10QSB 1 qsb2q02.txt 10QSB PERIOD ENDING JUNE 30, 2002 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 June 30, 2002 ------------------ [ ] 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: 08/09/2002 40,783,590 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 June 30, 2002 (unaudited) 1 and December 31, 2001 (audited) Consolidated Statements of Operations for the six months 2 and three months ended June 30, 2002 (unaudited) and the six and three months ended June 30, 2001 (unaudited) Consolidated Statements of Cash Flows for six months 3 ended June 30, 2002 (unaudited) and for the six months ended June 30, 2001 (unaudited) Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial 4 - 12 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports 16 Item 7. Signatures 17 SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
ASSETS June 30, December 31, 2002 2001 Unaudited Audited --------- ------- Current assets: Cash and cash equivalents $ 13,073 $ 17,075 Accounts receivable - trade 49 352 13,234 Accounts receivable - other - 60,721 Inventories 208,083 310,857 Other current assets 26,823 125,446 ---------- --------- Total current assets 297,331 527,333 ---------- --------- Property and equipment, net 784,180 805,727 Deferred Financing costs 183,050 154,268 Other assets 25,363 25,363 ---------- --------- Total assets $1,289,924 $1,512,691 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligation $ 107,899 $ 69,615 Bank Note 33,180 99,535 Customer Deposits 169,201 289,368 Short term loan payable 213,776 195,000 Accounts payable 1,004,167 800,460 Accrued expenses 303,462 152,151 ---------- --------- Total current liabilities 1,831,685 1,606,129 Long Term liabilities: Non current portion of bank note 66,355 - Non current portion of capital lease obligation 20,514 58,798 Convertible Debenture 1,651,367 1,431,949 ---------- --------- Total liabilities $3,569,921 $3,096,876 ---------- --------- Commitments Shareholders' equity (deficit) Common stock - .01 par value, 45,000,000 shares authorized, 31,188,592 and 20,879,501 issued 31,062,792 and 20,753,701 outstanding in 2002 and 2001 respectively. 311,886 208,795 Additional paid-in capital 15,277,447 14,681,858 (Deficit) (17,471,497) (16,077,005) ---------- --------- (1,882,164) (1,186,352) Common stock held in treasury, at cost (397,833) (397,833) ---------- --------- Total shareholders' equity (deficit) (2,279,997) (1,584,185) ---------- --------- Total liabilities and shareholders' Equity $1,289,924 $1,512,691 ========== ========= The accompanying notes are an integral part of these consolidated financial statements.
-1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended Three Months Ended June 30 June 30, 2002 2001 2002 2001 ---- ---- ---- ---- NET SALES $ 655,878 $ 372,614 $ 186,081 $ 178,501 ---------- ---------- ---------- ---------- Operating costs and expenses: Cost of sales 276,642 288,526 91,838 151,679 Research and development 423,071 754,790 165,339 334,268 Selling, general and administrative 1,089,126 1,839,340 466,801 938,123 ---------- ---------- ---------- ---------- 1,788,839 2,882,656 723,978 1,424,070 ---------- ---------- ---------- ---------- Operating (loss) (1,132,961) (2,510,042) (537,897) (1,245,569) Other income (expenses): Interest Expense (70,328) 4,638 (36,702) 4,638 Finance Expense (191,204) (230,524) (47,511) (230,524) ---------- ---------- ---------- ---------- Net (loss) $(1,394,493) $(2,735,928) $(622,110) $(1,471,455) ========== ========== ======== ========== Net(loss)per common share basic and diluted $ (0.05) $ (0.15) $ (0.02) $ (0.08) ========== ========== ======== ========== The accompanying notes are an integral part of these consolidated financial statements.
-2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 2002 2001 ---- ---- Cash flows from operating activities: Net (loss) $(1,394,493) $(2,735,928) ----------- ----------- Adjustments to reconcile net (loss) to net cash used for operating activities: Depreciation 155,002 140,231 Financing expense non cash 191,204 212,524 Amortization of intangible assets - 150,000 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (36,118) (11,731) Other receivable 60,721 2,954 Inventories 102,774 8,983 Other current assets 98,623 17,004 Increase (Decrease) in: Accounts Payable and accrued expenses 355,018 174,829 customer deposits (120,167) - ----------- ----------- Total adjustments 807,057 694,794 ----------- ----------- Net cash used for operating activities (587,436) (2,041,134) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment - net (133,455) (109,176) ----------- ----------- Net cash used in investing activities (133,455) (109,176) ----------- ----------- Cash flows from financing activities: Increase (decrease)in Issuance of Convertible Debt 698,113 1,018,710 Short term loan Payable 18,776 - Payment on capitalized lease - (32,267) ----------- ----------- Net cash provided by financing activities 716,889 986,443 ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,003) (1,163,867) Cash and cash equivalents - beginning of period 17,075 1,351,641 ----------- ----------- Cash and cash equivalents - end of period $ 13,073 $ 187,774 The accompanying notes are an integral part of these consolidated financial statements.
