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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 2O549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15 (d) of
the Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2008
[_] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________________ to _______________
Commission File No. 2-95626-D
ACUNETX, INC.
Nevada 88-0249812
----------------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2301 W. 205TH STREET, SUITE 102, TORRANCE, CA 90501
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 328-0477
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share
Indicate by check mark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the issuer is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the issuer (l) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer |_| Non-accelerated filer |_|
Accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The aggregate market value of the voting common equity held by nonaffiliates of
the registrant, computed by reference to the closing sale price of such stock,
was approximately $1,002,677 as of June 30, 2008, the last business day of the
registrant's most recently completed second fiscal quarter. The registrant has
no non-voting common equity.
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Certain statements contained in this discussion or elsewhere in this report may
be deemed "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and
phrases such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "designed to achieve", variations of such words and
similar expressions are intended to identify such forward-looking statements,
which generally are not historical in nature. All statements that address
operating performance, events or developments that we expect or anticipate will
occur in the future - including statements relating to rent and occupancy
growth, general conditions in the geographic areas where we operate - are
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict.
Although we believe the expectations reflected in any forward-looking statements
are based on reasonable assumptions, we can give no assurance that our
expectations will be attained and therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. Many of the factors that may affect outcomes and results are beyond
our ability to control.
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PART I
ITEM l. BUSINESS
BACKGROUND
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.
o Supplementing some of these products is a proprietary information
technology system that is designed to establish product registry to
individual patients and track device behavior for post-market
surveillance, adverse event and outcomes reporting.
INTRODUCTION TO EYE-TRACKING DEVICES
Abnormal human eye movements and pupil reactions are excellent
indicators of the presence of disease, drugs or other conditions that can alter
the normal response of the human oculo-motor system. Our medical eye-tracking
technology addresses the central nervous system condition of nystagmus, a rapid,
involuntary back-and-forth or up-and-down oscillation of the eyeball. Nystagmus
occurs in different forms and has a number of causes, ranging from the serious,
e.g., a tumor in the brain or ear, to the "benign" or non-life threatening, such
as positional dizziness. The consumption of certain drugs and alcohol also
causes nystagmus, and there is a direct and quantifiable correlation between
blood alcohol concentration in the body and the onset of nystagmus. Medical
research conducted over the past fifty years has furnished evidence
demonstrating a relationship between irregular eye movement and abnormal central
nervous system physiology. The numerous causes of these conditions include the
influences of alcohol, drugs, illness, stress, extreme fatigue and other
neurological conditions. The underlying technology used in all of our
eye-tracking products and use. The products utilize infrared sensitive video
cameras to monitor, record, and analyze eye performance and movement. All of the
products share in a modular concept to promote efficiency in manufacturing. The
products are PC-computer based, with specialized and proprietary hardware and
embedded firmware. A common element of the products is the Ocular Motor Module,
which involves the subject donning goggles and looking at moving lights within a
dark environment. The products include an infrared sensitive Charge Coupled
Device video camera, which provides a bright video image, with the person being
tested seeing only a small stimulus or tracking light amid complete darkness.
All of our Video-Nystagmography (VNG) devices are designed to enable doctors to
diagnose balance problems, including patients, especially the elderly, who are
in danger of falling.
EYE-TRACKING PRODUCTS
MEDICAL PRODUCTS (IntelliNetx division): Video-nystagmography assesses
eye movements using infrared video cameras, and it has largely replaced the
prior technology, Electronystagmographic (ENG) testing. ENG utilizes electrodes
to assess eye movement, and a pen recorder to display the results, in order to
assess problems in the balance systems of patients.
AcuNetx brought the use of infrared illumination of the eyes into
clinical use in 1994, when the U.S. Food and Drug Administration ("FDA")
approved marketing of our House Infrared/VNG System. Our device was the first to
replace the electrodes with infrared sensitive video cameras and with computer
digital processing that follows the movement of the eyes and graphically
portrays the movements. The test subject wears a lightweight goggle assembly,
which contains miniature infrared video cameras. The goggles comprise an
essential component, because certain of the VNG tests require the patient to
move his or her head and often to recline on an examining table. The accuracy
and display of the Infrared/VNG System has proved to be a significant
improvement over other existing testing methods, including ENG. In addition, the
use of video by the Infrared/VNG System allows the test administrator or medical
practitioner to observe the eye movements directly, and it can provide a digital
video recording of the test for later playback and additional analysis. Since
1994, when we received FDA clearance to market this product, most competitors
have embraced video data acquisition as a superior technology. Results elicited
from the tests are used by physicians and clinicians.
We developed the AcuNetx system in conjunction with the world-renowned
House Ear Clinic and House Ear Institute, in Los Angeles, California. The
"House" name is used with the permission of the House Ear Institute. AcuNetx's
IntelliNetx division has obtained ISO 13485: 2003 Certification as a quality
medical manufacturer and approval from Health Canada for marketing & sales.
IMPAIRMENT DETECTION PRODUCTS (VisioNetx, Inc. subsidiary).
Our impairment detection products include:
SafetyScan(TM), to screen workers in safety-sensitive jobs for
physiological signs of impairment. The system evaluates involuntary changes in
eye movements and/or pupil reactions, which may result from drug or alcohol
abuse, reactions to medication, medical conditions, stress or fatigue.
Occupations in the medical, aviation, emergency response, construction,
manufacturing and transportation businesses are key markets for this technology.
Unlike most drug and alcohol test methods, SafetyScan(TM) functions without the
need for extraction and testing of bodily fluids, such as urine. SafetyScan(TM)
determines whether or not a person is impaired at the time of the test and is
not a test for past use of consciousness-altering substances. Unlike blood,
urine and saliva tests, which only measure the presence of a substance in the
body, SafetyScan(TM) takes into account the physiological effects of the
substance or "stressor." While substance abuse receives more attention, worker
impairment caused by other stressors, such as prescription and over-the-counter
medications, extreme fatigue, and illness, all result in significant expense to
employers. Workers suffering from such impairments are characterized by low
productivity, more accidents, higher workers' compensation and insurance costs,
and equipment and merchandise damage.
SafetyScan(TM) is based on methods developed by the federal government
and used by law enforcement over the past 30 years. SafetyScan(TM) is a simple
computer system that evaluates the ability of an individual's eyes to follow a
moving light, and the ability of the pupil of the eye to react to dim and bright
light stimuli.
SafetyScan(TM) is non-diagnostic and non-judgmental; it evaluates
performance of the individual solely for safety and productivity purposes. It
takes only 90 seconds for SafetyScan(TM) to test the human eye by measuring
twenty parameters of eye movement and pupil change, assessing parameters of
position and reaction time of the eye itself and the size of pupil.
SafetyScan(TM) reports the result of the test instantly with a "Pass" or "Fail"
result.
2
Unlike SafetyScan(TM), traditional drug tests do not determine
on-the-job impairment in real time. Companies and government agencies around the
world are beginning to evaluate our cost-effective technology as a replacement
for traditional drug tests that require body fluids and are much more expensive
to conduct. We believe that SafetyScan(TM) will be especially useful where
fatigue in the workplace has an impairing effect on workers. To this end, we
have contracted with a major human alertness technology consulting and research
organization to optimize SafetyScan(TM) for fatigue testing. We believe
SafetyScan(TM) will appeal to employers with round-the-clock workforces who
desire to reduce industrial accidents caused by employee fatigue and to improve
worker alertness and safety.
HawkEye(TM) is an evidence-capture device for use by state and federal
DREs, or Drug Recognition Experts, in evaluating DUI suspects, in the field and
in training mode. In most states, law enforcement agencies use a six point
evaluation of people thought to be intoxicated, known as the Standardized Field
Sobriety Test ("SFST"). The SFST includes three tests for balance, and three
tests involving eye performance. We believe there is a need for a product that
can be utilized not only in the jail or precinct house, but in the field by law
enforcement personnel in traffic patrol cars. Our HawkEye (TM) product will soon
be offered as an advanced prototype in a `handheld' or highly portable
configuration. Current police practices nationwide involve training of officers
in the SFST, and some advanced officers in Drug Recognition Expert (DRE) are
trained in protocols to evaluate individuals suspected of DUI or other drug
impairment. Both methods evaluate eye signs extensively, and this evidence has
met the exacting Frye standard for scientific validity in courts. Until the
invention of HawkEye(TM), which is patent-pending, there existed no means for
the officer to capture irrefutable objective evidence. Our HawkEye(TM) product
allows direct capture and digital recording of eye motions and pupil responses
on video, exactly as observed by the police officer. Early product feedback
suggests significant enthusiasm on the part of the law enforcement community,
and the company has made initial sales, thereby garnering potential future
market penetration, to police departments, the U.S. Army, and universities, in a
large number of states. In 2007, the United States Patent and Trademark Office
approved two HawkEye(TM) patents for issuance.
DISTRACTION OSTEOGENESIS DEVICES FOR OSTEOPLASTIC SURGERY
Osteoplastic surgery, which involves formation or molding of bone,
addresses the art and science of correcting deformities and deficiencies of the
skeleton caused by errors of birth, trauma, infections and tumors. Osteoplastic
surgery is applicable to all areas of the skeleton, including the skull and
face, jaws, long bones of the upper and lower extremities, hands, wrists, feet,
ankles and the spine.
Our OrthoNetx subsidiary holds patents and FDA approvals for a family
of osteoplastic surgery products that generate new bone through the process of
Distraction Osteogenesis, the growing of new of elongated bone. Together, these
products address an estimated $730 million potential worldwide market. The first
of these products, the GenerOs(TM) CF craniofacial bone generator, has been
available for commercial sale since December 2004.
Our GenerOs(TM) CF craniofacial bone generator, assists surgeons in
treating conditions such as birth deformities of the skull, facial bones and
jaws. It is a small, proprietary device that enables distraction of the bones of
the face and skull to correct developmental, congenital, and acquired defects
and deficiencies. The device is made of surgical grade stainless steel with an
internal gear system that allows for activation to take place even though the
device is buried below the skin and soft tissues. The device is often implanted
through incisions inside the mouth, thus minimizing external surgical scars. The
GenerOs(TM) CF device utilizes two blocks that are fixed to the bone on either
side of a surgically created bone, cut with miniscrews. A small transcutaneous
activation pin is turned, which drives a mechanism to separate the two blocks.
As the two blocks are separated, the bone gap is increased, to a recommended
distance of 1mm per day. After the desired separation is achieved (usually 10mm
- 20mm in most cases), the pin is removed and the device is left in position on
the bone until the bone is completely calcified. The device is then removed in a
small outpatient procedure. GenerOs CF will distract up to 20 millimeters, which
is adequate for approximately 95% of cases.
Our GenerOs (TM) SB small bone generator has the same form factor and
specifications as GenerOs CF. The difference is an extension of approved
indications for small bones of the extremities. We have received FDA clearance
for commercialization of this device.
In 2007, AcuNetx reached an agreement in principal with Robinson
MedSurg of Lone Tree, Colorado ("RMS"), that would permit RMS to market and sell
our proprietary line of bone distraction devices. RMS is a distributor of
medical devices for maxillofacial, craniofacial, and orthopedic use. RMS has
special marketing and product supporting relationships with independent
resellers throughout the world. The company is owned by Dr. Randolph Robinson,
M.D. DDS, the inventor of the OrthoNetx line of distraction devices, and the
largest shareholder of AcuNetx, Inc.
