UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-17629
ADM TRONICS UNLIMITED, INC.
(Name of Small Business Issuer in its Charter)
Delaware 22-1896032
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
224-S Pegasus Avenue, Northvale, New Jersey 07647
(Address of Principal Executive Offices) (Zip Code)
(201) 767-6040
(Issuer's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0005 par value
(Title of Class)
Check whether the issuer: (1) 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 such filing requirements for the past 90 days. YES[X] NO[_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in the form, and no disclosure will be contained, to
the best of the issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB. [X]
Indicate by check mark whether the issuer is a shell company (as defined by in
Rule 12b-2 of the Exchange Act). YES [ ] No [X]
The issuer's revenues for its most recent fiscal year were approximately
$1,724,000.
The aggregate market value of the issuer's common stock, par value $.0005 per
share (the "Common Stock"), held by non-affiliates of the issuer as of July 5,
2006, based on the average of the closing bid and asked prices of $0.33, for
such shares on such date, was approximately $8,600,000. For purposes of such
calculation, shares of Common Stock held by each executive officer and director
and by each person who owns more than 5% of the outstanding shares of Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the Common Stock outstanding as of July 5, 2006 was
53,882,037.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains various forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and information that is based on
management's beliefs as well as assumptions made by and information currently
available to management. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance
that such expectations will prove to be correct. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "predict," "project"
and similar expressions are intended to identify forward-looking statements. We
cannot guarantee the accuracy of the forward-looking statements, and you should
be aware that our actual results could differ materially from those contained
in the forward-looking statements due to a number of factors, including the
statements under "Risk Factors" set forth in "Item 1 - Description of Business"
and the statements under "Critical Accounting Policies" set forth in "Item 6 -
Management's Discussion and Analysis or Plan of Operation." Due to these
uncertainties and risks, readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Annual Report on Form 10-KSB.
Unless otherwise indicated in this prospectus, references to "we,"
"us," "our" or the "Company" refer to ADM Tronics Unlimited, Inc. and its
subsidiaries.
Explanatory Note
Share information in this Form 10-KSB related to our subsidiary, Ivivi
Technologies, Inc. gives effect to a stock split of 1.625 shares for each
outstanding share of common stock of Ivivi to be effected by Ivivi.
PART I
Item 1. Description of Business
Company Overview
We are a technology-based developer and manufacturer of
diversified lines of products in the following three areas: (1)
environmentally safe chemical products for industrial use; (2) therapeutic
non-invasive electronic medical devices; and (3) cosmetic and
topical dermatological products. The Company's currently derives its revenues
from the development, manufacture and sale of chemical products and from its
therapeutic non-invasive electronic medical devices and topical dermatological
products.
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 ADM Tronics Unlimited, Inc. and its three subsidiaries, Ivivi
Technologies, Inc.("Ivivi"), Pegasus Laboratories, Inc. ("Pegasus") and
Sonotron Medical Systems, Inc. ("SMI"). As of July 5, 2006, the Company owned
approximately 68.5%, 100% and 88% of the outstanding capital stock of
Ivivi, Pegasus and SMI, respectively.
Company Products
Chemical Products for Industrial Use
The Company develops, manufactures and sells chemical products to
industrial users. Such products consist primarily of the following:
o Water-based primers and adhesives;
o Water-based coatings and resins; and
o Water-based chemical additives.
Water-based primers and adhesives are chemical compounds used to bind
different plastic films, metal foils and papers. Examples are the binding of
polyethylene to polyester, nylon, vinyl, aluminum, paper and cellophane. The
Company's water-based primers and adhesives are similar in function to
solvent-based primers that are widely used to bind plastic films, papers and
foils. Solvent-based systems have come under criticism since they have been
found to be highly pollutant, dangerous to health and generally caustic in
nature. Based upon the Company's experience since 1969, including information
furnished to the Company by certain of its customers, the Company believes that
water-based systems have no known polluting effects and pose no known health
hazards. There can, of course, be no assurance that any governmental
restrictions will not be imposed on the Company's water-based products or that
such products will be accepted as replacements for solvent based products.
Coatings and resins for the printing industry are used to impart
properties to the printed substrate. The Company's coatings and resins can be
used to coat printed material for glossy or aesthetic appeal to make such
material virtually impervious to certain types of grease and to impart other
characteristics required or desired for various products and specifications.
Certain of the Company's chemical additives are used to impart
properties to inks and other chemical products used in the food packaging
and printing industries. These additives are used for their ability to
improve the performance of such products.
None of the Company's chemical products are protected by
patents, although the names of some of such products have been protected by
trademarks. The Company does not believe that any such trademarks are
material to its business. As of March 31, 2006, the dollar amount of
backlog orders for the Company's chemical products believed by the Company
to be firm, was not material.
Therapeutic Non-Invasive Medical Devices
SofPulse(R)
Ivivi, a majority-owned subsidiary of ADM, focuses on designing and
commercializing its proprietary electrotherapeutic technologies and products
for the non-invasive treatment of a wide array of acute and chronic disorders
of soft tissue. Its most advanced proprietary products utilize
pulsed electromagnetic field, or PEMF technology which we refer to as
"electroceuticals(tm)", to induce small electrical currents in soft tissue to
stimulate a therapeutic physiological response in the target area. Ivivi is
currently utilizing PEMF technology, through its patented SofPulse device
line of products, in the chronic wound and plastic and reconstructive surgery
markets.
Ivivi was incorporated in March 1989 under the name AA Northvale
Medical Associates, Inc. as a majority-owned subsidiary of ADM. From March
1989 until August 1998, Ivivi had very limited operations, which included the
operation of medical clinics for conducting clinical studies on certain
products of the Company. In August 1998, the Company purchased certain
assets from Electropharmacology, Inc. ("EPI") that were then used by EPI in
connection with the SofPulse device business, including the right to use the
EPI patents, and immediately transferred all of those assets to Ivivi. The
assets included all of EPI's rights, title and interest in the SofPulse device
business as well as certain rights related to three patents related to the
SofPulse device that were issued in 1994, 1996 and 1998. In January 2000,
Ivivi acquired all of the rights to the EPI patents. Ivivi has conducted
development and sales and marketing activities and has generated increasing
revenues, but has incurred significant losses to date.
The device has been cleared by the FDA for the treatment of pain and
edema in soft tissue. The device can be used for the treatment of chronic
wounds, as well as for post-surgical treatments, including following plastic
and reconstructive surgery.
The device consists of the following three components:
o the electroceutical signals
o a signal generator; and
o an applicator.
The signal generator produces a specific electromagnetic signal that is
pulsed through a cable and into the applicator, which functions as a broadcast
antenna. Without touching the skin, the applicator transmits the
electromagnetic signal into the desired area, penetrating medical dressings,
casts, coverings, clothing and virtually all other non-metal materials. This
process allows the SofPulse device to be used immediately following acute
injury, trauma and surgical wounds, as well as in chronic conditions,
unimpeded by standard clinical practices and more importantly, requiring
no alteration of those practices to accommodate the therapy provided by the
SofPulse device. The Company's product has been used in over 600,000 treatments
by healthcare professionals on medical conditions, such as:
o acute or chronic wounds, including post-surgical wounds;
o edema and pain following reconstructive and plastic surgery; and
o pain associated with the inflammatory phase of chronic conditions.
For such purpose, the Company regards each 15-minute application of the device
on a target area of a patient as one treatment.
We are currently focusing on the commercialization of products utilizing our
PEMF technology for the treatment of a wide array of acute and chronic
disorders. We are currently utilizing our PEMF technology, through the
following products, for the treatment of edema (swelling) and pain in soft
tissue.
SofPulse M-10. The SofPulse M-10 utilizes a box-shaped signal generator that
weighs approximately seven pounds. The signal generator delivers the
proprietary electroceutical signals through a lightweight and conformable
applicator that ranges in diameter. The SofPulse M-10 is primarily marketed as
a rental product to the chronic wound care markets, particularly for use in
long-term acute care hospitals, as well as in long-term care nursing
facilities, rehabilitation hospitals, acute care hospitals and facilities and
home health systems.
Roma3. We intend to replace the SofPulse M-10 with our new product, the Roma3.
The Roma3 utilizes a disk-shaped signal generator that is approximately nine
inches in diameter and weighs approximately two pounds. The signal generator
delivers the proprietary electroceutical signals simultaneously through up to
three lightweight and conformable applicators that range in diameter, allowing
multiple treatments on the same patient. The signal generator contains a
programmable microprocessor that can automatically activate and deactivate the
Roma3 for ongoing, unattended treatment. The applicators utilized by the Roma3
are intended for single-patient use and are disposable. The Roma3 is primarily
marketed as a rental product to the chronic wound care markets, particularly
for use in long-term acute care hospitals, as well as in long-term care nursing
facilities, rehabilitation hospitals, acute care hospitals and facilities and
home health systems.
Torino I. The Torino I utilizes a portable, battery powered disk-shaped signal
generator that is approximately two and a half inches in diameter and weighs
approximately four ounces. The signal generator delivers the proprietary
electroceutical signals through variable sized lightweight and conformable
applicators, depending on the application. The signal generator used in the
Torino I is pre-programmed to provide treatment at optimal intervals throughout
the course of therapy. The Torino I is primarily marketed in the plastic and
reconstructive surgery market, where the product is being sold to physicians
who then offer it to their patients.
Torino II. The Torino II is a battery powered, disposable single unit
consisting of both the signal generator and applicator for ease of use. The
Torino II is expected to replace the Torino I in mid-2006. The applicators
that are incorporated into the Torino II are also lightweight and conformable
and come in varying sizes, depending on the application. The signal generator
used in the Torino II is also pre-programmed to provide therapy at optimal
intervals throughout the course of therapy. The Torino II is primarily
marketed in the plastic and reconstructive surgery market, where the product is
sold to physicians who then offer it to their patients.
The Company is considering additional applications of its device,
as well as developing other products using PEMF. For example, the Company
is currently researching and clinically testing potential applications of the
PEMF technology for therapeutic angiogenisis (the regeneration of new blood
vessels) and vascularization (the creation of new blood vessels) for use in
circulatory and cardiac impairment conditions as well as for proliferation of
implanted stem cells. The Company is also exploring the possibility of
utilizing PEMF technology in an over-the-counter application for pain and edema
to compete as a non-invasive, non-pharmacological alternative to other pain
treatments, such as acetaminophen, without any of the potential known
side-effects or complications that are associated with such products. The
Company's ability to successfully expand the use of its product for these
applications will depend on a number of risks, including:
o establishing the efficacy of such applications;
o obtaining regulatory approval or clearance as needed for the
use of the Company's technology for these applications;
o developing and commercializing new products utilizing the
Company's technology for these applications; and
o establishing market acceptance and reimbursement of its
products for these uses.
Ivivi has built a portfolio of patents and applications covering its technology
and products, including its hardware design and methods. As July 5, 2006, Ivivi
had three issued U.S. patents, seven non-provisional pending U.S. patent
applications and one provisional U.S. patent pending covering various
embodiments and end use indications for PEMF and related signals and
configurations. The titles, patent numbers and normal expiration dates
(assuming all the U.S. Patent and Trademark Office fees are paid) of the three
issued U.S. patents are set forth in the chart below.
Patent
Title Number Expiration Date
Apparatus and Method for
Therapeutically Treating
Human Body Tissue with
Electromagnetic Radiation 5723001 March 3, 2019
Pulsed Radio Frequency
Electrotherapeutic System 5584863 December 17, 2013
Athermapeutic Apparatus
Employing Electro-Magnetic
Fields 5370680 December 6, 2011
Sonotron Technology
SMI, a majority-owned subsidiary of ADM, has developed a
technology, known as the "Sonotron Technology," which is described in
detail below, and has utilized the Sonotron Technology to develop medical
devices to treat subjects suffering from the pain of inflammatory joint
conditions. Although some of the devices utilizing this technology are
commercially available for the treatment of animals, none of such devices
have received clearance from the U.S. Food and Drug Administration (the
"FDA") for human application in the United States.
The late Dr. Alfonso Di Mino, founder of the Company, while employed by
the Company, conceived and developed a technique pursuant to which a subject
being treated is exposed to a corona discharge beam generated by combining audio
and radio frequency waves (the "Sonotron Technology"). The Sonotron Technology
is the subject of four United States patents (the "Sonotron Patents"), which
expire in 2006, 2011, 2012 and 2016. Foreign patents relating to the Sonotron
Technology have been issued in Brazil, Canada, France, Holland, Italy, Japan,
Sweden, Switzerland, the United Kingdom and West Germany, which patents expire
on various dates from 2007 through 2009.
The Company believes that the Sonotron Technology can be utilized to
reduce lameness in both thoroughbred and standard-bred horses. In this
connection, the Company commissioned the School of Veterinary Medicine of the
University of Wisconsin-Madison (the "SVM") to gather data which would confirm
the effectiveness of the Sonotron Device on horses. In a report dated December
10, 1987, the SVM concluded that the evidence from its experiments indicated
that treatment with a Sonotron Device designed for veterinary use had a
significant effect in reducing the level of lameness in ponies which had
arthritis experimentally induced and as the degree of arthritic changes
increased, the reduction in lameness was more dramatic and became statistically
more significant. The SVM further found that there is statistical evidence that
the therapy had a beneficial effect on the level of joint motion in the
arthritic ponies and resulted in reduced joint swelling in ponies with severe
arthritis. A significant reduction occurred in the degree of joint changes seen
radiographically in the ponies with severe arthritis and in the milder cases of
arthritis treated with low doses of the therapy. The SVM further reported that
there were significant reductions in the severity of the growth of pathological
lesions seen in ponies with mild arthritis which received low doses of therapy
and that a trend appears to exist toward seeing reduced severity of lesions in
ponies which had a severe degree of arthritis and were treated with a Sonotron
Device designed for veterinary use. No differences in the degree of
histopathological changes were noted between the treated ponies and the
untreated ponies with mild or severe arthritis. The SVM did not arrive at any
conclusions with respect to whether treatment with a Sonotron Device designed
for veterinary use has a beneficial effect upon chronic degenerative joint
disease in a horse and whether such treatment will be effective upon naturally
occurring cases of equine degenerative joint disease. The Company has conducted
tests utilizing Sonotron Devices designed for veterinary use on several race
horses and has obtained results substantially as those of SVM. Significant
further testing will be required to determine whether or not the administration
of the Sonotron Technology to race horses will support the establishment of a
viable market.
The Company granted to each of SMI and VET Sonotron Systems, Inc., a
former majority-owned subsidiary of the Company ("VET"), a royalty-free,
worldwide, exclusive, irrevocable license to the Sonotron Patents, the foreign
patent applications and the Sonotron Technology. The license granted to SMI
permits SMI to manufacture, to have manufactured and to sell apparatus utilizing
the Sonotron Technology exclusively in connection with human medical
applications thereof (the "SMI License"). The SMI License provides that future
improvements or discoveries relating to the Sonotron Technology, if any, which
are made by any officer or employee of the Company or any affiliates thereof,
whether or not patentable, and applicable to human medical applications, are to
be included in the SMI License. The license granted to VET is substantially
identical in its terms to that of the SMI License, except that the use of the
Sonotron Technology by VET is limited exclusively to veterinary applications. In
2003, all of the assets of VET, including such license, were transferred to SMI,
and VET ceased operations and was abandoned by the Company in order to minimize
the ongoing expense of maintaining the corporate entity and for other cost
saving reasons.
The FDA permits companies to begin to recoup certain expenses by
charging others for use of medical machines, provided that the use of such
machines does not constitute a commercial distribution thereof. Accordingly, the
Company is permitted to maintain a clinic and treatment center utilizing
Sonotron Devices, but may not advertise or otherwise promote Sonotron Devices as
being safe and effective for their intended use. Since 1989, four clinics have
operated at various times, none of which produced any significant revenues.
SMI intends to use data obtained from clinics utilizing the
Sonotron Device as well as additional data it may obtain from others in
the Company's FDA application, if filed. As of July 5, 2006, there were
five Sonotrons in use by clinical investigators collecting data for submission
to the FDA. SMI believes that sufficient data may be collected from these
investigations to support a submission to the FDA; however, there can be
no assurance that such data will be sufficient or if sufficient will result in
the filing of an application with the FDA. There can be no assurance that
the Company will obtain sufficient data in the foreseeable future, if at
all, to file an FDA application for FDA clearance of the Sonotron Device for
marketing in the United States for human application or that any data
theretofore or thereafter obtained by the Company will be satisfactory or will
be sufficient to support the Company's FDA application. SMI does not intend
to make any material changes to the Sonotron Devices nor have any such
changes been made since the completion of the research and development. In the
event that Sonotron Devices cannot be marketed pursuant to FDA clearance and
the data obtained by the Company are not favorable or, for any other reason,
the Company's FDA application is not filed or, if filed, is not approved by
the FDA, neither the Company nor SMI will be able to market the Sonotron
Devices in the United States to others in connection with human
applications, other than for research purposes. Under such circumstances,
it is probable that the Sonotron Devices will not be able to be marketed with
respect to human applications thereof in many foreign countries.
In 1997, Dr. Di Mino developed a device which utilizes the
Sonotron Technology to non-invasively treat neural-cerebral conditions
(the "NCCD Device"). The NCCD Device is a non-invasive electronic therapy
device which is designed to emit certain radio and audio waves at prescribed
power outputs to a patient's brain and spinal cord. Since 1997, the NCCD
Device has been in the prototype stage. Limited initial preliminary tests
on human subjects on a non-controlled basis appear to indicate that
treatment with the NCCD Device has a beneficial effect on the symptoms related
to certain neuro-cerebral disorders. The results ranged from minor
improvement in certain limited symptoms to dramatic overall improvements.
Based upon such results, subject to obtaining sufficient capital, Ivivi
intends to conduct extensive controlled clinical studies of the NCCD Device.
Testing involves applying radio and audio waves to the patients' spinal
cords and cerebrum on a weekly basis for several weeks to small groups of
patients having cerebral palsy, multiple sclerosis and Parkinson's
Disease.
In order to commercially exploit the NCCD Device, Ivivi must
successfully conduct significant engineering and design work. Such work
includes the design and manufacture of a pre-production model and the
production of approximately 40 similar units for use in the proposed clinical
studies. If the clinical studies establish the efficacy of the NCCD Device,
Ivivi intends to seek FDA approval of the NCCD Device. The Company also
plans to file applications for certain foreign and domestic patents in
connection with the NCCD Device. There can be no assurance that any
clinical studies of the NCCD Device will yield successful results or that FDA
approval will be obtained. The Company believes that the cost of clinical
studies and the engineering and design work will be approximately
$2,000,000. Because Ivivi does not presently have sufficient funds to
complete such tests and studies, Ivivi has sought and will continue to seek
financing for such purposes. There can be no assurance that Ivivi will be
able to obtain such financing on terms not unfavorable to it, if at all.
As of March 31, 2006, the dollar amount of backlog orders for
Sonotron Devices was not material.
Aurex-3
Dr. Di Mino developed an electronic device (the "Aurex-3") for the
treatment of Tinnitus. Tinnitus is a human medical condition which manifests
itself in a constant and annoying ringing in the ears. The Aurex-3 uses a probe
that transmits a vibratory and audio signal. In February 1997, Dr. Di Mino filed
a patent application for a United States patent with respect to the Tinnitus
Device. Dr. Di Mino advised the Company that any patents issued to him in
connection with the Tinnitus Device will be assigned to the Company. Although
significant testing of the Aurex-3 has not been conducted, pre-production and
production prototypes were built and testing and marketing strategies have been
developed. In May 1998, a 510-K Pre-market Notification ("PMN") was filed by the
Company with the FDA. In August 1998, the United States Patent and Trademark
Office issued a patent with respect to the Aurex-3 and the FDA notified the
Company that the PMN was accepted. Accordingly, the Company may market the
product in the United States for its intended indication, "[t]he treatment and
control of tinnitus." From August 1998 to November 1999, the Company finalized
manufacturing plans for the Aurex-3. In July 1999 the Company began taking
advance orders for Aurex-3 units from distributors and patients and began to
deliver the units in November 1999. Sales of the Aurex-3 have not been material.
There can be no assurance that the Company will receive significant orders for
the Aurex-3 or, if such orders are received, that the Company will be able to
manufacture the Aurex-3 in sufficient quantities.
At the end of December 1999, six Aurex-3 devices were made available to
the Dutch Commission on Tinnitus & Hyperacusis by a third party. On December 24,
1999, six participants were examined by the Dutch Commission for their tinnitus
and trained in the use of the Aurex-3 by an audiologist and adviser of the
group. After a six-week trial period with six participants, during which one
participant reported a worsening of tinnitus, the Dutch Commission concluded
that no positive results could be reported. Although the Dutch Commission
tentatively concluded that the Aurex-3 seldom or never has a positive effect on
tinnitus, especially on high frequency tinnitus, it did not exclude the
possibility that application of the Aurex-3 on patients with a low tone tinnitus
might show better results.
The Company believes that the Dutch Commission's conclusions are flawed
primarily because of the small number of participants and the probable selection
of participants whose condition could not be improved through the use of the
Aurex-3. In addition, in the Company's limited experience, when potential users
of the Aurex-3 were pre-screened to eliminate those with non-noise induced or
variable intensity tinnitus, more than 60% of the users of the Aurex-3 have
experienced significant improvement.
In November 2002, the Company sold, among other things, certain rights
to the Aurex-3 to a wholly owned subsidiary of New England Acquisitions, Inc.
The purchase price was 150,375 shares of New England's common stock and its
subsidiary's agreement to make certain payments with respect thereto. New
England's subsidiary provided a sample Aurex-3 to a Chinese distributor for its
evaluation. The distributor advised the subsidiary, on the basis of limited use,
that the sample has not been found to be effective. If the subsidiary did not
make required minimum royalty payments or purchase certain quantities of
products from the company within one year of its purchase of the rights, subject
to extension by the Company, it could lose certain rights of exclusivity. In
January, 2004 the Company notified New England that it had not purchased the
minimum quantity of Aurex-3 devices and therefore the Company exercised its
right to terminate the exclusive provision of the agreement.
In April 2004, the Company signed an agreement with Carepoint Group of
the United Kingdom ("Carepoint") granting Carepoint exclusive, worldwide rights
to manufacture and distribute the Aurex-3, for the treatment and control of
tinnitus. The agreement provides that Carepoint will manufacture a redesigned
version of the device and market it throughout the world. Carepoint is required
to pay royalties to the Company on revenues generated pursuant to the agreement.
