-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1AbVc7NvEKb45HbiEdwUrkMMD1v4YhLL33MZuIRmTDgOKQ24yzuIRysNYfnf1T2 A512hnb8aguMaKvVdQ8vWg== 0000350644-01-500018.txt : 20020411 0000350644-01-500018.hdr.sgml : 20020411 ACCESSION NUMBER: 0000350644-01-500018 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCIENCE DYNAMICS CORP CENTRAL INDEX KEY: 0000350644 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 222011859 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10690 FILM NUMBER: 1792310 BUSINESS ADDRESS: STREET 1: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 BUSINESS PHONE: 8564240068 MAIL ADDRESS: STREET 1: SCIENCE DYNAMICS CORP STREET 2: 1919 SPRINGDALE RD CITY: CHERRY HILL STATE: NJ ZIP: 08003 10QSB 1 qsb3q01a.txt 3Q,2001 10QSB 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 September 30, 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: 11/14/01 18,239,716 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 This is a duplicate of the filing made on November 14, 2001; as a result of a filing error that filing was mistakenly listed as a form 10KSB. However it is clear from the filing itself the filing was a form 10QSB for the period ending September 30, 2001 This duplicate is being made for the sole purpose of making form 10QSB filed on November 14, 2001 available to investors under form 10QSB heading. 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 September 30, 2001 (unaudited) and December 31, 2000 (audited) 1 Consolidated Statements of (Loss) Income for the nine months and three months ended September 30, 2001 (unaudited) and the nine and three months ended September 30, 2000 (unaudited) 2 Consolidated Statements of Cash Flows for nine months ended September 30, 2001 (unaudited) and for the nine months ended September 30, 2000 (unaudited) 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 - 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults upon Senior Securities 13 Item 4. Submission of Matters to Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports 13 Item 7. Signatures 14 SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
PART I. FINANCIAL INFORMATION Item 1. Financial Statements: ASSETS September 30, December 31, 2001 2000 (Unaudited) (Audited) --------- ---------- Current assets: Cash and cash equivalents $ 157,953 $ 1,351,641 Accounts receivable - trade 63,628 102,194 Accounts receivable - other 50,000 51,401 Inventories 245,196 87,623 Other current assets 86,780 84,566 --------- ---------- Total current assets 603,557 1,677,425 --------- ---------- Property and equipment, net 935,973 1,005,364 Intangible Assets, net of accumulated amortization of $1,425,000 in 2001 and $1,200,000 in 2000. 75,000 300,000 Other assets 25,363 25,363 --------- ---------- Total assets $1,639,893 $ 3,008,152 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of Credit 97,741 - Short term capital lease 66,394 $ 57,598 Customer deposits 420,200 - Accounts payable 695,172 358,820 Accrued expenses - payroll related 165,144 118,059 --------- ---------- Total current liabilities 1,444,651 534,477 --------- ---------- Convertible Notes 1,600,000 - Long Term Capital Lease 72,392 128,413 --------- ---------- Total liabilities 3,117,043 662,890 --------- ---------- 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 14,242,021 14,266,787 (Deficit) (14,499,175) (11,701,529) ---------- ---------- (1,079,317) 2,743,095 Common stock held in treasury, at cost (397,833) (397,833) ---------- ---------- Total shareholders' (deficit)/ equity (1,477,150) 2,345,262 ---------- ---------- Total liabilities and shareholders' equity $ 1,639,893 $ 3,008,152 ========== ==========
- -1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) --------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued):
Nine Months Ended September 30 Three Months Ended September 30, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES $ 506,134 $5,178,155 $ 133,521 $1,630,402 ---------- ---------- ---------- --------- Operating costs and expenses: Cost of sales 381,509 1,807,158 92,983 522,886 Research and development 1,107,916 833,935 353,126 307,402 Selling, general and administrative 2,560,369 2,201,692 719,229 792,617 ---------- ---------- ---------- --------- 4,049,794 4,842,785 1,165,338 1,622,905 ---------- ---------- ---------- --------- Operating (loss)/income (3,543,660) 335,370 (1,031,817) 7,497 Other income/expenses: Interest income - 22,044 - 13,606 Interest expense (253,986) (2,902) (28,100) (2,902) ---------- ---------- ---------- --------- Net(loss)/income $(3,797,646) $ 354,512 $(1,059,917) $ 18,201 ========== ========== ========== ========= Net income(loss) per common share $ (0.21) $ 0.02 $ (0.06) $ 0.00 ========== ========== ========== =========
- -2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------
