UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
---------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File number 0-27857
ACUNETX INC.
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(Exact name of registrant as specified in its charter)
NEVADA 88-0249812
------------------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
2301 W. 205TH STREET, #102, TORRANCE, CA 90501
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(Address of principal executive offices) (Zip Code)
310-328-0477
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting
company)
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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $0.001 par value
(Class)
65,429,309 shares
(Outstanding as at August 12, 2009)
2
AcuNetx Inc.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet (unaudited)
Consolidated Statement of Operations (unaudited)
Consolidated Statement of Cash Flows (unaudited)
Statement of Shareholders' Deficiency (unaudited)
Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
3
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
We desire to take advantage of the "SAFE HARBOR" provisions of the Private
Securities Litigation Reform Act of 1995. This Report on Form 10-Q contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, products, future results
and events and financial performance. All statements made in this Report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to distributor
channels, volume growth, revenues, profitability, new products, acquisitions,
adequacy of funds from operations, statements expressing general optimism about
future operating results and non-historical information, are forward-looking
statements. In particular, the words "BELIEVE," "EXPECT," "INTEND,"
"ANTICIPATE," "ESTIMATE," "MAY," "WILL," variations of such words, and similar
expressions identify forward-looking statements, but are not the exclusive means
of identifying such statements and their absence does not mean that the
statement is not forward-looking. These forward-looking statements are subject
to certain risks and uncertainties, including those discussed below. Our actual
results, performance or achievements could differ materially from historical
results as well as those expressed in, anticipated or implied by these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Readers should not place undue reliance on these forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below) and apply only
as of the date of this Report. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below in
"Management's Discussion and Analysis of Financial Condition and Results Of
Operations," as well as those discussed elsewhere in this Report, and the risks
discussed in our most recently filed Annual Report on Form 10-K and in the press
releases and other communications to shareholders issued by us from time to time
which attempt to advise interested parties of the risks and factors that may
affect our business.
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2009 December 31, 2008
ASSETS (Unaudited) (Audited)
------------------------------------------------------------------------------------------------------
Current Assets
Cash $ 4,707 $ 12,715
Restricted Cash 420 15,636
Accounts receivable, net 20,161 79,167
Inventory 100,529 99,020
Prepaid expenses and other current assets 17,881 51,816
-----------------------------
Total Current Assets 143,698 258,354
Property and equipment, net 6,603 10,355
Other intangible assets 114,447 114,996
Deferred tax assets 220,635 220,635
Other investments 15,000 15,000
Other assets 2,020 2,020
-----------------------------
TOTAL ASSETS $ 502,403 $ 621,360
=============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 462,048 $ 429,766
Accrued liabilities 845,097 909,508
Current portion of long-term debt 205,003 211,768
-----------------------------
Total Current Liabilities 1,512,148 1,551,042
Convertible debt, net of debt discount of $1,624 and $3,124 for 2009
and 2008, respectively 23,376 36,876
Long-Term Debt 150,000 150,000
-----------------------------
Total Liabilities 1,685,524 1,737,918
-----------------------------
Stockholders' Deficit
Common stock, $0.001 par value; 100,000,000 shares authorized;
65,429,309 shares issued and outstanding 65,429 65,429
Paid-in capital 11,336,933 11,288,208
Accumulated deficit (12,563,239) (12,457,279)
-----------------------------
Total AcuNetx Inc. Stockholders' Deficit (1,160,877) (1,103,642)
Noncontrolling deficit in subsidiary (22,244) (12,916)
-----------------------------
Total Stockholders' Deficit (1,183,121) (1,116,558)
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 502,403 $ 621,360
=============================
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
For the three months ended For the six months ended
June 30, June 30,
2009 2008 2009 2008
------------------------------ ------------------------------
Sales - Products $ 208,174 $ 285,463 $ 500,292 $ 505,051
Cost of sales - products 58,946 59,822 133,478 189,884
------------------------------ ------------------------------
Gross profit 149,228 225,642 366,814 315,168
------------------------------ ------------------------------
Operating Expenses:
Selling, general and administrative expenses 356,757 336,817 620,533 666,562
Stock option expense 6,394 (3,787) 14,367 142,996
------------------------------ ------------------------------
Total Operating Expenses 363,151 333,030 634,900 809,558
------------------------------ ------------------------------
Operating loss (213,923) (107,388) (268,086) (494,390)
------------------------------ ------------------------------
Other income(expenses)
Interest and other income 193,298 1,620 193,329 2,958
Interest and other expenses (13,956) (26,165) (43,124) (46,963)
------------------------------ ------------------------------
Total other income (expenses) 179,342 (24,545) 150,205 (44,005)
------------------------------ ------------------------------
