UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2005
AcuNetx, Inc.
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(Name of small business issuer in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
1000 S. McCaslin, Suite 300, Superior, CO 80027
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Address of principal executive offices) (ZIP Code)
303-494-1681
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Issuer's telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock Par Value $.001 per share
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB (X)
State issuer's revenues for its most recent fiscal year: $1,402,677
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as a specified date within the past 60 days: $8,948,154 as of March 1,
2006.
The number of shares outstanding of the issuer's common stock as of
March 1, 2006 was 56,252,897.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for its 2006
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Annual Report on Form 10-KSB. Except with respect to information
specifically incorporated by reference in this Annual Report on Form 10-KSB, the
Definitive Proxy Statement is not deemed to be filed as a part hereof.
Transitional Small Business Disclosure Format (check one):
( ) Yes (X) No
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND; MERGER OF EYE DYNAMICS, INC. AND ORTHONETX, INC.
AcuNetx, Inc. was formed by the merger of Eye Dynamics, Inc. and
OrthoNetx, Inc. in December of 2005. AcuNetx is organized around three separate
divisions: (i) a medical division with neurological diagnostic equipment, (ii) a
medical division with devices that create new bone, and (iii) a division with
products for occupational safety and law enforcement. For all its devices,
AcuNetx is integrating an information technology (IT) platform that allows the
device to capture data about the physiological condition of a human being. Our
IT platform is designed to gather data and connect the device-related data with
users and support persons. Our products include the following:
o Neurological diagnostic equipment that measures, tracks and
records human eye movements, utilizing our proprietary
technology and computer software, as a method to diagnose
problems of the vestibular (balance) system and other balance
disorders.
o Devices designed to test individuals for impaired performance
resulting from the influences of alcohol, drugs, illness,
stress and other factors that affect eye and pupil
performance. These products target the occupational safety and
law enforcement markets.
o Orthopedic and craniomaxillofacial (skull and jaw) surgery
products, which generate new bone through the process of
distraction osteogenesis.
o A proprietary information technology system called
SmartDevice-Connect(TM) ("SDC") that establishes product
registry to individual patients and tracks device behavior for
post-market surveillance, adverse event and outcomes
reporting, and creates "smart devices" that gather and
transmit physiological data concerning the device and its
interaction with the patient.
INTRODUCTION--EYE TRACKING DEVICES
The human eye is a very sensitive organ. Eye movements and pupil
reactions are excellent indicators of the presence of disease, drugs or other
conditions that can alter the normal response of the human oculomotor system. In
particular, our eye-tracking technology addresses the central nervous system
condition of nystagmus, a rapid, involuntary back-and-forth or up-and-down
oscillation of the eyeball. Nystagmus occurs in different forms and has a number
of causes, ranging from the serious (e.g., a tumor in the brain or ear) to the
benign (such as positional dizziness). The consumption of certain drugs and
alcohol also causes nystagmus, and there is a direct and quantifiable
correlation between blood alcohol concentration in the body and the angle of
onset of nystagmus. Medical research conducted over the past fifty years has
furnished evidence demonstrating a relationship between irregular eye movement
and abnormal central nervous system physiology. The causes of these conditions
are numerous, and include the influences of alcohol, drugs, illness, stress,
extreme fatigue and other neurological conditions
The basic technology used in all of our eye-tracking products is
similar, yet differs in its application and use. The products utilize infrared
sensitive video cameras to monitor, record and analyze eye performance and
movement. All the products share in a modular concept to promote efficiency in
manufacturing. The products are PC computer based with specialized and
proprietary hardware and embedded firmware. A common element of the products is
the Ocular Motor Module, where the subject being tested peers into a dark
environment. The products include an infrared sensitive Charge Coupled Device
video camera that provides a bright video image, even though the person being
tested sees nothing but a small stimulus or tracking light amid complete
darkness. All our VNG devices are designed to enable doctors to better diagnose
balance problems, including those (especially the elderly) who are in danger of
falling.
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EYE-TRACKING PRODUCTS
MEDICAL PRODUCTS. Eletronystagmographic (ENG) testing is a standard
medical procedure that employs electrodes to assess eye movement and a pen
recorder to display the results. ENG is used in assessing problems of the
balance system of patients. Now, videonystagmography (VNG) assesses eye
movements using infrared video cameras and has largely replaced ENG.
We brought the use of infrared illumination of the eyes into clinical
use in 1994 when the U.S. Food and Drug Administration ("FDA") approved
marketing of our House InfraRed/VNG System. This device was the first to replace
the electrodes with infrared sensitive video cameras and with computer digital
processing that follows the movement of the eyes and graphically portrays the
movements much like the pen recorder. The test subject wears a lightweight
goggle assembly which uses micro-miniature video cameras. The goggle is an
essential instrument because certain of the VNG tests require the patient to
move his head and often to recline on an examining table. We believe the
accuracy and display of the Infrared/VNG System represents a significant
improvement over other existing testing methods. In addition, the use of video
by the Infrared/VNG System allows the test administrator or medical practitioner
to observe the eye movements directly and can provide a video recording of the
test for later playback and additional analysis. We believe that this is a
significant improvement over prior technology. Since 1994, when we received FDA
approval to market this product, most every competitor has changed from
electrodes and is embracing video data acquisition as a superior technology.
Results from the tests are used by physicians and clinicians.
Our computer-based system, with proprietary Eye Position Interface
Controller, "locks" on to the pupils and independently tracks the horizontal and
vertical movements of each eye. The nystagmus is displayed in real time, saved,
analyzed and printed. Our four channel system comes with a 12" Quad/Video
Monitor that displays both eyes on a single video screen.
We developed the system in conjunction with the House Ear Clinic and
House Ear Institute, Los Angeles, California. The "House" name is used with the
permission of the House Ear Institute.
IMPAIRMENT DETECTION PRODUCTS. Our impairment detection product,
SafetyScan(TM), allows employers and others to screen individuals for
physiological signs of impairment. The system evaluates involuntary changes in
eye movements and/or pupil reactions, which may result from drug or alcohol
abuse, reactions to medication, medical conditions, stress or fatigue.
Occupations in the medical, aviation, emergency response, construction,
manufacturing and transportation businesses are key markets for this technology.
Unlike most drug and alcohol test methods, SafetyScan(TM) functions without the
need for bodily fluids. Also, due to its less invasive nature, SafetyScan(TM)
determines whether or not a person is impaired at the time of the test. It does
not test for past use. Also, unlike blood, urine and saliva tests which only
measure the presence of a substance in the body, SafetyScan(TM) takes into
account the physiological effects of the substance.
While substance abuse receives the most attention, worker impairment
caused by other factors, such as prescription and over-the-counter medications,
stress, extreme fatigue and illness, all result in significant expense to
employers. Workers suffering from such impairments are characterized by low
productivity, more accidents, higher workers' compensation and insurance costs,
and equipment and merchandise damage. Different types of performance tests have
evolved based on extensive scientific studies validating the relationship
between test results and the impaired performance of an individual. They assess
an individual's motor and cognitive skills at the time of the test.
SafetyScan(TM) is based on methods developed by the federal government
and used by law enforcement over the past 30 years. SafetyScan(TM) is a simple
computer system that evaluates the ability of an individual's eyes to follow a
moving light and react to a dim and bright light stimulus. SafetyScan(TM) is
non-diagnostic and non-judgmental; it evaluates performance of the individual
solely for safety and productivity purposes. The preferred pricing model is to
place the units with the customer at no initial cost, except for a modest
deposit, and to charge the customer a fee for each test administered. It is
anticipated that the fees for such tests will range from $1 to $5 per test,
depending on the monthly quantity of tests, with an average of approximately $3
per test. An employee looks into the SafetyScan(TM) viewport and focuses on a
moving point of light. A video camera records the action, and software analyzes
eye movement (smooth or jerky) and pupil reaction (small or large) and renders a
determination on whether there is deviation from the person's pre-recorded
baseline, thus indicating impairment. It takes only 90 seconds for
SafetyScan(TM) to test the human eye by measuring twenty parameters of eye
movement and pupil change, assessing parameters of position and reaction time of
the eye itself and the size of pupil. SafetyScan(TM) reports the result of the
test instantly with a "Pass" or "Fail" result. SafetyScan(TM) offers users major
advantages over traditional drug tests, in that the system can detect
on-the-spot impairment and results are immediate. Designed for workplace
testing, it can be utilized in a random testing or regularly scheduled testing
environment. Traditional drug tests can take days to complete, which is useless
for determining on the job impairment in real-time.
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SafetyScan(TM) promises to be an important component for evaluating an
employee for occupational safety, particularly in life-dependent occupations,
such as airline pilots, bus drivers, train engineers, firefighters, medical
personnel, construction workers and law enforcement personnel, among others.
Companies and government agencies around the world are beginning to evaluate
this cost-effective technology as a replacement for traditional drug tests that
require body fluids and are much more expensive to conduct.
We believe that SafetyScan(TM) will be especially useful where fatigue
in the workplace has an impairing effect on workers. To this end, we have
contracted with a major human alertness technology consulting and research
organization to optimize SafetyScan(TM) for fatigue testing. We believe
SafetyScan(TM) will appeal to employers with round-the-clock workforces who
desire to reduce industrial accidents caused by employee fatigue and to improve
worker alertness and safety. The product is undergoing further design
development to eliminate the need for a live operator. Test marketing is planned
for late in 2006.
We have also offered a variant of SafetyScan(TM), the EM/1, which is
designed for use by law enforcement agencies for forensic purposes and for the
evaluation of individuals suspected of driving or being under the influence of
intoxicants. The EM/1 functions in a manner similar to SafetyScan(TM), but
without the "Pass/Fail" result. Instead, the EM/1 delivers the video data for
interpretation by the law enforcement agency.
