UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNE 30, 2002.
EYE DYNAMICS, INC.
(Name of small business issuer in its charter)
Nevada 88-0249812
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2301 W. 205th Street, #106, Torrance, CA 90501
(Address of principal executive offices) (City, state and ZIP)
Issuer's telephone number 310-328-0477
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No []
The number of shares outstanding of the issuer's common stock as of June 30,
2002 was 17,050,313.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2002
-------------
ASSETS
Current Assets
Cash $ 14,472
Account receivable 46,750
Employee loans and advances 64,722
Inventory 145,286
------------
TOTAL CURRENT ASSETS 302,253
Property and Equipment, net of
accumulated depreciation of $13,627 1,136
Other Assets 10,536
------------
TOTAL ASSETS $ 313,925
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable & accrued expenses $ 69,571
Accrued interest 88,356
Line of Credit 59,621
Notes payable, current portion 8,000
------------
TOTAL CURRENT LIABILITIES 225,548
Long-term debt 535,229
------------
TOTAL LIABILITIES 760,777
Stockholders' Deficit
Common Stock, $0.001 par value; 50,000,000
shares authorized; 17,050,313 shares
issued and outstanding 17,050
Paid-in capital 3,453,236
Accumulated deficit (3,853,388)
Unamortized expenses (contra-equity) (63,750)
------------
(446,852)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 313,925
============
See Notes to Interim Unaudited Consolidated Financial Statements
1
EYE DYNAMICS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For Three and Six Months ended June 30, 2002 and 2001
-----------------------------------------------------
For Three Months For Six Months
ended June 30, ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------
Sales $ 311,894 $ 162,648 $ 529,581 $ 274,816
Cost of sales 143,062 72,272 237,134 116,841
------------- ------------- ------------- -------------
Gross profit 168,832 90,376 292,447 157,975
Selling, general and administrative
expenses 173,046 231,760 337,670 488,113
------------- ------------- ------------- -------------
(Loss) from operations (4,214) (141,384) (45,223) (330,138)
------------- ------------- ------------- -------------
Other income (expenses)
Interest and other income 1,627 1,485 3,112 1,814
Interest Expenses (3,895) (10,433) (7,419) (20,144)
------------- ------------- ------------- -------------
Total other income (expenses) (2,268) (8,948) (4,307) (18,330)
------------- ------------- ------------- -------------
Net (loss) before taxes and
extraordinary item (6,482) (150,332) (49,530) (348,468)
Provision for income taxes -- -- 1,600 1,600
------------- ------------- ------------- -------------
Net (loss) before extraordinary item (6,482) (150,332) (51,130) (350,068)
Extraordinary item-gain on restructuring
of debt, net of applicable income
taxes of $0 26,479 -- 26,579 --
------------- ------------- ------------- -------------
Net income (loss) $ 19,997 $ (150,332) $ (24,651) $ 350,068)
============= ============= ============= =============
Per share of common stock
Loss before extraordinary item $ (0.00) $ (0.01) $ (0.00) $ (0.03)
Extraordinary item, net 0.00 -- 0.00 --
------------- ------------- ------------- -------------
Net income (loss) per share
- basic and diluted $ 0.00 $ (0.01) $ (0.00) $ (0.03)
============= ============= ============= =============
Weighted average number of shares 16,216,980 12,025,313 15,350,313 11,858,313
============= ============= ============= =============
See Notes to Interim Unaudited Consolidated Financial Statements
2
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Six Months Ended June 30, 2002 and 2001
-------------------------------------------
2002 2001
----------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net (loss) $ (24,651) $(350,068)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation 739 1,305
Noncash expenses 102,307 144,306
Extraordinary gain on debt restructuring (26,479) --
(Increase) decrease in:
Accounts receivable 4,805 59,157
Inventory (29,769) (57,918)
Prepaids and other assets (9,530) 4,652
Increase (decrease) in:
Accounts payable and accrued expenses 15,668 27,250
Contingent liabilities (75,000) --
Accrued interest (14,645) 18,732
---------- ----------
CASH FLOWS (USED IN) OPERATING ACTIVITIES (56,555) (152,584)
---------- ----------
Cash Flow From Investing Activities:
Employee loans and advances 394 (50,516)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 394 (50,516)
---------- ----------
Cash Flow From Financing Activities:
Proceeds from issuing of common stock -- 50,000
Advance from line of credit 14,260 54,378
Net proceeds from (repayments on) notes payable
to shareholder (15,000) 15,000
Net proceeds from other notes payable 47,750 10,250
---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 47,010 129,628
---------- ----------
NET (DECREASE) IN CASH (9,151) (73,472)
Cash balance at beginning of period 23,623 85,688
---------- ----------
CASH BALANCE AT END OF PERIOD $ 14,472 $ 12,216
========== ==========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 22,064 $ 1,412
Taxes Paid 1,600 --
Supplemental Schedules of Noncash Investing and Financing Activities
Issuing common stock for:
Services $ -- $ 177,226
Reduction of liability 10,000 21,000
Restructuring of debt 100,000 --
See Notes to Interim Unaudited Consolidated Financial Statements
3
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Eye Dynamics, Inc. and subsidiary (the "Company") markets
and distributes diagnostic equipment that utilize the Company's proprietary
technology and computer software to test individuals for impaired eye and pupil
performance. The Company also markets a medical diagnostic product that tracks
and measures eye movements during a series of standardized tests.
