UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 2004
Commission File No. 0-27857
EYE DYNAMICS, INC.
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(Name of small business issuer as specified in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
2301 W. 205th Street, #102, Torrance, CA 90501
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(Address of principal executive offices)
310-328-0477
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(Issuer's telephone number)
The number of shares outstanding of the issuer's common stock as
of September 30, 2004 was 17,883,081.
Transitional Small Business Disclosure Format (check one) ( ) Yes; (X) No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
EYE DYNAMICS, INC.
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2004
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ASSETS
Current Assets
Cash $ 760,292
Accounts receivable 173,513
Employee loans and advances, net of allowance for loan
loss of $58,218 500
Inventory 350,137
Prepaid expenses and taxes 29,547
------------
Total current assets 1,313,989
Property and equipment, net of accumulated depreciation
of $13,512 932
Other assets 218,098
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TOTAL ASSETS $ 1,533,019
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 19,362
Accrued expenses 12,005
Notes payable, current portion 23,762
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Total current liabilities 55,129
Long-term debt and accrued interest 330,076
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Total liabilities 385,205
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Stockholders' Equity
Common stock, $0.001 par value; 50,000,000 shares
authorized; 17,883,081 shares issued and outstanding 17,883
Paid-in capital 3,497,069
Accumulated deficit (2,367,138)
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Total stockholders' equity 1,147,814
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,533,019
============
See Notes to Interim Unaudited Financial Statements
1
EYE DYNAMICS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
For Three Months For Nine Months
ended September 30, ended September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
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Net Sales
Products $ 437,421 $ 1,095,602 $ 1,502,878 $ 2,436,228
Service -- 5,500 -- 5,500
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437,421 1,101,102 1,502,878 2,441,728
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Cost of Sales
Products 206,037 529,334 712,470 1,227,442
Service -- 800 -- 800
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206,037 530,134 712,470 1,228,242
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Gross profit 231,384 570,968 790,408 1,213,486
Selling, general and
administrative expenses 180,190 188,541 528,343 530,603
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Operating income 51,194 382,427 262,065 682,883
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Other income(expenses)
Interest and other income 9,240 155 9,300 687
Interest and other expenses (789) (802) (2,819) (17,000)
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Total other income(expenses) 8,451 (647) 6,481 (16,313)
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Net income before taxes 59,645 381,780 268,546 666,570
Provision for income taxes -- 33,173 800 60,269
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Net income $ 59,645 $ 348,607 $ 267,746 $ 606,301
============= ============= ============= =============
Net income per share-basic $ 0.00 $ 0.02 $ 0.01 $ 0.03
============= ============= ============= =============
Net income per share-diluted $ 0.00 $ 0.02 $ 0.01 $ 0.03
============= ============= ============= =============
Shares used in
per share calculation-Basic 17,883,081 17,850,313 17,883,081 17,850,313
Shares used in per share
calculation-Diluted 21,710,174 21,706,001 21,710,174 21,696,712
See Notes to Interim Unaudited Financial Statements
2
EYE DYNAMICS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004 2003
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Cash Flow From Operating Activities:
Net income $ 267,746 $ 606,301
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation 171 306
(Increase) Decrease in:
Accounts receivable (42,093) (42,139)
Inventory (30,184) (31,884)
Prepaids and other assets 6,587 (19,962)
Increase (decrease) in:
Accounts payable and accrued expenses (72,595) 17,301
Contingent liabilities -- (13,271)
Accrued interest 2,100 (74,602)
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 131,732 442,050
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Cash Flow From Investing Activities:
Purchase of property and equipment -- (1,113)
Employee loans and advances (500) (407)
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CASH FLOWS (USED IN) INVESTING ACTIVITIES (500) (1,520)
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Cash Flow From Financing Activities:
Net repayments on notes payable (71,284) (74,617)
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CASH FLOWS (USED IN) FINANCING ACTIVITIES (71,284) (74,617)
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NET INCREASE IN CASH 59,948 365,913
Cash balance at beginning of period 700,344 177,668
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CASH BALANCE AT END OF PERIOD $ 760,292 $ 543,581
========== ==========
Supplemental Disclosures of
Cash Flow Information:
Interest Paid $ -- $ 78,889
Taxes Paid 58,555 39,242
Taxes (Refund) (9,118) --
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 September 30,
2004 and for the three and nine months ended September 30, 2004 and 2003 is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
financial information set forth herein, in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") for interim
financial information, and with the instructions to Form 10-QSB. Accordingly,
such information does not include all of the information and footnotes required
by U.S. GAAP for annual financial statements. For further information refer to
the Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2003.
The results for the three and nine months ended September 30, 2004 may
not be indicative of results for the year ending December 31, 2004 or any future
periods.
