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, 2003.
Commission File No. 0-27857
EYE DYNAMICS, INC.
(Name of small business issuer as specified in its charter)
Nevada 88-0249812
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2301 W. 205th Street, #102, Torrance, CA 90501
(Address of principal executive offices)
310-328-0477
(Issuer's telephone number)
The number of shares outstanding of the issuer's common
stock as of June 30, 2003 was 17,850,313.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2003
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ASSETS
Current Assets
Cash $ 304,308
Accounts receivable 114,178
Employee advances and receivable, net of
allowance for loan losses of $58,218 257
Inventory 217,295
Prepaid expenses 8,695
------------
Total Current Assets 644,733
Property and equipment, net of accumulated depreciation
of $14,569 1,307
Other Assets 34,074
------------
TOTAL ASSETS $ 680,114
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable & accrued expenses $ 116,147
Notes payable, current portion 47,523
------------
Total Current Liabilities 163,670
Long-term debt and accrued interest 421,709
------------
Total Liabilities 585,379
------------
Stockholders' Equity
Common Stock, $0.001 par value; 50,000,000 shares authorized;
17,850,313 shares issued and outstanding 17,850
Paid-in Capital 3,497,101
Accumulated Deficit (3,420,216)
------------
Total Stockholders' Equity 94,735
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 680,114
============
See Notes to Interim Unaudited Consolidated Financial Statements
1
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For Three Months For Six Months
ended June 30, ended June 30,
-------------- --------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------------------------------------
Sales
Products $ 688,018 $ 295,394 $ 1,340,626 $ 488,331
Services -- 16,500 -- 41,250
----------------------------------------------------------------------
688,018 311,894 1,340,626 529,581
Cost of sales
Products 386,140 134,632 698,108 218,719
Services -- 8,430 -- 18,415
----------------------------------------------------------------------
386,140 143,062 698,108 237,134
Gross profit 301,878 168,832 642,518 292,447
Selling, general and administrative
expenses 161,059 173,046 342,061 337,670
----------------------------------------------------------------------
Income (loss) from operations 140,819 (4,214) 300,457 (45,223)
----------------------------------------------------------------------
Other income(expenses)
Interest and other income 29 1,627 532 3,112
Interest and other expense (14,360) (3,895) (16,198) (7,419)
----------------------------------------------------------------------
(14,331) (2,268) (15,666) (4,307)
----------------------------------------------------------------------
Net income (loss) before taxes and
extraordinary item 126,488 (6,482) 284,791 (49,530)
Provision for income taxes 25,496 -- 27,096 1,600
----------------------------------------------------------------------
Net income (loss) before extraordinary item 100,992 (6,482) 257,695 (51,130)
Extraordinary item-gain on restructuring of
debt, net of applicable income taxes of $0 -- 26,479 -- 26,479
----------------------------------------------------------------------
Net income (loss) $ 100,992 $ 19,997 $ 257,695 $ (24,651)
======================================================================
Net income (loss) per share-basic
Net income (loss) before extraordinary item $ 0.01 $ (0.00) $ 0.01 $ (0.00)
Extraordinary gain, net -- 0.00 -- 0.00
----------------------------------------------------------------------
Net income (loss) $ 0.01 $ 0.00 $ 0.01 $ (0.00)
======================================================================
Net income (loss) per share-diluted
Net income (loss) before extraordinary item $ 0.00 $ (0.00) $ 0.01 $ (0.00)
Extraordinary gain, net -- 0.00 -- 0.00
----------------------------------------------------------------------
Net income (loss) $ 0.00 $ 0.00 $ 0.01 $ (0.00)
======================================================================
Shares used in per share calculation-basic 17,850,313 16,216,980 17,850,313 15,350,313
Shares used in per share calculation-diluted 21,647,240 16,216,980 21,692,067 15,350,313
See Notes to Interim Unaudited Consolidated Financial Statements
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EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For Six Months ended June 30, 2003 2002
----------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 257,695 $ (24,651)
Adjustments to reconcile net income (loss) to net cash
cash provided by (used in) operating activities:
Depreciation 204 739
Noncash expenses -- 102,307
Extraordinary gain on debt restructuring -- (26,479)
(Increase) Decrease in:
Accounts Receivable 72,800 4,805
Inventory (62,129) (29,769)
Prepaid and Others (27,810) (9,530)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 26,741 15,668
Other Liabilities (13,271) (75,000)
Accrued Interest (75,364) (14,645)
--------------------------
Net cash provided by (used in) operating activities 178,866 (56,555)
--------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (1,113) --
Employee loan and advances (257) 394
--------------------------
Net cash provided by (used in) investing activities (1,370) 394
--------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Advance from Line of Credit -- 14,260
Proceeds from (Repayments on) Notes Payable (50,856) 47,750
Repayments to Shareholders -- (15,000)
--------------------------
Net cash provided by (used in) financing activities (50,856) 47,010
--------------------------
NET INCREASE (DECREASE) IN CASH 126,640 (9,151)
CASH BALANCE AT BEGINNING OF PERIOD 177,668 23,623
--------------------------
CASH BALANCE AT END OF PERIOD $ 304,308 $ 14,472
==========================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 78,889 $ 22,064
Taxes Paid $ -- $ 1,600
Supplemental Schedules of Noncash Investing and Financing Activities
Issuing common stock for reduction of a liability $ -- $ 10,000
Issuing common stock for debt restructuring $ -- $ 100,000
See Notes to Interim Unaudited Consolidated Financial Statements
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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: The financial information at June 30, 2003
and for the three and six months ended June 30, 2003 and 2002 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial
information, and with the instructions to Form 10-QSB. Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2002.
