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, 2005
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.
(Exact name of registrant as specified in its Charter)
Delaware 22-1896032
(State or Other Jurisdiction (I.R.S. Employer Identifi-
of Incorporation or organization) cation Number)
224-S 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 registrant 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 21, 2006
ADM TRONICS UNLIMITED, INC.
INDEX
Page Number
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2005
and March 31, 2005 (restated) 2
Consolidated Statements of Operations - For the
three months and nine months ended December
31, 2005 and 2004 (restated) 3
Consolidated Statement of Changes in Stockholders'
Deficit - For the nine months ended December 31, 2005 4
Consolidated Statements of Cash Flows - For the
nine months ended December 31, 2005 and 2004 (restated) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Controls and Procedures 19
Part II. Other Information
Item 6. Exhibits 20
1
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER MARCH
ASSETS 31, 2005 31, 2005
(RESTATED)
Current assets:
Cash and equivalents $ 926,170 $ 3,011,631
Accounts receivable, net of allowance
for doubtful accounts of $139,133 and
$72,593, respectively 261,252 102,691
Inventories:
Raw materials and supplies 191,014 124,393
Finished goods 178,768 248,324
Prepaid expenses and other current assets 18,638 285,818
Total current assets 1,575,842 3,772,857
Property and equipment net of
accumulated depreciation of $251,913 and
$271,188, respectively 51,848 40,550
Inventory long term portion 307,522 287,582
Equipment in use and under rental agreements, net
of accumulated depreciation of $883,850 and
$832,059, respectively - 51,791
Accounts receivable - long term 52,763 -
Loan receivable and accrued interest, officer 83,773 82,666
Deferred loan costs, net 819,847 823,564
Deferred offering costs 286,436 133,125
Other assets 99,511 104,928
Total assets $3,277,542 $5,297,063
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 372,861 $ 172,978
Accrued expenses and other current liabilities 196,846 225,252
Accrued interest and penalties 620,920 101,359
Total current liabilities 1,190,627 499,589
Long-term liabilities
Convertible debentures, net of unamortized
discount of $2,269,595 and $2,628,219,
respectively 5,067,905 3,459,281
Warrants issued with registration rights 185,149 1,449,326
Total liabilities 6,443,681 5,408,196
Stockholders' deficit:
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 26,941
2
Additional paid-in capital 10,079,761 10,003,561
Deferred compensation (613,889) (743,537)
Accumulated deficit (12,658,952) (9,398,098)
Total stockholders' deficit (3,166,139) (111,133)
Total liabilities and
stockholders'deficit $ 3,277,542 $ 5,297,063
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
(RESTATED) (RESTATED)
Revenues $ 470,671 $334,183 $1,289,482 $987,166
Costs and expenses:
Cost of revenues 238,559 169,402 507,835 535,172
Research and development 85,599 114,064 407,524 131,439
Selling, general and
administrative 1,000,767 758,651 3,697,506 1,639,348
Total costs and expenses 1,324,925 1,042,117 4,612,865 2,305,959
Operating (loss) (854,254) (707,934) (3,323,383) (1,318,793)
Interest and finance
cost, net (430,310) (133,625) (1,201,648) (134,639)
Change in fair value of
warrant liability 537,743 (840,539) 1,264,177 (713,187)
Net (loss) $(746,821) $(1,682,098) $(3,260,854) $(2,166,619)
Net (loss) per common share,
Basic and diluted $(0.01) $(0.03) $(0.06) $(0.04)
Weighted average shares
Outstanding 53,882,037 52,882,037 53,882,037 52,215,370
3
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED DECEMBER 31, 2005
(UNAUDITED)
Preferred Common
Shares Shares Capital
5,000,000 150,000,000 in
Authorized Authorized excess
$.01 Par $.0005 Par of Par Deferred Accumulated
Value Par Value Value Value Compensation Deficit Total
Balance,
March 31,
2005
Restated - 53,882,037 $26,941 $10,003,561 $(743,537) $(9,398,098) $(111,133)
Warrants
issued
with debt 64,886 64,886
Options issued
for services 2,746 (2,746) -
Intrinsic value
of employee
options 8,568 8,568
Amortization
of deferred
compensation 132,394 132,394
Net loss for
the period
ended
December
31, 2005 (3,260,854) (3,260,854)
Balance,
December
31, 2005 - 53,882,037 $26,941 $10,079,761 ($613,889) ($12,658,952)($3,166,139)
4
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
2005 2004
(RESTATED)
Cash flows from Operating activities:
Net (loss) ($3,260,854) ($2,166,619)
Adjustments to reconcile net (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 67,873 103,874
