UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-14210
COMPUMED, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
--------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
95-2860434
----------
(I.R.S. Employer Identification No.)
5777 W. CENTURY BLVD., SUITE 1285, LOS ANGELES, CA 90045
(Address of principal executive offices)
(310) 258-5000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has 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)
has been subject to such filing requirements in for the past 90 days. Yes X No
As of May 11, 2004, we had 17,951,034 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
INDEX
COMPUMED, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements (unaudited)
Balance Sheets - March 31, 2004 (unaudited) and September 30, 2003.
Statements of Operations - Three months and six months ended March
31, 2004 and 2003 (unaudited).
Statements of Cash Flows - Six months ended March 31, 2004 and 2003
(unaudited).
Notes to condensed Financial Statements (unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Controls and Procedures.
PART II. OTHER INFORMATION
-----------------------------
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
----------
PART I
INDEX
COMPUMED, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
BALANCE SHEETS
COMPUMED, INC.
March 31, 2004 SEPTEMBER 30, 2003
------------------ -------------------
(UNAUDITED) (AUDITED)
------------------ -------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 38,000 $ 66,000
Marketable securities. . . . . . . . . . . . . . . . . . . . . . 218,000 181,000
Accounts receivable, less allowance of $21,000 (March 2004)
and $22,000 (September 2003). . . . . . . . . . . . . . . . . . 232,000 219,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000 25,000
Prepaid expenses and other current assets. . . . . . . . . . . . 22,000 21,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 544,000 512,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,287,000 1,276,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 42,000 42,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 35,000 35,000
------------------ -------------------
1,364,000 1,353,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,237,000) (1,144,000)
------------------ -------------------
127,000 209,000
OTHER ASSETS
Patents, net of accumulated amortization of $3,000 (March 2004)
and $2,000 (September 2003). . . . . . . . . . . . . . . . . . . 54,000 48,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 11,000
------------------ -------------------
TOTAL ASSETS $736,000 $780,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 193,000 $125,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 104,000 139,000
Current portion of capital lease obligations . . . . . . . . . . 3,000 7,000
------------------ -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 300,000 271,000
STOCKHOLDERS' EQUITY
Preferred Stock, $.10 par value - authorized 1,000,000 shares
Preferred Stock- Class A $3.50 cumulative convertible voting -
issued and outstanding - 8,400 shares. . . . . . . . . . . . 1,000 1,000
Preferred Stock- Class B $3.50 cumulative convertible voting -
issued and outstanding -300 shares. . . . . . . . . . . . . . - -
Common Stock, $.01 par value-authorized 50,000,000 shares,
issued and outstanding-17,951,034 shares. . . . . . . . . . . 180,000 180,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,304,000 32,296,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,118,000) (31,978,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 69,000 27,000
Deferred stock compensation. . . . . . . . . . . . . . . . . . . - (17,000)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 436,000 509,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $736,000 $780,000
================== ===================
See notes to condensed financial statements.
