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, 2004
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________
Commission file number 000-010690
____________________
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
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(IRS Employer Identification No.)
7150 N. Park Dr., Suite 500, Pennsauken, New Jersey 08109
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(Address of principal executive offices)
( 856 ) 910-1168
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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 CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
05/14/2004 41,418,655 shares of common stock were outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [x]
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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004
(unaudited) and December 31, 2003 (audited) 1
Consolidated Statements of Operations for three months
ended March 31, 2004 (unaudited) and three months
ended March 31, 2003 (unaudited) 2
Consolidated Statements of Cash Flows for three months
ended March 31, 2004 (unaudited) and three months
ended March 31, 2003 (unaudited) 3
Notes to Consolidated Financial Statements 4 - 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 6 - 12
Item 3. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2004 2003
Unaudited Audited
--------- -------
Current assets:
Cash and cash equivalents $ 58,303 $ 74,250
Accounts receivable trade 725,352 447,060
Inventories 159,954 181,119
Other current assets 2,842 2,812
----------- ---------
Total current assets 946,451 705,241
----------- ---------
Property and equipment, net 175,145 209.654
Deferred Asset 44,369 66,847
Other assets 2,812 2,812
Goodwill 250,498 250,498
----------- ---------
Total assets $ 1,419,275 $1,235,052
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term payable $ 261,860 $ 111,860
Customer deposits 172,757 137,004
Deferred Income 18,441 35,404
SBA Loan 50,000 50,000
Revolving Credit Line 231,028 336,309
Loan payable stockholders 163,192 163,192
Accounts payable 1,485,365 1,488,690
Accrued expenses 475,446 443,474
Convertible Debenture 1,198,362 1,198,362
Subscribed Stock Payable -0- 200,000
----------- ---------
Total current liabilities 4,056,449 4,164,295
Long Term liabilities:
Long Term Debt 420,891 428,828
Non current portion of bank Note - -
----------- ---------
Total liabilities 4,477,340 4,593,123
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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,
45,554,454and 41,554,454 issued
45,428,654and 41,128,654 outstanding
in 2004 and 2003 respectively. 455,545 415,545
Additional paid-in capital 15,753,569 15,593,569
Reserve for stock compensation 160,909 160,909
(Deficit) (19,030,256) (19,130,261)
----------- ---------
(2,660,233) (2,960, 238)
Common stock held in treasury, at cost (397,833) (397,833)
----------- ---------
Total shareholders' equity (Deficit) (3,058,066) (3,358,071)
----------- ---------
Total liabilities and shareholders'
Equity $ 1,419,274 $1,235,052
=========== =========
The accompanying notes are an integral part of these consolidated financial statements.
-1-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31
2004 2003
---- ----
NET SALES $ 1,534,275 $ 476,297
---------- ----------
Operating costs and expenses:
Cost of sales 575,611 72,807
Research and development 71,505 121,740
Selling, general
And administrative 722,068 343,998
---------- ----------
1,369,184 538,545
---------- ----------
Operating Income (Loss) before
other income (expenses) 165,091 (62,248)
Other income (expenses):
Other Income 2,144 -
Interest Expense (44,753) (24,106)
Finance Expense (22,478) (18,633)
---------- ----------
Net Income (Loss) 100,004 (104,987)
---------- ----------
- -
---------- ----------
Net Income (Loss) 100,004 (104,987)
Net Income (loss) per common share Basic $ 0.00 $ (0.00)
========== ==========
Net Income (loss) per common share Diluted $ 0.00 $ (0.00)
========== ==========
Weighted average shares outstanding Basic 50,792,290 34,485,986
========== ==========
Weighted average shares outstanding Diluted (see Note 2) 76,219,014 34,485,986
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
-2-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31
2004 2003
---- ----
Cash flows from operating activities:
Net (loss) $ 100,004 $ (104,987)
-------- ---------
Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
Depreciation 34,509 64,856
Interest expense non cash - 24,106
