UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2004
EYE DYNAMICS, INC.
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(Name of small business issuer in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation)
2301 W. 205th Street, #102 Torrance, CA 90501
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(Address of principal executive offices) (City, state and ZIP)
Issuer's telephone number 310-328-0477
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock Par Value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for 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 (X) Yes ( ) No.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB (X)
State issuer's revenues for its most recent fiscal year: $2,084,538
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as a
specified date within the past 60 days: $4,775,335 as of February 15, 2005
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The number of shares outstanding of the issuer's common stock as of February 15,
2005 was 17,883,081.
Transitional Small Business Disclosure Format (check one). ( ) Yes (X) No
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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.
INTRODUCTION
The human eye is a very sensitive organ. Eye movements or pupil
reactions are excellent indicators of the presence of disease, drugs or other
conditions which may impair the human ocular motor system. In particular, the
Company's technology deals with the central nervous system condition of
nystagmus, a rapid, involuntary oscillation of the eyeball. Nystagmus occurs in
different forms and has a number of causes, ranging from the serious (e.g., a
tumor in the brain or ear) to the benign (such as positional dizziness). The
consumption of certain drugs and alcohol also causes nystagmus, and there is a
direct and quantifiable correlation between blood alcohol concentration in the
body and the angle of onset of nystagmus. Medical research conducted over the
past fifty years has furnished evidence demonstrating a relationship between
irregular eye movement and abnormal central nervous system physiology. The
causes of these conditions are numerous, and include the influences of alcohol,
drugs, illness, stress, extreme fatigue and other neurological conditions
The basic technology used in all of the Company's products is similar,
yet differs in its application and use. The Company's products utilize infrared
sensitive video cameras to monitor, videotape and analyze eye performance and
movement. All the products share in a modular concept for efficiency in
manufacturing. The products are PC computer based with specialized and
proprietary hardware and embedded firmware. A common element of the products is
the Ocular Motor Module, where the subject being tested peers into a dark
environment. The products include an infrared sensitive Charge Coupled Device
video camera that provides a bright video image, even though the person being
tested sees nothing but a small stimulus or tracking light amid complete
darkness.
PRODUCTS
MEDICAL PRODUCTS. Eletronystagmographic (ENG) testing is a standard
medical procedure used in assessing problems of the balance system of patients.
This method provides enhanced diagnostic information for the medical
practitioner to use for the final diagnosis of the patient's problem. Testing of
patients for irregular eye movements has been a standard medical procedure for
several decades. For this market, the Company markets the House InfraRed/Video
ENG System. The ENG System is the first major technological improvement in this
standard medical testing method in the past forty years. The Company's products
have gained a share of this highly specialized market. The FDA granted approval
to market this product in 1994.
Irregular eye movements and conditions are analyzed by medical
specialists as an aid in diagnosing problems with the human balance system and
other neurological conditions. In the past, diagnostic products have used
"electrodes" that are taped to the skin around the periphery of the patient's
eyes and a very small electrical signal from the corneo-retinal potential of the
eyes drives a pen recorder. The pen recorder provides a graphical depiction of
the eye movements under different test conditions. These graphs are then
interpreted by the medical diagnostician.
2
The Company brought the use of infrared illumination of the eyes into
clinical use in 1994 when the U.S. Food and Drug Administration ("FDA") approved
marketing of its House InfraRed/Video ENG System. This device was the first to
replace the electrodes with infrared sensitive video cameras and with computer
digital processing that follows the movement of the eyes and graphically
portrays the movements much like the pen recorder. The test subject wears a
lightweight goggle assembly which uses micro-miniature video cameras. The goggle
is an essential instrument because certain of the ENG tests require the patient
to move his head and often to recline on an examining table. The Company
believes the accuracy and display of the Infrared/Video ENG System represents a
significant improvement over other existing testing methods. In addition, the
use of video by the Infrared/Video ENG System allows the test administrator or
medical practitioner to observe the eye movements directly and can provide a
videotape record of the test for later playback and additional analysis. The
Company believes that this is a significant improvement over prior technology.
This product was first marketed in 1994, after gaining FDA approval to market.
Since then most every competitor has changed from electrodes and is embracing
video data acquisition as a superior technology. Results from the tests are used
by physicians and clinicians.
The computer-based system, with proprietary Eye Position Interface
Controller, "locks" on to the pupils and independently tracks the horizontal and
vertical movements of each eye. The nystagmus is displayed in real time, saved,
analyzed and printed. The four channel system comes with a 12" Quad/Video
Monitor that displays both eyes on a single video screen.
The system was developed by the Company in conjunction with the House
Ear Clinic and House Ear Institute, Los Angeles, California. The "House" name is
used with the permission of the House Ear Institute.
IMPAIRMENT DETECTION PRODUCTS. The Company's impairment detection
product, SafetyScope (previously known as the "EPS-100"), allows employers and
others to screen individuals for physiological signs of impairment. The system
evaluates involuntary changes in eye movements and/or pupil reactions, which may
result from drug or alcohol abuse, reactions to medication, medical conditions,
stress or fatigue. Occupations in the medical, aviation, emergency response,
manufacturing and transportation businesses are key markets for this technology.
Unlike most drug and alcohol test methods, the SafetyScope functions without the
need for body fluids. Also, due to its less invasive nature, SafetyScope only
reveals if a person is impaired at the time of the test and does not test for
past use. Also, unlike blood and urine tests which only measure the presence of
a substance in the body, the SafetyScope only takes into account the
physiological effects of the substance.
While substance abuse receives the most attention, worker impairment
caused by other factors, such as prescription and over-the-counter medications,
stress, extreme fatigue and illness, is a significant expense to employers.
Workers suffering from such impairments are characterized by low productivity,
more accidents, higher workers' compensation and insurance costs, and equipment
and merchandise damage. Different types of performance tests have evolved based
on extensive scientific studies validating the relationship between test results
and the impaired performance of an individual. They assess an individual's motor
and cognitive skills at the time of the test.
The SafetyScope is based on methods developed by the federal government
and used by law enforcement over the past 30 years. The SafetyScope is a simple
computer system that evaluates the ability of an individual's eyes to follow a
moving light and react to a dim and bright light stimulus. The SafetyScope is
non-diagnostic and non-judgmental; it evaluates performance of the individual
solely for safety and productivity purposes. The preferred pricing model is to
place the units with the user at no initial cost, except for a modest deposit,
and to charge the user a fee for each test administered. It is anticipated that
the fees for such tests will range from $1 to $5 per test, depending on the
monthly quantity of tests, with an average of approximately $3 per test.
