10QSB 1 qsb1q01.txt 1QTR 10QSB MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to ______________ Commission file number 010690 ____________________ Science Dynamics Corporation ------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware ------------------------------------------------------------ (State or other jurisdiction of incorporation or organization) 22-2011859 ------------------------------- (IRS Employer Identification No.) 1919 Springdale Road, Cherry Hill, New Jersey 08003 ----------------------------------------------------- (Address of principal executive offices) ( 856 ) 424-0068 ----------------------------------------------------- (Issuer's telephone number) N/A --------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Check whether the issuer (1) 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 for the past 90 days. Yes [x] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 04/25/2001 17,657,901 shares of common stock were outstanding. S C I E N C E D Y N A M I C S C O R P O R A T I O N INDEX ----- PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 1 (unaudited)and December 31, 2000 (audited) Consolidated Statements of Operations for three 2 months ended March 31, 2001 (unaudited) and three months ended March 31, 2000 (unaudited) Consolidated Statements of Cash Flows for three 3 months ended March 31, 2001 (unaudited) and three months ended March 31, 2000 (unaudited) Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial 4 - 11 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of Matters to Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports 12 Item 7. Signatures 13 SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements: ASSETS March 31, December 31, 2001 2000 Unaudited Audited --------- ------- Current assets: Cash and cash equivalents $ 208,126 $ 1,351,641 Accounts receivable - trade 92,283 102,194 Accounts receivable - other 64,461 51,401 Inventories 83,467 87,623 Other current assets 103,453 84,566 --------- ---------- Total current assets 551,790 1,677,425 --------- ---------- Property and equipment, net 1,012,248 1,005,364 Intangible Assets, net of accumulated amortization of $1,275,000 in 2001 and $1,200,000 in 2000. 225,000 300,000 Other assets 25,363 25,363 --------- ---------- Total assets $1,814,401 $ 3,008,152 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligation $ 61,353 $ 57,598 Accounts payable 354,568 358,820 Accrued expenses 206,396 118,059 --------- ---------- Total current liabilities 622,317 534,477 --------- ---------- Long-term portion of capital lease obligation 106,657 128,413 --------- ---------- Commitments Shareholders' equity - Common stock - .01 par value, 45,000,000 shares authorized, 17,783,701 issued and 17,657,901 outstanding in 2001 and 2000 respectively. 177,837 177,837 Additional paid-in capital 14,266,787 14,266,787 (Deficit) (12,961,364) (11,701,529) ---------- ---------- 1,483,260 2,743,095 Common stock held in treasury, at cost (397,833) (397,833) ---------- ---------- Total shareholders' equity 1,085,427 2,345,262 ---------- ---------- Total liabilities and shareholders' equity $ 1,814,401 $ 3,008,152 ========== ==========
-1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) --------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued):
Three Months Ended March 31, 2001 2000 ---- ---- NET SALES $ 194,113 $ 1,443,482 --------- --------- Operating costs and expenses: Cost of sales 136,847 572,042 Research and development 420,522 255,707 Selling, general and administrative 901,217 605,266 --------- --------- 1,458,586 1,433,015 --------- --------- Operating (Loss) / Income (1,264,473) 10,467 Other income/expenses: Interest income 4,638 2,898 --------- --------- Net (Loss) / Income (1,259,835) 13,365 ========= ========= Net (Loss) / Income per common share basic and diluted $ (0.07) $ 0.00 ========= =========
-2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------
PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued): Three Months Ended March 31, 2001 2000 ---- ---- Cash flows from operating activities: Net (Loss)/Income $(1,259,835) $ 13,365 ----------- ---------- Adjustments to reconcile net (loss)/ income to net cash used for operating activities: Depreciation 62,363 24,509 Amortization of capitalized software 75,000 76,910 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 9,911 (497,164) Other receivable (13,060) 12,689 Inventories 4,156 134,373 Other current assets (18,887) (25,890) Increase (decrease) in: Accounts Payable and accrued expenses 84,085 (272,368) ----------- ---------- Total adjustments 203,568 (546,940) ----------- ---------- Net cash used for operating activities (1,056,267) (533,576) ----------- ---------- Cash flows from investing activities: Purchase of property and equipment (69,247) (158,256) ----------- ---------- Net cash used in investing activities (69,247) (158,256) ----------- ---------- Cash flows from financing activities: Increase (decrease) in Payment on capitalized leases (18,001) - Issuance of common stock - 153,907 ----------- ---------- Net cash (used in) provided by financing activities (18,001) 153,907 ----------- ---------- Net decrease in cash and cash equivalents (1,143,515) (537,925) Cash and cash equivalents - beginning of period 1,351,641 674,793 ----------- ---------- Cash and cash equivalents - end of period $ 208,126 $ 136,868 =========== ==========
