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 DECEMBER 31, 2004
[ ] TRANSITION REPORT PURSUANT TO 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 small business issuer as specified in its charter)
DELAWARE 95-2860434
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(State or Other Jurisdiction of (I.R.S.
Incorporation or Organization) Employer Identification No.)
5777 WEST CENTURY BLVD., SUITE 1285, LOS ANGELES, CA 90045
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(Address of principal executive offices)
(310) 258-5000
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(issuer's telephone number)
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 January 31, 2005, we had 20,287,226 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
COMPUMED, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements (unaudited)
Balance Sheets - December 31, 2004 (unaudited) and September 30, 2004.
Statements of Operations - Three months ended December 31, 2004 and
2003 (unaudited).
Statements of Cash Flows - Three months ended December 31, 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 Unregistered Sales of Equity Securities and Use of
Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INDEX
COMPUMED, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
BALANCE SHEETS
COMPUMED, INC.
December 31, 2004 SEPTEMBER 30, 2004
------------------ -------------------
(UNAUDITED)
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 105,000 $ 62,000
Marketable securities, at fair market value . . . . . . . . . . 167,000 165,000
Accounts receivable, less allowance of $25,000 (December 2004)
and $21,000 (September 2004). . . . . . . . . . . . . . . . . . 296,000 297,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 31,000
Prepaid expenses and other current assets. . . . . . . . . . . . 31,000 38,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 634,000 593,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,231,000 1,307,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 78,000 78,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 50,000 50,000
------------------ -------------------
1,359,000 1,435,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,230,000) (1,293,000)
------------------ -------------------
TOTAL PROPERTY AND EQUIPMENT 129,000 142,000
OTHER ASSETS
Patents, net of accumulated amortization of $4,000 (December 2004)
and $4,000 (September 2004). . . . . . . . . . . . . . . . . . . 70,000 66,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 12,000
------------------ -------------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . .. . . . . . 83,000 78,000
TOTAL ASSETS $846,000 $813,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
Accounts payable $ 184,000 $160,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 113,000 88,000
Current portion of capital lease obligations . . . . . . . . . . 8,000 8,000
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TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 305,000 256,000
Capital lease obligations, less current portion 37,000 39,000
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 - 20,247,238 shares (December 2004)
issued and outstanding - 19,599,812 shares (September 2004) 203,000 197,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,603,000 32,520,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,346,000) (32,253,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 51,000 53,000
Deferred stock compensation. . . . . . . . . . . . . . . . (8,000) -
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 504,000 518,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $846,000 $813,000
================== ===================
See notes to condensed financial statements.
STATEMENT OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ending December 31
2004 2003
----------- -----------
REVENUES
ECG services. . . . . . . . . . . . . . . . . . . . . 399,000 384,000
ECG product and supplies sales. . . . . . . . . . . . 270,000 18,000
OsteoGram (R) sales and services. . . . . . . . . . . 8,000 58,000
----------- -----------
TOTAL REVENUES. . . . . . . . . . . . . . . . . . 677,000 460,000
----------- -----------
COSTS AND EXPENSES
Cost of ECG services. . . . . . . . . . . . . . . . . 138,000 119,000
Cost of goods sold-ECG. . . . . . . . . . . . . . . . 221,000 15,000
Cost of goods sold-OsteoGram (R). . . . . . . . . . . 1,000 4,000
Selling expenses. . . . . . . . . . . . . . . . . . . 68,000 45,000
Research & development. . . . . . . . . . . . . . . . 62,000 53,000
General & administrative expenses . . . . . . . . . . 274,000 241,000
Depreciation & amortization . . . . . . . . . . . . . 18,000 51,000
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TOTAL EXPENSES. . . . . . . . . . . . . . . . . . 782,000 528,000
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OPERATING LOSS. . . . . . . . . . . . . . . . . . . . (105,000) (68,000)
Interest income and dividends . . . . . . . . . . . . 6,000 5,000
Other miscellaneous income. . . . . . . . . . . . . . 8,000 -
Realized gains on marketable securities . . . . . . . - 2,000
Interest expense. . . . . . . . . . . . . . . . . . . (2,000) -
----------- -----------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . (93,000) (61,000)
=========== ===========
NET LOSS PER SHARE (BASIC AND DILUTED). . . . . . . . (0.00) (0.00)
=========== ===========
Weighted average number of common shares outstanding. 19,691,544 17,951,034
=========== ===========
STATEMENT OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
Three Months Ended December 31,
2004 2003
--------- ---------
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93,000) (61,000)
