**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 March 31, 2003**                                                                                                                                                             |
|                                                                                                                                                                                                          |
| **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 March 31, 2003.

 

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 – March 31, 2003 (unaudited) and September 30, 2002. |
|                                 |   |   |
|                                 |   | Statements of Operations – Three months and six months ended March  31, 2003 and 2002 (unaudited). |
|                                 |   |   |
|                                 |   | Statements of Cash Flows – Six months ended March 31, 2003 and 2002  (unaudited). |
|                                 |   |   |
|                                 |   | Notes to Financial Statements (unaudited). |
|                                 |   |   |
|                                 | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |
|                                 |   |   |
|                                 | Item 3. | 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

 

CONDENSED BALANCE SHEETS

COMPUMED, INC.

 
| ** **                                                                                                                   | ** ** | **March 31,  2003** | ** ** | **September  30, 2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                                                                                                   | ** ** | **(Unaudited)**     | ** ** | **(Note A)**            | ** ** |
| ASSETS                                                                                                                       |       |                |       |                    |       |
|                                                                                                                         |       |                |       |                    |       |
| CURRENT  ASSETS                                                                                                              |       |                |       |                    |       |
| Cash and  cash equivalents                                                                                                   |       | $                   | 25,000     |                    | $          | 78,000 |   |
| Marketable  securities                                                                                                       |       | 185,000             |       | 249,000                 |       |
| Accounts  receivable, less allowance of $25,000 (March 2003) and $41,000 (September  2002)                                   |       | 265,000             |       | 227,000                 |       |
| Inventory                                                                                                                    |       | 39,000              |       | 41,000                  |       |
| Prepaid  expenses and other current assets                                                                                   |       | 9,000               |       | 14,000                  |       |
|                                                                                                                         |       |                |       |                    |       |
| TOTAL  CURRENT ASSETS                                                                                                        |       | 523,000             |       | 609,000                 |       |
|                                                                                                                         |       |                |       |                    |       |
| PROPERTY AND  EQUIPMENT                                                                                                      |       |                |       |                    |       |
| Machinery  and equipment                                                                                                     |       | 1,286,000           |       | 1,278,000               |       |
| Furniture,  fixtures and leasehold improvements                                                                              |       | 42,000              |       | 100,000                 |       |
| Equipment  under capital leases                                                                                              |       | 35,000              |       | 66,000                  |       |
|                                                                                                                         |       | 1,363,000           |       | 1,444,000               |       |
|                                                                                                                         |       |                |       |                    |       |
| Accumulated  depreciation and amortization                                                                                   |       | (1,044,000          | )          | (1,014,000              | )          |
|                                                                                                                         |       | 319,000             |       | 430,000                 |       |
|                                                                                                                         |       |                |       |                    |       |
| Other assets                                                                                                                 |       | 28,000              |       | 28,000                  |       |
|                                                                                                                         |       |                |       |                    |       |
| TOTAL ASSETS                                                                                                                 |       | $                   | 870,000    |                    | $          | 1,067,000 |   |
|                                                                                                                         |       |                |       |                    |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                   |       |                |       |                    |       |
|                                                                                                                         |       |                |       |                    |       |
| CURRENT  LIABILITIES                                                                                                         |       |                |       |                    |       |
| Accounts  payable                                                                                                            |       | $                   | 124,000    |                    | $          | 119,000 |   |
| Accrued  liabilities                                                                                                         |       | 115,000             |       | 116,000                 |       |
| Current  portion of capital lease obligations                                                                                |       | 8,000               |       | 8,000                   |       |
|                                                                                                                         |       |                |       |                    |       |
| TOTAL  CURRENT LIABILITIES                                                                                                   |       | 247,000             |       | 243,000                 |       |
|                                                                                                                         |       |                |       |                    |       |
| Capital  lease obligations, less current portion                                                                             |       | 3,000               |       | 7,000                   |       |
|                                                                                                                         |       |                |       |                    |       |
| Commitments  and Contingencies                                                                                               |       |                |       |                    |       |
|                                                                                                                         |       |                |       |                    |       |
| 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                                                                                                  |       | 32,262,000          |       | 32,241,000              |       |
|                                                                                                                         |       |                |       |                    |       |
| Accumulated  deficit                                                                                                         |       | (31,825,000         | )          | (31,603,000             | )          |
|                                                                                                                         |       |                |       |                    |       |
| Accumulated  other comprehensive income                                                                                      |       | 14,000              |       | 2,000                   |       |
|                                                                                                                         |       |                |       |                    |       |
| Deferred  stock compensation                                                                                                 |       | (11,000             | )          | (3,000                  | )          |
|                                                                                                                         |       |                |       |                    |       |
| TOTAL  STOCKHOLDERS’ EQUITY                                                                                             |       | 620,000             |       | 817,000                 |       |
|                                                                                                                         |       |                |       |                    |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                             |       | $                   | 870,000    |                    | $          | 1,067,000 |   |