A summary of significant accounting policies follows:
PRESENTATION OF INTERIM INFORMATION: In the opinion of the management,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial condition and the results of operations of the
Company for the periods presented have been included. Interim results are not
necessarily indicative of results for a full year. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted unless significant changes have occurred since the
Form 10-KSB was filed. The accompanying financial statements and notes thereto
should be read in conjunction with the Company's Form 10-KSB.
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The accompanying consolidated
financial statements include the accounts of Eye Dynamics, Inc. and its
wholly-owned subsidiary, Oculokinetics, Inc., after elimination of all material
intercompany accounts and transactions. Certain prior period balances have been
reclassified to conform to the current period presentation.
DEBT RESTRUCTURINGS: The Company accounts for debt restructurings that occurred
in April 2002 in accordance with SFAS No. 15, "Accounting for Debtors and
Creditors for Troubled Debt Restructurings." The statement requires that a
debtor should (a) recognize a gain or loss by reducing the carrying amount of
the debt by the fair value of the assets or equity interest transferred, and (b)
account for the remainder of the restructuring as a modification of debt terms.
When the terms of a debt are adjusted in a trouble-debt restructuring, the total
amount of the future cash payments should be determined. If the carrying amount
of debt is less than the aggregate future cash payments required by the new debt
term, the debtor should amortize the difference over the life of the new debt as
interest expense using the effective interest method. No gain or loss is
recognized in the period of extinguishments. If the carrying amount of debt is
greater than the aggregate future cash payments required by the new debt term,
the debtor should reduce the carrying value of debt to an amount equal to the
total future cash payments and recognize the reduction an extraordinary gain. No
interest expense should be recorded.
NEW ACCOUNTING STANDARDS: SFAS No. 143, "Accounting for Asset Retirement
Obligations," addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the period it is
incurred if a reasonable estimate of fair value can be made. The associated
retirement costs are capitalized as a component of the carrying amount of the
long-lived asset and allocated to expense over the useful life of the asset. The
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Management believes the adoption of the statement
will not have a material effect on the Company's financial statements.
4
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued and establishes accounting and reporting
standards for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed." SFAS No. 144 provides one accounting
model to be used for long-lived assets to be disposed of by sale, whether
previously held for use or newly acquired and broadens the presentation of
discontinued operations to include more disposal transactions. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Accordingly, the statement was effective for
the Company for the fiscal quarter beginning January 1, 2002 and it did not have
an impact on its financial position.
NOTE 2 - DEBT RESTRUCTURING
In April 2002, the Company restructured a debt of $396,721 plus accrued interest
of $223,987 with a prior distributor in regards to the Settlement Agreement and
Mutual Release that was signed in 1993. The new settlement includes that a new
note of $400,000 was issued to replace the old debt. The new note is compounded
at 7% per annum and is amortized over 5 years commencing January 1, 2003. The
Company also paid a sum of $60,000 in cash and issued 2,500,000 shares of
restricted common stock to the prior distributor upon the execution of the new
amendment. The fair market value of the stock at the date of settlement was
$0.04 per share. All accrued and unpaid interest on the old debt, and all
amounts due related to the consigned inventory were forgiven. The Company
recognized an extraordinary gain of $26,479 on the restructuring in accordance
with SFAS No. 15.