Net adjustments to reconcile net loss to net cash used in operating activities:
Realized gain/loss on marketable securities. . . . . . . . . . . . . . . . . . . - (2,000)
Amortization of deferred stock compensation. . . . . . . . . . . . . . . . . . . - 25,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 51,000
Decrease in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . 1,000 2,000
Decrease (Increase) in inventory and prepaid expenses. . . . . . . . . . . . . . 3,000 (8,000)
Decrease (Increase) in accounts payable and other liabilities. . . . . . . . . . 49,000 (46,000)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . (23,000) (39,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from selling of marketable securities . . . . . . . . . . . . . . . . . - 7,000
Investments in purchase of marketable securities. . . . . . . . . . . . . . . . (4,000) -
Purchase of other asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000) (1,000)
Purchase of property, plant and equipment. . . . . . . . . . . . . . . . . . . . (3,000) -
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . . . . . . . . (13,000) 6,000
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option . . . . . . . . . . . . . . . . . . . . . 48,000 -
Net offering of the investment agreement with Dutchess Private Equities Fund . . 33,000 -
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . . . . (2,000) (2,000)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . . . . . . . . . . . . 79,000 (2,000)
NET [INCREASE] DECREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . 43,000 (35,000)
CASH BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 66,000
--------- ---------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000 31,000
SUPPLEMENTAL DISCLOSURES:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000) -
Disposal of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000 -
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 three-month period ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2005. For further information, refer to the financial statements
for the year ended September 30, 2004 and the notes thereto included in the
Company's Annual Report on Form 10-KSB.
The balance sheet at September 30, 2004 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.
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
$154,000 for the three months ended December 31, 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.
In fiscal 2005, during the three months ended December 31, 2004, the Company
granted 35,000 shares to a consultant and 235,000 shares to employees. 35,000
shares were valued at $8,000 of which $200 was expensed in this quarter and
235,000 shares were valued at $54,000 and recorded at $0 using the intrinsic
method.
In fiscal 2004, during the three months ended December 31, 2003, the Company
granted 26,087 shares to a consultant and 235,000 shares to employees. 26,087
shares were valued at $8,000 of which $8,000 was expensed in fiscal 2004 and
235,000 shares were valued at $59,000 and recorded at $0 using the intrinsic
method.
The options were valued in accordance with SFAS 123 and the fair values were
estimated using Black-Scholes option pricing method with the following
assumptions:
For The Three Months Ended
December 31, 2004 December 31, 2003
---------------- -----------------
Risk free interest rate . . . . . . . . 4.23% 4.05%
Stock volatility factor . . . . . . . . . 33% 55% to 65%
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 December 31,
2004 2003
------------ ------------
Net loss as reported . . . . . . . . . . . . . (93,000) (61,000)
Basic and diluted loss per share as reported . (0.00) (0.00)
Add: stock-based employee compensation cost
included in determination of net loss reported -- 8,000
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. . (16,000) (8,000)
Pro forma net loss if the fair value based
method had been applied to all awards. . . . . (109,000) (61,000)
Basic and diluted pro forma loss per share
if the fair value based method had been
applied to all awards. . . . . . . . . . . . . (0.01) (0.00)
A summary of the stock options activity, and related information for the nine
months ended December 31 follows:
2004 2003
------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------------ ------------ ------------
Options outstanding, beginning of period 6,437,217 0.22 5,027,025 0.22
Options exercised (525,869) 0.09 - -
Options granted 270,000 0.32 261,087 0.34
Options forfeited/canceled (10,879) 0.71 (1,104) 0.96
------------- ------------ ------------- ------------
Options outstanding, end of period 6,170,469 0.24 5,287,008 0.23
============= ============ ============= ============
Options exercisable, end of period 4,093,809 0.25 4,495,347 0.22
============= ============ ============= ============
The following summarizes information concerning stock options outstanding at
December 31, 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 . . . . . . . . 5,306,234 8.5 0.17 3,229,574 0.13
$0.4251 - $0.8500. . . . . . .. . 832,985 4.5 0.67 832,985 0.67
$0.8501 - $1.2750. . . . . . . . . 31,250 2.9 1.15 31,250 1.15
-------------- ------------- ----------- ----------- ---------
6,170,469 7.9 0.24 4,093,809 0.25
============= ============= =========== =========== =========
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, the Company entered into an Investment Agreement with
Dutchess Private Equities Fund. That agreement provides that, following notice
to Dutchess, the Company 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 the Company's 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 by 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.
