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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 March 31, 2007
 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
    
    (I.R.S. EmployerOf incorporation or organization)
    
    Identification No.)
 10226 SAN PEDRO AVENUE, SUITE 200SAN ANTONIO, TEXAS
    
    78216(Address of principal executive offices)
    
    (Zip Code)
 (210) 582-2664
 þ o
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MDI, INC.
FORM 10-QSB
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
as of March 31, 2007 and December 31, 2006Consolidated Statements of Operations
For the Three Month Periods Ended March 31, 2007 and 2006Consolidated Statements of Cash Flows
For the Three Month Periods Ended March 31, 2007 and 2006Notes to Financial StatementsItem 2. Managements Discussion and Analysis and Results of OperationItem 3. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBITSCERTIFICATIONSCertification of Chief Executive OfficerCertification of Chief Financial OfficerJoint Certification of Chief Executive Officer and Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial OfficerJoint Certification of Chief Executive Officer and Chief Financial Officer
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PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 MDI, INC. and SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    35
    
    
    $
    452Trade accounts receivable, net
    
    
    1,712
    
    
    
    1,308Inventories
    
    
    695
    
    
    
    736Prepaid expenses and other current assets
    
    
    105
    
    
    
    74Total current assets
    
    
    2,547
    
    
    
    2,570Property and Equipment  net
    
    
    220
    
    
    
    225Other Assets:Goodwill
    
    
    4,612
    
    
    
    4,612Other intangible assets
    
    
    27
    
    
    
    28Other assets
    
    
    134
    
    
    
    363Total assets
    
    $
    7,540
    
    
    $
    7,798LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Trade accounts payable
    
    $
    1,602
    
    
    $
    1,473Accrued expenses
    
    
    374
    
    
    
    263Deferred legal settlement
    
    
    388
    
    
    
    388Accrued compensation
    
    
    370
    
    
    
    382Bank factoring advance
    
    
    277
    
    
    
    312Other current liabilities
    
    
    21
    
    
    
    9Deferred revenue
    
    
    247
    
    
    
    210Total current liabilities
    
    
    3,279
    
    
    
    3,037Long-Term Liabilities
    
    
    
    
    
    
    Total Liabilities
    
    
    3,279
    
    
    
    3,037Commitments 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, $0.01 par value, 100,000,000 shares authorized; 28,220,142
and 22,657,610 shares issued at March 31, 2007 and December 31, 2006, respectively
    
    
    282
    
    
    
    227Additional paid-in-capital
    
    
    135,910
    
    
    
    132,957Stock subscription receivable
    
    
    (2,600
    )
    
    
    Accumulated deficit
    
    
    (130,308
    )
    
    
    (129,400
    )Total stockholders equity
    
    
    4,261
    
    
    
    4,761Total liabilities and stockholders equity
    
    $
    7,540
    
    
    $
    7,798
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MDI, INC. and SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
 Three months ended March 31,2007
    
    
    2006Net sales
    
    $
    2,263
    
    
    $
    2,695Cost of sales (exclusive of depreciation shown separately below)
    
    
    934
    
    
    
    1,250Gross profit
    
    
    1,329
    
    
    
    1,445Other operating costs:Selling, general and administrative
    
    
    2,147
    
    
    
    2,713Depreciation and amortization
    
    
    28
    
    
    
    1212,175
    
    
    
    2,834Operating loss
    
    
    (846
    )
    
    
    (1,389
    )Other income (expense):Interest income
    
    
    2
    
    
    
    Interest expense
    
    
    (21
    )
    
    
    Loss on disposal of fixed assets
    
    
    (5
    )
    
    
    Other, net
    
    
    (29
    )
    
    
    1(53
    )
    
    
    1Loss before income taxes and discontinued operations
    
    
    (899
    )
    
    
    (1,388
    )Income taxes
    
    
    (1
    )
    
    
    Loss from continuing operations
    
    
    (900
    )
    
    
    (1,388
    )Loss from discontinued operations
    
    
    
    
    
    
    (12
    )Net loss
    
    
    (900
    )
    
    
    (1,400
    )Dividend requirements on preferred stock
    
    
    (8
    )
    
