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, 2004.
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 June 30, 2004 was 17,883,081.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONSOLIDATED BALANCE SHEET
ASSETS
Current Assets
Cash $ 737,943
Accounts receivable 204,182
Employee advances and receivable, net of
allowance for loan losses of $58,218 200
Inventory 321,068
Prepaid expenses and taxes 35,163
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Total Current Assets 1,298,556
Property and equipment, net of accumulated depreciation
of $14,455 989
Other Assets 219,098
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TOTAL ASSETS $ 1,518,643
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 29,685
Accrued expenses 20,208
Notes payable, current portion 55,443
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Total Current Liabilities 105,336
Long-term debt and accrued interest 325,138
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Total Liabilities 430,474
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Stockholders' Equity
Common Stock, $0.001 par value; 50,000,000 shares authorized;
17,883,081 shares issued and outstanding 17,883
Paid-in Capital 3,497,069
Accumulated Deficit (2,426,783)
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1,088,169
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,518,643
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CONSOLIDATED STATEMENTS OF OPERATIONS
For Three Months For Six Months
ended June 30, ended June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
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Sales - Products $ 456,581 $ 688,018 $ 1,065,457 $ 1,340,626
Cost of Products 213,451 386,140 506,433 698,108
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Gross profit 243,130 301,878 559,024 642,518
Selling, general and administrative expenses 174,473 161,059 348,153 342,061
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Operating income 68,657 140,819 210,871 300,457
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Other income(expenses)
Interest and other income -- 29 60 532
Interest and other expense (921) (14,360) (2,030) (16,198)
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(921) (14,331) (1,970) (15,666)
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Net income before taxes 67,736 126,488 208,901 284,791
Provision for income taxes -- 25,496 800 27,096
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Net income $ 67,736 $ 100,992 $ 208,101 $ 257,695
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Net income per share-basic $ 0.00 $ 0.01 $ 0.01 $ 0.01
============================================================================================================
Net income per share-diluted $ 0.00 $ 0.00 $ 0.00 $ 0.01
============================================================================================================
Shares used in per share calculation-basic 17,883,081 17,850,313 17,883,081 17,850,313
Shares used in per share calculation-diluted 21,763,168 21,647,240 21,763,168 21,692,067
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2004 2003
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 208,101 $ 257,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 114 204
(Increase) Decrease in:
Accounts Receivable (72,762) 72,800
Inventory (1,115) (62,129)
Prepaid and Others (29) (27,810)
(Decrease) in:
Accounts Payable and Accrued Expenses (56,908) (48,623)
Other Liabilities -- (13,271)
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Net cash provided by operating activities 77,401 178,866
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment -- (1,113)
Employee loan and advances (200) (257)
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Net cash (used in) investing activities (200) (1,370)
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CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on Notes Payable (39,602) (50,856)
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Net cash (used in) financing activities (39,602) (50,856)
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NET INCREASE IN CASH 37,599 126,640
CASH BALANCE AT BEGINNING OF PERIOD 700,344 177,668
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CASH BALANCE AT END OF PERIOD $ 737,943 $ 304,308
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Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ 78,889
Taxes Paid $ 58,555 $ --
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Eye Dynamics, Inc. (the "Company") designs, develops,
produces and markets diagnostic equipment that measures, tracks and records
human eye movements, utilizing the Company's proprietary technology and computer
software. The products perform separate, but related, functions and target two
separate markets. First, the Company markets a neurological diagnostic product
that tracks and measures eye movements during a series of standardized tests, as
an aid in diagnosing problems of the vestibular (balance) system and other
balance disorders. Second, the Company's impairment detection devices target the
corporate and criminal justice markets and are designed to test individuals for
impaired performance resulting from the influences of alcohol, drugs, illness,
stress and other factors that affect eye and pupil performance. The Company is a
Nevada corporation formed in 1989.
A summary of significant accounting policies follows:
PRESENTATION OF INTERIM INFORMATION: The financial information at June 30, 2004
and for the three and six months ended June 30, 2004 and 2003 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, 2003.
The results for the three and six months ended June 30, 2004 may not be
indicative of results for the year ending December 31, 2004 or any future
periods.
