SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: December 23, 2005
AcuNetx, Inc.
(Exact name of the Company as specified in its charter)
Nevada 0-27857 88-0249812
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1000 S. McCaslin Blvd., Suite 300
Superior, CO 80027
----------------------------------------------
(Address of principal executive offices)
The Company's telephone number, including area code:
(303) 494-1681
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Attached hereto are audited financial statements of OrthoNetx, Inc. for the
fiscal years ended December 31, 2004 and December 31, 2003, and unaudited
financial statements for the period of nine months ended September 30, 2005.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AcuNetx, Inc., a Nevada
corporation
By: /s/ Terry Knapp, Chief Executive Officer
----------------------------------------
Terry Knapp, Chief Executive Officer
Date: March 13, 2006
ORTHONETX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
ORTHONETX, INC. AND SUBSIDIARIES
(A Development Stage Company)
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-18
Mayer Hoffman McCann P.C.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
OrthoNetx,Inc.
We have audited the accompanying consolidated balance sheets of OrthoNetx, Inc.
and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OrthoNetx, Inc and
Subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of $1,120,366 and $235,689
during the years ended December 31, 2004 and 2003, respectively. As discussed in
Note 1 to the consolidated financial statements, the Company's significant
operating losses raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Mayer Hoffman McCann P.C.
-----------------------------
Denver, Colorado
December 14, 2005
F-1
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2005 2004 2003
----------- ----------- -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 272,323 $ 80,867 $ 19,561
Accounts receivable, net 12,400 5,400 2,000
Inventories 101,457 66,507 --
Prepaid expenses 21,503 32,875 --
Other current assets 1,341 10,000 --
----------- ----------- -----------
TOTAL CURRENT ASSETS 409,024 195,649 21,561
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET 31,782 36,979 5,157
----------- ----------- -----------
OTHER ASSETS:
Deposits 6,208 6,208 --
Intellectual property 88,664 31,179 29,513
Investment 186,000 -- --
----------- ----------- -----------
TOTAL OTHER ASSETS 280,872 37,387 29,513
----------- ----------- -----------
TOTAL ASSETS $ 721,678 $ 270,015 $ 56,231
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 160,653 $ 115,218 $ 8,466
Accrued expenses 2,201 -- 44,966
Accrued payroll and payroll taxes 87,594 41,896 126,341
Convertible debt -- -- 10,000
Line of credit - shareholder 300,000 -- 287,100
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 550,448 157,114 476,873
----------- ----------- -----------
LONG-TERM LIABILITIES:
Accrued expenses 19,090 19,090 --
----------- ----------- -----------
TOTAL LIABILITIES 569,538 176,204 476,873
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 100,000,000 shares authorized,
27,488,194 (unaudited), 15,968,194 and 10,359,000 shares
issued and outstanding, respectively 27,488 15,968 10,359
Additional paid-in capital 2,740,990 1,846,226 217,016
Deficit accumulated during the development stage (2,616,338) (1,768,383) (648,017)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 152,140 93,811 (420,642)
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 721,678 $ 270,015 $ 56,231
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-2
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
OCTOBER 3, 1996
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004 2003 2005
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
NET SALES $ 19,450 $ 4,400 $ 9,800 $ 27,700 $ 111,155
COST OF GOODS SOLD 9,278 -- 2,642 34,556 60,246,
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 10,172 4,400 7,158 (6,856) 50,909
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 817,207 434,825 739,541 199,337 2,019,884
RESEARCH AND DEVELOPMENT EXPENSE 29,073 203,291 353,281 11,532 550,275
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (836,108) (633,716) (1,085,664) (217,725) (2,519,250)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 311 351 428 -- 1,224
Loss on disposal of equipment -- -- -- (727) (727)
Other income 35 -- -- -- 35
Interest expense (12,193) (27,945) (35,130) (17,237) (97,620)
------------ ------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE (11,847) (27,594) (34,702) (17,964) (97,088)
------------ ------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (847,955) (661,310) (1,120,366) (235,689) (2,616,338)
PROVISION FOR INCOME TAXES -- -- -- -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $ (847,955) $ (661,310) $ (1,120,366) (235,689) $ (2,616,338)
============ ============ ============ ============ ============
NET LOSS PER BASIC AND DILUTED SHARE OF COMMON STOCK $ (0.04) $ (0.06) $ (0.10) $ (0.02) $ (0.23)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 19,533,212 10,359,000 11,160,883 10,306,422 11,564,171
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM OCTOBER 3, 1996 (INCEPTION) TO SEPTEMBER 30, 2005
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
-------------------------- PAID IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ----------- ----------- ----------- -----------
INCEPTION, OCTOBER 3, 1996 TO DECEMBER 31, 1999
(UNAUDITED) 10,000,000 $ 10,000 $ (9,125) $ (104,697) $ (103,822)
