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 March 31, 2005
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
incorporation or organization) Identification No.)
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 May 9, 2005
Common stock, $0.001 par value 23,515,000
- --------------------------------------------------------------------------------
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................. 2
Condensed Consolidated Unaudited Statements of Stockholders' Deficit ..... 4
Condensed Consolidated Unaudited Statements of Cash Flows................. 5
Notes to Condensed Consolidated Unaudited Financial Statements ........... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 13
Item 3. Controls and Procedures.......................................... 19
PART II OTHER INFORMATION................................................ 19
Item 2. Unregistered Sales of Equity Securities.......................... 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
SIGNATURES................................................................ 20
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 266,676
Accounts receivable, net 1,974,994
Inventories, net 2,283,751
Prepaid expenses 222,660
-----------
Total current assets 4,748,081
-----------
PROPERTY AND EQUIPMENT, Net of accumulated depreciation 247,359
-----------
LICENSE AGREEMENTS, Net of accumulated amortization 3,219,105
-----------
OTHER 27,775
-----------
TOTAL ASSETS $ 8,242,320
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable, current portion $ 1,262,710
Capital leases payable, current portion 14,095
Accounts payable and accrued expenses 2,804,097
Deposits from customers 753,006
Payables, Lam Research Corporation, current portion 915,060
License and royalty payable, Axcelis 855,299
Amounts due to related party 423,252
-----------
Total current liabilities 7,027,519
-----------
LONG TERM LIABILITIES:
Capital leases payable, long term portion 15,014
Payables, Lam Research Corporation, long term portion 3,178,831
-----------
Total long term liabilities 3,193,845
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock --
Common stock, par value, $.001 per share;
authorized, 50,000,000 shares;
issued and outstanding, 23,515,000 shares 23,515
Paid-in capital 2,039,145
Common stock to be issued 55,000
Accumulated deficit (4,096,704)
-----------
Total stockholders' deficit (1,979,044)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 8,242,320
===========
See accompanying notes.
1
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
REVENUE:
Systems and chillers $ 2,833,501 $ 1,733,866
Parts, assemblies and consumables 1,509,973 1,507,224
Field service and training 16,861 49,685
----------- -----------
Total revenue 4,360,335 3,290,775
----------- -----------
COST OF REVENUE:
Cost of revenues 2,722,139 1,930,155
Reserve for slow moving
and obsolete inventory 128,009 --
----------- -----------
Total cost of revenue 2,850,148 1,930,155
----------- -----------
GROSS PROFIT 1,510,187 1,360,620
----------- -----------
OPERATING EXPENSES:
Research and development 21,127 15,187
Sales and marketing 647,454 416,532
General and administrative 480,614 431,597
Lawsuit settlement -- 140,000
----------- -----------
Total operating expenses 1,149,195 1,003,316
----------- -----------
INCOME FROM OPERATIONS 360,992 357,304
GAIN ON SETTLEMENT OF DEBT 17,500 --
INTEREST EXPENSE (83,877) (94,123)
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 294,615 263,181
INCOME TAX EXPENSE (800) (800)
----------- -----------
NET INCOME $ 293,815 $ 262,381
=========== ===========
(Continued)
2
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
NET INCOME
PER COMMON SHARE:
Basic $ .01 $ .01
=========== ===========
Diluted $ .01 $ .01
=========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
AND SUBSCRIBED:
Basic 23,251,778 23,000,000
=========== ===========
Diluted 27,395,825 24,909,690
=========== ===========
See accompanying notes.
3
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(UNAUDITED)
Common Stock Stock To Be Issued
------------ Paid-In ------------------ Accumulated
Shares Amount Capital Shares Amount Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
JANUARY 1, 2005 23,000,000 $ 23,000 $ 1,957,160 1,100,000 $ 55,000 $(4,390,519) $(2,355,359)
COMMON STOCK
ISSUED FOR
ACCRUED EXPENSES 365,000 365 73,135 -- -- -- 73,500
COMMON STOCK
ISSUED UPON
EXERCISE OF
OPTION 150,000 150 8,850 -- -- -- 9,000
NET INCOME -- -- -- -- -- 293,815 293,815
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
MARCH 31, 2005 23,515,000 23,515 2,039,145 1,100,000 55,000 (4,096,704) (1,979,044)
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes.