3
MARKETING
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. Marketing of the Infrared/VNG
System is conducted by AcuNetx through independent distributors. One major
distributor, MedTrak Technologies, Inc, operates through a network of
independently owned sub-distributors, known as special instrument dealers. These
independently owned businesses are distributors of not only our VNG System, but
a variety of allied and related products for the audiometric and otolaryngology
("ENT") markets. These distributors market across the United States and operate
in assigned territories. In addition, there are several foreign distributors
that the product in Latin American, Canada, and the Middle East. We plan to
obtain the "CE" mark of approval to offer the product in the European Community.
The market for the VNG products is relatively mature and represents
estimated annual growth of 5%. Because of the advancement of technology spurred
by our introduction of video data acquisition methods in 1994, the market for
replacement products has been strong. We intend to expand efforts to open new
markets for our products, including the neurology market, through our
distributors.
IMPAIRMENT DETECTION PRODUCTS. We have test-marketed an early version
of SafetyScan(TM) and have sold a few units in the prison system for inmate
testing in drug rehabilitation programs. In general, government drug testing
regulations are based on urine testing, so testing of employees by governmental
agencies, quasi-governmental agencies and certain regulated industries must
comply with these regulations. Accordingly, some modification of these
regulations may be necessary in order for the SafetyScan(TM) to gain broad
acceptance in sectors subject to federal drug test regulations, such as those
regulated by the Department of Transportation and certain others. We have
conducted discussions with various government agencies regarding modification of
applicable regulations and procedures so that they will encompass testing based
on eye movement and performance. While certain governmental agencies have
expressed an interest in the VisioNetx products, we believe that modifying
governmental testing regulations may be a lengthy process, and success is not
assured.
For these and other reasons, AcuNetx is developing marketing plans
that focus on nongovernmental private sector companies that are not regulated by
the federal government with respect to testing employees for substance abuse. In
general, these are companies with major safety issues related to their
operations. These companies tend to have employees in close proximity to, and
often in charge of operating, very expensive and dangerous capital equipment in
often vulnerable or hostile environments; and some of these companies may have
encountered recent "cataclysmic" events that have resulted in high-level
corrective activities within their enterprises. There are many companies in
various industries that meet these criteria, and the marketing plan will focus
on those portions of the industry that are not subject to governmental
regulation.
Recently, we have entered a distribution agreement for SafetyScan(TM)
products with Circadian Technologies, Inc., a research and consulting firm to
industry, concerning shift work and worker safety issues.
HAWKEYE(TM). In 2007, we successfully completed a licensing agreement with our
majority-owned subsidiary, VisioNetx, Inc. The agreement permits us to
manufacture, market and distribute the HawkEye(TM) video system to law
enforcement agencies throughout the world. AcuNetx uses a direct-to-customer
marketing strategy based on the Internet, E-marketing and a focused approach to
conferences and seminars. Sales of this product commenced in 2007.
COMPETITION
VIDEONYSTAGMOGRAPHY (VNG) PRODUCTS. The principal competitors in the
medical market producing VNG testing equipment are MicroMedical Technologies,
Inc., ICS Medical Corporation and Interacoustics. Since our VNG product was
introduced in 1994, these competitors have developed similar video-based VNG
goggle products. As a result, the market has become very competitive and subject
to pricing pressures. To combat this competitive pressure, AcuNetx has reduced
manufacturing costs in an effort to offset the gross margin loss.
IMPAIRMENT DETECTION PRODUCTS. Competition for SafetyScan(TM) will come
from companies that have developed tests and devices that evaluate motor and
cognitive skills. These take the form of hand-eye coordination tests, divided
attention tests, and other behavioral tests or series of tests administered
either in series or selectively. We have identified three such competitors that
have marketed these products in the past, including Performance Factors, Inc.,
Essex Corporation and Pulse Medical Instruments.
4
We believe that only Pulse Medical Instruments has developed a product
that could be directly competitive with our products. The product differs from
the others manufactured by our competitors in that it does not use the law
enforcement testing paradigm which forms the basis for SafetyScan; its results
are displayed in graphic form on a computer monitor for the qualified expert to
interpret. Based on information available to us, we anticipate that such a
product will be more expensive than SafetyScan(TM). Also, we believe it is not
versatile enough to determine impairment regardless of the case of the
impairment: one model is for fatigue, another for alcohol and drugs, etc. As a
result, we are not aware of whether that product has been validated as a useful
device. SafetyScan(TM) differs from its competitors' approach, because the
SafetyScan(TM) test evaluates changes in eye performance, which are involuntary
responses and not under the control of the individual. For this reason, these
responses cannot be faked, changed, improved upon or learned. All of the
competitive forms of performance tests known to us can be learned, and over time
the individual being tested can improve his skills in responding to those tests
and therefore potentially deceive the tester or alter the test results
improperly. We believe that this difference from our product gives our products
an additional important competitive advantage over other forms of performance
testing. SafetyScan(TM) also competes with drug and alcohol abuse test kits and
devices, which rely principally on collection and testing of urine or breath
samples. In addition, certain drug and alcohol abuse tests now being developed
will test saliva and/or hair for evidence of the presence of certain drugs or
alcohol. Additional advantages of SafetyScan(TM) over other tests, include the
immediacy of result feedback, and the non-invasive nature of the test procedure.
We believe that the potential for occupational safety improvement that
SafetyScan(TM) will provide for life-risk professions, such as airline pilots,
bus drivers and train engineers, will make the system a very important
breakthrough for public safety in these fields.
There are no currently known direct competitors for the HawkEye(TM)
line of products.
DISTRACTION OSTEOGENESIS DEVICES. Several companies offer devices which
compete with our GenerOs(TM) devices, including Stryker Leibinger GmbH & Co
(bone distraction systems), KLS Martin, L.P. (distraction osteogenesis
products), Walter Lorenz Surgical, Inc., a subsidiary of Biomet, Inc.
(distraction osteogenesis devices), Ace Surgical Supply Co. (external mandible
and dental distraction devices), Osteomed, Inc. (internal mandibular distraction
device) and Wells Johnson Company (mandibular distraction device). We believe
our distraction osteogenesis devices offer features that differentiate them from
competitive devices currently available. Our devices are generally smaller and
more adaptable to the bone, making it easy for the surgeon to use on patients of
all ages and varying osteoplastic surgery needs. Also, our craniofacial device
can be inserted through the mouth for lower jaw applications and can be
positioned for virtually any distraction vector required, and it features
break-off plates, which make it fast and simple for the surgeon to insert.
Finally, its removable, low profile activation pin is unobtrusive and leaves a
minimal scar.
MANUFACTURING. We have internally performed all design and engineering of our
VNG, SafetyScan(TM) and HawkEye(TM) products, and have developed all software
and validation of software algorithms that are used in the analysis portion of
the proprietary software.
All of our products boast a modular concept for efficiency in
manufacturing. Manufacturing of components of both the VNG products and
SafetyScan(TM) is outsourced. We attempt not to rely on a single supplier for
the manufacturing of components. Our GenerOs distraction osteogenesis devices
are manufactured under contract by High Precision Devices, Inc.
GOVERNMENT REGULATION
Our VNG products have been cleared for marketing by the U.S. Food and
Drug Administration (FDA), and we are licensed by the State of California as a
Medical Device Manufacturer. We are ISO 13485 certified for our manufacturing
processes. SafetyScan(TM) and HawkEye(TM) are not subject to FDA regulation, as
they are not considered medical devices. However, as discussed above under
"Marketing," government regulations on substance abuse testing for government
employees and certain private companies impact our ability to market the
SafetyScan(TM) in these areas. In 2005, we received ISO 13485-2003
Certification, which should assist in marketing these products.
5
Our distraction osteogenesis products are medical devices, subject to
regulation by the FDA and corresponding state agencies. In order for us to
market these products for clinical use in the United States, we must obtain
clearance from the FDA via 510(k) pre-market notification or approval by a more
extensive submission known as a pre-market approval application ("PMAA"). In
addition, certain material changes to medical devices are subject to FDA review
and clearance or approval. The FDA currently has cleared three of our products
for sale under 510(k); the GenerOs CF, the GenerOs SB and the GenerOs EX.
Sales of medical devices outside of the United States are subject to
regulatory requirements that vary from country to country. The time required to
obtain approval or sales internationally may be longer or shorter than that
required for FDA clearance, and the requirements may differ.
PATENTS & PROPRIETARY PROTECTION
We license the technology used in our performance evaluation products
from Ronald A. Waldorf, former CEO and director of AcuNetx, who holds a patent
covering claims relating to tracking eye movements in the dark, utilizing
infrared illumination and infrared sensitive video cameras, as well as the
related analysis methodology. The patent was issued in 1989. The license is for
the term of the underlying patent, and calls for nominal royalties of $100 per
year.
VisioNetx is the owner of a patent issued in August 1992, covering
certain technology underlying the SafetyScan(TM) equipment, principally relating
to the apparatus for testing for impairment by tracking eye movements and pupil
reactions to presented stimuli. VisioNetx has two patents pending for
SafetyScan(TM), while two patents have been approved for issue for the
HawkEye(TM) devices and technology. Additionally, our OrthoNetx subsidiary is
the owner of two patents and a patent pending covering our devices for
distraction osteogenesis.
The existence of patents may be important to our future operations, but
there is no assurance that additional patents will be issued. We also rely on
unpatented technology, know-how and trade secrets covering a number of items,
particularly the methods of obtaining data regarding eye performance; and we
rely on confidentiality agreements and internal procedures to protect
information.
EMPLOYEES
AcuNetx employs four full time employees, including two in executive
and administrative positions, one in compliance and administration, and one in
operations, engineering and research. We also employ one part-time employee, and
three consultants. Our employees are not parties to any collective bargaining
agreement, and we believe that our employee relations are satisfactory.
ITEM 1A. RISK FACTORS
Not required.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required.
ITEM 2. PROPERTIES
The principal offices of AcuNetx are located at 2301 205th Street,
Suite 102, Torrance, California 90501. The offices, with an adjacent
manufacturing floor, occupy 1620 square feet and the lease expires on January
31, 2010. The current monthly lease payment is $2,106. These offices are
considered satisfactory for conducting both corporate business and the
production and shipment of our products. We believe that suitable additional
space will be available to accommodate planned expansion.
ITEM 3. LEGAL PROCEEDINGS
AcuNetx is not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
2008.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
AcuNetx's Common Stock is traded on the OTC Bulletin Board under the
symbol "ANTX". The following table sets forth the quarterly high and low closing
prices for the Common Stock, as reported on the OTC Bulletin Board, during the
2007 and 2008 calendar years.
LOW HIGH
--- ----
2008
First Quarter $ 0.03 $ 0.18
Second Quarter 0.07 0.12
Third Quarter 0.03 0.08
Fourth Quarter 0.03 0.08
2007
First Quarter $ 0.02 $ 0.230
Second Quarter 0.028 0.055
Third Quarter 0.026 0.137
Fourth Quarter 0.026 0.142
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
HOLDERS
As of December 31, 2008, AcuNetx Common Stock was held of record by
approximately 276 holders. Registered ownership includes nominees who may hold
securities on behalf of multiple beneficial owners.
DIVIDENDS
AcuNetx has not paid cash dividends on its Common Stock, and we have no
present intention of paying cash dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about AcuNetx's Common Stock
that may be issued upon the exercise of options, warrants or rights under
existing equity compensation plans. The information in this table is as of
December 31, 2008.