Common stock issued at $.50 per share (unaudited) 120,000 120 59,880 -- 60,000
Net loss (unaudited) -- -- -- (28,678) (28,678)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2000 (UNAUDITED) 10,120,000 10,120 50,755 (133,375) (72,500)
Common stock issued at $.50 per share (unaudited) 10,000 10 4,990 -- 5,000
Common stock issued for services at $.50 per share
(unaudited) 10,000 10 4,990 -- 5,000
Net loss (unaudited) -- -- -- (110,335) (110,335)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2001 (UNAUDITED) 10,140,000 10,140 60,735 (243,710) (172,835)
Common stock issued at $.50 per share (unaudited) 75,000 75 37,425 -- 37,500
Common stock issued for services at $.50 per share
(unaudited) 40,000 40 19,960 -- 20,000
Net loss (unaudited) -- -- -- (168,618) (168,618)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2002 (UNAUDITED) 10,255,000 10,255 118,120 (412,328) (283,953)
Common stock issued from $.50 to $1.00 per share 104,000 104 98,896 -- 99,000
Net loss -- -- -- (235,689) (235,689)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2003 10,359,000 10,359 217,016 (648,017) (420,642)
Common stock issued from conversion of debt at
$.35 per share, net of commissions of $88,933 3,831,825 3,832 1,248,356 -- 1,252,188
Common stock issued at $.35 per share 50,000 50 17,450 -- 17,500
Stock options exercised at $.01 per share 1,727,369 1,727 15,546 -- 17,273
Forgiveness of debt - shareholder -- 347,858 -- 347,858
Net loss -- -- -- (1,120,366) (1,120,366)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2004 15,968,194 15,968 1,846,226 (1,768,383) 93,811
Common stock issued from $.083 to $.50 per share,
net of commissions of $50,750 (unaudited) 7,190,000 7,190 674,560 -- 681,750
Common stock issued for services at $.083 per
share (unaudited) 500,000 500 41,167 -- 41,667
Common stock issued for acquisition of High
Precision Devices, Inc. at $.31 per share
(unaudited) 600,000 600 185,400 -- 186,000
Common stock issued for merger with PrivaComp
Inc. (unaudited) 1,000,000 1,000 (26,433) -- (25,433)
Common stock issued to lender and guarantors of
line of credit - shareholder at $.01 per share
(unaudited) 480,000 480 4,320 -- 4,800
Common stock issued to settle accounts payable at
$.01 per share (unaudited) 1,750,000 1,750 15,750 -- 17,500
Net loss (unaudited) -- -- -- (847,955) (847,955)
----------- ----------- ----------- ----------- -----------
BALANCE at SEPTEMBER 30, 2005 (UNAUDITED) 27,488,194 $ 27,488 $ 2,740,990 $(2,616,338) $ 152,140
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
OCTOBER 3, 1996
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004 2003 2005
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (847,955) $ (661,310) $(1,120,366) $ (235,689) (2,616,338)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,978 1,261 2,343 1,732 13,967
Loss on disposal of equipment -- -- -- 727 727
Issuance of common stock for services 41,667 -- -- -- 66,667
Interest expense on forgiveness of debt -- -- 15,791 17,202 60,758
Write-off of obsolete inventories -- -- -- 33,181 33,181
Interest expense on convertible debt -- 14,310 19,080 -- 19,080
Issuance of common stock to lender and
guarantors of line of credit -
shareholder 4,800 -- -- -- 4,800
Cash provided (used) due to changes in assets and
liabilities:
Accounts receivable (7,000) 2,000 (3,400) 2,507 (12,400)
Inventories (34,950) (6,667) (66,507) -- (134,638)
Prepaid expenses 11,372 -- (32,875) -- (21,503)
Deposits and other current assets 8,659 (10,000) (16,208) -- (7,549)
Accounts payable (17,065) 77,721 106,753 8,135 98,153
Accrued expenses 2,201 50,006 19,090 -- 21,291
Accrued payroll and payroll taxes 45,698 1,374 (84,445) 72,341 87,594
----------- ----------- ----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (786,595) (531,305) (1,160,744) (99,864) (2,386,210)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- -- -- 75 75
Purchase of property and equipment (781) (7,365) (34,165) -- (46,552)
Purchase of intellectual property (2,918) (710) (1,666) (2,096) (34,097)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,699) (8,075) (35,831) (2,021) (80,574)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - shareholder 300,000 -- -- 11,000 587,100
Proceeds from issuance of convertible
debt -- 639,000 1,312,041 10,000 1,247,666
Commissions from issuance of convertible
debt -- (41,200) (88,933) -- (88,933)
Proceeds from issuance of common stock 732,500 -- 34,773 99,000 1,044,024
Commissions from issuance of common
stock (50,750) -- -- -- (50,750)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 981,750 597,800 1,257,881 120,000 2,739,107
----------- ----------- ----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 191,456 58,420 61,306 18,115 272,323
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 80,867 19,561 19,561 1,446 --
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 272,323 $ 77,981 $ 80,867 $ 19,561 $ 272,323
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ 60 $ 60 $ 35 $ 5,672
=========== =========== =========== =========== ===========
Income taxes $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SUMMARY OF SIGN F CANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
OrthoNetx, Inc. ("the Company" or "OrthoNetx"), a development stage company, was
originally formed as a single member Colorado limited liability company on
October 3, 1996, and was subsequently reorganized as Inter-Os Technologies,
Inc., a Colorado corporation, on November 8, 1999. Inter-Os Technologies, Inc.
