SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2006
Commission File No. 2-95626-D
AcuNetx, Inc.
(Name of small business issuer in its charter)
Nevada 88-0249812
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2301 W. 205th Street, Suite 102, Torrance, CA 90501
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (310) 328-0477
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
(Title of Class)
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]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
The issuer's revenues for the year ended December 31, 2006 were
$2,223,813.
The aggregate market value of the voting stock held by non-affiliates as
of March 27, 2007, computed based on the closing price reported on the OTC
Bulletin Board, was $1,742,414.
As of March 15, 2007, there were 63,199,814 shares of Common Stock of the
issuer outstanding.
Documents Incorporated by Reference: NONE
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
AcuNetx, Inc. was formed by the merger of Eye Dynamics, Inc. and OrthoNetx, Inc.
in December of 2005. AcuNetx is now organized around a dedicated medical
division and two separate subsidiary companies: (i) IntelliNetx, a medical
division with neurological diagnostic equipment, (ii) OrthoNetx, Inc., a
wholly-owned medical subsidiary company with devices that create new bone, and
(iii) VisioNetx, Inc., an AcuNetx-controlled subsidiary company, formed
subsequent to December 31, 2006, 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, fatigue 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.
Supplementing some of these products is a proprietary information technology
system that is designed to establish product registry to individual patients and
track device behavior for post-market surveillance, adverse event and outcomes
reporting.
INTRODUCTION--EYE TRACKING DEVICES
Human 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. Our medical 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
2
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 videonystagmography
(VNG) devices are designed to enable doctors to better diagnose balance
problems, including those (especially the elderly) who are in danger of falling.
EYE-TRACKING PRODUCTS
MEDICAL PRODUCTS (IntelliNetx division). 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 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 contains miniature infrared video cameras. The goggle is
an essential component because certain of the VNG tests require the patient to
move his head and often to recline on an examining table. The accuracy and
display of the Infrared/VNG System has proved to be 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. Since 1994, when we received FDA
clearance to market this product, most competitors have embraced video data
acquisition as a superior technology. Results from the tests are used by
physicians and clinicians.
We developed the AcuNetx 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 (VisioNetx subsidiary). Our impairment detection
products include:
o SafetyScan(TM), to screen workers in safety-sensitive jobs 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 or "stressor." While substance abuse receives the most
attention, worker impairment caused by other stressors, such as prescription and
over-the-counter medications, 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.
3
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 the pupil of the eye to 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. 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.
Unlike SafetyScan(TM), traditional drug tests do not determine on the job
impairment in real-time. 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 2007.
o HawkEye(TM), an evidence capture device for use by police officers in
evaluating DUI suspects and in training mode. 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, we believe 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, HawkEye (TM), is
currently offered as an advanced prototype in a 'handheld' or highly portable
configuration.
Current police practices nationwide involve training of officers in the SFST,
and some advanced officers in Drug Recognition Expert (DRE) protocols to
evaluate individuals suspected of DUI or other drug impairment. Both methods
evaluate eye signs extensively, and this evidence has met the Frye standard for
scientific validity in courts of law. However, until HawkEye(TM), which is
patent-pending, there has been no means for the officer to capture irrefutable
objective evidence. Our HawkEye(TM) product allows direct capture of eye motions
and pupil responses on video, exactly as observed by the police officer. Early
product feedback suggests great enthusiasm on the part of the law enforcement
community.
4
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.
Our OrthoNetx subsidiary holds 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 worldwide market. The first of these products, the GenerOs(TM)
CF craniofacial bone generator, has been available for commercial sale since
December 2004.
Our 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. The
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.
Our 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.
Because of other development and marketing priorities and limited resources in
2006, we have not created a dedicated marketing/sales force to bring these
products to full commercial fruition. We are seeking a strategic distribution
partner to assist with this effort.
MARKETING
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. Marketing of the Infrared/VNG System is
conducted by AcuNetx via its independent distributors. One major distributor,
MedTrak Technologies, Inc, also operates through a network of independently
owned sub-distributors, known as special instrument dealers. These independently
owned businesses are distributors of not only our 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 assigned
territories. In addition, there are several foreign distributors that are
merchandising the product in various Latin American and other countries. 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.
5
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.
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 may be necessary 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. 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 may be a lengthy process and success is not assured.
Recently, we have entered a distribution agreement for SafetyScan(TM) products
with Circadian Technologies, Inc., a research and consulting firm to industry
worldwide concerning shift work and worker safety issues.
We are currently seeking distribution partners for our HawkEye(TM) line of law
enforcement products. The product is now shipping to select customers in
advanced prototype configuration.
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. To combat this competitive pressure, AcuNetx has reduced
manufacturing costs in an effort to offset the gross margin loss.
6
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.
There are no currently known competitors for the HawkEye(TM) line of products
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.
7
MANUFACTURING
We have internally performed all design and engineering of our VNG,
SafetyScan(TM) and HawkEye(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. 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.
Our GenerOs distraction osteogenesis devices are manufactured under contract by
High Precision Devices, Inc. ("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. We also are ISO 13485 certified for our
manufacturing processes. SafetyScan(TM) and HawkEye(TM) 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, we 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) pre-market notification or approval by a more extensive
submission known as a pre-market 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.
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 IntelliNetx
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.
8
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. Our VisioNetx subsidiary has two patents pending for
SafetyScan(TM) and HawkEye(TM) devices and technology. Additionally, the
OrthoNetx subsidiary is the owner of 2 patents and a patent pending covering our
devices for distraction osteogenesis.
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 four full time employees, including two in executive and
administrative positions, one in operations and one in engineering and research.
Our employees are not parties to any collective bargaining agreement, and we
believe that our employee relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The principal offices of AcuNetx are located at 2301 205th Street, Suite 102,
Torrance, California 90501. The offices occupy 1620 square feet and the lease
expires on January 31, 2008. The current monthly lease payment is $1,685. These
offices are considered satisfactory for conducting both corporate business and
the production and shipment of our products. We believe that suitable additional
space will be available to accommodate planned expansion,
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in routine legal proceedings, none of
which are material to its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's 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 2006 and
2005 calendar years.
LOW HIGH
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2006
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First Quarter $.18 $.26
Second Quarter .14 .30
Third Quarter .08 .20
Fourth Quarter .06 .13
2005
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First Quarter $.15 $.39
Second Quarter .20 .35
Third Quarter .18 .34
Fourth Quarter .16 .29
HOLDERS
As of March 27, 2006, AcuNetx Common Stock was held of record by approximately
290 holders. Registered ownership includes nominees who may hold securities on
behalf of multiple beneficial owners.
During the last quarter of 2006, the Company issued 5,275,000 shares of common
stock in a private placement offering. The Company believes such sales were
exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4 (2) thereof and Regulation D thereunder.
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, 2006.
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 2,560.768 $ 0.21 N/A
------------------- -------------------- -------------------
Total 2,975,768 $ 0.20
------------------- -------------------- -------------------
10
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 both the December 31, 2005 and December 31, 2006 Consolidated
Balance Sheets. 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 as well as for
the full year of 2006.
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, both as a branded product for our major distributor
and under the IntelliNetx brand internationally and through independent
distributors. In 2006 the VNG line products accounted for virtually all of our
revenue. While the current products are being sold into a relatively mature
market, recent research has indicated that additional markets may be suitable
for our lines, and we will continue to explore those opportunities with our
distributors and partners.