Net loss before income taxes and minority interest (34,581) (131,933) (117,881) (538,395)
Provision for income taxes 0 -- 800 800
------------------------------ ------------------------------
Net loss before noncontrolling interest (34,581) (131,933) (118,681) (539,195)
Noncontrolling interest in losses of subsidiary (6,152) (2,468) (12,721) (4,291)
------------------------------ ------------------------------
Net loss $ (28,429) $ (129,465) $ (105,960) $ (534,904)
============================== ==============================
Net Loss per share-Basic and Diluted $ (0.00) $ (0.002) $ (0.00) $ (0.01)
============================== ==============================
Weighted average number of common shares 65,429,309 65,405,499 65,429,309 65,345,856
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
FOR SIX MONTHS ENDED JUNE 30, 2009 2008
-------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(105,960) $(534,904)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncontrolling interest in loss of subsidiary (12,721) (4,291)
Depreciation and amortization 4,301 4,504
Issuance of stock and stock equity awards for services 52,118 142,996
Provision for bad debt 46,756 11,775
Amortization of debt discount 1,500 1,500
Intellectual property write-down -- 46,504
Gain on recovery from loan loss -- (400)
(Increase) Decrease in:
Accounts receivable 12,250 (41,784)
Inventory (1,509) 67,245
Prepaid and other assets 33,935 (38,756)
Increase (Decrease) in:
Accounts payable and accrued expenses (32,129) 118,096
-----------------------
Net cash used in operating activities (1,459) (227,515)
-----------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash 15,216 (16,105)
Capitalized intellectual property 0 (12,775)
-----------------------
Net cash provided by (used in) investing activities 15,216 (28,880)
-----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock -- 20,050
Proceeds from issuance of long-term debt (6,765) 150,000
Net proceeds from convertible debt (15,000) 15,000
Repayments on notes payable -- (31,802)
-----------------------
Net cash provided by (used in) financing activities (21,765) 153,248
-----------------------
NET DECREASE IN CASH (8,008) (103,148)
CASH BALANCE AT BEGINNING OF PERIOD 12,715 205,162
-----------------------
CASH BALANCE AT END OF PERIOD $ 4,707 $ 102,014
=======================
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 0 $ 800
Interest paid $ 10,056 $ 20,533
Schedule of Noncash Investing and Financing Activities:
Issuance of stock options for accrued expenses $ 0 $ 1,036
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 1 - NATURE OF BUSINESS AND GOING CONCERN
NATURE OF BUSINESS
------------------
AcuNetx, Inc. was formed by the merger of Eye Dynamics, Inc., incorporated in
1988, and OrthoNetx, Inc., in December of 2005. AcuNetx is now organized around
a dedicated medical division and two separate subsidiaries, as follows: (i)
IntelliNetx, a medical division with neurological diagnostic equipment, (ii)
OrthoNetx, Inc., a wholly-owned medical subsidiary company with devices that
create new bone, and (iii) VisioNetx, Inc., an AcuNetx-controlled subsidiary
company, formed January 3, 2007, with products for occupational safety and law
enforcement. Our products offer a technology platform that allows the devices to
capture data about physiological conditions and connect the device-related data
to computers operated by users and support persons.
Our products include the following:
o Neurological diagnostic equipment that measures, tracks and records human eye
movements, utilizing our proprietary technology and computer software, as a
method to diagnose problems of the vestibular (balance)system and other balance
disorders.
o Devices designed to test individuals for impaired performance resulting from
the influences of alcohol, drugs, illness, fatigue and other factors that affect
eye and pupil performance. These products target the occupational safety and law
enforcement markets.
o Orthopedic and cranio-maxillofacial (skull and jaw) surgery products, which
generate new bone through the process of distraction osteogenesis.
Supplementing some of these products is a proprietary information technology
system that is designed to establish product registry to individual patients and
track device behavior for post-market surveillance, adverse event and outcomes
reporting.
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
GOING CONCERN
-------------
In the near term, the Company expects the operating cash flows will not be
sufficient to cover all debt and payables, although it expects its sales to grow
and should be able to cover current operating costs and to reduce the working
capital deficit.
Management's plans include raising operating capital to take advantage of its
IntelliNetx and HawkEye commercial opportunities.
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.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred net losses of $105,960 and $534,094 for the six months ended June 30,
2009 and 2008, respectively. The Company had a working capital deficit of
$1,183,121 and an accumulated deficit of $12,563,239 as of June 30, 2009. In the
near term, the Company expects the operating cash flows will not be sufficient
to cover all debt and payables although it expects its sales to grow and will be
able to cover current operating costs and to reduce the working capital deficit.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at June 30, 2009
and for the three and six months ended June 30, 2009 and 2008 is unaudited but
includes all adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary for a fair presentation of the financial
information set forth herein, in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP") for interim financial
information, and with the instructions to Form 10-Q Accordingly, such
information does not include all of the information and footnotes required by
U.S. GAAP for annual financial statements. For further information refer to the
Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2008.
