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, 1999
------------------
[ ] 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
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
22-2011859
-------------------------------
(IRS Employer Identification No.)
1919 Springdale Road, Cherry Hill, New Jersey 08003
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(Address of principal executive offices)
( 856 ) 424-0068
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(Issuer's telephone number)
N/A
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(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:
09/30/99 16,707,678 shares of common stock were outstanding.
<PAGE>
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
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 1
(unaudited) and December 31, 1998 (audited)
Consolidated Statements of Income (loss) for Nine
months and three months ended September 30, 1999
(unaudited) and nine months and three months ended
September 30, 1998 (unaudited) 2
Consolidated Statements of Cash Flows for Nine
months ended September 30, 1999 (unaudited) and
nine months ended September 30, 1998 (unaudited) 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports 11
Item 7. Signatures 12
<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
ASSETS
September 30 December 31,
1999 1998
Unaudited Audited
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 78,765 $ 32,249
Accounts receivable - trade 493,882 266,403
Accounts receivable - other 27,223 659,900
Inventories 362,833 478,494
Other current assets 38,697 46,266
----------- ----------
Total current assets 1,001,400 1,483,312
----------- ----------
Property and equipment, net 202,908 231,088
Software development costs, net of
accumulated amortization of $486,485
in 1999 and $382,239 in 1998 34,749 138,996
Deferred income taxes 308,000 308,000
Intangible Assets, net of accumulated
amortization of $825,000 in 1999 and
$600,000 in 1998. 675,000 900,000
Other assets 135,686 41,418
----------- ----------
Total assets $ 2,357,743 $3,102,814
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan Payable $ 266,746 $ 100,000
Advance Deposit 259,281 -
Accounts payable 404,389 638,493
Accrued expenses, principally
payroll related 126,503 181,492
----------- ----------
Total current liabilities 1,056,919 919,985
----------- ----------
Commitments
Shareholders' equity -
Common stock - .01 par value,
45,000,000 shares authorized,
16,833,478 and 15,861,449 issued
16,707,678 and 15,735,649 outstanding
in 1999 and 1998 respectively. 168,335 158,614
Additional paid-in capital 11,217,183 10,729,429
Retained earnings (deficit) (9,686,861) (8,307,381)
----------- ----------
1,698,657 2,580,662
Common stock held in treasury,
at cost (397,833) (397,833)
----------- ----------
Total shareholders' equity 1,300,824 2,182,829
----------- ----------
Total liabilities and shareholders'
equity $ 2,357,743 $3,102,814
=========== ==========
</TABLE>
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<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Continued):
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 1,828,559 $3,400,297 $ 620,335 $ 1,074,991
------------- ---------- ----------- -------------
Operating costs and expenses:
Cost of sales 881,072 1,299,739 447,124 402,096
Research and development 914,677 954,416 298,904 341,287
Selling, general
and administrative 1,403,562 1,770,243 388,281 527,750
------------- ---------- ----------- -------------
3,199,311 4,024,398 1,134,309 1,271,133
------------- ---------- ----------- -------------
Operating (loss) (1,370,752) (624,101) (513,974) (196,142)
Other (expenses):
Interest expense (8,728) (2,354) (1,823) (2,354)
------------- ---------- ----------- -------------
Net (Loss) $ (1,379,480) $ (626,455) $ (515,797) $ (198,496)
============= ========== =========== =============
Net (Loss) per common share $ (0.08) $ (0.04) $ (0.03) $ (0.01)
============= ========== =========== =============
</TABLE>
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<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
---------
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Continued):
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(1,379,480) $ (626,455)
Adjustments to reconcile net (loss) to
net cash provided by (used for)
operating activities:
Depreciation 67,748 52,981
Amortization of capitalized software 104,247 78,185
capitalized software
Amortization of Intangible assets 225,000 225,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (227,479) 24,010
Other receivable 632,677 -
Inventories 115,661 (54,850)
Other current assets 7,569 15,356
Other assets (94,268) (5,697)
Increase (decrease) in:
Deposit in Advance 259,281 -
accrued expenses (289,093) 189,934
----------- ----------
Total adjustments 801,343 524,919
----------- ----------
Net cash provided by (used for)
operating activities (578,137) (101,536)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment - net (39,568) (82,750)
----------- ----------
Net cash (used) in investing activities (39,568) (82,750)
----------- ----------
Cash flows from financing activities: -
Increase (decrease) in
Loan Payable 166,746 180,521
Issuance of common stock and warrants 497,475 -
----------- ----------
Net cash (used in) provided
by financing activities 664,221 180,521
----------- ----------
Net increase (decrease) in
cash and cash equivalents 46,516 (3,765)
Cash and cash equivalents -
beginning of period 32,249 21,181
----------- ----------
Cash and cash equivalents -
end of period $ 78,765 $ 17,416
=========== ==========
</TABLE>
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<PAGE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PART I
Item 1. (continued)
Basis of Presentation
---------------------
The unaudited financial statements included in the Form 10-QSB have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation SB.
