**SECURITIES AND EXCHANGE COMMISSION**

**UNITED STATES**

**WASHINGTON, D.C.20549**

 

**FORM 10-QSB**

 

| **(Mark One)**                                                                                                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **ý**                                                                                                                                                                                                    |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                          |   |
| **For the quarterly period ended December 31, 2002**                                                                                                                                                          |
|                                                                                                                                                                                                          |   |
| **or**                                                                                                                                                                                                        |
|                                                                                                                                                                                                          |   |
| **o**                                                                                                                                                                                                         |   | **TRANSITION REPORT UNDER SECTION 13  OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                          |   |
| **For the transition period  from              to              ** |
|                                                                                                                                                                                                          |   |
| **Commission File Number:  0-14210**                                                                                                                                                                     |
|                                                                                                                                                                                                               |        |  |  |

 

| **COMPUMED,  INC.**                                                                 |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |   |   |
| **Delaware**                                                                        |   | **95-2860434** |
| (State or Other Jurisdiction of Incorporation or   Organization)                    |   | (I.R.S. Employer Identification No.) |
|                                                                                |   |   |
| **5777 W. Century Blvd., Suite 1285, Los Angeles, CA  90045**                  |
| (Address of Principal Executive Officers)                                           |
|                                                                                |   |   |
| **(310) 258-5000**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |   |   |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports, and (2) has been subject to such filing requirements in for the past90 days.                                         Yes  ý   No  o

 

The registranthad 17,869,309 shares of common stock, ($.01 par value) issued and outstandingas of December 31, 2002.

 

TransitionalSmall Business Disclosure Format (check one): Yes  o  No ý

 

 

 

 

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INDEX

 

COMPUMED, INC. AND SUBSIDIARIES

 
| PART I.  FINANCIAL INFORMATION |
|-------------------------------------|
|                                |   |
|                                | Item 1. | Financial  Statements (unaudited) |
|                                |   |   |
|                                |   | Balance  Sheets – December 31, 2002 (unaudited) and September 30, 2002. |
|                                |   |   |
|                                |   | Statements of Operations – Three months  ended December 31, 2002 and 2002 (unaudited). |
|                                |   |   |
|                                |   | Statements of Cash Flows – Three months  ended December 31, 2002 and 2002 (unaudited). |
|                                |   |   |
|                                |   | Notes to Financial Statements (unaudited). |
|                                |   |   |
|                                | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |
|                                |   |   |
|                                | Item 3. | Quantitative and Qualitative Disclosures  about Market Risk |
|                                |   |   |
|                                | Item 4. | Controls and Procedures. |
|                                |   |   |
| PART II.  OTHER INFORMATION    |
|                                |   |
| Item 1                              | Legal Proceedings |
|                                |   |
| Item 2                              | Changes in Securities |
|                                |   |
| Item 3                              | Defaults upon Senior Securities |
|                                |   |
| Item 4                              | Submission of Matters to a Vote of Security  Holders |
|                                |   |
| Item 5                              | Other Information |
|                                |   |
| Item 6                              | Exhibits and Reports on Form 8-K |
|                                |   |
| SIGNATURES                          |

 

2

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PART I

 

FINANCIAL INFORMATION

 

BALANCE SHEETS

COMPUMED, INC.

