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 March 31, 2007
Commission File No. 0-27857
ACUNETX, INC.
-------------------
(Exact name of small business issuer 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
------------
(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 March 31, 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 SHEETS (UNAUDITED)
MARCH 31, 2007
--------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 87,375
Certificate of Deposits -
Accounts receivable, net 286,908
Inventory 209,330
Prepaid expenses and other current assets 42,000
-------------
Total Current Assets 625,613
Property and equipment, net 24,009
Goodwill -
Other intangible assets 136,932
Deferred tax assets 220,635
Other investment -
Other assets 1,772
-------------
TOTAL ASSETS $ 1,008,961
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 567,474
Accrued liabilities 385,800
Notes payable to related parties 243,731
Current portion of long-term debt 578
-------------
Total Current Liabilities 1,197,583
Notes payable to related parties -
Long-term debt 1,137
-------------
Total Liabilities 1,198,720
-------------
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
62,716,714 shares issued and outstanding 62,716
Paid-in capital 10,901,885
Accumulated deficit (11,154,360)
-------------
Total Stockholders' Deficit (189,759)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,008,961
=============
See notes to interim unaudited consolidated financial statements
3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THREE MONTHS ENDED MARCH 31, 2007 2006
-------------------------------------------------------------------------------------------------
Sales - products $ 1,123,946 $ 283,575
Cost of sales - products 228,454 120,813
------------------------------------
Gross profit 895,492 162,762
------------------------------------
Operating Expenses:
Selling, general and administrative 1,039,407 827,679
Stock option expense 139,077 108,030
Impairment of goodwill 362 -
Research and development - 45,556
------------------------------------
Total operating expenses 1,178,846 981,265
------------------------------------
Operating loss (283,354) (818,503)
------------------------------------
Other Income (Expense)
Interest and other income 4,261 5,827
Loss on equity-method investment - (17,886)
Interest and other expenses (9,662) (10,802)
------------------------------------
Other income (expense) (5,401) (22,861)
------------------------------------
Net loss before taxes (288,755) (841,364)
Provision for income taxes 800 1,166
------------------------------------
Net loss $ (289,555) $ (842,530)
====================================
Net loss per share-basic and diluted $ (0.00) $ (0.02)
====================================
Weighted average number of shares 63,038,781 53,860,247
See notes to interim unaudited consolidated financial statements
4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THREE MONTHS ENDED MARCH 31, 2007 2006
---------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (289,555) $ (842,530)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 5,582 2,152
Issuance stock and stock equity awards for services 139,076 193,030
Provision for bad debt 8,657 1,712
Impairment of goodwill 362 -
Deferred tax expense - 366
Loss on investment accounted for under equity method - 17,886
(Increase) Decrease in:
Accounts receivable (199,164) (1,730)
Inventory 42,106 11,192
Prepaid and other assets 53,310 (25,347)
Increase (Decrease) in:
Accounts payable and accrued expenses 125,288 (59,799)
--------------------------------------
Net cash used in operating activities (114,338) (703,068)
--------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in certificate of deposits - (2,350)
Purchase of property and equipment - (2,671)
Capitalized intellectual property (745) (6,694)
--------------------------------------
Net cash used in investing activities (745) (11,715)
--------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stock - 1,036,529
Net proceeds from exercise of warrants - 20,000
Repayments on notes payable (112) (33,397)
--------------------------------------
Net cash provided by (used in) financing activities (112) 1,023,132
--------------------------------------
NET INCREASE (DECREASE) IN CASH (115,195) 308,349
CASH BALANCE AT BEGINNING OF PERIOD 202,570 171,340
--------------------------------------
CASH BALANCE AT END OF PERIOD $ 87,375 $ 479,689
======================================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ - $ -
Interest paid $ - $ 13,416
Schedule of Noncash Investing and Financing Activities:
Retirement of common stock for an equity-method investment $ 14,007 $ -
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., 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 $289,555 and $842,530 for the three months
ended March 31, 2007 and 2006 respectively. In addition, the Company has a
working capital deficit of $571,970 and an accumulated deficit of $11,154,360 as
of March 31, 2007. In the near term, the Company expects the operating cash
flows will not be sufficient to cover all the old debt and payables although it
expects its sales will continue to grow and is able to cover current operating
costs and to reduce the working capital deficit.
