UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(X) Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2009
Commission File No. 0-27857
ACUNETX, INC.
-------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0249812
------ ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2301 W. 205th Street, #102, Torrance, CA 90501
----------------------------------------------
(Address of principal executive offices)
310-328-0477
------------
(Registrant's telephone number, including area code)
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] 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 March 31, 2009, the issuer had 65,429,309 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-Q contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, acquisitions,
adequacy of funds from operations, statements expressing general optimism about
future operating results and non-historical information, are forward-looking
statements. In particular, the words "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "MAY," "WILL," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Readers should not place undue reliance on these forward-looking
statements, which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions (including those described below) and apply
only as of the date of this Report. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below
"Management's Discussion and Analysis and Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Report, and the risks
discussed in our most recently filed Annual Report on Form 10-K 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 SHEETS
March 31, 2009 December 31, 2008
ASSETS (Unaudited) (Audited)
---------------------------------------------------------------------------------------------------------
Current Assets
Cash $ 1,849 $ 12,715
Restricted Cash 15,667 15,636
Accounts receivable, net 113,866 79,167
Inventory 93,735 99,020
Prepaid expenses and other current assets 34,202 51,816
-------------------------------
Total Current Assets 259,319 258,354
Property and equipment, net 8,480 10,355
Goodwill -- --
Other intangible assets 114,722 114,996
Deferred tax assets 220,635 220,635
Other investments 15,000 15,000
Other assets 2,020 2,020
-------------------------------
TOTAL ASSETS $ 620,176 $ 621,360
===============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 440,411 $ 429,766
Accrued liabilities 979,821 909,508
Notes payable to related parties -- --
Current portion of long-term debt 205,003 211,768
-------------------------------
Total Current Liabilities 1,625,235 1,551,042
Convertible debt, net of debt discount of $2,374 and $3,124
for 2009 and 2008, respectively 37,626 36,876
Long-Term Debt 150,000 150,000
-------------------------------
Total Liabilities 1,812,861 1,737,918
-------------------------------
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,429,309 shares issued and outstanding 65,429 65,429
Common stock to be issued -- --
Paid-in capital 11,293,013 11,288,208
Accumulated deficit (12,534,810) (12,457,279)
-------------------------------
Total AcuNetx Inc. Stockholders' Deficit (1,176,368) (1,103,642)
Noncontrolling deficit in subsidiary (16,317) (12,916)
-------------------------------
Total Stockholders' Deficit (1,192,685) (1,116,558)
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 620,176 $ 621,360
===============================
See notes to interim unaudited consolidated financial statements
3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months ended
March 31,
2009 2008
-------------------------------
Sales - Products $ 292,118 $ 219,588
Cost of sales - products 74,532 130,062
-------------------------------
Gross profit 217,586 89,526
-------------------------------
Operating Expenses:
Selling, general and administrative expenses 263,776 328,998
Stock option expense 7,973 147,530
-------------------------------
Total Operating Expenses 271,749 476,528
-------------------------------
Operating loss (54,163) (387,002)
-------------------------------
Other income(expense)
Interest and other income 31 1,338
Interest and other expenses (29,168) (20,798)
-------------------------------
Total other income (expenses) (29,137) (19,460)
-------------------------------
Net loss before income taxes and minority interest (83,300) (406,462)
Provision for income taxes 800 800
-------------------------------
Net loss before noncontrolling interest (84,100) (407,262)
Noncontrolling interest in losses of subsidiary (6,569) (1,823)
-------------------------------
Net loss $ (77,531) $ (405,439)
===============================
Net Loss per share-Basic and Diluted $ (0.00) $ (0.01)