3
An employee looks into the SafetyScope and focuses on a moving beam of
light. A video camera records the action, and software analyzes eye movement
(smooth or jerky) and pupil reaction (small or large) and renders a
determination on whether there is impairment. In just ninety seconds, the
SafetyScope tests the human eye for the purpose of evaluating an individual for
impairment, by measuring twenty parameters of eye movement and pupil change,
relating to the position and reaction time of the eye and the size of pupil. The
SafetyScope reports the result of the test instantly with a "Pass" or "Fail"
result. The system does not require bodily fluids such as blood or urine.
SafetyScope offers users major advantages over traditional drug tests, in that
the system can detect on-the-spot impairment and results are immediate. Designed
for workplace testing, it can be utilized in a random testing or regular
scheduled testing environment. Traditional drug tests can take days to complete,
which is too late for detecting a problem the day it occurs.
SafetyScope can be an important component for evaluating an employee
for job safety, particularly those jobs in life-dependent occupations, such as
airline pilots, bus drivers, train engineers, firefighters, medical personnel,
construction workers and law enforcement personnel, among others. Companies and
government agencies around the world are evaluating this cost-effective
technology to replace traditional drug tests that require body fluids and are
much more expensive to conduct.
Even in healthy subjects the eyeball exhibits rapid, involuntary,
oscillatory movements, a phenomenon called nystagmus. But, as the subject's
brain function becomes increasingly impaired these movements become more and
more erratic. The SafetyScope uses an algorithm developed through thousands of
trials with hundreds of people under the influence of alcohol, heroin,
marijuana, and cocaine. The trials compared their current reading with a
baseline reading taken prior to being dosed with the substance.
The Company believes that the SafetyScope will be especially useful for
applications where fatigue in the workplace has an impairing effect on workers.
The Company contracted with a major human alertness technology consulting and
research organization to optimize the SafetyScope for fatigueness testing. The
Company believes the SafetyScope will appeal to employers with round-the-clock
workforces who desire to reduce industrial accidents caused by employee fatigue
and to improve worker alertness and safety. It is estimated that in our society
more than 20 million Americans, or over 10% of the workforce, work outside of
normal daylight working hours, which tends to increase the effect of extreme
fatigue.
The Company also offers a second model, the EM/1, which is designed for
use by law enforcement agencies for forensic purposes and for the evaluation of
individuals suspected of driving or being under the influence of intoxicants.
The EM/1 functions in a manner similar to the SafetyScope, but without the
"Pass/Fail" result. Instead, the EM/1 delivers the videotaped data for
interpretation by the law enforcement agency.
In most states, law enforcement agencies use a six point evaluation of
people thought to be intoxicated. This is referred to as the Standardized Field
Sobriety Test ("SFST"). The SFST includes three tests for balance and three
tests involving eye performance. Thus, the Company believes there is a need for
a product that can be utilized, not only in the jail or precinct house, but in
the field by traffic patrol cars. This product must ultimately be in a 'hand
held' configuration.
Hardware for the EM/1 is similar to the SafetyScope, but different
operating software requires that a person trained and certified in SFST and drug
recognition and evaluation operate the equipment and evaluate eye performance.
From the EM/1 test results and other test information, the evaluator draws an
opinion as to whether the individual is impaired and under the influence of
intoxicants or not, or whether medical treatment is indicated. The video tape
made of the test is then available as evidence to support the conclusion of the
law enforcement officer and, depending on the jurisdiction, may be admissible as
evidence in court proceedings. The EM/1 is currently priced at $14,000 per unit;
however, the Company plans to introduce a handheld unit within the next two
years, which should sell for less than $5,000.
4
MARKETING
MEDICAL PRODUCTS. Marketing of the Infrared/Video ENG System is
conducted through an exclusive master distributor who has a network of
independently owned sub-distributors, known as special instrument dealers. These
independently owned businesses are distributors of not only the IR/Video ENG
System, but of a variety of allied and related products for the audiometric and
otolaryngology ("ENT") markets. These distributors are across the United States
and operate in territories that are assigned both exclusively and
non-exclusively to them by the master distributor. In addition, there are
several foreign distributors that are merchandising the product in countries
such as India, Egypt, Hungary, Turkey, Thailand, Taiwan and Korea. The Company
is not yet selling in the European Community countries due to lack of the "CE"
mark of approval that must be obtained prior to marketing in those countries.
The Company has also supplied a modified version of the Infrared/Video
ENG System to two distributors on a private label basis. These private label
sales have represented a significant portion of sales of the product. Sales to
this private label distributor accounted for 62% of the total sales for the year
2004.
The market for the ENG products is relatively mature and represents
only annual growth estimated at 5%, but because of the advancement of technology
spurred by the Company's introduction of video data acquisition methods in 1994,
the market for replacement products has been strong. Also, there has been
considerable effort to open new markets for our products, including the
neurology market, through our private label distributor and through mobile
diagnostic providers of testing services.
The Company contemplates that new versions of the ENG product will be
marketed through an arrangement with MedTrak Technologies, our master
distributor. It will market new "Eye Dynamics" branded products to an expanded
array of medical specialty markets. The Company has appointed MedTrak as "Master
Distributor" for these products.
IMPAIRMENT DETECTION PRODUCTS. The Company has been test marketing the
SafetyScope and has sold a few units in various locales. Currently, independent
sales representatives are being recruited to achieve geographic distribution
coverage over the United States. However, implementation of a full marketing
plan is contingent on receipt of additional working capital.
In general, government drug testing regulations are based on urine
Testing, so testing of employees by governmental agencies, quasi-governmental
agencies and certain regulated industries must comply with these regulations.
Accordingly, some modification of these regulations must be achieved in order
for the SafetyScope to gain broad acceptance in this sector. Companies that do
substantial business with government agencies often must have a drug testing
program that complies with government regulations. Also, industries that are
regulated by the Department of Transportation must comply with these
regulations, as well as certain other industries regulated by the federal
government, such as the nuclear power industry.
These factors limit the overall size of the market currently available
to the Company to private companies that are not regulated by the federal
government with respect to testing employees for substance abuse. If a private
employer falls within government regulated drug testing requirements, but
desires to also use impairment testing methodologies, it must do so in addition
to the government regulation requirements. This creates an additional cost to
such testing and therefore greatly limits the Company's access to that market.
The Company has conducted discussions with various government agencies
to modify applicable regulations and procedures so that they will encompass
testing based on eye movement and performance. While certain governmental
agencies have expressed an interest in the Company's products, management
believes that changing governmental testing regulations will be a lengthy
process and success is not assured.
COMPETITION
MEDICAL PRODUCTS. The principal competitors in the medical market
making ENG testing equipment are MicroMedical Technologies, Inc., ICS Medical
Corporation and Interacoustics. Since the Company's ENG product was introduced
in 1994, competitors have developed similar video-based ENG goggle products. As
a result, the market has become very competitive and subject to pricing
pressures. As a consequence, the Company has reduced prices, with an adverse
effect on overall gross margins. To combat this competitive pressure the Company
has reduced manufacturing costs in an effort to offset the gross margin loss.