subsequently changed its name to OrthoNetx in August 2004. On March 3, 2005,
OrthoNetx was reorganized as a Nevada corporation.
OrthoNetx develops, manufactures, markets and supports proprietary medical
devices for distraction osteogenesis (mechanically induced growth of new bone
and adjacent soft tissues) to treat human bone-related tissue deficiencies and
deformities, both congenital and acquired. OrthoNetx has patented and developed
its GENEROS(TM) family of distraction osteogenesis devices for infants, children
and adults with: (a) craniofacial deformities and mandibular, maxillary and/or
alveo (dental) bone loss, and (b) deficiencies and malformations of the upper
and lower limbs, and in the bones of hands and feet.
Physician specialists who are trained to use these devices include oral and
dental surgeons, craniofacial surgeons, plastic reconstructive surgeons, ENT
surgeons, and orthopedic surgeons, all working in the field of osteoplastic
surgery (forming and molding bone).
OrthoNetx also employs web-based and special information technology to educate
physicians and patients make its products "smart devices" for patient
protection, product risk management, and doctor-patient support.
BASIS OF PRESENTATION
As indicated in the accompanying financial statements, the Company had a net
loss of $1,120,366 for the year ended December 31, 2004, an accumulated deficit
of $1,768,383 as of December 31, 2004, and is considered a company in the
development stage. Management's plans include a merger with Eye Dynamics, Inc.,
("Eye Dynamics") a medical device public company, which is scheduled to occur in
December 2005, raising of capital through the sale of common stock, and
generating revenue through its business. Failure to complete the merger with Eye
Dynamics, to raise additional capital, and generate revenue could result in the
Company having to curtail or cease operations. Additionally, even if the
Company's planned merger with Eye Dynamics takes place and the Company does
raise additional capital to support its operations and generate revenues, there
can be no assurances that revenues will be sufficient to generate profits and
cash flows from operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries Inc. OrthoMatx, and OrthoProsthetx,
Inc., collectively referred to as the "Company." OrthoMatx, Inc. and
OrthoProsthetx, Inc. were incorporated in October 2004 and have conducted no
business since their formation. All intercompany accounts and transactions have
been eliminated in consolidation.
F-6
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company recognizes revenue from the sale of products, and related costs of
products sold, where persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price is fixed or determinable and collectibility is
reasonably assured. This generally occurs when the customer receives the product
or at the time title passes to the customer. Sales incentives and returns are
estimated and recognized at the date of shipment based upon historical activity
and current agreements with customers. The Company evaluates these estimates on
a regular basis and revises them as necessary.
NET LOSS PER SHARE OF COMMON STOCK
Basic earnings (loss) per common share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) per share is calculated based on the weighted
average number of common shares outstanding adjusted for the dilutive effect, if
any, of stock options and warrants outstanding. Outstanding options and warrants
to purchase 1,881,456 and 1,916,480 (unaudited) shares of common stock for the
year ended December 31, 2003 and for the nine months ended September 30, 2004,
respectively, are not included in the computation of diluted loss per share as
the effect of the assumed exercise of the options and warrants would be
antidilutive. There are no outstanding options or warrants to purchase shares of
common stock as of December 31, 2004 and September 30, 2005 (unaudited).
ACCOUNTS RECEIVABLE
The Company grants credit to all qualified customers and generally requires no
collateral. Accounts receivable are carried at cost less an allowance for
losses, if an allowance is deemed necessary. The Company does not accrue finance
or interest charges. The Company evaluates its accounts receivable and
determines the requirement for an allowance for losses, based upon history of
past write-offs, collections and current credit conditions. A receivable is
written off when it is determined that all reasonable collection efforts have
been exhausted and the potential for recovery is considered remote. Management
determined that no allowance for losses was required as of December 31, 2004 and
2003.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising costs
charged to expense were $30,394 and $0 for the years ended December 31, 2004 and
2003, respectively.
