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 September 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
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(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 November 13, 2009)
AcuNetx Inc.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet (unaudited) 2
Consolidated Statement of Operations (unaudited) 3
Consolidated Statement of Cash Flows (unaudited) 4
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 4. CONTROLS AND PROCEDURES 24
PART II - OTHER INFORMATION 25
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS 25
SIGNATURES 25
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.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACUNETX, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2009 2008
ASSETS (Unaudited) (Audited)
--------------------------------------------------------------- ------------ ------------
Current Assets
Cash $ 2,938 $ 12,715
Restricted Cash 421 15,636
Accounts receivable, net 32,378 79,167
Inventory 95,043 99,020
Prepaid expenses and other current assets 19,684 51,816
------------ ------------
Total Current Assets 150,464 258,354
Property and equipment, net 4,727 10,355
Other intangible assets 114,104 114,996
Deferred tax assets 220,635 220,635
Other investments 15,000 15,000
Other assets 2,020 2,020
------------ ------------
TOTAL ASSETS $ 506,950 $ 621,360
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 445,945 $ 429,766
Accrued liabilities 934,842 909,508
Current portion of long-term debt 231,263 211,768
------------ ------------
Total Current Liabilities
1,612,050 1,551,042
Convertible debt, net of debt discount of $874 and
$3,874 for 2009 and 2008, respectively 24,126 36,876
Long-Term Debt 150,000 150,000
------------ ------------
Total Liabilities 1,786,176 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 11,338,230 11,288,208
Accumulated deficit (12,655,085) (12,457,279)
------------ ------------
Total AcuNetx Inc. Stockholders' Deficit (1,251,426) (1,103,642)
Noncontrolling deficit in subsidiary (27,800) (12,916)
------------ ------------
Total Stockholders' Deficit (1,279,226) (1,116,558)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 506,950 $ 621,360
============ ============
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
For the three months ended For the nine months ended
September 30, September 30,
2009 2008 2009 2008
------------ ------------ ------------ ------------
Sales - Products $ 176,244 $ 213,936 $ 676,536 $ 718,988
Cost of sales - products 45,171 110,373 178,649 300,257
------------ ------------ ------------ ------------
Gross profit 131,073 103,563 497,887 418,731
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative expenses 208,465 306,805 828,998 974,114
Stock option expense 1,521 17,814 15,888 160,063
------------ ------------ ------------ ------------
Total Operating Expenses 209,986 324,619 844,886 1,134,177
------------ ------------ ------------ ------------
Operating loss (78,913) (221,056) (346,999) (715,446)
------------ ------------ ------------ ------------
Other income(expenses)
Interest and other income 157 14,884 193,486 17,841
Interest and other expenses (18,869) (19,643) (61,993) (66,606)
------------ ------------ ------------ ------------
Total other income (expenses) (18,712) (4,760) 131,493 (48,765)
------------ ------------ ------------ ------------
Net loss before income taxes and minority interest (97,625) (225,816) (215,506) (764,211)
Provision for income taxes 0 -- 800 800
------------ ------------ ------------ ------------
Net loss before noncontrolling interest (97,625) (225,816) (216,306) (765,011)
Noncontrolling interest in losses of subsidiary (5,779) (3,401) (18,500) (7,692)
------------ ------------ ------------ ------------
Net loss $ (91,846) $ (222,414) $ (197,806) $ (757,319)
============ ============ ============ ============
Net Loss per share-Basic and Diluted $ (0.00) $ (0.00) $ (0.00) $ (0.01)
============ ============ ============ ============
Weighted average number of common shares 65,429,309 65,429,309 65,429,309 65,373,674
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
ACUNETX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For Nine Months ended September 30, 2009 2008
-------------------------------------------------------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (197,806) $ (757.319)
Adjustments to reconcile net loss to net cash used
in operating activities:
Minority interest (18,500) (7,692)
Depreciation and amortization 6,521 6,655
Issuance of stock and stock equity awards for services 53,638 190,063
Provision for bad debt 51,261 18,711
Amortization of debt discount 2,250 2,250
Intellectual property write-down -- 47,249
Gain on recovery from loan loss -- (900)
