SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File No. 0-17629
ADM TRONICS UNLIMITED, INC.
(Exact name of registrant as specified in its Charter)
Delaware 22-1896032
(State or Other Jurisdiction (I.R.S. Employer Identifi-
of Incorporation or organization) cation Number)
224-S Pegasus Ave., Northvale, New Jersey 07647
(Address of Principal Executive Offices)
Issuer's Telephone Number, including area code: (201) 767-6040
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
Such shorter period that the Issuer was required to file such reports),
And (2) has been subject to the filing requirements for the past 90 days:
YES X NO ______
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
53,882,037 shares of Common Stock, $.0005 par value,
as of February 4, 2005
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A to the Quarterly Report on Form 10-
QSB (the "Quarterly Report") of ADM Tronics Unlimited, Inc. (the "Company or
"ADM") filed on February 22, 2005 with the Securities and Exchange Commission
(the "SEC") is filed (i) as a result of a restatement of the financial
statements for the three and nine month period ended December 31, 2004
primarily to record a beneficial conversion feature related to the Company's
convertible notes payable and to record an additional discount related to the
fair value of warrants issued with the debt and (ii) to respond to comments
received from the SEC. See Note 1 of the Notes to the Company's Consolidated
Financial Statements contained in Item 1 of this Amendment No. 1 for a
discussion of the restatement. Therefore, the Company is amending and
restating in its entirety the Quarterly Report. In addition, the Company is
including with this Amendment No. 1 certain currently dated certifications.
Except as described above, no other amendments are being made to the Quarterly
Report. This Form 10-QSB/A does not reflect events occurring after the
February 22, 2005 filing of this Quarterly Report or modify or update the
disclosure contained in the Quarterly Report in any way other than as required
to reflect the amendments discussed above and reflected below.
ADM TRONICS UNLIMITED, INC.
INDEX
Page Number
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2004
and March 31, 2004 2
Consolidated Statements of Operations - For the
three months and nine months ended December
31, 2004 and 2003 3
Consolidated Statement of Changes in Stockholders'
Equity - For the nine months ended December 31, 2004 3
Consolidated Statements of Cash Flows - For the
nine months ended December 31, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Controls and Procedures 8
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 8
Item 6. Exhibits 9
1
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER MARCH
ASSETS 31, 2004 31, 2004
(RESTATED)
Current assets:
Cash and equivalents $2,032,406 $ 90,081
Accounts receivable--trade, less allowance
for doubtful accounts of $29,000 and
$29,000, respectively 174,681 118,433
Inventories:
Raw materials and supplies 106,502 159,497
Finished goods 155,629 107,688
Other current assets 317,288 32,993
Total current assets 2,786,506 508,692
Property and equipment at cost, net of
accumulated depreciation of $458,764 and
$268,353, respectively 32,001 8,887
Inventory long term portion 186,371 344,465
Equipment in use and under lease agreements, net
of accumulated depreciation of $726,598 and
$758,330, respectively 84,700 179,895
Loan receivable from officer, bearing
interest at 3% per annum, unsecured 49,188 49,188
Other assets 588,313 31,039
Total assets $3,727,079 $1,122,166
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade $ 85,554 $ 159,798
Accrued expenses and other 135,726 51,340
Total current liabilities 221,280 211,138
Long-term liabilities
Note payable 135,000 135,000
Convertible 6% Notes, net of discount
of $987,742 2,649,758 -
Warrants issued with registration rights 1,091,035 -
Total long-term liabilities 3,875,793 135,000
Total liabilities 4,097,073 346,138
Stockholders' equity (369,994) 776,028
Total liabilities and
stockholders' equity $3,727,079 $1,122,166
2
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
(RESTATED) (RESTATED)
Revenues $ 334,183 $237,021 $ 987,166 $830,803
Costs and expenses:
Cost of sales 169,402 126,425 535,172 457,999
Selling, general and
administrative 845,696 187,659 1,602,137 530,913
Total costs and expenses 1,015,098 314,084 2,137,309 988,912
Operating (loss) (680,915) (77,063) (1,150,143) (158,109)
Other income (expense):
Interest and other income
(expense), net (54,922) 3,770 (14,976) 3,934
Amortization of debt discount (78,703) - (119,663) -
Change in fair value of
warrant liability (840,539 - (713,187) -
Net (loss) $(1,655,079) $(73,293) $(1,997,969) $(154,175)
Net (loss) per common share,
Basic and diluted $(0.03) $(0.001) $(0.04) $(0.003)
Weighted average shares
Outstanding 52,882,037 51,132,037 52,215,370 50,632,037
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)
(RESTATED)
Preferred Common
Shares Shares Capital
5,000,000 150,000,000 in
Authorized Authorized excess
$.01 Par $.0005 Par of Par Deferred Accumulated
Value Par Value Value Value Compensation Deficit Total
Balance,
March 31,
2004 - 51,882,037 $25,941 $6,861,574 $(69,600) $(6,041,887) $776,028
Issuance of
common stock 2,000,000 1,000 19,000 20,000
Beneficial
conversion
feature 690,620 690,620
Warrants issued
With debt 100,237 100,237
Warrants issued
For services 294,761 (294,761) -
Amortization of
Deferred Compensation 41,090 41,090
Net loss for
the period
ended
December
31, 2004 (1,997,969)(1,997,969)
Balances,
December
31, 2004 - 53,882,037 $26,941 $7,966,192(323,271) $(8,039,856) ($369,994)
3
ADM TRONICS UNLIMITED, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
2004 2003
(RESTATED)
Cash flows from Operating activities:
Net (loss) ($1,997,969) $(154,175)
