UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2007
COMMISSION FILE NO. 0-27857
ACUNETX, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0249812
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2301 W. 205th Street, #102, Torrance, CA 90501
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(Address of principal executive offices)
310-328-0477
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file for
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
-----------------------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
-----------------------
As of June 30, 2007, the issuer had 62,716,714 shares of common stock
outstanding.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) [ ] YES [X] NO.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "SAFE HARBOR" provisions of the Private
Securities Litigation Reform Act of 1995. This Report on Form 10-QSB contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, acquisitions,
adequacy of funds from operations, statements expressing general optimism about
future operating results and non-historical information, are forward-looking
statements. In particular, the words "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "MAY," "WILL," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Readers should not place undue reliance on these forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below) and apply only
as of the date of this Report. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below "Management's
Discussion and Analysis and Plan of Operation," as well as those discussed
elsewhere in this Report, and the risks discussed in our most recently filed
Annual Report on Form 10-KSB and in the press releases and other communications
to shareholders issued by us from time to time which attempt to advise
interested parties of the risks and factors that may affect our business.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2007
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ASSETS
Current Assets
Cash $ 66,681
Accounts receivable, net 120,476
Inventory 214,326
Prepaid expenses and other current assets 118,912
------------
Total Current Assets 520,395
Property and equipment, net
22,028
Other intangible assets 140,506
Deferred tax assets 220,635
Other assets
1,772
TOTAL ASSETS $ 905,335
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 505,988
Accrued liabilities 472,700
Current portion of long-term debt
38,466
Total Current Liabilities 1,017,154
Long-Term Debt 228,301
------------
Total Liabilities 1,245,455
------------
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
62,492,879 shares issued and outstanding
62,493
Common stock to be issued
5,000
Paid-in capital 10,939,288
Accumulated deficit (11,346,901)
------------
Total Stockholders' Deficit (340,120)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 905,335
============
See notes to interim unaudited consolidated financial statements.
3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THREE MONTHS FOR SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
.............................. ..............................
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------------------------
Sales - Products $ 678,474 $ 371,730 $ 1,802,420 $ 655,305
Cost of sales - products 128,280 148,675 356,734 269,488
------------ ------------ ------------ ------------
Gross profit 550,194 223,055 1,445,686 385,817
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 717,952 1,141,583 1,757,359 1,969,262
Stock option expense 19,441 136,846 158,518 244,876
Impairment of goodwill -- -- 362 --
Research and development -- 146,022 -- 191,578
------------ ------------ ------------ ------------
Total Operating Expenses 737,393 1,424,451 1,916,239 2,405,716
------------ ------------ ------------ ------------
Operating loss (187,199) (1,201,396) (470,553) (2,019,899)
------------ ------------ ------------ ------------
Other income(expenses)
Interest and other income 8,002 11,021 12,263 16,848
Loss on equity-method investments
-- (10,804) -- (28,690)
Interest and other expenses (13,344) (8,445) (23,006) (19,247)
------------ ------------ ------------ ------------
Total other income (expenses) (5,342) (8,228) (10,743) (31,089)
------------ ------------ ------------ ------------
Net loss before income taxes (192,541) (1,209,624) (481,296) (2,050,988)
Provision for income taxes -- -- 800 1,166
------------ ------------ ------------ ------------
Net loss $ (192,541) $ (1,209,624) $ (482,096) $ (2,052,154)
============ ============ ============ ============
Net Loss per share-Basic and Diluted $ (0.00) $ (0.02) $ (0.01) $ (0.04)
============ ============ ============ ============
Weighted average number of common shares 62,448,443 56,918,605 62,743,612 55,389,426
See notes to interim unaudited consolidated financial statements
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR SIX MONTHS ENDED JUNE 30, 2007 2006
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CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (482,096) $(2,052,154)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 7,564 6,297
Issuance of stocks and stock equity awards for services 158,518 577,178
Provision for bad debt 14,707 6,512
Impairment of goodwill 362 --
Gain on recovery from loan loss (12,000) --
Deferred income tax -- 366
Loss on investment accounted for under equity method -- 28,690
(Increase) Decrease in:
Accounts Receivable (38,782) (14,821)
Inventory 37,110 (18,900)
Prepaid and Others (23,602) (40,318)
Increase (Decrease) in:
Accounts Payable and Accrued Liabilities 172,153 162,562
----------- -----------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (166,066) (1,344,588)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Closing of Certificate of Deposits -- 305,274
Capitalize of patent costs (4,319) (20,945)
