologies, Inc.
under the trade names of "Bobcat 209" and "Cheetah" (limited to such
equipment that includes at least one reactive ion etch chamber). The
agreement provides for a quarterly payment equal to 18% of net revenues
from the sale of this product by the Company, beginning with the fourth
quarter of 2004 and ending December 31, 2011, or until $750,000 (the
license fee) has been paid, whichever occurs first, and payment of a
declining royalty on related sales from 10% down to 2% over a period of
time that ends December 31, 2011.
7. NOTE PAYABLE, MERRILL LYNCH
On May 14, 2004, the Company entered into an agreement with Merrill Lynch,
which provided for the dismissal of all litigation between the companies
and the restructure of the outstanding balance of the line of credit and
the existing term loan into a new term loan. On June 18, 2004, the Order
regarding Joint Stipulation to Dismiss with Prejudice was filed in the US
District Court of Arizona.
The renegotiated term loan bears interest at 2.00% plus the Prime Rate as
published in the Wall Street Journal per annum. The loan is due February
2006 with amortized payments over 45 months and a balloon payment due at
maturity. The loan also required a loan fee of $11,450. The loan is
secured by a first lien on the Company's accounts receivable and
inventories ($4,756,640 as of September 30, 2004) and has been guaranteed
by Doug Dixon and the Company.
8. NOTES PAYABLE, OTHER
A note payable, bearing interest at 12% was due $200,000
in November 2003, required monthly interest
payments of $2,000 and is secured by a second
lien on the receivables and inventory of ASI . The
note includes options to purchase shares of the
Company's common stock (200,000 shares @ $0.20
per share and 200,000 shares at $1.00 per share).
Legal representatives of the Cartier estate have
agreed to forbearance of the outstanding principal
payment until December 31, 2004. At that time, the
entire amount shall be paid in full.
10
Unsecured demand note due to an individual
with interest accruing at 7% 289,350
--------
Total (all current) $489,350
========
9. LAWSUIT SETTLEMENT
On April 30, 2004, the Company and a former employee settled
counter-claims against each other arising from the employee's prior
association with the Company. The Company has recorded an expense of the
entire settlement payable to the employee, $140,000. Payments in the
amount of $10,000 per month begin September 1, 2004 and continue until
October 1, 2005, without interest.
10. ACCOUNTS PAYABLE, LAM RESEARCH CORPORATION
On June 25, 2004, the Company signed an amendment to the November 2002
Asset Purchase and License Agreement with Lam Research Corporation that
calls for payments of the inventory purchase (See Note 5) to be paid as
follows:
The spares inventory payment plan calls for 30 monthly $761,936
installment payments of $28,220 beginning August 1,
2004 and ending January 1, 2007 with an additional
payment of $90,000 that was due and paid on September
30, 2004. An additional inventory transfer of $65,000
took place in August 2004 and was added to this
outstanding balance.
The product group inventory payment plan calls for 141,062
--------
18 monthly installments of $9,404 beginning August 1,
2004 and ending January 1, 2006.
$902,998
Total ========
Future minimum payments per the agreement are as
follows:
Fiscal
------
December 31, 2004 $112,872
December 31, 2005 451,487
December 31, 2006 338,639
--------
$902,998
========
11
11. AMOUNTS DUE TO RELATED PARTIES
The amounts due to related parties at September 30, 2004 consists of the
following:
Notes payable to Chairman of Company at 7.0% $ 120,000
Accrued interest on notes payable 41,473
Accrued officer's salaries 256,092
----------
Total Amount Due To Related Parties $ 417,565
==========
12. COMMITMENTS AND CONTINGENCIES
Real Estate Leases
The Company leases its Arizona and Texas facilities under operating leases
which require monthly payments of $14,424 and $9,762 and expire in
November 2007 and November 30, 2008, respectively. Rent expense in 2004
and 2003 amounted to $292,492 and $283,853, respectively.
