10QSB 1 file001.txt FORM 10-QSB 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, 2002 ------------------ 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 106, 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 ----- ----- There were 29,544,621 shares of common stock outstanding as of November 1, 2002. 1 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS ------ Current assets: Cash $ 413,300 Accounts receivable-trade 100,080 Current portion of receivable due from purchaser 594,992 Inventories 35,366 Prepaid expenses and other current assets 34,168 --------------- Total current assets 1,177,906 Property and equipment, net 33,722 Long term receivable due from purchaser 500,000 Other 11,658 --------------- Total Assets $ 1,723,286 =============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses $ 406,205 Unearned service revenue 18,382 Other liabilities 267,826 --------------- Total current liabilities 692,413 --------------- Stockholders' equity: Common stock - par value $.0005 per share, 45,000,000 shares authorized, and 29,544,621 shares issued and outstanding 14,771 Additional paid-in capital 38,648,693 Accumulated deficit (37,632,591) --------------- Total stockholders' equity 1,030,873 --------------- Total Liabilities and Stockholders' Equity $ 1,723,286 =============== See notes to consolidated financial statements. 2 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ---------------- ------------------ Revenue $ 525,650 $ 677,279 Cost of revenue 211,845 503,658 ------------- ---------------- Gross profit 313,805 173,621 Sales and marketing 415,541 659,695 General and administrative expense 792,143 889,236 Research and development expense 177,468 69,363 ---------------- ---------------- Operating loss (1,071,347) (1,444,673) Interest expense (38,302) (104,457) Interest income 4,575 1,686 ---------------- ---------------- Loss from continuing operations (1,105,074) (1,547,444) ---------------- ---------------- Discontinued operations: Net (loss) income from discontinued operations (250,731) 338,027 Gain on disposal of discontinued operations 4,355,222 - ---------------- ---------------- Income from discontinued operations 4,104,491 338,027 ---------------- ---------------- Income (loss) before extraordinary item 2,999,417 (1,209,417) Extraordinary item - Gain on extinguishment of debt 811,087 - ---------------- ---------------- Net income (loss) $ 3,810,504 $ (1,209,417) ================ ================ Basic and diluted weighted average shares 29,684,629 30,365,862 ================ ================ Basic and diluted income (loss) per share: Loss from continuing operations $ (0.04) $ (0.05) Income from discontinued operations 0.14 0.01 Gain on extinguishment of debt 0.03 - ---------------- ---------------- Net income (loss) $ 0.13 $ (0.04) ================ ================
See notes to consolidated financial statements. 3 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ----------------- ----------------- Revenue $ 319,593 $ 105,559 Cost of revenue 120,871 74,403 --------------- ----------------- Gross profit 198,722 31,156 Sales and marketing 185,913 198,698 General and administrative expense 318,985 278,734 Research and development expense 85,490 23,121 ----------------- ----------------- Operating loss (391,666) (469,397) Interest expense - (34,888) Interest income 1,068 126 ----------------- ----------------- Loss from continuing operations (390,598) (504,159) ----------------- ----------------- Discontinued operations: Net loss from discontinued operations - (6,780) Loss on disposal of discontinued operations (350,000) - ----------------- ----------------- Loss from discontinued operations (350,000) (6,780) ----------------- ----------------- Net loss $ (740,598) $ (510,939) ================= ================= Basic and diluted weighted average shares 29,544,621 30,433,509 ================= ================= Basic and diluted loss per share: Loss from continuing operations $ (0.02) $ (0.02) Loss from discontinued operations (0.01) - ----------------- ----------------- Net loss $ (0.03) $ (0.02) ================= =================
See notes to consolidated financial statements. 4 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended September 30, September 30, 2002 2001 ----------------- ---------------- Cash Flows From Operating Activities: Net income (loss) $ 3,810,504 $ (1,209,417) Adjustments to reconcile net income (loss) to net cash used in operating activities: Net loss (income) from discontinued operations 250,731 (338,027) Gain on disposal of discontinued operations (4,355,222) - Gain on extinguishment of debt (811,087) - Accounts receivable reserve (137,343) (18,500) Amortization expense 13,281 39,843 Depreciation expense 7,384 10,710 Changes in assets and liabilities: Decrease in accounts receivable 102,876 103,297 Decrease in inventories 17,340 17,387 (Increase) decrease in non current assets (3,850) 700 Decrease (increase) in