RECLASSIFICATION: Certain prior period balances have been reclassified to
conform to the current period presentation.
NEW ACCOUNTING STANDARDS: In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104, "Revenuer Recognition," which codifies, revises and
rescinds certain sections of SAB No. 101, "Revenue Recognition," in order to
make this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's results of operations,
financial positions or cash flows.
NOTE 2 - WIND DOWN OF SUBSIDIARY
On September 15, 2003, the Board of Directors approved to wind down the
Company's sole subsidiary, Oculokinetics, Inc., which was inactive and has no
asset or liability as of that date.
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At June 30, 2004 2003
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Prepaid expenses and taxes
Prepaid insurance $ 17,387 $ --
Prepaid income taxes 15,760 --
Other prepaid expenses 2,016 8,674
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Total $ 35,163 $ 8,674
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Property and equipment, net
Furniture and Fixtures $ 1,113 $ 2,545
Equipment 13,331 13,331
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14,444 15,876
Less: accumulated depreciation (13,455) (14,467)
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Total $ 989 $ 1,409
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Other Assets
Commission payable $ 10,770 $ 21,166
Warranty reserve 6,779 --
Accrued interest 4,239 52,672
Other (1,580) (425)
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Total $ 20,208 $ 73,413
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NOTE 4 NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Three Months ended June 30, Six Months ended June 30,
2004 2003 2004 2003
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Basic earnings per share:
Net income $ 67,736 $ 100,992 $ 208,801 $ 257,695
------------ ------------ ------------ ------------
Weighted average number of common shares 17,833,081 17,850,313 17,883,081 17,850,313
============ ============ ============ ============
Basic earnings per common share $ 0.00 $ 0.01 $ 0.01 $ 0.01
============ ============ ============ ============
Diluted earnings per share:
Net income $ 67,736 $ 100,992 $ 208,801 $ 257,695
Addback: Debenture interest 700 763 1,400 1,526
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Adjusted net income $ 68,436 $ 101,755 $ 210,201 $ 259,221
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Weighted average number of common shares 17,883,081 17,850,313 17,883,081 17,850,313
Incremental shares from assumed conversion:
Convertible debt 3,591,799 3,591,799 3,591,799 3,691,571
Stock warrants 288,288 205,128 288,288 150,183
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Adjusted weighted average number of common shares 21,763,168 21,647,240 21,763,168 21,692,067
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Diluted earnings per common share $ 0.00 $ 0.00 $ 0.01 $ 0.01
============ ============ ============ ============
Approximately, 200,000 shares issuable under outstanding stock warrants were
excluded from the calculation of diluted earnings per share for 2003 because the
exercise price of the stock warrants was greater than the average share price of
the common stock and, therefore, the effect would have been antidilutive.
NOTE 5 - INCOME TAXES
The Company accounts for income taxes using a balance sheet approach whereby
deferred tax assets and liabilities are determined based on the differences in
financial reporting and income tax basis of assets and liabilities. The
differences are measured using the income tax rate in effect during the year of
measurement.
The Company experienced significant net losses in prior fiscal years resulting
in a net operating loss carryforward ("NOLC") for federal income tax purposes of
approximately $1,531,790 at December 31, 2003. The Company's NOLC will expire
through 2021. The Company also has state NOLC of $901,140, which was suspended
in years of 2002 and 2003. The state NOLC will expire through 2013.
NOTE 6 - MAJOR CUSTOMERS
During the three months ended June 30, 2004 and 2003, the private label
distributor accounted for $327,659 and $322,451 or 71.8% and 46.9% of total
revenues, respectively.
During the six months ended June 30, 2004, two customers accounted for $791,261
or 74.3% of total revenues.
Special Instrument Dealer 21.2%
Private label distributor 53.1%
During the six months ended June 30, 2003, the private label distributor
accounted for $733,215 or 54.7% of total revenues.
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 2003, and the Company has
only one segment; accordingly, detailed information of the reportable segment is
not presented.
