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, 2005
[ ] 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.
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(exact name of small business issuer as specified in its charter)
DELAWARE 95-2860434
----------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 April 30, 2005, we had 21,090,044 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.
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. 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 and Reports on Form 8-K.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX
COMPUMED, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
BALANCE SHEETS
COMPUMED, INC.
March 31, 2005 SEPTEMBER 30, 2004
------------------ -------------------
(UNAUDITED)
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 120,000 $ 62,000
Marketable securities, at fair market value . . . . . . . . . . 145,000 165,000
Accounts receivable, less allowance of $24,000 (March 2005)
and $21,000 (September 2004). . . . . . . . . . . . . . . . . . 271,000 297,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 31,000
Prepaid expenses and other current assets. . . . . . . . . . . . 23,000 38,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 584,000 593,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,243,000 1,307,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 78,000 78,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 178,000 50,000
------------------ -------------------
1,499,000 1,435,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,244,000) (1,293,000)
------------------ -------------------
TOTAL PROPERTY AND EQUIPMENT 255,000 142,000
OTHER ASSETS
Patents, net of accumulated amortization of $5,000 (March 2005)
and $4,000 (September 2004). . . . . . . . . . . . . . . . . . . 71,000 66,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 12,000
------------------ -------------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . .. . . . . . 82,000 78,000
TOTAL ASSETS $921,000 $813,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
Accounts payable $ 216,000 $160,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 121,000 88,000
Current portion of capital lease obligations . . . . . . . . . . 18,000 8,000
------------------ -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 355,000 256,000
Capital lease obligations, less current portion 79,000 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 - 20,386,671 shares (March 2005)
issued and outstanding - 19,599,812 shares (September 2004) 205,000 197,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,643,000 32,520,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,379,000) (32,253,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 25,000 53,000
Deferred stock compensation. . . . . . . . . . . . . . . . (8,000) -
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 487,000 518,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $921,000 $813,000
================== ===================
See notes to condensed financial statements.
STATEMENT OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
REVENUE FROM OPERATIONS
ECG services. . . . . . . . . . . . . . 451,000 407,000 850,000 791,000
ECG product and supplies sales. . . . . 71,000 25,000 341,000 43,000
OsteoGram (R) sales and services. . . . 12,000 29,000 20,000 87,000
--------- --------- --------- ---------
534,000 461,000 1,211,000 921,000
COSTS AND EXPENSES
Costs of ECG services . . . . . . . . . 154,000 124,000 292,000 243,000
Cost of goods sold-ECG. . . . . . . . . 48,000 18,000 269,000 33,000
Cost of goods sold - OsteoGram (R). . . 2,000 - 3,000 4,000
Selling expenses. . . . . . . . . . . . 62,000 57,000 130,000 102,000
Research & development. . . . . . . . . 55,000 55,000 117,000 108,000
General and administrative expenses . . 226,000 275,000 500,000 516,000
Depreciation and amortization . . . . . 18,000 43,000 36,000 94,000
--------- --------- --------- ---------
565,000 572,000 1,347,000 1,100,000
--------- --------- --------- ---------
OPERATING LOSS. . . . . . . . . . . . . (31,000) (111,000) (136,000) (179,000)
Interest Income and dividends . . . . . 2,000 4,000 8,000 9,000
Other miscellaneous income. . . . . . . - 28,000 8,000 28,000
Realized gain on marketable securities. - - - 2,000
Interest expense. . . . . . . . . . . . (4,000) - (6,000) -
--------- --------- --------- ---------
NET LOSS. . . . . . . . . . . . . . . . (33,000) (79,000) (126,000) (140,000)
--------- --------- --------- ---------
NET LOSS PER SHARE (Basic and diluted). (0.00) (0.00) (0.01) (0.01)
Weighted average number of common
shares outstanding. . . . . . . . . . . 20,308,016 17,951,034 20,093,325 17,951,034
STATEMENT OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
Six Months Ended March 31,
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126,000) (140,000)
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 . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 94,000
Decrease (Increase) in accounts receivable. . . . . . . . . . . . . . . . . . . 26,000 (13,000)
Decrease (Increase) in inventory and prepaid expenses . . . . . . . . . . . . . 21,000 (10,000)
Decrease in accounts payable and other liabilities. . . . . . . . . . . . . . . 20,000 33,000
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . (23,000) (13,000)
CASH FLOW FROM INVESTING ACTIVITIES:. . . . . . . . . . . . . . . . . . . . . . - -
Proceeds from selling of marketable securities. . . . . . . . . . . . . . . . . - 7,000
Investments in purchase of marketable securities . . . . . . . . . . . . . . . (8,000) -
Purchase of other asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,000) (7,000)
Purchase of property, plant and equipment . . . . . . . . . . . . . . . . . . . (20,000) (11,000)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . (33,000) (11,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option. . . . . . . . . . . . . . . . . . . . . 48,000 -
Net offering of the investment agreement with Dutchess Private Equities Fund. . 75,000 -
Payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . (9,000) (4,000)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . . . . . . . . 114,000 (4,000)
NET [INCREASE] DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . 58,000 (28,000)
CASH AND CASH EQUVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . 62,000 66,000
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . . . 120,000 38,000
SUPPLEMENTAL DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 -
Disposal of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000 -
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 six-month period ended March 31, 2005 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.