prepaid expenses and other current assets 30,052 (1,725) (Decrease) increase in accounts payable and accrued expenses (1,388,353) 29,991 Increase in unearned service revenue 18,382 - Increase in other liabilities 217,826 - ----------------- ------------- Net cash used in continuing operations (2,227,479) (1,365,741) Net cash (used in) provided by discontinued operations (515,242) 1,132,452 ----------------- ------------- Net cash used in operating activities (2,742,721) (233,289) ----------------- ------------- Cash Flows From Investing Activities: Proceeds from disposal of discontinued operations 3,733,974 - ----------------- ------------- Cash Flows From Financing Activities: Issuance of common stock - 180,000 Proceeds of borrowings from related parties 200,000 - Repayment of borrowings from related parties (330,267) - Repayment of notes payable (463,888) - ----------------- ------------- Net cash (used in) provided by financing activities (594,155) 180,000 ----------------- ------------- Net increase (decrease) in cash 397,098 (53,289) Cash at beginning of period 16,202 53,289 ----------------- ------------- Cash at end of period $ 413,300 $ - ================= =============
See notes to consolidated financial statements. 5 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BASIS OF PRESENTATION --------------------- The consolidated financial statements of Orthometrix, Inc. (formerly Norland Medical Systems, Inc.) and Subsidiaries (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 generally accepted accounting principles. These statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2001, and included in the Company's Report on Form 10-K as filed with the Securities and Exchange Commission on March 12, 2002. 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. The results of operations for the nine months ended September 30, 2002 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2002. 2. INVENTORIES ----------- As of September 30, 2002, inventories consisted of the following: September 30, 2002 ------------------ Product kits, spare parts And assemblies $ 35,366 ======== 3. CASH FLOWS ---------- During February 2002, the Company exchanged inventory with a net book value of $40,000 for 888,888 shares of the Company's common stock, with a market value of $35,556 on the date of exchange. The difference between the net book value of the inventory exchanged and the market value of the stock received was recorded in cost of revenue during the nine months ended September 30, 2002. Cash paid for interest was $7,615 for the nine months ended September 30, 2002. 6 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 4. DISCONTINUED OPERATIONS AND CONTINGENCY --------------------------------------- On April 11, 2002, the Company sold its bone measurement business to CooperSurgical Acquisition Corp., ("Cooper") a wholly-owned subsidiary of the Cooper Companies, Inc. The Company is entitled to receive up to a maximum of $12.0 million for the sale (the "Asset Sale"). The Company received $3.5 million of the purchase price at the closing of the Asset Sale. $1.5 million of the purchase price is to be released to the Company by Cooper as follows: (i) $1.0 million was to be received during August 2002 upon submission to the Company of the closing statement prepared by Cooper and (ii) $500,000 on or before January 31, 2004 (less any indemnification obligations owing by the Company to Cooper). In August 2002, the Company received approximately $405,000 of the $1.0 million purchase price it was to receive. Cooper has alleged that certain adjustments to the purchase price are required based upon the purchase agreement. The Company does not agree with Cooper's purchase price adjustment, and is currently attempting to resolve the differences with Cooper. If a satisfactory settlement cannot be reached, the Company intends to proceed with arbitration. In addition, the Company is eligible to receive earn-out payments (up to a maximum purchase price of $12.0 million for the Asset Sale) based on Cooper's net sales over three twelve-month periods of (i) the products sold by the Company to Cooper in the Asset Sale, (ii) the McCue C.U.B.A. product and (iii) each bone measurement product (other than the Sahara Clinical Bone Sonometer of Hologic, Inc.) that may be acquired or introduced by Cooper during the earn-out periods. After paying transaction-related expenses, the Company recorded a gain of approximately $4.7 million in the second quarter of the year ending December 31, 2002. During the third quarter of the year ending December 31, 2002, the Company reduced the gain on sale by $350,000 for post closing adjustments and additional costs relating to the transaction. Any income tax liability incurred on the gain was fully offset by the Company's net operating loss carryforwards. The results of operations for all periods presented have been restated for the discontinued operations.