Equity based compensation 140,962 228,740
Amortization of loan costs and debt discount 519,216 119,663
Bad debts 74,716 -
Change in fair value of warrant liability (1,264,177) 713,187
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (286,040) (56,248)
Inventories (17,005) 163,148
Prepaid expenses and other current assets 267,179 (284,295)
Other assets (1,106) (18,976)
Increase in:
Accounts payable and accrued expenses 691,038 10,142
Net cash flows used by
operating activities (3,068,198) (1,187,384)
Cash flows from Investing activities:
Purchases of property and equipment (21,963) (31,793)
Net cash flows used by
investing activities (21,963) (31,793)
Cash flows from Financing activities:
Proceeds from convertible notes 1,250,000 3,180,502
Debt issue costs (245,300) (20,000)
Issuance of common stock for cash - 1,000
Net cash flows provided by
financing activities 1,012,170 3,161,502
Net change in cash and cash equivalents $(2,085,461) $1,942,325
Cash and cash equivalents--beginning of period $ 3,011,631 $ 90,081
Cash and cash equivalents--end of period $ 926,170 $2,032,406
Supplemental disclosure of
cash flow activities:
Interest paid $142,388 -
Income taxes paid - -
5
Supplemental schedule of non-cash financing activities:
During the nine months ended December 31, 2005 a discount on debt of $64,886
was recognized, comprised of the fair value of warrants issued with the debt.
During the nine months ended December 31, 2004:
Costs of $456,998 were deducted from the proceeds from the sale of convertible
debentures.
An aggregate of 2,006,570 common stock purchase warrants, valued at $100,237,
were issued in connection with services provided for the sale of convertible
debentures.
A discount on debt of $1,068,467 was recognized, comprised of the fair value
of warrants issued with the debt of $377,848, and a beneficial conversion
feature of $690,619.
ADM TRONICS UNLIMITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1-Basis of Presentation:
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of ADM Tronics Unlimited, Inc. and its subsidiaries including
Ivivi Technologies, Inc. ("Ivivi") (collectively, the "Company"). 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 accruals) considered
necessary for a fair presentation of the results for the interim periods
have been included. Operating results for the nine months ended December
31, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2006. 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, 2005.
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.
6
Significant estimates made by management include the fair value of equity
instruments, the impairment of long-lived assets, the valuation allowance
against deferred tax assets and the collectibility of receivables.
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,
2005 and 2004 since the effect would be anti-dilutive. There were
50,182,341 common stock equivalents at December 31, 2005 and 31,657,773
at December 31, 2004.
Stock Options and Warrants
The Company accounts for its stock-based employee compensation plans
using the intrinsic value based method, under which compensation cost is
measured as the excess of the stock's market price at the grant date over
the amount an employee must pay to acquire the stock. Stock options and
warrants issued to non-employees are accounted for using the fair value
based method, under which the expense is measured as the fair value of
the security at the date of grant based on the Black-Scholes pricing
model. A subsidiary of the Company had 616,000 employee stock options
outstanding at December 31, 2005, and 578,500 at December 31, 2004.
Pro Forma Information
Employee and Director Common Share Purchase Options - Pro forma
information regarding the effects on operations of employee and director
common share purchase options as required by SFAS No. 123 and SFAS
No. 148 has been determined as if the Company's subsidiary had accounted
for those options under the fair value method. Pro forma information is
computed using the Black Scholes method at the date of grant of the
options based on the following assumptions: (1) risk free interest rate
of 3.62%; (2) dividend yield of 0%; (3) volatility factor of the expected
market price of the common stock of 67%; and (4) an expected life of the
options of 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 our management
necessarily provide a reliable single measure of the fair value of common
share purchase options we have granted to our employees and directors.
