OMRX Orthometrix Inc (CE)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2008

OR

For the transition period from ___________ to ___________

Commission file number 0-26206

Orthometrix, Inc.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code (914) 694-2285

Indicate by check mark whether the 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.  x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes    x No

There were 46,928,618 shares of common stock outstanding as of May 13, 2008.

 

 

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Balance Sheets

 

See notes to consolidated financial statements.

 

 

2 of 13

 

---

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008
 

Consolidated Statements of Operations (Unaudited)

 

See notes to consolidated financial statements.

 

 

3 of 13

 

---

 

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

Consolidated Statements of Cash Flows (Unaudited)

 

See notes to consolidated financial statements.

 

 

4 of 13

 

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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-Q 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, 2007, and included in the Company’s Report on Form 10-KSB as filed with the Securities and Exchange Commission on March 21, 2008. 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, 2007 and 2006, the Company has experienced aggregate losses from operations of $3,056,246 and has incurred total negative cash flow from operations of $1,390,003 for the same two-year period. During the three months ended March 31, 2008, the Company experienced a net loss of $241,299 and a negative cash flow from operating activities of $ 191,466. 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 three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2008.

As of March 31, 2008, inventories consisted of $428,448 of sub-assemblies, parts, spare parts and finished goods. During the three months ended March 31, 2008, the Company wrote down the value of its spare parts in excess of on-hand inventory by $22,000.

 

 

5 of 13

 

---

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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:

 

The Company will not be renewing its corporate office lease on July 31, 2008.

As of March 31, 2008, related party debt consists of:

 

For all of the notes, the Company is obligated to prepay the principal amount within 10 days upon the occurrence of either of two events; if it (i) receives at least $5,000,000 from an equity financing or (ii) sells substantially all of its assets.

During the three months ended March 31, 2008, the Company issued notes payable to related parties of $535,000. In conjunction with these notes payable, 535,000 warrants were issued. The warrants issued were valued at $20,755. These warrants were valued using the Black-Scholes option pricing model, and recorded as a discount to the notes payable and a credit to additional paid in capital. At March 31, 2008, the unamortized discount on the notes payable is $15,679. During the three months ended March 31, 2008 and 2007, amortization of the notes payable discounts of $34,559 and $124,722 was recorded as interest expense, respectively.

 

 

6 of 13

 

---

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Interest expense for the three months ended March 31, 2008 and 2007, in relation to related party loans and notes payable amounted to $63,691 and $48,145, respectively.

During the three months ended March 31, 2008, the Company’s board of directors approved a grant of stock options to Mr. Reynald Bonmati to purchase an aggregate of 2,453,750 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 5-year options (Mr. Bonmati is a 10% shareholder) and vested over four years. The fair value of these issuances was estimated using the application of the Black-Scholes option pricing model. During the three months ended March 31, 2008, $46,629 of non-cash compensation was recorded as consulting fees and additional paid-in capital. Mr. Bonmati’s salary was waived for the three months ended March 31, 2008.

During the three months ended March 31, 2008, the Company’s board of directors approved a grant of stock options to employees, directors and independent consultants to purchase an aggregate of 2,921,250 shares of its common stock (which includes the amount described in Note 5) 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 fair value of these issuances was estimated using the application of the Black-Scholes option pricing model. During the three months ended March 31, 2008, $61,731 of non-cash compensation cost was recognized.

During the three months ended March 31, 2008, approximately 87.6% of total sales were derived from the Company’s three largest customers.

 

 

7 of 13

 

---

ORTHOMETRIX, INC.

FORM 10-Q MARCH 31, 2008

The matters discussed in this Form 10-Q 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-Q 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.

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 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.

In the United States and Canada, the Company offers one-year warranties on both the hardware and software included in its systems (except for computer systems, if any, which are covered under their respective manufacturers’ warranty), as well as extended warranty contracts. Outside of the United States and Canada, the Company only offers one-year warranties on parts; the labor warranty is provided by the Company’s distributors. The Company also offers six-month warranties on replacement parts worldwide. The Company provides warranty services to its customers in the United States and Canada. Any costs incurred by the Company in connection with a warranty of a system are borne by the manufacturer pursuant to the applicable distribution agreement. Therefore, no warranty reserve is required by products sold by the Company.

