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 March 31, 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)
( 609 ) 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:
03/31/99 16,323,478 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 March 31, 1999 1
(unaudited) and December 31, 1998 (audited)
Consolidated Statements of Operations for three months 2
ended March 31, 1999 (unaudited) and three months
ended March 31, 1998 (unaudited)
Consolidated Statements of Cash Flows for three months 3
ended March 31, 1999 (unaudited) and three months
ended March 31, 1998 (unaudited)
Consolidated Statements of Shareholders' Equity for 4
the year ended December 31, 1998 (audited) and the
three months ending March 31, 1999 (unaudited)
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports 10
Item 7. Signatures 11
<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
ASSETS
March 31, December 31,
1999 1998
Unaudited Audited
---------------------------
Current assets:
Cash and cash equivalents $ 59,864 $ 32,249
Accounts receivable - trade 578,038 266,403
- other 185,075 659,900
Inventories 455,322 478,494
Other current assets 29,631 46,266
---------- ----------
Total current assets 1,307,930 1,483,312
---------- ----------
Property and equipment, net 219,250 231,088
Software development costs, net of
accumulated amortization of $416,987
in 1999 and $382,239 in 1998 104,247 138,996
Deferred income taxes 308,000 308,000
Intangible Assets, net of accumulated
amortization of $675,000 in 1999 and
$600,000 in 1998. 825,000 900,000
Other assets 139,507 41,418
---------- ----------
Total assets $2,903,934 $3,102,814
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loan payable $ 253,801 $ 100,000
Accounts payable 485,946 638,493
Accrued expenses, principally
payroll related 94,162 181,492
---------- ----------
Total current liabilities 833,909 919,985
---------- ----------
Commitments
Shareholders' equity -
Common stock - .01 par value,
45,000,000 shares authorized,
16,323,478 and 15,861,449 issued
16,197,678 and 15,735,649 outstanding
in 1999 and 1998 respectively. 163,235 158,614
Additional paid-in capital 10,974,808 10,729,429
(Deficit) (8,670,185) (8,307,381)
---------- ----------
2,467,858 2,580,662
Common stock held in treasury,
at cost (397,833) (397,833)
---------- ----------
Total shareholders' equity 2,070,025 2,182,829
---------- ----------
Total liabilities and shareholders' equity $2,903,934 $3,102,814
========= =========
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</TABLE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Three Months Ended March 31, 1999 and 1998
(UNAUDITED)
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Continued):
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET SALES $ 767,859 $1,572,707
--------- ----------
Operating costs and expenses:
Cost of sales 248,399 602,342
Research and development 317,599 288,062
Selling, general
and administrative 561,574 607,757
--------- ----------
1,127,572 1,498,161
--------- ----------
Operating (loss) (359,713) 74,546
Other income (expenses):
Interest expense (3,091) -
--------- ----------
Net Income (Loss) $(362,804) $ 74,546
========= ==========
Net Income (Loss) per common share
Basic And Diluted $ (0.02) $ 0.01
========= ==========
</TABLE>
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<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three Months Ended March 31, 1999 and 1998
(UNAUDITED)
---------
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Continued):
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating
activities:
Net (loss) $(362,804) $ 74,546
--------- --------
Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
Depreciation 21,984 15,097
Amortization of capitalized software 34,749 26,062
Amortization of Intangible assets 75,000 75,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (311,635) (218,774)
Other receivable 474,825 -
Inventories 23,172 (28,776)
Other current assets 16,635 5,104
Other assets (98,089) (5,197)
Increase (decrease) in:
Accounts payable and accrued expenses (239,877) 129,158
--------- --------
Total adjustments (3,236) (2,326)
--------- --------
Net cash provided by (used for)
operating activities (366,040) 72,220
--------- --------
Cash flows from investing activities:
Purchase of property and
equipment - net (10,146) (43,477)
--------- --------
Net cash (used) in
investing activities (10,146) (43,477)
--------- --------
Cash flows from financing activities:
Increase (decrease) in Loan Payable 153,801
Issuance of Common Stock 250,000 -
--------- --------
Net cash (used in) provided
by financing activities 403,801 -
--------- --------
Net increase (decrease) in
cash and cash equivalents 27,615 28,743
Cash and cash equivalents -
beginning of period 32,249 21,181
--------- --------
Cash and cash equivalents -
end of period $ 59,864 $ 49,924
========= ========
</TABLE>
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<PAGE>
<TABLE>
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
THREE MONTHS ENDED MARCH 31, 1999
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Continued):
Common Stock Additional Treasury
------------ Paid-In --------
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1997 14,661,449 $146,614 $10,166,429 $(7,271,075) 125,800 $397,833
---------- -------- ----------- ----------- ------- --------
Issuance of common stock
net of related expenses 1,200,000 12,000 563,000 - - -
Net loss - - - (1,036,306) - -
---------- -------- ----------- ----------- ------- --------
Balance
December 31, 1998 15,861,449 158,614 10,729,429 (8,307,381) 125,800 397,833
========== ======== =========== =========== ======= ========
Issuance of common stock
net of related expenses 462,029 4,621 245,379 - - -
Net loss - - - (362,804) - -
---------- -------- ----------- ----------- ------- --------
Balance
March 31, 1999 16,323,478 $163,235 $10,974,808 $(8,670,185) 125,800 $397,833
========== ======== =========== =========== ======= ========
</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 THE THREE MONTHS ENDED MARCH 31, 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.