Pro forma information relating to employee and director common share purchase
options is as follows:
7
For the For the
Three Months Nine Months
Ended Ended
December 31, December 31, December 31, December 31,
2005 2004 2005 2004
Net loss as reported $(746,821) $(1,682,098) $(3,260,854) $ (2,166,619)
Stock based
compensation included
in net loss 2,856 2,856 8,568 8,568
Stock based
compensation calculated
under SFAS No. 123 (5,261) (5,261) (15,783) (15,783)
Pro forma net loss $(749,226) $ (1,684,503) $(3,268,069) $ (2,173,834)
Historical basic and
diluted loss per share $(0.01) $(0.03) $(0.06) $(0.04)
Pro forma basic and
diluted loss per share $(0.01) $(0.03) $(0.06) $(0.04)
Reclassifications:
Certain items in the fiscal 2005 financial statements have been reclassified
to conform to the current period presentation.
Non-Reliance on Previously Issued Financial Statements:
On February 20, 2006, the Board of Directors (the "Board") of the Company
on the recommendation of the Company's management and after discussions
with its independent auditors, made an internal determination and
concluded that the financial statements contained in the Company's
Quarterly Report on Form 10-QSB and Form 10-QSB/A for the Company's fiscal
quarters ended June 30, 2004, September 30, 2004, December 31, 2004, June
30, 2005 and September 30, 2005 (the "Form 10-QSBs") and the financial
statements audited by the Company's independent auditors and contained in
the Company's Annual Report on Form 10-KSB/A for the Company's fiscal year
ended March 31, 2005 (the "Form 10-KSB"), require restatement resulting
from various adjustments to the financial statements of Ivivi as more
fully described below.
The decision to restate the financial statements was made by the Board,
upon the recommendation of the Company's management and with the
concurrence of the Company's independent auditors. In addition, the
Board, upon recommendation of management, made an internal determination
that the previously issued financial statements contained in the Form 10-
QSBs and the Form 10-KSB should not be relied upon.
8
Adjustments affecting this filing:
Adjustments have been made to the three and nine months periods ended
December 31, 2004, to reflect additional expense of $27,019 and $168,650,
respectively, resulting from contributed services of $62,109, and the
revaluation of equity based compensation of $106,541. As a result of
these corrections, net loss for the three and nine months ended December
31, 2004 has increased to $1,682,098 and $2,166,619, respectively, from
$1,655,079 and $1,997,969, respectively, and net loss per share remained
unchanged.
The Company's balance sheet as of March 31, 2005 has been restated as a
result of these adjustments, as well as an additional accrual of
financing expense in the amount of $26,821. Such corrections are
summarized as follows:
As reported Restated
Accrued interest and penalties $ 74,538 $ 101,359
Capital in excess of
par value $ 9,391,972 $ 10,003,561
Deferred compensation $ (327,615) $ (743,537)
Accumulated deficit $(9,175,610) $ (9,398,098)
Adjustments affecting other filings:
Similar corrections will be made to all quarters of the fiscal year ended
March 31, 2005 and corrections will also be made to the quarters ending
June 30, 2005 and September 30, 2005. Amendments to the 10-QSB and 10-KSB
will be filed to reflect these corrections.
Recent Accounting Pronouncements:
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board
Opinions No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28."
SFAS 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application, or
the latest practicable date, as the required method for reporting a change
in accounting principle and the reporting of a correction of an error. SFAS
154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005 and is required to be adopted
by us in the first quarter of fiscal 2007. We do not believe the adoption
of SFAS 154 will have an effect on our consolidated results of operations
and financial condition unless we need to correct errors or there are
accounting changes.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS 123(R) covers
a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R) replaces
FASB Statement No. 123, "Accounting for Stock-Based Compensation", and
9
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees".
SFAS 123, as originally issued in 1995, established as preferable a fair-
value-based method of accounting for share-based payment transactions with
employees. However, that statement permitted entities the option of
continuing to apply the guidance in Opinion 25, as long as the footnotes to
financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. On April 14, 2005, the SEC
announced the adoption of a rule that defers the required effective date of
SFAS 123(R) for public entities to the beginning of the first fiscal year
that begins after June 15, 2005. Furthermore, all public companies are
required to apply the new standard on a modified prospective method to
transition to the expensing of share-based compensation. Under this method,
compensation of unvested awards is recognized over the remaining service
period. Any new and modified awards are expensed prospectively. SFAS
123(R) is required to be adopted by us in the first quarter of fiscal 2007.