STATEMENTS OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------- -------------------------------
2004 2003 2004 2003
------------------- ----------- ----------------- -----------
REVENUES FROM OPERATIONS
ECG services . . . . . . . . . . . . . $ 407,000 $ 401,000 $ 791,000 $ 811,000
ECG product and supplies sales . . . . 25,000 29,000 43,000 57,000
OsteoGram(R) sales and services. . . . 29,000 52,000 87,000 66,000
------------------ ----------- ----------------- ------------
461,000 482,000 921,000 934,000
COSTS AND EXPENSES
Costs of ECG services. . . . . . . . . 124,000 119,000 243,000 243,000
Cost of goods sold-ECG . . . . . . . . 18,000 20,000 33,000 41,000
Cost of goods sold-OsteoGram(R). . . . -0- 5,000 4,000 7,000
Selling expenses . . . . . . . . . . . 57,000 62,000 102,000 144,000
Research and development . . . . . . . 55,000 56,000 108,000 107,000
General and administrative
expenses. . . . . . . . . . . . . . . 275,000 240,000 516,000 514,000
Depreciation and amortization. . . . . 43,000 53,000 94,000 108,000
------------------ ----------- ----------------- ------------
572,000 555,000 1,100,000 1,164,000
------------------ ----------- ----------------- ------------
OPERATING LOSS . . . . . . . . . . . . (111,000) (73,000) (179,000) (230,000)
Interest income and dividends. . . . . 4,000 6,000 9,000 14,000
Other miscellaneous income . . . . . . 28,000 -0- 28,000 -0-
Realized gain on marketable securities -0- 8,000 2,000 10,000
Interest expense . . . . . . . . . . . -0- -0- -0- (1,000)
------------------ ----------- ----------------- ------------
NET LOSS . . . . . . . . . . . . . . . (79,000) (59,000) (140,000) (207,000)
================== =========== ================= ============
NET LOSS PER SHARE (Basic and diluted) (.00) (.00) (0.01) (0.01)
================== =========== ================= ============
Weighted average number of common
shares outstanding. . . . . . . . . . 17,951,034 17,869,309 17,951,034 17,869,309
================== =========== ================= ============
STATEMENTS OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
SIX MONTHS ENDED
--------------------------------------------------
MARCH 31, 2004 MARCH 31, 2003
----------------- ------------------
OPERATING ACTIVITIES:
Net loss $(140,000) $(207,000)
Net adjustments to reconcile net loss to net cash used in
operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . (2,000) (10,000)
Amortization of deferred stock compensation. . . . . . . . . . . . 25,000 13,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 94,000 108,000
Increase in accounts receivable . . . . . . . . . . . . . . . (13,000) (38,000)
Decrease (Increase) in inventory and prepaid expenses . . . . (10,000) 7,000
Decrease (Increase) in accounts payable and other liabilities 33,000 (7,000)
------------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (13,000) (134,000)
INVESTING ACTIVITIES:
Proceed from selling of marketable securities. . . . . . . . . . . 7,000 86,000
Purchase of other asset. . . . . . . . . . . . . . . . . . . . . . (7,000) -
Purchase of property, plant and equipment . . . . (11,000) (1,000)
------------------- ------------------
NET CASH PROVIDED BY (USED in) INVESTING ACTIVITIES. . . . . . . (11,000) 85,000
FINANCING ACTIVITIES:
Principal payments on capital lease obligations. . . . . . . . . . (4,000) (4,000)
------------------- ------------------
NET CASH USED IN FINANCING ACTIVITIES. . . . . . . . . . . . . . . (4,000) (4,000)
------------------- ------------------
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . (28,000) (53,000)
Cash and cash equivalents at beginning period. . . . . . . . . . . 66,000 78,000
------------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38,000 $ 25,000
================== =================
Cash paid for interest $ - $ -
================== =================
See notes to condensed financial statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
COMPUMED, INC.
NOTE A-BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying interim unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2004. For further information, refer to the financial statements for the year
ended September 30, 2003 and the notes thereto included in the Company's Annual
Report on Form 10-KSB.
The balance sheet at September 30, 2003 has been derived from the Company's
year-end audited financial statements but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain reclassifications have been made to prior period amounts to conform to
the current period presentation.
The Company has historically used existing cash and readily available marketable
securities balances to fund operating losses and capital expenditures. The
Company raised these funds in 1997 through 2000 through the placement of
Preferred Stock issuances and proceeds from the exercise of certain stock
options and warrants.
The Company has incurred recurring losses and had net losses aggregating
$347,000 for the six months ended March 31, 2004 and 2003. The Company's
business strategy includes an increase in OsteoGram (R) revenue through OEM
sales to the manufactures of digital x-ray equipment and through direct sales
through domestic and international distributors. The Company intends to finance
this business strategy by using its current working capital resources and cash
flows from existing operations. There can be no assurance that the sales will be
sufficient to offset related expenses.
STOCK-BASED COMPENSATION
-------------------------
The Company accounts for employee stock option grants in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations (APB 25), and has adopted the "disclosure
only" alternative described in Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, amended by SFAS No. 148
Accounting for Stock-Based Compensation-Transition and Disclosure.