Also, the gross profit on sales to the private label distributor is less than
sales of our own branded products.
5
IMPAIRMENT DETECTION PRODUCTS. Competition for the SafetyScope is from
companies that have developed tests and devices that evaluate motor and
cognitive skills. These take the form of hand-eye coordination tests, divided
attention tests and other behavioral tests or series of tests administered
either in series or selectively. The Company has identified three such
competitors that have marketed these products in the past, including Performance
Factors, Inc., Essex Corporation, and Pulse Medical Instruments.
The Company believes only Pulse Medical Instruments is developing a
product to be directly competitive with the Company's products. The Pulse
Medical product does not use video sensors and its results are displayed in
graphic form on a computer monitor for the qualified expert to interpret. The
Company believes that such product will be more expensive than the SafetyScope
and is still under development and validation as a useful device.
The SafetyScope differs from its competitors' tests because the
SafetyScope test evaluates changes in eye performance, which are involuntary
responses and not under the control of the individual. For this reason, these
responses cannot be changed, improved upon or learned. All the other competitive
forms of performance tests known to the Company can be learned and over time the
individual being tested can improve his skills. The Company believes that this
difference is an important competitive advantage over other forms of performance
tests.
The SafetyScope also competes with drug and alcohol abuse test kits and
devices, which principally rely on collection and testing of urine samples. In
addition, certain drug and alcohol abuse tests now being developed will test
saliva and/or hair for evidence of the presence of certain drugs or alcohol. The
principal advantages of the SafetyScope over others tests are the immediacy of
results and the non-invasive nature of the procedure. The Company believes that
the potential for safety improvement that the SafetyScope will provide for
life-dependent professions, such as airline pilots, bus drivers and train
engineers, will make the system a very important breakthrough for public safety
in these fields.
MANUFACTURING
The Company has performed all its own design and engineering of
products and has developed all software and validation of software algorithms
that are used in the analysis portion of the proprietary software.
Manufacturing of both the ENG products and the SafetyScope is primarily
done through subcontracting with various suppliers. The Company does not rely on
a single supplier for the major manufacturing of items. Various companies build
and test product modules on an OEM contract basis. Final system integration and
testing is completed by the Company prior to shipment of devices to customers.
All the products share in a modular concept for efficiency in manufacturing. The
products are PC Computer based with specialized and proprietary hardware and
embedded firmware. The common elements of the products are the viewport and the
goggles, through which the individual being tested peers into a dark
environment.
Manufactured or fabricated modules include the molded eye piece, the
goggle assembly, the viewport assembly and proprietary printed circuit boards.
As a majority of the components in the Company's products are readily available,
the Company does not anticipate undertaking internal manufacturing of any
components. Manufacturing operations consist of only assembly, testing and
packaging functions.
GOVERNMENT REGULATION
The Company's ENG products have been approved for marketing by the U.S.
Food and Drug Administration. The Company is also licensed by the State of
California as a Medical Device Manufacturer. The SafetyScope and EM/1 are not
subject to regulation, as they are not considered medical devices. However, as
discussed above under the caption "Marketing," governmental regulations on
substance abuse testing for government employees and certain private companies
impact the Company's ability to market the SafetyScope in these areas.
PATENTS & PROPRIETARY PROTECTION
The Company licenses the technology used in its performance evaluation
products from Ronald A. Waldorf, Chairman of the Board of Directors and Chief
Executive Officer, who holds a patent covering claims relating to tracking eye
movements in the dark, utilizing infrared illumination and infrared sensitive
video cameras, as well as the related analysis methodology. The patent was
issued in 1989 and expires in 2006. The license is for the term of the
underlying patent, and calls for nominal annual royalties of $100.
6
The Company is the owner of a patent issued in August 1992, covering
certain technology underlying the SafetyScope, principally relating to the
apparatus for testing for impairment by tracking eye movements and pupil
reactions to presented stimuli.
The existence of patents may be important to the Company's future
operations, but there is no assurance that additional patents will be issued.
For both of the above named patents, eleven foreign patents have been issued
and/or are pending in several foreign countries.
The Company also relies on unpatented technology, know-how and trade
secrets covering a number of items, particularly the methods of obtaining data
regarding eye performance. The Company relies on confidentiality agreements and
internal procedures to protect such information.
EMPLOYEES
The Company employs five employees full time, including its President,
a development engineer, an export marketing manager and technical support person
plus an administrative person. Other part time consulting and commissioned
personnel are also utilized. The Company's employees are not parties to any
collective bargaining agreement, and the Company believes that its employee
relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's offices are in leased space in an industrial complex in
Torrance, California. The offices occupy 1620 square feet and the lease expires
on January 31, 2006. The current monthly lease payment is $1,685.
ITEM 3. LEGAL PROCEEDINGS
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
The following table sets forth the quarterly high and low closing
prices for the Common Stock, as reported on the OTC Bulletin Board, during the
2004 and 2003 fiscal years.
LOW HIGH
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2004
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First Quarter $.42 $.79
Second Quarter .37 .85
Third Quarter .14 .39
Fourth Quarter .13 .18
2003
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First Quarter .045 .11
Second Quarter .05 .35
Third Quarter .14 .25
Fourth Quarter .205 .75
The Company's common stock is traded on the OTC Bulletin Board under
the symbol "EYDY". As of December 31, 2004, the Company's Common Stock was held
of record by approximately 111 holders. Registered ownership includes nominees
who may hold securities on behalf of multiple beneficial owners.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future.
7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-KSB. Except for the historical
information contained herein, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Annual Report on Form 10-KSB should be read
as being applicable to all related forward-looking statements wherever they
appear in this Annual Report on Form 10-KSB. The Company's actual results may
differ materially from the results discussed in the forward-looking statements
as a result of certain factors including, but not limited to, those discussed
elsewhere in this Annual Report on Form 10-KSB.
The Company has invested substantial funds in the last several years
developing and validating its products. The Company is successfully producing
and marketing the Infrared/Video ENG System; however, since this is a niche
product in a relatively mature market, potential revenue growth from this
product line is limited. To date, sales of this product have constituted a
substantial portion of the Company's revenues.
The SafetyScope product and its predecessor, the EPS-100 Performance
System, has been sold in a few locales and beta marketing has been successful.
However, for large scale marketing and sales of this product, the Company will
need a substantial infusion of capital, as well as modification of federal drug
testing regulations. This is a significant project, requiring a coordinated
effort with potential customers, government officials, and legislators.
Therefore, additional investment capital will be is required to launch the
marketing of the SafetyScope, and a large scale marketing and lobbying effort
will be necessary for the product to succeed. A business plan has been prepared
for commercialization of the SafetyScope and is being evaluated by interested
parties.