The Company entered into an agreement with CEOcast, Inc. (the "Consultant") an
investor relations company from June 15, 2004 to December 15, 2004. During the
term of this Agreement, the Company paid the Consultant $45,000 and issued
250,000 shares of Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
----------------------------------------------
This Report on Form 10-QSB contains forward-looking statements, including,
without limitation, statements concerning our possible or assumed future results
of operations. These statements are preceded by, followed by or include the
words "believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons including, but not limited
to, product and service demand and acceptance, changes in technology, ability to
raise capital, the availability of appropriate acquisition candidates and/or
business partnerships, economic conditions, the impact of competition and
pricing, capacity and supply constraints or difficulties, government regulation
and other risks described in this report. Although we believe the expectations
reflected in the forward-looking statements are reasonable, they relate only to
events as of the date on which the statements are made, and our future results,
levels of activity, performance or achievements may not meet these expectations.
We do not intend to update any of the forward-looking statements after the date
of this document to conform these statements to actual results or to changes in
our expectations, except as required by law.
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. 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) was originally marketed as a film-based product that 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. Last year we began marketing a DICOM, or Digital Imaging and
Communications in Medicine, version of the OsteoGram software. The DICOM
OsteoGram(R) was developed to take advantage of the growing market for digital
(filmless) 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 of digital
x-ray and network equipment. In addition we enlist dedicated imaging
distributors to sell our products in the after sale market.
For the quarter ended December 31, 2004 we continued to focus on the
implementation of our DICOM OsteoGram(R) strategy. Our development team is now
experienced in the integration of OsteoGram software into digital x-ray
workstations, and as a result, future integration projects will progress more
rapidly. Although our initial partnerships in this market have yielded mediocre
results, we continue to believe the strategy is viable and that partnerships
with the market leaders will be successful. We recently signed licensing and
distribution agreements with Swissray International and SourceOne Healthcare
Technologies. Swissray is the global market leader in direct digital x-ray
equipment, and SourceOne is the largest imaging distributor in the United
States. To assist SourceOne in their efforts, we are developing the OsteoGram
CADKit and CADServer products that will enable distribution partners to readily
connect the OsteoGram to the growing installed base of digital x-ray equipment.
In addition to these partners, Fuji Medical Systems exhibited the DICOM
OsteoGram at the 90th Scientific Assembly and Annual Meeting of the Radiological
Society of North America (RSNA) in Chicago (November 29-December 3). Fuji
Medical is the market leader in the computed radiography (CR) arena, and we hope
to expand our relationship with this firm.
During October we completed the proof of principal phase of utilizing the
OsteoGram on a digital mammography platform at a major teaching center. The
global market for digital mammography is rapidly expanding, and these advanced
units have a more consistent peak energy level than their analog predecessors,
which produces an excellent image for OsteoGram analysis. One of the public
health problems in stopping osteoporosis is to test and treat more at risk
women. By combining the OsteoGram with mammography equipment, women can be
conveniently tested for osteoporosis at the same time and on the same equipment
as their routine mammogram. We were delighted that Fuji Medical displayed the
OsteoGram in conjunction with their digital mammography image reader at the
recent RSNA. We are planning a clinical trial in the second quarter of 2005 to
validate the use of the OsteoGram on these new digital platforms.
Our ECG business grew significantly this quarter as we shipped a one-time order
of nearly 100 new ECG terminals to the New York State Department of Correctional
Services. These state-of-the-art terminals are transmitting to our new Schiller
SEM@Net system, which will serve our ECG customers for years to come. The
Internet capability of the SEM@Net will allow us to enter the international
markets, where the cost of a 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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2004 COMPARED TO THE
--------------------------------------------------------------------------------
QUARTER ENDED DECEMBER 31, 2003.