4
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 293,815 $ 262,381
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 47,199 44,880
Amortization 138,265 136,245
Provision for slow moving and
obsolete inventories 128,009 (113,140)
Gain on settlement of debt (17,500) --
Loss on disposal of fixed asset -- 2,349
Changes in operating assets
and liabilities:
Accounts receivable 472,035 (482,986)
Inventories 530,575 (212,636)
Prepaid expenses and other assets (155,940) 8,036
Accounts payable and accrued expenses (941,254) (106,202)
Deposits from customers (349,913) 1,183,960
Amounts due to related parties 2,852 11,569
---------- ----------
Net cash provided
by operating activities 148,143 734,456
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,242) (10,295)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayment on line of credit -- (5,992)
Exercise of common stock options 9,000 --
Principal payments on long-term debt (200,713) (113,297)
---------- ----------
Net cash (used) by financing
activities (191,713) (119,289)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALANTS (49,812) 604,872
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 316,488 157,801
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 266,676 $ 762,673
========== ==========
5
DND TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
SUPPLEMENTARY DISCLOSURE
OF CASH FLOW INFORMATION:
Cash paid for interest $ 71,254 $ 63,152
======== ========
Cash paid for taxes $ 0 $ 0
======== ========
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Cancellation of capital lease
and return of asset to vendor $ 0 $ 9,202
======== ========
Common stock issued for
accrued expenses $ 73,500 $ 0
======== ========
See accompanying notes.
6
DND TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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 period presented. Operating results for the three months ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. Accordingly, your attention
is directed to footnote disclosures found in the December 31, 2004 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-1 and ASI MX-10 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.
Principles of Consolidation - The consolidated financial statements
include the accounts of DND Technologies, Inc. and its wholly-owned
subsidiaries ASI and ASI Team Asia Ltd. All material inter-company
accounts and transactions have been eliminated.
Net Income - Basic income per common share is computed by dividing net
income available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted income per common
share is computed by dividing net income available to common stockholders
by the weighted-average number of common shares outstanding plus an
assumed increase in common shares outstanding for potentially dilutive
securities, which consist of options. Potentially dilutive shares are
excluded from the computation in loss periods, as their effect would be
anti-dilutive. The dilutive effect of options to acquire common stock is
measured using the treasury stock method. The dilutive effect of
potentially issuable securities was 4,144,047 shares and 1,909,690 shares
for the three months ended March 31, 2005 and 2004, respectively.
Concentration of Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
and trade accounts receivable.
The Company places its temporary cash investments in reputable financial
institutions. As of March 31, 2005, the Company had $181,877 deposited in
one banking institution and $212,162 in a second banking institution. Only
$100,000 of the balance at each institution is federally insured.
7
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers comprising the Company's customer
base and their dispersion across different geographic areas. The Company
routinely assesses the financial strength of its customers. At March 31,
2005, the Company had one customer whose balance was 41% of net accounts
receivable.
Significant Customers - For the three months ended March 31, 2005, the
Company had three customers whose revenues exceeded 10% of total revenues,
comprising 32%, 17% and 14% of total revenues, respectively. For the three
months ended March 31, 2004, the Company had four customers, whose
revenues exceeded 10% of total revenues, comprising 10%, 13%, 16% and 18%
of total revenues, respectively. Revenues in 2005 and 2004 outside the
United States include Europe 6% and 27%, Asia 31% and 7% and Canada 0% and
7%, respectively.
Significant Suppliers - For the three months ended March 31, 2005 and
2004, approximately 22% and 15%, respectively, of gross inventory
purchases were purchased from Lam. The Company expects to have significant
purchases of inventory from Lam in the coming year.
Stock Based Compensation - As permitted by FAS 123, as amended, the
Company accounts for stock options issued to employees using the intrinsic
value method as prescribed by APB 25. Under this method no expense is
recognized for options issued with an exercise price equal to or greater
than the market price of the stock on the date of grant. Expense for
options or warrants issued to non-employees is recorded in the financial
statements at estimated fair value. For options issued to employees the
Company is subject to proforma disclosures based on the estimated fair
value of the options issued.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options and warrants have
characteristics different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of such
stock options.
