UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2007
COMMISSION FILE NO. 0-27857
ACUNETX, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2301 W. 205th Street, #102, Torrance, CA 90501
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(Address of principal executive offices)
310-328-0477
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(Issuer's telephone number)
Check whether the issuer: (1) 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 for
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 shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
-----------------------
As of September 30, 2007, the issuer had 65,085,737 shares of common stock
outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) ( ) YES; (X) NO.
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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-QSB 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.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2007
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ASSETS
Current Assets
Cash $ 136,496
Accounts receivable, net 167,458
Inventory 199,276
Prepaid expenses and other current assets 122,520
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Total Current Assets 625,749
Property and equipment, net 20,046
Other intangible assets 140,506
Deferred tax assets 220,635
Other assets 1,772
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TOTAL ASSETS $ 1,008,708
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 529,967
Accrued liabilities 549,653
Current portion of long-term debt 65,330
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Total Current Liabilities 1,144,950
Convertible debt, net of debt discount of $7,188 17,813
Long-Term Debt 201,298
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Total Liabilities 1,364,060
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Minority Interest 2,551
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,085,737 shares issued and outstanding 65,086
Common stock to be issued 65,000
Paid-in capital 10,982,448
Accumulated deficit (11,470,438)
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Total Stockholders' Deficit (357,904)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,008,708
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SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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FOR THREE MONTHS FOR NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Sales - Products $ 428,286 $ 764,763 $ 2,230,706 $ 1,420,068
Cost of sales - products 148,644 126,337 505,378 395,825
------------ ------------ ------------ ------------
Gross profit 279,642 638,426 1,725,328 1,024,243
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 388,415 1,117,913 2,145,774 3,087,175
Stock option expense 19,931 109,737 178,449 354,613
Impairment of goodwill -- -- 362 --
Research and development -- 28,450 -- 220,028
------------ ------------ ------------ ------------
Total Operating Expenses 408,346 1,256,100 2,324,585 3,661,816
------------ ------------ ------------ ------------
Operating loss (128,704) (617,674) (599,257) (2,637,573)
------------ ------------ ------------ ------------
Other income (expenses)
Interest and other income 8,069 620 20,332 17,468
Loss on equity-method investments -- (9,232) -- (37,922)
Interest and other expenses (12,828) (9,902) (35,835) (29,149)
------------ ------------ ------------ ------------
Total other income (expenses) (4,760) (18,514) (15,503) (49,603)
------------ ------------ ------------ ------------
Net loss before income taxes and minority interest (133,464) (636,188) (614,760) (2,687,176)
Provision for income taxes -- -- 800 1,166
------------ ------------ ------------ ------------
Net loss before minority interest (133,464) (636,188) (615,560) (2,688,342)
Minority interest in losses of subsidiaries 9,927 -- 9,927 0
------------ ------------ ------------ ------------
Net loss $ (123,537) $ (636,188) $ (605,633) $ (2,688,342)
============ ============ ============ ============
Net Loss per share-Basic and Diluted $ (0.00) $ (0.01) $ (0.01) $ (0.05)
============ ============ ============ ============
Weighted average number of common shares 64,221,451 57,458,147 63,236,225 56,079,000
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR NINE MONTHS ENDED SEPTEMBER 30, 2007 2006
----------------------------------------------------------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (605,633) $(2,688,342)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest in loss of subsidiaries (9,927) --
Depreciation 9,545 8,879
Issuance of stocks and stock equity awards for services 244,249 787,415
Provision for bad debt 15,434 9,083
Impairment of goodwill 362 --
Gain on recovery from loan loss (20,000) --
Amortization of debt discount 312 --
Deferred income tax -- 366
Loss on investment accounted for under equity method -- 37,922
Write-off fixed assets -- 1,174
(Increase) Decrease in:
Accounts Receivable (86,491) 38,405
Inventory 52,160 17,743
Prepaid and Others (27,210) (4,168)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities 273,085 449,928
----------- -----------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (154,113) (1,341,595)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Closing of Certificate of Deposits -- 305,274
Capitalize of patent costs (4,319) (27,734)
Capitalize of trademark -- (10,072)
Purchase of Equipment -- (5,161)
Repayment from Notes Receivable 20,000 --
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NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 15,681 262,307
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stocks 55,000 1,036,529
Repurchase of common stocks (7,262) --
Net proceeds from exercising of stock warrants -- 20,000
Proceeds from convertible debt 25,000 --
Repayments on notes payable (381) (56,014)
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NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 72,357 1,000,515
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NET DECREASE IN CASH (66,075) (78,773)
CASH BALANCE AT BEGINNING OF PERIOD 202,570 171,340
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CASH BALANCE AT END OF PERIOD $ 136,495 $ 92,567
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 9,069 $ 21,852
Taxes Paid $ 800 $ 800
Schedule of noncash investing and financing activities:
Retirement of common stocks for an equity-method investment $ 14,007 $ --
Conversion of accrued interest into debt principal $ 21,451 $ --
Issuance of warrants as debt discount $ 7,500 $ --
Issuance of common stocks for merger adjustment $ -- $ 362
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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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 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 is organized around a dedicated medical division (i) IntelliNetx, a
medical division with neurological diagnostic equipment, and two separate
subsidiary companies: (ii) OrthoNetx, Inc., a wholly-owned medical subsidiary
company with devices that create new bone, and (iii) VisioNetx, Inc., a
majority-owned subsidiary company 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.
