17-May-2005
Quarterly Report
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward Looking Statements
This Form 10-QSB includes forward-looking statements relating to the business of Science Dynamics Corporation (the "Company" or "Science Dynamics"). Forward-looking statements contained herein or in other statements made by Science Dynamics are made based on management's expectations and beliefs concerning future events impacting the Company 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.
General Overview
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 twenty-five years.
Traditionally, the Company has been providing telecom service providers with its transaction based technology systems and more recently, via its acquisition of Systems Management Engineering, Inc., a Virginia corporation ("SMEI"), in the first quarter of 2005, is now providing software solutions to federal, state and local government utilizing a proprietary application development platform (Department of Defense "DOD" Certified) called "Aquifer".
Business Overview
During the first quarter of 2005 the Company completed the acquisition of approximately 85% of SMEI. SMEI provides proprietary software and advanced technology services to the federal government, primarily the Department of Defense. The acquisition is consistent with management's strategy to diversify the Company's proven software solutions into a broader market base.
SMEI's product offering includes Aquifer, an innovative software product that enables government departments and businesses to efficiently manage distributed computing applications in a secure environment. The Aquifer product has DOD certification and is already in production at various governmental agencies.
In addition to the stand-alone saleability of its product offering, the Company has identified potential in combining Aquifer's application management qualities with the IP based transaction processing capabilities of BubbleLink. Management believes this will provide Science Dynamics with a dynamic product offering that can be used to develop vertical applications encompassing a multitude of industries. Science Dynamics has begun working with key government clients to explore new applications that can be developed using a combination of the two products.
As the Company continues to identify opportunities utilizing either its combined or stand-alone technologies the Company will be working to integrate the product offerings through a single brand. The Company's branding and marketing initiatives will include the its two core product offerings, BubbleLink and Aquifer. Management believes selling the Company's product offering through a single brand will enable the Company to market enabling technologies that provide customers an enterprise solution with global networking capabilities.
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, 2005 (unaudited) compared to the Three Months ended
March 31, 2004 (unaudited).
Three Months Ended March 31,
2005 2004
---- ----
Sales $874,570 $690,219
Net Income (Loss) (228,815) 100,004
Net Income (Loss) Per Share $0.00 $ 0.00
OPERATING EXPENSES PERCENT OF SALES
Three Months Ended
March 31,
2005 2004 2005 2004
---- ---- ---- ----
Cost of Goods Sold 345,092 110,379 39.5% 15.9%
Research & Development 95,147 71,505 10.8% 10.4%
Sales, General & Admin. 560,552 270,601 64.1% 39.2%
Depreciation 25,320 28,259 2.9% 4.1%
Total Operating Costs and Expenses
1,026,111 480,744 117.3% 69.6%
Sales for the three months ended March 31, 2005 were $874,570, an increase of $184,351 from sales of $690,219 for the three months ended March 31, 2004. Total sales of $874,570 consisted of $433,447 from the software technology
division and $441,123 from software consulting services. The Software Technology Division's decrease in sales of $256,772 included a decrease of $150,000 attributable to the loss of the "Evercom" consulting contract in the fourth quarter of 2004. The Company's Software Technology revenue in the three months ended March 31, 2005 was primarily derived from its Commander Product Line. Sales from the software consulting division were derived from service contracts with federal, state and local governmental agencies. These contracts are based on a time and material billing. The total increase in the Company's sales of $184,351 was comprised of an increase of $441,123 attributable to the SMEI acquisition (Software Consulting Division) from the date of the acquisition February 14, 2005 to March 31, 2005, a partial quarter. This was offset by a decrease in sales from Science Dynamics (Software Technology Division) of $256,772, of which, $150,000 was attributable to the loss of the "Evercom" consulting contract in the fourth quarter of 2004.
Cost of Goods Sold increased to $345,092 in the three months ended March 31, 2005 from $110,379 in the corresponding three months ended March 31, 2004. Included in overall cost of goods sold were $109,609 and $235,483 attributable to the software technology division and the software consulting division respectively. The cost of sales in the software technology division are substantially lower than those for the software consulting division. The software consulting division is labor intensive. The increase in the cost of good sold in the three months ended March 31, 2005 over the corresponding three months ended March 31, 2004, is mainly due to the acquisition of SMEI which was not present in the prior period.
Research & Development expenses increased to $95,147 in the three months ended March 31, 2005 as compared to $71,505 in the comparable three months ended March 31, 2004. The increase was attributable to the hiring of additional engineering staff. Management believes that continual enhancements of the Company's products will be required to enable Science Dynamics to maintain its competitive position. Science Dynamics 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.
Sales, General & Administrative expenses increased to $560,552 in the three months ended March 31, 2005, compared to $270,601 in the three months ended March 31, 2004. The overall increase is primarily attributable to the acquisition of the SMEI operations. Additionally, the first quarter included front-loaded marketing expenses and non-recurring professional fees totaling approximately $71,500.
Depreciation expenses decreased to $25,320 in the three months ended March 31, 2005, compared to $28,259 in the three months ended March 31, 2004.
Interest Expense increased to $77,274 for the three months ended March 31, 2005 compared to $33,953 for the three months ended March 31, 2004. Interest consists of interest paid and accrued on outstanding convertible notes, notes payable, interest due on loans from stockholders and interest accrued of $22,667 on the convertible note due to late SB2 filing.
Finance Expense in the three months ended March 31, 2005 was capitalized in conjunction with the SMEI acquisition. These costs totaling $92,500 were included in the Balance Sheet as "Goodwill". Finance expense for the three months in the prior year ended March 31, 2004 included $22,478 of amortized financing costs.
Liquidity and Capital Resources
Cash and cash equivalents decreased to $135,580 from $192,681 at December 31, 2004. Net cash provided by operating activities was $273,890 for the three months ended March 31, 2005 compared to $444,638 in the corresponding three months ended March 31, 2004. This consisted of a net loss of $228,815 favorably offset by non-cash (depreciation) expense of $25,320, a decrease in accounts receivable of $256,138, an increase of $215,100 in accounts payable and accrued expenses and a net decrease in other assets and liabilities of $6,147.
Net cash used in investing activities consisted of the cash component of the SMEI purchase of $1,655,325. The lack of investing in capital equipment is consistent with planned budgetary restraints.
Net cash provided by financing activities was $1,327,050 for the three months ended March 31, 2005 compared to net cash used of $457,937 in the corresponding three months ended March 31, 2004. In connection with the acquisition of SMEI, the Company entered into a Securities Purchase Agreement, dated February 11, 2005, with Laurus Master Fund, Ltd. for the sale of a $2,000,000 principal amount secured convertible term note and a common stock purchase warrant to purchase 6,000,000 shares of common stock at a price of $.10 per share, which provided net proceeds of $1,867,500. The net increase in cash provided by financing consisted of the net proceeds of $1,867,500 from the issuance of the $2,000,000 convertible note used to finance the purchase of SMEI and for working capital requirements. The Company reduced its short term notes and revolving debt facility by $120,000 and $367,000 respectively. The revolving credit facility is based on the accounts receivable of the Company's software consulting 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 the reduction of working capital and 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 Science Dynamics 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, Science Dynamics must obtain additional financing. The inability to obtain the required additional funds could require Science Dynamics to reduce or curtail operations. The Company does not have any definitive plans or arrangements for obtaining additional financing at this time.
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