In most states, law enforcement agencies use a six point evaluation of
people thought to be intoxicated, known as the Standardized Field Sobriety Test
("SFST"). The SFST includes three tests for balance and three tests involving
eye performance. Thus, AcuNetx believes there is a need for a product that can
be utilized, not only in the jail or precinct house, but in the field by traffic
patrol cars. This product is expected to be offered in a 'handheld' or highly
portable configuration.
Hardware for the EM/1 is similar to SafetyScan(TM), but different
operating software requires that a person trained and certified in SFST and drug
recognition and evaluation operate the equipment and evaluate eye performance.
>From the EM/1 test results and other test information, the evaluator draws an
opinion as to whether the individual is impaired and under the influence of
intoxicants or not, or whether medical treatment is indicated. The video record
of the test is then available as evidence to support the conclusion of the law
enforcement officer and, depending on the jurisdiction, may be admissible as
evidence in court proceedings. The EM/1 has been priced at $14,000 per unit;
however, we plan to introduce a more portable unit within the next two years,
which is expected to be offered at a substantially lower price.
INTRODUCTION--DISTRACTION OSTEOGENESIS DEVICES FOR OSTEOPLASTIC SURGERY
Osteoplastic (meaning to form or mold bone) surgery is the art and
science of correcting deformities and deficiencies of the skeleton caused by
errors of birth, trauma, infections and tumors. Osteoplastic surgery is
applicable to all areas of the skeleton, including the skull and face, jaws,
long bones of the upper and lower extremities, hands, wrists, feet, ankles and
the spine.
We hold patents and FDA approvals for a family of osteoplastic surgery
products that generate new bone through the process of distraction osteogenesis.
Together, these products address an estimated $730 million potential market. The
first of these products, the GenerOs(TM) CF craniofacial bone generator, is now
being sold commercially, with first sales in December 2004.
DISTRACTION OSTEOGENESIS PRODUCTS
The GenerOs(TM) CF craniofacial bone generator is a device that assists
surgeons in treating conditions such as birth deformities of the skull, facial
bones and jaws. It is a small, proprietary device that enables distraction of
the bones of the face and skull to correct developmental, congenital, and
acquired defects and deficiencies. The device is made of surgical grade
stainless steel with an internal gear system that allows for activation to take
place even though the device is buried below the skin and soft tissues. The
device is often implanted through incisions inside the mouth, thus minimizing
external surgical scars.
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GenerOs(TM) CF utilizes two blocks that are fixed to the bone on either
side of a surgically created bone cut with miniscrews. A small transcutaneous
activation pin is turned, which drives a mechanism to separate the two blocks.
As the two blocks are separated the bone gap is increased, to a recommended
distance of 1mm per day. After the desired separation is achieved (usually 10mm
- 20mm in most cases), the pin is removed and the device is left in position on
the bone until the bone is completely calcified. The device is then removed in a
small outpatient procedure. GenerOs CF will distract up to 20 millimeters, which
is adequate for approximately 95% of cases.
The GenerOs(TM) CF offers features that differentiate it from
competitive devices now available. It is small and adaptable to the bone, making
it easy for the surgeon to use on patients of all ages and osteoplastic surgery
needs. Also, it is inserted through the mouth for lower jaw applications and can
be positioned for virtually any distraction vector required. It features
break-off plates, which make it fast and simple for the surgeon to tailor to a
patient's specific need. Finally, its removable, low profile activation pin is
unobtrusive and leaves minimal scar.
The GenerOs (TM) EX limb lengthener is a distraction osteogenesis
device for the lengthening large bones of the upper and lower extremities. Limb
lengthening by distraction osteogenesis is indicated for post-traumatic or
congenital discrepancies in limb length. Generally, discrepancies in leg length
of 2cm or greater may cause gait disturbances, back and hip/knee pain, and
degenerative joint disease. There are approximately 157,000 such leg length
discrepancies diagnosed in the U.S. each year, of which 5,500 are treated
surgically. Upper extremity deficiencies and congenital anomalies resulting in
deformed and foreshortened extremities comprise a lesser group that requires
treatment. We have received FDA clearance for commercialization of this product.
However, we believe that several minor modifications are desirable before
marketing and sales begin.
The GenerOs (TM) SB small bone generator has the identical form factor
and specifications as GenerOs CF. The difference is an extension of approved
indications for small bones of the extremities. We have received FDA clearance
for commercialization of this device.
Accessories sold in conjunction with GenerOs CF and SB include an
Activation Tool and an Activation Pin Insertion/Removal (I-R) Tool. These tools
are sold separately or in a combination Kit. Installation of the GenerOs CF and
SB devices may be accomplished with standard bone plating tools and any bone
screws from 1.5 mm - 2.0 mm diameter.
The GenerOs (TM) DI dental implant distractor promotes dental
(alveolar) bone generation and tooth replacement. It is estimated that
approximately 55-65 million people in the U.S. have lost some or all of their
teeth prematurely, and a significant portion of the adult population wear
dentures of some kind. Dentures are problematic and can lead to further bone
loss, which can cause the dentures to move and click. Distraction osteogenesis
rebuilds the alveolar ridge, thus enabling the placement of dental implants, the
most effective tooth replacement solution. Dental implants are permanent
fixtures which allow for the placement of tooth prosthetics. Bone loss of the
alveolar ridge (supporting bone of the jaw) prevents the placement of dental
implants. The OrthoNetx dental product corrects the bone loss and serves as the
permanent base for the dental implant. We have not yet applied for FDA approval
of the GenerOs (TM) DI device.
MEDICAL INFORMATION TECHNOLOGY PLATFORM-(A FUTURE PRODUCT)
We have acquired and are continuing to develop a technology platform
based on a proprietary informatics system to support our medical devices (and
potentially other medical devices), called SmartDevice-Connect(TM) ("SDC").
SmartDevice-Connect has the potential to:
o Establish product registries to individual patients and track
device behavior for post-market surveillance, adverse event
and outcomes reporting,
o Create "smart devices" that gather and transmit physiological
data concerning the device residing in the patient to enable
better physician enhancement of patient care, and to provide
overall product knowledge and product risk management for the
company,
o Educate, certify and document the understanding of its
physician customers, and
o Educate patients and obtain product informed consent.
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In addition to enhancing and differentiating our own products, we
believe that SmartDevice-Connect can create a significant business opportunity
among other manufacturers of medical devices and other medical products.
Because we operate in the area of privacy and security of health care
information storage, access and exchange by authorized parties, our software is
designed to support regulatory and legal transactions, including product
informed consent, physician training and certification, and registry and
tracking of medical devices for post-market surveillance and adverse event
reporting. Our information technology infrastructure allows connectivity among
patients, doctors and medical device manufacturers to satisfy ethical, legal and
regulatory (HIPAA) requirements for protecting patient information while
supporting business transactions.
HIGH PRECISION DEVICES, INC.
We own 20% of High Precision Devices, Inc. ("HPD"), an engineering,
design and manufacturing firm that has, under contract, been instrumental in the
development and manufacturing of the OrthoNetx GenerOs(TM) CF craniofacial bone
generator and the GenerOs(TM) SB small bone generator. HPD has agreed to render
design and manufacturing services related to distraction osteogenesis devices as
well as "smart devices" solely for OrthoNetx. HPD will also provide research and
development and manufacturing functions as requested. HPD is a full service
engineering and manufacturing business specializing in precision mechanical
instrumentation, medical, and aerospace-related devices.
MARKETING
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. Marketing of the Infrared/VNG
System is conducted through an exclusive master distributor that operates
through a network of independently owned sub-distributors, known as special
instrument dealers. These independently owned businesses are distributors of not
only the IR/VNG System, but of a variety of allied and related products for the
audiometric and otolaryngology ("ENT") markets. These distributors are across
the United States and operate in territories that are assigned both exclusively
and non-exclusively to them by the master distributor. In addition, there are
several foreign distributors that are merchandising the product in countries
such as India, Egypt, Hungary, Turkey, Thailand, Taiwan and Korea. We are not
yet offering the product in the European Community countries due to lack of the
"CE" mark of approval that must be obtained prior to marketing in those
countries.
The market for the VNG products is relatively mature and represents
estimated annual growth of 5%. However, because of the advancement of technology
spurred by our introduction of video data acquisition methods in 1994, the
market for replacement products has been strong. Also, we intend to expend
efforts to open new markets for our products, including the neurology market,
through our distributors and through mobile diagnostic providers of testing
services.
We contemplate that new versions of our VNG product will be marketed
through an arrangement with MedTrak Technologies, our master distributor.
AcuNetx is negotiating to restructure the relationship with MedTrak Technologies
in order to enhance marketing effectiveness.
IMPAIRMENT DETECTION PRODUCTS. We have test marketed an early version
of SafetyScan(TM), and have sold a few units in the prison system for inmate
testing in drug rehabilitation programs. Currently, full marketing plans are
under development.
In general, government drug testing regulations are based on urine
testing, so testing of employees by governmental agencies, quasi-governmental
agencies and certain regulated industries must comply with these regulations.
Accordingly, some modification of these regulations must be achieved in order
for the SafetyScan(TM) to gain broad acceptance in sectors subject to federal
drug test regulations, such as those regulated by the Department of
Transportation and certain others.
These factors limit the overall size of the market currently available
to private companies that are not regulated by the federal government with
respect to testing employees for substance abuse. If a private employer falls
within government regulated drug testing requirements, but desires to also use
impairment testing methodologies, it must do so in addition to the government
regulation requirements. This creates an additional cost to such testing and
therefore may limit our access to that market.