The Company retains manufacturing and distribution rights for the new version of
the device for the United States. There can be no assurance that Carepoint
and/or the Company will successfully distribute the new version of the device or
generate meaningful revenues pursuant to the agreement.
Needle Eater
In May 1999 the Company acquired certain assets related to the
Needle-Eater, a patented device used to dispose of used syringes and other
medical sharps. The Company acquired the worldwide rights to the patent covering
the technology in the Needle-Eater product; an inventory of finished units and
parts; the rights to trademarks; and, information needed to assist it in
manufacturing the units. The Company paid $14,206 to the previous owner of the
Needle-Eater, and issued options to purchase an aggregate of 500,000 shares of
the Company's common stock at an exercise price of $.625 per share, all of which
have expired. The Company also agreed to pay a consulting fee of $750 per month
for 24 months and a royalty of 5% on gross sales of Needle-Eater products for
the life of the patent as well as certain other compensation. To date, sales of
Needle Eater products have not been material.
Cosmetic and Topical Products
The Company, through its subsidiary, Pegasus, has developed several
cosmetic and topical products. The Company has not realized any significant
revenues from such products and there can be no assurance that any such products
will account for significant revenues or any profits in the future.
Although the Company believes that its proposed products can be
successfully marketed for over-the-counter use through one or more entities
representing numerous retail pharmacies and otherwise, there can be no assurance
that sales of such products will be material or that the Company will be able to
derive any profits therefrom.
In November 2002, the Company sold certain rights to an ethnic shave
cream, a burn lotion and the Aurex-3 to a wholly owned subsidiary of New England
Acquisitions, Inc. The purchase price was 150,375 shares of New England's common
stock and its subsidiary's agreement to make certain payments. The agreement
provided that if the subsidiary did not make required minimum royalty payments
or purchase certain quantities of products from the Company within one year of
its purchase of the rights, it would lose certain rights of exclusivity. In
January, 2004 the Company notified New England's subsidiary that it had not made
the required payments and the Company thereby terminated the exclusive rights.
Customers
During the Company's fiscal years ended March 31, 2006 and 2005,
sales of chemical products accounted for approximately 50% and 68% of the
Company's operating revenues, respectively; sales and/or rentals of
medical device products accounted for approximately 50%, and 32% of the
Company's operating revenues, respectively; and sales of our cosmetic
and topical dermatological products were not material. No contract exists
with any of the Company's customers that would obligate any customer to
continue to purchase and/or rent products from the Company.
During the fiscal year ended March 31, 2006, no one customer
accounted for more than 10% the Company's revenue. During the year ended March
31, 2005, the Company sold 32% of its products to two customer. At March 31,
2006, two customers accounted for 27% of the Company's accounts receivable. The
loss of these major customers could have a material impact on the Company's
operations and cash flow.
Marketing and Distribution
A majority of ADM's chemical product sales are distributed to
customers directly from ADM's headquarters. Customers place purchase orders
with the Company and chemical products are then shipped via common
carrier truck delivery on an "FOB shipping point" basis. A portion of the
sales are accomplished through distributors who place purchase orders with ADM
for certain quantities of it's chemical products which are shipped by common
carrier to their respective warehouses. These stocking distributors then ship
product to the ultimate customer via common carrier from their inventory of
ADM's chemical products.
Ivivi is currently marketing and generating revenues in the wound care
and plastic surgery markets. In order to facilitate the marketing of its
products, it has developed and intends to further develop relationships with
sales and distribution companies currently operating in these markets. In the
wound care market, it is focusing its marketing efforts on the long-term acute
care hospitals because of the high concentration of wound care patients and
fixed reimbursements from Medicare. In the plastic surgery market, it is
currently focusing its efforts on surgical procedures requiring compression
garments, by establishing relationships with garment manufacturers and their
principle distributors. Ivivi also intends to pursue additional markets and
applications, assuming it obtains FDA approval, such as angiogenesis and
vascularization for the treatment of certain circulatory impairment conditions
and pain relief. As Ivivi develops additional products and technologies, it
intends to develop the distribution arrangements for this market in concert with
overall regulatory and marketing approaches.
Ivivi is currently a party to, and intends to continue to seek,
collaborative and strategic agreements to assist it in the marketing of its
products. Ivivi has engaged third-party distributors to market its products in
the United States and intends to engage additional distributors and sales
organizations to expand the scope of its markets nationally and internationally,
with an initial international focus in Western Europe. Ivivi has granted these
distributors, subject to maintaining certain revenue goals, the exclusive right
to distribute its SofPulse device products to long-term acute care hospitals,
acute care facilities, rehabilitation/wound centers, nursing homes and
skilled nursing facilities. Additionally, Ivivi has contracted with one
third party to help it penetrate the home health care market. Ivivi is
also actively pursuing exclusive arrangements with strategic partners it
believes have leading positions in its target markets, in order to establish
nationwide, and in some cases worldwide, marketing and distribution channels
for its products. Generally, under these arrangements, the strategic partners
would be responsible for marketing, distributing and selling Ivivi's products
while Ivivi continues to provide the related technology, products and technical
support. Through this approach, Ivivi expects to achieve broader marketing
and distribution capabilities in multiple target markets.
In April 2003, SMI entered into a distribution agreement with THM
Group, LLC ("THM") with respect to the distribution and sale by THM of the
veterinary Sonotron Device for the treatment of animals. Pursuant to the
agreement THM was granted an exclusive territory comprising North America and
Europe for a term of three years conditioned upon THM arranging for the purchase
of certain minimum quantities of product from SMI on an annual basis. In April
2005, SMI terminated the agreement with THM due to THM's failure to arrange for
the minimum purchases required thereby.
Manufacturer and Suppliers
Manufacturer
ADM manufactures its chemical products and SMI's and Ivivi's medical
device products at its facilities located in Northvale, New Jersey.
ADM, Ivivi and SMI are parties to a manufacturing agreement,
pursuant to which ADM serves as the exclusive manufacturer of all current
and future medical, non-medical electronic and other devices or products to be
produced by such subsidiaries. Pursuant to the terms of the manufacturing
agreement, for each product that the Company manufactures for a subsidiary, the
subsidiary pays ADM an amount equal to 120% of the sum of (i) the actual,
invoiced cost for raw materials, parts, components or other physical items
that are used in the manufacture of the product and actually purchased for the
subsidiary by the Company, if any, plus (ii) a labor charge based on the
Company's standard hourly manufacturing labor rate. The subsidiaries generally
purchase and provide ADM with all of the raw materials, parts and
components necessary to manufacture their respective products and, as a
result, the manufacturing fee paid to the ADM is generally 120% of the labor
rate charged by ADM.
ADM warrants the products it manufactures for its subsidiaries
against defects in material and workmanship for a period of 90 days after the
completion of manufacture. After such 90-day period, the Company has agreed
to provide repair services for the products to the subsidiary at its
customary hourly repair rate plus the cost of any parts, components or items
necessary to repair the products unless the subsidiary provides such parts,
components or items to the Company.
Under the manufacturing agreement, all inventions, patentable or
otherwise, trade secrets, discoveries, ideas, writings, technology, know-how,
improvements or other advances or findings relating to the subsidiaries'
products and technologies shall be and become the exclusive proprietary and
confidential information of such subsidiary or any person to whom such
subsidiary may have assigned rights therein. The Company has no rights in any
such proprietary or confidential information and is prohibited from using or
disclosing any of such proprietary or confidential information for its own
benefit or purposes, or for the benefit or purpose of any other person other
than the subsidiary without such subsidiary's prior written consent. The Company
has also agreed to cooperate with each subsidiary in securing for it any
patents, copyrights, trademarks or the like which it may seek to obtain in
connection therewith. If the Company breaches any of the confidentiality
agreements contained in the manufacturing agreement, or if these agreements are
not sufficient to protect a subsidiary's technology or are found to be
unenforceable, the subsidiary's competitors could acquire and use information
that it considers to be our trade secrets and the subsidiary may not be able to
compete effectively.
Since ADM is the exclusive manufacturer of all of its
subsidiaries' current and future products under the manufacturing agreement,
if the operations of the Company are interrupted or if orders or orders of
other customers of the Company exceed the manufacturing capabilities of the
Company, the Company may not be able to deliver products on time and the
subsidiaries may not be able to deliver their respective products to their
respective customers on time. Under the terms of the manufacturing
agreement, if the Company is unable to perform its obligations thereunder
or is otherwise in breach of any provision thereof, the subsidiaries have the
right, without penalty, to engage third parties to manufacture some or all of
their products. In addition, if a subsidiary elects to utilize a third-
party manufacturer to supplement the manufacturing being completed by ADM,
such subsidiary has the right to require the Company to accept delivery of the
products from these third-party manufacturers, finalize the manufacture of
the products to the extent necessary for such subsidiary to comply with FDA
regulations and ensure that the design, testing, control, documentation and
other quality assurance procedures during all aspects of the manufacturing
process have been met.
As the exclusive manufacturer of the medical devices of its
subsidiaries, ADM is required to comply with QSR requirements, which
require manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures
during all aspects of the manufacturing process. In addition, the Company's
manufacturing facility is required to be registered as a medical device
manufacturing site with the FDA and is subject to inspection by the FDA. The
Company has been registered by the FDA as a Registered Medical Device
Establishment since 1988 allowing it to manufacture medical devices in
accordance with procedures outlined in FDA regulations, which include quality
control and related activities. Such registration is renewable annually and
although the Company does not believe that the registration will fail to be
renewed by the FDA, there can be no assurance of such renewal. The failure of
the Company to obtain any annual renewal would have a material adverse effect on
its subsidiaries if they were not able to secure another manufacturer of their
products.
Suppliers
ADM purchases the raw materials used in the manufacture of its
chemical products from numerous sources. The Company believes that all necessary
raw materials for its chemical products are readily available and will continue
to be so in the foreseeable future. The Company has never had, nor does it
anticipate experiencing, any shortages of such materials. The raw materials for
chemical products consist primarily of water, resins, elastomers and catalysts.
The Company generally maintains sufficient quantities of inventories of its
chemical products to meet customer demands. When orders are received by the
Company for its chemical products, the Company's customers require immediate
shipment thereof. Accordingly, in order to satisfy its customers' needs, the
Company has maintained an inventory ranging, in dollar amounts, from 15% to 30%
of sales of chemical products in the form of either raw materials or finished
goods.
Ivivi and SMI purchase and provide the Company with the raw materials,
parts, components and other items that are required to manufacture their
respective products. Such subsidiaries rely on a single or limited number of
suppliers for such raw materials, parts, components and other items. Although
there are many suppliers for each of these raw materials, parts, components and
other items, the subsidiaries are dependent on a limited number of suppliers for
many of the significant raw materials and components. Neither Ivivi nor SMI have
any long-term or exclusive purchase commitments with any of its suppliers. Their
failure to maintain existing relationships with their respective suppliers or to
establish new relationships in the future could also negatively affect their
ability to obtain raw materials and components used in their products in a
timely manner. If either Ivivi or SMI is unable to obtain ample supply of
product from its existing suppliers or alternative sources of supply, it may be
unable to satisfy customers' orders which could reduce its revenues and
adversely affect its relationship with its customers.
Research and Development
During the Company's fiscal years ended March 31, 2006 and 2005, the
Company made no material expenditures with respect to company-sponsored research
and development activities relating to its chemical business other than a
portion of the regular salaries of its executive officers which may be allocated
thereto. During such fiscal years, the Company did not expend any funds on
customer-sponsored research and development activities with respect thereto.
During the Company's fiscal years ended March 31, 2006 and 2005, other
than the regular compensation paid by the Company to its executive officers, the
Company did not spend any appreciable amounts on testing, application, clinical
studies and company-sponsored research and development activities in connection
with the Sonotron Technology and other activities determined in accordance with
generally accepted accounting principles. During each of such years no material
amounts were spent on customer-sponsored research and development activities
relating to the development of new products, services or techniques or the
improvement of any of the foregoing.
Pursuant to a sponsored research agreement with Montefiore Medical Center that
expired in September 2005, Ivivi conducted, under the supervision of Dr. Diana
Casper, research studies relating to the potential benefits of its PEMF
technology in connection with the treatment of Parkinson's disease and other
neurodegenerative disorders. Ivivi completed the first phase of such studies in
September 2005. Based on the results of such studies, Ivivi initiated a second
phase of such studies under the supervision of Dr. Casper at Montefiore Medical
Center pursuant to an unwritten month-to-month arrangement with Montefiore
Medical Center. Such studies ceased during the fourth quarter of 2005 when Dr.
Casper received an NIH grant in the amount of $270,000 to commence studies to
examine the effects of pulsed magnetic fields on neurons and vessels in cell
culture and intact brain and neural transplants, as well as to explore the
potential of this modality to lessen neurodegeneration (progressive damage or
death of neurons leading to a gradual deterioration of the bodily functions
controlled by the affected part of the nervous system) and increase vascular
plasticity (the lifelong ability of the brain to reorganize neural pathways
based on new experiences). We believe this modality could have applications in
the treatment of chronic and acute vascular and neurodegenerative diseases,
including Parkinson's disease. Although Dr. Casper is not required to do so
pursuant to the NIH grant, she has advised us that she intends to use our PEMF
technology in connection with these studies.
Ivivi also expects to commence research studies with respect to pain relief at
Montefiore Medical Center and although we do not have any specific plans to
date, we are seeking opportunities to commence additional studies at other
research facilities. We believe that two studies to validate consumer pain
application for FTC purposes will be completed within four to six months from
commencement and estimate that the aggregate cost of such studies will be
approximately $200,000.
Ivivi's research and development efforts continue on several fronts directly
related to its technology, including its expansion into the angiogenesis and
vascularization market, as well as new technologies and products. Although we
do not have any specific plans to date, we intend to pursue entering into joint
ventures, license agreements or other relationships with third-parties to
commercialize any new technologies and products we develop in the future.
Ivivi's research and development expenditures were $544,426 and $270,894 for
the fiscal years ended March 31, 2006 and 2005, respectively.
Ivivi is currently a party to a sponsored research agreement with Montefiore
Medical Center pursuant to which it funds research in the fields of pulsed
electro-magnetic frequencies under the supervision of Berish Strauch, M.D., of
Montefiore Medical Center's Department of Plastic Surgery, that commenced on
October 17, 2004 and expires on December 31, 2009, subject to renewal in one-
year increments by mutual agreement. Ivivi also funded the research in the
field of neurosurgery under the supervision of Diana Casper, Ph.D., of
Montefiore Medical Center's Department of Neurosurgery pursuant to a sponsored
research agreement with Montefiore Medical Center that commenced on September
24, 2004 and expired on September 24, 2005. Although this sponsored research
agreement expired, Dr. Casper continued to conduct research in this field
pursuant to a month-to-month arrangement with Montefiore Medical Center during
the fourth quarter of 2005, for which Ivivi paid $23,000. Ivivi's sponsored
research agreements provided for total payments to be made to Montefiore
Medical Center of $524,435, payable at various times from September 2004
through April 2005. Montefiore Medical Center has been paid in full.
Under Ivivi's sponsored research agreement, Montefiore Medical Center is
required to use its reasonable efforts to complete the applicable research
project that is directed and controlled by the principal investigator, subject
to informal consultation with our technical representative, Arthur A. Pilla,
Ph.D. Under the agreement, Montefiore Medical Center is required to promptly
disclose any discovery or invention made by it, the principal investigator or
any other personnel in the performance of the research project, and title to
any and all of such discoveries or inventions and all other intellectual
property rights developed that relate to any of our products will be our sole
and exclusive property. Ivivi also has the first option to obtain a worldwide
royalty bearing license to all other inventions not owned by us that are
conceived or made during the performance of the research project. Although
Montefiore Medical Center and its employees have sole ownership of any
copyrighted or copyrightable works (including reports and publications) that
are created by them in the performance of the research project, Ivivi has an
irrevocable royalty-free, nontransferable, non-exclusive right to copy and
distribute research reports furnished to us under the agreement and to prepare,
copy and distribute derivative works based on these research reports. Further,
subject to certain limited exceptions, each of Montefiore Medical Center, the
principal investigator and us are required to keep all confidential information
of the other party in strict confidence for a period of five years after the
end of the term of the agreement.
In January 2006, Ivivi entered into a Master Clinical Trial Agreement with
Cleveland Clinic Florida, a not-for-profit multispecialty medical group
practice, to set forth the basic terms and conditions with respect to studies
to be conducted by Cleveland Clinic Florida thereunder from time to time during
the term of the agreement, which is from January 9, 2006 to January 9, 2009.
Ivivi expects to pay an aggregate of approximately $220,000 to Cleveland Clinic
Florida for its services during the term of the agreement. Ivivi also expects
to pay additional fees, costs and expenses in the aggregate amount of
approximately $125,000 to third parties for lab work to be handled by such
third parties during the term of the agreement. The IRB approved a double-blind
randomized placebo-controlled clinical trial in patients who are not candidates
for angioplasty or cardiac bypass surgery, which has begun at the Cleveland
Clinic Florida. The study is looking at the use of our PEMF technology on
patients with ischemic cardiomyopathy the primary endpoint of which will be the
improvement in regional myocardial perfusion and function and the secondary
endpoint of which will be improvement in patient angina and exercise tolerance.
Competition
ADM's chemical business is highly competitive and substantially all of
it's competitors possess greater experience, financial resources,
operating history and marketing capabilities than does ADM. Although the
Company does not believe that there are one or more dominant competitors
in such industry, there can be no assurance that ADM will be able to
effectively compete with any or all of its competitors on the basis of price,
service or otherwise. Competitors may be better able to withstand a change
in conditions within the chemical products industry and throughout the
economy as a whole. In addition, current and anticipated future consolidation
among our competitors and customers may cause ADM to lose market share as
well as put downward pressure on pricing. Furthermore, there is a trend in
the chemical industry toward relocation of manufacturing facilities to
lower-cost regions such as Asia. Such relocation may permit some of
the Company's competitors to lower their costs and improve their
competitive position. If ADM does not compete successfully, its business,
operating margins, financial condition, cash flows and profitability could
be adversely affected.
ADM's results of operations depend, in part, on its ability to expand
its chemical product offerings. ADM is committed to remaining a competitive
producer and believes that its portfolio of new or re-engineered products is
strong. However, ADM may not be able to continue to develop new products, re-
engineer our existing products successfully or bring them to market in a
timely manner. While ADM believes that the products, pricing and services it
offers customers are competitive, it may not be able to continue to attract and
retain customers to which to sell its chemical products.
The manufacture, distribution and sale of medical devices and
equipment designed to relieve swelling and pain or to treat chronic wounds
is highly competitive and substantially many of Ivivi's competitors possess
greater experience, financial resources, operating history and marketing
capabilities than the Company. For example, Diapulse Corporation of
America, Inc. manufactures and markets devices that are deemed by the FDA to
be substantially equivalent to SofPulse, Regenesis Biomedical, Inc.,
manufactures and markets a device that is similar to Ivivi's first generation
SofPulse device, and KCI Concepts, Inc., manufactures and markets negative
pressure wound therapy devices in the wound care market. A number of other
manufacturers, both domestic and foreign, and distributors market shortwave
diathermy devices that produce deep tissue heat and that may be used for the
treatment of certain of the medical conditions in which the SofPulse is
also indicated. In addition, SofPulse may be deemed to be competitive with
pain relief drugs as well as pain relief medical devices. Ivivi also faces
competition from companies that have developed other forms of treatment, such
as hyperbaric oxygen chambers, thermal therapies and hydrotherapy. Other
companies with substantially larger expertise and resources than Ivivi's
may develop or market new products that directly compete with SofPulse or other
products or technologies developed by the Company. In addition, other forms
of treatment that compete with the Company's technologies and products may
achieve more rapid acceptance in the medical community.
In addition, several other companies manufacture medical devices
based on the principle of electrotherapeutic technologies for applications
in bone healing and spinal fusion, and may adapt their technologies or
products to compete directly with Ivivi. Ivivi is also aware of other
companies that manufacture and market devices in the same target markets as
it does. Certain of these companies have significant product sales and have
greater financial, technical, personnel and other resources than Ivivi.
Also, universities and research organizations may actively engage in
research and development to develop technologies or products that will
compete with the Company's technologies and products. Barriers to entry in
Ivivi's industry include (i) a large investment in research and development;
(ii) numerous costly and time-consuming regulatory hurdles to overcome
before any products can be marketed and sold; (iii) high costs for marketing
and for building an effective distribution network; and (iv) the ability to
obtain financing during the entire start up period.
The medical products market is characterized by rapidly changing
technology that may result in product obsolescence or short product life
cycles. Ivivi's ability to compete will be dependent on it's ability to
continually enhance and improve its products and to develop successfully or
acquire and market new products. There can be no assurance that Ivivi will be
able to compete successfully, that competitors will not develop technologies
or products that render it's medical device products obsolete or less
marketable or that Ivivi will be able to enhance successfully its existing
products or develop or acquire new products. Furthermore, there can be no
assurance that other technologies or products that are functionally similar to
those of Ivivi are not currently under development.
Government Regulation
Several of the Company's products are medical devices subject to
extensive and rigorous regulation by the FDA, as well as other regulatory
bodies. The FDA regulations govern the following activities that the Company
performs and will continue to perform to help ensure that medical products
distributed worldwide are safe and effective for their intended uses:
o product design and development;
o product testing;
o product manufacturing;
o product safety;
o product labeling;
o product storage;
o record keeping;
o pre-market clearance or approval;
o advertising and promotion;
o production; and
o product sales and distribution.
FDA's Pre-market Clearance and Approval Requirements
Unless an exemption applies, each medical device the Company wishes to
commercially distribute in the United States will require either prior 510(k)
pre-market notification ("PMN") clearance or pre-market approval ("PMA") from
the FDA. The FDA classifies medical devices into one of three classes. Devices
deemed to pose lower risks are placed in either class I or II, which requires
the manufacturer to submit to the FDA a PMN requesting permission to
commercially distribute the device. This process is generally known as 510(k)
clearance. Some low risk devices are exempt from this requirement. Devices
deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are placed in class III,
requiring pre-market approval.