Bringing the workplace safety products (SafetyScan(TM) I and II) and the law
enforcement products (HawkEye) to the marketplace continues to be a fundamental
key to our future success. In 2006 we made a significant investment in the
engineering, programming, and policy work that will be needed to bring the
SafetyScan II product to market. We also established beta sites for
pre-production versions of both SafetyScan I and HawkEye. Several of the beta
sites purchased the products, while others are conducting extensive testing.
Funding continues to be sought to finish these efforts as early as possible in
2007.
We believe that the OrthoNetx product line still has great value in its
marketplace, however resource constraints have not allowed sufficient focus to
move the product forward. Efforts continue to seek a distribution partner for
this line of products.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005.
Revenues from sales of products increased by 59%, from $1,402,677 in 2005 to
$2,223,813 in 2006. This increase was driven primarily by the change in revenue
recognition from a wholesale model to a retail model in the 2nd quarter of 2006.
As a result of re-negotiating our contract with our national distributor, the
Company now delivers title to our systems directly to the end customer, and
receives full retail payment. Commissions are then distributed to our
distributors and sub-distributors. The overall impact of this change is an
increase in our gross profit, offset by additional sales and marketing expense.
The overall number of systems sold during 2006 showed a small decline from 2005,
primarily due to the pause in activity while the contracts were re-negotiated.
Our national distributor accounted for approximately 86% of our sales revenues
in 2005, and in 2006 accounted for 83%. While VNG products and supplies continue
to make up the majority of our revenue, we did have modest revenue growth from
the sale of OrthoNetx products and prototype safety and law enforcement
products.
11
While the Company maintained a steady unit cost for its major systems, the
overall gross profit improved from $679,917 (48%) in 2005 to $1,608,796 (72%)
for the reasons explained previously. That growth was then offset by sales
expense for commission payments. The Company invested heavily in 2006 in product
development, marketing analysis, and consultants in labor law, information
technology, intellectual property, and capital formation. These expenses were
focused on the completion of the workplace safety line of products.
Additionally, at the end of the year, it was determined that the investments
represented by goodwill in the OrthoNetx acquisition and the 20% ownership in
High Precision Devices were sufficiently impaired as to require a write-off of
substantially all of their value. As a result, the net loss of $392,843 in 2005
grew to a loss of $8,223,391 in 2006.
Inventory turnover ratio in 2006 was approximately 2.5:1, compared to 2.2:1 in
2005. This was achieved as we aligned our inventory stocking to the lower
volumes and to a lesser extent to a write-down of the OrthoNetx inventory value.
Collection of accounts receivables has been very satisfactory, even with the
change of direct invoicing the final customer, with only minimal slow paying
accounts. Year end accounts receivable totaled $96,401 in 2006, a decrease from
$116,099 in 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, AcuNetx had an accumulated deficit of $10,864,805. As
of that date, we had $202,570 in cash and certificates of deposit, approximately
$96,401 in net accounts receivable, and $251,436 in inventory. Also, we had
$1,072,249 of current liabilities, which included accounts payable of $615,103,
most of which was related to the aforementioned development and consulting work.
All activities and vendors that are required to ship our major product line are
current. We also had accrued liabilities of $212,883, and a $300,000 note
payable, with a current balance of $243,731, plus accumulated interest. In 2007,
as noted in the footnotes to the financial statements, the holder of the note
declared the company in default. Discussions with that holder, a former director
of the Company, are ongoing to resolve the issue. Long-term liabilities were
$1,295
AcuNetx has no plans for significant capital equipment expenditures for the
foreseeable future.
The Standby Equity Distribution Agreement with Cornell Capital Partners, LP,
outlined in this document for 2005, has not been used for the purpose of raising
capital, and the Company does not anticipate its use in the future.
12
GOING CONCERN
The Company's independent auditors have included an explanatory paragraph in
their report on the December 31, 2006 consolidated financial statements
discussing issues which raise substantial doubt about the Company's ability to
continue as a "going concern." The going concern qualification is attributable
to the Company's operating losses during the year and the amount of capital
which the Company projects it needs to satisfy existing liabilities and achieve
profitable operations.
Management understands the comments in the Footnotes to the Financial Statements
relative to the Company as a going concern. We have taken a number of actions,
described in the footnotes, to significantly reduce expenses and conserve cash.
All activities will be focused on maintaining our ability to ship our VNG line
of products, which continue to serve as our source of revenue. These activities
will include maintaining the excellent relationships already formed with our
suppliers, distributors, and customers. Any future expenses not related to this
core business will be examined in the light of our current liquidity position
before approval. Management believes that the plan that has been implemented
will allow continuing operations and improvements over time.
EFFECT OF INFLATION
We do not believe that inflation has had a material effect on our net sales or
profitability in recent years.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of AcuNetx are attached 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 Interim 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.
ITEM 8B. OTHER INFORMATION
Inapplicable
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information on the officers and directors of the
Company:
NAME AGE POSITION
---- --- --------
Charles E. Phillips 71 Chairman of the Board of Directors
Ronald A. Waldorf 59 President, CEO and a Director
Terry R. Knapp, M.D. 63 Director and CEO VisioNetx
Robert S. Corrigan 53 Director
Douglas MacCarthy 61 Senior VP Operations VisioNetx
Directors hold office for a period of one year from their election at the
annual meeting of shareholders or until their successors are duly elected
and qualified.
14
Mr. Phillips is the co-founder of Eye Dynamics, predecessor to AcuNetx, and was
its President between 1988 and 2005. He became Chairman of the Board in 2006.
From 1974 to 1985, Mr. Phillips was Executive Vice President and Director of
Akai America, Ltd., a consumer electronics company. Prior to that he was
President of Califone-Roberts Division of Rheem Manufacturing Company. Mr.
Phillips received a B.A. from Pepperdine College, Los Angeles, California with
emphasis on Business and Speech Education, in 1956.
Mr. Waldorf was Chairman of the Board of Directors of Eye Dynamics between 1991
and 2005 and is currently President and Chief Executive Officer of AcuNetx, Inc.
He is the inventor of the IR/Video ENG System, SafetyScope and EM/1 products. He
also owns a patent covering closely related technology that has been licensed
exclusively to Eye Dynamics. Since 1969 Waldorf has been active in the field of
otolaryngology, primarily in an academic research environment at the University
of Florida, College of Medicine and at the University of California (Irvine),
Department of Surgery. He has published numerous articles on vestibular and
optokinetic research in international scientific and medical journals and was
the principal investigator in a research grant funded by the National Institute
of Health/National Institute on Alcohol Abuse and Alcoholism (NIH/NIAAA). Mr.
Waldorf earned an M.S. from the Department of Physiology of the College of
Medicine, University of Florida, in 1972.
Dr. Knapp has been a director of the Company since December 2005. He is
President of VisioNetx, a subsidiary of the Company. He was Chief Executive
Officer and a director of OrthoNetx, Inc. between December 2003 and its
acquisition by AcuNetx. He served as President and Chief Executive Officer
throughout 2006. He was a founder and a director of Collagen Corporation, a
publicly traded (NASDAQ) medical device company. He co-founded, served as
Chairman and Chief Executive Officer for Lipomatrix, a medical device company
based in Switzerland, with operations in the U.S. and Europe, until its
acquisition. Dr. Knapp founded PrivaComp, Inc. in 1999 as an information
technology solution for health care data management, product tracking and
surveillance, and informed consent. Dr. Knapp is a reconstructive facial and
hand surgeon, and has spoken and published extensively on matters of quality
systems and risk management in health care.