SFAS No. 123, Accounting for Stock-Based Compensation, requires pro forma
information regarding net income (loss) using compensation that would have been
incurred if the Company had accounted for its employee stock options under the
fair value method of that statement. Options to purchase 0 and 1,744,907 shares
of Common Stock of CompuMed, Inc. were granted during the three months ended
March 31, 2004 and 2003, respectively. The fair value of these options was
estimated at $0 and $66,000 for the three months ended March 31, 2004 and 2003,
respectively. Options to purchase 261,087 and 0 shares of Common Stock of
CompuMed, Inc. were granted during the three months ended December 31, 2003 and
2002, respectively. The fair value of these options was estimated at $65,000 and
$0 for the three months ended December 31, 2003 and 2002, respectively. The fair
value were estimated using Black-Scholes Option pricing method with the
following assumptions:
For The Six Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Risk free interest rate . . . . . . . . . . 4.28% 3.33%
Stock volatility factor . . . . . . . . . . 54% 18%
Weighted average expected option life . . . 10 years 10 years
Expected dividend yield . . . . . . . . . . None None
The pro forma net loss and loss per share had the Company accounted for the
options using FAS 123 would have been as follows:
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
Net loss as reported . . . . . . . . . . . . . (79,000) (59,000) (140,000) (207,000)
Basic and diluted loss per share as reported . (0.00) (0.00) (0.01) (0.01)
Add: stock-based employee compensation cost
included in determination of net loss reported - 4,000 24,000 4,000
Deduct: stock-based employee compensation cost
that would have been included in the
determination of net loss if the fair value
based method had been applied to all awards. . (5,000) (16,000) (50,000) (22,000)
Pro forma net loss if the fair value based
method had been applied to all awards. . . . . (84,000) (71,000) (166,000) (225,000)
Basic and diluted pro forma loss per share
if the fair value based method had been
applied to all awards. . . . . . . . . . . . . (0.00) (0.00) (0.01) (0.01)
A summary of the stock options activity, and related information for the six
months ended March 31 follows:
2004 2003
-------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- --------- ---------- ---------
Options outstanding, beginning of period 5,027,025 0.22 3,124,466 0.51
Options exercised. . . . . . . . . . . . - - - -
Options granted. . . . . . . . . . . . . 261,087 0.34 1,824,907 0.08
Options forfeited/canceled . . . . . . . (1,104) 0.96 (262,242) 0.70
---------- --------- ---------- ---------
Options outstanding, end of period . . . 5,287,008 0.23 4,687,131 0.33
========== ========= ========== =========
Options exercisable, end of period . . . 4,495,347 0.22 1,915,565 0.63
========== ========= ========== =========
The following summarizes information concerning stock options outstanding at
March 31, 2004:
Weighted Weighted Number Weighted
Average Remaining Average Subject Average
Number Contractual Exercise to Exercise
Outstanding Life Price Exercise Price
----------- ----------- -------- --------- --------
Range of Exercise Prices
0.00 - $0.4250 . . . . . 4,406,130 8.7 0.1319 3,614,469 0.1047
0.4251 - $0.850 . . . . . 847,375 5.1 0.6734 847,375 0.6734
0.8501 - $1.275 . . . . . 33,503 3.4 1.1436 33,503 1.1436
----------- ----------- -------- --------- --------
5,287,008 8.1 0.2251 4,495,347 0.2197
=========== =========== ======== ========= ========
PER SHARE DATA
----------------
The Company reports its earnings (loss) per share in accordance with Statement
of Financial Accounting Standards No.128, "Accounting for Earnings Per Share"
("FAS 128"). Basic loss per share is calculated using the net loss divided by
the weighted average common shares outstanding. Shares from the assumed
conversion of outstanding warrants, options and the effect of the conversion of
the Class A Preferred Stock and Class B Preferred Stock are omitted from the
computations of diluted loss per share because the effect would be antidilutive.