AcuNetx products include the followings: (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
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.
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 $605,633 and $2,688,342 for the nine months
ended September 30, 2007 and 2006 respectively. In addition, the Company has a
working capital deficit of $519,201 and an accumulated deficit of $11,470,438 as
of September 30, 2007. 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 plans to spin off VisioNetx, Inc., to begin a process of raising
additional working capital through equity financing, to increase its IntelliNetx
division's marketing and sales efforts and to focus on its neurological
diagnostic product line which has historically been the company's principal
business. VisioNetx, Inc. has recruited senior management and is seeking funding
that will allow it to move forward with its marketing and sales plans.
The ability of the Company to continue as a going concern is dependent on its
ability to meet its financing requirements 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.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at September 30,
2007 and for the three and nine months ended September 30, 2007 and 2006 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-QSB. 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, 2006.
The results for the three and nine months ended September 30, 2007 may not be
indicative of results for the year ending December 31, 2007 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, 2007 and 2006.
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 during the nine months ended September 30, 2007. No impairment of
goodwill was recorded for nine months ended September 30, 2006.
MINORITY INTEREST: Minority interest represents other stockholders'
proportionate share in the equity of VisioNetx, Inc. At September 30, 2007, the
Company owned 84% of the issued and outstanding common stock of VisioNetx, Inc.
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE PROMISSORY NOTE AND WARRANTS: The Company has evaluated all
freestanding instruments and embedded features embodied in the Series A
Convertible Promissory Note financing arrangement in accordance with current
accounting standards for complex financing transactions. The following points
illustrate the key considerations in the Company's evaluation:
o The terms and features of the Series A Convertible Promissory Note
resulted in the Company's conclusion that the instrument was more akin
to a debt security than an equity security. Therefore, embedded
features that met the definition of derivative financial features were
evaluated for their clear and close relationship with a debt
instrument. Significant features included conversion features;
redemption features and interest features. While conversion features,
such as those included in the Series A Convertible Promissory Note, are
generally not clearly and closely related to debt instruments, the
Company was afforded the "Conventional Convertible" exemption from
derivative accounting. While redemption features and interest features
are generally considered clearly and closely related to debt
instruments, the Company was also afforded the "Conventional
Convertible" exemption from derivative accounting.
o The terms and features of the freestanding warrants were evaluated
under the guidance for equity classification set forth in EITF 00-19,
ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO A COMPANY'S
OWN STOCK and EITF 05-04, THE EFFECT OF A LIQUIDATING DAMAGES CLAUSE ON
A FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO EITF 00-19. As a result,
the Company concluded that the warrants did not rise to an uneconomic
settlement. In addition, all other indicators of equity provided in
EITF 00-19 were present. Therefore, the warrants were afforded equity
classification.
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.
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, 2007 and 2006, the Company recognized pre-tax stock option
compensation expense of $178,449 and $354,613, respectively.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT 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).
NEW ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board ("FASB') issued Financial Accounting Standards ("FAS") No. 159,
THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING
AN AMENDMENT OF FASB STATEMENT NO. 115, which permits entities to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. A business entity is required to report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. This statement is expected to expand
the use of fair value measurement. FAS No.159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1 ("FSP 48-1"),
DEFINITION OF SETTLEMENT IN FASB INTERPRETATION NO. 48. FSP 48-1 amended FIN 48
to provide guidance on how an enterprise should determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized
tax benefits. FSP 48-1 required application upon the initial adoption of FIN 48.