The financial information furnished herein reflects all adjustments,
which in the opinion of management are necessary for a fair
presentation of the Company's financial position, the results of
operations and the cash flows for the periods presented.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed, or omitted, pursuant to
such rules and regulations.
These interim statements should be read in conjunction with the
audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998. 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.
Shares issuable upon exercise of common stock options and warrants are
not included for the periods presented, as they would be anti-dilutive.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1999 AND FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1999.
Business Overview
- -----------------
Science Dynamics Corporation designs, develops and markets a variety
of Telecommunication products and applications, including intelligent
call processing platforms which provide telecommunications service
capabilities to both the IP and public switched telephone network.
These platforms are sophisticated software based systems that satisfy
a wide range of computer telephony integration applications. The
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<PAGE>
Company's development is driven by user needs for cost effective,
easy to use multiservice products that provide an array of
telecommunications solutions and services to the customers.
These opportunities are primarily in the areas of Voice over
Internet Protocol, Inmate Systems, Video over Frame Relay, Voice
Announcements, Interactive Communications, Intelligent Network
Control and Administration. The Company's strategy is to deliver
quality software products and services that empower its customers to
improve their applications and deploy quality services worldwide.
IntegratorC-2000(R) IP Telephony Products
-----------------------------------------
The development effort on the IntegratorC-2000(R) series platform has
continued to progress during the third quarter. Accomplishments to
date include the H323 interface service Multipacket IP Compression
that allows for greater utilization of network bandwidth and greater
port concentration per node. Gatekeeper services such as address
translation and real time call rating provide the basis for large
multi-node VoIP networks. Currently in development is an SS7 Server
which allow one or more Integrator Gateways to connect to Carrier
networks as an End Office Gateway or centralized tandem access
for large scale network handoff to traditional PSTN carriers.
Also in development is an SNMP management solution for Integrator
networks and a new Integrator hardware platform is currently in test.
This new platform will provide higher densities of trunk termination
in a smaller footprint.
During the third quarter a purchase order for the first phase of the
rollout was received from One Stop Communication in the amount of
$3.1 million. Site preparation for the first eight sites is
underway. Management anticipates the financial arrangements to be
finalized imminently. The Company continues to conduct sales
presentations to prospective customers worldwide for its Voice over
IP Telephony System. Management is committed to penetrating the
marketplace by obtaining the strategic alliances necessary to enable
sustained growth.
VFX Product
-----------
The VFX 250-S has seen a marked increase in awareness from the
international market. This is due to a couple of factors.
First, a joint press release with Lucent Technologies was issued in
the third quarter announcing a successful contract negotiation with
the Government of the Northwest Territories of Canada in which Lucent
has been the chosen supplier for a video over frame relay system using
SDC's VFX-250S. In turn, this announcement created a great deal of
interest in the international market where a marked increase in
inquiries has been received.
Second, SDC completed shipment of our largest project to date.
Over 150 VFX-250S are currently being installed in a project involving
a Latin American government organization. This project signals the
first time such a large number of VFX's have been deployed in a
single frame relay network.
- -5-
<PAGE>
Third, SDC kicked off a road show campaign with one of its larger
resellers, which has already shown an increase in sales inquiries.
With the third quarter initiatives continuing and the emphasis
on pushing the resellers to promote VFX, SDC has seen a marked
increase in the number of sales inquiries. As these projects
tend to have at least a six-month lead-time this gives SDC a
good base upon which to build.
COMMANDER
---------
The majority of the Company's customers in the correctional market
place continued to spend their resources (both labor and funding) on
Y2K projects. The majority of the telephone companies have frozen
the purchasing of new software based products through March 2000.
This time interval will be dedicated to testing all new software
products for Y2K compliance. Our customers will also be working
with suppliers in de-bugging installed software system to insure
their obligations to Y2K compliance.
Customer dedication to the above mentioned Y2K actions has had a
negative impact on Commander sales revenue throughout Q3. The
Company anticipates that sales revenue Q4 will reflect only modest
improvement as our customers continue to upgrade their installed
system with the Y2K compliant Commander systems.