510(k) Clearance Pathway
When a 510(k) clearance is required, the Company must submit a PMN
demonstrating that its proposed device is substantially equivalent to a
previously cleared 510(k) device or a device that was in commercial distribution
before May 28, 1976 for which the FDA has not yet called for the submission of
PMA applications. By regulation, the FDA is required to clear or deny a PMN
within 90 days of submission of the application. As a practical matter,
clearance often takes significantly longer. The FDA may require further
information, including clinical data, to make a determination regarding
substantial equivalence. On January 17, 1991, EPI received FDA clearance for
commercial marketing of the SofPulse device for the treatment of pain and edema
in soft tissue pursuant to a 510(k) PMN. In 1999, the Company received FDA
clearance for the commercial marketing of the Aurex-3 pursuant to a 510(k) PMN.
Pre-market Approval Pathway
A PMA application must be submitted to the FDA if the device cannot be
cleared through the 510(k) process. The process of submitting a satisfactory PMA
application is significantly more expensive, complex and time consuming than the
process of establishing "substantial equivalence" to a device marketed prior to
1976 pursuant to a PMN and requires extensive research and clinical studies. A
PMA application must be supported by extensive data, including, but not limited
to, technical, preclinical, clinical trials, manufacturing and labeling to
demonstrate to the FDA's satisfaction the safety and effectiveness of the
device. Upon completion of these tasks, an applicant is required to submit to
the FDA all relevant clinical, animal testing, manufacturing, laboratory
specifications and other information. If accepted for filing, the application is
further reviewed by the FDA and subsequently may be reviewed by an FDA
scientific advisory panel comprised of physicians, statisticians and other
qualified personnel. A public meeting may be held before the advisory panel in
which the PMA application is reviewed and discussed. Upon completion of such
process, the advisory panel issues a favorable or unfavorable recommendation to
the FDA or recommends approval with conditions. The FDA is not bound by the
opinion of the advisory panel. The FDA may conduct an inspection to determine
whether the applicant conforms with CGMP guidelines. If the FDA's evaluation is
favorable, the FDA will subsequently publish a letter approving the PMA
application for the device for a mutually agreed upon indication of use.
Interested parties can file comments on the order and seek further FDA review.
The PMA process may take several years and no assurance can be given concerning
the ultimate outcome of PMA applications submitted by an applicant.
In March 1989, in response to a PMN filed by the Company with the FDA,
the FDA notified the Company that the then current model of the Sonotron Device,
under the FDA's standards, was not substantially equivalent to certain medical
devices marketed in interstate commerce prior to May 28, 1976. In March 1991, a
further PMN was filed with the FDA on behalf of the Company with respect to the
then current model of the Sonotron Device which was subsequently voluntarily
withdrawn by the Company. The FDA advised the Company that its determination
with respect to the initial PMN was based upon (a) the new intended use of
applying superficial heat at non-therapeutic temperatures for the treatment of
osteoarthritis, and (b) new types of safety and effectiveness questions that are
raised by the new technological characteristics of the Sonotron Devices when
compared to certain devices marketed before May 28, 1976. In the event that
Sonotron Devices cannot be marketed pursuant to a PMN, before Sonotron Devices
can be marketed in the United States, the Company would be required to obtain a
PMA before the Sonotron Devices can be marketed in the United States for
commercial distribution in connection with human applications. There can be no
assurance that any approval can be obtained from the FDA in the foreseeable
future, if at all.
In January 1991, the FDA advised EPI of its determination to treat the
MRT100, the first model of the SofPulse device, as a class III device. The FDA
retains the right to require the manufacturers of certain Class III medical
devices to submit a PMA application in order to sell such devices or to promote
such devices for specific indications. To date, the Company has not been asked
by the FDA to seek pre-market approval for the SofPulse device; however, there
can be no assurance that the Company will not be required to do so and that, if
required, the Company will be able to comply with such requirement for the
SofPulse device.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory
requirements apply. These include:
o quality system regulations, or QSR, which require manufacturers,
including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
o labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or "off-label" uses;
o medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury
if the malfunction were to recur; and
o post-market surveillance regulations, which apply when necessary
to protect the public health or to provide additional safety and
effectiveness data for the device.
The FDA has broad post-market and regulatory enforcement powers. The
Company is subject to unannounced inspections by the FDA to determine its
compliance with the QSR and other regulations, and these inspections may include
the Company's manufacturing facilities, or any other manufacturing
subcontractors that the Company may engage. The Company has been registered by
the FDA as a Registered Medical Device Establishment allowing it to manufacture
medical devices in accordance with procedures outlined in FDA regulations which
include quality control and related activities. Such registration is renewable
annually and although the Company does not believe that the registration will
fail to be renewed by the FDA, there can be no assurance of such renewal. The
failure of the Company to obtain any annual renewal would have a material
adverse effect on it.
Failure to comply with applicable regulatory requirements can result in
enforcement action by the FDA, which may include any of the following sanctions:
o fines, injunctions, consent decrees and civil penalties;
o recall or seizure of the Company's products;
o operating restrictions, partial suspension or total
shutdown of production;
o refusing the Company's requests for 510(k) clearance
or pre-market approval of new products or new intended uses;
o withdrawing 510(k) clearance or pre-market approvals that
are already granted; and
o criminal prosecution.
The FDA also has the authority to require us to repair, replace or
refund the cost of any medical device that has been manufactured for us or
distributed by the Company. If any of these events were to occur, they could
have a material adverse effect on the Company's business.
The Company is also subject to a wide range of federal, state and local
laws and regulations, including those related to the environment, health and
safety, land use and quality assurance. The Company believes that it is in
compliance with these laws and regulations as currently in effect, and its
compliance with such laws will not have a material adverse effect on the
Company's capital expenditures, earnings and competitive and financial position.
International Regulations
International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country to country. The
time required to obtain clearance or approval by a foreign country may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may be different. There can be no assurance that the Company will
be successful in obtaining or maintaining necessary approvals to market its
products in certain foreign markets, or obtain such approvals for additional
products that may be developed or acquired by the Company.
The primary regulatory environment in Europe is that of the European
Union, which consists of 25 countries encompassing most of the major countries
in Europe. Three member states of the European Free Trade Association have
voluntarily adopted laws and regulations that mirror those of the European Union
with respect to medical devices. Other countries, such as Switzerland, have
entered into Mutual Recognition Agreements and allow the marketing of medical
devices that meet European Union requirements.
The European Union has adopted numerous directives and European
Standardization Committees have promulgated voluntary standards regulating the
design, manufacture, clinical trials, labeling and adverse event reporting for
medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear a CE conformity marking (which stands for
Conformite Europeenne), indicating that the device conforms with the essential
requirements of the applicable directives and, accordingly, can be commercially
distributed throughout the member states of the European Union, the member
states of the European Free Trade Association and countries which have entered
into a Mutual Recognition Agreement. The method of assessing conformity varies
depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer of the product and a
third-party assessment by a Notified Body, an independent and neutral
institution appointed by a country to conduct the conformity assessment. This
third-party assessment may consist of an audit of the manufacturer's quality
system and specific testing of the manufacturer's device. An assessment by a
Notified Body in one member state of the European Union, the European Free Trade
Association or one country which has entered into a Mutual Recognition Agreement
is required in order for a manufacturer to commercially distribute the product
throughout these countries. ISO 9001 and ISO 13845 certification are voluntary
harmonized standards. Compliance establishes the presumption of conformity with
the essential requirements for a CE Marking.
Reimbursement
Ivivi's products are rented principally to nursing homes and extended
care facilities that receive payment coverage for products and services they
utilize from various public and private third-party payors, including the
Medicare program and private insurance plans. As a result, the demand and
payment for our products are dependent, in part, on the reimbursement policies
of these payors. The manner in which reimbursement is sought and obtained for
any of our products varies based upon the type of payor involved and the
setting to which the product is furnished and in which it is utilized by
patients.
Ivivi cannot determine the effect of changes in the healthcare system or method
of reimbursement for its products or any other products that may be produced by
us in the United States. For example, from 1991 to 1997, products utilizing our
technology were marketed primarily for use in nursing homes for the Medicare
reimbursable treatment of chronic wounds through a rental program. Due to
changes in reimbursement made by CMS, in 1997, which prohibited Medicare
coverage of the use of the technology used in our products in the treatment of
non-healing wounds, the nursing home revenue diminished significantly by 2001
and Ivivi pursued alternative markets and applications for use of its
technology. In December 2003, CMS reversed its policy and issued an NCD
providing for Medicare reimbursement for electromagnetic therapies for non-
healing wounds, which became effective in July 2004. In response to this
significant regulatory change, Ivivi re-entered the wound care market.
CMS has not yet cleared reimbursement for the home health use of the technology
used in our products. Accordingly, in December 2005, Ivivi retained a
consulting company specializing in CMS reimbursement and coverage matters to
assist it in arranging and preparing for a meeting with CMS to request such
clearance. In May 2006, with the assistance of this consulting company, Ivivi
held a meeting with CMS and made a presentation in support of reimbursement for
the home health use of the technology used in our products, and we currently
await feedback from CMS. Even if Ivivi were to obtain clearance from CMS for
reimbursement for home health use of the technology used in our products, the
regulatory environment could again be changed to bar CMS coverage for treatment
of chronic wounds utilizing the technology used in our products, whether for
home health use or otherwise, which could limit the amount of coverage patients
or providers are entitled to receive.
Ivivi believes that government and private efforts to contain or reduce health
care costs are likely to continue. These trends may lead third-party payors to
deny or limit reimbursement for our products, which could negatively impact the
pricing and profitability of, or demand for, our products.
Medicare
Medicare is a federally funded program that provides health coverage
primarily to the elderly and disabled. Medicare is composed of four parts: Part
A, Part B, Part C and Part D. Medicare Part A (hospital insurance) covers, among
other things, inpatient hospital care, home health care and skilled nursing
facility services. Medicare Part B (supplementary medical insurance) covers
various services, including those services provided on an outpatient basis.
Medicare Part B also covers medically necessary durable medical equipment and
medical supplies. Medicare Part C, also known as "Medicare Advantage," offers
beneficiaries a choice of various types of health care plans, including several
managed care options. Medicare Part D is the new Voluntary Prescription Drug
Benefit Program, which becomes effective in 2006. The Medicare program has
established guidelines for the coverage and reimbursement of certain equipment,
supplies and support services. In general, in order to be reimbursed by
Medicare, a health care item or service furnished to a Medicare beneficiary must
be reasonable and necessary for the diagnosis or treatment of an illness or
injury or to improve the functioning of a malformed body part and not otherwise
excluded by statute. In October 2004, CMS issued a quarterly update that
allows skilled nursing facilities, or SNFs, and providers of healthcare in the
home to use the electromagnetic therapy code in the Healthcare Common
Procedure Code System, the standardized coding system developed by CMS to
ensure that Medicare reimbursement claims are processed in an orderly and
consistent manner for consolidated billing enforcement. Although CMS has
provided for reimbursement for the use of electromagnetic therapy by SNFs,
CMS has not yet provided for reimbursement for the use of electromagnetic
therapy by providers of healthcare in the home. However, Ivivi is pursuing
obtaining clearance for use of electromagnetic therapy by providers of
healthcare in the home, but it may not be able to obtain such clearance.
The methodology for determining the amount of Medicare reimbursement
of Ivivi's products varies based upon, among other things, the setting in
which a Medicare beneficiary receives health care items and services.
Hospital Setting
Since the establishment of the prospective payment system in
1983, acute care hospitals are generally reimbursed for certain patients by
Medicare for inpatient operating costs based upon prospectively determined
rates. Under the prospective payment system, or PPS, acute care
hospitals receive a predetermined payment rate based upon the Diagnosis-
Related Group, or DRG, which is assigned to each Medicare beneficiary's stay,
regardless of the actual cost of the services provided. Certain additional or
"outlier" payments may be made to a hospital for cases involving unusually
high costs or lengths of stay. Accordingly, acute care hospitals generally
do not receive direct Medicare reimbursement under PPS for the distinct costs
incurred in purchasing or renting Ivivi's products. Rather, reimbursement for
these costs is included within the DRG-based payments made to hospitals for the
treatment of Medicare-eligible inpatients who utilize the products. Long-term
care and rehabilitation hospitals also are now paid under a PPS rate that does
not directly account for all actual services rendered. Since PPS payments are
based on predetermined rates, and may be less than a hospital's actual costs
in furnishing care, hospitals have incentives to lower their inpatient
operating costs by utilizing equipment and supplies, such as our medical
device products, that will reduce the length of inpatient stays, decrease
labor or otherwise lower their costs. In addition, the amount that the
hospital receives under PPS could limit the amount that the Company could
charge a hospital for the use of its products.
Certain specialty hospitals also use the Company's medical device
products. Such specialty hospitals are exempt from the PPS and, subject
to certain cost ceilings, are reimbursed by Medicare on a reasonable cost basis
for inpatient operating and capital costs incurred in treating
Medicare beneficiaries. Consequently, such hospitals may have additional
Medicare reimbursement for reasonable costs incurred in purchasing or
renting the Company's products. There has been little experience with PPS for
long-term care and rehabilitation hospitals. A final rule for rehabilitation
hospital PPS became effective on January 1, 2002. A final ruling was published
in August 2002 implementing PPS for long-term care hospitals with a
phased-in transition period, effective October 1, 2002. Ivivi cannot predict
the impact of the rehabilitation hospital PPS or the long-term care hospital
PPS on the health care industry or on Ivivi's financial position or results of
operations.
Skilled Nursing Facility Setting
On July 1, 1998, reimbursement for SNFs under Medicare Part A changed
from a cost-based system to a prospective payment system which is based on
resource utilization groups ("RUGs"). Under the RUGs system, a Medicare patient
in a SNF is assigned to a RUGs category upon admission to the facility. The RUGs
category to which the patient is assigned depends upon the medical services and
functional support the patient is expected to require. The SNF receives a
prospectively determined daily payment based upon the RUGs category assigned to
each Medicare patient. These payments are intended generally to cover all
inpatient services for Medicare patients, including routine nursing care,
capital-related costs associated with the inpatient stay and ancillary services.
Effective July 2002, the daily payments were based on the national average cost.
Although the Refinement Act and BIPA increased the payments for certain RUGs
categories, certain provisions of the Refinement Act and BIPA covering these
payment increases expired on September 30, 2002 and, in effect, the RUGs rates
for the most common categories of SNF patients decreased. Because the RUGs
system provides SNFs with fixed daily cost reimbursement, SNFs have become less
inclined to use products which had previously been reimbursed as variable
ancillary costs.
Insurance
The Company may be exposed to potential product liability claims by
those who use the Company's products. Therefore, the Company maintains a general
liability insurance policy, which includes aggregate product liability coverage
of $2,000,000 for certain of the Company's products. The Company does not have
product liability coverage for its medical device products, other than the
SofPulse which is covered by a product liability policy held by Ivivi. The
Company believes that its present insurance coverage is adequate for the types
of products currently marketed. There can be no assurance, however, that such
insurance will be sufficient to cover potential claims or that the present level
of coverage will be available in the future at a reasonable cost.
Employees
As of July 5, 2006, the Company had an aggregate of 19 employees, 11
of which are employed directly by the Company and 8 of which are employed by
Ivivi. As of such date, the Company had four salaried employees in executive
or managerial positions.
Recent Developments
Initial Public Offering of Ivivi
On February 11, 2005, the Company issued a press release pursuant to
which the Company announced the filing of a registration statement on Form SB-2
by Ivivi related to the proposed initial public offering of Ivivi's common
stock. Reference is made to the Company's Current Report on Form 8-K dated
February 11, 2005. On June 19, 2006, Ivivi filed an update to the above
referenced registration statement. Upon the effectiveness of the
registration statement and the consummation of a public offering of
Ivivi common stock, ADM will no longer own a majority of the
outstanding common stock of Ivivi, and, if so, then Ivivi's operations
will no longer be reported on a consolidated basis.
Risk Factors
An investment in our stock involves a high degree of risk. You should
carefully consider the following information, together with other information in
this prospectus, before buying shares of our stock. If any of the following
risks or uncertainties occur, our business, financial condition and results of
operations could be materially and adversely affected, the trading price of our
stock could decline and you may lose all or a part of the money you paid to buy
our stock.
Risks Relating to Our Chemical Business
New environmental or other regulations could increase the Company's operating
costs.
Like other manufacturers, the Company is subject to a broad range
of Federal, state and local laws and requirements, including those
governing discharges in the air and water, the handling and disposal of
solid and hazardous substances and wastes, the remediation of contamination
associated with the release of hazardous substances, work place safety and
equal employment opportunities. The Company has made expenditures to comply
with such laws and requirements. The Company believes, based on information
currently available to management, that it is in compliance with applicable
environmental and other legal requirements and that the Company will not
require material capital expenditures to maintain compliance with such
requirements in the foreseeable future. Governmental authorities have the
power to enforce compliance with such laws and regulations, and violators may
be subject to penalties, injunctions or both. Third parties may also have the
right to enforce compliance with such laws and regulations. As ADM develops
new formulations for its chemical products, those products may become
subject to additional review and approval requirements governing the sale and
use of its products. Although the Company's manufacturing processes do not
currently result in the generation of hazardous wastes, this may not always be
the case and material costs or liabilities may be incurred by the Company in
the future as a result of the manufacturing operations. It is also
possible that other developments, such as additional or increasingly strict
requirements of laws and regulations of these types, or enforcement policies
thereunder, could significantly increase the Company's costs of operations.
Because we use various materials and substances in manufacturing our chemical
products, our production facilities are subject to operating hazards that could
cause personal injury and loss of life, severe damage to, or destruction of,
property and equipment and environmental contamination.
We are dependent on the continued operation of our production and
distribution facility. This facility is subject to hazards associated with the
manufacture, handling, storage and transportation of chemical materials and
products, including natural disasters, mechanical failure, unscheduled downtime,
labor difficulties, transportation interruptions, and environmental hazards,
such as spills, discharges or releases of toxic or hazardous substances and
remediation complications. These hazards can cause personal injury and loss of
life, severe damage to, or destruction of, property and equipment and
environmental contamination and other environmental damage and could have a
material adverse effect on our financial condition. In addition, due to the
nature of our business operations, we could become subject to scrutiny from
environmental action groups.
We rely significantly on raw materials in the production of our chemical
products and fluctuations in costs of such raw materials would increase our
operating expenses.
Our manufacturing operations with respect to our chemical products depend
upon obtaining adequate supplies of our raw materials on a timely basis. The
loss of a key source of supply or a delay in shipments could have an adverse
effect on our business. We are exposed to price risks associated with these raw
material purchases. The availability and prices of raw materials may be subject
to curtailment or change due to, among other things, new laws or regulations,
suppliers' allocations to other purchasers, interruptions in production by
suppliers, changes in exchange rates, cost components of raw materials and
worldwide price levels. Our results of operations could be adversely affected if
we were unable to obtain adequate supplies of raw materials in a timely manner
or if the costs of raw materials increased significantly.
We face competition from other chemical companies, which could adversely affect
our revenue and financial condition.
We actively compete with companies producing the same or similar
products and, in some instances, with companies producing different products
designed for the same uses. We encounter competition in price, delivery,
service, performance, product innovation and product recognition and quality,
depending on the product involved. For some of our products, our competitors are
larger and have greater financial resources. As a result, these competitors may
be better able to withstand a change in conditions within the industries in
which we operate, a change in the prices of raw materials or a change in the
economy as a whole. Our competitors can be expected to continue to develop and
introduce new and enhanced products, which could cause a decline in market
acceptance of our chemical products. Current and future consolidation among our
competitors and customers may also cause a loss of market share as well as put
downward pressure on pricing. Our competitors could cause a reduction in the
prices for some of our chemical products as a result of intensified price
competition. Competitive pressures can also result in the loss of major
customers. If we cannot compete successfully, our business, financial condition
and results of operations could be adversely affected.
We face competition from other chemical companies, which could force us to lower
our prices thereby adversely affecting our operating margins, financial
condition, cash flows and profitability.
The markets in which we operate are highly competitive, and this
competition could harm our business, results of operations, cash flow and
financial condition. Our competitors include major international producers as
well as smaller regional competitors. We believe that a significant competitive
factor for our products is selling price. We could be subject to adverse results
caused by our competitors' pricing decisions. In addition, current and
anticipated future consolidation among our competitors and customers may cause
us to lose market share as well as put downward pressure on pricing.
Furthermore, there is a trend in the chemical industry toward relocation of
manufacturing facilities to lower-cost regions such as Asia. Such relocation may
permit some of our competitors to lower their costs and improve their
competitive position. Some of our competitors are larger, have greater financial
resources and have less debt than we do. As a result, those competitors may be
better able to withstand a change in conditions within our industry and
throughout the economy as a whole. If we do not compete successfully, our
business, operating margins, financial condition, cash flows and profitability
could be adversely affected.
Failure to develop new chemical products and/or improve our existing products
will make us less competitive.
Our results of operations depend, in part, on our ability to expand our
chemical product offerings. We are committed to remaining a competitive producer
and believe that our portfolio of new or re-engineered products is strong.
However, we may not be able to continue to develop new products, re-engineer our
existing products successfully or bring them to market in a timely manner. While
we believe that the products, pricing and services we offer customers are
competitive, we may not be able to continue to attract and retain customers to
which to sell our chemical products.
Failure to make continued improvements in our productivity could hurt our
competitive position.
In order to obtain and maintain a competitive position, we believe that
we must continue to make improvements in our productivity. When we invest in new
technologies or processes, we face risks related to cost overruns and
unanticipated technical difficulties. Our inability to anticipate, respond to or
utilize changing technologies could have a material adverse effect on our
business and our results of operations.
Changes in our customers' products could reduce the demand for our chemical
products, which may decrease our net sales and operating margins.
Our chemical products are used for a broad range of applications by our
customers. Changes, including technological changes, in our customers' products
or processes may make our chemical products unnecessary, which would reduce the
demand for those products. Other customers may find alternative materials or
processes that no longer require our products. If the demand for our chemical
products is reduced, our net sales and operating margins may be reduced as well.
We have few proprietary rights with respect to our chemical products, the lack
of which may make it easier for our competitors to compete against us.
None of our chemical products are protected by patents. We do attempt
to protect the names of some of our chemical products through trademarks and
some of our other limited proprietary property through trade secret,
nondisclosure and confidentiality measures; however, such protections may not
preclude competitors from developing similar technologies.
Risks Relating to Our Medical Device Business
The medical products market is highly competitive and susceptible to rapid
change and such changes could render any products developed by us uneconomical
or obsolete.