-3- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Item 1. 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, 2001. 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 SIX MONTHS ENDED JUNE 30, 2002 AND FOR THE THREE MONTHS ENDED JUNE 30, 2002. Business Overview ----------------- Science Dynamics made significant efforts in the past twelve months to react to the tremendous slowdown in the global communications market. The focus was to concentrate on all potential revenue opportunities and eliminate those that could not produce revenue in the short-term. This resulted in drastic reductions in the workforce especially in the area of Voice over Internet technologies. The sales revenue potential of the IP product line was deemed to have a long-term sales cycle with no short-term revenue opportunity. Unforeseen was the continued decline in the telecom market combined with the step response to critical failures in major telecom industry giants. This has set in motion an uncertain future for this sector along with predictable reductions in capital spending. These reductions along with refocused efforts on core business markets helped sustain SciDyn during the early portion of 2002. SciDyn set in motion an early effort to enter new avenues for sustained revenue during this period of reduced capital spending. These include new sales models for the Commander Call Control System including lease and transaction based offerings. These new financing options have opened the door to allow many vendors access to the Commander product line. In addition to forging new customer relationships, many of the traditional SciDyn customers such as the major long distance and local exchange carriers, are exploring how these financing options allow them to continue to improve operational costs in an increasingly competitive market without the up-front capital expenditure. New SciDyn revenue initiatives included the launching of an operations center to provide value-added enhancements to key industry services. These services focus on the needs of the corrections market and extend the value of a typical equipment sale into a multi-year contract for transaction-based services. The operations center is now in full production mode and the initial invoicing commenced during the latter part of June. SciDyn is also exploring other established markets that are considered more viable in the short term following the telecom disruption currently facing the industry. One such market is the pre-paid and debit calling card industry. SciDyn is embracing this industry by offering a new entry-level product for pre-paid and debit card carriers. The new product known as MinuteMan offers advanced pre-paid services comparable with many of the legacy systems on the market today at a price that is targeted at allowing providers the chance to transition from a pure resale mode into the first step of creating a network infrastructure. Over the past year, several new software releases have been produced for the Commander I and II models that have repositioned the product for a greater segment of the inmate call control market. This has opened the door to allow the Commander product to fill the needs of all service providers, both large and small. Heretofore, the Commander product was designed solely for the needs of the large Local Exchange Carrier (LEC) customers. SciDyn has recently engaged several nascent independent inmate call control service providers that are now competing equitably with LECs. These smaller companies are winning contracts on the merits, strength and reputation of the Commander platform. -5- SciDyn continues to embrace the benefits and competitive advantages that a converged voice/data network holds for communications carriers in many market sectors. As such, SciDyn will continue to maintain a forward pace in the development of integrated voice over data technology. SciDyn expects operating losses and negative cash flow for the foreseeable future, as we must obtain orders, continue to introduce additional services and offer optional procurement methods. We believe that increasing our revenues will depend in large part on our ability to offer products that are attractive to our customers, increase customer awareness of our product offerings by developing effective marketing and promotional activities and developing strategic relationships. We intend to continue to increase the scope of our operations while also facing the challenge of maximizing resources effectively. PRODUCTS -------- Commander Call Control System The Commander call control system is built on SciDyn'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 models are designed for the small to midsize 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. Commander call control systems are supported by an integrated array of administrative and investigative programs that