- -5-
<PAGE>
These platforms are sophisticated software based systems that satisfy
a wide range of computer telephony integration applications. The
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 IP Telephony products
--------------------------------------
During the first quarter, the Company concentrated its activities on
research and development for the GateKeeper product. There was
continual development on the Gateway products, adding the latest
billing system components, working towards interoperability testing
and creating an even more stable product.
In March, One Stop Communication signed an agreement in principle
with the Company and, subsequent to the quarter ending, finalized a
contract for more than 50,000 lines of gateway equipment contingent
upon customer approval of an initial installation scheduled for the
latter part of May. As part of the roll out strategy for its Voice
over IP Telephony System, the Company has been conducting sales
presentations to prospective customers worldwide.
VFX Product
-----------
During the first quarter, The World Bank, the largest provider of
development assistance to the international community, has chosen
Science Dynamics' VFX-250S Frame Relay Access Device to seamlessly
integrate Videoconferencing to its remote sites over an existing
Frame Relay infrastructure. The Company believes the World Bank
acceptance has enhanced the Company's recognition within the
industry and aided in positioning the Company within both Cisco and
PictureTel, the industry leaders in the Frame Relay and
VideoConferencing markets, respectively.
The Company also released and shipped the first VFX-240S products, a
reduced capability version of the VFX-250S. A new release of the
VFX-250S product (version 2.2) has passed beta testing and will be
ready for final release. Version 2.2 includes several new features
and will be offered as an upgrade to all 2.1 users. The Company
also adopted a new 'soft' approach to all the documentation supplied
with the VFX products, shipping a single CD, which includes marketing
material, manuals, software and help capability.
CIMS
----
The Company installed its new CIMS II WindowsNT software system at
Rocky Mount, NC and Leesburg, FL network operation centers, with the
Carlisle, PA Northeast operations center to follow. The CIMS
Centralized Intercept Message System provides the automatic data base
broadband administrative capabilities for Telco's change number
databases for directory assistance and telephone directory updates.
- -6-
<PAGE>
COMMANDER
---------
The Commander II Version 2.0 WindowsNT software module was installed
in a Bell Advanced Technology Laboratory for acceptance testing and
approval. In addition to implementing a new Commander I & II annual
software licensing program, contract negotiations were commenced for
Commander pricing, support services and annual software licensing
programs. The Company initiated the conversions of currently installed
CCTD and Commander Plus systems (Phase I) to the Year 2000 compliant
Commander II WindowsNT Inmate Phone Control System (IPCS).
A performance trial 3-Way Call Detection system was installed at a
major prison facility in Oklahoma. The Company's new NetLynks
centralized management system for telephone call LIDB Line
Identification Data Base verification and billing, and a new
Commander call transaction pricing program based on monthly inmate
completed telephone call activity have both been established as
marketing offerings.
The Company completed the acquisition of the "Error Detection and
Correction System for Use with Address Translation Memory Controller"
patent, in exchange for 172,029 shares of common stock to GORCA Memory
systems, Inc., et. al. This conveyance provides the Company with the
ability to embed in certain technology an error correction method that
should substantially reduce data transmission errors. This correction
device is designed to reduce costly retransmission and can be utilized
across various data transport mediums.
Year 2000 Technology
--------------------
The Company continues to investigate the Year 2000 issue to ensure
its operations and systems will not be adversely impacted by the
inability of the Company's systems to process data having dates that
could be affected by the Year 2000 issue.
There are only six major suppliers of products incorporated into the
Company's final system. Each of those suppliers has attested that
the components are Y2K compliant. With those sub-systems installed
in the Company's newest system, compliance testing following the
defined test plan is progressing with competition scheduled for
June 1999.
There are twenty-two support facilities such as telephone, utilities,
banks, etc., nine have attested to be compliant with the remaining
thirteen in testing to prove compliance or correct. If any company
should fail to attest 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.
- -7-
<PAGE>
Three Months ended March 31, 1999 compared to the Three Months ended
March 31,1998 (unaudited).