 

See notes tocondensed financial statements.

 

3

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CONDENSEDSTATEMENTS OF OPERATIONS (UNAUDITED)

COMPUMED, INC.

 
|                                                  |   | **Three  Months Ended  March 31,** |    | **Six Months  Ended  March 31,** |   |
|-------------------------------------------------------|--------|------------------------------------|---------|----------------------------------|--------|
|                                                  |   | **2003**                           |    | **2002**                         |   | **2003** |   | **2002** |   |
| REVENUES FROM OPERATIONS                              |   |                               |    |                             |   |   |   |   |   |
| ECG services                                          |   | $                                  | 401,000 |                             | $      | 429,000 |   | $ | 811,000 |   | $ | 844,000 |   |
| ECG product and supplies sales                        |   | 29,000                             |    | 37,000                           |   | 57,000 |   | 74,000 |   |
| OsteoGram® sales and services                    |   | 52,000                             |    | 45,000                           |   | 66,000 |   | 45,000 |   |
|                                                  |   | 482,000                            |    | 511,000                          |   | 934,000 |   | 963,000 |   |
| COSTS AND EXPENSES                                    |   |                               |    |                             |   |   |   |   |   |
| Costs of ECG services                                 |   | 119,000                            |    | 128,000                          |   | 243,000 |   | 252,000 |   |
| Cost of goods sold-ECG                                |   | 20,000                             |    | 25,000                           |   | 41,000 |   | 49,000 |   |
| Cost of goods sold-OsteoGram®                    |   | 5,000                              |    | 7,000                            |   | 7,000 |   | 7,000 |   |
| Selling expenses                                      |   | 62,000                             |    | 71,000                           |   | 144,000 |   | 135,000 |   |
| Research and development                              |   | 56,000                             |    | 59,000                           |   | 107,000 |   | 109,000 |   |
| General and administrative expenses                   |   | 240,000                            |    | 247,000                          |   | 514,000 |   | 515,000 |   |
| Depreciation and amortization                         |   | 53,000                             |    | 66,000                           |   | 108,000 |   | 140,000 |   |
|                                                  |   | 555,000                            |    | 603,000                          |   | 1,164,000 |   | 1,207,000 |   |
|                                                  |   |                               |    |                             |   |   |   |   |   |
| OPERATING LOSS                                        |   | (73,000                            | )       | (92,000                          | )      | (230,000 | ) | (244,000 | ) |
|                                                  |   |                               |    |                             |   |   |   |   |   |
| Interest income and dividends                         |   | 6,000                              |    | 11,000                           |   | 14,000 |   | 20,000 |   |
| Realized gain on marketable securities                |   | 8,000                              |    | -0-                              |   | 10,000 |   | -0- |   |
| Interest expense                                      |   | -0-                                |    | 2,000                            |   | (1,000 | ) | 1,000 |   |
| NET LOSS                                              |   | $                                  | (59,000 | )                                | $      | (79,000 | ) | $ | (207,000 | ) | $ | (223,000 | ) |
|                                                  |   |                               |    |                             |   |   |   |   |   |
| NET LOSS PER SHARE (Basic and diluted)                |   | $                                  | (.00    | )                                | $      | (.00 | ) | $ | (.01 | ) | $ | (.01 | ) |
|                                                  |   |                               |    |                             |   |   |   |   |   |
| Weighted average number of common shares  outstanding |   | 17,869,309                         |    | 17,869,309                       |   | 17,869,309 |   | 17,869,309 |   |

 

See notes tocondensed financial statements.