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We have conducted discussions with various government agencies
regarding modification of applicable regulations and procedures so that they
will encompass testing based on eye movement and performance. While certain
governmental agencies have expressed an interest in the AcuNetx products, we
believe that modifying governmental testing regulations will be a lengthy
process and success is not assured.
DISTRACTION OSTEOGENESIS PRODUCTS. We have relied on unaffiliated
distributors, advertising in medical and trade journals, exhibitions at trade
conventions, direct mailings and our internal sales staff to market these
products. However, we recently hired a Senior Vice President of Sales to oversee
marketing and sales efforts of all our products, including the distraction
osteogenesis product lines. Our marketing efforts in this area principally
target surgeons, surgical clinics, and surgical supply distributors. Outside the
United States we plan to sell our products through established local medical
device distributors.
INFORMATION TECHNOLOGY PRODUCTS/SERVICES. As we develop and deploy
"smart device" technologies for our own products, we also intend to license our
SmartDevice-Connect platform to other manufacturers of medical devices. We also
anticipate that products incorporating our information technologies will be
developed through collaboration with external companies or partners, and sold
through companies with existing distribution channels.
COMPETITION
VIDEONYSTAGMOGRAPHY(VNG)PRODUCTS. The principal competitors in the
medical market producing VNG testing equipment are MicroMedical Technologies,
Inc., ICS Medical Corporation and Interacoustics. Since our VNG product was
introduced in 1994, these competitors have developed similar video-based VNG
goggle products. As a result, the market has become very competitive and subject
to pricing pressures. In response, we have reduced prices, with an adverse
effect on overall gross margins. To combat this competitive pressure, AcuNetx
has reduced manufacturing costs in an effort to offset the gross margin loss.
IMPAIRMENT DETECTION PRODUCTS. Competition for SafetyScan(TM) is from
companies that have developed tests and devices that evaluate motor and
cognitive skills. These take the form of hand-eye coordination tests, divided
attention tests and other behavioral tests or series of tests administered
either in series or selectively. We have identified three such competitors that
have marketed these products in the past, including Performance Factors, Inc.,
Essex Corporation, and Pulse Medical Instruments.
We believe that only Pulse Medical Instruments is currently developing
a product to be directly competitive with our products. The Pulse Medical
product does not use video sensors and its results are displayed in graphic form
on a computer monitor for the qualified expert to interpret. Based on
information available to us, we anticipate that such a product will be more
expensive than SafetyScan(TM), and we are not aware of whether the product has
been validated as a useful device.
SafetyScan(TM) differs from its competitors' approach because the
SafetyScan(TM) test evaluates changes in eye performance, which are involuntary
responses and not under the control of the individual. For this reason, these
responses cannot be faked, spoofed, changed, improved upon or learned. All the
other competitive forms of performance tests known to us can be learned, and
over time the individual being tested can improve his skills. We believe that
this difference is an important competitive advantage over other forms of
performance testing.
SafetyScan(TM) also competes with drug and alcohol abuse test kits and
devices, which principally rely on collection and testing of urine or breath
samples. In addition, certain drug and alcohol abuse tests now being developed
will test saliva and/or hair for evidence of the presence of certain drugs or
alcohol. The principal advantages of SafetyScan(TM) over others tests are the
immediacy of results and the non-invasive nature of the test procedure. We
believe that the potential for occupational safety improvement that
SafetyScan(TM) will provide for life-risk professions, such as airline pilots,
bus drivers and train engineers, will make the system a very important
breakthrough for public safety in these fields.
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DISTRACTION OSTEOGENESIS DEVICES. Several companies offer devices which
compete with our GenerOs(TM) devices, including Stryker Leibinger GmbH & Co.
(bone distraction systems), KLS Martin, L.P. (distraction osteogenesis
products), Walter Lorenz Surgical, Inc., a subsidiary of Biomet, Inc.
(distraction osteogenesis devices), Ace Surgical Supply Co. (external mandible
and dental distraction devices), Osteomed, Inc. (internal mandibular distraction
device) and Wells Johnson Company (mandibular distraction device). We believe
our distraction osteogenesis devices offer features that differentiate them from
competitive devices currently available. Our devices are generally smaller and
more adaptable to the bone, making it easy for the surgeon to use on patients of
all ages and varying osteoplastic surgery needs. Also, our craniofacial device
can be inserted through the mouth for lower jaw applications and can be
positioned for virtually any distraction vector required, and features break-off
plates, which make it fast and simple for the surgeon to insert. Finally, its
removable, low profile activation pin is unobtrusive and leaves a minimal scar.
MANUFACTURING
We have internally performed all design and engineering of our VNG and
SafetyScan(TM) products, and have developed all software and validation of
software algorithms that are used in the analysis portion of the proprietary
software.
Manufacturing of both the VNG products and SafetyScan(TM) is conducted
primarily by subcontracting with various suppliers. We do not rely on a single
supplier for the major manufacturing of items. Various companies build and test
product modules on an OEM contract basis. We complete final integration and
testing prior to shipment of devices to customers. All our products share in a
modular concept for efficiency in manufacturing. Our electronic products are PC
Computer based with specialized and proprietary hardware and embedded firmware.
The common elements of the eye-tracking products are the viewport and the
goggles, through which the individual being tested peers into a dark
environment.
Manufactured or fabricated modules include the molded eye piece, the
goggle assembly, the viewport assembly and proprietary printed circuit boards.
As a majority of the components in our products are readily available, we do not
anticipate undertaking internal manufacturing of any components. Our in-house
manufacturing operations consist only of assembly, testing and packaging.
Our GenerOs distraction osteogenesis devices are manufactured under
contract by High Precision Devices, Inc. ("HPD"). We own 20% of the outstanding
Common Stock of HPD.
GOVERNMENT REGULATION
Our VNG products have been cleared for marketing by the U.S. Food and
Drug Administration (FDA), and we are licensed by the State of California as a
Medical Device Manufacturer. SafetyScan(TM) and EM/1 are not subject to FDA
regulation, as they are not considered medical devices. However, as discussed
above under "Marketing," government regulations on substance abuse testing for
government employees and certain private companies impact our ability to market
the SafetyScan(TM) in these areas. In 2005, our Eye Dynamics division received
ISO 13485-2003 Certification, which should assist in marketing these products.
Our distraction osteogenesis products are medical devices, subject to
regulation by the FDA and corresponding state agencies. In order for us to
market these products for clinical use in the United States, we must obtain
clearance from the FDA via 510(k) premarket notification or approval by a more
extensive submission known as a premarket approval application ("PMAA"). In
addition, certain material changes to medical devices also are subject to FDA
review and clearance or approval. The FDA currently has cleared three of our
products for sale under 510(k); the GenerOs CF, the GenerOs SB and the GenerOs
EX.
Sales of medical devices outside of the United States are subject to
regulatory requirements that vary from country to country. The time required to
obtain approval or sales internationally may be longer or shorter than that
required for FDA clearance, and the requirements may differ.
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PATENTS & PROPRIETARY PROTECTION
We license the technology used in our performance evaluation products
from Ronald A. Waldorf, a director of AcuNetx and President of our Eye Dynamics
division, who holds a patent covering claims relating to tracking eye movements
in the dark, utilizing infrared illumination and infrared sensitive video
cameras, as well as the related analysis methodology. The patent was issued in
1989. The license is for the term of the underlying patent,
and calls for nominal annual royalties of $100.
AcuNetx is the owner of a patent issued in August 1992, covering
certain technology underlying the SafetyScan(TM), principally relating to the
apparatus for testing for impairment by tracking eye movements and pupil
reactions to presented stimuli. Additionally, AcuNetx is the owner of 2 patents
and a patent pending covering our devices for distraction osteogenesis.
We hold an exclusive license for use of U.S. Patent Number 6,278,999
for the proposed medical device data-gathering-and-analysis component of our
medical device risk management and patient outcomes system, the
SmartDevice-Connect(TM) System. The owner of the patent is Dr. Terry Knapp, our
Chief Executive Officer.
The existence of patents may be important to our future operations, but
there is no assurance that additional patents will be issued. We also rely on
unpatented technology, know-how and trade secrets covering a number of items,
particularly the methods of obtaining data regarding eye performance, and we
rely on confidentiality agreements and internal procedures to protect such
information.
EMPLOYEES
AcuNetx employs seven full time employees, including four in executive
and administrative positions, one in engineering and research, and two in sales
and marketing. Our employees are not parties to any collective bargaining
agreement, and we believe that our employee relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive offices are located at 1000 South McCaslin
Blvd., Suite 300, Superior, Colorado, where we lease 3,900 square feet of office
space at $19 per square foot per year (full service), for a period of two years.
These facilities are adequate for AcuNetx corporate functions, OrthoNetx
activities and SDC functions for the foreseeable future.
We also maintain offices in Torrance, California for our Eye Dynamics
division. We lease approximately 1,620 square feet in an industrial complex in
Torrance, California. The offices occupy 1620 square feet and the lease expires
on July 27, 2007. The current monthly lease payment is $1,685.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, we are not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock is traded on the OTC Bulletin Board under the symbol
"ANTX". The following table sets forth the quarterly high and low closing prices
for our Common Stock, as reported on the OTC Bulletin Board, during the 2005 and
2004 calendar years.
LOW HIGH
--- ----
2005
----
First Quarter $.15 $.39
Second Quarter .20 .35
Third Quarter .18 .34
Fourth Quarter .16 .29
2004
----
First Quarter $.42 $.79
Second Quarter .37 .85
Third Quarter .14 .39
Fourth Quarter .13 .18
HOLDERS
As of March 1, 2006, AcuNetx Common Stock was held of record by
approximately 312 holders. Registered ownership includes nominees who may hold
securities on behalf of multiple beneficial owners.