Financing expense non cash 22,478 18,633
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (278,291) (53,114)
Inventories 21,165 40,417
Other current assets (30) (18,443)
Increase (decrease) in:
Accounts Payable and
accrued expenses 28,647 163,359
Deferred Income (16,963) -
Customer Deposits 35,753 (197,498)
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Total adjustments (153,328) 42,316
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Net cash provided by (used for)
operating activities (52,728) (62,671)
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Cash flows from investing activities:
Purchase of property and equipment - net - -
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Net cash (used) in investing activities - -
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Cash flows from financing activities:
Increase (decrease) in
Short term notes 150,000 -
Line of Credit - (7,971)
Capitalized Lease (7,937) 36,324
Net borrowing on Revolving AR credit facility (105,282) -
-------- ---------
Net cash (used in) provided by financing
activities 36,781 28,353
Net increase (decrease) in
cash and cash equivalents (15,947) (34,318)
Cash and cash equivalents -
beginning of period 74,250 43,141
-------- ---------
Cash and cash equivalents -
end of period $ 58,303 $ 8,823
-------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
-3-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
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, 2003. 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 in May 1973 and commenced
operations in July 1977. The Company has been developing and delivering
technologically advanced telecommunication solutions for over thirty years.
Even though the Inmate Telephony business continues to provide revenue for
the Company, we have been rebuilding the business by partnering with many
other organizations and providing them with custom solutions accented toward
their individual requirements. Science Dynamics still regards itself as a
market leader in this business and is one of a few companies in this area
with applicable patented technology.
As a result of these efforts, on December 22, 2003, Evercom Systems, Inc.
(Evercom) and Science Dynamic executed a series of agreements which provide,
among other things, that Science Dynamics will assist Evercom in accelerating
its development of a next generation IP based inmate telephony system. In
concert with this development effort, Science Dynamics has sold to Evercom
certain Intellectual Property that relates to technology known as "voice over
Internet protocol". As a condition of the purchase and consulting agreements,
Science Dynamics will receive a perpetual, royalty-free, non-exclusive
license to use the technology primarily developed by Science Dynamics during
this contract term with the condition that Science Dynamics may only exploit
such technology outside of the law enforcement market place. Under this
contract, Science Dynamics' engineering resources will be required for the
development of the new platform, design and consultancy services for the next
four years.
Acquisition of Assets
---------------------
On March 31, 2003, the Company acquired certain business assets and
liabilities of Modern Mass Media, Inc., a privately held company based in
Florham Park, NJ. The income and expenses for the three months ended March
31, 2003 do not reflect any operations from Modern Mass Media.
-4-
Use of Estimates
----------------
Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States (US GAAP). The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments we make
about the carrying values of assets and liabilities that are not readily
apparent from other sources. We base our estimates and judgments on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances. However, future events are subject to
change and the best estimates and judgments routinely require adjustment. US
GAAP requires us to make estimates and judgments in several areas, including
those related to impairment of goodwill and equity investments, revenue
recognition, recoverability of inventory and receivables, the useful lives of
long lived assets such as property and equipment, the future realization of
deferred income tax benefits and the recording of various accruals. The
ultimate outcome and actual results could differ from the estimates and
assumptions used.
Segment Reporting
-----------------
Management views its business in two divisions, the software
engineering division and the audiovisual division.
