SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
Commission File No. 2-95626-D
AcuNetx, Inc.
(Name of small business issuer in its charter)
Nevada 88-0249812
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2301 W. 205th Street, Suite 102, Torrance, CA 90501
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (310) 328-0477
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [X]
The issuer's revenues for the year ended December 31, 2007 were
$2,574,645.
The aggregate market value of the voting stock held by non-affiliates as
of March 24, 2008, computed based on the closing price reported on the OTC
Bulletin Board, was $4,365,900.
As of March 15, 2007, there were 65,142,880 shares of Common Stock of the
issuer outstanding.
Documents Incorporated by Reference: NONE
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
AcuNetx, Inc. was formed by the merger of Eye Dynamics, Inc. and OrthoNetx, Inc.
in December of 2005. AcuNetx is now organized around a dedicated medical
division and two separate subsidiary companies: (i) IntelliNetx, a medical
division with neurological diagnostic equipment, (ii) OrthoNetx, Inc., a
wholly-owned medical subsidiary company with devices that create new bone, and
(iii) VisioNetx, Inc., an AcuNetx-controlled subsidiary company, formed January
3, 2007, with products for occupational safety and law enforcement. For all its
devices, AcuNetx is also contemplating integrating an information technology
(IT) platform that allows the device to capture data about the physiological
condition of a human being. Our IT platform is designed to gather data and
connect the device-related data with users and support persons. Our products
include the following:
o Neurological diagnostic equipment that measures, tracks and records
human eye movements, utilizing our proprietary technology and computer
software, as a method to diagnose problems of the vestibular (balance)
system and other balance disorders.
o Devices designed to test individuals for impaired performance resulting
from the influences of alcohol, drugs, illness, fatigue and other
factors that affect eye and pupil performance. These products target
the occupational safety and law enforcement markets.
o Orthopedic and craniomaxillofacial (skull and jaw) surgery products,
which generate new bone through the process of distraction
osteogenesis.
Supplementing some of these products is a proprietary information technology
system that is designed to establish product registry to individual patients and
track device behavior for post-market surveillance, adverse event and outcomes
reporting.
INTRODUCTION--EYE TRACKING DEVICES
Human eye movements and pupil reactions are excellent indicators of the presence
of disease, drugs or other conditions that can alter the normal response of the
human oculomotor system. Our medical eye-tracking technology addresses the
central nervous system condition of nystagmus, a rapid, involuntary
back-and-forth or up-and-down oscillation of the eyeball. Nystagmus occurs in
different forms and has a number of causes, ranging from the serious (e.g., a
tumor in the brain or ear) to the benign (such as positional dizziness). The
consumption of certain drugs and alcohol also causes nystagmus, and there is a
direct and quantifiable correlation between blood alcohol concentration in the
body and the angle of onset of nystagmus. Medical research conducted over the
past fifty years has furnished evidence demonstrating a relationship between
irregular eye movement and abnormal central nervous system physiology. The
causes of these conditions are numerous, and include the influences of alcohol,
drugs, illness, stress, extreme fatigue and other neurological conditions. The
basic technology used in all of our eye-tracking products is similar, yet
differs in its application and use. The products utilize infrared sensitive
video cameras to monitor, record, and analyze eye performance and movement. All
the products share in a modular concept to promote efficiency in manufacturing.
The products are PC computer based with specialized and proprietary hardware and
embedded firmware. A common element of the products is the Ocular Motor Module,
where the subject being tested peers into a dark environment. The products
include an infrared sensitive Charge Coupled Device video camera that provides a
bright video image, even though the person being tested sees nothing but a small
stimulus or tracking light amid complete darkness. All our videonystagmography
(VNG) devices are designed to enable doctors to better diagnose balance
problems, including those (especially the elderly) who are in danger of falling.
EYE-TRACKING PRODUCTS
MEDICAL PRODUCTS (IntelliNetx division). Eletronystagmographic (ENG) testing is
a standard medical procedure that employs electrodes to assess eye movement and
a pen recorder to display the results. ENG is used in assessing problems of the
balance system of patients. Now, videonystagmography assesses eye movements
using infrared video cameras and has largely replaced ENG.
1
We brought the use of infrared illumination of the eyes into clinical use in
1994 when the U.S. Food and Drug Administration ("FDA") approved marketing of
our House Infrared/VNG System. This device was the first to replace the
electrodes with infrared sensitive video cameras and with computer digital
processing that follows the movement of the eyes and graphically portrays the
movements much like the pen recorder. The test subject wears a lightweight
goggle assembly which contains miniature infrared video cameras. The goggle is
an essential component because certain of the VNG tests require the patient to
move his head and often to recline on an examining table. The accuracy and
display of the Infrared/VNG System has proved to be a significant improvement
over other existing testing methods. In addition, the use of video by the
Infrared/VNG System allows the test administrator or medical practitioner to
observe the eye movements directly and can provide a video recording of the test
for later playback and additional analysis. Since 1994, when we received FDA
clearance to market this product, most competitors have embraced video data
acquisition as a superior technology. Results from the tests are used by
physicians and clinicians.
We developed the AcuNetx system in conjunction with the House Ear Clinic and
House Ear Institute, Los Angeles, California. The "House" name is used with the
permission of the House Ear Institute.
AcuNetx's IntelliNetx division has obtained ISO 13485: 2003 Certification as a
quality medical manufacturer and approval from Health Canada for marketing &
sales.
IMPAIRMENT DETECTION PRODUCTS (VisioNetx, Inc. subsidiary). Our impairment
detection products include:
o SafetyScan(TM), to screen workers in safety-sensitive jobs for
physiological signs of impairment. The system evaluates involuntary
changes in eye movements and/or pupil reactions, which may result from
drug or alcohol abuse, reactions to medication, medical conditions,
stress or fatigue. Occupations in the medical, aviation, emergency
response, construction, manufacturing and transportation businesses are
key markets for this technology. Unlike most drug and alcohol test
methods, SafetyScan(TM) functions without the need for bodily fluids.
SafetyScan(TM) determines whether or not a person is impaired at the
time of the test and is not a test for past use. Unlike blood, urine
and saliva tests, which only measure the presence of a substance in the
body, SafetyScan(TM) takes into account the physiological effects of
the substance or "stressor." While substance abuse receives the most
attention, worker impairment caused by other stressors, such as
prescription and over-the-counter medications, extreme fatigue and
illness, all result in significant expense to employers. Workers
suffering from such impairments are characterized by low productivity,
more accidents, higher workers' compensation and insurance costs, and
equipment and merchandise damage.
SafetyScan(TM) is based on methods developed by the federal government and used
by law enforcement over the past 30 years. SafetyScan(TM) is a simple computer
system that evaluates the ability of an individual's eyes to follow a moving
light and the pupil of the eye to react to a dim and bright light stimulus.
SafetyScan(TM) is non-diagnostic and non-judgmental; it evaluates performance of
the individual solely for safety and productivity purposes. It takes only 90
seconds for SafetyScan(TM) to test the human eye by measuring twenty parameters
of eye movement and pupil change, assessing parameters of position and reaction
time of the eye itself and the size of pupil. SafetyScan(TM) reports the result
of the test instantly with a "Pass" or "Fail" result.
Unlike SafetyScan(TM), traditional drug tests do not determine on the job
impairment in real-time. Companies and government agencies around the world are
beginning to evaluate this cost-effective technology as a replacement for
traditional drug tests that require body fluids and are much more expensive to
conduct. We believe that SafetyScan(TM) will be especially useful where fatigue
in the workplace has an impairing effect on workers. To this end, we have
contracted with a major human alertness technology consulting and research
organization to optimize SafetyScan(TM) for fatigue testing. We believe
SafetyScan(TM) will appeal to employers with round-the-clock workforces who
desire to reduce industrial accidents caused by employee fatigue and to improve
worker alertness and safety.
o HawkEye(TM) is an evidence capture device for use by police officers in
evaluating DUI suspects and in training mode. In most states, law
enforcement agencies use a six point evaluation of people thought to be
intoxicated, known as the Standardized Field Sobriety Test ("SFST").
The SFST includes three tests for balance and three tests involving eye
performance. Thus, we believe there is a need for a product that can be
utilized, not only in the jail or precinct house, but in the field by
traffic patrol cars. This product, HawkEye (TM), is currently offered
as an advanced prototype in a 'handheld' or highly portable
configuration.
2
Current police practices nationwide involve training of officers in the SFST,
and some advanced officers in Drug Recognition Expert (DRE) protocols to
evaluate individuals suspected of DUI or other drug impairment. Both methods
evaluate eye signs extensively, and this evidence has met the Frye standard for
scientific validity in courts of law. However, until HawkEye(TM), which is
patent-pending, there has been no means for the officer to capture irrefutable
objective evidence. Our HawkEye(TM) product allows direct capture of eye motions
and pupil responses on video, exactly as observed by the police officer. Early
product feedback suggests great enthusiasm on the part of the law enforcement
community. In 2007, the United States Patent and Trademark Office approved two
HawkEye(TM) patents for issuance.
DISTRACTION OSTEOGENESIS DEVICES FOR OSTEOPLASTIC SURGERY
Osteoplastic (meaning to form or mold bone) surgery is the art and science of
correcting deformities and deficiencies of the skeleton caused by errors of
birth, trauma, infections and tumors. Osteoplastic surgery is applicable to all
areas of the skeleton, including the skull and face, jaws, long bones of the
upper and lower extremities, hands, wrists, feet, ankles and the spine.
Our OrthoNetx subsidiary holds patents and FDA approvals for a family of
osteoplastic surgery products that generate new bone through the process of
distraction osteogenesis. Together, these products address an estimated $730
million potential worldwide market. The first of these products, the GenerOs(TM)
CF craniofacial bone generator, has been available for commercial sale since
December 2004.