 
|                                                                                                                       |   | **December  31, 2002** |    | **September  30, 2002** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                                                                                                       |   | **(Unaudited)**        |    | **(Audited)**           |   |
| ASSETS                                                                                                                     |   |                   |    |                    |   |
|                                                                                                                       |   |                   |    |                    |   |
| CURRENT ASSETS                                                                                                             |   |                   |    |                    |   |
| Cash and cash equivalents                                                                                                  |   | $                      | 75,000  |                    | $      | 78,000 |   |
| Marketable securities                                                                                                      |   | 234,000                |    | 249,000                 |   |
| Accounts receivable, less allowance of  $25,000 (December 2002) and $41,000 (September 2002)                               |   | 194,000                |    | 227,000                 |   |
| Inventory                                                                                                                  |   | 42,000                 |    | 41,000                  |   |
| Prepaid expenses and other current assets                                                                                  |   | 19,000                 |    | 14,000                  |   |
|                                                                                                                       |   |                   |    |                    |   |
| TOTAL CURRENT ASSETS                                                                                                       |   | 564,000                |    | 609,000                 |   |
|                                                                                                                       |   |                   |    |                    |   |
| PROPERTY AND EQUIPMENT                                                                                                     |   |                   |    |                    |   |
| Machinery and equipment                                                                                                    |   | 1,312,000              |    | 1,278,000               |   |
| Furniture, fixtures and leasehold  improvements                                                                            |   | 100,000                |    | 100,000                 |   |
| Equipment under capital leases                                                                                             |   | 35,000                 |    | 66,000                  |   |
|                                                                                                                       |   | 1,447,000              |    | 1,444,000               |   |
|                                                                                                                       |   |                   |    |                    |   |
| Accumulated depreciation and amortization                                                                                  |   | (1,067,000             | )       | (1,014,000              | )      |
|                                                                                                                       |   | 380,000                |    | 430,000                 |   |
|                                                                                                                       |   |                   |    |                    |   |
| OTHER ASSETS                                                                                                               |   |                   |    |                    |   |
| Other Assets                                                                                                               |   | 28,000                 |    | 28,000                  |   |
|                                                                                                                       |   |                   |    |                    |   |
| TOTAL ASSETS                                                                                                               |   | $                      | 972,000 |                    | $      | 1,067,000 |   |
|                                                                                                                       |   |                   |    |                    |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                  |   |                   |    |                    |   |
|                                                                                                                       |   |                   |    |                    |   |
| CURRENT LIABILITIES                                                                                                        |   |                   |    |                    |   |
| Accounts payable                                                                                                           |   | $                      | 138,000 |                    | $      | 119,000 |   |
| Accrued liabilities                                                                                                        |   | 151,000                |    | 116,000                 |   |
| Current portion of capital lease  obligations                                                                              |   | 8,000                  |    | 8,000                   |   |
|                                                                                                                       |   |                   |    |                    |   |
| TOTAL CURRENT LIABILITIES                                                                                                  |   | 297,000                |    | 243,000                 |   |
|                                                                                                                       |   |                   |    |                    |   |
| Capital lease obligations, less current  portion                                                                           |   | 5,000                  |    | 7,000                   |   |
|                                                                                                                       |   |                   |    |                    |   |
| Commitments and Contingencies (Note C)                                                                                     |   |                   |    |                    |   |
|                                                                                                                       |   |                   |    |                    |   |
| STOCKHOLDERS’ EQUITY                                                                                                  |   |                   |    |                    |   |
| Preferred Stock, $.10 par value –  authorized 1,000,000 shares                                                        |   |                   |    |                    |   |
| Preferred Stock– Class A $3.50 cumulative  convertible voting  – issued and outstanding – 8,400 shares |   | 1,000                  |    | 1,000                   |   |
|                                                                                                                       |   |                   |    |                    |   |
| Preferred Stock– Class B $3.50 cumulative  convertible voting – issued and  outstanding –300 shares         |   | —                 |    | —                  |   |
|                                                                                                                       |   |                   |    |                    |   |
| Common Stock, $.01 par value-authorized  50,000,000 shares, issued and outstanding-17,869,309 shares                       |   | 179,000                |    | 179,000                 |   |
|                                                                                                                       |   |                   |    |                    |   |
| Additional paid in capital                                                                                                 |   | 32,241,000             |    | 32,241,000              |   |
|                                                                                                                       |   |                   |    |                    |   |
| Accumulated deficit                                                                                                        |   | (31,760,000            | )       | (31,603,000             | )      |
|                                                                                                                       |   |                   |    |                    |   |
| Accumulated other comprehensive income                                                                                     |   | 12,000                 |    | 2,000                   |   |
|                                                                                                                       |   |                   |    |                    |   |
| Deferred stock compensation                                                                                                |   | (3,000                 | )       | (3,000                  | )      |
|                                                                                                                       |   |                   |    |                    |   |
| TOTAL STOCKHOLDERS’ EQUITY                                                                                            |   | 670,000                |    | 817,000                 |   |
|                                                                                                                       |   |                   |    |                    |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                            |   | $                      | 972,000 |                    | $      | 1,067,000 |   |

 

See notes to condensedfinancial statements.