NOTE B-OTHER AGREEMENTS
On December 23, 2003, we entered into an Investment Agreement with Dutchess
Private Equities Fund, also referred to as an Equity Line of Credit. That
agreement provides that, following notice to Dutchess, we may Put to Dutchess up
to $5 million in shares of our Common Stock for a purchase price equal to 95% of
the average of the three lowest closing bid prices on the Over-the-Counter
Bulletin Board of our Common Stock during the five day period following that
notice. The number of shares that we will be permitted to put pursuant to the
Investment Agreement will be either: (A) two hundred percent of the average
daily volume of our Common Stock for the ten trading days prior to the
applicable put notice, multiplied by the average of the three daily closing best
bid prices immediately preceding the day we issue the put, or (B) $25,000;
provided that in no event will the put amount be more than $1,000,000 with
respect to any single Put.
Dutchess' obligation to purchase our Common Stock is contingent upon certain
closing conditions. Such conditions relate to the Investment Agreement and
include: (i) that our representations and warranties are true and correct as of
the funding date, (ii) that we have performed all of our covenants, agreements
and conditions required to be performed us, (iii) that trading of our Common
Stock has not been suspended, (iv) that no statute, rule, regulation, executive
order, decree, ruling or injunction is in force against the transactions
contemplated in the Investment Agreement, (v) that no pending or threatened
litigation exists, and (vi) that the SEC has declared effective a registration
statement covering the shares to be purchased by Dutchess.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
----------------------------------------------
We are including the following cautionary statement in this Quarterly Report on
Form 10-QSB to make applicable and take advantage of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 with respect to
forward-looking statements made by us, or on our behalf. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
that are other than statements of historical facts. From time to time, we may
make written or oral statements that are forward-looking including statements
contained in this report and other filings with the Securities and Exchange
Commission. These forward-looking statements are principally contained in the
section captioned "Management's Discussion and Analysis of Operations". In that
and other portions of this Form 10-QSB, the words "anticipates", "believes,"
"estimates," "seeks," "expects," "plans," "intends" and similar expressions as
they relate to us or our management are intended to identify forward-looking
statements. All such forward-looking statements are expressly qualified by these
cautionary statements.
Forward-looking statements involve risks and uncertainties that could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The forward-looking statements contained herein are
based on various assumptions, many of which are based, in turn, upon further
assumptions. Our expectations, beliefs and forward-looking statements are
expressed in good faith on the basis of management's views and assumptions as of
the time the statements are made, but there can be no assurance that
management's expectations, beliefs or projections will result or be achieved or
accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause actual results to
differ materially from those discussed in the forward-looking statements:
technological advances by our competitors, the impact of competition, dependence
on key employees and the need to attract new management, effectiveness and costs
of sales and marketing efforts, acceptance of product offerings, ability to
expand into new markets, the risks of patent claims or other third party
liability, and the risks of launching a new product or service, such as our
OsteoGram(R) test, changes in health care regulation, including reimbursement
programs, capital needs to fund any delays or extensions of research programs
and the availability of capital on terms satisfactory us. We do not intend to
update any forward-looking statements to reflect events or circumstances after
the date hereof.
OVERVIEW
--------
Our core business is providing remote electrocardiogram (ECG) interpretation
services to medical facilities that may not have access either to trained
physicians that can interpret ECG results or to self-interpreting ECG equipment.
Our customers are typically correctional facilities, ambulatory surgery centers,
occupational health clinics and physician offices. Although self-interpreting
ECG equipment is widely available, many of our customers like the optional
feature of automatically sending their ECG results to one of our cardiologists
for an overread when the results are abnormal. This overread feature is a key
advantage that enables us to market our services in segments of the market where
physicians may not be available on a routine basis. We are evaluating new
opportunities for our ECG business, however, we could lose customers who choose
to receive services from a competitor or who purchase a self-interpretive
machine and no longer need our ECG interpretations. If we were to lose existing
customers, they may be difficult to replace, and that could have a material
adverse impact on our operations and financial condition.