Mr. Corrigan has been a director since December 2005. He has been Chairman and
Chief Executive Officer of Centennial Capital Group, Inc. for the past twelve
years. CCGI is an investment banking enterprise which assists developmental
stage and other companies in corporate finance, mergers and acquisitions and
business development. Prior to founding CCGI, Mr. Corrigan was employed by the
major financial services companies of Merrill Lynch, Pierce Fenner & Smith, Inc.
and Paine Webber, Inc. Mr. Corrigan holds a B.S. degree from Castleton State
College, Castleton, Vermont and an M.S. from Youngstown State University,
Youngstown, Ohio.
Mr. MacCarthy served as Vice President, Operations for OrthoNetx from 2002 until
its acquisition by AcuNetx in December 2005. Between 1968 and 1999 he served in
various positions with IBM, including manager of finance, planning and
administration, and team leader for critical situation management. Mr. MacCarthy
earned a B.A. degree in Economics in 1967 and an M.B.A. in 1968, both from the
University of Michigan.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company to its Named Executive Officers and others during the fiscal years ended
December 31, 2006, 2005, and 2004
15
ITEM 10. EXECUTIVE AND DIRECTOR COMPENSATION
COMPENSATION TABLE
STOCK
NAME YEAR SALARY BONUS OTHER AWARDS OPTIONS PAYOUT
---- ---- ------ ----- ----- ------ ------- ------
Charles E. Phillips 2006 0 0 5,500 (A) 300,000 (E) 0 0
2005 52,500 60,000 32,916 (C) 0 140,000 0
2004 120,000 0 0 0 0 0
Ronald A. Waldorf 2006 150,000 0 0 0 500,000 (B) 0
2005 105,458 0 0 0 140,000 0
2004 0 0 0 0 0 0
Terry R. Knapp, MD 2006 180,000 0 0 0 1,333,333 (B) 0
2005 175,000 0 0 0 0 0
2004 104,000 0 0 0 0 0
Robert S. Corrigan 2006 0 0 49,225 (A) 300,000 (E) 0 0
2005 0 0 0 0 0 0
2004 0 0 0 0 0 0
Randolph C. Robinson, MD 2006 0 0 26,666 (D) 300,000 (E) 0 0
2005 60,000 0 0 0 0 0
2004 20,000 0 0 0 0 0
Douglas MacCarthy 2006 140,000 0 0 0 533,333 (B) 0
2005 120,000 0 0 0 0 0
2004 56,000 0 0 0 0 0
(A) Consulting Fees
(B) Options vested
(C) Accrued Vacation on termination
(D) Salary/Severance
(E) Common stock grant for Board service
Mr. Waldorf is employed pursuant to an Employment Agreement that calls for an
annual salary of $150,000, subject to annual cost of living increases. The
Agreement also provides that he will be granted 1,500,000 shares of Common Stock
as a stock bonus, which will vest at the rate of 33% per year on each
anniversary of the date of the Agreement. If he is terminated without cause, or
there is a change in control of AcuNetx, the shares vest immediately.
16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Common Stock of the Company as of March 27, 2007, by (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock of
the Company; (ii) each of the Company's directors; (iii) the Named Executive
Officers identified in the Summary Compensation Table; and (iv) all directors
and Named Executive Officers of the Company as a group.
Name & Address Number of Shares Percentage Owned
-------------- ---------------- ----------------
Randolph C. Robinson, M.D. 8,834,760 11.4%
7144 S Chapparal Cir E
Centennial, CO 80016
Charles E. Phillips 2,925,489 (1) 3.8
2301 W. 205th St., #102
Torrance, CA 90501
Terry R. Knapp, M.D. 3,201,771 (2) 4.1
20971 E. Smoky Hill Road #403
Centennial, CO 80015
Ronald A. Waldorf 1,230,433 (3) 1.6
2301 W. 205th St., #102
Torrance, CA 90501
Robert S. Corrigan 1,000,000 (4) 1.3
20971 E. Smoky Hill Road #403
Centennial, CO 80015
Douglas E. MacCarthy
20971 E. Smoky Hill Road #403 876,681 (5) 1.1
Centennial, CO 80015
Galen Capital Group LLC
1660 International Drive, #410 4,615,120 (6) 6.0
McLean, VA 22102
All directors and executive 9,234,374 (7) 12.0
officers as a group (5 persons)
--------------------------------------------------------------------------------
Options are those fully vested with a 60 day forward period for exercising.
(1) Total includes 520,000 options
(2) Total includes 1,833,333 options
(3) Total includes 348,333 options
(4) Total includes 500,000 options
(5) Total includes 533,000 options
(6) Total includes 1,388,889 warrants
(7) Total includes 4,114,999 options and warrants
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Shares of Common Stock subject to
securities currently convertible, or convertible within 60 days after March 15,
2006, are deemed to be outstanding in calculating the percentage ownership of a
person or group but are not deemed to be outstanding as to any other person or
group.
17
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who own more than 10% of a registered class of the Company's equity
securities (the "10% Stockholders"), to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Officers, directors and
10% Stockholders of the Company are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms so filed.
Based upon a review of filings made and other information available to it, the
Company believes that each of the Company's present Section 16 reporting persons
filed all forms required of them by Section 16(a) during the year 2006.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INAPPLICABLE.
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 (2)
3.2 Amended and Restated Bylaws (2)
10.1 Employment Agreement, dated December 23, 2005 between the Company and
Ronald A. Waldorf (2)
10.2 Exclusive Licensing Agreement, dated November 1, 1989 between the Company
and Ronald A. Waldorf (3)
10.3 Licensing Agreement, dated November 15, 2004 between the Company and Terry
Knapp (2)
10.4 Exclusive Manufacturing, Sales, Licensing and Software Ownership
Agreement, dated May 18, 2006 between the Company and Medtrak, Inc.
10.5 Standard Multi-Tenant Commercial Industrial Lease-Gross, dated January 9,
2003, between the Company and AMB Property, L.P. (4)
10.6 AcuNetx, Inc.2006 Non-Executive Directors' Stock Plan (2))
10.7 Standby Equity Distribution Agreement, dated January 31, 2006, between the
Company and Cornell Capital Partners, LP (2)
10.8 Placement Agent Agreement, dated January 31, 2006, between the Company and
Monitor Capital, Inc. (2)
10.9 Registration Rights Agreement, dated January 31, 2006, between the Company
and Cornell Capital Partners, LP (2)
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-KSB for the fiscal year
ended December 30, 2005, filed on March 31, 2006.
(3) Incorporated by reference from Report on Form 10-SB filed on December 13,
1999.
(4) Incorporated by reference from Report on Form 10-KSB for the year ended
December 31, 2002.
18
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a summary of the fees billed to the Company by Spector & Wong
for professional services rendered for the fiscal years ended December 31, 2006
and 2005:
Fee Category Fiscal 2006 Fees Fiscal 2005 Fees
------------ ---------------- ----------------
Audit Fees $ 74,000 $ 48,863
Audit-Related Fees 0 0
Tax Fees 0 0
All Other Fees 150 500
Total Fees $ 74,150 $ 49,363
Audit Fees. Consists of fees billed for professional services rendered for the
audit of the Company's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Spector & Wong, LLP in connection with
statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's consolidated financial statements and are not reported under "Audit
Fees." There were no Audit-Related services provided in fiscal 2006 or 2005.
