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 JUNE 30, 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
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(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 July 31, 2004, we had 19,094,835 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 - June 30, 2004 (unaudited) and September 30, 2003.
Statements of Operations - Three months and nine months ended June
30, 2004 and 2003 (unaudited).
Statements of Cash Flows - Nine months ended June 30, 2004 and 2003
(unaudited).
Notes to condensed Financial Statements (unaudited).
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures.
PART II. OTHER INFORMATION
-----------------------------
Item 1 Legal Proceedings
Item 2 Changes in Securities and Small Business Issuer Purchases of Equity
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.
June 30, 2004 SEPTEMBER 30, 2003
------------------ -------------------
(UNAUDITED)
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 90,000 $ 66,000
Marketable securities. . . . . . . . . . . . . . . . . . . . . . 142,000 181,000
Accounts receivable, less allowance of $21,000 (June 2004)
and $22,000 (September 2003). . . . . . . . . . . . . . . . . . 275,000 219,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 25,000
Prepaid expenses and other current assets. . . . . . . . . . . . 30,000 21,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 565,000 512,000
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. . . . . . . . . . . . (1,268,000) (1,144,000)
------------------ -------------------
TOTAL PROPERTY AND EQUIPMENT 96,000 209,000
OTHER ASSETS
Patents, net of accumulated amortization of $3,000 (June 2004)
and $2,000 (September 2003). . . . . . . . . . . . . . . . . . . 55,000 48,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 11,000
------------------ -------------------
TOTAL ASSETS $733,000 $780,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
Accounts payable $ 173,000 $125,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 114,000 139,000
Current portion of capital lease obligations . . . . . . . . . . 1,000 7,000
------------------ -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 288,000 271,000
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 - 18,635,750 shares (June 2004)
issued and outstanding - 17,869,309 shares (September 2003) 187,000 180,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,382,000 32,296,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,158,000) (31,978,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 33,000 27,000
Deferred stock compensation. . . . . . . . . . . . . . . . . . . - (17,000)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 445,000 509,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $733,000 $780,000
================== ===================
See notes to condensed financial statements.
STATEMENTS OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
------------------- ----------- ----------------- -----------
REVENUES FROM OPERATIONS
ECG services . . . . . . . . . . . . . $ 401,000 $ 381,000 $ 1,192,000 $ 1,192,000
ECG product and supplies sales . . . . 20,000 27,000 63,000 84,000
OsteoGram(R) sales and services. . . . 42,000 20,000 129,000 86,000
------------------ ----------- ----------------- ------------
TOTAL OPERATING REVENUE 463,000 428,000 1,384,000 1,362,000
COSTS AND EXPENSES
Costs of ECG services. . . . . . . . . 129,000 116,000 372,000 359,000
Cost of goods sold-ECG . . . . . . . . 14,000 19,000 47,000 60,000
Cost of goods sold-OsteoGram(R). . . . 2,000 2,000 6,000 9,000
Selling expenses . . . . . . . . . . . 68,000 63,000 170,000 207,000
Research and development . . . . . . . 56,000 53,000 164,000 160,000
General and administrative
expenses. . . . . . . . . . . . . . . 231,000 185,000 747,000 699,000
Depreciation and amortization. . . . . 31,000 55,000 125,000 163,000
------------------ ----------- ----------------- ------------
TOTAL COSTS AND EXPENSES 531,000 493,000 1,631,000 1,657,000
------------------ ----------- ----------------- ------------
OPERATING LOSS . . . . . . . . . . . . (68,000) (65,000) (247,000) (295,000)
Interest income and dividends. . . . . 4,000 6,000 13,000 20,000
Other income . . . . . . . . . . . . . 17,000 -0- 45,000 -0-
Realized gain on marketable securities 7,000 11,000 9,000 21,000
Interest expense . . . . . . . . . . . -0- -0- -0- (1,000)
------------------ ----------- ----------------- ------------
NET LOSS . . . . . . . . . . . . . . . (40,000) (48,000) (180,000) (255,000)
================== =========== ================= ============
NET LOSS PER SHARE (basic and diluted) (.00) (.00) (0.01) (0.01)
================== =========== ================= ============
Weighted average number of common
shares outstanding. . . . . . . . . . 18,062,355 17,869,309 17,988,141 17,869,309
================== =========== ================= ============
STATEMENTS OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
NINE MONTHS ENDED
--------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003
----------------- ------------------
OPERATING ACTIVITIES:
Net loss $(180,000) $(255,000)
