UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 0-27857
ACUNETX INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0249812
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2301 W. 205TH STREET, #102, TORRANCE, CA 90501
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(Address of principal executive offices) (Zip Code)
310-328-0477
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.001 par value 65,429,585 shares
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(Class) (Outstanding as at November 14, 2008)
AcuNetx Inc.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I - FINANCIAL INFORMATION...............................................4
ITEM 1. FINANCIAL STATEMENTS................................................4
Consolidated Balance Sheet (unaudited)............................4
Consolidated Statement of Operations (unaudited)..................5
Consolidated Statement of Cash Flows (unaudited)..................6
Notes to Financial Statements.....................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........31
ITEM 4. CONTROLS AND PROCEDURES.............................................31
PART II - OTHER INFORMATION..................................................31
ITEM 1. LEGAL PROCEEDINGS...................................................31
ITEM 1A. RISK FACTORS........................................................31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.........31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................31
ITEM 5. OTHER INFORMATION...................................................31
ITEM 6. EXHIBITS............................................................32
SIGNATURES...................................................................33
2
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. This Report on Form 10-Q contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, acquisitions,
adequacy of funds from operations, statements expressing general optimism about
future operating results and non-historical information, are forward-looking
statements. In particular, the words "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "MAY," "WILL," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Readers should not place undue reliance on these forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below) and apply only
as of the date of this Report. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below "Management's
Discussion and Analysis and Plan of Operation," as well as those discussed
elsewhere in this Report, and the risks discussed in our most recently filed
Annual Report on Form 10-KSB and in the press releases and other communications
to shareholders issued by us from time to time which attempt to advise
interested parties of the risks and factors that may affect our business.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2008 December 31, 2007
ASSETS (Unaudited) (Audited)
------------ ------------
Current Assets
Cash $ 95,776 $ 205,162
Restricted Cash 91,514 75,000
Accounts receivable, net 27,732 45,034
Inventory 107,683 204,279
Prepaid expenses and other current assets 99,541 73,685
------------ ------------
Total Current Assets 422,245 603,160
Property and equipment, net 12,232 18,064
Other intangible assets 115,271 150,472
Deferred tax assets 220,635 220,635
Other investments 15,000 0
Other assets 2,020 2,020
------------ ------------
TOTAL ASSETS $ 787,403 $ 994,351
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 453,923 $ 395,157
Accrued liabilities 967,188 794,757
Current portion of long-term debt 218,317 72,019
------------ ------------
Total Current Liabilities 1,639,428 1,261,933
Convertible debt, net of debt discount of $3,874
and $6,124 for 2008 and 2007, respectively 111,126 93,876
Long-Term Debt 150,000 197,830
------------ ------------
Total Liabilities 1,900,553 1,553,639
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Minority Deficit (14,856) (8,394)
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares
authorized; 65,429,309 shares issued and outstanding 65,429 65,143
Paid-in capital 11,335,177 11,125,546
Accumulated deficit (12,498,901) (11,741,583)
------------ ------------
Total Stockholders' Deficit (1,098,294) (550,894)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 787,403 $ 994,351
============ ============
See notes to interim unaudited consolidated financial statements
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Sales - Products $ 213,936 $ 428,286 $ 718,988 $ 2,230,706
Cost of sales - products 110,373 148,644 300,257 505,378
------------ ------------ ------------ ------------
Gross profit 103,563 279,642 418,731 1,725,328
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 306,805 388,415 974,114 2,145,774
Stock option expense 17,814 19,931 160,063 178,449
Impairment of goodwill 0 -- 0 362
------------ ------------ ------------ ------------
Total Operating Expenses 324,619 1,134,177
408,346 2,324,585
------------ ------------ ------------ ------------
Operating loss (221,056) (128,704) (715,446) (599,257)
------------ ------------ ------------ ------------
Other income (expenses)
Interest and other income 14,884 8,069 17,841 20,332
Interest and other expenses (19,643) (12,828) (66,606) (35,835)
------------ ------------ ------------ ------------
Total other income (expenses) (4,760) (4,760) (48,765) (15,503)
------------ ------------ ------------ ------------
Net loss before income taxes and minority interest (225,816) (133,464) (764,211) (614,760)
Provision for income taxes 0 -- 800 800
------------ ------------ ------------ ------------
Net loss before minority interest (225,816) (133,464) (765,011) (615,560)
Minority interest in losses of subsidiaries (3,401) (9,927) (7,692) (9,927)
------------ ------------ ------------ ------------
Net loss $ (222,414) $ (123,537) $ (757,319) $ (605,633)
============ ============ ============ ============
Net Loss per share-Basic and Diluted $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average number of common shares 65,429,309 64,221,451 65,373,674 63,236,225
See notes to interim unaudited consolidated financial statements
5
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR NINE MONTHS ENDED SEPTEMBER 30, 2008 2007
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(757,319) $(605,633)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest (7,692) (9,927)
Depreciation and amortization 6,655 9,545
Issuance of stock and stock equity awards for services 190,063 244,249
Provision for bad debt 18,711 15,434
Amortization of debt discount 2,250 312
Impairment of goodwill -- 362
Intellectual property write-down 47,249 --
Gain on recovery from loan loss (900) (20,000)
Unrealized gain on trading securities (14,100) --
(Increase) Decrease in:
Accounts receivable (1,408) (86,491)
Inventory 96,596 52,160
Prepaid and other assets (25,856) (27,210)
Increase (Decrease) in:
Accounts payable and accrued expenses 232,232 273,085
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Net cash used in operating activities (213,519) (154,113)
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CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash (16,514) --
Capitalized intellectual property (12,871) (4,319)
Repayment from Notes Receivable -- 20,000
--------- ---------
Net cash provided by (used in) investing activities (29,385) 15,681
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stock 20,050 55,000
Proceeds from issuance of long-term debt 150,000 --
Repurchase of common stock -- (7,262)
Net proceeds from convertible debt 15,000 25,000
Repayments on notes payable (51,532) (381)
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Net cash provided by financing activities 133,518 72,357
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NET DECREASE IN CASH (109,386) (66,075)
CASH BALANCE AT BEGINNING OF PERIOD 205,162 202,570
--------- ---------
CASH BALANCE AT END OF PERIOD $ 95,776 $ 136,495
========= =========
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 800 $ 800
Interest paid $ 34,689 $ 9,069
Schedule of Noncash Investing and Financing Activities:
Retirement of common stock for an equity-method investment $ 0 $ 14,007
Conversion of accrued interest into debt principal $ 0 $ 21,451
Issuance of stock options for accrued expenses $ 1,036 $ --
Issuance of warrants as debt discount $ 0 $ 7,500
See notes to interim unaudited consolidated financial statements
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
NATURE OF BUSINESS
AcuNetx, Inc., a Nevada corporation, (the "Company" or "AcuNetx", formerly known
as Eye Dynamics, Inc. or "EDI") and its subsidiaries OrthoNetx Inc. and
VisioNetx Inc., combine 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 Torrance, California.
AcuNetx operates its divisions as IntelliNetx, a medical division with
neurological diagnostic equipment; and its two subsidiary companies mentioned
above, which are (i) wholly owned OrthoNetx, Inc., which has devices that create
new bone; and (ii) VisioNetx, Inc., a majority-owned subsidiary company with
products for occupational safety and law enforcement.
AcuNetx and its subsidiaries offer the following product lines: (a) Neurological
diagnostic equipment that measures, tracks and records human eye movements,
utilizing the company's proprietary technology and computer software, as a
method to diagnose problems of the vestibular (balance) system and other balance
disorders; (b) Devices, targeting the occupational safety and law enforcement
markets, 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; (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"). SmartDeviceConnect establishes product
registry to individual patients and tracks device results for post-market
surveillance, adverse event and outcomes reporting, and creates "smart devices"
that gather and transmit physiological data from the device and its interaction
with patients.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
GOING CONCERN
In the near term, the Company expects that operating cash flows will not be
sufficient to pay off all debt and payables, although management expects this
position to improve as sales grow significantly. In the meantime, the Company
will continue to be able to cover current operating costs and to reduce the
working capital deficit.
In order to ensure adequate cash flow for operations, management is currently
finalizing Purchase Order financing. This financing provides cash to the Company
as soon as an order is received, so that management has the working capital to
pay for the purchase of inventory and the manufacturing process, as well as to
finance sales and administration.
Additionally, management's plans include raising operating capital to take
advantage of the Company's IntelliNetx and HawkEye commercial opportunities. A
mezzanine debt financing in conjunction with a commercial bank line of credit is
being considered and preliminarily structured by Management and the Board of
Directors.
This new financing is expected to enable the Company to focus its efforts on
expanding its ongoing sales to the medical community of its neurological
diagnostic products, which have historically constituted its primary and most
consistent business; and to increase the enhancement, marketing and sales
efforts of the Company's sobriety testing products for law enforcement and work
fitness testing products for industry and public safety.
The ability of the Company to continue as a going concern is dependent on the
success of its future operations and would be boosted by the success of its new
financing efforts. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at September 30,
2008 and for the three and nine months ended September 30, 2008 and 2007 is
unaudited but includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
financial information set forth herein, in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") for interim
financial information, and with the instructions to Form 10-Q Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information, refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2007.
The consolidated balance sheet as of December 31, 2007 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by U.S. GAAP for complete financial
statements.
The results for the nine months ended September 30, 2008 may not be indicative
of results for the year ending December 31, 2008 or any future periods.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying 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 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.
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 nine months ended September 30, 2008 and 2007.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired
in a business combination. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. An impairment of goodwill of $362 was
recorded for the nine months ended September 30, 2007. Goodwill was fully
impaired in 2007.
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 effect is anti-dilutive. Dilutive
potential common shares consist primarily of stock options, stock warrants and
shares issuable under convertible debt.
STOCK-BASED COMPENSATION: The Company has 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 2007 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2007
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, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). For the nine months
ended September 30, 2008 and 2007, the Company recognized pre-tax stock option
compensation expense of $160,063 and $178,449, respectively.
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).
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS: In March 2008, Financial Accounting Standards
Board {"FASB") issued Statement of Financial Accounting Standards (SFAS) No.