Tax Fees. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning.
All Other Fees. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2006 or 2005.
Policy On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit
Services Of Independent Auditors
The Company's Audit Committee, subject to Board of Directors consent
pre-approves all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval would generally be
provided for up to one year and any pre-approval would be detailed as to the
particular service or category of services, and would be subject to a specific
budget. The independent auditors and management are required to periodically
report to the Audit Committee and Board of Directors regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Board of
Directors may also pre-approve particular services on a case-by-case basis.
19
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/ Ronald A. Waldorf
---------------------
Ronald A. Waldorf, President and
Chief Executive Officer
Date: April 12, 2007
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 and Principal Financial and Accounting Officer
/s/ Ronald A. Waldorf Chief Executive Officer, Interim
--------------------- Chief Financial Officer April 12, 2007
Ronald A. Waldorf and a Director
(3) Directors
/s/ Terry Knapp Director April 12, 2007
---------------
Terry Knapp
/s/ Charles E. Phillips Director April 12, 2007
----------------------
Charles E. Phillips
/s/ Robert S. Corrigan Director April 12, 2007
----------------------
Robert S. Corrigan
20
[SPECTOR & WONG, LLP LETTERHEAD]
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, Inx. as
of December 31, 2006 and 2005, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
years then ended. These 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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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. as of
December 31, 2006 and 2005, 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has recurring losses, substantial
working capital deficiency, stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Spector & Wong, LLP
Pasadena, CA
April 6, 2007
F-1
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
----------------------------------------------------------------------------------------------------------
ASSETS
Current Assets 2006 2005
---------------- ----------------
Cash $ 202,570 $ 171,340
Certificate of deposits - 305,274
Accounts receivable, net 96,401 116,099
Inventory 251,436 321,260
Prepaid expenses 95,519 89,403
---------------- ----------------
Total Current Assets 645,926 1,003,376
Property and equipment, net 29,591 32,296
Goodwill 362 4,823,138
Other intangible assets 136,187 89,621
Deferred tax assets 220,635 221,001
Other investments 14,007 187,285
Other assets 1,563 1,563
---------------- ----------------
TOTAL ASSETS $ 1,048,271 $ 6,358,280
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 615,103 $ 269,043
Accrued liabilities 212,883 95,661
Notes payable to related parties 243,731 300,000
Current portion of long-term debt 532 -
---------------- ----------------
Total Current Liabilities 1,072,249 664,704
Long-term debt 1,295 -
---------------- ----------------
Total Liabilities 1,073,544 664,704
---------------- ----------------
Stockholders' Equity (Deficit)
Common stock, $0.001 par value; 100,000,000 shares authorized;
62,974,814 shares issued and outstanding 62,975 47,818
Common stocks to be issued 40,500 -
Paid-in capital 10,736,057 8,287,172
Accumulated deficit (10,864,805) (2,641,414)
---------------- ----------------
Total stockholders' equity (deficit) (25,273) 5,693,576
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,048,271 $ 6,358,280
================ ================
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, 2006 2005
--------------------------------------------------------------------------------------------------
Sales - products $ 2,223,813 $ 1,402,677
Cost of products 615,017 722,760
------------------------------------
Gross profit 1,608,796 679,917
Operating expenses:
Selling,general and administrative expenses 4,062,300 1,069,988
Stock option expense 464,349 -
Impairment of goodwill 4,823,138 -
Research and development 285,332 8,205
------------------------------------
Total operating expenses 9,635,119 1,078,193
------------------------------------
Operating income (loss) (8,026,323) (398,276)
------------------------------------
Other income (expense):
Interest and other income 17,769 6,794
Gain (loss) on equity-method investment (173,278) 52
Interest and other expense (40,393) (2,381)
------------------------------------
Total other income (expenses) (195,902) 4,465
------------------------------------
Net loss before income tax (benefit) (8,222,225) (393,811)
Provision for income tax (Benefit) 1,166 (968)
------------------------------------
Net loss $ (8,223,391) $ (392,843)
====================================
Net loss per share-basic and diluted $ (0.14) $ (0.02)
====================================
Weighted average number of shares-basic and diluted 57,605,037 22,922,161
See notes to consolidated financial statements F-3
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
Common Stock Stock to Paid-in Accumulated
Shares Amount be issued Capital Deficit Total
-------------------------------------------------------------------------------------
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
Stocks to be issued 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
Issuance of stock for services 3,316,259 3,316 40,500 350,684 394,500
Issuance of stock for cash 11,438,892 11,439 1,530,090 1,541,529
Exercise of warrants 399,999 400 19,600 20,000
Issuance shares on OrthoNetx merger 2,013 2 360 362
Stock option and warrant expenses 548,151 548,151
Net loss (8,223,391) (8,223,391)
-------------------------------------------------------------------------------------
Balance at 12/31/06 62,974,814 $ 62,975 $ 40,500 $10,736,057 $ (10,864,805) $ (25,273)
=====================================================================================
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, 2006 2005
---------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $ (8,223,391) $ (392,843)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 7,047 318
Provision for bad debt 7,865 -
Provision for inventory valuation 56,863 -
Deferred tax (benefit) 366 (1,768)
Write-off note receivable - 16,731
Write-off fixed assets 1,174 -
Impairment of goodwill 4,823,138 -
Issuance of stocks and stock equity awards for services 942,651 68,000
(Gain) or loss on equity-method investments 173,278 (52)
Loss on disposal of assets 2,521 -
(Increase) Decrease in:
Accounts Receivable 11,833 (71,607)
Inventory 12,961 (47,261)
Prepaid and Others (6,116) (22,866)
Increase in:
Accounts Payable and Accrued Expenses 463,282 57,112
------------------------------------
Net cash used in operating activities (1,726,528) (394,236)
------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,250) (1,966)
Closing of certificate of deposits 305,274 -
Capitalize of patent costs and trademarks (46,566)
Purchase of certificate of deposits - (305,274)
Cash received from merge with OrthoNetx - 22,581
Cash collected from note receivable - 3,000
------------------------------------
Net cash provided by (used in) investing activities 252,458 (281,659)
------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stocks 1,541,529 -
Net proceeds from exercising of stock warrants 20,000 -
Net repayments on notes payable (56,229) -
------------------------------------
Net cash provided by financing activities 1,505,300 -
------------------------------------
NET INCREASE (DECREASE) IN CASH 31,230 (675,895)
CASH BALANCE AT BEGINNING OF YEAR 171,340 847,235
------------------------------------
CASH BALANCE AT END OF YEAR $ 202,570 $ 171,340
====================================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 800 $ 800
Taxes Refund $ - $ 4,560
Interest paid $ 32,554 $ -
Schedule of noncash investing and financing activities:
Note payable incurred for purchase of fixed asset $ 1,787 $ -
Issuance of common stocks for:
Notes Payable and accrued interest $ - $ 46,338
Merger with OrthoNetx 362 4,705,699
------------------------------------
$ 362 $ 4,752,037
====================================
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)
====================================
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., a Nevada corporation, (the "Company" or
"AcuNetx", formerly known as Eye Dynamics, Inc. or "EDI") combines diagnostic,
analytical and therapeutic devices with proprietary software to permit: health
providers to diagnose and treat balance disorders and various bone deficiencies;
law enforcement officers to evaluate roadside sobriety; and employers in
high-risk industries to determine, in real-time, the mental fitness of their
employees to perform mission-critical tasks. AcuNetx is headquartered in
Superior Colorado, and has operating divisions in Torrance, California.