-3- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) PART I Item 1. (continued) Basis of Presentation --------------------- The unaudited financial statements included in the Form 10-QSB have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation SB. The financial information furnished herein reflects all adjustments, which in the opinion of management are necessary for a fair presentation of the Company's financial position, the results of operations and the cash flows for the periods presented. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed, or omitted, pursuant to such rules and regulations. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000. The Company presumes that users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for any interim period are not necessarily indicative of the results for the full year. Income per share ---------------- Per-share data has been computed on the basis of the weighted average number of shares of common stock outstanding during the periods. -4- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2001 AND FOR THE THREE MONTHS ENDED March 31, 2000. Business Overview ----------------- In 1998, management made a strategic decision to divert most of our development efforts towards the IP system. Advances in public and private IP-based networks now enable businesses to use the Internet Protocol (IP) to by-pass the Public Switched Telephone Network (PSTN) for national and international long distance voice, fax, and video communications. The Company continues to gain knowledge and experience in enhancing the development of the system for IP Telephony. The Company has revised its development and implementation of the products accordingly to the direction of the marketplace. Management believes that the penetration of the IP Telephony market along with renewed interest and development in the Commander II call control series will provide significant growth potential. During 2000, the Company changed the size and structure of its sales force. The sales team has increased from two UK based sales people in 1999 to a 10- person team (8 in the US and 2 in the UK) led by our new Vice President of Sales and Marketing. This team was fully in place by October 2000. Given typical sales lead times and the current state of the Telco market, we do not anticipate significant revenues to be generated by the new team until the second half of 2001. The Company's net sales results for the three month period ending March 31, 2001 were $194,113 a decrease of $1,249,369 from sales of $1,443,482 for the three month period ended March 31, 2000. The Company's revenue in 2000 was predominantly derived from the Integrator Product Line. The results were due to the beginning of the deployment of the Cascadent Supply Agreement during 2000. This Agreement was terminated upon SciDyn receiving official notification that Cascadent was placed into receivership. The loss of this contract is directly related to the decrease in sales for the first quarter, moreover, we expect the loss of this contract to negatively effect the second quarter of 2001 as well. SciDyn does not have information as to when or if Cascadent will emerge from receivership. The strategy for 2001 is to generate sales revenue from the IP system via the efforts of our expanded sales team and to reinvigorate the Commander I and II product lines, as well as, to exploit the VFX-250S product. Although the sales of the VFX-250S did not reach the anticipated level, the market awareness of the functionality and quality of the product has been recognized. The sales for this product have been primarily in South America, with future sales opportunities generating from China and Russia. The sales and marketing team will continue to pursue additional venues for this product producing a base line source of revenue in the coming year. The Company is continuously exploring new niche opportunities, introducing new product offerings and marketing and sales initiatives to increase market share and value for our customers. The focus of our strategy included providing the core technology needed to deliver a broad range of telephony services; targeting key growth markets worldwide; promoting strategic relationships between our customers; delivering added value through customer support and services; and continuing to actively pursue business alliance candidates that complement or support the Company's core competencies. -5- Management believes that current products and development strategy teamed with SciDyn's strong telecommunications background will provide a solid product to meet customer needs and the advancements required for the packet based telecom revolution. PRODUCTS -------- IP Telephony One of the current impacts of IP Telephony is the way it is driving the convergence of the IT and telecom markets. Both of these traditional markets are now seeing a paradigm shift to IP Telephony. IP Telephony is crossing traditional parameters and amalgamating historically separated disciplines on an IP network. This means the carriers and companies of the world are starting to send voice over the packet networks that previously were used only for data. This is an opportunity for dynamic companies to take their experience and expertise and apply it in markets not traditionally open to them. By crossing borders, IP Telephony allows companies like Science Dynamics to diversify