10QSB 1 qsb3q2003.txt 10QSB PERIOD ENDING SEPTEMBER 30, 2003 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, 2003 ------------------ [ ] 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.) 7150 N. Park Dr, Suite 500 Pennsauken, NJ 08109 ----------------------------------------------------- (Address of principal executive offices) ( 856 ) 910-1166 ----------------------------------------------------- (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 CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 11/13/2003 41,428,655 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 September 30, 2003 (unaudited) 1 and December 31, 2002 (audited) Consolidated Statements of Operations for nine months and three Months Ended September 30, 2003 (unaudited) and nine months ended and three months September 30, 2002 (unaudited) 2 Consolidated Statements of Cash Flows for six months ended 3 September 30, 2003 (unaudited) and six months ended September 30, 2002 (unaudited) Notes to Consolidated Financial Statements 4 - 5 Item 2. Management's Discussion and Analysis of Financial 5 - 12 Condition and Results of Operations Item 3. Controls and Procedures 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports 14 - 15 Item 7. Signatures 16 Item 1. Financial Statements SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS September 30, December 31, 2003 2002 Unaudited Audited --------- ----------- Current assets: Cash and cash equivalents $ 16,742 $ 43,141 Accounts receivable - trade 555,567 46,428 Inventories 237,336 205,551 Other current assets - 28,275 ----------- ---------- Total current assets 809,645 323,395 ----------- ---------- Property and equipment,net 361,167 514,417 Deferred Financing costs 89,324 149,068 Other assets - 17,370 Goodwill 500,997 - ----------- ---------- Total assets $ 1,761,133 $1,004,250 =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term payable $ 256,860 $ 128,413 Current portion of convertible note 185,500 185,500 Bank Note 33,550 33,550 Customer deposits 56,152 286,990 Deferred Income 82,658 - Revolving Credit Line 203,500 - Short term loan payable 163,192 163,192 Accounts payable 1,867,269 1,214,792 Accrued expenses 522,989 413,534 ----------- ---------- Total current liabilities 3,371,670 2,425,971 ----------- ---------- Long term liabilities: Long term Debt 569,466 - Non current portion of bank note 26,074 50,326 Convertible Debenture 1,874,861 1,653,815 ----------- ---------- Total liabilities 5,842,071 4,130,112 ----------- ---------- Minority Interest - - Shareholders' equity (deficit) Preferred Stock - .01 par value 10,000,000 shares authorized - - No shares issued Common stock - .01 par value, 200,000,000 and 45,000,000 shares authorized, 41,554,455 and 41,254,455 issued 41,428,655 and 41,128,655 outstanding in 2003 and 2002 respectively. 415,545 412,545 Additional paid-in capital 15,754,478 15,546,611 Reserve for stock compensation - 160,909 (Deficit) (19,853,128) (18,848,094) ----------- ---------- (3,683,105) (2,728,029) Common stock held in treasury, At cost (397,833) (397,833) ----------- ---------- Total shareholders' equity (deficit) (4,080,938) (3,125,862) ----------- ---------- Total liabilities and shareholders'Equity $ 1,761,133 $ 1,004,250 =========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-1- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Months Ended Three Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES $2,797,047 $ 812,143 $1,022,162 $156,266 ---------- --------- ---------- -------- Operating costs and expenses: Cost of sales 1,527,241 357,611 756,653 80,969 Research and development 303,138 593,707 89,545 170,636 Selling, general and administrative 1,662,409 1,258,679 511,671 324,536 Depreciation 227,312 225,115 55,649 70,113 ---------- --------- ---------- -------- 3,720,100 2,435,112 1,413,518 646,254 ---------- --------- ---------- -------- Operating (loss) (923,053) (1,622,969) (391,356) (489,988) Other income (expenses): NJ NOL refund 146,000 90,000 146,000 90,000 Other Income 499 - (1,221) - Interest Expense (125,013) (120,577) (61,168) (50,250) Finance Expense (103,465) (311,193) (22,477) (119,989) ---------- --------- ---------- -------- Net (loss) $(1,005,032) $(1,964,739) $(330,222) $(570,227) ========== ========= ========== ======== Net (loss) per common share basic and diluted $ (0.02) $ (0.07) $ (0.01) $ (0.02) ========== ========= ========== ======== Weighted average shares outstanding basic and diluted 41,418,655 27,889,860 41,418,655 27,889,860 The accompanying notes are an integral part of these consolidated financial statements.
