UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(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, 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
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(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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of January 31, 2006, we had 23,264,452 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
1
We are amending this report on Form 10-QSB because, in the Statement of
Operations the Total Expenses and Operating Loss lines did not calculate
properly. The correct number for Total Expenses is $717,000 and for Operating
Loss is $66,000. The Net Loss and all subsequent calculations were correct. This
amended 10-QSB contains the correct financial statements.
COMPUMED, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
--------------------------------
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis or Plan of Operation. 7
Item 3. Controls and Procedures. 10
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings. 11
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 11
Item 3. Defaults Upon Senior Securities. 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
Item 5. Other Information. 11
Item 6. Exhibits and Reports on Form 8-K. 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEX
COMPUMED, INC. AND SUBSIDIARIES
FINANCIAL INFORMATION
BALANCE SHEETS
COMPUMED, INC.
December 31, September 30,
2005 2005
----------- -----------
(UNAUDITED)
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 145,000 $ 281,000
Marketable securities, at fair market value . . . . . . . . . . 355,000 290,000
Accounts receivable, less allowance of $26,000
(December and September 2005). . . . . . . . . . . . . . . . . . 482,000 323,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 31,000
Prepaid expenses and other current assets. . . . . . . . . . . . 28,000 18,000
----------- -----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 1,034,000 943,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,252,000 1,252,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 78,000 78,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 183,000 183,000
----------- -----------
1,513,000 1,513,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,291,000) (1,273,000)
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 222,000 240,000
OTHER ASSETS
Patents, net of accumulated amortization of $6,000 (December 2005)
and $5,000 (September 2005) . . . . . . . . . . . . . . . . . . 89,000 77,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 13,000
----------- -----------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . .. . . . . . 102,000 90,000
TOTAL ASSETS $1,358,000 $1,273,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
Accounts payable $ 147,000 $ 159,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 189,000 148,000
Current portion of capital lease obligations . . . . . . . . . . 34,000 33,000
----------- -----------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 370,000 340,000
Capital lease obligations, less current portion 117,000 126,000
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 - 23,126,055 shares (December 2005)
issued and outstanding - 22,920,609 shares (September 2005) 232,000 230,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 33,285,000 33,154,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,630,000) (32,589,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 6,000 17,000
Deferred stock compensation. . . . . . . . . . . . . . . . . . . (23,000) (6,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 871,000 807,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,358,000 $1,273,000
=========== ===========
See notes to condensed financial statements.
3
STATEMENTS OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ending December 31
2005 2004
----------- -----------
REVENUES
ECG services . . . . . . . . . . . . . . . . . . . . . . . . . . 433,000 399,000
ECG product and supplies sales . . . . . . . . . . . . . . . . . 61,000 270,000
OsteoGram (R) sales and services . . . . . . . . . . . . . . . . 157,000 8,000
----------- -----------
TOTAL REVENUES . . . . . . . . . . . . . . . . . . . . . . . 651,000 677,000
----------- -----------
COSTS AND EXPENSES
Cost of ECG services . . . . . . . . . . . . . . . . . . . . . . 144,000 138,000
Cost of goods sold-ECG . . . . . . . . . . . . . . . . . . . . . 42,000 221,000
Cost of goods sold-OsteoGram (R) . . . . . . . . . . . . . . . . 3,000 1,000
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . 105,000 68,000
Research & development . . . . . . . . . . . . . . . . . . . . . 98,000 62,000
General & administrative expenses. . . . . . . . . . . . . . . . 307,000 274,000
Depreciation & amortization. . . . . . . . . . . . . . . . . . . 18,000 18,000
----------- -----------
TOTAL EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 717,000 782,000
----------- -----------
OPERATING LOSS . . . . . . . . . . . . . . . . . . . . . . . . . (66,000) (105,000)
Interest income and dividends. . . . . . . . . . . . . . . . . . 30,000 6,000
Other miscellaneous income . . . . . . . . . . . . . . . . . . . - 8,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (5,000) (2,000)
----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,000) (93,000)
=========== ===========
NET LOSS PER SHARE (BASIC AND DILUTED) . . . . . . . . . . . . . (0.00) (0.00)
=========== ===========
Weighted average number of common shares outstanding . . . . . . 23,095,602 19,691,544
=========== ===========
4
STATEMENTS OF CASH FLOWS (UNAUDITED)
COMPUMED, INC.