------------------------------------
Revenues from ECG operations increased by 66% for the first quarter of fiscal
2005 to $669,000 from $402,000 for the same period in fiscal 2003, due to
increase in ECG equipment sales. Revenues from the OsteoGram(R) sales and
services for the first quarter of fiscal 2005 decreased by 86% to $8,000 from
$58,000 due to continued delays in obtaining a CE Mark enabling European sales
and a slower than expected ramp up of licensing partnerships.
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 first quarter of fiscal 2005 increased by 16% to
$138,000 from $119,000 for the same period in fiscal 2004, mostly due to
increased of overread services and some overhead expenses related to the
acquisition and renewal of certain contracted ECG accounts. Cost of goods sold
of ECG for the first quarter of fiscal 2005 increased by 1373% to $221,000 from
$15,000, primarily due to increase of ECG equipment sales. The cost of goods
sold for OsteoGram(R) for the first quarter of fiscal 2005 decreased by 75% to
$1,000 from $4,000 for the same period in fiscal 2004, primarily due to lower
sales.
Selling expenses for the first quarter 2005 increased by 51% to $68,000 from
$45,000, mostly due to increased trade shows and marketing expenses related to
the OsteoGram (R) business.
General and administrative expenses for the first quarter of fiscal 2005
increased by 14% to $274,000 from $241,000 for the same period in fiscal 2004,
primarily due to cash payment to our Directors that previously were accepting
stock options in lieu of cash (see Stock-Based Compensation) and increased
costs of investor relations.
Research and development costs for the first quarter of fiscal 2005 increased by
17% to $62,000 from $53,000 in fiscal 2004 due to contracted services and
salary adjustments.
Depreciation expenses for the first quarter of fiscal 2005 decreased by 65% to
$18,000 from $51,000 compared to fiscal 2004 due to a large portion of fixed
assets that was fully amortized.
Interest income and dividends for the first quarter of fiscal 2005 increased by
20% to $6,000 from $5,000 due to increase of investments in marketable
securities.
Other miscellaneous income was $8,000 for the first quarter of fiscal 2005 and
none for the same period in fiscal 2004, mostly due to the reversal of a reserve
related to a disputed charge from a utility company.
Net loss for the first quarter of fiscal 2005 increased by 52% to $93,000 from
$61,000, primarily due to lower than expected sales of highly profitable
OsteoGram (R) products.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At December 31, 2004, we had approximately $272,000 in cash and marketable
securities, as compared to a balance of $227,000 at September 30, 2004, a net
increase of $45,000 primarily due to increased sales in ECG. Purchases of
property, plant and equipment used $3,000 in the first quarter ended December
31, 2004.
We have historically used existing cash and readily available marketable
securities balances to fund operating losses and capital expenditures. We also
raise funds through the sale of Common and Preferred stock issuances and
proceeds from the exercise of stock options and warrants.
CAPITAL COMMITMENTS
We entered into an agreement with CEOcast, Inc,.an investor relations company,
from June 15, 2004 to December 15, 2004. During the term of this Agreement, we
paid CEOcast $45,000 and issued 250,000 shares of Common Stock.
We lease our corporate offices at a monthly rental of $11,478 per month
with 3% annual increase.
We entered into a long-term agreement with John McLaughlin effective November 2,
2002 through September 30, 2004. This agreement provides a base salary of
$150,000 per year and a bonus up to $150,000 based on performance factors
including revenue, profit and the accomplishment of certain key milestones.
In addition, Mr. McLaughlin received standard employee options to purchase
50,000 shares of Common Stock at an exercise price of $0.20 per share upon
acceptance of the agreement.
Each of our Directors receives an annual Board of Directors fee of $10,000,
which is paid to each Director in equal monthly installments. The Chairman
receives an additional $4,500. In addition to the Board of Directors fee,
Directors receive an additional $750 per meeting when they serve as a member of
the Executive, Audit or Compensation Committee. Such amount is reduced to $250
if the committee meeting is held by teleconference or on the same day as a board
meeting.