The consolidated balance sheet as of December 31, 2008 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by U.S. GAAP for complete financial
statements.
The results for the three and six months ended June 30, 2009 may not be
indicative of results for the year ending December 31, 2009 or any future
periods.
PRINCIPLE OF CONSOLIDATION AND PRESENTATION: The accompanying financial
statements include the accounts of AcuNetx, Inc. and its subsidiaries after
elimination of all intercompany accounts and transactions. Certain prior period
balances may have been reclassified to conform to the current period
presentation.
USE OF ESTIMATES: The preparation of the accompanying consolidated financial
statements in conformity with U.S. GAAP requires management to make certain
estimates and assumptions that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ from these
estimates.
OTHER INTANGIBLE ASSETS: Other intangible assets consist primarily of
intellectual property and trademarks. The Company capitalizes intellectual
property costs as incurred, excluding costs associated with Company personnel,
relating to patenting its technology. The majority of capitalized costs
represent legal fees related to a patent application. If the Company elects to
stop pursuing a particular patent application or determines that a patent
application is not likely to be awarded or elects to discontinue payment of
required maintenance fees for a particular patent, the Company, at that time,
records as expense the capitalized amount of such patent application or patent.
Awarded patents will be amortized over the shorter of the economic or legal life
of the patent. Trademarks are not amortized, but rather are tested for
impairment at least annually. There was no impairment of other intangible assets
for the six months ended June 30, 2009 and 2008.
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: Goodwill represents the excess of the purchase price in a business
combination over the fair value of net tangible and intangible assets acquired
in a business combination. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. Goodwill was fully impaired in 2007.
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 effect is anti-dilutive. Dilutive
potential common shares consist primarily of stock options, stock warrants and
shares issuable under convertible debt.
STOCK-BASED COMPENSATION: The Company has adopted the fair value recognition
provisions of FASB Statement No.123(R), "SHARE-BASED PAYMENT" (SFAS 123R), using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2008 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2008
based on the grant date fair value calculated in accordance with the original
provisions of SFAS 123, and (b) compensation cost for all share-based payments
granted subsequent to December 31, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123(R). For the six months
ended June 30, 2009 and 2008, the Company recognized pre-tax stock option
compensation expense of $14,367 and $142,996, respectively.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the EITF Issue No. 00-18, "ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES." SFAS No. 123 states that equity
instruments that are issued in exchange for the receipt of goods or services
should be measured at the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably measurable.
Under the guidance in Issue 00-18, the measurement date occurs as of the earlier
of (a) the date at which a performance commitment is reached or (b) absent a
performance commitment, the date at which the performance necessary to earn the
equity instruments is complete (that is, the vesting date).
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements: On January 1, 2008, the Company adopted the provision
of SFAS No. 157, "FAIR VALUE MEASUREMENTS," except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
has been delayed by one year. The Company measures at fair value certain
financial assets and liabilities, including its marketable securities trading
SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:
o Level 1 Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities;
o Level 2 Quoted prices in markets that are not active, or inputs that
are observable, either directly or indirectly, for substantially the
full term of the asset or liability;
o Level 3 Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair Value Measurements as of June 30, 2009
-----------------------------------------------------
Total Level 1 Level 2 Level 3
----- ------- ------- -------
Marketable securities
Trading $15,000 $15,000 $0 $0
======= ======= == ==
The adoption of SFAS 157 did not have a material effect on the Company's
financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS: On January 1, 2009, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 160, "NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT TO ARB NO. 51." SFAS No. 160
changed the Company's classification and reporting for its noncontrolling
interests in its variable interest entity to a component of stockholders' equity
and other changes to the format of its financial statements. Except for these
changes in classification, the adoption of SFAS No. 160 did not have a material
impact on the Company's financial condition or results of operations.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, "INTERIM
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." This FSP essentially
expands the disclosure about fair value of financial instruments that were
previously required only annually to also be required for interim period
reporting. In addition, the FSP requires certain additional disclosures
regarding the methods and significant assumptions used to estimate the fair
value of financial instruments. These additional disclosures will be required
beginning with the quarter ending June 30, 2009. The company is currently
evaluation the requirements of these additional disclosures.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
JUNE 30, DECEMBER 31,