    
    (8
    )Net loss allocable to common shareholders
    
    $
    (908
    )
    
    $
    (1,408
    )Basic and diluted earnings (loss) per share from:Continued operations
    
    $
    (0.03
    )
    
    $
    (0.06
    )Discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )Basic and diluted loss per share
    
    $
    (0.03
    )
    
    $
    (0.07
    )Number of common shares used in computations
    
    
    26,234,911
    
    
    
    19,685,787
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MDI, INC. and SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 Three months ended March 31,2007
    
    
    2006Operating Activities:Net loss
    
    $
    (900
    )
    
    $
    (1,400
    )Adjustments to reconcile net loss to net cash used in operating activities:Loss on disposal of fixed assets
    
    
    4
    
    
    
    Non cash stock compensation
    
    
    168
    
    
    
    164Depreciation and amortization
    
    
    27
    
    
    
    121Provision for losses on accounts receivable
    
    
    4
    
    
    
    6Loss on early collection of notes receivable
    
    
    29
    
    
    
    Changes in operating assets and liabilities, net of dispositions:Trade accounts receivable
    
    
    (408
    )
    
    
    (652
    )Inventories
    
    
    41
    
    
    
    9Prepaid and other current assets
    
    
    169
    
    
    
    (86
    )Trade accounts payable
    
    
    129
    
    
    
    330Accrued and other current liabilities
    
    
    184
    
    
    
    (62
    )Net cash used in operating activities
    
    
    (553
    )
    
    
    (1,570
    )Investing Activities:Purchases of property and equipment
    
    
    (25
    )
    
    
    (39
    )Net cash used in investing activities
    
    
    (25
    )
    
    
    (39
    )Financing Activities:Sale of common stock
    
    
    196
    
    
    
    Net proceeds from factoring payable
    
    
    (35
    )
    
    
    Payment of preferred stock dividends
    
    
    
    
    
    
    (8
    )Net cash provided by (used in) financing activities
    
    
    161
    
    
    
    (8
    )Net decrease in cash and cash equivalents
    
    
    (417
    )
    
    
    (1,617
    )Cash and cash equivalents, beginning of period
    
    
    452
    
    
    
    2,140Cash and cash equivalents, end of period
    
    $
    35
    
    
    $
    523Non cash investing and financing activities:Purchase of assets from assets from Ecomatrix Funding, allocated to goodwill for
2,000,000 shares of common stock
    
    $
    
    
    
    $
    1,820Subscription receivable for 5,306,122 shares of stock
    
    $
    2,600
    
    
    $
    Rent forgiveness for 247,293 warrants issued
    
    $
    46
    
    
    $
    Supplemental cash flow information:Cash paid during the year for:Interest
    
    $
    15
    
    
    $
    Income taxes
    
    $
    
    
    
    $
    
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Organization and Business Description
  Note 2  Basis of Presentation
  Note 3  Summary of Significant Accounting Policies
 Use of Estimates
  Revenue Recognition
   Stock-Based Compensation
 6
    Table of Contents      March 31,
    
    
    March 31,2007
    
    
    2006Expected life in years
    
    
    2.5
    
    
    
    5.5Expected volatility
    
    
    84
    %
    
    
    81
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.3
    %
 Earnings (Loss) Per Share
   Note 4  Business Acquisition
  Note 5  Stockholders Equity
    Note 6  Subsequent Event
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward Looking Statements
  Overview
  Product and Service Offerings
  1.
    
    Enterprise-Grade Business
  a.
    
    SAFEnet® -
  b.
    
    Pointguard® Xtreme and iTRUST -
   c.
    
    Digital Video Recorders 
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2.
    
    Global Systems Solutions, Inc.
  3.
    
