SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-17629
ADM TRONICS UNLIMITED, INC.
(Name of Small Business Issuer in its Charter)
Delaware 22-1896032
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
224 Pegasus Ave., Northvale, New Jersey 07647
(Address of Principal Executive Offices)
Issuer's Telephone Number, including area code: (201) 767-6040
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to the filing requirements for the past 90 days:
YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
YES [ ] NO [X]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
53,882,037 shares of Common Stock, $.0005 par value, as of February 7, 2007
1
ADM TRONICS UNLIMITED, INC.
INDEX
Page Number
-----------
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet - December 31, 2006 (unaudited) 3
Consolidated Statements of Operations - For the
three months and nine months ended December
31, 2006 and 2005 (unaudited) 4
Statement of Stockholders' Equity For the
nine months ended December 31, 2006 (unaudited) 5
Consolidated Statements of Cash Flows - For the nine
months ended December 31, 2006
and 2005 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Controls and Procedures 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits 14
2
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,647,761
Accounts receivable, net of allowance for doubtful
accounts of $6,689 44,279
Inventories 189,015
Prepaid expenses and other current assets 2,996
------------
Total current assets 2,884,051
Property and equipment, net of accumulated depreciation
of $55,495 17,012
Inventory - long term portion 122,838
Investment in Ivivi 3,011,241
Due from Ivivi 8,604
Loan receivable and accrued interest, officer 92,565
Other assets 92,317
------------
Total assets $ 6,228,628
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90,310
Accrued expenses and other current liabilities 62,760
------------
Total current liabilities 153,070
------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $.0005 par value; 150,000,000 shares
authorized, 53,882,037 shares issued and outstanding 26,941
Additional paid-in capital 30,176,924
Accumulated deficit (24,128,307)
------------
Total stockholders' equity 6,075,558
------------
Total liabilities and stockholders' equity $ 6,228,628
============
The accompanying notes are an integral part of these consolidated financial statements.
3
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
Three Months Ended December 31, Nine Months Ended December 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 234,627 $ 470,671 $ 1,270,188 $ 1,289,482
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 79,794 238,559 330,845 507,835
Research and development 828 85,599 298,219 407,524
Selling, general and administrative 821,622 1,000,767 4,117,748 3,697,506
------------ ------------ ------------ ------------
Total operating expenses 902,244 1,324,925 4,746,812 4,612,865
------------ ------------ ------------ ------------
Operating loss (667,617) (854,254) (3,476,624) (3,323,383)
Interest and financing costs, net (1,263,146) (430,310) (3,128,569) (1,201,648)
Change in fair value of warrant and
registration rights liabilities (352,188) 537,743 (378,033) 1,264,177
Equity in net loss of Ivivi (575,853) -- (575,853) --
------------ ------------ ------------ ------------
Net loss $ (2,858,804) $ (746,821) $ (7,559,079) $ (3,260,854)
============ ============ ============ ============
Net loss per share, basic and diluted: $ (0.05) $ (0.01) $ (0.14) $ (0.06)
============ ============ ============ ============
Weighted average shares outstanding 53,882,037 53,882,037 53,882,037 53,882,037
The accompanying notes are an integral part of these consolidated financial statements.