ACCOUNTS RECEIVABLE, NET 2009 2008
-------------------------- ---------------------------
Accounts Receivable $ 65,981 $ 84,331
Allowance for Bad Debt (45,820) (5,164)
--------- ---------
Total Accounts Receivable, Net $ 20,161 $ 79,167
========= =========
INVENTORY
---------
Finished Goods $ 53,175 $ 46,316
Demo units 51,018 72,754
Allowance for loss in inventory (3,664) (20,050)
--------- ---------
Total Inventory $ 100,529 $ 99,020
========= =========
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 11,243 $ 4,042
Employee Advance 6,638 6,058
Other Prepaid Expenses -- 41,716
--------- ---------
Total Prepaids and Others $ 17,881 $ 51,816
========= =========
PROPERTY AND EQUIPMENT, NET
---------------------------
Furniture and Fixtures $ 9,531 $ 9,531
Equipment 40,530 40,530
Software 5,757 5,757
--------- ---------
55,818 55,818
Accumulated Depreciation (49,214) (45,463)
--------- ---------
Total Property and Equipment, Net $ 6,603 $ 10,355
========= =========
ACCRUED LIABILITIES
-------------------
Warranty reserve $ 2,314 $ 3,045
Accrued payroll and related taxes 187,907 67,081
Accrued consulting fees 258,690 259,692
Commissions payable 8,358 7,596
Deferred Revenues -- 14,016
Accrued vacation 49,498 58,502
Accrued professional fees 158,958 171,136
Related party payable 0 (10)
Other accrued liabilities 179,372 328,450
--------- ---------
Total Accrued Liabilities $ 845,097 $ 909,508
========= =========
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 4 - OTHER INTANGIBLE ASSETS
The Company's intangible assets consisted of the following at June 30, 2009 and
December 31, 2008:
JUNE 30, DECEMBER 31,
2009 2008
----------------------------
Pending Intellectual Property $ 94,140 $ 94,140
Awarded patents 21,954 21,954
Accumulated amortization (1,647) (1,098)
--------- ---------
Other Intangible Assets, Net $ 114,447 $ 114,996
========= =========
Amortization of intangibles was $549 for the six months ended June 30, 2009 and
June 30, 2008.
Based on the carrying amount of the intangibles as of June 30, 2009, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows:
Years ended December 31,
---------------------------------
2009 (From July 1, 2009) $ 549
2010 1,098
2011 1,098
2012 1,098
2013 and over 16,464
--------------------
Total $ 20,307
====================
NOTE 5 - OTHER INVESTMENT
The Company's other investment consisted of 1,000,000 shares of preferred stock
in a public-traded company with carrying values of $15,000 and $15,000 as of
June 30, 2009 and December 31, 2008, respectively. The shares are classified as
trading securities, of which the shares were reported in the balance sheet at
fair value with realized and unrealized gains and losses included in current
period operations. As of June 30, 2009, there was no gross unrealized gain or
loss for these securities. An unrealized gain of $14,100 was recorded at
December 31, 2008.
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 6 - BORROWINGS
June 30, December 31,
2009 2008
------------------------------------------------------------------------------------------------------------
Installment note payable secured by computer equipment. Monthly payments total
$81, including interest at 18.99%. The original note amount was $2,062. Matures
July 21, 2009. $ 783 $ 783
Reconstructed note payable to related party. Monthly interest payment only at 13%
through January 31. 2008. Effective February 1, 2008, principal and interest
payment based on a 36-month amortization. Matures August 1, 2009.(a) 204,220 210,985
Secured note payable to a customer. Monthly interest payment only at 10%.
A balloon payment due on April 1, 2011. (b) 150,000 150,000
------------------------------------------------------------------------------------------------------------
355,003 361,768
Less: Current Maturities (205,003) (211,768)
------------------------------------------------------------------------------------------------------------
Long-term debt $ 150,000 $ 150,000
============================================================================================================
(a) On June 30, 2008, 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 August
1, 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. On July 14, 2009, the Company entered into an Agreement for Extension
and Amendment of a Note ("Agreement") with the related party. Under the
Agreement, the related party agrees to apply $26,260 of interest in arrears to
principal and convert the note into an interest only note commencing in August
2009.
(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 June 30, 2009, no fund was set aside.
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 6 - BORROWINGS (CONTINUED)
CONVERTIBLE PROMISSORY NOTES
June 30, December 31,
2009 2008
------------------------------
10% Series A Convertible Promissory Note, matures on December 31, 2010 $ 25,000 $ 25,000
8% Convertible Promissory Notes, matures commencing May 18, 2009 - 15,000
------------------------------------------------------------------------------------------------------------
25,000 40,000
Less: Unamortized debt discount (1,624) (3,124)
------------------------------------------------------------------------------------------------------------
Convertible debt, net $ 23,376 $ 36,876
------------------------------------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
Provision for income taxes consisted of a minimum state franchise tax of $800
for six months ended June 30, 2009 and 2008.
The Company had removed the valuation allowance on December 31, 2003 because it
believed it was more likely than not that all deferred tax assets would be
realized in the foreseeable future and would be reflected as a credit to
operations. However, as of December 31, 2005, the Company's ability to utilize
its federal net operating loss carryforwards was uncertain due to the merger
with OrthoNetx which had net operating loss carryforwards of approximately $1.7
million. Thus a valuation reserve was provided against the Company's net
deferred tax assets.