 

3

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STATEMENTS OFOPERATIONS (UNAUDITED)

COMPUMED, INC.

 
|                                                  |   | **Three  Months Ended December 31,** |     |
|-------------------------------------------------------|--------|--------------------------------------|----------|
|                                                  |   | **2002**                             |     | **2001** |   |
| REVENUES FROM OPERATIONS                              |   |                                 |     |   |   |
| ECG services                                          |   | $                                    | 410,000  |   | $ | 415,000 |   |
| ECG product and supplies sales                        |   | 28,000                               |     | 37,000 |   |
| OsteoGram® sales and services                    |   | 14,000                               |     | — |   |
|                                                  |   | 452,000                              |     | 452,000 |   |
| COSTS AND EXPENSES                                    |   |                                 |     |   |   |
| Costs of ECG services                                 |   | 124,000                              |     | 124,000 |   |
| Cost of goods sold-ECG                                |   | 21,000                               |     | 24,000 |   |
| Cost of goods sold— OsteoGram®              |   | 2,000                                |     | — |   |
| Selling expenses                                      |   | 82,000                               |     | 64,000 |   |
| Research and development                              |   | 51,000                               |     | 50,000 |   |
| General and administrative expenses                   |   | 274,000                              |     | 268,000 |   |
| Depreciation                                          |   | 55,000                               |     | 74,000 |   |
|                                                  |   | 609,000                              |     | 604,000 |   |
|                                                  |   |                                 |     |   |   |
| OPERATING LOSS                                        |   | (157,000                             | )        | (152,000 | ) |
|                                                  |   |                                 |     |   |   |
| Interest income and dividends                         |   | 8,000                                |     | 9,000 |   |
| Realized gain on marketable securities                |   | 2,000                                |     | — |   |
| Interest expense                                      |   | —                               |     | (1,000 | ) |
| NET LOSS                                              |   | $                                    | (147,000 | ) | $ | (144,000 | ) |
|                                                  |   |                                 |     |   |   |
| NET LOSS PER SHARE (Basic and diluted)                |   | $                                    | (.01     | ) | $ | (.01 | ) |
|                                                  |   |                                 |     |   |   |
| Weighted average number of common shares  outstanding |   | 17,869,309                           |     | 17,869,309 |   |

 

See notes to condensedfinancial statements.

 

4

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STATEMENTS OFCASH FLOWS (UNAUDITED)

COMPUMED, INC.

 
|                                                                             |   | **Three  Months Ended** |     |
|----------------------------------------------------------------------------------|--------|-------------------------|----------|
|                                                                             |   | **December  31, 2002**  |     | **December  31, 2001** |   |
|                                                                             |   |                    |     |   |   |
| OPERATING ACTIVITIES:                                                            |   |                    |     |   |   |
| Net loss                                                                         |   | $                       | (147,000 | ) | $ | (144,000 | ) |
| Net adjustments to reconcile net loss to  net cash used in operating activities: |   |                    |     |   |   |
| Realized gain on marketable securities                                           |   | (2,000                  | )        | — |   |
| Amortization of deferred stock compensation                                      |   | —                  |     | 5,000 |   |
| Depreciation and amortization                                                    |   | 55,000                  |     | 74,000 |   |
| Changes in operating assets and  liabilities:                                    |   |                    |     |   |   |
| Accounts receivable                                                              |   | 33,000                  |     | 12,000 |   |
| Inventory, prepaid expenses and other  assets                                    |   | (6,000                  | )        | (11,000 | ) |
| Accounts payable and other liabilities                                           |   | 44,000                  |     | 5,000 |   |
| NET CASH USED IN OPERATING ACTIVITIES                                            |   | (23,000                 | )        | (59,000 | ) |
|                                                                             |   |                    |     |   |   |
| INVESTING ACTIVITIES:                                                            |   |                    |     |   |   |
| Sales of marketable securities                                                   |   | 27,000                  |     | — |   |
| Purchases of property, plant and equipment                                       |   | (5,000                  | )        | (6,000 | ) |
| NET CASH PROVIDED BY (USED IN) INVESTING  ACTIVITIES                             |   | 22,000                  |     | (6,000 | ) |
|                                                                             |   |                    |     |   |   |
| FINANCING ACTIVITIES:                                                            |   |                    |     |   |   |
| Principal payments on capital lease  obligations                                 |   | (2,000                  | )        | (21,000 | ) |
|                                                                             |   |                    |     |   |   |
| NET CASH USED IN FINANCING ACTIVITIES                                            |   | (2,000                  | )        | (21,000 | ) |
|                                                                             |   |                    |     |   |   |
| DECREASE IN CASH AND CASH EQUIVALENTS                                            |   | (3,000                  | )        | (86,000 | ) |
|                                                                             |   |                    |     |   |   |
| Cash and cash equivalents at beginning  period                                   |   | 78,000                  |     | 239,000 |   |
|                                                                             |   |                    |     |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       |   | $                       | 75,000   |   | $ | 153,000 |   |
|                                                                             |   |                    |     |   |   |
| Cash paid for interest                                                           |   | $                       | —   |   | $ | 1,000 |   |