COMPREHENSIVE INCOME
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Components of
comprehensive income are required to be reported in a financial statement that
is displayed with the same prominence as other financial statements. The Company
has no comprehensive income items other than net loss during 2004 and 2003.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at the date of
purchase to be cash equivalents.
SHIPPING AND HANDLING COSTS
The Company includes inbound shipping costs in cost of goods sold, and shipping
and handling costs to customers as operating expenses.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out pricing method.
F-7
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over estimated useful lives
ranging from three to seven years. Leasehold improvements are amortized over the
life of the lease. Depreciation was $2,343 and $1,732 for the years ended
December 31, 2004 and 2003, respectively.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred. Gains and losses from retirement or
replacement are included in other income (expense).
LONG-LIVED ASSETS
The Company reviews and evaluates its long-lived assets for impairment when
events or changes in circumstances indicate that the related carrying amounts
may not be recoverable. An impairment loss is measured as the amount by which
the asset carrying value exceeds its fair value. Fair value is generally
determined using valuation techniques such as estimated future cash flows. An
impairment is considered to exist if total estimated future cash flows on an
undiscounted basis are less than the carrying amount of the asset. An impairment
loss is measured and recorded based on discounted estimated future cash flows.
Assumptions underlying future cash flow estimates are subject to risk and
uncertainties. No impairment losses were recorded during the years ended
December 31, 2004 and 2003.
INTELLECTUAL PROPERTY
The Company capitalizes intellectual property costs as incurred, excluding costs
associated with Company personnel, relating to patenting its technology. As of
December 31, 2004 and 2003, the capitalized costs, the majority of which
represent legal fees, are related to a patent application. If the Company elects
to stop pursuing a particular patent application or determines that a patent
application is not likely to be awarded or elects to discontinue payment of
required maintenance fees for a particular patent, the Company, at that time,
records as expense the capitalized amount of such patent application or patent.
Awarded patents will be amortized over the shorter of the economic or legal life
of the patent.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under the
liability method, deferred tax assets and liabilities are recognized for the
estimated future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the financial statements.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense consists of the
tax payable or refundable for the current period and the change during the
period in net deferred tax assets and liabilities.
STOCK BASED COMPENSATION
The Company has adopted the fair value method of accounting pursuant to
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for all
issuances of stock options and shares of common stock to non-employees of the
Company. The Company uses the intrinsic value method under the provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for stock options issued
to employees and directors. Under APB No. 25, compensation cost is recognized to
the extent that the exercise price is less than the fair market value for the
underlying stock on the date of grant. No compensation cost was recognized for
the years ended December 31, 2004 and 2003 relative to the granting of stock
options to Company employees.
F-8
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the Company had elected to recognize compensation expense based upon the
estimated fair value at the grant date for awards under its stock-based
compensation plans consistent with the methodology prescribed by SFAS No. 123,
the Company's net loss and loss per share would be increased to the following
pro forma amounts:
PERIOD FROM
OCTOBER 3, 1996
NINE MONTHS ENDED YEAR ENDED (INCEPTION) TO
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2005 2004 2004 2003 2005
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net loss as reported $ (847,955) $ (661,310) $(1,120,366) $ (235,689) $(2,616,338)
Less stock based compensation expense
determined under fair value based methods
for all awards, net of tax -- 119,942 119,942 11,023 147,877
----------- ----------- ----------- ----------- -----------
Pro forma net loss $ (847,955) $ (781,252) $(1,240,308) $ (246,712) $(2,764,215)
=========== =========== =========== =========== ===========
Net loss per basic and diluted share of
common stock:
As reported $ (0.04) $ (0.06) $ (0.10) $ (0.02) $ (0.23)
Pro forma $ (0.04) $ (0.08) $ (0.11) $ (0.02) $ (0.24)
The fair value for these options were estimated using the minimum value method
with the following assumptions for the:
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2005 2004 2004 2003
------------------------------------------------
(UNAUDITED)
Risk-free interest rate 0.00 % 1.17 % 1.17 % 1.28 %
Expected life 0 years 1 year 1 year 1 year
Expected dividend yield 0 % 0 % 0 % 0 %
Expected volatility 0.005 % 0.005 % 0.005 % 0.005 %
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and consist primarily of
product development costs. Financial accounting standards require the
capitalization of certain development costs after technological feasibility of
the product is established. In the development of the Company's new products and
enhancements to existing products, technological feasibility is not established
until substantially all product development is complete. As a result, product
development costs that are eligible for capitalization are considered
insignificant and are charged to research and development expense. During the
years ended December 31, 2004 and 2003, research and development costs were
$353,281 and $11,532, respectively.
