##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
  þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 Commission file number: 0-9463
 MDI, INC.
  DELAWARE
    
    75-2626358(State or other jurisdiction
Of incorporation or organization)
    
    (I.R.S. Employer
Identification
No.)9725 DATAPOINT DRIVE, SUITE 200
SAN ANTONIO, TEXAS
(Address of principal executive offices)
    
    78229
(Zip Code)
 (210) 477-5400
 NONE
  COMMON STOCK, $.01 PAR VALUE
 þ o
 o o




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##### 



MDI, INC.
FORM 10-QSB
TABLE OF CONTENTS
 FORWARD LOOKING STATEMENTSPART IITEM 1: FINANCIAL STATEMENTSITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONSITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4: CONTROLS AND PROCEDURESPART IIITEM 1: LEGAL PROCEEDINGSITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDSITEM 3: DEFAULTS UPON SENIOR SECURITIESITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5: OTHER INFORMATIONITEM 6: EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESCERTIFICATIONSCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive Officer and Chief Financial Officer
  Forward Looking Statements
  2




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 MDI, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,708
    
    
    $
    2,140Trade accounts receivable, net
    
    
    2,023
    
    
    
    1,912Inventories
    
    
    1,078
    
    
    
    1,008Prepaid expenses and other current assets
    
    
    318
    
    
    
    191Total current assets
    
    
    5,127
    
    
    
    5,251Property and Equipment, net
    
    
    489
    
    
    
    661Other Assets:Goodwill
    
    
    4,612
    
    
    
    2,792Other intangible assets, net
    
    
    32
    
    
    
    35Other assets
    
    
    451
    
    
    
    520Total assets
    
    $
    10,711
    
    
    $
    9,259LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    1,224
    
    
    $
    876Accrued expenses
    
    
    323
    
    
    
    256Deferred legal settlement
    
    
    388
    
    
    
    388Accrued compensation
    
    
    467
    
    
    
    401Other current liabilities
    
    
    2
    
    
    
    70Deferred revenue
    
    
    245
    
    
    
    236Total current liabilities
    
    
    2,649
    
    
    
    2,227Long-Term Liabilities
    
    
    
    
    
    
    Commitments and Contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, $5 par value, issuable in
series; 2,000,000 shares authorized; Series A,
LIBOR + 2% cumulative convertible; 195,351
shares authorized, issued and outstanding
    
    
    977
    
    
    
    977Common stock, $.01 par value; 100,000,000 shares
authorized; 25,965,960 and 21,174,137 shares
issued at June 30, 2006 and December 31, 2005,
respectively
    
    
    260
    
    
    
    212Additional paid-in-capital
    
    
    171,239
    
    
    
    166,926Accumulated deficit
    
    
    (125,713
    )
    
    
    (122,382
    )Treasury stock, at cost (3,488,350 common shares
at June 30, 2006 and December 31, 2005)
    
    
    (38,701
    )
    
    
    (38,701
    )Total stockholders equity
    
    
    8,062
    
    
    
    7,032Total liabilities and stockholders equity
    
    $
    10,711
    
    
    $
    9,259
  3




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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Three months ended June 30,2006
    
    
    2005Net sales
    
    $
    2,219
    
    
    $
    1,754Cost of sales (exclusive of depreciation shown separately below)
    
    
    1,165
    
    
    
    951Gross profit
    
    
    1,054
    
    
    
    803Other operating costs:Selling, general and administrative
    
    
    2,675
    
    
    
    2,487Non cash stock compensation
    
    
    183
    
    
    
    Depreciation and amortization
    
    
    121
    
    
    
    1982,979
    
    
    
    2,685Operating loss
    
    
    (1,925
    )
    
    
    (1,882
    )Other income (expense):Interest income
    
    
    10
    
    
    
    Other, net
    
    
    
    
    
    
    62810
    
    
    
    628Loss from continuing operations
    
    
    (1,915
    )
    