The medical products market is characterized by extensive research and
development activities and significant technological change. Our ability to
execute our business strategy depends in part upon our ability to develop and
commercialize efficient and effective products based on our technologies. We
compete against established companies as well as numerous independently owned
small businesses, including Diapulse Corporation of America, Inc., which
manufactures and markets devices that are deemed by the FDA to be substantially
equivalent to SofPulse; Regenesis Biomedical, which manufactures and markets
devices that are similar to our first generation SofPulse device; and KCI
Concepts, Inc., which manufactures and markets negative pressure wound therapy
devices in the wound care market. We also face competition from companies that
have developed other forms of treatment, such as hyperbaric oxygen chambers,
thermal therapies and hydrotherapy. In addition, companies are developing or
may, in the future, engage in the development of products and/or technologies
competitive with our products. We expect that technological developments will
occur and that competition is likely to intensify as new technologies are
employed. Many of our competitors are capable of developing products based on
similar technology, have developed and are capable of continuing to develop
products based on other technologies, which are or may be competitive with our
products and technologies. Many of these companies are well-established, and
have substantially greater financial and other resources, research and
development capabilities and more experience in obtaining regulatory approvals,
manufacturing and marketing than we do. Our ability to execute our business
strategy and commercially exploit our SofPulse device must be considered in
light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the development of new medical
processes, devices and products and their level of acceptance by the medical
community. Our competitors may succeed in developing competing products and
technologies that are more effective than our products and technologies, or that
receive government approvals more quickly than our new products and
technologies, which may render our existing and new products or technology
uncompetitive, uneconomical or obsolete. See "Item 1. Business - Competition."
A portion of our revenues are currently dependent on our products that utilize
PEMF technology, and increasing our revenues will depend on our ability to
increase market penetration, as well as our ability to develop and commercialize
new products and technologies.
Products based on non-invasive, electrotherapeutic technologies
represent known methods of treatment that we believe have been under-utilized
clinically. Physicians and other healthcare professionals may not use SofPulse
or other potential products and technologies developed by us unless they
determine that the clinical benefits to the patient are greater than those
available from competing products or therapies or represent equal efficacy with
lower cost. Even if the advantage of our products and technologies is
established as clinically and fiscally significant, physicians and other
healthcare professionals may not elect to use SofPulse or other products and
technologies developed by us for any number of reasons. For example, the first
generation of the SofPulse device cannot be used in hospital intensive care
units because the power output of the device can interfere with medical
monitoring equipment. The rate of adoption and acceptance of our products and
technologies, including the SofPulse device, may also be affected adversely by
unexpected side effects or complications associated with our products,
consumers' reluctance to invest in new products and technologies, the level of
third-party reimbursement and widespread acceptance of other products and
technologies. Consequently, physicians and other healthcare professionals,
healthcare payors and consumers may not accept SofPulse device products or new
products or technologies developed by us. Broad market acceptance of the
SofPulse device products and other products and technologies developed by us in
the future may require the education and training of numerous physicians and
other healthcare professionals, as well as conducting or sponsoring clinical and
fiscal studies to demonstrate the cost efficiency and other benefits of such
products and technologies. The amount of time required to complete such training
and studies could be costly and result in a delay or dampening of such market
acceptance. Moreover, healthcare payors' approval of use for our products and
technologies in development may be an important factor in establishing market
acceptance.
We may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products or
technologies. Although we have received FDA clearance for the SofPulse device
for the treatment of edema and pain in soft tissue, we may not be able to obtain
regulatory clearance or approval of new products or technologies or new
treatments through existing products. In addition, we have not demonstrated an
ability to market and sell our SofPulse device products, much less multiple
products simultaneously. If we are unable to increase market acceptance of our
current products or develop and commercialize new products in the future, we
will not be able to increase our revenues. The completion of the development of
any new products or technologies or new uses of existing products will remain
subject to all the risks associated with the commercialization of new products
based on innovative technologies, including:
o our ability to fund and establish research that supports the
efficacy of new technologies and products;
o our ability to obtain regulatory approval or clearance of such
technologies and products, if needed;
o our ability to obtain market acceptance of such new technologies
and products;
o our ability to effectively and efficiently market and distribute
such new products;
o the ability of ADM Tronics or other manufacturers utilized by us to
effectively and efficiently manufacture such new products; and
o our ability to sell such new products at competitive prices that
exceed our per unit costs for such products.
We will need additional capital to market our existing medical device products
and to develop and commercialize new technologies and products and it is
uncertain whether such capital will be available.
Our medical device business is capital intensive and will require
additional financing in order to:
o fund research and development;
o expand sales and marketing activities;
o develop new or enhanced technologies or products;
o respond to competitive pressures; and
o acquire complementary technologies or take advantage of
unanticipated opportunities.
Our need for additional capital will depend on:
o the costs and progress of our research and development
efforts;
o the preparation of pre-market application submissions to
the FDA for our new products and technologies and costs
associated therewith;
o the number and types of product development programs
undertaken;
o the number of medical devices, including the SofPulse
device, we have manufactured for sale or rental;
o the costs and timing of expansion of sales and marketing
activities;
o the amount of revenues from sales of our existing and
potentially new products;
o the cost of obtaining and maintaining, enforcing and
defending patents and other intellectual property rights;
o competing technological and market developments; and
o developments related to regulatory and third-party
coverage matters.
We will need to obtain capital to continue to operate and grow our medical
device business. Our ability to obtain additional financing in the future will
depend in part upon the prevailing capital market conditions, as well as our
business performance. There can be no assurance that we will be successful in
our efforts to arrange additional financing on terms satisfactory to us or at
all. If additional financing is raised by the issuance of common stock you may
suffer additional dilution and if additional financing is raised through debt
financing, it may involve significant restrictive covenants which could affect
our ability to operate our business. If adequate funds are not available, or are
not available on acceptable terms, we may not be able to continue our
operations, grow our medical device business or take advantage of opportunities
or otherwise respond to competitive pressures and remain in business.
If customers are unable to receive reimbursement from third-parties, including
reimbursement from Medicare, our growth and revenues will be adversely affected
in markets where our customers rely on insurance coverage for payment.
Some healthcare providers such as hospitals and physicians that
purchase, lease or rent medical devices in the United States generally rely on
third-party payors, principally Medicare and private health insurance plans,
including health maintenance organizations, to reimburse all or part of the cost
of the treatment for which the medical device is being used. Commercialization
of our medical device products and technologies marketed in the United States
will depend in part upon the availability of reimbursement for the cost of the
treatment from third-party healthcare payors such as Medicare and private health
insurance plans, including health maintenance organizations, in non-capitated
markets, markets where we rely on insurance coverage for payment. Such
third-party payors are increasingly challenging the cost of medical products and
services, which have and could continue to have a significant effect on the
ratification of such technologies and services by many healthcare providers.
Several proposals have been made by federal and state government officials that
may lead to healthcare reforms, including a government directed national
healthcare system and healthcare cost-containment measures. The effect of
changes in the healthcare system or method of reimbursement for the SofPulse
device and any other products or technologies that we may market in the United
States cannot be determined.
While third-party payors generally make their own decisions regarding
which medical procedures, technologies and services to cover, Medicare and other
third-party payors may apply standards similar to those used by CMS in
determining whether to provide coverage for a particular procedure, technology
or service. The Medicare statute prohibits payment for any medical procedures,
technologies or services that are not reasonable and necessary for the diagnosis
or treatment of illness or injury. In 1997, CMS, which is responsible for
administering the Medicare program, had interpreted this provision to prohibit
Medicare coverage of procedures that, among other things, are not deemed safe
and effective treatments for the conditions for which they are being used, or
which are still investigational. However, in July 2004, reimbursement of the use
of the technology used in our SofPulse device in the treatment of non-healing
wounds was reinstated by CMS after being discontinued from July 1997 through
July 2004. In October 2004, CMS issued a quarterly update that allows skilled
nursing facilities, or SNFs, and providers of healthcare in the home to use the
electromagnetic therapy code in the Healthcare Common Procedure Code System, the
standardized coding system developed by CMS to ensure that Medicare
reimbursement claims are processed in an orderly and consistent manner for
consolidated billing enforcement. Although CMS has provided for reimbursement
for the use of electromagnetic therapy by SNFs, CMS has not yet provided for
reimbursement for the use of electromagnetic therapy by providers of healthcare
in the home. In addition, the regulatory environment could again be changed to
bar CMS coverage for treatment of chronic wounds utilizing our SofPulse device
or to limit the amount of coverage patients or providers are entitled to
receive. Either of these events would adversely affect our revenues and
operating results. See "Item 1. Business - Reimbursement."
We cannot predict what additional legislation or regulations, if any,
may be enacted or adopted in the future relating to our business or the
healthcare industry, including third-party coverage and reimbursement, or what
effect any such legislation or regulations may have on us. Furthermore,
significant uncertainty exists as to the coverage status of newly approved
healthcare products, and there can be no assurance that adequate third-party
coverage will be available with respect to any of our future products or new
applications for our present products. In currently non-capitated markets,
failure by physicians, hospitals, nursing homes and other users of our products
to obtain sufficient reimbursement for treatments using our technologies would
adversely affect our revenues and operating results. Alternatively, as the U.S.
medical system moves to more fixed-cost models, such as payment based on
diagnosis related groups, prospective payment systems or other forms of
capitation, the market landscape may be altered, and the amount we can charge
for our products may be limited.
If we are unable to achieve market acceptance of our medical device products or
any new technologies or uses we develop in new markets where third-party
reimbursement is unlikely, our growth could be impeded which could result in an
inability to increase our revenues.
As part of our growth strategy, we intend to market our SofPulse device
products to plastic surgeons and other plastic surgery practitioners. The use of
the SofPulse device in these markets is unlikely to be reimbursed by insurance
and, accordingly, we may experience cost resistance from physicians and patients
in these markets that could adversely affect our growth strategy, our operating
results and our ability to increase our revenues.
Our subsidiaries, SMI and Ivivi, outsource the manufacturing of their products
to us and if our operations are interrupted or if our orders exceed our
manufacturing capabilities, our subsidiaries may not be able to deliver their
products to customers on time.
Pursuant to a manufacturing agreement between SMI, Ivivi and us, we are
the exclusive manufacturer of the products of SMI and Ivivi. We operate a single
facility and have limited capacity that may be inadequate if SMI's or Ivivi's
customers place orders for unexpectedly large quantities of their products, or
if our other customers place large orders of products, which could limit our
ability to produce the products of SMI or Ivivi. In addition, if our operations
were halted or restricted, even temporarily, or we are unable to fulfill large
orders, SMI and Ivivi could experience business interruption, increased costs,
damage to their reputations and loss of their customers. Although SMI and Ivivi
have the right to utilize other manufacturers if we are unable to perform under
our agreement, manufacturers of their products need to be licensed with the FDA,
and identifying and qualifying a new manufacturer to replace us as the
manufacturer of their products could take several months during which time, they
would likely lose customers and their revenues could be materially delayed
and/or reduced. See "Item 1. Business - Manufacturer and Suppliers."
SMI and Ivivi depend on a limited number of suppliers for their respective
components and raw materials and any interruption in the availability of these
components and raw materials used in their products could reduce their
respective revenues.
SMI and Ivivi rely on a limited number of suppliers for the components
and raw materials used in their medical devices. Although there are many
suppliers for each of their component parts and raw materials, they are
dependent on a single or limited number of suppliers for many of the significant
components and raw materials. This reliance involves a number of significant
risks, including:
o unavailability of materials and interruptions in
delivery of components and raw materials from suppliers;
o manufacturing delays caused by such unavailability or
interruptions in delivery; and
o fluctuations in the quality and the price of components
and raw materials.
Neither SMI nor Ivivi has any long-term or exclusive purchase
commitments with any of its suppliers. Their failure to maintain existing
relationships with their suppliers or to establish new relationships in the
future could also negatively affect their ability to obtain components and raw
materials used in their products in a timely manner. If they are unable to
obtain ample supply of product from their existing suppliers or alternative
sources of supply, they may be unable to satisfy their customers' orders which
could reduce their revenues and adversely affect their relationships with their
customers. See "Item 1. Business - Manufacturers and Suppliers."
Our ability to execute our business plan depends on the scope
of our intellectual property rights and not infringing the intellectual
property rights of others. The validity, enforceability and commercial value of
these rights are highly uncertain.
Our ability to compete effectively with other companies is
materially dependent upon the proprietary nature of our technologies. We rely
primarily on patents and trade secrets to protect our medical device
technologies.
Third parties may seek to challenge, invalidate, circumvent or render
unenforceable any patents or proprietary rights owned by us based on,
among other things:
o subsequently discovered prior art;
o lack of entitlement to the priority of an earlier, related
application; or
o failure to comply with the written description, best mode,
enablement or other applicable requirements.
In general, the patent position of medical device companies is highly
uncertain, still evolving and involves complex legal, scientific and factual
questions. We are at risk that:
o other patents may be granted with respect to the patent
applications filed by us; and
o any patents issued to us may not provide commercial benefit
to us or will be infringed, invalidated or circumvented by others.
The United States Patent and Trademark Office currently has a
significant backlog of patent applications, and the approval or rejection of
patents may take several years. Prior to actual issuance, the contents of United
States patent applications are generally published 18 months after filing. Once
issued, such a patent would constitute prior art from its filing date, which
might predate the date of a patent application on which we rely. Conceivably,
the issuance of such a prior art patent, or the discovery of "prior art" of
which we are currently unaware, could invalidate a patent of ours or prevent
commercialization of a product claimed thereby.
Although we generally conduct a cursory review of issued patents prior
to engaging in research or development activities, we may be required to obtain
a license from others to commercialize any of our new products under
development. If patents that cover our existing or new products are issued to
other companies, there can be no assurance that any necessary license could be
obtained on favorable terms or at all.
There can be no assurance that we will not be required to resort to
litigation to protect our patented technologies and other proprietary rights or
that we will not be the subject of additional patent litigation to defend our
existing and proposed products and processes against claims of patent
infringement or any other intellectual property claims. Such litigation could
result in substantial costs, diversion of management's attention, and diversion
of our resources. In fact, on June 29, 2005, Ivivi filed a complaint against
Regenesis Biomedical, Inc. alleging that Regenesis is infringing on one of
Ivivi's U.S. patents through its sales of a product that competes with Ivivi's
SofPulse(R) product. Although Ivivi is seeking money damages and an injunction
against future sales of the competing product, there can be no assurance that it
will be successful. See "Item 3. Legal Proceedings."
We also have applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights between the United States and foreign countries, the extent
of protection provided by patents and proprietary rights granted to us by the
United States may differ from the protection provided by patents and proprietary
rights granted to us by foreign countries.
We attempt to protect our trade secrets, including the processes,
concepts, ideas and documentation associated with our technologies, through the
use of confidentiality agreements and non-competition agreements with our
current employees and with other parties to whom we have divulged such trade
secrets. If our employees or other parties breach our confidentiality agreements
and non-competition agreements or if these agreements are not sufficient to
protect our technology or are found to be unenforceable, our competitors could
acquire and use information that we consider to be our trade secrets and we may
not be able to compete effectively. Most of our competitors have substantially
greater financial, marketing, technical and manufacturing resources than we have
and we may not be profitable if our competitors are also able to take advantage
of our trade secrets.
We may decide for business reasons to retain certain knowledge that we
consider proprietary as confidential and elect to protect such information as a
trade secret, as business confidential information or as know-how. In that
event, we must rely upon trade secrets, know-how, confidentiality and
non-disclosure agreements and continuing technological innovation to maintain
our competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or
otherwise gain access to or disclose such information.
If the FDA or other state or foreign agencies impose regulations that affect our
medical device products, our development, manufacturing and marketing costs will
be increased.
The development, testing, production and marketing of our existing
medical devices are, and devices we may develop in the future will be, subject
to regulation by the FDA as devices under the 1976 Medical Device Amendments to
the Federal Food, Drug and Cosmetic Act. Although we have received FDA clearance
for the SofPulse device for the treatment of pain and edema in soft tissue,
alternative uses for the SofPulse device and any new products developed by us
may be subject to FDA regulation as well. In addition, although we have not been
asked by the FDA to seek pre-market approval for the SofPulse device, there can
be no assurance that we will not be required to do so and that, if required, we
will be able to comply with such requirement for the SofPulse device. Before a
new medical device, or a new use of, or claim for, an existing product can be
marketed in the United States, it must first receive either 510(k) clearance or
pre-market approval from the FDA, unless an exemption applies. Either process
can be expensive and lengthy. The FDA's 510(k) clearance process usually takes
from three to twelve months, but it can take longer and is unpredictable. The
process of obtaining pre-market approval is much more costly and uncertain than
the 510(k) clearance process and it generally takes from one to three years, or
even longer, from the time the application is filed with the FDA. See "Item 1.
Business - Government Regulation."
In the United States, medical devices must be:
o manufactured in registered and quality approved
establishments by the FDA; and
o produced in accordance with the FDA Quality System
Regulation ("QSR") for medical devices.
As a result, we, as well as ADM Tronics, the exclusive manufacturer of our
Ivivi device, are required to comply with QSR requirements and if they fail
to comply with these requirements, we will need to find another company to
manufacture our SofPulse devices which could delay the shipment of our product
to our customers. In addition, the Company's manufacturing facility:
o is required to be registered as a medical device
manufacturing site with the FDA; and
o is subject to inspection by the FDA.
The FDA requires producers of medical devices to obtain FDA licensing prior to
commercialization in the United States. Testing, preparation of necessary
applications and the processing of those applications by the FDA is expensive
and time consuming. We do not know if the FDA will act favorably or quickly in
making such reviews, and significant difficulties or costs may be encountered by
us in our efforts to obtain FDA licenses. The FDA may also place conditions on
licenses that could restrict commercial applications of such products. Product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. Delays imposed by
the FDA licensing process may materially reduce the period during which we have
the exclusive right to commercialize patented products. We have made
modifications to our devices and may make additional modifications in the future
that we believe do not or will not require additional clearances or approvals.
If the FDA disagrees, and requires new clearances or approvals for the
modifications, we may be required to recall and to stop marketing the modified
devices. We also are subject to Medical Device Reporting regulations, which
require us to report to the FDA if our products cause or contribute to a death
or serious injury, or malfunction in a way that would likely cause or contribute
to a death or serious injury. We are not aware of any death or serious injury
caused by or contributed to by our medical device products, however, we cannot
assure you that any such problems will not occur in the future with our existing
or future products.
Additionally, our existing and future products may be subject to
regulation by similar agencies in other states and foreign countries. While we
believe that we have complied with all applicable laws and regulations,
continued compliance with such laws or regulations, including any new laws or
regulations in connection with our medical devices or any new products developed
by us, might impose additional costs on us or marketing impediments on our
products which could adversely affect our revenues and increase our expenses.
The FDA and state authorities have broad enforcement powers. Our failure to
comply with applicable regulatory requirements could result in enforcement
action by the FDA or state agencies, which may include any of the following
sanctions:
o warning letters, fines, injunctions, consent decrees and civil penalties;
o repair, replacement, refunds, recall or seizure of our products;
o operating restrictions or partial suspension or total shutdown of
production;
o refusing our requests for 510(k) clearance or premarket approval of
new products, new intended uses, or modifications to existing
products;
o withdrawing 510(k) clearance or premarket approvals that have already been
granted; and
o criminal prosecution.
If any of these events were to occur, it could harm our business.
The FDA can impose civil and criminal enforcement actions and other penalties on
us if we or our manufacturer fails to comply with stringent FDA regulations.
Medical device manufacturing facilities must maintain records, which
are available for FDA inspectors documenting that the appropriate manufacturing
procedures were followed. The FDA has authority to conduct inspections of our
facility, as well as the facility of our manufacturer. Labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances, by
the Federal Trade Commission. Any failure by us or the manufacturer of our
products to take satisfactory corrective action in response to an adverse
inspection or to comply with applicable FDA regulations could result in
enforcement action against us or our manufacturer, including a public warning
letter, a shutdown of manufacturing operations, a recall of our products, civil
or criminal penalties or other sanctions. From time to time, the FDA may modify
such requirements, imposing additional or different requirements which may
require us to alter our business methods which could result in increased
expenses. See "Item 1. Business - Governmental Regulation."
Risks Related to Our Company
We have a history of significant and continued operating losses and a
substantial accumulated earnings deficit and we may continue to incur
significant losses.
We have incurred substantial net losses of approximately $7.2 million
and $3.4 million for the fiscal years ended March 31, 2006 and 2005,
respectively. At March 31, 2006, we had an stockholders' deficiency of
approximately $6.2 million and an accumulated deficit of $16.6 million. We
expect to incur additional operating losses, as well as negative cash flow from
operations, for the foreseeable future. As a result of our continued losses
and the debt incurred by us in connection with our financings, our independent
auditors have included an explanatory paragraph in our financial statements for
the fiscal years ended March 31, 2006 and 2005, expressing doubt as to our
ability to continue as a going concern. Our financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The inclusion of a going concern explanatory paragraph in the report of our
independent auditors could make it more difficult for us to secure additional
financing or enter into strategic relationships with distributors on terms
acceptable to us, if at all, and may materially and adversely affect the terms
of any financing that we may obtain.
Our existing indebtedness may adversely affect our ability to obtain additional
funds and may increase our vulnerability to economic or business downturns.
Our outstanding notes issued in our financings aggregated approximately
$8.0 million principal amount as of March 31, 2006 (not including trade
payables and other account payables). In addition, we may incur additional
indebtedness in the future. Accordingly, we are subject to the risks associated
with significant indebtedness, including:
o we must dedicate a portion of our cash flows from operations to pay
principal and interest and, as a result, we may have less funds
available for operations and other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and
less flexible in reacting to changes in our industry and general
economic conditions; and
o if we default under any of our existing debt instruments, including
paying the outstanding principal when due, and if our creditors demand
payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments.
The occurrence of any of these events could materially adversely affect
our results of operations and financial condition and adversely affect our
stock price.
The agreements governing the terms of our notes contain numerous
affirmative and negative covenants that limit the discretion of our management
with respect to certain business matters and place restrictions on us,
including obligations on our part to preserve and maintain our assets and
restrictions on our ability to incur or guarantee debt, to merge with or sell
our assets to another company, and to make significant capital expenditures
without the consent of the noteholders. Our ability to comply with these and
other provisions of such agreements may be affected by changes in economic or
business conditions or other events beyond our control.
We have restated our financial statements in the past to reflect various
corrections. No assurances can be given that similar restatements will not be
required in the future.