F-9
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The more significant areas requiring the use of
management estimates and assumptions relate to depreciation and amortization of
property and equipment; valuation allowances for deferred tax assets;
amortization of intellectual property; and disclosure of contingencies. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances.
Accordingly, actual results may differ significantly from these estimates under
different assumptions or conditions.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In December 2003, the FASB issued Financial Interpretation ("FIN") 46R,
"Consolidation of Variable Interest Entities (as revised), which provides
guidance on the identification and reporting for entities over which control is
achieved through means other than voting rights. FIN 46R defines such entities
as variable interest entities ("VIES"). In general a VIE is a corporation,
partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46R requires a VIE to be consolidated by a company
if that company is subject to a majority of the risk of loss from the VIEs
activities or entitled to receive a majority of the entity's residual returns or
both. Application of FIN 46R is required in financial statements of nonpublic
entities that have interest in VIEs at various dates in 2004 and 2005. The
Company currently has no contractual relationship or other business relationship
with a VIE. However, if the Company enters into any such agreement with a VIE in
the future, the adoption of FIN 46R may have an adverse impact on its financial
position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of
ARB No. 43, Chapter 4," which clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted materials as current
period costs. It also requires that allocations of fixed production overheads to
the costs of conversion be based on the normal capacity of production
facilities. SFAS No. 151 applies to inventory costs incurred in the first fiscal
year beginning after June 15, 2005. The provisions of SFAS No. 151 are not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB No. 29". SFAS No. 153 eliminates the exception to account
for nonmonetary exchanges of similar productive assets at carrying value and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance; otherwise, the exchange principle of fair value
applies. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The provisions of SFAS No. 153 are
not expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No.123R, "Share-Based Payment", which
revised SFAS No. 123, "Accounting for Stock-Based Compensation" and superseded
APB No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS No. 123R will provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. SFAS No. 123R requires
measurement and recording in the financial statements of the costs of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, recognized over the period during which an
employee is required to provide services in exchange for such award. SFAS No.
F-10
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
123R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Public entities that
file as small business issuers will be required to apply SFAS No. 123R as of the
first interim or annual reporting period that begins after December 15, 2005.
The Company has not yet evaluated the impact of the adoption of SFAS No. 123R
and has not determined the impact on the Company's financial position or results
of operations.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 2005 and for the nine
months ended September 30, 2005 and 2004 are unaudited. However, in the opinion
of management, all adjustments (consisting solely of normal recurring
adjustments) necessary to a fair presentation of the consolidated financial
statements for the interim periods have been made.
NOTE 2 INVENTORIES
Inventories consist of the following at December 31:
2004 2003
------- -------
Work in process $46,434 $ --
Finished goods 20,073 $ --
------- -------
Total $66,507 $ --
======= =======
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following at December 31:
2004 2003
-------- --------
Equipment $ 7,327 $ --
Office equipment and furniture 32,521 8,122
Software 2,439 --
-------- --------
42,287 8,122
Accumulated depreciation and amortization (5,308) (2,965)
-------- --------
Total $ 36,979 $ 5,157
======== ========
NOTE 4 LINE OF CREDIT - SHAREHOLDER
In May 2002, the Company entered into a $350,000 revolving line of credit
agreement with Randolph Robinson, the Company's founder and a
shareholder/officer of the Company, which was due on demand and had an interest
rate of 8.0% per annum. In November 2004, the holder of the note agreed to
forgive the outstanding balance of $287,100 and unpaid accrued interest of
$60,758. The Company and the holder have mutually agreed to release and
discharge any and all claims and demands related to the revolving line of credit
agreement. The forgiveness of debt of $347,858 is recorded as additional paid-in
capital in the accompanying consolidated statements of shareholders' equity
(deficit).
F-11
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 CONVERTIBLE DEBT
During 2004 and 2003, the Company issued convertible notes in the amount of
$1,312,041 and $10,000, respectively, which accrued interest at 8.0% per annum,
were unsecured and were due upon the successful completion of a planned raising
of capital. The proceeds received from the issuance of convertible notes, net of
commissions, was $1,233,108. The Company's capital raising plans did not
materialize and, in October 2004, the holders of the convertible notes converted
their outstanding principal amount plus accrued interest of $19,080 into
3,831,825 shares of common stock. As of December 31, 2004 and 2003, the Company
owed $0 and $10,000, respectively, in convertible debt.
NOTE 6 STOCK OPTIONS
The Company has granted incentive and non-qualified stock options to its
employees, officers and directors under terms of its 2002 stock option plan.
Stock options are generally granted at an exercise price equal to or greater
than the fair market value on the date of grant. The Company reserved 2,538,000
shares of common stock under the 2002 stock option plan. During 2004, all of the
outstanding options were repriced at an exercise price of $.01 per share.