Our GenerOs(TM) CF craniofacial bone generator is a device that assists surgeons
in treating conditions such as birth deformities of the skull, facial bones and
jaws. It is a small, proprietary device that enables distraction of the bones of
the face and skull to correct developmental, congenital, and acquired defects
and deficiencies. The device is made of surgical grade stainless steel with an
internal gear system that allows for activation to take place even though the
device is buried below the skin and soft tissues. The device is often implanted
through incisions inside the mouth, thus minimizing external surgical scars. The
GenerOs(TM) CF utilizes two blocks that are fixed to the bone on either side of
a surgically created bone cut with miniscrews. A small transcutaneous activation
pin is turned, which drives a mechanism to separate the two blocks. As the two
blocks are separated the bone gap is increased, to a recommended distance of 1mm
per day. After the desired separation is achieved (usually 10mm - 20mm in most
cases), the pin is removed and the device is left in position on the bone until
the bone is completely calcified. The device is then removed in a small
outpatient procedure. GenerOs CF will distract up to 20 millimeters, which is
adequate for approximately 95% of cases.
Our GenerOs (TM) SB small bone generator has the identical form factor and
specifications as GenerOs CF. The difference is an extension of approved
indications for small bones of the extremities. We have received FDA clearance
for commercialization of this device.
In 2007, we reached an agreement in principal with Robinson MedSurg of Lone
Tree, Colorado ("RMS"), that would permit RMS to market and sell our proprietary
line of bone distraction devices. RMS is a distributor of medical devices for
maxillofacial, craniofacial, and orthopedic use. RMS has special marketing and
product supporting relationships with independent resellers throughout the
world. The company is owned by Dr. Randolph Robinson, M.D. DDS, the inventor of
the OrthoNetx line of distraction devices, and the largest shareholder of
AcuNetx, Inc.
MARKETING
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. Marketing of the Infrared/VNG System is
conducted by AcuNetx through independent distributors. One major distributor,
MedTrak Technologies, Inc, also operates through a network of independently
owned sub-distributors, known as special instrument dealers. These independently
owned businesses are distributors of not only our VNG System, but of a variety
of allied and related products for the audiometric and otolaryngology ("ENT")
markets. These distributors are across the United States and operate in assigned
territories. In addition, there are several foreign distributors that are
merchandising the product in Latin American, Canada, and the Middle East. We
plan to obtain the "CE" mark of approval to offer the product in the European
Community.
The market for the VNG products is relatively mature and represents estimated
annual growth of 5%. However, because of the advancement of technology spurred
by our introduction of video data acquisition methods in 1994, the market for
replacement products has been strong. Also, we intend to expend efforts to open
new markets for our products, including the neurology market, through our
distributors.
3
IMPAIRMENT DETECTION PRODUCTS. We have test marketed an early version of
SafetyScan(TM), and have sold a few units in the prison system for inmate
testing in drug rehabilitation programs. In general, government drug testing
regulations are based on urine testing, so testing of employees by governmental
agencies, quasi-governmental agencies and certain regulated industries must
comply with these regulations. Accordingly, some modification of these
regulations may be necessary in order for the SafetyScan(TM) to gain broad
acceptance in sectors subject to federal drug test regulations, such as those
regulated by the Department of Transportation and certain others. We have
conducted discussions with various government agencies regarding modification of
applicable regulations and procedures so that they will encompass testing based
on eye movement and performance. While certain governmental agencies have
expressed an interest in the VisioNetx products, we believe that modifying
governmental testing regulations may be a lengthy process and success is not
assured.
For these and other reasons, the Company is developing marketing plans that
focus on nongovernmental private sector companies that are not regulated by the
federal government with respect to testing employees for substance abuse. In
general, these are companies with major safety issues related to their
operations; have employees in close proximity to, and often in charge of
operating, very expensive and dangerous capital equipment in often hostile
environments; and /or have encountered recent "cataclysmic" events that have
resulted in high-level corrective activities within their enterprises. There are
many companies in various industries that meet these criteria, and the marketing
plan will focus on an industry that is not subject to governmental regulation.
Recently, we have entered a distribution agreement for SafetyScan(TM) products
with Circadian Technologies, Inc., a research and consulting firm to industry
concerning shift work and worker safety issues.
HawkEye(TM). In 2007, We successfully completed a licensing agreement with our
majority-owned subsidiary, VisioNetx, Inc. The agreement permits us to
manufacture, market and distribute the HawkEye(TM) video system to law
enforcement agencies throughout the world. AcuNetx is using a direct to customer
marketing strategy based on the Internet, E-marketing and a focused approach to
conferences and seminars. Sales of this product commenced in 2007.
COMPETITION
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. The principal competitors in the medical
market producing VNG testing equipment are MicroMedical Technologies, Inc., ICS
Medical Corporation and Interacoustics. Since our VNG product was introduced in
1994, these competitors have developed similar video-based VNG goggle products.
As a result, the market has become very competitive and subject to pricing
pressures. To combat this competitive pressure, AcuNetx has reduced
manufacturing costs in an effort to offset the gross margin loss.
IMPAIRMENT DETECTION PRODUCTS. Competition for SafetyScan(TM) is from companies
that have developed tests and devices that evaluate motor and cognitive skills.
These take the form of hand-eye coordination tests, divided attention tests and
other behavioral tests or series of tests administered either in series or
selectively. We have identified three such competitors that have marketed these
products in the past, including Performance Factors, Inc., Essex Corporation,
and Pulse Medical Instruments.
We believe that only Pulse Medical Instruments has developed a product to be
directly competitive with our products. The product differs in the fact it does
not use the law enforcement testing paradigm which forms the basis for
SafetyScan, its results are displayed in graphic form on a computer monitor for
the qualified expert to interpret and, based on information available to us, we
anticipate that such a product will be more expensive than SafetyScan(TM). Also,
we believe it is not ubiquitous in determining overall impairment, i.e. one
model is for fatigue, one for alcohol and drugs, etc. We are not aware of
whether the product has been validated as a useful device.
SafetyScan(TM) differs from its competitors' approach because the SafetyScan(TM)
test evaluates changes in eye performance, which are involuntary responses and
not under the control of the individual. For this reason, these responses cannot
be faked, spoofed, changed, improved upon or learned. All the other competitive
forms of performance tests known to us can be learned, and over time the
individual being tested can improve his skills. We believe that this difference
is an important competitive advantage over other forms of performance testing.
SafetyScan(TM) also competes with drug and alcohol abuse test kits and devices,
which principally rely on collection and testing of urine or breath samples. In
addition, certain drug and alcohol abuse tests now being developed will test
saliva and/or hair for evidence of the presence of certain drugs or alcohol. The
principal advantages of SafetyScan(TM) over others tests are the immediacy of
results and the non-invasive nature of the test procedure. We believe that the
potential for occupational safety improvement that SafetyScan(TM) will provide
for life-risk professions, such as airline pilots, bus drivers and train
engineers, will make the system a very important breakthrough for public safety
in these fields.
There are no currently known competitors for the HawkEye(TM) line of products.
4
DISTRACTION OSTEOGENESIS DEVICES.
Several companies offer devices which compete with our GenerOs(TM) devices,
including Stryker Leibinger GmbH & Co. (bone distraction systems), KLS Martin,
L.P. (distraction osteogenesis products), Walter Lorenz Surgical, Inc., a
subsidiary of Biomet, Inc. (distraction osteogenesis devices), Ace Surgical
Supply Co. (external mandible and dental distraction devices), Osteomed, Inc.
(internal mandibular distraction device) and Wells Johnson Company (mandibular
distraction device). We believe our distraction osteogenesis devices offer
features that differentiate them from competitive devices currently available.
Our devices are generally smaller and more adaptable to the bone, making it easy
for the surgeon to use on patients of all ages and varying osteoplastic surgery
needs. Also, our craniofacial device can be inserted through the mouth for lower
jaw applications and can be positioned for virtually any distraction vector
required, and features break-off plates, which make it fast and simple for the
surgeon to insert. Finally, its removable, low profile activation pin is
unobtrusive and leaves a minimal scar.
MANUFACTURING
We have internally performed all design and engineering of our VNG,
SafetyScan(TM) and HawkEye(TM) products, and have developed all software and
validation of software algorithms that are used in the analysis portion of the
proprietary software.
Manufacturing of both the VNG products and SafetyScan(TM) is conducted primarily
by subcontracting with various suppliers. We do not rely on a single supplier
for the major manufacturing of items. We complete final integration and testing
prior to shipment of devices to customers. All our products share in a modular
concept for efficiency in manufacturing. Our electronic products are PC Computer
based with specialized and proprietary hardware and embedded firmware. The
common elements of the eye-tracking products are the viewport and the goggles,
through which the individual being tested peers into a dark environment.
Our GenerOs distraction osteogenesis devices are manufactured under contract by
High Precision Devices, Inc.
GOVERNMENT REGULATION
Our VNG products have been cleared for marketing by the U.S. Food and Drug
Administration (FDA), and we are licensed by the State of California as a
Medical Device Manufacturer. We also are ISO 13485 certified for our
manufacturing processes. SafetyScan(TM) and HawkEye(TM) are not subject to FDA
regulation, as they are not considered medical devices. However, as discussed
above under "Marketing," government regulations on substance abuse testing for
government employees and certain private companies impact our ability to market
the SafetyScan(TM) in these areas. In 2005, we received ISO 13485-2003
Certification, which should assist in marketing these products.
Our distraction osteogenesis products are medical devices, subject to regulation
by the FDA and corresponding state agencies. In order for us to market these
products for clinical use in the United States, we must obtain clearance from
the FDA via 510(k) pre-market notification or approval by a more extensive
submission known as a pre-market approval application ("PMAA"). In addition,
certain material changes to medical devices also are subject to FDA review and
clearance or approval. The FDA currently has cleared three of our products for
sale under 510(k); the GenerOs CF, the GenerOs SB and the GenerOs EX.
Sales of medical devices outside of the United States are subject to regulatory
requirements that vary from country to country. The time required to obtain
approval or sales internationally may be longer or shorter than that required
for FDA clearance, and the requirements may differ.