The Company has no obligations to provide any other services to any of its third party dealers or distributors or their customers.

 

 

8 of 13

 

---

 

ORTHOMETRIX, INC.
FORM 10-Q MARCH 31, 2008

 

Critical Accounting Policies and Estimates (Continued)

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 uncollectible 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 four years through the sale of equity securities and the issuance of debt. For the two years ending December 31, 2007 and 2006, the Company incurred aggregate net losses of $3,056,246 and negative cash flow from operations of $1,390,003. During the three months ended March 31, 2008, the Company incurred a net loss of $241,299 and negative cash flow from operations of $191,466. As of March 31, 2008, the Company had $99,009 in unrestricted cash 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. However, 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.

The level of the Company’s cash increased to $99,009 at March 31, 2008 from $27,077 at December 31, 2007. The Company had net cash used in operating activities of $191,466 for the three months ended March 31, 2008 which was more than offset by $263,398 in net cash provided by financing activities. Financing activities consisted of $535,000 in loans from related parties and $49,650 of proceeds received from the exercise of stock options and warrants, which were partially offset by the repayment of equipment loan payable of $3,252 and repayment of borrowings of $318,000 from related parties.

 

 

9 of 13

 

---

ORTHOMETRIX, INC.
FORM 10-Q MARCH 31, 2008

Liquidity and Capital Resources (Continued)

For all of the notes, the Company is obligated to prepay the principal amount within 10 days upon the occurrence of either of two events; if it (i) receives at least $5,000,000 from an equity financing or (ii) sells substantially all of its assets.

During the three months ended March 31, 2008, the Company’s board of directors approved a grant of stock options to employees, directors and independent consultants to purchase an aggregate of 2,921,250 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 fair value of these issuances was estimated using the application of the Black-Scholes option pricing model. During the three months ended March 31, 2008, $61,731 of non-cash compensation cost was recognized as non-cash compensation expense and additional paid-in capital.

The Company had no backlog of orders as of March 31, 2008 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. 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 $241,299 ($0.01 per share based on 45,987,080 weighted average shares) for the three months ended March 31, 2008 compared to net loss of $364,202 ($0.01 per share based on 45,178,618 weighted average shares) for the three months ended March 31, 2007.

Revenue for the three months ended March 31, 2008 decreased $217,761 (or 37.5%) to $363,732 from $580,493 from the comparable period of fiscal 2007. The decrease in revenue was primarily due to a decrease in VibraFlex® and XCT system sales during 2008.

Cost of revenue as a percentage of revenue was 53.0% and 57.8% for the three months ended March 31, 2008 and 2007, respectively, resulting in a gross profit of 47.0% for the three months ended March 31, 2008 compared to 42.2% for the comparable period of 2007. The increase in gross profit was due to a predominant sale of the XCT system, which has a higher gross profit percentage.

 

 

10 of 13

 

---

ORTHOMETRIX, INC.
FORM 10-Q MARCH 31, 2008

Results of Operations (Continued)

Sales and marketing expense for the three months ended March 31, 2008 decreased $127,996 (or 50.6%) to $125,180 from $253,176 for the three months ended March 31, 2007. The decrease is due to the Company’s decrease in sales staff to market and sell the Orbasone™ and decreased trade show and travel expenses to market the Orbasone™.

General and administrative expense for the three months ended March 31, 2008 increased $16,645 (or 9.2%) to $197,186 from $180,541 for the three months ended March 31, 2007. The increase was due to a rise in travel expenses incurred.

Interest expense decreased $77,203 (or 43.9%) to $98,726 for the three months ended March 31, 2008 from $175,929 for the three months ended March 31, 2007. Interest expense decreased primarily due to a reduction in the amortization expense of note payable discounts.

Recently Issued Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect this standard to have a material impact on its financial position, results of operations or cash flows.

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 March 31, 2008 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 $22,203 change in annual interest expense.

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) 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’s internal controls over financial reporting during the Company’s first quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

 

11 of 13

 

---

ORTHOMETRIX, INC.
FORM 10-Q MARCH 31, 2008

PART II – OTHER INFORMATION

 

 

 

12 of 13

 

---

ORTHOMETRIX, INC.
FORM 10-Q MARCH 31, 2008

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.

 

 

 

 

13 of 13

 

---