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 September 30, 2006 ------------------ 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 Identification No.) incorporation or organization) 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) of 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 ------- ------- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X -------- ------- Transitional Small Business Disclosure Format (check one): Yes No X ------- ------- There were 44,488,618 shares of common stock outstanding as of October 17, 2006. 1 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS ------ September 30, 2006 ------------------ Current assets: Cash $ 33,007 Accounts receivable - trade 160,780 Inventories 517,148 Prepaid expenses and other current assets 278,384 ------------ Total current assets 989,319 Property and equipment, net 90,234 Other 11,658 ------------ Total Assets $ 1,091,211 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- Current liabilities: Accounts payable - trade $ 1,037,901 Accrued expenses 33,376 Related party loans 918,226 Unearned service revenue 79,423 Loan payable - equipment 17,037 Line of credit 350,000 ------------ Total current liabilities 2,435,963 Long term loan payable - equipment 41,929 Long term loan payable - related party 25,000 Stockholders' deficit: Common stock - par value $.0005 per share, 75,000,000 shares authorized, and 44,488,618 shares issued and outstanding 22,243 Preferred stock - par value $.0005 per share, 1,000,000 shares authorized - Additional paid-in capital 43,471,037 Accumulated deficit (44,904,961) ------------ Total stockholders' deficit (1,411,681) ------------ Total Liabilities and Stockholders' Deficit $ 1,091,211 ============ See notes to consolidated financial statements. 2 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------ ------------ Revenue $ 1,967,390 $ 1,165,445 Cost of revenue 689,954 479,744 ------------ ------------ Gross profit 1,277,436 685,701 Sales and marketing expense 1,236,818 889,712 General and administrative expense 877,858 969,436 Research and development expense 104,664 313,109 ------------ ------------ Operating loss (941,904) (1,486,556) Interest expense (218,093) (40,340) Interest income 2,187 3,648 Other income 115,231 - ------------ ------------ Net loss $ (1,042,579) $ (1,523,248) ============ ============ Basic and diluted weighted average shares 44,366,457 41,472,122 ============ ============ Basic and diluted loss per share: Net loss $ (0.02) $ (0.04) ============ ============ See notes to consolidated financial statements. 3 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2006 2005 ------------ ------------ Revenue $ 507,368 $ 302,981 Cost of revenue 180,907 135,762 ------------ ------------ Gross profit 326,461 167,219 Sales and marketing expense 372,205 343,938 General and administrative expense 208,681 303,226 Research and development expense 37,135 84,905 ------------ ------------ Operating loss (291,560) (564,850) Interest expense (121,954) (11) Interest income 179 212 Other income 20,000 - ------------ ------------ Net loss $ (393,335) $ (564,649) ============ ============ Basic and diluted weighted average shares 44,455,303 43,470,248 ============ ============ Basic and diluted loss per share: Net loss $ (0.01) $ (0.01) ============ ============ See notes to consolidated financial statements. 4 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 ------------------ ------------------ Cash Flows From Operating Activities: Net loss $(1,042,579) $(1,523,248) Adjustments to reconcile net loss to net cash used in operating activities: Stock options and warrants issued 122,379 203,709 Non cash compensation - 72,000 Amortization expense 137,427 33,597 Depreciation expense 15,830 4,210 Changes in assets and liabilities: (Increase) decrease in accounts receivable (125,240) 113,281 Increase in inventories (254,652) (143,546) Increase in prepaid expenses and other current assets (122,253) (18,267) Increase (decrease) in accounts payable 333,479 (85,596) Decrease in accrued expenses (23,881) (78,519) Increase in unearned service revenue 41,478 18,612 ----------- ----------- Net cash used in operating activities (918,012) (1,403,767) ----------- ----------- Cash Flows From Investing Activities: Purchases of property and equipment (11,831) (1,954) ----------- ----------- Cash used in investing activities (11,831) (1,954) ----------- ----------- Cash Flows From Financing Activities: Repayment of borrowings from related parties (170,000) (500,000) Proceeds of borrowings from related parties 1,083,000 65,000 Proceeds for issuance of common stock - 1,740,000 Exercise of stock options and warrants 17,046 115,150 Proceeds from line of credit 20,000 - Repayment of loan payable - equipment (10,057) - ----------- ----------- Net cash provided by financing activities 939,989 1,420,150 ----------- ----------- Net increase in cash 10,146 14,429 Cash at beginning of period 22,861 - ----------- ----------- Cash at end of period $ 33,007 $ 14,429 =========== =========== Supplemental disclosure of non-cash investing and financing activities: Purchase of property and equipment 64,028 - Less: Amount financed (52,197) - ----------- ----------- 11,831 - =========== =========== See notes to consolidated financial statements. 