Unrealized gain on trading securities -- (14,100)
(Increase) Decrease in:
Accounts receivable (4,472) (1,408)
Inventory 3,977 96,596
Prepaid and other assets 32,132 (25,856)
Increase (Decrease) in:
Accounts payable and accrued expenses 67,773 232,232
----------- -----------
Net cash used in operating activities (3,227) (213,519)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash 15,215 (16,514)
Intellectual property write-down -- (12,871)
----------- -----------
Net cash used in investing activities 15,215 (29,385)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from sales of common stock -- 20,050
Proceeds from issuance of long-term debt -- 150,000
Net proceeds from (repayments to) convertible debt (15,000) 15,000
Repayments on notes payable (6,765) (51,532)
----------- -----------
Net cash provided by (used in) financing activities (21,765) 133,518
----------- -----------
NET DECREASE IN CASH (9,777) (109,386)
CASH BALANCE AT BEGINNING OF PERIOD 12,715 205,162
----------- -----------
CASH BALANCE AT END OF PERIOD $ 2,938 $ 95,776
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Taxes Paid $ 0 $ 800
Interest paid $ 17,496 $ 34,689
Schedule of Noncash Investing and Financing Activities:
Conversion of accrued interest into debt principal $ 26,260 $ 0
Issuance of stock options for accrued expenses $ 0 $ 1,036
SEE NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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.
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 $197,806 and $757,319 for the nine months ended September
30, 2009 and 2008, respectively. The Company had a working capital deficit of
$1,461,586 and an accumulated deficit of $12,655,085 as of September 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.
5
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION OF INTERIM INFORMATION: The financial information at September 30,
2009 and for the three and nine months ended September 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 nine months ended September 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 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 nine months ended September 30, 2009 and 2008.
6
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 nine months
ended September 30, 2009 and 2008, the Company recognized pre-tax stock option
compensation expense of $15,888 and $160,063, 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).
7
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 trading securities.
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 September 30, 2009
------------------------------------------------
Total Level 1 Level 2 Level 3
------- ------- ------- -------
Marketable Trading
Securities $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 September 30, 2009. The company is currently
evaluating the requirements of these additional disclosures.
8
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." The statement
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This new standard is effective for fiscal years or
interim periods after June 15, 2009. The adoption of this statement did not have
a material impact on the Company's consolidated financial position or results of
operations.
In June 2009, the FASB issued SFAS No. 166, "ACCOUNTING FOR TRANSFERS OF
FINANCIAL ASSETS, AN AMENDMENT OF FASB STATEMENT NO. 140." The statement
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. This new standard is
effective for fiscal years beginning after November 15, 2009. The Company is
currently assessing the potential impacts, if any, on its consolidated financial
statements.
In June 2009, the FASB issued SFAS No .167, "AMENDMENTS TO FASB INTERPRETATION
NO. 46(R)." The statement changes the approach to determining the primary
beneficiary of a variable interest entity (VIE) and requires companies to more
frequently assess whether they must consolidate VIEs. This new standard is
effective for fiscal years beginning after November 15, 2009. The Company is
currently assessing the potential impacts, if any, on its consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles -
a replacement of FASB Statements No. 162". The statement establishes the
Accounting Standards Codification TM (Codification) as the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Under the Codification, all of its content will carry the same level
of authority. This statement is effective for financial statements issued for
interim and annual periods ending after September 15, 2009. The adoption of this
statement did not have a material impact on the Company's consolidated financial
position or results of operations.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed
by management to, have a material impact on the Company's present or future
consolidated financial statements.
