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 September 30, 2003.
Commission File No. 0-27857
EYE DYNAMICS, INC.
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(Name of small business issuer as specified in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2301 W. 205th Street, #102, Torrance, CA 90501
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(Address of principal executive offices)
310-328-0477
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(Issuer's telephone number)
The number of shares outstanding of the issuer's common stock as
of September 30, 2003 was 17,850,313.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ASSETS
Current Assets
Cash $ 543,581
Accounts receivable 229,116
Employee loans and advances, net of allowance for loan
loss of $58,218 407
Prepaid expenses 5,247
Inventory 187,051
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TOTAL CURRENT ASSETS 965,402
Property and equipment, net of accumulated depreciation
of $13,239 1,205
Other assets 29,674
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TOTAL ASSETS $ 996,281
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 106,707
Notes payable, current portion 23,761
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TOTAL CURRENT LIABILITIES 130,468
Long-term debt and accrued interest 422,471
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TOTAL LIABILITIES 552,939
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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 (3,071,609)
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443,342
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 996,281
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See Notes to Interim Unaudited Consolidated Financial Statements
2
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For Three Months For Nine Months
ended September 30, ended September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
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Net Sales
Products $ 1,095,602 $ 518,508 $ 2,436,228 $ 1,006,840
Service 5,500 -- 5,500 41,250
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1,101,102 518,508 2,441,728 1,048,090
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Cost of Sales
Products 529,334 240,258 1,227,442 458,977
Service 800 -- 800 18,415
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530,134 240,258 1,228,242 477,392
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Gross profit 570,968 278,250 1,213,486 570,698
Selling, general and administrative expenses 188,541 173,873 530,603 511,544
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Operating income 382,427 104,377 682,883 59,154
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Other income(expenses)
Interest and other income 155 1,485 687 4,597
Interest and other expenses (802) (3,284) (17,000) (10,703)
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Total other income(expenses) (647) (1,799) (16,313) (6,106)
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Net income before taxes and extraordinary item 381,780 102,578 666,570 53,048
Provision for income taxes 33,173 -- 60,269 1,600
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Net income before extraordinary item 348,607 102,578 606,301 51,448
Extraordinary item-gain on restructuring of debt,
net of applicable income taxes of $0 -- -- -- 26,479
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Net income $ 348,607 $ 102,578 $ 606,301 $ 77,927
=============================================================
Net income per share-Basic:
Net income before extraordinary item $ 0.02 $ 0.01 $ 0.03 $ 0.00
Extraordinary item, net -- -- -- 0.00
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Net income $ 0.02 $ 0.01 $ 0.03 $ 0.00
=============================================================
Net income per share-Diluted:
Net income before extraordinary item $ 0.02 $ 0.00 $ 0.03 $ 0.00
Extraordinary item, net -- -- -- 0.00
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Net income $ 0.02 $ 0.00 $ 0.03 $ 0.00
=============================================================
Shares used in per share calculation-Basic 17,850,313 17,350,313 17,850,313 16,016,980
Shares used in per share calculation-Diluted 21,706,001 22,738,013 21,696,712 19,010,147
See Notes to Interim Unaudited Consolidated Financial Statements
3
EYE DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months ended September 30, 2003 2002
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Cash Flow From Operating Activities:
Net income $ 606,301 $ 77,927
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 306 1,108
Noncash expenses -- 149,557
Extraordinary gain on debt restructuring -- (26,479)
(Increase) in:
Accounts receivable (42,139) (98,017)
Inventory (31,884) (3,996)
Prepaids and other assets (19,962) (19,713)
Increase (decrease) in:
Accounts payable and accrued expenses 17,301 993
Contingent liabilities (13,271) (75,000)
Accrued interest (74,602) (12,757)
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CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES 442,050 (6,377)
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Cash Flow From Investing Activities:
Purchase of property and equipment (1,113) --
Employee loans and advances (407) 3,452
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CASH FLOWS PROVIDED BY (USED IN )INVESTING ACTIVITIES (1,520) 3,452
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Cash Flow From Financing Activities:
Advance from (repayments on) line of credit -- (1,458)
Net proceeds from (repayments on) notes payable to shareholder -- (15,000)
Net proceeds from (repayments on) other notes payable (74,617) 39,750
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CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (74,617) 23,292
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NET INCREASE IN CASH 365,913 20,367
Cash balance at beginning of period 177,668 23,623
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CASH BALANCE AT END OF PERIOD $ 543,581 $ 43,990
=======================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 78,889 $ 23,459
Taxes Paid 39,242 1,600
Supplemental Schedules of Noncash Investing and Financing Activities
Issuing common stock for:
Services $ -- $ 9,000
Reduction of liability -- 10,000
Restructuring of debt -- 100,000
See Notes to Interim Unaudited Consolidated Financial Statements
4
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 September 30,
2003 and for the three and nine months ended September 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 nine months ended September 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.
DEBT RESTRUCTURINGS: The Company accounts for debt restructurings that occurred
in April 2002 in accordance with Statement of Financial Accounting Standards
(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.
5
NET INCOME PER SHARE: Basic earnings per share includes no dilution and is
computed by dividing net income 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, using the treasury stock method. Options and warrants
that are antidilutive because their average exercise price exceeded the average
market price of the Company's common stock for the period approximated 200,000
and 350,000 for the three and nine months ended September 30, 2003 and 2002,
respectively.