    
    (1,254
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    (45
    )Net loss
    
    
    (1,915
    )
    
    
    (1,299
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (8
    )Net loss allocable to common stockholders
    
    $
    (1,923
    )
    
    $
    (1,307
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.09
    )
    
    $
    (0.09
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.00
    )Basic and diluted loss per share
    
    $
    (0.09
    )
    
    $
    (0.09
    )Number of common shares used in computations
    
    
    22,335,110
    
    
    
    14,617,603
  4




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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Six months ended June 30,2006
    
    
    2005Net sales
    
    $
    4,914
    
    
    $
    3,702Cost of sales (exclusive of depreciation shown separately below)
    
    
    2,415
    
    
    
    1,913Gross profit
    
    
    2,499
    
    
    
    1,789Other operating costs:Selling, general and administrative
    
    
    5,223
    
    
    
    5,029Non cash stock compensation
    
    
    347
    
    
    
    Depreciation and amortization
    
    
    242
    
    
    
    3945,812
    
    
    
    5,423Operating loss
    
    
    (3,313
    )
    
    
    (3,634
    )Other income (expense):Interest income
    
    
    10
    
    
    
    2Loss on disposal of fixed assets
    
    
    
    
    
    
    (2
    )Other, net
    
    
    1
    
    
    
    62811
    
    
    
    628Loss from continuing operations
    
    
    (3,302
    )
    
    
    (3,006
    )Income (loss) from discontinued operations
    
    
    (12
    )
    
    
    (38
    )Net loss
    
    
    (3,314
    )
    
    
    (3,044
    )Dividend requirements on preferred stock
    
    
    (17
    )
    
    
    (17
    )Net loss allocable to common stockholders
    
    $
    (3,331
    )
    
    $
    (3,061
    )Basic and diluted earnings (loss) per share from:Continuing operations
    
    $
    (0.15
    )
    
    $
    (0.21
    )Discontinued operations
    
    
    (0.00
    )
    
    
    (0.00
    )Basic and diluted loss per share
    
    $
    (0.15
    )
    
    $
    (0.21
    )Number of common shares used in computations
    
    
    22,335,110
    
    
    
    14,617,603
  5




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MDI, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six months ended June 30,2006
    
    
    2005Operating Activities:Net loss
    
    $
    (3,314
    )
    
    $
    (3,044
    )Adjustments to reconcile net loss to net cash used in operating activities:Non cash stock compensation
    
    
    347
    
    
    
    Loss on disposal of fixed assets
    
    
    
    
    
    
    2Depreciation and amortization
    
    
    242
    
    
    
    394Provision for losses on accounts receivable
    
    
    11
    
    
    
    (8
    )Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    (122
    )
    
    
    1,441Inventories
    
    
    (70
    )
    
    
    (420
    )Prepaid and other current assets
    
    
    (58
    )
    
    
    (83
    )Trade accounts payable
    
    
    348
    
    
    
    (110
    )Accrued and other current liabilities
    
    
    75
    
    
    
    (789
    )Net cash used in operating activities
    
    
    (2,541
    )
    
    
    (2,617
    )Investing Activities:Purchases of property and equipment
    
    
    (67
    )
    
    
    (127
    )Net cash used in investing activities
    
    
    (67
    )
    
    
    (127
    )Financing Activities:Purchase of treasury stock
    
    
    
    
    
    
    Issuance of common stock
    
    
    2,193
    
    
    
    Payment of preferred stock dividends
    
    
    (17
    )
    
    
    (17
    )Net cash provided by (used in) financing activities
    
    
    2,176
    
    
    
    (17
    )Net decrease in cash and cash equivalents
    
    
    (432
    )
    
    
    (2,761
    )Cash and cash equivalents, beginning of period
    
    $
    2,140
    
    
    $
    3,368Cash and cash equivalents, end of period
    
    $
    1,708
    
    
    $
    607Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    Non-cash
investing and financing activities:
Goodwill acquisition from purchase of Advanced Security Link
with common stock
    