DIVIDENDS
We have paid no cash dividends on our Common Stock and we have no
present intention of paying cash dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The following table gives information about our common stock that may
be issued upon the exercise of options, warrants or rights under our existing
equity compensation plans. The information in this table is as of December 31,
2005.
Number of securities
issuable upon
exercise of Weighted average
outstanding exercise price of
options, outstanding options, Number of securities
PLAN CATEGORY warrants and rights warrants, and rights remaining available
------------- ------------------- -------------------- -------------------
Equity compensation
plans approved by
security holders 415,000 $ 0.15 N/A
Equity compensation
plans not approved
by security
holders --
------------------- -------------------- -------------------
Total 415,000 $ 0.15
------------------- -------------------- -------------------
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and Notes thereto, included elsewhere
in this Annual Report on Form 10-KSB. Except for the historical information
contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-KSB. Our actual results may differ materially from
the results discussed in the forward-looking statements, as a result of certain
factors including, but not limited to, those discussed elsewhere in this Annual
Report on Form 10-KSB.
On December 23, 2005, we successfully concluded the acquisition of
OrthoNetx, Inc., a Nevada corporation, headquartered in Superior Colorado. The
financial statements contained in this Annual Report on Form 10-KSB reflect the
merged companies on the December 31, 2005 Consolidated Balance Sheet. The
consolidated Statement of Operations represents the former Eye Dynamics for the
period January 1, 2005 through December 23, 2005, and the merged companies from
December 24, 2005 through December 31, 2005.
AcuNetx has invested substantial funds in the last several years
developing and validating its products. We are successfully producing and
marketing the Infrared/Video ENG System; however, since this is a niche product
in a relatively mature market, potential revenue growth from this product line
is limited. To date, sales of this product have constituted substantially all of
our revenues.
Bringing the SafetyScan(TM) product (formerly known as SafetyScope) to
the marketplace is viewed as a fundamental key to our future success.
Accordingly, the acquisition of OrthoNetx was undertaken to be able to leverage
certain skills, intellectual property, and potential sources of funding. The
process of commercialization for SafetyScan(TM) was begun shortly after the
acquisition was finalized, and remains a key company focus.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004.
Revenues from sales of products decreased by 33%, from $2,084,538 in
2004 to $1,402,677 in 2005. There was no OrthoNetx revenue in the seven day
period of combined operations. This decrease is largely due to a continuation of
downward pressure on sales as Medicare reimbursement issues for specialized
equipment are fully understood by potential customers. We have continued to work
closely with MedTrak Technologies, our exclusive domestic marketing partner, to
expand and improve the dealer network and training for the representatives to be
able to clarify both the product benefits and reimbursement regulations. We also
expanded our international marketing efforts, and engaged dealers in Latin
America, China, India, and the Middle East. AcuNetx received ISO 13485-2003
certification, which should open additional opportunities for sales in Canada,
Asia, Africa, and Europe.
Our national distributor accounted for approximately 62% of our sales
revenues in 2004, and in 2005 accounted for 85%. Despite the decline in volume,
AcuNetx has maintained a stable gross profit margin of 48% in 2005, compared to
49% in 2004. Gross profit in 2005 of $679,917 was attained with a net loss of
$392,843 for the year. Gross profit in 2004 was $1,030,986, with a net profit of
$386,318. Selling, general and administrative expense increased in 2005 to
$1,078,193 from $691,658 in the prior year. Much of this increase is associated
with expenses related to the acquisition of OrthoNetx, with additional amounts
for increased product development, market research, and the transition of
leadership with the retirement of President Charles Phillips in early 2005.
Inventory turnover ratio in 2005 was approximately 4:1, compared to 6:1
in 2004. This is a reflection of the decrease in business and our inability to
reduce inventory adequately because of production volume needs. Collection of
accounts receivables has been very satisfactory, with only minimal slow paying
accounts. Our national distributor regularly pays invoices within the terms of
sale, which is 15 days after the invoice date. Year end accounts receivable
totaled $116,099 in 2005, an increase over $44,492 in 2004, primarily due to
year end sales that were not yet due for payment, but were paid in January and
February. Also, the national distributor had overlooked one large invoice that
was paid in March. By the end of March, the accounts receivable had been reduced
to a 30-45 day level. Also included in the year end amount is $24,500 in
invoices for demonstration systems that are not due for payment until mid 2006.
12
Bad debt write off for 2004 consisted primarily of a $16,731 note
receivable, under which a partial payment was made and the equipment returned in
lieu of further payments. The balance was deemed uncollectible and written off
at year end.
LIQUIDITY AND CAPITAL RESOURCES
Effective December 23, 2005, the acquisition of OrthoNetx resulted in a
merged balance sheet for the combined companies. This stock for stock
transaction is described in detail in Note 3 of the attached financial
statements. The purchase price of $4,705,699 included the acquisition of all
assets owned by OrthoNetx, including 100% of PrivaComp, Inc., 20% of High
Precision Devices, Inc., intellectual property (including patents, patents
pending, license agreements, and trademarks), inventory, capital equipment and
goodwill. We also assumed the liabilities of this early stage company.
As of December 31, 2005, AcuNetx had an accumulated deficit of
$2,641,414. As of that date, we had $476,614 in cash and certificates of
deposit, approximately $116,099 in net accounts receivable, and $321,260 in
inventory. Also, we had $664,704 of current liabilities, consisting of accounts
payable of $269,043, much of which was directly related to expense of the
acquisition, accrued liabilities of $95,661, and a $300,000 note payable, with
repayment scheduled over two years. There were no long term liabilities.
AcuNetx has no plans for significant capital equipment expenditures for
the foreseeable future.
As part of the acquisition agreement, we entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. This $12,000,000
equity line of credit, which is subject to certain conditions, will be used for
the funding of strategic projects, such as the introduction of the
SafetyScan(TM) product (See Note 16 of Financial Statements). We believe that
this arrangement, along with current and future available capital resources,
cash flow from operations and other existing sources of liquidity, will be
adequate to fund our operations.
EFFECT OF INFLATION
AcuNetx believes that inflation has not had a material effect on its
net sales or profitability in recent years.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of AcuNetx are submitted as a separate section
of this Annual Report on Form 10-KSB, commencing with page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act"), that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. We conducted an evaluation (the "Evaluation"), under the supervision
and with the participation of our Chief Executive Officer ("CEO") and Interim
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures ("Disclosure Controls") as
of the end of the period covered by this report pursuant to Rule 13a-15 of the
Exchange Act. Based on this Evaluation, our CEO and Interim CFO concluded that
our Disclosure Controls were effective as of the end of the period covered by
this report.
13
CHANGES IN INTERNAL CONTROLS
We have also evaluated our internal controls for financial reporting,
and there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our CEO and Interim CFO, does not expect that
our Disclosure Controls and internal controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within AcuNetx have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management or
board override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
CHIEF EXECUTIVE OFFICER AND INTERIM CHIEF FINANCIAL OFFICER CERTIFICATIONS
Appearing immediately following the Signatures section of this report
there are Certifications of the CEO and the Interim CFO. The Certifications are
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certifications). This Item of this report, which you are currently
reading is the information concerning the Evaluation referred to in the Section
302 Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
ITEM 8B. OTHER INFORMATION
Inapplicable.
PART III
Certain information required by Part III is omitted from this Report
because we expect to file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") within 120 days after the end of our
fiscal year pursuant to Regulation 14A, as promulgated by the Commission, for
our 2006 annual meeting of shareholders (the "Proxy Statement"), and certain
information included in the Proxy Statement will be incorporated herein by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item 9 with respect to identification
of our directors will be included under the captions "Proposal I: Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our
Proxy Statement, and is incorporated herein by reference.
We are in the process of preparing a Code of Business Conduct and
Ethics (the "Code") for adoption that applies to all of our Directors, officers
and employees, including our principal executive officer and principal financial
14
officer. The Code, when completed and adopted, will be included as an exhibit to
the next report we file with the Securities and Exchange Commission. In
addition, any waivers of the Code for Directors or executive officers will be
disclosed in a report on Form 8-K.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item 10 with respect to management
remuneration and transactions is incorporated herein by reference to our Proxy
Statement under the heading "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 with respect to the security
ownership of certain beneficial owners and management is incorporated herein by
reference from our Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 with respect to transactions
between us and certain related entities is incorporated herein by reference from
our Proxy Statement under the heading "Certain Relationships and Related
Transactions."
ITEM 13. EXHIBITS.
The following exhibits are included herein or incorporated by
reference:
2.1 Agreement and Plan of Merger, dated September 1, 2005, among
Eye Dynamics, Inc., OrthoNetx, Inc., and Eye Dynamics
Acquisition Corp. (1)
3.1 Amended and Restated Articles of Incorporation
3.2 Amended and Restated Bylaws
10.1 Employment Agreement, dated December 23, 2005 between the
Company and Ronald A. Waldorf
10.2 Exclusive Licensing Agreement, dated November 1, 1989 between
the Company and Ronald A. Waldorf (2)
10.3 Licensing Agreement, dated November 15, 2004 between the
Company and Terry Knapp
10.4 Exclusive Manufacturing, Sales, Licensing and Software
Ownership Agreement, dated March 22, 2004 between the Company
and Medtrak, Inc. (3)
10.5 Standard Multi-Tenant Commercial Industrial Lease-Gross, dated
January 9, 2003, between the Company and AMB Property, L.P.
(4)
10.6 Building Lease, dated November 11, 2004 between OrthoNetx,
Inc. and Superior Point, LLC
10.7 AcuNetx, Inc.2006 Non-Executive Directors' Stock Plan
10.8 Standby Equity Distribution Agreement, dated January 31, 2006,
between the Company and Cornell Capital Partners, LP
10.9 Placement Agent Agreement, dated January 31, 2006, between the
Company and Monitor Capital, Inc.