FINANCING ACTIVITIES
On December 23, 2003, we entered into an Investment Agreement with Dutchess
Private Equities Fund. 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.
During the fiscal quarter ended December 31, 2004, we sold 121,557 shares of
Common Stock to Dutchess Private Equities Fund at $0.28 per share. Gross
proceeds were $34,036.
PLAN OF OPERATIONS
--------------------
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 likely utilize our $5,000,000 available through the
Investment Agreement with Dutchess Private Equities Fund. 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 bulletin board, which makes it more
difficult to raise funds through the issuance of equity or convertible
securities because our Common Stock is thinly traded and those who wish to sell
shares of our Common Stock may have difficulty locating buyers. Additional
sources of financing may not be available on acceptable terms, if at all.
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. Acquisition could be dilutive to stockholders.
MATERIAL TRENDS AND UNCERTAINITIES
-------------------------------------
We are disappointed by the rate of progress in commercializing the Digital
Communications and Imaging in Medicine (DICOM) OsteoGram, and we expect that our
distribution partners will accelerate their efforts to incorporate our product
into their sales training schedules in early fiscal 2005. The Chinese market
continues to be a disappointment, mainly due to delays in a government sponsored
program to bring osteoporosis testing to rural areas. We experienced a slowing
of sales for our older, film-based unit; however, we laid the groundwork for
the introduction of our DICOM version of the OsteoGram(R) by expanding
distribution to include Siemens AG, Orex's local partner.
CRITICAL ACCOUNTING POLICIES
------------------------------
Our discussion and analysis of our financial condition and results of
operations, including the discussion on liquidity and capital resources, are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
re-evaluate our estimates and judgments, particularly those related to the
determination of the estimated recoverable amounts of trade accounts receivable,
impairment of long-lived assets, revenue recognition and deferred tax assets. We
believe the following critical accounting policies require our more significant
judgment and estimates used in the preparation of the financial statements.
We maintain an allowance for doubtful accounts for estimated losses that may
arise if any of our customers are unable to make required payments. Management
specifically analyzes the age of customer balances, historical bad debt
experience, customer credit-worthiness, and changes in customer payment terms
when making estimates of the uncollectability of our trade accounts receivable
balances. If we determine that the financial conditions of any of our customers
deteriorated, whether due to customer specific or general economic issues,
increases in the allowance may be made. Accounts receivable are written off when
all collection attempts have failed.
We have a significant amount of property, equipment and intangible assets,
including patents. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long
Lived Assets, we review our long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset or asset group may not be recoverable.
Recoverability of long-lived and amortizable intangible assets to be held and
used is measured by a comparison of the carrying amount of an asset to the
undiscounted future operating cash flows expected to be generated by the asset.
If these assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying value of the assets exceeds
their fair value.
We follow the provisions of Staff Accounting Bulletin 101, "Revenue Recognition
in Financial Statements" (SAB 101), for revenue recognition. Under SAB 101, four
conditions must be met before revenue can be recognized: (i) there is persuasive
evidence that an arrangement exists, (ii) delivery has occurred or service has
been rendered, (iii) the price is fixed or determinable and (iv) collection is
reasonably assured. In December 2003, the SEC issued Staff Accounting Bulletin
(SAB) No. 104, "Revenue Recognition" (SAB No. 104), which revises and rescinds
certain sections of SAB No. 101, "Revenue Recognition", in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our results of operations, financial
position or cash flows.
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
first 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 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the fiscal quarter ended December 31, 2004, we issued an aggregate of
647,426 shares of Common Stock, of which 505,869 shares were exercise of stock
options by directors, 20,000 shares by a consultant and 121,557 shares sold to
Dutchess Private Equities Fund at $0.28.
All sales were made pursuant to Section 4(2) of the Securities Act of 1933, as
amended, and Rule 506 of Regulation D promulgated hereunder. All proceeds
received were added to the Company's working capital.
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
NUMBER DESCRIPTION OF EXHIBIT
------ ------------------------
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant's
Registration Statement of Form S-1 effective May 7, 1992 and incorporated
herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation (filed as
Exhibit 3.1a to the Registrant's Registration Statement on Form S-2/A
filed on June 28, 1994 and incorporated herein by reference).