===============================
Weighted average number of common shares 65,429,309 65,286,213
See notes to interim unaudited consolidated financial statements
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THREE MONTHS ENDED MARCH 31, 2009 2008
-------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (77,531) $(405,439)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncontrolling interest in loss of subsidiary (6,569) (1,823)
Depreciation and amortization 2,149 2,151
Issuance of stock and stock equity awards for services 7,973 147,530
Provision for bad debt 7,000 483
Amortization of debt discount 750 750
(Increase) Decrease in:
Accounts receivable (41,699) 9,034
Inventory 5,285 57,318
Prepaid and other assets 17,614 37,460
Increase (Decrease) in:
Accounts payable and accrued expenses 80,958 12,543
-------------------------
Net cash used in operating activities (4,070) (139,993)
-------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash (31) (15,820)
Capitalized intellectual property (0) (406)
-------------------------
Net cash used in investing activities (31) (16,226)
-------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stock -- 15,050
Net proceeds from convertible debt -- 15,000
Repayments on notes payable (6,765) (12,506)
-------------------------
Net cash provided by (used in) financing activities (6,765) 17,544
-------------------------
NET DECREASE IN CASH (10,866) (138,675)
CASH BALANCE AT BEGINNING OF PERIOD 12,715 205,162
-------------------------
CASH BALANCE AT END OF PERIOD $ 1,849 $ 66,487
=========================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 0 $ 0
Interest paid $ 4,784 $ 8,746
Schedule of Noncash Investing and Financing Activities:
Issuance of stock options for accrued expenses $ 0 $ 1,036
See notes to interim unaudited consolidated financial statements
5
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
Nature of Business
------------------
AcuNetx, Inc. was formed by the merger of Eye Dynamics, Inc., incorporated in
1988, and OrthoNetx, Inc., in December of 2005. AcuNetx is now organized around
a dedicated medical division and two separate subsidiaries, as follows: (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. Our products offer a technology platform that allows the devices to
capture data about physiological conditions and connect the device-related data
to computers operated by 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 cranio-maxillofacial (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.
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 net losses of $77,531 and $405,439 for the three months ended March 31,
2009 and 2008, respectively. The Company had a working capital deficit of
$74,193 and an accumulated deficit of $12,534,810 as of March 31, 2009. In the
near term, the Company expects the operating cash flows will not be sufficient
to cover all debt and payables although it expects its sales to grow and will be
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 include raising operating capital to take advantage of its
IntelliNetx and HawkEye commercial opportunities. The company is seeking a
maximum of $500,000 in a private placement of securities, the terms of which
have not been finalized. This will enable the Company to focus its efforts on
selling its neurological diagnostic products that has historically been its
primary business and to increase the marketing and sales efforts for its HawkEye
law enforcement product.
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 March 31, 2009
and for the three months ended March 31, 2009 and 2008 is unaudited but includes
all adjustments (consisting only of normal recurring adjustments) that the
Company considers necessary for a fair presentation of the financial information
set forth herein, in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP") for interim financial information,
and with the instructions to Form 10-Q. Accordingly, such information does not
include all of the information and footnotes required by U.S. GAAP for annual
financial statements. For further information refer to the Consolidated
Financial Statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008.
The consolidated balance sheet as of December 31, 2008 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by U.S. GAAP for complete financial
statements. The results for the three months ended March 31, 2009 may not be
indicative of results for the year ending December 31, 2009 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.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 three months ended March 31, 2009 and 2008.