    $
    1,820
    
    
    $
    
  6




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MDI, Inc.
 Notes to Consolidated Financial Statements
 Note 1: General / Nature of Operations and Significant Accounting Principles
 General
       www.mdisecure.com
 7




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Basis of Presentation
   Stock-Based Compensation
     8




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Three months endedJune 30, 2005Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (1,262
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (267
    )Pro forma
    
    $
    (1,529
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.09
    )Pro forma
    
    $
    (0.10
    )
 Six months endedJune 30, 2005Net loss from continuing operations
allocable to common stockholders:As reported
    
    $
    (3,023
    )Deduct: Total stock-based compensation under fair value
based method for all awards
    
    
    (541
    )Pro forma
    
    $
    (3,564
    )Basic and diluted loss per share from continuing
operationsAs reported
    
    $
    (0.21
    )Pro forma
    
    $
    (0.24
    )
 Warranty Reserves
   Three months ended June 30,2006
    
    
    2005Beginning balance
    
    $
    86
    
    
    $
    68Charged to expense
    
    
    2
    
    
    
    1Usage
    
    
    
    
    
    
    Closing balance
    
    $
    88
    
    
    $
    69
 Six months ended June 30,2006
    
    
    2005Beginning balance
    
    $
    83
    
    
    $
    80Charged to expense
    
    
    5
    
    
    
    3Usage
    
    
    
    
    
    
    (14
    )Closing balance
    
    $
    88
    
    
    $
    69
 9




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Reclassifications
  Note 2: Business acquisition
  Note 3: Trade Accounts Receivable
  June 30,
    
    
    December 31,2006
    
    
    2005Gross trade accounts receivable
    
    $
    2,250
    
    
    $
    2,131Less: allowance for doubtful
accounts
    
    
    (227
    )
    
    
    (219
    )$
    2,023
    
    
    $
    1,912
 Note 4: Earnings Per Share
   Note 5: Severance Compensation
  Accrued at
    
    
    2006 Charges
    
    
    Amount paid
    
    
    Accrued atDecember 31, 2005
    
    
    (credits)
    
    
    in cash
    
    
    June 30, 2006Severance
    
    
    10
    
    
    
    87
    
    
    
    (85
    )
    
    
    12$
    10
    
    
    $
    87
    
    
    $
    (85
    )
    
    $
    12
   10




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Note 6: Litigation
   Note 7: Sale of Common Stock
 st
 Note 8: Changes to Company Stock
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
  11




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PercentagePercentage of Net Sales
    
    Increase (Decrease)Three Months ended June 30,
    
    Between Periods2006
    
    2005
    
    2006 vs. 2005Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    26.5
    %Cost of sales
    
    
    52.5
    %
    
    
    54.2
    %
    
    
    22.5
    %Gross profit
    
    
    47.5
    %
    
    
    45.8
    %
    
    
    31.3
    %Operating expenses:Selling, general and administrative
    
    
    120.5
    %
    
    
    141.8
    %
    
    
    7.6
    %Depreciation and amortization
    
    
    5.5
    %
    
    
    11.3
    %
    
    
    -38.9
    %Operating loss
    
    
    -86.8
    %
    
    
    -107.3
    %
    
    
    -2.3
    %Other income (expense)
    
    
    0.5
    %
    
    
    35.8
    %
    
    
    98.4
    %Loss before taxes and discontinued operations
    
    
    -86.3
    %
    
    
    -71.5
    %
    
    
    -52.7
    %Loss from continuing operations
    
    
    -86.3
    %
    
    
    -71.5
    %
    
    
    -52.7
    %Loss from discontinued operations
    
    
    0.0
    %
    
    
    -2.6
    %
    
    
    100.0
    %Net loss
    
    
    -86.3
    %
    
    
    -74.1
    %
    
    
    -47.4
    %Net loss allocable to common stockholders
    
    
    -86.7
    %
    
    
    -74.5
    %
    
    
    -47.1
    %
 PercentagePercentage of Net Sales
    
    Increase (Decrease)Six Months ended June 30,
    
    Between Periods2006
    
    2005
    
    2006 vs. 2005Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    32.7
    %Cost of sales
    