Number of securities
issuable upon
exercise of Weighted average
outstanding exercise price of
options, outstanding options, Number of securities
PLAN CATEGORY warrants and rights warrants, and rights remaining available
------------- ------------------- -------------------- -------------------
Equity compensation
plans approved by
security holders 40,000 $ 0.18 N/A
Equity compensation
plans not approved
by security
holders 9,818,168 $ 0.11 4,181,832
------------------ ------------------- ------------------
Total 9,818,168 $ 0.15 4,181,832
------------------ ------------------- ------------------
7
On March 27, 2006, the Board of Directors adopted the 2006 Stock
Incentive Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to all employees and nonstatutory options to consultants
and other service providers. Generally, all options granted to employees and
consultants expire in five and three years, respectively, from the date of
grant. All options have an exercise price equal to or higher than the fair
market value of the Common Stock on the date the options were granted. Options
generally vest over three years. The plan reserves 14 million shares of common
stock under the Plan and is effective through December 31, 2015.
In the first half of 2008, AcuNetx conducted a private offering of up
to $500,000 of its equity units, each consisting of one share of Common Stock
and one warrant to purchase an additional share of common stock, at a price of
$0.07 per Unit. The exercise price for the warrant included in the unit is $0.10
and expires two years from the date of purchase. AcuNetx issued 286,429 units in
the offering, for gross proceeds of $20,050. AcuNetx believes such sales were
exempt from the registration requirements of the Securities Act of 1933, as
amended, by virtue of Section 4 (2) thereof and Regulation D thereunder.
ITEM 6. SELECTED FINANCIAL DATA
Not Required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and Notes thereto, included elsewhere
in this Annual Report on Form 10-K. Except for the historical information
contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-K should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-K. Our actual results may differ materially from
the results discussed in the forward-looking statements, as a result of certain
factors including, but not limited to, those discussed elsewhere in this Annual
Report on Form 10-K.
AcuNetx has invested substantial funds in the last several years,
developing and validating its products. We produce and market the Infrared/Video
VNG System, both as a branded product for our major distributor and under the
IntelliNetx brand internationally and through independent distributors. In 2008,
the VNG line of medical products, and Hawkeye traffic sobriety testing devices,
together accounted for virtually all of our revenue. While the VNG products are
being sold into a relatively mature market, the Hawkeye market is in the
beginning of its product life cycle.
Recent research has indicated that additional markets may be suitable
for our VNG lines, and we will continue to explore those opportunities with our
distributors and partners. Several ongoing initiatives are important to our
future success. In 2008, we made several important changes to realign our
resources.
First, we sought and obtained "Purchase Order" financing for the
corporation and all of its subdivisions, which provides for payment of the bill
of materials on products as soon as ordered by the customer, as well as
receivables financing from the date of sale, for those sales where the company
does not receive full payment from the customer before or upon shipment. This
financing allows the company to pay for our manufacturing and sales operations
with reduced concern for the delay in collecting receivables.
We have also commenced seeking financing for the VisioNetx, Inc.
subsidiary founded in 2007, and we believe that this subsidiary allows us more
flexibility in obtaining possible financing.
Secondly, we have accelerated marketing and sales of the HawkEye(TM)
eye observation and recording system, now leased from VisioNetx, and this should
allow AcuNetx management to address this market and generate revenues from the
product. We believe that we have 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.
Third, 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.
8
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007.
Revenues from sales of products declined by $1,520,315, or 59%, from
$2,574,645 in 2007, to $1,054,330 in 2008. Changes in revenue recognition from a
retail model in the second quarter of 2007 back to a wholesale model impacts the
comparison of these figures. A better way to view the company's progress is a
comparison of system unit sales. In 2008, 66 IntelliNetx and private label
medical systems were sold, compared to 96 of the same systems sold in 2007. This
33% decrease was a result of a management change and the outsourcing of sales
responsibilities to a consultant not sufficiently familiar with the company's
sales needs. Two major distributors accounted for approximately 45% of our sales
revenues in 2008, and in 2007 accounted for 64%. While VNG products and supplies
continue to make up the majority of our revenue, we did have modest revenue
growth from the sale of the HawkEye(TM) eye observation and recording law
enforcement system, providing an additional $90,000 of revenue (15 systems).
Due to changes in revenue recognition from a retail model in the second quarter
of 2007 back to a wholesale model and decline in revenue, the gross profit
declined from $1,960,628 (76%) in 2007 to $684,079 (65%) in 2008. That decline
was then offset by sales expense for commission payments. The 2008 net loss of
$715,696 represented an improvement of 18% over 2007, or $161,082, primarily due
to a reduction in selling, general and administrative expenses which declined
54% or $1,402,692 from 2007.
Inventory turnover ratio in 2008 was approximately 3:1, compared to 3:1
in 2007. This was achieved as we aligned our inventory stocking to the lower
volumes. Inventory was down $105,259, or 52%, from $204,279 at December 31, 2007
to $99,020 on December 31, 2008. Collection of accounts receivables has been
very satisfactory with only minimal slow paying accounts. Year end net accounts
receivable totaled $79,167 on December 31, 2008, an increase of $34,133, or 76%,
from $45,034 on December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2008, AcuNetx had $12,715 in cash and cash
equivalents, $15,636 in restricted cash, $79,167 in net accounts receivable, and
$99,020 in inventory. Conversely, AcuNetx had $1,551,042 of current
liabilities, which included accounts payable of $429,766. AcuNetx also had
accrued liabilities of $909,508, and notes payable of $361,768, with an
accumulated deficit of $12,457,279. AcuNetx has no plans for significant capital
equipment expenditures for the foreseeable future.
GOING CONCERN
AcuNetx's independent auditors have included an explanatory paragraph
in their report on the December 31, 2008 consolidated financial statements
discussing issues which raise substantial doubt about AcuNetx's ability to
continue as a "going concern." The going concern qualification is attributable
to the operating losses during the year and the amount of capital that AcuNetx
projects it needs to satisfy existing liabilities and achieve profitable
operations.
Management understands the comments in the auditor's report relative to
AcuNetx as a going concern. We have taken a number of actions, described
above and in the footnotes, to obtain financing, significantly reduce expenses
and conserve cash. We have also hired an internal sales force, to complement the
occasionally inconsistent, and in some cases non-existent, sales by the
company's network of representatives. All activities well as the HawkEye (TM)
product for law enforcement applications, which continue to serve as our source
of revenue. These activities will include maintaining the excellent
relationships already formed with our suppliers, distributors, and customers.
Any future expenses not related to this core business will be examined in the
light of our current liquidity position before approval. Management believes
that the plan that has been implemented will allow continuing operations and
improvements over time.
EFFECT OF INFLATION
We do not believe that inflation has had a material effect on our net
sales or profitability in recent years.
9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of AcuNetx are attached as a separate section of this
Annual Report on Form 10-K, commencing with page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
No response required
ITEM 9A (T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this
Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended December 31, 2008, management focused efforts
to improve internal control over financial reporting. Weaknesses identified in
our disclosure controls and procedures, and internal controls over financial
reporting were analyzed and remediation efforts were pursued. We improved our
control procedures primarily through engaging third party experts in compliance,
presentation and internal control evaluation, as well as providing additional
guidance and training to our present staff. As a result of these efforts, at
December 31, 2008, the material weaknesses identified and reported in prior
periods have been successfully remediated and adequate control procedures have
been implemented in those areas to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our management,
including our CEO and CFO, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2008 based on
the guidelines established in INTERNAL CONTROL -- INTEGRATED FRAMEWORK issued by
10
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the results of our evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31, 2008
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with Generally Accepted Accounting Principles applied in the United
States.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth information on the executive officers and
directors of AcuNetx:
NAME AGE POSITION
---- ---- --------
Robert S. Corrigan 55 President, CEO and Chairman
of the Board of Directors
Dennis G. Geselowitz 55 Chief Financial Officer
Ronald A. Waldorf 61 Director
Peter Miterko 55 Director
Steven Butler 49 Director
Terry R. Knapp, M.D. 64 Chairman of VisioNetx, Inc.
Directors hold office for a period of one year from their election at
the annual meeting of shareholders or until their successors are duly elected
and qualified.
Mr. Corrigan is the Chairman, President and CEO of AcuNetx. He has been
a director of VisioNetx since its inception in 2007 and has been a director of
AcuNetx since 2005. He has been Chairman and Chief Executive Officer of
Centennial Capital Group, Inc. for the past twelve years. CCGI is an investment
banking enterprise which assists developmental stage and other companies in
corporate finance, mergers and acquisitions and business development. Prior to
founding CCGI, Mr. Corrigan was employed by the major financial services
companies of Merrill Lynch, Pierce Fenner & Smith, Inc. and Paine Webber, Inc.
Mr. Corrigan is a Director of AcuNetx, Inc, and VisioNetx, Inc. Mr. Corrigan
holds a B.S. degree from Castleton State College, Castleton, Vermont and an M.S.
from Youngstown State University, Youngstown, Ohio.
Mr. Geselowitz has been Chief Financial Officer since September of
2008. A business and labor lawyer and financial executive, he maintains a
private legal practice, and he previously held various combined financial
management and general counsel positions for corporations, including Nature's
Gate and Moldex Metric, two manufacturing companies. Mr. Geselowitz has also
held senior banking positions, as an Assistant Vice President at First
Interstate Bank and Chief Financial Officer of a smaller institution, and he has
significant experience in fund-raising for small corporations. He has published
numerous syndicated financial articles on the internet. Mr. Geselowitz holds a
B.A. Degree from Witwatersrand University, a B. Proc degree from the University
of South Africa, and J.D. and M.B.A. degrees from the University of Southern
California (USC) in Los Angeles, California.
Mr. Waldorf was President and Chief Financial Officer of AcuNetx until
his retirement in 2008. He has been a director of AcuNetx since 1991 He acted as
Chairman of the Board of Directors of Eye Dynamics between 1991 and 2005. He is
the co-inventor of the IR/Video ENG System, SafetyScan and HawkEye products.
Since 1969 Waldorf has been active in the field of otolaryngology, primarily in
an academic research environment at the University of Florida,
11
College of Medicine and at the University of California (Irvine), Department of
Surgery. He has published numerous articles on vestibular and optokinetic
research in international scientific and medical journals and was the principal
investigator in a research grant funded by the National Institute of
Health/National Institute on Alcohol Abuse and Alcoholism (NIH/NIAAA). Mr.
Waldorf earned an M.S. from the Department of Physiology of the College of
Medicine, University of Florida, in 1972.
Mr. Miterko is a partner and Executive Vice President of Denver
Management Advisors, Inc. Previously, he was Chairman of HR Source, the largest
compensation, consulting and human resources outsourcing firm in the Rocky
Mountain area .As a partner at Ernst & Young, Peter founded and ran the Human
Resources Consulting Division of the firm, and served on the firm's U.S.
Operating Committee. Peter practiced law in New York City, where he also served
as senior associate in compensation and benefits at Carter, Ledyard & Milburn, a
Wall Street law firm. He has also served on the Board of the Association of
Private Pension and Welfare Plans, a Washington, D.C. based lobbying group and
has taught compensation and benefits law at the University Of Denver School Of
Law.
Mr. Butler, age 48, has been President and Chief Operating Officer of
Denver Management Advisors, a compensation and benefits consulting firm, since
2007. Between 2005 and 2007, he was CEO of Startek, Inc., a NYSE-listed business
process outsourcing firm. Between 2002 and 2004, he was President and Chief
Executive Officer of S.D. Butler Financial Consulting Services, LLC, which
provided consulting services to startup businesses. Mr. Butler has also served
as Chief Executive Officer and Chief Financial Officer of Verado, Inc., a
NASDAQ-listed data center company, and as managing Director of Finance and
Treasurer of United Pan-Europe Communications, a Netherlands-based cable TV
service provider.