Accordingly, the weighted average exercise price in the table below is stated at
$.01 per share for all periods presented. As of December 31, 2004, there were no
outstanding options and the 2002 stock option plan was terminated.
A summary of the activity under the Company's 2002 stock option plan as of
December 31, 2004 and 2003 and changes during the years then ended is set forth
below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
Options outstanding at December 31, 2002 370,000 $ 0.01
Granted 1,507,155 0.01
Exercised -- --
Cancelled (149,524) 0.01
---------- --------
Options outstanding at December 31, 2003 1,727,631 0.01
Granted 139,500 0.01
Exercised (1,727,369) 0.01
Cancelled (139,762) 0.01
---------- --------
Options outstanding at December 31, 2004 -- $ --
========== ========
In May 2003, the Company issued warrants to purchase 153,825 shares of common
stock at a price of $.01 per share as consideration for consulting services.
These warrants expired in 10 years from the grant date. These warrants were
cancelled during 2004. Accordingly, no compensation expense has been recognized
during 2004 and 2003.
F-12
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments. The Company
places its cash with high quality financial institutions and limits its credit
exposure with any one financial institution. At times, the Company's bank
account balances may exceed federally insured limits.
NOTE 8 NON-CASH INVESTING AND FINANCING TRANSACTIONS
During 2004 and 2003, the Company issued convertible debt in the amount of
$1,312,041 and $10,000, respectively. In October 2004, the Company issued
3,831,825 shares of common stock in exchange for the outstanding convertible
debt plus accrued interest of $19,080 at an exchange rate of $.35 per share.
NOTE 9 INCOME TAXES
The provision for income taxes consists of the following at December 31:
2004 2003
------- -------
Current
Federal $ -- $ --
State -- --
------- -------
Total current income tax expense Deferred -- --
------- -------
Federal -- --
State -- --
------- -------
Total deferred income tax expense -- --
------- -------
Total $ -- $ --
======= =======
The provision for income taxes reconciles to the amount computed by applying the
federal statutory rate to income before the provision for income taxes as
follows:
2004 2003
------- -------
Federal statutory rate 35 % 35 %
State income taxes, net of federal benefits 4 % 4 %
Valuation allowance (39)% (39)%
------- -------
Total -% -%
======= =======
F-13
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of deferred income taxes as of December 31 are as
follows:
2004 2003
--------- ---------
Deferred tax assets:
Net operating loss carry forwards $ 677,618 $ 201,785
Accrued salaries 11,537 48,945
Valuation allowance (688,106) (250,284)
--------- ---------
1,049 446
Deferred tax liabilities:
Depreciation, amortization and other (1,049) (446)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
The Company records a valuation allowance for certain temporary differences for
which it is more likely than not that it will not receive future tax benefits.
The Company assesses its past earning history and trends, sales backlog and
projections of future net income. The Company recorded a valuation allowance for
the entire amount of the net deferred tax asset in 2004 and 2003 as it had
determined that it was more likely than not that no deferred tax assets would be
realized. The net change in the valuation allowance was an increase of $437,822
and $93,906 for the years ended December 31, 2004 and 2003, respectively. The
Company will continue to review this valuation allowance and make adjustments as
appropriate.
At December 31, 2004, the Company had federal and Colorado net operating loss
carry forwards of approximately $1,737,000. Such carry forwards expire in the
years 2020 through 2024.
NOTE 10 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its office facilities under an operating lease which expires
November 2006. The lease contains two one-year options to renew at market rates.
Minimum future lease payments under these leases are as follows for the years
ending December 31:
2005 $ 74,496
2006 68,288
---------
Total $142,784
=========
Total rent expense for the years ended December 31, 2004 and 2003 was $9,519 and
$0, respectively.
OFFICER INDEMNIFICATION
Under the Company's organizational documents, the Company's officers, employees
and directors are indemnified against certain liability arising out of the
performance of their duties. The Company's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Company that have not yet occurred. However, based on experience,
the Company expects any risk of loss to be remote.
F-14
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL ADVISOR
In August 2004, the Company entered into an agreement with Galen Capital Group,
LLC ("Galen") for the purpose of providing certain merchant banking and
corporate financial advisory services in connection with the Company's
capitalization. The agreement provides for monthly consulting and expense
reimbursement of $20,000 for six months beginning September 2004, and also
provides for various success fees ranging from five to seven percent o capital
raised. The Company agreed to issue Galen stock options upon the successful
raising of capital equal to three percent of the Company's equity at an exercise
price to be determined by the board of directors. These options are fully
exercisable for five years once issued. In addition, Galen will also receive
shares of common stock equal to five percent of the issued and outstanding
shares of common stock of the Company upon the successful raising of capital.