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 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 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 three months ended March
31, 2009 and 2008, the Company recognized pre-tax stock option compensation
expense of $7,973 and $147,530, 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)
FAIR VALUE MEASUREMENTS: On January 1, 2008, the Company adopted the provision
of SFAS No. 157, "FAIR VALUE MEASUREMENTS," except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
ahs been delayed by one year. The Company measures at fair value certain
financial assets and liabilities, including its marketable securities trading
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
o Level 1 Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities;
o Level 2 Quoted prices in markets that are not active, or inputs that
are observable, either directly or indirectly, for substantially the
full term of the asset or liability;
o Level 3 Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair Value Measurements as of March 31, 2009
-----------------------------------------------------
Total Level 1 Level 2 Level 3
----- ------- ------- -------
Marketable securities
Trading $15,000 $15,000 $0 $0
======= ======= == ==
The adoption of SFAS 157 did not have a material effect on the Company's
financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS: On January 1, 2009, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 160, "NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT TO ARB NO. 51." SFAS No. 160
changed the Company's classification and reporting for its noncontrolling
interests in its variable interest entity to a component of stockholders' equity
and other changes to the format of its financial statements. Except for these
changes in classification, the adoption of SFAS No. 160 did not have a material
impact on the Company's financial condition or results of operations.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "INTERIM
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures will be required
beginning with the quarter ending June 30, 2009. The company is currently
evaluation the requirements of these additional disclosures.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET MARCH 31, 2009 DECEMBER 31, 2008
------------------------ -------------- ------------------
Accounts Receivable $ 126,030 $ 84,331
Allowance for Bad Debt (12,164) (5,164)
--------- ---------
Total Accounts Receivable, Net $ 113,866 $ 79,167
========= =========
INVENTORY
---------
Finished Goods $ 46,376 $ 46,316
Demo units 67,409 72,754
Allowance for loss in inventory (20,050) (20,050)
--------- ---------
Total Inventory $ 93,735 $ 99,020
========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 10,427 $ 4,042
Prepaid rent and deposit -- --
Employee Advance 7,058 6,058
Other Prepaid Expenses 16,717 41,716
--------- ---------
Total Prepaids and Others $ 34,202 $ 51,816
========= =========
PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 40,530
Software 5,757 5,757
--------- ---------
55,818 55,818
Accumulated Depreciation (47,338) (45,463)
--------- ---------
Total Property and Equipment, Net $ 8,480 $ 10,355
========= =========
ACCRUED LIABILITIES
-------------------
Warranty reserve $ 3,741 $ 3,045
Accrued payroll and related taxes 130,123 67,081
Accrued consulting fees 271,192 259,692
Commissions payable 2,508 7,596
Deferred Revenues -- 14,016
Accrued vacation 60,849 58,502
Accrued professional fees 158,637 171,136
Related party payable (10) (10)
Other accrued liabilities 352,782 328,450
--------- ---------
Total Accrued Liabilities $ 979,821 $ 909,508
========= =========
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - OTHER INTANGIBLE ASSET
The Company's intangible assets consisted of the following at March 31, 2009 and
December 31, 2008:
March 31, December 31,
2009 2008
---------------------------------------
Pending Intellectual Property $ 94,140 $ 94,140
Awarded patents 21,954 21,954
Accumulated amortization (1,372) (1,098)
--------- ---------
Other Intangible Assets, Net $ 114,722 $ 114,996
========= =========
Amortization of intangibles was $275 for each of the three-month period ended
March 31, 2009 and 2008.
Based on the carrying amount of the intangibles as of March 31, 2009, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows:
Years ended December 31,
-------------------------
2009 (From April 1, 2009) $ 823
2010 1,098
2011 1,098
2012 1,098
2013 and over 16,465
----------------
Total $ 20,582
================
NOTE 5 - OTHER INVESTMENT
The Company's other investment consisted of 1,000,000 shares of preferred stock
in a public-traded company with carrying values of $15,000 and $15,000 as of
March 31, 2009 and December 31, 2008, respectively. The shares are classified as
trading securities, of which the shares were reported in the balance sheet at
fair value with realized and unrealized gains and losses included in current
period operations. As of March 31, 2009, there was no gross unrealized gain or
loss for these securities. An unrealized gain of $14,100 was recorded at
December 31, 2008.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - BORROWINGS
Long-Term Debt
--------------
March 31, December 31,
2009 2008
-------------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment. Monthly
payments total $81, including interest at 18.99%. The original note
amount was $2,062. Matures July 21, 2009. $ 783 $ 783
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 (a) 204,220 210,985
Secured note payable to a customer. Monthly interest payment only at
10%. A balloon payment due on April 1, 2011. (b) 150,000 150,000
-------------------------------------------------------------------------------------------------
355,003 361,768
Less: Current Maturities (205,003) (211,768)
-------------------------------------------------------------------------------------------------
Long-term debt $ 150,000 $ 150,000
-------------------------------------------------------------------------------------------------
(a) On June 30, 2007, the Company entered into an Agreement for Extension and
Amendment of a Note ("Agreement") with a related party. Under the
Agreement, the Company's subsidiary, OrthoNetx, Inc. executed an Amended
and Extended Promissory Note in favor of a related party, in the principal
amount of $268,551. The new note replaces a promissory note issued by
OrthoNetx, Inc. on January 30, 2005 in the original amount of $300,000.