Dr. Knapp was a director of AcuNetx between December 2005 and April
2007. In April 2007he became Chairman of the Board of VisioNetx, Inc. He was CEO
and a director of OrthoNetx, Inc. between December 2003 and its acquisition by
AcuNetx. He served as President and Chief Executive Officer throughout 2006. He
was a founder and a director of Collagen Corporation, a publicly traded (NASDAQ)
medical device company. He co-founded, served as Chairman and Chief Executive
Officer for Lipomatrix, a medical device company based in Switzerland, with
operations in the U.S. and Europe, until its acquisition. Dr. Knapp founded
PrivaComp, Inc. in 1999 as an information technology solution for health care
data management, product tracking and surveillance, and informed consent. Dr.
Knapp is a reconstructive facial and hand surgeon, and has spoken and published
extensively on matters of quality systems and risk management in health care.
Dr. Knapp is President and co-founder of DRL Foundation, a 501(c) (3)
humanitarian organization for reconstructive surgery and telehealth to
developing countries.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation awarded or paid by AcuNetx to
its Executive Officers during the fiscal years ended December 31, 2008 and 2007.
SUMMARY COMPENSATION TABLE
---------------------------------- ------ --------- ----------- --------- ---------
Name and principal position Year Salary Option awards Total
($) ($) ($)
---------------------------------- ------ ---------- ------------ --------- ---------
Robert S. Corrigan - CEO 2008 58,333 30,000 (A)(B) 88,333
2007 -- -- --
---------------------------------- ------ ---------- ----------- --------- ---------
Ronald A. Waldorf - CEO 2008 75,000 -- (A)(B) 23,851
2007 150,000 122,996 (A) 272,996
---------------------------------- ------ ---------- ----------- --------- ---------
Dennis G. Geselowitz - CFO 2008 25,000 25,268 50,268
2007 -- -- --
---------------------------------- ------ ---------- ----------- --------- ---------
(A) Options vested and valued using assumptions as described in Note 11 of Notes
to Financial Statements - STOCKS OPTIONS AND WARRANTS.
(B) Award amended per Narrative Disclosure to the Summary Compensation Table.
12
NARRATIVE DISCLOSURE TO THE SUMMARY COMPENSATION TABLE
In July of 2008, Ronald A. Waldorf resigned as Chief Executive Officer
and the Board appointed Robert Corrigan as Chief Executive Officer. Mr. Corrigan
receives a salary of $150,000 per year, and is entitled to a stock grant of
1,000,000 shares of Common Stock, to be issued in 2009. In September 2008, the
Board approved the employment of Chief Financial Officer Dennis Geselowitz,
under which he receives an annual salary of $90,000 and options to purchase
1,000,000 shares of the company's Common Stock, vesting over a two year period.
OUTSTANDING EQUITY AWARDS AT YEAR-END
The following table sets forth information concerning all equity awards.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Number of Number of
securities securities
underlying underlying
unexercised unexercised
options options Equity
(#) (#) incentive Option exercise Option
exercisable unexercisable plan price expiration
(#) ($) date
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf(A) 500,000 - - 0.198 7/14/2009(B)
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf 850,000(C) - - 0.067 7/14/2009(B)
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Ronald Waldorf 500,000 - - 0.198 7/14/2009(B)
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
Dennis Geselowitz 333,333 666,667(D) - 0.03 9/22/2013
------------------------------------ ----------------- ----------------- ----- ---------------- ----------------- -----------------
(A) Former Chief Executive Officer
(B) The original expiration date is October 14, 2008, 90 days after his
resignation. The expiration date was extended by action of the Board of
Directors.
(C) Granted as director compensation
(D) 333,333 shares vest on September 22, 2009 and 333,334 shares vest on
September 22, 2010
13
COMPENSATION OF DIRECTORS
The following table provides information concerning the compensation of all
directors for the year ended December 31, 2008.
DIRECTOR COMPENSATION
Name Option All other Total
awards compensation ($)
($) ($)
----------------------------------------------------------- ------------- -------- --------------- ----- ----------
Charles E. Phillips(F) 45,539 (A)(C) 45,539
-
----------------------------------------------------------- ------------- -------- --------------- ----- ----------
Robert S. Corrigan 45,539 (A)(C) 75,000 (B) 120,539
----------------------------------------------------------- ------------- -------- --------------- ----- ----------
Peter Miterko 47,582 (A)(D) - 47,582
----------------------------------------------------------- ------------- -------- --------------- ----- ----------
Steven Butler 9,550 (A)(E) - 9,550
----------------------------------------------------------- ------------- -------- --------------- ----- ----------
(A) Options vested and valued using assumptions as described in Note 11 of Notes
to Financial Statements - STOCKS OPTIONS AND WARRANTS.
(B) Consulting Fees and salary
(C) 850,000 Options outstanding as of 12/31/2008.
(D) 630,000 Options outstanding as of 12/31/2008.
14
(E) 377,400 Options outstanding as of 12/31/2008.
(F) Resigned on May 30, 20008.
NARRATIVE DISCLOSURE TO THE DIRECTOR COMPENSATION TABLE
During 2008, the Board of Directors agreed to waive all compensation for service
on the Board of Directors in 2009.
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information regarding the beneficial ownership of
the Common Stock of AcuNetx as of March 24, 2009, by (i) each person known by
AcuNetx to beneficially own 5% or more of its outstanding Common Stock ; (ii)
each of AcuNetx's directors; (iii) the Named Executive Officers identified in
the Summary Compensation Table; and (iv) all directors and Named Executive
Officers of AcuNetx as a group.
Number Of
Name Address Shares Owned % Owned
Randolph Robinson 7144 S Chapparal Cir E Centennial, CO 80016 8,834,760 13.50%
Winchester Financial Services Limited 295 Madison Ave 5th Floor NY, NY 10017 1 7,142,858 10.92%
Galen Capital Group LL 1660 International Drive, #410 McLean, VA 22102 3,226,231 4.93%
Charles Philips 2301 W. 205th St, Suite 102, Torrance, CA 90501 2 3,755,489 5.73%
Ronald Waldorf 2301 W. 205th St, Suite 102, Torrance, CA 90501 3 2,352,100 3.59%
Robert Corrigan 2301 W. 205th St, Suite 102, Torrance, CA 90501 4 2,650,000 4.05%
Dennis Geselowitz 2301 W. 205th St, Suite 102, Torrance, CA 90501 5 333,333 0.51%
Peter Miterko 2301 W. 205th St, Suite 102, Torrance, CA 90501 6 687,143 1.05%
Steven Butler 2301 W. 205th St, Suite 102, Torrance, CA 90501 7 377,400 0.58%
TOTAL 29,359,314 44.87%
1 - Total includes 3,571,429 warrants
2 - Total includes 1,350,000 options
3 - Total includes 1,850,000 options
4 - Total includes 1,350,000 options and unissued 1,000,000 restricted shares
5 - Total includes 1,000,000 options
6 - Total includes 630,000 options
7 - Total includes 377,400 options
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. Shares of Common Stock subject to
securities currently convertible or convertible within 60 days after March 24,
2009, are deemed to be outstanding in calculating the percentage ownership of a
person or group but are not deemed to be outstanding as to any other person or
group.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities (the "10% Stockholders"), to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Officers, directors and
10% Stockholders of AcuNetx are required by Commission regulation to furnish us
with copies of all Section 16(a) forms so filed.
Based upon a review of filings made and other information available to it,
AcuNetx believes that each of its Company's present Section 16 reporting persons
filed all forms required of them by Section 16(a) during the year 2008.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Not Applicable
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees billed to AcuNetx by Spector, Wong &
Davidian, LLP for professional services rendered for the fiscal years ended
December 31, 2008 and 2007:
Fee Category Fiscal 2008 Fees Fiscal 2007 Fees
--------------------- ------------------- -------------------
Audit Fees $ 65,000.00 $ 74,000.00
Audit-Related Fees
Tax Fees
All Other Fees
--------------------- ------------- -------------
Total Fees $ 65,000.00 $ 74,000.00
===================== ============= =============
Audit Fees. Consists of fees billed for professional services rendered for the
audit of our consolidated financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by Spector, Wong & Davidian, LLP in connection with
statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of our
consolidated financial statements and are not reported under "Audit Fees." There
were no Audit-Related services provided in fiscal 2008 or 2007.
Tax Fees. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning. There were no tax fees provided in fiscal 2008 or
2007
All Other Fees. Consists of fees for products and services other than the
services reported above. There were no other services provided in fiscal 2008 or
2007.
Policy On Audit Committee Pre-Approval Of Audit And Permissible Non-Audit
Services Of Independent Auditors
Our Audit Committee, subject to Board of Directors consent, pre-approves all
audit and permissible non-audit services provided by the independent auditors.
These services may include audit services, audit-related services, tax services
and other services. Pre-approval would generally be provided for up to one year
and any pre-approval would be detailed as to the particular service or category
of services, and would be subject to a specific budget. The independent auditors
and management are required to periodically report to the Audit Committee and
Board of Directors regarding the extent of services provided by the independent
auditors in accordance with this pre-approval, and the fees for the services
performed to date. The Board of Directors may also pre-approve particular
services on a case-by-case basis.
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements
See Index to Financial Statements.
(2) Exhibits
The following exhibits are included herein or incorporated by reference:
2.1 Agreement and Plan of Merger, dated September 1, 2005, among Eye
Dynamics, Inc., OrthoNetx, Inc., and Eye Dynamics Acquisition Corp. (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (2)
10.1 Employment Agreement, dated December 23, 2005 between the Company and
Ronald A. Waldorf (2)
10.1 Exclusive Licensing Agreement, dated November 1, 1989 between the
Company and Ronald A. Waldorf (3)
10.3 Licensing Agreement, dated November 15, 2004 between the Company and
Terry Knapp (2)
10.4 Exclusive Manufacturing, Sales, Licensing and Software Ownership
Agreement, dated May 18, 2006 between the Company and Medtrak, Inc.
10.5 Standard Multi-Tenant Commercial Industrial Lease-Gross, dated January
9, 2003, between the Company and AMB Property, L.P. (4)
10.6 AcuNetx, Inc. 2006 Non-Executive Directors' Stock Plan (2)
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Interim Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Interim Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------
(1) Incorporated by reference from Report on Form 8K dated September 1,
2005.
(2) Incorporated by reference from Report on Form 10-KSB for the fiscal
year ended December 30, 2005, filed on April 24, 2006.
(3) Incorporated by reference from Report on Form 10-SB filed on December
13, 1999.
(4) Incorporated by reference from Report on Form 10-KSB for the year ended
December 31, 2002.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AcuNetx, Inc.
By: /s/ Robert S. Corrigan
---------------------------
Robert S. Corrigan,
President and
Chief Executive Officer
Date: April 24, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
(1) Principal Executive Officer and Principal Financial and Accounting Officer
/s/ Robert S. Corrigan Chief Executive Officer and a Director April 24, 2009
----------------------
Robert S. Corrigan
/s/ Dennis G. Geselowitz Chief Financial Officer April 24, 2009
-----------------------
Dennis G. Geselowitz
(2) Directors
/2/ Ronald A. Waldorf
---------------------
Ronald A. Waldorf Director April 24, 2009
/s/ Peter Miterko Director April 24, 2009
---------------
Peter Miterko
/s/ Steven Butler Director April 24, 2009
----------------
Steven Butler
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Stockholders of AcuNetx, Inc.