Our second business is the development and marketing of medical imaging software
tools that automatically make accurate and precise measurements to diagnose bone
disease. Our target markets for these growth products are radiologists and
orthopedic surgeons, although our underlying technology can be applied to a
number of other situations, including specific cancers and dental disease. Our
initial product, the OsteoGram(R), is an automated system for the rapid
screening, diagnosis and monitoring of osteoporosis, a disease that effects more
than 200 million people worldwide. Osteoporosis is a "silent disease" that costs
the U.S. healthcare system over $16 billion annually. Medicare is currently
scrutinizing methods to lower the costs of fighting this largely preventable
disease through early intervention, and health plans will soon be required to
test "at risk" patients at a point-of-care. We believe that convenient, low-cost
methods of screening and diagnosing will become increasingly desirable as
hospitals comply with recent initiatives directling them to test and treat this
insidious disease.
The OsteoGram(R) is marketed in both film-based and DICOM (Digital Imaging and
Communications in Medicine) formats. The film-based version utilizes a standard
hand x-ray film that is digitized on a desktop scanner. The digital image is
then analyzed on a personal computer by means of the patented OsteoGram(R)
software. This system is marketed to small hospitals, clinics and physician's
offices. The DICOM OsteoGram(R) was developed to take advantage of the growing
market for digital x-ray equipment. DICOM is the information standard that
allows digital imaging equipment to interconnect, enabling clinicians to readily
move, archive and retrieve images over networks. By residing on the workstations
of these advanced digital systems, the OsteoGram(R) software can automatically
capture and analyze images directly from either the x-ray equipment or the
network. The goal is to enable clinicians to utilize software applications
integrated into digital imaging platforms. This helps reduce the need for
additional dedicated equipment, redundant computer workstations and specially
trained staff. CompuMed plans to develop a series of laborsaving applications
that will be directed towards the needs of radiologists and orthopedic surgeons.
For the quarter ended March 31, 2004 we continued to focus on the implementation
of our DICOM OsteoGram(R) strategy. Our development team is completing the
integration of the OsteoGram(R) software into the computed radiography (CR)
platform of Orex Computed Radiography Inc., and we expect to release the fully
automated application by the end of May. Located in Yokneam, Israel and
Auburndale, MA, Orex is a developer of digital (i.e., filmless) x-ray systems.
We also added eTrauma Corporation as a strategic partner in the orthopedic
office market. We intend to integrate our OsteoGram(R) into the eTrauma PACS
(Picture Archiving and Communications System) network, enabling us to enter the
growing market for digital systems in the orthopedic office environment. We were
pleased with eTrauma's performance at the March annual meeting of the American
Association of Orthopaedic Surgeons, and the company placed their initial order
prior to the exhibition. We expect to deliver an integrated software solution to
eTrauma before June 30, 2004.
March marked the first shipment of the DICOM OsteoGram(R), which will be
installed in China through our Shanghai-based distributor. This dealer is
working closely with a major provider of digital imaging systems, and we expect
his efforts to gain momentum later this year. We view the Chinese market for
digital imaging products to be a high growth area, and a successful placement
will be key to future revenue streams in China where osteoporosis is so
prevalent. Orex is also targeting China, and they recently signed a distribution
agreement with the Medical Solutions Group of Siemens, LTD., China. We expect
to work closely with these two partners in attaining our goals in the Chinese
market. Siemens Medical Solutions, a division German electronics giant Siemens
AG, is one of the largest suppliers to the healthcare industry in the world.
In addition, we continue to work with a number of manufacturers of digital
radiography platforms to structure domestic and global agreements to integrate
our software into their workstations and network servers. Integrating our
software is a complex task, and full automation requires intimate knowledge of
each manufacturer's proprietary software package. Our plans in this segment are
aggressive, and we expect that select partnerships will ultimately yield the
results we seek.
Our ECG business remains stable, and March was the best revenue month since
October 2002. This was mainly due to new correctional accounts coming on line.