 

4

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CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

COMPUMED, INC.

 
| ** **                                                                       | ** ** | **Six Months  Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                             |       | **March 31,  2003**   | ** ** | **March 31,  2002** |   |
| OPERATING  ACTIVITIES:                                                           |       |                  |       |   |   |
| Net loss                                                                         |       | $                     | (207,000   | ) | $ | (223,000 | ) |
| Net  adjustments to reconcile net loss to net cash used in operating activities: |       |                  |       |   |   |
| Realized  gain on marketable securities                                          |       | (10,000               | )          | — |   |
| Amortization  of deferred stock compensation                                     |       | 13,000                |       | 10,000 |   |
| Depreciation  and amortization                                                   |       | 108,000               |       | 140,000 |   |
| Changes in  operating assets and liabilities:                                    |       |                  |       |   |   |
| Accounts  receivable                                                             |       | (38,000               | )          | 31,000 |   |
| Inventory,  prepaid expenses and other assets                                    |       | 7,000                 |       | (7,000 | ) |
| Accounts  payable and other liabilities                                          |       | (7,000                | )     | (30,000 | ) |
| NET CASH  USED IN OPERATING ACTIVITIES                                           |       | (134,000              | )          | (79,000 | ) |
|                                                                             |       |                  |       |   |   |
| INVESTING  ACTIVITIES:                                                           |       |                  |       |   |   |
| Sales of  marketable securities                                                  |       | 86,000                |       | — |   |
| Purchases/Sales/Disposals  of property, plant and equipment                      |       | (1,000)               |       | (7,000 | ) |
| NET CASH  PROVIDED BY (USED IN) INVESTING ACTIVITIES                             |       | 85,000                |       | (7,000 | ) |
|                                                                             |       |                  |       |   |   |
| FINANCING  ACTIVITIES:                                                           |       |                  |       |   |   |
| Principal  payments on capital lease obligations                                 |       | (4,000                | )          | (37,000 | ) |
|                                                                             |       |                  |       |   |   |
| NET CASH  USED IN FINANCING ACTIVITIES                                           |       | (4,000                | )          | (37,000 | ) |
|                                                                             |       |                  |       |   |   |
| DECREASE IN  CASH AND CASH EQUIVALENTS                                           |       | (53,000               | )          | (123,000 | ) |
|                                                                             |       |                  |       |   |   |
| Cash and  cash equivalents at beginning period                                   |       | 78,000                |       | 239,000 |   |
|                                                                             |       |                  |       |   |   |
| CASH AND  CASH EQUIVALENTS AT END OF PERIOD                                      |       | $                     | 25,000     |   | $ | 116,000 |   |
|                                                                             |       |                  |       |   |   |
| Cash paid  for interest                                                          |       | $                     | —     |   | $ | 2,000 |   |
|                                                                                  |            |                       |            |  |  |  |  |  |

 

See notes tocondensed financial statements.

 

5

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NOTES TO CONDENSED FINANCIALSTATEMENTS (UNAUDITED)

COMPUMED, INC.

 

NOTE A–BASIS OF PREPARATION

 

 

The accompanying interim unaudited financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and pursuant to the rules andregulations of the Securities and Exchange Commission.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operating results for the three-month and six-month period ended March 31, 2003are not necessarily indicative of the results that may be expected for the yearending September 30, 2003.  For further information, refer to thefinancial statements for the year ended September 30, 2002 and the notesthereto included in the Company’s Annual Report on Form 10–KSB.

 

The balance sheet at September 30, 2002 has been derived from theCompany’s year-end audited financial statements but does not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. 

 

Certain reclassifications have been made to prior period amounts toconform to the current period presentation.

 

The Companyhas historically used existing cash and readily available marketable securitiesbalances to fund operating losses and capital expenditures.  The Companyraised these funds in 1997 through 2000 through the placement of PreferredStock issuances and proceeds from the exercise of certain stock options andwarrants.