We have audited the accompanying consolidated balance sheets of AcuNetx, Inc. As
of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AcuNetx, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2, the
Company's ability to continue in the normal course of business is dependent upon
the success of future operations. The Company has recurring losses, substantial
working capital deficiency, stockholders' deficit and negative cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans regarding these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ SPECTOR, WONG & DAVIDIAN, LLP
Pasadena, CA
April 15, 2009
F-1
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
------------------------------------------------------------------------------------------------------------
ASSETS December 31, 2008 December 31, 2007
----------------- -----------------
Current Assets
Cash $ 12,715 $ 205,162
Restricted Cash 15,636 75,000
Accounts receivable, net 79,167 45,034
Inventory 99,020 204,279
Prepaid expenses and other current assets 51,816 73,685
------------ ------------
Total Current Assets 258,354 603,160
Property and equipment, net 10,355 18,064
Goodwill -- --
Other intangible assets, net 114,996 150,472
Deferred tax assets 220,635 220,635
Other investments 15,000 --
Other assets 2,020 2,020
------------ ------------
TOTAL ASSETS $ 621,360 $ 994,351
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 429,766 $ 395,157
Accrued liabilities 909,508 794,757
Notes payable to related parties -- --
Current portion of long-term debt 211,768 72,019
------------ ------------
Total Current Liabilities 1,551,042 1,261,933
Convertible debt, net of debt discount of $3,124 and
$6,124 for 2008 and 2007, respectively 36,876 93,876
Long-Term Debt 150,000 197,830
------------ ------------
Total Liabilities 1,737,918 1,553,639
------------ ------------
Minority Deficit (12,916) (8,394)
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,429,309 shares issued and outstanding 65,429 65,143
Common stock to be issued -- --
Paid-in capital 11,288,208 11,125,546
Accumulated deficit (12,457,279) (11,741,583)
------------ ------------
Total Stockholders' Deficit (1,103,642) (550,894)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 621,360 $ 994,351
============ ============
See notes to consolidated financial statements
F-2
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2008 AND 2007
------------------------------------------------------------------------------------------
For years ended December 31,
2008 2007
----------- -----------
Sales - Products $ 1,054,330 $ 2,574,645
Cost of sales - products 370,251 614,017
----------- -----------
Gross profit 684,079 1,960,628
----------- -----------
Operating Expenses:
Selling, general and administrative expenses 1,174,663 2,577,355
Stock option expense 167,404 253,647
Impairment of goodwill -- 362
----------- -----------
Research and development -- --
----------- -----------
Total Operating Expenses 1,342,067 2,831,364
----------- -----------
Operating loss (657,988) (870,736)
----------- -----------
Other income (expenses)
Interest and other income 17,978 27,477
Loss on equity-method investments -- --
Interest and other expenses (70,599) (54,633)
----------- -----------
Total other income (expenses) (52,621) (27,156)
----------- -----------
Net loss before income taxes and minority interest (710,609) (897,892)
Provision for income taxes 800 800
----------- -----------
Net loss before minority interest (711,409) (898,692)
Minority interest in gain (losses) of subsidiaries 4,287 (21,914)
----------- -----------
Net loss $ (715,696) $ (876,778)
=========== ===========
Net Loss per share-Basic and Diluted $ (0.01) $ (0.01)
=========== ===========
Weighted average number of common shares 65,387,583 63,703,365
See notes to consolidated financial statements
F-3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common
Common Stock Stock to Paid-in Accumulated
Shares Amount be issued Capital Deficit Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 62,974,814 $ 62,975 $ 40,500 $ 10,736,057 $(10,864,805) $ (25,273)
Issuance of stock for services 225,000 225 (40,500) 40,275 --
Issuance of stock for cash 785,715 786 54,214 55,000
Issuance of stock for accounts payable 57,143 57 3,943 4,000
Return to treasury (1,064,078) (1,064) (20,205) (21,269)
Shares adjustments on prior
year subscriptions 2,164,286 2,164 (2,164) --
1
Stock option and warrant expenses 246,649 246,649
Equity adjustments related to
subsidiary stock transactions 66,777 66,777
Net loss (876,778) (876,778)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2007 65,142,880 $ 65,143 $ -- $ 11,125,546 $(11,741,583) $ (550,894)
------------ ------------ ------------ ------------ ------------ ------------
Stocks to be issued for services -- 30,000 30,000
Issuance of stock for cash 286,429 286 19,764 20,050
Stock option and warrant expenses 159,143 159,143
Equity adjustments related to
subsidiary stock transactions (46,245) (46,245)
Net loss (715,696) (715,696)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2008 65,429,309 $ 65,429 $ -- $ 11,288,208 $(12,457,279) $ (1,103,642)
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements
F-4
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR YEARS ENDED DECEMBER 31, 2008 AND 2007
-------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES: 2008 2007
--------- ---------
Net loss $(715,696) $(876,778)
Adjustments to reconcile net loss to net cash used in operating activities:
Minority interest 4,287 (21,914)
Depreciation and amortization 8,807 11,527
Issuance stock and stock equity awards for services 133,053 319,447
Provision for bad debt (3,692) 6,089
Amortization of debt discount 3,000 1,375
Impairment of goodwill and intangible assets -- 10,434
Intellectual property write-down 47,249 --
Gain on recovery from loan loss (900) (24,000)
Unrealized gain on trading securities (14,100) --
(Increase) Decrease in: --
Accounts receivable (30,441) 45,278
Inventory 105,259 47,157
Prepaid and other assets 21,869 21,377
Increase (Decrease) in:
Accounts payable and accrued expenses 150,396 387,379
--------- ---------
Net cash used in operating activities (290,909) (72,629)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Decrease in restricted cash 59,364 --
Capitalized intellectual property (12,871) (24,357)
Repayment from Notes Receivable -- 24,000
--------- ---------
Net cash provided by (used in) investing activities 46,493 (357)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stocks 20,050 55,000
Repurchase of common stock -- (7,262)
Proceeds from convertible debt 15,000 25,000
Repayments on convertible debt (75,000) --
Proceeds from issuance of long-term debt 150,000 3,369
Repayments on notes payable (58,081) (530)
--------- ---------
Net cash provided by financing activities 51,969 75,577
--------- ---------
NET DECREASE IN CASH (192,447) 2,592
CASH BALANCE AT BEGINNING OF PERIOD 205,162 202,570
--------- ---------
CASH BALANCE AT END OF PERIOD $ 12,715 $ 205,162
========= =========
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 0 $ 800
Interest paid $ 38,884 $ 14,982
Schedule of Noncash Investing and Financing Activities:
Retirement of common stocks for an equity-method investment $ 0 $ 14,007
Conversion of accrued interest into debt principal $ 0 $ 21,451
Issuance of stock options for accrued expenses $ 1,036 $ --
Issuance of warrants as debt discount $ 0 $ 7,500
Issuance of common stocks for accounts payable $ 0 $ 4,000
See notes to consolidated financial statements
F-5
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES
AcuNetx, Inc., a Nevada corporation, (the "Company" or "AcuNetx", formerly known
as Eye Dynamics, Inc. or "EDI") and its subsidiaries OrthoNetx Inc. and
VisioNetx Inc., combine diagnostic, analytical and therapeutic devices with
proprietary software to permit health providers to diagnose and treat balance
disorders and various bone deficiencies; law enforcement officers to evaluate
roadside sobriety; and employers in high-risk industries to determine, in
real-time, the mental fitness of their employees to perform mission-critical
tasks. AcuNetx is headquartered in Torrance, California.
AcuNetx is organized around a dedicated medical division (i) IntelliNetx, a
medical division with neurological diagnostic equipment, and two separate
subsidiary companies: (ii) OrthoNetx, Inc., a wholly-owned medical subsidiary
company with devices that create new bone, and (iii) VisioNetx, Inc., a
majority-owned subsidiary company with products for occupational safety and law
enforcement. For all its devices, AcuNetx is integrating an information
technology (IT) platform that allows the device to capture data about the
physiological condition of a human being. The company's IT platform is designed
to gather data and connect the device-related data with users and support
personnel.
AcuNetx products include the followings: (a) Neurological diagnostic equipment
that measures, tracks and records human eye movements, utilizing the company's
proprietary technology and computer software, as a method to diagnose problems
of the vestibular (balance) system and other balance disorders; (b) Devices
designed to test individuals for impaired performance resulting from the
influences of alcohol, drugs, illness, stress and other factors that affect eye
and pupil performance. These products target the occupational safety and law
enforcement markets; (c) Orthopedic and craniomaxillofacial (skull and jaw)
surgery products, which generate new bone through the process of distraction
osteogenesis; and (d) A proprietary information technology system called
SmartDevice-Connect(TM) ("SDC") that establishes product registry to individual
patients and tracks device behavior for post-market surveillance, adverse event
and outcomes reporting, and creates "smart devices" that gather and transmit
physiological data concerning the device and its interaction with patients.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying consolidated
financial statements include the accounts of AcuNetx, Inc. and its subsidiaries
after elimination of all intercompany accounts and transactions. Certain prior
period balances have been reclassified to conform to the current period
presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with accounting principles generally accepted in the
United States (U.S. GAAP) requires management to make certain estimates and
assumptions that directly affect the results of reported assets, liabilities,
revenue, and expenses. Actual results may differ from these estimates.
F-6
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: The Company recognizes revenue from the sale of products,
and related costs of products sold, where persuasive evidence of an arrangement
exists, shipment has occurred, the seller's price is fixed or determinable and
collectibility is reasonably assured.
For its domestic customers, the Company supplies systems through several
distribution channels; though its IntelliNetx sales group of manufacturer
representatives and international dealers, its private label distributor,
MedTrak Technologies, Inc. (Scottsdale, AZ) and its direct sales,
commission-based, HawkEye(TM) team. Revenue is recognized when products are
shipped. No provisions were established for estimated product returns and
allowances based on the Company's historical experience. Price discounts and
other sales incentives are charged to sales when sales are recognized.
The Company provides repair and maintenance, consulting and education services
to its customers. Revenue from such services is generally recognized over the
period during which the service is performed or on a service-performed basis.
The Company evaluated Statement of Position No. 97-2, "SOFTWARE REVENUE
RECOGNITION" ("SOP 97-2"), but does not expect that SOP 97-2 will have a
material impact on the Company's financial position, results of operations, or
cash flows since the Company did not sell, license, lease or market any
individual computer software. The Company's computer software is included with
equipment sales and is not sold separately.
ACCOUNTS RECEIVABLE: The Company carries its accounts receivable at cost less an
allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
the history of past write-offs and collections and current credit conditions. An
allowance for doubtful accounts of $5,164 and $11,143 has been established for
the years ended December 31, 2008 and 2007, respectively.
STOCK-BASED COMPENSATION: The Company accounts for its stock options in
accordance with FASB Statement No.123(R), "SHARE-BASED PAYMENT" (SFAS 123R).
SFAS 123R requires the recognition of the cost of services received in exchange
for an award of equity instruments in the financial statements and is measured
based on the grant date fair value of the award. SFAS 123R also requires the
stock option compensation expense to be recognized over the period during which
the recipient is required to provide service in exchange for the award (the
vesting period).
Stock-based employee compensation incurred for the years ended December 31, 2008
and 2007, was $167,404 and $253,647, respectively.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123R 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. 123R 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).