9
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 3 - BALANCE SHEET DETAILS
The following tables provide details of selected balance sheet items:
SEPTEMBER 30, DECEMBER 31,
ACCOUNTS RECEIVABLE, NET 2009 2008
------------------------ ------------ ------------
Accounts Receivable $ 41,793 $ 84,331
Allowance for Bad Debt (9,415) (5,164)
------------ ------------
Total Accounts Receivable, Net $ 32,378 $ 79,167
============ ============
INVENTORY
---------
Finished Goods $ 52,025 $ 46,316
Demo units 46,682 72,754
Allowance for loss in inventory (3,664) (20,050)
------------ ------------
Total Inventory $ 95,043 $ 99,020
============ ============
PREPAID EXPENSES AND OTHER CURRENT ASSETS
-----------------------------------------
Prepaid Insurance $ 19,684 $ 4,042
Employee Advance -- 6,058
Other Prepaid Expenses -- 41,716
------------ ------------
Total Prepaids and Others $ 19,684 $ 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 (51,091) (45,463)
------------ ------------
Total Property and Equipment, Net $ 4,727 $ 10,355
============ ============
ACCRUED LIABILITIES
-------------------
Warranty reserve $ 2,616 $ 3,045
Accrued payroll and related taxes 215,140 67,081
Accrued consulting fees 261,411 259,692
Commissions payable 8,358 7,596
Deferred Revenues 44,349 14,016
Accrued vacation 45,234 58,502
Accrued professional fees 193,792 171,136
Related party payable -- (10)
Other accrued liabilities 163,942 328,450
------------ ------------
Total Accrued Liabilities $ 934,842 $ 909,508
============ ============
10
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 4 - OTHER INTANGIBLE ASSETS
The Company's intangible assets consisted of the following at September 30, 2009
and December 31, 2008:
September 30, December 31,
2009 2008
------------- -------------
Pending Intellectual Property $ 94,140 $ 94,140
Awarded patents 21,954 21,954
Accumulated amortization (1,990) (1,098)
------------- -------------
Other Intangible Assets, Net $ 114,104 $ 114,996
Amortization of intangibles was $892 and $823 for the nine months ended
September 30, 2009 and September 30, 2008, respectively.
Based on the carrying amount of the intangibles as of September 30, 2009, and
assuming no impairment of the underlying assets, the estimated future
amortization is as follows:
Years ended December 31,
---------------------------
2009 (From October 1, 2009) $ 275
2010 1,098
2011 1,098
2012 1,098
2013 and over 16,396
-----------
Total $ 19,964
===========
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
September 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 September 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.
11
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 6 - BORROWINGS
September 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. Reconstructed note payable to related party.
Effective July 1, 2009, Monthly interest payment only at 13% (a) 230,480 210,985
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
-----------------------------------------------------------------------------------------------
381,263 361,768
Less: Current Maturities (231,263) (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 payee 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, the payee is entitled
to a penalty equal to 10% of the principal balance of the Note, payable monthly
until fully paid. As of September 30, 2009, no funds were set aside.
12
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 6 - BORROWINGS (CONTINUED)
CONVERTIBLE PROMISSORY NOTES
September December
30, 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 (874) (3,124)
--------------------------------------------------------------------------------
Convertible debt, net $ 24,126 $ 36,876
--------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
Provision for income taxes consisted of a minimum state franchise tax of $800
for the nine months ended September 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.
13
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September
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 -- -- 6,472,088 $ 0.05
Expired/Cancelled (4,394,102) $ 0.10 (1,750,000) $ 0.06
----------- -----------
Outstanding at end of period 5,424,066 $ 0.11 10,247,856 $ 0.10
=========== ===========
Exercisable at end of period 5,424,066 $ 0.11 8,204,443 $ 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 $ 0.04
Risk-free interest rate N/A 3.26%
Expected dividend yield N/A 0.00%
Expected lives N/A 5.00
Expected volatility N/A 129.73%
14
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 8 - STOCK OPTIONS (CONTINUED)
The following table sets forth additional information about stock options
outstanding at September 30, 2009:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
----------------- ------------- ---------------- ------------ ------------
$0.03-$0.30 5,424,066 4.42 years $ 0.11 5,424,066
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 September 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 365,685 $ 0.10 314,951 $ 0.10
======= =======
15
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 2009 there was $3,444 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 year.
