UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________.
COMMISSION FILE NUMBER: 0-8632
MEDICAL DYNAMICS, INC.
----------------------------------------------------
Exact name of Registrant as specified in its charter
Colorado 84-0631765
- ------------------------------ -----------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
99 INVERNESS DRIVE EAST, ENGLEWOOD, CO 80112
- -------------------------------------- --------
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: 303-790-2990
------------
Former name, former address and former fiscal year, if changed
since last report: NA
Indicate by check mark whether the Registrant (1) has filed an annual, quarterly
and other reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter periods
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
----- ------
The number of shares outstanding of each of the issuer's classes of common
stock, as of January 31, 1997 is 7,593,392 shares, $.001 par value.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS December September
31, 1996 30, 1996
---------- ----------
CURRENT ASSETS
Cash and equivalents $1,034,000 $ 993,200
Certificate of deposit 40,000 10,000
Trade receivables, less
allowance for doubtful
accounts of $25,000 138,200 181,600
Inventories 242,400 264,400
Prepaid expenses 8,600 9,400
---------- ----------
Total Current Assets 1,463,200 1,458,600
---------- ----------
PROPERTY AND EQUIPMENT
Loaner equipment 915,800 853,800
Machinery and equipment 274,900 266,800
Furniture and fixtures 267,300 266,700
Leasehold improvements 54,500 54,500
---------- ----------
1,512,500 1,441,800
Less accumulated deprecia-
tion and amortization (1,251,000) (1,225,300)
---------- ----------
Property and Equipment, Net 261,500 216,500
---------- ----------
OTHER ASSETS
Inventories, net of allowance
for obsolescence of $210,000 450,000 450,000
Patents, patents pending and
trademarks, net of accumulated
amortization of $687,900
and $681,400 87,500 96,700
Other 20,600 14,900
---------- ----------
Total Other Assets 558,100 561,600
---------- ----------
TOTAL ASSETS $2,282,800 $2,236,700
========== ==========
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December, September
31, 1996 30, 1996
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 132,400 $ 217,900
Accrued expenses 54,300 77,500
Warranty reserve 15,000 15,000
Accrued royalties 30,000 -0-
------------ ------------
Total Current Liabilities 231,700 310,400
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001
par value; authorized
5,000,000 shares; none
issued and outstanding -- --
Common stock, $.001 par
value; authorized
15,000,000 shares;
issued 7,335,500
and 7,180,200 shares 7,300 7,200
Additional paid-in capital 18,176,600 17,721,900
Accumulated deficit (16,053,500) (15,723,500)
------------ ------------
2,130,400 2,005,600
------------ ------------
Treasury stock at cost
15,900 shares (79,300) (79,300)
------------ ------------
Total Stockholders Equity 2,051,100 1,926,300
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $ 2,282,800 $ 2,236,700
============ ============
See Notes to Consolidated Financial Statements
-3-
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Quarter ended Three months
December 31, ended December 31,
-------------------------------- ------------------------------
1996 1995 1996 1995
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $ 197,600 $ 163,400 $ 197,600 $ 163,400
Cost of goods sold 145,300 112,600 145,300 112,600
----------- ----------- ----------- -----------
Gross profit 52,300 50,800 52,300 50,800
----------- ----------- ----------- -----------
Other operating
revenue 6,900 30,600 6,900 30,600
----------- ----------- ----------- -----------
Operating expenses:
Selling, general
and adminis-
trative 298,700 310,000 298,700 310,000
Depreciation and
amortization 38,800 44,900 38,800 44,900
Royalties 30,000 -- 30,000 --
Research and
development 32,300 51,100 32,300 51,100
----------- ----------- ----------- -----------
399,800 406,000 399,800 406,000
----------- ----------- ----------- -----------
Operating loss (340,600) (324,600) (340,600) (324,600)
----------- ----------- ----------- -----------
Other income
(expense):
Interest income 11,100 15,400 11,100 15,400
Interest expense (500) -- (500) --
----------- ----------- ----------- -----------
10,600 15,400 10,600 15,400
----------- ----------- ----------- -----------
Loss before
income taxes (330,000) (309,200) (330,000) (309,200)
Income tax expense -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (330,000) $ (309,200) $ (330,000) $ (309,200)
=========== =========== =========== ===========
Net loss per share $ (.05) $ (.04) $ (.05) $ (.04)
=========== =========== =========== ===========
Weighted average
number of shares
outstanding 7,309,000 6,879,500 7,309,000 6,879,500
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
-4-
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
ended December 31,
--------------------------
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(330,000) $(309,200)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization 38,800 44,900
Fair value of common
stock options 13,600 --
Gain on sale of loaner
equipment -- (4,500)
Change in assets and liabilities:
Decrease in trade
accounts receivable 41,700 111,400
Increase in accrued
royalties payable 30,000 --
(Increase) Decrease in
inventory purchases (80,000) 7,300
Increase in reserve for
inventory obsolescence -- --
Change in other assets (4,900) 23,700
(Decrease) in accounts
payable, accrued expenses
and product warranty costs (108,900) (47,100)
--------- ---------
Net cash used in
operating activities (399,700) (173,500)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of
loaner equipment -- 4,500
Loss on disposal of
Loaner equipment 41,600 --
Increase in intangible assets (4,000) (23,300)
Purchase of certificate of
deposit (30,000) --
Purchase of equipment (8,500) (15,000)
--------- ---------
Net cash used in
investing activities (900) (33,800)
--------- ---------
See Notes to Consolidated Financial Statements.