For purposes of proforma disclosures, the estimated fair value of the
options granted in 2003 is amortized to expense over the options' vesting
periods. The Company's proforma information follows:
Net income:
As reported $293,815
Proforma $290,163
Net Income per common stock share:
Basic:
As reported $.01
Proforma $.01
Diluted:
As reported $.01
Proforma $.01
Recently Issued Accounting Pronouncements - In November 2004, the FASB
issued SFAS No. 151, "Inventory Costs-an amendment of ARB. No. 43, Chapter
4". This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for
8
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously
stated that "... under some circumstances, items such as idle facility
expense, excessive spoilage, double freight, and re-handling costs may be
so abnormal as to require treatment as current period charges...." This
Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of "so abnormal." In
addition, this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of
the production facilities. The Company will adopt this standard on January
1, 2006.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29". This Statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The
Company will adopt this standard on January 1, 2006.
In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment".
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services
in share-based payment transactions. This Statement does not change the
accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and
EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services." This Statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.
The Company will adopt this standard on January 1, 2006.
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable and allowance for doubtful accounts is as
follows:
Accounts receivable $2,001,834
Allowance for doubtful accounts 26,840
----------
Net accounts receivable $1,974,994
==========
There was no change in the balance of allowance for doubtful accounts from
January 1, 2005 to March 31, 2005.
3. INVENTORIES
A summary of inventories and allowance for obsolescence is as follows:
Parts and materials $ 4,007,005
Work-in-process 518,866
Allowance for obsolescence (2,242,120)
-----------
Net inventories $ 2,283,751
===========
Allowance for Obsolescence:
Balance, January 1, 2005 $ 2,114,111
Provision 128,009
-----------
Balance, March 31, 2005 $ 2,242,120
===========
9
4. PROPERTY AND EQUIPMENT
Property and equipment and accumulated depreciation at March 31, 2005
consist of:
Office furniture, fixtures and equipment $ 364,981
Leasehold improvements 444,669
Machinery and equipment 342,211
Laboratory tools 35,843
----------
1,187,704
Less accumulated depreciation 940,345
----------
Total property and equipment $ 247,359
==========
5. LICENSE AGREEMENT AND PAYABLES, LAM RESEARCH CORPORATION
Future minimum payments under the agreements are as follows:
Inventory License
--------- -------
December 31, 2005 $ 376,240 $ 399,967
December 31, 2006 310,418 507,050
December 31, 2007 28,220 538,324
December 31, 2008 -- 571,527
December 31, 2009 -- 606,777
Thereafter -- 755,368
---------- ----------
$ 714,878 $3,379,013
========== ==========
6. LICENSE AND ROYALTY PAYABLE, AXCELIS TECHNOLOGIES, INC.
The license and royalty payable at March 31, 2005 consisted of the
following:
License payable $549,835
Royalty payable 305,464
--------
Total license and royalty payable $855,299
========
7. NOTES PAYABLE
The Company's term loan to Merrill Lynch bears
interest at 2.00% plus the Prime Rate as published
in the Wall Street Journal per annum. The loan is
due March 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 total
assets ($8,242,320 as of March 31, 2005) and has
been guaranteed by Doug Dixon and the Company. $ 973,360
Unsecured demand note due to an individual
with interest accruing at 7% 289,350
----------
Total $1,262,710
==========
10
Future minimum payments under the notes are as follows:
December 31, 2005 $ 513,971
December 31, 2006 748,739
----------
$1,262,710
==========
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of accounts payable and accrued expenses is as follows:
Trade accounts payable $1,493,524
Accrued commissions 316,038
Accrued payroll 246,724
Product warranty provision 348,122
Accrued interest 200,265
Lawsuit payable 70,000
Sales and state income taxes payable 88,174
Accrued officer bonus 41,250
----------
$2,804,097
==========
9. RELATED PARTY TRANSACTIONS
Amounts Due to Related Party
The Company has the following amounts due to its Chairman at March 31,
2005:
Notes payable at 7.0% $120,000
Accrued interest on notes payable 47,160
Accrued salaries 256,092
--------
Total Amount Due To Related Party $423,252
========
The amounts due to the Chairman are delinquent and payable on demand.
10. GAIN ON SETTLMENT OF DEBT
In February 2005, the Company issued 100,000 shares of common stock for
payment of approximately $15,000 of legal services received during the
year ended December 31, 2004. The shares had an aggregate fair value of
$20,500, accordingly, the Company recorded a $5,500 loss on settlement of
debt. This loss was offset by a $23,000 gain resulting from the
forgiveness of accrued interest expense after the Company made the final
$100,000 payment on an unsecured note payable.