Three Months Ended
December 31,
-------------------------
2005 2004
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OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,000) (93,000)
Net adjustments to reconcile net loss to net cash used in
operating activities:
Realized gain on marketable securities . . . . . . . . . . . . .
Amortization of deferred stock compensation. . . . . . . . . . . 1,000 -
Depreciation and amortization. . . . . . . . . . . . . . . . . . 18,000 17,000
Decrease/(Increase) in accounts receivable . . . . . . . . . . . (159,000) 1,000
Decrease/(Increase) in inventory and prepaid expenses. . . . . . (3,000) 3,000
Decrease/(Increase) in accounts payable and other liabilities. . 29,000 49,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (155,000) (23,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from selling of marketable securities
Investments in purchase of marketable securities. . . . . . . . (76,000) (4,000)
Purchase of other assets . . . . . . . . . . . . . . . . . . . . (12,000) (6,000)
Purchase of property, plant and equipment. . . . . . . . . . . . - (3,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (88,000) (13,000)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option . . . . . . . . . . . . . 4,000 48,000
Net offering of the investment agreement with Dutchess Private
Equities Fund. . . . . . . . . . . . . . . . . . . . . . . . . . 111,000 33,000
Payments on capital lease obligations. . . . . . . . . . . . . . (8,000) (2,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . 107,000 79,000
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . (136,000) 43,000
CASH AND CASH EQUVALENTS AT BEGINNING OF PERIOD. . . . . . . . . 281,000 62,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . 145,000 105,000
SUPPLEMENTAL DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . (5,000) (2,000)
Disposal of fixed assets . . . . . . . . . . . . . . . . . . . . 79,000
5
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, 2005 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2006. For further information, refer to the financial statements
for the year ended September 30, 2005 and the notes thereto included in the
Company's Annual Report on Form 10-KSB.
The balance sheet at September 30, 2005 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. During the first quarter of fiscal 2006, we raised $112,000 through
the sale of 165,446 shares to Dutchess Private Equities Fund, LLP.
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.
During the three months ended December 31, 2005 and 2004, the Company granted
options to purchase 50,000 shares and 35,000 shares to a consultant, and 310,000
shares and 235,000 shares to directors, officers and employees, respectively.
The fair value of 50,000 and 35,000 options were valued at $18,000 and $8,000,
respectively. The fair value of 310,000 and 235,000 options were valued at
$111,000 and $39,000, respectively. These options were valued in accordance with
SFAS and the fair values were estimated using Black-Scholes option pricing
method with the following assumptions:
For The Three Months Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Risk free interest rate 4.47% 4.23%
Stock volatility factor 37% 33%
Weighted average expected option life: 10 years. Expected dividend yield: 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,
2005 2004
-------------- --------------
Net loss as reported . . . . . . . . . . . . . (41,000) (93,000)
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 - -
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. . (26,000) (16,000)
Pro forma net loss if the fair value based
method had been applied to all awards. . . . . (67,000) (109,000)
Basic and diluted pro forma loss per share
if the fair value based method had been
applied to all awards. . . . . . . . . . . . . ( 0.00) (0.01)
A summary of the stock options activity and related information for the three
months ended December 31 follows:
2005 2004
------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- -------------- --------------
Options outstanding,
beginning of period 6,571,934 0.25 6,437,217 0.22
Options exercised (40,000) 0.10 (525,869) 0.09
Options granted 360,000 0.64 270,000 0.32
Options forfeited/canceled - - (10,879) 0.71
-------------- -------------- -------------- --------------
Options outstanding,
end of period 6,891,934 0.27 6,170,469 0.24
============== ============== ============== ==============
Options exercisable,
end of period 4,491,944 0.26 4,093,809 0.25
============== ============== ============== ==============
The following summarizes information concerning stock options outstanding at
December 31, 2005:
Weighted
Weighted Average Weighted Weighted
Average Remaining Average Average
Number Contractual Exercise Number
Outstanding Life Price Exercisable
-------------- -------------- -------------- --------------
0.000000 - $0.425000 5,669,249 7.53 $ 0.16 3,629,259
0.425100 - $0.850000 1,191,435 5.43 $ 0.67 831,435
0.850100 - $1.275000 31,250 1.89 $ 1.15 31,250
-------------- -------------- -------------- --------------
6,891,934 7.14 $ 0.26 4,491,944
============== ============== ============== ==============
6
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 February 25, 2004, 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 we 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 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 ECG (electrocardiogram)
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 affects more than 200 million people worldwide.