4
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2006
(Unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------- --------------- ---------------- --------------- ---------------
Balance, March 31, 2006 53,882,037 $ 26,941 $ 10,342,480 $ (16,569,228) $ (6,199,807)
Share based compensation - - 1,779,913 - 1,779,913
Reclassification of warrant liability
upon effectiveness of Ivivi's
registration statement - - 630,312 - 630,312
Reclassification of unamortized loan
costs and discount upon conversion
of Ivivi debt - - (669,347) - (669,347)
Net assets of equity method
Investment in Ivivi 3,401,810 - 3,401,810
Increase in paid in capital of Ivivi - - 184,284 - 184,284
Deconsolidation of Ivivi 14,507,472 - 14,507,472
Net loss - - - (7,559,079) (7,559,079)
------------- --------------- ---------------- --------------- ---------------
Balance December 31, 2006 53,882,037 $ 26,941 $ 30,176,924 $ (24,128,307) $ 6,075,558
============= =============== ================ =============== ===============
5
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(Unaudited)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,559,079) $(3,260,854)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 17,559 67,873
Loss from equity investment 575,853 --
Stock based compensation 1,779,913 140,962
Amortization of loan costs and discount 1,692,354 519,216
Share based financing penalties 1,355,837 238,018
Provision for doubtful accounts 16,882 74,716
Change in fair value of warrant and registration rights liabilities 196,682 (1,264,177)
Amortization of deferred revenue (4,833)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (34,225) (286,040)
Inventory (30,330) (17,005)
Prepaid expenses and other current assets (101,785) 267,179
Other assets (1,107) (1,106)
Increase (decrease) in:
Accounts payable and accrued expenses 1,268,414 453,020
Deferred revenue 290,000 --
----------- -----------
Net cash used by operating activities (537,865) (3,068,198)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash retained by Ivivi (67,483) --
Purchases of property and equipment (2,657) (21,963)
----------- -----------
Net cash used by investing activities (70,140) (21,963)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net 245,725 1,250,000
Receivable from Ivivi 2,598,662 --
Deferred offering costs (571,291) (245,300)
----------- -----------
Net cash provided by financing activities 2,273,096 1,004,700
----------- -----------
Net increase (decrease) in cash 1,665,091 (2,085,461)
Cash and cash equivalents, beginning of period 982,670 3,011,631
----------- -----------
Cash and cash equivalents, end of period $ 2,647,761 $ 926,170
=========== ===========
Cash paid for:
Interest $ 166,174 $ 142,388
Income taxes -- --
The accompanying notes are an integral part of these consolidated financial statements.
6
ADM TRONICS UNLIMITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of ADM Tronics Unlimited, Inc. and its subsidiaries ("we", "us", "the
Company", "our", or "ADM"). These consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB and do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for a fair
presentation of the results for the interim periods have been included.
Operating results for the three and nine months ended December 31, 2006 are not
necessarily indicative of the results that may be expected for the full year
ending March 31, 2007. The accompanying consolidated financial statements and
the information included under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" should be read in conjunction
with the Company's audited consolidated financial statements and related notes
included in the Company's Form 10-KSB for the fiscal year ended March 31, 2006.
IVIVI OPERATIONS
ADM's former majority owned subsidiary, Ivivi Technologies, Inc. ("Ivivi"),
filed a Registration Statement with the Securities and Exchange Commission
("SEC") for the initial public offering of a portion of its common stock. The
Registration Statement was declared effective by the SEC on October 18, 2006. As
a result of the consummation of Ivivi's initial public offering, we no longer
own a majority of the outstanding common stock of Ivivi and do not control
Ivivi's operations. We do own approximately 34% of Ivivi's outstanding common
stock and can exert significant influence based upon the percentage of Ivivi's
stock owned by us. As a result, our investment in Ivivi subsequent to October
18, 2006 is reported under the equity method of accounting, whereby we recognize
our share of Ivivi's earnings or losses as they are incurred.
GOING CONCERN
In connection with the consummation of Ivivi's initial public offering during
October 2006, (i) Ivivi repaid advances made to it by us aggregating
approximately $2.6 million and (ii) our outstanding convertible notes were
converted into shares of Ivivi's common stock. While we continue to suffer
operating and net losses and negative cash flows from operations, we believe
that we can continue as a going concern for the next 12 months as a result of
the inflow of cash from financing activities and the elimination of our long
term debt.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
LOSS PER SHARE
Basic and diluted loss per common share for all periods presented is computed
based on the weighted average number of common shares outstanding during the
periods presented as defined by SFAS No. 128, "Earnings Per Share". The assumed
exercise of common stock equivalents was not utilized for the nine and three
month periods ended December 31, 2006 and 2005 since the effect would be
anti-dilutive. There were 11,626,854 common stock equivalents at December 31,
2006 and 50,109,612 at December 31, 2005.
STOCK OPTIONS AND WARRANTS
In April 2006, we adopted the fair value recognition provisions of SFAS No.
123(R), Accounting for Stock-Based Compensation, to account for compensation
costs under our stock option plans and those of the our subsidiary. We
previously utilized the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB
25"). Pro forma information is computed using the Black-Sholes option pricing
model at the date of grant of the options based on the following assumptions
ranges: risk free interest rates of 3.62% to 4.6%; dividend yield of 0%;
volatility factors of the expected market price of our common stock of 60% to
67%; and expected lives of the options of 2.5 to 5 years. The foregoing option
valuation model requires input of highly subjective assumptions. Because common
share purchase options granted to employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value of estimates,
the existing model does not in the opinion of the Company's management
necessarily provide a reliable single measure of fair value of common share
purchase options that we have granted to our employees and directors.