The adoption of FSP 48-1 did not affect the Company's condensed consolidated
financial statements.
In June 2006, the 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.
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET
------------------------
Accounts Receivable $ 187,968
Allowance for Bad Debt (20,510)
---------
Total Accounts Receivable, Net $ 167,458
=========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 16,398
Prepaid rent and deposit 399
Employee advance 2,100
Other Prepaid Expenses 103,623
---------
Total Prepaids and Others $ 122,520
=========
PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures $ 9,531
Equipment 40,530
Software 5,757
---------
55,818
Accumulated Depreciation (35,772)
---------
Total Property and Equipment, Net $ 20,046
=========
ACCRUED LIABILITIES
-------------------
Commission payable $ 2,194
Warranty reserve 10,391
Accrued payroll and related taxes 99,714
Accrued consulting fees 334,955
Accrued vacation 18,189
Other accrued liabilities 84,210
---------
Total Accrued Liabilities $ 549,653
=========
NOTE 4 - SALES OF INVESTMENTS
On March 28, 2007, the 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 were 483,100 shares. The market
value of the shares returned to the Company at closing was $14,007, which was
equal to the carrying value. Accordingly, the Company did not recognize any gain
or loss on this transaction. The returned shares were retired at March 31, 2007.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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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 - 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. The Company has collected $20,000 through
September 30, 2007.
NOTE 6 - BORROWINGS
NOTE PAYABLE TO RELATED PARTY
-----------------------------
On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of Note ("Agreement") with the 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
$268,551.25. 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 only commencing
August 1, 2007 until February 1, 2008, at which time payments of principal and
interest will commence based on a 36-month amortization. All principal and
interest is due on August 1, 2009. As of September 30, 2007, 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.
In accordance with SFAS 15, "ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED
DEBT RESTRUCTURING," the carrying amount of the old debt was not changed as it
did not exceed the future cash payments specified by the new debt terms. The
difference will be amortized over the life of the new debt using the effective
interest method.
Debt Carrying Value as of June 30, 2007:
Original carrying amount of old debt $ 243,731
Accrued and unpaid interest balance 21,451
---------
Carrying value of debt $ 265,182
Future Cash Flows:
New debt principal $ 268,551
Interest to be paid on new principal amount 60,630
---------
Total future cash payments required 329,181
---------
Future cash payments over carrying value of debt $ (63,999)
=========
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 6 - BORROWINGS (CONTINUED)
LONG-TERM DEBT
--------------
At September 30, 2007
------------------------------------------------------------------------
Installment note payable secured by computer equipment. 1,446
Monthly payments total $81, including interest at 18.99%.
The original note amount was $2,062. Matures July 21, 2009.
Reconstructed 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. 265,182
------------------------------------------------------------------------
266,628
Less: Current Maturities (65,330)
------------------------------------------------------------------------
Long-term debt $ 201,298
------------------------------------------------------------------------
SERIES A CONVERTIBLE PROMISSORY NOTE
------------------------------------
On May 21, 2007, VisioNetx, Inc. (VisioNetx) conducted a private placement
offering to sell and issue convertible notes and detachable warrants up to
$500,000. The offering price is $50,000 per 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 were sold. In the event that
VisioNetx issues and sells its common stock for aggregate consideration of at
least $3.5 million ("Qualified Financing") and (ii) the notes has not been paid
in full, then the entire outstanding principal and all unpaid accrued interest
of the note shall automatically convert into shares of VisioNetx under the same
terms and conditions as those for investors in the Qualified Financing.
Subscribers to this offering will receive a warrant to purchase VisioNetx shares
equal to a 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 sold
one half of a unit and received $25,000 in proceeds. In consideration of the
early closing, 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
determined. 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.
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
The components of the deferred net tax assets are as follows:
For Three Months ended For Nine Months ended
September 30, September 30,
2007 2006 2007 2006
==========================================================================
Federal:
Current $ -- $ -- $ -- $ --
Deferred -- -- -- 377
--------------------------------------------------------------------------
-- -- -- 377
--------------------------------------------------------------------------
State:
Current -- -- 800 800
Deferred -- -- -- (11)
--------------------------------------------------------------------------
-- -- 800 789
--------------------------------------------------------------------------
Total $ -- $ -- $ 800 $ 1,166
==========================================================================
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, $6,076,628 and $6,390,821 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 8 - STOCKHOLDERS' EQUITY
COMMON STOCK RETIREMENT
-----------------------
On April 17, 2007, the Company repurchased and retired 580,978 shares of its
common Stock. The shares were purchased from a single shareholder in a privately
negotiated transaction at $0.0125 per share for a total repurchase price of
$7,262.