Inmate sales opportunities are currently being managed with several
long distance service providers and the RBOC's. The Company is
currently in BETA test for the V.20 Commander administration software
module. The V.20 software release brings forth many new and robust
system features that customers have requested since the Commander
product line was introduced. This new software release is a priced
software upgrade that will be implemented in all Commander systems
presently installed.
The Commander product line passed product line acceptance testing at
one of the major RBOC's. We are currently in negotiations with this
RBOC in signing a master purchasing agreement that will position SDC
as a primary supplier for their inmate telephone control system
requirements.
CIMS/Voice Intercept
--------------------
Sales revenues in these product lines have been extremely modest.
This is a result of the Y2K actions of our customers. The Company
anticipates a significant sales revenue opportunity for our Voice
Intercept product in Q1 of 2000.
- -6-
<PAGE>
Year 2000 Technology
--------------------
The Company continues the investigation on the Year 2000 issue to
ensure its operations and systems will not be adversely impacted by
the inability of the Company's and supplier systems to process data
affected by Year 2000 date corruption.
There are six major suppliers of products incorporated into the
Company's deliverable systems. Each of those suppliers has attested
that the components are Y2K compliant. With those sub-systems
installed in the Company's newest platform, compliance testing,
following the defined test plan was satisfactorily completed in
June.
There are twenty-two identified critical facilities such as
telephone, utilities, banks, etc., There are only three entities that
have reported to still be in the testing phase to prove compliance or
needed correction. The other facilities have attested to be
compliant. If any company should fail to confirm compliance, that
supplier will be replaced, if practical.
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, 1999 compared to the Nine Months
ended September 30, 1998 (unaudited).
For the Nine Months Ended September 30,
1999 1998
---- ----
Sales $1,828,559 $3,400,297
Net Loss (1,379,480) (626,455)
Net Loss Per Share $(0.08) $(.04)
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of Goods Sold $881,072 $1,229,739 48.2% 38.2%
Research & Development 914,677 954,416 50.0% 28.1%
Selling, General & Admin 1,403,562 1,770,243 76.8% 52.1%
Total Operating Costs
and Expenses $3,199,311 $4,024,398 175.0% 118.4%
- -7-
<PAGE>
Sales for the nine-month period of 1999 were $1,828,559 a decrease of
$1,571,738 from sales of $3,400,297 in the corresponding period in
1998. This decrease was due to the lower than anticipated sales on
the Commander II and VFX product lines. The business focus has
continued undaunted to initiate and promote a full-scale sales and
marketing program aimed at obtaining commitments and eventual orders
for the Voice over IP Gateways from those customers who have already
evaluated the IP technology. The Management believes this strategic
mission will launch the Company into achieving significant sales
revenue in the upcoming quarter and succeeding years.
Cost of Goods sold decreased to $881,072 in the first nine months of
1999 from $1,299,739 in the corresponding nine-month period of 1998.
The decrease in the cost of goods sold was directly related to the
decrease in sales revenue.
Research & Development expenses decreased to $914,677 in the first
nine months of 1999 as compared to $954,416 in the comparable
nine-month period of 1998. Although the Company continues to invest
significant resources in the research and development area the
decrease was due to the financial support by the next generation
Telco to accelerate the IP Telephony development.
Sales, General & Administrative expenses decreased to $1,403,562 in
the first nine months of 1999, compared to $1,770,243 in the
corresponding period of 1998. The decrease is largely related to
the additional funding received to promote and expand the IP
Telephony in the marketplace.
Interest expenses were incurred as part of the cost of the financing
agreement with The CIT Group/Commercial Services. The agreement,
for a revolving credit facility has provided a solution to cash flow
situations that occur due to the fluctuations in sales revenue.
Three Months ended September 30, 1999 compared to the Three Months
ended September 30, 1998 (unaudited).
For the Quarter Ended September 30,
1999 1998
---- ----
Sales $620,335 $1,074,991
Net Loss $(515,797) $(198,496)
Net Loss Per Share $(0.03) $(0.01)
- -8-
<PAGE>
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of Goods Sold $447,124 $402,096 72.1% 37.4%
Research & Development 298,904 341,287 48.2% 31.7%
Selling, General & Admin 388,281 527,750 62.6% 49.1%
Total Operating Costs
and Expenses $1,134,309 $1,271,133 182.9% 118.2%
Cost of Goods sold in the three months ended September 30, 1999 was
$447,124 as compared to $402,096 in the corresponding period of 1998.
The cost of goods sold as a percentage of sales amounted to 72.1%
and 37.4% for the three months periods ending September 30, 1999 and
September 30, 1998 respectively. The increase in the cost of sales
was due to the low sales volume and the increase in the unit price
of replacement boards procured at low volumes.