Net adjustments to reconcile net loss to net cash used in
operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . (9,000) (21,000)
Amortization of deferred stock compensation. . . . . . . . . . . . 25,000 20,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 125,000 163,000
Increase in accounts receivable . . . . . . . . . . . . . . . (56,000) (7,000)
Decrease (increase) in inventory and prepaid expenses . . . . (12,000) 4,000
Decrease (increase) in accounts payable and other liabilities 23,000 (23,000)
------------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . (84,000) (119,000)
INVESTING ACTIVITIES:
Proceeds from sale of marketable securities. . . . . . . . . . . . 54,000 80,000
Purchase of other asset. . . . . . . . . . . . . . . . . . . . . . (14,000) -
Purchase of property, plant and equipment . . . . . . . . . . . . (11,000) -
------------------- ------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES. . . . . . . . . . . . 29,000 80,000
FINANCING ACTIVITIES:
Proceeds from exercise of stock option 36,000 -
Net offering of the Equity Line of Credit from Dutchess Private
Equities Fund 49,000 -
Principal payments on capital lease obligations. . . . . . . . . . (6,000) (5,000)
------------------- ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . ... . . . 79,000 (5,000)
------------------- ------------------
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . 24,000 (44,000)
Cash and cash equivalents at beginning period. . . . . . . . . . . 66,000 78,000
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 90,000 $ 34,000
================== =================
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 condensed 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 nine-month period ended June 30, 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 sale 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
$435,000 for the nine months ended June 30, 2004 and 2003.
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 1,050,000 shares and 1,316,861 shares of Common Stock of
CompuMed, Inc. were granted during the three months ended June 30, 2004 and
2003, respectively. The fair value of these options was estimated at $76,000 and
$75,000 for the three months ended June 30, 2004 and 2003, respectively.
Options to purchase 0 shares and 1,774,906 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 shares 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 values were estimated using Black-Scholes Option pricing method with
the following assumptions:
For The Nine Months Ended
June 30, 2004 June 30, 2003
-------------- --------------
Risk free interest rate . . . . . . . . 4.28% - 4.73% 3.33% - 4.05%
Stock volatility factor . . . . . . . . . . 22% 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 Nine Months Ended Nine Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Net loss as reported . . . . . . . . . . . . . (40,000) (48,000) (180,000) (255,000)
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 - 9,000 24,000 13,000
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. . (40,000) (30,000) (54,000) (52,000)
Pro forma net loss if the fair value based
method had been applied to all awards. . . . . (44,000) (78,000) (234,000) (307,000)
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) (0.02)
A summary of the stock options activity, and related information for the nine
months ended June 30 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 (394,027) 0.09 - -
Options granted 1,311,087 0.20 3,141,768 0.09
Options forfeited/canceled (1,104) 0.96 (353,276) 0.56
------------- ------------ ------------- ------------
Options outstanding, end of period 5,942,981 0.22 5,912,958 0.28
============= ============ ============= ============
Options exercisable, end of period 4,284,651 0.23 2,998,061 0.45
============= ============ ============= ============
The following summarizes information concerning stock options outstanding at
June 30, 2004:
Weighted
Average Weighted Number Weighted
Remaining Average Subject Average
Number Contractual Exercise to Exercise
Outstanding Life Price Exercise Price
--------------- ------------- ----------- ---------- ---------
Range of Exercise Prices
$0.0000 - $0.4250 . . . . . . . . 5,062,103 8.8 0.14 3,403,773 0.11
$0.4251 - $0.8500. . . . . . .. . 847,375 4.9 0.67 847,375 0.67
$0.8501 - $1.2750. . . . . . . . . 33,503 3.2 1.14 33,503 1.14
-------------- ------------- ----------- ----------- ---------
5,942,981 8.2 0.22 4,284,651 0.23
============= ============= =========== =========== =========
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 sell 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 are permitted to sell pursuant to the
Investment Agreement is either: (A) two hundred percent of the average daily
volume of our Common Stock for the ten trading days prior to the applicable sale
notice, multiplied by the average of the three daily closing best bid prices
immediately preceding the day we issue the notice, or (B) $25,000; provided that
in no event will the sale be more than $1,000,000 with respect to any single
sale.
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.