5 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BASIS OF PRESENTATION AND GOING CONCERN --------------------------------------- The consolidated financial statements of Orthometrix, Inc. and Subsidiary (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, 2005, and included in the Company's Report on Form 10-KSB as filed with the Securities and Exchange Commission on February 24, 2006. In the opinion of management, the accompanying interim unaudited consolidated financial statements contain all adjustments (consisting of normal, recurring accruals) necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for these interim periods. During the past two fiscal years ended December 31, 2005 and 2004, the Company has experienced aggregate losses from operations of $4,332,317 and has incurred total negative cash flow from operations of $3,000,606 for the same two-year period. During the nine months ended September 30, 2006 the Company experienced a net loss of $1,042,579 and a negative cash flow from operating activities of $918,012. These matters raise substantial doubt about the Company's ability to continue as a going concern. The consolidated 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 obtaining substantial additional financing, increasing sales volume, achieving profitability on the sale of some products and developing new products. The Company is pursuing initiatives to increase liquidity, including external investments and obtaining lines of credit. In order to increase its cash flow, the Company is continuing its efforts to stimulate sales. The Company has also 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. The Company is also requesting prepayment from customers and attempting to more closely coordinate the timing of purchases with the timing of orders for products. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2006. 6 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 2. INVENTORIES ----------- As of September 30, 2006, inventories consisted of $517,148 of sub-assemblies, parts, spare parts and finished goods. 3. CASH FLOWS ---------- The Company paid $53,312 and $37,064 for interest during the nine months ended September 30, 2006 and 2005, 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. CONTINGENCY ----------- 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: 2006 $30,816 2007 31,584 2008 18,424 ------- $80,824 ======= 7 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 6. RELATED PARTY TRANSACTIONS -------------------------- During the nine months ended September 30, 2006, the Company borrowed $1,058,000 from certain officers and directors in addition to borrowings of $285,000 from related parties and others in 2005. $40,000 of the borrowings in 2005 were short term, non-interest bearing loans and were repaid in 2005. $25,000 of the borrowings in 2005 were short term loans, bearing interest at prime. $333,000 of the borrowings in 2006 were short term, interest bearing loans, of which $170,000 were repaid in 2006. The remaining $945,000 were notes issued in 2005 and 2006 that bear interest at the JPMorgan Chase prime rate plus one (9.25% at September 30, 2006) which mature one year from the date of issuance. As of September 30, 2006, $333,588 of the remaining proceeds received were allocated to the warrants based on the application of the Black-Scholes option pricing model, with the remaining proceeds of $611,412 allocated to the notes payable. The value allocated to the warrants is being amortized to interest expense over the term of the notes. At September 30, 2006, the unamortized discount on the notes payable is $189,744. During the quarter ending September 30, 2006, the Company recorded interest expense of $84,082. 7. STOCK-BASED COMPENSATION ------------------------ Beginning in the first quarter of 2006, the Company applied SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS No. 123R") to determine the compensation cost of stock options granted to employees and non-employees based on the fair value method. Non-cash compensation cost is recognized over the service or vesting period. During the nine months ended September 30, 2006, the Company's board of directors approved a grant of stock options to employees, directors and independent consultants to purchase an aggregate of 670,000 shares of its common stock with exercise prices equal to or greater than the market price of stock on the date of grant. The options are 10-year options (with the exception of Mr. Bonmati, a 10% shareholder, whose options expire in 5 years) and vest over 4 years. The value of these issuances was based on the application of the Black-Scholes option pricing model and valued at $114,041. The value of options was recorded as non-cash compensation expense and additional paid-in capital. 8 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 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 Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported amount of revenues and expenses during the periods presented. Estimates are used when accounting for the allowance for uncollectible receivables, potentially excess and obsolete inventory, depreciation and amortization, warranty reserves, income tax valuation allowances and contingencies, among others. Actual results could differ significantly from those estimates. The Company believes that the estimates, judgments and assumptions upon which the Company rely are reasonable based upon information available at the time they are made. The Company believes the following 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 sells its products directly to customers and through third-party dealers and distributors. Revenue is generally recognized at the time products are shipped and title passes to the customer. The Company estimates and records provisions for product installation and user training in the period that the sale is recorded. Other than the bone densitometry systems, the Company's products are covered by warranties provided by its vendors. Therefore, no warranty reserve is required on such products. In the United States and Canada, the Company offers one-year warranties covering parts and labor on both hardware and software components of its bone densitometry systems (except for computer systems, if any, which are covered under their respective manufacturers' warranty). Outside of the United States and Canada, the Company only offers one-year warranties on parts; the labor warranty is provided by the distributors. The provision for product warranties represents an estimate for future claims arising under the terms of the various product warranties. The estimated future claims are accrued at the time of sale. To the extent that the Company provides warranty services for products that the Company does not manufacture, the Company invoices the manufacturer for the costs of performing such warranty services. 