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XCEL ASSOCIATES, INC.
224 Middle Road, Hazlet, NJ 07730
Telephone: 732-264-3433
Facsimile: 732-264-5327
E-mail: XcelAssoc@aol.com
Financial Consulting/Mergers and Acquisitions
I N V E S T M E N T R E S E A R C H
COMPANY PROFILE March 5, 1999
INDUSTRY: MEDICAL EQUIPMENT
EYE DYNAMICS, INC.
(OTC-BB-EYDY--$.42)
INVESTMENT OPINION
Eye Dynamics, Inc. (the "Company" or "EYDY") is a small manufacturer of specialty medical
equipment, which measures and diagnoses important human eye movements. The key
product--an infrared/video-based electro-nystagmography unit--enjoys a state-of-the-art status
in its field. This technology, plus a new marketing structure in 1997 and a marketing manager
in 1998, propelled sales to $679,000 last year--a five-fold gain in five years. Based on these
factors and continuing demand momentum, we forecast another sales surge to at least $1
million in 1999. If achieved, this would probably move earnings solidly into the black for the
first time. The Company's products appear to face significant market opportunities, which will
require external financing to substantially capitalize upon. We recommend purchase of EYDY,
in speculative accounts, for its apparent major appreciation potential. There are 9.1 million
shares outstanding and a nominal float of 2.1 million shares. Daily trading volume averaged
67,000 shares over the past 90 days.
ORIGINS
Eye Dynamics, Inc. was incorporated in 1989 as Petro Plex, Inc., then a public company which
later became a corporate shell. In 1991, Petro Plex acquired OculoKinetics, Inc. in a reverse
merger, and Oculo-Kinetics' management became the officers, directors, and principal
shareholders of Petro Plex. Subsequently, Petro Plex changed its name to Drug Detection
Systems, Inc. and then to Eye Dynamics, Inc., in 1993.
OculoKinetics, Inc. was formed in 1988 by Ronald A. Waldorf (now Chairman of Eye
Dynamics) and Charles E. Phillips (now President of Eye Dynamics) to combine their
scientific and business backgrounds, respectively. Their objective was to create, through
OculoKinetics, successful commercial applications of Ronald's education in vestibular
physiology and his subsequent research and work in its advanced ramifications.
OculoKinetics remains a wholly-owned subsidiary of Eye Dynamics, Inc.
OPERATIONS
Eye Dynamics, Inc. is engaged in the design, development, manufacture and distribution of
equipment and related systems, which measure and record human eye movements in
response to certain stimuli. The eye is an incredibly sensitive organ; and, thus eye
movements are indicators of the presence of diseases, drugs, or other conditions which
impair the human visual-motor systems. In particular, the Company deals with the central
nervous system condition of nystagmus--"a rapid, involuntary oscillation of the eyeball"
(Webster). Nystagmus occurs in different forms and has a number of causes, ranging from the
serious (tumor in the brain or ear) to the benign (positional and curable dizziness). The
consumption of drugs and alcohol also both cause nystagmus, with alcohol having a direct and
quantifiable correlation between the blood alcohol concentration (BAC) in the body and the
degree of nystagmus.
The Company sells two products (both have patents), which are both applications of its
scientific competency in the neuro-optical field, in which its Co-founder and Chairman (Ronald
A. Waldorf) is a ranking expert. The most important is its House InfraRed/Video ENG
(electro-nystagmography) system, an FDA-approved medical device. It is used to diagnose
nystagmus and its causes, including dizziness (which ranks only behind the cold/flu as the
reason to visit a primary physician). Although electronystagmography has been used some 40
years, Eye Dynamics was the first to add the important infrared video feature. The previous
procedure required attaching electrodes to the patient's head and face and intermittently
recalibrating the equipment during the test, resulting in a two-hour procedure. The advent of
the IR/V by Eye Dynamics brought major benefits to the patient, the health practitioner
administering the test, and society because: (1) the collection of medical information is
improved; (2) the patient is more comfortable; and (3) the test time has been reduced by
about 60% to approximately 45 minutes. This greater productivity is an important attribute,
given the current era of health-care cost containment and a price tag of about $30,000 per
IR/V ENG. Doctors are now more "capped" on how much they can bill a patient (or
insurer/HMO), but with this technology they can now test more patients per day with less
legal liability (use of state-of-the-art is a defense against malpractice suits). Since introducing
the IR/V ENG in 1994, this product has been EYDY's mainstay by accounting for over 90% of
revenues.