The Company has evaluated the impact of the adoption of SFAS 123(R), and
believes that the impact may be significant to the Company's future overall
results of operations and financial position.
Note 2. Going Concern Issue:
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal
course of business. As reflected in the accompanying condensed
consolidated financial statements, we have a net loss of $3,260,854 and
net cash used in operating activities of $3,075,668 for the nine months
ended December 31, 2005, and a stockholders' deficiency of $3,166,139 as
of December 31, 2005. These factors raise substantial doubt about our
ability to continue as a going concern. Our ability to continue as a
going concern is dependent on our ability to return to profitable
operations and to raise additional funds to finance our operations.
The Company does not have any material external sources of liquidity or
unused sources of funds. The financial statements do not include any
adjustment that might be necessary if we are unable to continue as a
going concern.
10
Note 3. Segment Information
Information about segment information is as follows:
Nine Months Ended December 31, 2005: CHEMICAL MEDICAL TOTAL
Revenues from external customers $677,250 $612,232 $1,289,482
Segment profit (loss) $(61,655) $(3,199,199) $(3,260,854)
Identifiable Assets as of
December 31, 2005 $831,363 $ 2,446,179 $ 3,277,542
Nine Months Ended December 31, 2004:
Revenues from external customers $659,414 $327,752 $987,166
Segment profit (loss) $165,711 $(2,332,330) $(2,166,619)
Three Months Ended December 31, 2005:
Revenues from external customers $212,821 $257,850 $470,671
Segment profit (loss) $11,601 $(758,422) $(746,821)
Three Months Ended December 31, 2004:
Revenues from external customers $222,927 $111,256 $334,183
Segment profit (loss) $45,335 $(1,727,433) $(1,682,098)
Note 4. Private Placement Offering
On November 10, 2005, a majority-owned subsidiary of the Company, Ivivi
Technologies, Inc. ("Ivivi"), completed a private placement of securities to
two institutional accredited investors (the "Private Placement"). In
connection with the Private Placement, Ivivi realized aggregate gross
proceeds of $1,250,000 from the sale of unsecured convertible promissory
notes (the "Notes") and warrants (the "Warrants") to purchase shares of
common stock of Ivivi.
The Notes are due and payable in November, 2010, unless earlier converted.
The Notes bear interest at a rate of 8% per annum, payable in cash,
increasing by 1% every 365 days from the date of issuance to a maximum of 12%
per annum. The principal and accrued and unpaid interest on the Notes will be
automatically converted into shares of common stock of Ivivi upon
consummation of an initial public offering of Ivivi (an "IPO") at 85% of the
initial public offering price of the common stock (the "IPO Price");
provided, however, that each holder of a Note may elect to convert all or any
portion of the outstanding principal amount of the Note into shares of common
stock of Ivivi at $7.00 per share at any time from and after the earlier to
occur of (i) the first anniversary of the date of the Note and (ii) a
withdrawal of Ivivi's registration statement on Form SB-2, which was
initially filed with the Securities and Exchange Commission on February 11,
2005.
The holder of each Warrant is entitled to purchase shares of common stock of
Ivivi at an initial exercise price per share equal to (i) if an IPO has
occurred prior to the exercise of the Warrant 100% of the IPO Price or (ii)
if an IPO has not occurred prior to the exercise of the Warrant, $7.00 per
share, subject to adjustment. The aggregate number of shares of common stock
11
of Ivivi issuable upon exercise of the Warrants shall equal either (i) if the
Note has been converted as of the date of exercise of the Warrant, the number
of shares of common stock into which the Note was converted or (ii) if the
Note has not been converted as of the date of exercise of the Warrant, such
number of shares of common stock into which the Note is then convertible. In
accordance with EITF 00-27, a portion of the proceeds was allocated to the
warrant liability based on its relative fair value, which totaled $64,886
using the Black-Scholes option pricing model. The remaining balance was
allocated to the convertible notes. The assumptions used in the Black-Scholes
model are as follows: (1) dividend yield of 0%; (2) expected volatility of
67%, (3) risk-free interest rate of 3.62%,(4) expected life of 5 years and
(5) estimated fair value of Ivivi's common stock was $1.53 per share. The
debt discount is being amortized over the term of the notes. During the three
and nine months ended December 31, 2005, amortization as interest expense
amounted to $1,884.