The Company also agreed to pay Galen a merger and advisory fee of three to seven
percent if the Company merges or is acquired by a party identified and
introduced by Galen. This agreement may be cancelled by either party with 30
days notice after the first 270 days. During January 2005, the Company agreed to
issue Galen 1,000,000 shares of common stock as consideration for services
performed during 2004, valued at $10,000, which is included in accounts payable
at December 31, 2004.
Upon completion of a capital raising event, Galen will receive a one year
consulting agreement paid at $10,000 per month plus expenses with two additional
one year extensions at the Company's option.
NOTE 11 RELATED PARTY TRANSACTIONS
LICENSING AGREEMENTS
In November 2004, the Company entered into a licensing agreement with Terry
Knapp, the Company's CEO and a shareholder/director, for the licensing of a
patent. The licensing agreement provides for contingent payments, to be
determined at a later date, in the event the Company receives a benefit from the
patent. As of December 31, 2004, the Company had no liability for payment of
fees under this agreement.
In November 2004, the Company entered into a licensing agreement with PrivaComp,
Inc. ("PrivaComp"), an entity under common ownership. The term of the agreement
was for five years and allowed for the licensing of certain technology and
patents pending. No expense was incurred under this agreement in 2004. On May
27, 2005 the Company entered into a merger agreement with PrivaComp, which
became a wholly-owned subsidiary of the Company.
NOTE 12 SUBSEQUENT EVENTS
COMMON STOCK ISSUANCES
During 2005, the Company sold 8,390,000 shares of common stock, at prices
ranging from $.083 - $.50, and received net proceeds of $832,500.
During 2005, the Company issued 950,000 shares of common stock for services
performed during 2005 by the Company's board of directors and Galen, valued at
$.083 per share.
During January 2005, the Company agreed to issue consultant 750,000 shares of
common stock valued at $7,500 for services performed during 2004, which is
included in accounts payable at December 3l,2004.
During January 2005, the Company agreed to issue Galen 1,000,000 shares of
common stock as consideration for services performed during 2004, valued at
$10,000, which is included in accounts payable at December 31, 2004.
F-15
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN
Effective January 1, 2005, the Company adopted a 2005 incentive and
non-qualified stock option plan for its employees, officers, directors and
consultants. The Company has reserved 1,000,000 shares of common stock for this
stock option plan. Stock options are generally to be granted at an exercise
price equal to or greater than the fair market value of the common stock on the
date of grant. The options expire ten years from the grant date. There have been
no options granted under the 2005 stock option plan.
LETTER OF INTENT CANCELLED
The Company had entered into a letter of intent in October 2004 to acquire all
of the ownership interest in a medical device company. The Company terminated
the letter of intent on January 2, 2005. The Company has no further obligation
under the letter of intent.
LINE OF CREDIT - SHAREHOLDER
On January 30, 2005, the Company entered into a $300,000 line of credit
agreement with Randolph Robinson ("Lender"). The line of credit agreement bears
interest at .75% above the Wall Street Journal Prime Rate, with interest only
payments due monthly, and matures on January 10, 2006. The line of credit
agreement is collateralized by substantially all of the Company's assets and is
guaranteed by Terry Knapp, CEO and shareholder/director of the Company, one
director/shareholder of the Company and by Galen (collectively referred to as
the "Guarantors"). In consideration for the issuance of the line of credit, the
Company issued the Lender and the Guarantors 300,000 shares and 180,000 shares
of common stock, respectively.
INVESTMENT IN ENGINEERING/MANUFACTURING COMPANY
On June 16, 2005, the Company acquired 20% (1,644,361 shares) of the issued and
outstanding shares of common stock of High Precision Devices, Inc. ("HPD"), a
Colorado corporation, in exchange for 600,000 shares of the Company's common
stock. HPD is a full service engineering and manufacturing business specializing
in precision mechanical instrumentation integrated with optics, cryogenics,
electronics, vacuum and UHV. HPD builds one-of-a-kind instruments and
prototypes, and provides high-quality small-volume manufacturing. The Company
subcontracts the manufacturing of its medical devices with HPD.
The Company also received options to purchase additional shares of common stock
of HPD ("HPD Options") so as to allow the Company to maintain its 20% ownership
of HPD common stock, in the event HPD employees exercise their option to
purchase shares of HPD common stock. The HPD Options have an exercise price of
$.228 per share and expire in June 2008.
The Company has the right to appoint its CEO as a director of HPD. HPD will
provide design, development and manufacturing services exclusively to the
Company for its GenerOs(TM) distraction osteogenesis devices and certain other
medical devices. The Company has agreed to provide a first right of negotiation
to HPD for the design, development and initial manufacturing of future medical
devices.