7
Pro forma information relating to employee and director common share purchase
options is as follows:
For the Three For the Nine
Months Ended Months Ended
December 31, 2005 December 31, 2005
------------------ ------------------
Net loss as reported $ (746,821) $(3,260,854)
Add: Shared based compensation expense included in reported net loss 2,856 8,568
Less: Share based compensation calculated under fair value method (5,261) (15,783)
----------- -----------
Pro forma net loss $ (749,226) $(3,268,069)
=========== ===========
Basic and diluted historical loss per share $ (0.01) $ (0.06)
=========== ===========
Pro forma basic and diluted loss per share $ (0.01) $ (0.06)
=========== ===========
NOTE 2 SEGMENT INFORMATION
Information about segment information is as follows:
CHEMICAL MEDICAL TOTAL
-------- ------- -----
Nine Months Ended December 31, 2006:
Revenues from external customers $ 584,271 $ 685,917 $ 1,270,188
Segment loss (operating loss) (694,316) (2,782,308) (3,476,624)
Nine Months Ended December 31, 2005:
Revenues from external customers 677,250 612,232 1,289,482
Segment loss (operating loss) (70,285) (3,253,098) (3,323,383)
Three Months Ended December 31, 2006:
Revenues from external customers 183,564 51,063 234,627
Segment loss (operating loss) (225,312) (442,305) (667,617)
Three Months Ended December 31, 2005:
Revenues from external customers 212,821 257,850 470,671
Segment loss (operating loss) 8,429 (862,683) (854,254)
Total assets at December 31, 2006 6,181,480 47,148 6,228,628
NOTE 3 INVENTORY
Inventory at December 31, 2006 consists of the following:
Raw materials $ 233,824
Finished goods 78,029
----------
$ 311,853
==========
NOTE 4 INVESTMENT IN IVIVI AND RELATED CAPITAL TRANSACTIONS
On October 18, 2006, Ivivi's Registration Statement on Form SB-2 was declared
effective by the SEC. As a result, unsecured convertible notes in the aggregate
principal amount of $6,087,500, issued in our December 2004 and February 2005
joint private placement with Ivivi, automatically converted into shares of Ivivi
common stock. Also upon effectiveness of the Registration Statement, unsecured
convertible notes in the aggregate principal amount of $2,000,000 issued in
connection with Ivivi's November 2005 and March 2006 private placement to four
institutional investors automatically converted into shares of Ivivi common
stock.
Upon the conversion of the above debt into Ivivi common stock, unamortized loan
costs and loan discount in the aggregate amount of $669,347 were charged to
additional paid-in capital. Unamortized discount in the amount of $1,218,657
related to a beneficial conversion feature of the convertible debt was charged
to interest expense upon conversion.
8
Upon the effectiveness of Ivivi's Registration Statement, certain ADM warrants
which contained registration rights were cancelled. The fair value of these
warrants was carried as a liability on our balance sheet. From October 1 through
October 18, 2006, we recorded an expense for the change in fair value of these
warrants in the amount of $176,857. At October 18, 2006, the liability related
to these warrants in the amount of $630,312 was reclassified to additional
paid-in capital. For the period from April 1 through October 18, 2006, we
recorded an expense related to the change in fair value of these warrants in the
amount of $197,082.
Upon the consummation of Ivivi's initial public offering, we no longer own a
majority of the outstanding common stock of Ivivi and do not control Ivivi's
operations, but can exert significant influence based upon the percentage of
Ivivi's stock owned by us. As a result, we have deconsolidated the operations of
Ivivi subsequent to October 18, 2006. We have recorded a credit to additional
paid-in capital in the amount of $3,401,810 to record our proportionate
investment in the net assets of Ivivi at October 18, 2006. Any future change of
interest gains or losses related to our investment in Ivivi will be recorded as
a credit or charge to additional paid-in capital.
During the period from October 18, 2006 to December 18, 2006, Ivivi recorded an
increase in additional paid-in capital as a result of the recognition of
compensation expense related to option grants to employees and others. We have
recorded a proportional increase in our investment in Ivivi in the amount of
$184,284, with a related credit to additional paid-in capital.