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Revenue
Audio Visual Division $ 844,056 $ -0-
Software Technology Division 690,219 476,297
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Total Consolidated Revenue $ 1,534,275 $ 476,297
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Net Income (loss)
Audio Visual Division $ (53,040) $ -0-
Software Technology Division 153,044 (104,987)
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Total Consolidated Net Loss $100,004 $(104,987)
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Assets
Audio Visual Division 527,538 $ -0-
Software Technology Division 891,738 879,758
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Total Consolidated Assets $ 1,419,275 $ 879,758
--------- ---------
-5-
2. Earnings Per Common Share
-------------------------
Basic earnings per common share ("EPS) is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. For the three month period ending March 31, 2004
the weighted average number of common shares used to compute basic earnings
per share was calculated as follows:
Number of shares outstanding at March 31, 2004 45,428,654
Add: Shares reserved for Calabash Consulting ltd. 4,363,636
Shares reserved for Joy Hartman as per 2002 & 2003 1,000,000
----------
Basic - Weighted average common shares outstanding 50,792,290
Upon potential exercise of Convertible debenture 23,840,057
Diluted effect of employee stock options 1,586,667
----------
Diluted outstanding shares 76,219,014
----------
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised
or converted into common stock.
In the three month period ending March 31, 2003 the basic weighted average
common shares outstanding used to compute basic loss per share was 34,485,986.
The shares attributable to the exercise of outstanding options and convertible
debentures were excluded from the calculation of diluted loss per share in
the period ended March 31, 2003 These items were not calculated because
the effect was anti dilutive.
Item 2. Management's Discussion and Analysis or Plan of Operation.
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.
Business Overview
-----------------
During the first quarter of 2004 the company realized improved revenues from
both the Software and Audio Visual divisions. In addition, the Software
division produced a net profit while the Audio Visual division had reduced
losses. These improving results are due to the company's focused efforts on
reducing operating costs and the re-alignment of our sales efforts to higher
margin products and services.
-6-
The software division continues to generate the majority of revenue from the
Commander product line and has seen increasing demand for those products
utilizing VoIP technology. The company intends to continue its focus on
higher margin products and leverage our expertise in VoIP technology
addressing growing demand in this area.
The Audio Visual division's reduced losses are a result of cost reductions
and increased sales in service oriented activities including engineering,
rentals and staging. These services carry a higher gross margin and
therefore have been the primary focus of our sales efforts. The Audio Visual
division will continue its efforts in these areas in an effort to increase
gross margins and improve profitability.
While the Company continued to generate revenue from the Inmate Telephony
industry, the Company has also continued to build on its well-founded
expertise in Internet Protocol telephony. Now with the added benefit of
Modern Mass Media, the Company has concentrated its future in the "Converged
Communications" arena. IP Telephony is now an established, accepted and
respected voice medium, with users demanding the deployment of many services
and functions that this technology promises. The Company's focus is on
developing and deploying these services and functions in its Intelligent
Peripheral products built on its highly successful and adaptable
"BubbleLINK(R)" technology. The Company's many years of experience working
with the Regional Bell Operating Companies (RBOC's) has brought it the
capability to integrate security, process, reliability and control together
with complex billing methodologies to its product set. This experience is
now being put to good use providing security, management and billing to
converged IP communications.
Over the past year, the Company has created several new software releases for
the Commander I and II models that have repositioned the product to
capitalize on the demand for a centralized VoIP solution. This has opened the
door to allow the Commander product to fill the needs of the independent
service providers. This is a segment of the industry that had previously been
overlooked as development centered on the needs of the large Local Exchange
Carrier (LEC) customers. In addition, the product is better positioned to
penetrate markets outside of the inmate telephony business. Consistent with
this strategy SciDyn has engaged several upcoming independent inmate call
control service providers that, in the past year, have been successful in
displacing the local LEC competition in contract awards that were not
possible without the strength and reputation of a system such as the
Commander.
During the past year, SciDyn has successfully leveraged our partnerships and
intellectual property to grow and diversify the Company's customer base. The
Company has rebuilt the business by partnering with many other organizations
and providing them with custom solutions accented toward their individual
requirements. This strategy has diversified the Company's customer base,
mitigating the risks associated with having the majority of the Company's
revenue obtained from a single customer.