PART I. FINANCIAL INFORMATION Item 1. Financial Statements(Continued): Nine Months Ended September 30, 2001 2000 ---- ---- Cash flows from operating activities: Net (loss)Income $(3,797,646) $ 354,512 ----------- ---------- Adjustments to reconcile net (loss)income to net cash used for operating activities: Depreciation 189,453 99,518 Amortization of Intangible assets 225,000 225,000 Interest expense - non cash 212,524 - Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable 38,566 (1,643,631) Other receivable 1,401 (10,844) Inventories (157,573) (161,998) Other current assets (2,214) (84,659) Other assets - 6,400 Increase (decrease) in: Deferred revenue 420,200 - Accounts Payable and accrued expenses 383,437 (53,152) ----------- ---------- Net cash used for operating activities (2,486,852) (944,858) ----------- ---------- Cash flows from investing activities: Purchase of property and equipment - net (120,062) (543,532) ----------- ---------- Net cash used in investing activities (120,062) (543,532) ----------- ---------- Cash flows from financing activities: Increase (decrease) in Issuance of Convertible debt, net 1,362,710 - Payment on capitalized leases (47,225) (3,862) Proceed from line of credit 97,741 - Issuance of common stock and warrants - 1,724,057 ----------- ---------- Net cash provided by financing activities 1,413,226 1,720,195 ----------- ---------- Net (decrease) increase in cash and cash equivalents (1,193,688) 231,805 Cash and cash equivalents - beginning of period 1,351,641 674,793 ----------- ---------- Cash and cash equivalents - end of period $ 157,953 $ 906,598 =========== ==========
- -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 period. Common equivalent shares, including warrants and stock options, are included in the calculation of diluted earnings per common and common equivalent shares to the extent that they are dilutive and excluded to the extent they are anti-dilutive. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2001 AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001. 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 in 2002. - -4- During 2001, the Company changed the structure of its sales force. The Commander sales team consists of our vice president of sales, a sales manager, an inside sales representative and a marketing associate. The focus on VOIP sales has been shifted to Asia with the hiring of a vice president of sales-Asia/Pacific. The Asia strategy includes both direct and indirect sales via collaboration with distributors and resellers. The company expects significant growth during 2002 from both domestic Commander sales and from our VOIP and video conferencing products in Asia. As a result of this restructuring of the sales group, the sales office in the United Kingdom was closed to make more resources available for our push into Asia. 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 first quarter of 2002. 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. 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. - -5- 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. 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 completed the Commander II live monitoring and recording during 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. - -6- 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. There has been a resurgence in interest for our frame relay video conferencing solution with strong interest coming from Korea, China and Mexico. We expect to see an increase in revenue from this product throughout 2002. 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. - -7- 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. A base line revenue stream will be generated from support of this product. 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. 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. Results of Operations - --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Nine Months ended September 30, 2001 (unaudited) compared to the Nine Months ended September 30, 2000 (unaudited). Nine Months Ended September 30, 2001 2000 ---- ---- Sales 506,134 5,178,155 Net Loss / Income (3,797,646) 354,512 Net Loss / Income Per Share $(0.21) $ 0.02 - -8- OPERATING EXPENSES PERCENT OF SALES 2001 2000 2001 2000 ---- ---- ---- ---- Cost of Goods Sold 381,509 1,807,158 75% 35% Research & Development 1,107,916 833,935 219% 16% Sales, General & Admin. 2,560,369 2,201,692 505% 43% Total Operating Costs and Expenses $4,049,794 $4,842,785 799% 94% Sales for the nine-month period ending September 30, 2001 were $506,134 a decrease of $4,672,021 from sales of $5,178,155 for the nine-month period ended September 30, 2000. The Company's revenue in 2000 was predominantly derived from the Integrator Product Line. Those results were due to 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 year. SciDyn has received word that Cascadent will not emerge from receivership. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his serving as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. Cost of Goods sold decreased to $381,509 in the first nine months of 2001 from $1,807,158 in the corresponding nine-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 goods sold as a percentage of sales was due to the change in mix of sales between the quarters with high margin integrator equipment sales in 2000 compared to lower margin legacy products and services in 2001. Research & Development expenses increased to $1,107,916 in the first nine months of 2001 as compared to $833,935 in the comparable nine-month period of 2000. The increase in research and development expenses is related to continued work on adding additional functionality to our product mix, specifically introducing VoIP, live monitoring and recording 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 $2,560,369 in the first nine months of 2001, compared to $2,201,692 in the corresponding period of 2000. The increase is related to the addition of sales and administrative staff during the second half of 2000 and increased consulting fees during 2001. As we launch our sales initiative into Asia 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. Interest Expense increased to 253,986 for the period ended September 30, 2001 as compared to $2,902 for the same period in 2000. The Company entered into Convertible Notes totaling $1,600,000, these Notes contain a beneficial conversion feature (see the Liquidity section below for a description of the Note). Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or - -9- Contingently Adjustable Conversion Ratios", this beneficial conversion feature was assigned an intrinsic value of $212,524, as calculated under the provisions of the EITF. This amount was immediately expensed, as the Notes were convertible into common shares of the Company at the time of the signing of the Agreement. The remaining interest expense is accrued interest on the Convertible Notes. Three Months ended September 30, 2001 (unaudited) compared to the Three Months ended September 30, 2000 (unaudited). Three Months Ended September 30, 2001 2000 ---- ---- Sales 133,521 1,630,402 Net Loss / Income (1,059,917) 18,201 Net Loss / Income Per Share $(0.06) $ 0.00 OPERATING EXPENSES PERCENT OF SALES 2001 2000 2001 2000 ---- ---- ---- ---- Cost of Goods Sold 92,983 522,886 70% 32% Research & Development 353,156 307,402 264% 19% Sales, General & Admin 719,229 792,617 539% 49% Total Operating Costs and Expenses $1,165,338 $1,622,905 873% 100% Sales for the three-month period ending September 30, 2001 were $133,521 a decrease of $1,496,881 from sales of $1,630,402 for the three-month period ended September 30, 2000. The Company's revenue in 2001 was predominantly derived from the Integrator Product Line. The results were due 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 third quarter. SciDyn has received word that Cascadent will not emerge from receivership. Our former president, chief executive officer and chairman of the board, Alan Bashforth, became president of Cascadent subsequent to his serving as an officer of Science Dynamics. Mr. Bashforth continues to serve as a member of our board of directors. Cost of Goods sold decreased to $92,983 during the third quarter of 2001 from $522,886 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 goods sold as a percentage of sales was due to the change in mix of sales between the quarters with high margin integrator equipment sales in 2000 compared to lower margin legacy products and services in 2001. Research & Development expenses increased to $353,126 during the three-month period of 2001 as compared to $307,402 in the comparable three-month period of 2000. The increase in research and development expenses during 2001 is related to continued work on adding additional functionality to our product mix, specifically introducing VoIP, live monitoring and recording to our Commander II - -10- 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 decreased to $719,229 during the three-month period of 2001, compared to $792,617 in the corresponding period of 2000. The decrease is related to the reductions in administrative and sales staff during the quarter and the voluntary salary reductions taken by certain employees to help preserve cash.. 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. Interest Expense increased to 28,100 for the period ended September 30, 2001 as compared to $2,902 for the same period in 2000. The Company entered into Convertible Notes totaling $1,600,000 during 2001. (see the Liquidity section below for a description of the Note). LIQUIDITY AND CAPITAL RESOURCES: - ------------------------------- Cash and cash equivalents decreased to $157,953 for the period ended September 30, 2001 from $1,351,641 at December 31, 2000. Net cash used for operating activities was $2,486,852 for the nine months period ended September 30, 2001 compared to $944,858 cash used for operating activities in the nine month period ended September 30, 2000. This difference is due to the loss of the Cascadent Supply Agreement and the resultant loss of revenue. Net cash used in investing activities was $120,062 during the nine-month period of 2001 compared to $543,532 in the corresponding nine-month period of 2000. On May 22, 2001, we issued $1,200,000 principal amount of 8% convertible debentures, due May 22, 2003, to three investors pursuant to a Subscription Agreement dated May 22, 2001. Interest only payments are due