10.10 Registration Rights Agreement, dated January 31, 2006, between
the Company and Cornell Capital Partners, LP
15
23.1 Consent of Spector & Wong, LLP
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Interim Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Interim Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
----------------------------
(1) Incorporated by reference from Report on Form 8K dated September 1, 2005.
(2) Incorporated by reference from Report on Form 10-SB filed on December 13,
1999.
(3) Incorporated by reference from Report on Form 10-QSB for the quarter ended
March 31, 2004.
(4) Incorporated by reference from Report on Form 10-KSB for the year ended
December 31, 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item 14 is incorporated herein by
reference from our Proxy Statement under the heading "Principal Accountant Fees
and Services."
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AcuNetx, Inc.
By: /s/ Terry Knapp
---------------
Terry Knapp, President and Chief
Executive Officer
Date: March 31, 2006
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
(1) Principal Executive Officer
/s/ Terry R. Knapp Chief Executive Officer March 31, 2006
------------------ and a Director
Terry R. Knapp
(2) Principal Interim Financial and Accounting Officer
/s/ Ronald A. Waldorf Interim Chief Financial Officer March 31, 2006
--------------------- and a Director
Ronald A. Waldorf
(3) Directors
/s/ Stephen Moses Director March 31, 2006
-----------------
Stephen Moses
/s/ Charles E. Phillips Director March 31, 2006
-----------------------
Charles E. Phillips
/s/ Randolph C. Robinson, M.D. Director March 31, 2006
------------------------------
Randolph C. Robinson, M.D
/s/ Robert S. Corrigan Director March 31, 2006
-----------------
Robert S. Corrigan
17
HAROLD Y. SPECTOR, CPA 80 SOUTH LAKE AVENUE
CAROL S. WONG, CPA SUITE 723
PASADENA, CA 91101
SPECTOR & WONG, LLP
Certified Public Accountants
1- (888) 584-5577
FAX (626) 584-6447
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of AcuNetx, Inc.
We have audited the accompanying consolidated balance sheets of AcuNetx, Inc.
(formerly known as Eye Dynamics, Inc.) as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity, 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 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 AcuNetx, Inc.
(formerly known as Eye Dynamics, Inc.) as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Spector & Wong, LLP
Pasadena, California
March 27, 2006
F-1
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
---------------------------------------------------------------------------------------------------
ASSETS
Current Assets 2005 2004
----------- -----------
Cash $ 171,340 $ 847,235
Certificate of Deposits 305,274 --
Accounts receivable, net 116,099 44,492
Note receivable, net of allowance of loan loss of $58,218 -- 19,731
Inventory 321,260 180,708
Prepaid expenses 89,403 37,641
----------- -----------
Total Current Assets 1,003,376 1,129,807
Property and equipment, net 32,296 875
Goodwill 4,823,138 --
Intellectual Property 89,621 --
Deferred Tax Assets 221,001 219,233
Other Investments 187,285 --
Other Assets 1,563 10,162
----------- -----------
TOTAL ASSETS $ 6,358,280 $ 1,360,077
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 269,043 $ 15,622
Accrued liabilities 95,661 38,073
Notes payable to related parties 300,000 --
----------- -----------
Total Current Liabilities 664,704 53,695
Long-term debt -- 40,000
----------- -----------
Total Liabilities 664,704 93,695
----------- -----------
Stockholders' Equity
Common Stock, $0.001 par value; 100,000,000 shares authorized;
47,817,651 shares issued and outstanding 47,818 17,883
Paid-in Capital 8,287,172 3,497,070
Accumulated Deficit (2,641,414) (2,248,571)
----------- -----------
Total stockholders' equity 5,693,576 1,266,382
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,358,280 $ 1,360,077
=========== ===========
See notes to consolidated financial statements
F-2
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2005 2004
----------------------------------------------------------------------------------
Sales - Products $ 1,402,677 $ 2,084,538
Cost of Products 722,760 1,053,552
-------------------------------
Gross Profit 679,917 1,030,986
Selling, General and Administrative Expenses 1,078,193 691,658
-------------------------------
Operating income (loss) (398,276) 339,328
-------------------------------
Other Income (Expense)
Interest and Other Income 6,846 9,300
Gain on early extinguishment of debt -- 28,621
Interest and Other Expense (2,381) (3,931)
-------------------------------
Total other income 4,465 33,990
-------------------------------
Net income (loss) before income tax (benefit) (393,811) 373,318
Provision for Income Tax (Benefit) (968) (12,997)
-------------------------------
Net income (loss) $ (392,843) $ 386,315
===============================
Net income (loss) per share-Basic $ (0.02) $ 0.02
===============================
Net income (loss) per share-Diluted: $ (0.02) $ 0.02
===============================
Shares used in per share calculation-Basic 22,922,161 17,883,081
Shares used in per share calculation-Diluted 22,922,161 21,765,478
See notes to consolidated financial statements
F-3
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------------
Balance at 12/31/03 17,883,081 $ 17,883 $ 3,497,070 $ (2,634,886) $ 880,067
Net Income 386,315 386,315
-----------------------------------------------------------------------
Balance at 12/31/04 17,883,081 17,883 3,497,070 (2,248,571) 1,266,382
Issuance of stock for services 200,000 200 67,800 68,000
Issuance of stock for notes
payable conversion 3,591,799 3,592 42,746 46,338
Issuance of stock to merge
with OrthoNetx 26,142,771 26,143 4,679,556 4,705,699
Net Loss (392,843) (392,843)
-----------------------------------------------------------------------
Balance at 12/31/05 47,817,651 $ 47,818 $ 8,287,172 $ (2,641,414) $ 5,693,576
=======================================================================
See notes to consolidated financial statements
F-4
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2005 2004
-----------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (392,843) $ 386,315
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 318 228
Write-off note receivable 16,731 --
Issuance of stock for service 68,000 --
Earnings on investment accounted for under equity method (52) --
Deferred tax benefit (1,768) (13,797)
Gain on early extinguishment of debt -- (28,621)
(Increase) Decrease in:
Accounts Receivable (71,607) 67,197
Inventory (47,261) 139,245
Prepaid and Others (22,866) 992
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 57,112 (53,106)
------------------------------
Net cash provided by (used in) operating activities (394,236) 498,453
------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,966) --
Purchase of certificate of deposits (305,274) --
Cash received from merger with OrthoNetx 22,581 --
Cash collected from note receivable 3,000 --
------------------------------
Net cash used in investing activities (281,659) --
------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on notes payable -- (351,562)
------------------------------
Net cash used in financing activities -- (351,562)
------------------------------
NET INCREASE (DECREASE) IN CASH (675,895) 146,891
CASH BALANCE AT BEGINNING OF YEAR 847,235 700,344
------------------------------
CASH BALANCE AT END OF YEAR $ 171,340 $ 847,235
==============================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 800 $ 59,355
Taxes Refund $ 4,560 $ 21,118
Schedule of noncash investing and financing activities:
Issuance of common stock to convert notes payable:
Notes Payable $ 40,000 $ --
Accrued Interest 6,338 --
------------------------------
$ 46,338 $ --
==============================
Merger with OrthoNetx, Inc.
Working capital deficit other than cash $ (29,207) $ --
Property and equipment 29,772
Intangible assets and Investments 276,854
Debt to related party assumed (300,000) --
------------------------------
Net cash received from merger with OrthoNetx $ (22,581) $ --
==============================
Issuance of common stock to merge with OrthoNetx, Inc. $ 4,705,699 $ --
Conversion of account receivable into note receivable $ -- $ 19,731
See notes to consolidated financial statements
F-5
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES
NATURE OF BUSINESS: AcuNetx, Inc. (the "Company" or "AcuNetx", formerly known as
Eye Dynamics, Inc. or "EDI") designs, develops, produces and markets diagnostic
equipment that measures, tracks and records human eye movements, utilizing the
Company's proprietary technology and computer software. The products perform
separate, but related, functions and target two separate markets. First, the
Company markets a neurological diagnostic product that tracks and measures eye
movements during a series of standardized tests, as an aid in diagnosing
problems of the vestibular (balance) system and other balance disorders. Second,
the Company's impairment detection devices target the corporate and criminal
justice markets and are designed to test individuals for impaired performance
resulting from the influences of alcohol, drugs, illness, stress and other
factors that affect eye and pupil performance. The Company is a Nevada
corporation formed in 1989 and qualified to do business in California in 1992.
On December 23, 2005, the Company completed the merger with OrthoNetx,
Inc. ("OrthoNetx" or "ONX"), a Colorado-based provider of medical devices for
osteoplastic surgery. The acquisition was completed as a stock transaction in
which ONX shareholders received the number of shares equal to the number of
EDI's outstanding shares at the closing date.
Following the merger, the Company changed its name to AcuNetx, Inc. and
shifted its headquarters to Superior, Colorado. The President and CEO of ONX
assumed the position of President and CEO of the merged company.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying consolidated
financial statements include the accounts of AcuNetx, Inc. and its subsidiaries
after elimination of all intercompany accounts and transactions. Certain prior
period balances have been reclassified to conform to the current period
presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States (U.S. GAAP) requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue, and expenses. Actual results may differ from these estimates.
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.
For its domestic customers, the Company supplies systems to its
national distributor, MedTrak Technologies (Scottsdale, AZ). Revenue is
recognized when products are shipped and accepted by the end users. No
provisions were established for estimated product returns and allowances based
on the Company's historical experience. Commission cost, price discounts and
other sales incentives are accrued and charged to cost of sales when revenue
from the distributor is recognized.