Debt carrying value:
Original carrying amount of debt $ 396,721
Accrued and unpaid interest balance 223,987
Consigned inventory 41,000
----------
Total debt $ 661,708
Less: fair value of consideration given:
Cash paid (60,000)
Common stock issued (2,500,000 shares
at a fair value of $0.04 per share) (100,000)
----------
(160,000)
----------
Carrying value of debt 501,708
Future cash flows:
New debt principal 400,000
Interest to be paid on new principal amount 75,229
----------
Total future cash payments required 475,229
----------
Extraordinary gain recognized $ 26,479
==========
5
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 3 - NOTES PAYABLE
In May 2002, the Company issued two notes payable of $40,000 and $20,000 to fund
the cash payment of $60,000 as discussed in Note 2. Both notes carry an interest
rate of 7% per annum commencing January 1, 2003. Principal and interest payable
are due on December 31, 2007. The notes are convertible into 3,591,800 and
1,795,900 shares of the Company's restricted common stock, respectively. The
notes are also callable on or before December 31, 2002 by the Company in the sum
of $13,333 and $6,666, respectively. Upon the occurrence of such payments, the
balance of the notes shall be convertible into 2,394,533 and 1,197,267 shares,
respectively. The Company will also issue 266,667 and 133,333 shares of
warrants, respectively, to the holders if such payments are made. The warrants
are exercisable at five cents($0.05) per share and expire on December 31, 2007.
NOTE 4 - LITIGATION SETTLEMENT
In 2001, the Company was involved in a lawsuit filed by 6800 Owensmouth, Inc.
("OWEN") alleging that the Company had aided and abetted an employee in avoiding
payment of a lawsuit judgment in favor of OWEN. On February 21, 2002, the Board
of Directors, in the interest of capital conservation and avoiding the time and
expense of a court trial, approved to reach a settlement through a mediation
conference. The settlement reached included payment of $10,000 and issuance of
200,000 shares of 144 restricted common stock of the Company at a fair market
value of $0.05 per share. The settlement loss, aggregate of $20,000, was accrued
and charged to operations in 2001. The liability was paid in full and the shares
were issued in February 2002.
NOTE 5 - NONCASH FINANCING ACTIVITIES
In May 2002, the Company issued 2,500,000 shares of restricted common stock at a
fair value of $0.04 per share to restructure a debt (see Note 3).
In February 2002, the Company issued 200,000 shares of restricted common stock
to reduce a contingent liability of $10,000 which was accrued in 2001 (see Note
4).
NOTE 6 - NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of shares of
common stock outstanding during the period. Basic net loss per share was $0.00
and $0.01 for three months ended June 30, 2002 and 2001, respectively, and was
$0.00 and $0.03 for six months ended June 30, 2002 and 2001, respectively. Net
loss per share does not include options and warrants as they would be
anti-dilutive in 2002 and 2001 due to the net loss in those periods.
6
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 6 - NET LOSS PER SHARE (CONTINUED)
Three Months ended Six Months ended
June 30, June 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Numerator:
Net income (Loss) $ 19,997 $ (150,332) $ (24,651) $ (350,068)
------------- ------------- ------------- -------------
Denominator:
Weighted average of common shares 16,216,980 12,025,313 15,350,313 11,858,313
------------- ------------- ------------- -------------
Basic and diluted net loss per share $ 0.00 $ (0.01) $ (0.00) $ (0.03)
============= ============= ============= =============
The net income amount for three months ended June 30, 2002 and the net loss
amount for six months ended June 30, 2002 included an after-tax amount of
$26,479, which relates primarily to an extraordinary gain from restructuring of
debt. Excluding the effects of these transactions, the basic and diluted loss
per share would have been the same for both periods.
NOTE 7 - SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that a publicly traded company must disclose information
about its operating segments when it presents a complete set of financial
statements. Since the subsidiary did not have any operations in 2002 or 2001,
and the Company has only one segment; accordingly, detailed information of the
reportable segment is not presented.
NOTE 8 - GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company
incurred a net loss before extraordinary item of $51,130 and $350,068 for six
months ended June 30, 2002 and 2001, respectively, and as of June 30, 2002, the
Company's total liabilities exceeded its total assets by $446,852. Those factors
create uncertainty about the Company's ability to continue as a going concern.
As discussed in Note 2, the Company reduced its current liabilities by
restructuring a default note payable of $396,721 plus accrued interest of
$223,987 into a new long-term debt of $400,000. The new debt is amortized at 7%
per annum over 5 years commencing January 1, 2003.
The Company is also beginning to market and publicize its second product line,
Impairment Detection Device. The Company continued existence depends on its
ability to meet its financing requirements and the success of its future
operations. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
7
ITEM 2. Management's Discussion and Analysis or Plan of Operation
Revenues from the sale of medical products during the second quarter
were $312,000, representing a 91% increase over the first quarter of 2001.