Osteoporosis is a "silent disease" that costs the U.S. healthcare system over
$17 billion annually contrasted to the $6 billion spent annually on breast
cancer. Fifty percent of all women will suffer an osteoporosis-related
fracture in their lifetime, and Medicare is currently scrutinizing methods to
lower the costs of fighting this largely preventable disease through
point-of-care testing of "at risk" patients through an initiative named HEDIS.
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 utilized 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's offices. In June of 2004, we began marketing a DICOM (Digital
Imaging and Communications in Medicine) version of the OsteoGram(R) 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 and diagnostic information 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(R) software to manufacturers of digital x-ray and network
equipment to place at the point-of-sale. In addition, we enlist dedicated
imaging distributors to sell our products in the after sale market.
7
During the quarter ending December 31, 2005, we signed an important licensing
agreement with FUJIFILM Medical Systems, USA (Div. Fuji Photo Film Co., Ltd.)
that enables FUJIFILM Medical Systems USA, Inc. (Fuji) to integrate CompuMed's
proprietary OsteoGram(R) osteoporosis screening software with its market-leading
computed radiography (CR) systems. Under the terms of the five year agreement,
Fuji will place an initial order for 10 OsteoGram(R) systems and then license
and distribute the OsteoGram(R) on existing and new CR systems, as well as
future mammography platforms in the United States. Fuji has the largest
installed base of CR systems in the U.S. and currently markets its products
through a direct sales organization and a nationwide network of imaging
distributors. We expect Fuji to launch our bundled solution at their national
sales meeting in early April.
OsteoGram(R)-enhanced Fuji CR systems were showcased at the 91st Scientific
Assembly and Annual Meeting of the Radiological Society of North America (RSNA)
in Chicago (November 27-December 2). In addition, the OsteoGram(R) was featured
in the exhibits of Swissray International and the Kodak Health Group, division
of the Eastman Kodak Company.
We also amended and expanded our previous software licensing agreement with Orex
Computed Radiography, Inc. The agreement provides for the use of our
OsteoGram(R) osteoporosis screening software with Orex's distributed computed
radiography scanners. Under the amendment, our agreement with Orex has been
extended for a five-year period. On March 3, 2005, Orex became a wholly owned
subsidiary of the Eastman Kodak Company, and the expanded terms of the new
agreement include sales of our OsteoGram(R) systems on Kodak's computed
radiography (CR) scanners. The amended agreement with Orex also includes an
upfront purchase and minimum purchase obligations, which are to increase
annually over the five-year contract period.
We also attended Medica, the world's largest all medical trade show held
annually in D sseldorf, Germany. The OsteoGram(R) was displayed in the exhibit
of our German distributor that launched the product locally. Reference sites are
now being established, and we hope that German sales efforts will commence in
the first quarter of 2006, coinciding with the launch in Italy.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED DECEMBER 31, 2005 COMPARED TO THE
--------------------------------------------------------------------------------
QUARTER ENDED DECEMBER 2004.
-------------------------------
Revenues from ECG operations decreased by 26% for the first quarter of fiscal
2006 to $494,000 from $669,000 in fiscal 2005, due to a one-time sale of new
ECG equipment sold to New York Department of Corrections in fiscal 2005.
Revenues from the OsteoGram(R) sales and services for the first quarter of
fiscal 2006 increased by 1,863% to $157,000 from $8,000 in fiscal 2005 mainly
due to an order from OREX Computed Radiography.
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 2006 increased by 4% to
$144,000 from $138,000 in fiscal 2005, due to increases in overread services
and travel expenses related to the software upgrade of the ECG equipment sold
to New York Department of Corrections last fiscal year. Cost of goods sold of
ECG for the first quarter of fiscal 2006 decreased by 81% to $42,000 from
$221,000 for the same period of fiscal 2005, primarily due to decreased ECG
equipment sales. The cost of goods sold for OsteoGram(R) for the first quarter
of fiscal 2006 increased by 200% to $3,000 from $1,000 in fiscal 2005, due to
increased OsteoGram systems sales.