Along with system improvements to reposition Commander equipment sales,
SciDyn has been developing the necessary back-office operation systems
necessary to provide the complete offering required by many inmate call
control companies in today's market. Back-office services include Billed
Number Screening (BNS), billing data collection, and customer support.
Additional services will be introduced over time to increase the value to our
customers. Typically, these back-office services are charged on a monthly or
transaction basis and apply to calls made through Commander platforms
installed in the field. This introduces a new revenue producing operation
that can extend the value of a typical system beyond the initial equipment
sale to a potential three to five year revenue source.
Science Dynamics regards itself as a market leader in this business and is
one of a few companies in this area with applicable patented technology. To
maximize revenue potential, the Company made the decision to license its
technology and take on custom development projects for other organizations.
Science Dynamics is now entering a phase where the Company will be actively
developing new relationships for the deployment of its IP based technology
across many other business sectors. The Company has undertaken to meet its
goals in the deployment of its IP technology not only through the sale of
equipment but also through partnering with others in the development of new
and innovative systems for specific vertical markets such as the current
development contract with Evercom Systems Inc.
-7-
In addition, SciDyn acquired certain assets and assumed certain liabilities
of Modern Mass Media. The acquisition of Modern Mass Media has positioned
the Company to supply high quality Audio Visual, Video conferencing, and
Multi Media solutions to many Fortune 500 companies. This provides SciDyn
further customer and product diversification, mitigating the risks associated
with the uncertainties surrounding the telecommunications market. In the
coming months the revised and reconstructed Company intends to develop these
new relationships to extend the product and service offering both within
vertical markets and geographically.
Our success depends upon effective cash management. The Company believes it
has made significant progress in lowering its Selling General &
Administrative and Research & Development expenses. We continue to drive
down costs and take decisive steps to restructure the Company's business. At
March 31, 2004 we had a total of thirty employees. We intend to continue to
increase the scope of our operations while facing the challenge of maximizing
resources effectively.
With the advent of the industry's renewed demand for VoIP technology and the
Company's underlying strength in this area, the Company believes it is well
positioned to take advantage of this market opportunity. In order to
effectively capitalize on this opportunity, the Company is continually
evaluating different alternatives for raising the additional capital required
to execute these strategies.
PRODUCTS
--------
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.
Commander Call Control System
The Commander call control system is built on SciDyn's unique BubbleLINK(R)
software architecture. This open system platform is a combination of
integrated Computer Telephony (CTI) hardware and software, which can handle
thousands of call transactions per hour and provide correctional facility
officials with effective tools to manage and control inmate telephone calls
using the Commander system software.
The Commander I models are designed for the small to midsize municipal and
county correctional facilities requiring control for up to 40 inmate
telephone lines. The Commander I base system provides telephone control for 4
lines and can be expanded in 4 line increments. This modular design provides
a cost effective solution with an abundance of inmate phone control features.
Commander call control systems are supported by an integrated array of
administrative and investigative programs that provide a management solution
suite. All programs interact in real-time with Commander calls and databases
via an Ethernet Local Area Network (LAN) or a Wide Area Network (WAN).
Commander provides state of the art call control and some of the first tools
targeted at investigation and law enforcement in the inmate telephone control
industry. The Commander Live Monitoring, Debit and Recording continue to be
some of the leading features required within the industry today.
The 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.
During 2003, SciDyn commenced deployment of its next generation Commander
system. The next generation Commander system operates on the latest
technology and provides greater capabilities with new features, including
SciDyn's first internal recording solution, now a fully integrated component
providing great cost savings over traditional recording equipment used today.
Commander systems are no longer assembled exclusively from components
purchased from a single vendor. Our software has now been successfully ported
to support multiple vendors' equipment and currently two vendors have been
selected as sources for components of the next generation Commander. This
provides SciDyn greater flexibility, reliability and pricing in producing and
supporting new systems.
-8-
SciDyn is also continuing development and integration of new biometric
technology interfaces to the Commander. Biometric technology is quickly
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.