provide a management solution suite. All programs interact in real-time with Commander calls and databases via an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN). Commander provides state of the art call control and some of the first tools targeted at investigation and law enforcement in the inmate telephone control industry. The Commander Live Monitoring, Debit and, Recording continue to be some of the leading features required within the industry today. The latest software release for Commander enhances the debit capability of the product by providing an extensive pre-paid card system. The new DebitCard feature set provides flexible capability in card creation and management. DebitCard supports specialized tariffs and call timing. By being totally integrated with the Commander, no external network facility is necessary. This provides complete control and security when using pre-paid cards. None of the Commander call control functions are jeopardized when a pre-paid card is used. Currently under development is the next generation Commander system. This next generation Commander will be produced on the latest technology and provide greater capabilities for new features. This generation of Commander system will introduce SciDyn's first totally internal recording solution. This new recording component will provide great cost savings over the traditional recording equipment used today. This generation of Commander will no longer be assembled exclusively from components purchased from a single vendor. Currently two vendors have been selected to source components in the next generation Commander. This will provide SciDyn greater flexibility and reliability in producing and supporting new systems. -6- Also in development is the integration of new biometric technology interfaces to the Commander. Biometric technology is fast becoming a realistic tool for increasing system security at many levels. SciDyn and the Commander product will lead the industry with practical and effective biometric solutions. Development will also continue in the area of more powerful investigative tools. The Investigator's File Cabinet will provide a single repository for storing call records, recordings and other documents related to a specific case or investigation. SciDyn continues to explore opportunities with the major telephone companies in providing the Commander inmate phone control system with call transaction (price per call) programs. Management believes that the recent and continued drive to develop new capabilities for the Commander will establish the Commander and SciDyn as the leader in inmate telephone control. IP Telephony One of the impacts of IP Telephony has been that of driving the convergence of the IT and telecom markets. This together with the dramatic over capacity in the bandwidth market place and the corresponding reduction of demand in the IP telephony and networking product has meant that Scidyn has taken the decision not to compete directly against the large manufactures of such equipment. SciDyn's modular approach to the design of these "next generation" has positioned it well to now focus on adding value and driving toward the promise of enhanced functionality that these converged network can ultimately provide. Building on it's core BubbleLINK(R) technology the company is continuing to develop products, concepts and services that will bring such enhanced value added propositions to those systems provided by the larger suppliers of networking equipment. The SciDyn modular architecture 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. The IP Integrator gateway product line addresses the various market segments. The IntegratorC-2100(R) Series focus is corporate enterprises, the IntegratorC-2300(R) Series focus is large ISPs and Telco Carriers and the IntergratorC-2500(R) Series focus is intended to address the needs of PTT/Telco Carriers. 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. 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. During 2001 the Integrator product was enhanced with additional capabilities. System enhancements included support for SNMP, Radius Authentication and Interoperability testing with various other vendor products. The system hardware was revised and a cost reduction cycle was executed to lower the per-port cost and conversely the entry-level price of the IntegratorC-2300(R). Due to the slowdown of Internet Telephony networks, development efforts in this area have been re-directed to align with areas in which Internet telephony has managed to sustain growth. Specifically the enterprise marketplace including IP-PBX and inter-office gateway applications. SciDyn is exploring this market and developing technology to supplement these applications. SciDyn expects to make new product announcements in this area later this year or in early 2003. -7- MinuteMan The MinuteMan product, built on SciDyn's core BubbleLINK(R) technology, is a complete turnkey system providing all aspects of a pre-paid and debit card platform. MinuteMan provides PSTN interface, card