The results for the three and six months ended June 30, 2003 may not be
indicative of results for the year ending December 31, 2003 or any future
periods.
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.
INCOME (LOSS) PER COMMON SHARE: Basic earnings per share includes no dilution
and is computed by dividing net income (loss) available to common stockholders
by the weighted average number of common stock outstanding for the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of shares plus the dilutive effect of outstanding warrants and
shares issuable under convertible debt to sell 3,796,927 shares and 3,841,754
shares of the Company common stock for the three and six months ended June 30,
2003, respectively, using the treasury stock method. Approximately, 200,000
shares outstanding stock warrants were excluded from the calculation of diluted
earnings per share for 2003 because they were anti-dilutive. However, these
options and warrants could be dilutive in the future. Diluted net loss per
common share does not differ from basic net loss per common share since
potential shares of common stock are anti-dilutive for all periods presented.
Shares excluded from diluted net loss per share totaled 850,000.
NEW ACCOUNTING STANDARDS: In April 2003, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," which is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. SFAS 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS No.
133, clarifies when a derivative contains a financing component, amends the
definition of an "underlying" to conform it to the language used in FASB
Interpretation No. 45, "Guarantor Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" and amends
certain other existing pronouncements. The Company does not have any derivative
financial instruments. The Company does not anticipate that the adoption of SFAS
No. 149 will have an impact on its consolidated balance sheets or statements of
operations and cash flows.
4
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
requires that certain instruments that were previously classified as equity on
the Company's statement of financial position now be classified as liabilities.
The Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company currently has no
instruments impacted by the adoption of this statement and therefore the
adoption did not have an effect on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 2 - WIND DOWN OF SUBSIDIARY
On June 30, 2003, the Board of Directors decided to wind down its wholly owned
subsidiary, which was inactive and has no asset or liability as of June 30,
2003. Management believes that the wind down of the subsidiary has no material
effect on the Company's financial position, results of operations and cash
flows.
NOTE 3 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
Three Months ended June 30, Six Months ended June 30,
2003 2002 2003 2002
------------------------------- -------------------------------
Numerator:
Net income (loss) $ 100,992 $ 19,997 $ 257,695 $ (24,651)
------------- ------------- ------------- -------------
Denominator:
Weighted average of common shares 17,850,313 16,216,980 17,850,313 15,350,313
Diluted effect of convertible debt and stock warrants 3,796,927 -- 3,841,754 --
------------- ------------- ------------- -------------
Diluted weighted average common shares outstanding 21,647,240 16,216,980 21,692,067 15,350,313
------------- ------------- ------------- -------------
Basic net income (loss) per share $ 0.01 $ 0.00 $ 0.01 $ (0.00)
Diluted net income (loss) per share $ 0.00 $ 0.00 $ 0.01 $ (0.00)
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 4 - PRIOR PERIOD ADJUSTMENT
An understatement of 2002 reported Income Tax Payable of $12,699 was discovered
during the second quarter of 2003. The Company charged this error to the current
quarter's operations and did not restate the 2002 financial statements.
Management believes that the restatement did not have material effect on the
Company's financial position, results of operations and cash flows.