On June 15, 2004, we entered into a six-month agreement with CEOcast, Inc. (the
"Consultant") an investor relations company. Such agreement is terminable at any
time after three months. During the term of this Agreement, we will pay the
Consultant $7,500 per month and 250,000 shares of Common Stock. 125,000 of such
shares were issued to the Consultant on July 20, 2004 and the remaining 125,000
shares are to be issued on September 14, 2004, if the Agreement has not been
terminated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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,
the availability of capital on terms satisfactory and the factors discussed in
our Annual Report on Form 10-KSB for the year ended September 30, 2003,and other
reports filed with the SEC. 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 other 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 products are hospitals, imaging centers
and orthopedic office practices, although in the future our underlying
technology could be applied to a number of other maladies, 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 point-of-care testing
of "at risk" patients with fragility fractures. We believe that convenient,
low-cost methods of screening and diagnosing will become increasingly desirable
as hospitals comply with recent initiatives directing them to test for 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 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 We
license our DICOM OsteoGram software to manufacturers and distributors of DICOM
x-ray and PACS equipment.
For the quarter ended June 30, 2004 we continued to focus on the implementation
of our DICOM OsteoGram(R) strategy. Our development team completed the
integration of the OsteoGram(R) software into the computed radiography (CR)
platform of Orex Computed Radiography Inc., and the product was released for
sale. Located in Yokneam, Israel and Auburndale, MA, Orex is a developer of
digital (i.e., filmless) x-ray systems. Orex has a distribution agreement with
the Medical Solutions Group of Siemens, LTD., China, and we attended ChinaMed in
April to officially launch the DICOM OsteoGram in conjunction with these two
partners. Our technicians subsequently trained a select number of Siemens sales
representatives in Beijing.
During May 2004 we installed the first two DICOM OsteoGram systems in hospitals
near Shanghai. These two systems were integrated into a market-leading CR
workstation, and we received positive preliminary feedback. Our Shanghai
distributor continues to work closely with one of the world's largest marketers
of digital imaging systems, and we expect that these two trial installations
will generate continuing demand for our products.
In addition, we continue to work directly 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 operating software. We have demonstrated our
ability to seamlessly integrate the OsteoGram into several manufacturers'
platforms, and we hope to negotiate licensing agreements as a result of our
efforts.
Our ECG business grew this quarter as new correctional accounts came on line. We
successfully bid our services to a number of state correctional departments, and
one of our partners that provides correctional health care services was awarded
a state bid that included our CardioGram as part of their package. In addition,
we selected ECG market leader, Schiller AG, as our partner for new ECG
terminals. As part of our agreement with Schiller, we will acquire a new
Schiller server system that will enable us to accept transmissions over the
Internet. This will allow us to enter the international markets, where the cost
of telephone transmission was previously prohibitive. We believe that an
overread by a U.S. based cardiologist could be a value-added service in 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 sell 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 are permitted to sell pursuant to the
Investment Agreement is either: (A) two hundred percent of the average daily
volume of our Common Stock for the ten trading days prior to the applicable sale
notice, multiplied by the average of the three daily closing best bid prices
immediately preceding the day we issue the notice, or (B) $25,000; provided that
in no event will the sale be more than $1,000,000 with respect to any single
sale.
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.
On June 15, 2004, we entered into a six-month agreement with CEOcast, Inc. (the
"Consultant") an investor relations company. Such agreement is terminable at any
time after three months. During the term of this Agreement, we will pay the
Consultant $7,500 per month and 250,000 shares of Common Stock. 125,000 of such
shares were issued to the Consultant on July 20, 2004 and the remaining 125,000
shares are to be issued on September 14, 2004, if the Agreement has not been
terminated.
RESULTS OF OPERATIONS
-----------------------
Revenues from ECG operations increased by 3% for the third quarter of fiscal
2004 to $421,000 from $408,000 for the same period in fiscal 2003, due to the
acquisition of new correctional facility accounts, and for the nine months ended
June 30, 2004 decreased by 2% to $1,255,000 from $1,276,000 for the same period
in fiscal year 2003 mostly due to lower sales of ECG equipment replacing
rentals. Revenues from the OsteoGram(R) sales and services for the third quarter
of fiscal 2004 increased by 110% to $42,000 from $20,000 due to initial
shipments of the DICOM version of the product, and for the nine months ended
June 30, 2004 increased by 50% to $129,000 from $86,000 for the same period in
fiscal 2003 due to initial orders from new international distributors, repeat
orders from Asian customers and the 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 third quarter of fiscal 2004 increased by 11% to
$129,000 from $116,000 for the same period in fiscal 2003, and for the nine
months ended June 30, 2004, increased by 4% to $372,000 from $359,000 for the
same period in fiscal 2003, mostly due to increased demand for overread services
and restocking of raw materials to refurbish ECG machines provided to newly
contracted facilities. Cost of goods sold of ECG for the third quarter of fiscal
2004 decreased by 26% to $14,000 from $19,000, and for the nine months ended
June 30, 2004 decreased by 22% to $47,000 from $60,000 for the same period in
fiscal 2003, primarily due to lower sales of ECG equipment. The cost of goods
sold for OsteoGram(R) remained the same for the third quarter of of fiscal years
2004 and 2003, and for the nine months ended June 30, 2004 decreased by 33% to
$6,000 from $9,000 for the same period in fiscal 2003, primarily due to recent
sales that do not include computer hardware.