Ivivi entered into registration rights agreements with the investors that
participated in the Private Placement, under which the investors received
demand and piggy-back registration rights for the common stock underlying the
securities sold in the Private Placement.
Each investor in the Private Placement is affiliated with an individual who
has agreed to serve as a director of Ivivi upon effectiveness of Ivivi's
Registration Statement on Form SB-2 relating to Ivivi's proposed initial
public offering of its common stock.
These securities were issued in a private placement of securities exempt from
registration under the Act, pursuant to Section 4(2) of the Act.
Note 5. Subsequent Events
In January 2006, Ivivi entered into a Master Clinical Trial Agreement
with the Cleveland Clinic in Florida to perform a clinical trial of
Ivivi's device for a new use. The estimated cost of the clinical trial
is $350,000. The Cleveland Clinic is a not-for-profit multi-specialty
medical group practice.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of the Company's operations and financial condition
should be read in conjunction the 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. The Company uses forward-looking statements in its description of
its 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
12
cause actual results to differ materially from those described in such
forward-looking statements. The Company expressly disclaims 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/A for the fiscal year ended March 31,
2005 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 are recognized on a monthly basis as earned on either a monthly or a
pay-per use basis in accordance with individual agreements. Shipments to
distributors are recognized as sales only when no right of return exists as
with sales of chemicals. This is generally not the case with sales of the
Company's products in its medical segment. The Company recognizes revenue
from the sale of these products when the products are shipped to end users
which includes sales to medical facilities and distributors. An increasing
amount of rental revenue is recognized on a fixed monthly recurring basis as
the product is utilized by the end medical facility, or patient user and is
billed by the Company to such user. In the instances when the Company's
distributors bill the end user, the Company recognizes revenue when paid to
the Company by the distributor. Sales returns have been immaterial. The
Company's products are principally shipped on a "freight collect" basis.
Shipping and handling charges and costs are immaterial.
Use of Estimates:
The Company's discussion and analysis of its 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 the Company 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, the Company evaluates its 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. The Company
bases its estimates on historical experience and on various other assumptions
that the Company believes 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, the Company believes that its estimates, including those
for the above- described items, are reasonable.
13
Business Overview
The Company is 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. The
Company has historically derived most of its revenues from the development,
manufacture and sale of chemical products, and, to a lesser extent, from its
therapeutic non- invasive electronic medical devices and topical
dermatological products. However, during the three months ended December 31,
2005, the Company derived an increased amount of its revenue from the sale
and rental of its therapeutic non-invasive medical devices.
The Company is a corporation that was organized under the laws of the State
of Delaware on November 24, 1969. The Company's operations are conducted
through the Company itself and its three subsidiaries, Ivivi Technologies,
Inc., Pegasus Laboratories, Inc. and Sonotron Medical Systems, Inc.
Results of Operations for the three months ended December 31, 2005 as
compared to December 31, 2004
Revenues
Revenues were $470,671 for the three months ended 2005 as compared to
$334,183 for the three months ended December 31, 2004, an increase of
$136,488 or 41%. Revenues from the Company's chemical activities decreased
by $10,106, offset by an increase of $146,594 in the Company's medical
technology activities in the 2005 period as compared to the 2004 period. The
decrease in revenue from chemical activities primarily resulted from a
significant customer of the Company's chemical products ceasing operations
in August 2005, resulting in no orders during the quarter ended December 31,
2005. Such customer had accounted for approximately $71,000 of the
Company's revenues for the comparable period in 2004. The increase in
revenues from the Company's medical technology activities was primarily due
to increased sales and rentals of the Company's products in this segment.