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.
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. The Company's IT platform is designed
to gather data and connect the device-related data with users and support
persons. Its products include the followings: (a) 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; (b) 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; (c) Orthopedic and craniomaxillofacial (skull and jaw)
surgery products, which generate new bone through the process of distraction
osteogenesis; and (d) 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.
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 through 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. Price discounts and other sales
incentives are accrued and charged to cost of sales when revenue from the
distributor is recognized.
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)
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.
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 $5,345 and $899 has been established for
years ended December 31, 2006 and 2005, respectively.
STOCK-BASED COMPENSATION: Prior to January 1, 2006, the Company's stock option
plans were accounted for under the recognition and measurement provisions of APB
Opinion No. 25 (Opinion 25), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and
related Interpretations, as permitted by FASB Statement No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" (as amended by SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION TRANSITION AND DISCLOSURE") (collectively SFAS 123). No
stock-based employee compensation cost was recognized in the Company's
consolidated statements of operations through December 31, 2005, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of FASB Statement No.
123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2005, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R).
For the year ended December 31, 2006, as a result of adopting SFAS 123(R)
on January 1, 2006, the Company recognized pre-tax compensation expense related
to stock options of $464,349. The following table illustrates the effect on net
loss and net loss per share if the Company had applied the fair value
recognition provisions of SFAS 123 to options granted under the Company's stock
option plan for the year ended December 31, 2005. For purposes of this pro forma
disclosure, the value of the options is estimated using the Black-Scholes
option-pricing model and is being amortized to expense over the options' vesting
periods.
Net loss, as reported $ (392,843)
Deduct: Total stock-based employee compensation expense
determined under the fair value of awards, net of tax
related effects 48,947
--------------
Pro forma net loss $ (441,790,)
==============
Reported net loss per share-basic and diluted $ (0.02)
==============
Pro forma net loss per share-basic and diluted $ (0.02)
==============
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)
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).
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
$7,047 and $318 for 2006 and 2005, respectively.
OTHER INTANGIBLE ASSETS: Other intangible assets consist primarily of
intellectual property and trademarks. The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology. The majority of capitalized costs
represent legal fees 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. Trademarks are not amortized, but rather are tested for
impairment at least annually. There was no impairment of other intangible assets
for the years ended December 31, 2006 and 2005.
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)
GOODWILL: The Company accounts for Goodwill and Intangible Assets in accordance
with SFAS No. 141, "Business Combinations" and SFAS No. 142, Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill and intangibles that are deemed
to have indefinite lives are no longer amortized but, instead, are to be
reviewed at least annually for impairment. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value. Significant judgments
required to estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for each reporting unit.
The Company recorded goodwill in connection with the Company's acquisition
described in Note 4 amounting to $4,823,500. The Company's annual impairment
review of goodwill has identified that the goodwill impairment charge of
$4,823,138 are necessary for the year ended December 31, 2006 as discussed in
Note 5. 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.
INVESTMENT: The Company held 20% of the issued and outstanding common stock of a
Colorado privately-held company (see Note 6 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.
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 $24,326 and $4,718 for 2006 and 2005, 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, 2006 and 2005, the outbound
shipping charges included in operating expenses were $50,255 and $51,714,
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, 2006 and
2005, research and development costs were $285,332 and $8,205, respectively.
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)
NEW ACCOUNTING PRONOUNCEMENTS: In June 2006, the Financial Accounting Standards
Board (FASB) issued Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES", ("FIN 48"). This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES." This Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect the adoption of
FIN 48 to have a material impact on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 157, "FAIR VALUE MEASUREMENTS." SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement addresses how to calculate fair value measurements required or
permitted under other accounting pronouncements. Accordingly, this statement
does not require any new fair value measurements. However, for some entities,
the application of the statement will change current practice. SFAS No. 157 is
effective for the Company beginning January 1, 2008. The Company is currently
evaluating the impact of this standard.
In September 2006, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 108 ("SAB 108"), "CONSIDERING THE EFFECTS
OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR
FINANCIAL STATEMENTS." The stated purpose of SAB 108 is to provide consistency
between how registrants quantify financial statement misstatements.
Prior to the issuance of SAB 108, there have been two widely-used methods,
known as the "roll-over" and "iron curtain" methods, of quantifying the effects
of financial statement misstatements. The roll-over method quantifies the amount
by which the current year income statement is misstated while the iron curtain
method quantifies the error as the cumulative amount by which the current year
balance sheet is misstated. Neither of these methods considers the impact of
misstatements on the financial statements as a whole.
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
Company's financial statements and the related financial statement disclosures.
This approach is referred to as the "dual approach" as it requires
quantification of errors under both the roll-over and iron curtain methods.
SAB 108 allows registrants to initially apply the dual approach by either
retroactively adjusting prior financial statements as if the dual approach had
always been used, or by recording the cumulative effect of initially applying
the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to the
opening balance of retained earnings.
The Company will initially apply SAB 108 using the cumulative effect
transition method in connection with the preparation of the annual financial
statements for the year ending December 31, 2006. The Company does not believe
the adoption of SAB 108 will have a significant effect on its consolidated
financial statements.
F-10
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
In June 2005, the FASB issued 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.
The FASB has also issued SFAS No. 155, "ACCOUNTING FOR CERTAIN HYBRID
FINANCIAL INSTRUMENTS-AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140," SFAS No.
156, "ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS-AN AMENDMENT OF FASB
STATEMENT NO. 140," and FAS 158, "EMPLOYER'S ACCOUNTING FOR DEFINED BENEFIT
PENSION AND OTHER POSTRETIREMENT PLANS," but they will not be applicable to the
current operations of the Company. Therefore a description and the impact on the
Company's operations and financial position for each of the pronouncements above
have not been disclosed.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred operating losses totaling $8,223,391 and $392,843 for the years ended
December 31, 2006 and 2005 respectively. In addition, the Company has a working
capital deficit of $426,303 and an accumulated deficit of $10,864,805 as of
December 31, 2006. In the near term, the Company expects the operating cash
flows will not be sufficient to cover all the old debt and payables although it
expects its sales will continue to grow and is able to cover current operating
costs and to reduce the working capital deficit.
Management's plans include spinning off VisioNetx division, raising additional
working capital through debt or equity financing, closing the Colorado facility
to reduce expenditures, and increasing marketing efforts to increase revenues.
Subsequent to the year-end, the Company formed a subsidiary to spin-off the
VisioNetx division (see Note 18) and transferred, at cost, certain assets
(approximately $30,000) related to the impairment detection business. In
addition, VisioNetx assumed approximately $200,000 of liabilities. This will
enable the Company to focus in efforts on selling its neurological diagnostic
products that has historically been its primary business. VisioNetx is seeking
funding that will allow it to purchase SafetyScan-I products from the Company
and sell them to companies that wish to test for impairment of their employees.
As part of the restructuring, the Company's CEO and COO resigned subsequent to
year end and the Company moved its headquarters to Torrance, CA. The Superior
Colorado facilities are closing, thus saving salaries and operating costs.
Whereas the Company had approximately $3 million in operating expenses last
year, excluding sales commissions, cost of sales, non-cash option expense, stock
expense and write-offs, the Company is forecasting approximately $700,000 in
operating expenses in the near future that does not call for new capital
(excluding sales commissions, cost of sales, option expense and other non cash
expenses).
