UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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.
--------------
(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
--------------
(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 July 31, 2005, we had 22,920,609 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.
June 30, 2005 SEPTEMBER 30, 2004
------------------ -------------------
(UNAUDITED)
------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 141,000 $ 62,000
Marketable securities, at fair market value . . . . . . . . . . 148,000 165,000
Accounts receivable, less allowance of $24,000 (June 2005)
and $21,000 (September 2004). . . . . . . . . . . . . . . . . . 315,000 297,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,000 31,000
Prepaid expenses and other current assets. . . . . . . . . . . . 29,000 38,000
------------------ -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 662,000 593,000
PROPERTY AND EQUIPMENT
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . 1,235,000 1,307,000
Furniture, fixtures and leasehold improvements . . . . . . . . . 78,000 78,000
Equipment under capital leases . . . . . . . . . . . . . . . . . 183,000 50,000
------------------ -------------------
1,496,000 1,435,000
Accumulated depreciation and amortization. . . . . . . . . . . . (1,255,000) (1,293,000)
------------------ -------------------
TOTAL PROPERTY AND EQUIPMENT 241,000 142,000
OTHER ASSETS
Patents, net of accumulated amortization of $5,000 (June 2005)
and $4,000 (September 2004) . . . . . . . . . . . . . . . . . . 78,000 66,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 12,000
------------------ -------------------
TOTAL OTHER ASSETS. . . . . . . . . . . . . . . . . .. . . . . . 91,000 78,000
TOTAL ASSETS $994,000 $813,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES
Accounts payable $ 129,000 $160,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . 120,000 88,000
Current portion of capital lease obligations . . . . . . . . . . 33,000 8,000
------------------ -------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 282,000 256,000
Capital lease obligations, less current portion 134,000 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 - 21,304,922 shares (June 2005)
issued and outstanding - 19,599,812 shares (September 2004) 214,000 197,000
Additional paid in capital . . . . . . . . . . . . . . . . . . . 32,775,000 32,520,000
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (32,430,000) (32,253,000)
Accumulated other comprehensive income . . . . . . . . . . . . . 25,000 53,000
Deferred stock compensation. . . . . . . . . . . . . . . . (7,000) -
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 578,000 518,000
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $994,000 $813,000
================== ===================
See notes to condensed financial statements.
STATEMENTS OF OPERATIONS (UNAUDITED)
COMPUMED, INC.
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
-------- --------- --------- ---------
REVENUE FROM OPERATIONS
ECG services. . . . . . . . . . . . . . . . . . . 449,000 401,000 1,299,000 1,192,000
ECG product and supplies sales. . . . . . . . . . 53,000 20,000 394,000 63,000
OsteoGram (R) sales and services. . . . . . . . . 52,000 42,000 72,000 129,000
-------- --------- --------- ---------
554,000 463,000 1,765,000 1,384,000
COSTS AND EXPENSES
Costs of ECG services . . . . . . . . . . . . . . 149,000 129,000 441,000 372,000
Cost of goods sold - ECG. . . . . . . . . . . . . 28,000 14,000 297,000 47,000
Cost of goods sold - OsteoGram(R) . . . . . . . . 6,000 2,000 9,000 6,000
Selling expenses. . . . . . . . . . . . . . . . . 74,000 68,000 204,000 170,000
Research & development. . . . . . . . . . . . . . 78,000 56,000 195,000 164,000
General and administrative expenses . . . . . . . 263,000 231,000 763,000 747,000
Depreciation and amortization . . . . . . . . . . 26,000 31,000 62,000 125,000
-------- --------- --------- ---------
624,000 531,000 1,971,000 1,631,000
-------- --------- --------- ---------
OPERATING LOSS. . . . . . . . . . . . . . . . . . (70,000) (68,000) (206,000) (247,000)
Interest Income and dividends . . . . . . . . . . 4,000 4,000 12,000 13,000
Other miscellaneous income. . . . . . . . . . . . 0 17,000 8,000 45,000
Realized gain on marketable securities. . . . . . 19,000 7,000 19,000 9,000
Interest expense. . . . . . . . . . . . . . . . . (4,000) 0 (10,000) 0
-------- --------- --------- ---------
NET LOSS. . . . . . . . . . . . . . . . . . . . . (51,000) (40,000) (177,000) (180,000)
-------- --------- --------- ---------
NET LOSS PER SHARE (Basic and diluted). . . . . . (0.00) (0.00) (0.01) (0.01)
Weighted average number of common
shares outstanding. . . . . . . . . . . . . . . . 21,109,519 18,062,355 20,438,626 17,988,141
COMPUMED, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30,
2005 2004
---------- ---------
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (177,000) (180,000)
Net adjustments to reconcile net loss to net cash used in operating activities:
Realized gain on marketable securities . . . . . . . . . . . . . . . . . . . . . (19,000) (9,000)
Amortization of deferred stock compensation. . . . . . . . . . . . . . . . . . . 1,000 25,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 125,000
Increase in accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (18,000) (56,000)
Decrease (Increase) in inventory and prepaid expenses. . . . . . . . . . . . . . 11,000 (12,000)
Decrease in accounts payable and other liabilities . . . . . . . . . . . . . . . 1,000 23,000
---------- ---------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . (139,000) (84,000)
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from selling of marketable securities . . . . . . . . . . . . . . . . . 55,000 54,000
Investments in purchase of marketable securities . . . . . . . . . . . . . . . . (47,000) -
Purchase of other asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,000) (14,000)
Purchase of property, plant and equipment. . . . . . . . . . . . . . . . . . . . (27,000) (11,000)
---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . . . . . . . . (33,000) 29,000
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock option . . . . . . . . . . . . . . . . . . . . . 93,000 36,000
Net offering of the investment agreement with Dutchess Private Equities Fund . . 171,000 49,000
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . . . . (13,000) (6,000)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . . . . . . . . . . 251,000 79,000
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . 79,000 24,000
CASH AND CASH EQUVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 62,000 66,000
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . 141,000 90,000
SUPPLEMENTAL DISCLOSURES:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 0
Disposal of fixed assets 99,000 0
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
COMPUMED, INC.