Net (Loss)
Net loss for the three months ended December 31, 2005 was $746,821, or $0.01
per share, compared to a net loss for the three months ended December 31,
2004 of $1,682,098, or $0.03 per share. Selling, general and administrative
expenses increased by $242,116 primarily due to the significant increase in
personnel, marketing, and overhead costs from the Company's Ivivi subsidiary
to support Ivivi's expanded activities related to the distribution and
marketing of its SofPulse units. Research and development expense was $85,599
during the three months ended December 31, 2005 for the Ivivi subsidiary for
laboratory studies for its technology, a decrease of $28,465 from $114,064 in
research and development expense in the comparable 2004 period. Net interest
and financing costs increased $296,685 due to interest expense and accrued
penalties and amortization of discount on the convertible notes issued in the
Company's private placements partially offset by interest earned from amounts
invested in money market funds. During the three months ended December 31,
2005, the Company recorded a recovery of expense of $537,743 due to the
decrease in the fair value of the liability for warrants issued with
registration rights, compared to an expense of $840,539 in the comparable
2004 period due to the increase in the fair value of the liability for the
warrants.
14
Results of Operations for the nine months ended December 31, 2005 as
compared to December 31, 2004
Revenues
Revenues were $1,289,482 for the nine months ended December 31, 2005 as
compared to $987,166 for the nine months ended December 31, 2004, an increase
of $302,316, or 31%. Revenues from the Company's chemical activities
increased by $17,836 and revenues from the Company's medical technology
activities increased by $284,480 in the 2005 period, compared to the 2004
period. During the nine month period, a significant customer of the Company's
chemical products ceased operations and curtailed purchases. Such customer
had limited orders during the nine months ended December 31, 2005 and
accounted for approximately $39,000 of the Company's revenues for such
period, and approximately $134,000 for the comparable period in 2004. The
increase in revenues from the Company's medical technology activities was
primarily due to increased sales and rentals of the Company's products in
this segment.
Net (Loss)
Net loss for the nine months ended December 31, 2005 was $3,260,854, or $.06
per share, compared to a net loss for the nine months ended December 31,
2004 of $2,166,619, or $.04 per share. Selling, general and administrative
expenses increased by $2,058,158, primarily due to the significant increase
in personnel, marketing, and overhead costs from the Company's Ivivi
subsidiary to support Ivivi's expanded activities related to the
distribution and marketing of its products. Research and development expense
was $407,524 during the nine months ended December 31, 2005 for the Ivivi
subsidiary for laboratory studies for its technology, with an expense of
$131,439 in the 2004 period. Net interest and financing costs increased
$1,067,009 due to interest expense and accrued penalties and amortization of
discount on the convertible notes issued in the Company's private placements
partially offset by interest earned from amounts invested in money market
funds. During the nine months ended December 31, 2005, the Company recorded
a recovery of expense of $1,264,177 due to the decrease in the fair value of
the liability for warrants issued with registration rights, compared to an
expense of $713,187 in the comparable 2004 period.
Liquidity and Capital Resources
At December 31, 2005, the Company had cash and equivalents of $926,170 as
compared to $3,011,631 at March 31, 2005. The decrease was primarily the
result of the increased operating expenses at the Company's subsidiary,
Ivivi, partially offset by net proceeds of $1,250,000 from a private
placement of unsecured convertible notes which was completed in November
2005.
Operating Activities
Net cash flows used by operating activities were $3,075,668 for the nine
months ended December 31, 2005 as compared to net cash flows used by
operating activities of $1,187,384 for the nine months ended December 31,
2004. The use of cash in 2005 was primarily due to a net loss of $3,260,854
related mostly to the Company's medical technologies activities, and
increases in accounts receivable of $286,040 and inventory of $17,005 offset
by decreases in prepaid expenses of $267,179 and increases in accounts
15
payable and accrued expenses of $691,038. The net loss was partially offset
by non cash charges for equity based compensation costs, bad debt expense and
for the amortization of loan costs and amortization of discount on the
convertible notes issued in the private placements. The Company has 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.
The use of cash in 2004 was primarily due to a net loss of $2,166,619 related
mostly to the Company's medical technologies activities, and increases in
accounts receivable of $56,248 and prepaid expenses of $284,295, offset by a
decrease in inventory of $163,148. The net loss was partially offset by non
cash charges for equity based compensation costs, bad debt expense and for
the amortization of loan costs and amortization of discount on the
convertible notes issued in the private placements. The Company recorded a
non-cash expense of $713,187 due to the increase in the fair value of the
liability for warrants issued with registration rights in the 2004 period.