SELF-WRITTEN OFFERING
---------------------
In May 2007, the Company conducted a self-written offering to sell up to
$200,000 of its equity units which consist of one share of the Company's common
stock and one warrant to purchase an additional share of common stock. Each unit
is sold for the sum of $0.07. The exercise price for the warrant included in the
unit is $0.10 and expires two years from the date of purchase. As of September
30, 2007, the Company had raised $55,000 from the offering and sold 785,715
units.
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
In July 2007, pursuant to the terms in the investment agreement, the Company
resolved to issue additional 2,164,286 shares of the common stock to the
investors who subscribed the Company shares in October 2006. In addition, the
Company cancelled all the warrant agreements that were attached in lieu of the
shares sold and reissued new warrant agreements to the investors. The new
warrant agreements reduced the exercise price from $0.20 per share to $0.10 per
share and revised the expiration date to July 11, 2009.
NON-EXECUTIVE DIRECTORS' STOCK PLAN
-----------------------------------
On January 18, 2007 the Board of Directors agreed to provide 500,000 stock
options to each of the three nonemployee directors as compensation for 2007
services pursuant to the 2006 Stock Option Plan established on March 27, 2006.
The stock options vested immediately and are exercisable at $0.09 per share for
a period of five years. For the three and nine months ended September 30, 2007,
the Company recognized directors' compensation of $0 and $113,884, respectively.
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 valued at $0.18 per share, 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 three and nine months ended September
30, 2006, the Company recognized directors' compensation of $40,500 and $144,000
respectively.
SUBSIDIARY STOCK TRANSACTIONS
-----------------------------
On July 1, 2007, VisioNetx resolved to issue 800,000 shares to three
non-executive directors for their services provided, at a fair value of $0.001
per share, or an aggregate of $800.
On July 16, 2007, VisioNetx entered into three executive employment agreements
providing that VisioNetx agreed to issue 650,000 shares at a fair value of $0.10
per share to these executives. The shares will not be issued until the first
equity financing is obtained. The aggregate amount of $65,000 was accrued and
classified as an equity component.
The Company complies with the requirement of SEC Staff Accounting Bulletin No.
51, "Accounting for Sales of Stock by a Subsidiary," which requires that the
difference between the carrying amount of parent's investment in a subsidiary
and the underlying net book value of the subsidiary after the issuance of stock
by the subsidiary be reflected as either a gain or loss in the statement of
operations or reflected as an equity transaction. The Company has elected to
record gains or losses resulting from the issuance of subsidiary's stock as
equity transactions.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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.
A summary of the status of stock options issued by the Company as of September
30, 2007 and 2006 is presented in the following table.
2007 2006
----------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------------------------------------------
Outstanding at beginning of year 7,309,102 $ 0.21 415,000 $ 0.15
Granted 1,500,000 $ 0.09 6,894,102 $ 0.21
Exercised/Expired/Cancelled (3,375,001) $ 0.21 -- $ --
------------ ---------
Outstanding at end of period 5,434,101 $ 0.17 7,309,102 $ 0.21
============ =========
Exercisable at end of period 4,434,101 $ 0.17 1,309,102 $ 0.19
============ =========
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.
2007 2006
----------------------
Weighted average fair value per option granted $ 0.09 $ 0.17
Risk-free interest rate 4.75% 4.41%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 9.80
Expected volatility 120.88% 155.69%
As of September 30, 2007 there was $97,207 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 1.25 years.
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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
exercisable for ten years from the date of grant. The plan reserves 1 million
shares of common stock.
A summary of the status of stock options issued by VisioNetx as of September 30,
2007 is presented in the following table.
2007
--------------------
Weighted
Number Average
of Exercise
Shares Price
--------------------
Outstanding at beginning of year -- $ --
Granted 362,500 $ 0.10
Exercised/Expired/Cancelled -- $ --
---------
Outstanding at end of period 362,500 $ 0.10
=========
Exercisable at end of period 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.