The following table sets forth additional information about stock options
outstanding at September 30, 2009:
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise Options
Prices Outstanding Life Price Exercisable
------------------------------------------------------------------------------
$ 0.10 425,500 5.55 years $ 0.10 365,685
NOTE 9 - OFFERING
On September 1, 2009, the Company began an offering to issue up to $500,000 in
8% convertible notes. As of September 30, 2009, no sales were made.
16
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 10 - 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 Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
---------------------------------------------------------------------------------------------------
Numerator:
Net loss $ (91,846) $ (222,414) $ (197,806) $ (757,319)
---------------------------------------------------------------------------------------------------
Denominator:
Weighted average of common shares 65,429,309 65,429,309 65,429,309 65,373,674
---------------------------------------------------------------------------------------------------
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 nine months ended September 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 9,564,873 and 17,592,783 for three months
ended September 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 15,224,635 and 16,728,869 for nine months ended September 30,
2009 and 2008, respectively.
NOTE 11 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
During the three months ended September 30, 2009 and 2008, sales to major
customers (those exceeding 10% of the Company's net revenues) approximated 86.4%
and 37%, respectively, of the Company's consolidated net revenues. In addition,
accounts receivable balances of such major customers approximated 30.8% of the
Company's total accounts receivable balance at September 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.
17
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 12 - 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 of 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 reviews the operating companies' income to evaluate segment
performance and allocate resources. Operating companies' income for the
reportable segments excludes income taxes and amortization of goodwill.
Provision for income taxes is centrally managed at the corporate level and,
accordingly, such items are not presented by segment. The segments' accounting
policies are the same as those described in the summary of significant
accounting policies.
The Company does not track its assets by operating segments. Consequently, it is
not practical to show assets by operating segments.
Summarized financial information of the Company's results by operating segment
is as follows:
For three months ended For nine months ended
September 30, September 30,
2009 2008 2009 2008
---------------------------------------------------------------------- ---------------------
Net Revenue to external customers:
INX $ 176,244 $ 213,936 $ 676,536 $ 700,222
ONX -- -- -- 18,766
VNX -- -- -- --
--------- --------- --------- ---------
Consolidated Net Revenue to external customers $ 176,244 $ 213,936 $ 676,536 $ 718,988
---------------------------------------------------------------------- ---------------------
Cost of Revenue:
INX $ 45,171 $ 110,373 $ 177,728 $ 257,977
ONX -- -- -- 42,280
VNX -- -- -- --
--------- --------- --------- ---------
Consolidated Cost of Revenue $ 45,171 $ 110,373 $ 177,728 $ 300,257
---------------------------------------------------------------------- ---------------------
Gross Margin:
INX $ 131,073 $ 103,563 $ 498,808 $ 442,245
ONX -- -- -- (23,514)
VNX -- -- -- --
--------- --------- --------- ---------
Consolidated Gross Margin $ 131,073 $ 103,563 $ 498,808 $ 418,731
---------------------------------------------------------------------- ---------------------
18
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
Intersegment 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 nine months ended
September 30, September 30,
2009 2008 2009 2008
-----------------------------------------------------------------------------------------------------------
Total margin for reportable segments $ 131,073 $ 103,563 $ 497,887 $ 418,731
Corporate and general and administrative expenses (208,465) (306,805) (828,998) (974,114)
Stock option expenses (1,521) (17,814) (15,888) (160,063)
Interest and Other Expense 157 (19,643) 193,486 (66,606)
Interest and Other Income (18,869) 14,884 (61,993) 17,841
------------------------------------------------
Net loss before income taxes and noncontrolling interest $ (97,625) $(225,815) $(215,506) $(764,211)
================================================
NOTE 13 - 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 14 - 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 September 30, 2009.