F-7
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
CONVERTIBLE PROMISSORY NOTES AND WARRANTS: The Company has evaluated all
freestanding instruments and embedded features embodied in the Convertible
Promissory Notes financing arrangement in accordance with current accounting
standards for complex financing transactions. The following points illustrate
the key considerations in the Company's evaluation:
o The terms and features of the Convertible Promissory Notes resulted in
the Company's conclusion that the instrument was more akin to a debt
security than an equity security. Therefore, embedded features that met
the definition of derivative financial features were evaluated for
their clear and close relationship with a debt instrument. Significant
features included conversion features; redemption features and interest
features. While conversion features, such as those included in the
Convertible Promissory Notes, are generally not clearly and closely
related to debt instruments, the Company was afforded the "Conventional
Convertible" exemption from derivative accounting. While redemption
features and interest features are generally considered clearly and
closely related to debt instruments, the Company was also afforded the
"Conventional Convertible" exemption from derivative accounting.
o The terms and features of the freestanding warrants were evaluated
under the guidance for equity classification set forth in EITF 00-19,
"ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO A COMPANY'S
OWN STOCK" and EITF 05-04, "THE EFFECT OF A LIQUIDATING DAMAGES CLAUSE
ON A FREESTANDING FINANCIAL INSTRUMENT SUBJECT TO EITF 00-19." As a
result, the Company concluded that the warrants did not rise to an
uneconomic settlement. In addition, all other indicators of equity
provided in EITF 00-19 were present. Therefore, the warrants were
afforded equity classification.
NET INCOME PER SHARE: Basic net income per share includes no dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common stock outstanding for the period. Diluted net income
per share is computed by dividing net income by the weighted average number of
common shares and the dilutive potential common shares outstanding during the
period. Diluted net loss per common share is computed by dividing net loss by
the weighted average number of common shares and excludes dilutive potential
common shares outstanding, as their effective is anti-dilutive. Dilutive
potential common shares consist primarily of employee stock options, stock
warrants and shares issuable under convertible debt.
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:
F-8
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
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 December 31, 2008
---------------------------------------------
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.
OTHER SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments. The Company places its cash with high quality financial
institutions and limits its credit exposure with any one financial institution.
At times, the Company's bank account balances may exceed federally insured
limits.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the financial
instruments have been estimated by management to approximate fair value.
INVENTORIES: Costs incurred for materials, technology and shipping are
capitalized as inventories and charged to cost of sales when revenue is
recognized. Inventories consist of finished goods and are stated at the lower of
cost or market, using the first-in, first-out method. A provision is provided
for slow-moving facial bone devices and demo units.
PROPERTY AND EQUIPMENT: Property and Equipment are valued at cost. Maintenance
and repair costs are charged to expenses as incurred. Depreciation is computed
on the straight-line method based on the following estimated useful lives of the
assets: 3 years for computer software, 5 to 7 years for computer and office
equipment, and 7 years for furniture and fixtures. Depreciation expense was
$7,709 and $11,527 for 2008 and 2007, respectively.
F-9
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL 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 patent applications. If the Company elects to
stop pursuing a particular patent application or determines that a patent
application is not likely to be awarded or elects to discontinue payment of
required maintenance fees for a particular patent, the Company, at that time,
records as expense the capitalized amount of such patent application or patent.
Awarded patents will be amortized over the shorter of the economic or legal life
of the patent. Trademarks are not amortized, but rather are tested for
impairment at least annually.
There was no impairment of other intangible assets for the year ended December
31, 2008. In December of 2007, the Company stopped paying for certain AcuNetx
graphic art trademark maintenance fees. As a result, the Company conducted an
impairment evaluation, which resulted in a $10,072 impairment charge to these
trademarks, classified in the caption "selling, general and administrative
expenses".
GOODWILL: The Company accounts for Goodwill and Intangible Assets in accordance
with SFAS No. 141, "BUSINESS COMBINATIONS" and SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS." Under SFAS No. 142, goodwill and intangibles that are deemed
to have indefinite lives are no longer amortized but, instead, are to be
reviewed at least annually for impairment. Application of the goodwill
impairment test requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units, assigning goodwill
to reporting units, and determining the fair value. Significant judgments
required to estimate the fair value of reporting units include estimating future
cash flows, determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially affect the
determination of the fair value and/or goodwill impairment for each reporting
unit.
INCOME TAXES: Income tax expense is based on pretax financial accounting income.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are recorded to
reduce deferred tax assets to the amount that will more likely than not be
realized.
ADVERTISING COSTS: The Company uses advertising and marketing to promote its
product lines. These costs are expensed when time the advertising or marketing
takes place. Expenses were $0 and $8,717 for 2008 and 2007, respectively.
SHIPPING AND HANDLING COSTS: The Company historically has included inbound
shipping charges in cost of sales and classified outbound shipping charges as
operating expenses. For the years ended December 31, 2008 and 2008, the outbound
shipping charges included in operating expenses were $22,271 and $36,897,
respectively.
F-10
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS: Research and development costs are expensed as
incurred and consist primarily of product development costs. Financial
accounting standards require the capitalization of certain development costs
after technological feasibility of the product is established. In the
development of the Company's new products and enhancements to existing products,
technological feasibility is not established until substantially all product
development is complete. As a result, product development costs that are
eligible for capitalization are considered insignificant and are charged to
research and development expense. During the years ended December 31, 2008 and
2007, the corporation incurred no research and development costs.
MINORITY INTEREST (DEFICIT): Minority interest (deficit) represents other
stockholders' proportionate share in the equity (deficit) of VisioNetx, Inc. At
December 31, 2008, the Company owned approximately 74% of the issued and
outstanding common stocks in VisioNetx, Inc.
NEW ACCOUNTING PRONOUNCEMENTS: In March 2008, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
161, "DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING Activities" ("SFAS
161"). SFAS 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring companies to enhance disclosure
about how these instruments and activities affect their financial position,
performance and cash flows. SFAS 161 also improves the transparency about the
location and amounts of derivative instruments in a company's financial
statements and how they are accounted for under SFAS 133. SFAS 161 is effective
for financial statements issued for fiscal years beginning after November 15,
2008 and interim periods beginning after that date. As such, the Company is
required to adopt these provisions beginning the quarter ending in February
2009. The Company does not expect the adoption of SFAS No. 161 will have a
material impact on its financial condition or results of operation.
In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles in the
United States of America. SFAS No. 162 will be effective 60 days after the
Securities and Exchange Commission approves the Public Company Accounting
Oversight Board's amendments to AU Section 411. The Company does not anticipate
the adoption of SFAS No. 162 will have an impact on its consolidated financial
statements.
F-11
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND CRITICAL ACCOUNTING POLICIES (CONTINUED)
In June 2008, the FASB issued FASB SP EITF 03-6-1, "DETERMINING WHETHER
INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING
SECURITIES." SP EITF 03-6-1 addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting, and
therefore need to be included in the computation of earnings per share under the
two-class method as described in SFAS No. 128, "Earnings per Share." SP EITF
03-6-1 is effective for financial statements issued for fiscal years beginning
on or after December 15, 2008 and earlier adoption is prohibited. The Company is
required to adopt SP EITF 03-6-1 in the first quarter of 2009 and is currently
evaluating the impact that SP EITF 03-6-1 will have on its financial statements.
In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51." SFAS 160
clarifies the accounting for noncontrolling or minority interests. This
statement requires expanded disclosures in the consolidated financial statements
that clearly identify and distinguish between the interests of the parent's
owners and interests of the noncontrolling owners of a subsidiary. Those
expanded disclosures include a reconciliation of the beginning and ending
balances of the equity attributable to the parent and the noncontrolling owners
and a schedule showing the effects of changes in a parent's ownership interest
in a subsidiary on the equity attributable to the parent. The provisions of SFAS
160 are effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact of the adoption of SFAS 160 on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "BUSINESS
COMBINATIONS" ("SFAS 141(R)"). SFAS No. 141(R) will replace SFAS No. 141, and
establishes principles and requirements for how the acquirer in a business
combination recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquire; recognizes and measures the goodwill acquired in the business
combination or gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Currently, the Company does not anticipate that this
statement will have a significant impact on its consolidated financial
statements.
F-12
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.
As indicated in the accompanying consolidated financial statements, the Company
incurred operating losses totaling $715,696 and $876,778 for the years ended
December 31, 2008 and 2007, respectively. In addition, the Company has a working
capital deficit of $1,292,688 and an accumulated deficit of $12,457,279 as of
December 31, 2008. Total liabilities exceeded total assets by $1,103,642. In the
near term, the Company expects the operating cash flows will not be sufficient
to cover all the old debt and payables.
Management of the Company plans to cover current operating costs and to reduce
the working capital deficit through sales growth, cost reduction and equity
financing. In addition, VisioNetx, Inc. is recruiting senior management and is
seeking funding that will allow it to move forward with its marketing and sales
efforts. During 2008, the Company and VisioNetx, Inc. raised a total sum of
$185,050 through issuing debt and selling its common stocks.
The ability of the Company to continue as a going concern is dependent on its
ability to meet its financing requirements and the success of its future
operations. The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
F-13
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
ACCOUNTS RECEIVABLE, NET DECEMBER 31, DECEMBER 31,
2008 2007
--------- ---------
Accounts Receivable $ 84,331 $ 56,177
Allowance for Bad Debt (5,164) (11,143)
--------- ---------
Total Accounts Receivable, Net $ 79,167 $ 45,034
========= =========
INVENTORY
Finished Goods $ 46,316 $ 170,697
Demo units 72,754 85,206
Allowance for loss in inventory (20,050) (51,624)
--------- ---------
Total Inventory $ 99,020 $ 204,279
========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Insurance $ 4,042 $ 23,038
Prepaid rent and deposit -- 2,065
Employee Advance 6,058 3,415
Other Prepaid Expenses 41,716 45,167
--------- ---------
Total Prepaids and Others $ 51,816 $ 73,685
========= =========
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 (45,463) (37,754)
--------- ---------
Total Property and Equipment, Net $ 10,355 $ 18,064
========= =========
ACCRUED LIABILITIES
Warranty reserve $ 3,045 $ 11,339
Accrued payroll and related taxes 67,081 120,887
Accrued consulting fees 259,692 254,967
Commissions payable 7,596 --
Deferred Revenues 14,016 --
Accrued vacation 58,502 18,072
Accrued professional fees 171,136 136,413
Related party payable (10) 42,165
Other accrued liabilities 328,450 210,914
--------- ---------
Total Accrued Liabilities $ 909,508 $ 794,757
========= =========
F-14
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - IMPAIRMENT OF GOODWILL
The Company recorded $4,823,500 of goodwill in connection with its acquisition
of OrthoNetx in 2005. The amount that the Company recorded in connection with
this acquisition was determined by comparing the aggregate amounts of the
respective purchase price plus related transaction costs to the fair values of
the net tangible and identifiable intangible assets acquired for the business
acquired.
As of December 31, 2007, the goodwill was determined not recoverable, and fully
impaired.
NOTE 5 - OTHER INTANGIBLE ASSETS
The Company capitalizes intellectual property costs as incurred, excluding costs
associated with Company personnel, relating to patenting its technology. The
majority of capitalized costs represent legal fees related to patent
applications. Awarded patents will be amortized over the shorter of the economic
or legal life of the patent.
In December 2007, two intellectual properties were awarded. These two patents
are amortized using the straight-line method over 20 years commencing January 1,
2008.
The Company's intangible assets consisted of the following at December 31, 2008
and 2007:
2008 2007
--------- ---------
Pending Intellectual Property $ 94,140 $ 128,518
Awarded patents 21,954 21,954
Accumulated amortization (1,098) --
--------- ---------
Other Intangible Assets, Net $ 114,996 $ 150,472
========= =========
Future amortization expense as of December 31, 2008 was as follows:
Years ended December 31,
------------------------
2009 $ 1,098
2010 1,098
2011 1,098
2012 1,098
2013 and over 17,562
-------
Total $21,954
=======
F-15
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - SALES OF INVESTMENTS
On March 28, 2007, the Company entered into an agreement to exchange the shares
of common stock it holds in High Precision Devices, Inc. ("HPD"), a privately
held Colorado corporation, for all the common stock of the Company held by HPD,
which were 483,100 shares. The market value of the shares returned to the
Company at closing was $14,007, which was equal to the carrying value.