161, "DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS
161"). SFAS 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring companies to enhance disclosure
about how these instruments and activities affect their financial position,
performance and cash flows. SFAS 161 also improves the transparency about the
location and amounts of derivative instruments in a company's financial
statements and how they are accounted for under SFAS 133. SFAS 161 is effective
for financial statements issued for fiscal years beginning after November 15,
2008 and interim periods beginning after that date. As such, the Company is
required to adopt these provisions beginning with the quarter ending in February
2009. Adoption of SFAS 161 is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles in the
United States of America. SFAS No. 162 will be effective 60 days after the
Securities and Exchange Commission approves the Public Company Accounting
Oversight Board's amendments to AU Section 411. The Company does not anticipate
the adoption of SFAS No. 162 will have an impact on its consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 163, "ACCOUNTING FOR FINANCIAL GUARANTEE
INSURANCE CONTRACTS - AN INTERPRETATION OF FASB STATEMENT NO. 60." SFAS No. 163
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how SFAS No. 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. Those clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. SFAS No. 163 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company does not expect the adoption of SFAS No. 163 will have a material impact
on its consolidated financial condition or results of operations.
In June 2008, the FASB issued FASB SP EITF 03-6-1, "DETERMINING WHETHER
INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING
SECURITIES." SP EITF 03-6-1 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting, and
therefore need to be included in the computation of earnings per share under the
two-class method as described in SFAS No. 128, "Earnings per Share." SP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
on or after December 15, 2008 and earlier adoption is prohibited. The Company is
required to adopt SP EITF 03-6-1 in the first quarter of 2009 and is currently
evaluating the impact that SP EITF 03-6-1 will have on its consolidated
financial statements.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "BUSINESS
COMBINATIONS" ("SFAS NO.141(R)"). SFAS No. 141(R) will replace SFAS 141, and
establishes principles and requirements for how the acquirer in a business
combination reorganizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Currently, the Company does not anticipate that this
Statement will have a significant impact on its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, "NON-CONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51" ("SFAS No.
160"). This statement requires that noncontrolling or minority interests in
subsidiaries be presented in the consolidated statement of financial position
within equity, but separate from the parents' equity, and that the amount of the
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income. SFAS No. 160 will be effective for the Company's fiscal
year beginning August 1, 2009. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In December 2007, the FASB ratified the consensus reached on Emerging Issues
Task Force Issue No. 07-1, "ACCOUNTING FOR COLLABORATIVE ARRANGEMENTS RELATED TO
THE DEVELOPMENT AND COMMERCIALIZATION OF INTELLECTUAL PROPERTY" ("EITF 07-1").
EITF 07-1 defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. EITF
07-1 will be effective for the Company's fiscal year beginning August 1, 2009.
The Company is currently evaluating the potential impact of this standard on the
consolidated financial statements.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET SEPTEMBER 30, 2008 DECEMBER 31, 2007
------------------- -----------------
Accounts Receivable $ 55,298 $ 56,177
Allowance for Bad Debt (27,567) (11,143)
Total Accounts Receivable, Net $ 27,732 $ 45,034
INVENTORY
Finished Goods $ 55,310 $ 170,698
Demo units 72,424 85,206
Allowance for loss in inventory (20,050) (51,624)
Total Inventory $ 107,683 $ 204,280
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Insurance $ 6,835 $ 23,038
Prepaid rent and deposit (103) 2,065
Employee Advance 6,058 3,415
Other Prepaid Expenses 86,751 45,167
Total Prepaids and Others $ 99,541 $ 73,685
PROPERTY AND EQUIPMENT, NET
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 40,530
Software 5,757 5,757
55,818 55,818
Accumulated Depreciation (43,586) (37,754)
Total Property and Equipment, Net $ 12,232 $ 18,064
ACCRUED LIABILITIES
Warranty reserve $ 3,795 $ 11,339
Accrued payroll and related taxes 145,148 120,887
Accrued consulting fees 240,526 254,967
Commissions payable 4,685 --
Deferred Revenues 84,201 --
Accrued vacation 21,495 18,072
Accrued professional fees 143,153 136,413
Related party payable (4,176) 42,165
Other accrued liabilities 328,362 210,915
Total Accrued Liabilities $ 967,188 $ 794,758
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 4 - OTHER INTANGIBLE ASSETS
During the nine months ended September 30, 2008, the Company capitalized
intellectual property cost of $ 12,871 and expensed intellectual property that
the Company stopped pursuing which was previously capitalized at a cost of
$47,249. The Company's intangible assets consisted of the following at September
30, 2008 and December 31, 2007:
SEPTEMBER 30, DECEMBER 31,
2008 2007
------------ ------------
Pending Intellectual Property $ 94,140 $ 128,518
Awarded patents 21,954 21,954
Accumulated amortization (823) --
Total Accounts Receivable, Net $ 115,271 $ 150,472
Amortization of intangibles was $823 for the nine months ended September 30,
2008. No amortization of intangibles was recorded for the nine months ended
September 30, 2007, as no patents were awarded as of that date.
Based on the carrying amount of the intangibles as of September 30, 2008, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows:
Years ended December 31,
-------------------------
2008 (From Oct 1, 2008) $ 274
2009 1,098
2010 1,098
2011 1,098
2012 and after 17,563
-------
Total $21,131
=======
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 5 - SETTLEMENT ON NOTES RECEIVABLE
In March 2007, the Company entered into a settlement agreement with a former
employee who created indebtedness to the Company of $49,489 in 2001 to 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 April 2007. The Company collected $24,000 through
September 30, 2008. The former employee is in arrears of payments as of
September 30, 2008. In May 2008, the Company received 1,000,000 shares of
Preferred Stock of a publicly-traded, company which was provided as a security
in the agreement. The shares are classified as trading securities, of which the
shares were reported in the balance sheet at fair value with realized and
unrealized gains and losses included in current period operations. The fair
market value at the time of collection was $900. An unrealized gain of $14,100
was recorded at September 30, 2008.