11
11. 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.
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.
A summary of the option activity for the year ended March 31, 2005,
pursuant to the terms of the Plan is as follows:
Weighted
Average
-------
Options outstanding
at January 1, 2005 4,234,226 $.06
Granted 400,000 $.06
Exercised (150,000) $.06
Cancelled and expired (133,501) $.06
---------
Options outstanding
at March 31, 2005 4,350,725
=========
3,456,558 shares are exercisable at March 31, 2005.
Information regarding stock options outstanding as of March 31, 2005 is as
follows:
Price $ .06
Weighted average exercise price $ .06
Weighted average remaining
contractual life 9 years 2 months
In February 2005, the Company's Board of Directors unanimously approved
the preparation of the 2005 Stock Option plan and the registration of
3,000,000 shares. As of May 4, 2005, the plan has not been drafted and the
shares have not been registered.
12
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 new and
used semiconductor equipment and after-market support of semiconductor
manufacturing equipment which currently includes Lam AutoEtch, Rainbow, and TCP
plasma etch systems, and plasma etch and strip products manufactured on the ASI
MX-1 and ASI MX-10 (formerly Matrix System One and Ten), and the Arista and
Arista Dual (formerly Matrix Bobcat 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 ongoing 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 three
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. Inventory
Inventory is valued at the lower of cost or market. Cost includes raw
materials, freight, labor and manufacturing overhead. Inventory with no sales or
usage within the prior 12 months is considered obsolete. Inventory on hand, in
excess of a 12 month supply, is considered excessive and slow-moving. We review
our reserves on a quarterly basis and adjust them for the full carrying value of
obsolete, excessive and slow-moving inventory.
2. 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).
3. 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.
13
Selected Financial Information
Three Months Ended
Increase
03/31/2005 03/31/2004 (Decrease)
---------- ---------- ----------
Statements of Operations
Total Revenue $ 4,360,335 $ 3,290,775 $ 1,069,560
----------- ----------- -----------
Cost of Revenue:
Costs of revenues 2,722,139 1,930,155 791,984
Reserve for slow moving and
obsolete inventory 128,009 0 128,009
----------- ----------- -----------
Total Cost of Revenues 2,850,148 1,930,155 919,993
----------- ----------- -----------
Percentage of Sales 65% 59%
Gross Profit 1,510,187 1,360,620 149,567
----------- ----------- -----------
Percentage of Sales 35% 41%
Operating Expenses:
Research and development 21,127 15,187 5,940
Sales and marketing 647,454 416,532 230,922
General and administrative 480,614 431,597 49,017
Lawsuit Settlement 0 140,000 (140,000)
----------- ----------- -----------
Total Operating Expenses 1,149,195 1,003,316 145,879
----------- ----------- -----------
Income from Operations 360,992 357,304 3,688
----------- ----------- -----------
Other Income (Expense):
Gain on settlement of debt 17,500 0 17,500
Interest Expense (83,877) (94,123) 10,246
----------- ----------- -----------
Income Before Income Tax Expense 294,615 263,181 31,434
Income Tax Expense 800 800 0
----------- ----------- -----------
Net Income $ 293,815 $ 262,381 $ 31,434
=========== =========== ===========
Net Income Per Share
Basic .01 .01 .00
Diluted .01 .01 .00
Results of Operations
The Three Months Ended March 31, 2005 Compared To The Three Months Ended March
31, 2004.
Our revenue increase of $1,069,560, or 33%, 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:
Increase
March 31, 2005 March 31, 2004 (Decrease)
-------------- -------------- ----------
Systems and chillers $ 2,833,501 $ 1,733,866 $ 1,099,635
Parts, assemblies
and consumables 1,509,973 1,507,224 2,749
Field service and training 16,861 49,685 (32,824)
----------- ----------- -----------
$ 4,360,335 $ 3,290,775 $ 1,069,560
=========== =========== ===========
14
Cost of Revenues - Recurring Operations
Our cost of revenues for recurring operations increased $791,984 or 41%.