 

See notes to condensedfinancial statements.

 

5

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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

COMPUMED,INC.

 

NOTEA–BASIS OF PREPARATION

 

The balancesheet at September 30, 2002 has been derived from the Company’s year-endaudited financial statements.

 

Theaccompanying interim unaudited financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and pursuant to the rules and regulations ofthe Securities and Exchange Commission.  Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financialstatements.  In the opinion of management, all adjustments (consisting ofnormal recurring accruals) considered necessary for a fair presentation havebeen included.  Operating results for the three-month period endedDecember 31, 2002 are not necessarily indicative of the results that may beexpected for the year ending September 30, 2003.  For further information,refer to the financial statements for the year ended September 30, 2002 and thenotes thereto included in the Company’s Annual Report on Form 10–KSB

 

Certainreclassifications have been made to prior period amounts to conform to thecurrent period presentation.

 

The Company has historicallyused existing cash and readily available marketable securities balances to fundoperating losses and capital expenditures.  The Company raised these fundsin 1997 through 2000 through the placement of Preferred Stock issuances andproceeds from the exercise of certain stock options and warrants.

 

The Company’s business strategyincludes an increase in OsteoGram® sales through domestic andinternational marketing and distribution efforts.  The Company intends tofinance this business strategy by using our current working capital resourcesand cash flows from existing operations, including the ECG and OsteoGram®businesses.  There can be no assurance that the OsteoGram®sales will be sufficient to offset related expenses.

 

The Company anticipates that its cash flow from operations,available cash and marketable securities will be sufficient to meet ouranticipated financial needs for at least the next 12 months.  However, incertain circumstances it may need to raise additional capital in the future,which might not be available on reasonable terms or at all.  Failure toraise capital when needed could adversely impact our business, operatingresults and liquidity.  If additional funds are raised through theissuance of equity securities, the percentage of ownership of existingstockholders would be reduced. Furthermore, these equity securities might haverights, preferences or privileges senior to our Common Stock.  Our CommonStock is currently listed on the over-the-counter (OTC) bulletin board, whichwill make it more difficult to raise funds through the issuance of equitysecurities (prior to December 1, 1999, our Common Stock was listed onNASDAQ).  There can be no assurance that such additional sources of financing will be available onacceptable terms, if at all.

 

NOTEB–PER SHARE DATA

 

Basicloss per share is calculated using the net loss, less preferred stock dividends($10,000 and $0 for the three months ended December 31, 2002 and 2001,respectively), divided by the weighted average common shares outstanding. Shares from the assumed exercise of outstanding warrants, options and effect ofthe conversion of the Class A Preferred Stock and Class B Preferred Stock areomitted from the computations of diluted loss per share because the effectwould be antidilutive.

 

NOTEC–COMMITMENTS AND CONTINGENCIES

 

OnJanuary 26, 1998, the United States District Court for the Central District ofCalifornia approved the settlement of the class action and derivative lawsuitson the terms agreed to by the parties in the Memorandum of Understandingentered into on August 5, 1996.  The final settlement is anticipated to becompleted in the current fiscal year and will involve the issuance of 770,000shares of Common Stock and the issuance of 1,870,000 warrants for the purchaseof Common Stock at a price of $3.00.  The effect of these issuances on theCompany’s statement of operations was recorded during the fiscal year endedSeptember 30, 1997.