As of December 31, 2008, the Company has net operating loss carryforwards of
approximately, $6,800,000 and $4,300,000 to reduce future federal and state
taxable income, respectively. To the extent not utilized, the federal net
operating loss carryforwards will begin to expire in fiscal 2009 and the state
net operating loss carryforwards will begin to expire in fiscal 2012.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 8 - STOCK OPTIONS
ACUNETX, INC.
On March 27, 2006 the Board of Directors approved and adopted the 2006 Stock
Option Plan to provide for the issuance of incentive stock options and/or
nonstatutory options to employees and nonstatutory options to consultants and
other service providers. Generally, all options granted to employees and
consultants expire ten and three years, respectively, from the date of grant.
All options have an exercise price equal to or higher than the fair market value
of the Company's stock on the date the options were granted. Options generally
vest over three years. The plan reserves 14 million shares of common stock under
the Plan and is effective through December 31, 2015.
A summary of the status of stock options issued by the Company as of June 30,
2009 and 2008 is presented in the following table.
2009 2008
-------------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding at beginning of year 9,818,168 $0.11 5,525,768 $0.15
Granted - $0.00 3,830,000 $0.07
Expired/Cancelled (2,544,102) $0.07 - $0.00
Expired and Cancelled - $0.00 - $0.00
------------------ ------------------
Outstanding at end of period 7,274,066 $0.12 9,355,768 $0.12
================== ==================
Exercisable at end of period 6,649,066 $0.13 7,855,768 $0.12
================== ==================
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the Company's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2009 2008
----------------------------------
Weighted average fair value per option granted N/A $0.06
Risk-free interest rate N/A 3.28%
Expected dividend yield N/A 0.00%
Expected lives N/A 5.00
Expected volatility N/A 134.64%
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 8 - STOCK OPTIONS (CONTINUED)
As of June 30, 2009 there was $659 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plans. That cost is expected to be recognized fully in next quarter.
The following table sets forth additional information about stock options
outstanding at June 30, 2009:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
-------------------------------------------------------------------------------------------------------------
$0.01-$0.30 7,274,066 3.48 years $ 0.12 6,649,066
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 nonstatutory 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
are exercisable from five to ten years from the date of grant. The plan reserves
1 million shares of common stock.
A summary of the status of stock options issued by VisioNetx as of June 30, 2009
and 2008 is presented in the following table.
2009 2008
---------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------------------------------------------------------------------
Outstanding at beginning of year 425,500 $0.10 479,500 $0.10
Granted - $0.00 96,000 $0.10
------------------ -----------------
Outstanding at end of period 425,500 $0.10 575,500 $0.10
================== =================
Exercisable at end of period 347,583 $0.10 284,072 $0.10
================== =================
18
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 8 - STOCK OPTIONS (CONTINUED)
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes Merton option valuation model. The assumptions are
listed in the table below. Expected volatilities are based on the historical
volatility of the Company's stock. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
2009 2008
----------------------------------
Weighted average fair value per option granted N/A $0.04
Risk-free interest rate N/A 3.45%
Expected dividend yield N/A 0.00%
Expected lives N/A 5.00
Expected volatility N/A 134.64%
As of June 30, 2009 there was $4,305 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
1.25 years.
The following table sets forth additional information about stock options
outstanding at June 30, 2009:
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
-------------------------------------------------------------------------------------------------------------
$ 0.10 425,500 5.8 years $ 0.10 347,583
19
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 9 - NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per
share:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------------------------------
Numerator:
Net loss $ (28,429) $ (129,465) $ (105,960) $ (534,904)
-------------------------------------------------------------
Denominator:
Weighted average of common shares 65,429,309 65,405,499 65,429,309 65,345,856
-------------------------------------------------------------
Net loss per share-basic and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.01)
As a result of our net loss for the three and six months ended June 30, 2009 and
2008, all common share equivalents would have been anti-dilutive and therefore,
have been excluded from the diluted net loss per share calculation. The weighted
average securities, consisting of stock options and warrants, that were either
out of the money or anti-dilutive from our calculation of diluted net loss per
share were approximately 18,135,862 and 17,583,202 for three months ended June
30, 2009 and 2008, respectively. 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 18,054,516
and 13,821,079 for six months ended June 30, 2009 and 2008, respectively.