2007
---------
Weighted average fair value per option granted $ 0.05
Risk-free interest rate 4.60%
Expected dividend yield 0.00%
Expected lives 10.00
Expected volatility 143.00%
As of September 30, 2007 there was $17,635 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 2.75 years.
18
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months ended September 30, Nine Months ended September 30,
2007 2006 2007 2006
---------------------------- ----------------------------
Numerator:
Net loss $ (123,537) $ (636,188) $ (605,633) $ (2,688,342)
------------ ------------ ------------ ------------
Denominator:
Weighted average number of common shares 64,221,451 57,458,147 63,236,225 56,079,000
------------ ------------ ------------ ------------
Net loss per share-basic and diluted $ (0.00) $ (0.01) $ (0.01) $ (0.05)
============ ============ ============ ============
Stock options and warrants to purchase approximately 17,517,437 and 15,560,770
shares of the Company's common stocks 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, respectively, because the exercise price of the stock
options and warrants were greater than the average share price of the common
shares, and, therefore, the effect would have been antidilutive.
As the Company incurred net loss for the three and nine months ended September
30, 2006, the effect of dilutive securities totaling 475,384 and 2,101,182
equivalent shares, respectively, have been excluded from the calculation of
diluted loss per share because their effect was anti-dilutive.
NOTE 11 - FORMATION OF NEW SUBSIDIARY
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
Chief Executive Officer (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 Chief Operating Officer of the
subsidiary.
In July 2007, a new VisioNetx CEO was introduced. The former CEO
resigned from his position and remained as the Chairman of Board of the new
subsidiary. VisioNetx then appointed three new executives to lead VisioNetx. As
disclosed in Note 8, VisioNetx awarded 800,000 shares to three nonexecutive
directors on July 1, 2007; as a result, AcuNetx Inc.`s percentage ownership of
VisioNetx was reduced from 100% to 84%.
19
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended September 30, 2007, two customers accounted for
$322,200 or 75% of AcuNetx Inc. revenues. During the nine months ended September
30, 2007, three customers accounted for $1,487,674 or 67% of AcuNetx Inc.
revenues.
During the three months ended September 30, 2006, a SID distributor accounted
for $601,410 or 80.1% of IntelliNetx division revenues. During the nine months
ended September 30, 2006, two customers accounted for $1,147,842 or 82.1% of
IntelliNetx division revenues.
National distributor $449,567 or 32.2%
SID distributor $698,275 or 50.0%
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 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 internal organization to
develop three market-oriented operating divisions: (i) IntelliNetx division,
(ii) OrthoNetx division, and (iii) VisioNetx 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.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
20
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - SEGMENT INFORMATION (CONTINUED)
Summarized financial information of the Company's results by operating segment
is as follows:
For Three Months ended For Nine Months ended
September 30, September 30,
2007 2006 2007 2006
--------------------------------------- ----------------------- -----------------------
IntelliNetx Division:
Net revenue to external customers $ 423,886 $ 750,613 $2,212,951 $1,397,318
Cost of revenue 147,888 118,949 501,595 384,734
----------------------- -----------------------
Margin $ 275,999 $ 631,664 $1,711,357 $1,012,584
OrthoNetx Division:
Net revenue to external customers $ -- $ 14,150 $ -- $ 22,750
Cost of revenue -- 7,388 -- 11,091
----------------------- -----------------------
Margin $ -- $ 6,762 $ -- $ 11,659
VisioNetx Division:
Net revenue to external customers $ 4,400 $ -- $ 17,755 $ --
Cost of revenue 756 -- 3,783 --
----------------------- -----------------------
Margin $ 3,644 $ -- $ 13,972 $ --
Total Net Revenue to External Customers $ 428,286 $ 764,763 $2,230,706 $1,420,068
Total Cost of Revenue 148,644 126,337 505,378 395,825
----------------------- -----------------------
Total Margin $ 279,642 $ 638,426 $1,725,328 $1,024,243
======================= =======================
Intersegment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do no
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.
For Three Months ended For Nine Months ended
September 30, September 30,
2007 2006 2007 2006
---------------------------------------------------- -------------------------- --------------------------
Total margin for reportable segments $ 279,642 $ 638,426 $ 1,725,328 $ 1,024,243
Corporate and general and administrative expenses (388,415) (1,117,913) (2,145,774) (3,087,175)
Stock option expenses (19,931) (109,737) (178,449) (354,613)
Impairment of goodwill -- -- (362) --
Research and development -- (28,450) -- (220,028)
Interest and Other Expense (12,828) (9,902) (35,835) (29,149)
Loss on equity-method investments -- (9,232) -- (37,922)
Interest and Other Income 8,069 620 20,332 17,468
-------------------------- --------------------------
Net loss before income taxes and minority interest $ (133,464) $ (636,188) $ (614,760) $(2,687,176)
========================== ==========================
21
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently requires 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, 2007.