3.3 Certificate of Amendment of Certificate of Incorporation (filed as
Exhibit 3.1b to the Registrant's Registration Statement on Form S-2/A filed
on November 7, 1994 and incorporated herein by reference).
3.4 Certificate of Correction of Certificate of Amendment (filed as
Exhibit 3.1c the Registrant's Registration Statement on Form S-2/A filed on
November 7, 1995 and incorporated herein by reference).
3.5 By-Laws (filed as Exhibit 3.5 to the Registrant's Quarterly Report on Form
10-QSB filed on February 13, 2004 and incorporated herein by reference).
3.6 Amendment to By-laws (filed as Exhibit 3.6 to the Registrant's Quarterly
Report on Form 10-QSB filed on February 13, 2004 and incorporated herein by
reference).
4.1 Certificate of Designation of Class A Preferred Stock (filed as Exhibit 4.5
to the Registrant's Annual Report on Form 10-KSB filed on December 29, 1995 and
incorporated herein by reference).
4.2 Certificate of Designation of Class B Preferred Stock (filed as Exhibit 4.6
to the Registrant's Annual Report on Form 10-KSB filed on December 29, 1995 and
incorporated herein by reference).
4.3 Certificate of Designation of Class C Preferred Stock (filed as Exhibit 3.1
to the Registrant's Current Report on Form 8-K filed on January 9, 1998 and
incorporated herein by reference).
4.4 Certificate of Correction for Class C Preferred Stock (filed as Exhibit 3.2
to the Registrant's Current Report on Form 8-K filed on January 9, 1998 and
incorporated herein by reference).
10.1 Form of Non-Qualified Stock Option Agreement (filed as Exhibit 10 to the
Registrant's Registration Statement on Form S-8 filed on October 14, 1995 and
incorporated herein by reference).
10.2 Commercial Office Lease between the Registrant and L.A.T. Investment
Corporation, dated August 16, 1999 (filed as Exhibit 10.24 to the
Registrant's Annual Report on Form 10-KSB filed on December 29, 1999 and
incorporated herein by reference).
10.3 Form of Stock Option Agreement (filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-QSB filed on August 14, 2002 and incorporated herein
by reference).
10.4 Employment Agreement between the Registrant and John McLaughlin dated
November 2, 2002 (filed as Exhibit 10.6 to the Registrant's Quarterly Report on
Form 10-QSB filed on February 14, 2003 and incorporated herein by reference).
10.5 Amendment to Employment Agreement between the Registrant and John
McLaughlin (filed as Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-QSB filed on December 29, 2004 and incorporated herein by reference).
10.6 2003 Stock Incentive Plan (filed as Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 filed on June 2, 2003 and incorporated herein
by reference).
10.7 Amendment to Commercial Office Lease between the Registrant and L.A.T.
Investment Corporation (filed as Exhibit 10.6 to the Registrant's Quarterly
Report on
Form 10-QSB filed on December 29, 2004 and incorporated herein by reference).
10.8 Investment Agreement between the Registrant and Dutchess Private Equities
Fund, LP, dated February 25, 2004 (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form SB-2 filed on February 27, 2004 and incorporated
herein by reference).
10.9 Registration Rights Agreement between the Registrant and Dutchess Private
Equities Fund, LP, dated February 25, 2004 (filed as Exhibit 10.10 to the
Registrant's Registration Statement on Form SB-2 filed on February 27, 2004 and
incorporated herein by reference).
10.10 Placement Agent Agreement between the Registrant, Charleston Securities
and Dutchess Private Equities Fund, LP, dated February 25, 2004 (filed as
Exhibit 10.11 to the Registrant's Registration Statement on Form SB-2 filed on
February 27, 2004 and incorporated herein by reference).
31.1 Certification Pursuant to 18 U.S.C. Section 7241, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 7241, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
COMPUMED, INC.
Date February 11, 2005 By: /s/ John G. McLaughlin
---------------------------
John G. McLaughlin
President and Chief Executive Officer
(Chief Executive Officer)
Date February 11, 2005 By: /s/ Phuong Dang
-------------------
Phuong Dang
Controller (Principal Financial and
Accounting Officer)