Revenues for the first half of 2002 were $530,000, compared with $275,000 for
the first half of 2001, for a year to date increase of 92%. This increase can be
attributed principally to the success of our private label customer opening up
and developing new markets and applications for our video ENG products. As
reported in the first quarter, the market increase in the ENT segment of the
medical market is not substantial, but our penetration of the neurology segment,
which our private label customer is pursuing, has been successful. We continue
to receive additional interest from the export markets, and received orders from
Korea and Iran during the period.. Before we can fulfill orders from Iran, we
must receive an export license from the U.S. government. While medical equipment
and supplies qualify for export licenses, the government has been withholding
licenses for the past several months and is processing them very slowly. We have
enlisted the aid of our representative in Congress to assist in getting an
export license approved.
Gross profit for the quarter was 55%, and 56% for the first six months
of 2002. This figure is within 2% of the gross profit for the same period of
2001, and is a reflection of the increase in private label orders that we have
been shipping, which have a lower gross profit structure.
We are continuing our efforts to secure financing for the business plan
to commercialize the SafetyScope product, which is an Impairment Detection
Device. The plan requires substantial financial resources to fully implement the
commercialization of the product. Discussions and explorations of strategic
alliances are ongoing with the goal of securing the financing.
We also completed restructuring an obligation of $396,721, plus accrued
interest of $223,987, with a former distributor. The restructured obligation
includes a new note for $400,000, bearing interest at 7% per annum, with
payments to commence in January, 2003. The note is amortized over five years,
all due and payable in January 2008. In addition, the we paid $60,000 in cash
and issued 2,500,000 shares of restricted common stock to the noteholder, in
cancellation of all accrued and unpaid interest on the old debt. In addition,
all amounts due related to consigned inventory were forgiven. The net of this
transaction is that the company recognized an extraordinary gain of $26,479 on
the restructuring in accordance with SFAS No. 15. Further details of the
restructuring are included in the Financial Statements, Note No. 2 - Debt
restructuring.
As a result of the sales increase of 91% for the quarter, gross profit
is substantially higher. When combined with the extraordinary gain of $26,479 in
debt restructuring, a net profit of $19,997 was achieved for the quarter. This
net income includes $43,250 of expenses incurred in the promotion of the
business plan for commercialization of the SafetyScope product. Without the
SafetyScope commercialization expenses, the medical product sales and debt
restructuring would have generated a substantial profit for the quarter. Net
loss for the first half of 2002 was reduced to $24,651, compared to a loss of
$350,068 for the first half of 2001, representing a substantial improvement.
8
Inventory of $145,000 at June 30, 2002 includes $41,000 of previously
consigned inventory that was returned to us as a result of the restructuring of
debt with a prior distributor. This inventory consists of Impairment Detection
Devices and is being used as production samples and demonstrators for the fund
raising activity related to the SafetyScope impairment detection device. The
inventory balance of $104,000 represents less than 60 days inventory for the
medical products production and is balanced, except for the caloric irrigators
which must be ordered from Germany and The Netherlands well in advance of needs.
This tends to increase the inventory investment because of the long term
delivery and pre-payment requirements for these imported items.
Accounts receivable of $78,000 reflect less than 30 days average
accounts outstanding. This favorable collection experience is principally due to
the fact that our private label customer continues to make their payments within
the terms of sale of net 15 days. Cash on hand at June 30, 2002 was $14,472.
We continue to search out and evaluate other products and alliances to
enhance the company and to augment our revenues. However, none are currently in
the offing that we have found suitable. The search for new products is an
ongoing project.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party
or to which the property interests of the Company are subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the second quarter we issued 2,500,000 shares of restricted
common stock to TESA Corporation as a part of the debt restructuring discussed
above. The Company believes the issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders during
this quarterly reporting period.
9
ITEM 5 OTHER INFORMATION
The company completed negotiations to restructure an obligation of
$396,721, plus accrued interest of $223,987, with a former distributor pursuant
to a Settlement Agreement and Mutual Release that was signed in 1993. The new
settlement includes a new note of $400,000, which was issued to replace the old
debt. The new note bears interest at 7% per annum and is amortized over five
years commencing January 1, 2003. The company also paid $60,000 in cash and
issued 2,500,000 shares of restricted common stock to the former distributor
upon the execution of the new amendment. All accrued and unpaid interest on the
old debt, and all amounts related to the consigned inventory, were forgiven.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are included herein or incorporated by
reference:
99.1 Certification of Chief Executive and Financial Officer.
(B) No reports on Form 8-K were filed during the period
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Eye Dynamics, Inc.
Date: August 13, 2002 By /s/ Charles E. Phillips
------------------------------
Charles E. Phillips, President
and Chief Financial Officer
10