-5-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three months
ended December 31,
---------------------------
1996 1995
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common
stock arising from exercise
of options $ 441,400 $ --
Net cash provided by
financing activities 441,400 --
Net Increase (Decrease) in cash
and cash equivalents 40,800 (207,300)
Cash and equivalents:
Beginning of Period 993,200 1,071,700
----------- -----------
End of Period $ 1,034,000 $ 864,400
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 500 $ --
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Loaner equipment transferred
from inventory $ 102,000 $ 23,300
=========== ===========
See Notes to Consolidated Financial Statements.
-6-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT ADJUSTMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Registrant's September 30, 1996 Form 10-KSB. The
results of operations for the periods ended December 31, 1996 and December 31,
1995 are not necessarily indicative of operating results for the full years.
The Consolidated Financial Statements and other information furnished
herein reflect all adjustments which are, in the opinion of management of the
Registrant, necessary for a fair presentation of the results of the interim
periods covered by this report. Adjustments to the financial statements were of
a normal recurring nature.
Note 2. EARNINGS PER SHARE
For the three months ended December 31, 1996 and 1995, both primary and
fully-diluted earnings per share are calculated based upon 7,308,995 and
6,879,511, respectively, average common shares outstanding. Shares issuable
under common stock options were excluded from the computation of earnings per
share because the effect was deemed to be anti-dilutive. At December 31, 1996
and 1995, the Registrant had 1,057,850 and 1,251,250, respectively, vested
common stock options outstanding. Total common stock options outstanding
(including both vested and unvested) were 1,759,969 and 1,251,250 at December
31, 1996 and 1995 respectively.
NOTE 3. INCOME TAXES
Under the provisions of the Internal Revenue Code, the Registrant has
available net operating loss and research and development tax credit
carryforwards of approximately $16,300,000 and $170,000, respectively, which
expire in varying amounts from 1997 through 2011.
The net operating loss and business tax credit carryforwards described
above give rise to a deferred tax asset of approximately $6,600,000. This asset
is recorded net of a valuation allowance of the same amount. Therefore no
amounts are reflected in the accompanying balance sheet.
-7-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 4. INVENTORIES
Inventories consist of the following at December 31, 1996 and September 30,
1996:
December 31, September 30,
1996 1996
----------- -----------
Raw materials, purchased and
replacement parts $ 450,200 $ 444,600
Finished goods 385,100 479,800
Work in process 67,100 --
Allowance for obsolescence (210,000) (210,000)
--------- ---------
$ 692,400 $ 714,400
========= =========
At December 31, 1996 and September 30, 1996, respectively, inventories of
$450,000 are classified as a long term asset in the accompanying balance sheets.
This estimate was determined by considering both historical and projected levels
of sales for goods included in inventories. A substantial portion of raw
materials is expected to be utilized for repairs of equipment sold over the past
several years. Management believes that it may take up to five years to fully
utilize this portion of the Company's inventories based upon current levels of
repairs and expected production levels of new products.
-8-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
As discussed in Note 2 to the audited financial statements as of September
30, 1996, (see the Registrant's form 10-KSB dated September 30, 1996 and the
accompanying audited financial statements), the Company has suffered recurring
losses and negative cash flows from operations. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Financial Condition. (December 31, 1996 as compared to September 30, 1996)
During the three month period ended December 31, 1996, the Registrant's net
working capital increased approximately $83,300, due primarily to the generation
of cash of $441,400 through the exercise of common stock options, offset by the
use of cash in operations and the resultant operating loss. Cash has been used
primarily to fund the general operations of the Registrant including research
and development, and to promote the sales, introduction, and marketing of
products.