 

The Company’sbusiness strategy includes an increase in OsteoGram® sales throughdomestic and international marketing and distribution efforts.  TheCompany intends to finance this business strategy by using current workingcapital resources and cash flows from existing operations, including the ECGand OsteoGram® businesses.  There can be no assurance that theOsteoGram® 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 or convertible securities, the percentage of ownership ofexisting stockholders would be reduced. Furthermore, these equity andconvertible securities might have rights, preferences or privileges senior toour Common Stock.  Our Common Stock is currently listed on the over-the-counter(OTC) bulletin board, which will make it more difficult to raise funds throughthe issuance of equity or convertible securities (prior to December 1, 1999,our Common Stock was listed on NASDAQ).  There can be no assurance that such additional sources of financing will beavailable on acceptable terms, if at all.

 

NOTE B–PER SHARE DATA

 

Basic loss per share is calculated using the net loss, less preferredstock dividends ($14,000 and $0 for the six months ended March 31, 2003 and2002, respectively), divided by the weighted average common sharesoutstanding.  Shares from the assumed exercise of outstanding warrants,options and effect of the conversion of the Class A Preferred Stock and Class BPreferred Stock are omitted from the computations of diluted loss per sharebecause the effect would be antidilutive.

 

NOTE C–COMMITMENTS AND CONTINGENCIES

 

On January 26, 1998, the United States District Court for the CentralDistrict of California approved the settlement of the class action and derivativelawsuits on the terms agreed to by the parties in the Memorandum ofUnderstanding entered into on August 5, 1996.  The final settlement isanticipated to be completed in the current fiscal year and will involve theissuance of 770,000 shares of Common Stock and the issuance of 1,870,000warrants for the purchase of Common Stock at a price of $3.00.  The effectof these issuances on the Company’s statement of operations was recorded duringthe fiscal year ended September 30, 1997.

 

6

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NOTE D –MARKETABLE SECURITIES

 

Marketablesecurities consist of investments in equity and bonds in various publiclytraded domestic companies and are stated at market value based on the mostrecently traded prices of these securities at March 31, 2003.  Theseshort-term investments are defined as assets available for sale under theprovisions of FASB Statement No. 115, “Accounting for Certain Investments inDebt and Equity Securities.”

 

During thequarter ended March 31, 2003, the Company recognized $12,000 of unrealizedgains, which was recorded as a component of Accumulated Other ComprehensiveIncome in Stockholders’ Equity.  At March 31, 2003 and September 30, 2002the Company’s investments in marketable securities are as follows:

 
| **Investments Types** | ** ** | **March 31,  2003** | ** ** | **September  30, 2002** | ** ** |
|-----------------------|------------|---------------------|------------|-------------------------|------------|
| Corporate  Bonds      |       | $                   | 13,000     |                    | $          | 10,000 |   |
| Common Stock          |       | 172,000             |       | 239,000                 |       |
|                  |       |                |       |                    |       |
| Total                 |       | $                   | 185,000    |                    | $          | 249,000 |   |

 

7

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

 

**SAFE HARBOR FORFORWARD-LOOKING STATEMENTS**

 

We areincluding the following cautionary statement in this Quarterly Report on Form10-QSB to make applicable and take advantage of the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995 with respect toforward-looking statements made by us, or on our behalf.  Forward-looking statements includestatements concerning plans, objectives, goals, strategies, future events orperformance and underlying assumptions and other statements that are other thanstatements of historical facts.  Fromtime to time, we may make written or oral statements that are forward-looking includingstatements contained in this report and other filings with the Securities andExchange Commission.  Theseforward-looking statements are principally contained in the section captioned“Management’s Discussion and Analysis of Operations”.  In that and other portions of this Form 10-QSB, the words“anticipates”, “believes,” “estimates,” “seeks,” “expects,” “plans,” “intends”and similar expressions as they relate to us or our management are intended toidentify forward-looking statements. All such forward-looking statements are expressly qualified by thesecautionary statements.  Forward-looking statements involve risks anduncertainties that could cause actual results or outcomes to differ materiallyfrom those expressed in the forward-looking statements.  The forward-looking statements containedherein are based on various assumptions, many of which are based, in turn, uponfurther 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 toother factors and matters discussed elsewhere herein, the following areimportant factors that, in our view, could cause actual results to differmaterially from those discussed in the forward-looking statements:technological advances by our competitors, the impact of competition,dependence on key employees and the need to attract new management,effectiveness and costs of sales and marketing efforts, acceptance of productofferings, ability to expand into new markets, the risks of patent claims orother third party liability, and the risks of launching a new product orservice, such as our OsteoGram® test, changes in health careregulation, including reimbursement programs, capital needs to fund any delaysor extensions of research programs and the availability of capital on termssatisfactory us.  We disclaim anyobligation to update any forward-looking statements to reflect events orcircumstances after the date hereof.