NOTE 10 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended June 30, 2009 and 2008, sales to major customers
(those exceeding 10% of the Company's net revenues) approximated 39.5% and
64.9%, respectively, of the Company's consolidated net revenues. Approximately
27.0% and 27.1% of revenues for the three months ended June 30, 2009 and 2008
respectively, were to an independent distributer. Approximately 12.5% and 27.1%
of revenues for the three months ended June 30, 2009 and 2008 respectively, were
from another independent distributor. Approximately 0% and 10.7% of revenues for
the three months ended June 30, 2009 and 2008 respectively, were from a state
university. In addition, accounts receivable balances of such major customers
approximated 50.0% of the Company's total accounts receivable balance at June
30, 2009.
The loss or substantial reduction of the business of any of the major customers
could have a material adverse impact on the Company's results of operations and
cash flows.
The Company maintains cash deposits with major banks, which from time to time
may exceed federally insured limits. The Company periodically assesses the
financial condition of the institutions and believes that the risk of any loss
is minimal.
20
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 11 - SEGMENT INFORMATION
The Company evaluates its reporting segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The Chief
Executive Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131. The Chief Executive Officer allocates resources to each
segment based on their business prospects, competitive factors, net sales and
operating results.
The Company has three market-oriented operating segments: (i) IntelliNetx
division, (ii) OrthoNetx, Inc., and (iii) VisioNetx, Inc. 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 impairment screening. The Company also has other subsidiaries that do not
meet the quantitative thresholds of a reportable segment.
The Company reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
Provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
21
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 11 - SEGMENT INFORMATION (CONTINUED)
Summarized financial information of the Company's results by operating segment
is as follows:
For three months ended For six months ended
June 30, June 30,
2009 2008 2009 2008
-----------------------------------------------------------------------------------------------------------------
Net Revenue to external customers:
INX $208,174 $285,463 $500,292 $486,285
ONX - - - 18,766
VNX - - - -
-------------------------------------------------------------
Consolidated Net Revenue to external customers $208,174 $285,463 $500,292 $505,051
-----------------------------------------------------------------------------------------------------------------
Cost of Revenue:
INX $ 58,946 $ 56,854 $133,478 $147,604
ONX - 2,968 - 42,280
VNX - - - -
-------------------------------------------------------------
Consolidated Cost of Revenue $ 58,946 $ 59,822 $133,478 $189,884
-----------------------------------------------------------------------------------------------------------------
Gross Margin:
INX $366,814 $228,609 $366,814 $338,681
ONX - (2,968) - (23,514)
VNX - - - -
-------------------------------------------------------------
Consolidated Gross Margin $149,228 $225,641 $366,814 $315,167
-----------------------------------------------------------------------------------------------------------------
Inter-segment transactions are recorded at cost. The margins reported reflect
only the direct controllable expenses of each line of business and do not
represent the actual margins for each operating segment because they do not
contain an allocation of product development, information technology, marketing
and promotion, stock-based compensation, and corporate and general and
administrative expenses incurred in support of the lines of business.
For three months ended For Six months ended
June 30, June 30,
2009 2008 2009 2008
---------------------------------------------------------------------------------------------------------------------------
Total margin for reportable segments $ 149,228 $ 225,642 $ 366,814 $ 315,168
Corporate and general and administrative expenses (356,757) (336,817) (620,533) (666,562)
Stock option expenses (6,394) 3,787 (14,367) (142,996)
Interest and Other Expense (13,956) (26,165) (43,124) (46,963)
Interest and Other Income 193,298 1,620 193,329 2,958
---------------------------------------------------------------
Net loss before income taxes and noncontrolling interest $ (34,581) $ (131,933) $ (117,881) $ (538,395)
===============================================================
22
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company's employees periodically pay business-related expenses using
personal funds. Until reimbursed, these expenses are recorded in "Accrued
Liabilities" and listed as "Related party payables" in the balance sheet details
above.
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.
NOTE 13 - GUARANTEES AND PRODUCT WARRANTIES
The Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third party
claims. These contracts primarily relate to: (i) divestiture agreements, under
which the Company may provide customary indemnifications to purchasers of the
Company's businesses or assets; (ii) certain real estate leases, under which the
Company may be required to indemnify property owners for environmental and other
liabilities, and other claims arising from the Company's use of the applicable
premises; and (iii) certain agreements with the Company's officers, directors
and employees, under which the Company may be required to indemnify such persons
for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not
explicitly stated. Because the obligated amounts of these types of agreements
often are not explicitly stated, the overall maximum amount of the obligations
cannot be reasonably estimated. Historically, the Company has not been obligated
to make significant payments for these obligations, and no liabilities have been
recorded for these obligations on its balance sheet as of June 30, 2009.