Capitalize of trademark -- (6,567)
Purchase of Equipment -- (5,283)
Repayment from Notes Receivable 12,000 --
----------- -----------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 7,681 272,479
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stocks 30,000 1,036,529
Repurchase of common stocks (7,262) --
Net proceeds from exercising of stock warrants -- 20,000
Repayments on notes payable (242) (56,269)
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 22,496 1,000,260
----------- -----------
NET DECREASE IN CASH (135,889) (71,849)
CASH BALANCE AT BEGINNING OF PERIOD 202,570 171,340
----------- -----------
CASH BALANCE AT END OF PERIOD $ 66,681 $ 99,491
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 236 $ 19,069
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 common stocks for merger adjustment $ -- $ 362
See notes to interim unaudited consolidated financial statements
5
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
NATURE OF BUSINESS
AcuNetx, Inc., a Nevada corporation, (the "Company" or "AcuNetx", formerly known
as Eye Dynamics, Inc. or "EDI") combines diagnostic, analytical and therapeutic
devices with proprietary software to permit: health providers to diagnose and
treat balance disorders and various bone deficiencies; law enforcement officers
to evaluate roadside sobriety; and employers in high-risk industries to
determine, in real-time, the mental fitness of their employees to perform
mission-critical tasks. AcuNetx is headquartered in 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
wholly-owned subsidiary company with products for occupational safety and law
enforcement. For all its devices, AcuNetx is integrating an information
technology (IT) platform that allows the device to capture data about the
physiological condition of a human being. The company's IT platform is designed
to gather data and connect the device-related data with users and support
persons.
AcuNetx products include the followings: (a) Neurological diagnostic equipment
that measures, tracks and records human eye movements, utilizing the company's
proprietary technology and computer software, as a method to diagnose problems
of the vestibular (balance) system and other balance disorders; (b) Devices
designed to test individuals for impaired performance resulting from the
influences of alcohol, drugs, illness, stress and other factors that affect eye
and pupil performance. These products target the occupational safety and law
enforcement markets; (c) Orthopedic and craniomaxillofacial (skull and jaw)
surgery products, which generate new bone through the process of distraction
osteogenesis; and (d) A proprietary information technology system called
SmartDevice-Connect(TM) ("SDC") that establishes product registry to individual
patients and tracks device behavior for post-market surveillance, adverse event
and outcomes reporting, and creates "smart devices" that gather and transmit
physiological data concerning the device and its interaction with the patient.
GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred operating losses totaling $482,096 and $2,052,154 for the six months
ended June 30, 2007 and 2006 respectively. In addition, the Company has a
working capital deficit of $496,759 and an accumulated deficit of $11,346,901 as
of June 30, 2007. In the near term, the Company expects the operating cash flows
will not be sufficient to cover all the old debt and payables although it
expects its sales will continue to grow and is able to cover current operating
costs and to reduce the working capital deficit.
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN (CONTINUED)
Management's plans to spin off VisioNetx, Inc., to begin a process raising
additional working capital through equity financing, to fully close the Colorado
facility in order to reduce expenditures and to increase the IntelliNetx
division's marketing efforts to increase revenues have all been accomplished
during the second quarter. These efforts now enable the Company to focus in
efforts on selling its neurological diagnostic products that has historically
been its primary business. VisioNetx, Inc. has recruited senior management and
is seeking funding that will allow it to move forward with its marketing and
sales plans to companies that wish to screen for impairment of their employees.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at June 30, 2007
and for the three and six months ended June 30, 2007 and 2006 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial
information, and with the instructions to Form 10-QSB. Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2006.
The results for the three and six months ended June 30, 2007 may not be
indicative of results for the year ending December 31, 2007 or any future
periods.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying financial
statements include the accounts of AcuNetx, Inc. and its subsidiaries after
elimination of all intercompany accounts and transactions. Certain prior period
balances have been reclassified to conform to the current period presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with U.S. GAAP requires management to make certain
estimates and assumptions that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates.
OTHER INTANGIBLE ASSETS: Other intangible assets consist primarily of
intellectual property and trademarks. The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology. The majority of capitalized costs
represent legal fees related to a patent application. If the Company elects to
stop pursuing a particular patent application or determines that a patent
application is not likely to be awarded or elects to discontinue payment of
required maintenance fees for a particular patent, the Company, at that time,
records as expense the capitalized amount of such patent application or patent.