We recently were awarded a 5-year renewal with one of our largest existing
customers, and we expect to ship nearly 100 new ECG terminals in the coming
months. One of our goals for the quarter was to identify a new partner for ECG
equipment, and we will announce our selection early in the next quarter. Our
criteria included a new server system for ECG interpretation and billing that
will allow us to accept transmission over the Internet. This will enable us to
enter the international markets, where the cost of a telephone transmission was
previously prohibitive. Our effort to bolster worldwide OsteoGram(R)
distribution has resulted in a number of inquires about our CardioGram from
countries where American medical services are attractive. We are exploring means
to launch our CardioGram service overseas, since heart disease remains the
number one killer worldwide. We believe that an overread by an American
cardiologist could be a value-added service for those countries where
cardiologists are not readily available.
RECENT EVENTS
--------------
On December 23, 2003, we entered into an Investment Agreement with Dutchess
Private Equities Fund, also referred to as an Equity Line of Credit. That
agreement provides that, following notice to Dutchess, we may Put to Dutchess up
to $5 million in shares of our Common Stock for a purchase price equal to 95% of
the average of the three lowest closing bid prices on the Over-the-Counter
Bulletin Board of our Common Stock during the five day period following that
notice. The number of shares that we will be permitted to put pursuant to the
Investment Agreement will be either: (A) two hundred percent of the average
daily volume of our Common Stock for the ten trading days prior to the
applicable put notice, multiplied by the average of the three daily closing best
bid prices immediately preceding the day we issue the put, or (B) $25,000;
provided that in no event will the put amount be more than $1,000,000 with
respect to any single Put.
Dutchess' obligation to purchase our Common Stock is contingent upon certain
closing conditions. Such conditions relate to the Investment Agreement and
include: (i) that our representations and warranties are true and correct as of
the funding date, (ii) that we have performed all of our covenants, agreements
and conditions required to be performed us, (iii) that trading of our Common
Stock has not been suspended, (iv) that no statute, rule, regulation, executive
order, decree, ruling or injunction is in force against the transactions
contemplated in the Investment Agreement, (v) that no pending or threatened
litigation exists, and (vi) that the SEC has declared effective a registration
statement covering the shares to be purchased by Dutchess.
RESULTS OF OPERATIONS
-----------------------
Revenues from ECG operations increased slightly for the Second Quarter 2004 to
$432,000 from $430,000 for the same period fiscal 2003, due to the acquisition
of new correctional facility accounts, and during the six months ended March 31,
2004 decreased by 4% to $834,000 from $868,000 for the same period in fiscal
year 2003 mostly due to lower sales of ECG supplies. Revenues from the
OsteoGram(R) sales and services for the Second Quarter 2004 decreased by 44% to
$29,000 from $52,000 due to the strategic shift towards selling software without
associated computer hardware, and during the six months ended March 31, 2004
increased by 32% to $87,000 from $66,000 for the same period in fiscal 2003 due
to initial orders from international distributors, repeat orders from Asian
customers and first DICOM shipments to the Czech Republic and China.
Cost of services and goods sold consists of the costs of ECG services provided,
supplies, electrocardiograph equipment sold and OsteoGram(R) systems sold. Costs
of services of ECG for the Second Quarter 2004 increased by 4% to $124,000 from
$119,000 mostly due to increased demand for overread services, and during the
six months ended March 31, 2004, the costs of services of ECG remained the same
as $243,000 for the quarters ended March 2004 and 2003. Cost of goods sold of
ECG for the Second Quarter 2004 decreased by 10% to $18,000 from $20,000, and
during the six months ended March 31, 2004 decreased by 20% to $33,000 from
$41,000 for the same period in fiscal 2003, mainly due to lower sales in ECG
supplies. During the Second Quarter 2004, the Company's had no cost of goods
sold for OsteoGram(R) and $5,000 for the same period in fiscal 2003, a decrease
of 100%, and during the six months ended March 31, 2004 decreased by 43% to
$4,000 from $7,000 for the same period in fiscal 2003, mostly due to recent
sales that do not include computer hardware.
Selling expenses for the Second Quarter 2004 decreased by 8% to $57,000 from
$62,000, and during the six months ended March 31, 2004 decreased by 29% to
$102,000 from $144,000 for the same period in fiscal 2003, primarily due to
decreased marketing communication and trade show related expenses.