-2- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30 2003 2002 ---- ---- Cash flows from operating activities: Net (loss) $(1,005,032) $(1,964,199) ----------- ---------- Adjustments to reconcile net (loss) to net cash provided by (used for) operating activities: Depreciation 227,312 255,115 Interest expense non cash Financing expense non cash 103,465 311,193 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (509,140) (53,669) Other receivable - 60,721 Inventories (31,785) 85,699 Other current assets 28,275 90,884 Other assets 17,370 - Increase (decrease) in: Accounts Payable and accrued expenses 761,932 484,869 Short term payable (66,864) - Deferred Income 82,658 - Customer deposits (230,838) (148,772) ----------- ---------- Total adjustments 382,385 1,086,040 ----------- ---------- Net cash provided by (used for) operating activities (622,647) (878,699) ----------- ---------- Cash flows from investing activities: Purchase of property and equipment - net - (133,455) ----------- ---------- Net cash (used) in investing activities - (133,455) ----------- ---------- Cash flows from financing activities: Increase (decrease) in Line of Credit - (7,885) Issuance of Convertible Debt 217,000 1,082,421 Short term loan Payable 175,748 (37,000) Revolving Credit Line 203,500 - ----------- ---------- Net cash (used in) provided by financing activities 593,593 1,037,536 ----------- ---------- Net increase (decrease) in cash and cash equivalents (26,399) (4,618) Cash and cash equivalents - beginning of period 43,141 17,075 ----------- ---------- Cash and cash equivalents - end of period $ 16,742 $ 12,457 =========== ========== The accompanying notes are an integral part of these consolidated financial statements.
-3- SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Operations and Summary of Significant Accounting Policies --------------------------------------------------------- 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, 2002. 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. Description of Business ----------------------- Science Dynamics Corporation (the "Company", "SciDyn" or "Science Dynamics") was incorporated in the State of Delaware May 1973 and commenced operations in July 1977. The Company began as a provider of specialized solutions to the telecom industry. Throughout its history SciDyn has adapted to the changes in this industry by reinventing itself to be more responsive and open to the dynamic pace of change experienced in the broader converged communications industry of today. Currently SciDyn still provides advanced solutions for several vertical markets. The greatest change in operations is in the shift from being a component manufacture to a solution provider focused on developing applications through software on our core platform technology. Science Dynamics Corporation formed a subsidiary M3 Acquisition Corp. (M3) and has acquired Modern Mass Media, which was established in July 1, 1970 and was incorporated in the State of New Jersey. Modern Mass Media (MMM) is a company with a 30-year history of selling media solutions to some of the most widespread corporations in the Northeast. Since the company's inception in the early 1970s, it has been a leader in providing audio/video technology to corporate clients that span the spectrum from finance and advertising to healthcare and pharmaceuticals. MMM has also provided and continues to provide solutions to public institutions from local governments to educational institutions such as regional school boards and colleges. Principles of Consolidations ---------------------------- The consolidated financial statements included the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained. All significant intercompany accounts and transactions have been eliminated in consolidation. For those consolidated subsidiaries where Company ownership is less than 100%, the outside stockholders' interests are shown as minority interests. Investments in affiliates over which the Company has significant influence but not a controlling interest are carried on the equity basis. -4- 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. 2. Acquisition of Assets --------------------- Science Dynamics Corporation through its newly formed subsidiary, M3 Acquisition Corp. (M3) has acquired certain business assets and liabilities of Modern Mass Media, Inc. (MMM), a privately held company based in Florham Park, NJ. The acquisition builds on SciDyn's core competencies and helps diversify its product offering. The Company filed the consolidated financial information on Form 8-K, which reflected proforma statements for the period ended March 31, 2003. 3. Segment Reporting ----------------- Management views its business in two divisions, the software engineering division and the audiovisual division.