Future minimum lease payments on the real estate leases are as follows:
Fiscal
------
December 31, 2004 $ 279,000
December 31, 2005 293,000
December 31, 2006 302,000
December 31, 2007 299,000
December 31, 2008 112,000
----------
Total $1,285,000
==========
13. EMPLOYEE STOCK OPTIONS
On August 11, 2003, the Board of Directors and stockholders approved the
DND Technologies, Inc. Stock Option Plan, which permits the Board of
Directors to grant, for a ten year period, options to purchase up to
5,000,000 shares of its common stock to directors, employees and
consultants. The Plan is administered by the Board of Directors. The
administrators have the authority and discretion, subject to the
provisions of the Plan, to select persons to whom stock options will be
granted, to designate the number of shares to be covered by each option,
to specify the type of consideration to be paid, and to establish all
other terms and conditions of each option. Options granted under the Plan
will not have a term that exceeds ten years from date of grant.
12
The stock subject to the Plan and issuable upon exercise of options
granted under the Plan are shares of the Company's common stock, $.001 par
value, which may be either unissued or treasury shares.
The exercise price is no less than 100% of the fair market value of the
shares at the date of the grant of the options, as specified by the Board
of Directors.
Vesting terms of the options range from immediate to four years.
The Company has elected to account for stock-based compensation under APB
Opinion No. 25, under which no compensation expense has been recognized
for stock options granted to employees at fair market value.
A summary of the option activity for the nine months ended September 30,
2004, pursuant to the terms of the Plan is as follows:
Options outstanding at January 1, 2004 4,774,226 $.06
Granted 0 $.00
Exercised 0 $.00
Cancelled and expired 165,000 $.06
---------
Options outstanding at September 30, 2004 4,609,226
=========
4,204,226 shares are exercisable at September 30, 2004.
Information regarding stock options outstanding as of September 30, 2004
is as follows:
Price $ .06
Weighted average exercise price $ .06
Weighted average remaining contractual life 8 years, 10 months
The weighted average fair value of options granted in the year ended
December 31, 2003 were estimated as of the date of grant using the
Black-Scholes stock option pricing model, based on the following weighted
average assumptions:
Dividend yield $ -0-
Expected volatility 50%
Risk-free interest rate 4.37%
Expected life 10 years
For purposes of proforma disclosures, the estimated fair value of the
options is amortized to expense over the
13
options' vesting periods. The Company's proforma information follows:
Net income:
As reported $1,327,361
Proforma $1,311,343
Net Income per common stock share:
Basic:
As reported $.06
Proforma $.06
Diluted:
As reported $.05
Proforma $.05
14. MANAGEMENT PLANS IN REGARDS TO GOING CONCERN
Management's plans include, but are not limited to, increasing revenue by
continuing to expand the legacy product lines, obtaining additional equity
or debt financing from investors, and increasing revenue by capturing
greater market share through aggressive sales efforts.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Aspect Systems, Inc, ("ASI") a wholly owned subsidiary of DND
Technologies, Inc, ("DND" or the Company) is a supplier and provider of
after-market support of semiconductor manufacturing equipment which currently
includes Lam AutoEtch, Rainbow, and TCP plasma etch zsystems, and plasma etch
and strip products manufactured on the ASI MX and ASI MD (formerly Matrix System
One and Ten), and the Arista and Arista Dual (formerly Matrix Bobcat 209 and
Cheetah) platforms. Elements of support range from a full line of spare parts
and assemblies to various engineering services. ASI also offers a wide variety
of sub-assembly repair services and reconditioning/refurbishing of an array of
temperature control units used in the semiconductor industry.
Management's discussion and analysis of results of operations and
financial condition are based upon the Company's financial statements. These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America. These principles require management to
make certain estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates based on historical experience and various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Critical Accounting Policies and Estimates
In consultation with our Board of Directors, we have identified ten
accounting principles that we believe are key to an understanding of our
financial statements. These important accounting policies require management's
most difficult, subjective judgments.
1. Going Concern
The financial statements are presented on the basis that the Company is a
going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The Company has incurred significant operating losses in 2002
and 2003 and has negative working capital and a stockholder's deficit. These
factors raise uncertainty as to the Company's ability to continue as a going
concern.
Management's plans to eliminate the going concern situation include, but
are not limited to, the following:
1. Obtain additional equity or debt financing from investors.
2. Increase revenue by capturing greater market share through
aggressive sales efforts in a recovering market economy.
3. Expand the ASI product base by obtaining rights to other
legacy products, thereby increasing revenue.
2. Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances
less any allowance for doubtful accounts. Interest is not accrued on overdue
accounts receivable. The Company's subsidiary, "ASI", does require advance
payments on certain orders of large systems.
