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 September 30, 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.
(Name of Small Business Issuer in its Charter)
Delaware 22-1896032
(State or Other Jurisdiction (I.R.S. Employer Identifi-
of Incorporation or organization) cation 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 November 17, 2005
1
ADM TRONICS UNLIMITED, INC.
INDEX
Page Number
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 2005 (unaudited)
and March 31, 2005 (restated) 3
Consolidated Statements of Operations - For the
three months and six months ended September
30, 2005 (unaudited) and 2004 (unaudited and restated) 4
Consolidated Statements of Cash Flows - For the
six months ended September 30, 2005 (unaudited)
and 2004 (unaudited and restated) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Controls and Procedures 12
Part II. Other Information 13
Item 1. Legal Proceedings
Item 6. Exhibits 13
2
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September March
30, 2005 31, 2005
(Unaudited) (Restated)
ASSETS
Current assets:
Cash and equivalents $ 440,536 $3,011,631
Accounts receivable, net of allowance for doubtful
accounts of $143,065 and $72,593, respectively 326,229 102,691
Inventories:
Raw materials and supplies 178,748 124,393
Finished goods 229,839 248,324
Prepaid expenses and other current assets 130,861 319,296
Total current assets 1,306,213 3,806,335
Property and equipment, net of accumulated
depreciation of $248,635 and $271,188, respectively 55,126 40,550
Equipment in use and under rental agreements, net of
accumulated depreciation of $883,600
and $832,059, respectively 250 51,791
Inventory - long term portion 330,749 287,582
Loan receivable, officer 49,188 49,188
Other assets 101,309 104,928
Deferred loan costs, net 778,479 823,564
Deferred offering costs 213,891 133,125
Total assets $2,835,205 $5,297,063
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 513,244 $ 172,978
Accrued expenses and other current liabilities 197,196 225,252
Interest payable 175,215 74,538
Total current liabilities 885,655 472,768
Convertible debentures payable, net of unamortized
debt discount of $2,348,161 and $2,628,219,
respectively 3,739,339 3,459,281
Warrants issued with registration rights 722,892 1,449,326
Total liabilities 5,347,886 5,381,375
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
Additional paid-in capital 9,394,718 9,391,972
Deferred compensation (315,537) (327,615)
Accumulated deficit (11,618,803) (9,175,610)
Total stockholders' deficit (2,512,681) (84,312)
Total liabilities and stockholders' deficit $2,835,205 $5,297,063
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 SIX MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
(Restated) (Restated)
Revenues $ 504,584 $ 267,686 $ 825,594 $ 652,983
Costs and expenses:
Cost of revenue 136,014 196,191 269,276 365,770
Research and development 154,577 - 321,925 -
Interest and finance
costs, net 271,241 1,081 538,295 1,014
Change in fair value of
warrant liability 298,034 (127,352) (726,434) (127,352)
Selling, general and
administrative 1,721,253 564,634 2,865,725 756,441
Total operating expenses 2,581,119 634,554 3,268,787 995,873
Net loss $(2,076,535) $ (366,868) $(2,443,193) $ (342,890)
Net loss per share
basic and diluted $(0.04) $(0.01) $(0.05) $(0.01)
Weighted average shares
outstanding 53,882,037 51,882,037 53,882,037 51,882,037
The accompanying notes are an integral part of these
consolidated financial statements.
4
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
2005 2004
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,443,193) $ (342,890)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 62,547 69,174
Stock based compensation 39,937 -
Amortization of loan costs and discount 375,323 40,960
Bad debts 70,472 -
Change in fair value of warrant liability (726,434) (127,352)
Other adjustments (75,293) -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (294,010) (6,555)
Inventory (79,037) 128,070
Prepaid expenses 188,435 (6,140)
Deposits and other assets - 1,527
Increase (decrease) in:
Accounts payable and accrued expenses 412,887 5,570
Net cash flows used by operating activities (2,468,366) (237,636)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,963) (8,215)
Net cash used by investing activities (21,963) (8,215)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of costs
deducted - 2,337,160
Debt issue costs - (20,000)
Deferred offering costs (80,766) -
Net cash (used) provided by financing
activities (80,766) 2,317,160
Net (decrease) increase in cash (2,571,095) 2,071,309
Cash and cash equivalents, beginning of period 3,011,631 90,081
Cash and cash equivalents, end of period $ 440,536 $2,161,390
Cash paid for:
Interest $ 84,121 $ -
Income taxes - -
Non-cash financial information:
During the six months ended September 30, 2004:
Costs of $350,340 were deducted from the proceeds from the sale
of convertible debentures.