NOTE A - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying interim unaudited condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended June 30, 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.
During the nine months ended June 30, 2005 and 2004, the Company granted options
to purchase 35,000 shares and 26,000 shares to a consultant, and 960,000 shares
and 1,285,000 shares to directors, officers and employees, respectively. The
fair value of 35,000 and 26,000 options were valued at $9,000 and $8,000,
respectively. The fair value of 960,000 and 1,285,000 options were valued at
$119,000 and $133,000, 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 Nine months Ended
June 30, 2005 June 30, 2004
-------------- --------------
Risk free interest rate 4.00 to 4.23% 4.28% to 4.73%
Stock volatility factor 17% to 33% 22%
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 June 30, Nine months Ended June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net loss as reported. . . . . (51,000) (40,000) (177,000) (180,000)
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. . (21,000) (4,000) (57,000) (54,000)
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. . . (72,000) (44,000) (234,000) (210,000)
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
A summary of the stock options activity and related information for the nine
months ended June 30 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 (1,007,454) 0.09 (394,027) 0.09
Options granted 995,000 0.24 1,311,087 0.20
Options forfeited/canceled (10,879) 0.71 (1,104) 0.96
----------- ----------- ----------- -----------
Options outstanding,
end of period 6,413,884 0.25 5,942,981 0.22
=========== =========== =========== ===========
Options exercisable,
end of period 4,145,559 0.26 4,284,651 0.23
=========== =========== =========== ===========
The following summarizes information concerning stock options outstanding at
June 30, 2005:
Weighted
Weighted. . Average Weighted
Average . . Remaining Average Weighted
Number. . . Contractual Exercise Subject to
Outstanding Life Price Exercise
-------------- -------------- -------------- --------------
0.000000 - $0.425000 5,549,649 8.27 $ 0.18 3,281,324
0.425100 - $0.850000 832,985 3.96 $ 0.67 832,985
0.850100 - $1.275000 31,250 2.39 $ 1.15 31,250
------------ ------------ ------------ ------------
6,413,884 7.68 $ 0.24 4,145,559
============ ============= ============= =============
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 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 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. 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 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 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 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.
During the quarter ending June 30, 2005, we determined to strengthen our
management team with the goal of accelerating our OsteoGram revenue growth and
hastening product development. As a result, we hired vice presidents for both
sales and engineering. Our new sales VP is an experienced executive in the
medical imaging field, and we believe his admirable track record in imaging
distribution is a perfect fit for our current plan to increase the number of
domestic distributors. Our new engineering VP is well versed in DICOM product
development and his considerable skills in that area will support our efforts in
software updates and product line expansion. Our current vice president of
technology will take on a new role as chief technology officer, where she will
continue to guide our progress with imaging platform integration and business
development in select areas.
Our ECG business continues to show strong growth fueled by augmented equipment
shipments and increased revenue from transmission and over read services.
RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED JUNE 30, 2005
--------------------------------------------------------------------------------
COMPARED TO THE SAME PERIODS IN FISCAL 2004.
--------------------------------------------------
Revenues from ECG operations increased by 19% for the third quarter of fiscal
2005 to $502,000 from $421,000 in fiscal 2004, and during the nine months ended
June 30, 2005 increased by 35% to $1,693,000 from $1,255,000 for the same period
in fiscal 2004, mostly due to increased shipments of new ECG equipment and
increased transmissions and overread services from new and existing accounts.
Revenues from the OsteoGram(R) sales and services for the third quarter of
fiscal 2005 increased by 24% to $52,000 from $42,000 in fiscal 2004 due to
initial placements through Swissray International and increased shipments to
China, and for the nine months ended June 30, 2005 decreased by 44% to $72,000
from $129,000 for the same period in fiscal 2004, due to slower than expected
ramp up of licensing partnerships earlier in the fiscal year.