In addition, Ivivi paid approximately $2.6 million to us representing the
balance in inter-company accounts at October 24, 2006 due to ADM from Ivivi for
product manufacturing and allocations of personnel, professional services, rent,
utilities, insurance and office support services provided by ADM to Ivivi for
the period from March 1989 to October 2006.
The market value of our investment in Ivivi at December 31, 2006 was
$19,467,500. However, our common shares of Ivivi have not been registered with
the SEC and are subject to restriction as a result of securities laws and a
lock-up agreement for 12 months from Ivivi's IPO that has been executed by us.
The following table sets forth summarized results of operations of Ivivi for the
period ended December 31, 2006:
April 1, 2006 October 19, 2006
to to
October 18, 2006 December 31, 2006
--------------------- ------------------------
Revenue $ 615,307 $ 197,867
Costs and expenses 5,277,786 1,891,055
--------------------- ------------------------
Net loss $ (4,662,479) $ (1,693,188)
===================== ========================
NOTE 5 NON-CASH FINANCING AND INVESTING ACTIVITIES
As a result of Ivivi's Registration Statement on Form SB-2 being declared
effective by the SEC, unsecured convertible notes in the aggregate principal
amount of $6,087,500, issued in our December 2004 and February 2005 joint
private placement with Ivivi, automatically converted into shares of Ivivi
common stock. Also upon effectiveness of the Registration Statement, unsecured
convertible notes in the aggregate principal amount of $2,000,000 issued in
connection with Ivivi's November 2005 and March 2006 private placement to four
institutional investors automatically converted into shares of Ivivi common
stock.
Upon the conversion of the above debt into Ivivi common stock, unamortized loan
costs and loan discount in the aggregate amount of $669,347 were charged to
additional paid-in capital.
Upon the effectiveness of Ivivi's Registration Statement, certain ADM warrants
which contained registration rights were cancelled. At October 18, 2006, the
liability related to these warrants in the amount of $630,312 was reclassified
to additional paid-in capital.
Upon the consummation of Ivivi's initial public offering, we no longer own a
majority of the outstanding common stock of Ivivi and do not control Ivivi's
operations but can exert significant influence based upon the percentage of
Ivivi's stock owned by us. As a result, we have deconsolidated the operations of
Ivivi subsequent to October 18, 2006. We have recorded a credit to additional
paid-in capital in the amount of $3,401,810 to record our proportionate
investment in the net assets of Ivivi at October 18, 2006.
During the period from October 18, 2006 to December 18, 2006, Ivivi recorded an
increase in additional paid-in capital as a result of the recognition of
compensation expense related to option grants to employees and others. We have
recorded a proportional increase in our investment in Ivivi in the amount of
$184,284, with a related credit to additional paid-in capital.
9
NOTE 6 CONCENTRATIONS
As of December 31, 2006, two customers represented 67% of our accounts
receivable.
NOTE 7 RECENT ACCOUNTING PROUNCEMENTS
On July 13, 2006, FASB released its final interpretation on uncertain
tax positions, FIN 48, "Account for Uncertainty in Income Taxes." FIN 48
addresses the recognition and measurement of uncertain income tax positions
using a "more-likely-than-not" threshold and introduces a number of new
disclosure requirements. The guidance will become effective as of the beginning
of a company's fiscal year beginning after December 15, 2006, for both public
and non-public companies. We believe this new pronouncement will have an
immaterial impact on our financial statements in future periods.
In September 2006, FASB issued
Statement of Financial Accounting Standards No. 157 ("FAS 157"), Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), and expands
disclosures about fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. Prior
to FAS 157, there were different definitions of fair value and limited guidance
for applying those definitions in GAAP. Moreover, that guidance was dispersed
among the many accounting pronouncements that require fair value measurements.