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003.
Revenues from sales of products decreased by 35%, from $3,238,282 in
2003 to $2,084,538 in 2004. This decrease is largely due to a slowdown in
product sales due to a suspension of reimbursements to medical providers by
Medicare for several months while the agency evaluated the medical providers and
increased the quality requirements for the technicians performing tests. This
resulted in potential new customers delaying purchases of new capital equipment
until the technician training situation was resolved. In addition, issues had
been raised about tests being performed by testing centers where no 'medical
necessity' had been established and/or physician referral obtained. This was not
an issue relating to Eye Dynamics equipment, but rather an issue of the
practices utilized by the testing centers. These issues have been largely
resolved, and Medicare resumed payments shortly thereafter. However, product
purchase levels have not yet returned to the volume of 2003. Our private label
distributor accounted for approximately 53% of our sales revenues in 2003, and
in 2004 accounted for 62%. In November we appointed the Private Label
distributor as 'Master Distributor' to market all the Eye Dynamics branded
models of ENG equipment, as well as its private brand items. Gross profit
percentage remained stable in 2004 at 49%, compared to 52% in 2003, which is a
reflection of the higher percent of sales to the private label distributor.
Gross profit in 2004 of $1,030,986 was attained with a net profit of $386,315
for the year. Gross profit in 2003 was $1,668,726, with a net profit of
$1,043,027.
Inventory turnover ratio in 2004 was approximately 6:1, compared to 6:1
in 2003. This is a reflection of the decrease in business and also indicates the
reduction of products in inventory to match the lesser sales level of 2004.
Collection of accounts receivables has been very satisfactory, with
only minimal slow paying accounts. Our private label account ordinarily pays
invoices within fifteen days of the invoice date. Bad debt write off for 2004
was $1,669.
Product development is limited due to resources available and is
concentrated on software and current product improvements that will make the
existing products more competitive and desirable.
8
On March 24, 2005, the company announced the execution of a Letter of
Intent to acquire OrthoNetx, Inc., a leading provider of medical devices for
osteoplastic surgery. OrthoNetx is located in Superior, Colorado. It is
contemplated that the transaction, when completed, will be a stock transaction
in which OrthoNetx shareholders will receive one share of Eye Dynamics Stock in
exchange for each share of OrthoNetx stock. The acquisition is subject to
certain customary conditions, including regulatory approvals.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Company had an accumulated deficit of
approximately $2,248,571. As of that date, the Company had $847,235 in cash,
approximately $44,492 in net accounts receivable, and $180,708 in inventory.
Also, the Company had $53,695 of current liabilities, consisting of accounts
Payable and accrued liabilities. Long term liabilities consist solely of a note
balance of $40,000, which, at the note holder's option, may be converted into
common shares of the company.
The Company has no plans for significant capital equipment expenditures
for the foreseeable future.
The Company believes that current and future available capital
resources, cash flow from operations and other existing sources of liquidity
will be adequate to fund its operations. However, there can be no assurance that
sufficient funds will be available or that future events will not cause the
Company to seek additional capital sooner. To the extent the Company is in need
of any additional financing, there can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all. The
inability to obtain such financing could have a material adverse effect on the
Company's business, financial condition and results of operations. If additional
funds are raised by issuing equity or convertible debt securities, options or
warrants, further dilution to the existing shareholders may result.
If adequate funds are not available, the Company may also be required
to delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
its net sales or profitability in recent years.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are submitted as a separate
section of this Annual Report on Form 10-KSB, commencing with page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
9
ITEM 8A. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of its disclosure controls and procedures as
of the end of the year covered by this report (the "Evaluation Date"), as
required by Exchange Act Rule 13a-15, concluded that the Company's disclosure
controls and procedures were effective and designed to ensure that material
information relating to the Company is accumulated and would be made known to
them by others within the Company as appropriate to allow timely decisions
regarding required disclosures.
There were no significant changes in the Company's internal controls
over financial reporting that occurred during the year ended December 31, 2004
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
The Company's management believes that a control system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company will be detected.
ITEM 8B. OTHER INFORMATION
Inapplicable
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- -----------
Ronald A. Waldorf 56 Chief Executive Officer, Secretary & Director 1991
Charles E. Phillips 69 President, Treasurer & Director 1991
Arnold D. Kay 69 Director 1999
Barbara J. Mauch 59 Chief Product Development Engineer ----
Directors serve for a term of one year or until the next annual meeting
of shareholders.
RONALD A. WALDORF has been Chairman of the Board of Directors of the
Company since 1991 and is active in overall policy formation and strategic
planning for the Company. He was appointed as Chief Executive Officer in January
2005. He is the inventor of the IR/Video ENG System, SafetyScope and EM/1
products. He also owns a patent covering closely related technology that has
been licensed exclusively to the Company. Since 1969 Waldorf has been active in
the field of otolaryngology, primarily in an academic research environment at
the University of Florida, College of Medicine and at the University of
California (Irvine), Department of Surgery. He has published numerous articles
on vestibular and optokinetic research in international scientific and medical
journals and was the principal investigator in a research grant funded by the
National Institute of Health/National Institute on Alcohol Abuse and
Alcoholism(NIH/NIAAA). Since 1981 he has acted as a consultant to clinics and
hospitals in the Los Angeles area, including the House Ear Clinic. He has also
consulted to a Japanese company developing new technologies for eye movement
detection.
Mr. Waldorf earned an M.S. from the Department of Physiology of the
College of Medicine, University of Florida, in 1972.
10
CHARLES E. PHILLIPS has been President and a Director of the Company
and its predecessor, OculoKinetics, Inc. since its inception in 1988. Prior to
forming OculoKinetics, Inc., Mr. Phillips operated Charles E. Phillips, Inc., a
management and marketing consulting firm. His work has included assignments in
marketing, operations and the initiation of start-up ventures. From 1974 to
1985, Mr. Phillips was Executive Vice President and Director of Akai America,
Ltd., a consumer electronics company. His management background has encompassed
marketing, new product planning, sales, advertising, finance, accounting,
manufacturing, quality assurance and distribution.
Mr. Phillips received a B.A. from Pepperdine College, Los Angeles,
California with emphasis on Business and Speech Education, in 1956.
ARNOLD D. KAY was elected a Director in September 1999. He has more
than thirty years experience in finance, sales and administration. Mr. Kay was
an employee of the Company from 1991 to 1994. He currently is co-owner and
General Manager of Lomita Blueprint/CADWEST of Lomita, California, a software
and computer imaging business focusing on design, graphics and distribution of
CAD software and systems.
Mr. Kay received a B.S. in Business Administration/Finance from
California State University, Northridge, in 1961.
BARBARA J. MAUCH is the primary product development engineer for the
Company. She has been with the Company since 1989 and is responsible for product
engineering and software development. Her background encompasses computer
systems design and software development for access control of buildings and
other properties. She served as a Director of the Company from 1991 to 1996.