 

6

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NOTE D – MARKETABLE SECURITIES

 

Marketable securities consistof investments in equity and bonds in various publicly traded domesticcompanies and are stated at market value based on the most recently tradedprices of these securities at December 31, 2002.  These short-term investments are defined as assets available forsale under the provisions of FASB Statement No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.”

 

During the quarter endedDecember 31, 2002, the Company recognized $10,000 of unrealized gains, whichwas recorded as a component of Accumulated Other Comprehensive Income inStockholders’ Equity.  At December 31,2002 and September 30, 2002 the Company’s investments in marketable securitiesare as follows:

 
| **Investments  Types** |   | **December  31, 2002** |    | **September  30, 2002** |   |
|------------------------|--------|------------------------|---------|-------------------------|--------|
|                   |   |                   |    |                    |   |
| Corporate Bonds        |   | $                      | 12,000  |                    | $      | 10,000 |   |
| Common Stock           |   | 222,000                |    | 239,000                 |   |
|                   |   |                   |    |                    |   |
| Total                  |   | $                      | 234,000 |                    | $      | 249,000 |   |

 

7

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**Item2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS**

 

We are including the followingcautionary statement in this Quarterly Report on Form 10-QSB to make applicableand take advantage of the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995 with respect to forward-looking statements madeby us, or on our behalf. Forward-looking statements include statementsconcerning plans, objectives, goals, strategies, future events or performanceand underlying assumptions and other statements that are other than statementsof historical facts. From time to time, we may make written or oral statementsthat are forward-looking including statements contained in this report andother filings with the Securities and Exchange Commission. Theseforward-looking statements are principally contained in the section captioned“Management’s discussion and Analysis of Operations”. In that and otherportions of this Form 10-QSB, the words “anticipates”, “believes,” “estimates,”“seeks,” “expects,” “plans,” “intends” and similar expressions as they relateto us or our management are intended to identify forward-looking statements.All such forward-looking statements are expressly qualified by these cautionarystatements.  Forward-looking statementsinvolve risks and uncertainties that could cause actual results or outcomes todiffer materially from those expressed in the forward-looking statements. Theforward-looking statements contained herein are based on various assumptions,many of which are based, in turn, upon further assumptions. Our expectations,beliefs and forward-looking statements are expressed in good faith on the basisof management’s views and assumptions as of the time the statements are made,but there can be no assurance that management’s expectations, beliefs orprojections will result or be achieved or accomplished.

 

In addition to other factorsand matters discussed elsewhere herein, the following are important factorsthat, in our view, could cause actual results to differ materially from thosediscussed in the forward-looking statements: technological advances by ourcompetitors, the impact of competition, dependence on key employees and theneed to attract new management, effectiveness and costs of sales and marketingefforts, acceptance of product offerings, ability to expand into new markets,the risks of patent claims or other third party liability, and the risks oflaunching a new product or service, such as our OsteoGram® test,changes in health care regulation, including reimbursement programs, capitalneeds to fund any delays or extensions of research programs and theavailability of capital on terms satisfactory us. We disclaim any obligation toupdate any forward-looking statements to reflect events or circumstances afterthe date hereof.

 

**Overview**

 

Our core business is remote ECGinterpretation services.  Our customersinclude health care providers in the correctional health system, ambulatorysurgery centers and occupational health clinics who do not have access toself-interpreting ECG machines or who desire an overread by a Board Certifiedcardiologist.  We have implementedmeasures to further automate and improve our service, and we are exploring newopportunities in the existing market.  However,we could lose customers who choose to receive services from a competitor or whopurchase a self-interpretive machine and no longer need our ECGinterpretations.   If we were to loseexisting customers, they may be difficult to replace and that could have amaterial adverse impact on our operations and financial condition.