    Standardized Product Sales
  Growth Strategy
  ®
     Risk Associated with our Growth Strategy
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Competition
 Enterprise-Grade Business Offerings
    Global Systems Solutions Business Offerings
    Cash Requirements
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Financial Condition, Liquidity and Capital Resources
    Risks Associated With Our Common Equity
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Results of Operations
  Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Three months ended
    
    
    Three months ended
    
    
    Three months ended March 31,March 31, 2007
    
    
    March 31, 2006
    
    
    
    
    
    
    Percentage% of Net
    
    
    
    
    
    
    % of Net
    
    
    Change In
    
    
    Change InDollars
    
    
    Sales
    
    
    Dollars
    
    
    Sales
    
    
    Dollar Value
    
    
    Dollar ValueNet Sales
    
    $
    2,263
    
    
    
    100
    %
    
    $
    2,695
    
    
    
    100
    %
    
    
    ($432
    )
    
    
    -16
    %Gross profit
    
    
    1,329
    
    
    
    59
    %
    
    
    1,445
    
    
    
    54
    %
    
    
    (116
    )
    
    
    -8
    %Selling, general and administrative
    
    
    2,147
    
    
    
    95
    %
    
    
    2,713
    
    
    
    101
    %
    
    
    (566
    )
    
    
    -21
    %Operating loss
    
    
    (846
    )
    
    
    -37
    %
    
    
    (1,389
    )
    
    
    -52
    %
    
    
    543
    
    
    
    -39
    %Net loss
    
    
    (900
    )
    
    
    -40
    %
    
    
    (1,400
    )
    
    
    -52
    %
    
    
    500
    
    
    
    -36
    %
  
 ITEM 3. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 Exhibits
 1.
    
    31.1 Certification of CEO Pursuant to Rule 13a-14(a)2.
    
    31.2 Certification of CFO Pursuant to Rule 13a-14(a)3.
    
    32.1 Joint Certification of CEO and CFO Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code.
 Reports on Form 8-K
  1.
    
    On January 8, 2007 the Company filed a Form 8-K stating that on January 5, 2007, Jim
Kitchens announced his retirement as Vice President and CFO of the company effective as of
January 5, 2007 and that Mike Sweet, Senior Vice President and Chief Operating Officer,
will continue to have responsibility over the financial and accounting functions of the
company and will assume the role of CFO.2.
    
    On February 1, 2007 the Company filed a Form 8-K stating that on January 31, 2007,
the Company entered into a Stock Purchase and Registration Rights Agreement with Stratis
Authority (the Investor) providing for the sale by MDI of 5,306,122 shares of common
stock priced at $0.49 per share and that the Company is obligated to register the shares
for resale on a registration statement within 180 days. The total cash to be received by
MDI is $2,600,000 to be paid to MDI in equal installments every two (2) weeks until such
time as the entire $2,600,000 purchase price has been paid.3.
    
    On February 1, 2007 the Company filed a Form 8-K stating that on January 31, 2007, in
accordance with the provisions of the Companys Bylaws, the Board of Directors (the
Board) of MDI, Inc. (the Company) appointed James M. Vandevere to serve as a member of
the Board, effective immediately.4.
    
    On March 1, 2007 the Company filed a Form 8-K stating that the Company had received
on February 28, 2007 an initial Blanket Purchase Order totaling $25.3 million dollars from
Stratis Authority for its Learn Safe school safety and security program. The order was
based on an initial Scope of Work submitted by MDI and approved by Stratis Authority to
provide security products and professional services to multiple school districts located
in the Southeast.5.
    
    On April 26, 2007 the Company filed a Form 8-K stating that on April 26, 2007, it
received a letter from the Chairman and CEO of Stratis Authority, Inc., the largest
shareholder of the Company, addressing defamatory statements and false information that
has been widely circulated over the last week about Stratis, its
LearnSafe(TM) program and
MDI.6.
    
    On May 7, 2007 the Company filed a Form 8-K stating that on May 7, 2007, the Company
entered into a Securities Purchase Agreement and Registration Rights Agreement with
certain institutional investors providing for the sale by MDI of 2,395,210 shares of
common stock priced at $1.67 per share and warrants totaling 1,197,605 shares exercisable
at $2.51 having a five year term from the date of issuance. MDI is obligated to register
the shares and warrant shares for resale on a registration statement within 90 days. The
total cash received by MDI at closing was $4,000,000, from which approximately $40,000
will be dispersed as transaction related expenses.
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SIGNATURES
  MDI, INC.Dated: May 11, 2007
    
    By:
    
    /s/ Michael SweetMichael SweetSenior Vice President and Chief Financial Officer
 14