5
EYE DYNAMICS, INC. AND SUBSIDIARY
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - MAJOR CUSTOMER
During the three months ended June 30, 2003 and 2002, the Company's private
label distributor accounted for $322,451 and $200,091 or 46.9% and 64.1% of
total revenues, respectively.
During the six months ended June 30, 2003 and 2002, the Company's private label
distributor accounted for $733,215 and $370,299 or 54.7% and 69.9% of total
revenues, respectively.
NOTE 6 - 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 recognized an extraordinary gain of $26,479 on the restructuring in
accordance with SFAS No. 15.
NOTE 7 - SEGMENT INFORMATION
The Company is currently managed and operated as one business. The entire
business is managed by a single management team that reports to the Company's
President. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and dose not have separately reportable
segments as defined by SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information".
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ITEM 2. Management's Discussion and Analysis or Plan of Operation
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Revenues from the sale of medical products during the second quarter
were $688,000, representing an increase of 220% over the second quarter of 2002.
This is the fourth quarter in succession where sales are a minimum of two times
the corresponding quarter of the prior year and is a reflection of the steady
growth of the company. This increase is attributed to the success of the
Company's private label customer opening up and developing new markets and
applications for the video ENG products, as well as an increase in the Eye
Dynamics brand products. The private label portion of the Company's business
represented 47% of revenues for the quarter, which is a smaller percent than in
the first quarter, and is a reflection of the increase in Eye Dynamics brand
product sales. The market increase in the ENT segment of the medical market is
not substantial, but the Neurology segment, which is being actively pursued by
the Company's private label customer, continues to be successful. In addition,
mobile diagnostic testing companies are beginning to recognize the value of the
Company's products, and several have purchased systems for their use.
The gross profit for the quarter was 43%, which is lower than the first
quarter. This decrease in gross profit is due to larger than normal commissions
being paid to distributors for sale of the Company's products. However, total
revenues are more than two times the same quarter of the prior year.
As a result of the sales increase of 220% for the quarter, the gross
profit dollars are still substantial and a profit, after taxes, of $100,992 was
achieved, compared to a loss of $6,482 in the second quarter of 2002. This is a
substantial improvement and turnaround to profitability for the company for four
successive quarters. Overhead fixed expenses have increased only slightly, which
is a contributing factor to the increase in earnings.
The principal additional expense for the second quarter was the accrual
of state income taxes for 2003 of $25,496, as well as expense of $12,699 for
state income taxes for the year 2002. These state income taxes were the result
of a moratorium on the use of tax loss carryovers for 2002 and 2003 imposed by
the California Franchise Tax Board. Accordingly, despite the existence of
substantial tax loss carryovers from prior years, the Company was unable to use
them to offset state income taxes for 2002 and 2003. Federal tax loss
carryovers, however, were not affected and the Company was not required to
accrue federal income taxes for 2003.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 2003 totaled $304,308.
Inventory of $217,000 at June 30, 2003 includes $25,000 of SafetyScope
Impairment Detection Device items, which are not being actively marketed but are
being used as production samples and demonstrators for capital-raising
activities related to the SafetyScope impairment detection device. The inventory
balance of $192,000 represents only a little more than one month of turnover,
and is relatively balanced in content.
7
Accounts receivable of $114,000 represents less than 15 days accounts
receivable aging, which is favorable as the Company's private label customer
generally makes payment within the net 15 days term of sale. Other customers are
utilizing leasing and credit cards more, which provide for very quick collection
of receivables.
The Company continues to seek 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; however the
Company has no arrangements or agreements as to any such financing.
The Company continues to search out and evaluate other products and
alliances to enhance its product lines and to augment revenues. The search for
new products is an ongoing project.
Sales prospects for the balance of the year are encouraging as
evidenced by July revenues being in the order of $250,000, which is above the
Company's informal monthly target of $200,000.
Item 3. Controls and Procedures.
Under the supervision and with the participation of our Chief Executive
and Financial Officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), within 90 days of the filing date of this report. Based on this
evaluation, our Chief Executive and Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports under the Exchange Act are processed and
reported within the time periods specified by law. The design of any such system
of controls is based in part on assumptions about the likelihood of future
events, and there can be no assurance that any such system of controls will
succeed in all circumstances.
12
Since the date of the evaluation described above, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls.
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
None
Item 3. Defaults Upon Senior Securities
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.
Item 5. Other Information
None
8
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31 Certificate of Chief Executive and Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive and Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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.
Date: August 13, 2003
By: /s/ Charles E. Phillips
---------------------------------------
Charles E. Phillips, President
9