We restated our financial statements in the past to reflect various
corrections of certain errors. The impact of the restatement of such financial
statements is included in our financial statements as of and for the years
ended March 31, 2006 and 2005. While we believe we have put processes in place
to begin to remedy areas in our internal controls, no assurances can be given
that we will not be faced with situations which may require us to restate our
financial statements again. Any such restatements could adversely effect the
credibility of our reported financial results and the price of our common
stock.
We may be exposed to product liability claims for which our
insurance may be inadequate.
Our business exposes us to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of chemical products and
medical devices. Although we maintain a general liability insurance policy,
which includes aggregate product liability coverage of $2,000,000 for certain of
our products, there can be no assurance, that such insurance will be sufficient
to cover potential claims or that the present level of coverage will be
available in the future at a reasonable cost.
We do not have product liability coverage for our medical device
products other than the SofPulse, which is covered by a $2.0 million product
liability policy held by Ivivi. While we are not aware of side-effects resulting
from the use of any of our products, there may be unknown long-term effects of
their use that may result in product liability claims in the future. Further, we
cannot provide any assurance that:
o our insurance will provide adequate coverage against potential
liabilities if a product causes harm or fails to perform as promised;
o adequate product liability insurance will continue to be
available in the future; or
o our insurance can be maintained on acceptable terms.
The obligation to pay any product liability claim in excess of whatever
insurance we are able to obtain would increase our expenses and could greatly
reduce our assets. See "Item 1. Business - Insurance."
The loss of any of our executive officers or key personnel may
adversely affect our operations and our ability to execute our growth strategy.
Our ability to execute our business plan depends upon the continued
services of Andre' DiMino, our President and Chief Executive Officer, as well as
our key technology, marketing, sales and support personnel. We do not have
employment or consulting agreements containing non-compete agreements with Mr.
DiMino and certain of our key personnel, and we may not be able to retain these
individuals. If we lost the services of Mr. DiMino or our key personnel, our
business may be adversely affected and our stock price may decline. In addition,
our ability to execute our business plan is dependent on our ability to attract
and retain additional highly skilled personnel. We have key person life
insurance in the amount of $2 million for Mr. DiMino, but not for any of our
other executive officers or key employees.
Andre' DiMino, our President and Chief Executive Officer, also serves
as Chairman and Chief Financial Officer of Ivivi. While Mr. DiMino devotes a
substantial portion of his work-time toward ADM Tronics, the remaining amount of
his work-time may be devoted elsewhere, including at Ivivi. As a result, Mr.
DiMino's attention to our business and operations may be diverted by his
obligations elsewhere, including at Ivivi, and we may not be able to have access
to Mr. DiMino as needed by us.
Our executive officers and directors and entities affiliated with
them have substantial control over us, which could delay or prevent a
change in our corporate control favored by our other shareholders.
Our executive officers and directors and entities affiliated with
them may be deemed to beneficially own, in the aggregate, approximately 51.7%
of our outstanding common stock. In particular, Mr. DiMino, together with
members of the DiMino family, may be deemed to beneficially own approximately
38.7% of the outstanding shares of our common stock. The interests of our
current officer and director shareholders may differ from the interests
of our other shareholders. As a result, the current officers and directors
would have the ability to exercise substantial control over all corporate
actions requiring shareholder approval, irrespective of how our other
shareholders may vote, including the following actions:
o the election of directors;
o adoption of stock option plans;
o the amendment of charter documents; or
o the approval of certain mergers and other significant
corporate transactions, including a sale of substantially all
of our assets.
Penny stock regulations may impose certain restrictions on marketability of our
securities.
If our common stock were to be subject to penny stock rules, these
rules may discourage broker-dealers from effecting transactions in our common
stock or affect their ability to sell our securities. As a result, purchasers
and current holders of our securities could find it more difficult to sell their
securities. Our stock is traded on the OTC Bulletin Board. Trading volume of OTC
Bulletin Board stocks have been historically lower and more volatile then stocks
traded on an exchange or the Nasdaq Stock Market. In addition we may be subject
to rules of the Securities and Exchange Commission that impose additional
requirements on broker-dealers when selling penny stocks to persons other than
established customers and accredited investors. In general, an accredited
investor is a person with assets in excess of $1,000,000 or annual income
exceeding $200,000 individually, or $300,000 together with his or her spouse.
The relevant Securities Exchange Commission regulations generally define penny
stocks to include any equity security not traded on an exchange or the Nasdaq
Stock Market with a market price (as defined in the regulations) of less than $5
per share. Under the penny stock regulations, a broker-dealer must make a
special suitability determination as to the purchaser and must have the
purchaser's prior written consent to the transaction. Prior to any transaction
in a penny stock covered by these rules, a broker-dealer must deliver a
disclosure schedule about the penny stock market prepared by the Securities
Exchange Commission. Broker-dealers must also make disclosure concerning
commissions payable to both the broker-dealer and any registered representative
and provide current quotations for the securities. Finally, broker-dealers are
required to send monthly statements disclosing recent price information for the
penny stock held in an account and information on the limited market in penny
stocks.
Our stock price, like that of many small companies, has been and may continue to
be volatile.
We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results and other factors beyond
our control. These fluctuations may be exaggerated if the trading volume of our
common stock is low.
We have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of your stock.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future and any return on investment may be limited to the value of your stock.
We plan to retain any future earnings to finance growth.
Item 2. Description of Property
The Company is headquartered at 224-S Pegasus Avenue, Northvale, New
Jersey. The Company leases approximately 16,000 square feet of combined office
and warehouse space from an unaffiliated third party with a monthly rent of
$7,200. The lease expires in June, 2008. The Company and its three subsidiaries
utilize portions of the leased space. Pursuant to a management services
agreement to which the Company and its subsidiaries are parties, the Company
determines, on a monthly basis, the portion of space utilized by each subsidiary
during such month, and each subsidiary reimburses the Company for their portion
of the lease costs, real property taxes and related costs.
Ivivi also has research facilities located at 3120 De La Cruz
Boulevard, Santa Clara, California. On July 23, 2004, one of the Company's
subsidiaries entered into a lease for this space with a monthly rent of
$400. The term of the lease ends on July 31, 2007.
Ivivi also maintains additional executive offices in Los Angeles,
California. One of the Company's subsidiaries rents this office space on
a month-to-month basis with a monthly rent of approximately $2,000.
The Company believes that its existing facilities are suitable as
office, storage and laboratory space, and are adequate to meet its current
needs. The Company further believes that such properties are adequately covered
by insurance.
The Company does not own any real property for use in its operations or
otherwise.
Item 3. Legal Proceedings
On May 25, 2005, we also filed a complaint against Regenesis Biomedical, Inc.,
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. We are 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. The Court denied the
defendants' motion and permitted a period of discovery to determine
jurisdiction as to defendants, Terrence Kennedy, Mary C. Ritz and Frank R.
George.
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a New York
Home Health Care Equipment, or 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 that we and NYHHC entered into on or about August 1,
2004, pursuant to which: (i) we appointed NYHHC as exclusive distributor of our
products in a defined market place for so long as NYHHC secured a minimum
number of placements of our products and (ii) NYHHC agreed to pay us $2,500 per
month for each product shipped to NYHHC. By letter, dated August 9, 2005, we
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. We are 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 our
products. The defendants filed a motion to dismiss alleging lack of
jurisdiction and failure to state a claim with regard to Harry Ruddy. We
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, which has not been completely decided. The Court permitted a
period of discovery to determine the jurisdiction issue, which discovery is
substantially complete. The defendants filed another motion to dismiss based
upon a claim of lack of jurisdiction, which was heard and denied by the Court
on June 9, 2006.
Other than the foregoing, we are not a party to, and none of our property is
the subject of, any pending legal proceedings other than routine litigation
that is incidental to our business. To our knowledge, no governmental authority
is contemplating any such proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
The Company's common stock trades on the OTC-Bulletin Board under the
symbol "ADMT." For the periods indicated, the following table sets forth the
high and low bid quotations for the Company's common stock, as reported by the
National Quotation Bureau, Inc. The quotations represent inter-dealer quotations
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Quarter Ended High Bid Low Bid
Fiscal 2005
June 30, 2004 0.40 0.29
September 30, 2004 0.41 0.23
December 31, 2004 0.47 0.20
March 31, 2005 0.49 0.35
Fiscal 2006
June 30, 2005 0.29 0.28
September 30, 2005 0.33 0.32
December 31, 2005 0.25 0.25
March 31, 2006 0.27 0.27
Holders of Record
As of March 31, 2006, 53,882,037 shares of the Company's common stock
were issued and outstanding. On March 31, 2006 there were 1,381 shareholders of
record.
Dividends
The Company has never paid any cash dividends on its common stock and
has no intention of paying cash dividends in the foreseeable future. The Company
intends to retain all earnings, if any, for use in the operation and expansion
of its business.
Equity Compensation Plan
As of July 5, 2006, ADM did not have any compensation plans
(including individual compensation arrangements) under which its equity
securities were authorized for issuance. Ivivi has a stock option plan
pursuant to which up to 2,437,500 shares of common stock of Ivivi, 1,584,347
shares of which have been granted as of July 5, 2006, at exercise prices
ranging from $.06 to $7.00 per share.
Item 6. Management's Discussion and Analysis or Plan of Operation
Forward-Looking Statements
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of the "safe harbor" provisions under section 21E of the
Securities and Exchange Act of 1934 and the Private Securities Litigation Act of
1995. We use forward-looking statements in its description of our plans and
objectives for future operations and assumptions underlying these plans and
objectives. Forward-looking terminology includes the words "may", "expects",
"believes", "anticipates", "intends", "forecasts", "projects", or similar terms,
variations of such terms or the negative of such terms. These forward-looking
statements are based on management's current expectations and are subject to
factors and uncertainties which could cause actual results to differ materially
from those described in such forward-looking statements. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained in this Form 10-KSB 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 this Annual Report
on Form 10-KSB.
Critical Accounting Policies
See "Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements for our critical accounting policies. These
policies include revenue recognition, determining our allowance for doubtful
accounts receivable, accounting for cost of revenue, valuation of long-lived
assets and research and development costs. No significant changes in our
critical accounting policies have occurred since March 31, 2005.
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 currently derives 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.
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 ADM and its three subsidiaries, Ivivi Technologies, Inc.,
Pegasus Laboratories, Inc. and Sonotron Medical Systems, Inc.
Results of Operations for the Fiscal Years Ended March 31, 2006 and March 31,
2005
Our Ivivi subsidiary has filed a registration statement for an initial
public offering of its stock in order to raise the funds necessary to fully
implement its plan to market its products. The table at the end of this
section summarizes our results of operations as if Ivivi had been separately
stated. Our medical segment includes our Sonotron subsidiary as well as
Ivivi.
Revenues
Revenues were $1,724,269 for the year ended March 31, 2006 as compared
to $1,286,074 for the year ended March 31, 2005, an increase of $438,195, or
34%. Revenues from our chemical activities decreased by $14,873 and revenues
from our medical technology activities (primarily from our Ivivi Subsidiary)
increased by $453,068. During 2006, a significant customer of our chemical
products ceased operations and curtailed purchases. Such customer accounted for
approximately $39,000 of the Company's revenues for 2006, and approximately
$261,000 for 2005. The increase in revenues from the Company's medical
technology activities was primarily due to increased marketing of Ivivi's
products. Revenues from our Ivivi subsidiary were $786,512 in 2006 and $328,996
in 2005.
Operating Loss
Our operating loss for 2006 was $4,981,806 compared to an operating
loss for 2005 of $2,468,760, an increase of $2,513,046. Selling, general and
administrative expenses increased by $2,515,583, primarily due to the
significant increase in personnel, marketing, and overhead costs from our Ivivi
subsidiary to support Ivivi's expanded activities related to the distribution
and marketing of its products and share based compensation of $705,900 for 2006
compared to $284,278 for 2005. Research and development expense was $544,426
for 2006 for Ivivi's laboratory studies for its technology at Montefiore
Medical Center and Cleveland Clinic started in January 2006, compared with an
expense of $270,894 in 2005. The Cleveland Clinic study is expected to be
completed by December 2006 at an estimated expense of $300,000.
Interest and Financing Costs
Net interest and financing costs increased $1,593,273, from $305,702 in
the 2005 period to $1,898,975 in 2006, due to interest expense and accrued
penalties and amortization of discount on the convertible notes issued in our
private placements partially offset by interest earned from amounts invested in
money market funds. During 2006 we recorded an expense of $290,349 due to the
increase in the fair value of warrants and registration rights liabilities,
compared to an expense of $581,749 in 2005.
Net Loss
Net loss was $7,171,130, or $0.13 per share, for the 2006 period as compared to
$3,356,211, or $0.06 per share, for the 2005 period, an increase of 3,814,919,
or $0.07 per share.
Ivivi Operations
The following table summarizes our results of operations for 2006 as if
Ivivi had been separately stated:
Ivivi Others Total
Revenues $ 786,512 $ 937,757 $ 1,724,269
Costs and expenses:
Cost of sales 216,984 476,014 692,998
Research and development 544,426 - 544,426
Selling, general
and administrative 4,706,950 761,701 5,468,651
Operating income (loss) $(4,681,848) $ (299,958) $(4,981,806)
Liquidity and Capital Resources
We have had significant operating losses for the fiscal years ended
March 31, 2006 and 2005. As of March 31, 2006, we had an accumulated deficit of
approximately $16.6 million. Our continuing operating losses have been funded
principally from the proceeds of our private placement financings in which we
have received gross proceeds of approximately $8.1 million and net proceeds of
approximately $7.4 million. We expect to incur additional operating losses, as
well as negative cash flow from operations, for the foreseeable future, as we
continue to expand our marketing efforts with respect to our products and to
continue our research and development of additional applications for our
technology and other technologies that we may develop in the future.
We have had net losses of $7,171,130 and $3,356,211 for the years ended
March 31, 2006 and 2005, respectively, and had a stockholders' deficiency of
$6,199,807 at March 31, 2006. These factors raise substantial doubt about our
ability to continue as a going concern. The significant increase in the net
loss for the year ended March 31, 2006 is the result of our expanded
activities. In anticipation of expanding our operations, we raised $8,087,500
in private placements, and at March 31, 2006, we had cash and cash equivalents
of $982,670 and working capital of $333,726. Our net loss for the year ended
March 31, 2006 has been principally funded from the net proceeds received from
the private placement offering of the 6% unsecured notes payable described in
Note 6 of the financial statements for the years ended March 31, 2006 and 2005.
Our continuation as a going concern is dependent on our ability to increase
revenues, in receiving additional financing from outside sources, including a
public offering of Ivivi's common stock and a return to profitable operations.
We have developed additional commercially viable product offerings for both the
wound market and the cosmetic surgery markets and we are actively pursuing
exclusive arrangements with strategic partners, having leading positions in our
target markets in order to establish revenue relationships and nationwide, and
in some cases worldwide, marketing and distributions channels for our products.
Operating Activities:
Net cash flows used by operating activities was $3,719,371 for 2006 as
compared to net cash used by operating activities of $2,059,121 for 2005. The
use of cash in 2006 was primarily due to a net loss of $7,171,130 related
mostly to the Company's medical technologies activities, and an increase in
accounts receivable of $276,984 offset by decreases in other current assets of
$272,365 and increases in accounts payable and accrued expenses of $751,564.
The net loss was partially offset by an aggregate of non cash charges of
$2,646,926 for share based compensation costs, depreciation and amortization
bad debt expense, amortization of loan costs and discount on the convertible
notes issued in the private placements, equity based penalties and the change
in fair value of warrant and registration rights liabilities.
The use of cash in 2005 was primarily due to a net loss of $3,356,211
related mostly to the Company's medical technologies activities, and increases
in accounts receivable of $27,851, inventory of $48,649 and other current
assets of $286,303, offset by an increase in accounts payable of $261,630. The
net loss was partially offset by an aggregate of non cash charges of $1,238,765
for share based compensation costs, depreciation and amortization, bad debt
expense, amortization of loan costs and discount on the convertible notes
issued in the private placements and the change in fair value of warrant and
registration rights liabilities.
Investing Activities:
Cash used in investing activities was of $22,320 for 2006 as compared
to $96,206 for 2005 related to the purchase of equipment.
Financing Activities:
On December 1, 2004 and February 11, 2005, we completed private
placement financings (collectively, the "Placements") to "accredited investors"
only, consisting of an aggregate of $6,087,500 principal amount of unsecured
convertible notes bearing interest at an annual rate of 6%. The notes are due
at various times from July 2009 through February 2010, unless converted
earlier, and will convert automatically upon the consummation of a public
offering into 1,191,830 shares of Ivivi common stock, subject to adjustment,
plus up to an additional 60,003 shares of Ivivi common stock for the payment of
interest on the notes through April 30, 2006 and 5,959 shares for each month
thereafter until the date that a registration statement filed with the
Securities and Exchange Commission is declared effective, assuming each holder
elects to have his interest paid in shares of Ivivi common stock. Interest on
the notes is payable quarterly in cash or shares of Ivivi common stock, at the
direction of the holder. The Placements are also convertible into shares of ADM
common stock at $0.29 per share. In addition, commencing March 1, 2005 with
respect to the investors holding the notes issued in the private placement that
was completed in December 2004, and June 30, 2005 with respect to the investors
holding the notes issued in the private placement that was completed in
February 2005, the investors have the additional right to receive interest
payments in shares of ADM common stock in lieu of cash or shares of Ivivi
common stock. In connection with the issuance of the notes, we also issued to
the investors warrants to purchase an aggregate of 1,191,830 shares of Ivivi
common stock at $3.51 per share, as well as warrants to purchase an aggregate
of 20,991,379 shares of the common stock of ADM at $.41 per share. The warrants
to purchase shares of ADM common stock automatically expire upon the
consummation of a public offering of Ivivi common stock. Under the terms of the
notes sold in the private placement that was completed in December 2004 and
February 2005, the number of shares of Ivivi common stock issuable upon
conversion of the notes and exercise of the warrants will increase by 2% for
each 30-day period, or portion thereof, after March 1, 2005 and June 30, 2005,
respectively, that the registration statement in connection to the public
offering of Ivivi common stock is not declared effective.
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 Ivivi common
stock.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 Ivivi common stock upon consummation of
an initial public offering (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 Ivivi common stock at $4.31 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.
The holder of each Warrant is entitled to purchase shares of Ivivi
common stock 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, $4.31 per share,
subject to adjustment. The aggregate number of shares of Ivivi common stock
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 Ivivi 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 Ivivi common stock into which the Note is then convertible.
Ivivi has 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
proposed initial public offering of its common stock.
In March 2006, Ivivi completed a private placement of securities to two
institutional accredited investors (the "March Private Placement"). In
connection with the March Private Placement, Ivivi realized aggregate gross
proceeds of $750,000 from the sale of unsecured convertible promissory notes
(the "2006 Notes") and warrants (the "2006 Warrants") to purchase shares of
common stock of Ivivi.
The 2006 Notes are due and payable in March 2011, unless earlier
converted. The 2006 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 2006 Notes
will be automatically converted into shares of Ivivi common 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 2006 Note may elect to convert all or any portion of the
outstanding principal amount of the Note into shares of Ivivi common stock at
$4.31 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 the
registration statement.
On June 16, 2006, Ivivi entered into a $250,000 unsecured subordinated
loan with Ajax Capital LLC. This loan bears interest at an annual rate of 8%
and is due upon the earlier to occur of (i) December 31, 2006, (ii) the
consummation of an offering of Ivivi securities, whether in a private or public
offering, in which Ivivi raises gross proceeds of at least $5,000,000 and (iii)
receipt by Ivivi from a strategic partner of a lump sum cash payment of at
least $5,000,000. If the principal amount, together with all accrued and unpaid
interest, is not paid on or before the maturity date, the interest rate will
increase by 1% every year after the maturity date to a maximum of 13% per annum
until all amounts due and payable under the note are paid in full.
As of July 5, 2006, ADM and Ivivi were in compliance with the financial
covenants contained in the notes. These covenants will terminate upon
conversion of the notes.
The Company is seeking sources of additional financing from several
sources. The Company does not have any material sources of liquidity or
unused sources of liquid assets.
Item 7. Financial Statements
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
MARCH 31, 2006
I N D E X
Page No.
FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of March 31, 2006 and 2005 F-2
Consolidated Statements of Operations
For the Years Ended March 31, 2006 and 2005 F-3
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)
For the Years Ended March 31, 2006 and 2005 F-3
Consolidated Statements of Cash Flows
For the Years Ended March 31, 2006 and 2005 F-4
Notes to Consolidated Financial Statements F-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
ADM Tronics Unlimited, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ADM Tronics
Unlimited, Inc. and subsidiaries as of March 31, 2006 and 2005, and the
related statements of operations, changes in stockholders' equity
(deficiency), and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ADM
Tronics Unlimited, Inc. and subsidiaries as of March 31, 2006 and 2005, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in note 1 to
the consolidated financial statements, the company has had recurring losses and
has accumulated deficits and stockholders' deficiencies at March 31, 2006 and
2005. Those conditions raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in note 2 to the consolidated financial statements, certain errors
resulting in understatement of previously recorded deferred compensation and
additional paid-in capital as of March 31, 2005, were discovered by management
of the company during the current year. Accordingly, the 2005 consolidated
financial statements have been restated to correct these errors.