Ms. Mauch earned a B.S. in Mathematics from Northern Colorado
University in 1971 and completed the Master's program in computer science at
UCLA.
DIRECTORS' COMPENSATION
The members of the Board of Directors do not receive monetary
compensation for their service as directors, but are entitled to receive options
to purchase 20,000 shares of common stock for each year of service. As no
options had been issued under this policy since its inception in 1999, in
January 2005 the Company issued the options to each director for his period of
service. Thus, options to purchase up to 360,000 shares were issued, at an
exercise price of $.15 per share.
Directors are also eligible for reimbursement of their expenses
incurred in connection with attendance at Board meetings in accordance with
Company policy.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities (the "10% Stockholders"), to file reports of
ownership and changes of ownership with the Securities and Exchange Commission.
Officers, directors and 10% Stockholders of the Company are required by
Commission regulation to furnish the Company with copies of all Section 16(a)
forms so filed.
Based upon a review of filings made and other information available to
it, the Company believes that each of the Company's present Section 16 reporting
persons filed all forms required of them by Section 16(a) during the year 2002.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain compensation awarded or paid by
the Company to its Named Executive Officers and others during the fiscal years
ended December 31, 2004, 2003 and 2002.
11
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ------------------------------------
RESTRICTED LTIP
NAME AND SALARY BONUS OTHER STOCK AWARDS OPTIONS PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR $ $ $ $ # $ COMPENSATION
------------------ ---- ------ ----- ----- ------ ------- ------- ------------
Charles E. Phillips 2004 120,000 0 0 0 0 0 0
2003 97,500 0 0 0 0 0 0
2002 76,000 0 0 0 0 0 0
Ronald A. Waldorf 2004 0 0 0 0 0 0 0
2003 0 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
Barbara J. Mauch 2004 76,000 0 0 0 0 0 0
2003 67,500 0 0 0 0 0 0
2002 56,000 0 0 0 0 0 0
There were no options granted or exercised in 2004.
The following table sets forth certain information concerning options
outstanding at December 31, 2004:
Number of Value of Unexercised
Shares Unexercised In-the-money
Acquired on Value Options at Options at
Exercise Realized December 31, 2003* December 31, 2003*
---------- -------- ------------------ ------------------
Name
----
Charles E. Phillips 0 0 0 0
Ronald Waldorf 0 0 0 0
Arnold Kay 0 0 0 0
Barbara J. Mauch 0 0 0 0
The Company has employment agreements with its President and an employee that
provide for aggregate annual compensation of $150,000. The agreements are
automatically renewed year to year. The agreements may be terminated by the
Company or the officers with notice 60 days prior to any expiration date.
12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of December 31, 2004, by (i)
each person known by the Company to beneficially own 5% or more of the
outstanding Common Stock of the Company; (ii) each of the Company's directors;
(iii) the Named Executive Officers identified in the Summary Compensation Table;
and (iv) all directors and Named Executive Officers of the Company as a group.
Name & Address Number of Shares Percentage Owned
-------------- ---------------- ----------------
Charles E. Phillips
2301 W. 205th St., #102 2,105,489 11.8
Torrance, CA 90501
Ronald A. Waldorf
2301 W. 205th St., #102 1,067,100 6.0
Torrance, CA 90501
Barbara J. Mauch 1,382,544 7.8
2301 W. 205th St., #102
Torrance, CA 90501
Arnold D. Kay 63,128 0.4
2301 W. 205th St., #102
Torrance, CA 90501
All directors and executive
officers as a group 4,618.261 25.8
(4 persons)
-----------------------
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Shares of Common Stock subject to
securities currently convertible, or convertible within 60 days after December
31, 2004, are deemed to be outstanding in calculating the percentage ownership
of a person or group but are not deemed to be outstanding as to any other person
or group.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company licenses the technology used in its performance evaluation
products from Ronald A. Waldorf, Chairman of the Board of Directors and Chief
Executive Officer, who holds a patent covering claims relating to tracking eye
movements in the dark, utilizing infrared illumination and infrared sensitive
video cameras, as well as the related analysis methodology. The patent was
issued in 1989 and expires in 2006. The license is for the term of the
underlying patent, and calls for nominal annual royalties of $100.
13
ITEM 13. EXHIBITS
(A) The following exhibits are included herein or incorporated by reference:
3(i)* Articles of Incorporation, as amended.
3(ii)* Bylaws
10.1* Employment Agreement, dated April 1, 1989 with Charles E. Phillips
10.2* Employment Agreement, dated December 1, 1989 with Barbara J. Mauch
10.3* Exclusive Licensing Agreement, dated November 1, 1989 with Ronald A.
Waldorf
10.4** Agreement, dated March 19, 2001 between the Company and Medtrak, Inc.
10.4*** Standard Multi-Tenant Commercial Industrial Lease-Gross, dated January
9, 2003, between the Company and AMB Property, L.P.
10.6*** Technology Development Agreement, dated November 18, 2002, between the
Company and HRL Laboratories, LLC
10.7*** Registration Rights Agreement, dated November 18, 2002, between the
Company and HRL Laboratories, LLC
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Incorporated by reference from Amendment No. 1 to the Registration Statement
on Form 10-SB, filed on December 13, 1999.
** Incorporated by reference from Report on Form 10-K for the year ended
December 31, 2000, filed on April 16, 2001.
*** Incorporated by reference from Report on Form 10-KSB for the year ended
December 31, 2002, filed on April 9, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to the Company by Spector
& Wong, LLP, its independent certified accountants, for professional services
rendered for the fiscal years ended December 31, 2004 and 2003:
Fee Category Fiscal 2004 Fees Fiscal 2003 Fees
------------- ---------------- -----------------
Audit Fees $7,000 $6,600
Audit-Related Fees 5,000 7.200
Tax Fees 1,350 1,200
All Other Fees -0- -0-
Total Fees $13,350 $15,000
Audit Fees. Consists of fees billed for professional services rendered
for the audit of the Company's consolidated financial statements and review of
the interim consolidated financial statements included in quarterly reports and
services that are normally provided by Spector & Wong in connection with
statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of the Company's consolidated financial statements and are not reported under
"Audit Fees." There were no Audit-Related services provided in fiscal 2003 or
2002.
14
Tax Fees. Consists of fees billed for professional services for tax
compliance, tax advice and tax planning.
All Other Fees. Consists of fees for products and services other than
the services reported above. There were no management consulting services
provided in fiscal 2004 or 2003.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE
NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Company has no audit committee. The Board of Directors' policy is
to pre-approve all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval would generally be
provided for up to one year and any pre-approval would be detailed as to the
particular service or category of services, and would be subject to a specific
budget. The independent auditors and management are required to periodically
report to the Board of Directors regarding the extent of services provided by
the independent auditors in accordance with this pre-approval, and the fees for
the services performed to date. The Board of Directors may also pre-approve
particular services on a case-by-case basis.