PATENTS & PROPRIETARY PROTECTION
We license the technology used in our performance evaluation products from
Ronald A. Waldorf, CEO and director of AcuNetx, who holds a patent covering
claims relating to tracking eye movements in the dark, utilizing infrared
illumination and infrared sensitive video cameras, as well as the related
analysis methodology. The patent was issued in 1989. The license is for the term
of the underlying patent, and calls for nominal annual royalties of $100.
VisioNetx is the owner of a patent issued in August 1992, covering certain
technology underlying the SafetyScan(TM), principally relating to the apparatus
for testing for impairment by tracking eye movements and pupil reactions to
presented stimuli. VisioNetx has two patents pending for SafetyScan(TM), while
two patents have been approved for issue for the HawkEye(TM) devices and
technology. Additionally, our OrthoNetx subsidiary is the owner of two patents
and a patent pending covering our devices for distraction osteogenesis.
The existence of patents may be important to our future operations, but there is
no assurance that additional patents will be issued. We also rely on unpatented
technology, know-how and trade secrets covering a number of items, particularly
the methods of obtaining data regarding eye performance, and we rely on
confidentiality agreements and internal procedures to protect such information.
5
EMPLOYEES
AcuNetx employs three full time employees, including one in executive and
administrative positions, one in operations and one in engineering and research.
We also employ three part-time employees, one in compliance and administration,
one for customer service and training, and the other as our accounting manager.
Our employees are not parties to any collective bargaining agreement, and we
believe that our employee relations are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The principal offices of AcuNetx are located at 2301 205th Street, Suite 102,
Torrance, California 90501. The offices occupy 1620 square feet and the lease
expires on January 31, 2010. The current monthly lease payment is $2,106. These
offices are considered satisfactory for conducting both corporate business and
the production and shipment of our products. We believe that suitable additional
space will be available to accommodate planned expansion,
ITEM 3. LEGAL PROCEEDINGS
AcuNetx is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"ANTX". The following table sets forth the quarterly high and low closing prices
for the Company's Common Stock, as reported on the OTC Bulletin Board, during
the 2007 and 2006 calendar years.
LOW HIGH
--- ----
2007
----
First Quarter $0.02 $0.12
Second Quarter 0.025 0.055
Third Quarter 0.026 0.137
Fourth Quarter 0.026 0.142
2006
----
First Quarter $0.18 $0.26
Second Quarter 0.14 0.3
Third Quarter 0.08 0.2
Fourth Quarter 0.06 0.13
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and, thus, may not represent actual transactions
HOLDERS
As of December 31, 2007, AcuNetx Common Stock was held of record by
approximately 270 holders. Registered ownership includes nominees who may hold
securities on behalf of multiple beneficial owners.
During the last quarter of 2007, the Company issued 57,143 shares of common
stock in a private placement offering. The Company believes such sales were
exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4 (2) thereof and Regulation D thereunder.
DIVIDENDS
The Company has not paid cash dividends on its Common Stock and the Company has
no present intention of paying cash dividends in the foreseeable future.
6
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the Company's common stock that
may be issued upon the exercise of options, warrants or rights under the
Company's existing equity compensation plans. The information in this table is
as of December 31, 2007.
Number of securities
issuable upon
exercise of Weighted average
outstanding exercise price of
options, outstanding options, Number of securities
PLAN CATEGORY warrants and rights warrants, and rights remaining available
------------- ------------------- -------------------- -------------------
Equity compensation
plans approved by
security holders 40,000 $ 0.18 N/A
Equity compensation
plans not approved
by security
holders 5,485,768 $ 0.15 8,514,232
------------------- -------------------- -------------------
Total 5,525,768 $ 0.15 8,514,232
------------------- -------------------- -------------------
On March 27, 2006 the Board of Directors adopted the 2006 Stock Incentive Plan
to provide for the issuance of incentive stock options and/or nonstatutory
options to all employees and nonstatutory options to consultants and other
service providers. Generally, all options granted to employees and consultants
expire in five 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.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, included elsewhere in this
Annual Report on Form 10-KSB. Except for the historical information contained in
this report, the following discussion contains certain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-KSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Annual Report on
Form 10-KSB. Our actual results may differ materially from the results discussed
in the forward-looking statements, as a result of certain factors including, but
not limited to, those discussed elsewhere in this Annual Report on Form 10-KSB.
AcuNetx has invested substantial funds in the last several years developing and
validating its products. We are producing and marketing the Infrared/Video ENG
System, both as a branded product for our major distributor and under the
IntelliNetx brand internationally and through independent distributors. In 2007
the VNG line products accounted for virtually all of our revenue. While the
current products are being sold into a relatively mature market, recent research
has indicated that additional markets may be suitable for our lines, and we will
continue to explore those opportunities with our distributors and partners.
Several on-going initiatives are important to our future success. In 2007 we
made several important changes to realign its resources. First, it established
VisioNetx, Inc. which provides a better capitalization structure for raising the
funds necessary to capitalize on its technology for the detection of impairment
in the workplace. Second, it licensed the HawkEye(TM) eye observation and
recording system from VisioNetx, which should allow AcuNetx management to
address this market and generate revenues from the product. Third, it continues
to pursue sales and marketing activities for its IntelliNetx division, to take
advantage of the growing global opportunity for balance assessment and fall
prevention in the elderly, which we believe has the potential to develop into a
substantial new market.
We believe that the OrthoNetx product line still has significant potential value
in its marketplace, and the relationship with Robinson MedSurg LLC is an
important step to maximize this opportunity. .
7
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006.
Revenues from sales of products increased by $350,832, or 16%, from $2,223,813
in 2006 to $2,574,645 in 2007. Changes in revenue recognition from a retail
model in the second quarter of 2007 back to a wholesale model impacts the
comparison of these figures. A better way to view the company's progress is a
comparison of system unit sales. In 2007, 96 IntelliNetx and private label
medical systems were sold, compared to 71 of the same systems sold in 2006. This
35% increase was a result of the IntelliNetx marketing and sales initiatives
implemented from the time that the company and its private label distributor
changed from an exclusive to a non-exclusive arrangement. Two major distributors
accounted for approximately 64% of our sales revenues in 2007, and in 2006
accounted for 86%. While VNG products and supplies continue to make up the
majority of our revenue, we did have modest revenue growth from the sale of the
HawkEye(TM) eye observation and recording law enforcement system, providing an
additional $27,200 of revenue (six systems).
While the Company maintained a steady unit cost for its major systems, the
overall gross profit improved from $1,608,796 (72%) in 2006 to $1,960,627 (76%)
in 2007. That growth was then offset by sales expense for commission payments.
The 2006 net loss of $8,223,391 decreased by $7,346,613, or 89%, to $876,778.
The decrease was due primarily to a 2006 impairment of goodwill, but also to a
significant decrease in selling, general and administrative expenses, which
decreased $1,484,945, or 37%, from $4,062,300 in 2006 to $2,577,355 in 2007.
Inventory turnover ratio in 2007 was approximately 3:1, compared to 2.5:1 in
2006. This was achieved as we aligned our inventory stocking to the lower
volumes. Inventory was down $47,157, or 19%, from $251,436 at December 31, 2006
to $204,279 on December 31, 2007. Collection of accounts receivables has been
very satisfactory with only minimal slow paying accounts. Year end net accounts
receivable totaled $45,034 on December 31, 2007, a decrease of $51,367, or 53%,
from $96,401 on December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, the Company had $205,162 in cash and cash equivalents,
$75,000 in restricted cash, $45,034 in net accounts receivable, and $204,279 in
inventory. Conversely, the Company had $1,261,933 of current liabilities, which
included accounts payable of $395,157. The Company also had accrued liabilities
of $794,757, and a $268,551 note payable. In 2007, as noted in the footnotes to
the financial statements, the holder of the note declared the company in
default. Discussions with that holder, a former director of the Company, have
resulted in a settlement agreement that allows for interest payments, then
interest plus principal, ending in a final payment on August 1, 2009 for
$148,852. Long-term liabilities were $291,705. As of December 31, 2007, AcuNetx
had an accumulated deficit of $11,741,583.
AcuNetx has no plans for significant capital equipment expenditures for the
foreseeable future.
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. We have taken a number of actions, described in the
footnotes, to significantly reduce expenses and conserve cash. All activities
will be focused on maintaining our ability to ship our VNG line of products, as
well as the HawkEye (TM) product for law enforcement applications, which
continue to serve as our source of revenue. These activities will include
maintaining the excellent relationships already formed with our suppliers,
distributors, and customers. Any future expenses not related to this core
business will be examined in the light of our current liquidity position before
approval. Management believes that the plan that has been implemented will allow
continuing operations and improvements over time.
EFFECT OF INFLATION
We do not believe that inflation has had a material effect on our net sales or
profitability in recent years.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of AcuNetx are attached as a separate section of this
Annual Report on Form 10-KSB, commencing with page F-1.
8
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with our accountants.
ITEM 8A AND 8A (T). CONTROLS AND PROCEDURES.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Management and the Board of Directors have agreed that the following plan will
be used to implement management's responsibility for establishing and
maintaining adequate internal controls over financial reporting (ICOFR).
RISK EVALUATION & METHOD OF ASSESSMENT.
Management's evaluation of ICOFR effectiveness was conducted using the financial
control elements provided by the Committee of Sponsoring Organizations (COSO)
framework. The assessment of risks and internal controls was conducted by all
appropriate service providers and member employees of the Company with moderator
of the assessment done by the Chairman of our Audit Committee. A log of this
assessment is available for detailed study.
The result of this assessment indicates that there are no material weaknesses in
internal controls as of December 31, 2007 that would impact the 2007 financial
statements. While management concluded that ICOFR were effective, the assessment
did highlight areas that could be improved, as described below.
AcuNetx, with a small number of employees, minimizes risk factors in financial
controls and reporting by assigning major tasks to individuals within their
specialty skills, such as inventory controls and buying process, accounting
documentation and disbursal of funds to payables.
Control and evaluation of finances for our partially owned subsidiary out of
state may be at risk, but close communication with the financial and operating
principals of the subsidiary is maintained in order to assure clarity and
accuracy of data.