This increase is directly related to the 33% increase in total revenue for the
three months ended March 31, 2005. Our cost of revenues as a percentage of
revenues for the three months ended March 31, 2005 was 62% as compared to 59%
for the three months ended March 31, 2004.
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 first quarter of 2005, we recorded a
$128,009 increase to the reserve due to an analysis of inventory items. In the
three months ended March 31, 2004, the reserve did not require an adjustment.
Research and Development
Research and development costs increased $5,940 or 39% in the three months
ended March 31, 2005. The increase is primarily related to payroll and employee
benefits ($2,000), and outside contractor expenses for product development work
($4,000). We normally do not incur significant research and development
expenses.
Sales and Marketing
Sales and marketing costs increased $230,922 or 55% in the three months
ended March 31, 2005. The increase is primarily related to the increase in the
Axcelis license and royalty expense of $166,000 due to increased sales of these
products, and increased commissions of approximately $58,000 which are
increasing with the increase in system sales.
General and Administrative
Three Months Ended
Increase
03/31/2005 03/31/2004 (Decrease)
---------- ---------- ----------
General and Administrative
Salaries and wages $ 262,687 $ 191,830 $ 70,857
Professional fees 71,281 81,115 (9,834)
Occupancy Expense, less amount allocated to Cost
of Revenue 52,925 58,773 (5,848)
Other general and administrative expenses 93,721 99,879 (6,158)
--------- --------- ---------
Total General and Administrative $ 480,614 $ 431,597 $ 49,017
========= ========= =========
Salaries and wages increased $70,857 or 37% in the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004. This
increase is primarily the result of an increase in G&A headcount by 4 employees
which increased our 2005 payroll and benefits by approximately $66,000.
Professional fees decreased in 2005 in the amount of $9,834 or 12%
primarily due to a $34,000 decrease in legal expenses from litigation ultimately
settled by us. This was offset by a $30,000 increase in accounting related
expense due to increased reporting requirements.
Other general and administrative expenses decreased $6,158 or 6%. The
decreased expenses are primarily attributable to a $10,700 decrease in our 401k
plan contribution due to forfeitures in the period.
Lawsuit Settlement
In April 2004, we 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.")
15
Gain on Settlement of Debt
In February 2005, we issued 100,000 shares of common stock for payment of
approximately $15,000 of legal services received during the year ended December
31, 2004. The shares had an aggregate fair value of $20,500; accordingly, we
recorded a $5,500 loss on settlement of debt. This loss was offset by a $23,000
gain resulting from the forgiveness of accrued interest expense after we made
the final $100,000 payment on an unsecured note payable.
Net Income
Primarily as a result of the foregoing we had net income of $293,815 for
the three months ended March 31, 2005, compared to $262,381 for the three months
ended March 31, 2004.
Capital Resources
Three Months Ended
------------------
Favorable
Working Capital 03/31/2005 03/31/2004 (Unfavorable)
- --------------- ---------- ---------- -------------
Current Assets $ 4,748,081 $ 3,699,666 $ 1,048,415
Current Liabilities (7,027,519) (11,100,045) 4,072,526
------------ ------------ ------------
Deficit Working Capital $ (2,279,438) $ (7,400,379) $ 5,120,941
============ ============ ============
Long-term Debt $ (3,193,845) $ (99,347) $ (3,094,498)
============ ============ ============
Stockholders' (Deficit) $ (1,979,044) $ (3,328,000) $ 1,348,956
============ ============ ============
During the three months ended March 31, 2004, we were in default of our payment
terms on the amounts owed to Lam Research Corporation. As a result, the entire
debt of $5,989,709 was classified as current in the consolidated balance sheet.
During June 2004, we renegotiated the payment terms of the amounts owed to Lam.
In the current consolidated balance sheet the amounts owed are classified as
current, $915,060 and long term, $3,178,831. We incurred no additional long term
debt from March 31, 2004 to March 31, 2005.
Statements of Cash Flows Select Information
Three Months Ended
03/31/2005 03/31/2004
---------- ----------
Net Cash Provided (Used) By:
Operating Activities $ 148,143 $ 734,456
Investing Activities $ (6,242) $ (10,295)
Financing Activities $(191,713) $(119,289)
Operating Activities
For the three months ended March 31, 2005, cash provided by operating
activities of $148,143 was primarily attributed to income from operations of
$293,815, a decrease in accounts receivable of $472,035 (resulting from
collections on significant shipments made in the quarter ended December 31,
2004) and a decrease in inventories of $530,575 (resulting from shipments early
in the quarter ended March 31, 2005). These amounts were offset by an increase
in prepaid expenses and other assets of $155,940, a decrease in accounts payable
and accrued expenses of $941,254 and a decrease in deposits from customers of
$349,913.