3. Allowance for Doubtful Accounts
The allowance for doubtful accounts on accounts receivable is charged to
income in amounts sufficient to maintain the allowance for uncollectible
accounts at a level management believes is adequate to cover any probable
losses. Management determines the adequacy of the allowance based on historical
write-off percentages and information collected from individual customers.
15
Accounts receivable are charged off against the allowance when
collectibility is determined to be permanently impaired (bankruptcy, lack of
contact, age of account balance, etc.).
4. Inventory
Inventory is valued at the lower of cost or market. Cost includes raw
materials, freight, labor and manufacturing overhead.
5. License Agreements
The Company has license agreements, which are being amortized using the
straight-line method over the life of the contract with Lam Research Corporation
("Lam") (8 years) and Axcelis Technologies, Inc. ("Axcelis") (7 years).
6. Property and Equipment
Depreciation is provided for by the accelerated and straight-line methods
over the following estimated useful lives.
Office furniture, fixtures and equipment 5 - 7 Years
Leasehold improvements Term of Lease
Machinery and equipment 7 Years
Laboratory tools 7 Years
7. Product Warranty Provision
ASI provides a warranty provision on sales of its parts and systems to
cover anticipated repairs and/or replacement. The Company provides a warranty on
its systems ranging from ninety days to twelve months from date of acceptance,
not to exceed fourteen months from the ship date.
8. Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, title transfer has occurred, the price is fixed or readily determinable,
and collectibility is probable. Sales are recorded net of sales discounts. The
Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," (SAB 101). Our revenues are
recorded under two categories:
Product sales - The Company recognizes revenue from product sales
when the goods are shipped and title passes to its customers.
Service income - The Company recognizes revenue from service income
when services are performed.
9. Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the amount
of taxable income and pretax financial income and between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in FASB Statement No. 109, "Accounting for Income Taxes." As changes
in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
10. Employee Stock Options
The Company accounts for stock-based compensation under APB Opinion No.
25, under which no compensation expense has been recognized for stock options.
16
Selected Financial Information
Three Months Ended
9/30/2004 9/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Statements of Operations
Total Revenue $ 3,453,416 $ 2,887,288 $ 566,128
----------- ----------- -----------
Cost of Revenue:
Costs of revenues 1,866,856 1,888,294 (21,438)
Reserve for slow moving and
Obsolete inventory (223) 2,322,330 (2,322,553)
----------- ----------- -----------
Total Cost of Revenues 1,866,633 4,210,624 (2,343,991)
----------- ----------- -----------
Percentage of Sales 54% 146%
Gross Profit 1,586,783 (1,323,336) 2,910,119
----------- ----------- -----------
Percentage of Sales 46% N/A
Operating Expenses:
Research and development 32,759 13,928 18,831
Sales and marketing 715,251 244,409 470,842
General and administrative 484,194 557,893 (73,699)
----------- ----------- -----------
Total Operating Expenses 1,232,204 816,230 415,974
----------- ----------- -----------
Income (Loss) from Operations 354,579 (2,139,566) 2,494,145
----------- ----------- -----------
Other Income (Expense):
Interest Expense (83,115) (75,688) 7,427
Other Income 0 0 0
----------- ----------- -----------
Total Other Income (Expense) (83,115) (75,688) 7,427
----------- ----------- -----------
Income (Loss) Before Income Tax Expense 271,464 (2,215,254) 2,486,718
Income Tax Expense 0 0 0
----------- ----------- -----------
Net Income (Loss) $ 271,464 $(2,215,254) $ 2,486,718
=========== =========== ===========
Net (Loss) Per Share
Basic .01 (.10) .11
Diluted .01 N/A N/A
Results of Operations
Three Months Ended September 30, 2004 Compared To Three Months Ended September
30, 2003.