The Company's other product is the EPS-100 (Enhanced Performance System) whose design
is based on the core technology of the IR/V ENG, with some modifications. The EPS-100 is
used to measure eye performance (not diagnose), hence it does not need FDA approval. It
can determine with about 90% accuracy (after only a 90-second non-invasive test) whether a
worker is "unfit for duty" at that point in time, or whether a vehicle operator is "driving
under the influence"--in either case because of the consumption of alcohol or other drugs.
These impair the central nervous system which is then manifested in the eye movements.
"The eyes tell all," so to speak.
MARKETS AND MARKETING
The electronystagmography (ENG) market accounts for about $15,000,000 annually of the
$700,000,000 total medical neurological diagnostic market. There are several other ENG
manufacturers and some are now offering the video feature. The ENG market has about a 5%
growth rate, with replacement demand accounting for about 75% of unit sales. Private
practice doctors (otolaryngologists, otologists, neuro-ophthalmologists, audiologists and
others in the broadening eye-ear field) are the largest source of demand.
From 1994-1998 Eye Dynamics sold approximately 125 IR/V ENG units, causing revenues to
rise from $113,000 in 1993 to $679,000 (estimated, unaudited) in 1998. This virtual 100%
annual growth rate for five years is impressive per se. It is even more impressive when one
recognizes that the previous marketing arrangement from 1994-1997 was less than optimal
and the Company lacked the funds to adequately support marketing (the funds were
sufficient, however, for critical product development).
We believe Eye Dynamics is facing an attractive sales outlook over the next few years, at
least, because:
1. The state-of-the-art technology of the Eye Dynamics IR/V ENG is very likely to accelerate
replacement demand by present users of now obsolete ENG models.
2. Eye Dynamics switched to a single-step marketing arrangement in 1997-1998 when it
adopted a Special Instrument Dealer network. This consists of 15 dealers, employing some
50 sales reps, in 49 states. The advantage is these dealers specialize in selling limited
medical lines to the eye-ear medical community--the heart of the target market for Eye
Dynamics. This change-over was instrumental in increasing Eye Dynamic's sales by 54% to
$436,000 between 1996-1997. Further marketing changes occurred in July 1998: the
commission payout was altered and Mr. Charlie Anderson was hired as Marketing Manager.
The result was another robust sales performance in 1998, with sales soaring 56% to
$679,000, with about two-thirds of this occurring in the second half of the year. Clearly, Eye
Dynamics' IR/V ENG is displaying great sales momentum.
Eye Dynamic's EPS-100 has very attractive performance features. It recently competed
against five other systems in an evaluation conducted by the prestigious Battelle Institute and
commissioned by the Transportation Research Board. The EPS-100 was three times more
accurate at detecting blood alcohol concentration than the nearest competitor's product. It
seems to us that the EPS-100 is a "natural" for use in performance testing in the
corporate/industrial environment. This is a $2 billion per year testing market, almost all via
urine analysis, which is slow, costly, and invasive (of privacy). Law enforcement also appears
to offer attractive potential to Eye Dynamics. Its EPS-100 can measure nystagmus, replacing
the "hand-flashlight" method currently used in the Standard Field Sobriety Test. The law
enforcement market, including that of driver and parole/correction applications, is a $1 billion
annual testing market.
INVESTMENT RISKS AND CONCERNS INCLUDE:
1. Eye Dynamics is a small, single-product company.
-But, this product concentration is currently an advantage because of soaring demand for its
IR/V ENG.
2. EYDY's technology could be leap-frogged by competitors.
-True, in principle; but EYDY is presently a technology leader in its field.
-And, the ENG market may be too small to attract large technology firms; thus reducing this
risk.
3. Credit strength is limited.
A. At 12/31/97, net working capital was a negative $(249,000),
resulting in a qualified auditor's opinion.
B. Approximately $550,000 (principal and interest) is due 12/31/99
to TESA, which has collateral rights to EYDY's accounts receivable, inventory and patents.
-However, TESA is an investor group which does not conduct
operations, so it would probably have more to gain by keeping EYDY alive and its top
management in place, than by ousting management or triggering bankruptcy.
