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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2005
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________.
Commission File No. 33-21537-D
DAUPHIN TECHNOLOGY, INC.
(Exact name of registrant as specified in charter)
Illinois 87-0455038
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1014 E. Algonquin Rd., Suite 111, Schaumburg, Illinois 60067
(Address of principal executive offices) (Zip Code)
(847) 303-6566
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of June 30, 2006, 99,569,028
shares of the registrant's common stock, $.001 par value, were issued and
outstanding.
Dauphin Technology, Inc.
(A Development Stage Company)
Table of Contents
-----------------
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2005 and 2004, six
months ended June 30, 2005 and 2004 and cumulative
amounts since January 1, 2004 (Commencement of
development stage) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 2005 and 2004, six
months ended June 30, 2005 and 2004 and cumulative
amounts since January 1, 2004 (Commencement of
development stage) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Item 3. Controls and Procedures 11
PART II OTHER INFORMATION 12
Item 1. Legal Proceedings 12
Item 2. Unregistered sale of equity securities and Use of Proceeds 12
Item 3. Default Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6(a). Exhibits 12
SIGNATURE 12
2
Dauphin Technology, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, 2005 and December 31, 2004
--------------------------------------------------------------------------------
ASSETS
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 101,911 $ 7,829
Prepaid expenses - 2,500
Assets from discontinued operations - 8,832
------------ ------------
Total assets $ 101,911 $ 19,161
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 193,570 $ 68,602
Accrued expenses 294,488 323,838
Short-term borrowings 8,961 200,000
Current portion of long-term debt 13,515 13,515
Derivative liability 986,641 760,565
Convertible debentures 950,000 950,000
Liabilities from discontinued operations - 243,748
------------ ------------
Total current liabilities 2,447,175 2,560,268
CONVERTIBLE LOANS 2,656,078 2,405,078
------------ ------------
Total liabilities $ 5,103,253 $ 4,965,346
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' DEFICIT:
Preferred stock, $0.01 par value, 10,000,000
shares authorized, issued and outstanding
at June 30, 2005 100,000 -
Common stock, $0.001 par value, 100,000,000
shares authorized; 99,251,688 shares issued
and outstanding at June 30, 2005 and
98,501,688 shares issued and outstanding
at December 31, 2004 99,252 98,502
Additional paid-in capital 65,567,942 65,081,192
Accumulated deficit (70,768,536) (70,125,879)
------------ ------------
Total shareholders' deficit (5,001,342) (4,946,185)
------------ ------------
Total liabilities and shareholders' deficit $ 101,911 $ 19,161
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
3
Dauphin Technology, Inc.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2005 and 2004, the six months
ended June 30, and 2004 and cumulative amounts since January 1, 2004
(Commencement of development stage)
(Unaudited)
-----------------------------------------------------------------------------------------------------------
Cumulative
Amounts
Three Months Ended June 30, Six Months Ended June 30, Since
---------------------------- ---------------------------- January 1,
2005 2004 2005 2004 2004
------------ ------------ ------------ ------------ ------------
NET SALES $ - $ - $ - $ - $ -
COST OF SALES - - - - -
------------ ------------ ------------ ------------ ------------
Gross profit - - - - -
GENERAL AND
ADMINISTRATIVE EXPENSES 224,733 755,740 386,581 821,516 1,935,481
------------ ------------ ------------ ------------ ------------
Loss from operations (224,733) (755,756) (386,581) (821,516) (1,935,481)
Derivative (loss) gain (195,493) (68,289) (226,076) 295,252 1,121
INTEREST EXPENSE (15,000) (94,061) (30,000) (210,759) (367,238)
------------ ------------ ------------ ------------ ------------
Loss from continuing
operations before income
taxes and discontinued
operations (435,226) (918,090) (642,657) (737,023) (2,301,598)
INCOME TAXES - - - - -
------------ ------------ ------------ ------------ ------------
Net loss from continuing
operations (435,226) (918,090) (642,657) (737,023) (2,301,598)
DISCONTINUED OPERATIONS
Loss from discontinued
operations - (93,183) - (173,948) (548,865)
------------ ------------ ------------ ------------ ------------
Net loss $ (435,226) $ (1,011,273) $ (642,657) $ (910,971) $ (2,850,463)
============ ============ ============ ============ ============
LOSS PER SHARE:
Continuing Operations $ (0.00) $ (0.01) $ (0.01) $ (0.01) $ (0.02)
Discontinued Operations (0.00) (0.00) (0.00) (0.00) (0.01)
------------ ------------ ------------ ------------ ------------
Total Basic and Diluted $ (0.00) $ (0.01) $ (0.01) $ (0.01) $ (0.03)
============ ============ ============ ============ ============
Weighted average number of
shares of common stock
outstanding
Basic 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000
Diluted 99,252,000 97,002,000 99,127,000 95,086,000 97,571,000
The accompanying notes are an integral
part of these consolidated financial statements.