15
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eye Dynamics, Inc.
By: /s/ Charles E. Phillips
-----------------------------------
Date: April 6, 2005 Charles E. Phillips, President
and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons On behalf of the Registrant and in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Charles E. Phillips President, Chief Financial April 6, 2005
Charles E. Phillips Officer and a Director
/s/ Ronald A. Waldorf Chairman, Chief Executive
Ronald A. Waldorf Officer and a Director April 6, 2005
/s/ Arnold Kay Director April 6, 2005
Arnold Kay
16
HAROLD Y. SPECTOR, CPA SPECTOR & WONG, LLP 80 SOUTH LAKE AVENUE
CAROL S. WONG, CPA Certified Public Accountants SUITE 723
1- (888) 584-5577 PASADENA, CA 91101
FAX (626) 584-6447
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and stockholders of Eye Dynamics, Inc.
We have audited the accompanying balance sheets of Eye Dynamics, Inc.
as of December 31, 2004 and 2003, and the related statements of operations,
changes in stockholders' deficit, and cash flows for the years ended December
31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial positions of Eye Dynamics, Inc.
as of December 31, 2004 and 2003, and its operations and its cash flows for the
years ended December 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
Spector & Wong, LLP
Pasadena, California
March 9, 2005
(Except for Note 16, as to which the date is March 28, 2005)
F-1
EYE DYNAMICS, INC.
BALANCE SHEETS
ASSETS
Current Assets 2004 2003
------------ ------------
Cash $ 847,235 $ 700,344
Accounts receivable, net of allowance of doubtful accounts
of $899 and $0, respectively 44,492 131,420
Note receivable, net of allowance of loan loss of $58,218 19,731 --
Inventory 180,708 319,953
Prepaid expenses 37,641 37,232
------------ ------------
Total Current Assets 1,129,807 1,188,949
Property and equipment, net of accumulated depreciation
of $13,569 and $13,341, respectively 875 1,103
Other Assets 229,395 216,999
------------ ------------
TOTAL ASSETS $ 1,360,077 $ 1,407,051
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,622 $ 12,231
Accrued liabilities 38,073 94,570
Notes payable, current portion -- 95,046
------------ ------------
Total Current Liabilities 53,695 201,847
Long-term debt 40,000 325,137
------------ ------------
Total Liabilities 93,695 526,984
------------ ------------
Stockholders' Equity
Common Stock, $0.001 par value; 50,000,000 shares authorized;
17,883,081 shares issued and outstanding 17,883 17,883
Paid-in Capital 3,497,070 3,497,070
Accumulated Deficit (2,248,571) (2,634,886)
------------ ------------
Total stockholders' equity 1,266,382 880,067
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,360,077 $ 1,407,051
============ ============
See notes to financial statements
F-2
EYE DYNAMICS, INC.
STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2004 2003
------------------------------------------------------------------------------------
Sales
Products $ 2,084,538 $ 3,230,284
Services -- 8,000
--------------------------------
Total sales 2,084,538 3,238,284
--------------------------------
Cost of Sales
Products 1,053,552 1,567,414
Services -- 2,144
--------------------------------
Total cost of sales 1,053,552 1,569,558
--------------------------------
Gross Profit 1,030,986 1,668,726
Selling, General and Administrative Expenses 691,658 720,248
--------------------------------
Operating income 339,328 948,478
--------------------------------
Other Income(Expense)
Interest and Other Income 9,300 819
Gain on early extinguishment of debt 28,621 --
Interest and Other Expense (3,931) (17,551)
--------------------------------
Total other income(expenses) 33,990 (16,732)
--------------------------------
Net income before taxes and extraordinary item 373,318 931,746
Provision for Income Taxes (Benefits) (12,997) (111,281)
--------------------------------
Net income $ 386,315 $ 1,043,027
================================
Net income per share-Basic $ 0.02 $ 0.06
================================
Net income per share-Diluted: $ 0.02 $ 0.05
================================
Shares used in per share calculation-Basic 17,883,081 17,853,044
Shares used in per share calculation-Diluted 21,765,478 21,797,759
See notes to financial statements
F-3
EYE DYNAMICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------------
Balance at 12/31/02 17,850,313 $ 17,850 $ 3,497,103 $ (3,677,913) $ (162,960)
Exercise of warrants under
noncash provision 32,768 33 (33) -
Net Income 1,043,027 1,043,027
-----------------------------------------------------------------------
Balance at 12/31/03 17,883,081 17,883 3,497,070 (2,634,886) 880,067
Net Income 386,315 386,315
-----------------------------------------------------------------------
Balance at 12/31/04 17,883,081 $ 17,883 $ 3,497,070 $ (2,248,571) $1,266,382
=======================================================================
See notes to financial statements
F-4
EYE DYNAMICS, INC.
STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 386,315 $ 1,043,027
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 228 408
Deferred tax benefit (13,797) (205,436)
Gain on early extinguishment of debt (28,621) --
(Increase) Decrease in:
Accounts Receivable 67,197 55,557
Inventory 139,245 (164,786)
Prepaid and Others 992 (33,836)
(Decrease) in:
Accounts Payable and Accrued Expenses (53,106) (59,495)
Other Liabilities -- (13,271)
------------------------------
Net cash provided by operating activities 498,453 622,168
------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment -- (1,113)
------------------------------
Net cash (used in) investing activities -- (1,113)
------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on notes payable (351,562) (98,379)
------------------------------
Net cash (used in) financing activities (351,562) (98,379)
------------------------------
NET INCREASE IN CASH 146,891 522,676
CASH BALANCE AT BEGINNING OF YEAR 700,344 177,668
------------------------------
CASH BALANCE AT END OF YEAR $ 847,235 $ 700,344
==============================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ 78,889
Taxes Paid $ 59,355 $ 66,573
Taxes (Refund) $ (21,118) $ --
Supplemental Schedules of Noncash Investing and Financing Activities
Conversion of account receivable into note receivable $ 19,731 $ --
Exercise warrant under noncash provision $ -- $ 33
See notes to financial statements
F-5
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL 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 and qualified to do business in California in
1992.
In 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 the winding date.
USE OF ESTIMATES: The preparation of the accompanying financial statements in
conformity with accounting principles generally accepted in the United States
(U.S. GAAP) requires management to make certain estimates and assumptions that
directly affect the results of reported assets, liabilities, revenue, and
expenses. Actual results may differ from these estimates.