 

**Overview**

 

Our corebusiness is providing remote electrocardiograph (ECG) interpretation servicesto customers who do not have access to self-interpreting ECG systems.  Our customers include health care providersin the correctional health system, ambulatory surgery centers and occupationalhealth clinics.  A unique feature of ourservice offering is an automated reflex to a cardiologist for an overread, whena further review of the patient is desirable. The end-user selects the reflex option on their ECG system, and weimmediately send the ECG trace to a cardiologist for a thorough workup.  We have implemented measures to improve ourservice, and we are actively exploring new opportunities in the existingmarket.  However, we could losecustomers who choose to receive services from a competitor or who purchase aself-interpretive machine and no longer need our ECG interpretations.  If we were to lose existing customers, theymay be difficult to replace and that could have a material adverse impact onour operations and financial condition.

 

Ten years ago we acquired theOsteoGram® technology to diagnose osteoporosis from a standard handx-ray coupled with computer imaging techniques.  Osteoporosis is a “silent disease” that affects over 200 millionpeople worldwide, 80% of which are women. During the interim period we licensed our technology to Merck & Co.,as they developed their successful osteoporosis drug- Fosamax.  We have since automated the OsteoGram® technologyto work with a desktop scanner and computer, and we currently market theOsteoGram® system to hospitals, clinics and physician offices, bothin the domestic and international markets. We believe that the future of our company lies in the successfulexploitation of our underlying OsteoGram® technology, especially inthe field of digital, or filmless, radiological devices.  The world of radiography is rapidly movingtowards digital platforms, which enable clinicians to transfer images fromradiology, orthopedic surgery or the emergency setting to other areas of thehospital or offsite physicians’ offices for rapid diagnosis and archiving.  Our present OsteoGram® softwareapplication is being converted to the DICOM format, which is the computerprotocol used by digital imaging platforms, such as computed radiography (CR),digital radiography (DR) and network servers (PACS systems).  This will allow busy clinicians to utilizetheir state-of-the-art digital platforms to diagnose osteoporosis at apoint-of-care without the need for expensive DXA systems and specially trainedtechnicians.  As we further expand ourOsteoGram® technology to measure, follow and diagnose otherdiseases, such as arthritis, the applications will become value-added toolsthat free up clinicians from time-consuming tasks.  Our business model has caught the attention of several majorimaging manufacturers, and they are evaluating our existing osteoporosisapplication for placement on the digital platforms.  In addition, we are having discussions with these manufacturersto develop other high value applications that will open up new markets whereour products will assist their efforts in selling incremental digital units.

 

For the quarter ended March 31,2003 we continued to concentrate our business development efforts ondistribution for our OsteoGram® product in the domestic andinternational markets, as well as foster strategic partnerships with majorimaging manufacturers.  As westrengthened our distribution in the U.S. and China, we also entered the Koreanmarket where our local partner has filed for registration with the KoreanFDA.  We have identified a number ofsuitable distribution partners in the Middle East, South Asia and Latin America.  Our goal is to sign, train and subsequentlysupport our new partners through the regulatory process in their respectivecountries in order that we can come to market as soon as possible.  Concurrently, our Research and Developmentfocus is to convert the existing OsteoGram® software application tothe DICOM format and to complete the development of our second application,which will follow the progression of arthritic disease.  Our scientific team has also been generatingthe required data to submit for a CE Mark, which will enable us to enter themarket in the European Union.

 

**Critical AccountingPolicies**

 

Due to thenature of the business, few critical accounting policies are applicable and nosubjective, complex judgments have been made by the Company with respect toaccounting estimates.  The criticalaccounting policies of the Company are disclosed in Note A to the FinancialStatements included in the Company’s Annual Report on Form 10-KSB for the yearended September 30, 2002.

 

**Recent Accounting Pronouncements**

** **

In December2002, the FASB issued SFAS No. 148, "Accounting for Stock-BasedCompensation—Transition and Disclosure", which amends SFAS No, 123,"Accounting for Stock-Based Compensation". SFAS 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation and requiresmore prominent and more frequent disclosures in the financial statements of theeffects of stock-based compensation. The provisions of SFAS 148 are effectivefor fiscal years ending after December 15, 2002 and the interim disclosureprovisions are effective for the current period. 