Nine Months Nine Months Three Months Three Months Ended Ended Ended Ended September 30, 2003 September 30,2002 September 30, 2003 September 30,2002 ------------------ ----------------- ------------------ ----------------- Revenue Audio Visual Division $ 1,874,666 - $ 798,599 - Software Technology Division 922,381 812,143 223,563 156,266 ------------- ------------ ----------- ----------- Total Consolidated Revenue $ 2,797,047 $ 812,143 $ 1,022,162 $ 156,266 ------------- ------------ ----------- ----------- Net Loss Audio Visual Division $ 297,914 - $ 192,957 - Software Technology Division 707,118 1,964,739 137,265 570,227 ------------- ------------ ----------- ----------- Total Consolidated Net Loss $ 1,005,032 $ 1,964,739 $ 330,222 $ 570,227 ------------- ------------ ----------- ----------- Assets Audio Visual Division $ 1,194,136 - $ 1,194,136 - Software Technology Division 566,997 1,237,778 566,997 1,237,778 ------------- ------------ ----------- ----------- Total Consolidated Assets $ 1,761,133 $ 1,237,778 $ 1,761,133 $ 1,237,778 ------------- ------------ ----------- -----------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2003 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002. Business Overview ----------------- On March 31, 2003, Science Dynamics Corp. (the "Company") through its newly formed 80% majority owned subsidiary, M3 Acquisition Corp., acquired certain business assets and assumed certain liabilities of Modern Mass Media, Inc., a privately held company based in Florham Park, NJ. M3 Acquisition, doing business as Modern Mass Media, Inc., is in the business of providing audio/video technology that includes consultation, custom engineering, facility design, audio/visual products, installation, testing, and user training and repair service. -5- The Company developed its position as a leader in the delivery of audio and visual systems solutions by providing complete turnkey solutions. From its inception MMM has offered design, fabrication and installation of multi media and video presentation systems, rental and repair services supported by a highly trained, professional and experienced staff. As the need for advanced business communications continued to grow and became more sophisticated, so to has MMM's offering. The need for professional assistance in the selection of the appropriate audio/video equipment and the support services of that equipment has become increasingly important. With our diversified product and service offerings, MMM has become a vendor of choice to a widespread client base. Modern Mass Media's management continues to focus their efforts on reducing operating costs while maintaining the company's gross margin. During the third quarter of 2003, we made additional cost reductions and began to leverage synergies between MMM and Science Dynamics telecom division. In addition, we have been solidifying relationships with key vendors that will enable us to offer value add solutions to the existing customer base. This strategy will help the company focus on higher margin business while providing distinctive differentiators from its current competitors. The Company's telecom technology division has focused efforts to expand its position within the inmate phone control market. New emphasis has been placed on updating existing products and services in this market and to embark on developing new solutions paced with the current direction of the inmate phone control market. The company's efforts have started to result in more consistent opportunities in the inmate market as service providers begin to view the company as a supplier of innovative solutions for this market. The Company expects operating losses and negative cash flow for the foreseeable future as we must obtain orders, introduce additional services and create optional procurement methods. We believe that increasing our revenues will depend in large part on our ability to offer products and services that are attractive to our customers, increase customer awareness of our product offerings by developing effective marketing and promotional activities and develop strategic relationships. PRODUCTS AND SERVICES --------------------- The Company's audiovisual integration segment is now focusing efforts on providing the following value added services to its customer base: Turnkey Audio/Visual System Design and Implementation MMM's turnkey solutions provide complete solutions to customers from the initial design all the way through to the implementation, training and on- going maintenance. Service With MMM's service team MMM customers receive customized service level agreements to ensure an optimized level of service for all their audio\visual needs. Customers have the comfort of being backed by a service team that has the capabilities to provide everything from board level repairs to complete equipment replacement. Staging and Rental Our staging and rental group provides a full array of equipment and services to meet our clients' temporary and special situations' needs. With access to a full inventory of projection and video equipment we can meet our client rental needs for daily, weekly or monthly