9 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Critical Accounting Policies And Estimates (Continued) ------------------------------------------------------ The Company has no obligations to provide any other services to any of its third party dealers or distributors or their customers. 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 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. Liquidity and Capital Resources ------------------------------- The Company has financed operations for the past three years through the sale of equity securities and the issuance of debt. For the two years ending December 31, 2005 and 2004, the Company incurred aggregate net losses from operations of $4,332,317 and negative cash flow from operations of $3,000,606. During the nine months ended September 30, 2006, the Company incurred a net loss of $1,042,579 and negative cash flow from operations of $918,012. As of September 30, 2006, the Company had $33,007 in unrestricted cash and cash equivalents available for working capital purposes. 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 obtaining substantial additional financing, increasing sales volume, achieving profitability on the sale of some products and developing new products. In order to increase cash flow, the Company is continuing its efforts to stimulate sales. In order to manage credit risk, the Company has begun to implement higher credit standards for customers and to emphasize the receipt of down payments from customers at the time their purchase orders are received. The Company has also begun to request more prepayments from customers and attempt to more closely coordinate the timing of purchases with the timing of orders for products. The Company cannot predict whether or to what extent these risk management functions may slow its ability to grow revenues. 10 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- On July 6, 2006, the Company formed Orbasone Mobile, LLC, ("Orbasone Mobile") a limited liability company and a wholly-owned subsidiary of the Company. Orbasone Mobile will provide an extracorporeal shock wave therapy ("ESWT") mobile service to healthcare providers using the Company's Orbasone ESWTTM Pain Relief System ("Orbasone"). Beginning on August 1, 2006, Healthcare Reimbursement Solutions, Inc. ("HRSI") will provide the following services to healthcare providers serviced by Orbasone Mobile: seek insurance carrier ESWT procedure authorizations for their patients, submit insurance claims and any related appeals, and issue collection payments. On February 1, 2006, the Company had formed an alliance with HRSI to provide customers using the Orbasone with a broad range of billing advisory services. These services included billing and reimbursement consulting, turn-key billing, as well as a reimbursement hotline dedicated to one on one consulting and assistance with denial and claim review. Beginning August 1, 2006, the reimbursement hotline provided by HRSI will be discontinued and replaced by the reimbursement services mentioned above and provided through Orbasone Mobile. The Company is pursuing several initiatives to increase liquidity, including obtaining equity and debt financings and a bank line of credit. On September 30, 2006, the Company had outstanding borrowings of $350,000 in principal amount under the existing line of credit with HSBC Bank USA, N.A. Interest on borrowings under the credit line accrues at HSBC's prime rate plus 1.50%. The level of the Company's cash and cash equivalents increased to $33,007 at September 30, 2006 from $22,861 at December 31, 2005. The Company expended $98,012 in cash for operations and $11,831 for investments during the nine months ended September 30, 2006 which were offset by $939,989 in cash provided by financing activities during the nine month period. Through these financing activities the Company received $1,083,000 in loans from officers and directors, $17,046 pursuant to the exercise of stock options, and $20,000 from the HSBC line of credit, which were offset by the repayment of equipment loan payable of $10,057 and $170,000 repayment of borrowings. During the nine months ended September 30, 2006, the Company borrowed $1,058,000 from certain officers and directors in addition to borrowings of $285,000 from related parties and others in 2005. $40,000 of the borrowings in 2005 were short term, non-interest bearing loans and were repaid in 2005. $25,000 of the borrowings in 2005 were short term loans, bearing interest at prime. $333,000 of the borrowings in 2006 were short term, interest bearing loans, of which $170,000 were repaid in 2006. The remaining $945,000 were notes issued in 2005 and 2006 that bear interest at the JPMorgan Chase prime rate plus one (9.25% at September 30, 2006) which mature one year from the date of issuance. As of September 30, 2006, $333,588 of the remaining proceeds received were allocated to the warrants based on the application of the Black-Scholes option pricing model, with the remaining proceeds of $611,412 allocated to the notes payable. The value allocated to the warrants is being amortized to interest expense over the term of the notes. At September 30, 2006, the unamortized discount on the notes payable is $189,744. During the quarter ending September 30, 2006, the Company recorded interest expense of $84,082. 