2003 saw the introduction of a new Commander system targeted at multi-
facility with centralized control. This solution allows Inmate phone
providers to offer all of the Commander features including the extensive call
control, debit, and pre-paid solutions to the smallest facilities. Utilizing
SciDyn's VoIP technology, 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 all, per facility
branding and rating without the need for dedicated switching equipment at the
institution.
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(R) technology, is a
complete turnkey system providing all aspects of a pre-paid and debit card
platform. MinuteMan provides PSTN interface, card databases, IVR and SMDR
collection. The MinuteMan is ideal for smaller pre-paid card vendors that
want to break free from the resale only mode of the card business. MinuteMan
is also the ideal front end for VoIP carriers that are looking to complete
their offerings for low cost international traffic. Most VoIP Gateways do
not offer a robust solution for pre-paid calling. Most of these carriers
have been forced to purchase or lease expensive adjunct systems to integrate
pre-paid solutions into their VoIP networks. The MinuteMan provides all of
the necessary functions to convert an existing VoIP toll bypass network into
a full-featured international pre-paid network.
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.
New applications for the MinuteMan were 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 including 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 its 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.
-9-
Video over Frame Relay
The market for the VFX continues to be the international arena in which
customers benefit from the most substantial cost savings versus peak long
distance rates. SciDyn maintains a small but steady revenue stream from the
VFX.
Error Correction Algorithm
To date, a suitable entity has not been identified to exploit this new
technology in the near term. SciDyn's near term strategy and capital
priorities preclude the Company from investing additional time and funds into
exploiting this patent independently.
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 March 31, 2004 (unaudited) compared to the Three Months
ended March 31, 2003 (unaudited).
Three Months Ended
March 31,
2004 2003
---- ----
Sales 1,534,275 476,297
Net Income (Loss) 100,004 (104,987)
Net Income (Loss) Per Share $0.00 $ (0.00)
OPERATING EXPENSES PERCENT OF SALES
2004 2003 2004 2003
---- ---- ---- ----
Cost of Goods Sold 575,611 72,807 38% 15%
Research & Development 71,505 121,740 5% 26%
Sales, General & Admin. 687,559 279,142 45% 59%
Depreciation 34,509 64,856 2% 14%
Total Operating Costs
and Expenses 1,369,184 538,545 89% 114%
-10-
Sales for the three months ended March 31, 2004 were $1,534,275, an increase
of $1,057,978 from sales of $476,297 for the three months ended March 31,
2003. Sales of $844,056 were derived from our audiovisual division, $565,219
was from software technology and $125,000 was the consulting contract with
Evercom. The Company's revenue in the three months ended March 31, 2004 was
predominantly derived from two products: the MinuteMan Calling Platform and
the Commander Product Line.
Cost of Goods Sold increased to $575,611 in the three months ended March 31,
2004 from $72,807 in the corresponding three months ended March 31, 2003.
Cost of $465,232 were derived from the audiovisual division and $110,379 were
derived from the software technology division. The cost of sales in the
audiovisual division are substantially higher than those for the software
technology. The audiovisual division is dependent on its suppliers for
pricing and credit. The increase in the cost of good sold in the three months
ended March 31, 2004 over the corresponding three months ended March 31,
2003, is due to the addition of the audiovisual division, which was not
present in this period.
Research & Development expenses decreased to $71,505 in the three months
ended March 31, 2004 as compared to $121,740 in the comparable three months
ended March 31, 2003. The decrease in research and development expenses
during the first three months of 2004 was due to the limited resources
available for product development. We believe that continual enhancements of
our products will be required to enable SciDyn to maintain its competitive
position. SciDyn will have to focus its principal future product development
and resources on developing new, innovative, technical products and updating
existing products in the communications area which will enable the Company to
explore other established markets that are considered "safe" from the telecom
disruption currently facing the industry. In addition, we have committed
some of our engineering staff to the Evercom consulting contract.