from their traditional core technology and enhance and develop bridges between the existing data and telecom infrastructures. The difference between the current circuit-switched PSTN, which provides a dedicated end-to-end connection, and the packet switched IP network, which provides a virtual connection, is the enhancement of bandwidth utilization. By sharing bandwidth as data networks do, new operators should have the potential to provide a reduction in cost as compared to traditional circuit- switched PSTN operators. The focus in today's market is to integrate these two very different forms of communication throughout the world. SciDyn's IP Telephony products aim to enhance the new operators' abilities to combine the technologies of the new IP-based networks with the traditional feature-rich circuit networks without forfeiting the key functionality of IP network-adaptability. The SciDyn system features a modular architecture that permits our customers to add new product and service features without significant cost or development time. Based on publicly available data provided by large telecommunications service providers, we believe our modular architecture enables the provision of new and existing communications services at a lower cost than the provision of communications services by traditional telephone companies. SciDyn offers its proprietary BubbleLink(R) software architecture throughout its current IP Telephony Gateway product line. This includes our high capacity versatile IntegratorC-2308(R), which has one of the smallest footprints in the industry. Commander Inmate Telephone Control System (ITCS) The Commander product lines are built on the Company's unique BubbleLINK(R) software architecture. This open system platform is a combination of integrated Computer Telephony (CTI) hardware and software, which can handle thousands of call transactions per hour and provide correctional facility officials with effective tools to manage and control inmate telephone calls using the Commander system software. The Commander I products are designed for the small to mid sized municipal and county correctional facilities requiring control for up to 40 inmate telephone lines. The Commander I base system provides telephone control for 4 lines and can be expanded in 4 line increments. This modular design provides a cost effective solution with an abundance of inmate phone control features. -6- SciDyn has recently introduced its VoIP technology to its Commander call control system. This enhancement reduces the hardware and operation costs of running the SciDyn solution. The new configuration allows all of SciDyn's technology to be housed at one central location reducing the amount of lines that SciDyn clients will need in order to move the same traffic, moreover, the VoIP component allows for a reduction in the per minute charges incurred by our client which enhances profitability. The Commander I and II call control systems can be configured using one or more AdminManager workstations. The AdminManager provides real-time administration of the Commander through an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN). In 1999, the company released a new Commander II AdminManager software module. This new software module provides the Commander II with a sophisticated Graphical User Interface (GUI) with new inmate phone control features. These new features were based on recommendations by several of the Company's customers. The Company completed the Inmate debit system and GUI interface capability on Commander in April 2001. We expect to complete the Commander II Integrated Recording by the end of the second quarter 2001. The Company continues to explore opportunities with the major telephone companies in providing the Commander II inmate phone control system with call transaction (price per call) programs. Video over Frame Relay In 1997, SciDyn launched its new way to carry video conferencing. The VFX- 250S is a hardware based Frame Relay Access Device (FRAD) designed to carry video streams through the frame relay network. As the largest data network protocol in the world, frame relay seemed an obvious choice for adding video connectivity to its wide complement of features. Traditionally, video conferencing has been carried via leased lines or ISDN circuits. In the US market, due to the proliferation of ISDN availability, video conferencing has been able to take off with a relatively high growth curve. This is not true in the international markets where leased lines and ISDN circuits are either not readily available or prove to be rather costly. Video conferencing suite manufacturers such as PictureTel, the industry leader, found markets outside of ISDN enabled networks have proven to be slow and tedious. By leveraging the proliferation of frame relay networks throughout the world, SciDyn intends to market the VFX-250S products in markets where ISDN and leased line services are not available. This has proven very successful in the past in markets such as Brazil. Three countrywide frame relay networks are presently under construction in China. Trials are continuing and we continue to anticipate possible business opportunities in the mid part of 2001. There are a number of large-scale projects quoted late last year, which have not yet been awarded. These include opportunities in China and Russia. Brazil continues to proceed steadily and