databases, IVR and SMDR collection. The MinuteMan is ideal for smaller pre-paid card vendors that want to break free from the resale only mode of the card business. MinuteMan is also the ideal front end for VoIP carriers that are looking to complete their offerings for low cost international traffic. Most VoIP Gateways do not offer a robust solution for pre-paid calling. Most of these carriers have been forced to purchase or lease expensive adjunct systems to integrate pre-paid solutions into their VoIP networks. The MinuteMan provides all of the necessary functions to convert an existing VoIP toll bypass network into a full-featured international pre-paid network. Voice Response System SciDyn'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 non-BubbleLINK(R) 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. SciDyn maintains a small but steady revenue from the maintenance of VRS and VRI platforms. There are currently several hundred of these systems still actively installed and operational. SciDyn is currently investigating the need to provide a technology upgrade to customers using these traditional platforms. Product Development New applications are also being investigated within our product development team. We believe that new vertical markets exist and can be penetrated with ongoing platform enhancements. We believe that the robust capabilities of our current technology along with the ability to integrate a voice over packet interface can combine traditional network systems with new market requirements. SciDyn's products have primarily been designed and developed by its internal engineering staff. SciDyn 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 SciDyn to maintain its competitive position. SciDyn 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. SciDyn 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, the MinuteMan pre-paid card system, and the IntegratorC-2000(R) Series of IP Telephony gateway products. Management believes that the product design strategy will keep SciDyn competitive in the changing communications marketplace. -8- 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. SciDyn continues to market the VFX-250S products in markets where ISDN and leased-line services are not available or are cost prohibitive. As Frame Relay becomes more prolific, so does the need for value added services to maximize the efficiency of the network. In June, a contract was signed with Mercury Corporation for exclusive rights to distribute the VFX within Korea. The first systems have been shipped and are current undergoing the approval process in Korea. We have had additional sales in Germany, China, Mexico, Brazil, Peru and Canada, extending the reach of the VFX across six continents. We expect continued sales from these opportunities to proceed steadily throughout the year. Error Correction Algorithm In 1999, SciDyn 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 (FEC) is designed to reduce costly retransmission and can be utilized across various data transport mediums. 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. We intended to make the patent available to others on a royalty basis. SciDyn has explored the use of its FEC patent with several entities during the past few years. We have continually been advised that the prime difficulty of incorporating this new method of Error Correction is that it is so different in approach and incompatible with the long used Reed-Solomon Error correction system. It is difficult to supplant Reed-Solomon, particularly in today's Telecom environment. In spite of the advantages of lower cost, smaller footprint because of fewer components, and the inherent better correction performance, uprooting R-S would be a major undertaking. The SciDyn FEC must be at both ends of the data stream. This, in turn, means that only new installations are candidates for the Company's system. To date a suitable entity has not been identified to exploit this new technology in the near term. SciDyn's near term strategy and capital priorities preclude it from investing additional time and funds into exploiting this patent independently. As stated in previous reports its carrying value of $89,700 has been written off. SciDyn believes that the underlying patent may still have practical applications. -9- RESULTS OF OPERATIONS --------------------- The following table summarizes the basic results of operations for the periods indicated in the Consolidated Statement of Operations. Six Months ended June 30, 2002 (unaudited) compared to the Six Months ended June 30, 2001 (unaudited). Six Months Ended June 30, 2002 2001 ---- ---- Sales $655,878 $372,614 Net (Loss) (1,394,493) (2,735,928) Net (Loss) Per Share $(0.05) $(0.15) OPERATING EXPENSES PERCENT OF SALES 2002 2001 2002 2001 ---- ---- ---- ---- Cost of Goods Sold $ 276,642 $ 288,526 42% 77% Research & Development 423,071 754,790 65% 203% Sales, General & Admin 1,089,126 1,839,340 166% 494% Total Operating Costs and Expenses $1,788,839 $2,882,656 273% 774% Sales for the six months ended