Sales, General & Administrative expenses increased to $687,559 in the three
months ended March 31, 2004, compared to $279,142 in the three months ended
March 31, 2003. The increase was derived from the addition of the
audiovisual division.
Depreciation expenses decreased to $34,509 in the three months ended March
31, 2004, compared to $64,856 in the three months ended March 31, 2003.
Interest Expense consists of interest paid and accrued on the Convertible
Notes, and the interest due for the loan from a stockholder.
Finance Expense in the three months ended March 31, 2004 and 2003 was $22,478
and $18,633 respectively which consists of amortization of financing costs.
LIQUIDITY AND CAPITAL RESOURCES:
-------------------------------
Cash and cash equivalents decreased to $58,303 from $74,250 at December 31,
2003. . Net cash used in operating activities was $52,728for the three
months ended March 31, 2004 compared to $62,671 in the corresponding three
months ended March 31, 2003. Net cash used in operating activities consist
of net income of$100,004, increase in accounts payable, accrued expenses, and
customer deposits offset by an increase in accounts receivable and decrease
in inventories and deferred income. Accounts payable and accrued expenses
consist of over extended accounts payable. Payment arrangements have been
made with several vendors to extend payments over the next year. The accrued
expenses consist primarily of accrued interest due on the convertible notes.
Net cash used in investing activities - There was no cash used for the three
months ended March 31, 2004, and ended March 31, 2003. The lack of investing
in capital equipment is attributable to budgetary restraints.
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Net cash provided by financing activities in the three months ended March 31,
2004 amounted to $36,782 compared to $28,353 in the corresponding three
months ended March 31, 2003. Due our need for liquidity we negotiated two
short term notes for $150,000 that are collateralized by the future sale of
the New Jersey Net Operating Loss. These notes will be paid directly from the
sale of the Net Operating Loss with $50,000 of interest. The proceeds of
$150,000 short term note were offset by the repayment of $105,281 on our
revolving credit facility. The revolving credit facility is based on the
accounts receivable of our audiovisual division.
The cash requirements for funding our operations continue to exceed cash
flows from operations. We have satisfied our operating cash flow deficiencies
primarily through debt financing.
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. If we
are unable to obtain successful negotiations, our business may well be
severely adversely affected.
While SciDyn believes that its current cash flows are sufficient to pay the
current expenses that the Company incurs, the Company is unable to pay past
accrued expenses and convertible notes from current cash flows. In order to
satisfy all of the Company's obligations that are due in the next twelve months,
SciDyn must obtain additional financing. The inability to obtain the required
additional funds could require SciDyn to reduce or curtail operations.
Item 3. Controls and Procedures.
As of the end of the period covered by this report, Science Dynamics
conducted an evaluation, under the supervision and with the participation of
its principal executive officer and principal financial officer, of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Exchange Act). Based upon this evaluation, Science Dynamics' principal
executive officer and principal financial officer concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules and
forms. There was no significant change in Science Dynamics' internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
In April 1, 2004 the Company issued 1,080,000 options to employees
under the 2002 Employee Stock Option Plan at a price of $.18 per
share.
In April 2004 the Company issued 196,079 shares of common stock
for settlement of $30,000 in notes payable.
The issuance of the options and the shares was exempt from
registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of such Securities Act.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Articles of Incorporation (1)
3.2 By-Laws (1)
31.1 Certification by Alan C. Bashforth,
Chief Executive Officer and acting
Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification by Alan C. Bashforth,
Chief Executive Officer and acting
Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.
(1) Incorporated by reference to the Company's Registration
Statement on Form S-18, File Number 33-20687,
effective April 21, 1981.
(b) Reports on Form 8-K:
None.
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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: May 17, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
BY: /s/ Alan C. Bashforth CEO/President/Acting CFO May 17, 2004
Alan C. Bashforth Chairman of the Board
Secretary
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