/s/ Raich Ende Malter & Co. LLP
Raich Ende Malter & Co. LLP
East Meadow, New York
June 27, 2006
F-1
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2005
March 31, 2005
March 31, 2006 (Restated)
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 982,670 $ 3,011,631
Accounts receivable, net of allowance for
doubtful accounts of $20,015 and $72,593,
respectively 295,163 102,691
Inventories 273,594 372,717
Prepaid expenses and other current assets 13,452 278,502
--------- ----------
Total current assets 1,564,879 3,765,541
Property and equipment, net of accumulated
depreciation of $254,162 and $271,188,
respectively 49,599 40,550
Equipment in use and under rental
agreements, net of accumulated
depreciation of $883,850 and $832,059,
respectively - 51,791
Inventory - long term portion 327,342 287,582
Loan receivable and accrued interest, officer 91,458 89,982
Other assets 97,712 104,928
Deferred loan costs, net 785,016 823,564
Deferred offering costs 323,657 133,125
---------- ------------
Total assets $ 3,239,663 $ 5,297,063
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $419,557 $172,978
Accrued expenses and other current liabilities 519,089 225,252
Accrued interest 319,823 101,359
---------- ---------
Total current liabilities 1,258,469 499,589
Convertible debentures payable, net of
unamortized debt discount of $2,434,281
and $2,628,219, respectively 5,653,219 3,459,281
Warrant and registration rights
liabilities 2,527,782 1,449,326
---------- ----------
Total liabilities 9,439,470 5,408,196
---------- ----------
Stockholders' deficiency:
Preferred stock, $.01 par value; 5,000,000
shares authorized, -0- 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 10,342,480 10,003,561
Deferred compensation - (743,537)
Accumulated deficit (16,569,228) (9,398,098)
---------- ----------
Total stockholders' deficiency (6,199,807) (111,133)
--------- --------
Total liabilities and stockholders' deficiency $ 3,239,663 $ 5,297,063
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
March 31,
2005
2006 (Restated)
--------- ---------
Revenues $1,724,269 $1,286,074
--------- ---------
Costs and expenses:
Cost of sales 692,998 530,872
Research and development 544,426 270,894
Selling, general and administrative 5,468,651 2,953,068
--------- ---------
Total operating expenses 6,706,075 3,754,834
--------- ---------
Operating loss (4,981,806) (2,468,760)
Interest and finance costs, net (1,898,975) (305,702)
Change in fair value of warrant and
registration rights liabilities (290,349) (581,749)
--------- ---------
Net (loss) $(7,171,130) $(3,356,211)
========= =========
Net loss per share, basic and diluted $(0.13) $(0.06)
Weighted average shares outstanding 53,882,037 52,548,704
See accompanying notes to consolidated financial statements.
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
Additional
Common Stock Paid-in Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------- ------- ------------ ------- -----
Balance, March 31, 2004 51,882,037 $25,941 $6,861,574 $(69,600) $(6,041,887) $776,028
Valuation of warrants
issued to underwriter
for services 67,253 67,253
Beneficial conversion
feature 1,940,694 1,940,694
Contributed services 62,109 62,109
Issuance of warrants 844,241 (844,241) -
Issuance of warrants
for placement services 208,690 208,690
Issuance of common stock 2,000,000 1,000 19,000 20,000
Amortization of deferred
compensation 170,304 170,304
Net loss (3,356,211) (3,356,211)
---------- ------ --------- -------- ---------- ----------
Balance, March 31, 2005 53,882,037 26,941 10,003,561 (743,537) (9,398,098) (111,133)
Reclassify deferred
compensation (743,537) 743,537 -
Beneficial conversion
feature 133,776 133,776
Share based compensation 705,900 705,900
Warrants issued with debt 242,780 242,780
Net loss (7,171,130) (7,171,130)
---------- ------- ----------- ------- ---------- ---------
Balance, March 31, 2006 53,882,037 $26,941 $10,342,480 $ - $(16,569,228)$(6,199,807)
========== ======= ========== ======= =========== ==========
F-3
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
March 31,
2006 2005
(Restated)
-------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,171,130) $(3,356,211)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 72,278 143,796
Contributed services - 62,109
Stock based compensation 705,900 284,378
Amortization of loan costs and discount 705,780 266,936
Equity based penalty expense 788,107 -
Bad debts 84,512 43,593
Change in fair value of warrant and
registration rights liabilities 290,349 581,749
Other - 19,148
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (276,984) (27,851)
Inventory 59,363 (48,649)
Other current assets 272,365 (286,303)
Deposits and other assets (1,475) (3,446)
Increase (decrease) in:
Accounts payable and accrued expenses 751,564 261,630
------- -------
Net cash used by operating activities (3,719,371) (2,059,121)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (22,320) (96,206)
-------- --------
Net cash used by investing activities (22,320) (96,206)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, net of
costs deducted 1,895,792 5,345,002
Payment of note payable - (135,000)
Deferred offering costs (183,062) (133,125)
--------- ---------
Net cash provided by financing activities 1,712,730 5,076,877
--------- ---------
Net (decrease) increase in cash and
cash equivalents (2,028,961) 2,921,550
Cash and cash equivalents, beginning of year 3,011,631 90,081
--------- ------
Cash and cash equivalents, end of year $982,670 $3,011,631
======== ==========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $170,164 $70,890
Income taxes - -
Non-cash financing and investing activities:
During the year ended March 31, 2006 the Company:
Issued warrants valued at $242,780 in connection
with convertible debt.
Recorded a beneficial conversion feature related to
convertible debt in the amount of $133,776,
presented as a debt discount.
During the year ended March 31, 2005 the Company:
Issued convertible debt with detachable warrants
valued at $867,577.
Recorded a beneficial conversion feature related to
convertible debt in the amount of $1,940,694,
presented as a debt discount.
See accompanying notes to consolidated financial statements.
F-4
ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
1. ORGANIZATIONAL MATTERS
ORGANIZATION
ADM Tronics Unlimited, Inc. ("we", "us", "the company" or "ADM"), was
incorporated under the laws of the state of Delaware on November 24, 1969. We
are authorized under our Certificate of Incorporation to issue 150,000,000
common shares, with $.0005 par value, and 5,000,000 preferred shares with $.01
par value.
NATURE OF BUSINESS
We are a manufacturer and engineering concern whose principal lines of
business are the production and sale of chemical products and manufacturing,
selling and leasing of medical devices. Our chemical product line is
principally comprised of water-based chemical products used in the food
packaging and converting industries. These products are sold to customers
located in the United States, Australia, and Europe. Medical equipment is
manufactured in accordance with customer specification on a contract basis.
Our medical device product line consists principally of proprietary devices
used in the treatment of joint pain, postoperative edema, and tinnitus. These
devices are FDA cleared medical devices known as "SofPulse" units. These
products are sold or rented to customers located principally in the United
States.
IVIVI OPERATIONS
Our majority owned subsidiary, Ivivi Technologies, Inc., has filed a
Registration Statement with the Securities and Exchange Commission for the
public offering of a portion of its common stock. Upon the effectiveness of the
registration statement and the consummation of a public offering of Ivivi
common stock, ADM will no longer own a majority of the outstanding common stock
of Ivivi, and, if so, then Ivivi's operations will no longer be reported on a
consolidated basis. For the years ended March 31, 2006 and 2005, Ivivi's
revenues included in these consolidated financial statements were $786,512 and
$328,996, respectively, and Ivivi's operating loss was $4,681,848 and
$2,390,173.
GOING CONCERN
We have had net losses of $7,171,130 and $3,356,211 for the years ended
March 31, 2006 and 2005, respectively, negative cash flow from operating
activities of $3,719,371 and $2,059,121 for the years ended March 31, 2006 and
2005, respectively, and a stockholders' deficiency of $6,199,807 and $111,133
at March 31, 2006 and 2005 respectively. These factors raise substantial doubt
about our ability to continue as a going concern.
The continuation of the company as a going concern is dependent on our
ability to increase revenues, receive additional financing from outside
sources, including a public offering of the common stock of a subsidiary, Ivivi
Technologies, Inc.("Ivivi") and a return to profitable operations. Management
is continuing to secure ongoing revenue relationships for our products,
including those with several strategic partners who will assist us in marketing
and distribution of our products. On June 16, 2006, we received additional
financing in the form of an unsecured loan in the amount of $250,000 from Ajax
Capital LLC (see Note 13, Subsequent Events). We have developed additional
commercially viable product offerings for both the wound market and the
cosmetic surgery markets, and we are currently seeking strategic partnerships
that would provide upfront payments, in return for possible geographic and/or
market exclusivity, as well as certain guaranteed annual minimum revenue.
If we are not able to raise the necessary funding, we may be forced to
curtail our operations and this may have a material adverse impact on our
future financial position and results of operations.
F-5
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION-- The consolidated financial statements include the accounts of
ADM Tronics Unlimited, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES-- These financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and,
accordingly, require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include expected
economic life and value of our SofPulse devices, deferred tax assets, option
and warrant expenses related to compensation to employees and directors,
consultants and investment banks, the value of warrants issued in conjunction
with convertible debt, allowance for doubtful accounts, and warranty reserves.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS-- For certain of our financial instruments,
including accounts receivable, inventories, accounts payable and accrued
expenses and advances payable-affiliates, the carrying amounts approximate fair
value due to their relatively short maturities.
Our convertible debt and loan receivable have interest rates that
approximate market and therefore the carrying amounts approximate their fair
values. The warrant and registration rights liabilities, as well as deferred
loan costs, are discussed in note 6.
CASH AND EQUIVALENTS-- Cash equivalents are comprised of certain highly liquid
investments with maturity of three months or less when purchased. We maintain
our cash in bank deposit accounts, which at times, may exceed federally insured
limits. We have not experienced any losses to date as a result of this policy.
REVENUE RECOGNITION-
Chemical Products:
Sales revenues are recognized when products are shipped to end users. Shipments
to distributors are recognized as sales where no right of return exists.
Medical Devices:
We recognize revenue primarily from the rental and to a lesser extent
from the sale of our medical devices.
Rental revenue is recognized as earned on either a monthly or pay-per-
use basis in accordance with individual customer agreements. In most cases, we
allow the rental end user to evaluate our equipment on a 30-day trial basis,
during which time we provide any demonstration or education necessary for the
use of our equipment. Rental revenue recognition commences after the end of the
trial period. All of our rentals are terminable by either party at any time.
When we use a third party to bill insurance companies, we still recognize
revenue as our products are used. When certain of our distributors bill end
users, we recognize rental revenue when we are paid by the distributor.
Sales are recognized when our products are shipped to end users
including medical facilities and distributors. Our products are principally
shipped on a "freight collect" basis. Shipping and handling charges and costs
are immaterial. We have no post shipment obligations and sales returns have
been immaterial.
We provide an allowance for doubtful accounts determined primarily
through specific identification and evaluation of significant past due
accounts, supplemented by an estimate applied to the remaining balance of past
due accounts.
INVENTORY AND EQUIPMENT HELD FOR RENTAL-
Chemical product inventories are stated at the lower of cost
(first-in, first-out method) or market. Inventory that is expected to be sold
within one operating cycle (1 year) is classified as a current asset. Inventory
that is not expected to be sold within 1 year, based on historical trends, is
classified as Inventory - long term.
Our medical device inventories consist principally of Sofpulse Units
("Units"), FDA cleared devices, and are included in the balance sheet under
three categories:
o Inventory - current portion for finished units expected to be sold within one
year.
The current portion of inventory at March 31 consists of the following:
2006 2005
Raw Materials $129,444 $124,393
Finished Goods 144,150 248,324
$273,594 $372,717
o Inventory - long term portion, for finished units of $232,053 held for sale
and raw materials of $75,289 used to refurbish and build units. Units held for
sale are stated at the lower of cost (first-in, first-out method) or market.
o Equipment held for rental, on a specific identification basis, for SofPulse
Units leased to third parties, Units used internally and Units loaned out for
marketing and testing. These Units are depreciated over seven years commencing
on the date placed in service. At March 31, 2006, units held for rental were
fully depreciated.
PROPERTY & EQUIPMENT - We record our equipment at historical cost. We expense
maintenance and repairs as incurred. Depreciation is provided for by the
straight-line method over five to seven years, the estimated useful lives of
the property and equipment.
LONG-LIVED ASSETS - We follow SFAS No. 144, "Accounting for Impairment of
Disposal of Long-Lived Assets", which established a "primary asset" approach to
determine the cash flow estimation period for a group of assets and liabilities
that represents the unit of accounting for a long lived asset to be held and
used. Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The carrying amount of a long-lived asset
is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Long-
lived assets to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell. During the years ended March 31, 2006 and 2005,
no impairment loss was recognized.
ADVERTISING COSTS - Advertising costs are expensed as incurred and amounted to
approximately $333,000 and $138,000 for the years ended March 31, 2006 and
2005, respectively. Costs incurred in connection with the sponsorship of a PBS
promotional medical television program were capitalized until the completion
and initial airing of the program, at which time they were expensed in full.
Capitalized costs were $101,500 at March 31, 2005, and these costs were charged
to expense during the year ended March 31, 2006.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs consist of
expenditures for the research and development of patents and technology, which
are not capitalizable. Our research and development costs consist mainly of
payments for third party research and development arrangements.
DEFERRED LOAN COSTS - Deferred loan costs are being amortized on a straight-
line basis over a five year period through the maturity date of the related
convertible notes (see Note 6). There is no material difference between the
straight-line basis of amortization of debt costs and the effective interest
method.
SHARE BASED COMPENSATION - Our share based compensation results primarily from
the use of Ivivi common stock and common stock options.
SFAS No. 123, "Accounting for Share-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for share-
based compensation arrangements under which compensation cost is determined
using the fair value of share-based compensation determined as of the date of
the grant or the date at which the performance of the services is completed and
is recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for share-based compensation to employees. We have elected to use the intrinsic
value based method for grants to our employees and directors and have disclosed
the pro forma effect of using the fair value based method to account for our
share-based compensation to employees.
We also follow the provisions of FASB Interpretation No. 44 (as
amended), Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25 (FIN 44), which provides guidance for
certain stock compensation issues, such as changes in grantee status that occur
after July 1, 2000.
We use the fair value method for equity instruments granted to non-
employees and use the Black Scholes option value model for measuring the fair
value of warrants and options. The stock based fair value compensation is
determined as of the date of the grant or the date at which the performance of
the services is completed (measurement date) and is recognized over the periods
in which the related services are rendered.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-
Based Payment". SFAS 123(R) provides 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) are required to
apply SFAS 123(R) as of the first interim or annual reporting period that
begins after June 15, 2005. SFAS 123(R) is applicable for us effective the
first interim period of our first fiscal year beginning on or after December
15, 2005. We will transition to the new standards 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 to the statement
of operations. Companies must use fair value reported on a pro forma basis in
the notes to the financial statements previously filed. We have evaluated the
impact of the adoption of SFAS 123(R), and believe that the impact will be
significant to our overall results of operations and financial position.
In November 2005, the FASB issued Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards." FAS 123(R)-3 provides that companies may elect to use a
specified alternative method to calculate the historical pool of excess tax
benefits available to absorb tax deficiencies recognized upon adoption of SFAS
No. 123 (R). The option to use the alternative method is available regardless
of whether SFAS No. 123 (R) was adopted using the modified prospective or
modified retrospective application transition method, and whether it is has the
ability to calculate its pool of excess tax benefits in accordance with the
guidance in paragraph 81 of SFAS No. 123 (R). This method only applies to
awards that are fully vested and outstanding upon adoption of SFAS No. 123 (R).
FAS 123(R)-3 became effective after November 10, 2005. The adoption of FAS
123(R)-3did not have a material impact on our financial position or results of
operations.
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 we 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 assumption
ranges for Ivivi: (1) risk free interest rate of 3.62%; to 4.6% (2) dividend
yield of 0%; (3) volatility factor of the expected market price of our common
stock of 60% to 67%; and (4) an expected life of the options of 2.5 to 5 years.
The foregoing option valuation model requires input of highly subjective
assumptions. Because common share purchase options granted to employees and
directors have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value of estimates, the existing model does not in the opinion
of 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 YEAR FOR THE YEAR
ENDED ENDED
MARCH 31, 2006 MARCH 31, 2005
Net loss as reported ......................... $(7,171,130) $(3,356,211)
Stock-based compensation expense included in
reported net loss ......................... 11,424 11,424
Stock compensation calculated under fair value
method .................................... (46,511) (21,043)
Pro forma net loss ........................... $(7,206,217) $(3,365,830)
Basic and diluted loss per share as
reported .................................. $ (0.13) $ (0.06)
Pro forma basic and diluted loss per share ... $ (0.13) $ (0.06)
INCOME TAXES - We report the results of our operations as part of a
consolidated tax return with our subsidiaries. We have entered into a tax
sharing arrangement where each of the members compensates each other to the
extent that their respective taxes are affected as a result of this
arrangement. Deferred income taxes result primarily from temporary differences
between financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the financial statement bases and
tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is recorded to reduce a deferred tax asset to that portion that is
expected to more likely than not be realized.
NET LOSS PER SHARE - We use SFAS No. 128, "Earnings Per Share" for calculating
the basic and diluted loss per share. We compute basic loss per share by
dividing net loss and net loss attributable to common shareholders by the
weighted average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the potential shares had been issued and if the additional
shares were dilutive. Common equivalent shares are excluded from the
computation of net loss per share if their effect is anti-dilutive.
Per share basic and diluted net loss amounted to $0.13 for the year
ended March 31, 2006 and $0.06 for the year ended March 31, 2005. For each of
the years ended March 31, 2006 and 2005, 50,182,341 potential shares were
excluded from the shares used to calculate diluted earnings per share as their
inclusion would reduce net loss per share.
CONVERTIBLE DEBT - In accordance with EITF 00-27, a portion of the proceeds of
our convertible debt has been allocated to the warrants issued with the debt
based on their fair value. This allocation has resulted in a discount on the
debt and the discount is being amortized over the term of the notes to their
maturity date. When the fair value of the underlying common stock is greater
than the effective conversion price, we record a beneficial conversion feature,
which is also amortized over the term of the notes to their maturity date.
In conjunction with the issuance of the convertible debt, we have
issued warrants that have registration rights for the underlying shares. As the
contracts must be settled by the delivery of registered shares and the shares
were not registered by the balance sheet date, pursuant to EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the value of the warrants at the date of
issuance was recorded as a warrant liability on the balance sheet. We have
included the change in fair value from the date of issuance to March 31, 2006
in other income (expense), in accordance with EITF 00-19. The fair value of the
warrant liability was $433,630 at March 31, 2006 and $1,449,326 at March 31,
2005. Upon the registration statement being declared effective, the fair value
of the warrants on that date will be reclassified as equity.
In June 2005, the EITF issued EITF 05-2, "The Meaning of Conventional
Convertible Debt Instrument in Issue No. 00-19." EITF 05-2 retained the
definition of a conventional convertible debt instrument as set forth in EITF
00-19, and which is used in determining certain exemptions to the accounting
treatments prescribed under SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." EITF 05-2 also clarified that certain contingencies
related to the exercise of a conversion option would not be outside the
definition of "conventional" and determined that convertible preferred stock
with a mandatory redemption date would also qualify for similar exemptions if
the economic characteristics of the preferred stock are more akin to debt than
equity. EITF 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005. We adopted the provisions of
EITF 05-2 on July 1, 2005, which did not have a material effect on our
financial position or results of operations.
In September 2005, the FASB ratified the EITF's Issue No. 05-7,
"Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues" (EITF 05-7"), which addresses whether a
modification to a conversion option that changes its fair value effects the
recognition of interest expense for the associated debt instrument after the
modification, and whether a borrower should recognize a beneficial conversion
feature, not a debt extinguishment, if a debt modification increases the
intrinsic value of the debt (for example, the modification reduces the
conversion price of the debt). The statement is effective for accounting
modifications of debt instruments beginning in the first interim or annual
reporting period beginning after December 15, 2005. The adoption of EITF 05-7
did not have a material impact on our financial position or results of
operations.
In September 2005, the FASB ratified the EITF's Issue No. 05-8, "Income
Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
Feature" ("EITF 05-8"), which discusses whether the issuance of convertible
debt with a beneficial conversion feature results in a basis difference arising
from the intrinsic value of the beneficial conversion feature on the commitment
date (which is recorded in the stockholder's equity for book purposes, but as a
liability for income tax purposes) and, if so, whether that basis difference is
a temporary difference under FASB Statement No. 109, "Accounting for Income
Taxes." The statement will be effective for financial statements beginning in
the first interim or annual reporting period beginning after December 15, 2005.
The adoption of EITF 05-8 did not have a material impact on our financial
position or results of operations.
RECLASSIFICATIONS - Certain reclassifications have been made to the
consolidated financial statements for the prior period in order to have them
conform to the current period's classifications. These reclassifications have
no effect on previously reported net income.
RESTATEMENT - The March 31, 2005 financial statements have been restated to
reflect additional expense of $222,488 resulting from contributed services of
$62,109, accrued financing expense of $26,821, and the revaluation of equity
based compensation of $133,558. As a result of these corrections, net loss for
the year ended March 31, 2005 has increased by $222,488, to $3,356,211 from
$3,133,723, and loss per share remained unchanged at $0.06 per share
Changes to the balance sheet at March 31, 2005 resulting from these
corrections are as follows:
As reported in Form 10-KSB/A
(Amendment No. 2) Restated
Accrued interest and penalties $ 74,538 $ 101,359
Additional paid-in capital $ 9,391,972 $10,003,561
Deferred compensation $ (327,615) $ (743,537)
Accumulated deficit $(9,175,610) $(9,398,098)
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS No. 151 are effective for fiscal years
beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to
have a material effect on our financial position, results of operations, or
cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"). SFAS 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle. It also requires that the new accounting principle be applied to the
balances of assets and liabilities as of the beginning of the earliest period
for which retrospective application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings for that period
rather than being reported in an income statement. The statement will be
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. We do not expect that the adoption of SFAS
No. 154 will have a material effect on our financial position or results of
operations.
3. PROPERTY AND EQUIPMENT
Our property and equipment as of March 31, 2006 is as follows:
2006 2005
Computer equipment.................... $ 19,691 $ 12,986
Leasehold improvements................ 3,401 3,401
Machinery and equipment............... 280,669 295,351
Total property and equipment....... 303,761 311,738
Accumulated depreciation and
amortization 254,162 271,188
Property and equipment, net $ 49,599 $ 40,550
Depreciation and amortization expense related to property and equipment
amounted to $13,271 and $7,722 during the years ended March 31, 2006 and 2005,
respectively.
4. EQUIPMENT IN USE AND UNDER RENTAL AGREEMENTS
Equipment in use and under rental agreements consists of the
following at March 31, 2006:
2006 2005
SofPulse units........................... $883,850 $883,850
Accumulated depreciation................. 883,850 832,059
Equipment in use and under
rental agreements, net.......... $ -- $ 51,791
Depreciation expense related to equipment in use and under rental
agreements amounted to $51,791 and $131,470 during the years ended March 31,
2006 and 2005, respectively.