NOTE 6 - BORROWINGS
LONG-TERM DEBT
September 30, December 31,
2008 2007
=================================================================================================================
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. $ 783 $ 1,297
Restructured note payable to related party. Monthly interest payment only
at 13% through January 31. 2008. Effective February 1, 2008, principal and
interest payment based on a 36-month amortization. Matures August 1, 2009.
(a) 217,534 268,552
Note payable to S&S Health Products, Inc maturing on April 1, 2011. The note
provides for monthly payments of interest only at the rate
of 10% per annum. (b) 150,000 --
----------------------------------------------------------------------------------------------------------------
388,047 269,849
Less: Current Maturities (218,317) (72,109)
----------------------------------------------------------------------------------------------------------------
Long-term debt $ 150,000 $ 197,740
================================================================================================================
(a) On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of a Note ("Agreement") with a related party. Under the
Agreement, the Company's subsidiary, OrthoNetx, Inc. executed an Amended
and Extended Promissory Note in favor of a related party, in the principal
amount of $268,551. The new note replaces a promissory note issued by
OrthoNetx, Inc. on January 30, 2005 in the original amount of $300,000. The
new note bears interest at 13% per annum, and provides for payments of
interest that commenced on August1, 2007. Payments of principal and
interest commenced on February 1, 2008, based on a 36-month amortization
schedule. All principal and interest is due on August 1, 2009. As of
September 30, 2008, the Company has made all scheduled interest payments.
Under the Agreement, the Company entered into a Commercial Guaranty, under
which it guaranteed payment of the note. Also, the related party entered
into a termination of guaranty to release the former CEO from his guaranty
of the original note.
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 6 - BORROWINGS (CONTINUED)
(b) The Note provides that if, on the second anniversary of the date of the
Note, AcuNetx has not set aside at least $100,000 for repayment of the
Note upon maturity, the principal of S&S has the right to compel
AcuNetx to conduct a private offering to raise the funds necessary to
repay the Note. The Note also provides that if AcuNetx is unable to pay
the balance at maturity, S&S is entitled to a penalty equal to 10% of
the principal balance of the Note, payable monthly until fully paid. As
of September 30, 2008, no fund was set aside.
SERIES A CONVERTIBLE PROMISSORY NOTE
On May 21, 2007, the Company's subsidiary, VisioNetx Inc., conducted a private
placement offering of convertible notes and detachable warrants up to $500,000.
The offering price was $50,000 per unit, each unit consisting of a convertible
debenture in the amount of $50,000 and a detachable warrant to purchase shares
of VisioNetx common stock. The note bears interest payable annually at 10% per
annum, and is due the earlier of (i) December 31, 2010 or (ii) two years from
the closing date of a minimum of $300,000 of units. In the event that VisioNetx
(i) issues and sells its common stock for aggregate consideration of at least
$3.5 million ("Qualified Financing") and (ii) the note has not been paid in
full, then the entire outstanding principal and all unpaid accrued interest of
the note automatically converts into shares of VisioNetx under the same terms
and conditions as those for investors in the Qualified Financing. Subscribers
also received a warrant to purchase VisioNetx shares equal to 150% of the common
stock to be issued to investors in the Qualified Financing. The warrants expire
in seven years after the date of issuance.
The offering was closed on September 14, 2007. Through that date, VisioNetx had
sold one half of a unit and received $25,000 in proceeds. In consideration for
the release of the funds from escrow for the Company's working capital needs,
VisioNetx agreed to issue to the subscriber an additional warrant, with the same
terms and conditions as the previously issued warrant for an additional 50% of
the common stock to be issued to investors in a Qualified Financing.
The Company allocated the proceeds between the convertible note ($17,500) and
the warrants ($7,500) based on the management's subjective judgment as the
exercise price of the warrants and the conversion feature of the note were not
determinable. The warrants were classified as a component of equity and charged
against the note as a debt discount which will be amortized over the life of the
note using the effective interest method.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 6 - BORROWINGS (CONTINUED)
CONVERTIBLE PROMISSORY NOTES
On November 9, 2007, VisioNetx Inc. initiated a private placement offering to
sell and issue convertible notes for up to $750,000. The offering price was
$50,000 per unit, consisting of a convertible debenture in the amount of $50,000
and underlying warrants. The notes bear interest payable annually at 8% per
annum, and are due the earlier of (i) eighteen months from the date of issue or
(ii) upon completion of a financing of New Securities, as defined, of at least
$2.0 million ("Qualified Financing"). Upon completion of a Qualified Financing
the note holder is to convert the principal and interest of the note into the
New Securities. Also upon conversion of the note, the note holders are to
receive warrants to purchase up to 100% of the number of New Securities to be
issued. The warrants are exercisable for five (5) years.
September 30, December 31,
2008 2007
---------------------------------------------------------------------------------------------------------
10% Series A Convertible Promissory Note, matures on December 31, 2010 $ 25,000 $ 25,000
8% Convertible Promissory Notes, maturing commencing May 18, 2009 90,000 75,000
---------------------------------------------------------------------------------------------------------
115,000 100,000
Less: Unamortized debt discount (3,874) (6,124)
----------------------------------------------------------------------------------------------------------
Long-term debt $ 111,126 $ 93,876
==========================================================================================================
NOTE 7 - INCOME TAXES
Provision for income taxes consisted of a minimum state franchise tax of $800
for nine months ended September 30, 2008 and 2007.