quarterly commencing September 30, 2001, and the principal is due in one lump sum on May 22, 2003, or upon certain events of default. The conversion price for the convertible debentures is the lesser of 85% of the average of the three lowest closing prices for the common stock for the 30 trading days prior to but not including May 22, 2001, or 85% percent of the average of the three lowest closing prices for the common stock for the 30 trading days prior to but not including the conversion date. The maximum number of shares of common stock that any subscriber or group of affiliated subscribers may own after conversion at any given time is 4.99%. The number of shares of common stock issuable upon conversion of the convertible debentures is 1,470,588, based on a conversion price of $0.816 per share. We are required to register 200% of this amount, for a total of 2,941,176 shares. The actual conversion price will depend on the market price of our common stock prior to the conversion. In addition to the convertible debentures, we also issued warrants to purchase 872,727 shares of common stock. These warrants, which expire May 22, 2006, have an exercise price of $1.4339 per share. On August 15, 2001, we issued $400,000 principal amount of 8% convertible debentures, due August 15, 2003, to one investor pursuant to a Subscription Agreement dated August 15, 2001. Interest only payments are due quarterly commencing September 30, 2001, and the principal is due in one lump sum on August 15, 2003, or upon certain events of default. The conversion price for the convertible debentures is the lesser of 85% of the average of the three lowest closing prices for the common stock for the 30 trading days prior to but not including August 15, 2001, or 85% percent of the average of the three lowest closing prices for the common stock for the 30 trading days prior to but not including the conversion date. The maximum number of shares of common stock that any subscriber or group of affiliated subscribers may own after conversion at any given time is 4.99%. The number of shares of common stock issuable upon conversion of the convertible debentures is 5,000,000, based on a conversion price of $0.08 per share. We are required to register 200% of this amount, for a total of 10,000,000 shares. The actual conversion price will depend on the market price of our common stock prior to the conversion. In addition to the convertible debentures, we also issued warrants to purchase 290,909 shares of common stock. These warrants, which expire August 15, 2006, have an exercise price of 130% of the three lowest closing prices during the 10 trading days preceding exercise. Net cash provided by financing activities during the nine-month period ended September 30, 2001 was $1,413,226 this is related to the convertible debt described above plus proceed from a line of credit, offset by the payment on capitalized leases. Net cash provided by financing for the nine-month period ended September 30, 2001 was $1,720,195. This amount is related to the sale of 200,650 common shares at $8.50 per share which netted $1,570,149, the finders fee from this transaction included the issuance of 13,115 warrants to purchase common shares. The remaining increase in financing activities of $153,908 was related to the exercise of stock options by employees of the Company. - -11- The Company was notified by Nasdaq that it was not in compliance with Marketplace rules. A plan outlining how the Company intended to comply with listing requirements was submitted on June 15, 2001. On August 23, 2001 Nasdaq informed the Company that its plan to come back into compliance was not accepted. As such, the Company was delisted from Nasdaq and currently trades over the counter under the symbol SIDY.OB. The sales revenue shortfall in the first nine months has greatly impacted cash on hand. The Company's currently anticipated levels of revenue and cash flow are subject to many uncertainties and cannot be assured. The amount of funds required by the Company will depend on many factors, including the extent and timing of sales, product costs, engineering and customer/technical support requirements. The Company does not have sufficient cash on hand to continue its operations without successfully raising additional funds either through the issuance of debt or equity. The inability to obtain the required financing and to generate sufficient cash from operations could require the Company to curtail its operations. While negotiations are underway to secure additional funds the Company cannot guarantee that such negotiations will be successful. 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. - -12- 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 (a) Reports on Form 8-K None 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. - -13- SCIENCE DYNAMICS CORPORATION In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- BY: /s/ Robert O'Connor Vice President and November 14,2001 --------------------- Chief Accounting --------------- Robert O'Connor Officer -----END PRIVACY-ENHANCED MESSAGE-----