The new note bears interest at 13% per annum, and provides for payments of
interest that commenced on August1, 2007. Payments of principal and
interest commenced on February 1, 2008, based on a 36-month amortization
schedule. All principal and interest is due on August 1, 2009. As of March
31, 2009, the Company was in arrear of four monthly payments, aggregated
to $36,194. 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.
(b) The Note provides that if, on the second anniversary of the date of the
Note, AcuNetx has not set aside at least $100,000 for repayment of the
Note upon maturity, the principal of S&S has the right to compel AcuNetx
to conduct a private offering to raise the funds necessary to repay the
Note. The Note also provides that if AcuNetx is unable to pay the balance
at maturity, S&S is entitled to a penalty equal to 10% of the principal
balance of the Note, payable monthly until fully paid. As of March 31,
2009, no fund was set aside.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - BORROWINGS (CONTINUED)
Convertible Debt, net
---------------------
March 31, December 31,
2009 2008
------------------------------
10% Series A Convertible Promissory Note, matures on December 31, 2010 $ 25,000 $ 25,000
8% Convertible Promissory Notes, matures commencing May 18, 2009 15,000 15,000
------------------------------------------------------------------------------------------------------
40,000 40,000
Less: Unamortized debt discount (2,374) (3,124)
------------------------------------------------------------------------------------------------------
Convertible debt, net $ 37,626 $ 36,876
------------------------------------------------------------------------------------------------------
NOTE 7 - INCOME TAXE
Provision for income taxes consisted of a minimum state franchise tax of $800
for three months ended March 31, 2009 and 2008.
The Company had removed the valuation allowance on December 31, 2003 because it
believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and would be reflected as a credit to
operations. However, as of December 31, 2005, the Company's ability to utilize
its federal net operating loss carryforwards was uncertain due to the merger
with OrthoNetx, which had net operating loss carryforwards of approximately $1.7
million. Thus a valuation reserve was provided against the Company's net
deferred tax assets.
As of December 31, 2008, the Company has net operating loss carryforwards of
approximately $7,500,000 and $5,800,000 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 - STOCK OPTIONS
AcuNetx, Inc.
-------------
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Option Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to employees and nonstatutory options to consultants and
other service providers. Generally, all options granted to employees and
consultants expire ten and three years, respectively, from the date of grant.
All options have an exercise price equal to or higher than the fair market value
of the Company's stock on the date the options were granted. Options generally
vest over three years. The plan reserves 14 million shares of common stock under
the Plan and is effective through December 31, 2015.
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS (CONTINUED)
A summary of the status of stock options issued by the Company as of March 31,
2009 and 2008 is presented in the following table.
2009 2008
---------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------------------
Outstanding at beginning of year 9,818,168 $0.11 5,525,768 $0.15
Granted - $0.00 3,830,000 $0.07
Expired/Cancelled (65,000) $0.22 - $0.00
------------ --------------
Outstanding at end of period 9,753,168 $0.10 9,355,768 $0.12
============ ==============
Exercisable at end of period 8,461,501 $0.12 7,855,768 $0.12
============ ==============
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.
2009 2008
-------------------------------
Weighted average fair value per option granted N/A $0.06
Risk-free interest rate N/A 3.28%
Expected dividend yield N/A 0.00%
Expected lives N/A 5.00
Expected volatility N/A 134.64%
As of March 31, 2009 there was $23,137 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
15 months.
The following table sets forth additional information about stock options
outstanding at March 31, 2009:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
-----------------------------------------------------------------------------------------
$0.01-$0.30 9,753,168 3.26 years $ 0.10 8,461,501
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - STOCK OPTIONS (CONTINUED)
VisioNetx, Inc.
On August 16, 2007, the shareholders of VisioNetx, Inc. approved the adoption of
the 2007 Stock Incentive Plan to provide for the issuance of incentive stock
options and/or 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 March 31,
2009 and 2008 is presented in the following table.
2009 2008
---------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------------------------
Outstanding at beginning of year 425,500 $0.10 479,500 $0.10
Granted - $0.00 96,000 $0.10
--------------- -----------------
Outstanding at end of period 425,500 $0.10 575,500 $0.10
=============== =================
Exercisable at end of period 329,678 $0.10 229,486 $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.