F-11
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In 2006, the Company negotiated amendments to its exclusive license agreement
whereby the Company is able to sell their products directly at a higher net
margin and not entirely through their distributor. As a result, the Company
expects sales will grow in the near future.
The Company also developed a more feasible plan to raise $250,000 in equity that
will allow for more sales and marketing resources and cash reserves to implement
accounts payable payment plans. The Company has generated approximately
$1,561,529 in additional operating capital during 2006 through sales of its
common stock in a private placement offering and in exercising of options and
warrants.
The ability of the Company to continue as a going concern is dependent on its
ability to meet its financing arrangement and the success of its future
operations. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
At December 31, 2006 2005
--------------------------------------------------------------------------------
Prepaid Expenses and Others:
Prepaid insurance $ 45,709 $ 58,244
Prepaid rent and deposit 7,321 14,109
Other prepaid expenses 42,489 17,050
--------------------------------------------------------------------------------
Total $ 95,519 $ 89,403
================================================================================
Property and equipment, net
Furniture and fixtures $ 9,531 $ 9,531
Equipment 41,698 46,333
Software 5,110 3,614
--------------------------------------------------------------------------------
56,339 59,478
Less: accumulated depreciation (26,748) (27,182)
--------------------------------------------------------------------------------
Total $ 29,591 $ 32,296
================================================================================
Accrued liabilities
Accrued insurance $ 18,652 $ 14,307
Warranty reserve 7,200 8,462
Accrued payroll and related taxes 91,028 39,098
Accrued consulting fees 23,250 19,090
Accrued vacation 24,003 -
Other 48,750 14,704
--------------------------------------------------------------------------------
Total $ 212,883 $ 95,661
================================================================================
F-12
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - 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 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 $4,706,061, and is comprised of:
Stocks issued to acquire the outstanding common
stock of OrthoNetx (22,496,966 shares at $0.18
per share) $ 4,049,454
Acquisition related transaction costs (3,647,818
shares at $0.18 per share) 656,607
---------------
Total purchase price $ 4,706,061
===============
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 4,823,500
Other non-current assets 187,233
Liabilities assumed (560,234)
--------------
Total purchase price $ 4,706,061
==============
F-13
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - MERGERS AND ACQUISITIONS (CONTINUED)
The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the year ended December 31,
2005 assuming OrthoNetx had been acquired at the beginning of the period
presented:
2005
----------------
Net revenue $ 1,430,527
Net loss $ (1,633,122)
Basic and diluted net loss per share $ (0.03)
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.
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 no activity during the year ended December 31, 2005; therefore, no
pro forma information has been presented for 2005.
NOTE 5 - IMPAIRMENT OF GOODWILL
The Company recorded $4,823,500 of goodwill in connection with its acquisition
of OrthoNetx (see Note 4). The amount that the Company recorded in connection
with this acquisition was determined by comparing the aggregate amounts of the
respective purchase price plus related transaction costs to the fair values of
the net tangible and identifiable intangible assets acquired for the business
acquired.
F-14
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company performed its annual impairment test of goodwill at its designated
valuation date of December 31, 2006 in accordance with SFAS 142. As a result of
these tests, the Company determined that the amount of goodwill recorded was not
recoverable. Accordingly the Company recorded a goodwill impairment charge of
$4,823,138 for the year ended December 31, 2006.
The Company recorded the aforementioned charge during the quarter ended December
31, 2006 after key management re-evaluated the Company's available resources and
the strategic direction of the business. As a result of having made this
evaluation, management determined that the Company's entry into osteoplastic
surgery market and the market for the Company's impairment detection devices was
not feasible given its limited capital resources.
Accordingly, management determined that, it would be necessary to curtail
certain of the businesses activities and principally pursue opportunities for
sales of its neurological diagnostic products.
Based on these factors, the Company revised its forecasts of future sales to
give effect to its limited capital resources. See Note 18 for subsequent events.
NOTE 6 - 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 $0.228 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.
Based on management's assessment of its current operating plan, as discussed in
Note 5, the Company determined that the strategic value of the HPD relationship
and the value of the investment is not fully recoverable and $173,278 has been
reserved against the carrying value and charged to expense in the quarter ended
December 31, 2006. See subsequent events Note 18 for the sale of this
investment.
F-15
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - 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 and a director of the
Company during 2006, until his resignation from the board in December 2006). The
line of credit agreement, as amended during 2006, bears interest at 13% and
payments are to be amortized over two year period, with additional payments of
$100,000 each time the Corporation draws against its SEDA financing arrangement.
The line of credit matures on January 10, 2008 and is collateralized by certain
intangible assets and other tangible assets of OrthoNetx and is guaranteed by
the CEO and two shareholders (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.
At December 31, 2006, the Company is in arrears for payments on the line of
credit, and subsequent to December 31, 2006 the Company received a letter
demanding payment of the note. See subsequent events (Note 18).
As of December 31, 2006, the loan balance and the related accrued interest were
$243,731 and $5,608, respectively.
LONG-TERM DEBT
At December 31, 2006 2005
-------------------------------------------------------------------- ------------- -------------
Installment note payable secured by computer equipment.
Monthly payments total $81, including interest at 18.99%. The
original note amount was $2,062. Matures July 21, 2009. $ 1,827 $ -
------------- -------------
1,827 -
Less: current portion (532) -
------------- -------------
Total long-term portion $ 1,295 $ -
============= =============
The following is a schedule of the maturities of long-term debt:
Years ended December 31,
--------------------------------
2007 $ 532
2008 765
2009 530
------------
$ 1,827
============
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). The line of credit was closed in 2006. The Company did not borrow
against the line of credit during 2006 and 2005.
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.
F-16
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision for income taxes (benefits) consisted of the following:
For year ended December 31, 2006 2005
------------------------------------------------------------------
Federal:
Current $ - $ -
Deferred 377 (835)
------------------------------------------------------------------
377 (835)
------------------------------------------------------------------
State:
Current $ 800 $ 800
Deferred (11) (933)
------------------------------------------------------------------
789 (133)
------------------------------------------------------------------
Total $ 1,166 $ (968)
==================================================================
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)
-----------------------------------------------------------------------------------
F-17
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The components of the deferred net tax assets are as follows:
At December 31, 2006 2005
--------------------------------------------------------------------------------
Net Operating Loss Carryforwards $ 2,039,478 $ 947,131
Property and equipment (329) (1,337)
Accruals and reserves 2,256,990 2,414
Other 261,186 -
Valuation Allowance (4,336,690) (727,207)
--------------------------------------------------------------------------------
Net deferred tax assets $ 220,635 $ 221,001
--------------------------------------------------------------------------------
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, 2006, the Company has net operating loss carryforwards of
approximately, $6,300,000 and $2,900,000 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.
NOTE 9 - STOCKS OPTIONS AND WARRANTS
STOCK OPTIONS
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Incentive Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to all employees and nonstatutory options to consultants
and other service providers. Generally, all options granted to employees and
consultants expire in ten and three years, respectively, from the date of grant.
All options have an exercise price equal to or higher than the fair market value
of the Company's stock on the date the options were granted. It is the policy of
the Company to issue new shares for stock option exercised and restricted stock,
rather than issue treasury shares. Options generally vest over three years. The
plan reserves 14 million shares of common stock under the Plan and shall be
effective through December 31, 2015.