periods. Design and Engineering With our Design and Engineering team MMM provides our customers with a complete designed and engineered audio/visual solution tailored to their needs. In addition, our engineering team works closely with a customer's architect or consulting team to ensure our solutions seamlessly integrate into the customer's environment. -6- The Company's software technology segment continues to focus its efforts on its core competencies: Commander Call Control System The Commander call control system is built on SciDyn's unique BubbleLINK(c) 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 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. As with all of the Commander feature sets, integrity of the system is not compromised with the use of pre-paid cards. Currently under development is the next generation Commander system. The next generation Commander will be produced on the latest technology and provide greater capabilities for new features. This new Commander system will introduce SciDyn's first totally internal recording solution. The fully integrated 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. 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. Development has begun on a new Commander system targeted at multi-facility centralized control. This solution will allow Inmate phone providers to offer all of the Commander features including the extensive call control, debit, and pre-paid solutions to the smallest facilities. This system provides an aggregated point of switching and control for the provider, minimizing on-site equipment and maintenance costs. The Commander will still maintain per facility branding and rating without the need for dedicated switching equipment at the institution. -7- 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. MinuteMan The MinuteMan product, built on SciDyn's core BubbleLINK(c) 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. MinuteMan development is continuing based on requirements from customers and other industry trends. Enhancements to the original MinuteMan include expanded rating capabilities for specialized charges and dynamic rates. A second-generation MinuteMan platform is currently in the integration test stage. This next generation platform is built on the industry standard Compact PCI architecture. This solution provides an even higher level of system reliability and maintainability. This version of the MinuteMan will provide higher density within a single chassis as well as the ability to dynamically add new resources to the switch and provision new services with out taking the system offline. New applications for the MinuteMan will be released this year expanding the service offerings of the platform beyond traditional Pre-Paid calling cards to account based calling and calling card services, making the MinuteMan a versatile revenue source for the owner and operator. The latest releases of the MinuteMan also provide greater flexibility in system integration with support for various database technologies. Support will be provided for Microsoft SQL Server, the open source MYSQL server, and the original embedded data engine of the MinuteMan. All applications developed for the MinuteMan will operate on any of the supported database solutions. This allows system owners to operate at a cost and performance level, which they feel appropriate. A specialized version of MinuteMan has been developed and deployed for use in the Inmate Marketplace. This version provides an Inmate Phone Service provider with a centralized system to switch and manage pre-paid calling from all of it's contracted facilities. This Version of MinuteMan capitalizes on SciDyn's years of experience in inmate phone control to provide a full featured pre-paid switch without compromising the security and fraud protection required for this specialized calling application. IP Telephony SciDyn has continued efforts in the development of Voice over Internet technology. The focus of these efforts revolves around upgrading existing product technology and adapting the technology into new and existing applications. IP technology is being deployed within the Commander system at specific installations. This is a major step in the Inmate phone control industry, and SciDyn is at the forefront of this technology. SciDyn is also in the process of adding direct IP trunking capability to the MinuteMan platform. Additionally SciDyn will be enhancing the MinuteMan with a complete Radius interface to allow any Voice Over IP gateway that supports this common protocol to use the MinuteMan as a centralized platform to create and manage pre and post paid services. -8- Video over Frame Relay The market for the VFX has not flourished due to International economic conditions. The lifecycle of this product is at the mature stage and the company has resolved against devoting any resources to further development. The company has decided to discontinue this product after exhausting the stock. 