4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2004
(Unaudited)
-----------------------------------------------------------------------------------------
Cumulative
Amounts
Six Months Ended June 30, Since
-------------------------- January 1,
2005 2004 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) gain $ (642,657) $ (910,971) $(2,850,463)
Non-cash items included in net loss:
Amortization of debt discount - 90,418 269,588
Convertible loans issued in lieu of
consulting fees - - 1,161,500
Common stock issued in lieu of
convertible loans 37,500 - 37,500
Common stock issued for consulting fees - - 435,000
Changes in:
Accounts receivable - (13,500) 3,248
Assets of discontinued operations 8,832 8,520 166,123
Prepaid expenses 2,500 - 2,500
Accounts payable 124,968 (43,810) 60,480
Accrued expenses (29,350) (160,713) (73,852)
Liabilities from discontinued operations (243,748) (1,028,429) (1,188,240)
----------- ----------- -----------
Net cash used in operating activities (741,955) (2,058,485) (1,976,616)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of restricted shares - 323,000 323,000
Proceeds from issuance of preferred stock 550,000 - 550,000
Derivative liability 226,076 (295,251) 1,662
Issuance of convertible loans 251,000 2,420,136 1,494,578
Repayment of convertible debentures - - (100,000)
Payments on short-term borrowings (200,000) (200,000) (200,000)
Increase in short-term borrowing 8,961 - 8,961
----------- ----------- -----------
Net cash provided by financing activities 836,037 2,247,885 2,078,201
----------- ----------- -----------
Net increase in cash 94,082 189,400 101,585
CASH BEGINNING OF PERIOD 7,829 326 326
----------- ----------- -----------
CASH END OF PERIOD $ 101,911 $ 189,726 $ 101,911
=========== =========== ===========
Cash Paid During The Period FOR:
Interest $ - $ 1,258 $ 18,262
NONCASH TRANSACTIONS:
Common stock issued in connection with:
Services $ 37,500 $ - $ 37,500
The accompanying notes are an integral
part of these consolidated financial statements
5
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying financial statements are unaudited, but in the opinion of the
management of the Company, contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position at June
30, 2005, the results of operations for the three months and six months ended
June 30, 2005 and 2004, and the cash flows for the six months ended June 30,
2005 and 2004 and cumulative amounts since January 1, 2004 (date of commencement
of development stage).
Reference is made to the Company's Form 10-K for the year ended December 31,
2004. The results of operations for the six months ended June 30, 2005 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2005.
Effective January 1, 2004, the Company is considered a development stage company
as defined in SFAS No. 7. The Company's development stage activities consist of
evaluating potential merger candidates and raising additional financing.
2. Related Party Transactions
During the second quarter of 2005, our CEO loaned $17,130 to the Company. The
loan bore no interest and was paid back in the same quarter.
3. Stock-Based Compensation
For stock options granted to employees prior to January 1, 2005, the Company
utilized the footnote disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 encourages entities to adopt a fair-value
based method of accounting for stock options or similar equity instruments.
However, it also allows an entity to continue measuring compensation cost for
stock-based compensation using the intrinsic-value method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. The Company elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures required by SFAS
No. 123 as applicable. Accordingly, no compensation cost has been recognized in
the consolidated financial statements for stock options granted to employees.
There have been no stock options granted during the second quarter of 2005 or
2004, nor since January 1, 2004.
4. Weighted Average Shares
The computation of basic income (loss) per common share is based on the weighted
average number of shares outstanding during each period.
