U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-26206 Orthometrix, Inc. (Exact name of small business issuer as specified in its charter) Delaware 06-1387931 ------------------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 106 Corporate Park Drive, Suite 102, White Plains, NY 10604 ------------------------------------------------------ ---------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (914) 694-2285 -------------- Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) Fof the Securities Exchange Act of 1934 during the preceding 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. Yes [X] No [ ] There were 42,952,368 shares of common stock outstanding as of May 13, 2005. 1 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS. BALANCE SHEET (UNAUDITED) ASSETS ------ March 31, 2005 ------------------------- Current assets: Cash $ 739,897 Accounts receivable - trade 134,916 Inventories 147,245 Prepaid expenses and other current assets 155,044 ------------------------- Total current assets 1,177,102 Property and equipment, net 16,490 Other 11,658 ------------------------- Total Assets $ 1,205,250 ========================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable - trade $ 335,628 Accrued expenses 134,400 Unearned income 99,650 Unearned service revenue 19,760 ------------------------- Total current liabilities 589,438 ------------------------- Stockholders' equity: Common stock - par value $.0005 per share, 45,000,000 shares authorized, and 42,902,368 shares issued and outstanding 21,450 Additional paid-in capital 42,613,477 Accumulated deficit (42,019,115) ------------------------- Total stockholders' equity 615,812 ------------------------- Total Liabilities and Stockholders' Equity $ 1,205,250 ========================= See notes to financial statements. 2 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 --------------------- --------------------- Revenue $ 470,980 $ 168,387 Cost of revenue 174,330 73,708 -------------------- -------------------- Gross profit 296,650 94,679 Sales and marketing expense 350,633 154,826 General and administrative expense 316,555 225,935 Research and development expense 135,242 99,231 --------------------- --------------------- Operating loss (505,780) (385,313) --------------------- --------------------- Interest expense (40,329) (39,100) Interest income 1,244 188 --------------------- --------------------- Net loss $ (544,865) $ (424,225) ===================== ===================== Basic and diluted weighted average shares 37,935,677 29,544,621 ===================== ===================== Basic and diluted loss per share: Net loss $ (0.01) $ (0.01) ===================== ===================== See notes to financial statements. 3 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 ---------------------- --------------------- Cash Flows From Operating Activities: Net loss $ (544,865) $ (424,225) Adjustments to reconcile net loss to net cash used in operating activities: Stock options and warrants issued to non-employees 153,050 - Amortization expense 33,597 19,264 Depreciation expense 1,266 1,377 Changes in assets and liabilities: Decrease in accounts receivable 14,859 496,315 (Increase) decrease in inventories (26,785) 26,445 Increase in prepaid expenses and other current assets (47,248) (2,450) (Decrease) increase in accounts payable (192,198) 5,546 (Decrease) increase in accrued expenses (9,329) 27,602 Increase (decrease) in unearned service revenue 12,250 (4,853) Increase in unearned income 99,650 - Decrease in other liabilities - (5,645) ---------------------- --------------------- Net cash (used in) provided by operating activities (505,753) 139,376 ---------------------- --------------------- Cash Flows From Investing Activities: Purchases of Property and Equipment - (742) ---------------------- --------------------- Cash Flows From Financing Activities: Repayment of borrowings from related parties (500,000) (350,000) Proceeds of borrowings from related parties - 225,000 Proceeds for issuance of common stock 1,740,000 - Exercise of stock options 5,650 - ---------------------- --------------------- Cash provided by (used in) financing activities 1,245,650 (125,000) Net increase in cash 739,897 13,634 Cash at beginning of period - 44,121 ---------------------- --------------------- Cash at end of period $ 739,897 $ 57,755 ====================== ===================== See notes to financial statements. 