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
23
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
NOTE 13 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
The following table presents the changes in the Company's warranty reserve
during the first six months of 2009 and 2008:
For six months ended June 30, 2009 2008
------------------------------- ---------- ----------
Beginning balance $ 3,741 $ 11,339
Provision for warranty (1,427) (6,847)
Utilization of reserve - -
---------- ----------
Ending balance $ 2,314 $ 4,492
========== ==========
NOTE 14 - CHANGE IN OFFICERS
As of June 1, 2009, Dennis Geselowitz, Chief Financial Officer of the Company,
ceased to be employed by the Company. Robert S. Corrigan, President of the
Company, is serving as Acting Chief Financial Officer until a permanent Chief
Financial Officer can be hired.
NOTE 15 - COMMITMENTS
In April 2009, the Company amended its April 2006 agreement with a key private
label distributor to exchange an obligation to issue 4,194,451 of the Company's
common stock to the distributor with the obligation to issue 4,194,451 warrants
to purchase the Company's common stock for $0.001 per share. In addition, the
distributor agreed to waive future obligations to issue $500,000 in stock and
$225,000 in consulting work over the next five years. The Company remains liable
to the distributor for past consulting fees in the amount of $132,000. Interest
is being accrued at 4% on the balance until paid. The parties agreed on an early
payment provision to reduce the payable to $105,600 if paid on or before
December 31, 2009. In addition, there is an extension of the distribution
agreement of 10 years from the date of amendment.
As a result, the Company recognized other income of $162,250 on these
amendments.
NOTE 16 - SUBSEQUENT EVENTS
Long-Term Debt
--------------
On July 14, 2009, the Company entered into an Agreement for Extension and
Amendment of a Note ("Agreement") with a related party. Under the Agreement, the
related party agrees to apply $26,260 of interest in arrears to principal and
convert the note into an interest only note commencing in August 2009.
Offering
--------
On September 1, 2009, AcuNetx, Inc. will be offering to issue up to $500,000 in
8% convertible notes.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of
operations ("MD&A") supplements the accompanying consolidated financial
statements and notes to help provide an understanding of AcuNetx Inc.'s
financial condition, changes in financial condition and results of operations.
MD&A is organized as follows:
o Cautionary statement concerning forward-looking statements. This section
provides a description of the use of forward-looking information contained in
this report.
o Business overview. This section provides a description of the Company's
business and recent developments the Company believes are important in
understanding the results of operations and financial condition.
o Financial condition and liquidity. This section provides an analysis of the
Company's financial condition as of June 30, 2009 and cash flows for the six
months ended June 30, 2009.
o Results of operations. This section provides an analysis of the Company's
results of operations for the six months ended June 30, 2009.
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Information in this Item 2, "Management's
Discussion and Analysis or Plan of Operation," and elsewhere in this 10-QSB that
does not consist of historical facts, are "forward-looking statements."
Statements accompanied or qualified by, or containing, words such as "may,"
"will," "should," "believes," "expects," "intends," "plans," "projects,"
"estimates," "predicts," "potential," "outlook," "forecast," "anticipates,"
"presume," and "assume" constitute forward-looking statements and, as such, are
not a guarantee of future performance. The statements involve factors, risks and
uncertainties, the impact or occurrence of which can cause actual results to
differ materially from the expected results described in such statements. Risks
and uncertainties can include, among others, fluctuations in general business
cycles and changing economic conditions; changing product demand and industry
capacity; increased competition and pricing pressures; advances in technology
that can reduce the demand for the Company's products, as well as other factors,
many or all of which may be beyond the Company's control. Consequently,
investors should not place undue reliance on forward-looking statements as
predictive of future results. The Company disclaims any obligation to release
publicly any updates or revisions to the forward-looking statements herein to
reflect any change in the Company's expectations with regard thereto, or any
changes in events, conditions or circumstances on which any such statement is
based.
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere in this Quarterly Report on Form 10-Q. Except for the historical
information contained in this report, the following discussion contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Quarterly Report on Form 10-Q should be read
as being applicable to all related forward-looking statements wherever they
appear in this Quarterly Report on Form 10-Q. The Company's actual results may
differ materially from the results discussed in the forward-looking statements,
as a result of certain factors including, but not limited to, those discussed
elsewhere in this Quarterly Report on Form 10-Q.
25
BUSINESS OVERVIEW
AcuNetx Inc. is an innovative medical, law enforcement, workplace safety and
optical polygraph equipment manufacturer and retailer. During the first half of
2009, medical related products accounted for 94.0% of the Company's revenues.
The balance of the revenues came from law enforcement. While the Company's
medical product lines are being sold in a relatively mature market, recent
research indicates additional markets may be suitable for the Company's newer
product lines, and the company will continue to actively explore those
opportunities with distributors and partners both in the United States and
Internationally.
Historically, the Company's VNG product line was aimed at specialized
physicians. While remaining in this market has proven that the Company's VNG
systems have gained general acceptance among its specialist customers, the
market of primary care physicians is significantly larger. Therefore, the
company believes that focusing on primary care physicians has the potential to
develop into a substantially larger growth market. As a result, during the first
half of 2008, the company introduced a new more affordable VNG medical device
aimed at primary care physicians and will continue to pursue this market going
forward.