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.
The options were valued in accordance with SFAS 123 totaling $68,000 and $65,000
for the six months ended March 31, 2005 and 2004, respectively, and the fair
values were estimated using Black-Scholes option pricing method with the
following assumptions:
For The Six Months Ended
March 31, 2005 March 31, 2004
-------------- --------------
Risk free interest rate 4.23% 4.28%
Stock volatility factor 33% 54%
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 March 31, Six Months Ended March 31,
2005 2004 2005 2004
--------- --------- --------- ---------
Net loss as reported. . . . . (33,000) (79,000) (126,000) (140,000)
Basic and diluted loss per
share as reported . . . . . . (0.00) (0.00) (0.01) (0.01)
Add: stock based employee
compensation cost . . . . . . - - - 24,000
included in determination
of net loss reported
Deduct: stock-based
employee compensation cost. . (20,000) (5,000) (36,000) (50,000)
that would have been
included in the determination
of net loss if the fair value
method had been applied
to all awards
Pro forma net loss if the
fair value based method. . . (53,000) (84,000) (162,000) (166,000)
had been applied to all
awards
Basic and diluted pro forma
loss per share if the
fair value based method had
been applied for . . . . . . (0.00) (0.00) (0.01) (0.01)
all awards
20,308,016 17,951,034 20,093,325 17,951,034
A summary of the stock options activity and related information for the six
months ended March 31 follows:
2005 2004
-------------------------- --------------------------
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
March 31, 2005:
Weighted Weighted Number Weighted
Average Remaining Average Subject
Number Contractual Exercise to
Outstanding Life Price Exercise
Range of exercise prices
0.0000 - $0.4250 . . . . 5,306,234 8.3 0.1653 3,229,574
0.4251 - $0.8500 . . . . 832,985 4.2 0.6734 832,985
0.8501 - $1.2750 . . . . 31,250 2.6 1.1540 31,250
--------- --------- --------- ---------
6,170,469 7.7 0.2389 4,093,809
========= ========= ========= =========
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
anti-dilutive.
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.
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 traditional core business is providing remote electrocardiogram or 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
$17 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. Recent guidelines in the United Kingdom favor the use
of peripheral devices, such as ours, as front-line screening tools, since
expensive DXA equipment is not readily available. DXA technology is considered
the "Gold Standard" for the diagnosis of osteoporosis, and DXA platforms
typically cost from $80-150,000.
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 still marketed to small hospitals, clinics, and
physician offices. Last year, we began marketing a Digital Imaging and
Communications in Medicine or DICOM version of the OsteoGram software. The DICOM
OsteoGram(R) was developed to take advantage of the growing market for digital,
or 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.
In addition, we have a new product the OsteoGram CADK which is an application
workstation that can be readily plugged into a digital x-ray platform in the
after-sale market. We expect that distributors will adapt the CADKit approach to
selling our OsteoGram product in the growing market for digital imaging
platforms.
Our development team concluded a small study late last year for
"proof-of-principal" that the OsteoGram functions on full field digital
mammography equipment. The global market for digital mammography is rapidly
expanding and 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 believe this strategy is sound and we
have undertaken a clinical trial at a major teaching hospital to validate the
application on digital mammography platforms. A provisional patent application
was filed in November 2004 to protect our intellectual property rights in this
area.
RESULTS OF OPERATIONS FOR THE QUARTER AND SIX MONTHS ENDED MARCH 31, 2005
--------------------------------------------------------------------------------
COMPARED TO THE SAME PERIOD IN FISCAL 2004.