2009 2008
----------------------------------
Weighted average fair value per option granted N/A $0.04
Risk-free interest rate N/A 3.45%
Expected dividend yield N/A 0.00%
Expected lives N/A 5.00
Expected volatility N/A 134.64%
As of March 31, 2009 there was $5,167 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans. That cost is expected to be recognized over a weighted average period of
1.5 years.
The following table sets forth additional information about stock options
outstanding at March 31, 2009:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
----------------------------------------------------------------------------------------------
$ 0.10 425,500 6.05 years $ 0.10 329,678
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
For the Three Months Ended
March 31,
2009 2008
-----------------------------------------------------------------------------
Numerator:
Net loss $ (77,531) $ (405,439)
-----------------------------------------------------------------------------
Denominator:
Weighted average of common shares 65,429,309 65,286,213
-----------------------------------------------------------------------------
Net loss per share-basic and diluted $ (0.00) $ (0.01)
As a result of our net loss for the three months ended March 31, 2009 and 2008,
all common share equivalents would have been anti-dilutive and therefore, have
been excluded from the diluted net loss per share calculation. The weighted
average securities, consisting of stock options and warrants, that were either
out of the money or anti-dilutive from our calculation of diluted net loss per
share were approximately 17,973,169 and 10,058,956 for three months ended March
31, 2009 and 2008, respectively.
NOTE 10 - MAJOR CUSTOMERS
During the three months ended March 31, 2009 and 2008, major distributors
accounted for $153,103 and $82,500 or 49% and 42% of IntelliNetx division
revenues, respectively.
NOTE 11 - 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 11 - 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
March 31,
2009 2008
--------------------------------------------------------------------------------
Net Revenue to external customers:
INX $292,118 $200,822
ONX - 18,766
VNX - -
---------------------------------
Consolidated Net Revenue to external customers $292,118 $219,588
--------------------------------------------------------------------------------
Cost of Revenue:
INX $ 74,532 $ 90,750
ONX - 39,312
VNX - -
---------------------------------
Consolidated Cost of Revenue $ 74,532 $130,062
--------------------------------------------------------------------------------
Gross Margin:
INX $217,586 $110,072
ONX - (20,546)
VNX - -
---------------------------------
Consolidated Gross Margin $217,586 $ 89,526
--------------------------------------------------------------------------------
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 three months ended
March 31,
2009 2008
--------------------------------------------------------------------------------
Total margin for reportable segments $ 217,586 $ 89,526
Corporate and general and administrative expenses (263,776) (328,998)
Stock option expenses (7,973) (147,530)
Interest and Other Expense (29,168) (20,798)
Interest and Other Income 31 1,338
----------------------
Net loss before income taxes and noncontrolling interest $ (83,300) $(406,462)
======================
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - 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 March 31, 2009.
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first three months of 2009 and 2008:
For three months ended March 31, 2009 2008
-------------------------------- ------------ -------------
Beginning balance $ 3,045 $ 11,339
Provision for warranty 696 (6,001)
Utilization of reserve - -
------------ -------------
Ending balance $ 3,741 $ 5,338
============ =============
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BUSINESS OVERVIEW
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q. Except for the historical
information contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q should be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's actual results may
differ materially from the results discussed in the forward-looking statements,
as a result of certain factors including, but not limited to, those discussed
elsewhere in this Quarterly Report on Form 10-Q.
AcuNetx has invested substantial funds in the last several years developing and
validating its products. The Company is producing and marketing the
Infrared/Video VNG System, both as a branded product for a distributor and under
the IntelliNetx brand through independent distributors nationwide and
internationally. In the first quarter of 2009, the VNG line of products
accounted for 96.1% of the Company's revenue. The balance of the revenue came
from HawkEye sales and other R&D projects. While the current products are being
sold into a relatively mature market, recent research has indicated that
additional markets may be suitable for the Company's lines, and the company will
continue to explore those opportunities with the its distributors and partners.
Ongoing initiatives are important to our future success. In 2009, we have made
several important changes to realign our resources.