Differences in that guidance created inconsistencies that added to the
complexity in applying GAAP. The changes to current practice resulting from the
application of FAS 157 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value
measurements. FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. We do not expect the adoption of FAS 157 to have an effect on
our financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our operations and financial condition should be
read in conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Quarterly Report on Form 10-QSB.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of the "safe harbor" provisions under section 21E of the Securities
and Exchange Act of 1934 and the Private Securities Litigation Act of 1995. We
use forward-looking statements in our description of our plans and objectives
for future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may", "expects", "believes",
"anticipates", "intends", "forecasts", "projects", or similar terms, variations
of such terms or the negative of such terms. These forward- looking statements
are based on management's current expectations and are subject to factors and
uncertainties which could cause actual results to differ materially from those
described in such forward-looking statements. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward- looking statements contained in this report to reflect any change in
our expectations or any changes in events, conditions or circumstances on which
any forward-looking statement is based. Factors which could cause such results
to differ materially from those described in the forward- looking statements
include those set forth under "Item. 1 Description of Business - Risk Factors"
and elsewhere in, or incorporated by reference into the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 2006 and other filings with
the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION:
Sales revenues are recognized when products are shipped to end users and rental
and lease revenues are recognized principally on either a monthly or a pay-per
use basis in accordance with individual rental or lease agreements and are
recognized on a monthly basis as earned. Shipments to distributors are
recognized as sales where no right of return exists. This is generally the case
with sales of chemicals. This is generally not the case with sales of the
medical products. We recognize revenue from the sale of medical products when
the products are shipped to end users. An increasing amount of rental revenue is
recognized on a fixed monthly recurring basis as product is utilized by the
end-user. Sales returns have been immaterial. Lease revenues through third party
distributors have also been immaterial and there have been no sales through
third party distributors. Our products are principally shipped on a "freight
collect" basis. Shipping and handling charges are immaterial.
USE OF ESTIMATES:
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to reserves, deferred tax assets and valuation allowance, impairment of
long-lived assets, fair value of equity instruments issued to consultants for
services and fair value of equity instruments issued to others. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above- described items, are
reasonable.
RECENT ACCOUNTING PROUNCEMENTS
On July 13, 2006, FASB released its final interpretation on uncertain
tax positions, FIN 48, "Account for Uncertainty in Income Taxes." FIN 48
addresses the recognition and measurement of uncertain income tax positions
using a "more-likely-than-not" threshold and introduces a number of new
disclosure requirements. The guidance will become effective as of the beginning
of a company's fiscal year beginning after December 15, 2006, for both public
and non-public companies. We believe this new pronouncement will have an
immaterial impact on our financial statements in future periods.
In September 2006, FASB issued
Statement of Financial Accounting Standards No. 157 ("FAS 157"), Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), and expands
disclosures about fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. Prior
to FAS 157, there were different definitions of fair value and limited guidance
for applying those definitions in GAAP. Moreover, that guidance was dispersed
among the many accounting pronouncements that require fair value measurements.
Differences in that guidance created inconsistencies that added to the
complexity in applying GAAP. The changes to current practice resulting from the
application of FAS 157 relate to the definition of fair value, the methods used
to measure fair value, and the expanded disclosures about fair value
measurements. FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. We do not expect the adoption of FAS 157 to have an effect on
our financial statements.
BUSINESS OVERVIEW
ADM is a corporation that was organized under the laws of the State of Delaware
on November 24, 1969. During the three and nine months ended December 31, 2006
and 2005, our operations were conducted through ADM itself and its three
subsidiaries, Ivivi Technologies, Inc. (through October 18, 2006), Pegasus
Laboratories, Inc. and Sonotron Medical Systems, Inc. Ivivi has been
deconsolidated as of October 18, 2006 upon the consummation of Ivivi's initial
public offering, as we no longer own a majority of the outstanding common stock
of Ivivi and do not control Ivivi's operations, but can exert significant
influence based on the percentage of Ivivi's stock owned by us. As a result,
our investment in Ivivi subsequent to October 18, 2006 is reported under the
equity method of accounting.
10
We are a technology-based developer and manufacturer of diversified lines of
products in the following three areas: (1) environmentally safe chemical
products for industrial use, (2) therapeutic non-invasive electronic medical
devices and (3) cosmetic and topical dermatological products. We have
historically derived most of our revenues from the development, manufacture and
sale of chemical products, and, to a lesser extent, from our therapeutic non-
invasive electronic medical devices and topical dermatological products.
However, during the nine months ended December 31, 2006, we derived an increased
amount of our revenue from the sale and rental of our therapeutic non-invasive
medical devices, through Ivivi. With the consummation of Ivivi's IPO, our
continuing revenues will once again be derived primarily from the development,
manufacture and sale of chemical products, and, to a lesser extent, from our
therapeutic non- invasive electronic medical devices and topical dermatological
products.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED
TO DECEMBER 31, 2005
REVENUES
We have included the operations of our Ivivi subsidiary in our consolidated
results of operations through October 18, 2006. For the three month periods
ended December 31, 2006 and 2005, revenues from such operations were $29,354 and
$224,073, respectively.