is anticipated to provide sales. With some expected further development of the VFX family and some investment in the promotion of the product line we continue to anticipate an overall increase in sales over the next twelve months. -7- Error Correction Algorithm In 1999, the Company acquired the "Error Detection and Correction System for Use with Address Translation Memory Controller" patent, in exchange for 172,029 shares of common stock then valued at $100,000. Such a patent provides the Company with the ability to embed in certain technology an error correction method that should substantially reduce data transmission errors. This correction device is designed to reduce costly retransmission and can be utilized across various data transport mediums. The patent, which we intend to make available to others on a royalty basis, can be utilized on virtually any data transmitting system, from fiber optics to satellite transmission. Since both transmitting and receiving stations must utilize the same algorithm, the Company's primary task is to initially convince new or redesigned applications to utilize SciDyn's patent for each end of the application. As stated in previous quarterly reports SciDyn continues to pursue a third party to undertake the implementation of this algorithm. To date a suitable entity has not been identified to exploit this new technology in the near term. Since SciDyn's near term strategy and capital priorities preclude it from investing additional time and funds into exploiting this patent independently, its carrying value of $89,700 has been written off during 2000. SciDyn believes that the underlying patent may still have practical applications and is pursuing the outright sale of the patent to interested third parties. The Patent, which has been issued in the United States with application in many foreign countries, is for a data transmission system for use in a mass memory system, which includes an EDAC that corrects all single component errors and detects all double component errors. High-speed operation permits use of the EDAC on address and control lines as well as on data lines. In memory systems, which use virtual memory addressing, further efficiency and economy is achieved by incorporating a partial implementation of the EDAC encoding in the same virtual memory address translation unit in which the virtual memory address is calculated. At the present time there is one issued patent. There are many upgrades to the patented material that can be patented, which are now trade secrets. These include both revisions to the algorithm and implementation approaches. Voice Response System The Company's Voice Response System (VRS) is an automatic intercept product designed to provide a cost-effective solution for implementing announcement capabilities at the central office location. This product has reached its mature stage of the product life cycle and has been discontinued. Future Product Development The Company's products have primarily been designed and developed by its internal engineering staff. The Company considers the features and performance of its products to be generally competitive to those of other available applications. We believe that continual enhancements of our products will be required to enable the Company to maintain its competitive position. The Company intends to focus its principal future product development efforts on developing new, innovative, technical products and updating existing products in the communications arena to enable the Company to take advantage of opportunities resulting from the expected direction of technology. -8- The Company continues to refine its core BubbleLINK(R) software architecture. This software architecture provides the foundation for hosting applications for various Telephony and transaction oriented processes. Currently the BubbleLINK(R) architecture supports existing Company products such as the Commander family of inmate products, and the IntegratorC-2000(R) Series of IP Telephony gateway products. Management believes that the product design strategy will keep the Company competitive in the emerging Internet Telephony market. Results of Operations --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Three Months ended March 31, 2001 (unaudited) compared to the Three Months ended March 31, 2000 (unaudited). Three Months Ended March 31, 2001 2000 ---- ---- Sales 194,113 1,443,482 Net (Loss)/Income (1,259,835) 13,365 Net (Loss)/Income Per Share $(0.07) $ 0.00 OPERATING EXPENSES PERCENT OF SALES 2001 2000 2001 2000 ---- ---- ---- ---- Cost of Goods Sold 136,847 572,042 70% 39.6% Research & Development 420,522 255,707 217% 17.8% Sales, General & Admin 901,217 605,266 464% 41.9% Total Operating Costs and Expenses $1,458,586 $1,433,015 751% 99.3% Sales for the three month period ending March 31, 2001 were $194,113 a decrease of $1,249,369 from sales of $1,443,482 for the three month period ended March 31, 2000. The Company's revenue in 2000 was predominantly derived from the Integrator Product Line. The results were due to the beginning of the deployment of the Cascadent Supply Agreement during 2000. This Agreement was terminated during the first quarter of 2001 upon SciDyn receiving official notification that Cascadent was placed into receivership. The loss of this contract is directly related to the decrease in sales for the first quarter, moreover, we