11 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- During the nine months ended September 30, 2006, the Company's board of directors approved a grant of stock options to employees, directors and independent consultants to purchase an aggregate of 670,000 shares of its common stock with exercise prices equal to or greater than the market price of stock on the date of grant. The options are 10-year options (with the exception of Mr. Bonmati, a 10% shareholder, whose options expire in 5 years) and vest over 4 years. The value of these issuances was based on the application of the Black-Scholes option pricing model and valued at $114,041. The value of options was recorded as non-cash compensation expense and additional paid-in capital. The Company had a backlog of orders of $9,900 as of September 30, 2006 and there are no material commitments for capital expenditure as of that date. The Company believes that they will need to raise substantial additional capital within the next twelve months in order to support the planned growth of the business. The Company may seek additional funding through collaborative arrangements and public or private financings. Additional funding may not be available on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of the Company's stockholders. For example, if the Company raises additional funds by issuing equity securities, further dilution to existing stockholders may result. If the Company is unable to obtain funding on a timely basis, they may be required to significantly curtail one or more of the Company's research or development programs. The Company also could be required to seek funds through arrangements with collaborators or others that may require the Company to relinquish rights to some of their technologies, product candidates or products which they would otherwise pursue on their own. Results of Operations --------------------- The Company had a net loss of $1,042,579 ($0.02 per share based on 44,366,457 weighted average shares) for the nine months ended September 30, 2006 compared to net loss of $1,523,248 ($0.04 per share based on 41,472,122 weighted average shares) for the nine months ended September 30, 2005. Revenue for the nine months ended September 30, 2006 increased $801,945 (or 68.8%) to $1,967,390 from $1,165,445 from the comparable period of fiscal 2005. The increase in revenue was primarily due to an increase in Orbasone(TM), VibraFlex(R) and pQCT(R) system sales during 2006. Cost of revenue as a percentage of revenue was 35.1% and 41.2% for the nine months ended September 30, 2006 and 2005, respectively, resulting in a gross margin of 64.9% for the nine months ended September 30, 2006 compared to 58.8% for the comparable period of 2005. The increase in gross margin was due to an increase in Orbasone(TM) sales in 2006, which maintains a large gross profit percentage. Sales and marketing expense for the nine months ended September 30, 2006 increased $347,106 (or 39.0%) to $1,236,818 from $889,712 for the nine months ended September 30, 2005. The increase is due to the Company's increase in sales staff hired to market and sell the Orbasone(TM) and increased trade show and travel expenses to market the Orbasone(TM). 12 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------------------- Results of Operations (Continued) --------------------------------- General and administrative expense for the nine months ended September 30, 2006 decreased $91,578 (or 9.5%) to $877,858 from $969,436 for the nine months ended September 30, 2005. The decrease was due to a decrease in non-cash compensation associated with an equity financing in 2005 and a decrease in payroll expense associated with the exclusion of the Chief Executive Officer's salary effective August 7, 2006. Research and development expense for the nine months ended September 30, 2006 decreased $208,445 (or 66.6%) to $104,664 from $313,109 for the nine months ended September 30, 2005. The decrease was primarily due to decreased expenses incurred as a result of the PMA process in 2005. The Orbasone(TM) was approved by FDA in 2005. Interest expense increased $177,753 (or 440.6%) to $218,093 for the nine months ended September 30, 2006 from $40,340 for the nine months ended September 30, 2005. Interest expense increased due to the increase in borrowings bearing interest. Other income increased $115,231 (or 100%) for the nine months ended September 30, 2006. The increase was due to the balance adjustment of the legal reserve. New Accounting Pronouncements ----------------------------- In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FAS Statement No. 3" ("FAS 154"). FAS 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring retrospective application to prior periods' financial statements of the change in accounting principle, unless it is impractical to do so. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of FAS 154 to have any impact on the financial statements. 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. All of the Company's loans payable outstanding at September 30, 2006 have variable interest rates and therefore are subject to interest rate risk. A one percent change in the variable interest rate would result in a $15,420 change in annual interest expense. 