Management's plans include spinning off the VisioNetx division, raising
additional working capital through debt or equity financing, closing the
Colorado facility to reduce expenditures, and increasing marketing efforts to
increase revenues. Subsequent to the year-end, the Company formed a subsidiary
to spin-off the VisioNetx division (see Note 11) and transferred, at cost,
certain assets and liabilities related to the impairment detection business.
This will enable the Company to focus in efforts on selling its neurological
diagnostic products that has historically been its primary business. VisioNetx
is seeking funding that will allow it to purchase SafetyScan-I products from the
Company and sell them to companies that wish to test 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.
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at March 31,
2007and for the three months ended March 31, 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 months ended March 31, 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 three months ended March 31, 2007 and 2006. The Company had no other
intangible assets in 2007.
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 three months ended March 31, 2007. No impairment of goodwill
was recorded for three months ended March 31, 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.
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION: The Company has adopted the fair value recognition
provisions of FASB Statement No.123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2007 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2007
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). For the three months
ended March 31, 2007 and 2006, the Company recognized pre-tax stock option
compensation expense of $139,077 and $108,030, 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).
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 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.
8
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:
At March 31, 2007 2006
--------------------------------------------------------------------------------
Accounts Receivable, net
Accounts receivable $ 300,910 $ 118,543
Other receivable - 185
Allowance for bad debt (14,002) (2,611)
--------------------------------------------------------------------------------
Total $ 286,908 $ 116,117
================================================================================
Prepaid Expenses and Other Current Assets
Prepaid insurance $ 19,847 $ 43,210
Prepaid rent and deposit 278 14,725
Other prepaid expenses 21,875 20,276
--------------------------------------------------------------------------------
Total $ 42,000 $ 78,211
================================================================================
Property and equipment, net
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 46,333
Software 5,757 6,285
--------------------------------------------------------------------------------
55,818 62,149
Less: accumulated depreciation (31,809) (29,334)
--------------------------------------------------------------------------------
Total $ 24,009 $ 32,815
================================================================================
Accrued Liabilities
Commission payable $ 81,821 $ -
Accrued insurance - 10,015
Warranty reserve 7,649 8,462
Accrued payroll and related taxes 60,457 17,666
Accrued interest 13,530 -
Accrued consulting fees 96,391 19,090
Other 125,952 24,363
--------------------------------------------------------------------------------
Total $ 385,800 $ 79,596
================================================================================
9
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 was 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 a creditor of OrthoNetx,
Inc., a wholly-owned subsidiary of the Company,declaring the note in default and
electing to accelerate the entire unpaid balance and interest.
The creditor asserts that the Note had been assumed by the Company and that
grounds for default include failure to pay principal and interest when due and a
material adverse change in the financial condition or operations of OrthoNetx,
Inc., default under the collateral documents securing the Note and other
defaults. The Company maintains that the Note is an obligation of OrthoNetx,
Inc.,not of the Company, and is collateralized by certain assets of OrthoNetx.
Under the terms of the Note, the Company had 60 days from the date of the
default notice to cure the default. The Company is continuing discussion with
the related party to resolve this issue.
As of March 31, 2007 and 2006, the loan balance was $243,731 and $266,603,
respectively. The related accrued interest balance was $13,530 at March 31,
2007.
LONG-TERM DEBT
At March 31, 2007 2006
------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment. 1,715 -
Monthly payments total $81, including interest at 18.99%.
The original note amount was $2,062. Matures July 21, 2009.