With a small number of employees the risk for fraud and/or inaccurate financial
reporting is minimized because we do not duplicate functions and spread
responsibilities to multiple parties.
EFFECTIVENESS OF INTERNAL CONTROLS.
The primary judge of the effectiveness of controls is the quarterly and annual
audits that have been done over the past several years and the recent assessment
that confirms that there are no material deficiencies that impact the 2007
financial statements.
A principal concern, the recent lack of effectiveness in maintaining a proper
central record of corporate documents. is in process of being rectified. This
lack of proper record maintenance was caused by the transfer of corporate
recordkeeping out of state in January 2006 in connection with a merger, but this
transfer was reversed in January 2007 when our records were relocated back to
our corporate headquarters in Torrance, California.
The move out of state in 2006 involved new personnel taking responsibility for
these items, and the reversal back to Torrance one year later also caused some
confusion and delay in locating and organizing corporate documentation in a
single location.
AcuNetx is in the process of moving all significant corporate documents to a
single dedicated computer in the Torrance office. This data will be backed up on
a weekly basis, with the backup located at a separate site for security and
audit purposes. We expect to have this project completed by mid 2008.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to the Company's ICFOR during the quarter ended December
31, 2007 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
ONGOING ASSESSMENT AND ACTIVITIES.
The Company received ISO approval by independent auditors for the last two years
as required under certain FDA regulations. Wherever ISO procedures or processes
may be in conflict with appropriate financial internal controls, there is a
mechanism to amend the ISO procedures to be in compliance with our internal
financial controls.
9
Management continues to gather evidence of controls effectiveness by assessing
processes and procedures and how each is applied. Also of importance is whether
the personnel assigned to a task have the competence and the necessary authority
to fulfill the tasks.
By the end of the third quarter of 2008, management plans to have adequate
evidence to document and evaluate the design and operating effectiveness of the
controls. We will continue to look for material weaknesses in the reporting
function as well as control deficiencies that may pose a risk to interim and
annual financial statements
By the end of the fourth quarter, management plans to have identified, assessed,
and corrected identified deficiencies in the ICOFR process and procedure. This
will include whether material weaknesses (if any) affect the company's financial
reporting and internal controls, as well as plans to address any material
weakness that may occur in the future. These will be described to the company's
audit committee as well as our independent auditors.
The 2008 Annual Report will include status reporting on the progress of the
company's improvement of effectiveness of its ICOFR Plan and its compliance with
COSO financial control elements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth information on the officers and directors of the
Company:
NAME AGE POSITION
---- --- --------
Charles E. Phillips 72 Chairman of the Board of Directors
Ronald A. Waldorf 60 President, CEO and a Director
Robert S. Corrigan 54 Director
Peter Miterko 54 Director
Terry R. Knapp, M.D. 63 Chairman of VisioNetx, Inc.
Directors hold office for a period of one year from their election at the annual
meeting of shareholders or until their successors are duly elected and
qualified.
Mr. Phillips is the co-founder of Eye Dynamics, predecessor to AcuNetx, and was
its President between 1988 and 2005. He became Chairman of the Board in 2006.
From 1974 to 1985, Mr. Phillips was Executive Vice President and Director of
Akai America, Ltd., a consumer electronics company. Prior to that he was
President of Califone-Roberts Division of Rheem Manufacturing Company. Mr.
Phillips received a B.A. from Pepperdine College, Los Angeles, California with
emphasis on Business and Speech Education, in 1956.
Mr. Waldorf was Chairman of the Board of Directors of Eye Dynamics between 1991
and 2005 and is currently President and Chief Executive Officer of AcuNetx, Inc.
He is also the Chairman of the Board and President of OrthoNetx, Inc. He is the
co-inventor of the IR/Video ENG System, SafetyScan and HawkEye products. Since
1969 Waldorf has been active in the field of otolaryngology, primarily in an
academic research environment at the University of Florida, College of Medicine
and at the University of California (Irvine), Department of Surgery. He has
published numerous articles on vestibular and optokinetic research in
international scientific and medical journals and was the principal investigator
in a research grant funded by the National Institute of Health/National
Institute on Alcohol Abuse and Alcoholism (NIH/NIAAA). Mr. Waldorf earned an
M.S. from the Department of Physiology of the College of Medicine, University of
Florida, in 1972.
Mr. Corrigan has been a director since December 2005. He has been Chairman and
Chief Executive Officer of Centennial Capital Group, Inc. for the past twelve
years. CCGI is an investment banking enterprise which assists developmental
stage and other companies in corporate finance, mergers and acquisitions and
business development. Prior to founding CCGI, Mr. Corrigan was employed by the
major financial services companies of Merrill Lynch, Pierce Fenner & Smith, Inc.
and Paine Webber, Inc. Mr. Corrigan is a Director of AcuNetx, Inc, and
VisioNetx, Inc. Mr. Corrigan holds a B.S. degree from Castleton State College,
Castleton, Vermont and an M.S. from Youngstown State University, Youngstown,
Ohio.
10
Peter Miterko is a partner and Executive Vice President of Denver Management
Advisors, Inc. Previously, he was Chairman of HR Source, the largest
compensation, consulting and human resources outsourcing firm in the Rocky
Mountain area .As a partner at Ernst & Young, Peter founded and ran the Human
Resources Consulting Division of the firm, and served on the firm's U.S.
Operating Committee. Peter practiced law in New York City, where he also served
as senior associate in compensation and benefits at Carter, Ledyard & Milburn, a
Wall Street law firm. He has also served on the Board of the Association of
Private Pension and Welfare Plans, a Washington, D.C. based lobbying group and
has taught compensation and benefits law at the University Of Denver School Of
Law.
Dr. Knapp was a director of AcuNetx between December 2005 and April 2007. In
April 2007he became Chairman of the Board of VisioNetx, Inc. He was CEO and a
director of OrthoNetx, Inc. between December 2003 and its acquisition by
AcuNetx. He served as President and CEO throughout 2006. He was a founder and a
director of Collagen Corporation, a publicly traded (NASDAQ) medical device
company. He co-founded, served as Chairman and CEO for Lipomatrix, a medical
device company based in Switzerland, with operations in the U.S. and Europe,
until its acquisition. Dr. Knapp founded PrivaComp, Inc. in 1999 as an
information technology solution for health care data management, product
tracking and surveillance, and informed consent. Dr. Knapp is a reconstructive
facial and hand surgeon, and has spoken and published extensively on matters of
quality systems and risk management in health care. Dr. Knapp is President and
co-founder of DRL Foundation, a 501(c)3 humanitarian organization for
reconstructive surgery and telehealth to developing countries.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the information required by Securities and
Exchange Commission Regulation S-B Item 402 as to the compensation paid or
accrued by us for the two years ended December 31, 2007 for services rendered in
all capacities, by all persons who served as our Chief Executive Officer or
Chief Financial Officer and the other most highly compensated executive officers
during the year ended December 31, 2007(the "Named Executive Officers").
NAME AND PRINCIPAL POSITION
NONQUALIFIED
NAME AND OPTION NON-EQUITY DEFERRED
PRINCIPAL FISCAL STOCK AWARDS INCENTIVE PLAN COMPENSATION ALL OTHER
POSITION YEAR SALARY (1) BONUS AWARDS (A)(B) COMPENSATION EARNINGS COMPENSATION TOTAL
--------------- ---------- ----------- --------- ---------- -------- --------------- ------------- ------------ --------
Ronald A. 2007 $150,000 -0- -0- $122,996 -0- -0- -0- $272,996
Waldorf
Chief 2006 $150,000 -0- -0- $77,766 -0- -0- -0- $227,766
Executive
Officer
Terry R. 2007 $-0- -0- -0- -0- -0- -0- -0- -0-
Knapp, M.D.
Chief 2006 $180,000 -0- -0- $204,066 -0- -0- -0- $384,066
Executive
Officer
Douglas 2007 -0- -0- -0- -0- -0- -0- -0- -0-
McCarthy
Chief 2006 $140,000 -0- -0- $81,627 -0- -0- -0- $221,627
Operating
Officer
(A) Options vested and valued using assumptions as described in financial
statement Note 11 - STOCK OPTIONS AND WARRANTS.
(B) Award amended per Narrative Disclosure to the Summary Compensation
Table.
Narrative Disclosure to the Summary Compensation Table
In January 2008, the Company entered into a new Employment Agreement with Ronald
A. Waldorf, Chief Executive Officer of the Company. The Employment Agreement
provides for an annual salary of $150,000, subject to annual cost of living
increases, and options to purchase 1.5 million shares of the Company's Common
Stock, vesting over a three-year period. The agreement also provides for a stock
bonus to purchase 850,000 shares of the Company's Common Stock, vested
immediately. If he is terminated without cause, or there is a change in control
of AcuNetx, the shares vest immediately.
11
OUTSTANDING EQUITY AWARDS AT YEAR-END
The following table sets forth information concerning all equity awards held by
our Named Executive Officers as of December 31, 2007.
Outstanding Equity Awards at Fiscal Year-End
------------------------------------ ----------------------------------------------------------------------------------------------
Name Option awards
------------------------------------ ----------------------------------------------------------------------------------------------
Number of Number of
securities securities
underlying underlying
unexercised unexercised
options options Equity
(#) (#) incentive Option exercise Option
exercisable unexercisable plan price expiration
(#) ($) date
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf 20,000 0.180 12/9/2008
- -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
500,000 0.198 12/31/2016
Ronald Waldorf - -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
850,000 0.067 12/2/2012
Ronald Waldorf - -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
500,000 0.198 12/31/2017
Ronald Waldorf - -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf 500,000 (A) 0.067 12/31/2012
- -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
500,000 (B) 0.067 12/31/2012
Ronald Waldorf - -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf 500,000 (C) 0.067 12/31/2012
- -
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
(A) Vests on December 31, 2008
(B) Vests on December 31, 2009 (C) Vests on December 31, 2010
COMPENSATION OF DIRECTORS
The following table provides information concerning the compensation of all
directors for the year ended December 31, 2007.