 

Our major growth opportunity isin the development and marketing of applications software that cost-effectivelyautomates existing manual or costly procedures in the medical imagingfield.  Our current product is the OsteoGram®system for the screening, diagnosis and monitoring of osteoporosis, a globaldisease affecting over 200 million people. Future products include applications for following the progression ofarthritic disease and for fracture risk assessment, amongst others.  Our present customers include domestic andinternational hospitals, clinics and physician offices.  Prospective customers include major imagingmanufacturers where our revenue-generating applications will be added todigital imaging devices either as an enhancement to existing systems or at thepoint-of-sale.

 

For the quarter ended December31, 2002 we concentrated on domestic and international distribution issues forour OsteoGram® product.  Weattended the American Academy of Family Practice exhibition in October, wherewe tested the market in the primary care segment.  We identified suitable distributors to market the OsteoGram®in this market, and we are working with a number of these distributors toimplement novel sales programs.  We alsoattended Medica by cost-effectively obtaining space as part of the NorthAmerican Pavilion.  Held annually inDusseldorf, Germany, Medica is the world’s largest all-medical trade fair.  We were encouraged by the number ofinternational distributors that have an interest in marketing the OsteoGram®,and we are currently setting up a global distribution system in selectcountries.

 

We have not lost sight of ourECG business, and we are taking steps to bolster sales in market segments thatare not as price sensitive as our existing markets.  In addition, we are implementing programs to gain new businessfrom existing customers by selling incremental services and long-term warrantyplans.

 

**Critical Accounting Policies**

 

Due to the nature of thebusiness, few critical accounting policies are applicable and no subjective,complex judgments have been made by the Company with respect to accountingestimates. The critical accounting policies of the Company are disclosed inNote A to the Financial Statements included in the Company’s Annual Report onForm 10KSB for the year ended September 30, 2002.

 

**Results of Operations**

 

For the quarter ended December31, 2002 revenues from ECG operations decreased by 3% to $438,000 from $452,000for the same period in fiscal year 2002. The decrease is mostly due to lower sales of equipment. Revenues fromOsteoGram® sales and services for the quarter ended December 31,2002 was $14,000 as compared to no revenues for the same period in fiscal 2002.

 

Cost of services and goods soldconsists of the costs of ECG services provided, supplies, electrocardiographequipment sold and OsteoGram® systems sold.  During the quarter ended December 31, 2002costs of services and goods sold decreased by 1% to $147,000 from $148,000during the same period in fiscal 2002. The decrease in cost of services is due to lower sales of equipment asmentioned above.

 

General and administrativeexpenses increased by 2% during the quarter ended December 31, 2002 to$274,000, as compared to $268,000 for the same period in fiscal 2002, mostlydue to an increase in professional and consulting services in the preparationof the 10-KSB.

 

8

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Research and development costs,generally for the OsteoGram® product, increased by 2% during thequarter ended December 31, 2002 to $51,000 as compared to $50,000 for thesame period in fiscal 2002.

 

Selling expenses increased by28% during the quarter ended December 31, 2002 to $82,000 as compared to$64,000 for the same period in fiscal 2002, primarily due to increased marketingactivities and trade show related expenses associated with the OsteoGram®.

 

Werecorded interest and dividend income during the quarter ended December 31,2002 of $8,000 as compared to $9,000 for the same period in fiscal 2002.

 

Net lossfor the quarter ended December 31, 2002 was $147,000 compared to a loss of$144,000 for the same period in fiscal 2002.

 

 

**FINANCIAL CONDITION,LIQUIDITY AND CAPITAL RESOURCES**

 

AtDecember 31, 2002, we had approximately $309,000 in cash and marketablesecurities, as compared to a balance of $327,000 at September 30, 2002. The net decrease of $18,000 in cash and marketable securities is primarily dueto cash used in operations.  The decrease of working capital to $267,000at December 31, 2002 from $366,000 at September 30, 2002 is primarily a resultof losses from operations.  Purchases ofproperty, plant and equipment were $5,000 in the quarter ended December 31,2002.

 

We have historically usedexisting cash and readily available marketable securities balances to fund operatinglosses and capital expenditures.  We raised these funds in 1997 through2000 through the placement of Preferred Stock issuances and proceeds from theexercise of certain stock options and warrants.

 

Our business strategy includesan increase in OsteoGram® sales through domestic and internationalmarketing and distribution efforts.  We intend to finance this businessstrategy by using our current working capital resources and cash flows fromexisting operations, including the ECG and OsteoGram® businesses.  Therecan be no assurance that the OsteoGram® sales will be sufficient tooffset related expenses.