------------------------------------------------------------------------------------------
1,715 -
Less: Current Maturities (578) -
------------------------------------------------------------------------------------------
Long-term debt $ 1,138 $ -
==========================================================================================
10
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 March 31, 2007 2006
---------------------------------------------------------------------------
Federal:
Current $ - $ -
Deferred - 377
---------------------------------------------------------------------------
- 377
---------------------------------------------------------------------------
State:
Current 800 800
Deferred - (11)
---------------------------------------------------------------------------
800 789
---------------------------------------------------------------------------
Total $ 800 $ 1,166
===========================================================================
The Company had removed the valuation allowance as of December 31, 2003 because
it believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and was reflected as a credit to operations.
However, as of December 31, 2005, the Company's ability to utilize its federal
net operating loss carryforwards is uncertain due to the net loss of the year
and the merger with OrthoNetx which has net operating loss carryforwards
approximately of $1.7 million, as of that date, and thus a valuation reserve has
been provided against the Company's net deferred tax assets.
As of December 31, 2006, the Company has net operating loss carryforwards of
approximately, $6,300,000 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
EXERCISE OF WARRANTS
The Company received total proceeds of $20,000 for exercised stock warrants
during the first three 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.
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 months ended
March 31, 2006, the Company issued 300,000 shares of common stock and recognized
directors' compensation of $54,000. The Plan expired on December 31, 2006.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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 March 31,
2007 and 2006 is presented in the following table.
2007 2006
------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------------------------------------------------------------
Outstanding at beginning of year 7,309,102 $ 0.21 415,000 $ 0.15
Granted 1,500,000 0.09 6,765,000 0.21
Expired and Cancelled (3,360,001) 0.21 - -
--------------- ---------------
Outstanding at end of period 5,449,101 $ 0.20 7,180,000 $ 0.20
=============== ===============
Exercisable at end of period 4,449,101 $ 0.17 1,150,000 $ 0.18
=============== ===============
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% 4.40%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 9.93
Expected volatility 120.88% 162.13%
As of March 31, 2007 there was $136,090 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 1.75 years.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
For three months ended March 31, 2007 2006
------------------------------------------------------------------------------
Numerator:
Net loss $ (289,555) $ (842,530)
Denominator:
Weighted average of common shares 63,038,781 53,860,247
Net loss per share - basic and diluted $ (0.00) $ (0.02)
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 months ended March 31,
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 a net loss for the three months ended March 31, 2006,
the effect of dilutive securities totaling 693,276 equivalent shares were also
excluded from the calculation of diluted loss per share because their effect was
antidilutive.
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
An independent sales representative accounted for $818,535, or 69.2%, of
IntelliNetx revenues for the three months ended March 31, 2007. During the three
months ended March 31, 2006, this sales representative accounted for revenues of
$199,250, or 70.3%, of IntelliNetx revenues.
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.
13
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
March 31,
2007 2006
----------------------------------------- --------------------------------
IntelliNetx Division:
Net revenue to external customers $ 1,119,546 $ 283,575
Cost of revenue 226,585 120,813
--------------------------------
Margin $ 892,961 $ 162,762
OrthoNetx Division:
Net revenue to external customers $ - $ -
Cost of revenue - -
--------------------------------
Margin $ - $ -
VisioNetx Division:
Net revenue to external customers $ 4,400 $ -
Cost of revenue 1,869 -
--------------------------------
Margin $ 2,531 $ -
Total Net Revenue to External Customers $ 1,123,946 $ 283,575
Total Cost of Revenue 228,454 120,813
--------------------------------
Total Margin $ 895,492 $ 162,762
================================
Intersegment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do no
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
For Three Months ended
March 31,
2007 2006
--------------------------------------------------- -------------------------------
Total margin for reportable segments $ 895,492 $ 162,762
Corporate and general and administrative expenses (1,039,407) (827,679)
Stock option expenses (139,077) (108,030)
Research and development - (45,556)
Impairment of goodwill (362) -
Interest and Other Expense (9,662) (10,802)
Loss on equity-method investments - (17,886)
Interest and Other Income 4,261 5,827
-------------------------------
Net loss before income taxes $ (288,755) $ (841,364)
===============================
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - COMMITMENT
The Company has an agreement with a special instrument dealer providing that the
Company will issue restricted common stock to the distributor and dealer as a
sale incentive if certain conditions are reached pursuant to the agreements. As
of March 31, 2007, none of these conditions have been satisfied and the Company
has issued no shares.