NOTE 8 - MANUFACTURING, SALES, LICENSING, AND SOFTWARE AGREEMENT
On March 22, 2004, the Company entered into an exclusive manufacturing, sales,
and licensing and software ownership agreement with its private label
distributor (Distributor). Under the terms and conditions of the contract, the
Distributor agrees to purchase all of its current and future Video ENG products
exclusively from the Company. In addition, the Company grants the Distributor
the exclusive marketing rights for all of its Video ENG products throughout the
United States.
NOTE 9 GUARANTEES AND PRODUCT WARRANTIES
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 June 30, 2004.
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. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first six months of 2004:
Balance as of December 31, 2003 $ 8,044
Provision for warranty 2,609
Utilization of reserve (3,894)
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Balance as of June 30, 2004 $ 6,779
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ITEM 2. Management's Discussion and Analysis or Plan of Operation
PERIOD ENDED JUNE 30, 2004 COMPARED TO PERIOD ENDED JUNE 30, 2003.
Revenues from the sale of medical products during the second quarter of
2004 totaled $456,581, representing a 34% decrease from revenues during the same
quarter of 2003. Net income after taxes of $467,736 during the current quarter
decreased commensurately, but still represents 14% of revenues for the period.
Revenues for the first half of 2004 were $1,065,457, compared to $1,340,626 for
the same period of 2003. After tax income for the six month period was $208,101,
compared to $257,695 in 2003. Earnings per share of $0.01 for the first half is
the same in 2004 as in 2003.
Lower sales can be attributed to Medicare's continued scrutiny of
reimbursements for ENG tests. This has caused potential new customers to delay
or, in come cases, abandon their plans to purchase equipment. Medicare generally
requires that only ENT doctors, neurologists or audiologists perform ENG tests
in order to be assured of reimbursement. This development has caused much
concern within the industry, because many physicians have utilized trained
medical technicians to administer the ENG test for years. This issue is being
debated and is not yet settled.
The private label portion of our business accounted for 72% of revenues
for the quarter, as opposed to 47% of revenues during the same quarter of 2003.
For the six month period, the private label portion of the business represents
53% of total revenues, compared to 55% for the same period in 2003.
Gross profit for the quarter was 53%, slightly higher than the prior
quarter. Year to date gross profit is 52%. The Company's goal is to maintain a
gross profit of at least 50% for each period. The Company is working to contain
expenses and to reduce product costs in order to achieve the gross profit
percent goal. Principal operating expense increases have been in insurance,
including product liability, workers compensation and general liability. The
cost of product liability insurance was the greatest change, at four times the
rate of 2003.
The Company incurred only the minimum California state income tax
because the moratorium on the use of tax loss carryovers for the years 2002 and
2003 expired, and the use of net operating loss carryovers is put back into
place. Federal tax loss carryovers were not affected and because of substantial
NOL's, the Company is not required to accrue federal income taxes for 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 2004 of $737,943 allow 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 $321,068 at June 30, 2004 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
$296,000 represents almost 3 months of consumption, and is balanced in content.
However, management believes the amount is too high for the volume of sales and
is in process of being reduced to an appropriate level. In the second quarter
inventory was reduced by 10%, and the Company plans to reduce it even more. The
higher inventory is the result of the slowdown in sales and sufficient time has
not yet passed to reduce the inventory to an acceptable level.
Accounts receivable of $204,000 represents less than 60 days accounts
receivable aging, which is acceptable, and efforts to reduce it to a 30 day
level have shown some progress. At March 31, 2004 the accounts receivable were
$366,000, so there has been a substantial reduction. The company's private label
customer makes payments within the net 15 days term of sale. We are encouraging
other customers to utilize leasing and credit cards with more frequency,
providing for quicker 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 rest of the year are encouraging, but not as
robust as 2003. Some buyers are now moving forward with purchases that had been
delayed earlier in the year.
Item 3. Controls and Procedures.
At the end of the period covered by this Form 10-QSB, the Company's
management, including the Chief Executive and Financial Officer, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive and Financial Officer
determined that such controls and procedures are effective to ensure that
information relating to the Company required to be disclosed in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. There have been no
changes in the Company's internal controls over financial reporting that were
identified during the evaluation that occurred during the Company's last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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: August 16, 2004
By: /s/ Charles E. Phillips
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Charles E. Phillips, President and Chief Financial Officer