Awarded patents will be amortized over the shorter of the economic or legal life
of the patent. Trademarks are not amortized, but rather are tested for
impairment at least annually. There was no impairment of other intangible assets
for the six months ended June 30, 2007 and 2006. The Company had no other
intangible assets in 2007.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired
in a business combination. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. An impairment of goodwill of $362 was
recorded during the six months ended June 30, 2007. No impairment of goodwill
was recorded for six months ended June 30, 2006.
INVESTMENT: The Company held 20% of the issued and outstanding common stock of a
privately-held Colorado company. The Company accounts for the investment using
the equity method of accounting. Under the equity method, the carrying amount of
the investment is increased for its proportionate share of the investee's
earnings or decreased for its proportionate share of the investee's losses. The
Company monitors the investment for impairment and makes appropriate reductions
in carrying value if the Company determines that an impairment charge is
required based primarily on the financial condition and near-term prospects of
this company.
NET INCOME PER SHARE: Basic net income per share includes no dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted net income
per share is computed by dividing net income by the weighted average number of
common shares and the dilutive potential common shares outstanding during the
period. Diluted net loss per common share is computed by dividing net loss by
the weighted average number of common shares and excludes dilutive potential
common shares outstanding, as their effective is anti-dilutive. Dilutive
potential common shares consist primarily of employee stock options, stock
warrants and shares issuable under convertible debt.
STOCK-BASED COMPENSATION: The Company has adopted the fair value recognition
provisions of FASB Statement No.123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2007 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2007
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). For the six months
ended June 30, 2007 and 2006, the Company recognized pre-tax stock option
compensation expense of $158,518 and $244,876, respectively.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the EITF Issue No. 00-18, "ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS: In February 2007, the Financial Accounting
Standards Board ("FASB') issued Financial Accounting Standards ("FAS") No. 159,
THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING
AN AMENDMENT OF FASB STATEMENT NO. 115, which permits entities to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. A business entity is required to report unrealized
gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. This statement is expected to expand
the use of fair value measurement. FAS No.159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1 ("FSP 48-1"),
DEFINITION OF SETTLEMENT IN FASB INTERPRETATION NO. 48. FSP 48-1 amended FIN 48
to provide guidance on how an enterprise should determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized
tax benefits. FSP 48-1 required application upon the initial adoption of FIN 48.
The adoption of FSP 48-1 did not affect the Company's condensed consolidated
financial statements.
In June 2006, the FASB issued Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY
IN INCOME TAXES", ("FIN 48"). This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES." This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect the adoption of
FIN 48 to have a material impact on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157, "FAIR VALUE MEASUREMENTS." SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement addresses how to calculate fair value measurements required or
permitted under other accounting pronouncements. Accordingly, this statement
does not require any new fair value measurements. However, for some entities,
the application of the statement will change current practice. SFAS No. 157 is
effective for the Company beginning January 1, 2008. The Company is currently
evaluating the impact of this standard.
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.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT 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 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET
------------------------
Accounts Receivable $ 136,128 $ -- $ 4,400 $ 140,528
Allowance for Bad Debt (20,052) -- -- (20,052)
--------- --------- --------- ---------
Total Accounts Receivable, Net $ 116,076 $ -- $ 4,400 $ 120,476
========= ========= ========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 18,353 $ 4,035 $ -- $ 22,388
Prepaid rent and deposit 2,464 -- -- 2,464
Employee advance 2,000 -- -- 2,000
Other Prepaid Expenses 91,979 -- 81 92,060
--------- --------- --------- ---------
Total Prepaids and Others $ 114,796 $ 4,035 $ 81 $ 118,912
========= ========= ========= =========
PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures $ 1,113 $ 8,418 $ -- $ 9,531
Equipment 16,037 24,493 -- 40,530
Software -- 5,757 -- 5,757
--------- --------- --------- ---------
17,150 38,668 -- 55,818
Accumulated Depreciation (14,750) (19,040) -- (33,790)
--------- --------- --------- ---------
Total Property and Equipment, Net $ 2,400 $ 19,628 $ -- $ 22,028
========= ========= ========= =========
ACCRUED LIABILITIES
-------------------
Commission payable $ 21,917 $ -- $ -- $ 21,917
Warranty reserve 8,988 -- -- 8,988
Accrued payroll and related taxes 20,488 11,662 41,046 73,196
Accrued consulting fees 145,750 -- -- 145,750
Accrued vacation 18,578 -- -- 18,578
Other accrued liabilities 182,682 3,574 18,015 204,271
--------- --------- --------- ---------
Total Accrued Liabilities $ 398,403 $ 15,236 $ 59,061 $ 472,700
========= ========= ========= =========
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 4 - SALES OF INVESTMENTS
On March 28, 2007, the Company entered into an agreement to exchange the shares
of common stock it holds in High Precision Devices, Inc. ("HPD") for all the
common stock of the Company held by HPD, which were 483,100 shares. The market
value of the shares returned to the Company at closing was $14,007, which was
equal to the carrying value. Accordingly, the Company did not recognize any gain
or loss on this transaction. The returned shares were retired at March 31, 2007.