The Company had removed the valuation allowance on 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 would be reflected as a credit to
operations. However, as of December 31, 2005, the Company's ability to utilize
its federal net operating loss carryforwards was uncertain due to the merger
with OrthoNetx which had net operating loss carryforwards of approximately $1.7
million. Thus a valuation reserve was provided against the Company's net
deferred tax assets.
As of December 31, 2007, the Company has net operating loss carryforwards of
approximately, $6,800,000 and $4,300,000 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.
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 8 - STOCKHOLDERS' EQUITY
STOCK COMPENSATION
On July 17, 2008, the Compensation Committee approved the issuance of 1,000,000
shares of common stock to the incoming Chief Executive Officer as a signing
bonus. The shares are vested ratably over the remaining periods in 2008. The
shares were valued at quoted market price on the grant date and are amortized
over the vesting period. The stocks will be issued in the fourth quarter.
SALES OF COMMON STOCK
In May, 2008, the Company sold 71,429 equity units, consisting of 71,429 shares
of common stock and warrants, and received $5,000 in gross proceeds under the
April 2008 self-underwritten offering.
In February, 2008, the Company sold 215,000 equity units, consisting of 215,000
shares of common stock and warrants, and received $15,050 in gross proceeds
under the May 2007 self-underwritten offering.
COMMON STOCK RETIREMENT
In March 2007 the Company retired 483,100 shares of its common stock to rescind
an equity-method investment. The market value of the shares returned to the
Company at closing was equal to the carrying value. Accordingly, the Company did
not recognize any gain or loss on this transaction.
NOTE 9 - STOCK OPTIONS
ACUNETX, INC.
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Option Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to employees and nonstatutory options to consultants and
other service providers. Generally, all options granted to employees and
consultants expire 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. Options generally
vest over three years. The plan reserves 14 million shares of common stock under
the Plan and is effective through December 31, 2015.
18
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
A summary of the status of stock options issued by the Company as of September
30, 2008 and 2007 is presented in the following table.
2008 2007
------------------------ -----------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 5,525,768 $ 0.15 7,309,102 $ 0.21
Granted 6,472,088 $ 0.05 1,500,000 $ 0.09
Exercised, Expired and Cancelled (1,750,000) $ 0.06 (3,375,001) $ 0.21
---------- ----------
Outstanding at end of period 10,247,856 $ 0.10 5,434,101 $ 0.17
========== ==========
Exercisable at end of period 8,204,443 $ 0.12 4,434,101 $ 0.17
========== ==========
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
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.
2008 2007
---- ----
Weighted average fair value per option granted $0.04 $0.09
Risk-free interest rate 3.26% 4.75%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 5.00
Expected volatility 129.73% 120.88%
As of September 30, 2008 there was $45,745 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the plans. That cost is expected to be recognized over a weighted average period
of 11 months.
The following table sets forth additional information about stock options
outstanding at September 30, 2008:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
------------ ----------- ----------- ---------- -----------
$0.01-$0.30 10,247,856 3.76 years $ 0.10 8,204,443
19
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
VISIONETX, INC.
On August 16, 2007, the shareholders of VisioNetx, Inc. approved the adoption of
the 2007 Stock Incentive Plan to provide for the issuance of incentive stock
options and/or nonstatutory options to officers, directors, employees, and
consultants who provide services to VisioNetx. All options have an exercise
price equal to or higher than the fair market value of VisioNetx common stock on
the date the options were granted. Options generally vest over three years and
are exercisable from five to ten years from the date of grant. The plan reserves
1 million shares of common stock.
2008 2007
------------------------ ----------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 479,500 $ 0.10 -- $ 0.00
Granted 96,000 $ 0.10 362,500 $ 0.10
Exercised/Expired/Cancelled -- $ 0.00 -- $ 0.00
------- -------
Outstanding at end of period 575,500 $ 0.10 362,500 $ 0.10
======= =======
Exercisable at end of period 314,951 $ 0.10 20,139 $ 0.10
======= =======
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
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.
2008 2007
------ ------
Weighted average fair value per option granted $0.04 $0.05
Risk-free interest rate 3.45% 4.60%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 10.00
Expected volatility 134.64% 143.00%
As of September 30, 2008 there was $12,465 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the plans. That cost is expected to be recognized over a weighted average period
of 1.54 years.
20
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 9 - STOCK OPTIONS (CONTINUED)
The following table sets forth additional information about stock options
outstanding at September 30, 2008:
A summary of the status of stock options issued by VisioNetx as of September 30,
2008 is presented in the following table.
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
--------- ----------- ----------- ---------- ------------
$0.10 575,500 7.17 years $0.10 314,951
NOTE 10 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
For Three Months Ended For Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
-----------------------------------------------------------------------------------------------------------
Numerator:
Net loss $ (222,414) $ (123,537) $ (757,319) $ (605,633)
-----------------------------------------------------------------------------------------------------------
Denominator:
Weighted average of common shares 65,429,309 64,221,451 65,373,674 63,236,225
------------------------------------------------------------------------------------------------------------
Net loss per share-basic and diluted $ (0.003) $ (0.002) $ (0.01) $ (0.01)
As the Company incurred net losses for the three and nine months ended September
30, 2008, the effect of dilutive securities totaling 75,346 and 1,168,099
equivalent shares, respectively, have been excluded from the calculation of
diluted net loss per share because their effect is anti-dilutive.