5. INCOME TAXES
Net operating losses for tax purposes of approximately $11,567,000 at
March 31, 2006 are available for carryover. The net operating losses will
expire from 2010 through 2026. We have provided a 100% valuation allowance for
the deferred tax benefit resulting from the net operating loss carryover due to
our limited operating history. In addressing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences are
deductible. A reconciliation of the statutory Federal income tax rate and the
effective income tax rate for the years ended March 31, 2006 and 2005 follows:
Significant components of deferred tax assets and liabilities are as follows:
MARCH 31, MARCH 31,
2006 2005
Deferred tax assets (liabilities):
Bad debts.................................. $ 8,000 $ 29,000
Net operating loss carryforwards........... $ 4,627,000 $ 2,729,000
Deferred tax assets, net................... 4,635,000 2,758,000
Valuation allowance........................ (4,635,000) (2,758,000)
Net deferred tax assets.................... $ -- $ --
MARCH 31, MARCH 31,
2006 2005
Statutory federal income tax rate.......... (34)% (34)%
State income taxes, net of federal taxes... (6)% (6)%
Non-deductible items....................... 12% 11%
Valuation allowance........................ 28% 29%
Effective income tax rate.................. 0% 0%
6. PRIVATE PLACEMENTS OF CONVERTIBLE DEBT
On December 1, 2004 and February 11, 2005, we completed private
placement financings (collectively, the "Placements") to "accredited investors"
only, consisting of an aggregate of $6,087,500 principal amount of unsecured
convertible notes bearing interest at an annual rate of 6%. The notes are due
at various times from July 2009 through February 2010, unless converted
earlier, and will convert automatically upon the consummation of a public
offering into 1,191,830 shares of Ivivi common stock, subject to adjustment,
plus up to an additional 60,003 shares of Ivivi common stock for the payment of
interest on the notes through April 30, 2006 and 5,959 shares for each month
thereafter until the date that a registration statement filed with the
Securities and Exchange Commission is declared effective, assuming each holder
elects to have his interest paid in shares of Ivivi common stock. Interest on
the notes is payable quarterly in cash or shares of Ivivi common stock, at the
direction of the holder. The Placements are also convertible into shares of ADM
common stock at $0.29 per share. In addition, commencing March 1, 2005 with
respect to the investors holding the notes issued in the private placement that
was completed in December 2004, and June 30, 2005 with respect to the investors
holding the notes issued in the private placement that was completed in
February 2005, the investors have the additional right to receive interest
payments in shares of ADM common stock in lieu of cash or shares of Ivivi
common stock. In connection with the issuance of the notes, we also issued to
the investors warrants to purchase an aggregate of 1,191,830 shares of Ivivi
common stock at $3.51 per share, as well as warrants to purchase an aggregate
of 20,991,379 shares of the common stock of ADM at $.41 per share. The warrants
to purchase shares of ADM common stock automatically expire upon the
consummation of a public offering of Ivivi common stock. Under the terms of the
notes sold in the private placement that was completed in December 2004 and
February 2005, the number of shares of Ivivi common stock issuable upon
conversion of the notes and exercise of the warrants will increase by 2% for
each 30-day period, or portion thereof, after March 1, 2005 and June 30, 2005,
respectively, that the registration statement in connection to the public
offering of Ivivi common stock is not declared effective. In accordance with
EITF 00-27, a portion of the proceeds were allocated to the warrants based on
their fair value, which totaled $867,577 using the Black Scholes option pricing
model based on the following assumptions: (1) risk free interest rate of 1.5%;
(2) dividend yield of 0%; (3) volatility factor of the expected market price of
our common stock of 64%; and (4) an expected life of 6 months. The remaining
balance was allocated to the convertible debt instruments and was used to
compute the beneficial conversion feature. We attributed a beneficial
conversion feature of $1,940,694 to the convertible debt instruments based upon
the difference between the effective conversion price of the instruments and
the closing price of our shares on the date of issuance. Accordingly, the notes
payable were discounted by a total of $2,808,271. The discount is being
amortized over the term of the notes to their maturity date. During the years
ended March 31, 2006 and 2005, amortization as interest expense amounted to
$560,115 and $180,052, respectively. Since the fair value of the underlying
common stock was less than the effective conversion price, there was no
beneficial conversion feature.
In conjunction with the issuance of the convertible debt, we have
issued warrants that have registration rights for the underlying shares. As the
contracts must be settled by the delivery of registered shares and the shares
were not registered by the balance sheet date, pursuant to EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the value of the warrants at the date of
issuance was recorded as a warrant liability on the balance sheet. We have
included the change in fair value from the date of issuance to March 31, 2006
in other income (expense), in accordance with EITF 00-19. The fair value of the
warrant liability was $433,630 at March 31, 2006 and $1,449,326 at March 31,
2005. Upon the registration statement being declared effective, the fair value
of the warrants on that date will be reclassified as equity.
Ivivi has filed a Registration Statement with the Securities and
Exchange Commission for the public offering of a portion of their common stock.
Because Ivivi does not have an effective registration statement, we
have incurred the penalties described above. As a result, as of March 31, 2006,
we are obligated to issue an additional 281,094 shares of Ivivi common stock
and 281,094 additional Ivivi warrants. Included in interest and finance costs,
we have recorded an expense of $788,107 during the year ended March 31, 2006
related to this penalty, based on the fair value of the Ivivi shares and
warrants as incurred. Additionally, during the year ended March 31, 2006, we
have recorded an additional expense of $1,306,045 due to the increase in value
of the Ivivi shares and warrants at March 31, 2006.
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 Ivivi common
stock.
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 Ivivi common stock upon consummation of
an initial public offering (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 Ivivi common stock at $4.31 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.
The holder of each Warrant is entitled to purchase shares of Ivivi
common stock 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, $4.31 per share,
subject to adjustment. The aggregate number of shares of Ivivi common stock
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 Ivivi 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 Ivivi 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 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 common stock was $0.83 per share. The debt discount is being
amortized over the term of the notes. During the year ended March 31, 2006,
amortization as interest expense amounted to $5,084. Since the fair value of
the underlying common stock was less than the effective conversion price, there
was no beneficial conversion feature.
Ivivi has 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
proposed initial public offering of its common stock.
In March 2006, Ivivi completed a private placement of securities to two
institutional accredited investors (the "March Private Placement"). In
connection with the March Private Placement, Ivivi realized aggregate gross
proceeds of $750,000 from the sale of unsecured convertible promissory notes
(the "2006 Notes") and warrants (the "2006 Warrants") to purchase shares of
common stock of Ivivi.
The 2006 Notes are due and payable in March 2011, unless earlier
converted. The 2006 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 2006 Notes
will be automatically converted into shares of Ivivi common 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 2006 Note may elect to convert all or any portion of the
outstanding principal amount of the Note into shares of Ivivi common stock at
$4.31 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 the
registration statement.
The holder of each 2006 Warrant is entitled to purchase shares of Ivivi
common stock at an initial exercise price per share equal to (i) if an IPO has
occurred prior to the exercise of the 2006 Warrant 100% of the IPO Price or
(ii) if an IPO has not occurred prior to the exercise of the 2006 Warrant,
$4.31 per share, subject to adjustment. The aggregate number of shares of Ivivi
common stock issuable upon exercise of the 2006 Warrants shall equal either (i)
if the 2006 Note has been converted as of the date of exercise of the 2006
Warrant, the number of shares of Ivivi common stock into which the Note was
converted or (ii) if the 2006 Note has not been converted as of the date of
exercise of the Warrant, such number of shares of Ivivi 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 based on its relative fair value, which
totaled $177,894 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 60%, (3) risk-free interest rate of 4.6%,(4) expected life of 2.5
years and (5) estimated fair value of our common stock was $5.60 per share. The
debt discount is being amortized over the term of the notes. During the year
ended March 31, 2006, amortization as interest expense amounted to $2,663. We
attributed a beneficial conversion feature of $133,776 to the 2006 Notes based
upon the difference between the effective conversion price of those shares and
the fair value of Ivivi common shares on the date of issuance. Since the debt
is considered to be conventional convertible debt, we have not bifurcated the
embedded conversion feature as a separate derivative instrument.
We 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.
These securities were issued in a private placement of securities
exempt from registration under the Act, pursuant to Section 4(2) of the Act.
On the effective date of the registration statement of which these
financial statements form a part, Ivivi will effect a 1.625 to 1 stock split of
all shares outstanding at that time. All Ivivi share and per share data give
retroactive effect to the stock split.
7. STOCKHOLDERS' EQUITY TRANSACTIONS
During the year ended March 31, 2006, Ivivi issued in the aggregate
227,500 common share purchase options to consultants. The fair value of the
options is being expensed over the vesting period. In accordance with EITF 96-
18, the fair value of the vesting options will be recomputed at each reporting
period and any increase will be charged to expense.
During the year ended March 31, 2006, Ivivi issued in the aggregate
87,750 common share purchase options to employees.
During the year ended March 31, 2005, Ivivi issued 260,000 warrants to
purchase shares of Ivivi common stock to consultants with an exercise price of
$5.63 per share. The warrants are also exercisable into 4,564,997 shares of ADM
common stock. The warrants to purchase shares of ADM common stock automatically
expire upon the consummation of a public offering of Ivivi common stock. The
fair market of the ADM warrants was $294,761 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 1.8%; (2) dividend yield of 0%; (3) volatility
factor of the expected market price of our common stock of 64%; and (4) an
expected life of the options of .5 years. The value of the warrants is being
amortized over a five year vesting period.
In connection with the February 2005 private placement described in
Note 6, the underwriter was issued 184,426 Ivivi warrants. Of these warrants,
92,214 have an exercise price of $3.51 per share and 92,214 have an exercise
price of $5.11 per share. The warrants expire in five years. The warrants are
also exercisable into 3,247,804 shares of ADM common stock, 1,623,902 at an
exercise price of $0.41 per share and 1,623,902 at an exercise price of $0.29
per share. The warrants to purchase shares of ADM common stock automatically
expire upon the consummation of a public offering of Ivivi common stock. The
fair market of the ADM warrants was $208,690 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 1.8%; (2) dividend yield of 0%; (3) volatility
factor of the expected market price of our common stock of 64%; and (4) an
expected life of the options of .5 years. The fair value of the warrants has
been classified as debt issue costs and is being amortized over the life of the
related notes.
During the year ended March 31, 2005, the underwriter for the private
placement was issued 142,899 Ivivi warrants for financial services performed.
The warrants are also exercisable into 386,782 shares of ADM common stock at an
exercise price of $0.27 per share. The warrants to purchase shares of ADM
common stock automatically expire upon the consummation of a public offering of
Ivivi common stock. The fair market of the ADM warrants was $67,253 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 1.8%; (2) dividend yield of
0%; (3) volatility factor of the expected market price of our common stock of
64%; and (4) an expected life of the options of .5 years. The fair value of the
warrants has been charged to operations during the year ended March 31, 2005.
During the year ended March 31, 2005, Ivivi issued in the aggregate 108,387
common share purchase options to consultants. The options were issued with
exercise prices ranging from $1.23 to $6.15. Of these awards, 20% vested
immediately and the balance vests equally over the next five years of service.
The fair value of the options is being expensed over the vesting period. In
accordance with EITF 96-18, the fair value of the vesting options will be
recomputed at each reporting period and any increase will be charged to
expense.
During the year ended March 31, 2004, Ivivi issued an aggregate of
958,750 shares of common stock for consulting services. Of these shares,
112,125 vested immediately and the balance vests equally over the next five
years of service. During April 2004, certain of the grantees became employees
of Ivivi. The value of the unvested shares was remeasured using the intrinsic
value method at the date of change. The balance of the shares held by
consultants is being accounted for in accordance with EITF 96-18, and the fair
value of the vesting options will be recomputed at each reporting period. We
have recorded the expense related to these shares based on the fair value of
the stock issued, either as determined by a third party valuation or estimated
based on the anticipated IPO price.
During the year ended March 31, 2004, Ivivi issued in the aggregate
736,125 common share purchase options to consultants. The options were issued
with exercise prices ranging from $0.06 to $0.31. Of these awards, 20% vested
immediately and the balance vests equally over the next five years of service.
During April 2004, certain of the grantees became employees of Ivivi. The value
of the options was remeasured at that time, and an additional $11,424 of
expense has been recorded during the years ended March 31, 2006 and 2005
related to the intrinsic value resulting from the remeasurment. The balance of
the options held by consultants is being accounted for in accordance with EITF
96-18, and the fair value of the vesting options will be recomputed at each
reporting period.
8. OPTIONS AND WARRANTS OUTSTANDING
ADM has an aggregate of 29,190,962 common stock purchase warrants
outstanding as of March 31, 2006 and 2005. The warrants have a weighted average
exercise price of $0.39 per share, are all exerciseable at March 31, 2006, and
automatically expire upon the consummation of a public offering of Ivivi common
stock.
Ivivi has instituted a stock option plan for the issuance of 2,437,500
shares. As of March 31, 2006 and 2005, 1,544,725 and 1,220,700 of options,
respectively, were awarded, with 892,775 reserved for future issuance. The
weighted average fair value of options issued to employees and directors during
the years ended March 31, 2006 and 2005 is $1.82 and $0.34 per share,
respectively.
The following table summarizes information on all common share purchase
options and warrants issued by Ivivi for the periods ended March 31, 2006 and
2005, including common share equivalents relating to the convertible debenture
share purchase warrants.
MARCH 31, 2006 MARCH 31, 2005
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
Outstanding at beginning
of the year 3,003,105 $2.68 1,115,562 $0.17
Granted during the year 737,003 7.00 1,887,543 4.13
Exercised during the year -- -- -- --
Terminated during the year -- -- -- --
--------- ---- --------- -----
Outstanding at end of
the year 3,740,107 $3.50 3,003,105 $2.68
========= ===== ========= =====
Exercisable at end of
the year 876,627 $2.83 423,280 $0.32
======= ===== ======= =====
The number and weighted average exercise prices of Ivivi common shares
and common share equivalents issuable and stock purchase options and warrants
outstanding as of March 31, 2006 is as follows:
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE
$0 to 1 1,112,963 8.2 $0.17
1 to 3 67,763 8.3 1.58
3 to 4 1,284,041 4.0 3.51
4 to 6 352,214 8.4 5.48
6 to 9 923,126 7.6 6.88
-------
Total 3,740,107 6.6 $3.50
=========
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing facilities under non-
cancelable operating leases. The approximate future minimum annual rental
under these leases at March 31, 2006 are as follows:
Years Ending:
March 31, 2007 85,000
March 31, 2008 85,000
March 31, 2009 22,000
------
$192,000
========
Other leases are month-to-month.
Rent expense for all facilities for the years ended March 31, 2006 and
2005 was approximately $152,000 and $127,000, respectively.
In January 2006 Ivivi entered into a Master Clinical Trial Agreement
with the Cleveland Clinic Florida to perform a clinical trial of our device for
a new use. The estimated cost of the clinical trial is $300,000. The Cleveland
Clinic Florida is a not-for-profit multi-specialty medical group practice.
Effective January 1, 2004, Ivivi entered into a Consulting Agreement
with the Chairman of the department of Plastic Surgery at Montefiore Medical
Center pursuant to which we engaged the consultant to render consulting
services to it for a term of six years with automatic one-year renewals.
Pursuant to the consulting agreement, the consultant serves as Chairman of
Ivivi's Medical Advisory Board and advises us on technological developments,
future clinical and research applications and product development and efficacy
in the pulsed magnetic frequencies field. In exchange for the consultant's
consulting services, the consultant received 130,000 shares of Ivivi common
stock, 16,250 of which vested immediately upon us entering into the consulting
agreement with him, 17.5% of which vested on January 5, 2005 and the remaining
70% of which vest in four equal yearly installments on January 5 of each year
from January 5, 2006 through January 1, 2009. In addition, Ivivi has agreed to
pay the consultant an annual bonus (not to exceed $500,000) equal to the sum of
0.5% of that portion of Ivivi annual revenues in excess of $20 million and up
to $80 million, 0.25% of that portion of Ivivi annual revenues in excess of
$120 million. Ivivi has also agreed to pay the consultant a royalty equal to
0.05% of revenues received for practicing and/or commercializing any "new
inventions" (as such term is defined in the agreement) developed by the
consultant under the agreement. Bonuses and royalties payable for the fiscal
years ended March 31, 2006 and 2007 are subject to a cap of 10% of our pre-tax
profit (after deduction of such bonuses and royalty payments) for such fiscal
years. Bonuses and royalties payable under the consulting agreement are also
subject to certain adjustments for returns, allowances or setoffs, to the
consultant's compliance with the non-compete provisions of our consulting
agreement and certain other restrictions.
Our medical devices are sold under agreements providing for the repair
or replacement of any devices in need of repair, at our cost, for up to one
year from the date of delivery, unless such need was caused by misuse or abuse
of the device. Based on prior experience, at March 31, 2006 and 2005 no amounts
have been accrued for potential warranty costs and such costs are expected to
be nominal.
10. LEGAL PROCEEDINGS
We are involved, from time to time, in litigation and proceedings
arising out of the ordinary course of business. Except as described below there
are no pending material legal proceedings or environmental investigations to
which we are a party or to which our property is subject.
On May 25, 2005, we also filed a complaint against Regenesis
Biomedical, Inc., 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. We are 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.
The Court denied the defendants' motion and permitted a period of discovery to
determine jurisdiction as to defendants, Terrence Kennedy, Mary C. Ritz and
Frank R. George.
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a
New York Home Health Care Equipment ("NYHCC"), 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 that we and NYHCC entered into on or
about August 1, 2004, pursuant to which (i) we appointed NYHHC as exclusive
distributor of our products in a defined market place for so long as NYHHC
secured a minimum number of placements of our products and (ii) NYHHC agreed to
pay us $2,500 per month for each product shipped to NYHHC. By letter, dated
August 9, 2005, we terminated the agreement due to NYHCC's failure to make the
payments required under the agreement and failure to achieve the minimum number
of placements required under the agreement. We are 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 our products. The defendants filed a motion to dismiss alleging lack
of jurisdiction and failure to state a claim with regard to Harry Ruddy. We
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, which has not been completely decided. The Court permitted a
period of discovery to determine the jurisdiction issue, which discovery is
substantially complete. The defendants filed another motion to dismiss based
upon a claim of lack of jurisdiction, which was heard and denied by the Court
on June 9, 2006.
We believe that the ultimate resolution of the foregoing matters will
not have a material adverse impact on our cash flows or financial condition.
11. CONCENTRATIONS
During the year ended March 31, 2006, no one customer accounted for
more than 10% of our revenue. During the year ended March 31, 2005, we sold 32%
of our products to 2 customers. At March 31, 2006, two customers accounted for
27% of our accounts receivable. The loss of these major customers could have a
material adverse impact on our operations and cash flow.
12. SEGMENT INFORMATION AND GEOGRAPHICAL INFORMATION
We operate in two reportable segments, the production and sale of
chemicals and the manufacture and sale or lease of medical device. The
reportable segments are strategic business units that offer different products
and services. They are managed separately based on differences in customer
base, marketing strategies or regulatory environment. The accounting policies
of the segments are the same as those described in Note 1. The Company
evaluates performance on profit or loss from operations before income taxes.
Information about segment operations follows:
Year Ended March 31, 2006 Chemical Medical Total
Revenues $ 861,806 $ 862,463 $1,724,269
Segment (loss) (220,440) (6,950,690) (7,171,130)
Segment assets 685,718 2,546,629 3,232,347
Capital expenditures 15,725 6,595 22,320
Year Ended March 31, 2005 Chemical Medical Total
Revenues $ 876,679 $ 409,395 $ 1,286,074
Segment income (loss) 96,537 (3,452,748) (3,356,211)
Segment assets 934,382 4,362,681 5,297,063
Capital expenditures 60,771 35,435 96,206
Geographical Information:
Sales and rentals to unaffiliated customers, based on location of
customer, is as follows:
Years Ended March 31,
2006 2005
Chemical Segment:
United States $792,711 $797,020
Foreign 69,095 76,659
$861,806 $876,679
Medical Segment:
United States $759,719 $338,058
Foreign 102,744 71,337
$862,463 $409,395
13. RELATED PARTY TRANSACTIONS
At March 31, 2006 and 2005, ADM has advances to an officer of $49,188,
no advances have been made since 2000. This advance bears interest at the rate
of 3% per year. Interest accrued for the year ended March 31, 2006 and 2005
was $1,476 in each year and total accrued interest at March 31, 2006 and 2005
was $34,954 and $33,478, respectively.
At March 31, 2006 and 2005, ADM has advances to an employee, the wife
of the above referred officer, of $7,316, no advances have been made since
2000. This advance bears no interest.
14. SUBSEQUENT EVENTS
On June 16, 2006, Ivivi entered into a $250,000 unsecured subordinated
loan with Ajax Capital LLC. This loan bears interest at an annual rate of 8%
and is due upon the earlier to occur of (i) December 31, 2006, (ii) the
consummation of an offering of Ivivi securities, whether in a private or public
offering, in which Ivivi raises gross proceeds of at least $5,000,000 and (iii)
receipt by Ivivi from a strategic partner of a lump sum cash payment of at
least $5,000,000. If the principal amount, together with all accrued and unpaid
interest, is not paid on or before the maturity date, the interest rate will
increase by 1% every year after the maturity date to a maximum of 13% per annum
until all amounts due and payable under the note are paid in full. Steven
Gluckstern, the Chairman of Ajax Capital LLC, will serve as the Ivivi Chairman
of the Board upon the effectiveness of Ivivi's public offering.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
As previously reported in a Form 8-K dated August 11, 2006, on August
11, 2006, we appointed Raich Ende Malter & Co. LLP as our certifying accounts
to replace Weinick Sanders Leventhal & Co., LLP, which ceased operations
effective as of August 1, 2006. This engagement was approved by the Company's
board of directors.
During the Company's fiscal years ended March 31, 2005 and 2004 and the
subsequent interim period through August 1, 2005, the Company had no
disagreements with Weinick Sanders Leventhal & Co., LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Weinick Sanders Leventhal & Co., LLP, would have caused it to make reference to
the subject matter of the disagreements in its reports for such years.
Weinick Sanders Leventhal & Co., LLP's report on the Company's
financial statements for the fiscal year ended March 31, 2005 contained a
statement that the Company has suffered recurring losses from operations and
has a stockholders' deficiency that raise substantial doubt about the Company's
ability to continue as a going concern. Except for the statement discussed in
the immediately preceding sentence, Weinick Sanders Leventhal & Co., LLP's
report on the Company's financial statements for the fiscal year ended March
31, 2005 did not contain any adverse opinion or disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope or accounting
principles.
We provided Weinick Sanders Leventhal & Co., LLP with a copy of the
disclosures made pursuant to the Form 8-K (which disclosures are consistent
with the disclosures noted above) and Weinick Sanders Leventhal & Co., LLP
furnished us with a letter addressed to the Securities and Exchange Commission
stating that it agreed with the statements made by us in the Form 8-K filing, a
copy of which was filed as an exhibit to an amendment to the Form 8-K.