--------------------------------------------------
Revenues from ECG operations increased by 21% for the second quarter of fiscal
2005 to $522,000 from $432,000 in fiscal 2004, and during the six months ended
March 31, 2005 increased by 43% to $1,191,000 from $834,000 for the same period
in fiscal 2004, due to increased shipments of new ECG equipment and increased
transmissions from new and existing accounts. Revenues from the OsteoGram(R)
sales and services for the second quarter of fiscal 2005 decreased by 59% to
$12,000 from $29,000 in fiscal 2004, and for the six months ended March 31, 2005
decreased by 77% to $20,000 from $87,000 for the same period in fiscal 2004, due
to slower than expected ramp up of licensing partnerships and reimbursement
issues in the Chinese market.
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 of fiscal 2005 increased by 24% to
$154,000 from $124,000 in fiscal 2004, and for the six months ended March 31,
2005 increased by 20% to $292,000 from $243,000 for the same period in fiscal
2004, mostly due to increases in overread service revenue and some overhead
expenses related to the acquisition and renewal of certain contracted ECG
accounts. Cost of goods sold of ECG for the second quarter of fiscal 2005
increased by 167% to $48,000 from $18,000 for the same period of fiscal 2004,
and during the six months ended March 31, 2005 increased by 715% to $269,000 to
$33,000 for the same period in fiscal 2004, primarily due to increased ECG
equipment sales. The cost of goods sold for OsteoGram(R) for the second quarter
of fiscal 2005 was $2,000 and $0 in fiscal 2004, and for the six months ended
March 31, 2005 decreased by 25% to $3,000 from $4,000 for the same period in
fiscal 2004, mostly due to lower sales.
Selling expenses for the second quarter 2005 increased by 9% to $62,000 from
$57,000 in fiscal 2004, and for the six months ended March 31, 2005 increased by
27% to $130,000 from $102,000 for the same period in fiscal 2004, mostly due to
increased travel expenses relating to trade shows and training.
General and administrative expenses for the second quarter of fiscal 2005
decreased by 18% to $226,000 from $275,000 in fiscal 2004, and for the six
months ended March 31, 2005 decreased by 3% to $500,000 from $516,000 for the
same period in fiscal 2004, primarily due to reduction of legal expenses.
Research and development costs for the second quarter of fiscal 2005 and fiscal
2004 remained the same as $55,000, and during the six months ended March 31,
2005 increased by 8% to $117,000 from $108,000 for the same period of fiscal
2004, due to contracted services and salary adjustments.
Depreciation expenses for the second quarter of fiscal 2005 decreased by 58% to
$18,000 from $43,000 in fiscal 2004, and for the six months ended March 31, 2005
decreased by 62% to $36,000 from $94,000 for the same period in fiscal 2004, due
to a large portion of fixed assets that was fully amortized.
Interest income and dividends for the second quarter of fiscal 2005 decreased by
50% to $2,000 from $4,000 in fiscal 2004, and for the six months ended March 31,
2005 decreased by 11% to $8,000 from $9,000 for the same period in fiscal 2004,
mostly due to changing investments in marketable securities.
Other miscellaneous income for the second quarter of fiscal 2005 was $0 and
$28,000 in fiscal 2004, and for the six months ended March 31, 2005 and 2004 was
$8,000 and $28,000, respectively, due to a reversal of a reserve related to
operating business expenses.
Net loss for the second quarter of fiscal 2005 decreased by 58% to $33,000 from
$79,000 in fiscal 2004, and for the six months ended March 31, 2005 decreased by
10% to $126,000 from $140,000 for the same period in fiscal 2004, due to higher
sales in the ECG business and reduction of some overhead expenses.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At March 31, 2005, we had approximately $265,000 in cash and marketable
securities, as compared to a balance of $227,000 at September 30, 2004, a net
increase of $38,000 primarily due to increased sales in ECG. Purchases of
property, plant, and equipment used $5,000 in the second quarter ended March 31,
2005.
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 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. On September 2004, the Board passed a resolution to extend
this contract for an additional year to 2005.
Each of our Directors receives an annual Board of Directors fee of $12,000,
which is paid to each Director in equal monthly installments. The Chairman
receives an additional $4,800. In addition to the Board of Directors fee,
Directors receive an additional $1,000 per meeting when they serve as a member
of the Executive, Audit or Compensation Committee. Such amount is reduced to
$350 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 second quarter and the six months ended March 31, 2005, we sold
139,433 and 260,990 shares of Common Stock to Dutchess Private Equities Fund,
respectively, at an average of $0.29 per share. The gross proceeds were $42,000
and $75,000 respectively.