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.
The following table presents the changes in the Company's warranty reserve
during the first nine months of 2007 and 2006:
2007 2006
----------------------
Balance as of beginning of period $ 7,200 $ 8,462
Provision for warranty 4,991 1,051
Utilization of reserve (1,800) (1,051)
-------- --------
Balance as of end of period $ 10,391 $ 8,462
======== ========
NOTE 17 - DEPARTURE AND ELECTION OF NEW CHIEF EXECUTIVE OFFICER
As part of a corporate restructuring, on January 8, 2007 the company's Chief
Executive Officer, Terry Knapp, resigned and Ronald Waldorf, the company's
Interim Chief Financial Officer, was elected to serve as the Company's Chief
Executive Officer. On August 1, 2007, the former CEO resigned from the Board of
Directors of the Company.
NOTE 18 - PENDING DISPUTE/SUBSEQUENT EVENT
In October 2007, the Company agreed to settle a dispute with a prior Vice
President of Sales for $40,000 for his past performance bonus. The Company is
still negotiating the payment schedule The settlement amount has been accrued as
of September 30, 2007.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BUSINESS OVERVIEW
AcuNetx is 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. The
company's IT platform is designed to gather data and connect the device-related
data with users and support persons. The Company's products include the
following:
- Neurological diagnostic equipment that measures, tracks and records human
eye movements, utilizing its proprietary technology and computer software,
as a method to diagnose problems of the vestibular (balance) system and
other balance disorders.
- 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.
- Orthopedic and craniomaxillofacial (skull and jaw) surgery products, which
generate new bone through the process of distraction osteogenesis.
- 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2006
The first nine months of 2007 represents the combined results of AcuNetx, Inc.
and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc. compared with the first
nine months of 2006, which included the combined results of AcuNetx, Inc. and
its subsidiary, OrthoNetx Inc. VisioNetx was a division of AcuNetx for the first
nine months of 2006.
One significant aspect in the comparison is a shift in revenue recognition. In
the first quarter of 2006, AcuNetx products were purchased by a national
distributor and revenues were credited at the previously agreed upon wholesale
price. Between May of 2006 and June of 2007, under a revised contract, shipments
and title to the equipment moved directly from AcuNetx to the end customers, and
AcuNetx recognized the revenue at the retail price. This change resulted in
higher revenues for the same unit volume of sales, along with higher gross
profits, as costs did not change. An offsetting increase in selling expenses
occurred as the distributor was paid commissions from retail proceeds. Beginning
on July 1, 2007, the company returned to its original wholesale model of revenue
recognition with this national distributor.
23
Revenues during the first nine months of 2007 were $2,230,706, compared to
$1,420,068 for the corresponding period in 2006, a 57% increase. Furthermore,
system unit shipments increased to 82 units during the first nine months of
2007, up from 51 units during the first nine months of the prior year, a 60.7%
increase. Gross profits increased 68.4%. Total operating expenses decreased by
$1,377,231 (36.5%) from $3,661,816 during the first nine months of 2006 to
$2,324,585 during the first nine months of 2007. Decreased selling, general and
administrative expenses resulted in a loss of $559,257 for the nine months ended
September 30, 2007, compared to a loss of $2,637,573 for the same period in the
previous year.
Standard selling, general and administrative expenses for AcuNetx, OrthoNetx and
VisioNetx decreased primarily due to reduced commission expenses, reduced staff,
and the centralization of the company's operations into the Company's Torrance
facility. In addition, the shift to recognizing revenue at the wholesale level
for a major distributor for AcuNetx products mentioned earlier has resulted in
reduced selling expenses.
Now that the Company's two major issues during the first nine months of 2007,
closing of the Superior, Colorado office and transitioning all of the corporate
administrative and financial activities to the Torrance, California facility,
have been completed, resulting in continued G&A savings, the company's financial
resources are being directed to bolster the marketing and sales activities of
its revenue producing IntelliNetx division. To that end, the company exhibited
its IntelliNetx product line at the American Academy of Otolaryngology, the
California Academy of Audiology, and will exhibit at the upcoming regional
meeting of the Triologic Society (experts in the field of Otology). Ron Waldorf,
CEO of AcuNetx and the originator of video nystagmography was the featured
speaker at a CME-credit seminar on the balance system in New York and will
present to a meeting of the top clinical academicians in Beijing, China at the
end of this month, at the invitation of their distributor for that country.