Stock options and warrants to purchase approximately 17,517,437 and 15,560,770
shares of the Company's common stock were outstanding, but were not included in
the computation of diluted net loss per share for the three and nine months
ended September 30, 2007 because the exercise price of the stock options and
warrants was greater than the average share price of the common shares, and,
therefore, the effect would have been anti-dilutive.
21
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 11 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended September 30, 2008 and 2007, sales to major
customers (those exceeding 10% of the Company's net revenues) approximated 37%
and 75%, respectively, of the Company's consolidated net revenues. During the
nine months ended September 30, 2008 and 2007, sales to major customers
approximated 33% and 67%, respectively, of the Company's consolidated net
revenues.
The loss or substantial reduction of the business of a major customer could have
a material adverse impact on the Company's results of operations and cash flows.
The Company maintains cash deposits with major banks, which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
NOTE 12 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The Chief
Executive Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.
The Company has three market-oriented operating segments: (i) IntelliNetx
division, (ii) OrthoNetx, Inc., and (iii) VisioNetx, Inc. 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
for impairment screening. 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.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
22
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
Summarized financial information of the Company's results by operating segment
is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
---------------------------------------------------------------------------------------------------------------------
Net Revenue to external customers:
INX $213,936 $423,886 $700,222 $ 2,212,951
ONX -- -- 18,766 --
VNX -- 4,400 -- 17,755
----------------------------------------------------------
Consolidated Net Revenue to external customers $213,936 $428,286 $718,988 $ 2,230,706
---------------------------------------------------------------------------------------------------------------------
Cost of Revenue:
INX $110,373 $147,888 $257,977 $ 501,595
ONX -- -- 42,280 --
VNX -- 756 -- 3,783
----------------------------------------------------------
Consolidated Cost of Revenue $110,373 $148,644 $300,257 $ 505,378
---------------------------------------------------------------------------------------------------------------------
Gross Margin:
INX $103,563 $275,999 $442,244 $ 1,711,357
ONX -- -- (23,514) -
VNX -- 3,644 -- 13,972
----------------------------------------------------------
Consolidated Gross Margin $103,563 $279,642 $418,731 $ 1,725,328
---------------------------------------------------------------------------------------------------------------------
Inter-segment 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
------------------------------------------------------------------------------------------------------------------------------
Total margin for reportable segments $ 103,563 $ 279,642 $ 418,731 $1,725,328
Corporate and general and administrative expenses (306,805) (388,415) (974,114) (2,145,774)
Stock option expenses (17,814) (19,931) (160,063) (178,449)
Research and development 0 0 0 (362)
Impairment of goodwill 0 0 0 0
Interest and Other Expense (19,643) (12,828) (66,606) (35,835)
Gain (loss) on equity-method investments 0 0 0 0
Interest and Other Income 14,884 8,069 17,841 20,332
-------------------------------------------------------------
Net loss before income taxes and minority interest $(225,816) $(133,464) $(764,211) $ (614,760)
=============================================================
23
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 13 - RELATED PARTY TRANSACTION
The Company's employees periodically pay business-related expenses using
personal funds. Until reimbursed, these expenses are recorded in "Accrued
Liabilities" and listed as "Related party payables" in the balance sheet details
above. At September 30, 2008 the company had current related party payables, in
a deficit of $4,176.
In June of 2008, the Company decided to discontinue maintenance fee payments
related to its Limb Lengthener intellectual property petition. At that time, the
Company entered into an assignment agreement with a related party. In exchange
for consideration of $1, the party agreed to maintain the patent at its
discretion, without obligation, and at its expense. It further agreed that, upon
patent approval, it would give AcuNetx Inc. first right of refusal to repurchase
the assignment by reimbursing its expenses plus ten percent (10%) for a period
of 90 days from the date of issuance.
NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of September 30, 2008.
In general, the Company offers a one-year warranty for most of the products it
sells. 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.
24
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
The following table presents the changes in the Company's warranty reserve
during the first nine months of 2008 and 2007:
For the Nine Months Ended September 30, 2008 2007
------------------------------------------------------------------------------
Beginning balance $ 11,339 $ 7,200
Provision for warranty (7,544) 4,991
Utilization of reserve 0 (1,800)
-----------------------------------------------------------------------------
Ending balance $ 3,795 $ 10,391
-----------------------------------------------------------------------------
NOTE 15 - DEPARTURE AND ELECTION OF NEW OFFICERS
On July 14, 2008, Ronald A. Waldorf, President, Chief Executive Officer, and
Acting Chief Financial Officer of the Company, resigned from those positions for
personal and health reasons. At the time of his departure, the Company owed
Ronald A. Waldorf an accrued salary of $16,668 and accrued vacation of $16,954.
Robert S. Corrigan, Chairman of the Board of Directors, was appointed as
President and Acting Chief Executive Officer on an interim basis to replace Mr.
Waldorf.
Mr. Waldorf remains a member of the Board of Directors.
On July 22, 2008, the Board appointed Alexander P. Limbert to serve as Chief
Financial Officer of the Company. In September of 2008, Alexander Limbert,
former Chief Financial Officer of AcuNetx, resigned to pursue his public
accounting practice. He was replaced on September 22, 2008 by Dennis G.
Geselowitz.