Director Compensation
---------------------------------------------------------------------------------------------------------------------
Name Option All other Total
awards compensation ($)
($) ($)
----------------------------------------------------------- ------------- -------- --------------- ----- ------------
Charles E. Phillips 37,961 (A)(C) 37,961
-
----------------------------------------------------------- ------------- -------- --------------- ----- ------------
Robert S. Corrigan 37,961 (A)(D) 45,000 (B) 82,961
----------------------------------------------------------- ------------- -------- --------------- ----- ------------
Terry R. Knapp, MD 37,961 (A)(E) - 37,961
----------------------------------------------------------- ------------- -------- --------------- ----- ------------
(A) Options vested and valued using assumptions as described in financial
statement Note 11 - STOCKS OPTIONS AND WARRANTS.
(B) Consulting Fees
(C) 500,000 Options outstanding as of 12/31/2007.
(D) 500,000 Options outstanding as of 12/31/2007.
(E) 1,833,333 Options outstanding as of 12/31/2007.
Narrative Disclosure to the Director Compensation Table
On January 18, 2007 the Board of Directors agreed to provide options to purchase
500,000 shares of Common Stock to each of the three nonemployee directors as
compensation for 2007 services pursuant to the 2006 Stock Option Plan.. The
stock options vested immediately and are exercisable at $0.09 per share, for a
period of five years.
12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of
the Common Stock of the Company as of March 24, 2008, by (i) each person known
by the Company to beneficially own 5% or more of the outstanding Common Stock of
the Company; (ii) each of the Company's directors; (iii) the Named Executive
Officers identified in the Summary Compensation Table; and (iv) all directors
and Named Executive Officers of the Company as a group.
Number of Percentage
Name & Address Shares Owned
------------------------------------------------------------------------------------------ --------------- ---- ------------
Randolph C. Robinson - 7144 S Chapparal Cir E Centennial, CO 80016 8,834,760.00 13.6%
Winchester Fiduciary Services Limited - 295 Madison Ave 5th Floor New York, NY 10017 7,142,858.00 (1) 11.0%
Galen Capital Group LLC - 1660 International Drive, #410 McLean, VA 22102 4,615,120.00 (2) 7.1%
Charles E. Phillips - 2301 W. 205th St., #102 Torrance, CA 90501 3,775,489.00 (3) 5.8%
Ronald A. Waldorf - 2301 W. 205th St., #102 Torrance, CA 90501 2,372,100.00 (4) 3.6%
Robert S. Corrigan - 809 St. Andrews Lane, Louisville, CO 80027 1,650,000.00 (5) 2.5%
All directors and executive officers as a group (3 persons) 17,225,369.00 (6) 26.4%
(1) Total includes 3,571,429 warrants
(2) Total includes 1,388,889 warrants
(3) Total includes 1,370,000 options
(4) Total includes 1,870,000 options
(5) Total includes 1,350,000 options
(6) Total includes 2,758,889 options and warrants
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Shares of Common Stock subject to
securities currently convertible or convertible within 60 days after March 24,
2008, are deemed to be outstanding in calculating the percentage ownership of a
person or group but are not deemed to be outstanding as to any other person or
group.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who own more than 10% of a registered class of the Company's equity
securities (the "10% Stockholders"), to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Officers, directors and
10% Stockholders of the Company are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms so filed.
Based upon a review of filings made and other information available to it, the
Company believes that each of the Company's present Section 16 reporting persons
filed all forms required of them by Section 16(a) during the year 2007.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
None.
13
ITEM 13. EXHIBITS
The following exhibits are included herein or incorporated by reference:
2.1 Agreement and Plan of Merger, dated September 1, 2005, among Eye
Dynamics, Inc., OrthoNetx, Inc., and Eye Dynamics Acquisition Corp. (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
10.1 Executive Employment Agreement, dated January 1, 2008 between the Company
and Ronald A. Waldorf
10.2 Exclusive Licensing Agreement, dated November 1, 1989 between the Company
and Ronald A. Waldorf (3)
10.3 Licensing Agreement, dated November 15, 2004 between the Company and
Terry Knapp (2)
10.4 Exclusive Manufacturing, Sales, Licensing and Software Ownership
Agreement, dated May 18, 2006 between the Company and Medtrak, Inc.
10.5 Standard Multi-Tenant Commercial Industrial Lease-Gross, dated January 9,
2003, between the Company and AMB Property, L.P. (4)
10.6 AcuNetx, Inc. 2006 Non-Executive Directors' Stock Plan (2)
10.7 Licensing Agreement, dated October 30, 2007, between the Company and
VisioNetx, Inc.,
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Interim Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Interim Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------------------------
(1) Incorporated by reference from Report on Form 8K dated September 1, 2005.
(2) Incorporated by reference from Report on Form 10-KSB for the fiscal year
ended December 30, 2005, filed on March 31, 2006.
(3) Incorporated by reference from Report on Form 10-SB filed on December 13,
1999.
(4) Incorporated by reference from Report on Form 10-KSB for the year ended
December 31, 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following is a summary of the fees billed to the Company by Spector & Wong
for professional services rendered for the fiscal years ended December 31, 2007
and 2006:
Fee Category Fiscal 2007 Fees Fiscal 2006 Fees
--------------------- ------------------- -------------------
Audit Fees $74,000.00 $74,000.00
Audit-Related Fees
Tax Fees
All Other Fees 150.00
--------------------- ------------------- -------------------
Total Fees $74,000.00 $74,150.00
===================== =================== ===================
Audit Fees. Consists of fees billed for professional services rendered for the
audit of the Company's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Spector & Wong, LLP in connection with
statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's consolidated financial statements and are not reported under "Audit
Fees." There were no Audit-Related services provided in fiscal 2007 or 2006.
14
Tax Fees. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning.
All Other Fees. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2007 or 2006.
Policy On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit
Services Of Independent Auditors
The Company's Audit Committee, subject to Board of Directors consent
pre-approves all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit-related
services, tax services and other services. Pre-approval would generally be
provided for up to one year and any pre-approval would be detailed as to the
particular service or category of services, and would be subject to a specific
budget. The independent auditors and management are required to periodically
report to the Audit Committee and Board of Directors regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Board of
Directors may also pre-approve particular services on a case-by-case basis.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AcuNetx, Inc.
By: /s/ Ronald A. Waldorf
---------------------
Ronald A. Waldorf, President and
Chief Executive Officer
Date: March 31, 2008
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated:
(1) Principal Executive Officer and Principal Financial and Accounting Officer
/s/ Ronald A. Waldorf Chief Executive Officer, Interim
--------------------- Chief Financial Officer March 31, 2008
Ronald A. Waldorf and a Director
(3) Directors
/s/ Charles E. Phillips Director March 31, 2008
----------------------
Charles E. Phillips
/s/ Robert S. Corrigan Director March 31, 2008
----------------------
Robert S. Corrigan
/s/ Peter Miterko Director March 31, 2008
----------------
Peter Miterko
15
[Letterhead of Spector & Wong, LLP]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of AcuNetx, Inc.
We have audited the accompanying consolidated balance sheets of AcuNetx, Inc. as
of December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AcuNetx, Inc. as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has recurring losses, substantial
working capital deficiency, stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ SPECTOR & WONG, LLP
-----------------------
Pasadena, CA
March 20, 2008
F-1
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
----------------------------------------------------------------------------------------------
ASSETS
Current Assets 2007 2006
------------ ------------
Cash $ 205,162 $ 202,570
Restricted Cash 75,000 --
Accounts receivable, net 45,034 96,401
Inventory 204,279 251,436
Prepaid expenses and other current assets 73,685 95,519
------------ ------------
Total Current Assets 603,160 645,926
Property and equipment, net 18,064 29,591
Goodwill -- 362
Other intangible assets 150,472 136,187
Deferred tax assets 220,635 220,635
Other investments -- 14,007
Other assets 2,020 1,563
------------ ------------
TOTAL ASSETS $ 994,351 $ 1,048,271
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 395,157 $ 615,103
Accrued liabilities 794,757 212,883
Current portion of long-term debt 72,019 244,263
------------ ------------
Total Current Liabilities 1,261,933 1,072,249
Convertible debt, net of debt discount of $6,125 93,876 --
Long-Term Debt 197,830 1,295
------------ ------------
Total Liabilities 1,553,639 1,073,544
------------ ------------
Minority Deficit (8,394) --
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,142,880 shares issued and outstanding 65,143 62,975
Common stock to be issued -- 40,500
Paid-in capital 11,125,546 10,736,057
Accumulated deficit (11,741,583) (10,864,805)
------------ ------------
Total Stockholders' Deficit (550,894) (25,273)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 994,351 $ 1,048,271
============ ============
See notes to consolidated financial statements
F-2
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2007 2006
---------------------------------------------------------------------------------
Sales - Products $ 2,574,645 $ 2,223,813
Cost of sales - products 614,017 615,017
------------ ------------
Gross profit 1,960,628 1,608,796
------------ ------------
Operating Expenses:
Selling, general and administrative expenses 2,577,355 4,062,300
Stock option expense 253,647 464,349
Impairment of goodwill 362 4,823,138
Research and development -- 285,332
------------ ------------
Total Operating Expenses 2,831,364 9,635,119
------------ ------------
Operating loss (870,736) (8,026,323)
------------ ------------
Other income(expenses)
Interest and other income 27,477 17,769
Loss on equity-method investments -- (173,278)
Interest and other expenses (54,633) (40,393)
------------ ------------
Total other income (expenses) (27,156) (195,902)
------------ ------------
Net loss before income taxes and minority interest (897,892) (8,222,225)
Provision for income taxes 800 1,166
------------ ------------
Net loss before minority interest (898,692) (8,223,391)
Minority interest in losses of subsidiaries 21,914 --
------------ ------------
Net loss $ (876,778) $ (8,223,391)
============ ============
Net Loss per share-Basic and Diluted $ (0.01) $ (0.14)
============ ============
Weighted average number of common shares 63,703,365 57,605,037
See notes to consolidated financial statements
F-3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
Common Stock Stock to Paid-in Accumulated
Shares Amount be issued Capital Deficit Total
--------------------------------------------------------------------------------------------
Balance at December 31, 2005 47,817,651 $ 47,818 $ -- $ 8,287,172 $ (2,641,414) $ 5,693,576
Issuance of stock for services 3,316,259 3,316 40,500 350,684 394,500
Issuance of stock for cash 11,438,892 11,439 1,530,090 1,541,529
Exercise of warrants 399,999 400 19,600 20,000
Issuance shares on OrthoNetx merger 2,013 2 360 362
Stock option and warrant expenses 548,151 548,151
Net loss (8,223,391) (8,223,391)
--------------------------------------------------------------------------------------------
Balance at December 31, 2006 62,974,814 $ 62,975 $ 40,500 $ 10,736,057 $(10,864,805) $ (25,273)
--------------------------------------------------------------------------------------------