REVENUE RECOGNITION: The Company is subcontracting the manufacturing of the
medical diagnostic equipments and products. Manufacturing operations consist of
assembly, test, and packaging functions. Sales of product and equipment are
recognized when both title and risk of loss transfers to the customer (usually
it is the date of shipment), provided that no significant obligations remain and
collectibility is reasonably assured. No provisions were established for
estimated product returns and allowances based on the Company's historical
experience.
The Company provides repair and maintenance, consulting and education
services to its customers. Revenue from such services is generally recognized
over the period during which the applicable service is to be performed or on a
service-performed basis.
The Company evaluated Statement of Position No. 97-2, "Software Revenue
Recognition" ("SOP 97-2"), but does not expect that SOP 97-2 will have a
material impact on the Company's financial position, results of operations, or
cash flows since the Company did not sell, license, lease or market any
individual computer software. The Company's computer software is included with
the equipment and is not sold separately.
ACCOUNTS RECEIVABLE: The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit conditions.
STOCK-BASED COMPENSATION: SFAS No. 148. "Accounting for Stock-Based Compensation
- Transition and Disclosure, an Amendment of FASB Statement No. 123," amends the
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
F-6
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
The Company accounts for equity-based instruments issued or granted to
employees using the intrinsic method of accounting in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under the intrinsic value method, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the Company's Consolidated Statements of Operations.
The Company is required under SFAS 123 to disclose pro forma
information regarding option grants to its employees based on specified
valuation techniques that produce estimated compensation charges. The pro forma
information is as follows:
2004 2003
------------- ------------
Net income-as reported $ 386,315 $ 1,043,027
Pro forma compensation expense - -
------------- ------------
Pro forma net income $ 386,315 $ 1,043,027
============= ============
Basic earnings per share:
As reported $0.02 $0.06
Pro forma $0.02 $0.06
Diluted earnings per share:
As reported $0.02 $0.05
Pro forma $0.02 $0.05
The value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, which was developed for use in
estimating the value of traded options that have no vesting restrictions and are
fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
estimate, in management's opinion, the existing valuation models do not provide
a reliable measure of the fair value of the Company's employee stock options.
(For additional information regarding this pro forma information, see Note to
the Consolidated Financial Statements.)
The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and the EITF Issue No. 00-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
EARNINGS 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
common shares outstanding during the period, plus the dilutive effect of
outstanding stock warrants and shares issuable under convertible debt, using the
treasury stock method.
F-7
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
Other Significant Accounting Policies:
CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
The Company maintains its cash in one financial institution. The bank
account, at times, exceeded federally insured limits of $100,000. The Company
has not experienced any losses on such account.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the financial
instruments have been estimated by management to approximate fair value.
INVENTORIES: Costs incurred for materials, technology and shipping are
capitalized as inventories and charged to cost of sales when revenue is
recognized. Inventories consist of finished goods and are stated at the lower of
cost or market, using the first-in, first-out method.
PROPERTY AND EQUIPMENT: Property and Equipment are valued at cost. Maintenance
and repair costs are charged to expenses as incurred. Depreciation is computed
on the straight-line method based on the following estimated useful lives of the
assets: 5 to 7 years for computer and office equipment, and 7 years for
furniture and fixtures. Depreciation expense was $228 and $408 for 2004 and
2003, respectively.
INCOME TAXES: Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
ADVERTISING COSTS: All advertising costs are expensed as incurred. Advertising
expenses were $0 and $40 for 2004 and 2003, respectively.
SHIPPING AND HANDLING COSTS: The Company historically has included inbound
shipping charges in cost of sales and classified outbound shipping charges as
operating expenses. For the years ended December 31, 2004 and 2003, the outbound
shipping charges included in operating expenses were $62,548 and $75,203,
respectively.
RECLASSIFICATION: Certain reclassifications have been made to the 2003 financial
statements to conform with the 2004 consolidated financial statement
presentation. Such reclassification had no effect on net loss as previously
reported.
NEW ACCOUNTING PRONOUNCEMENTS: In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 153. This statement addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in that opinion; however, included certain exceptions to that principle. This
statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
incurred during fiscal years beginning after the date of this statement is
issued. Management believes the adoption of this statement will have no impact
on the financial statements of the Company.
F-8
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
In December 2004, the FASB issued SFAS No. 152, which amends FASB
statement No. 66, "Accounting for Sales of Real Estate," to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This statement also
amends FASB Statement No. 67, "Accounting for Costs and Initial Rental
Operations of Real Estate Projects," to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Management believes the adoption of this statement will have no impact on
the financial statements of the Company.
In December 2004, the FASB issued a revision to SFAS No. 123R,
"Accounting for Stock Based Compensations." This statement supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in SFAS
No. 123. This statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans." The Company has not
yet determined the impact to its financial statements from the adoption of this
statement.
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS -- AN
AMENDMENT OF ARB NO. 43, CHAPTER 4." This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this statement will have any
immediate material impact on the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
(hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying
and measuring certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. Previously, many of those
instruments were classified as equity. SFAS No. 150 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's adoption of this statement did not have an impact on the
financial statements of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (hereinafter "SFAS No.
149"). SFAS No. 149 amends and clarifies the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have an impact on the financial statements of the Company.
F-9
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51. Interpretation 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. Interpretation 46 applies to any business enterprise, both
public and private, that has a controlling interest, contractual relationship or
other business relationship with a variable interest entity. The Company
currently has no contractual relationship or other business relationship with a
variable interest entity and therefore the adoption did not have an effect on
its consolidated financial position or results of operations. However, if the
Company enters into any such arrangement with a variable interest entity in the
future, its financial position or results of operations may be adversely
impacted.
NOTE 2 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At December 31, 2004 2003
--------------------------------------------------------------------------------
Prepaid Expenses:
Prepaid Insurance $ 27,341 $ 34,704
Prepaid Taxes 4,560 --
Other Prepaid Expenses 5,740 2,528
--------------------------------------------------------------------------------
Total $ 37,641 $ 37,232
================================================================================
Property and equipment, net
Furniture and Fixtures $ 1,113 $ 1,113
Equipment 13,331 13,331
--------------------------------------------------------------------------------
14,444 14,444
Less: accumulated depreciation (13,569) (13,341)
--------------------------------------------------------------------------------
Total $ 875 $ 1,103
================================================================================
Other Assets
Deferred tax assets $ 219,233 $ 205,436
Deposits 10,162 11,563
--------------------------------------------------------------------------------
Total $ 229,395 $ 216,999
================================================================================
Accrued liabilities
Accrued Insurance $ 17,079 $ 23,104
Warranty reserve 8,884 8,044
Sales tax payable 2,171 20,065
Income tax payable -- 40,251
Other 9,939 3,106
--------------------------------------------------------------------------------
Total $ 38,073 $ 94,570
================================================================================
F-10
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - LINE OF CREDIT
The Company has an operating line of credit with Wells Fargo Bank of $75,000,
with interest payable at the bank's prime rate plus 2.75% (6.25% at December 31,
2004). This line of credit is payable on demand and is personally guaranteed by
the Company's President. The Company did not borrow against this line of credit
during 2004 and 2003.