Accordingly, the Company did not recognize any gain or loss on this transaction.
The returned shares were retired at March 31, 2007.
NOTE 7 - SETTLEMENT ON NOTES RECEIVABLE
In March 2007, the Company entered into a settlement agreement with a former
employee who created indebtedness to the Company of $49,489 in 2001 to 2004 and
had agreed to a Note Receivable (Receivable). The employee had been in default
on payments on this Receivable, which was fully reserved in 2004. The agreement
calls for the former employee to repay the Company $55,000 at a rate of $4,000
per month beginning in April 2007. The Company had collected $24,000 in 2007 and
none in 2008. In May 2008, the Company received 1,000,000 shares of Preferred
Stock of a publicly-traded company which was provided as a security in the
agreement. 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. The fair market value at
the time of collection was $900. An unrealized gain of $14,100 was recorded at
December 31, 2008.
NOTE 8 - BORROWINGS
LONG-TERM DEBT
At December 31, 2008 2007
---------------------------------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment. Monthly payments total
$81, including interest at 18.99%. The original note amount was $2,062. Matures
July 21, 2009. $ 783 $ 1,298
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) 210,985 268,551
Secured note payable to a customer. Monthly interest payment only at 10%. A
balloon payment due on April 1, 2011. (b) 150,000 --
--------- ---------
361,768 269,849
Less: Current Maturities (211,768) (72,019)
--------- ---------
Long-term debt $ 150,000 $ 197,830
--------- ---------
F-16
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - BORROWINGS (CONTINUED)
(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 December 31, 2008, the Company was in arrear
of two monthly payments, aggregated to $18,097. 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 December 31, 2008, no fund was set aside.
The following is a schedule of the maturities of long-term debt:
Years ended December 31,
------------------------
2009 $ 211,768
2010 --
2011 150,000
----------
$ 361,768
===========
SERIES A CONVERTIBLE PROMISSORY NOTE
On May 21, 2007, VisioNetx Inc. conducted a private placement offering to sell
and issue convertible notes and detachable warrants up to $500,000. The offering
price is $50,000 per unit, each unit consisting of a convertible debenture in
the amount of $50,000 and a detachable warrant to purchase shares of VisioNetx
common stock. The note bears interest payable annually at 10% per annum, and is
due the earlier of (i) December 31, 2010 or (ii) two years from the closing date
of a minimum of $300,000 of units were sold. In the event that VisioNetx (i)
issues and sells its common stock for aggregate consideration of at least $3.5
million ("Qualified Financing") and (ii) the note has not been paid in full,
then the entire outstanding principal and all unpaid accrued interest of the
note shall automatically convert into shares of VisioNetx under the same terms
and conditions as those for investors in the Qualified Financing. Subscribers to
this offering will receive a warrant to purchase VisioNetx shares equal to a
150% of the common stock to be issued to investors in the Qualified Financing.
The warrants expire in seven years after the date of issuance.
F-17
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 8 - BORROWINGS (CONTINUED)
The offering was closed on September 14, 2007. Through that date, VisioNetx had
sold one half of a unit and received $25,000 in proceeds. In consideration for
the release of the funds from escrow for the Company's working capital needs,
VisioNetx agreed to issue to the subscriber an additional warrant, with the same
terms and conditions as the previously issued warrant for an additional 50% of
the common stock to be issued to investors in a Qualified Financing.
The Company allocated the proceeds between the convertible note ($17,500) and
the warrants ($7,500) based on the management's subjective judgment as the
exercise price of the warrants and the conversion feature of the note were not
determinable. The warrants were classified as a component of equity and charged
against the note as a debt discount which will be amortized over the life of the
note using the effective interest method.
CONVERTIBLE PROMISSORY NOTES
On November 9, 2007, VisioNetx Inc. initiated a private placement offering to
sell and issue convertible notes for up to $750,000. The offering price is
$50,000 per unit consisting of a convertible debenture in the amount of $50,000
which has underlying warrants. The notes bear interest payable annually at 8%
per annum, and are due the earlier of (i) eighteen months from the date of issue
or (ii) upon completion of a financing of New Securities, as defined, of at
least $2.0 million ("Qualified Financing"). Upon completion of a Qualified
Financing the note holder shall convert the principal and interest of this note
into the New Securities. Also upon conversion of the note, the note holder shall
received warrants to purchase up to 100% of the number of New Securities to be
issued. The warrants are exercisable for five (5) years.
Upon completion of a Qualified Offering, the Company may redeem the notes for a
cash payment equal to the note amount plus any accrued, but unpaid interest.
However, upon completion of a Qualified Offering and election to redeem the
notes, the note holder will be given 30 days notice to elect to either receive
the proceeds of the redemption (and receive the underlying warrants) or convert
the notes into New Securities subject to the terms of the Qualified Offering.
Through September 2008, the Company had received $90,000 in proceeds from this
offering and had deposited these funds in a restricted cash account. Under the
terms of this offering, proceeds from the offering would have been available for
use by the Company upon receipt of at least $300,000. In October 2008, VisioNetx
decided to close the offering and returned $75,000 plus interest to two of the
investors.
December 31, December 31
2008 2007
--------- ---------
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 75,000
--------- ---------
40,000 100,000
Less: Unamortized debt discount (3,124) (6,124)
--------- ---------
Convertible debt, net $ 36,876 $ 93,876
--------- ---------
F-18
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
Provision for income taxes consisted of a minimum state franchise tax of $800
for years ended December 31, 2008 and 2007. The provision for income taxes
differs from the amount computed by applying the federal statutory rate to the
income tax expense (benefit) at the effective rate is as follows:
For years ended December 31, 2008 2007
--------- ---------
Income tax expense (benefit) at statutory rate $(241,607) $(282,579)
State tax expense, net of federal benefit (272) (272)
Nondeductible deferred stock services 45,238 94,842
NOL Carryforwards -- --
Others 818 1,879
Valuation Allowance 196,623 186,930
--------- ---------
Provision of income tax (benefit) $ 800 $ 800
========= =========
The components of the deferred net tax assets are as follows:
At December 31, 2008 2007
----------- -----------
Net Operating Loss Carryforwards $ 3,019,283 $ 2,586,715
Property and equipment (1,130) (824)
Accruals and reserves 2,272,997 2,335,252
Other 239 547
Valuation Allowance (5,070,754) (4,701,055)
----------- -----------
Net deferred tax assets $ 220,635 $ 220,635
=========== ===========
The Company had removed the valuation allowance as of December 31, 2003 because
it believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and was reflected as a credit to operations.
However, as of December 31, 2005, the Company's ability to utilize its federal
net operating loss carryforwards is uncertain due to the net loss of the year
and the merger with OrthoNetx which has net operating loss carryforwards
approximately of $1.7 million, as of that date, and thus a valuation reserve has
been provided against the Company's net deferred tax assets.
As of December 31, 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.
F-19
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY
STOCK COMPENSATION
On July 17, 2008, the Compensation Committee approved the issuance of 1,000,000
shares of common stock to the interim Chief Executive Officer as a signing
bonus. The shares are vested ratably over the remaining periods in 2008. The
shares were valued at quoted market price on the grant date and are amortized
over the vesting period. The stocks will be issued in 2009.
SALES OF COMMON STOCKS
In May, 2008, the Company sold 71,429 equity units, consisting of 71,429 shares
of common stock and warrants, and received $5,000 in gross proceeds under the
April 2008 self-underwritten offering.
In February, 2008, the Company sold 215,000 equity units, consisting of 215,000
shares of common stock and warrants, and received $15,050 in gross proceeds
under the May 2007 self-underwritten offering.
In July 2007, pursuant to the terms in the investment agreement, the Company
resolved to issue additional 2,164,286 shares of the common stock to the
investors who subscribed to the Company shares in October 2006. In addition, the
Company cancelled all the warrant agreements that were attached in lieu of the
shares sold and reissued new warrant agreements to those investors. The new
warrant agreements reduced the exercise price from $0.20 per share to $0.10 per
share and revised the expiration date to July 11, 2009. COMMON STOCK RETIREMENT
On April 17, 2007, the Company repurchased and retired 580,978 shares of its
common Stock. The shares were purchased from a single shareholder in a privately
negotiated transaction at $0.0125 per share for a total repurchase price of
$7,262.
In March 2007 the Company retired 483,100 shares of its common stock to rescind
an equity-method investment. The market value of the shares returned to the
Company at closing was equal to the carrying value. Accordingly, the Company did
not recognize any gain or loss on this transaction.
SUBSIDIARY STOCK TRANSACTIONS
In 2007, VisioNetx agreed to issue 650,000 shares at a fair value of $0.10 per
share to certain executives. The shares were not to be issued until the first
equity financing was obtained. The aggregate amount of $65,000 was accrued and
classified as an equity component. In December 2008, the VisioNetx's Board of
Directors agreed to modify the terms and issued the shares; as a result, the
aggregate fair value of these shares was reduced to $650. VisioNetx recorded a
credit of $92,556, including the accrued payroll taxes of $28,206 against the
compensation expense.
F-20
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company complies with the requirement of SEC Staff Accounting Bulletin No.
51, "Accounting for Sales of Stock by a Subsidiary," which requires that the
difference between the carrying amount of parent's investment in a subsidiary
and the underlying net book value of the subsidiary after the issuance of stock
by the subsidiary be reflected as either a gain or loss in the statement of
operations or reflected as an equity transaction. The Company has elected to
record gains or losses resulting from the issuance of subsidiary's stock as
equity transactions.
NOTE 11 - STOCKS OPTIONS AND WARRANTS
STOCK OPTIONS
On March 27, 2006, the Board of Directors approved and adopted the 2006 Stock
Incentive Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to all employees and nonstatutory options to consultants
and other service providers. Generally, all options granted to employees and
consultants expire in three to ten years from the date of grant. All options
have an exercise price equal to or higher than the fair market value of the
Company's stock on the date the options were issued. It is the policy of the
Company to issue new shares for stock option exercised and restricted stock,
rather than issue treasury shares. Options generally vest immediately or over a
three year period. The plan reserves 14 million shares of common stock under the
Plan and shall be effective through December 31, 2015.
A summary of the status of stock options issued by the Company as of December
31, 2008 and 2007 is presented in the following table.
2008 2007
----------------------------------- ---------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
----------------------------------- ---------------------------------
Outstanding at beginning of year 5,525,768 $0.15 7,309,102 $0.21
Granted 6,082,400 $0.05 2,425,000 $0.08
Expired/Cancelled (1,790,000) $0.06 (4,208,334) $0.21
Expired and Cancelled -- $0.00 -- $0.00
---------- ----------
Outstanding at end of period 9,818,168 $0.11 5,525,768 $0.15
========== ==========
Exercisable at end of year 8,526,501 $0.12 2,525,768 $0.15
========== ==========
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.
2008 2007
----------- ------------
Weighted average fair value per option granted $ 0.05 $ 0.07
Risk-free interest rate 3.25% 4.19%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 5.00
Expected volatility 130.19% 126.12%
F-21
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - STOCKS OPTIONS AND WARRANTS (CONTINUED)
As of December 31, 2008 there was $30,150 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 1.38 years.