Issuance of stock for services 225,000 225 (40,500) 40,275 --
Issuance of stock for cash 785,715 786 54,214 55,000
Issuance of stock for accounts
payable 57,143 57 3,943 4,000
Return to treasury (1,064,078) (1,064) (20,205) (21,269)
Shares adjustments on prior
year subscriptions 2,164,286 2,164 (2,164) --
Stock option and warrant expenses 246,649 246,649
Equity adjustments related to
subsidiary stock transactions 66,777 66,777
Net loss (876,778) (876,778)
--------------------------------------------------------------------------------------------
Balance at December 31, 2007 65,142,880 $ 65,143 $ -- $ 11,125,546 $(11,741,583) $ (550,894)
============================================================================================
See notes to consolidated financial statements
F-4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEAR ENDED DECEMBER 31, 2007 2006
------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (876,778) $(8,223,391)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interest in loss of subsidiaries (21,914) --
Depreciation 11,527 7,047
Issuance of stocks and stock equity awards for services 319,447 942,651
Provision for bad debt 6,089 7,865
Provision for inventory valuation -- 56,863
Impairment of goodwill and intangible assets 10,434 4,823,138
Gain on recovery from loan loss (24,000) --
Amortization of debt discount 1,375 --
Deferred tax (benefit) -- 366
(Gain) or loss on equity-method investments -- 173,278
Loss on disposal of assets -- 2,521
Write-off fixed assets -- 1,174
(Increase) Decrease in:
Accounts Receivable 45,278 11,833
Inventory 47,157 12,961
Prepaid and Others 21,377 (6,116)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities 387,379 463,282
----------- -----------
Net cash flows provided by (used in) operating activities (72,628) (1,726,528)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Closing of Certificate of Deposits -- 305,274
Capitalize of patent costs and trademarks (24,357) (46,566)
Purchase of property and equipment -- (6,250)
Cash collected from note receivable 24,000 --
----------- -----------
Net cash flows provided by (used in) investing activities (357) 252,458
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stocks 55,000 1,541,529
Repurchase of common stocks (7,262) --
Net proceeds from exercising of stock warrants -- 20,000
Proceeds from convertible debt 25,000 --
Increase in long-term debt 3,369 --
Net repayments on notes payable (530) (56,229)
----------- -----------
Net cash flows provided by (used in) financing activities 75,577 1,505,300
----------- -----------
NET INCREASE (DECREASE) IN CASH 2,592 31,230
CASH BALANCE AT BEGINNING OF YEAR 202,570 171,340
----------- -----------
CASH BALANCE AT END OF YEAR $ 205,162 $ 202,570
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 14,982 $ 32,554
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 $ --
Note payable incurred for purchase of fixed asset $ -- $ 1,787
Issuance of common stocks for:
Accounts Payable $ 4,000 $ --
Merger with OrthoNetx $ -- $ 362
See notes to consolidated financial statements
F-5
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES
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 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
personnel.
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 patients.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying consolidated
financial statements include the accounts of AcuNetx, Inc. and its subsidiaries
after elimination of all intercompany accounts and transactions. Certain prior
period balances have been reclassified to conform to the current period
presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States (U.S. GAAP) requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue, and expenses. Actual results may differ from these estimates.
REVENUE RECOGNITION: The Company recognizes revenue from the sale of products,
and related costs of products sold, where persuasive evidence of an arrangement
exists, shipment has occurred, the seller's price is fixed or determinable and
collectibility is reasonably assured.
For its domestic customers, the Company supplies systems through several
distribution channels; though its IntelliNetx sales group of manufacturer
representatives and international dealers, its private label distributor,
MedTrak Technologies, Inc. (Scottsdale, AZ) and its direct sales,
commission-based, HawkEye(TM) team. Revenue is recognized when products are
shipped. No provisions were established for estimated product returns and
allowances based on the Company's historical experience. Price discounts and
other sales incentives are charged to sales when sales are recognized.
The Company provides repair and maintenance, consulting and education services
to its customers. Revenue from such services is generally recognized over the
period during which the service is performed or on a service-performed basis.
The Company evaluated Statement of Position No. 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), but does not expect that SOP 97-2 will have a
material impact on the Company's financial position, results of operations, or
cash flows since the Company did not sell, license, lease or market any
individual computer software. The Company's computer software is included with
equipment sales and is not sold separately.
ACCOUNTS RECEIVABLE: The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
the history of past write-offs and collections and current credit conditions. An
allowance for doubtful accounts of $11,143 and $5,345 has been established for
the years ended December 31, 2007 and 2006, respectively.
F-6
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
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).
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123(R) 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(R) 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).
CONVERTIBLE PROMISSORY NOTES AND WARRANTS: The Company has evaluated all
freestanding instruments and embedded features embodied in the Convertible
Promissory Notes 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 Convertible Promissory Notes 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 Convertible Promissory Notes, 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.
OTHER SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments. The Company places its cash with high quality financial
institutions and limits its credit exposure with any one financial institution.
At times, the Company's bank account balances may exceed federally insured
limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the financial
instruments have been estimated by management to approximate fair value.
F-7
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
INVENTORIES: Costs incurred for materials, technology and shipping are
capitalized as inventories and charged to cost of sales when revenue is
recognized. Inventories consist of finished goods and are stated at the lower of
cost or market, using the first-in, first-out method. A provision is provided
for slow-moving facial bone devices and demo units.
PROPERTY AND EQUIPMENT: Property and Equipment are valued at cost. Maintenance
and repair costs are charged to expenses as incurred. Depreciation is computed
on the straight-line method based on the following estimated useful lives of the
assets: 3 years for computer software, 5 to 7 years for computer and office
equipment, and 7 years for furniture and fixtures. Depreciation expense was
$11,527 and $7,047 for 2007 and 2006, respectively.
OTHER INTANGIBLE ASSETS: Other intangible assets consist primarily of
intellectual property and trademarks. The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology. The majority of capitalized costs
represent legal fees related to patent applications. 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.
In December of 2007, the Company stopped paying for certain AcuNetx graphic art
trademark maintenance fees. As a result, the Company conducted an impairment
evaluation, which resulted in a $10,072 impairment charge to these trademarks,
classified in the caption "selling, general and administrative expenses". There
was no impairment of other intangible assets for the year ended December 31,
2006.
GOODWILL: The Company accounts for Goodwill and Intangible Assets in accordance
with SFAS No. 141, "BUSINESS COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." Under SFAS No. 142, goodwill and intangibles that are deemed
to have indefinite lives are no longer amortized but, instead, are to be
reviewed at least annually for impairment. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value. Significant judgments
required to estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of the fair value and/or goodwill impairment for each reporting
unit. The Company's annual impairment review of goodwill has identified that the
goodwill impairment charge of $362 and $4,823,138 for the years ended December
31, 2007 and 2006, respectively.
INCOME TAXES: Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are recorded to
reduce deferred tax assets to the amount that will more likely than not be
realized.
ADVERTISING COSTS: The Company uses advertising to promote its product lines.
The costs of advertising are expensed when time the advertising takes place.
Advertising expenses were $8,717 and $24,326 for 2007 and 2006, respectively.
SHIPPING AND HANDLING COSTS: The Company historically has included inbound
shipping charges in cost of sales and classified outbound shipping charges as
operating expenses. For the years ended December 31, 2007 and 2006, the outbound
shipping charges included in operating expenses were $36,897 and $50,255,
respectively.
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred and consist primarily of product development costs. Financial
accounting standards require the capitalization of certain development costs
after technological feasibility of the product is established. In the
development of the Company's new products and enhancements to existing products,
technological feasibility is not established until substantially all product
development is complete. As a result, product development costs that are
eligible for capitalization are considered insignificant and are charged to
research and development expense. During the years ended December 31, 2007 and
2006, research and development costs were $0 and $285,332, respectively.
F-8
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
MINORITY INTEREST (DEFICIT): Minority interest (deficit) represents other
stockholders' proportionate share in the equity (deficit) of VisioNetx, Inc. At
December 31, 2007, the Company owned 84% of the issued and outstanding common
stocks in VisioNetx, Inc.
NEW ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board (FASB) issued SFAS No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115." SFAS
No. 159 provides companies with an option to measure, at specified election
dates, certain financial instruments and other items at fair value that are not
currently measured at fair value. A company that adopts SFAS 159 will report
unrealized gains and losses on items for which the fair value option has been
elected in its financial statements during each subsequent reporting date. SAFS
No.159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company does not expect SFAS 159 to have material impact on its consolidated
financial position, results of operations and cash flows.
In May 2007, the FASB issued FASB Staff Position No. FIN 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 consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB No. 51." SFAS 160
clarifies the accounting for noncontrolling or minority interests. This
statement requires expanded disclosures in the consolidated financial statements
that clearly identify and distinguish between the interests of the parent's
owners and interests of the noncontrolling owners of a subsidiary. Those
expanded disclosures include a reconciliation of the beginning and ending
balances of the equity attributable to the parent and the noncontrolling owners
and a schedule showing the effects of changes in a parent's ownership interest
in a subsidiary on the equity attributable to the parent. The provisions of SFAS
160 are effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact of the adoption of SFAS 160 on its
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 engage in risky tax
transactions and therefore does not anticipate the need for a FIN 48 tax
adjustment.