An aggregate of 1,482,536 common stock purchase warrants, valued at
$75,416, were issued in connection with services provided for the sale
of convertible debentures.
A discount on debt of $815,922 was recognized, comprised of the fair value
of warrants issued with the debt of $287,351, and a beneficial conversion
feature of $528,571.
The accompanying notes are an integral part of these
consolidated financial statements.
5
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
(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 six months ended September 30, 2005 are not necessarily
indicative of the results that may be expected for the 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.
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 six and three month periods ended September 30,
2005 and 2004 since the effect would be anti-dilutive. There were
53,882,037 common stock equivalents at September 30, 2005 and 51,882,037
at September 30, 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 578,500 employee stock options
outstanding at September 30, 2005 and 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 ranges: (1) risk free
interest rate of 3.62%; (2) dividend yield of 0%; (3) volatility factor
of the expected market price of our common stock of 67%; and (4) an
expected life of the options of 6 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:
For the For the
Three Months Three Months
Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
Net loss
as reported $(2,076,535) $(366,868) $(2,443,193) $(342,890)
Stock Compensation
calculated under
SFAS No. 123 (2,492) (2,492) (4,983) (4,983)
Pro forma net loss $(2,079,027) $(369,360) $(2,448,176) $(348,873)
Basic and diluted
historical loss
per share $ (0.04) $ (0.01) $ (0.05) $ (0.01)
Pro forma basic
and diluted loss
per share $ (0.04) $ (0.01) $ (0.05) $ (0.01)
Restatement:
The September 30, 2004 financial statements have been restated to record
a beneficial conversion feature related to convertible notes payable
issued by the Company in the amount of $528,571. The Company has also
recorded an amount of $287,351 related to the fair value of warrants
issued with the debt, which was recorded as a liability due to a
registration rights agreement. The result is to record an aggregate
discount on debt of $815,922. Additionally, the Company issued
compensation warrants related to the debt placement with a fair value of
$75,416. The amortization of these items for the three and six months
periods ended September 30, 2004 was $40,660. Also, the fair value of the
warrants has been recorded at $159,999 at September 30, 2004, and a
recovery of expense for the three and six months ended September 30, 2004
of $127,352 has been recorded. As a result of these corrections, net loss
for the three and six months ended September 30, 2004 has decreased by
$86,692 for each period, to $366,868 and $342,890, respectively, and loss
per share was unchanged at $0.01 and $0.01, respectively.
The March 31, 2005 financial statements have been restated to record the
corrections described above, along with additional warrants issued as
compensation, cumulative through March 31, 2005.
Changes to the balance sheet at March 31, 2005 resulting from these
corrections are as follows:
As reported Restated
Unamortized deferred loan costs $ 670,498 $ 823,564
Unamortized deferred compensation $ 106,880 $ 327,615
Unamortized debt discount $ 299,000 $ 2,628,219
Warrants issued with registration rights 325,000 1,449,326
Capital in excess of par value 7,003,968 9,391,972
Accumulated deficit (8,366,300) (9,175,610)
Reclassifications:
Certain items in the fiscal 2005 financial statements have been
reclassified to conform to the current period presentation.
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 the
Company in the first quarter of fiscal 2007. The Company is currently
evaluating the effect that the adoption of SFAS 154 will have on its
consolidated results of operations and financial condition.
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 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. Public entities (other than those filing as
small business issuers) would have been required to apply SFAS 123(R) as
of the first interim or annual reporting period that begins after June
15, 2005. SFAS 123(R) would have been applicable for the Company
effective the first interim period that starts after December 15, 2005.
In April 2005, the Securities and Exchange Commission announced the
adoption of a rule that defers the required effective date of SFAS 123(R)
for registrants. SFAS 123(R) is now effective for all registrants as of
the beginning of the first fiscal year beginning after June 15, 2005.
SFAS 123(R), when effective, will supercede both SFAS 123 and SFAS 148.