Revenues
Our revenue increase of $566,128, or 20%, was due to an increase in sales
from customers purchasing additional capital equipment to meet the demands of a
recovering economy. Our sales increase by segment is as follows:
September 30, 2004 September 30, 2003 Increase
(Unaudited) (Decrease) (Unaudited)
----------- ---------- -----------
Systems and chillers $2,013,849 $1,504,185 $ 509,664
Parts, assemblies
and consumables 1,335,180 1,293,018 42,162
Field service and training 104,387 90,085 14,302
---------- ---------- ----------
$3,453,416 $2,887,288 $ 566,128
========== ========== ==========
17
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations decreased $21,438 or 1%, and
our cost of revenues as a percentage of revenues decreased from 65% in 2003 to
54% in 2004. This decrease in percentage is primarily due to a $509,664 increase
in systems and chiller revenue, which carries a significantly lower cost of
revenue percentage than parts. In addition, our systems cost of revenue
percentage continues to decrease as we become more efficient in the
manufacturing process.
Cost of Revenues - Reserve for Slow Moving and Obsolete Inventory
Our cost of revenues - reserve for slow moving and obsolete inventory is
the change in our analysis of the need for slow-moving and obsolete inventory
reserve. Based on our analysis in the third quarter of 2004, we recorded a $223
decrease in our reserve as compared to management's decision to increase our
reserve by $2,296,128 for slow moving and obsolete inventory in the third
quarter of 2003.
Research and Development
Research and development costs increased $18,831 or 135% in the three
months ended September 30, 2004. The increase is related to payroll and payroll
benefits of $5,000 and outside engineering charges of $14,000. We normally do
not incur significant research and development expenses.
Sales and Marketing
Sales and marketing costs increased $470,842 or 193% in the three months
ended September 30, 2004. The increase is primarily related to the Axcelis
license and related royalties of $299,000, which began in December 2003, and
commissions of $133,000, which are increasing with the increase in system sales.
General and Administrative
Three Months Ended
9/30/2004 9/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
General and Administrative
Salaries and wages $ 197,790 $ 180,782 $ 17,008
Professional fees 47,857 160,519 (112,662)
Rent, less amount allocated to Cost of Revenue 53,389 48,699 4,690
Depreciation, less amount allocated to Cost of
Revenue 29,381 33,537 (4,156)
Other general and administrative expenses 155,777 134,356 21,421
--------- --------- ---------
Total General and Administrative $ 484,194 $ 557,893 $ (73,699)
========= ========= =========
Salaries and wages increased approximately $17,008 or 9% in the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003. This increase resulted from the hiring of two new employees ($13,000);
pay reductions for certain managerial personnel applicable in 2003 but not
applicable in 2004 ($17,000); and an increase in overtime and the employee
vacation accrual ($11,000); offset by a reduction for employees who have left
the company ($24,000).
Professional fees decreased in 2004 in the amount of $112,662 primarily
due to an $82,000 decrease in legal expenses related to litigation ultimately
settled by the Company and a $12,000 decrease in accounting related expenses.
Net Income
We had net income of $271,464 for the three months ended September 30,
2004, compared to net loss of $2,215,254 for the three months ended September
30, 2003. The substantial increase in net income is primarily the result of a
$2,322,330 net increase in our reserve for slow moving and obsolete inventory in
the three months ended September 30, 2003, plus improved operating efficiencies
achieved
18
through a higher level of business activity, offset by an increase in
commissions and royalties due to the increased sales for the three months ended
September 30, 2004.
Selected Financial Information
Nine Months Ended
9/30/2004 9/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Statements of Operations
Total Revenue $ 10,481,725 $ 7,038,926 $ 3,442,799
------------ ------------ ------------
Cost of Revenue:
Costs of revenues 6,323,324 4,533,527 1,789,797
Reserve for slow moving and
Obsolete inventory (800,891) 2,256,128 (3,057,019)
------------ ------------ ------------
Total Cost of Revenues 5,522,433 6,789,655 (1,267,222)
------------ ------------ ------------
Percentage of Sales 53% 96%
Gross Profit 4,959,292 249,271 4,710,021
------------ ------------ ------------
Percentage of Sales 47% 4%
Operating Expenses:
Research and development 64,602 44,036 20,566
Sales and marketing 1,683,111 738,281 944,830
General and administrative 1,481,847 1,437,408 44,439
Lawsuit Settlement 140,000 0 140,000
------------ ------------ ------------
Total Operating Expenses 3,369,560 2,219,725 1,149,835
------------ ------------ ------------
Income (Loss) from Operations 1,589,732 (1,970,454) 3,560,186
------------ ------------ ------------
Other Income (Expense):
Interest Expense (261,571) (278,109) 16,538
Income (Loss) Before Income Tax Expense 1,328,161 (2,248,563) 3,576,724
Income Tax Expense (Benefit) 800 0 800
------------ ------------ ------------
Net Income (Loss) $ 1,327,361 $ (2,248,563) $ 3,575,924
============ ============ ============
Net (Loss) Per Share
Basic .06 (.10) .16
Diluted .05 N/A N/A
Results of Operations
Nine Months Ended September 30, 2004 Compared To Nine Months Ended September 30,
2003.