For the three months ended March 31, 2004, $734,456 cash was provided by
operating activities. This was primarily due to an increase of $1,183,960 in
customer deposits which was offset by an increase in accounts receivable of
$482,986 and an increase in inventories of $212,636.
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Investing Activities
During the three months ended March 31, 2005 and 2004, cash was used by
investing activities for purchases of equipment in the amounts of $6,242 and
$10,295, respectively.
We currently have no material commitments for capital expenditures.
Financing Activities
Financing activities in the three months ended March 31, 2005 used a total
of $191,713 as compared to $119,289 in the three months ended March 31, 2004. In
the three months ended March 31, 2005, $200,713 was used for the repayment of
long-term debt as compared to $113,297 in the three months ended March 31, 2004
in which we also repaid a net of $5,992 on our line of credit. In the three
months ended March 31, 2005 we received $9,000 from the issuance of common stock
options.
Liquidity and Capital Resources
Based on our continuing increase in sales, our liquidity has improved with
positive cash flows in 2004 and continuing into 2005.
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. This loan was paid in full in March 2005 and no further amounts are due.
Our subsidiary's restructured term loan with Merrill Lynch Business
Financial Services, Inc. (the "New Loan") had a balance of $973,360 as of March
31, 2005, 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 total assets.
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 (of which approximately $4
million remains to be paid) as a fee for the licensed intellectual property.
On June 25, 2004, we 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, we will 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 will 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, a former employee and the Company settled
counter-claims against each other arising from the employee's prior association
with the Company. We recorded, in 2004, 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, we entered into an agreement with Axcelis Technologies,
Inc. and acquired an exclusive license to all future manufacturing, sales,
service, and parts support for certain dry strip semiconductor manufacturing
equipment now marketed under the trade names MX-1 and MX-10 (formerly Matrix
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 (from 10% down to
2%) on related sales through December 31, 2010.
On August 2, 2004, we entered into an additional agreement with Axcelis
Technologies, Inc., acquiring an exclusive license to manufacture, sell and
provide services and parts support for certain
17
reactive ion etch semiconductor manufacturing equipment for wafer sizes up to
200mm now marketed under the ASI trade name Arista and Arista Dual (formerly
Matrix Bobcat and Cheetah). 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 (from 10% down to 2%) on related sales through 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.
During the next 12-month period we intend to seek financing from one or
more sources such as capital investment firms or private fund managers in order
to expand our business and infrastructure. Although we do not have any current
commitments for financing, we will soon be engaging in discussions with such
funding sources. 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 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, 2004.
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 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.
18
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.
o We are exposed to risks associated with our acquisition strategy.
o In the past, our independent accountants have expressed uncertainty
about our ability to continue as a going concern.
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.
o We are subject to increasing costs of compliance with the
Sarbanes-Oxley Act of 2002 and must maintain high margins to pay for
these ongoing expenses required of public companies.
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) 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. However,
our management received a letter from the Company's independent auditors on May
10, 2005 that identified certain weaknesses in our internal control over
financial reporting. Our management has begun to implement changes to our
internal control over financial reporting to address primarily two issues
identified in our auditor's letter. We are exploring ways to improve our
inventory accounting software to prevent adjustments to the valuation of items
without proper approval or identification that a change has been made and to
improve the tracking of our inventory at foreign locations. We are also working
to improve our internal control through increased segregation of critical duties
among the members of our accounting staff and improved oversight of the
financial accounting and reporting process by our principal accounting officer.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
In February 2005 100,000 shares of common stock were issued to David
Maddux as payment for legal services received during the 2004 fiscal year,
valued at $15,000, in reliance on the exemption from registration provided by
ss. 4.2 of the Securities Act of 1933, as amended.
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:
None.
19
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: May 16, 2005
DND TECHNOLOGIES, INC., a Nevada corporation
By: /s/ Douglas N. Dixon
---------------------------------------------
Douglas N. Dixon, CEO, President and Chairman
20