June 30, 2002 were $655,878 an increase of $283,264 from sales of $372,614 for the six months ended June 30, 2001. Our revenue in 2002 was predominantly derived from the Commander Product Line with sales of the VFX Product Line progressively increasing. The sales results in the six months ended June 2001 were the result of the loss of the Cascadent contract. Cost of Goods Sold decreased to $276,642 in the six months ended June 30, 2002 from $288,526 in the corresponding six months ended June 30, 2001. The decrease in the cost of goods sold was related to the decrease in overhead. The percentage decrease of cost of goods sold as a percentage of sales was due to the increase in sales and improved margins on the Commander and VFX product lines. Research & Development expenses decreased to $423,071 in the six months ended June 30, 2002 as compared to $754,790 in the comparable six months ended June 30, 2001. The decrease in research and development expenses during the first six months of 2002 was due to the reduction in the development staff for the IP Telephony Integrator product line. The sales revenue potential of the IP product line was long term and we had to reduce our expenses to survive in this very difficult market place. We believe that continual enhancements of our products will be required to enable SciDyn to maintain its competitive position. SciDyn intends to focus its principal future product development efforts on developing new, innovative, technical products and updating existing products in the communications arena which will enable the Company to explore other established markets that are considered "safe" from the telecom disruption currently facing the industry. -10- One such market is the pre-paid and debit calling card industry. In June, we introduced the MinuteMan Calling Card/Billing System, which is described above in the product section. Sales, General & Administrative expenses decreased to $1,089,126 in the six months ended June 30, 2002, compared to $1,839,340 in the six months ended June 30, 2001. The decrease is related to a reduction in force and other cost saving initiatives. Interest Expense in the first six months ended June 30, 2002 is interest accrued on our convertible notes, paid on the line of credit and the interest due for the loans from two stockholders. Finance Expense in the first six months ended June 30, 2002 was $191,204. The finance expense includes $135,176 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible notes issued between February 6, 2002 and June 20, 2002. The finance expense also includes the amortization of the finance cost. Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," this beneficial conversion feature was assigned an intrinsic value of $135,176, 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. 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 June 30, 2002 (unaudited) compared to the Three Months ended June 30, 2001 (unaudited). Three Months Ended June 30, 2002 2001 ---- ---- Sales $186,081 $178,501 Net (Loss) (622,110) (1,471,455) Net (Loss) Per Share $(0.02) $(0.08) OPERATING EXPENSES PERCENT OF SALES 2002 2001 2002 2001 ---- ---- ---- ---- Cost of Goods Sold $ 91,838 $ 151,679 49% 85% Research & Development 165,339 334,268 89% 187% Sales, General & Admin 466,801 938,123 251% 526% Total Operating Costs and Expenses $ 723,978 $1,424,070 389% 798% -11- Sales for the three months ended June 30, 2002 were $186,081 an increase of $7,580 from sales of $178,501 for the three months ended June 30, 2001. Our revenue in the three months ended June 2002 was predominantly derived from the Commander Product Line with sales of the VFX Product Line progressively increasing. Contributing factors to the sales performance in the second quarter ended June 30, 2002 were the overall reduction in capital spending for products and services in the telecom industry and the continued economic downturn. The sales results in the second quarter of 2001 were due to a combination of the slowdown in telecommunications spending and the loss of the Cascadent contract. Cost of Goods Sold decreased to $91,838 in the three months ended June 30, 2002 from $151,679 in the corresponding three months ended June 30, 2001. The decrease in the cost of goods sold was related to the decrease in overhead. The percentage decrease of cost of goods sold as a percentage of sales was due to the increase in sales and improved margins on the Commander and VFX product lines. Research & Development expenses decreased to $165,339 in the three months ended June 30, 2002 as compared to $334,268 in the comparable three months ended June 30, 2001. The decrease in research and development expenses during the three months ended June 2002 was due to the reduction in the development staff for the IP Telephony Integrator product line. The sales revenue potential of the IP product line was long term and we had to reduce our expenses to survive in this very difficult market place. We believe that continual enhancements of our products will be required to enable SciDyn to maintain