expect the loss of this contract to negatively effect the second quarter of 2001 as well. SciDyn does not have information as to when or if Cascadent will emerge from receivership. -9- Cost of Goods sold decreased to $136,847 in the first three months of 2001 from $572,042 in the corresponding three-month period of 2000. The decrease in the cost of goods sold was directly related to the decrease in sales revenue. The percentage increase of cost of good sold as a percentage of sales was due to the change in mix of sales between the quarters with high margin integrater equipment sales in 2000 compared to lower margin VFX and contract labor sales in 2001. Research & Development expenses increased to $420,522 in the first three months of 2001 as compared to $255,707 in the comparable three-month period of 2000. The increase in research and development expenses during the first three months of 2001 is related to continued work on adding additional functionality to our product mix, specifically introducing VoIP to our Commander II series. We believe our success will depend, in part, on our ability to develop and introduce new products and enhancements to our existing products. We continue to work on expanding our engineering team and intend to continue to make, significant investments in research and development. Sales, General & Administrative expenses increased to $901,217 in the first three months of 2001, compared to $605,266 in the corresponding period of 2000. The increase is related to the addition of sales and administrative staff during the second half of 2000. SciDyn has increased its sales and marketing department from 2 people in the first quarter of 2000 to ten in the first quarter of 2001. The major directive is to initiate and promote a full-scale sales and marketing program to bring the company above the radar screen to promote awareness and recognition of SciDyn in the marketplace. We expect to incur substantial expenditures related to sales and marketing activities, the recruitment of additional sales and marketing personnel and the expansion of our domestic and international distribution channels. LIQUIDITY AND CAPITAL RESOURCES: ------------------------------- Cash and cash equivalents decreased to $208,126 for the period ended March 31, 2001 from $1,351,641 at December 31, 2000. Net cash used for operating activities was $1,056,267 during the three-month period ended March 31, 2001 compared to $533,576 in the corresponding period of 2000. Net cash used for operating activities reflects the net loss marginally offset by non cash items and an increase in accrued expenses. Cash used in investing activities was $69,247 for the three-month period ended March 31, 2001 compared to $158,256 in the corresponding period of 2000. The outlay reflects the continual investment in computer related equipment to further development efforts. Cash used in financing activities in the three-month period ended March 31, 2001, amounted to $18,001 which represented payments on capital lease obligations. This compares to $153,907 in cash provided by financing activities in the previous period which was raised through the issuance on Common Stock pursuant to the Company's employee stock option plan. Although the Company expects to close upon a loan which will provide working capital shortly, until the loan is closed, there is no guarantee that the Company will receive such funds. If the Company does not receive the funds in the near term it will prevent the Company from continuing to operate at current capacity. -10- Forward Looking and Cautionary Statements Except for the historical information and discussions contained herein, statements contained in this Form 10-QSB may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including the company's failure to continue to develop and market new and innovative products and services and to keep pace with technological change; competitive pressures; failure to obtain or protect intellectual property rights; issues on the company's business, financial condition or results of operations; quarterly fluctuations in revenues and volatility of stock prices; the company's ability to attract and retain key personnel; currency and customer financing risks; dependence on certain suppliers; changes in the financial or business condition of the company's distributors or resellers; the company's ability to successfully manage acquisitions and alliances; legal, political and economic changes and other risks, uncertainties and factors discussed elsewhere in this Form 10-QSB, in the company's other filings with the Securities and Exchange Commission or in materials incorporated therein by reference. -11- PART II.OTHER INFORMATION SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES _____________________________________________ Item 1. Legal Proceedings No material developments Item 2. Changes in Securities None 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 (B)On March 15, 2001 a Form 8K was filed concerning an Equity Line with the Alpha Capital Group. -12- Item 7. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. SIGNATURE TITLE DATE --------- ----- ---- BY: /s/ Joy C. Hartman CEO and President 05/15/01 --------------------- ----------------- Joy C. Hartman BY: /s/ Robert O'Connor Vice President and 05/15/01 --------------------- Chief Accounting Officer ----------------- Robert O'Connor -13-