NOTE 5 - SETTLEMENT ON NOTES RECEIVABLE
In March 2007, the Company entered into a settlement agreement with a former
employee who created indebtedness to the Company of $49,489 in 2001 - 2004 and
had agreed to a Note Receivable (Receivable). The employee had been in default
on payments on this Receivable, which was fully reserved in 2004. The agreement
calls for the former employee to repay the Company $55,000 at a rate of $4,000
per month beginning in March 2007. The former employee has made all scheduled
payments to date.
NOTE 6 - BORROWINGS
NOTE PAYABLE TO RELATED PARTY
The Company has an installment note payable to a related party with monthly
payments of $14,263, including interest at 13%. The original note amount was
$300,000 and matures on December 31, 2007. The Company is currently in arrears
for payments.
The Company received a letter dated March 8, 2007 from the creditor. The letter
declares that the note is in default and that the creditor has elected to
accelerate the entire unpaid balance and interest.
On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of Note ("Agreement") with the related party. Under the Agreement, the
Company's subsidiary, OrthoNetx, Inc. executed an Amended and Extended
Promissory Note in favor of the related party, in the principal amount of
$268,551.25. The new note replaces a promissory note issued by OrthoNetx, Inc.
on January 30, 2005 in the original amount of $300,000. The new note bears
interest at 13% per annum, and provides for payments of interest only commencing
August 1, 2007 until February 1, 2008, at which time payments of principal and
interest will commence based on a 36-month amortization. All principal and
interest is due on August 1, 2009.
Under the Agreement, the Company entered into a Commercial Guaranty under which
it guaranteed payment of the note. Also, the related party entered into a
termination of guaranty to release the former CEO from his guaranty of the
original note.
In accordance with SFAS 15, "ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED
DEBT RESTRUCTURING," the carrying amount of the old debt was not changed as it
did not exceed the future cash payments specified by the new debt terms. The
difference will be amortized over the life of the new debt using the effective
interest method.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 6 - BORROWINGS (CONTINUED) 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)
=========
LONG-TERM DEBT
At June 30, 2007
--------------------------------------------------------------------------------
Installment note payable secured by computer equipment.
Monthly payments total $81, including interest at 18.99%.
The original note amount was $2,062. Matures July 21, 2009. 1,585
Reconstructed note payable to related party. Monthly interest
payment only at 13% through January 31, 2008. Effective
February 1, 2008, principal and interest payment based on a
36-month amortization. Matures August 1, 2009. 265,182
--------------------------------------------------------------------------------
266,767
Less: Current Maturities (38,466)
--------------------------------------------------------------------------------
Long-term debt $ 228,301
--------------------------------------------------------------------------------
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 7 - INCOME TAXES
The components of the deferred net tax assets are as follows:
For Three Months ended For Six Months ended
June 30, June 30,
2007 2006 2007 2006
--------------------------------------------------------------------------------
Federal:
Current $ -- $ -- $ -- $ --
Deferred -- -- -- 377
--------------------------------------------------------------------------------
-- -- -- 377
--------------------------------------------------------------------------------
State:
Current -- -- 800 800
Deferred -- -- -- (11)
--------------------------------------------------------------------------------
-- -- 800 789
--------------------------------------------------------------------------------
Total $ 0,000 $ 0,000 $ 800 $ 1,166
--------------------------------------------------------------------------------
The Company had removed the valuation allowance as of December 31, 2003 because
it believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and was reflected as a credit to operations.
However, as of December 31, 2005, the Company's ability to utilize its federal
net operating loss carryforwards is uncertain due to the net loss of the year
and the merger with OrthoNetx which has net operating loss carryforwards
approximately of $1.7 million, as of that date, and thus a valuation reserve has
been provided against the Company's net deferred tax assets.