Our revenue increase of $3,442,799, or 49%, was due to an increase in
sales from customers who are purchasing additional capital equipment to meet the
demands of a recovering economy. Our sales increase by segment is as follows:
September 30, 2004 September 30, 2003 Increase
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
Systems and chillers $ 5,821,950 $ 2,547,648 $ 3,274,302
Parts, assemblies
and consumables 4,461,965 4,197,808 264,157
Field service and training 197,810 293,470 (95,660)
----------- ----------- -----------
$10,481,725 $ 7,038,926 $ 3,442,799
=========== =========== ===========
19
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations increased $1,789,797 or 39%.
This increase is directly related to the 49% increase in total revenue for the
nine months ended September 30, 2004. Our cost of revenues as a percentage of
revenues for the nine months ended September 30, 2004 was 60% as compared to 64%
for the nine months ended September 30, 2003.
Cost of Revenues - Reserve for Slow Moving and Obsolete Inventory
Our cost of revenues - reserve for slow moving and obsolete inventory is
the change in our analysis of the need for a slow-moving and obsolete inventory
reserve. Based on our analysis in the second quarter of 2004, we recorded a
$962,758 decrease in our reserve primarily as a result of signing an amendment
to the November 2002 Lam Asset Purchase and License Agreement and re-valuing the
corresponding inventory. This amount was offset by a $161,867 increase to the
reserve due to an analysis of all other inventory items. Thus, the net change
was a decrease of $800,891. In the third quarter of 2003, management elected to
increase our reserve by $2,256,128 for slow moving and obsolete inventory.
Research and Development
Research and development costs increased $20,566 or 47% in the nine months
ended September 30, 2004. The increase is primarily related to a $7,700 increase
in payroll/benefits and a $13,000 increase in outside engineering expenses. We
normally do not incur significant research and development expenses.
Sales and Marketing
Sales and marketing costs increased $944,830 or 128% in the nine months
ended September 30, 2004. The increase is primarily related to the Axcelis
license and related royalties of $533,000 which began in December 2003,
commissions of $340,000 which are increasing with the increase in system sales,
and a $52,000 increase in sales/marketing payroll and benefits due to
commission-based sales for part of 2003.
General and Administrative
Nine Months Ended
9/30/2004 9/30/2003 Increase
--------- --------- --------
(Unaudited) (Unaudited) (Decrease)
----------- ----------- ----------
General and Administrative
Salaries and wages $ 594,346 $ 491,017 $ 103,329
Professional fees 230,933 400,834 (169,901)
Rent, less amount allocated to Cost of Revenue 158,020 138,691 19,329
Depreciation, less amount allocated to Cost of
Revenue 86,972 96,756 (9,784)
Other general and administrative expenses 411,576 310,110 101,466
---------- ---------- ----------
Total General and Administrative $1,481,847 $1,437,408 $ 44,439
========== ========== ==========
Salaries and wages increased approximately $103,329 or 21% in the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. This increase is primarily the result of an increase of $63,000 from
new employee salaries, an increase of $52,000 from selected managerial personnel
who took pay reductions in 2003 but did not take reductions in 2004, $29,000
from general pay increases, $31,000 for increased overtime and vacation accrual,
and a decrease of $72,000 from employees who left the Company in 2004.
Professional fees decreased in 2004 in the amount of $169,901 primarily
due to a $102,000 decrease in consulting expense related primarily to the
integration of our accounting and inventory/production control systems that was
completed in 2003 ($41,000), and a decrease in investor relations expense
($53,000), a decrease in legal expense from litigation ultimately settled by the
Company ($41,000), and a decrease in accounting related expense ($21,000).