Research & Development expenses, as a percentage of revenue,
increased to 48.2% in the third quarter of 1999 compared with 31.7%
in the third quarter 1998. The increase in the percentage of revenue
was due to the depressed sales achieved. The expenses in absolute
dollars decreased $42,383 in the third quarter 1999, compared to the
corresponding quarter of 1998. The decrease in absolute dollars was
attributable to the financial assistance received during the third
quarter of 1999. Due to the technological nature of the Company's
business and the anticipated expansion of its technology into
new applications, management expects continual investment for
development and engineering expenses.
Sales, General & Administrative expenses, as a percentage of sales,
increased in the third quarter of 1999 over the same period in 1998,
and represent 62.6% of sales as compared with 49.1% of sales for
the same period of 1998. The increase in the percentage of sales is
directly related to the low sales captured in the third quarter of
1999. The expenses in absolute dollars decreased $139,469 in 1999 over
the corresponding quarter in 1998. This decrease was primarily due to
the shared expense to increase market awareness of the Company's
initiatives into the Voice over IP market. The Company believes
continued investment in sales and marketing is necessary to promote
the Company's products due to the intensely competitive nature of
the industry.
- -9-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Cash and cash equivalents increased to $78,765 for the period ended
September 30, 1999 from $32,249 at December 31, 1998. Net cash used
for operating activities was $578,137 during the nine-month period
ended September 30, 1999 compared to $101,536 in the corresponding
period of 1998.
Cash used in investing activities was $39,568 for the nine-month
period ended September 30, 1999 compared to $82,750 in the
corresponding period of 1998. The outlay reflects the continual
investment in computer related equipment to further development
efforts.
Cash provided by financing activities amounted to $664,221 in the
nine-month period ended September 30, 1999. The increase was the
funds provided by the issuance of 800,000 shares of common stock
to subsidize working capital requirements.
The Company believes that based on our current proposed plans and
assumptions relating to operations along with the commitments
received to date the Company will have sufficient cash to satisfy
our estimated cash requirements for working capital needs. In the
event of unanticipated expenses, delays or other problems beyond
this period, the Company might be required to seek additional funding.
In addition, in the event that the Company receives a larger than
anticipated number of purchase orders the Company may require
resources greater than our available cash or than are otherwise
available. In such event, the Company may be required to raise
additional capital. The Company believes that, if needed, it will be
able to obtain additional funds required for future needs.
Certain statements contained in the 10QSB concerning the Company's
business outlook on future performance and statements concerning
assumptions made or expectations as to any future events, conditions
or other matters are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors,
which may cause actual results to differ materially from those set
forth in this report. The Company may encounter competitive,
technological, and financial and business challenges making it more
difficult to market its products and services, the impact of which
may in turn affect the Company's results of operations and financial
position.
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<PAGE>
PART II. OTHER INFORMATION
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
_____________________________________________
Item 1. Legal Proceedings
No material developments.
Item 2. Changes in Securities
There has been no change or modification in the constituent
instruments defining the rights of holders of neither the
corporation's sole class of registered security nor any
modification of the rights evidenced by such class by issuance
or modification of any other class of securities.
Item 3. Defaults Upon Senior Securities
There has been no default of any nature upon any form neither
of senior security nor in payment of interest or sinking or
purchase fund installment with respect to any indebtedness of
the registrant, nor any other form of default upon any
financial obligation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports
None.
- -11-
<PAGE>
Item 7. Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, registrant has duly caused this report to be
signed in its behalf by the undersigned thereunto duly authorized.
Signature Title Date
--------- ----- ----
By: /s/ Alan C. Bashforth CEO, President, Director November 15, 1999
---------------------
Alan C. Bashforth
By: /s/ Joy C. Hartman Exec. Vice President, CFO, November 15, 1999
--------------------- Treasurer, Secretary and
Joy C. Hartman Director
- -12-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 79
<SECURITIES> 0
<RECEIVABLES> 521
<ALLOWANCES> 0
<INVENTORY> 363
<CURRENT-ASSETS> 39
<PP&E> 464
<DEPRECIATION> 261
<TOTAL-ASSETS> 2358
<CURRENT-LIABILITIES> 1057
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 11,217
<TOTAL-LIABILITY-AND-EQUITY> 2358
<SALES> 1829
<TOTAL-REVENUES> 1829
<CGS> 881
<TOTAL-COSTS> 881
<OTHER-EXPENSES> 2318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (1379)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1379)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1379)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