The Company provides repair and maintenance, consulting and education
services to its customers. Revenue from such services is generally recognized
over the period during which the applicable service is to be performed or on a
service-performed basis.
The Company evaluated Statement of Position No. 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), but does not expect that SOP 97-2 will have a
material impact on the Company's financial position, results of operations, or
cash flows since the Company did not sell, license, lease or market any
individual computer software. The Company's computer software is included with
the equipment and is not sold separately.
F-6
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE: The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit conditions. An
allowance for doubtful accounts of $899 has been established for years ended
December 31, 2005 and 2004.
STOCK-BASED COMPENSATION: The Company accounts for equity-based instruments
issued or granted to employees using the intrinsic method of accounting in
accordance with Accounting Principles Board (APB) Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"). Under the intrinsic value method,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized in the Company's Consolidated Statements of Operations.
Pro forma information regarding option grants made to the Company's
employees and directors is based on specified valuation techniques that produce
estimated compensation charges. The following table reflects the pro forma
information:
2005 2004
----------- -----------
Net income (loss) - as reported $ (392,843) $ 386,315
Pro forma compensation expense 48,947 --
----------- -----------
Pro forma net income (loss) $ (441,790) $ 386,315
Basic net income (loss) per share:
As reported $ (0.02) $ 0.02
Pro forma $ (0.02) $ 0.02
Diluted net income (loss) per share:
As reported $ (0.02) $ 0.02
Pro forma $ (0.02) $ 0.02
The value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, which was developed for use in
estimating the value of traded options that have no vesting restrictions and are
fully transferable. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
estimate, in management's opinion, the existing valuation models do not provide
a reliable measure of the fair value of the Company's employee stock options.
(For additional information regarding this pro forma information, see Note 7 to
the Consolidated Financial Statements.)
The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and the EITF Issue No. 00-18, "ACCOUNTING
FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR
IN CONJUNCTION WITH SELLING, GOODS OR SERVICES." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
F-7
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER SHARE: Basic net income per share includes no dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted net income
per share is computed by dividing net income by the weighted average number of
common shares and the dilutive potential common shares outstanding during the
period. Diluted net loss per common share is computed by dividing net loss by
the weighted average number of common shares and excludes dilutive potential
common shares outstanding, as their effective is anti-dilutive. Dilutive
potential common shares consist primarily of employee stock options, stock
warrants and shares issuable under convertible debt.
Other Significant Accounting Policies:
CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the financial
instruments have been estimated by management to approximate fair value.
INVENTORIES: Costs incurred for materials, technology and shipping are
capitalized as inventories and charged to cost of sales when revenue is
recognized. Inventories consist of finished goods and are stated at the lower of
cost or market, using the first-in, first-out method.
PROPERTY AND EQUIPMENT: Property and Equipment are valued at cost. Maintenance
and repair costs are charged to expenses as incurred. Depreciation is computed
on the straight-line method based on the following estimated useful lives of the
assets: 3 years for computer software, 5 to 7 years for computer and office
equipment, and 7 years for furniture and fixtures. Depreciation expense was $318
and $228 for 2005 and 2004, respectively.
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, 2005, 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.
GOODWILL: Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired
in a business combination. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. There was no impairment of goodwill for
year ended December 31, 2005. The Company had no goodwill in 2004.
INVESTMENT: The Company held 20% of the issued and outstanding common stock of a
Colorado privately-held company (see Note 4 to the Consolidated Financial
Statements). The Company accounts for the investment using the equity method of
accounting. Under the equity method, the carrying amount of the investment is
increased for its proportionate share of the investee's earning or decreased for
its proportionate share of the investee's loss.
F-8
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
The Company monitors the investment for impairment and makes
appropriate reductions in carrying value if the Company determines that an
impairment charge is required based primarily on the financial condition and
near-term prospects of this company.
INCOME TAXES: Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are recorded to
reduce deferred tax assets to the amount that will more likely than not be
realized.
ADVERTISING COSTS: All advertising costs are expensed as incurred. Advertising
expenses were $4,718 and $0 for 2005 and 2004, respectively.
SHIPPING AND HANDLING COSTS: The Company historically has included inbound
shipping charges in cost of sales and classified outbound shipping charges as
operating expenses. For the years ended December 31, 2005 and 2004, the outbound
shipping charges included in operating expenses were $51,714 and $62,548,
respectively.
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, 2005 and
2004, research and development costs were $8,205 and $950, respectively.
NEW ACCOUNTING PRONOUNCEMENTS: In June 2005, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 154,
"ACCOUNTING CHANGES AND ERRORS CORRECTIONS, a replacement of APB Opinion No. 20,
ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN
INTERIM FINANCIAL STATEMENT." SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Previously,
most voluntary changes in accounting principles were required recognition via a
cumulative effective adjustment within net income of the period of the change.
SFAS 154 requires retrospective application to prior periods' financial
statements, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 14, 2005; however, the Statement does not change the transition
provisions of any existing accounting pronouncements. The Company does not
believe this pronouncement will have a material impact in its consolidated
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153. This statement addresses the
measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No.
29, "ACCOUNTING FOR NONMONETARY TRANSACTIONS," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion; however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. 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. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this statement is issued. Management believes the adoption of this
statement will have no impact on its consolidated financial position, results of
operations or cash flows.
F-9
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
In December 2004, the FASB issued Statement No. 123 (revised 2004),
"SHARE-BASED PAYMENT" ("SFAS 123(R)"), which requires the measurement and
recognition of compensation expense for all stock-based compensation payments
and supersedes the Company's current accounting under APB 25. SFAS 123(R) is
effective for the first interim or annual reporting period that begins after
December 15, 2005 for small business issuers. In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107")
relating to the adoption of SFAS 123(R).
The Company adopted SFAS 123(R) on December 16, 2005, using the
modified prospective method and will continue to evaluate the impact of SFAS
123(R) on its operating results and financial condition. The pro forma
information presented above and in Note 7 presents the estimated compensation
charges under SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." The Company's
assessment of the estimated compensation charges is affected by the Company's
stock price as well as assumptions regarding a number of complex and subjective
variables and the related tax impact. These variables include, but are not
limited to, the Company's stock price volatility and employee stock option
exercise behaviors. The Company will recognize the compensation cost for
stock-based awards issued after December 15, 2005 on a straight-line basis over
the requisite service period for the entire award.
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS -- AN
AMENDMENT OF ARB NO. 43, CHAPTER 4." This statement amends the guidance in ARB
No. 43, Chapter 4, INVENTORY PRICING, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this statement will have any
immediate material impact on the Company.
The FASB has also issued SFAS No. 151, but it will not have
relationship to the operations of the Company. Therefore a description and its
impact on the Company's operations and financial position have not been
disclosed.
NOTE 2 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At December 31, 2005 2004
---------------------------------------------------------------------------
Prepaid Expenses and Others:
Prepaid insurance $ 58,244 $ 27,341
Prepaid rent and deposit 14,109 -
Prepaid taxes - 4,560
Other prepaid expenses 17,050 5,740
---------------------------------------------------------------------------
Total $ 89,403 $ 37,641
===========================================================================
F-10
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - BALANCE SHEET DETAILS (CONTINUED)
Property and equipment, net
Furniture and fixtures $ 9,531 $ 1,113
Equipment 46,333 13,331
Software 3,614 -
---------------------------------------------------------------------------
59,478 14,444
Less: accumulated depreciation (27,183) (13,569)
---------------------------------------------------------------------------
Total $ 32,295 $ 875
===========================================================================
Accrued liabilities
Accrued insurance $ 14,307 $ 17,079
Warranty reserve 8,462 8,884
Accrued payroll and related taxes 39,098 -
Accrued consulting fees 19,090 -
Other 14,704 12,110
---------------------------------------------------------------------------
Total $ 95,661 $ 38,073
===========================================================================
NOTE 3 - MERGERS AND ACQUISITIONS
OrthoNetx, Inc.
---------------
Pursuant to the Agreement and Plan of Merger ("ONX Agreement") with
OrthoNetx, Inc., a privately-held company in Colorado, dated September 1, 2005,
the Company acquired 100% of the issued and outstanding common stock of
OrthoNetx. The acquisition was completed on December 23, 2005.
OrthoNetx, Inc., which was formed in 1996, 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.
Under the terms of the ONX Agreement, the shareholders of ONX will
receive the number of shares equal to the number of outstanding shares of EDI's
common stock, including stock options and stock warrants at the closing date. As
a result, each outstanding share of ONX's common stock was converted into
approximately 0.805 shares of AcuNetx's common stock. Immediately upon the
completion of the merger, ONX's CEO became the CEO of AcuNetx.
The acquisition was accounted for as a business combination, and
accordingly, the tangibles assets acquired were recorded at their fair value at
December 23, 2005. The results of operations of OrthoNetx have been included in
the Company's consolidated financial statements subsequent to that date. The
total purchase price is $4,705,699, and is comprised of:
F-11
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - MERGERS AND ACQUISITIONS (CONTINUED)
Stock issued to acquire the outstanding common
stock of OrthoNetx (22,494,953 shares at $0.18 per share) $ 4,049,092
Acquisition related transaction costs
(3,647,818 shares at $0.18 per share) 656,607
------------
Total purchase price $ 4,705,699
============
The fair value of the purchase price was valued at $0.18 per share,
which represented the closing price of the Company's stock at December 23, 2005.