20
Other general and administrative expenses increased $101,466. The
increased expenses are attributable to travel costs of $33,000 incurred in 2004,
primarily for our subsidiary's new CEO to work in both our Arizona and Texas
locations, and the purchase of supplies and delayed maintenance of our
facilities (due to our cash flow problems in 2003) amounting to $61,000.
Lawsuit Settlement
In April 2004, the Company settled litigation with a former employee,
which provided for the payment of $140,000 in installments of $10,000 per month
beginning September 2004. (See further discussion below under "Liquidity and
Capital Resources.")
Net Income
We had net income of $1,327,361 for the nine months ended September 30,
2004, compared to a net loss of $2,248,563 for the nine months ended September
30, 2003. The large increase in net income is primarily the result of a $800,668
decrease (see further discussion under Cost of Revenues-Slow Moving and Obsolete
Inventory for the nine month period) in our reserve for slow moving and obsolete
inventory, compared to a $2,256,128 increase in our reserve for slow moving and
obsolete inventory during 2003, plus improved operating efficiencies achieved
through a higher level of business activity, offset by an increase in
commissions and royalties due to the increased sales for the nine months ended
September 30, 2004.
Capital Resources
Nine Months Ended
-----------------
Working Capital 9/30/2004 9/30/2003
- --------------- --------- ---------
(Unaudited) (Unaudited) Change
----------- ----------- ------
Current Assets $ 5,150,557 $ 2,518,287 $ 2,632,270
Current Liabilities (6,693,249) (6,249,701) (443,548)
----------- ----------- -----------
Deficit Working Capital $(1,542,692) $(3,731,414) $ 2,188,722
=========== =========== ===========
Long-term Debt $(4,416,735) $(3,767,085) $ (649,650)
=========== =========== ===========
Stockholders' (Deficit) $(2,263,020) $(3,157,685) $ 894,665
=========== =========== ===========
Statements of Cash Flows Select Information
Nine Months Ended
9/30/2004 9/30/2003
--------- ---------
(Unaudited) (Unaudited)
----------- -----------
Net Cash Provided (Used) By:
Operating Activities $ 471,139 $(192,267)
Investing Activities $ (25,123) $ (4,227)
Financing Activities $(423,146) $ 198,788
Operating Activities
For the nine months ended September 30, 2004, cash provided by operating
activities of $471,139 was primarily attributed to an increase in income from
operations, an increase in accounts payable and accrued expenses of $1,029,481,
and an increase in deposits from customers in the amount of $1,093,451, which
also relate to our increase in overall activity. These increases were partially
offset by an increase in accounts receivable of $468,432, and an increase in
inventories of $3,148,025. The increase in accounts receivable relates
principally to the increased sales in the second and third quarters of 2004. The
increase in inventories relates to our increased production relating to our
increased sales and backlog during the same quarters.
For the nine months ended September 30, 2003, $192,267 cash was used by
operating activities. This was primarily due to a decrease in income from
operations and an increase in accounts payable and
21
accrued expenses of $512,147, which related directly to our cash flow problems
during this period, which forced us to delay some payments. These increases were
partially offset by the increase in accounts receivable of $756,122 relating to
increased sales in the second and third quarters and an increase in inventories
of $355,314, which related to additional shipments received from Lam.
Investing Activities
During the nine months ended September 30, 2004 and 2003, cash was used by
investing activities for minor purchases of equipment.
The Company currently has no material commitments for capital
expenditures.
Financing Activities
Financing activities in the nine months ended September 30, 2004 used
$418,183 as compared to $427,238 in the nine months ended September 30, 2003 for
the repayment of long-term debt. In the nine months ended September 30, 2004 we
experienced a net repayment on our line of credit in the amount of $4,963. Also
in the nine months ended September 30, 2003 we received net proceeds of $626,026
from issuance of long-term debt.
We have $2,805,451 and $4,416,735 of term-debt payments due within the
next year and next two to five years, respectively. Our ability to repay this
debt is contingent upon continued improvement of cash flow from operations, and
upon our ability to continue the expansion of our product line and market share.
Liquidity and Capital Resources
Our liquidity has been negatively impacted by operating losses we
experienced in 2002 and 2003. We attribute these losses primarily to the general
decline in the economy of the United States, which we believe substantially
decreased discretionary spending by consumers. As a result, consumers purchased
fewer products in the computer and semiconductor industries. With the
improvement in the economy beginning in the first nine months of 2004, we are
now experiencing improved liquidity from the sale of a greater number of
products, and a related significant increase in customer deposits.