Nine Months Ended
March 31,
1999 1998
---- ----
Sales $ 767,859 $1,572,707
Net Income (Loss) (362,804) 74,546
Net Income (Loss) Per Share $(0.02) $ 0.01
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of Goods Sold $ 248,399 $ 602,342 32.4% 38.3%
Research & Development 317,599 288,062 41.4% 18.3%
Sales, General & Admin 561,574 607,757 73.1% 38.6%
Total Operating Costs
and Expenses $1,127,572 $1,498,161 146.9% 95.2%
Sales for the three-month period of 1999 were $767,859 compared to
$1,572,707 in the corresponding period in 1998. The Commander Inmate
Product was the major contributor to the sales results in the three
months ending 1999 and 1998. The sales of the VFX-250 have been lower
than originally projected due to the lack of market awareness and
acceptance of the product. The selection of the VFX-250S by the
World Bank Group is expected to provide both credibility to product
functionality and to market exposure to exchange sales of this
product.
The Company's results of operations have and may continue to be
subject to significant quarterly variation. The results for a
particular quarter may vary due to a number of factors, including the
development status and demand for the Company's products, economic
conditions in the Company's markets, the timing of orders, the timing
of expenditures in anticipation of future sales, the mix of products
sold by the Company, the introduction of new products and product
enhancements by the Company or its competitors pricing and other
competitive conditions.
Cost of Goods sold decreased to $248,399 in the first three months
of 1999 from $602,342 in the corresponding three-month period of 1998.
The decrease in the cost of goods sold is attributable to the lower
level of sales achieved in the quarter ended 1999.
Research & Development expenses increased to $317,599 in the first
three months of 1999 as compared to $288,062 in the comparable
three-month period of 1998. The increased costs are attributable to
the use of contract engineering to augment the engineering group.
- -8-
<PAGE>
The Company's ability to accomplish it's future growth strategy
effectively will require it to invest significant resources to
attract, train, motivate and manage its employees successfully as
market acceptance of the new product offerings comes to fruition.
Sales, General & Administrative expenses decreased to $561,574 in
the first three months of 1999, compared to $607,757 in the
corresponding period of 1998. The decrease is related to the
reduction of overhead resulting from sub leasing approximately half
of the facility.
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.
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Cash and cash equivalents increased to $59,864 for the period ended
March 31, 1999 from $32,249 at December 31, 1998. The current ratio
is 1.6 to 1 for the period ended March 31, 1999 same as
December 31, 1998.
Cash used for operations during the three-month period ended
March 31, 1999 was $366,040 compared to $72,220 provided by operating
activities in the corresponding period of 1998. The change was
primarily attributable to the collections of other receivables
resulting in a decrease in accounts payable and accrued expenses
offset by the increase in accounts receivable.
Cash used for investing activities for the three months ended
March 31, 1999 amounted to $10,146 compared to $43,477 in the
comparable period of 1997. The expenditures in both periods were
for development applications for product development and enhancement.
Cash provided by financing activities amounted to $403,801 in the
three-month period ended March 31, 1999. The increase was the funds
provided by the issuance of the 250,000 shares of common stock for
the private placement. Another factor was an increase in the loan
payable related to the financing arrangement with CIT to assist in
the management of cash flows as necessary.
The Company believes that funds generated by operations, the remaining
proceeds from the private equity placement and the additional
borrowings that will be available under the credit facility should
enable the Company to meet its current working capital needs.
Management is committed to exploring both product opportunities and
strategic alliances to enable sustained growth to promote investor
interest and confidence.
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, 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.
- -9-
<PAGE>
PART II.OTHER INFORMATION
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARIES
- ---------------------------------------------
Item 1. Legal Proceedings
No material developments.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
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 on Form 8-K.
(b) Reports on Form 8-K
Filed January 29, 1999 concerning the private offering of
the Company's common stock.
- -10-
<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 May 17, 1999
---------------------
Alan C. Bashforth
By: /s/ Joy C. Hartman Exec. Vice President, CFO, May 17, 1999
--------------------- Treasurer, Secretary and
Joy C. Hartman Director
- -11-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 763
<ALLOWANCES> 0
<INVENTORY> 455
<CURRENT-ASSETS> 1308
<PP&E> 434
<DEPRECIATION> 215
<TOTAL-ASSETS> 2904
<CURRENT-LIABILITIES> 834
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 10,974
<TOTAL-LIABILITY-AND-EQUITY> 2904
<SALES> 768
<TOTAL-REVENUES> 768
<CGS> 248
<TOTAL-COSTS> 519
<OTHER-EXPENSES> 879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (363)
<INCOME-TAX> 0
<INCOME-CONTINUING> (363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (363)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