As of December 31, 2006, the Company has net operating loss carryforwards of
approximately, $6,300,000 and $2,900,000 to reduce future federal and state
taxable income, respectively. To the extent not utilized, the federal net
operating loss carryforwards will begin to expire in fiscal 2009 and the state
net operating loss carryforwards will begin to expire in fiscal 2012.
NOTE 8 - STOCKHOLDERS' EQUITY
COMMON STOCK RETIREMENT
On April 17, 2007, the Company repurchased and retired 580,978 shares of its
common Stock. The shares were purchased from a single shareholder in a privately
negotiated transaction at $0.0125 per share for a total repurchase price of
$7,262.
PRIVATE OFFERING
In May 2007, the Company conducted a private 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
offered 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 June 30,
2007, the Company had raised $30,000 from the offering and sold 428,571 units.
Subsequent to June 30, 2007, the Company raised another $25,000 in this offering
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
EXERCISE OF WARRANTS
The Company received total proceeds of $20,000 for stock warrants exercised
during the first six months of 2006.
NON-EXECUTIVE DIRECTORS' STOCK PLAN
On January 18, 2007 the Board of Directors agreed to provide 500,000 stock
options to each of the three nonemployee directors as compensation for 2007
services pursuant to the 2006 Stock Option Plan established on March 27, 2006.
The stock options vested immediately and are exercisable at $0.09 per share for
a period of five years. For the three and six months ended June 30, 2007, the
Company recognized directors' compensation of $113,884 and $0, respectively.
On February 27, 2006 the Board of Directors agreed to provide 300,000 shares of
restricted stock to each of the four non-employee directors as compensation for
2006 services pursuant to the 2006 Non-Executive Stock Plan established on
January 1, 2006. The shares were valued at $0.18 per share, the closing market
price on the effective date of the Plan, and were amortized on a straight-line
basis over a twelve month period. For the three and six months ended June 30,
2006, the Company recognized directors' compensation of $28,500 and $103,500,
respectively.
NOTE 9 - STOCK OPTIONS
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Option Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to employees and nonstatutory options to consultants and
other service providers. Generally, all options granted to employees and
consultants expire ten and three years, respectively, from the date of grant.
All options have an exercise price equal to or higher than the fair market value
of the Company's stock on the date the options were granted. Options generally
vest over three years. The plan reserves 14 million shares of common stock under
the Plan and is effective through December 31, 2015.
A summary of the status of stock options issued by the Company as of June 30,
2007 and 2006 is presented in the following table.
2007 2006
-----------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
----------------------------------------------------
Outstanding at beginning of year 7,309,102 $ 0.21 415,000 $ 0.15
Granted 1,500,000 0.09 6,894,102 0.21
Exercised/Expired/Cancelled (3,360,001) 0.21 -- --
---------- ----------
Outstanding at end of period 5,449,101 $ 0.20 7,309,102 $ 0.21
========== ==========
Exercisable at end of period 4,449,101 $ 0.17 1,301,602 $ 0.19
========== ==========
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 9 - STOCK OPTIONS (CONTINUED)
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the Company's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2007 2006
---------------------------
Weighted average fair value per option granted $ 0.09 $ 0.17
Risk-free interest rate 4.75% 4.41%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 9.80
Expected volatility 120.88% 155.69%
As of June 30, 2007 there was $116,648 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
various plans. That cost is expected to be recognized over a weighted average
period of 1.5 years.
NOTE 10 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
Three Months ended June 30, Six Months ended June 30,
2007 2006 2007 2006
------------------------------ ------------------------------
Numerator:
Net loss $ (192,541) $ (1,209,624) $ (482,096) $ (2,052,154)
------------ ------------ ------------ ------------
Denominator:
Weighted average number of common shares 62,448,443 56,918,605 62,743,612 55,389,426
------------ ------------ ------------ ------------
Net loss per share-basic and diluted $ (0.00) $ (0.02) $ (0.01) $ (0.04)
============ ============ ============ ============
Stock options and warrants to purchase approximately 14,582,436 shares of the
Company's common stocks were outstanding, but were not included in the
computation of diluted net loss per share for the three and six months ended
June 30, 2007 because the exercise price of the stock options and warrants was
greater than the average share price of the common shares, and, therefore, the
effect would have been antidilutive.
As the Company incurred net loss for the three and six months ended June 30,
2006, the effect of dilutive securities totaling 693,537 and 693,407 equivalent
shares, respectively, have been excluded from the calculation of diluted loss
per share because their effect was anti-dilutive.