Item 8A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
During the fourth quarter of the Company's fiscal year ended March 31,
2006, the Company's management, including the principal executive officer and
principal financial officer, evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) related to the recording, processing, summarization, and reporting of
information in the Company's periodic reports that it files with the SEC. These
disclosure controls and procedures have been designed to ensure that material
information relating to the Company, including its subsidiaries, is made known
to the Company's management, including these officers, by other of the Company's
employees, and that this information is recorded, processed, summarized,
evaluated, and reported, as applicable, within the time periods specified in the
SEC's rules and forms. Due to the inherent limitations of control systems, not
all misstatements may be detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The Company's controls and
procedures can only provide reasonable, not absolute, assurance that the above
objectives have been met.
Based on that evaluation as of March 31, 2006, the Company's principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Internal Control over Financial Reporting.
There were no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Item 8B. Other Information
None.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The following table sets forth the names, positions and ages of the
Company's executive officers and directors. All of the Company's directors serve
until the next annual meeting of stockholders or until their successors are
elected and qualify. Officers are elected by the board of directors and their
terms of offices are, except to the extent governed by employment contracts, at
the discretion of the board of directors.
Name Age Position
Andre' DiMino 50 President, Chief Executive
Officer, Chief Financial Officer
and Director
Vincent DiMino 80 Vice President of Production
and Director
David Saloff 53 Director
Andre' DiMino has served as President of the Company since December
2001 and a director and chief Financial Officer of the Company since 1987.
Prior thereto, Mr. DiMino served as Executive Vice President and Chief
Operating Officer since 1991 and Secretary and Treasurer of the Company
since 1978. Mr. DiMino also served as the Technical Director of ADM
Tronics from 1982 to 1991. Mr. DiMino has also served as Chairman and Chief
Financial Officer of Ivivi since January 2004 and served as President of Ivivi
from 1989 to January 2004.
Vincent DiMino has served as Vice President of Production of the
Company since 1969 and as a director of the Company since August 1987. Mr.
DiMino has also served as a director of Ivivi since 1989.
David Saloff has served as a director of the Company since 2001.
From 1999 to 2003, Mr. Saloff served as President of Lifewaves International
Inc., a health and wellness start-up company. Prior thereto Mr. Saloff served
as Vice President of Electropharmacology, Inc., from which the Company
acquired the SofPulse technology referred to elsewhere herein. Mr. Saloff has
also served as President and Chief Executive Officer and a director of Ivivi
since 2004.
The terms of office of each of the directors and officers expire
upon the election of their respective successors.
Vincent DiMino is Andre' DiMino's uncle. There is no other family
relationship between any of the Company's directors or executive officers.
Audit Committee and Audit Committee Financial Expert
Because of the Company's ongoing efforts to engage qualified
board members, the Company does not have a separately designated audit
committee or compensation committee at this time. Accordingly, the
Company's Board of Directors also has determined that the Company does not
have an audit committee financial expert. The Company continues to seek new
board members in order to appoint a separately designated audit committee.
The functions which would be performed by an audit committee are performed
by the Board of Directors as a whole.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder, requires the
Company's directors, executive officers and persons who own beneficially more
than 10% of the Company's common stock to file reports of ownership and changes
in ownership of such stock with the Securities and Exchange Commission. Based
solely upon a review of such reports, the Company believes that all of its
directors, executive officers and 10% stockholders complied with all applicable
Section 16(a) filing requirements during the Company's last fiscal year.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of such Code of
Ethics has been filed as Exhibit 14.1 to the Annual Report on Form 10-K for the
fiscal year ended March 31, 2005.
Item 10. Executive Compensation
The following table provides certain summary information for the
fiscal years ended March 31, 2006 and 2005 concerning compensation paid, or
accrued, by ADM to, or on behalf of, ADM's President and Chief Executive
Officer (the "Named Officer"). Other than ADM's President and Chief Executive
Officer, the Company does not have any executive officers of the Company whose
total annual salary and bonus exceeded $100,000 during the fiscal year ended
March 31, 2006.
Summary Compensation Table
Annual Compensation
Name and Fiscal Other Annual
Principal Position Year Salary Bonus Compensation
Andre' Di Mino 2006 $101,760 -- --
President, Chief Executive Officer 2005 $88,664 -- --
And Chief Financial Officer 2004 $86,600 -- --
Option Grants in Last Fiscal Year
There were no stock options to purchase shares of ADM's common stock
granted to Mr. DiMino during the fiscal year ended March 31, 2005.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Mr. DiMino did not hold any stock options to purchase shares of the
Company's common stock at any time during the fiscal year ended March 31, 2005
or at March 31, 2005. Accordingly, Mr. DiMino did not exercise any stock
options during the fiscal year ended March 31, 2005.
Employment Contracts, Terminations of Employment and Change-In-Control
Arrangements
ADM does not have any employment contracts with any person.
Directors' Compensation
The Company does not pay fees to its directors, nor does it reimburse
its directors for expenses incurred.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information regarding ownership of
shares of Company's common stock, as of July 5, 2006, by (i) each person known
to ADM to be the owner of 5% or more of ADM's common stock (ii) each director
and director nominee of ADM, (iii) each Named Officer, and (iv) all directors
and officers of ADM as a group. Except as otherwise indicated, each person
and each group shown in the table has sole voting and investment power with
respect to the shares of the Company's common stock indicated. For
purposes of the table below, in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, a person is deemed to be the beneficial
owner, for purposes of any shares of Common Stock over which he or she has or
shares, directly or indirectly, voting or investment power; or of which he
or she has the right to acquire beneficial ownership at any time within 60 days
after July 5, 2006. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" includes the power to
dispose or direct the disposition of shares. Common Stock beneficially owned
and percentage ownership is based on 53,882,037 shares of Common Stock
outstanding as of July 5, 2005.
Number of Shares
Name and Address Beneficially Owned Percentage
Andre' DiMino ............................ 20,856,935 38.7%
c/o ADM Tronics Unlimited, Inc.
224-S Pegasus Ave.
Northvale, NJ 07647
Vincent DiMino ........................... 6,987,928 (2) 13.0%
c/o ADM Tronics Unlimited, Inc.
224-S Pegasus Ave.
Northvale, NJ 07647
David Saloff .............................. 0 0.0%
c/o ADM Tronics Unlimited, Inc.
224-S Pegasus Ave.
Northvale, NJ 07647
Sherleigh Associates Defined .............. 6,896,552 (3) 11.3%
Benefit Pension Plan
660 Madison Avenue, 15th floor
New York, New York 10021
Eugene Stricker ........................... 4,250,000 (4) 7.9%
c/o Fifth Avenue Venture Capital Partners
42 Barrett Road
Lawrence, NY 11559
Heiko H. Thieme ........................... 3,617,500 (5) 6.7%
1370 Ave of the Americas
New York, NY 10019
Burton Friedlander ........................ 3,313,900 (6) 6.2%
104 Field point Road.
Greenwich, CT 06830
ProMed Offshore Fund II, Ltd. ............. 3,275,862 (7) 5.7%
237 Park Avenue, 9th Floor
New York, NY 10021
All Executive Officers and Directors
as a group .............................. 27,844,863 (8) 51.7%
(three persons)
(1) Includes 9,172,696 shares of the Company's common stock directly
owned by Andre DiMino; 1,700,000 shares of the Company's common stock held
by the Andre' DiMino Irrevocable Trust, a Trustee and the beneficiary of which
is Andre' DiMino, who may be deemed to be a beneficial owner of such shares;
1,700,000 shares of the Company's common stock held by the Maria Elena DiMino
Trust, a Trustee of which is Andre' DiMino, who may be deemed to be a
beneficial owner of such shares by reason of his power to vote such shares;
1,700,000 shares of the Company's common stock held by the Maurice DiMino
Irrevocable Trust, a Trustee of which is Andre' DiMino, who may be deemed to
be a beneficial owner of such shares by reason of his power to vote such
shares; 1,004,239 shares of the Company's common stock, which are held by the
Estate of Dr. Alfonso DiMino (the "DiMino Estate"), the administrator of which
is Andre' DiMino who may be deemed to be a beneficial owner of such shares
by reason of his power to vote such shares, and of which Andre DiMino, as a
beneficiary of the DiMino Estate, is entitled to receive 167,374 shares;
1,330,000 shares of the Company's common stock, which the DiMino Estate has
the power to vote pursuant to an agreement dated July 8, 1987, and with
respect to which Andre' Di Mino may be deemed to be a beneficial owner by
reason of his power to vote such shares in his capacity as administrator
of the Di Mino Estate; and 4,250,000 shares of the Company's common stock held
by Eugene Stricker, of which Andre' DiMino may be deemed to be a beneficial
owner by reason of his power to vote such shares pursuant to an agreement.
(2) Includes 1,287,928 shares of the Company's common stock directly
owned by Mr. Vincent DiMino, 300,000 shares of the Company's common stock
owned by the spouse of Vincent DiMino, as to which Mr. DiMino disclaims
beneficial ownership; 300,000 shares of the Company's common stock owned by a
child of Mr. DiMino, who resides in Mr. DiMino's home, as to which Mr.
DiMino disclaims beneficial ownership; and 5,100,000 shares of the
Company's common stock of which 1,700,000 shares are held by each of the
Andre' DiMino Irrevocable Trust, the Maria Elena DiMino Irrevocable Trust
and the Maurice DiMino Irrevocable Trust, a Trustee of which is Vincent
DiMino, who may be deemed to be a beneficial owner of the shares held by
such trusts by reason of his power to vote such shares.
(3) Includes up to 6,896,552 shares of the Company's common stock
issuable after June 30, 2005 upon conversion of an unsecured
convertible promissory note. Does not include shares of the Company's common
stock underlying warrants that are not exercisable until after June 30, 2005
and unless such shares are registered for resale with the SEC.
(4) Mr. Di Mino may be deemed to be a beneficial owner of such shares
by reason of his power to vote such shares pursuant to an agreement.
Reference is also made to Footnote No. 1.
(5) Includes 2,000,000 shares of the Company's common stock owned by
The American Heritage Fund, Inc. and 1,617,500 shares of the Company's
common stock Owned by The Global Opportunity Fund Limited, each of which
Mr. Thieme is a principal.
(6) Includes 2,896,600 shares of the Company's common stock owned
by Friedlander International Limited, of which Mr. Friedlander is a
principal.
(7) Includes up to 3,275,862 shares of the Company's common stock issuable
after June 30, 2005 upon conversion of an unsecured convertible
promissory note. Does not include shares of the Company's common stock
underlying warrants that are not exercisable until after June 30, 2005 and
unless such shares are registered for resale with the SEC.
(8) Reference is made to Footnote Nos. 1 and 2.
Item 12. Certain Relationships and Related Transactions
Loans
In March 2005, the Company repaid the outstanding principal and
interest in the amount of approximately $170,000 owed to the Estate of Dr.
Alfonso Di Mino, Andre' Di Mino's father, pursuant to a note issued to the
Company in February 2001. The proceeds of this note were used for Ivivi's
working capital.
From time to time, the Company has loaned funds to Andre' Di Mino at an
interest rate of 3% per annum. The largest aggregate amount of indebtedness,
including interest, outstanding at any time since the beginning of the Company's
fiscal year ended March 31, 2003 was approximately $89,900 and the amount of
principal and interest outstanding as of March 31, 2006 was approximately
$84,000.
Transactions with Ivivi
Andre' Di Mino, the Company's President and Chief Executive Officer,
owns approximately 13.4% of the outstanding common stock of Ivivi, one of
ADM's majority-owned subsidiaries, and serves as Chairman and Chief
Financial Officer of Ivivi. During the past two years, ADM and Ivivi
have engaged in the transactions set forth below:
Private Placements
In December 2004 and February 2005, ADM, 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
proceeds of the private placements are being used primarily by Ivivi for
the research and development and sales and marketing of the SofPulse device
line of products and for the research and development of other potential
products being developed by Ivivi. See "Description of Business -- Recent
Developments."
Amounts Owed to the Company.
As of March 31, 2006, Ivivi owed approximately $2.6 million to
ADM. No interest is payable on such amount. Such amount was incurred in
connection with the funding of operations under the terms of the management
services agreement, as well as in connection with the manufacturing of
Ivivi's SofPulse device under the terms of the manufacturing agreement, since
1998. Each of such agreements are described below.
Management Services Agreement
ADM entered into a management services agreement, dated as of August
15, 2001, with Ivivi, SMI and Pegasus under which the Company provides such
subsidiaries with management services and allocates portions of its real
property facilities for use by such subsidiaries for the conduct of their
respective businesses. The management services provided by the Company under
the management services agreement include managerial and administrative
services, marketing and sales services, clerical and communication
services, the maintenance of a checking account and the writing of checks, the
maintenance of accounting records and other services in the ordinary course
of business. The subsidiaries pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM and such subsidiaries based on a
portion of its applicable costs plus any invoices it receives from third
parties specific to each such subsidiary. ADM's subsidiaries also use
office, manufacturing and storage space in a building located in Northvale, New
Jersey, currently leased by the Company, pursuant to the terms of the
management services agreement. ADM determines the portion of space allocated
to each subsidiary on a monthly basis, and the subsidiaries are required
to reimburse the Company for their respective portions of the lease costs,
real property taxes and related costs.
Ivivi had approximately $216,000 and $227,000 in management
services provided to it by ADM pursuant to the management services agreement
during the fiscal year ended March 31, 2005 and the fiscal
year ended March 31, 2006, respectively.
Manufacturing Agreement
ADM, Ivivi and SMI are parties to a manufacturing agreement, dated
as of August 15, 2001, and as amended in February, 2005. Under the terms of
the agreement, the Company has agreed to serve as the exclusive manufacturer
of all current and future medical and non-medical electronic and other
devices or products to be sold or rented by the subsidiaries. For each product
that ADM manufactures for each subsidiary, the subsidiary pays ADM an amount
equal to 120% of the sum of (i) the actual, invoiced cost for raw
materials, parts, components or other physical items that are used in
the manufacture of the product and actually purchased for such subsidiary
by the Company, if any, plus (ii) a labor charge based on the Company's
standard hourly manufacturing labor rate, which the Company believes is more
favorable than could be attained from unaffiliated third-parties. The
Company generally purchases and provides ADM with all of the raw materials,
parts and components necessary to manufacture the subsidiaries' products. Under
the terms of the agreement, if the Company is unable to perform its
obligations to either subsidiary under the manufacturing agreement or is
otherwise in breach of any provision of the manufacturing agreement, such
subsidiary has the right, without penalty, to engage third parties to
manufacture some or all of its products. In addition, if a subsidiary elects
to utilize a third-party manufacturer to supplement the manufacturing being
completed by ADM, such subsidiary has the right to require ADM to accept
delivery of its products from these third-party manufacturers, finalize the
manufacture of the products to the extent necessary and ensure that the
design, testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process have been met.
Reference is made to "Item 1. Description of Business--Manufacturers
and Suppliers."
Ivivi has accrued amounts owed to the Company of approximately $4,000
and $10,000 for the Company's manufacture of its products pursuant to the
manufacturing agreement during the fiscal year ended March 31, 2005 and
the fiscal year ended March 31, 2006, respectively. The amounts owed to
the Company by SMI for the Company's manufacture of its products pursuant
to the manufacturing agreement during such periods were not material.
Item 13. Exhibits
Exhibit
No. Description
3.1 Certificate of Incorporation and amendments thereto filed on August
9, 1976 and May 15, 1978 is incorporated by reference to Exhibit 3(a)
to the Company's Registration Statement Form 10 (File No. 0-17629) (the
"Form 10").
3.2 Certificate of Amendment to Certificate of Incorporation filed December
9, 1996 is incorporated by reference to Exhibit 3(a) to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997.
3.3 By-Laws are incorporated by reference to Exhibit 3(b) to the Form 10.
4.1 Warrant issued to the Global Opportunity Fund Inc. is incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1998.
4.2 Warrant issued to Heiko H. Thieme is incorporated by reference to
Exhibit 4.2 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1999.
4.3 Form of Company Warrant issued to certain investors (one in a series of
warrants with identical terms) is incorporated by reference to Exhibit
4.1 to the Company's Current Report on Form 8-K dated February 11, 2005
4.4 Form of Ivivi Warrant issued to certain investors (one in a series of
warrants with identical terms) is incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated February 11, 2005
4.5 Form of Note issued to certain investors (one in a series of notes with
identical terms) is incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K dated February 14, 2005.
9.1 Trust Agreements of November 7, 1980 by and between Dr. Alfonso DiMino
et al. are incorporated by reference to Exhibit 9 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1993.
10.1 Memorandum of Lease by and between the Company and Cresskill Industrial
Park III dated as of August 26, 1993 is hereby incorporated by
reference to Exhibit 10(a) to the Company's Annual Report on Form 10-KSB
for the fiscal year March 31, 1994.
10.2 Agreement of July 8, 1987 by and between Donna DiMino, Dr. Alfonso
DiMino, et al. is hereby incorporated by reference to Exhibit 10(q) to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1993.
10.3 Agreement of March 21, 2002 by and between the Company and New England
Acquisitions, Inc. is hereby incorporated by reference to Exhibit 10.8
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 2002.
10.4 Agreement of April 29, 2003 by and between Vet-Sonotron Systems, Inc. and
THM Group, LLC is hereby incorporated by reference the Exhibit 10.4 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 2003.
10.5 Agreement of January 17, 2003 by and between the Company and Fifth Avenue
Venture Capital Partners is hereby incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2003.
10.6 Amended and Restated Manufacturing Agreement, dated February 10, 2005,
among the Company, Ivivi Technologies, Inc. and Sonotron Medical Systems,
Inc. is incorporated by reference to the Company's Annual
Report on Form 10-KSB form the fiscal year ended March 31, 2005.
10.7 Management Services Agreement, dated August 15, 2001, among the Company,
Ivivi Technologies, Inc., Sonotron Medical Systems, Inc. and Pegasus
Laboratories, Inc., as amended. is incorporated by reference to the
Company's Annual Report on Form 10-KSB form the fiscal year ended March
31, 2005.
10.8 Agreement of April 3, 2004 by and between the Company and Carepoint Group
is incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 2004.
10.9 Placement Agency Agreement of May 20, 2004 by and between the Company
and Maxim Group LLC. is incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated December 1, 2005.
10.10 Agreement of April 1, 2005 by and between Ivivi Technologies, Inc. and
Global Medical, L.L.C. is incorporated by reference to Exhibit 10.11 of
Amendment No. 2 to the Registration Statement on SB-2 of Ivivi
Technologies, Inc. File No. 333-122768.
10.11 Master Clinical Trial Agreement, dated as of January 9, 2006, between
Ivivi Technologies, Inc. and Cleveland Clinic Florida is incorporated
by reference to Exhibit 10.11 of Amendment No. 4 to the Registration
Statement on SB-2 of Ivivi Technologies, Inc. File No. 333-122768.
10.12 Promissory Note, dated June 16, 2006, made in the principal amount of
$250,000 by Ivivi Technologies, LLC in favor of Ajax Capital LLC. is
incorporated by reference to Exhibit 10.5 of Amendment No. 4 to the
Registration Statement on SB-2 of Ivivi Technologies, Inc. File No.
333-122768.
10.13 Option Agreement, dated as of June 16, 2006, between Ivivi Technologies,
Inc. and Steven M. Gluckstern is incorporated by reference to Exhibit
10.17 of Amendment No. 4 to the Registration Statement on SB-2 of Ivivi
Technologies, Inc. File No. 333-122768.
10.14 Share Purchase Agreement, dated as of November 8, 2005, between Ivivi
Technologies, Inc. and Steven Gluckstern is incorporated by reference to
Exhibit 10.18 of Amendment No. 4 to the Registration Statement on SB-2 of
Ivivi Technologies, Inc. File No. 333-122768.
14.1 Code of Ethics is incorporated by reference to the Company's Annual
Report on Form 10-KSB form the fiscal year ended March 31, 2005.
21.1 Subsidiaries of the Company.
31.1 Certification of the Chief Executive Officer of the Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer of the Company pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Chief Financial Officer
of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees billed for professional services rendered by Raich
Ende Malter & Co. LLP ("Raich") for the audit of the Company's annual
consolidated financial statements for the fiscal year ended March 31, 2006,
and for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-QSB for the fiscal year ended March 31, 2006,
were $55,057. The aggregate fees for professional services rendered by Weinick
Sanders Leventhal & Co., LLP ("WSL") for the audit of the Company's annual
consolidated financial statements for the fiscal year ended March 31, 2005, and
for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-QSB for the fiscal year ended March 31, 2005,
were $48,000. In addition, Raich billed $30,545 for the re-audit of the
Company's financial statements for the fiscal year ended March 31, 2005 due to
their restatement.
Audit-Related Fees
The aggregate fees billed for each of the fiscal years ended March
31, 2006 and March 31, 2005 for assurance and related services by Raich and
WSL and that are reasonably related to the performance of the audit or review
of the Company's financial statements were $0 and $0, respectively.
Tax Fees
The aggregate fees billed for each of the fiscal years ended March
31, 2006 and March 31, 2005 for professional services rendered by Raich for
tax compliance were $0 and $15,500, respectively.
All Other Fees
The aggregate fees billed in each of the fiscal years ended March 31,
2006 and March 31, 2005 for products and services provided by Raich and
WSL (other than those covered above under "Audit Fees," "Audited-Related Fees"
and "Tax Fees") were $141,658 and $75,000 respectively. The other fees billed
in the years ended March 31, 2006 and 2005 were for audit services rendered in
connection with Ivivi's Registration Statement on Form SB-2.
Audit Committee Administration of the Engagement
The Company does not have an audit committee.
Less than 50% of hours expended on the principal accountant's
engagement to audit the Company's financial statements for Raich Ende
Malter & Co., LLP were attributed to work performed by persons other than
Raich Ende Malter & Co. LLP's full-time, permanent employees.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 14th day of July,
2006.
ADM TRONICS UNLIMITED, INC.
By: /s/ Andre' DiMino
-----------------
Andre' Di Mino
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Andre' Di Mino Chief Executive Officer (Principal July 14, 2006
Andre' Di Mino Executive Officer, Principal
Financial Officer and Principal
Accounting Officer) and Director
/s/ Vincent Di Mino Director July 14, 2006
Vincent Di Mino
/s/ David Saloff Director July 14, 2006
David Saloff