AcuNetx's marketing and sales activity for its law enforcement product, HawkEye,
is moving forward. The website (www.acunetx.com/hawkeye) is now the first
internet video portal for the posting of drunk and/or drugged eyes. Website
marketing activities are being enhanced based on its early acceptance by
HawkEye's growing user base. Two patents recently filed on HawkEye give added
company value to these law enforcement products. Ron Waldorf, along with Sgt.
Richard Studdard (LAPD retired) were invited speakers on HawkEye at the
California Academy of Toxicology held in Monterey, California in November 2007.
Management believes 2008 will be a watershed year for this important product and
its impact on highway safety.
The OrthoNetx, Inc. subsidiary is having meetings with potential strategic
partners in conjunction with Dr. Robinson, the inventor of the OrthoNetx
products. Management looks forward to the coming year and enhancing the traction
and value of OrthoNetx.
In regards to the subsidiary, VisioNetx, Inc., senior management is now in place
and fund raising efforts have begun. Discussions with `early adaptor' companies
(some being in the Fortune 500) continue.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of September 30, 2007 of $136,496 will not allow
for payment of all outstanding invoices until additional financing is completed.
The Company has a loan from the founder of OrthoNetx, which the Company was
renegotiated on June 30, 2007. Under the Agreement, the Company's subsidiary,
OrthoNetx, Inc. executed an Amended and Extended Promissory Note in the
principal amount of $268,551.25. The new note replaces a Promissory Note issued
by OrthoNetx, Inc., on January 30, 2005 in the original principal amount of
$300,000. The new note bears interest at 13% per annum, and provides for
payments of interest only until February 1, 2008, at which time payments of
principal and interest will commence based on a 36- month amortization. All
principal and interest is due on August 1, 2009.
24
The Company recognizes that the current liquidity situation raises the question
of being able to continue as a going concern. It is addressing this issue in two
ways:
First, VisioNetx, Inc. is seeking additional funding in the as described below,
which will allow the continuation of operations through the full implementation
of the SafetyScan product. Second, the Company intends to restructure expense
and overhead parameters in a manner that will allow it to continue to
manufacture and sell its current product lines while paying current liabilities
over time.
Sales prospects for the balance of 2007 are on target to exceed last year's
amount, both in units sold and dollar volume, as we supplement all distribution
channels, domestically and internationally for the IntelliNetx medical products.
With Health Canada approval as well as a focus on federal government
opportunities, management confidence in its revenue projections increases. As
its majority-owned subsidiary, VisioNetx, Inc., requires HawkEye and worker
impairment screening products, AcuNetx, as the manufacturer, will see increasing
revenues from these activities. AcuNetx is seeking to raise a minimal amount of
additional capital (approximately $250,000) to support its IntelliNetx marketing
and sales efforts as well as to decrease pressure on its cash flow for
forward-looking obligations. An active fund raising effort is also in place to
secure funding for its majority-owned subsidiary, VisioNetx, Inc.
Inventory on September 30, 2007 was $199,276, compared to $303,517 on September
30, 2006. Accounts receivable as of September 30, 2007 were $167,458, compared
to $68,611 on September 30, 2006.
Accounts payable as of September 30, 2007 were $529,967, compared to $529,365 as
of September 30, 2006. OrthoNetx had previously acquired a private firm, and has
been carrying accounts payable at full value until a settlement is resolved.
ITEM 3. CONTROLS AND PROCEDURES.
At the end of the period covered by this Form 10-QSB, the Company's management,
including its Chief Executive and Acting Chief Financial Officer, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive and Acting Chief
Financial Officer determined that such controls and procedures are effective to
ensure that information relating to the Company required to be disclosed in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that were identified during the evaluation that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in default under a loan from the founder of OrthoNetx, who is
also a former director. The note has been fully renegotiated with revised
payment schedules, as explained in Note 6 of Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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 Acting 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 Acting Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE: NOVEMBER 13, 2007
BY: /s/ RONALD A. WALDORF
---------------------
RONALD A. WALDORF, CHIEF EXECUTIVE OFFICER
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