-Significantly perhaps, EYDY would have right of first
refusal for exclusive use of the patents, if it lost them to TESA.
-Moreover, EYE Dynamics' trade know-how and presence in the
marketplace may be more important than the rights of the IR/V ENG patent.
4. Operating losses have been historically chronic, causing an accumulated deficit of $(2.9)
million.
-However, this is typical of an early-stage company.
-Further, EYDY's sales are growing rapidly and the Company would
have been profitable in 1998, if not for losses from its former Cardiac Event Monitoring
service (discontinued in January).
5. Additional external financing will be required to finance growth (and/or pay off the balloon
note).
-It will probably have to be equity in nature, given the debt-heavy balance sheet.
-But, the need to externally finance growth is also typical of small firms and exists only when
opportunity also exists.
6. Dependency on the chairman and president.
-Loss of either would hurt.
-However, a promising technology has already been developed and is selling well--probably
without much daily help from either officer.
7. Ownership is concentrated in the chairman and president (together, 60%).
But, the chairman and the president are co-founders, they have the
vision and the capability (in our view) to grow Eye Dynamics more, and it is preferable,
therefore, that they be economically bonded to the Company.
8. Potential dilution, all from options, is large (31%).
-However, if the options are exercised, over $725,000 would be received by the Company,
and present management would still control.
9. The FDA regulates EYDY's medical products.
-However, EYDY has received FDA approval, which would be an entry barrier to new
competition.
10. As a low-priced stock on the Bulletin Board, its price is volatile.
-But, the 2.1 million share nominal float helps mitigate.
INVESTMENT OPPORTUNITIES AND POTENTIALS INCLUDE:
1. Eye Dynamics has leading technical capabilities in the electronystamography (ENG) field.
-Chairman Ron Waldorf is a renowned expert in vestibular physiology.
-EYDY introduced the infrared/video feature in 1994, the first major technological
advancement in the ENG in 40 years.
-The Company's IR/V ENG's technological strength is the main reason sales have increased
500% in five years.
2. The Company's marketing structure is now much stronger.
-In 1997, the Special Instrument Dealer network, targeted at the eye-ear medical practice,
was added.
-In 1998, a Marketing Manager was hired. Charlie Anderson is an electrical engineer whose
ENG sales roots go back to the beginning of the industry.
3. The ENG market is attractive in some respects.
-At only $15 million annually, it is small.
-But, replacement demand-75% of annual sales-has a positive outlook. Most of the installed
base of some 5,000 ENG's is technologically/economically obsolete. With fully-competitive
technology in its IR/V ENG and recently added marketing strength, Eye Dynamics should be
able to increase its domestic market share.
- And, international sales are picking up, from Asia to Europe.
4. EYDY's EPS-100 offers vast potential, albeit problematic.
-This product is an extrapolation of the Company's core competency in the neuro-optical
medical field.
-The EPS-100 does performance testing-in only 90 seconds-to determine if a person's
visual-motor system is impaired.
-The corporate/industrial market is huge ($2 billion annually spent on urine testing). 10% of
the U.S. work force tests positive for substance abuse!
-The law enforcement market is also huge ($1 billion annual spending). Motor vehicle
accidents kill 45,000 people annually, and about one-half are alcohol related.
-The EPS-100 has superior features (relative to traditional substance abuse tests), namely:
faster, cheaper, and non-invasive.
-But, to date, only 5 units have been sold. We attribute this to cultural lag and heretofore
insufficient marketing resources at EYDY. A capital infusion would fix the latter, but the
cultural hurdle of getting bureaucrats to adopt new systems (at $10,000 each) is more
daunting, though not insurmountable.
William N. Walling, Jr., CFA
Consultant
ABOUT THE ANALYST
Mr. William Walling, Jr., a Chartered Financial Analyst, has several decades of experience on
the brokerage and fiduciary sides of the investment profession. These former positions
include: Vice President at White, Weld; Shearson; and A.G. Becker Paribas and Trust
Investment Officer at Empire Trust Company. He is a former four-time member of the
“Institutional Investor Magazine” All America Research Team.
The information and statistical data herein have been obtained from the company covered in
this report and from other sources believed to be reliable but in no way are warranted by us
as to accuracy or completeness. Xcel Associates, Inc. or their officers, directors, analysts,
employees, or consultants have been compensated and may have positions in these
securities. |