For the Nine Months Ended September 30, 2002 September 30, 2001 ------------------ ------------------ Summary of Operating Results of Discontinued Operations: Revenue $ 1,658,042 $ 6,409,755 Cost of revenue 1,030,183 3,632,524 Sales and marketing 650,074 1,382,308 General and administrative 301,623 872,345 Research and development expense 72,050 184,551 Accounts receivable reserve adjustment (145,157) - --------------- ---------------- Net (loss) income from discontinued operations $ (250,731) $ 338,027 =============== ================
7 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 4. DISCONTINUED OPERATIONS AND CONTINGENCY (CONTINUED) --------------------------------------------------- In connection with the Asset Sale, Cooper assumed the lease commitment for the Company's facility located in Fort Atkinson, Wisconsin. The following is a schedule of the Company's remaining future minimum lease payments as of December 31, 2001. 2002 $133,442 2003 114,480 2004 114,480 2005 114,480 2006 76,320 On April 11, 2002, the Company exercised an option agreement entered into during January 2002 to purchase the note payable in the amount of $1,135,810 as of March 31, 2002, for a discounted amount of $463,888. The discounted amount included accrued and unpaid interest of $139,165. The Company recorded a gain on the purchase of the note and the forgiveness of the accrued and unpaid interest of $811,087 in the second quarter of the year ending December 31, 2002. 5. RELATED PARTY DEBT ------------------- During the second quarter of the year ending December 31, 2002, the Company repaid $330,267 of loans from directors and officers of the Company, including interest of $7,615. 6. GOING CONCERN ------------- As of September 30, 2002, the Company has working capital of approximately $150,000, exclusive of any amounts to be received from the purchaser. The Company estimates that it will have payroll costs of approximately $1,090,000 per year for its 6 employees and 4 consultants. Additionally, the Company estimates that its aggregate annual costs for rent, insurance, audit services, legal services, Commission filings and other items will be approximately $645,000. For the following 12 months, the Company has also budgeted $360,000 for research and development costs, including costs related to the Orbasone PMA. However, regulatory and development costs are subject to change and budgets may require revision to reflect such changes. It is essential that the Company receive the remaining amounts due from the purchaser, achieve sufficient sales volume and/or obtain third party financing to continue as a going concern. 8 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ 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 generally accepted accounting principles 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. An adjustment to income could be required if the Company were to determine it could realize deferred tax assets in excess of the net recorded amount or it would not be able to realize all or part of its net deferred tax assets. Liquidity and Capital Resources ------------------------------- The level of liquidity based on cash experienced a $397,098 increase at September 30, 2002, as compared to December 31, 2001. The Company's $3,733,974 of cash provided by the sale of its bone measurement business (investing activities) was substantially offset by $2,742,721 of net cash used in operating activities and by $594,155 of net cash used in financing activities. Financing activities consisted of $200,000 of proceeds of borrowings from directors and officers of the Company which was more than offset by $463,888 to repurchase the promissory notes and $330,267 to repay borrowings from directors and officers. 9 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- On April 11, 2002, the Company sold its bone measurement business to CooperSurgical Acquisition Corp., ("Cooper") a wholly-owned subsidiary of the Cooper Companies, Inc. (NYSE: COO) and the Company's exclusive distributor to U.S. physicians and group practices specializing in Obstetrics and Gynecology. The Company is entitled to receive up to a maximum of $12.0 million for the sale of substantially all its assets and the assumption of certain liabilities (the "Asset Sale"). The Company received $3.5 million of the purchase price at the closing of the Asset Sale. $1.5 million of the purchase price will be released to the Company by Cooper as follows: $1.0 million was to be received during August 2002 upon submission to the Company of the closing statement prepared by Cooper and $500,000 on or before January 31, 2004 (less any indemnification obligations owing by the Company to Cooper). In August 2002, the Company received approximately $405,000 of the $1.0 million purchase price it was to receive. Cooper has alleged that certain adjustments to the purchase price are required based upon the purchase agreement. The Company does not agree with Cooper's purchase price adjustment, and is currently attempting to resolve the differences with Cooper. If a satisfactory settlement cannot be reached, the Company intends to proceed with arbitration. In addition, the Company can receive 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. The Company recorded a gain of approximately $4.7 million in the second quarter of the year ending December 31, 2002. During the third quarter of the year ending December 31, 2002, the Company reduced the gain on sale by $350,000 for post closing adjustments and additional costs relating to the transaction. Any income tax liability incurred on the gain was fully offset by the Company's net operating loss carryforwards. After paying certain liabilities at closing of approximately $171,000 the Company used the net proceeds of approximately $3,329,000 to satisfy approximately $2,400,000 of indebtedness of the Company not assumed by Cooper and current operating expenses, including $463,888 to repurchase in full $1,274,975 of promissory notes (including accrued and unpaid interest) previously issued to Nissho Iwai Corporation and Nissho Iwai American Corporation and $330,267 to repay loans from directors and officers of the Company. None of the proceeds from the Asset Sale have been or will be distributed to any shareholders of the Company. 