On January 3, 2005, the Board of Directors approved to issue stock options to
directors in the amount of 20,000 shares for each of the years from 1999 through
2004. The total options for each of directors shall be 120,000 shares. The
options are vesting immediately and exercisable at $0.15 per share through
January 3, 2007.
A summary of the status of stock options issued by the Company as of December
31, 2006 and 2005 is presented in the following table.
F-18
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2006 2005
-----------------------------------------------------------
Weghted Weghted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-----------------------------------------------------------
Outstanding at beginning of year 415,000 $ 0.15 - $ -
Granted 6,894,102 0.21 415,000 0.15
Exercised/Expired/Cancelled - - - -
-------------- --------------
Outstanding at end of period 7,309,102 $ 0.21 415,000 $ 0.15
============== ==============
Exercisable at end of period 2,975,768 $ 0.20 415,000 $ 0.15
============== ===============
The fair value of each stock option granted is estimated on the date of grant
using the Binominal Lattice option valuation model for 2006 and the
Black-Scholes Merton option valuation model for 2005. Both models use the
assumptions listed in the table below. Expected volatilities are based on the
historical volatility of the Company's stock. The risk-free rate for periods
within the expected life of the option is based on the U.S. Treasury yield curve
in effect at the time of grant.
2006 2005
--------------------------
Weighted average fair value per option granted $ 0.17 $ 0.12
Risk-free interest rate 4.41% 3.33%
Expected dividend yield 0.00% 0.00%
Expected lives 9.80 2.10
Expected volatility 155.69% 161.21%
As of December 31, 2006 there was $678,243 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the various plans. That cost is expected to be recognized over a weighted
average period of 2 years.
NOTE 9 - STOCKS OPTIONS AND WARRANTS (CONTINUED)
The following table sets forth additional information about stock options
outstanding at December 31, 2006:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
---------------------------------------------------------------------------
$0.01-$0.30 7,309,102 9.98 years $ 0.21 2,975,768
STOCK WARRANTS
The Company had 399,999 warrants outstanding as of December 31, 2005 which were
exercised during 2006. The warrants are exercisable at $0.05 per share and
expire on December 31, 2007.
During 2006 the Company issued 9,383,335 warrants to purchase common stock at
pricing ranging from $0.20 to $2.00 per share as described below.
F-19
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY
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 4. 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 net proceeds of $602,779 after offering expenses. Additional
offering expenses of $81,250 were paid, of which $15,000 was paid in cash in
2005; $16,250 was paid in cash in 2006; and the balance of $50,000 was paid in
277,778 shares of AcuNetx's common stock and 138,889 warrants with the above
terms. All cash proceeds were received in January 2006 and total of 3,888,892
shares of AcuNetx's common stock plus 1,944,446 warrants, including the 277,778
shares and 138,889 warrants issued as expense of the offering, were issued.
In March 2006, 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, the former financial
advisor, is the investor and received 2,777,778 shares of common stock of the
Company plus 1,388,889 warrants exercisable for 2 years at a price of $0.33 per
share for their investment.
In October 2006, OrthoNetx commenced a private placement offering for a bridge
financing of equity securities to raise up to $505,000 on a best efforts basis
in conjunction with a planned follow-on financing to be initiated in 2007. Under
this private placement, the Company received proceeds of $505,000. There were no
commissions or fees paid on this offering. The Company issued 5,050,000 shares
of common stock at $0.10 per share and warrants to purchase 5,050,000
exercisable for 2 years at $0.20 per share.
STANDBY EQUITY DISTRIBUTION AGREEMENT
On January 31, 2006, the Company entered into a Standby Equity Distribution
Agreement (SEDA) 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
draw-downs.
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.
F-20
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, as amended, 1,090,266 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 has 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 warrants were valued at $83,802 using Black-Scholes option-pricing
model and were charged to operations.
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.
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. 57,143 shares of Common Stock as a fee under
the Placement Agent Agreement. The shares were valued at $0.175 per share. The
total of $10,000 was charged to operations.
At December 31, 2006 the Company had not drawn down any of the SEDA commitment
financing.
NON-EXECUTIVE DIRECTORS' STOCK PLAN
On February 27, 2006 the Board of Directors agreed to provide 300,000 shares of
restricted stock to each of the four non-employee directors as compensation for
2006 services pursuant to the 2006 Non-Executive Stock Plan established on
January 1, 2006. The shares were ratified valuing at $0.18 per share which was
the closing market price on the effective date of the Plan, and were amortized
on a straight-line basis over a twelve month period. For the year ended, the
Company issued 1,025,000 shares of common stock and recognized directors'
compensation of $184,500. The Plan was in effect until December 31, 2006.
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.
F-21
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Years ended December 31, 2006 2005
---------------------------------------------------------------------------------
Numerator:
Net loss $ (8,223,391) $ (392,322)
---------------------------------------------------------------------------------
Denominator:
Weighted average of common shares 57,605,037 22,922,161
---------------------------------------------------------------------------------
Net loss per share-basic and diluted $ (0.14) $ (0.02)
As the Company incurred net loss for the years ended December 31, 2006 and 2005,
the effect of dilutive securities totaling 346,703 and 1,385,958, respectively,
equivalent shares has been excluded from the calculation of diluted loss per
share because their effect was anti-dilutive.
NOTE 12 - MAJOR CUSTOMERS
During the year ended December 31, 2006, two major distributors accounted for
$1,803,592 or 83.3% of IntelliNetx division revenues.
National distributor $488,425 or 22.2%
SID distributor $1,342,167 or 61.1%
During year ended December 31, 2005, the national distributor accounted for
$1,196,983 or 85.3% of total revenues.
NOTE 13 - 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.
In 2006, the Company changed the structure of its internally organization to
develop three market-oriented operating divisions: (i) IntelliNetx (INX)
division, (ii) OrthoNetx (ONX) division, and (iii) VisioNetx (VNX) division. The
IntelliNetx division markets patented medical devices that assist in the
diagnosis of dizziness and vertigo, and rehabilitate those in danger of falling
as a result of balance disorders The OrthoNetx division markets patented medical
devices that mechanically induce new bone formation in patients with skeletal
deformities o the face, skull, jaws, extremities and dentition. The VisioNetx
division markets patented products that track and analyze human eye movements.
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.
F-22
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
Summarized financial information of the Company's results by operating segment
is as follows:
Years ended December 31,
2006 2005
------------------------------------------------------------------------
Net Revenue:
INX $ 2,177,528 $ 1,402,677
ONX 28,300 -
VNX 17,985 -
-----------------------------
Consolidated Net Revenue $ 2,223,813 $ 1,402,677
========================================================================
Cost of Revenue:
INX $ 548,294 $ 722,760
ONX 61,723 -
VNX 5,000 -
-----------------------------
Consolidated Cost of Revenue $ 615,017 $ 722,760
========================================================================
Gross Margin:
INX $ 1,629,234 $ 679,917
ONX (33,423) -
VNX 12,985 -
-----------------------------
Consolidated Gross Margin $ 1,608,796 $ 679,917
========================================================================
Intersegment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do not
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
NOTE 13 - SEGMENT INFORMATION
For years ended December 31,
2006 2005
----------------------------------------------------- ------------------------------
Total margin for reportable segments $ 1,608,796 $ 679,917
Corporate and general and administrative expenses (4,062,300) (1,069,988)
Stock option expenses (464,349) -
Research and development (285,332) (8,205)
Impairment of goodwill (4,823,138) -
Interest and Other Expense (40,393) (2,381)
Gain (loss) on equity-method investments (173,278) 52
Interest and Other Income 17,769 6,794
------------------------------
Net loss before income taxes $ (8,222,225) $ (393,811)
==============================
F-23
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS
The Company lease facilities and a copier under operating leases. In addition
the Company entered into a three year contract during the year with a supplier
of internet services. As of December 31, 2006, the minimum annual operating
lease payments and payments under the contract for internet services were as
follows:
Year Ended December 31, Amount
----------------------- -----------
2007 $ 47,478
2008 28,464
2009 17,552
2010 4,650
-----------
$ 98,144
===========
Rent expense totaled $100,611 and $21,186 for 2006 and 2005, 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, 2006, none of these conditions are reached and
the Company issued no shares.