4 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- 1. BASIS OF PRESENTATION AND GOING CONCERN --------------------------------------- The financial statements of Orthometrix, Inc. (formerly Norland Medical Systems, Inc.) (the "Company") presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-QSB and do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2004, and included in the Company's Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 25, 2005. In the opinion of management, the accompanying interim unaudited financial statements contain all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for these interim periods. During the past two fiscal years ended December 31, 2004 and 2003, the Company has experienced aggregate losses from operations of $3,293,341 and has incurred total negative cash flow from operations of $2,180,729 for the same two-year period. During the three months ended March 31, 2005 the Company experienced a net loss from operating activities of $544,865 and a negative cash flow from operating activities of $505,753. The Company does not currently have an operating line of credit. These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continued existence is dependent upon several factors including increased sales volume and the ability to achieve profitability on the sale of some of the Company's remaining product lines. The Company is pursuing initiatives to increase liquidity, including external investments and obtaining a line of credit. The Company completed a $1,740,000 share issuance in the first quarter of 2005. This will significantly improve the Company's liquidity for the near future. In order to increase its cash flow, the Company is continuing its efforts to stimulate sales. The Company has implemented high credit standards for its customers and is emphasizing the receipt of down payments from customers at the time their purchase orders are received and attempting to more closely coordinate the timing of purchases. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2005. 5 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- 2. INVENTORIES ----------- As of March 31, 2005, inventories consisted of $147,245 of product kits, spare parts and sub-assemblies. 3. CASH FLOWS ---------- The Company paid $37,053 and $14,013 for interest during the three months ended March 31, 2005 and 2004, respectively. 4. INCOME TAXES ------------ The Company accounts for deferred income taxes by recognizing the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. The Company realizes an income tax benefit from the exercise of certain stock options or the early disposition of stock acquired upon exercise of certain options. This benefit results in an increase in additional paid in capital. Realization of the deferred tax asset is dependent on the Company's ability to generate sufficient taxable income in future periods. Based on the Company's existing financial condition, the Company determined that it was more likely than not that the deferred tax assets would not be realized. Accordingly, the Company recorded a valuation allowance to reduce the deferred tax assets to zero. 5. DISCONTINUED OPERATIONS AND CONTINGENCY --------------------------------------- On January 30, 2004, the Company received the remaining $500,000 installment of the purchase price of its bone measurement business sold to CooperSurgical Acquisition Corp. ("Cooper") in 2002. In addition, the Company was eligible to receive up to an additional $7.0 million in earn-out payments based on the net sales of certain products over a three-year period from May 1, 2002 to April 30, 2005. No amounts have been earned through May 13, 2005 and the Company will not receive any sales proceeds from the earn-out. The Company leases its corporate office space located in White Plains, New York. Effective August 1, 2003, the Company amended its lease for office space expiring on July 31, 2008. Minimum future rental commitments with regard to the original and amended lease are payable as follows: 2005 29,500 2006 30,816 2007 31,584 2008 18,424 ---------- $ 110,324 ========== 6 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- 6. RELATED PARTY TRANSACTIONS -------------------------- During the three months ended March 31, 2005, there were no borrowings from officers and directors of the Company, as compared to the $995,000 borrowed from several officers and directors of the Company and $405,000 borrowed from unaffiliated individuals in 2004. The Company issued notes in 2004 bearing interest at prime plus one (6% as of December 31, 2004) which mature one year from the date of issuance and have all been repaid as of March 31, 2005. In December 2004, the Board of Directors authorized the Company to offer to the holders of certain promissory notes issued by the Company the right to convert such notes into shares of Common Stock. Holders of such notes elected to convert $1,545,000 of notes (the "Total Conversion Amount") into 5,492,995 shares of Common Stock at $0.28 per share. Of the Total Conversion Amount, $1,300,000 were notes held by Michael W. Huber ($350,000), Neil H. Koenig ($120,000), Reynald G. Bonmati ($660,000), Andre-Jacques Neusy (120,000), Albert S. Waxman ($50,000), officers and directors of the Company. The notes that were converted