All public companies will transition to the new standard under the
"modified prospective method", which means that the fair value of any
stock options which vest after the effective date would be expensed and
recorded in the statement of operations. Companies must use fair values
reported on a pro forma basis in the notes to the financial statements
previously filed. 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
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, the Company has a net loss of
$2,443,193 and a negative cash flow from operations of $2,468,366 for the
six months ended September 30, 2005, and a stockholders' deficiency of
$2,512,681 as of September 30, 2005. These factors raise substantial
doubt about its ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent on the Company's
ability to raise additional funds to finance its operations. The
consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
NOTE 3 SEGMENT INFORMATION
Information about segment information is as follows:
Six Months Ended September 30, 2005: CHEMICAL MEDICAL TOTAL
Revenues from external customers $ 464,429 $ 361,165 $ 825,594
Segment profit (loss) (73,256) (2,369,937) (2,443,193)
Identifiable assets 1,037,855 1,797,350 2,835,205
Six Months Ended September 30, 2004:
Revenues from external customers 436,486 216,497 652,983
Segment profit (loss) 26,196 (369,086) (342,890)
Identifiable assets 2,888,071 591,393 3,479,464
Three Months Ended September 30, 2005:
Revenues from external customers 183,987 320,597 504,584
Segment profit (loss) (103,793) (1,972,742) (2,076,535)
Three Months Ended September 30, 2004:
Revenues from external customers 196,529 71,157 267,686
Segment profit (loss) (7,917) (358,951) (366,868)
NOTE 4 SUBSEQUENT EVENTS
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 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.
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.
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 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 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 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 SofPulse units. The Company recognizes revenue
from the sale of the SofPulse 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. 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 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, 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.
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 September 30, 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 September 30, 2005 as
compared to September 30, 2004
Revenues
Revenues were $504,584 for the three months ended 2005 as compared to
$267,686 for the three months ended September 30, 2004, an increase of
$236,898 or 88.5%. Revenues from the Company's chemical activities
decreased by $12,542, offset by an increase of $249,440 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 and curtailing purchases during the period. Such customer
had no orders during the quarter ended September 30, 2005 and 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 SofPulse units.
Net (Loss)
Net loss for the three months ended September 30, 2005 was $2,076,535, or
$0.04 per share, compared to an operating loss for the three months
ended September 30, 2004 of $366,868, or $0.01 per share. Selling, general
and administrative expenses increased by $1,156,619 of which,
approximately $1,088,000 or 94% was 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 and the balance of
approximately $69,000 was attributable to the Company's chemical
activities primarily resulting from an increase in personnel costs from
the addition of an employee and increased technical consulting expenses.
Research and development expense was $154,577 during the three months
ended September 30, 2005 for the Ivivi subsidiary for laboratory studies
for its SofPulse technology, with no expense in the comparable 2004
period. Net interest and financing costs increased $222,324 due to
interest expense 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 September 30, 2005, the Company recorded an expense of
$298,034 due to the increase in the fair value of the liability for
warrants issued with registration rights, compared to a recovery of
expense of $127,352 in the comparable 2004 period due to the decrease in
the fair value of the liability for the warrants.
Results of Operations for the six months ended September 30, 2005 as
compared to September 30, 2004
Revenues
Revenues were $825,594 for the six months ended September 30, 2005 as
compared to $652,983 for the six months ended September 30, 2004, an
increase of $172,611 or 26.4%. Revenues from the Company's chemical
activities increased by $27,943 and revenues from the Company's medical
technology activities increased by $144,668 in the 2005 period, compared
to the 2004 period. During the six month period, a significant customer
of the Company's chemical products has ceased operations and curtailed
purchases. Such customer had limited orders during the six months ended
September 30, 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 SofPulse units.
Net (Loss)
Net loss for the six months ended September 30, 2005 was $2,443,193, or
$.05 per share, compared to an operating loss for the six months ended
September 30, 2004 of $342,890, or $.01 per share. Selling, general and
administrative expenses increased by $2,109,284 of which, approximately
$1,988,000 or 94% was 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 and the balance of approximately $121,000
was attributable to the Company's chemical activities primarily resulting
from an increase in personnel costs from the addition of an employee and
increased technical consulting expenses. Research and development expense
was $321,925 during the six months ended September 30, 2005 for the Ivivi
subsidiary for laboratory studies for its SofPulse technology, with no
expense in the 2004 period. Net interest and financing costs increased
$537,281 due to interest expense 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 six months ended September 30, 2005, the Company recorded a
recovery of expense of $726,434 due to thedecrease in the fair value of
the liability for warrants issued with registration rights, compared to a
recovery of expense of $127,352 in the comparable 2004 period.
Liquidity and Capital Resources
At September 30, 2005, the Company had cash and equivalents of $440,536
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 Technologies, Inc.
Operating Activities
Net cash flows used by operating activities were $2,468,366 for the six
months ended September 30, 2005 as compared to net cash flows used by
operating activities of $237,636 for the six months ended September 30,
2004. The use of cash in 2005 was primarily due to a net loss of
$2,443,193 related mostly to the Company's medical technologies
activities, and increases in accounts receivable of $294,010 and
inventory of $79,037 offset by decreases in prepaid expenses of $188,435
and increases in accounts payable and accrued expenses of $412,887. The
net loss was partially offset by non cash charges for 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 $726,434 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 $342,890
related mostly to the Company's medical technologies activities, offset
by a decrease in accounts receivable of $128,070. The net loss was
partially offset by non cash charges for 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 recovery of expense of $127,352 due to the decrease in the
fair value of the liability for warrants issued with registration rights
in the 2004 period.