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, 2003 (unaudited) compared to the Nine Months ended September 30, 2002 (unaudited). Nine Months Ended September 30, 2003 2002 ---- ---- Sales 2,797,047 812,143 Net (Loss) (1,005,032) (1,964,739) Net (Loss) Per Share $ (0.02) $ (0.07) OPERATING EXPENSES PERCENT OF SALES 2003 2002 2003 2002 ---- ---- ---- ---- Cost of Goods Sold 1,527,241 357,611 54.6% 44.0% Research & Development 303,138 593,707 10.9% 73.1% Sales, General & Admin. 1,662,409 1,258,679 59.4% 155.0% Depreciation 227,312 225,115 8.1% 27.7% Total Operating Costs and Expenses 3,720,100 2,435,112 133.0% 299.8% Sales for the nine months ended September 30, 2003 were $2,797,047, which includes revenue from the acquired audiovisual division for the six months commencing April 1, 2003, compared to SciDyn revenue of $812,143 for the corresponding nine months ended September 30, 2002. Sales from our audiovisual division for the period ended September 30, 2003 was $1,874,666 and $922,381 was derived from our software technology division. Sales from the audiovisual division were strongest in the equipment sales and engineering fabrication areas with sales from our technology division resulting from the commander line and licensing of our technology. -9- Cost of Goods sold increased to $ 1,527,241 in the nine months ended September 30, 2003 from $357,611 in the corresponding nine months ended September 30, 2002. These costs include the expenses for the six months commencing April 1, 2003 of Modern Mass Media. Costs of $1,315,640 were derived from our audiovisual division and costs of $211,601 were derived from our software technology division. The increase in the cost of goods sold is associated with lower profit margins from our audiovisual division with the software technology division maintaining a higher profit margin. Research & Development expenses decreased to $303,138 in the nine months ended September 30, 2003 as compared to $593,707 in the comparable nine months ended September 30, 2002. The research and development expenses are entirely derived from the software technology division. The decrease in research and development expenses during the nine months of 2003 reflects the full implementation of cost cutting measures and strategies. In addition the reduction in the development staff for the IP Telephony Integrator product line occurred in the first quarter of 2002. Sales, General & Administrative expenses increased to $1,662,409 in the nine months ended September 30, 2003, compared to $1,258,680 in the nine months ended September 30, 2002. These expenses include the expenses for the six months commencing April 1, 2003, of Modern Mass Media. Selling, general and administrative costs of $817,470 were derived from our software technology division and $844,939 was derived from our audiovisual division. The increase is a result of the additional overhead from Modern Mass Media. Overall the Company has reduced its operating requirements by streamlining its operations and continuing to implement cost cutting initiatives. Depreciation expenses increased to $227,312 in the nine months ended September 30, 2003, compared to $225,115 in the nine months ended September 30, 2002. Interest Expense is interest paid and accrued on the Convertible Notes, the line of credit and the interest due for the loan from a stockholder. Finance Expense in the first nine months ended September 30, 2003 was $103,465 consisting of $43,721 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible notes issued on April 1, 2003, from the Laurus Master Fund, Ltd to finance the acquisition and $59,744 relating to the amortization of the finance cost. The finance expense in the period ending September 30, 2002, includes $116,470 relating to the recognition of a debt discount resulting from a beneficial conversion feature embedded in the convertible notes from the Laurus Master Fund, Ltd issued between February 6, 2002 and April 1, 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 $43,721, 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. -10- 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 September 30, 2003 (unaudited) compared to the Three Months ended September 30, 2002 (unaudited). Three Months Ended September 30, 2003 2002 ---- ---- Sales 1,022,162 156,266 Net (Loss) (330,222) (570,227) Net (Loss) Per Share $ (0.01) $ (0.02) OPERATING EXPENSES PERCENT OF SALES 2003 2002 2003 2002 ---- ---- ---- ---- Cost of Goods Sold 756,653 80,969 74.0% 7.9% Research & Development 89,545 170,636 8.8% 16.7% Sales, General & Admin. 