The Company believes that the OrthoNetx product line still has potential value
in its marketplace, and the relationship with Robinson MedSurg LLC is an
important step in maximizing that opportunity.
FINANCIAL CONDITION AND LIQUIDITY
GOING CONCERN
The Company's independent auditors have included an explanatory paragraph in
their report on the June 30, 2009 consolidated financial statements discussing
issues which raise substantial doubt about the Company's ability to continue as
a "going concern." The going concern qualification is attributable to the
Company's operating losses during the year and the amount of capital which the
Company projects it needs to satisfy existing liabilities and achieve profitable
operations.
Management understands the comments in the auditor's report relative to the
Company as a going concern. In the second quarter, we have continued to see a
softness in the overall economy which translates into our customers an
uncertainty to purchase our relatively expensive medical devices. We continue to
see our customers or potential customers struggle to obtain lease financing for
our devices. In some cases, we have helped arrange financing but many customers
desiring to purchase our products have been unable to do so, based on the
illiquidity in the marketplace. Recently, we have seen a slight improvement in
this problematic situation and we certainly hope this improvement continues. We
have taken a number of actions, described in the footnotes, to reduce expenses
and conserve cash. All activities will be focused on maintaining our ability to
ship our VNG medical equipment line of products, as well as the HawkEye (TM) law
enforcement product lines, 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.
CURRENT ASSETS
Current assets decreased by 44.4%, down $114,656 from December 31, 2008 to June
30, 2009 primarily due to lower accounts receivable, prepaid expense and cash
balances. These decreases were offset, to a lesser extent, by a higher inventory
balance.
26
OTHER INTANGIBLE ASSETS
Other intangible assets decreased by $549 from December 31, 2008 to June 30,
2009 due to amortization.
CURRENT LIABILITIES
Current liabilities decreased by 2.5%, down $38,894 from December 31, 2008 to
June 30, 2009 primarily due to the renegotiation of contractual obligations and
debt restructuring.
LONG-TERM DEBT
Long-term debt remained the same at $150,000 from December 31, 2008 to June 30,
2009.
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased 0.9%, up $105,960 from December 31, 2008 to June
30, 2009 due to a net loss for the period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2009, the Company had $143,698 in current assets. This includes
$4,707 in non-restricted cash and cash equivalents and $420 in restricted cash.
Net accounts receivable was $20,161 and inventory was $100,529.
The Company had $1,512,148 in current liabilities, which included accounts
payable of $462,048. The Company also had accrued liabilities of $845,097 and a
current portion of long term debt of $205,003. Long-term liabilities were
$173,376. As of June 30, 2009, AcuNetx had a stockholder deficit of $1,183,121
which includes an accumulated deficit of $12,563,239.
AcuNetx has no plans for significant capital equipment expenditures for the
foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
MATERIAL COMMITMENTS
The Company has no material commitment to make capital equipment expenditures.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO SIX MONTHS ENDED JUNE 30, 2008
The six months ended June 30, 2009 and 2008 represent the combined results of
AcuNetx, Inc. and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc.
Revenues during the six months ended June 30, 2009 were $ $500,292 compared to
$505,051 for the corresponding period in 2008. System unit shipments remained
the same at 27 units in the first six months of 2009 and 27 units in the same
period of the prior year. Gross profit, as a percentage of sales, increased from
62% to 73%. Total operating expenses decreased by 21.5%, down $174,658, from
$809,558 in the first half of 2008 to $634,900 in the first half of 2009.
Selling, general and administrative expenses decreased 6.9%, down $46,029 from
$666,562 during the first half of 2008 to $620,533 during the first half of
2009. Net loss decreased 80.2%, down $428,944 from $534,904 in the first half of
2008 to $105,960 in the first half of 2009.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company," the Company is not required to respond to this
item.
28
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, our CEO and CFO concluded that as of June 30, 2009 our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company required to be included in the
Company's periodic filings with the SEC, such that the information relating to
the Company required to be disclosed in SEC reports (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms, and (ii) is accumulated and communicated to the Company's management,
including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.
There has been no material change in our internal control over financial
reporting during the three months ended June 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
As a "smaller reporting company," the Company is not required to respond to this
item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Number Description
------ -----------
31.1 Certification Required by Rule 13a-14(a) of the Securities Exchange Act
of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (*)
31.2 Certification Required by Rule 13a-14(a) of the Securities Exchange Act
of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (*)
32.1 Certification of President and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(*)
-------------------
* Filed herewith.
30
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 19, 2009 By: /s/ Robert S. Corrigan
------------------------
Robert S. Corrigan,
Chief Executive Officer
31