Revenues excluding Ivivi's operations were $205,273 for the three months ended
2006 as compared to $246,598 for the three months ended December 31, 2005, a
decrease of $41,325, or 17%. The decrease results from an overall reduction in
sales volume as a result of the significant time commitment related to the
completion of Ivivi's IPO and the successful negotiation and execution of
Ivivi's agreement with Allergan , which took much of management's focus in the
period. Gross profit was $128,671 and $115,769 for the three months ended
December 31, 2006 and 2005, respectively, the reduction resulting from the
decrease in sales volume.
NET LOSS
We have included the operations of our Ivivi subsidiary in our consolidated
results of operations through October 18, 2006. For the three month periods
ended December 31, 2006 and 2005, net loss attributable to the Ivivi operations
was $2,079,094 and $757,655, respectively.
Net loss excluding Ivivi's operations for the three months ended December 31,
2006 was $779,710 compared to net income for the three months ended December 31,
2005 of $10,834. Selling, general and administrative expenses increased by
$247,793, or 228%, from $108,226 to $356,019, mainly due to a $205,644 increase
in consulting and professional fees. We also recorded an equity method
investment loss of $575,853 in 2006 from our investment in Ivivi. Interest
income increased $20,198, to $23,490 in the three months ended December 31, 2006
from $3,292 in the three months ended December 31, 2005, due to increased funds
invested in a money market account.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO
DECEMBER 31, 2005
REVENUES
We have included the operations of our Ivivi subsidiary in our consolidated
results of operations through October 18, 2006. For the nine month periods ended
December 31, 2006 and 2005, revenues from such operations were $615,307 and
$540,661, respectively.
Revenues excluding Ivivi's operations were $654,881 for the nine months ended
December 31, 2006 as compared to $748,821 for the nine months ended December 31,
2005, a decrease of $93,940, or 12.5%. The decrease results from an overall
reduction in sales volume as a result of the significant time commitment related
to the completion of Ivivi's IPO and the successful negotiation and execution of
Ivivi's agreement with Allergan , which took much of management's focus in the
period. Gross profit was $395,496 and $402,479 for the three months ended
December 31, 2006 and 2005, respectively, the reduction resulting from the
decrease in sales volume.
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NET LOSS
We have included the operations of our Ivivi subsidiary in our consolidated
results of operations through October 18, 2006. For the nine month periods ended
December 31, 2006 and 2005, net loss from the Ivivi operations was $6,315,624
and $3,171,459, respectively.
Net loss excluding Ivivi's operations for the nine months ended December 31,
2006 was $1,243,455 compared to a net loss for the nine months ended December
31, 2005 of $89,395. Selling, general and administrative expenses increased by
$590,835, or 118%, from $500,244 to $1,091,079, mainly due to a $327,748
increase in consulting and professional fees and employee stock based
compensation expense of $276,201 in 2006, with no such expense in the comparable
period. We also recorded an equity method investment loss of $575,853 in 2006
from our investment in Ivivi. Interest income increased $19,610, to $27,981 in
the nine months ended December 31, 2006 from $8,371 in the nine months ended
December 31, 2005, due to increased funds invested in a money market account.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2006, we had cash and equivalents of $2,647,761 as compared to
$982,670 at March 31, 2006. The increase was primarily the result of the payment
by Ivivi of approximately $2.6 million representing the balance at October 24,
2006 due from Ivivi for product manufacturing and allocations of personnel,
professional services, rent, utilities, insurance and office support services
provided to Ivivi for the period from March 1989 to October 2006. These proceeds
will be used for increased administrative and marketing costs in order to
attempt to increase our revenue. Additionally, as a result of the consummation
of Ivivi's initial public offering, we no longer have debt outstanding or any
related warrant obligations. This debt, which amounted to approximately $8.1
million, was converted automatically into shares of Ivivi's common stock on the
initial public offering date. The market value of our investment in Ivivi at
December 31, 2006 was $19,467,500. However, our common shares of Ivivi have not
been registered with the SEC and are subject to restriction as a result of
securities laws and a lock-up agreement for 12 months from Ivivi's IPO that has
been executed by us.