Cost of services and goods sold consists of the costs of ECG services provided,
supplies, electrocardiograph equipment sold and OsteoGram(R) systems sold. Costs
of services of ECG for the third quarter of fiscal 2005 increased by 16% to
$149,000 from $129,000 in fiscal 2004, and for the nine months ended June 30,
2005 increased by 19% to $441,000 from $372,000 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 third quarter of fiscal 2005
increased by 100% to $28,000 from $14,000 for the same period of fiscal 2004,
and during the nine months ended June 30, 2005 increased by 532% to $297,000 to
$47,000 for the same period in fiscal 2004, primarily due to increased ECG
equipment sales. The cost of goods sold for OsteoGram(R) for the third quarter
of fiscal 2005 increased by 200% to $6,000 from $2,000 in fiscal 2004, and for
the nine months ended June 30, 2005 increased by 50% to $9,000 from $6,000 for
the same period in fiscal 2004, due to increased shipments of computer hardware
associated with OsteoGram systems.
Selling expenses for the third quarter 2005 increased by 9% to $74,000 from
$68,000 in fiscal 2004, and for the nine months ended June 30, 2005 increased by
20% to $204,000 from $170,000 for the same period in fiscal 2004, mostly due to
increased of consulting services related to the application for a CE Mark.
General and administrative expenses for the third quarter of fiscal 2005
increased by 14% to $263,000 from $231,000 in fiscal 2004, and for the nine
months ended June 30, 2005 increased by 2% to $763,000 from $747,000 for the
same period in fiscal 2004, primarily due to the increase in board of director
fees starting January 2005 and increased number of board meetings.
Research and development costs for the third quarter of fiscal 2005 increased by
39% to $78,000 from $56,000 in fiscal 2004, and for the nine months ended June
30, 2005 increased by 19% to $195,000 from $164,000 in fiscal 2004, due to
consulting fees.
Depreciation expenses for the third quarter of fiscal 2005 decreased by 16% to
$26,000 from $31,000 in fiscal 2004, and for the nine months ended June 30, 2005
decreased by 50% to $62,000 from $125,000 for the same period in fiscal 2004,
due to a large portion of fixed assets that was fully amortized.
Interest income and dividends was $4,000 for the third quarter of fiscal 2005
and 2004, and for the nine months ended June 30, 2005 decreased by 8% to $12,000
from $13,000 for the same period in fiscal 2004, mostly due to changing
investments in marketable securities.
Other miscellaneous income for the third quarter of fiscal 2005 was none
compared to $17,000 in fiscal 2004, and for the nine months ended June 30, 2005
decreased by 82% to $8,000 from $45,000 in fiscal 2004, due to a reversal of a
reserve related to operating business expenses.
Interest expense for the third quarter and for the nine months ended June 30,
2005 was $4,000 and $10,000, respectively, compared to $0 for the same periods,
respectively, in fiscal 2004. The expense was increased due to financing of new
ECG equipment.
Net loss for the third quarter of fiscal 2005 increased by 28% to $51,000 from
$40,000 in fiscal 2004, mainly due to expenses related to new marketing
initiatives and product development, and for the nine months ended June 30, 2005
decreased by 2% to $177,000 from $180,000 for the same period in fiscal 2004,
due to higher sales in the ECG business.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
---------------------------------------------------------
At June 30, 2005, we had approximately $289,000 in cash and marketable
securities, as compared to a balance of $227,000 at September 30, 2004, a net
increase of $62,000 primarily due to funds raised through the Dutchess Private
Equity Fund.
Purchases of property, plant, and equipment used $27,000 in the nine months
ended June 30, 2005 as compared to $11,000 for the same period in 2004. The
increase in spending was due to the acquisition of new ECG equipment.
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. All of CompuMed's directors have deferred cash compensation since
fiscal year 2003 and have used most of this deferred compensation to purchase
stock through exercise of some of their stock options. This action has enabled
the company to retain the director's cash compensation for the benefit of
operations, including, research and development, sales and marketing as well as
other company expenses, This action is voluntary and may be discontinued at the
election of each individual director.
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 nine months ended June 30, 2005, we sold 697,656 shares of Common
Stock to Dutchess Private Equities Fund at an average of $0.25 per share. The
gross proceeds were $172,000.
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.
MATERIAL TRENDS AND UNCERTAINITIES
-------------------------------------
The rate of progress in commercializing the DICOM (digital) OsteoGram has
continued to build at a slow pace. However, we expect that by expanding our
sales capabilities with the addition of the recently hired Vice President of
Sales, we can accelerate revenue growth going forward. In addition, we have made
further improvements to the functionality of the OsteoGram software as a result
of the contribution from our new Vice President of Engineering. Combined with
the increased focus our new distribution and licensing partners, we anticipate
improved results in the near future.
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 our Principal 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 our Principal Financial Officer have 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 our Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting during our
third 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 nine months ended June 30, 2005, we sold 697,666 shares to Dutchess
Private Equities Fund at an average of $0.25 per share. The gross proceeds were
$172,000.
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).
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.
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 August 15, 2005 By: /s/ John G. McLaughlin
---------------------------
John G. McLaughlin
President and Chief Executive Officer
Date August 15, 2005 By: /s/ Phuong Dang
-------------------
Phuong Dang
Secretary, Controller
and Principal Financial Officer