its competitive position. SciDyn intends to focus its principal future product development efforts on developing new, innovative, technical products, updating existing products in the communications arena, which will enable us to explore other established markets. The MinuteMan Calling Card/Billing System, which is described above in the product section, was introduced in June to address the pre-paid and debit calling card industry. Sales, General & Administrative expenses decreased to $466,801 in the three months ended June 30, 2002, compared to $938,123 in the three months ended June 30, 2001. The decrease is related to a reduction in force and other cost saving initiatives that were implemented. Interest Expense is interest accrued on our convertible notes, paid on the line of credit and the interest due for the loans from the two stockholders. Finance Expense in the three months ended June 30, 2002 was $47,511. The finance expense includes $18,706 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible note issued on June 20, 2002. The finance expense also includes the amortization of the finance cost. Per Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," this beneficial conversion feature was assigned an intrinsic value of $18,706, 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. -12- LIQUIDITY AND CAPITAL RESOURCES: ------------------------------- Cash and cash equivalents decreased to $13,073 for the six months ended June 30, 2002 from $17,075 at December 21, 2001. Net cash used for operating activities was $587,436 during the six months ended June 30, 2002 compared to $2,041,134 in the corresponding six months ended June 30, 2001. Net cash used in investing activities was $133,455 for the six months ended June 30, 2002 compared to $109,176 in the corresponding six months ended June 30, 2001. Net cash provided by financing activities in the six months ended June 30, 2002 amounted to $716,889. This compares to $986,443 in the corresponding six months ended June 30, 2001. The cash requirements for funding our operations have greatly exceeded cash flows from operations. We have satisfied our capital needs primarily through issuance of convertible debentures and equity financing. Our liabilities consist of over extended accounts payable, arrearages to the landlord and we are in default on the capital lease obligation. We are attempting to negotiate payment arrangements with our vendors, landlord and an alternate arrangement with the leasing company. We cannot guarantee that any of these discussions will be successful. If we are unable to obtain successful negotiations, our business may well be severely affected. The short-term loan payable consists of loans from two stockholders. One stockholder has agreed to exchange debt for equity and the other stockholder is taking it under advisement. The equipment against the customer deposits have not been shipped to date as the customer has two delivered systems they have not yet deployed. The bank line of credit has been converted to a Loan and shall be repaid over a term of three years during which we shall make equal monthly payments of $3,046.79 each, including interest, which for the purpose of maintaining level monthly payments has been calculated at the assumed rate of 6.25% per annum. Monthly payments shall commence on the tenth (10th) day of July 2002 and continue on the same day of each month thereafter during the term with a final payment to be due and payable on the tenth (10th) day of June 2005. This final payment shall consist of all unpaid principal and any interest which shall have accrued thereon. We are seeking and continually investigating other business ventures and strategic relationships that may have applications directly related to our product offerings. Due to general economic conditions, rapid technological advances being made in the telecom industry and shortages of available capital we believe other companies will be seeking joint ventures and partnerships to augment their sales potential. We anticipate that we may be able to participate in only limited potential business ventures because we have nominal assets and limited financial resources. However, we believe perceived benefits of our technology will provide the interest to implementing joint ventures. Our failure to develop strategic relationships could inhibit our ability to grow. We believe that, in order to market our technology, we need to enter into strategic relationships and business ventures to develop commercial applications of our technology directed at other vertical markets. We intend to concentrate on identifying preliminary prospective business opportunities, which may be brought to our attention through present affiliations and relationships. We do not presently have any agreements relating to strategic relationships, we may never enter into such agreements, and our failure to develop such relationships could impair our ability to grow. We may be unable to respond to the rapid technological changes in our industry. Rapidly changing technologies, frequent new product and service introductions and evolving industry standards characterize the telecom and telecommunications industries. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance, features and reliability of our services, particularly with respect to other companies. -13- The sales revenue shortfall has greatly impacted cash on hand. SciDyn's currently anticipated levels of revenue and cash flow are subject to many uncertainties and cannot be assured. In order to have sufficient cash to meet our anticipated cash requirements for the next twelve months we must increase sales to provide cash flow from operations. We have reduced our expenses and continue to investigate further cost cutting initiatives. However, SciDyn does not have sufficient cash on hand to continue its operations without successfully raising additional funds to implement the business plan. The inability to generate sufficient cash from operations or to obtain the required additional funds could require SciDyn to reduce or curtail operations. While negotiations are underway to secure additional funds, SciDyn cannot guarantee that such negotiations will be successful. Forward Looking Statements -------------------------- The Company is making this statement in order to satisfy the "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995. This Form 10-QSB includes forward-looking statements relating to the business of SciDyn. Forward-looking statements contained herein or in other statements made by SciDyn are made based on management's expectations and beliefs concerning future events impacting SciDyn and are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by forward-looking statements. The Company believes that the following factors, among others, could affect its future performance and cause actual results of the Company to differ materially from those expressed in or implied by forward-looking statements made by or on behalf of the Company: (a) the effect of technological changes; (b) increases in or unexpected losses; (c) increased competition; (d) fluctuations in the costs to operate the business; (e) uninsurable risks; and (f) general economic conditions -14- PART II. OTHER INFORMATION SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES --------------------------------------------- Item 1. Legal Proceedings No material developments. Item 2. Changes in Securities RECENT SALES OF UNREGISTERED SECURITIES The securities described below represent our securities sold by us for the period ending June 30, 2002 that were not registered under the Securities Act of 1933, as amended, (the "Securities Act") all of which were issued by us pursuant to exemptions under the Securities Act. Underwriters were involved in none of these transactions. Private Placements of Common Stock and Warrants for Cash None. Sales of Debt and Warrants for Cash From January 1, 2002 to June 30, 2002, we entered into securities purchase agreements with one accredited investor, Laurus Master Fund, Ltd. for the issuance of 8% convertible debentures in the aggregate amount of $768,880. Date Conv Notes ------------------------------------- 2/6/2002 $ 50,000 2/8/2002 $ 94,000 2/13/2002 $ 30,000 2/20/2002 $ 131,500 3/25/2002 $ 147,380 3/27/2002 $ 98,800 3/28/2002 $ 75,250 4/1/2002 $ 35,950 6/20/2002 $ 106,000 Total 2002: $ 768,880 ------------------------------------- The debentures were convertible into common stock at a conversion price of the lower of 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to the closing date or 85% of the average of the three lowest closing bid prices for the common stock thirty days prior to conversion. The commission for the transactions were 8%. The offering of convertible debentures was exempt from registration under Rule 506 of Regulation D and under Section 4(2) of the Securities Act. No advertising or general solicitation was employed in offering the securities. All persons were accredited investors, represented that they were capable of analyzing the merits and risks of their investment. -15- Option Grants None. Issuances of Stock for Services or in Satisfaction of Obligations 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) Exhibits. Exhibit Number Description -------------- ----------- 99.1 Certification of the Chief Executive Officer of Science Dynamics Corporation Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer of Science Dynamics Corporation Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports on Form 8-K were filed during the fiscal quarter ended June 30, 2002. -16- 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. SCIENCE DYNAMICS CORPORATION BY: /s/ Alan C. Bashforth --------------------- CEO/President DATED: August 12,2002 -------------- In accordance with the Securities 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/ Alan C. Bashforth CEO/President August 12, 2002 --------------------- Chairman of the Board --------------- Alan C. Bashforth Secretary BY: /s/ Joy C. Hartman CFO August 12, 2002 --------------------- --------------- Joy C. Hartman -17-