Acquisition related transaction costs include 3,647,818 shares issued to a
financial advisor of ONX. The allocation of the purchase price to assets
acquired and liabilities assumed is presented in the table that follows:
Tangible assets acquired $ 136,169
Property and equipment 29,772
Intangible assets 89,621
Goodwill 4,823,138
Other non-current assets 187,233
Liabilities assumed (560,234)
------------
Total purchase price $ 4,705,699
============
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the years ended
December 31, 2005 and 2004 assuming OrthoNetx had been acquired at the beginning
of the periods presented:
2005 2004
------------- ------------
Net revenue $ 1,430,527 $ 2,094,338
Net loss $ (1,633,122) $ (734,052)
Basic and diluted net loss per share $ (0.03) $ (0.02)
PrivaComp, Inc.
---------------
On May 27, 2005, OrthoNetx, Inc. entered into an Agreement and Plan of
Merger ("PrivaComp Agreement") with PrivaComp, Inc., 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 OrthoNetx.
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
OrthoNetx's common stock. OrthoNetx 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.
F-12
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - MERGERS AND ACQUISITIONS (CONTINUED)
PrivaComp and OrthoNetx are related through common ownership.
Accordingly, the assets and liabilities of PrivaComp have been recorded by
OrthoNetx at historical cost at June 30, 2005 as follows:
Assets:
Intellectual Property $ 54,567
Liabilities:
Accounts Payable (62,669)
-----------
Net liabilities assumed $ (8,102)
===========
PrivaComp had minimal activity during 2004 and no activity during the
year ended December 31, 2005, therefore, no pro forma information has been
presented for 2004 and 2005.
NOTE 4 - INVESTMENT IN ENGINEERING/MANUFACTURING COMPANY
On June 16, 2005, OrthoNetx acquired 20% (represents 1,644,361 shares)
of the issued and outstanding shares of common stock of High Precision Devices,
Inc. ("HPD"), a privately-held Colorado corporation, in exchange for 600,000
shares of OrthoNetx'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. OrthoNetx subcontracts the manufacturing of its medical devices
with HPD.
OrthoNetx 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
OrthoNetx for its GenerOs(TM) distraction osteogenesis devices and certain other
medical devices. OrthoNetx has agreed to provide a first right of negotiation to
HPD for the design, development and initial manufacturing of future medical
devices.
The investment was valued at $0.30 per share or $186,000 of total which
was the closing price of the Company's common stock as of June 16, 2005. The
Company accounts for the investment under the equity method as it has 20% or
more ownership and the ability to exercise significant influence over the
investment.
NOTE 5 - BORROWINGS
Note Payable to related party
-----------------------------
On January 30, 2005, OrthoNetx entered into a $300,000 line of credit
agreement with Randolph Robinson ("Lender", founder of OrthoNetx). The line of
credit agreement bears interest at 0.75% above the Wall Street Journal Prime
F-13
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Rate (8.0% at December 31, 2005), 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 Capital, LLC (collectively referred to as the "Guarantors"). In
consideration for the issuance of the line of credit, OrthoNetx issued the
Lender and the Guarantors 300,000 shares and 180,000 shares of common stock,
respectively. The stock was valued at $0.01 per share or $4,800 of total, which
was capitalized and being amortized over the term of the loan.
NOTE 5 - BORROWINGS (CONTINUED)
As of December 31, 2005, the loan balance and the related accrued
interest were $300,000 and $2,644, respectively.
Lines of Credit
---------------
The Company has a $100,000 unsecured revolving line of credit with Bank
of the West. Interest is payable monthly at 3.00 above index point (9.75% at
December 31, 2005). There was no outstanding balance on this line at December
31, 2005.
The Company has an operating line of credit with Wells Fargo Bank of
$75,000, with interest payable at the bank's prime rate plus 2.75% (6.25% at
December 31, 2004). This line of credit is payable on demand and is personally
guaranteed by the Company's President. The line of credit was closed in 2005.
The Company did not borrow against the line of credit during 2004.
Retirement of Convertible Debt
------------------------------
The Company had convertible notes payable of $40,000 as of December 31,
2004. The notes carry interest at 7% per annum, due and payable on December 31,
2007. In April 2005, the Company converted the notes of $40,000 and related
accrued interest of $6,338 into 3,591,799 shares of common stock pursuant to the
conversion privileges stated in the original note agreements. As a result, the
Company did not recognize any gain or loss from these conversions.
Extinguishment of Debt
----------------------
In December 2004, the Company paid off a promissory note of $400,000
that was restructured in 2003; as a result, the Company recognized a gain of
$28,621 which was classified as a nonoperating income in accordance with SFAS
No. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES-A REPLACEMENT OF FASB STATEMENT NO. 125."
NOTE 6 - INCOME TAXES
The provision for income taxes (benefits) consisted of the following:
F-14
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
For year ended December 31, 2005 2004
------------------------------------------------------------------------------
Federal:
Current $ - $ -
Deferred (835) (46,828)
------------------------------------------------------------------------------
(835) (46,828)
------------------------------------------------------------------------------
State:
Current 800 800
Deferred (933) 33,031
------------------------------------------------------------------------------
(133) 33,831
------------------------------------------------------------------------------
Total $ (968) $ (12,997)
==============================================================================
NOTE 6 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by
applying the federal statutory rate to the income tax expense (benefit) at the
effective rate is as follows:
For years ended December 31, 2005 2004
--------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $ (133,896) $ 126,744
State tax expense, net of federal benefit 272 272
Nondeductible deferred stock services 23,120 -
NOL Carryforwards - (138,408)
Others 1,036 (1,585)
Valuation Allowance 108,500 -
--------------------------------------------------------------------------------
Provision of income tax (benefit) $ (968) $ (12,977)
================================================================================
The components of the deferred net tax assets are as follows:
At December 31, 2005 2004
--------------------------------------------------------------------------------
Net Operating Loss Carryforwards $ 947,131 $ 229,186
Property and equipment (1,337) 209
Accruals and reserves 2,414 -
Valuation Allowance (727,207) -
--------------------------------------------------------------------------------
Net deferred tax assets $ 221,001 $ 229,395
================================================================================
The Company had removed the valuation allowance as of December 31, 2003
because it believed it was more likely than not that all deferred tax assets
would be realized in the foreseeable future and was reflected as a credit to
operations. However, as of December 31, 2005, the Company's ability to utilize
its federal net operating loss carryforwards is uncertain due to the net loss of
the year and the merger with OrthoNetx which has net operating loss
carryforwards approximately of $1.7 million as of that date, and thus a
valuation reserve has been provided against the Company's net deferred tax
assets.
As of December 31, 2005, the Company has net operating loss
carryforwards of approximately, $3,200,000 and $833,000 to reduce future federal
and state taxable income, respectively. To the extent not utilized, the federal
net operating loss carryforwards will begin to expire in fiscal 2009 and the
state net operating loss carryforwards will begin to expire in fiscal 2012.
F-15
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCKS OPTIONS AND WARRANTS
Stock Options
-------------
In 2005, the Board of Directors approved to issue stock options to the
directors for their services rendered in the amount of 20,000 shares for each of
the years from 1999 through 2005, pursuant to approval granted in 1998 at the
annual shareholders' meeting. The total number of options granted was 415,000
shares. The options are vesting immediately and exercisable in a range of $0.15
to $0.20 per share through December 9, 2008. The Company had no stock options
outstanding as of December 31, 2004.
A summary of the status of stock options issued by the Company as of
December 31, 2005 is presented in the following table.
Weighted
Number Average
of Exercise
Shares Price
---------------- -------------
Outstanding at January 1, 2005 - $ -
Granted 415,000 0.15
Exercised/Expired/Cancelled - -
---------------- ------------
Outstanding at December 31, 2005 415,000 $ 0.15
==============================================================
Exercisable at December 31, 2005 415,000 $ 0.15
==============================================================
The following table sets forth additional information about stock
options outstanding at December 31, 2005:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
--------------------------------------------------------------------------------
$0.01-$1.00 415,000 1.21 years $ 0.15 415,000
In accordance with SFAS 148, the Company is required to present pro
forma information regarding its net loss and net loss per share as if the
Company had accounted for its stock options using the fair value based method of
accounting. The weighted average fair value of the options granted in 2005 was
$0.12 and the options has been estimated at the date of grant using the
Black-Scholes-Merton option pricing model with the following weighted average
assumptions:
Risk-free interest rate 3.33%
Expected dividend yield 0.00%
Expected lives 2.10
Expected volatility 161.21%
Stock Warrants
--------------
The Company had 399,999 warrants outstanding as of December 31, 2005
and 2004. The warrants are exercisable at $0.05 per share and expire on December
31, 2007.
F-16
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
Years ended December 31, 2005 2004
================================================================================
Numerator:
Net income (loss) $ (392,322) $ 386,315
================================================================================
Denominator:
Weighted average of common shares-basic 22,922,161 17,883,081
Diluted effect of stock warrants - 290,598
Diluted effect of convertible debt - 3,591,799
--------------------------------------------------------------------------------
Weighted average common shares-diluted 22,922,161 21,765,478
================================================================================
Basic net income (loss) per share $ (0.02) $ 0.02
================================================================================
Diluted net income (loss) per share $ (0.02) $ 0.02
================================================================================
As the Company incurred net loss for the year ended December 31, 2005,
the effect of dilutive securities totaling 1,385,958 equivalent shares has been
excluded from the calculation of diluted loss per share because their effect was
anti-dilutive.
NOTE 9 - AUTHORIZED SHARES
In September 2005, the shareholders approved to increase the number of
authorized common stock to 100 million. The amendment to its article of
incorporation was filed in November.
NOTE 10 - PRIVATE PLACEMENT OFFERING
In September 2005, OrthoNetx 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 in
Note 3. 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 OrthoNetx'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 OrthoNetx'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. Total proceeds from this offering
were $650,000; the Company received $602,779, net of offering expense of $47,221
Additional offering expenses of $80,000 was paid, of which $30,000 was paid in
cash; and the balance of $50,000 was paid in 277,778 shares of AcuNetx's common
stock. All cash proceeds were received in 2006 and total of 3,888,892 shares of
AcuNetx's common stock, including the 277,778 shares, were issued.