Selling expenses for the third quarter 2004 increased by 8% to $68,000 from
$63,000, mostly to the increased travel expenses related to product launch and
training in China, and for the nine months ended June 30, 2004 decreased by 18%
to $170,000 from $207,000 for the same period in fiscal 2003, primarily due to
decreased marketing communication and trade show related expenses.
General and administrative expenses for the third quarter of fiscal 2004
increased by 25% to $231,000 from $185,000 in fiscal 2003, and for the nine
months ended June 30, 2004 increased by 7% to $747,000 from $699,000 for the
same period in fiscal 2003, due to increased expenses related to regulatory
compliance and cash payment to our Directors that previously were accepting
stock in lieu of cash.
Research and development costs for the third quarter of fiscal 2004 increased by
6% to $56,000 from $53,000 in fiscal 2003, and for the nine months ended June
30, 2004 increased by 3% to $164,000 from $160,000 for the same period in fiscal
2003 due to salary adjustments.
Interest income for the third quarter of fiscal 2004 decreased by 33% to $4,000
from $6,000, and during the nine months ended June 30, 2004 decreased by 35% to
$13,000 from $20,000 for the same period in fiscal 2003, primarily due to
decreased investments in marketable securities and reduced interest income from
such investments.
Other miscellaneous income was $17,000 for the third quarter of fiscal 2004,
$45,000 for the nine months ended June 30, 2004 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 third quarter of fiscal 2004 decreased by 17% to $40,000 from
$48,000, and for the nine months ended June 30, 2004 decreased by 29% to
$180,000 from $255,000 for the same period in fiscal 2003, primarily due to
increased OsteoGram (R) sales.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At June 30, 2004, we had approximately $232,000 in cash and marketable
securities, as compared to a balance of $247,000 at September 30, 2003, a net
decrease of $15,000 primarily due to cash used in operations. Purchases of
property, plant and equipment used $11,000 in the quarter ended June 30, 2004.
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 have historically used existing cash and readily available marketable
securities balances to fund operating losses and capital expenditures. We raise
funds through the sale of Common and Preferred stock issuances and proceeds from
the exercise of stock options and warrants.
PLAN OF OPERATIONS
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
our $5,000,000 equity line of credit 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 because of
our Common Stock is thinly traded and those who wish to sell shares of our
Common Stock may have difficulty locating buyers. 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 June 30, 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
third quarter of fiscal 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 AND USE OF PROCEEDS
During the fiscal quarter ended June 30, 2004, the Company issued an aggregate
of 684,726 shares of Common Stock, of which 394,027 shares were exercise of
stock options by directors as set forth in the table below and 290,699 shares of
which were sold to Dutchess Private Equities Fund at price ranging form $0.16
and $0.21. All sales were made pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder. All
proceeds received were added to the Company's working capital.
GRANT GRANT EXERCISE EXERCISE OPTIONS OPTION AGGREGATE
DIRECTORS DATE TYPE DATE TYPE EXERCISED PRICE OPTION COST
PLAN: 1992 STOCK OPTION PLAN
Robert Stuckelman 8/15/2001 Non-Qualified 6/24/2004 Cash 66,667 $ 0.14 $ 9,333.38
PLAN TOTALS 66,667 $ 9,333.38
PLAN: 2003 STOCK INCENTIVE PLAN
John D. Minnick . 2/11/2003 Non-Qualified 6/23/2004 Cash 85,729 $ 0.08 $ 6,858.32
John D. Romm. . . 2/11/2003 Non-Qualified 6/24/2004 Cash 91,631 $ 0.08 $ 7,330.48
Stuart Silverman. 2/11/2003 Non-Qualified 6/24/2004 Cash 150,000 $ 0.08 $ 12,000.00
PLAN TOTALS 327,360 $ 26,188.80
GRAND TOTALS 394,027 $ 35,522.18
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
------------- -------------------------------------
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 -None during the period of this Report.
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 August 13, 2004 By: /s/ John G. McLaughlin
-------------------------
John G. McLaughlin
President and Chief Executive Officer
(Chief Executive Officer)
Date August 13, 2004 By: /s/ Phuong Dang
-----------------
Phuong Dang
Controller (Principal Financial and
Accounting Officer)