OPERATING ACTIVITIES
Net cash used by operating activities was $537,865 for the nine months ended
December 31, 2006 as compared to net cash used by operating activities of
$3,068,198 for the nine months ended December 31, 2005. The use of cash in 2006
was primarily due to a net loss of $7,559,079, related mostly to Ivivi's
operations, partially offset by non cash charges for the amortization of loan
costs and amortization of discount of $1,692,354 on the convertible notes issued
in the private placements, stock based compensation of $1,779,913, equity based
penalty expense of $1,355,837, equity investment loss of $575,853 and increases
in accounts payable and accrued expenses of $1,268,414.
The use of cash in 2005 was primarily due to a net loss of $3,260,854 related
mostly to Ivivi's operations, partially offset by non cash charges for the
amortization of loan costs and amortization of discount of $519,216 on the
convertible notes issued in the private placements, stock based compensation of
$140,962 and equity based penalty expense of $238,018. We recorded a non-cash
recovery of expense of $1,264,177 due to the decrease in the fair value of the
liability for warrants issued with registration rights in the 2005 period. In
addition, we recorded an increase in accounts payable of $453,020
INVESTING ACTIVITIES
For the nine months ended December 31, 2006, cash used in investing activities
was $70,140. Of this amount, $2,657 was used for the purchase of office
equipment and $67,483 was retained by Ivivi after its IPO. For the nine months
ended December 31, 2005, $21,963 was used for the purchase of equipment.
FINANCING ACTIVITIES
During the nine months ended December 31, 2006, we paid $571,291 for deferred
costs related to the private placements as compared to $245,300 during the nine
months ended December 31, 2005. During the nine months ended December 31, 2006
and 2005, Ivivi had net proceeds from notes payable of $245,725 and $1,250,000,
respectively. During 2006, we received repayments of advances made to Ivivi of
$2,598,662.
We do not have any material external sources of liquidity or unused sources of
funds.
Our revenues, operations and cash flows over the past few years have declined.
Management has recognized the situation and has developed a business plan to
enhance the activities of its operations. Such plan includes retaining a sales
representative and seeking to hire additional sales employees as well as seeking
strategic relationships to help market and promote certain of our product lines.
Although we expect that our available funds and funds generated from our
operations, will be sufficient to meet our anticipated needs for a minimum of 12
months, we may need to obtain additional capital to continue to operate and grow
our business. Our cash requirements may vary materially from those currently
anticipated due to changes in our operations, including our marketing and sales
activities, product development, and the timing of our receipt of revenues. We
do not have any material external sources of liquidity or unused sources of
funds. Our ability to obtain additional financing in the future will depend in
part upon the prevailing capital market conditions, as well as our business
performance. There can be no assurance that we will be successful in our efforts
to arrange additional financing on terms satisfactory to us or at all.
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ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applies its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
As of the end of the period covered by this Quarterly Report on Form 10- QSB, we
carried out an evaluation, with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-15. Based upon that evaluation as of December 31, 2006, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in ensuring that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act is
accumulated and communicated to our management including our Chief Executive
Officer and Chief Financial Officer, to ensure that such information is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
The financial statements contained in our Quarterly Report on Form 10-QSB for
our fiscal quarter ended September 30, 2005, required restatement related to the
accounting for the fair value of warrants issued with convertible debt, and a
beneficial conversion feature related to the convertible debt issued with
respect to the private placements completed in December 2004 and February 2005
as previously accounted for by us.
We have taken the following steps in connection with its internal controls: (i)
during the quarter ended June 30, 2005, we retained a certified public
accountant as a consultant to assist with our financial reporting obligations
and to improve our internal controls over financial reporting and (ii) during
the quarter ended September 30, 2005, we hired a certified public accountant as
a part-time employee responsible for assisting management with internal
controls, financial reporting and closing our books and records.
However, there have been no changes in our internal controls
over financial reporting that occurred during tour last fiscal quarter to which
this Quarterly Report on Form 10- QSB relates that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 6. EXHIBITS.
(a) Exhibit No.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADM TRONICS UNLIMITED, INC.
(Registrant)
By: /s/ Andre' DiMino
-----------------------------------
Andre' DiMino, Chief Executive
Officer and Chief Financial Officer
Dated: Northvale, New Jersey
February 14, 2007
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