F-17
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - MAJOR CUSTOMERS
During year ended December 31, 2005, the national distributor accounted
for $1,196,983 or 85.3% of total revenues.
During year ended December 31, 2004, two major customers accounted for
$1,541,423 or 73.8% of total revenues.
Special Instrument Dealer 11.4%
National distributor 62.4%
NOTE 12 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
The Chief Executive Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS No. 131. The Chief Executive Officer allocates
resources to each segment based on their business prospects, competitive
factors, net sales and operating results.
The Company currently reported two principal operating segments: (i)
EDI division and (ii) ONX division. The EDI division has pioneered and marketed
a diverse line of medical diagnostic devices that help doctors track and analyze
eye movements that may be disturbed when people have balance and dizziness
problems. The ONX division designs, develops, manufactures and markets medical
devices for osteoplastic surgery - generating, forming and molding bone by a
process known as distraction osteogenesis. The Company also has other
subsidiaries that do not meet the quantitative thresholds of a reportable
segment.
The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
Provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
Intersegment transactions: Intersegment transactions are recorded at
cost.
Summarized financial information of the Company's results by operating
segment is as follows:
Years ended December 31,
2005 2004
--------------------------------------------------------------------------------
Net Revenue:
EDI $ 1,402,677 $ 2,084,538
ONX - -
----------------------------------
Consolidated Net Revenue $ 1,402,677 $ 2,084,538
================================================================================
Operating income (loss):
EDI $ (377,336) $ 339,328
ONX (20,940) -
----------------------------------
Consolidated Operating Income (Loss) $ (398,276) $ 339,328
================================================================================
Net income (loss) before tax:
EDI $ (372,403) $ 373,318
ONX (21,408) -
----------------------------------
Consolidated Net Income (Loss) before tax $ (393,811) $ 373,318
================================================================================
At December 31,
Total Assets: 2005 2004
----------------------------------------------------------------------------
EDI $ 1,084,019 $ 1,360,777
ONX 5,274,261 -
---------------------------------
Consolidated assets $ 6,358,280 $ 1,360,777
============================================================================
F-18
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Company lease facilities and a copier under operating leases. As of
December 31, 2005, the minimum annual operating lease payments were as follows:
Year ended December 31, Amount
----------------------- ------
2006 $ 95,115
2007 26,112
2008 7,097
2009 5,364
2010 5,364
----------
$ 139,052
==========
Rent expense totaled $24,688 and $21,186 for 2005 and 2004,
respectively. Certain lease agreements contain renewal options providing for an
extension of the lease term at market rates. The monthly lease payment for the
copier does not include additional maintenance, insurance and per copy charges.
Sales Incentive Agreements
--------------------------
In April 2005, the Company entered into two individual agreements with
the national distributor and a special instrument dealer. The agreements provide
that the Company will issue restricted common stock to the distributor and
dealer as a sale incentive if certain conditions are reached pursuant to the
agreements. As of December 31, 2005, none of these conditions are reached and
the Company issued no shares.
Manufacturing, Sales, Licensing, And Software Agreement
-------------------------------------------------------
On March 22, 2004, the Company entered into an exclusive manufacturing,
sales, and licensing and software ownership agreement with its national
distributor ("Distributor"). Under the terms and conditions of the contract, the
Distributor agrees to purchase all of its current and future Video ENG products
exclusively from the Company. In addition, the Company grants the Distributor
the exclusive marketing rights for all of its Video ENG products throughout the
United States.
Financial Advisor
-----------------
In August 2004, OrthoNetx 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 of capital
raised. OrthoNetx agreed to issue Galen stock options upon the successful
raising of capital equal to three percent of OrthoNetx'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 OrthoNetx upon the successful raising of capital. The
option and share arrangement was subsequently satisfied by issuance of 3,647,818
shares of AcuNetx stock to Galen at the merger (see Note 3 to the consolidated
financial statements). OrthoNetx 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.
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
The agreement was terminated on February 28, 2006, by mutual consent of
both parties.
F-19
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - RELATED PARTY TRANSACTIONS
Licensing Agreement
-------------------
The Company has a licensing agreement with the Company's CEO 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, 2005, the Company had no liability for
payment of fees under this agreement.
Conflict of Interest
--------------------
The Company's CEO, the Chairman of the Board and a former director are
associated with the Company's financial advisor, Galen Capital Group, LLC
("Galen"). The Company's CEO has since resigned from Galen and the former
director also resigned from the Board of the Company in 2006.
NOTE 15 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts
that contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is
not explicitly stated. Because the obligated amounts of these types of
agreements often are not explicitly stated, the overall maximum amount of the
obligations cannot be reasonably estimated. Historically, the Company has not
been obligated to make significant payments for these obligations, and no
liabilities have been recorded for these obligations on its balance sheet as of
December 31, 2005.
In general, the Company offers a one-year warranty for most of the
products it sold. To date, the Company has not incurred any material costs
associated with these warranties. The Company provides reserves for the
estimated costs of product warranties based on its historical experience of
known product failure rates, use of materials to repair or replace defective
products and service delivery costs incurred in correcting product failures. In
addition, from time to time, specific warranty accruals may be made if
unforeseen technical problems arise with specific products. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
F-20
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
The following table presents the changes in the Company's warranty
reserve in the fiscal years December 31, 2005 and 2004 are as follows:
Years ended December 31, 2005 2004
---------- ----------
Beginning balance $ 8,884 $ 8,044
Provision for warranty 2,751 5,154
Utilization of reserve (3,173) (4,314)
---------- ----------
Ending balance $ 8,462 $ 8,884
========== ==========
NOTE 16 -SUBSEQUENT EVENTS
2006 Financing
--------------
On January 31, 2006, the Company entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP ("Cornell"), to finance
the continued development of its products. Under the agreement, Cornell has
committed to provide up to $12 million of equity financing to be drawn down over
a 24-month period at the Company's discretion. The financing will become
available after the Company has filed a Registration Statement covering the
securities with the Securities and Exchange Commission (the "SEC"), and the SEC
has declared the Registration Statement effective. The maximum amount of each
drawdown is $500,000, and there must be at least five trading days between
drawdowns.
Under the Standby Equity Distribution Agreement, each drawdown is
actually a sale by the Company to Cornell of newly-issued shares of common
stock, in the amount necessary to equate to the desired cash proceeds. Cornell
will pay the Company 98% of, or a 2% discount to, the lowest closing bid price
of the Company's common stock during the five consecutive trading day period
immediately following the date the Company notifies Cornell that the Company
desires to access the Standby Equity Distribution Agreement. Under the
agreement, the Company may not issue Cornell a number of shares of common stock
such that it would beneficially own greater than 9.99% of the Company's
outstanding shares of common stock.
In addition, Cornell Capital Partners will retain 5% of each cash
payment under the Standby Equity Distribution Agreement as a commitment fee. The
Company also issued 1,450,000 shares of common stock to Cornell Capital Partners
as a one-time commitment fee. The 2% discount, the 5% commitment fee and the
shares of common stock are considered to be underwriting discounts payable to
Cornell Capital Partners. The Company also paid $5,000 as a due diligence fee to
Cornell Capital Partners.
The Company also agreed to pay Yorkville Advisors, LLC, an affiliate of
Cornell Capital Partners, a structuring fee of $10,000 upon the earlier to occur
of (i) the first drawdown under the Standby Equity Distribution Agreement, or
(ii) April 21, 2006, as well as a fee of $500 per advance made.
Under the agreement, the Company issued three warrants to purchase the
Company's common stock to Cornell. The first is a one-year warrant for 250,000
shares, with an exercise price of $0.50 per share. The second is a two-year
warrant for 250,000 shares, with an exercise price of $1.00 per share. The third
is a three year warrant for 500,000 shares, with an exercise price of $2.00 per
share.
The Company agreed to register for resale, on Form SB-2, the shares of
common stock which the Company sell to Cornell Capital Partners under the
Standby Equity Distribution Agreement, as well shares issuable upon exercise of
the warrants and the shares issued as a commitment fee.
F-21
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - SUBSEQUENT EVENTS (CONTINUED)
The Company engaged Monitor Capital, Inc., a registered broker-dealer,
to act as placement agent in connection with the Standby Equity Distribution
Agreement, pursuant to a Placement Agent Agreement dated as of January 31, 2006.
The Company paid Monitor Capital, Inc. 50,000 shares of Common Stock as a fee
under the Placement Agent Agreement.
Additional 2006 Financing
-------------------------
In early March, a Subscription Agreement from the 2005 Private
Placement Memorandum was fulfilled in the amount of $500,000, resulting in
$450,000 net proceeds after offering expenses. Galen Capital Group is the
investor and will receive 2,777,778 shares of common stock of the Company for
their investment.
Manufacturing, Sales, Licensing, and Software Agreement
-------------------------------------------------------
The Company is negotiating to reconfigure its relationship with its
national distributor including terms of the Manufacturing, Sales, Licensing, and
Software Agreement (see Note 13) with the national distributor.
2006 Stock Option Plan
----------------------
On January 17, 2006, the Company initially adopted a 2006 Stock Option
Plan (the "Plan") for officers, directors, employees and consultants who provide
services to the Company. The Plan is being modified to its final state. The
Company contemplates reserving 14 million shares of common stock under the Plan.
The Plan shall be effective through December 31, 2015.
2006 Nonemployee Director Compensation
--------------------------------------
On February 27, 2006 the Company agreed to provide 300,000 shares of
restricted stock to each of the four nonemployee directors as compensation for
2006 services. Total grant was for 1,200,000 shares.
F-22