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 11 - FORMATION OF NEW SUBSIDIARY
The Company formed a new subsidiary, VisioNetx, Inc. ("VisioNetx"), and
transferred certain intangible assets and liabilities related to the Company's
impairment detection devices. The carrying value of the assets (totaling $30,160
at December 31, 2006) and the liabilities assumed (at date of transfer totaling
$198,572) were transferred at cost in accordance with SFAS 141. The Company's
Chief Executive Officer (CEO) and President resigned from AcuNetx and assumed
the role of CEO and President of VisioNetx. In addition, another officer
resigned from the Company and assumed the role as Chief Operating Officer of the
subsidiary.
NOTE 12 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended June 30, 2007, one sales representative accounted
for $362,762, or 54.2%, of revenues. During the six months ended June 30, 2006,
this sales representative accounted for $1,181,297, or 65.5%, of revenues.
During the three and six months ended June 30, 2006, the national distributor
accounted for $246,302 and $445,552, or 67.8% and 68.9% of total revenues,
respectively.
The Company maintains cash deposits with major banks, which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
NOTE 13 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The Chief
Executive Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.
In 2006, the Company changed the structure of its internal organization to
develop three market-oriented operating divisions: (i) IntelliNetx division,
(ii) OrthoNetx division, and (iii) VisioNetx division. The IntelliNetx division
markets patented medical devices that assist in the diagnosis of dizziness and
vertigo, and rehabilitate those in danger of falling as a result of balance
disorders The OrthoNetx division markets patented medical devices that
mechanically induce new bone formation in patients with skeletal deformities o
the face, skull, jaws, extremities and dentition. The VisioNetx division markets
patented products that track and analyze human eye movements. The Company also
has other subsidiaries that do not meet the quantitative thresholds of a
reportable segment.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 13 - 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.
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:
For Three Months ended For Six Months ended
June 30, June 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
IntelliNetx Division:
Net revenue to external customers $ 669,519 $ 363,130 $1,789,065 $ 646,705
Cost of revenue 127,122 144,972 353,707 265,785
---------- ---------- ---------- ----------
Margin $ 542,397 $ 218,158 $1,435,358 $ 380,920
OrthoNetx Division:
Net revenue to external customers $ -- $ 8,600 $ -- $ 8,600
Cost of revenue
-- 3,703 -- 3,703
---------- ---------- ---------- ----------
Margin $ -- $ 4,897 $ -- $ 4,897
OrthoNetx Division:
Net revenue to external customers $ 8,955 $ -- $ 13,355 $ --
Cost of revenue 1,158 -- 3,027 --
---------- ---------- ---------- ----------
Margin $ 7,797 $ -- $ 10,328 $ --
Total Net Revenue to External Customers $ 678,474 $ 371,730 $1,802,420 $ 655,305
Total Cost of Revenue 128,280 148,675 356,734 269,488
---------- ---------- ---------- ----------
Total Margin $ 550,194 $ 223,055 $1,445,686 $ 385,817
========== ========== ========== ==========
Intersegment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do no
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 13 - SEGMENT INFORMATION (CONTINUED)
For Three Months ended For Six Months ended
June 30, June 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Total margin for reportable segments $ 550,194 $ 223,055 $ 1,445,686 $ 385,817
=========== =========== =========== ===========
Corporate and general and administrative expenses (717,952) (1,141,583) (1,757,359) (1,969,262)
Stock option expenses (19,441) (136,846) (158,518) (244,876)
Impairment of goodwill -- -- (362) --
Research and development -- (146,022) -- (191,578)
Interest and Other Expense (13,344) (8,445) (23,006) (19,247)
Loss on equity-method investments -- (10,804) -- (28,690)
Interest and Other Income 8,002 11,021 12,263 16,848
----------- ----------- ----------- -----------
Net loss before income taxes $ (192,541) $(1,209,624) $ (481,296) $(2,050,988)
=========== =========== =========== ===========
NOTE 16 - 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 June 30, 2007.
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------
NOTE 16 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
The following table presents the changes in the Company's warranty reserve
during the first three months of 2007 and 2006:
2007 2006
------- -------
Balance as of beginning of period $ 7,200 $ 8,462
Provision for warranty 3,588 1,051
Utilization of reserve (1,800) (1,051)
------- -------
Balance as of end of period $ 8,988 $ 8,462
======= =======
NOTE 17 - DEPARTURE AND ELECTION OF NEW CHIEF EXECUTIVE OFFICER
As part of a corporate restructuring, on January 8, 2007 the company's Chief
Executive Officer, Terry Knapp, resigned and Ronald Waldorf, the company's
Interim Chief Financial Officer, was elected to serve as the Company's Chief
Executive Officer. On August 1, 2007, the former CEO resigned from the Board of
Directors of the Company.