RECLASSIFICATION: Certain prior period balances have been reclassified to
conform to the current period presentation.
NEW ACCOUNTING STANDARDS: In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104, "Revenuer Recognition," which codifies, revises and
rescinds certain sections of SAB No. 101, "Revenue Recognition," in order to
make this interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's results of operations,
financial positions or cash flows.
NOTE 2 - WIND DOWN OF SUBSIDIARY
On September 15, 2003, the Board of Directors approved to wind down the
Company's sole subsidiary, Oculokinetics, Inc., which was inactive and has no
asset or liability as of that date.
4
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At September 30, 2004 2003
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Prepaid expenses and taxes
Prepaid insurance $ 8,694 $ --
Prepaid income taxes 15,760 --
Other prepaid expenses 5,093 5,247
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Total $ 29,547 $ 5,247
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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 (13,512) (13,239)
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Total $ 932 $ 1,205
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Other Assets
Deferred tax assets $ 205,436 $ --
Deposits 12,662 29,674
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Total $ 218,098 $ 29,674
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Accrued expenses
Commission payable $ 4,000 $ 18,099
Warranty reserve 7,859 --
Income taxes payable -- 46,365
Other 146 22,339
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Total $ 12,005 $ 86,803
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NOTE 4 - INCOME TAXES
The Company accounts for income taxes using a balance sheet approach whereby
deferred tax assets and liabilities are determined based on the differences in
financial reporting and income tax basis of assets and liabilities. The
differences are measured using the income tax rate in effect during the year of
measurement.
The Company experienced significant net losses in prior fiscal years resulting
in a net operating loss carryforward ("NOLC") for federal income tax purposes of
approximately $1,531,790 at December 31, 2003. The Company's NOLC will expire
through 2021. The Company also has state NOLC of $901,140, which was suspended
in years of 2002 and 2003. The state NOLC will expire through 2013.
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EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 5 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Three Months ended Sep. 30, Nine Months ended Sep. 30,
2004 2003 2004 2003
---------------------------- ----------------------------
Basic earnings per share:
Net income $ 59,645 $ 348,607 $ 267,746 $ 606,301
------------ ------------ ------------ ------------
Weighted average number of common shares 17,883,081 17,850,313 17,883,081 17,850,313
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.00 $ 0.02 $ 0.01 $ 0.03
============ ============ ============ ============
Diluted earnings per share:
Net income $ 59,645 $ 348,607 $ 267,746 $ 606,301
Addback: Debenture interest 700 762 2,100 2,288
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Adjusted net income $ 60,345 $ 349,369 $ 269,846 $ 608,589
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Weighted average number of common shares 17,883,081 17,850,313 17,883,081 17,850,313
Incremental shares from assumed conversion:
Convertible debt 3,591,799 3,591,799 3,591,799 3,658,314
Stock warrants 235,294 263,889 235,294 188,085
------------ ------------ ------------ ------------
Adjusted weighted average number of common shares 21,710,174 21,706,001 21,710,174 21,696,712
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.00 $ 0.02 $ 0.01 $ 0.03
============ ============ ============ ============
Approximately, 200,000 shares outstanding stock warrants were excluded from the
calculation of diluted earnings per share for 2003 because the exercise price of
the stock warrants was greater than the average share price of the common stock
and, therefore, the effect would have been antidilutive.
NOTE 6 - MAJOR CUSTOMERS
During the three months ended September 30, 2004 and 2003, the private label
distributor accounted for $271,592 and $643,132 or 62.1% and 58.4% of total
revenues, respectively.
During the nine months ended September 30, 2004, two customers accounted for
$1,063,303 or 70.8% of total revenues.
Special Instrument Dealer 15.1%
Private label distributor 55.7%
During the nine months ended September 30, 2003, the private label distributor
accounted for $1,376,347 or 56.4% of total revenues.
NOTE 7 - SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires that a publicly traded company must disclose information
about its operating segments when it presents a complete set of financial
statements. Since the Company has only one segment; accordingly, detailed
information of the reportable segment is not presented.
6
EYE DYNAMICS, INC.
NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
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NOTE 8 - MANUFACTURING, SALES, LICENSING, AND SOFTWARE AGREEMENT
On March 22, 2004, the Company entered into an exclusive manufacturing, sales,
and licensing and software ownership agreement with its private label
distributor ("Distributor"). Under the terms and conditions of the contract, the
Distributor agrees to purchase all of its current and future Video ENG products
exclusively from the Company. In addition, the Company grants the Distributor
the exclusive marketing rights for all of its Video ENG products throughout the
United States.
NOTE 9 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of September 30, 2004.