The sales incentive agreement with the national distributor was replaced by the
Marketing and Distribution Agreement in May 2006.
MARKETING AND DISTRIBUTION AGREEMENT
On May 25, 2006 the Company executed a new Marketing and Distribution Agreement
with the national distributor. The new agreement restructures the Company's
relationship with the national distributor into a nonexclusive one, so that the
Company will be in a position to manufacture and sell VNG products under its own
brand names, as well as through the national distributor. The agreement also
changes the relationship between the Company and the national distributor so
that, in general, the Company will ship the national distributor branded
products directly to the end-user, receive payment from the end-user, and pay
the national distributor a commission on sales. The new Agreement is for a
period of eight years, provides for successive three year options, and
supersedes and replaces the previous Manufacturing, Sales, Licensing, and
Software Agreement and the Sales Incentive Agreement.
The Company also executed a Consulting Agreement with the owner of the national
distributor whereby the owner will provide advisory and consulting services to
the Company for the purposes of improving the Company's VNG products and other
balance-related product lines. The agreement is for a period of three years, and
renews for an additional one year term.
During 2006, the Company issued 444,445 shares valued at $0.22 per share. This
amount is being amortized as expense over a 12 month period. The Agreement
further requires seven additional annual payments of $100,000, payable in the
Company's common stock to be issued at the 15 day trailing average closing price
on the date of each issuance. In addition, the Agreement requires payments of
$45,000 per year in consulting fees to be paid over three years.
F-24
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The minimum payments schedule under these agreements was as follows:
Year Ended December 31, Amount
----------------------- -----------
2007 $ 145,000
2008 145,000
2009 100,000
2010 100,000
2011 and thereafter 300,000
-----------
$ 790,000
===========
FINANCIAL ADVISORS
In April 2006, the Company entered into a consulting agreement with Robert
Corrigan ("Corrigan"), who is also a director of the Company, for the purpose of
assisting the Company in strategic planning of relevant capital formation
alternatives and market making alternatives. Such contract provides for monthly
consulting fees of $10,000 per month plus reimbursement of expense. During 2006,
the Company paid Corrigan $51,907 in fees and expenses related to this contract.
In September 2006, the Company entered into an agreement with Stonegate Capital
("Stonegate") to be the Company's placement agent in its efforts to raise
additional equity capital. Under the terms of the agreement, Stonegate received
250,000 shares of the Company's common stock upon signing and another 250,000
shares after Stonegate had introduced the Company to potential investors. In
addition, Stonegate would receive 8% of proceeds received from investors
introduced by Stonegate. The shares were valued at the closing market price on
the date of agreement which is $0.13 per share. The total of $65,000 was charged
to operations. No amounts were raised under this agreement by year end.
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 4). 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.
F-25
ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
NOTE 15 - 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, 2006, 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 16 - DEPARTURE AND ELECTION OF CHAIRMAN OF THE BOARD OF DIRECTORS
On May 2, 2006, Stephen D. Moses resigned from the Board of Directors of
Registrant and as Chairman of the Board of Directors. The resignation arose out
of disagreements about the management and direction of the Company. The
remaining Directors of the Company disagree with the assertions of Mr. Moses.
On May 3, 2006, Charles Phillips, the Company's co-founder in 1988 and currently
a Director, was elected as the Chairman of the Board of Directors of the
Company.
NOTE 17 - 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.
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ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2006.
In general, the Company offers a one-year warranty for most of the products it
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve in
the fiscal years December 31, 2006 and 2005 are as follows:
Years Ended December 31, 2006 2005
------------------------ ----------- -----------
Beginning balance $ 8,462 $ 8,884
Provision for warranty 0 2,751
Utilization of reserve (1,262) (3,173)
----------- -----------
Ending balance $ 7,200 $ 8,462
=========== ===========
NOTE 18 -SUBSEQUENT EVENTS
FORMATION OF NEW SUBSIDIARY
Subsequent to year end, the Company formed a new subsidiary, VisioNetx, Inc.
(VisioNetx ) and transferred certain intangible assets and liabilities related
to the Company's impairment detection devices. The carrying value of the assets
(totaling $30,160 at December 31, 2006) and the liabilities assumed (at date of
transfer totaling $198,572) were transferred at cost in accordance with SFAS
141. The Company's CEO and President resigned from AcuNetx and assumed the role
of CEO and President of VisioNetx. In addition, another officer resigned from
the Company and assumed the role as COO of the subsidiary.
In addition, the Company moved its headquarters to Torrance, California.
SALE OF INVESTMENT IN HIGH PRECISION DEVICES, INC.
Subsequent to December 31, 2006 and Company entered into an agreement to
exchange the shares of common stock it holds in High Precision Devices, Inc.
("HPD") for all the common stock of the Company held by HPD, which is
approximately 483,000 shares. The value of the shares being returned to the
Company at closing is estimated to be $14,007, which is the carrying value of
the Investment in HPD at December 31, 2006.
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ACUNETX, INC. (F/K/A EYE DYNAMICS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
SETTLEMENT OF NOTES RECEIVABLE
Subsequent to December 31, 2006 and Company entered into a settlement agreement
with a former employee, who had created an indebtedness to the Company of
$49,489 in 2001 - 2004 and had agreed to a Note Receivable (Receivable). The
employee had been in default on payments on this Receivable, which was fully
reserved in 2004. The agreement calls for the former employee to repay the
Company $55,000 at a rate of $4,000 per month beginning in March 2007.
NOTICE OF DEFAULT ON NOTE WITH RELATED PARTY
The Company received a letter dated March 8, 2007 from Dr. Randolph C. Robinson
("Dr. Robinson"), a former director of the Company and holder of a promissory
note ("Note") issued by OrthoNetx, Inc. (OrthoNetx) a wholly owned subsidiary of
the Company. The letter declares that the note is in default and that Dr.
Robinson has elected to accelerate the entire unpaid balance and interest.
Accordingly the Company has reflected the entire principal and interest owed on
this note as a current liability in the accompanying consolidated financial
statements as of December 31, 2006 (see Note 7).
Dr. Robinson asserts that the Note had been assumed by the Company and that
grounds for default include, but are not limited to, failure to pay principal
and interest when due and according to the terms of the Note, material adverse
change in the financial condition or operations of the borrower, default under
the collateral documents securing the Note and other material, continuing
defaults. The Company maintains that the Note is an obligation of OrthoNetx, not
of the Company, and is collateralized by certain assets of OrthoNetx.
Under the terms of the Note, the Company has 60 days from the date of the
default notice to cure the default. The Company is continuing discussion with
Dr. Robinson to resolve this issue.
F-28