For the years ended December 31, 2008 and 2007, the Company recognized pre-tax
stock option compensation expense of $159,143 and $246,649, respectively.
The following table sets forth additional information about stock options
outstanding at December 31, 2008:
STOCK WARRANTS
As of December 31, 2008 and 2007, the Company had 8,720,001 and 12,083,336
outstanding warrants, respectively. The warrants allow for the purchase of
common stock at pricing ranging from $0.10 to $2.00 per share.
In December 2007, the Board approved to extend 3,333,340 warrants attached in
lieu of stocks sold between 2005 and 2006 for one year to December 22, 2008 and
reduced exercised price from $0.33 per share to $0.165 per share. The
modification had no significant impact on the Company's net loss.
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.
F-22
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - STOCKS OPTIONS AND WARRANTS (CONTINUED)
A summary of the status of stock options issued by VisioNetx as of December 31,
2008 is presented in the following table.
2008 2007
--------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------------------------ -----------------------
Outstanding at beginning of year 479,500 $ 0.10 -- $ 0.00
Granted 96,000 $ 0.10 479,500 $ 0.10
Expired/Cancelled (150,000) $ 0.00 -- $ 0.00
Expired and Cancelled -- $ 0.00 -- $ 0.00
-------- --------
Outstanding at end of period 425,500 $ 0.10 479,500 $ 0.10
========= ========
Exercisable at end of period 311,970 $ 0.10 157,278 $ 0.10
========== ========
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the AcuNetx's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2008 2007
---------- ----------
Weighted average fair value per option granted $ 0.04 $ 0.05
Risk-free interest rate 3.45% 4.51%
Expected dividend yield 0.00% 0.00%
Expected lives 5.00 8.78
Expected volatility 134.64% 143.00%
As of December 31, 2008 there was $6,031 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
1.75 years.
For the years ended December 31, 2008 and 2007, VisioNetx, Inc. recognized
pre-tax stock option compensation expense of $8,259 and $6,999, respectively.
The following table sets forth additional information about stock options
outstanding at December 31, 2008:
F-23
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
For the Years Ended
December 31,
2008 2007
------------ ------------
Numerator:
Net loss $ (715,696) $ (876,778)
------------ ------------
Denominator:
Weighted average of common shares 65,387,583 63,703,365
------------ ------------
Net loss per share-basic and diluted $ (0.01) $ (0.01)
As a result of our net loss for the years ended December 31, 2008 and 2007, 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 15,663,870 and 17,534,104 for years ended December 31, 2008
and 2007, respectively.
NOTE 13 - MAJOR CUSTOMERS
During the years ended December 31, 2008 and 2007, major distributors accounted
for $535,108 and $1,777,388 or 52% and 69% of IntelliNetx division revenues,
respectively.
2008 2007
------------------ -----------------
National Distributor $ 278,877 27% $ 631,136 25%
SID Distributors 256,231 25% 1,146,252 44%
---------- -- ---------- ---
$ 535,108 52% $1,777,388 69%
NOTE 14 - 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.
F-24
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
In December 2006, the Company changed the structure of its internal organization
to develop three market-oriented operations: (i) IntelliNetx (INX) division,
(ii) OrthoNetx (ONX) Inc., a wholly-owned subsidiary, and (iii) VisioNetx (VNX)
Inc, a majority-owned subsidiary. The IntelliNetx division markets patented
medical devices that assist in the diagnosis of dizziness and vertigo, and
rehabilitate those in danger of falling as a result of balance disorders The
OrthoNetx division markets patented medical devices that mechanically induce new
bone formation in patients with skeletal deformities o the face, skull, jaws,
extremities and dentition. The VisioNetx division markets patented products that
track and analyze human eye movements for worker impairment screening. In
addition, the Company licensed from its VisioNetx subsidiary the manufacturing
and sales rights to VisioNetx's law enforcement systems.
The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill. The
provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
Summarized financial information of the Company's results by operating segment
is as follows:
For years ended December 31,
2008 2007
----------- -----------
Net Revenue to external customers:
INX $ 1,035,564 $ 2,556,890
ONX 18,766 --
VNX -- 17,755
----------- -----------
Consolidated Net Revenue to external customers $ 1,054,330 $ 2,574,645
=========== ===========
Cost of Revenue:
INX $ 327,971 $ 610,234
ONX 42,280 --
VNX -- 3,783
----------- -----------
Consolidated Cost of Revenue $ 370,251 $ 614,017
=========== ===========
Gross Margin:
INX $ 707,593 $ 1,946,656
ONX (23,514) --
VNX -- 13,972
----------- -----------
Consolidated Gross Margin $ 684,079 $ 1,960,628
=========== ===========
Intercompany Segment Revenue:
INX $ -- $ 6,000
ONX -- --
VNX -- --
----------- -----------
Total Intercompany Segment Revenue $ -- $ 6,000
=========== ===========
F-25
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
Inter-segment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do not
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
For years ended December 31,
2008 2007
----------- -----------
Total margin for reportable segments $ 684,079 $ 1,960,628
Corporate and general and administrative expenses (1,174,663) (2,577,355)
Stock option expenses (167,404) (253,647)
Impairment of goodwill 0 (362)
Interest and Other Expense (70,599) (54,633)
Interest and Other Income 17,978 27,477
----------- -----------
Net loss before income taxes and minority interest $ (710,609) $ (897,892)
=========== ===========
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases facilities and a copier under operating leases. As of
December 31, 2008, the minimum annual operating lease payments were as follows:
Year Ended December 31, Amount
--------
2009 $ 31,823
2010 7,817
2011 469
--
--------
$ 40,109
========
Rent expense totaled $23,833 and $46,173 for 2008 and 2007, respectively.
Certain lease agreements contain renewal options providing for an extension of
the lease term at market rates. The monthly lease payment for the copier does
not include additional maintenance, insurance and per copy charges.
During 2009, the Company replaced some of its insurance policies, and there may
have been a temporary intervening lapse. Any exposure from this is considered
extremely remote, with any theoretical liability negligible.
ACCOUNTS RECEIVABLE PURCHASE AND PURCHASE ORDER FINANCING SECURITY AGREEMENT
On December 12, 2008, the Company entered into an Accounts Receivable Purchase
and Purchase Order Financing Security Agreement to factor its receivables.
Pursuant to the agreement, the Company will receive up to 75% of the eligible
gross receivables and 70% of related purchase orders submitted for financing.
The fee is 3% for the first 35 days and an additional 1% for each 10 days
thereafter. The agreement is collateralized by the receivables. The agreement
lasts for three months and is renewable. As of December 31, 2008, the Company
had not utilized the financing.
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ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
MARKETING AND DISTRIBUTION AGREEMENT
On May 25, 2006, the Company executed a Marketing and Distribution Agreement
with a national distributor. The agreement restructures the Company's
relationship with the national distributor into a nonexclusive one, so that the
Company is in a position to manufacture and sell VNG products under its own
brand names, as well as through the national distributor. The Agreement is for a
period of eight years, provides for successive three year options, and
supersedes and replaces the previous Manufacturing, Sales, Licensing, and
Software Agreement and the Sales Incentive Agreement.
The Company also executed a Consulting Agreement with the owner of the national
distributor whereby the owner will provide advisory and consulting services to
the Company for the purposes of improving the Company's VNG products and other
balance-related product lines. The agreement is for a period of three years, and
renews for an additional one year term.
The Consulting Agreement requires payments of $100,000 per year payable in the
Company's common stocks for eight consecutive years and cash payments of $45,000
per year for three consecutive years. During 2007, the Company setup an accrued
liability in the amount of $100,000. As of December 31, 2008, the balance due to
the distributor on this agreement aggregated to $316,250 ($200,000 in stocks and
$116,250 in cash). The Company is currently negotiating the payments with the
distributor
The minimum payments schedule under these agreements was as follows:
Year Ended December 31, Amount
---------
2009 $ 118,750
2010 100,000
2011 100,000
2012 100,000
2013 100,000
---------
$ 518,750
=========
NOTE 16 - RELATED PARTY TRANSACTIONS
FINANCIAL ADVISOR
In April 2007, the Company entered into a consulting agreement with a director
of the Company, for the purpose of assisting the Company in strategic planning
of relevant capital formation alternatives, market making alternatives and
merger and acquisitions. Such contract provides for monthly consulting fees of
$5,000 per month. During 2007, the Company paid the director $40,000 in fees
related to this agreement. This relationship was discontinued during 2008, when
the director assumed the role of CEO.
F-27
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 16 - RELATED PARTY TRANSACTIONS (CONTINUED)
LICENSING AGREEMENT
The Company has a licensing agreement with a former CEO of the Company for the
licensing of a patent. The licensing agreement provides for contingent payments,
to be determined at a later date, in the event the Company receives a benefit
from the patent. As of December 31, 2008, the Company had no liability for
payment of fees under this agreement.
INTELLECTUAL PROPERTY ASSIGNMENT
In June of 2008, the Company decided to discontinue maintenance fee payments
related to its Limb Lengthener intellectual property petition. At that time, the
Company entered into an assignment agreement with a related party. In exchange
for consideration of $1, the party agreed to maintain the patent at its
discretion, without obligation, and at its expense. It further agreed that, upon
patent approval, it would give AcuNetx Inc. first right of refusal to repurchase
the assignment by reimbursing its expenses plus ten percent (10%) for a period
of 90 days from the date of issuance.
EMPLOYMENT AGREEMENTS
In July 2008, the Board approved an agreement with the Company's interim Chief
Executive Officer (CEO) providing that the CEO will receive an annual salary of
$150,000 and 1 million shares of the Company's common stock, to be issued in
2009. The stock is fully vested.
In September 2008, the Company entered into an employment agreement with the new
Chief Financial Officer (CFO). The agreement provides for an annual salary of
$90,000 and stock options to purchase 1 million shares of the Company's common
stock, vesting over 2 years.
NOTE 17 - DEPARTURE AND ELECTION OF NEW CHIEF EXECUTIVE OFFICER
On July 14, 2008, Ronald A. Waldorf, President, Chief Executive Officer, and
Acting Chief Financial Officer of the Company, resigned from those positions for
personal and health reasons. At the time of his departure, the Company owed
Ronald A. Waldorf an accrued salary of $16,668 and accrued vacation of $16,954.
Mr. Waldorf agreed to receive $1,000 per month as back wages until the balance
was paid in full.
Robert S. Corrigan, Chairman of the Board of Directors, was appointed as
President and Acting Chief Executive Officer on an interim basis to replace Mr.
Waldorf.
Mr. Waldorf remains a member of the Board of Directors.
On July 22, 2008, the Board appointed Alexander P. Limbert to serve as Chief
Financial Officer of the Company. In September of 2008, Mr. Limbert, resigned
from his position to pursue his public accounting practice. He was replaced on
September 22, 2008 by Dennis G. Geselowitz.
On September 27, 2008, David Hunter resigned as CEO of VisioNetx, Inc.
(VisioNetx). At the time of his departure, VisioNetx owed Mr. Hunter an accrued
salary of 300,000 shares, which was subsequently issued in December 2008.
F-28
ACUNETX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 18 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of December 31, 2008.
In general, the Company offers a one-year warranty for most of the products
sold. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve in
the fiscal years ended December 31, 2008 and 2007:
For years ended December 31, 2008 2007
-------- --------
Beginning balance $ 11,339 $ 7,200
Provision for warranty (8,294) 5,939
Utilization of reserve -- (1,800)
-------- --------
Ending balance $ 3,045 $ 11,339
======== ========
F-29