Principal changes in the components of net working capital for the three
months ended December 31, 1996 consist of an increase in short term investments
by $30,000, a decrease in the accounts receivable balance by $41,700, a net
decrease in total inventory levels by $22,000 (cash purchases of $80,000 net of
a non-cash transfer of inventory to loaner and demo equipment of $102,000), and
a reduction in current liabilities by $78,700.
During the three month periods ended December 31, 1996 and 1995, the
Registrant experienced negative cash flows from operations of approximately
$399,700 and $173,500, respectively. This increase in cash used for operations
of $226,200 over the comparable quarter of last year was a result of the
following significant factors: Cash purchases of inventory increased by $80,000
during this first quarter of fiscal 1997 as compared to a reduction in inventory
levels during the first quarter of fiscal 1996 for a net increase in cash
expenditures of $87,300. Accounts payable and accrued expenses were reduced
during the first quarters of both fiscal 1997 and fiscal 1996, requiring cash
outlays of $108,900 and $47,100, respectively, for a net increase in cash
payments of $61,800 over the comparable period of last fiscal year. Trade
accounts receivable decreased by $41,700 during the first quarter of fiscal 1997
versus a decrease of $111,400 during fiscal 1996 for a net cash decrease of
$68,100 over the comparable period of last fiscal year.
-9-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
To continue the Registrant's objective of curtailing operating losses,
negative cash flow from operations and liquidity erosion further, management is
continually reviewing product profit margins and general expense accounts, and
will reduce or eliminate all non-essential expenditures. Purchasing procedures
are also in place to ensure minimized product costs and to avoid excess
inventory levels. A distribution agreement signed with Micro Medical Devices,
Inc. allows the Registrant more flexibility in matching inventory requirements
and purchases with currently anticipated sales of USES products and the Sterile
Coupler Drape, thereby reducing inventory carrying costs of these products. To
date, product sales pursuant to this agreement have been minimal. Management of
the Registrant is also continuing to seek OEM customers for all product lines.
The Company also entered into a revised license agreement with Dr. Edwin
Adair during fiscal 1995 resulting in reduced patent maintenance and other
associated costs.
Without significant sales increases, the Registrant still anticipates
negative cash flow from operations for fiscal 1997 and beyond. During fiscal
1996 cash flow deficits were funded by employee, officer, and consultant stock
option exercises. In previous years this deficit has been funded by equity
placements and loans from the Company's chairman. However, the Registrant's
ability to fund its operations will be dependant upon achieving profitability
and in generating a positive cash flow from operations. Unless the Registrant is
able to increase sales revenues, and achieve and maintain profitability during
fiscal 1997, the Registrant may be facing significant working capital shortages
beginning in fiscal year 1998. There can be no assurance that the Company will
be able to achieve this goal.
The Registrant believes that its existing capital resources are sufficient
for the current fiscal year, and the Registrant has planned no significant
capital expenditures. The Registrant is not seeking additional debt or equity
capital at this time, however there are 1,057,850 vested common stock options
outstanding as of December 31, 1996, and if exercised (of which there can be no
assurance), these options would provide varying amounts of additional working
capital to the Registrant. These options have various strike prices which range
between $1.12 and $4.00 per share and at December 31, 1996 the price of the
Company's common stock was approximately $3.20. If the Registrant does obtain
additional capital (of which there can be no assurance), the Registrant will
-10-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
be able to allocate more resources to sales and marketing efforts (including
negotiations with prospective OEM relationships), and research and development.
Results of Operations. As an aid to understanding the Registrant's
operating results, the following table indicates the percentage relationships of
principal revenue and expense items to total net sales included in the
Consolidated Statements of Operations for the three month periods ended December
31, 1996 and 1995 and the percentage changes in those items for the same
periods.