PLAN OF OPERATIONS
--------------------
Our business strategy includes an increase in OsteoGram(R) revenue through sales
to manufactures of medical digital x-ray equipment and through direct sales via
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 or DICOM OsteoGram, and we expect that
our distribution partners will accelerate their efforts to incorporate our
product into their sales training schedules in the near future. The Chinese
market continues to be a disappointment, mainly due to reimbursement issues and
delays in a government sponsored program to bring osteoporosis testing to rural
areas.
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, or 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, or SAB 101, "Revenue
Recognition in Financial Statements", 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", 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, 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 quarter of fiscal 2005 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 second quarter and the six months ended March 31, 2005, we sold
139,433 and 260,990 shares of Common Stock to Dutchess Private Equities Fund at
an average of $0.29 per share. The gross proceeds were $42,000 and $75,000
respectively.
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 AND REPORTS ON FORM 8-K.
Number Description of Exhibit
----------- ----------------------------
3.1 Certificate of Incorporation (filed as Exhibit 3.1 to the Form S-1
effective May 7, 1992, and incorporated herein by reference).
3.2 Certificate of Amendment of Certificate of Incorporation (included as
Exhibit 3.1a to the Form S-2/A filed June 28, 1994, and incorporated herein by
reference).
3.3 Certificate of Amendment of Certificate of Incorporation (included as
Exhibit 3.1b to the Form S-2/A filed November 7, 1994, and incorporated herein
by reference).
3.4 Certificate of Correction of Certificate of Amendment (included as Exhibit
3.1c to the Form S-2/A filed November 7, 1995, and incorporated herein by
reference).
3.5 By-Laws (included as Exhibit 3.5 to the Form 10-QSB filed February 13,
2004, and incorporated herein by reference).
3.6 Amendment to By-laws (included as Exhibit 3.6 to the Form 10-QSB filed
February 13, 2004, and incorporated herein by reference).
4.1 Certificate of Designation of Class A Preferred Stock (included as Exhibit
4.5 to the Form 10-KSB filed December 29, 1995, and incorporated herein by
reference).
4.2 Certificate of Designation of Class B Preferred Stock (included as Exhibit
4.6 to the Form 10-KSB filed December 29, 1995, and incorporated herein by
reference).
4.3 Certificate of Designation of Class C Preferred Stock (included as Exhibit
3.1 to the Form 8-K filed 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).
4.5 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated February 25, 2004 (included as Exhibit 10.10 to the
Form SB-2 filed February 27, 2004, and incorporated herein by reference).
10.1 Commercial Office Lease between the Company and L.A.T. Investment
Corporation, dated August 16, 1999 (included as Exhibit 10.24 to the Form 10-KSB
filed December 29, 1999, and incorporated herein by reference).
10.2 Form of Stock Option Agreement (included as Exhibit 10.5 to the Form
10-QSB filed August 14, 2002, and incorporated herein by reference).
10.3 Employment Agreement between the Company and John McLaughlin, dated
November 2, 2002 (included as Exhibit 10.6 to the Form 10-QSB filed February 14,
2003, and incorporated herein by reference).
10.4 Amendment to Employment Agreement between the Company and John McLaughlin
(included as Exhibit 10.5 to the Form 10-KSB filed December 29, 2004, and
incorporated herein by reference).
10.5 Amendment to Commercial Office Lease between the Company and L.A.T.
Investment Corporation (included as Exhibit 10.6 to the Form 10-KSB filed
December 29, 2004, and incorporated herein by reference).
10.6 Investment Agreement between the Company and Dutchess Private Equities
Fund, L.P., dated February 25, 2004 (included as Exhibit 10.9 to the Form SB-2
filed February 27, 2004, and incorporated herein by reference).
10.7 Placement Agent Agreement between the Company, Charleston Capital
Securities, and Dutchess Private Equities Fund, L.P., dated February 25, 2004
(included as Exhibit 10.11 to the Form SB-2 filed February 27, 2004, and
incorporated herein by reference).
10.8 Amended and Restated 2003 Stock Incentive Plan (included as Exhibit 10.1
to the Form S-8 filed April 13, 2005, 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.
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 May 16, 2005 By: /s/ John G. McLaughlin
---------------------------
John G. McLaughlin
President and Chief Executive Officer
(Chief Executive Officer)
Date May 16, 2005 By: /s/ Phuong Dang
-------------------
Phuong Dang
Controller (Principal Financial and
Accounting Officer)