The computation of diluted income (loss) per common share is based on the
weighted average number of common shares outstanding during the period, plus the
common stock equivalents that would arise from the exercise of stock options and
warrants outstanding, using the treasury stock method and the average market
price per share during the period. Options to purchase 20,000 shares and 626,666
shares at June 30, 2005 and 2004, respectively, at prices between $.12 and $2.75
and warrants to purchase 1,704,999 shares, 2,001,671 shares at June 30, 2005 and
2004, respectively, at prices between $.10 and $1.31 were outstanding but were
excluded for the calculations for diluted income (loss) per share as the effect
was antidilutive.
5. Supplemental Cash Flow Information
Interest in the amount of $18,262 has been paid during the period from January
1, 2004 to June 30, 2005. No amounts have been paid for income taxes during the
same period.
6. Liquidity
The Company is a development stage company and does not have revenues from
operations. In addition, the Company has a deficit in working capital and
stockholders' equity, and has incurred sustained losses.
The Company has funded losses from operations in the current quarter primarily
from the issuance of debt and the sale of the Company's restricted common stock
in private placement transactions, and will require additional funding from
these sources to sustain its future operations. The Company anticipates that the
issuance of debt and the sale of the Company's restricted common stock will
continue to fund operating losses in the short-term; however, there can be no
assurance that it will be successful in doing so.
6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Definitive Merger Agreement with GeoVax
On January 20, 2006, Dauphin entered into a Definitive Agreement and Plan of
Merger (the "Merger") whereby the Company's wholly owned subsidiary, GeoVax
Acquisition Corp., would merge with and into GeoVax. Upon completion of the
Merger, GeoVax would survive the Merger as a wholly owned subsidiary of Dauphin.
GeoVax, Inc., a Georgia biotechnology company, was established to develop,
license and commercialize the manufacture and sale of human vaccines for
diseases caused by HIV-1 (Human Immunodeficiency Virus) and other infectious
agents. The Merger shall become effective upon, among other things, an
affirmative vote of approval from each companies' shareholders. If the Merger is
completed, there is no assurance that the surviving company will be economically
successful.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are reasonable,
such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from these expectations. Such
risks and uncertainties include, without limitation, the following:
* financing of future operations, variations in our quarterly
results, the occurrence of unanticipated events and circumstances
and general economic conditions, including stock market
volatility, results of future operations, challenges in
establishing and/or managing joint ventures;
These risks and uncertainties are beyond our control and, in many cases; we
cannot predict the risks and uncertainties that could cause our actual results
to differ materially from those indicated by the forward-looking statements.
When used in this document, the words "assumptions," "believes," "plans,"
"expects," "anticipates," "intends," "continue," "may," "will," "could,"
"should," "future," "potential," "estimate," or the negative of such terms and
similar expressions as they relate to us or our management are intended to
identify forward-looking statements. We undertake no obligation to release
publicly the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the condensed consolidated financial statements and notes
thereto included in Item 1 of this Quarterly Report and the condensed
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations in our Forms 10-K
for the periods ending December 31, 2004 and 2005. Historical results and
percentage relationships among any amounts in the financial statements are not
necessarily indicative of trends in operating results for any future periods.
Critical accounting policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of these investments.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements and
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities (excluding non-deductible goodwill) and using enacted tax rates in
effect for the years in which the differences are expected to become recoverable
or payable.
7
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
(Loss) Per Common Share
Basic loss per common share is calculated by dividing net loss for the year by
the weighted-average number of shares outstanding during the period, which were
99,127,000 and 95,086,000 for the periods ending June 30, 2005 and 2004
respectively. Diluted loss per common share is adjusted for the assumed exercise
of stock options and warrants unless such adjustment would have an anti-dilutive
effect
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of the derivative liability.
Fair Value of Financial Instruments
The Company financial instruments consist of cash, payables, and notes payable.
The carrying amount of cash and payables approximates fair value because of the
short-term nature of these items. The aggregate carrying amount of notes payable
approximates fair value as the individual notes bear interest at market interest
rates.
