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 March 31, 2005
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)
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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
The number of shares outstanding of the issuer's common stock as
of March 31, 2005 was 18,083,081.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EYE DYNAMICS, INC.
BALANCE SHEET (UNAUDITED)
MARCH 31, 2005
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ASSETS
Current Assets
Cash $ 765,507
Accounts receivable, net of allowance for bad debt of $899 56,559
Note Receivable, net of allowance for loan loss of $58,218 18,231
Inventory 263,381
Prepaid expenses 31,309
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Total Current Assets 1,134,987
Property and equipment, net of accumulated depreciation
of $13,609 835
Other Assets 221,895
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TOTAL ASSETS $ 1,357,717
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 21,352
Accrued liabilities 37,443
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Total Current Liabilities 58,795
Long-term debt 40,000
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Total Liabilities 98,795
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Stockholders' Equity
Common stock, $0.001 par value; 50,000,000 shares authorized;
18,083,081 shares issued and outstanding 18,083
Paid-in capital 3,564,870
Accumulated deficit (2,324,031)
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Total Stockholders' Equity 1,258,922
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,357,717
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See Notes to Interim Unaudited Financial Statements
1
EYE DYNAMICS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For Three Months ended March 31, 2005 2004
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Sales - products $ 316,909 $ 608,876
Cost of sales - products 150,051 292,982
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Gross profit 166,858 315,894
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Selling, general and administrative expenses 240,774 173,680
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Operating (loss) income (73,916) 142,214
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Other Income(Expense)
Other income 150 60
Interest expense (894) (1,109)
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Other Expense, net (744) (1,049)
Net (loss) income before taxes (74,660) 141,165
Provision for income taxes 800 800
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Net (loss) income $ (75,460) $ 140,365
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Net (loss) income per share-basic $ (0.00) $ 0.01
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Net (loss) income per share-diluted $ (0.00) $ 0.01
==============================
Shares used in per share calculation-basic 17,949,748 17,883,081
Shares used in per share calculation-diluted 17,949,748 21,784,739
See Notes to Interim Unaudited Financial Statements
2
EYE DYNAMICS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For Three Months ended March 31, 2005 2004
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CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) Income $ (75,460) $ 140,365
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation 40 57
Issuance of stock for services 68,000 --
(Increase) Decrease in:
Accounts receivable (12,067) (234,671)
Inventory (82,673) (39,918)
Prepaid and other assets 13,832 7,729
Increase (Decrease) in:
Accounts payable and accrued expenses 5,100 (18,178)
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Net cash used in operating activities (83,228) (144,616)
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CASH FLOW FROM INVESTING ACTIVITIES:
Employee advances -- (1,781)
Repayments received from notes receivable 1,500 --
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Net cash provided by (used in) investing activities 1,500 (1,781)
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CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on notes payable -- (23,761)
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Net cash used in financing activities -- (23,761)
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NET DECREASE IN CASH (81,728) (170,158)
CASH BALANCE AT BEGINNING OF PERIOD 847,235 700,344
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CASH BALANCE AT END OF PERIOD $ 765,507 $ 530,186
=======================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 800 $ 39,750
See Notes to Interim Unaudited Financial Statements
3
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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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 March 31, 2005
and for the three months ended March 31, 2005 and 2004 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, 2004.
The results for the three months ended March 31, 2005 may not be indicative of
results for the year ending December 31, 2005 or any future periods.
RECLASSIFICATION: Certain prior period balances have been reclassified to
conform to the current period presentation.
NOTE 2 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At March 31, 2005 2004
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Property and equipment, net
Furniture and Fixtures $ 1,113 $ 1,113
Equipment 13,331 13,331
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14,444 14,444
Less: accumulated depreciation (13,609) (13,398)
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Total $ 835 $ 1,046
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Other Assets
Deferred tax assets $ 219,233 $ 205,436
Deposits 2,662 13,662
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Total $ 221,895 $ 219,098
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Accrued Liabilities
Commission payable $ 11,797 $ 16,615
Accrued insurance 11,955 15,146
Warranty reserve 6,549 9,071
Accrued interest 6,339 3,539
Other 803 (252)
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Total $ 37,443 $ 44,119
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4
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 3 - 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 $1,149,163 at December 31, 2004. The Company's NOLC will expire
through 2021. The Company also has state NOLC of $527,713. The state NOLC will
expire through 2013.
NOTE 4 - NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss)
income per share for three months ended March 31st:
2005 2004
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Basic earnings per share:
Net (loss) income $ (75,460) $ 140,365
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Weighted average number of common shares 17,949,748 17,883,081
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Basic (net loss) earnings per common share $ (0.00) $ 0.01
==============================
Diluted earnings per share:
Net (loss) income $ (75,460) $ 140,365
Addback: Debenture interest -- 700
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Adjusted net (loss) income $ (75,460) $ 141,065
Weighted average number of common shares 17,949,748 17,883,081
Incremental shares from assumed conversion:
Convertible debt -- 3,591,799
Stock warrants -- 309,859
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Adjusted weighted average number of common shares 17,949,748 21,784,739
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Diluted (net loss) earnings per common share $ (0.00) $ 0.01
==============================
As the Company incurred net loss for the three months ended March 31, 2005, the
effect of dilutive securities totaling 4,064,299 equivalent shares have been
excluded from the calculation of diluted loss per share because their effect was
anti-dilutive.
NOTE 5 - STOCK OPTIONS
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.