did not have a beneficial conversion feature. On February 25, 2005, the Company entered into a Securities Purchase Agreement with Rock Creek Investment Partners, L.P. Pursuant to such agreement, the Company sold 2,321,429 shares of Common Stock at $0.28 per share for an aggregate purchase price of $650,000 to Rock Creek Investment Partners, L.P. The market price of the Common Stock on February 25, 2005 was $0.33. On March 3, 2005 the Company entered into a Securities Purchase Agreement with Psilos Group Partners II SBIC L.P and Reynald Bonmati. Pursuant to such agreement, the Company sold 4,000,000 shares of Common Stock at $0.25 per share for a purchase price of $1,000,000 to Psilos Group Partners II SBIC L.P., of which Dr. Waxman (one of our directors) is Senior Managing Member, and sold 400,000 shares of Common Stock at $0.25 per share, for a purchase price of $100,000 to Reynald G. Bonmati, an officer and director of the company. The $100,000 purchase price was deemed paid by Mr. Bonmati as a result of the cancellation of the aggregate amount of $100,000 of promissory notes issued by the Company in favor of Mr. Bonmati. The Company sold an additional 360,000 shares of Common Stock for $90,000 in conjunction with this offering. The market price of the Common Stock on March 3, 2005 was $0.43. On March 4, 2005, the Company repaid the remaining $500,000 loan balance to Reynald G. Bonmati ($305,000), William Orr ($50,000), David E. Baines ($50,000), Ralph G Theodore and Ellen H Theodore JTWROS ($25,000), John Utzinger ($20,000), and Farooq Kathwari ($50,000), officers, directors, and affiliates of the Company. On March 11, 2005, the Company granted to a consultant a warrant to purchase up to 500,000 shares of Common Stock at $0.33 per share in consideration for the assistance with the financial structuring of the Company. The value of the warrants were based on the application of the Black-Scholes option pricing model and valued at $144,600. The value of the warrants was recorded as consulting expense and as additional paid-in capital. 7 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- 7. STOCK-BASED COMPENSATION ------------------------ The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Options Issued to Employees." The Company accounts for stock-based compensation to employees using the intrinsic value method, whereby compensation cost is recognized when the exercise price at the date of grant is less than the fair market value of the Company's common stock. The Company discloses the proforma effect of compensation cost based on the fair value method for determining compensation cost. The value of stock-based compensation awarded to non-employees is determined using the fair value method. Compensation cost is recognized over the service or vesting period. Had the compensation cost for stock options granted to employees been determined using the fair value method, consistent with SFAS 123 "Accounting for Stock-Based Compensation", the Company's net loss and loss per common share for the three months ended March 31, 2005 and 2004 would approximate the pro forma amounts as follows: For the Three Months Ended --------------------------------- March 31, 2005 March 31, 2004 -------------- -------------- Net loss, as reported $ (544,865) $ (424,225) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect (9,475) (6,953) -------------- -------------- Proforma net loss $ (554,340) $ (431,178) ============== ============== Basic and diluted loss per share As reported $ (0.01) $ (0.01) ============== ============= Pro forma $ (0.01) $ (0.01) ============== ============= During the three months ended March 31, 2005, the Company's board of directors approved a grant of stock options to independent consultants to purchase an aggregate of 30,000 shares of its common stock. The value of these issuances was based on the application of the Black-Scholes option pricing model and valued at $8,452. The value of options was recorded as consulting expense and additional paid-in capital. 8 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS ---------------------------------------------------------- The matters discussed in this Form 10-QSB contain certain forward-looking statements and involve risks and uncertainties (including changing market conditions, competitive and regulatory matters, etc.) detailed in the disclosure contained in this Form 10-QSB and the other filings with the Securities and Exchange Commission made by the Company from time to time. The discussion of the Company's liquidity, capital resources and results of operations, including forward-looking statements pertaining to such matters, does not take into account the effects of any changes to the Company's operations. Accordingly, actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. This item should be read in conjunction with the