NOTE 2 - WIND DOWN OF SUBSIDIARY
On September 15, 2003, the Board of Directors approved the winding down
Oculokinetics, Inc., a wholly-owned subsidiary, which was inactive and had no
assets or liabilities as of that date. 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 PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Three Months ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
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Numerator:
Net Income $ 348,607 $ 102,578 $ 606,301 $ 77,927
----------- ----------- ----------- -----------
Denominator:
Weighted average of common shares 17,850,313 17,350,313 17,850,313 16,016,980
Diluted effect of convertible debt and stock warrants 3,855,688 5,387,700 3,846,399 2,993,167
----------- ----------- ----------- -----------
Diluted weighted average common shares outstanding 21,706,001 22,738,013 21,696,712 19,010,117
Basic net income per share $ 0.02 $ 0.01 $ 0.03 $ 0.00
Diluted net income per share $ 0.02 $ 0.00 $ 0.03 $ 0.00
The net income amount for nine months ended September 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 income per share would have been the same.
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 adjustment did not have a material effect on the
Company's financial position, results of operations and cash flows.
NOTE 5 - MAJOR CUSTOMER
During the three months ended September 30, 2003 and 2002, the Company's private
label distributor accounted for $643,132 and $342,538, or 58.4% and 66.1%, of
total revenues, respectively.
6
During the nine months ended September 30, 2003 and 2002, the Company's private
label distributor accounted for $1,376,347 and $712,838, or 56.4% and 68.0%, of
total revenues, respectively.
NOTE 6 - LETTER AGREEMENT
On July 11, 2002, the Company entered into a letter agreement with HRL
Laboratories, LLC (HRL) to develop a robust iris eye tracking algorithm and
image capture plus DSP architecture. As consideration for HRL's research and
development, the Company is to issue to HRL (1) 300,000 shares of the Company's
restricted common stock as initial compensation for execution of the first phase
of the research and development project at date of agreement; (2) 300,000
additional shares upon the demonstration of the iris tracking algorithm; and (3)
up to 200,000 additional shares prorated by solution cost at a maximum of 1,000
shares per unit cost. The maximum number of shares to be issued to HRL is
800,000 shares.
The Company will own all intellectual property developed under the project and
HRL will have a royalty-free license throughout the universe to use such
intellectual property.
HRL will also be given a non-voting seat on the Company's Board of Directors, to
be filled by an individual selected in HRL's sole discretion.
All 800,000 shares have been issued in 2002, and the total cost of $28,000 was
charged to operations. Of these shares, 300,000 shares were issued during the
third quarter of 2002, and $9,000 was allocated and charged to the third
quarter.
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".
NOTE 8 - GUARANTEES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of September 30, 2003.
7
In general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs associated with
these warranties.
ITEM 2. Management's Discussion and Analysis or Plan of Operation
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from the sale of medical products during the third quarter
were $1,101,000, representing an increase of 211% over the third quarter of
2002. This is the fifth quarter in succession where the sales are a minimum of
two times the quarter of the prior year and is a reflection of the steady growth
of the company. The increase is largely due to the success of the private label
sales program for the Company's Video ENG Systems. Sales of the Company's own
branded ENG products also increased substantially in the quarter, and for the
year to date. The private label portion of our business accounted for 58% of
revenues for the quarter, as opposed to 66% of revenues during the same quarter
of 2002, and reflects 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 and mobile diagnostic testing continues to be successful.
Gross profit for the quarter was 53%, a significant improvement over
the 43% gross profit in the previous quarter, which reflected extraordinary
selling expenses. The Company's goal is to maintain a gross profit of at least
50% for each quarter and year to date. The Company is making efforts to contain
expenses and to reduce product costs in order to achieve the gross profit
percent goal.
Primarily as a result of the sales increase of 211% for the quarter, a
net income (before taxes) of $381,780 was achieved, compared to $102,578 in the
third quarter of 2002. This represents improved profitability for the Company
for five successive quarters. After-tax net income for the quarter was $348,607,
which includes provision for income taxes of $33,173.
Year to date net profit after taxes of $606,301 compares to $77,927 for
the same period of 2002. This improvement is principally attributable to the
substantial increase in revenues during 2003.
The Company incurred California state income taxes because the
California Franchise Tax Board placed a moratorium on the use of tax loss
carryovers for the years 2002 and 2003. Therefore, even though the Company has
substantial tax loss carryovers from prior years, it was unable to use these to
offset state income taxes in 2002 and 2003. Federal tax loss carryovers are not
affected and therefore, the Company is not required to accrue federal income
taxes for 2003.
8
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 2003 of $543,581 allows
for payment of all outstanding invoices and our single note payment on a current
basis. Accounts payable are current and the Company has not borrowed against
credit lines.
Inventory of $187,000 at September 30, 2003 includes $25,000 of
SafetyScope Impairment Detection Device items, which are not currently being
actively marketed, but are used as production samples and demonstrators for
capital-raising activities related to that business. The inventory balance of
$162,000 represents less than one month of consumption, and is relatively
balanced in content.
Accounts receivable of $229,000 represents less than 20 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 with more frequency, providing 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 2003 are encouraging, as evidenced
by October revenues in the order of $300,000, which is our monthly target.
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.
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.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending legal proceedings.
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
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: November 7, 2003
By: /s/ Charles E. Phillips
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Charles E. Phillips, President