General and administrative expenses for the Second Quarter 2004 increased by 15%
to $275,000 from $240,000, and during the six months ended March 31, 2004
increased slightly to $516,000 from $514,000 for the same period in fiscal 2003,
due to legal fees and expenses related to compliance with Sarbanes-Oxley and the
SB-2 registration for the Dutchess Equity Line.
Research and development costs for the Second Quarter 2004 decreased by 2% to
$55,000 from $56,000, and during the six months ended March 31, 2004 increased
slightly by 1% to $108,000 from $107,000 for the same period in fiscal 2003 due
to salary adjustments.
Interest income for the Second Quarter 2004 decreased by 33% to $4,000 from
$6,000, and during the six months ended March 31, 2004 decreased by 36% to
$9,000 from $14,000 for the same period in fiscal 2003, primarily due to
decreased investments in marketable securities and reduced interest income in
such investments.
Other miscellaneous income for the Second Quarter 2004 was $28,000 and none for
the same period in fiscal 2003 due to the reversal of a reserve related to a
property tax assessment dispute that was settled in our favor.
Net loss for the Second Quarter 2004 increased by 34% to $79,000 from $59,000
due to increases in legal fees and expenses related to compliance with
Sarbanes-Oxley and the SB-2 registration. Net loss for the six months ended
March 31, 2004 decreased by 32% to $140,000 from $207,000 for the same period in
fiscal 2003 mostly due to increased OsteoGram (R) sales and decreased marketing
expenses in ECG and OsteoGram(R).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At March 31, 2004, we had approximately $256,000 in cash and marketable
securities, as compared to a balance of $247,000 at September 30, 2003. The net
increase of $9,000 in cash and marketable securities is primarily due to
increase of unrealized gain of the Company's marketable securities. Purchases of
property, plant and equipment were $11,000 in the quarter ended March 31, 2004.
We have historically used existing cash and readily available marketable
securities balances to fund operating losses and capital expenditures. We raised
these funds in 1997 through 2000 through the placement of preferred stock
issuances and proceeds from the exercise of certain stock options and warrants.
Our business strategy includes an increase in OsteoGram(R) revenue through OEM
sales to manufactures of medical digital x-ray equipment and through direct
sales through domestic and international distributors. We intend to finance this
business strategy by using our current working capital resources and cash flows
from existing operations, including the ECG and OsteoGram(R) businesses. There
can be no assurance that the ECG and OsteoGram(R) sales will be sufficient to
offset related expenses.
We anticipate that our cash flow from operations, available cash and marketable
securities will be sufficient to meet our anticipated cash requirements for at
least the next 12 months. However, in certain circumstances we may need to raise
additional capital in the future, which might not be available on reasonable
terms or at all. If we raise additional capital we will probably do it through
the $5,000,000 equity line recently established with Dutchess Private Equities
Fund (see "Recent Events"). Failure to raise capital when needed could adversely
impact our business, operating results and liquidity. If additional funds are
raised through the issuance of equity or convertible securities, the percentage
of ownership of existing stockholders will be reduced. Furthermore, some equity
and convertible securities might have rights, preferences or privileges senior
to our Common Stock. Our Common Stock is currently traded on the
over-the-counter (OTC) bulletin board, which makes it more difficult to raise
funds through the issuance of equity or convertible securities. We cannot assure
you that such additional sources of financing will be available on acceptable
terms, if at all.
Our primary capital resource commitments at March 31, 2004 consist of capital
and operating lease commitments, primarily for office equipment and for our
corporate office facility.
We intend to pursue additional research and/or sub-contractor agreements
relating to our development projects. Additionally, we may seek partners and
acquisition candidates of businesses that are complementary to our own. Such
investments would be subject to our obtaining financing through issuance of debt
or other securities. No assurance can be given that any acquisition would not be
dilutive to stockholders.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Based on management's evaluation (with the participation of our principal
executive officer and principal financial officer), as of the end of the period
covered by this report, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, (the "Exchange Act")) are effective to ensure that information required
to be disclosed by us in reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and regulations.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There was no change in our internal control over financial reporting during our
second fiscal quarter of 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
LIMITATION ON THE EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Principal Financial
Officer, does not expect that our disclosure controls and internal controls will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control.
