UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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 March 31, 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
ASSETS
Current Assets
Cash $ 518,413
Accounts receivable 366,091
Employee advances 1,781
Inventory 359,871
Prepaid expenses 27,405
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Total Current Assets 1,273,561
Property and equipment, net of accumulated depreciation
of $13,398 1,046
Other Assets 219,098
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TOTAL ASSETS $ 1,493,705
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 47,877
Accrued expenses 28,973
Notes payable, current portion 71,284
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Total Current Liabilities 148,134
Long-term debt 325,138
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Total Liabilities 473,272
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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 (2,494,519)
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Total Stockholders' Equity 1,020,433
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,493,705
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EYE DYNAMICS, INC.
STATEMENT OF OPERATIONS
For Three Months ended March 31, 2004 2003
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Sales - products $ 608,876 $ 652,608
Cost of sales - products 292,982 311,968
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Gross profit 315,894 340,640
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Selling, general and administrative Expenses 173,680 181,002
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Operating income 142,214 159,638
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Other Income(Expense)
Other income 60 503
Interest expense (1,109) (1,838)
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(1,049) (1,335)
Net income before taxes 141,165 158,303
Provision for income taxes 800 1,600
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Net income $ 140,365 $ 156,703
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Net income (loss) per share-basic $ 0.01 $ 0.01
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Net income (loss) per share-diluted $ 0.01 $ 0.01
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Shares used in per share calculation-basic 17,883,081 17,850,313
Shares used in per share calculation-diluted 21,784,739 21,736,895
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EYE DYNAMICS, INC.
STATEMENT OF CASH FLOWS
For Three Months ended March 31, 2004 2003
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CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 140,365 $ 156,703
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 57 102
(Increase) Decrease in:
Accounts receivable (234,671) (43,252)
Inventory (39,918) (8,451)
Prepaid and other assets 7,729 (5,363)
Increase (Decrease) in:
Accounts payable and accrued expenses (18,178) (43,914)
Other liabilities -- (13,271)
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Net cash provided by (used in )operating activities (144,616) 42,554
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CASH FLOW FROM INVESTING ACTIVITIES:
Employee advances (1,781) --
Purchase of property and equipment -- (1,113)
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Net cash (used in) investing activities (1,781) (1,113)
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CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on notes payable (23,761) (27,094)
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Net cash (used in) financing activities (23,761) (27,094)
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NET INCREASE (DECREASE) IN CASH (170,158) 14,346
CASH BALANCE AT BEGINNING OF PERIOD 700,344 177,668
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CASH BALANCE AT END OF PERIOD $ 530,186 $ 192,014
=========================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ -- $ 26,052
Taxes Paid $ 39,750 $ --
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NOTES TO INTERIM UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Eye Dynamics, Inc. (the "Company') designs, develops,
produces and markets diagnostic equipment that measures, tracks and records
human eye movements, utilizing the Company's proprietary technology and computer
software. The products perform separate, but related, functions and target two
separate markets. First, the Company markets a neurological diagnostic product
that tracks and measures eye movements during a series of standardized tests, as
an aid in diagnosing problems of the vestibular (balance) system and other
balance disorders. Second, the Company's impairment detection devices target the
corporate and criminal justice markets and are designed to test individuals for
impaired performance resulting from the influences of alcohol, drugs, illness,
stress and other factors that affect eye and pupil performance. The Company is a
Nevada corporation formed in 1989.
A summary of significant accounting policies follows:
PRESENTATION OF INTERIM INFORMATION: The financial information at March 31, 2004
and for the three months ended March 31, 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 months ended March 31, 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.
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NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At March 31,
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Property and equipment, net
Furniture and Fixtures $ 1,113 $ 2,545
Equipment 13,331 13,331
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14,444 15,876
Less: accumulated depreciation (13,398) (14,467)
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Total $ 1,046 $ 1,409
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Other Assets
Deferred tax assets $ 205,436 $ --
Deposits 13,662 8,674
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Total $ 219,098 $ 8,674
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Accrued expenses
Commission payable $ 16,615 $ 21,166
Warranty reserve 9,071 --
Accrued interest 3,539 52,672
Income tax payable 1,301 1,600
Other (1,553) (425)
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Total $ 28,973 $ 75,013
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NOTE 4 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share for three months ended March 31st:
2004 2003
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Basic Earnings per Share:
New income $ 140,365 $ 156,703
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Weighted average number of common shares $17,883,081 $17,850,313
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Basic earnings per common share $ 0.01 $ 0.01
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Diluted Earnings per Share:
Net income $ 140,365 $ 156,703
Add back: Debenture interest 700 763
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Adjust net income $ 141,065 $ 157,466
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Weighted average number of common shares 17,883,081 17,850,313
Incremental shares from assumed conversion:
Convertible debt 3,591,799 3,791,344
Stock warrants 309,859 95,238
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Adjusted weighted average number of common shares 21,784,739 21,736,895
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Diluted earnings per common share $ 0.01 $ 0.01
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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 5 - 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.