financial statements and other items contained elsewhere in the report. Critical Accounting Policies And Estimates ------------------------------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. The Company believes the following critical accounting policies involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. The Company recognizes revenues in accordance with invoice terms, typically when products are shipped. Products are covered by warranties provided by the Company's vendors. Therefore, no warranty reserve is required on products sold by the Company. The Company provides estimated inventory allowances for slow-moving and obsolete inventory based on current assessments about future demands, market conditions and related management initiatives. If market conditions are less favorable than those projected by management, additional inventory allowances may be required. The Company provides allowances for uncollectable receivable amounts based on current assessment of collectability. If collectability is less favorable than those projected by management, additional allowances for uncollectability may be required. The Company has recorded a valuation allowance to reduce its deferred tax assets. The Company limited the amount of tax benefits recognizable from these assets based on an evaluation of the amount of the assets that are expected to be ultimately realized. Liquidity and Capital Resources ------------------------------- During the past two fiscal years ended December 31, 2004 and 2003, the Company has experienced aggregate losses from operations of $3,293,341 and has incurred total negative cash flow from operations of $2,180,729 for the same two-year period. During the three months ended March 31, 2005 the Company experienced a net loss from operating activities of $544,865 and a negative cash flow from operating activities of $505,753. The Company does not currently have an operating line of credit. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's continued existence is dependent upon several factors including increased sales volume and the ability to achieve profitability on the sale of some of the Company's remaining product lines. The Company is pursuing initiatives to increase liquidity, including external investments and obtaining a line of credit. The Company completed a $1,740,000 share issuance in the first quarter of 2005. This will significantly improve the Company's liquidity for the near future. 9 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- In order to increase its cash flow, the Company is continuing its efforts to stimulate sales. The Company has implemented high credit standards for its customers and is emphasizing the receipt of down payments from customers at the time their purchase orders are received and attempting to more closely coordinate the timing of purchases. The level of liquidity based on cash experienced a $739,897 increase at March 31, 2005, as compared to December 31, 2004. The Company's $505,753 used in operating activities was substantially offset by $1,245,650 of cash provided by financing activities. Financing activities consisted of $500,000 repayment of borrowings from directors and officers of the Company, $1,740,000 proceeds for issuance of common stock, and $5,650 exercise of stock options. During the three months ended March 31, 2005, there were no borrowings from officers and directors of the Company, as compared to the $995,000 borrowed from several officers and directors of the Company and $405,000 borrowed from unaffiliated individuals in 2004. The Company issued notes in 2004 bearing interest at prime plus one (6% as of December 31, 2004) which mature one year from the date of issuance and have all been repaid as of March 31, 2005. In December 2004, the Board of Directors authorized the Company to offer to the holders of certain promissory notes issued by the Company the right to convert such notes into shares of Common Stock. Holders of such notes elected to convert $1,545,000 of notes (the "Total Conversion Amount") into 5,492,995 shares of Common Stock at $0.28 per share. Of the Total Conversion Amount, $1,300,000 were notes held by Michael W. Huber ($350,000), Neil H. Koenig ($120,000), Reynald G. Bonmati ($660,000), Andre-Jacques Neusy (120,000), Albert S. Waxman ($50,000), officers and directors of the Company. The notes that were converted did not have a beneficial conversion feature. On February 25, 2005, the Company entered into a Securities Purchase Agreement with Rock Creek Investment Partners, L.P. Pursuant to such agreement, the Company sold 2,321,429 shares of Common Stock at $0.28 per share for an aggregate purchase price of $650,000 to Rock Creek Investment Partners, L.P. The market price of the Common Stock on February 25, 2005 was $0.33. On March 3, 2005 the Company entered into a Securities Purchase