 

Weanticipate that our cash flow from operations, available cash and marketablesecurities will be sufficient to meet our anticipated financial needs for atleast the next 12 months.  However, in certain circumstances we may needto raise additional capital in the future, which might not be available onreasonable terms or at all.  Failure to raise capital when needed couldadversely impact our business, operating results and liquidity.  Ifadditional funds are raised through the issuance of equity securities, thepercentage of ownership of existing stockholders would be reduced. Furthermore,these equity securities might have rights, preferences or privileges senior toour Common stock.  Our Common Stock is currently listed on theover-the-counter (OTC) bulletin board, which will make it more difficult toraise funds through the issuance of equity securities (prior to December 1,1999, our Common Stock was listed on NASDAQ).  We cannot assure you thatsuch additional sources of financing will be available on acceptable terms, ifat all.

 

Ourprimary capital resource commitments at December 31, 2002 consist of capitaland operating lease commitments, primarily for computer equipment and for ourcorporate office facility.

 

We intendto pursue additional research and/or sub-contractor agreements relating to ourdevelopment projects.  Additionally, we may seek partners and acquisitioncandidates of businesses that are complementary to our own.  Suchinvestments would be subject to our obtaining financing through issuance ofdebt or other securities.  No assurance can be given that any acquisitionwould not be dilutive to stockholders.

 

Managementanticipates our current working capital amounts will be sufficient to meet itsanticipated financial needs for the next 12 months.

 

We intendto pursue additional research and/or sub-contractor agreements relating to ourdevelopment projects.  Additionally, we are actively seeking partners andacquisition candidates of businesses that are complementary to our own.  Such investments would be financed either byour working capital, through issuance of Company securities or a combinationthereof.  No assurance can be given that any acquisition would not bedilutive to stockholders or that such financing would be available atsatisfactory terms.

 

**Item 3. Quantitative and QualitativeDisclosures about Market Risk**

 

Not applicable as the Registrant is a small business issuer as definedby SEC regulations.

 

**Item 4. Control and Procedures**

 

Within the 90 days prior to thedate of this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Office and Principal Accounting Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Company’s Chief Executive Officerand Principal Accounting Officer concluded that the Company’s disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic SEC filings.  There have been no significant changes inthe Company’s internal controls or in other factors that could significantlyaffect internal controls subsequent to the date the Company carried out itsevaluation.

 

9

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**PART II**

**OTHER INFORMATION**

 

Item 1.             LEGAL PROCEEDINGS

 

None

 

Item 2.             CHANGES IN SECURITIES

 

None

 

Item 3.             DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 4.              SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None

 

Item 5.             OTHER INFORMATION

 

None

 