In September 2006, the FASB issued 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.
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.
F-9
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
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.
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
As indicated in the accompanying consolidated financial statements, the Company
incurred operating losses totaling $876,778 and $8,223,391 for the years ended
December 31, 2007 and 2006 respectively. In addition, the Company has a working
capital deficit of $658,833 and an accumulated deficit of $11,741,583 as of
December 31, 2007. Total liabilities exceeded its total assets by $559,287. In
the near term, the Company expects the operating cash flows will not be
sufficient to cover all the old debt and payables.
Management of the Company plans to cover current operating costs and to reduce
the working capital deficit through sales growth, cost reduction and equity
financing. In addition, VisioNetx, Inc. has recruited senior management and is
seeking funding that will allow it to move forward with its marketing and sales
efforts. During 2007, the Company and VisioNetx, Inc. raised a total sum of
$155,000 through selling its common stocks and convertible notes payable.
Subsequent to 2007, an additional sum of $15,050 was raised.
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.
F-10
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
AT DECEMBER 31,
ACCOUNTS RECEIVABLE, NET 2007 2006
--------- ---------
Accounts Receivable $ 56,177 $ 101,746
Allowance for Bad Debt (11,143) (5,345)
--------- ---------
Total Accounts Receivable, Net $ 45,034 $ 96,401
========= =========
INVENTORY
Finished Goods $ 170,698 $ 252,424
Demo units 85,206 55,875
Allowance for loss in inventory (51,624) (56,863)
--------- ---------
Total Inventory $ 204,279 $ 251,436
========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Insurance $ 23,038 $ 45,709
Prepaid rent and deposit 2,065 7,321
Employee advance 3,415 --
Other Prepaid Expenses 45,167 42,489
--------- ---------
Total Prepaids and Others $ 73,685 $ 95,519
========= =========
PROPERTY AND EQUIPMENT, NET
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 41,698
Software 5,757 5,110
--------- ---------
55,818 56,339
Accumulated Depreciation (37,754) (26,748)
--------- ---------
Total Property and Equipment, Net $ 18,064 $ 29,591
========= =========
ACCRUED LIABILITIES
Warranty reserve $ 11,339 $ 17,200
Accrued payroll and related taxes 120,887 191,028
Accrued consulting fees 254,967 223,250
Accrued vacation 18,072 24,003
Accrued professional fees 136,413 --
Related party payable 42,165 --
Other accrued liabilities 210,915 167,402
--------- ---------
Total Accrued Liabilities $ 794,757 $ 212,883
========= =========
F-11
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - IMPAIRMENT OF GOODWILL
The Company recorded $4,823,500 of goodwill in connection with its acquisition
of OrthoNetx in 2005. The amount that the Company recorded in connection with
this acquisition was determined by comparing the aggregate amounts of the
respective purchase price plus related transaction costs to the fair values of
the net tangible and identifiable intangible assets acquired for the business
acquired.
The Company performed its annual impairment test of goodwill at its designated
valuation dates of December 31, 2006 and 2007 in accordance with SFAS 142. As a
result of these tests, the Company determined that the amount of goodwill
recorded was not recoverable. Accordingly the Company recorded a goodwill
impairment charge of $362 and $4,823,138 for the years ended December 31, 2007
and 2006, respectively.
The Company recorded the aforementioned charge during the quarter ended December
31, 2006 after key management re-evaluated the Company's available resources and
the strategic direction of the business. As a result of having made this
evaluation, management determined that the Company's entry into osteoplastic
surgery market and the market for the Company's impairment detection devices was
not feasible given its limited capital resources.
Accordingly, management determined that, it would be necessary to curtail
certain of the businesses activities and principally pursue opportunities for
sales of its neurological diagnostic products.
Based on these factors, the Company revised its forecasts of future sales to
give effect to its limited capital resources.
NOTE 5 - OTHER INTANGIBLE ASSETS
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 patent
applications. Awarded patents will be amortized over the shorter of the economic
or legal life of the patent.
In December 2007, two intellectual properties were awarded. These two patents
will be amortized using the straight-line method over 17 years commencing
January 1, 2008.
The Company's intangible assets consisted of the following at December 31, 2007
and 2006:
2007 2006
-------- --------
Pending Intellectual Property $128,518 $126,115
Awarded patents 21,954 --
Trademarks -- 10,072
Accumulated amortization -- --
-------- --------
Total Accounts Receivable, Net $150,472 $136,187
======== ========
Future amortization expense as of December 31, 2007 was as follows:
Years ended December 31,
------------------------
2008 $ 1,291
2009 1,291
2010 1,291
2011 1,291
2012 and over 16,788
-------
Total $21,954
=======
F-12
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - 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"), a privately
held Colorado corporation, 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. The Company recognized a
loss of $173,278 on this investment in 2006.
NOTE 7 - 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 March 2007. The Company collected $24,000 through
December 31, 2007. The former employee is three months in arrears of payments as
of December 31, 2007. The Company is seeking to collect the stock certificate of
a public company which was provided as a security of the agreement.
NOTE 8 - BORROWINGS
NOTE PAYABLE TO RELATED PARTY
On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of 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 August
1, 2007. Payments of principal and interest will commence on February 1, 2008,
based on a 36-month amortization. All principal and interest is due on August 1,
2009. As of December 31, 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 No. 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)
=========
F-13
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - BORROWINGS (CONTINUED)
LONG-TERM DEBT
At December 31, 2007 2006
-----------------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment. $ 589 $ 1,827
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 --
13% through January 31. 2008. Effective February 1, 2008, principal and
interest payment based on a 36-month amortization. Matures August 1, 2009. 268,551 --
--------- ---------
269,141 1,827
Less: Current Maturities (71,901) (532)
--------- ---------
Long-term debt $ 197,240 $ 1,295
========= =========
The following is a schedule of the maturities of long-term debt:
Years ended December 31,
-------------------------
2008 $ 71,901
2009 197,240
--------
$269,141
========
SERIES A CONVERTIBLE PROMISSORY NOTE
On May 21, 2007, VisioNetx Inc. 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, 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 were sold. 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 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 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.
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 is
$50,000 per unit consisting of a convertible debenture in the amount of $50,000
which has 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 shall convert the principal and interest of this note
into the New Securities. Also upon conversion of the note, the note holder shall
received warrants to purchase up to 100% of the number of New Securities to be
issued. The warrants are exercisable for five (5) years.
F-14
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - BORROWINGS (CONTINUED)
Upon completion of a Qualified Offering, the Company may redeem the notes for a
cash payment equal to the note amount plus any accrued, but unpaid interest.
However, upon completion of a Qualified Offering and election to redeem the
notes, the note holder will be given 30 days notice to elect to either receive
the proceeds of the redemption (and receive the underlying warrants) or convert
the notes into New Securities subject to the terms of the Qualified Offering.
At December 31, 2007 the Company had received $75,000 in proceeds from this
offering and has deposited these funds in a restricted cash account. Under the
terms of this offering, proceeds from the offering are available for use by the
Company upon receipt of at least $300,000.
NOTE 9 - INCOME TAXES
The provision for income taxes (benefits) consisted of the following:
For the Year ended December 31, 2007 2006
-----------------------------------------------------------------
Federal:
Current $ -- $ --
Deferred -- 377
------- -------
-- 377
------- -------
State:
Current 800 800
Deferred -- (11)
------- -------
800 789
------- -------
Total $ 800 $ 1,166
======= =======
The provision for income taxes differs from the amount computed by applying the
federal statutory rate to the income tax expense (benefit) at the effective rate
is as follows:
For years ended December 31, 2007 2006
------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $ (282,579) $(2,795,953)
State tax expense, net of federal benefit (272) (272)
Nondeductible deferred stock services 94,842 186,371
NOL Carryforwards -- --
Others 1,879 4,647
Valuation Allowance 186,930 2,606,372
----------- -----------
Provision of income tax (benefit) $ 800 $ 1,166
=========== ===========
The components of the deferred net tax assets are as follows:
At December 31, 2007 2006
----------------------------------------------------------------------------
Net Operating Loss Carryforwards $ 2,586,715 $ 2,039,478
Property and equipment (824) (329)
Accruals and reserves 2,335,252 2,256,990
Other 547 261,186
Valuation Allowance (4,701,055) (4,336,690)
----------- -----------
Net deferred tax assets $ 220,635 $ 220,635
=========== ===========
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, 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.
F-15
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - 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 December
31, 2007, the Company raised $55,000 from the offering and sold 785,715 units.
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 to 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 those 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.
On December 3, 2007 the Board of Directors agreed to provide 850,000 stock
options to each of the two nonemployee directors as compensation for 2008
services pursuant to the 2006 Stock Option Plan established on March 27, 2006.
The stock options vested immediately and are exercisable at $0.061 per share for
a period of five years.
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 year ended December 31, 2007 and 2006, the Company recognized directors'
compensation of $113,884 and $184,500, respectively.
Subsidiary Stock Transactions
On January 8, 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 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 was obtained. The aggregate amount of $65,000 was accrued and
classify 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.
F-16
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - STOCKS OPTIONS AND WARRANTS
STOCK OPTIONS
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Incentive Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to all employees and nonstatutory options to consultants
and other service providers. Generally, all options granted to employees and
consultants expire in three to ten years 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 issued. It is the policy of the
Company to issue new shares for stock option exercised and restricted stock,
rather than issue treasury shares. Options generally vest immediately or over a
three year period. The plan reserves 14 million shares of common stock under the
Plan and shall be effective through December 31, 2015.
A summary of the status of stock options issued by the Company as of December
31, 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 2,425,000 $ 0.08 6,894,102 $ 0.21
Exercised/Expired/Cancelled (4,208,334) $ 0.21 0 $ 0.00
-------------- --------------
Outstanding at end of period 5,525,768 $ 0.15 7,309,102 $ 0.21
============== ==============
Exercisable at end of period 5,525,768 $ 0.15 2,975,768 $ 0.20
============== ==============
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 $ 0.07 $ 0.17
Risk-free interest rate 4.19% 4.41%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 9.80
Expected volatility 126.12% 155.69%
For the years ended December 31, 2007 and 2006, the Company recognized pre-tax
stock option compensation expense of $246,649 and $464,349, respectively.