NOTE 15 - 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, 2007.
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first three months of 2007 and 2006:
For three months ended March 31, 2007 2006
-------------------------------- --------------- ---------------
Beginning balance $ 7,200 $ 8,462
Provision for warranty 2,249 -
Utilization of reserve (1,800) (1,262)
--------------- ---------------
Ending balance $ 7,649 $ 7,200
=============== ===============
NOTE 16 - 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.
NOTE 17 - SUBSEQUENT EVENT
Subsequent to March 31, 2007, the Company repurchased and retired 598,978 shares
of its Common Stock. The shares were purchased from a single shareholder in a
privately negotiated transaction.
15
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
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
The first quarter of 2007 represents the combined results of AcuNetx, Inc. and
its subsidiaries, OrthoNetx Inc. and VisioNetx Inc. compared with the first
quarter of 2006, which included the combined results of AcuNetx, Inc. and its
subsidiary, OrthoNetx Inc. VisioNetx was then a division of AcuNetx.
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.
Revenues during the first quarter of 2007 were $1,123,946, compared to $283,575
for the corresponding period in 2006. System unit shipments increased to 32
units in the first quarter from 23 units in 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 22.3%. Total
operating expenses increased by $197,581 from $981,265 in the first quarter of
2006 to $1,178,846 in the first quarter of 2007. Increased selling, general and
administrative expenses resulted in a loss of $289,555 ($0.005 per share) for
the current period, compared to a loss of $842,530 ($0.01 per share) for the
same period in the previous year.
The Company focused on two major issues during the first quarter 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.
16
In regard 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 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.
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 first quarter of 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of March 31, 2007 of $87,375 will not allow for
payment of all outstanding invoices until additional financing is completed The
Company has a loan from the founder of OrthoNetx, which is five months in
arrears on interest as of March 31, and ten months behind on principal payments.
A demand and notice of default has been served on the Company, and the Company
is discussing various forward-looking solutions regarding the default notice.
Management believes it will be able to renegotiate the terms and conditions of
payment that benefit both the Company and the note holder.
17
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 second quarter 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 the it
to continue to manufacture and sell its current product lines while paying
current liabilities over time.
Inventory on March 31, 2007 was $209,330, compared to $346,607 on March 31,
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 March 31, 2007 were $286,908.
Accounts payable as of March 31 were $567,474, compared to $225,309 as of March
31, 2006. The change is primarily due to significant increases in 2006 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 2007 are on target to exceed last year's
amount, both in units sold and dollar volume, as we supplement all distribution
channels, domestically and internationally for the IntelliNetx medical products.
With Health Canada approval as well as a focus on federal government
opportunities, management confidence in its revenue projections increases. As
our wholly-owned subsidiary, VisioNetx, Inc., requires HawkEye and worker
impairment screening products, AcuNetx, as the manufacturer, will 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 $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.
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is in default under a loan from the founder of OrthoNetx, who
is also a former director. The balance due, including principal and interest,
was approximately $257,261 as of March 31, 2007. A demand and notice of default
has been served on the Company, and the Company is negotiating with the note
holder for a restructuring of the note.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Certification of the Company's Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2 Certification of the Company's Acting Chief Financial Officer
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934
32.1 Certification of the Company's Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
32.2 Certification of the Company's Acting Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 15, 2007
By: /s/ Ronald A. Waldorf
---------------------
Ronald A. Waldorf, Chief Executive Officer
19