 

Pro formainformation regarding net loss and loss per share has not been presentedbecause the effect of the employee stock option grants is immaterial. 

 

**Resultsof Operations**

 

Revenues fromECG operations decreased by 8% for the Second Quarter 2003 to $430,000 from$466,000 for the same period in fiscal 2002, and during the six months endedMarch 31, 2003 decreased by 5% to $868,000 from $918,000 for the same period infiscal 2002.  The decrease is mostly dueto lower sales of equipment.  Revenuesfrom the Company’s OsteoGram® sales and services for the SecondQuarter ended March 31, 2003 increased by 16% to $52,000 from $45,000 for thesame period in fiscal 2002, and during the six months ended March 31, 2003increased by 47% to $66,000 from $45,000 for the same period in fiscal2002.  The increase is mostly due toOsteoGram® sales generated in Asia.

 

Cost of servicesand goods sold consists of the costs of ECG services provided, supplies, salesof electrocardiograph equipment and OsteoGram® systems and certainoverhead expenses.  During the Second Quarter 2003, costs of services andgoods sold decreased by 10% to $144,000 from $160,000 for the same period infiscal 2002, and during the six months ended March 31, 2003 decreased by 6% to$291,000 from $308,000 for the same period in fiscal 2002.  The decrease in cost of services isgenerally due to lower sales of equipment and reduction of certain overheadexpenses.

 

General andadministrative expenses decreased by 3% during the Second Quarter 2003 to$240,000, as compared to $247,000 for the same period in fiscal 2002, andduring the six months ended March 31, 2003 decreased slightly to $514,000 ascompared to $515,000 for the same period in fiscal 2002, mostly due toincremental cost-cutting measures offset by certain stock compensation cost.

 

8

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Research anddevelopment costs, generally for the OsteoGram® product, decreasedby 5% during the Second Quarter 2003 to $56,000 as compared to $59,000 forthe same period in fiscal 2002, and during the six months ended March 31, 2003decreased by 2% to $107,000 as compared to $109,000 for the same period offiscal 2002, due to decreased clinical trials expenses.

 

Sellingexpenses decreased by 13% during the Second Quarter ended March 31, 2003 to$62,000 as compared to $71,000 for the same period in fiscal 2002, due toreduction of trade show related expenses, and increased by 7% during the sixmonths ended March 31, 2003 to $144,000 as compared to $135,000 for the sameperiod in fiscal 2002, primarily due to increased marketing activities andconsulting services associated with the OsteoGram®.

 

We recorded interest and dividend income during the Second Quarterended March 31, 2003 of $6,000 as compared to $11,000 for the same period infiscal 2002, and during the six months ended March 31, 2003, we recorded$14,000 as compared to $20,000 for the same period in fiscal 2002.  The decrease was generally due to a decreasein the marketable securities balance from 2003 to 2002.

 

Net loss for the Second Quarter ended March 31, 2003 decreased 25% to$59,000 compared to a loss of $79,000 for the same period in fiscal 2002. Netloss for the six months ended March 31, 2003 was $207,000 as compared to$223,000 for the same period in fiscal 2002. The decreased loss is due to the factors described above.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

At March 31, 2003, we had approximately $210,000 in cash and marketablesecurities, as compared to a balance of $327,000 at September 30, 2002. The net decrease of $117,000 in cash and marketable securities is primarily dueto cash used in operations.  The decrease of working capital to $276,000at March 31, 2003 from $366,000 at September 30, 2002 is primarily a result oflosses from operations.  Purchases of property, plant and equipment were$9,000 in the quarter ended March 31, 2003 offset by proceeds of certain officeequipment sales.

 

We havehistorically used existing cash and readily available marketable securitiesbalances to fund operating losses and capital expenditures.  We raisedthese funds in 1997 through 2000 through the placement of Preferred Stockissuances and proceeds from the exercise of certain stock options and warrants.

 

Our businessstrategy includes an increase in OsteoGram® sales through domesticand international marketing and distribution efforts.  We intend to financethis business strategy by using our current working capital resources and cashflows 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.