Strategic Direction
In November 2003, Dauphin's Board of Directors, as then constituted, considered
and approved a plan to discontinue all operations effective January 1, 2004, and
to seek out potential merger and or acquisition candidates. As a result the
Company is considered a development stage business since January 1, 2004 for
financial reporting purposes.
On January 20, 2006, Dauphin signed a definitive Agreement and Plan of Merger
(the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition
Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax
would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc.,
a Georgia biotechnology company, was established to develop, license and
commercialize the manufacture and sale of human vaccines for diseases caused by
HIV-1 (Human Immunodeficiency Virus) and other infectious agents. The Merger
shall become effective upon, among other things, an affirmative vote of approval
from each companies' shareholders. If the Merger is completed, there is no
assurance that the surviving company will be economically successful.
Results of Operations
The Company was unsuccessful in its previous operations and terminated those
operations in December 2003. We were unsuccessful in generating income from or
positive cash flow from any of our operations. Currently, the Company is working
on the proposed transaction with GeoVax as described above. The loss of $642,657
for the six months ended June 30, 2005 is the result of employee wages, legal
and professional fees, and a loss pertaining to the derivative. The loss of
$910,971 for the six months ended June 30, 2004 is a result of employee wages,
professional fees and interest expense offset by a gain associated with the
derivative instrument. We anticipate that our general and administrative
expenses going forward will be approximately $90,000 per month.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since its founding
and as of June 30, 2005, has an accumulated deficit of $70,768,536. The Company
expects to incur operating losses over the near term.
As of June 30, 2005 the Company had current liabilities in excess of current
assets of approximately $2,345,000.
8
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
The Company has funded losses from operations in the current year primarily from
the issuance of debt and the sale of the Company's restricted common stock in
private placement transactions, and will require additional funding from these
sources to sustain its future operations. The Company anticipates that the
issuance of debt and the sale of the Company's restricted common stock will
continue to fund operating losses in the short-term. There is no assurance that
the Company will be successful in raising the needed amounts of capital and debt
needed to sustain the Company.
When used in this Form 10-Q, the words "expects," "anticipates," "estimates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties, including those set forth
under the "Risks and Uncertainties" set forth below that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. Dauphin expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any statement is based. This discussion should be read
together with the financial statements and other financial information included
in this Form 10-Q.
We are a development stage company as defined in SFAS No. 7 effective January 1,
2004. The Company's development stage activities consist of evaluating potential
merger candidates and raising additional financing.
Risks and Uncertainties
Readers should carefully consider the risks described below in evaluating the
Company's business. The following risks and uncertainties are not the only risks
and uncertainties facing the Company.
We have an accumulated deficit due to substantial losses incurred over the last
nine years
Since July 1996 we have operated with substantial losses from operations and
have an accumulated deficit of $70,768,536 as of June 30, 2005. The Company
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
ability to procure and market commercially acceptable products. There can be no
assurance that the Company will ever achieve a profitable level of operations or
if profitability is achieved, that it can be sustained. Our financial
performance may make it difficult for potential sources of capital to evaluate
the viability of our business to date and to assess its future viability.
We currently have no operations.
The Company was unsuccessful in its operations and terminated those operations
in December 2003. Our previous business operations were limited and did not
result in (i) significant revenues, (ii) the accumulation of a significant
dollar amount of assets, or (iii) in earnings. Because of a lack of resources,
we were unable to fund the costs of complying with our filing requirements under
Section 13 of the Securities Exchange Act of 1934, as amended. In November 2003,
Dauphin's Board of Directors, as then constituted, considered and approved a
plan to discontinue all operations effective January 1, 2004, and to seek out
potential merger and or acquisition candidates.
The Company's ability to continue as a going concern is questionable
Because of recurring operating losses, the excess of current liabilities over
current assets, the stockholders' deficit, and negative cash flows from
operations, there is substantial doubt about the Company's ability to continue
as a going concern. The Company's continuation as a going concern is dependent
on attaining profitable operations, restructuring its debt obligations, and
obtaining additional outside financing. The Company has funded losses from
operations in the current year primarily from the issuance of debt and the sale
of the Company's restricted common stock in private placement transactions, and
will require additional funding from these sources to sustain its future
operations. The Company anticipates that the issuance of debt and the sale of
the Company's restricted common stock will continue to fund operating losses in
the short-term but there is no assurance that the Company will be successful in
obtaining additional capital or financial resources.