NOTE 6 - MAJOR CUSTOMERS
During the three months ended March 31, 2004, two major customers accounted for
$463,070 or 76.1% of total revenues.
Special Instrument Dealer 37.0%
Private label distributor 39.1%
During the three months ended March 31, 2003, the private label distributor
accounted for $410,764 or 62.9% 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 subsidiary did not have any operations in 2004 or 2003,
and the Company has only one segment; accordingly, detailed information of the
reportable segment is not presented.
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 March 31, 2004.
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NOTE 9 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
In general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first quarter of 2004:
Balance of December 31, 2003 $ 8,044
Provision for warranty 1,509
Utilization of reserve (482)
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Balance as of March 31, 2004 $ 9,071
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ITEM 2. Management's Discussion and Analysis or Plan of Operation
THREE MONTHS ENDING MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH
31, 2003
Revenues from the sale of medical products during the first quarter
were $608,976, with a profit after taxes of $140,365. This is a 7% decrease in
revenues compared to the same quarter in 2003. Profit after taxes decreased
commensurately, but is still 23% of revenues for the quarterly period. Earnings
per share of $0.01 is the same as the first quarter of 2003. Slightly lower
sales can be attributed to rule changes by Medicare regarding reimbursements for
ENG tests, which is always done at the beginning of each year. In addition, a
Medicare rule change was made regarding need for increased qualifications of
personnel using our products for Video ENG testing. These changes caused many
customers to delay their purchases until the Medicare notices are fully
clarified.
The private label portion of our business accounted for 39% of revenues
for the quarter, as opposed to 58% of revenues during the same quarter of 2003,
and reflects the increase in Eye Dynamics brand product sales. The market
increase in the ENT segment of the medical market is not substantial, but the
neurology and mobile diagnostic testing continues to be successful.
Gross profit for the quarter was 51%, the same as in prior quarters.
The Company's goal is to maintain a gross profit of at least 50% for each
quarter and year to date. The Company is making efforts to contain expenses and
to reduce product costs in order to achieve the gross profit percent goal.
Principal operating expense increase in first quarter was insurance, 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 reinstated.
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.
An agreement was reached with our private label customer, MedTrak
Technologies, Inc. of Scottsdale, Arizona, for MedTrak to purchase all its
current and future Video ENG products exclusively from Eye Dynamics. In
addition, Eye Dynamics granted MedTrak the exclusive marketing rights for all of
its Video ENG products throughout the United States. This agreement enhances the
future of the company and consummates an evolving, profitable relationship that
has grown over the last six years.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 2004 of $518,413 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 $359,871 at March 31, 2004 includes $25,000 of SafetyScope
Impairment Detection Device items, which are not currently being actively
marketed, but are used as production samples and demonstrators for
capital-raising activities related to that business. The inventory balance of
$335,000 represents 2.5 months of consumption, and is balanced in content.
However, the amount is too high for the volume of sales and is in process of
being reduced to an appropriate level. The higher inventory is the result of a
tightening of sales and sufficient time has not yet passed to reduce the
inventory to an acceptable level.
Accounts receivable of $366,000 represents almost 60 days accounts
receivable aging, which is acceptable, but efforts to reduce it to a 30 day
level have shown some progress. The company's private label customer 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.
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 are encouraging. Customers are
now moving forward with purchases that had been delayed earlier in the year.
Item 3. Controls and Procedures.
Under the supervision and with the participation of our Chief Executive
and Financial Officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days
of the filing date of this report. Based on this evaluation, our Chief Executive
and Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports under the Exchange
Act are processed and reported within the time periods specified by law.
Since the date of the evaluation described above, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending legal proceedings.
Item 2. Changes In 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 and Reports on Form 8-K
(a) Exhibits
10.8 Exclusive Manufacturing, Sales, Licensing And Software Ownership
Agreement, dated March 22, 2004 between the Company and Medtrak,
Inc.
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
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 17, 2004
By: /s/ Charles E. Phillips
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Charles E. Phillips, President
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