NOTE 18 - SUBSEQUENT EVENT
In October 2006 investors were given the right to convert their investment terms
to the terms of the first "New Financing" if the first new financing was for
better terms than those in October of 2006. On July 12, 2007, in the first new
financing subsequent to October 2006, investments were issued at $0.07 per share
with warrants convertible into common stock at $0.10 per share. As a result, the
Company is obligated to issue an additional 2,164,286 to these investors and
restate their warrants exercisable price from $0.20 per share to $0.10 per
share.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BUSINESS OVERVIEW
AcuNetx is organized around a dedicated medical division and two separate
subsidiary companies: (i) IntelliNetx, a medical division with neurological
diagnostic equipment, (ii) OrthoNetx, Inc., a wholly-owned medical subsidiary
company with devices that create new bone, and (iii) VisioNetx, Inc., an
AcuNetx-controlled subsidiary company, formed subsequent to December 31, 2006,
with products for occupational safety and law enforcement. For all its devices,
AcuNetx is integrating an information technology (IT) platform that allows the
device to capture data about the physiological condition of a human being. The
company's IT platform is designed to gather data and connect the device-related
data with users and support persons. The Company's products include the
following:
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, stress 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.
o A proprietary information technology system called SmartDevice-Connect(TM)
("SDC") that establishes product registry to individual patients and tracks
device behavior for post-market surveillance, adverse event and outcomes
reporting, and creates "smart devices" that gather and transmit physiological
data concerning the device and its interaction with the patient.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
The first two quarters of 2007 represent the combined results of AcuNetx, Inc.
and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc. compared with the first
two quarters of 2006, which included the combined results of AcuNetx, Inc. and
its subsidiary, OrthoNetx Inc. VisioNetx was a division of AcuNetx for the first
half of 2006.
One significant aspect in the comparison is a shift in revenue recognition. In
the first quarter of 2006, AcuNetx products were purchased by a national
distributor and revenues were credited at the previously agreed upon wholesale
price. Since May of 2006, under a revised contract, shipments and title to the
equipment moves directly from AcuNetx to the end customers, and AcuNetx
recognizes the revenue at the retail price. This change results in higher
revenues for the same unit volume of sales, along with higher gross profits, as
costs do not change. An offsetting increase in selling expenses occurred as the
distributor is paid commissions from retail proceeds.
19
Revenues during the first half of 2007 were $ 1,802,420, compared to $655,305
for the corresponding period in 2006. System unit shipments increased to 49
units in the first half from 32 units in the first half of the prior year. The
revenue increase was also driven primarily by the systems being booked at the
retail level as described above. Gross profit, as a percentage of sales
increased 21.3%. Total operating expenses decreased by $489,477 from $2,405,716
in the first half of 2006 to $1,916,239 in the first half of 2007. Decreased
selling, general and administrative expenses resulted in a loss of $482,096
($0.008 per share) for the current period, compared to a loss of $2,052,154
($0.037 per share) for the same period in the previous year.
Standard selling, general and administrative expenses for AcuNetx, OrthoNetx and
VisioNetx increased primarily due to increased commission expenses from retail
proceeds. The shift to recognizing revenue at the retail level for AcuNetx
products mentioned earlier has resulted in increased selling expenses which
offset the higher gross profit for units sold through a sales representative and
will return higher contributions to net income for units sold through other new
channels. This change was in effect for the entire half quarter of 2007.
The Company focused on two major issues during the first half of 2007, closing
of the Superior, Colorado office and transitioning all of the corporate
administrative and financial activities to the Torrance, California facility.
Both of these tasks were completed which will result in further G&A savings in
addition to a reduction of senior management positions. The company's financial
resources were directed to bolster the marketing and sales activities of its
revenue producing IntelliNetx division. To that end, the company exhibited its
IntelliNetx product line at the American Academy of Audiology and continued to
add manufacturer's representatives as commission-based sellers. It obtained
approval from Health Canada to market its products in that county and has begun
to ship product to customers. Other global opportunities are being evaluated for
distribution, as are value-added products and services to supplement the
IntelliNetx product line.