Investing Activities
For the nine months ended December 31, 2005, cash used in investing
activities of $21,963 related to the purchase of equipment. For the nine
months ended December 31, 2004, $31,793 was used for the purchase of
equipment.
Financing Activities
On November 10, 2005, Ivivi completed a private placement of securities to
two institutional accredited investors (the "Private Placement"). In
connection with the Private Placement, Ivivi realized aggregate gross
proceeds of $1,250,000 from the sale of unsecured convertible promissory
notes (the "Notes") and warrants (the "Warrants") to purchase shares of
common stock of Ivivi.
The Notes are due and payable in November, 2010, unless earlier converted.
The Notes bear interest at a rate of 8% per annum, payable in cash,
increasing by 1% every 365 days from the date of issuance to a maximum of
12% per annum. The principal and accrued and unpaid interest on the Notes
will be automatically converted into shares of common stock of Ivivi upon
consummation of an initial public offering of Ivivi (an "IPO") at 85% of the
initial public offering price of the common stock (the "IPO Price");
provided, however, that each holder of a Note may elect to convert all or
any portion of the outstanding principal amount of the Note into shares of
common stock of Ivivi at $7.00 per share at any time from and after the
earlier to occur of (i) the first anniversary of the date of the Note and
(ii) a withdrawal of Ivivi's registration statement on Form SB-2, which was
initially filed with the Securities and Exchange Commission on February 11,
2005.
During the nine months ended December 31, 2004, the Company received
$3,180,502 net proceeds from the sale of convertible notes.
The Company does not have any material external sources of liquidity or
unused sources of funds.
16
The Company's 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 one of its subsidiaries which
markets the SofPulse medical device. In December 2004 and February 2005, the
Company, together with Ivivi, its majority-owned subsidiary, completed two
private placements pursuant to which they issued, jointly and severally,
unsecured convertible notes in an aggregate principal amount of $3,637,500
and $2,450,000, respectively. The liability for such borrowings has been
recorded in the Company's financial statements.
The notes are due and payable five years from the date of issuance, unless
earlier converted. The notes bear interest at 6% per annum and under certain
circumstances, the principal and accrued interest on the notes will either
be: (i) convertible into the Company's common stock at $.29 per share or
(ii) convertible into Ivivi's common stock at $8.30 per share. For each Note
in the principal amount of $100,000 issued in the private placements, one
warrant for the purchase of up to 344,828 shares of the Company's common
stock at $.41 per share (the "Company Warrant") and one warrant for the
purchase of up to 12,048 shares of Ivivi's common stock at $5.70 per share
(the "Ivivi Warrant") were issued. Each of the Company Warrants and the
Ivivi Warrants provides that in addition to paying the exercise price, the
holder must surrender the non-exercised warrant (i.e., either the Company
Warrant or the Ivivi Warrant).
Pursuant to the terms of the private placements completed in each of
December 2004 and February 2005, the number of shares of the Company's
common stock issuable upon conversion of the notes and exercise of the
warrants will increase by 1% for each 30 day period, or portion thereof,
following the 90th day of a demand for registration of the shares of the
Company's common stock underlying the notes and warrants and such
registration statement is not declared effective. In addition the number of
shares of Ivivi's common stock issuable upon conversion of the notes and
exercise of the warrants issued in December 2004 and February 2005 will
increase by 2% for each 30-day period, or portion thereof, after March 1,
2005 and June 30, 2005 that a registration statement covering the shares of
the Company's common stock and the shares of Ivivi's common stock,
respectively, underlying securities issued in the private placement is not
declared effective. There has been no demand for registration of the common
stock shares underlying the notes and warrants.