13 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 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. There has been no change in the Company internal controls over financial reporting during the Company's first, second and third quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting. 14 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ PART II - OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS -------- 2.1 Asset Purchase Agreement with Cooper Surgical Acquisition Corp. and Orthometrix, Inc. (E) 3.1 Restated Certificate of Incorporation of Orthometrix, Inc. (C) 3.2 Certificate of Amendment of Restated Certificate of Incorporation (F) 3.3 By-laws of Orthometrix, Inc. as amended (D) 4.1 Form of warrant to purchase shares of common stock of Orthometrix, Inc. (G) +10.1 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A) +10.2 Product Approval and Licensing Agreement, dated February 12, 2002, by and between M.I.P. GmbH and Bionix L.L.C. (A) +10.3 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A) +10.4 Distribution Agreement, dated as of October 1, 1999, by and between Stratec Medizintechnik, GmbH and Bionix, L.L.C. (A) +10.5 Assignment and Assumption Agreement, dated as of April 12, 2002 by and between Bionix, L.L.C. and Orthometrix, Inc. (A) +10.6 Distribution Agreement, dated as of October 1, 1999 by and between Novotec Maschinen GmbH and Bionix, L.L.C. (A) 10.7 $50,000 Promissory Note, dated October 4, 2005, between Orthometrix, Inc. and Michael Huber (G) 10.8 $20,000 Promissory Note, dated October 11, 2005, between Orthometrix, Inc. and John Utzinger (G) 10.9 $100,000 Promissory Note, dated November 18, 2005, between Orthometrix, Inc. and Reynald Bonmati (G) 10.10 $50,000 Promissory Note, dated December 12, 2005, between Orthometrix, Inc. and The Chrystele Bonmati Trust (H) 15 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ ITEM 6. EXHIBITS (CONTINUED) -------------------- 10.11 $25,000 Promissory Note, dated January 17, 2006, between Orthometrix, Inc. and The Chrystele Bonmati Trust (I) 10.12 $150,000 Promissory Note, dated February 28, 2006, between Orthometrix, Inc. and Reynald Bonmati (I) 10.13 $100,000 Promissory Note, dated March 15, 2006, between Orthometrix, Inc. and The Chrystele Bonmati Trust (I) 10.14 Securities Purchase Agreement, dated February 25, 2005, between Orthometrix, Inc. and Rock Creek Investment Partners, L.P. (B) 10.15 Securities Purchase Agreement, dated March 3, 2005, between Orthometrix, Inc. and Psilos Group Partners II SBIC, L.P. (B) 10.16 Amended and Restated 1994 Stock Option and Incentive Plan for Employees (F) 10.17 Amended and Restated 2000 Stock Option and Incentive Plan for Non Employee Directors and Consultants (F) 10.18 Small Business Grid Note, dated October 3, 2005, between HSBC Bank USA, N.A. and Orthometrix, Inc. (G) 10.19 General Security Agreement, dated October 3, 2005, between HSBC Bank USA, N.A. and Orthometrix, Inc. (G) 10.20 $100,000 Promissory Note, dated April 7, 2006, between Orthometrix, Inc. and Michael Huber. (J) 10.21 $50,000 Promissory Note, dated April 7, 2006, between Orthometrix, Inc. and Reynald Bonmati. (J) 10.22 $50,000 Promissory Note, dated April 17, 2006, between Orthometrix, Inc. and Reynald Bonmati. (J) 10.23 $250,000 Promissory Note, dated June 23, 2006 between Orthometrix, Inc. and Psilos Group Partners II-S, L.P. (J) 23.1 Consent of Radin, Glass & Co., LLP (G) 16 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ ITEM 6. EXHIBITS (CONTINUED) -------------------- 23.2 Consent of Kirkpatrick & Lockhart Nicholson Graham LLP (G) 24 Power of Attorney (G) 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. + Confidentiality requested as to certain provisions. (A) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-QSB dated May 15, 2003 and is incorporated herein by reference. (B) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-KSB dated March 24, 2005 and is incorporated herein by reference. (C) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-Q dated November 13, 1997, and is incorporated herein by reference. (D) This Exhibit was previously filed as an Exhibit to the Company's Registration Statement on Form S-I (Registration No. 33-93220), effective August 1, 1995, and is incorporated herein by reference. (E) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 8-K dated April 15, 2002, as incorporated herein by reference. (F) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-QSB dated August 2, 2005, as incorporated herein by reference. (G) This Exhibit was previously filed as an Exhibit to the Company's Registration Statement on Form SB-2 (Registration No. 333-130095), effective December 14, 2005, and is incorporated herein by reference. (H) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-KSB dated February 22, 2006, as incorporated herein by reference. 17 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ ITEM 6. EXHIBITS (CONTINUED) -------------------- (I) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-QSB dated May 10, 2006 as incorporated herein by reference. (J) This Exhibit was previously filed as an Exhibit to the Company's Report on Form 10-QSB dated August 4, 2006 as incorporated herein by reference. 18 of 19 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2006 ------------------------------ 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/Chief Executive Officer BY: /s/ Neil H. Koenig -------------------------------------- Neil H. Koenig Chief Financial Officer (Principal Financial Officer) Dated: October 30, 2006 19 of 19