In regards to the subsidiary, VisioNetx, Inc., demo units have been placed in
beta sites located in Mexico and Germany as part of the on-going program of its
impairment screening product introduction. VisioNetx has also seen a growing
interest in its HawkEye law enforcement data capture system, with several
municipalities having purchased and many more putting forth grants to local,
state and governmental agencies for funding.
The Company is distributing VNG products under the IntelliNetx brand through a
number of new channels, including Special Instrument Dealers. These sales should
result in an improvement to the bottom line as the company has negotiated a more
favorable commission structure with these channels. The company is working with
all of its marketing channels to formulate a consistent message to highlight its
product and company strengths.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of June 30, 2007 of $66,681will not allow for
payment of all outstanding invoices until additional financing is completed. The
Company has a loan from the founder of OrthoNetx, which the Company has
renegotiated on June 30, 2007. Under the Agreement, the Company's subsidiary,
OrthoNetx, Inc. executed an Amended and Extended Promissory Note in the
principal amount of $268,551.25. The new note replaces a Promissory Note issued
by OrthoNetx, Inc., on January 30, 2005 in the original principal amount of
$300,000. The new note bears interest at 13% per annum, and provides for
payments of interest only until February 1, 2008, at which time payments of
principal and interest will commence based on a 36- month amortization. All
principal and interest is due on August 1, 2009.
20
The Company recognizes that the current liquidity situation raises the question
of being able to continue as a going concern. It is addressing this issue in two
ways:
First, VisioNetx, Inc. is seeking additional funding in the as described below,
which will allow the continuation of operations through the full implementation
of the SafetyScan product. Second, the Company intends to restructure expense
and overhead parameters in a manner that will allow it to continue to
manufacture and sell its current product lines while paying current liabilities
over time.
Inventory on June 30, 2007 was $214,326, compared to $340,160 on June 30, 2006.
Purchasing for all VNG products has been adjusted to a level consistent with
current sales volumes. OrthoNetx bone distraction product inventories, both the
GenerOs CF and GenerOs SB, continue to be reduced through sales, but still
offset the management improvements in VNG inventory levels. Accounts receivable
as of June 30, 2007 were $120,476, compared to $124,408 on June 30, 2006.
Accounts payable as of June 30 2007 were $505,988, compared to $ 401,147 as of
June 30, 2006. The change is primarily due to the extension of payments due to
liquidity issues, both discussed above. OrthoNetx had previously acquired a
private firm, and has been carrying accounts payable at full value until a
settlement is resolved.
Sales prospects for the balance of 2007 are on target to exceed last year's
amount, both in units sold and dollar volume, as we supplement all distribution
channels, domestically and internationally for the IntelliNetx medical products.
With Health Canada approval as well as a focus on federal government
opportunities, management confidence in its revenue outlook increases. As our
wholly-owned subsidiary, VisioNetx, Inc., requires HawkEye and worker impairment
screening products, AcuNetx, as the manufacturer, should see increasing revenues
from these activities. The Company is exploring the possible sale of the
OrthoNetx division and its products for bone distraction as a method to raise
additional funds. To date, no substantial interest has been shown, but
exploratory talks with other candidates will continue. AcuNetx is seeking to
raise a minimal amount of additional capital (approximately $250,000) to support
its IntelliNetx marketing and sales efforts as well as to decrease pressure on
its cash flow for forward-looking obligations. An active fund raising effort is
also in place to secure funding for its wholly-owned subsidiary, VisioNetx, Inc.
ITEM 3. CONTROLS AND PROCEDURES.
At the end of the period covered by this Form 10-QSB, the Company's management,
including its Chief Executive and Acting Chief Financial Officer, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Chief Executive and Acting Chief
Financial Officer determined that such controls and procedures are effective to
ensure that information relating to the Company required to be disclosed in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission.
There have been no changes in the Company's internal controls over financial
reporting that were identified during the evaluation that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
21
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter the Company conducted a private 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 offered 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 June
30, 2007, the Company had raised $30,000 from the offering and sold 428,571
units.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company was in default under a loan from the founder of OrthoNetx, who is
also a former director. The note has been fully renegotiated with revised
payment schedules as explained in Note 6 of Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
10.1 Assignment Agreement, dated April 16, 2007, between the Company and Cornell
Capital Partners, L.P.
31.1 Certification of the Company's Chief Executive Officer Pursuant to Rule
13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Company's Acting Chief Financial Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1 Certification of the Company's Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of the Company's Acting Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE: AUGUST 14, 2007
BY: /S/ RONALD A. WALDORF
---------------------
RONALD A. WALDORF, CHIEF EXECUTIVE OFFICER
23