We have accelerated marketing and sales of the HawkEye(TM) eye observation and
recording system, and this should allow AcuNetx management to address this
market and generate revenues from the product. We believe that we have sold to
approximately half of the current, limited market for non-portable devices, and
that our planned minor technological advancements to the Hawkeye line, rendering
the devices fully portable, will open up to us a multi-billion dollar market in
which we currently have established penetration.
We continue to pursue sales and marketing activities for our 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. For example, we have for the
first time established an in-house sales group to sell to the recently untouched
California market in our home state.
We believe that the OrthoNetx product line still has significant potential value
in the marketplace, either for development or acquisition, and the relationship
with Robinson Medsurg LLC is an important step to maximize this opportunity.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31, 2008
The first quarter of 2009 represents the combined results of AcuNetx, Inc. and
its subsidiaries, OrthoNetx Inc. and VisioNetx Inc.
Revenues during the first quarter of 2009 totaled $292,118, compared to $219,588
for the corresponding period in 2008. System unit shipments dropped to 21 units,
including 19 Video-Nystagmography (VNG) systems and 2 Hawkeye Field sobriety
testers, in the first quarter from 32 units in the prior year. The average sales
price per system sold, however, accounted for the improved sales and profit
margins. Gross profit, as a percentage of sales, increased 33% from the previous
first quarter, to 74% in the first quarter of 2009.
Total operating expenses decreased from $476,528 in the first quarter of 2008,
to $271,749 in the first quarter of 2009. Lean cost management reduced our
operating loss to a near-breakeven $54,163 for the current period, compared to
an operating loss of $387,002 for the same period in the previous year.
The Company focused on two major issues during the first quarter of 2009,
trimming expenses and increasing the productivity of sales representatives.
Initial success in both of these tasks has begun to result in significant
increases in operating efficiency. 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 has both added an internal sales
force, and continued to add manufacturer's representatives as commission-based
sellers. Other global opportunities are being evaluated for distribution, as are
value-added products and services to supplement the IntelliNetx product line.
With regard to the subsidiary, VisioNetx, Inc., the Company is actively seeking
a Chief Executive Officer capable of operating this complex business and an
individual who has the ability to attract capital to finance what we believe to
be a significant opportunity.
In relation to the wholly-owned subsidiary, OrthoNetx, Inc., the company
continues its discussions with interested parties to secure either a
distribution partner or other business relationship.
The Company is distributing VNG products under the IntelliNetx brand through a
number of new channels, including its new in-house sales force commencing
operations. 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 March 31, 2009 will not allow for payment of all
outstanding invoices until additional financing is completed. The Company has
renegotiated its loan from the founder of OrthoNetx to benefit both the Company
and the note holder.
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, the various divisions, including IntelliNetx, and the subsidiary
VisioNetx, Inc. are seeking additional funding in the second quarter, which will
allow the continuation of operations through the full implementation of the
SafetyScan product.
Second, the Company has begun to demonstrate success in restructuring 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 March 31, 2009 was $93,735, compared to $146,961 on March 31, 2008.
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, but still offset the
management improvements in VNG inventory levels. Accounts receivable as of March
31, 2009 were $113,866, as opposed to $35,517 at the same time in 2008,
explaining the reduced cash balance.
Accounts payable as of March 31 2009 were $440,411, compared to $377,973 as of
March 31, 2008. The change is primarily due to significant increases in 2008 in
selling, general and administrative expense and an extending 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 2009 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 a focus on federal government opportunities, management confidence in its
revenue projections increases. AcuNetx should benefit from the success of
VisioNetx if a liquidity event occurs (such as a public offering or
acquisition), because AcuNetx, as the manufacturer, would see increasing
revenues from these activities. The company began 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 $500,000) 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 subsidiary, VisioNetx, Inc.
ITEM 3. CONTROLS AND PROCEDURES.
At the end of the period covered by this Form 10-Q, the Company's
management, including its Chief Executive and 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.
21
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (*)
31.2 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (*)
32.1 Certification of President and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002(*)
-------------------
* Filed herewith.
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: May 20, 2009 By: /s/ Robert S. Corrigan
-------------------------------------------
Robert S. Corrigan, Chief Executive Officer
23