Planned transaction with GeoVax may not be completed
On January 20, 2006, Dauphin signed a definitive Agreement and Plan of Merger
(the "Merger") whereby the Company's wholly owned subsidiary, GeoVax Acquisition
Corp., would merge with and into GeoVax. Upon completion of the Merger, GeoVax
would survive the Merger as a wholly owned subsidiary of Dauphin. GeoVax, Inc.,
a Georgia biotechnology company, was established to develop, license and
commercialize the manufacture and sale of human vaccines for diseases caused by
HIV-1 (Human Immunodeficiency Virus) and other infectious agents. The Merger
shall become effective upon, among other things, an affirmative vote of approval
9
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
from each companies' shareholders. There is no assurance that we will be
successful in finalizing this transaction. If the transaction is completed,
there is no assurance that the surviving company will be economically
successful. Regardless of the outcome with GeoVax, we may not be successful in
finding any suitable merger or acquisition candidate. If we are not successful
in finding any suitable candidate, it would raise substantial doubt as to our
ability to continue any operations.
Funding Requirements
In order to continue its planned transaction, the Company must obtain additional
funding. The Company has no source of working capital except the prospect of
obtaining new equity or debt financing. We have no revenues and therefore rely
solely on obtaining either equity or debt financing. The Company must continue
to sell equity or find another source of operating capital until its operations
are profitable. While the Company's financial statements have been prepared
under the assumption that the Company will continue as a going concern, the
independent registered public accounting firm's report on the Company's 2004 and
2005 financial statements, included an explanatory paragraph relating to the
substantial doubt as to the Company's ability to continue as a going concern.
The Company does not have sufficient shares of common stock authorized to meet
its obligations
Currently, we do not have enough authorized shares of common stock to issue to
holders of options and warrants, as well obligations pursuant to our convertible
loans and convertible debentures. This deficiency in the number of authorized
shares of common stock can only be rectified by an affirmative vote of the
majority of our shareholders to amend our Articles of Incorporation to reflect
an increased number of authorized shares of common stock. There can be no
assurance that our shareholders will approve an amendment to our Articles of
Incorporation.
Shareholders may suffer dilution from the exercise of existing options, warrants
and convertible notes; the terms upon which we will be able to obtain additional
equity capital could be adversely affected
Our common stock may become diluted if any of the outstanding warrants to
purchase our common stock are exercised. The total number of shares that may be
issued pursuant to the outstanding warrants is 1,704,999 at June 30, 2005 and is
presently 700,000.
It is likely that our shares will be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control
The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of and
development-stage companies have been especially volatile. Market volatility and
other market conditions could reduce the market price for our shares. Our stock
price has fluctuated in the past and could continue to do so in the future. Your
investment in the Company's stock could lose value. Some of the factors that
could significantly affect the market price of the Company's stock are discussed
in these Risk Factors and elsewhere in this report, and also include: variations
in quarterly financial results; changes in political, economic and market
conditions either generally or specifically to particular industries; and
fluctuations in stock prices generally, particularly with respect to the stock
prices for other biotechnology companies. A significant drop in our stock price
could expose us to the risk of securities class action lawsuits. Defending
against such lawsuits could result in substantial costs and divert management's
attention and resources. An unfavorable outcome of such a matter may have a
material adverse impact on the business, results of operations, financial
position, or liquidity.
General Economic and Other Conditions
The Company's business may be adversely affected from time to time by such
matters as changes in general economic, business and international conditions,
prices and costs, technological developments and other factors of a general
nature.
We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future
We have not declared, paid, or distributed any cash dividends on our shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.
10
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
Our shares are not widely traded
There is only a limited market for our shares. If a large portion of the shares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such shares. This could result in a significant reduction in
current market prices. There can be no assurance that investors will be able to
resell shares at the price they paid for the shares or at any price.
Our shares are subject to special trading rules relating to "penny stocks" which
restrict trading
Our shares are covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.
Item 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures designed to ensure that financial
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized, and reported within the required time periods, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding disclosure.