Agreement with Psilos Group Partners II SBIC L.P and Reynald G. Bonmati. Pursuant to such agreement, the Company sold 4,000,000 shares of Common Stock at $0.25 per share for a purchase price of $1,000,000 to Psilos Group Partners II SBIC L.P., of which Dr. Waxman (one of our directors) is Senior Managing Member, and sold 400,000 shares of Common Stock at $0.25 per share, for a purchase price of $100,000 to Reynald G. Bonmati, an officer and director of the company. The $100,000 purchase price was deemed paid by Mr. Bonmati as a result of the cancellation of the aggregate amount of $100,000 of promissory notes issued by the Company in favor of Mr. Bonmati. The Company sold an additional 360,000 shares of Common Stock for $90,000 in conjunction with this offering. The market price of the Common Stock on March 3, 2005 was $0.43. On March 4, 2005, the Company repaid the remaining $500,000 loan balance to Reynald G. Bonmati ($305,000), William Orr ($50,000), David E. Baines ($50,000), Ralph G Theodore and Ellen H Theodore JTWROS ($25,000), John Utzinger ($20,000), and Farooq Kathwari ($50,000), officers, directors, and affiliates of the Company. 10 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- On March 11, 2005, the Company granted to a consultant a warrant to purchase up to 500,000 shares of Common Stock at $0.33 per share in consideration for the assistance with the financial structuring of the Company. The value of the warrants were based on the application of the Black-Scholes option pricing model and valued at $144,600. The value of the warrants was recorded as consulting expense and as additional paid-in capital. During the three months ended March 31, 2005, the Company's board of directors approved a grant of stock options to independent consultants to purchase an aggregate of 30,000 shares of its common stock. The value of these issuances was based on the application of the Black-Scholes option pricing model and valued at $8,452. The value of options was recorded as consulting expense and additional paid-in capital. The Company markets, sells and services a wide range of proprietary non-invasive musculoskeletal and other devices through two divisions, a healthcare division and a sports & fitness division. The healthcare division markets, sells and services (1) pQCT(R) (peripheral Quantitative Computed Tomography) bone and muscle measurement systems used for musculoskeletal research and clinical applications (including for bone disorders and human performance)- the XCT(TM) product line; and (2) patented exercise systems used for physical therapy, sports medicine and rehabilitative medicine - the Galileo(TM) and Leonardo(TM) product lines, as well as the Mini VibraFlex(R). The healthcare division is continuing to work towards completion of the premarket approval ("PMA") process for its Orbasone(TM) pain management system (ESWT or Extracorporal Shock Wave Therapy), which will be added to its product line upon successful completion of the study and approval of the system by the United States Food and Drug Administration (the "FDA"). The Company has received approval in Canada in the first quarter of 2005 to market and sell the Orbasone(TM) for treatment of plantar fasciitis. The sports & fitness division markets, sells and services patented exercise systems to fitness centers, gyms, sports clubs and associations and to the general public - the VibraFlex(R) product line. The sports & fitness division's product line includes the Mini VibraFlex(R), the Mini VibraFlex(R) Plus and the VibraFlex(R) 500. The Company also intends to introduce the VibraFlex(R) Rx in the near future to replace the Galileo 2000 in the physical therapy, sports medicine and rehabilitation markets. The VibraFlex(R) products are based on the same patented technology as the Galileo products and offer a novel approach to muscle strength development given that such products are based on short and intense stimulations of the muscles. The Company has no current backlog of orders as of March 31, 2005. There are no material commitments for capital expenditures as of March 31, 2005. The nature of the Company's business is such that it is subject to changes in technology, government approval and regulation, and changes in third-party reimbursement in the United States and numerous foreign markets. Significant changes in one or more of these factors in a major market for the Company's products could significantly affect the Company's cash needs. If the Company experiences significant demand for any of its products, additional third party debt or equity financing will be required. 