In addition, the Company has the first right of refusal to purchase HPD. HPD
also has the right to repurchase its shares of common stock that are owned by
the Company in exchange for the 600,000 shares of the Company's common stock
that is owned by HPD. This right can be exercised by HPD should the Company fail
to close a merger, share exchange or acquisition with a publicly-held entity or
fail to register its common stock with the United States Securities and Exchange
Commission by December 19, 2006.
F-16
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF PRIVACOMP, INC.
On May 27, 2005, the Company entered into an Agreement and Plan of Merger
("PrivaComp Agreement") with PrivaComp, a Delaware corporation that is in the
business of developing technologies to provide patients with secure access to
their medical records and control over their medical privacy. PrivaComp is
considered a development stage company. The majority shareholder and CEO of
PrivaComp is also the CEO and a shareholder/director of the Company. Under the
terms of the PrivaComp Agreement, all of the issued and outstanding shares of
PrivaComp stock were cancelled and converted into 1,000,000 shares of the
Company's common stock. The Company is the surviving corporation and assumed all
assets and liabilities of PrivaComp, consisting primarily of developed software,
a pending patent application and accounts payable. The merger was effective June
30, 2005.
PrivaComp and the Company are related through common ownership. Accordingly, the
assets and liabilities of PrivaComp have been recorded by the Company at
historical cost at June 30, 2005 (unaudited), as follows:
Assets:
Intellectual property $ 54,567
Liabilities:
Accounts payable (80,000)
----------------
Net assets acquired $ (25,433)
================
The following pro forma information is based on the assumption that the
acquisition took place as of January 1, 2003. PrivaComp had minimal activity
during 2004 and no activity during the nine months ended September 30, 2005
(unaudited), therefore, no pro forma information has been presented for 2004 and
2005 (unaudited).
2003
--------------
(UNAUDITED)
Net sales $ 27,700
--------------
Net loss (408,409)
==============
Net loss per basic and diluted share of
common stock $ (0.04)
==============
MERGER WITH EYE DYNAMICS, INC.
On September 1, 2005, the Company entered into an Agreement and Plan of Merger
("Eye Dynamics Agreement") with Eye Dynamics, Inc. ("Eye Dynamics"), a
publicly-held Nevada corporation. Eye Dynamics manufactures and distributes
diagnostic equipment that measures and records human eye movements, utilizing
proprietary technology and computer software. Eye Dynamics was formed in 1989.
F-17
ORTHONETX, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Eye Dynamics Agreement, the Company will continue
operating as a wholly-owned subsidiary of Eye Dynamics. Subject to certain
adjustments described in the Eye Dynamics Agreement, each outstanding share of
the Company's common stock will be converted into approximately .86 shares
(subject to the terms of the conversion factor as described in the Eye Dynamics
Agreement) of Eye Dynamics common stock. Completion of the merger is subject to
various conditions, including among others, the approval of the Eye Dynamics
Agreement by the shareholders of the Company and the shareholders of Eye
Dynamics, the absence of certain legal impediments to the completion of the
merger, the approval of certain regulatory matters and the Company's successful
completion of a $1,500,000 private placement offering of common stock and
warrants.
Immediately upon the completion of the merger, the ownership structure of Eye
Dynamics will be as follows: (a) 46.25% owned by the shareholders, option
holders and warrant holders of Eye Dynamics and the Company, each; and (b) 7.5%
owned by Galen. The Eye Dynamics Agreement provides that an equal number of
members of the board of directors of Eye Dynamics will be appointed by the
Company and by Eye Dynamics, plus one member agreed upon by both parties. In
addition, the Company's CEO will become the CEO of Eye Dynamics.
The Eye Dynamics Agreement may be terminated by either party if the merger is
not completed by December 19, 2005.
PRIVATE PLACEMENT OFFERING
In September 2005, the Company commenced a private placement offering
("Offering") of equity securities to raise on a best efforts basis a maximum of
$1,500,000 in conjunction with the planned merger with Eye Dynamics discussed
above. There is no minimum amount required to be raised with the Offering. The
Offering consists of units priced at $50,000 per unit. Each unit consists of (a)
shares of the Company's common stock at a price equal to the lesser of $.22 per
share or 90% of the average closing price of Eye Dynamics common stock over the
30 days prior to the closing of the merger with Eye Dynamics and (b) warrants to
purchase additional shares of the Company's common stock equal to 50% of the
number of shares of common stock purchased in the Offering, exercisable for two
years at $.33 per share. As of December 9, 2005, the Company has received signed
subscription agreements for $750,000 but the cash proceeds have not been
received. Proceeds from the Offering will be held in escrow pending the
completion of the merger with Eye Dynamics.
F-18