511,671 324,536 50.1% 31.7% Depreciation 55,649 70,113 5.4% 6.9% Total Operating Costs and Expenses 1,413,518 646,254 138.3% 63.2% Sales for the three months ended September 30, 2003 were $1,022,162 an increase of $865,896 from sales of $156,266 for the three months ended September 30, 2002. Sales from our audiovisual division for the period ended September 30, 2003 was $798,599 and $223,563 was derived from our software technology division. Sales from the audiovisual division were strongest in the equipment sales and engineering fabrication areas with sales from our technology division resulting mainly from the commander line and licensing of our technology. Cost of Goods sold increased to $756,653 in the three months ended September 30, 2003 from $80,969 in the corresponding three months ended September 30, 2002. Costs of $674,667 were derived from our audiovisual division and costs of $81,986 were derived from our software technology division. The increase in the cost of goods sold is associated with lower profit margins from our audiovisual division. Research & Development expenses decreased to $89,545 in the three months ended September 30, 2003 as compared to $170,636 in the comparable three months ended September 30, 2002. The decrease in research and development expenses during the nine months of 2003 reflects the reduction in the development staff for the IP Telephony Integrator product line that occurred in the first quarter of 2002, natural attrition and other cost cutting initiatives. -11- Sales, General & Administrative expenses increased to $511,671 in the three months ended September 30, 2003, compared to $324,536 in the three months ended September 30, 2002. Selling, general and administrative costs of $206,824 were derived from our software technology division and $304,847 was derived from our audiovisual division. The increase is a result of the additional expenses from Modern Mass Media. Overall the Company has reduced its operating requirements by streamlining its operations and is continuing to implement cost cutting initiatives. Depreciation expenses decreased to $55,649 in the three months ended September 30, 2003, compared to $70,113 in the three months ended September 30, 2002. The decrease represents the write off of certain assets in the software technology division that are no longer being utilized in the first quarter of 2003. Additionally due to our weak cash flow capital expenditures have been delayed. Interest Expense is interest paid and accrued on the Convertible Notes, the line of credit and the interest due for the loan from a stockholder. Finance Expense in the three months ended September 30, 2003 was $22,477 which consisted of amortization of finance costs. LIQUIDITY AND CAPITAL RESOURCES: ------------------------------- Cash and cash equivalents decreased to $16,742 for the nine months ended September 30, 2003, from $43,141 at December 31, 2002. Net cash used for operating activities was $622,647 during the nine months ended September 30, 2003 compared to $908,699 in the corresponding nine months ended September 30, 2002. Net cash used for operating activities consists of the net loss $1,005,032 the increase in accounts receivable and decrease in customer deposits and short term payable; offset by an increase in accounts payable, accrued expenses and deferred income. The increase in accounts payable and accrued expenses in the software technology division consists of over extended accounts payable, accrued compensation and the accrued Calabash Consulting Ltd. consultancy fee. Net cash used in investing activities was zero for the nine months ended September 30, 2003, compared to $133,455 in the corresponding nine months ended September 30, 2002. This decrease was attributable to overall budgetary restraints and postponements of capital expenditures. Net cash provided by financing activities in the nine months ended September 30, 2003, amounted to $596,248 compared to $1,037,536 in the corresponding nine months ended September 30, 2002. Net proceeds of $420,500 were directly related to the financing provided by Laurus Master Fund, Ltd for the acquisition of Modern Mass Media and the draw down of the revolving credit line. Laurus Master Funds, Ltd. agreed to make advances available to the Company in the aggregate amount of up to $1,000,000 based on accounts receivable of Modern Mass Media at an advance rate of 80% of eligible accounts receivable. Science Dynamics Corporation acquired Modern Mass Media for a purchase price of $600,000. The negotiated payment terms were $100,000 at signing, $100,000 to be paid within thirty days, of which $75,000 was paid. The remaining $400,000 is to be paid over a five-year period. The Company partially financed the acquisition through a Purchase and Security Agreement between Laurus Master Fund, Ltd. and the Company. The Company issued a convertible note on March 31, 2003, for the advancement of $247,750 with net proceeds of $217,000 at the time of the