11 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Results of Operations --------------------- The Company had a net loss of $544,865 ($0.01 per share based on 37,935,677 weighted average shares) for the three months ended March 31, 2005 compared to a net loss of $424,225 ($0.01 per share based on 29,544,621 weighted average shares) for the three months ended March 31, 2004. Revenue for the three months ended March 31, 2005 increased $302,593 (or 179.7%) to $470,980 from $168,387 for the three months ended March 31, 2004. The increase in sales was primarily due to an increase in VibraFlex(R) and XCT(TM) sales for the three months ended March 31, 2005. Cost of revenue as a percentage of revenue was 37.0% and 43.8% for the three months ended March 31, 2005 and 2004, respectively, resulting in a gross margin of 63.0% for the three months ended March 31, 2005 compared to 56.2% for the three months ended March 31, 2004. The increase in gross margin was due to obtaining a higher sales price of certain products during the three months ended March 31, 2005. Sales and marketing expense for the three months ended March 31, 2005 increased $195,807 or (126.5%) to $350,633 from $154,826 for the three months ended March 31, 2004. The increase is due to the Company's increased commission and consulting expenses. General and administrative expense for the three months ended March 31, 2005 increased $90,620 (or 40.1%) to $316,555 from $225,935 for the three months ended March 31, 2004. The increase was primarily due to an increase in legal fees associated with the Company's financing transactions. Research and development expense for the three months ended March 31, 2005 increased $36,011 (or 36.3%) to $135,242 from $99,231 for the three months ended March 31, 2004. The increase was primarily due to increased expenses incurred for the development of the Orbasone. Interest expense increased $1,229 (or 3.1%) to $40,329 for the three months ended March 31, 2005 from $33,046 for the three months ended March 31, 2004. Interest expense increased as a result of the amortization of the remaining discount due to the repayment of all outstanding principal balances of loans payable in March 2005. 12 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Recently Issued Accounting Standards ------------------------------------ In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R"). The revised accounting standard eliminates the ability to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25 and requires instead that such transactions be accounted for using a fair-value-based method. SFAS No. 123R requires public entities to record noncash compensation expense related to payment for employee services by an equity award, such as stock options, in their financial statements over the requisite service period. SFAS No. 123R is effective as of the beginning of the first interim or annual period that begins after December 15, 2005 for small business issuers. The Company does not plan to adopt SFAS No. 123R prior to its first quarter of fiscal 2006. The Company expects that the adoption of SFAS No. 123R will have a negative impact on the Company's consolidated results of operations. The company has historically provided pro forma disclosures pursuant to SFAS No. 123 and SFAS No. 148 as if the fair value method of accounting for stock options had been applied, assuming use of the Black-Scholes options-pricing model. Although not currently anticipated, other assumptions may be utilized when SFAS No. 123R is adopted. Quantitative and Qualitative Disclosures of Market Risk ------------------------------------------------------- The Company does not have any financial instruments that would expose it to market risk associated with the risk of loss arising from adverse changes in market rates and prices. 13 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 3. CONTROLS AND PROCEDURES ----------------------- The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective. 14 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- ITEM 6. EXHIBITS (a) Exhibits: 10.11 Securities Purchase Agreement, dated February 25, 2005, between Orthometrix, Inc. and Rock Creek Investment Partners, L.P. (A) 10.12 Securities Purchase Agreement, dated March 3, 2005, between Orthometrix, Inc. and Psilos Group Partners II SBIC, L.P. and Reynald G. Bonmati. (A) Exhibits required by Item 601 of Regulation S-B are filed herewith: 31.1 Chief Executive Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer's Certification, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (A) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-KSB dated March 15, 2005 and is incorporated herein by reference. 15 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB MARCH 31, 2005 -------------------------- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORTHOMETRIX, INC. BY: /s/ Reynald G. Bonmati ---------------------------------------- Reynald G. Bonmati President BY: /s/ Neil H. Koenig ---------------------------------------- Neil H. Koenig Chief Financial Officer (Principal Financial Officer) Dated: May 13, 2005 16 of 21