    
    49.1
    %
    
    
    51.7
    %
    
    
    26.2
    %Gross profit
    
    
    50.9
    %
    
    
    48.3
    %
    
    
    39.7
    %Operating expenses:Selling, general and administrative
    
    
    106.3
    %
    
    
    135.8
    %
    
    
    3.9
    %Depreciation and amortization
    
    
    4.9
    %
    
    
    10.6
    %
    
    
    -38.6
    %Operating loss
    
    
    -67.4
    %
    
    
    -98.2
    %
    
    
    -8.8
    %Other income (expense)
    
    
    0.2
    %
    
    
    17.0
    %
    
    
    98.2
    %Loss before taxes and discontinued operations
    
    
    -67.2
    %
    
    
    -81.2
    %
    
    
    -9.8
    %Loss from continuing operations
    
    
    -67.2
    %
    
    
    -81.2
    %
    
    
    -9.8
    %Loss from discontinued operations
    
    
    -0.2
    %
    
    
    -1.0
    %
    
    
    68.4
    %Net loss
    
    
    -67.4
    %
    
    
    -82.2
    %
    
    
    -8.9
    %Net loss allocable to common stockholders
    
    
    -67.8
    %
    
    
    -82.7
    %
    
    
    -8.8
    %
 Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
   12




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Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
      13




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Financial Condition, Liquidity and Capital Resources
      Contractual Obligations and Commitments
  Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010Contractual
obligations and
commitments:Operating leases
    
    $
    1,986
    
    
    $
    299
    
    
    $
    599
    
    
    $
    575
    
    
    $
    513
    
    
    $
    0Severance obligations
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,998
    
    
    $
    311
    
    
    $
    599
    
    
    $
    575
    
    
    $
    513
    
    
    $
    0
  14




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rates
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II
 
 ITEM 1. LEGAL PROCEEDINGS
    15




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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
  
 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
     b)
    
    Reports on Form 8-K. The following reports on Form 8-K were filed during the three
months ended June 30,2006:
 1.
    
    On May 23, 2006, MDI, Inc. (MDI) entered into identical Securities Purchase
Agreements, Registration Rights Agreements and Common Stock Purchase Warrants with the
following investors: Crestview Capital Master, LLC, Iroquois Master Fund LTD, Rockmore
Investment Master Fund Ltd, Cranshire Capital, L.P. and Bristol Investment Fund, Ltd.
providing for the sale by MDI of 2,875,000 shares of common stock priced at $0.80 per share
and warrants totaling 1,150,000 shares exercisable at $1.02 having a five year term from
the date of issuance and exercisable on or after the 181st day following the closing of the
sale.
 16




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##### Table of Contents



2.
    
    On January 6, 2006, Peter Knepper, a member of the Board of Directors, agreed to
function as the Companys Interim Chief Financial Officer and Interim Chief Operating
Officer. Effective June 6, 2006, Mr. Knepper no longer will function in these capacities.
He remains a member of the Board of Directors. The Company intends to retain a permanent
Chief Financial Officer and is actively conducting a search for that position.3.
    
    On June 23, 2006, MDI, Inc. (the Company) issued a Press Release (the Press
Release) announcing the following management appointments: James A. Kitchens had been
appointed Vice President  Finance and Chief Financial Officer; Michael R. Sweet had been
appointed Senior Vice President  Chief Operating Officer and Harold J. Haug had been
appointed Senior Vice President  Sales and Marketing, all effective Thursday, June 22,
2006.
 17




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SIGNATURES
  MDI, INC.Dated: August 14, 2006
    By:
    /s/ James A. KitchensJames A. KitchensVice President Finance and Chief Financial Officer 18