NOTE 16 - SUBSEQUENT EVENTS
On September 27, 2008, Mr. Hunter resigned as CEO of VisioNetx, Inc.
(VisioNetx). In October, VisioNetx returned the investments of two investors
totaling $75,000 plus the amount of interest that was earned on those
investments ($996) while in an interest bearing account at a bank. The Company
will reflect a reduction of expense in the fourth quarter equal to $4,010, which
is the difference between the amount of interest accrued on those notes and the
amount of interest paid.
In addition, there are shares of VisioNetx's common stock that are to be issued
to its officers, the value of which have been recorded on the books at $65,000
($0.10 per share) and related payroll tax expense of $28,206. In light of the
inability to complete the needed financing, the value of those shares may be
reduced, resulting in an additional reduction of expense in the period the new
value is established and the shares issued.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results
of operations ("MD&A") supplements the accompanying consolidated financial
statements and notes to help provide an understanding of AcuNetx Inc.'s
financial condition, changes in financial condition and results of operations.
MD&A is organized as follows:
o Cautionary statement concerning forward-looking statements. This
section provides a description of the use of forward-looking
information contained in this report.
o Business overview. This section provides a description of the Company's
business and recent developments the Company believes are important in
understanding the results of operations and financial condition.
o Financial condition and liquidity. This section provides an analysis of
the Company's financial condition as of September 30, 2008 and cash
flows for the nine months ended September 30, 2008.
o Results of operations. This section provides an analysis of the
Company's results of operations for the nine months ended September
30, 2008.
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Information in this Item 2, "Management's
Discussion and Analysis or Plan of Operation," and elsewhere in this 10-Q that
does not consist of historical facts, are "forward-looking statements."
Statements accompanied or qualified by, or containing, words such as "may,"
"will," "should," "believes," "expects," "intends," "plans," "projects,"
"estimates," "predicts," "potential," "outlook," "forecast," "anticipates,"
"presume," and "assume" constitute forward-looking statements and, as such, are
not a guarantee of future performance. The statements involve factors, risks and
uncertainties, the impact or occurrence of which can cause actual results to
differ materially from the expected results described in such statements. Risks
and uncertainties can include, among others, fluctuations in general business
cycles and changing economic conditions; changing product demand and industry
capacity; increased competition and pricing pressures; advances in technology
that can reduce the demand for the Company's products, as well as other factors,
many or all of which may be beyond the Company's control. Consequently,
investors should not place undue reliance on forward-looking statements as
predictive of future results. The Company disclaims any obligation to release
publicly any updates or revisions to the forward-looking statements herein to
reflect any change in the Company's expectations with regard thereto, or any
changes in events, conditions or circumstances on which any such statement is
based.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q. 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 the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q should be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's 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 Quarterly Report on Form 10-Q.
26
BUSINESS OVERVIEW
AcuNetx Inc. is a manufacturer of innovative products that track eye movement
and are used in medical, law enforcement, workplace safety and optical polygraph
applications.
During the first nine months of 2008, sales of medical related products, in a
mature market, accounted for 90.5% of the Company's revenues, with the balance
of the revenues coming from law enforcement and optical polygraph sales. Recent
research indicates that the Company's newer product lines, in the early stages
of their product life cycles, should sell well in growing markets. The company
will actively explore those opportunities with distributors and partners, both
in the United States and internationally.
Several developing initiatives are important to the Company's future success.
First, the creation of VisioNetx, Inc. establishes a more effective and
efficient capitalization structure to help promote the Company's workplace
safety and law enforcement product lines. AcuNetx, Inc. has licensed the
HawkEye(TM) eye observation and recording system from VisioNetx to help provide
additional resources to promote the law enforcement product lines.
Secondly, the Company is ramping up product development, marketing, and sales
activities for both its new product lines, and its popular existing
Videonystagmography (VNG) medical equipment. The Company expects a growing
global demand for instruments such as these, for balance assessment and fall
prevention for the sick and elderly.
Thirdly, the company is attempting to expand significantly the market for its
medical product line. Historically, the Company's VNG product line has been
aimed at specialized physicians. While the Company has, by remaining a
significant seller in this market, proven that its VNG systems have gained
general acceptance among its specialist customers, the market of primary care
physicians is significantly larger. Therefore, the company believes that
focusing on primary care physicians has the potential to develop into a
substantially larger growth market. As a result, during the first half of 2008,
the company introduced a new more affordable VNG medical device aimed at primary
care physicians for universal patient diagnosis, and the Company will continue
to pursue this market going forward.
The Company believes that the OrthoNetx product line for repair and
reconstruction, and elongation, of human bones, has value in its marketplace,
and the Company's relationship with Robinson MedSurg LLC is an important step in
maximizing that opportunity.
27
FINANCIAL CONDITION AND LIQUIDITY
GOING CONCERN
The Company's independent auditors have included an explanatory paragraph in
their report on the December 31, 2007 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 auditor's report relative to the
Company as a going concern and has taken a number of actions, described in the
footnotes, to improve operating revenues, reduce expenses and conserve cash.
Cash flow is expected to be improved and normalized by the new purchase order
financing. Additionally, all activities will be focused on maintaining our
ability to ship our VNG medical equipment line of products, as well as the
HawkEye (TM) law enforcement product lines, which continue to serve as our
source of revenue. These activities will include maintaining the solid
relationships already formed with our suppliers, distributors, and customers,
the latter including a growing and impressive portfolio of public entities,
including state safety and police departments nationwide and recently the U.S.