Item 6.             EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits

 
| **Number** |   | **Description of Exhibit**                                                                                                                                                                                                                                           |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                 |
| 3.1        |   | Certificate  of Incorporation [Incorporated by reference to Exhibit 3.1 to our  Registration Statement on Form S–1 (File No. 33–46061),  effective May 7, 1992]                                                                                  |
| 3.2        |   | Certificate  of Amendment of Certificate of Incorporation [Incorporated by reference to  Exhibit 3.1a to Amendment No. 1 to Post-Effective Amendment No. 1 to our  Registration Statement on Form S–2 (File No. 33-48437), filed  June 28, 1994]      |
| 3.3        |   | Certificate  of Amendment of Certificate of Incorporation [Incorporated by reference to  Exhibit 3.1b to Amendment No. 2 to Post-Effective Amendment No. 1  to our Registration Statement on Form S-2 (File No. 33-48437), filed November 7,  1994]   |
| 3.4        |   | Certificate  of Correction of Certificate of Amendment [Incorporated by reference to  Exhibit 3.1c to Amendment No. 2 to Post-Effective Amendment No. 1  to our Registration Statement on Form S-2 (File No. 33–48437), filed  November 7, 1995] |
| 3.5        |   | By-Laws, as  currently in effect [Incorporated by reference to Exhibit 3.2 to our  Registration Statement on Form S–1 (File No. 33–46061),  effective May 7, 1992]                                                                               |
| 4.1        |   | Form of  Preferred Stock Certificate [Incorporated by reference to Exhibit 4.2 to our Registration  Statement on Form S–1 (File No. 33–46061), effective  May 7, 1992]                                                                           |
| 4.2        |   | Certificate  of Designation of Class A Preferred Stock [Incorporated by reference to  Exhibit 4.5 to our Annual Report on Form 10–KSB for the fiscal year  ended September 30, 1995 (File No. 0–14210)]                                               |
| 4.3        |   | Certificate  of Designation of Class B Preferred Stock [Incorporated by reference to  Exhibit 4.6 to our Annual Report on Form 10–KSB for the fiscal year  ended September 30, 1995 (File No. 0–14210)]                                               |
| 10.1       |   | 1992 Stock  Option Plan [Incorporated by reference to Exhibit 10.12 to our Registration  Statement on Form S–1 (File No 33–46061), effective  May 7, 1992]                                                                                  |
| 10.2       |   | Form of  Non-Qualified Stock Option Agreement [Incorporated by reference to Exhibit 10  to our Registration Statement on Form S–8 (File No. 33–63435),  filed October 14, 1995]                                                                       |
| 10.3       |   | Commercial  Office Lease dated August 16, 1999 between us and L.A.T. Investment  Corporation, a California corporation [Incorporated by reference to Exhibit  10.24 to our Annual Report on Form 10–KSB for the fiscal year ended  September 30, 1999]     |
| 10.4       |   | 2002 Stock  Option Plan [Incorporated by reference to Appendix B to our Definitive Proxy  Statement on Schedule 14A (File No. 0–14210), filed on May 3,  2002]                                                                                        |
| 10.5       |   | Form of  Stock Option Agreement [Incorporated by reference to Exhibit 10.5 to the  Company’s Form 10QSB for the quarter ended June 30, 2002 (File No. 0–14210),  filed August 14, 2002]                                                          |
| 10.6       |   | Employment  Agreement entered on November 2, 2002 between CompuMed, Inc. and Mr.  McLaughlin**                                                                                                                                                                  |
| 11         |   | Statement  re: computation of per share earnings*                                                                                                                                                                                                                    |
| 99.1       |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002**                                                                                                                                           |
| 99.2       |   | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002**                                                                                                                                           |

 

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*                                         Datarequired is provided in note B to the consolidated financial statements in thisreport.

**                                  Includedherein

 

(b)                                 Form 8-K — During the fiscal quarter endedDecember 31, 2002, we did not file any reports on

  Form8-K.

 

10

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SIGNATURES

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                   |   | COMPUMED, INC.                                           |
|------------------------|--------|----------------------------------------------------------|
|                   |   | (Registrant)                                             |
|                   |   |                                                     |
|                   |   |                                                     |
| Date February 11, 2003 | By:    | /s/ John G. McLaughlin                                   |
|                   |   | John G. McLaughlin                                       |
|                   |   | President and Chief Executive  Officer                   |
|                   |   |                                                     |
| Date February 11, 2003 | By:    | /s/ Phuong Dang                                          |
|                   |   | Phuong Dang                                              |
|                   |   | Controller (Principal Financial  and Accounting Officer) |

 

**Certification**

 

I, John G. McLaughlin, certifythat:

 

1. I have reviewed thisquarterly report on Form 10-QSB of CompuMed, Inc.;

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b) evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|  Date: February 11, 2003 | /s/ JOHN G.  MCLAUGHLIN                                        |
|-------------------------------|----------------------------------------------------------------|
|                          |                                                           |
|                          |                                                           |
|                          | **JOHN G. MCLAUGHLIN  President and Chief Executive  Officer** |

 

**Certification**

 

I, Phuong Dang, certify that:

 

1. I have reviewed thisquarterly report on Form 10-QSB of CompuMed, Inc.;

 

2. Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

a) designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b) evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
|  Date: February 11, 2003 | /s/ PHUONG  DANG                                                                          |
|-------------------------------|-------------------------------------------------------------------------------------------|
|                          |                                                                                      |
|                          | **PHUONG DANG   Secretary and Controller (Principal   Financial and Accounting Officer)** |

 

11

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