Investing Activities
For the six months ended September 30, 2005, cash used in investing
activities of $21,963 related to the purchase of equipment. For the six
months ended September 30, 2004, $8,215 was used for the purchase of
equipment.
Financing Activities
During the six months ended September 30, 2005, the Company paid $80,766
for deferred costs related to the private placements as compared to net
proceeds from the private placements of $2,337,160 during the six months
ended September 30, 2004, offset by costs paid of $20,000.
The Company does not have any material external sources of liquidity or
unused sources of funds.
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.
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.
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 November 15, 2005, 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.
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 September 30, 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 previously announced by the Company in its Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 2, 2005,
the financial statements contained in the Company's Quarterly Report on
Form 10-QSB for the Company's fiscal quarters ended September 30, 2004,
December 31, 2004 and June 30, 2005 (the "Form 10-QSBs") and the
financial statements previously audited by the Company's prior auditors
and contained in the Company's Annual Report on Form 10-KSB for the
Company's fiscal year ended March 31, 2005 (the "Form 10-K"), require
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 the Company.
As a result, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On June 29, 2005, Ivivi filed a complaint against Regenesis Biomedical,
Inc. ("Regenesis") in the United States District Court for the District
of New Jersey, Docket No. 05-CV-3300 (JAP), alleging that Regenesis is
infringing on one of Ivivi's United States patents through its sales of a
product that competes with Ivivi's SofPulse(R) product. Ivivi is seeking
money damages and an injunction against future sales of the competing
product. Regenesis filed an answer to the complaint on September 23,
2005. The parties have not yet commenced discovery.
In June 2005, Ivivi also filed a complaint against Regenesis, Virginia
Rybski, Vice President of Sales and Marketing of Regenesis, Terrence
Kennedy, Regional Sales Manager for the South Eastern Territories of
Regenesis, Mary Ritz, President of Regenesis, and Frank George, Chief
Science and Technology Officer of Regenesis, in the Superior Court of New
Jersey - Law Division - Bergen County, Docket 3724-05 alleging breach of
contract, tortious interference and conversion. Ivivi is seeking money
damages and an injunction against future sales of the competing product.
On July 5, 2005 the defendants filed a motion to dismiss for lack of
personal jurisdiction or for failure to state a claim upon which relief
can be granted. In September 2005, the motion to dismiss for lack of
personal jurisdiction was denied and a period of discovery to determine
the jurisdiction as to the defendants was permitted.
On August 17, 2005, Ivivi filed a complaint against Cova-Aids, Inc. t/a
New York Home Health Care Equipment ("NYHHC"), in the Superior Court of
New Jersey, Law Division, Docket No. BER-L-5792-05, alleging breach of
contract with respect to a distributor agreement between Ivivi and NYHHC
entered into on or about August 1, 2004 pursuant to which (i) Ivivi
appointed NYHHC as exclusive distributor of the SofPulse device in a
defined market place for so long as NYHHC secured a minimum number of
placements of the SofPulse device and (ii) NYHHC agreed to pay Ivivi
$2,500 per month for each SofPulse device shipped to NYHHC. By letter,
dated August 9, 2005, Ivivi terminated the agreement due to NYHHC's
failure to make the payments required under the agreement and failure to
achieve the minimum number of placements required under the agreement.
Ivivi is seeking various forms of relief, including (i) money damages,
including amounts due under unpaid invoices in an aggregate amount of
$236,560, (ii) an accounting and (iii) the return of Ivivi's SofPulse
devices. The defendants filed a motion to dismiss alleging lack of
jurisdiction and failure to state a claim with regard to Harry Ruddy.
The Company opposed the defendant's motion to dismiss. On November 18,
2005, the Court denied the Defendant's motion to dismiss, without
prejudice, based upon lack of jurisdiction and gave the Company a
discovery period until January 20, 2006 to investigate a basis for
jurisdiction. The Court also dismissed without prejudice the claim
against Harry Ruddy, individually.
Item 6. Exhibits.
(a) Exhibit No.
4.1 Form of Note issued to certain investors
4.2 Form of Warrant issued to certain investors
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.
ADM Tronics Unlimited, Inc.
(Registrant)
By:\s\ Andre' DiMino
Andre' DiMino, Chief Executive
Officer and Chief Financial Officer
Dated: Northvale, New Jersey
November 21, 2005