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 (peripheral Quantitative Computed Tomography) bone and muscle measurement systems used for musculoskeletal research and clinical applications (including for bone disorders and human performance), (2) ESWT (Extracorporal Shock Wave Therapy) systems used for urology (lithotripsy) and (3) patented exercise systems used for physical therapy, sports medicine and rehabilitative medicine. The healthcare division is currently initiating a study of the Orbasone pain management system (ESWT), 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 sports & fitness division markets, sells and services patented exercise systems to fitness centers, gyms, sports clubs and associations and to the general public. The sports & fitness division's product line includes the Galileo systems. Galileo products offer a novel approach to muscle strength development given that such products are based on short and intense stimulations of the muscles 10 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------- Liquidity and Capital Resources (Continued) ------------------------------------------- rather than on longer repetitive movements on conventional exercise systems. There can be no assurance that these efforts will be successful. During fiscal year 2000, the Company initiated sales of the Orbasone system pursuant to August 31, 1998 correspondence from the FDA to the system manufacturer that the product was a Class I product, exempt from premarket notification requirements. The Company suspended sales of the Orbasone system the same year, following notification from FDA that the Agency had erred in its earlier finding. The Company generated sales of $600,000 attributable to the Orbasone system during fiscal year 2000 before such suspension. The Company recently obtained approval of an Investigational Device Exemption ("IDE") application from the FDA, permitting the Company to conduct clinical studies of the Orbasone system, and intends to seek FDA Pre-Market Approval ("PMA") of the system following completion of those studies. The Galileo 2000 and 100 systems are exercise devices that feature an efficient method of muscle strength development. The systems mechanically stimulate targeted muscles at a specific frequency, typically 25 to 30 impulses per second, causing the muscles to respond by contracting and relaxing by natural reflex 20 to 30 times per second. The Galileo systems target the leg and lower back (Galileo 2000), the arm and shoulder muscles (Galileo 100). The Company has no current backlog of orders as of September 30, 2002. As of September 30, 2002, the Company has working capital of approximately $150,000, exclusive of any amounts to be received from the purchaser. The Company estimates that it will have payroll costs of approximately $1,090,000 per year for its 6 employees and 4 consultants. Additionally, the Company estimates that its aggregate annual costs for rent, insurance, audit services, legal services, Commission filings and other items will be approximately $645,000. For the following 12 months, the Company has also budgeted $360,000 for research and development costs, including costs related to the Orbasone PMA. However, regulatory and development costs are subject to change and budgets may require revision to reflect such changes. Accordingly, the Company currently needs the $600,000 portion of the purchase price in order to meet its obligations for the next 6 to 9 months. After this period, the Company must generate sales sufficient to meet its operating expenses. 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 SEPTEMBER 30, 2002 ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------- Results of Operations --------------------- The Company had net income of $3,810,504 ($0.13 per share based on 29,684,629 weighted average shares) for the nine months ended September 30, 2002 compared to a net loss of $1,209,417 ($0.04 per share based on 30,365,862 weighted average shares) for the nine months ended September 30, 2001. Loss from continuing operations decreased from $1,547,444 for the nine months ended September 30, 2001 to $1,105,074 for the nine months ended September 30, 2002. Revenue for the nine months ended September 30, 2002 decreased $151,629 (or 22.4%) to $525,650 from $677,279 from the comparable period of fiscal 2001. The decrease in sales was primarily due to the Company's liquidity problems, which forced management to focus its efforts and the Company's limited financial resources towards a sale of the Company rather than attempting to develop markets for its remaining products. Cost of revenue as a percentage of revenue was 40.3% and 74.4% for the nine months ended September 30, 2002 and 2001, respectively, resulting in a gross margin of 59.7% for the nine months ended September 30, 2002 compared to 25.6% for the comparable period of 2001. The increase in gross margin was due to reduced manufacturing overhead expenses attributable to the products sold thus far in 2002. Sales and marketing expense for the nine months ended September 30, 2002 decreased $244,154 (or 37.0%) to $415,541 from $659,695 for the nine months ended September 30, 2001 for the aforementioned reasons. General and administrative expense for the nine months ended September 30, 2002 decreased $97,093 (or 10.9%) to $792,143 from $889,236 for the nine months ended September 30, 2001. The decrease was primarily due to decreased consulting fees and lower labor expense. Research and development expense for the nine months ended September 30, 2002 increased $108,105 (or 155.9%) to $177,468 from $69,363 for the nine months ended September 30, 2001. The increase was primarily due to increased expenses incurred as a result of the Orbasone PMA process. Interest expense decreased $66,155(or 63.3%) to $38,302 for the nine months ended September 30, 2002 from $104,457 for the nine