<TABLE>
<CAPTION>
As a percent of
total revenue
for the three Percentage
month period change from
ended December 31, the prior years
1996 1995 Revenue/Expense Items comparable period
---- ---- --------------------- -----------------
<S> <C> <C> <C>
100.0% 100.0% Net sales 20.9%
73.5% 68.9% Cost of goods sold 29.0%
26.5% 31.1% Gross profit 3.0%
3.5% 18.7% Other operating revenue (77.5%)
151.2% 189.7% Selling, general and admin (3.6%)
19.6% 27.5% Depreciation & amortization (13.6%)
15.2% 0.0% Royalties n/a
16.3% 31.3% Research and development (36.8%)
(172.4%) (198.7%) Operating loss 4.9%
5.4% 9.4% Other income/(expense) (31.2%)
(167.0%) (189.2%) Net loss (6.7%)
</TABLE>
Revenue. Sales for the three months ended December 31, 1996 and 1995
totaled $197,600 and $163,400, respectively, for an increase of approximately
$34,200 or 20.9%. The Registrants new intraoral dental camera, still in the
introductory stage, generated revenues of $125,200 for the first quarter of
fiscal 1997. There were no sales of this camera during the comparable period of
fiscal 1996. The following medical product groups incurred significant sales
decreases over the comparable period of fiscal 1996 in the following amounts:
general accessories $26,800, electronic video laparoscope (EVL's) $11,700,
optical catheters & accessories $40,700. The declining sales levels are due to a
lack of market acceptance for the Registrant's medical products, a decrease in
capital budget expenditures in hospitals coupled with less influence over
purchasing decisions by physicians, reduced medical marketing efforts by the
Registrant, and increased competition from other manufacturers of surgical
cameras. Domestic, non-OEM sales
-11-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
accounted for 95% and 61% of total sales, foreign sales accounted for 5.0% and
27% of total sales, and OEM sales accounted for 0% and 12% of the total sales
for the comparable periods ended December 31, 1996 and 1995, respectively.
Foreign sales for the three months ended December 31, 1996 and 1995 were
$9,700 and $44,800, respectively, for a decrease of $35,100 or 78%. This
decrease is due primarily to a decline in EVL, light source and spare cable
sales to foreign distributors in Pakistan and England. Sales to Rosot
Enterprises, the Registrant's South American representative are currently
negligible. The Company's foreign sales are derived primarily from the following
markets: South America, England, France, Australia and The Netherlands.
Cost of Goods Sold. Cost of goods sold for the three months ended December
31, 1996 and 1995 totaled $145,300 and $112,600, respectively, for an increase
of approximately $32,700 or 29.0%. Total cost of goods sold as a percent of
sales was 73.5% and 68.9%, respectively, for the same periods. The cost of goods
sold amount for both fiscal 1997 and 1996 no longer includes a significant
underapplied overhead amount for under-utilized manufacturing capacity. The
fiscal 1996 cost of sales figure reflects a reclassification of $60,400 made by
management from cost of goods sold to selling, general and administrative
expense in an effort to more accurately identify and compare standard cost of
sales. The increase of 4.6% in cost of sales is due to negative production
variances such as labor and materials. Varying sales product mixes also
contribute to the cost of sales percentage increase.
Selling, General and Administrative Expenses (SG&A). SG&A expenses for the
three months ended December 31, 1996 and 1995 were $298,700 and $310,000,
respectively, for a decrease of approximately $11,300 or 3.6%. The fiscal 1997
number includes a non cash expense of $13,600 for vesting of consultant common
stock options per FAS 123, a $41,600 writeoff of loaner and demonstration
equipment, and a $10,200 charge for bad debts. Without these non-cash expense
charges totaling $65,400, the fiscal 1997 SG&A expense would have been
approximately $233,300, or an improvement by $76,700 over fiscal 1996 expenses.
Other significant expense reductions during fiscal 1997 versus the comparable
period of fiscal 1996 include reduced depreciation and amortization charges as a
substantial amount of loaner equipment became fully depreciated during fiscal
1996, and cost cutting measures instituted by Management precipitated by lower
sales and production values. The registrant continues to reduce or eliminate
expenses in all areas when practical.
-12-
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation. (Continued)
Research and Development Costs (R&D). For the three months ended December
31, 1996 and 1995 R&D expenses were $32,300 and $51,100, respectively, for a
decrease of approximately $18,800 or 36.8%. A significant portion of this
decrease is due to a reallocation and focus of the Registrant's R&D budget
toward projects specifically related to the intraoral dental camera. General R&D
funding has been reduced along with funding for the model 5990 optical catheter
system. The Registrant policy is to fund research and development as it deems
appropriate to maintain or gain a competitive advantage.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 1997 /S/ Van A. Horsley
------------------
Van A. Horsley, President,
Principal Executive Officer,
and Principal Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,034,000
<SECURITIES> 40,000
<RECEIVABLES> 163,200
<ALLOWANCES> (25,000)
<INVENTORY> 692,400
<CURRENT-ASSETS> 1,463,200
<PP&E> 1,512,500
<DEPRECIATION> (1,251,000)
<TOTAL-ASSETS> 2,282,800
<CURRENT-LIABILITIES> 231,700
<BONDS> 0
0
0
<COMMON> 7,300
<OTHER-SE> 2,043,800
<TOTAL-LIABILITY-AND-EQUITY> 2,282,800
<SALES> 197,600
<TOTAL-REVENUES> 215,600
<CGS> 145,300
<TOTAL-COSTS> 545,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 500
<INCOME-PRETAX> (330,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (330,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (330,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