acquisition. The cash requirements for funding our operations have greatly exceeded cash flows from operations. We have satisfied our operating cash flow deficiencies primarily through debt and equity financing. The software technology division of the company is delinquent on its trade payables. The delinquency with vendors has prompted several creditors to threaten legal collection action or in some cases file a complaint and summons for amounts due on trade credit. The Company has been able to handle these complaints by negotiating extended payment schedules with some of our vendors. We have successfully negotiated payment arrangements with some of our vendors and are attempting to negotiate payment arrangements with other vendors. We cannot guarantee that any of these discussions will be successful. In addition, the creditors provide vital services and equipment that if discontinued would cause there to be disruptions in the Company's ordinary course of business and severely limit the Company's ability to conduct normal business operations going forward. -12- The sales revenue shortfall 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. 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. Management believes that the acquisition of Modern Mass Media will improve the company's cash flow as a result of the consolidation of overhead of the two companies and the restructuring that has been implemented. In addition, the software division focus on the Commander product, the inmate business, should result in longer contractual relationships with customers. This should result in more monthly recurring revenue and more consistent revenue streams from new and existing customers. The Company does not have sufficient cash on hand to continue its operations without generating sufficient cash from operations or by obtaining additional funds from other sources. The inability to generate sufficient cash from operations or to obtain the required additional funds could require SciDyn to reduce or curtail operations. The auditors have expressed a going concern opinion and the company acknowledges that concern. Management believes the recent acquisition will expand the product and service offerings and enhance SciDyn's consolidated revenue in the future. 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. Item 3. CONTROLS AND PROCEDURES. As of September 30, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Principal Executive Officer and the Principal Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Principal Executive Officer and the Principal Accounting Officer, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2003. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2003. -13- PART II. OTHER INFORMATION SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES _____________________________________________________ Item 1. Legal Proceedings None. Item 2. Changes in Securities RECENT SALES OF UNREGISTERED SECURITIES The securities described below represent our securities sold by us for the period ending September 30, 2003 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 On March 31, 2003, we entered into a securities purchase agreement with one accredited investor, Laurus Master Fund, Ltd. for (1) advances to be made by Laurus to the Company in the aggregate principal amount of up to $1,000,000, (2) the issuance by the Company of a warrant exercisable to purchase 250,000 shares of common stock of the Company and (3) issuance of 8% convertible debentures in the aggregate amount of $247,500. The debentures were convertible into common stock at a conversion price of the lower of 103% of the average closing price for the common stock three days prior to the closing date subject to adjustment. The closing fee and legal fees for the Purchase and Security Agreement were $30,000 and $750 for the escrow agent fee. 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. Date Conv Notes --------------------------------- 4/1/2003 $ 247,500 Total 2003: $ 247,500 --------------------------------- -14- 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 Item 6. Exhibits and Reports A Form 8-K/A was filed on July 16, 2003 reflecting the acquisition of certain business assets and assumed certain liabilities of Modern Mass Media, Inc. on March 31, 2003. -15- 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 / Acting CFO DATED: November 14, 2003 --------------------- 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/Acting CFO November 14, 2003 ----------------- Chairman of the Board Alan C. Bashforth Secretary -16- CERTIFICATION I, Alan C. Bashforth, CEO and President, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Science Dynamics Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2003 /s/Alan C. Bashforth, CEO, President and Acting CFO Alan C. Bashforth, CEO, President and Acting CFO -17-