months ended September 30, 2001. Interest expense decreased due to repayment of all principal balances on promissory notes and related party loans during April 2002. Net loss from continuing operations decreased from $504,159 for the three months ended September 30, 2001 to $390,598 for the three months ended September 30, 2002. The decrease in loss from continuing operations is due to an increase in revenue and gross profit percentage. Revenues for the three months ended September 30, 2002 increased $214,034 (or 203%) to $319,593 from $105,559 from the comparable period of fiscal 2001. Gross profit percentage improved from 29.5% for the three months ended September 30, 2001 to 62.2% for the comparable period of 2002. The increase in gross margin was due to reduced manufacturing overhead expenses attributable to the products sold during the three months ended September 30, 2002. Other items remained relatively consistent. 12 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------- Recently Issued Accounting Standards ------------------------------------ In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits pooling-of-interests method of accounting for business combinations initiated after June 30, 2001, and applies to all business combinations completed after June 30, 2001. There are also transition provisions that apply to purchase combinations completed prior to June 30, 2001. SFAS 141 is effective immediately. SFAS No. 142 is effective for the Company beginning January 1, 2002, and applies to goodwill and other intangible assets recognized in the Company's consolidated balance sheet as of that date, regardless of when those assets were initially recognized. SFAS No. 141 and No. 142 had no effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted the provisions of SFAS No. 143 at the beginning of fiscal 2002. SFAS No. 143 did not have an impact on the Company's consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This Statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This statement also broadens the presentation of discontinued operations to include more disposal transactions. The Company adopted the provisions of SFAS No. 144 at the beginning of fiscal 2002. The adoption of this statement resulted in the presentation of the Company's financial statements to include the assets, liabilities and results of operations of its bone measurement business, which was sold in April 2002, as discontinued operations. 13 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS (CONTINUED) ---------------------------------------------------------- Recently Issued Accounting Standards (Continued) ------------------------------------------------ In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections," which updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." FASB No. 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior period items that do not meet the extraordinary item classification criteria in APB 30. The effect of this statement on the Company's financial statements would be the reclassification of extraordinary gain on early extinguishment of debt to continuing operations, however, this will have no effect on the Company's net income. The Company intends to adopt FASB No. 145 as of January 1, 2003. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not expect that this statement will have a material effect on the Company's financial statements. Quantitative and Qualitative Disclosures of Market Risk ------------------------------------------------------- All of the Company's notes payable were paid off following the sale of the Company's bone measurement business in April 2002. ITEM 3. CONTROLS AND PROCEDURES ----------------------- The Registrant's principal executive officer and principal financial officer have, within 90 days of the filing date of this quarterly report, evaluated the effectiveness of the Registrant's disclosure controls and procedures (as defined in Exchange Act Rules 131 - 14 (c)) and have determined that such disclosure controls and procedures are adequate. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect such internal controls since the date of evaluation. Accordingly, no corrective actions have been taken with regard to significant deficiencies or material weaknesses. 14 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ PART II - OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits: 99.1 Certification Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) Reports on Form 8-K: One report on Form 8-K, dated and filed September 13, 2002, for the appointment of the Company's chief financial officer and for a change in the Company's auditors. 15 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ 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 Bonmati -------------------------------- Reynald Bonmati President (Chief Executive Officer) /s/ Neil H. Koenig -------------------------------- Neil H. Koenig Chief Financial Officer Dated: November 14, 2002 16 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ CERTIFICATIONS I, Reynald Bonmati, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Orthometrix, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us, particularly during the period in which this quarterly report is being prepared: b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 17 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Reynald Bonmati ---------------------------------- Reynald Bonmati President (Chief Executive Officer) 18 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ CERTIFICATIONS -------------- I, Neil H. Koenig, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Orthometrix, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us, particularly during the period in which this quarterly report is being prepared: b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 19 of 21 ORTHOMETRIX, INC. ----------------- FORM 10-QSB SEPTEMBER 30, 2002 ------------------------------ 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Neil H. Koenig ------------------ Neil H. Koenig Chief Financial Officer 20 of 21