In November 2005, Ivivi completed a private placement of convertible notes
and warrants for aggregate gross proceeds of $1,250,000. The notes are due
and payable in November 2010, unless earlier converted. The notes bear
interest at a rate of 8% per annum, payable in cash, increasing by 1% every
365 days from the date of issuance to a maximum of 12% per annum. The
principal and accrued and unpaid interest on the notes will be automatically
converted into shares of common stock of Ivivi upon consummation of an
initial public offering of Ivivi (an "IPO") at 85% of the initial public
offering price of the common stock of Ivivi (the "IPO Price"); provided,
however, that each holder of a note may elect to convert all or any portion
of the outstanding principal amount of the note into shares of common stock
of Ivivi at $7.00 per share at any time from and after the earlier to occur
of (i) the first anniversary of the date of the note and (ii) a withdrawal
of Ivivi's registration statement on Form SB-2, which was initially filed
with the Securities and Exchange Commission on February 11, 2005.
17
The holder of each warrant is entitled to purchase shares of common stock of
Ivivi at an initial exercise price per share equal to (i) if an IPO has
occurred prior to the exercise of the warrant 100% of the IPO Price or (ii)
if an IPO has not occurred prior to the exercise of the warrant, $7.00 per
share, subject to adjustment. The aggregate number of shares of common stock
of Ivivi issuable upon exercise of the warrants shall equal either (i) if
the note has been converted as of the date of exercise of the warrant, the
number of shares of common stock into which the note was converted or (ii)
if the note has not been converted as of the date of exercise of the
warrant, such number of shares of common stock of Ivivi into which the note
is then convertible.
The proceeds of the private placements are being used primarily by the
Company for the research and development and sales and marketing of its
SofPulse line of products and for the research and development of other
potential products being developed by Ivivi.
The notes issued in the private placements contain covenants that limit each
of the Company's and Ivivi's ability to take certain actions without the
consent of the holders of the notes, including:
o incurring additional indebtedness for borrowed money, except in the
ordinary course of business;
o merging, selling substantially all of its assets or acquiring another
entity;
o making loans or investments;
o paying dividends or making distributions;
o incurring liens on its assets;
o making capital expenditures;
o entering into certain transactions with affiliates; and
o materially changing its business.
As of February 21, 2006, the Company was in material compliance with the
covenants contained in the notes.
The Company will need to obtain additional capital to continue to operate
and grow its business, including the business of its subsidiaries, and its
ability to obtain additional financing in the future will depend in part
upon the prevailing capital market conditions, as well as its and its
subsidiaries' business performance. In February 2005, the Company's
subsidiary, Ivivi, filed a registration statement with the Securities and
Exchange Commission related to the proposed initial public offering of
Ivivi's common stock. There can be no assurance that the Company or Ivivi
will be successful in their efforts to arrange additional financing,
including through the proposed initial public offering of Ivivi's common
stock, on terms satisfactory to the Company and/or Ivivi or at all.
18
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains 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 its 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, the Company carried out an evaluation, with the participation of its
management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its disclosure controls and procedures
pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation
as of December 31, 2005, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be
disclosed by the Company in the reports that the Company files or submits
under the Securities Exchange Act is accumulated and communicated to the
Company's management including its 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. As discussed above,
the Company has stated that the financial statements contained in the
Company's Quarterly Reports on Form 10-QSB and Form 10-QSB/A for the
Company's fiscal quarters ended June 30, 2004, September 30, 2004, December
31, 2004, June 30, 2005 and September 30, 2005 (the "Form 10-QSBs") and the
financial statements previously audited by the Company's independent
auditors and contained in the Company's Annual Report on Form 10-KSB/A for
the Company's fiscal year ended March 31, 2005 (the "Form 10-K"), require
restatement resulting from contributed services and the revaluation of
equity based compensation.
The Company has taken the following steps in connection with its internal
controls: (i) during the quarter ended June 30, 2005, the Company retained a
certified public accountant as a consultant to assist with the Company's
financial reporting obligations and to improve its internal controls over
financial reporting and (ii) during the quarter ended September 30, 2005,
the Company hired a certified public accountant as a part-time employee
responsible for assisting management with internal controls, financial
reporting and closing the Company's books and records.
Except as set forth above, there have been no changes in the Company's
internal controls over financial reporting that occurred during the
Company's last fiscal quarter to which this Quarterly Report on Form 10-QSB
relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
19
PART II. OTHER INFORMATION
ITEM 6. Exhibits
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.
By: \s\ Andre' DiMino,
Chief Executive Officer and
Dated: Northvale, New Jersey Chief Financial Officer
February 21, 2006
20