Selling expenses for the first quarter of fiscal 2006 increased by 54% to
$105,000 from $68,000 in fiscal 2005, due to the hiring of the Vice President
Sales for the OsteoGram business.
General and administrative expenses for the first quarter of fiscal 2006
increased to $307,000 from $274,000 in fiscal 2005, due to the accrued
expense related to the issuance of the restricted shares to the investor
relations firm Porter LeVay and Rose, Inc.
Research and development costs for the first quarter of fiscal 2006 increased by
58% to $98,000 from $62,000 in fiscal 2005, due to the hiring of the Vice
President of Engineering.
Interest income and dividends for the first quarter of fiscal 2006 increased by
400% to $30,000 from $6,000 in fiscal 2005, due to increased investments in
marketable securities.
Other miscellaneous income for the first quarter of fiscal 2006 was none
compared to $8,000 in fiscal 2005, due to a reversal of a reserve related to
operating business expenses.
Interest expense for the first quarter of fiscal 2006 increased by 150% to
$5,000 from $2,000, due to increased financing of ECG equipment.
Net loss for the first quarter of fiscal 2006 decreased by 56% to $41,000 from
$93,000 in fiscal 2005, mainly due to higher sales in the OsteoGram(R)
business.
8
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At December 31, 2005, we had approximately $500,000 in cash and marketable
securities, as compared to a balance of $571,000 at September 30, 2005, a net
decrease of $71,000 primarily due to cash used to increase staffing.
There were no purchases of property, plant, and equipment during the first
quarter of 2006 and $3,000 for the same period in fiscal 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 $11,822 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 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 24, 2004, the Board passed a resolution to
extend this contract for an additional year to 2005. On September 9, 2005 the
Board passed a resolution to continue Mr. McLaughlin at a monthly salary of
$14,500 starting October 1, 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 and 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 February 25, 2004, 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 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.
During the three months ended December 31, 2005, we sold 165,446 shares of
Common Stock to Dutchess Private Equities Fund at an average of $0.68 per share.
The gross proceeds were $112,000.
PLAN OF OPERATIONS
--------------------
Our business strategy includes an increase in OsteoGram(R) revenue through sales
to manufactures of digital x-ray equipment and through 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 a
portion of the $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. Acquisitions could be dilutive to stockholders.
9
MATERIAL TRENDS AND UNCERTAINITIES
-------------------------------------
The rate of progress in commercializing the DICOM (digital) OsteoGram
accelerated at the end of the first quarter of fiscal 2006, mainly due to an
order from Orex Computed Radiography. We expect this trend to pick-up in the
third quarter of fiscal 2006 as Fuji Medical USA launches the OsteoGram product.
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
Our management evaluated, with the participation of our Chief Executive
Officer and Principal Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-QSB. Based on this evaluation, our
Chief Executive Officer and Principal Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934 (i) is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms, and (ii) is accumulated and communicated to our
management, including our Chief Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed to provide reasonable
assurance that such information is accumulated and communicated to our
management. Our disclosure controls and procedures include components of our
internal control over financial reporting. Management's assessment of the
effectiveness of our internal control over financial reporting is expressed
at the level of reasonable assurance that the control system, no matter how
well designed and operated, can provide only reasonable, but not absolute,
assurance that the control system's objectives will be met.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting during our
first quarter of fiscal 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
10
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 three months ended December 31, 2005, we sold 165,446 shares of
Common Stock to Dutchess Private Equities Fund at an average of $0.68 per share.
The gross proceeds were $112,000.
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 our 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 Form 8-K filed 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).
4.6 Rights Agreement between the Company and U.S. Stock Transfer Corporation
dated October 28, 2005 (filed as Exhibit 4.1 to the Company's Form 8-A filed on
November 2, 2005 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 Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
11
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 16, 2006 By: /s/ John G. McLaughlin
---------------------------
John G. McLaughlin
President and Chief Executive Officer
Date February 16, 2006 By: /s/ Phuong Dang
-------------------
Phuong Dang
Secretary, Controller
and Principal Financial Officer
12