In connection with the completion of its audit of, and issuance of its report
on, our consolidated financial statements for the year ended December 31, 2004,
Tanner LC identified deficiencies that existed in the design or operation of our
internal control over financial reporting that it considered to be "significant
deficiencies" or "material weaknesses." The Public Company Accounting Oversight
Board ("PCAOB") has defined "significant deficiency" as a control deficiency, or
a combination of control deficiencies, that adversely affects the company's
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with generally accepted accounting principles such
that there is more than a remote likelihood that the misstatement of the
company' annual or interim financial statements that is more than
inconsequential will not be detected. The PCAOB has defined a "material
weakness" as a "significant deficiency or combination of significant
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial will not be prevented or
detected."
In connection with the completion of its audit of, and issuance of its report
on, our consolidated financial statements for the year ended December 31, 2005,
Porter Keadle Moore, LLP ("PKM") considered our internal controls in order to
determine their auditing procedures for the purpose of expressing their opinion
on the financial statements and not to provide assurance on our internal
controls. PKM noted certain matters involving our internal controls and our
operation that they consider to be reportable conditions under standards
established by the American Institute of Certified Public Accountants.
Reportable conditions involve matters relating to significant deficiencies in
the design or operation of the internal control that, in PKM's judgment, could
adversely affect our ability to record, process, summarize, and report financial
data consistent with the assertions of management in our financial statements.
The significant deficiencies or material weakness in our internal controls
relate to segregation of incompatible duties, the timely reconciliation of
general ledger accounts, controls over inventory, property and equipment, debt
documentation and derivative transactions and accounting for acquisitions and
disposals. Additionally, significant deficiencies or material weakness in our
internal control over accounting for derivative transactions, certain
disclosures in the footnotes to the financial statements was related to the
stock option disclosures required by SFAS No. 123R. We have disclosed these
significant deficiencies and material weaknesses to our Board of Directors.
Additional effort is needed to fully remedy these significant deficiencies and
material weaknesses and we are continuing our efforts to improve and strengthen
our internal controls over financial reporting. Our management and Board of
Directors will continue to work with our management and outside advisors with
the goal to implement internal controls over financial reporting that are
adequate and effective.
11
Dauphin Technology, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS - CONTINUED
(Unaudited)
(b) Changes in internal controls and procedures
There has been no change in our internal control over financial reporting during
the second quarter ended June 30, 2005, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On March 7, 2006, the Company filed legal action against preferred shareholders
Stavros N. Papageorgiou and Nikolaos S. Papageorgiou, their advisor, Miltos
Louizidis, and the investment banking firm of Crescent International, Ltd. (the
"Defendants"). The complaint alleges, among other things, breaches of various
agreements, fraud, tortious interference, conspiracy, and breaches of fiduciary
duties by the Defendants. Specifically, Dauphin alleges that the Defendants
embarked upon a scheme to defraud, tortiously interfere with contracts and
business relationships, and to breach fiduciary duties in order to steal from
Dauphin and its shareholders certain critical business opportunities, including
its current efforts to merge with GeoVax, Inc.
On May 15, 2006, the Company and the preferred shareholders agreed to settle all
legal actions between them. The settlement confirms the parties' agreement to
proceed with the GeoVax merger, based upon a conversion and exchange of
preferred shares upon closing of the merger, on the basis of a
1-preferred-for-2-common share exchange, as anticipated by the Merger Agreement.
In addition, a convertible note representing a Company liability of
approximately $1.3 million has been cancelled. On May 16, 2006, an agreed order
was entered in the Circuit Court of Cook County, Illinois, dismissing all
claims.
Item 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS - None.
Item 3. DEFAULTS UPON SENIOR SECURITIES - None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
Item 5. OTHER INFORMATION - None.
Item 6 (a). EXHIBITS
31. Certifications
31.1 Certification of Chief Executive and Chief Financial Officer in accordance
with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification of the Principal Executive and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the
Sarbanes-Oxley Act of
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DAUPHIN TECHNOLOGY, INC.
BY: /s/ Andrew J. Kandalepas
--------------------------------
Andrew J. Kandalepas,
President, Chief Executive and Chief Financial Officer
(Principal Executive and Financial Officer)
Date: June 30, 2006
12
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