To date, we have financed our business with cash from our operating
activities, a bank line of credit that has been restructured into a term loan,
and a loan for $200,000. This loan for $200,000 was made by Jean Charles Cartier
in October 2002, with a twelve-month term and at an interest rate of 12% per
annum. Mr. Cartier also received warrants to acquire 200,000 shares at $0.20 per
share and 200,000 shares at $1.00 per share. As of November 2003, we were in
default on our $200,000 bridge loan due to Mr. Cartier, which is secured by a
second lien on our accounts receivable and inventories. Interest of $24,000 has
now been paid, and the Cartier estate has agreed to forbearance of the
outstanding principal until December 31, 2004.
Our subsidiary's restructured term loan with Merrill Lynch Business
Financial Services, Inc. (the "New Loan") had a balance of $1,123,310 as of
September 30, 2004, requires payments over a term of 17 months at an interest
rate of two percent (2%) plus the prime rate with principal amortized over a 45
month period and a balloon payment upon the expiration of the term. The New Loan
is guaranteed by both DND Technologies, Inc. and Doug Dixon, and is secured by a
first lien on our accounts receivable and inventories that amounted to
approximately $4,757,000 at September 30, 2004.
Our Asset Sale and License Agreement with Lam, dated November 8, 2002,
granted us a non-exclusive license to several of Lam's patents and other
intellectual property, which enables us to sell, import, repair and distribute
products using this licensed intellectual property. To date, we have purchased
approximately $2.1 million in product under the Agreement, and we are required
to pay approximately $5.3 million over the term as a fee for the licensed
intellectual property.
On June 25, 2004, the Company signed an amendment to the November 2002
Asset Purchase and License Agreement with Lam, which, among other things,
restructured the terms of payment for the inventory purchases made as a part of
the original agreement. Under the new terms, the Company will
22
pay a revised balance of $871,596 for the original inventory purchases in 30
equal installment payments of $28,220, which began on August 1, 2004 and end
January 1, 2007, with an additional payment of $90,000 that was due and paid on
September 30, 2004. An additional inventory transfer of $65,000 took place in
August 2004, and was added to this outstanding balance for a total of $936,596.
On April 30, 2004, the Company and a former employee settled
counter-claims against each other arising from the employee's prior association
with the Company. The Company has recorded an expense of the entire settlement
payable to the employee of $140,000. Payments in the amount of $10,000 per month
began September 1, 2004 and continue until October 1, 2005, without interest.
In November 2003, the Company entered into an agreement with Axcelis
Technologies, Inc. and acquired an exclusive license to manufacture, sell, and
provide service and parts support for certain dry strip semiconductor
manufacturing equipment marketed under the trade names "System One" and "System
Ten". The agreement provided for a one time payment of $150,000 plus a quarterly
payment equal to 18% of net revenues from the sale of these products by the
Company until $2,750,000 (the license fee) has been paid and then payment of a
declining royalty on related sales from 10% down to 2% over a period of time
that ends December 31, 2010.
On August 2, 2004, the Company entered into an additional agreement with
Axcelis Technologies, Inc., acquiring an exclusive license to manufacture, sell
and provide services and parts support for certain reactive ion etch
semiconductor manufacturing equipment for wafer sizes up to 200mm formerly
marketed by Matrix Integrated Systems, Inc. and Axcelis Technologies, Inc. under
the trade names of "Bobcat 209" and "Cheetah" (limited to such equipment that
includes at least one reactive ion etch chamber). The agreement provides for a
quarterly payment equal to 18% of net revenues from the sale of this product by
the Company, beginning with the fourth quarter of 2004 and ending December 31,
2011, or until $750,000 (the license fee) has been paid, whichever occurs first,
and payment of a declining royalty on related sales from 10% down to 2% over a
period of time that ends December 31, 2011.
Our future cash requirements and the adequacy of available funds will
depend on many factors, including the pace at which we expand our business
generally, and our inventory in particular, the general state of the economy,
which impacts the amount of money that may be spent for computer related
purchases, and maintaining sufficient gross profit margins to service our
substantial indebtedness.