The Company accounts for these options under the recognition and measurement
principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, AND
RELATED INTERPRETATIONS. No stock-based employee compensation cost is reflected
in net loss, as all options granted had an exercise price equal to the market
value of the underlying common stock on the grant date. The following table
illustrates the effect on net loss and net loss per share if the Company had
applied the fair value provisions of FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to stock-based employee compensation.
5
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 5 - STOCK OPTIONS (CONTINUED)
Net loss, as reported $ (75,460)
Deduct: Total stock-based employee compensation
expense determined under the fair value of awards,
net of tax related effects 39,600
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Pro forma net loss $ (115,060)
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Reported net loss per share-basic and diluted $ (0.00)
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Pro forma net loss per share-basic and diluted $ (0.01)
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NOTE 6 - MAJOR CUSTOMERS
During the three months ended March 31, 2005, the private label distributor
accounted for $254,752 or 80.49% of total revenues.
During the three months ended March 31, 2004, two major customers accounted for
$463,070 or 76.1% of total revenues.
Special Instrument Dealer 37.0%
Private label distributor 39.1%
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 Company has only one segment; accordingly, detailed
information of the reportable segment is not presented.
NOTE 8 - CHANGE OF OFFICERS
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.
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 March 31, 2005.
6
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 9 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
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 quarter of 2005:
Balance as of January 1, 2005 $ 8,884
Provision for warranty 759
Utilization of reserve (3,094)
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Balance as of March 31, 2005 $ 6,549
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NOTE 10 - PENDING BUSINESS ACQUISITIONS
On March 24, 2005, the Company announced its intent to acquire OrthoNetx, Inc.,
a Colorado-based provider of medical devices for osteoplastic surgery. The
acquisition will be completed as a stock transaction or merger 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
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.
NOTE 11 - SUBSEQUENT EVENTS
In April 2005, the Company entered into two individual agreements with its
private label distributor and a special instrument dealer. The agreements
provide that the Company will issue restricted common stock to the distributor
and dealer as a sale incentive if certain conditions are reached pursuant to the
agreements.
Notes payable of $40,000 plus related accrued interest were converted into
3,591,799 shares of the Company's common stock in April 2005.
7
ITEM 2. Management's Discussion and Analysis or Plan of Operation
GENERAL
Certain of the statements contained in this report, including those
under "Management's Discussion and Analysis or Plan of Operation," and
"Liquidity and Capital Resources" may be "forward-looking statements" that
involve risks and uncertainties. All forward-looking statements included in this
report are based on information available to the Company on the date hereof and
the Company assumes no obligation to update any such forward-looking statements.
The actual future results of the Company could differ materially from those
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the Company's Annual Report on Form
10-KSB, as well as risks associated with managing the Company's growth. While
the Company believes that these statements are accurate, the Company's business
is dependent upon general economic conditions and various conditions specific to
its industry and future trends and results cannot be predicted with certainty.
THREE MONTHS ENDING MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Revenues during the first quarter were $316,909, compared to $608,876
for the corresponding period in 2004. Cost of sales stayed relatively static as
a percentage of sales. Selling, general and administrative expenses increased by
$67,094, from $173,680 in the first quarter of 2004 to $240,744 in the first
quarter of 2005. The decreased revenues and increased selling, general and
administrative expenses resulted in a loss of $75,460 for the current period,
compared to a profit of $140,365 for the same period in the previous year.
Lower sales can be attributed to several factors. First, Medicare
continues to scrutinize reimbursements for ENG tests performed by end-users
utilizing any manufacturer's equipment that was not clinically indicated
(although this seems to be in the process of resolution, as many newer testing
facilities have had to either implement their own clinical controls for testing
justification or cease that part of their business). Second, the Company
experienced a normal first quarter seasonal slow down, consistent with past
years. Third, the first quarter of 2005 saw an increase in competition. The
latter issue is being addressed with new models, pricing strategies, and more
aggressive marketing (both domestic and international).
8
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 2005 of $765,507 allows for
payment of all outstanding invoices on a current basis. Accounts payable are
current and the Company has not borrowed against credit lines.
Inventory as of March 31, 2005 was $263,381 compared to $359,871 at
March 31, 2004. Purchasing has been adjusted in order to achieve a more
realistic level of inventory.
Accounts receivable as of March 31, 2005 were only $56,559,
representing less then 15 days aging, which has contributed to positive cash
flow.
As announced on March 24, 2005, Eye Dynamics signed a Letter of Intent
to acquire OrthoNetx, Inc., of Superior, Colorado. Due Diligence for the
acquisition has begun, and is subject to certain conditions, including
regulatory and corporate approvals.
Sales prospects for the balance of 2005 appear strong, based on
projections received from the company's exclusive distributor, MedTrak
Technologies, Inc. (Scottsdale, AZ). The Company has broadened its line of
medical products with its OtoTrak and MobiTrak systems. OtoTrak performs a broad
range of tests including one that monitors head movement in both the horizontal
and vertical planes (Vestibular Ocular Reflex). The MobiTrak is a compact, ultra
lightweight, system ideally suited for field use.
In April 2005, the Company entered into two individual agreements with
the private label distributor and a special instrument dealer. The agreements
provide that the Company will issue restricted common stock to the distributor
and dealer as a sale incentive if certain conditions are reached pursuant to the
agreements.
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 Chief Financial Officers,
conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures. Based on this evaluation, the Chief Executive and Chief
Financial Officers have 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.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission Of Matters To A Vote Of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief 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
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: May 16, 2005
By: /s/ Ronald A. Waldorf
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Ronald A. Waldorf, Chief Executive Officer
10