 

We anticipate that our cash flow from operations, available cash andmarketable securities will be sufficient to meet our anticipated financialneeds for at least the next 12 months.  However, in certain circumstanceswe may need to raise additional capital in the future, which might not beavailable on reasonable terms or at all.  Failure to raise capital whenneeded could adversely impact our business, operating results andliquidity.  If additional funds are raised through the issuance of equityor convertible securities, the percentage of ownership of existing stockholderswould be reduced. Furthermore, these equity and convertible securities mighthave rights, preferences or privileges senior to our Common stock.  OurCommon Stock is currently listed on the over-the-counter (OTC) bulletin board,which will make it more difficult to raise funds through the issuance of equityor convertible securities (prior to December 1, 1999, our Common Stock waslisted on NASDAQ).  We cannot assure you that such additional sources offinancing will be available on acceptable terms, if at all.

 

Our primary capital resource commitments at March 31, 2003 consist of capitaland operating lease commitments, primarily for computer equipment and for ourcorporate office facility as mentioned in the Company’s Annual Report Form10-KSB for the year ended September 30, 2002.

 

We intend to pursue additional research and/or sub-contractoragreements relating to our development projects.  Additionally, we mayseek partners and acquisition candidates of businesses that are complementaryto our own.  Such investments would be subject to our obtaining financingthrough issuance of debt or other securities.  No assurance can be giventhat any acquisition would not be dilutive to stockholders.

 

**Item3****.  Control and Procedures**

 

Within the 90days prior to the date of this report, the Company carried out an evaluation,under the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Principal AccountingOfficer, of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and PrincipalAccounting Officer concluded that the Company’s disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company  required to beincluded in the Company’s periodic SEC filings.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the date the Companycarried out its evaluation.

 

Our CEO andCFO do not expect that our disclosure controls or our internal controls willprevent all error and all fraud. A control system, no matter how well conceivedand operated, can provide only reasonable, not absolute, assurance that theobjectives of the system are met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs.  Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control. The design of any system of controls also is based partly oncertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

 

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 SECURITY HOLDERS |
|    |                                                |
|    | 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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| *      | Data required is provided in note B to the consolidated financial  statements in this report.             |
|--------|-----------------------------------------------------------------------------------------------------------|
| **     | Included herein                                                                                           |
|   |                                                                                                      |
| (b)    | Form 8-K — During the fiscal quarter ended  March 31, 2003, we did not file any reports on Form 8-K. |

 

10

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|              |   | COMPUMED, INC.                                          |   |
|-------------------|--------|---------------------------------------------------------|--------|
|              |   | (Registrant)                                            |
|              |   |                                                    |
|              |   |                                                    |
| Date May 12, 2003 | By:    | /s/ John G. McLaughlin                                  |   |
|              |   | John G. McLaughlin                                      |
|              |   | President and Chief Executive Officer                   |
|              |   |                                                    |
| Date May 12, 2003 | By:    | /s/ Phuong Dang                                         |   |
|              |   | Phuong Dang                                             |
|              |   | Controller (Principal Financial and Accounting Officer) |
|                   |        |                                                         |        |  |  |

 

**Certification**

 

I, John G.McLaughlin, certify that:

 

1. I havereviewed this quarterly report on Form 10-QSB of CompuMed, Inc.;

 

2. Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on myknowledge, the financial statements, and other financial information includedin this quarterly 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. Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectivenessof the disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5. Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

11

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6. Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 12, 2003 | /s/ JOHN G. MCLAUGHLIN                                         |
|--------------------|----------------------------------------------------------------|
|               |                                                           |
|               |                                                           |
|               | **JOHN G. MCLAUGHLIN  President and Chief Executive  Officer** |

 

**Certification**

 

I, PhuongDang, certify that:

 

1. I havereviewed this quarterly report on Form 10-QSB of CompuMed, Inc.;

 

2. Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on myknowledge, the financial statements, and other financial information includedin this quarterly 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. Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date: May 12, 2003 | /s/ PHUONG DANG                                                                           |
|--------------------|-------------------------------------------------------------------------------------------|
|               |                                                                                      |
|               | **PHUONG DANG   Secretary and Controller (Principal   Financial and Accounting Officer)** |

 

12

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