Our current obligations consist of a total of $200,000 due by the end of
December 2004 to the Cartier estate, approximately $1.1 million due to Merrill
Lynch over the next 13 months, and a total of approximately $8 million due to
Lam and Axcelis over the next several years (assuming our level of sales results
in the maximum possible license fees under the two Axcelis agreements). Even if
we are able to increase revenue, maintain profit margins, expand our product
base and obtain additional financing, we cannot be certain that we will meet
these obligations.
Because of our tight cash flow, it is likely that during the next 12-month
period we will seek financing from one or more sources such as capital
investment firms or private fund managers. However, we do not have any
commitments for financing or other plans in place to obtain financing.
Additional financing may not be available on acceptable terms or at all.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Company's Form 10-KSB, any Form 10-QSB or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may contain
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "estimate," "forecast," "project," and
similar expressions identify forward-looking statements. All statements other
than statements of historical fact are statements that could be deemed
forward-looking statements, including any statements of the plans, strategies
and objectives of management for future operations; any statements concerning
proposed new products, services, developments or industry rankings; any
statements regarding future economic conditions or performance; any statements
of belief; and any statements of assumptions underlying any of the
23
foregoing. Such "forward-looking statements" are subject to risks and
uncertainties set forth from time to time in the Company's SEC reports and are
generally set forth below and particularly discussed in the Company's Form
10-KSB for the year ended December 31, 2003.
Readers are cautioned not to place undue reliance on such forward-looking
statements as they speak only of the Company's views as of the date the
statement was made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Risk Factors
You should consider the following discussion of risks as well as other
information regarding our operations. The risks and uncertainties described
below are not the only ones. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business
operations.
o We depend on Dennis Key, our CFO and CEO of ASI, and his
relationships within the semiconductor industry. His loss would
seriously disrupt our operations. Our CEO, Douglas Dixon, is
gradually decreasing his involvement with the Company in
anticipation of retirement. We anticipate that Mr. Dixon's
relationships within the semiconductor industry will be continued by
Mr. Key.
o Demand for our products is subject to cyclical downturns in the
semiconductor industry.
o We are subject to the risks associated with the intensely
competitive and capital-intensive nature of the semiconductor
industry.
o Our independent accountants have expressed uncertainty about out
ability to continue as a going concern, which may hinder our ability
to obtain future financing.
o Our substantial increase in gross profit primarily occurred as a
result of the decrease in our reserve for obsolete inventory. This
is unlikely to reoccur at the same magnitude in future quarters.
o We are subject to risks relating to product concentration and lack
of product revenue diversification.
o The semiconductor industry is based on rapidly changing technology.
o We may experience supply shortages.
o We are exposed to the risks of operating a global business.
o We are exposed to risks associated with a highly concentrated
customer base, with four customers accounting for approximately 57%
of sales.
o We are exposed to risks associated with our acquisition strategy.
o Our ability to raise additional financing is uncertain.
o There is a limited market for our common stock.
o Our common stock is subject to penny stock regulation.
24
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the design and operation of our disclosure controls
and procedures, as such term is defined under Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on that
evaluation, our principal executive officer and our principal financial officer
concluded that the design and operation of our disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Company's periodic reports filed with the SEC
under the Securities Exchange Act of 1934, as amended. The design of any system
of controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
(b) In addition, there have been no changes in our internal control over
financial reporting identified in connection with the evaluation that occurred
during the last fiscal quarter that have materially affected, or that are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Settlement Agreement with Merrill Lynch, which was disclosed in our
Forms 10-QSB for the quarters ended March 31, 2004, and June 30, 2004, has been
executed by the parties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal
Financial Officer
32 Section 1350 Certifications
(b) Reports on Form 8-K:
On August 17, 2004, we filed a Current Report on Form 8-K
announcing the settlement of our lawsuit with Scott Magoon,
final payment of a note payable to a former president of ASI,
forbearance of the principal due under the Cartier note, the
settlement of our lawsuit with Merrill Lynch Business
Financial Services, Inc. and the restructure of our
outstanding debt with Merrill Lynch, and the amendment of our
agreement with Lam Research Corp.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 12, 2004
DND TECHNOLOGIES, INC., a Nevada corporation
By: /s/ Douglas N. Dixon
-----------------------------------------
Douglas N. Dixon, CEO and Director
26