The following table sets forth additional information about stock options
outstanding at December 31, 2007:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
--------------------------------------------------------------------------------
$0.01-$0.30 5,525,768 6.62 years $0.15 5,525,768
Stock Warrants
As of December 31, 2007 and 2006, the Company had 12,083,336 and 9,383,335
outstanding warrants, respectively. The warrants allow for the purchase of
common stock at pricing ranging from $0.10 to $2.00 per share.
In December 2007, the Board approved to extend 3,333,340 warrants attached in
lieu of stocks sold between 2005 and 2006 for one year to December 22, 2008 and
reduced exercised price from $0.33 per share to $0.165 per share. The
modification has no impact on the Company's net loss.
F-17
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - STOCKS OPTIONS AND WARRANTS (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 non-statutory 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 December 31,
2007 is presented in the following table.
-----------------------------
Weighted
Number Average
of Exercise
Shares Price
-----------------------------
Outstanding at beginning of year -- $ 0.00
Granted 479,500 $ 0.10
Exercised/Expired/Cancelled -- $ 0.00
-------
Outstanding at end of period 479,500 $ 0.10
======
Exercisable at end of period 157,278 $ 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 AcuNetx'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 4.51%
Expected dividend yield 0.00%
Expected lives 8.78
Expected volatility 143.00%
As of December 31, 2007 there was $16,165 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 2.67 years.
For the years ended December 31, 2007, VisioNetx, Inc. recognized pre-tax stock
option compensation expense of $6,999.
The following table sets forth additional information about stock options
outstanding at December 31, 2007:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
-------------------------------------------------------------------------------
$ 0.10 479,500 8.49 years $0.10 157,278
F-18
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Years ended December 31, 2007 2006
-------------------------------------------------------------------------------
Numerator:
Net loss $ (876,778) $ (8,223,391)
------------ ------------
Denominator:
Weighted average of common shares 63,703,365 57,605,037
------------ ------------
Net loss per share-basic and diluted $ (0.01) $ (0.14)
As the Company incurred net loss for the year ended December 31, 2007, the
effect of dilutive securities totaling 173 equivalent shares has been excluded
from the calculation of diluted loss per share because their effect was
anti-dilutive. As of December 31, 2007, stock options and warrants to purchase
approximately 17,534,104 shares of the Company's common stocks were out of the
money.
As the Company incurred net loss for the year ended December 31, 2006, the
effect of dilutive securities totaling 346,703 equivalent shares has been
excluded from the calculation of diluted loss per share because their effect was
anti-dilutive.
NOTE 13 - FORMATION OF 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 No. 141.
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 two additional new executives to lead
VisioNetx. As disclosed in Note 10, VisioNetx awarded 800,000 shares to three
nonexecutive directors on January 8, 2007; as a result, AcuNetx Inc.`s ownership
on VisioNetx was reduced from 100% to 84%.
NOTE 14 - MAJOR CUSTOMERS
During the year ended December 31, 2007, major distributors accounted for
$1,777,388 or 69% of IntelliNetx division revenues.
National distributor $631,136 or 25%
SID distributors $1,146,252 or 44%
During year ended December 31, 2006, the national and SID distributors accounted
for $488,425, or 22.2%, and $1,342,167, or 61.1% of total revenues,
respectively.
NOTE 15 - 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 December 2006, the Company changed the structure of its internal organization
to develop three market-oriented operations: (i) IntelliNetx (INX) division,
(ii) OrthoNetx (ONX) Inc., a wholly-owned subsidiary, and (iii) VisioNetx (VNX)
Inc, a majority-owned subsidiary. 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 worker impairment screening. In
addition, the Company licensed from its VisioNetx subsidiary the manufacturing
and sales rights to VisioNetx's law enforcement systems.
F-19
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - SEGMENT INFORMATION (CONTINUED)
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. The
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.
Summarized financial information of the Company's results by operating segment
is as follows:
Years ended December 31,
2007 2006
-------------------------------------------------------------------------------
Net Revenue to external customers:
INX $ 2,556,890 $ 2,177,528
ONX -- 28,300
VNX 17,755 17,985
----------- -----------
Consolidated Net Revenue to external customers $ 2,574,645 $ 2,223,813
=========== ===========
Cost of Revenue:
INX $ 610,234 $ 548,294
ONX -- 61,723
VNX 3,783 5,000
----------- -----------
Consolidated Cost of Revenue $ 614,017 $ 615,017
=========== ===========
Gross Margin:
INX $ 1,946,656 $ 1,629,234
ONX -- (33,423)
VNX 13,972 12,985
----------- -----------
Consolidated Gross Margin $ 1,960,627 $ 1,608,796
=========== ===========
Intercompany Segment Revenue:
INX $ 6,000 $ --
ONX -- --
VNX -- --
----------- -----------
Total Intercompany Segment Revenue $ 6,000 $ --
=========== ===========
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.
For years ended December 31,
2007 2006
--------------------------------------------------- ---------------------------
Total margin for reportable segments $ 1,960,627 $ 1,608,796
Corporate and general and administrative expenses (2,577,355) (4,062,300)
Stock option expenses (253,647) (464,349)
Research and development 0 (285,332)
Impairment of goodwill (362) (4,823,138)
Interest and Other Expense (54,633) (40,393)
Gain (loss) on equity-method investments 0 (173,278)
Interest and Other Income 27,477 17,769
----------- -----------
Net loss before income taxes and minority interest $ (897,893) $(8,222,225)
=========== ===========
F-20
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company lease facilities and a copier under operating leases. As of December
31, 2007, the minimum annual operating lease payments were as follows:
Year Ended December 31, Amount
------------------------------------- ----------
2008 30,680
2009 31,823
2010 7,817
2011 469
---------
70,789
=========
Rent expense totaled $46,173 and $100,611 for 2007 and 2006, respectively.
Certain lease agreements contain renewal options providing for an extension of
the lease term at market rates. The monthly lease payment for the copier does
not include additional maintenance, insurance and per copy charges.
MARKETING AND DISTRIBUTION AGREEMENT
On May 25, 2006 the Company executed a Marketing and Distribution Agreement with
a national distributor. The agreement restructures the Company's relationship
with the national distributor into a nonexclusive one, so that the Company is in
a position to manufacture and sell VNG products under its own brand names, as
well as through the national distributor. The Agreement is for a period of eight
years, provides for successive three year options, and supersedes and replaces
the previous Manufacturing, Sales, Licensing, and Software Agreement and the
Sales Incentive Agreement.
The Company also executed a Consulting Agreement with the owner of the national
distributor whereby the owner will provide advisory and consulting services to
the Company for the purposes of improving the Company's VNG products and other
balance-related product lines. The agreement is for a period of three years, and
renews for an additional one year term.
During 2007, the Company setup an accrued liability in the amount of $100,000.
This amount is being amortized and expensed over a 12 month period. The
Agreement further requires six additional annual payments of $100,000. In
addition, the Agreement requires payments of $45,000 per year in consulting fees
to be paid ending in 2008.
The minimum payments schedule under these agreements was as follows:
Year Ended December 31, Amount
----------------------- -----------
2008 145,000
2009 100,000
2010 100,000
2011 100,000
2012 and thereafter 200,000
-----------
$ 645,000
===========
NOTE 17 - RELATED PARTY TRANSACTIONS
FINANCIAL ADVISOR
In April 2007, the Company entered into a consulting agreement with a director
of the Company, for the purpose of assisting the Company in strategic planning
of relevant capital formation alternatives, market making alternatives and
merger and acquisitions. Such contract provides for monthly consulting fees of
$5,000 per month. During 2007, the Company paid the director $40,000 in fees
related to this agreement.
LICENSING AGREEMENT
The Company has a licensing agreement with the Company's former CEO for the
licensing of a patent. The licensing agreement provides for contingent payments,
to be determined at a later date, in the event the Company receives a benefit
from the patent. As of December 31, 2007, the Company had no liability for
payment of fees under this agreement.
F-21
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17 - RELATED PARTY TRANSACTIONS (CONTINUED)
EMPLOYEE BUSINESS-RELATED EXPENSES
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 December 31, 2007 the company had a current related party payable to
the Company's CEO, in the amount of $42,970.
EMPLOYMENT AGREEMENTS
In December 2007, the Board approved an amended employment agreement with the
Company's CEO providing that the CEO will receive an annual salary of $150,000
and stock options to purchase 1.5 million shares of the Company's common stocks
vested over a three-year period. The agreement also provided a stock option
bonus to purchase 850,000 shares of the Company's stocks vested immediately. The
agreement expired in December 2010.
In August 2007, VisioNetx, Inc. entered into individual employment agreements
with each of its officers and senior management. The agreements provide annual
salary ranging from $150,000 to $175,000 and an aggregate of 650,000 shares of
VisioNetx common stock and 362,500 stock options. The salary will
commence when VisioNetx receives at least $300,000 in fund raising and
common stock will then be issued in lieu of the salary. The agreements also
provide equity incentives if certain performances are reached.
NOTE 18 - 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 19 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of December 31, 2007.
In general, the Company offers a one-year warranty for most of the products
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve in
the fiscal years ended December 31, 2007 and 2006:
Years Ended December 31, 2007 2006
------------------------ -------- ---------
Beginning balance $ 7,200 $ 8,462
Provision for warranty 5,939 --
Utilization of reserve (1,800) (1,262)
-------- --------
Ending balance $ 11,339 $ 7,200
======== ========
NOTE 20 -SUBSEQUENT EVENTS
Subsequent to December 31, 2007, the Company sold 215,000 units and received
proceeds of $15,050 from the self-written offering conducted in May 2007.
Subsequent to December 31, 2007, VisioNetx, Inc. received $15,000 from the
private placement offering conducted in November 2007.
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