19
ACUNETX, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
NOTE 14 - GUARANTEES AND PRODUCT WARRANTIES (CONTINUED)
In general, the Company offers a one-year warranty for most of the products it
sells. To date, the Company has not incurred any material costs associated with
these warranties. The Company provides reserves for the estimated costs of
product warranties based on its historical experience of known product failure
rates, use of materials to repair or replace defective products and service
delivery costs incurred in correcting product failures. In addition, from time
to time, specific warranty accruals may be made if unforeseen technical problems
arise with specific products. The Company periodically assesses the adequacy of
its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company's warranty reserve
during the first nine months of 2009 and 2008:
For nine months ended September 30, 2009 2008
------------------------------------------------ -------- --------
Beginning balance $ 3,045 $ 11,339
Provision for warranty (429) (7,554)
Utilization of reserve -- --
-------- --------
Ending balance $ 2,616 $ 3,795
======== ========
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.
20
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 September 30, 2009 and cash
flows for the nine months ended September 30, 2009.
o Results of operations. This section provides an analysis of the
Company's results of operations for the nine months ended September 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.
21
BUSINESS OVERVIEW
AcuNetx Inc. is an innovative medical, law enforcement, workplace safety and
optical polygraph equipment manufacturer and retailer. During the first nine
months of 2009, medical related products accounted for 95.7% 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 specialist, 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 December 31, 2008 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 current quarter, we have continued to see a
softness in the overall economy, which translates into an
uncertainty to purchase our medical devices on the part of our customers. 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 41.8%, down $107,890 from December 31, 2008 to
September 30, 2009 primarily due to lower accounts receivable, prepaid expense
and cash balances.
22
OTHER INTANGIBLE ASSETS
Other intangible assets decreased by $892 from December 31, 2008 to September
30, 2009 due to amortization.
CURRENT LIABILITIES
Current liabilities increased 3.9%, up $61,008 from December 31, 2008 to
September 30, 2009 primarily due to increased accrued liabilities, accounts
payable and the current portion of long-term debt.
LONG-TERM DEBT
Long-term debt remained the same at $150,000 from December 31, 2008 to September
30, 2009.
STOCKHOLDERS' DEFICIT
Stockholders' deficit increased 13.4%, up $147,784 from December 31, 2008 to
September 30, 2009 due to a net loss for the period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, the Company had $150,464 in current assets. This
includes $2,938 in non-restricted cash and cash equivalents and $421 in
restricted cash. Net accounts receivable was $32,378 and inventory was $95,043.
The Company had $1,612,050 in current liabilities, which included accounts
payable of $445,945. The Company also had accrued liabilities of $934,842 and a
current portion of long term debt of $231,263. Long-term liabilities were
$174,126. As of September 30, 2009, AcuNetx had a stockholder deficit of
$1,251,426 which includes an accumulated deficit of $12,655,085.
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
NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2008
The nine months ended September 30, 2009 and 2008 represent the combined results
of AcuNetx, Inc. and its subsidiaries, OrthoNetx Inc. and VisioNetx Inc.
Revenues during the nine months ended September 30, 2009 were $676,536 compared
to $718,988 for the corresponding period in 2008. System unit shipments
increased to the to 53 units in the first nine months of 2009 from 45 units in
the same period of the prior year. Gross profit, as a percentage of sales,
increased from 58% to 74%. Total operating expenses decreased by 25.5%, down
$289,291, from $1,134,177 in the first nine months of 2008 to $844,886 in the
first nine months of 2009. Selling, general and administrative expenses
decreased 14.9%, down $145,116 from $974,114 during the first nine months of
2008 to $828,998 during the first nine months of 2009. Net loss decreased 51.5%,
down $368,447 from $715,446 in the first nine months of 2008 to $346,999 in the
first nine months of 2009.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a "smaller reporting company," the Company is not required to respond to this
item.
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 September 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 September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
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.
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: November 23, 2009 By: /s/ Robert S. Corrigan
------------------------
Robert S. Corrigan,
Chief Executive Officer
25