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
At December 31, 2004 2003
--------------------------------------------------------------------------------
a.) Restructured note payable to TESA Corp.,
interest at 7% commencing January 1, 2003, due
on December 31, 2007. Collateralized by accounts
receivable, inventory, patents and a licensing
agreement for impairment testing products $ -- $ 380,183
b.) Note Payable to Others, interest at 7% due and
payable on December 31, 2007. Convertible into
2,394,533 shares of common stock 26,666 26,666
c.) Note Payable to Others, interest at 7% due and
payable on December 31, 2007. Convertible into
1,197,267 shares of common stock 13,334 13,334
--------------------------------------------------------------------------------
40,000 420,183
Less: Current Maturities -- (95,046)
--------------------------------------------------------------------------------
Long-term debt $ 40,000 $ 325,137
================================================================================
NOTE 5 - EXTINGUISHMENT OF DEBT
In December 2004, the Company paid off a promissory note of $400,000 that was
restructured in 2003 (see Note 4a); as a result, the Company recognized a gain
of $28,621 which was classified as a nonoperating income in accordance with SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities-a replacement of FASB Statement No. 125."
NOTE 6 - 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 2003
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.
NOTE 7 - NONCASH FINANCING ACTIVITIES
In 2003, a warrant holder exercised 66,666 of its stock warrants in the Company
at the price of $0.32 per share. The warrant holder elected the Net Issue
Exercise (noncash) provision of the warrant agreement. As a result, the Company
issued 32,768 shares of common stock to the warrant holder without any cash
proceeds.
F-11
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision for income taxes (benefits) consisted of the following:
FOR YEAR ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------
Federal:
Current $ -- $ 9,118
Deferred (46,828) (125,678)
--------------------------------------------------------------------------------
(46,828) (116,560)
--------------------------------------------------------------------------------
State:
Current 800 85,037
Deferred 33,031 (79,758)
--------------------------------------------------------------------------------
33,831 5,279
--------------------------------------------------------------------------------
Total $ (12,997) $(111,281)
================================================================================
The components of the deferred net tax assets are as follows:
At December 31, 2004 2003
--------------------------------------------------------------------------------
Net Operating Loss Carryforwards $229,186 $204,963
Property and equipment 209 473
Valuation Allowance -- --
--------------------------------------------------------------------------------
Net deferred tax assets $229,395 $205,436
================================================================================
At December 31, 2002, the Company provided a valuation allowance on the deferred
tax assets because of uncertainty regarding its ability to utilize its net
operating loss carryfowards. As of December 31, 2003, the Company had removed
the valuation allowance because it believed it was more likely than not that all
deferred tax assets would be realized in the foreseeable future and was
reflected as a credit to operations.
As of December 31, 2004, the Company has net operating loss carryforwards,
approximately, of $1,149,163 and $527,713 to reduce future federal and state
taxable income. To the extent not utilized, the federal net operating loss
carryforwards will begin to expire in fiscal 2021 and the state net operating
loss carryfowards will begin to expire in fiscal 2005.
NOTE 9 - STOCKS OPTIONS AND WARRANTS
Stock Options
-------------
All stock options expired in 2003. No new issued in 2004. The Company had no
stock options outstanding as of December 31, 2004 and December 31, 2003.
Stock Warrants
--------------
The Company had 333,333 warrants outstanding as of December 31, 2004 and 2003.
The warrants are exercisable at $0.05 per share and expire on December 31, 2007.
F-12
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
YEARS ENDED DECEMBER 31, 2004 2003
--------------------------------------------------------------------------------
Numerator:
Net income $ 386,315 $ 1,043,027
--------------------------------------------------------------------------------
Denominator:
Weighted average of common shares-basic 17,883,081 17,853,044
Diluted effect of stock warrants 290,598 303,030
Diluted effect of convertible debt 3,591,799 3,641,685
--------------------------------------------------------------------------------
Weighted average common shares-diluted 21,765,478 21,797,759
================================================================================
Basic net income per share $ 0.02 $ 0.06
================================================================================
Diluted net income per share $ 0.02 $ 0.05
================================================================================
NOTE 11 - 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 12 - MAJOR CUSTOMERS
During year ended December 31, 2004, two major customers accounted for
$1,541,423 or 73.8% of total revenues.
Special Instrument Dealer 11.4%
Private label distributor 62.4%
During year ended December 31, 2003, two major customers accounted for
$2,335,240 or 72.1% of total revenues.
Special Instrument Dealer 18.9%
Private label distributor 53.2%
NOTE 13 - 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.
F-13
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - LEASE COMMITMENTS
In February 2003, the Company relocated to a larger office facility for $1,571
per month. The new lease commences on February 1, 2003 and expires through
January 31, 2006. Rent expense totaled $21,186 and $21,740 for 2004 and 2003,
respectively.
The Company also leases a copier for $205 per month expiring in October 2008.
The monthly lease payment does not include additional maintenance, insurance and
per copy charges.
As of December 31, 2004, the minimum lease payments under these leases are:
Year ended
December 31, Amount
------------ --------
2005 $22,436
2006 4,123
2007 2,455
2008 2,046
-------
$31,060
=======
NOTE 15 - 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 December 31, 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.
F-14
EYE DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following table presents the changes in the Company's warranty reserve in
the fiscal years December 31, 2004 and 2003 are as follows:
Years ended December 31, 2004 2003
------------------------ -------- --------
Beginning balance $ 8,044 $ 0
Provision for warranty 5,154 8,044
Utilization of reserve (4,314) 0
-------- --------
Ending balance $ 8,884 $ 8,044
======== ========
NOTE 16 -SUBSEQUENT EVENTS
On January 3, 2005, the Board of Directors approved to issue stock options to
current directors in the amount of 20,000 shares for each of the years from 1999
through 2004. The total options for each of directors shall be 120,000 shares.
The options are vesting immediately and exercisable at $0.15 per share through
January 3, 2007.
On January 11, 2005, the Board of Directors elected the Chairman of the Board to
be the Company's new Chief Executive Officer (CEO). The former CEO remains as
the Company's chief financial officer and president.
On March 24, 2005, the Company announced intent to acquire 100% issued and
outstanding shares of OrthoNetx, Inc., a Colorado-based provider of medical
devices for osteoplastic surgery. The acquisition will be completed as a stock
transaction in which OrthoNetx shareholders will receive one share of the
Company's stock in exchange for each share of OrthoNetx stock. The acquisition
is subject to certain customary conditions including certain regulatory
approvals. As part of the transaction, the President and CEO of OrthoNetx will
assume the position of CEO of the merged company.
F-15