Army. 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.
CURRENT ASSETS
Current assets decreased by $180,915 from December 31, 2007 to September 30,
2008 primarily due to a lower cash balance, but also to a lower inventory
balance. These decreases were offset, to a lesser extent, by higher prepaid
expenses, restricted cash balances and other current assets.
OTHER INTANGIBLE ASSETS
Other intangible assets decreased by $35,201 from December 31, 2007 to September
30, 2008, primarily due the Company's assignment of its Limb Lengthener. This
decrease was partially offset by an increase of $12,226 resulting from the
Company's decision to advance its optical polygraph equipment intellectual
property petition.
CURRENT LIABILITIES
On a positive note, current liabilities have increased by $377,495 from December
31, 2007 to September 30, 2008, primarily due to higher accrued liabilities, but
also to a higher current portion of long-term debt. The primary reason for the
increase in current liabilities is a $100,000 accrual in May of 2008 relating to
a sales agreement with a major distributor. The increase in accrued expenses was
partially affected by an increase of $58,766 in accounts payable.
LONG-TERM DEBT
Long-term debt decreased by $47,830 from December 31, 2007 to September 30,
2008, primarily due to the increase in current portion of long-term debt, net of
issuance of a new note payable in the amount of $150,000. This decrease was
partially affected by debt payment of approximately $51,000.
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased by $547,400 from December 31, 2007 to September
30, 2008, primarily due to a net loss for the period. This decrease was offset,
to a lesser extent, by a $209,631 increase in paid-in capital for the same
period. The increase in paid-in capital was primarily due to the increase in
stock option expense.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, the Company had $422,245 in current assets. This
includes $95,776 in non-restricted cash and cash equivalents and $91,514 in
restricted cash. Net accounts receivable was $27,732, and inventory was
$107,683.
29
The Company had $1,639,428 in current liabilities, which included accounts
payable of $453,923. The Company also had accrued liabilities of $967,188 and a
current portion of long term debt of $218,317. Long-term liabilities were
$150,000. As of September 30, 2008, AcuNetx had an accumulated deficit of
$12,498,901.
AcuNetx has no plans for significant capital equipment expenditures for the
foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
MATERIAL COMMITMENTS
The Company has no material commitment to make capital equipment expenditures.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2007
The nine months ended September 30, 2008 and 2007 represent the combined results
of AcuNetx, Inc. and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc.
A significant aspect of the Company's year-to-year comparison is a change in
revenue recognition relating to one of the company's major distributors. During
the first half of 2007, the Company sold its products directly to end customers
and paid the distributor sales commissions based on sales to these customers.
Since July of 2007, the Company sells its products directly to this distributor
at wholesale prices. This change results in lower revenues for the same unit
volume of sales, along with lower gross profits, as costs do not change.
Correspondingly, a decrease in commission expense occurs as the distributor is
no longer receiving commissions.
Revenues during the nine months ended September 30, 2008 were $718,988, compared
to $2,230,706 for the corresponding period in 2007. System unit shipments
decreased to 35 units in the first nine months of 2008 from 49 units in the same
period of the prior year as a result of two significant factors: (i) the overall
uncertainty with the domestic economy, and (ii) the lack of funds to adequately
market the company's products. Gross profit, as a percentage of sales, decreased
from 77% to 58%. Total operating expenses decreased by $1,190,408, from
$2,234,585 in the first nine months of 2007 to $1,134,177 in the first nine
months of 2008. Selling, general and administrative expenses decreased from
$2,145,774, in the first nine months of 2007, to $974,114 in the first nine
months of 2008. Net loss increased from $605,663 in the first nine months of
2007 to $757,319 in the first nine months of 2008.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company" the Company is not required to provide the
information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, our CEO and CFO concluded that, as of September 30, 2008, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company required to be included in the
Company's periodic filings with the SEC, such that the information relating to
the Company required to be disclosed in SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company's management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There has been no material change in our internal control over financial
reporting during the three months ended September 30, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
As a "smaller reporting company" the Company is not required to provide
the information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On May 31, 2008, Charles E. Phillips, Chairman of the Board of Directors of the
Company, resigned from the Board for health reasons.
Robert S. Corrigan, a current member of the Board of Directors, was appointed
Chairman of the Board to replace Mr. Phillips.
31
On July 14, 2008, Ronald A. Waldorf, President, Chief Executive Officer, and
Acting Chief Financial Officer of the Company, resigned from those positions for
personal and health reasons. At the time of his departure, the Company owed
Ronald A. Waldorf an accrued salary of $16,668 and accrued vacation of $16,954.
Robert S. Corrigan, Chairman of the Board of Directors, was appointed as
President and Acting Chief Executive Officer on an interim basis to replace Mr.
Waldorf.
Mr. Waldorf remains a member of the Board of Directors.
On July 22, 2008, the Board appointed Alexander P. Limbert to serve as Chief
Financial Officer of the Company. In September of 2008, Alexander Limbert,
former Chief Financial Officer of AcuNetx, resigned to pursue his public
accounting practice. He was replaced on September 22, 2008 by Dennis G.
Geselowitz.
ITEM 6. EXHIBITS
31.1 Certification of the Company's Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of the Company's Chief Financial Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1 Certification of the Company's Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of the Company's Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 19, 2008 By: /s/ Robert S. Corrigan
-----------------------
Robert S. Corrigan,
Chief Executive Officer
33