The design of any system of controls also 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.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
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. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Certificate of Incorporation [Incorporated by reference to Exhibit 3.1 to
our Registration Statement on Form S-1 (File No. 33-46061), effective May
7, 1992]
3.2 Certificate of Amendment of Certificate of Incorporation [Incorporated by
reference to Exhibit 3.1a to Amendment No. 1 to Post-Effective Amendment
No. 1 to our Registration Statement on Form S-2 (File No. 33-48437), filed
June 28, 1994]
3.3 Certificate of Amendment of Certificate of Incorporation [Incorporated by
reference to Exhibit 3.1b to Amendment No. 2 to Post-Effective Amendment
No. 1 to our Registration Statement on Form S-2 (File No. 33-48437), filed
November 7, 1994]
3.4 Certificate of Correction of Certificate of Amendment [Incorporated by
reference to Exhibit 3.1c to Amendment No. 2 to Post-Effective Amendment
No. 1 to our Registration Statement on Form S-2 (File No. 33-48437), filed
November 7, 1995]
3.5 By-Laws, as currently in effect [Incorporated by reference to Exhibit 3.5
to our Quarterly Report on Form 10-QSB for the quarter ended December 31,
2003 (File No. 0-14210)]
3.6 Amendment to By-Laws [Incorporated by reference to Exhibit 3.6 to our
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2003
(File No. 0-14210)]
4.1 Form of Preferred Stock Certificate [Incorporated by reference to Exhibit
4.2 to our Registration Statement on Form S-1 (File No. 33-46061),
effective May 7, 1992]
4.2 Certificate of Designation of Class A Preferred Stock [Incorporated by
reference to Exhibit 4.5 to our Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1995 (File No. 0-14210)]
4.3 Certificate of Designation of Class B Preferred Stock [Incorporated by
reference to Exhibit 4.6 to our Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1995 (File No. 0-14210)]
10.1 Employment Agreement entered on November 2, 2002 between CompuMed, Inc. and
Mr. McLaughlin [Incorporated by reference to Exhibit 10.6 to the Company's
quarterly report on Form 10-QSB for the quarter ended December 31, 2002
(File No. 0-14210), filed February 14, 2003]
10.2 Amendment to Employment Agreement dated November 2, 2002 between the
Company and Mr. McLaughlin [Incorporated by reference to Exhibit 10.6 to
the Company's Form 10KSB for the year ended September 30, 2003 (File No.
0-14210), filed December 24, 2003].
10.3 2003 Stock Incentive Plan [Incorporated by reference to Exhibit 99.2 to the
Company's Registration Statement on Form S-8 (file No. 33-105770), filed
June 2, 2003]
10.4 Investment Agreement dated December 22, 2003, by and between the Company
and Dutchess Private Equities Fund, L.P. [Incorporated by reference to
Exhibit 10.9 to the Company's Current Report on Form 8-K dated December 22,
2003]
10.5 Registration Rights Agreement dated December 22, 2003, by and between the
Company and Dutchess Private Equities Fund, L.P. [Incorporated by reference
to Exhibit 10.10 to the Company's Current Report on Form 8-K dated December
22, 2003]
11 Statement re: computation of per share earnings*
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer**
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer**
32.1 Section 1350 Certification of Chief Executive Officer**
32.2 Section 1350 Certification of Principal Financial Officer**
* Data required is provided in the financial statements in this report.
** Included herein
(b) Form 8-K - On February 2, 2004 we filed a Current Report on Form 8-K dated
December 22, 2003 in connection with the Dutchess Private Equities Fund, L.P.
transaction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUMED, INC.
(Registrant)
------------
Date May 12, 2004 By: /s/ John G. McLaughlin
-------------------------
John G. McLaughlin
President and Chief Executive Officer
(Chief Executive Officer)
Date May 12, 2004 By: /s/ Phuong Dang
-----------------
Phuong Dang
Controller (Principal Financial and
Accounting Officer)