In general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first nine months of 2004:
Balance as of December 31, 2003 $ 8,044
Provision for warranty 3,609
Utilization of reserve (3,894)
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Balance as of September 30, 2004 $ 7,859
==========
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ITEM 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS FOR THE PERIODS OF THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004 AS COMPARED TO THE PERIODS OF THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues from the sale of medical products during the third quarter
were $437,421, with a profit after taxes of $59,645. This represents a 60%
decrease in revenues compared to the same quarter in 2003. Profit after taxes
decreased commensurately, but is still 13% of revenues for the quarterly period.
Revenues for the nine month period of 2004 were $1,502,878, compared to
$2,441,728 for the same period of 2003. After tax income was $267,746, compared
to $606,301 in 2003. Earnings per share was $0.02 for the nine month period of
2004, compared to $0.03 per share in 2003.
Lower sales can be attributed to Medicare's continued scrutiny of
reimbursements for ENG tests. This continues to cause potential new customers to
delay or even abandon plans to purchase equipment. Medicare is generally
requiring that the test be prescribed as a medical necessity and that the test
be administered appropriately in order to be assured of reimbursement. This
issue is being debated and is not yet settled.
The private label portion of our business accounted for 62% of revenues
for the quarter, as compared to 58% for the same period in the prior year. Year
to date private label portion represents 56% of total revenues, approximately
the same as in the corresponding period of 2003.
Gross profit for the quarter was 52%, and year to date gross profit is
also 52%. The Company's goal is to maintain a gross profit of at least 50% for
each period. The Company is working to contain expenses and to reduce product
costs in order to achieve the gross profit percentage goal. Principal operating
expense category increases have been in insurance, including product liability,
workers compensation and general liability. Product liability insurance was the
greatest change, at four times the rate of 2003.
The Company incurred only the minimum California state income tax
because the moratorium on the use of tax loss carryovers for the years 2002 and
2003 expired, and the use of net operating loss carryovers is again permissible.
Federal tax loss carryovers were not affected and because of substantial NOL's,
the Company is not required to accrue federal income taxes for 2004.
Liquidity And Capital Resources
-------------------------------
Cash and cash equivalents as of September 30, 2004 were $760,292, which
allows for payment of all outstanding invoices and our single note payment on a
current basis. Accounts payable are current and the Company has not borrowed
against credit lines.
Inventory of $350,137 at September 30, 2004 includes $25,000 of
SafetyScope Impairment Detection Device items, which are not currently being
marketed, but are used as production samples and demonstrators for capital
raising activities related to that business. The inventory balance of $325,000
represents almost four months of consumption, and is balanced in content.
However, management believes that the amount is too high for the volume of
sales, and is in the process of reducing inventory to an appropriate level. The
higher inventory is the result of the slowdown in sales. Sufficient time has not
yet passed to reduce the inventory to an acceptable level, principally because
of the importation of caloric irrigators from a supplier in Germany, which have
to be scheduled and committed for delivery several months in advance.
Accounts receivable of $173,000 represent only 40 days accounts
receivable aging, which is generally acceptable, and efforts to reduce it to a
30 day level have shown some substantial progress. At March 31, 2004 the
accounts receivable balance was $366,000, so the current balance reflects a
substantial reduction. The company's private label customer generally makes
payments within the net 15 days term of sale. We are encouraging other customers
to utilize leasing and credit cards with more frequency, providing for quicker
collection of receivables. Some export customers use Letters of Credit, which
often take substantial time to receive payment We are discouraging use of
letters of credit and requesting cash transfers by wire as an alternative.
8
The Company continues to seek financing for the business plan to
commercialize the SafetyScope product, which is an impairment detection device.
The plan requires substantial financial resources to fully implement the
commercialization of the product. Discussions and explorations of strategic
alliances are ongoing with the goal of securing the financing; however the
Company has no arrangements or agreements as to any such financing.
The Company continues to search out and evaluate other products and
alliances to enhance its product lines and to augment revenues. The search for
new products is an ongoing project.
Sales prospects for the rest of the year appear better than the third
quarter, but not as robust as 2003. Some buyers are now moving forward with
purchases that had been delayed earlier in the year.
Item 3. Controls and Procedures.
At the end of the period covered by this Form 10-QSB, the Company's
management, including its Chief Executive and Financial Officer, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive and Financial Officer
determined that such controls and procedures are effective to ensure that
information relating to the Company required to be disclosed in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. There have been no
changes in the Company's internal controls over financial reporting that were
identified during the evaluation that occurred during the Company's last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending legal proceedings.
Item 2. 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
There were no matters submitted to the vote of security holders during this
quarterly reporting period.
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
31 Certificate of Chief Executive and Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certificate of Chief Executive and Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 15, 2004
By: /s/ Charles E. Phillips
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Charles E. Phillips, President
9