Adjustments to reconcile net (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 103,874 110,813
Value of common stock issued
for services rendered 19,000 22,000
Amortization of debt discount 119,663 -
Amortization of deferred compensation 41,090 -
Change in fair value of warrant liability 713,187 -
Changes in operating assets and liabilities:
Accounts receivable (56,248) (388)
Inventories 163,148 105,599
Other current assets (284,295) 821
Other assets (18,976) 4,816
Accounts payable (74,244) (50,871)
Accrued expenses and other current liabilities 84,386 (21,050)
Net cash flows provided by (used in)
operating activities (1,187,384) 17,565
Cash flows from Investing activities:
Purchases of property and equipment (31,793) -
Net cash flows provided by (used in)
investing activities (31,793) -
Cash flows from Financing activities:
Proceeds from 6% Unsecured Convertible Notes 3,637,500 -
Deferred loan fees (476,998) -
Issuance of common stock for cash 1,000 750
Net cash flows provided by
financing activities 3,161,502 750
Net change in cash and cash equivalents $1,942,325 $ 18,315
Cash and cash equivalents--beginning of period $ 90,081 $ 49,765
Cash and cash equivalents--end of period $2,032,406 $ 68,080
Supplemental disclosure of cash flow activities:
Interest paid - -
Income taxes paid - -
4
ADM TRONICS UNLIMITED, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1-Basis of Presentation:
Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of ADM Tronics Unlimited, Inc. and its subsidiaries
(collectively, the "Company"). These consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and the instructions to Form 10-QSB and do not include all
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
of the results for the interim periods have been included. Operating
results for the nine months ended December 31, 2004 are not necessarily
indicative of the results that may be expected for the year ending March
31, 2005. The accompanying consolidated financial statements and the
information included under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" should be read
in conjunction with the Company's audited consolidated financial
statements and related notes included in the Company's Form 10-KSB for
the fiscal year ended March 31, 2004.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Loss Per Share
Basic and diluted loss per common share for all periods presented is
computed based on the weighted average number of common shares
outstanding during the periods presented as defined by SFAS No. 128,
"Earnings Per Share". The assumed exercise of common stock equivalents
was not utilized for the nine and three month periods ended December 31,
2004 since the effect would be anti-dilutive. There were 31,657,773
common stock equivalents at December 31, 2004 and none at December 31,
2003.
Stock Options and Warrants
The Company accounts for its stock-based employee compensation plans
using the intrinsic value based method, under which compensation cost is
measured as the excess of the stock's market price at the grant date over
the amount an employee must pay to acquire the stock. Stock options and
warrants issued to non-employees are accounted for using the fair value
based method, under which the expense is measured as the fair value of
the security at the date of grant based on the Black-Scholes pricing
model. A subsidiary of the Company had 578,500 employee stock options
outstanding at December 31, 2004, and none at December 31, 2003.
Pro Forma Information
Employee and Director Common Share Purchase Options - Pro forma
information regarding the effects on operations of employee and director
common share purchase options as required by SFAS No. 123 and SFAS
No. 148 has been determined as if the Company's subsidiary had accounted
for those options under the fair value method. Pro forma information is
computed using the Black Scholes method at the date of grant of the
options based on the following assumptions ranges: (1) risk free
interest rate of 3.62%; (2) dividend yield of 0%; (3) volatility factor
of the expected market price of our common stock of 67%; and (4) an
expected life of the options of 6 years. The foregoing option valuation
model requires input of highly subjective assumptions. Because common
share purchase options granted to employees and directors have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value of estimates, the existing model does not in the opinion
of our management necessarily provide a reliable single measure of the
fair value of common share purchase options we have granted to our
employees and directors.
Pro forma information relating to employee and director common share purchase
options is as follows:
For the For the
Three Months Nine Months
Ended Ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
Net loss as reported $(1,655,079) $ (73,293) $(1,997,969) $ (154,175)
Stock compensation
calculated under
SFAS No. 123 (2,493) - (7,475) -
Pro forma net loss $(1,657,572) $ (73,293) $(2,005,444) $ (154,175)
Historical basic and
diluted loss per share $(0.03) $(0.001) $(0.04) $(0.003)
Restatement:
The December 31, 2004 financial statements have been restated to record a
beneficial conversion feature related to convertible notes payable issued
by the Company in the amount of $690,620. The Company has also recorded
an amount of $377,848 related to the fair value of warrants issued with
the debt, which was recorded as a liability due to a registration rights
agreement. The result is to record an aggregate discount on debt of
$1,068,468. Additionally, the Company issued compensation warrants
related to the debt placement with a fair value of $100,237 and has
recorded deferred compensation of $294,761 related to warrants issued for
services. The amortization of these items for the three and nine month
periods ended December 31, 2004 was $93,441 and $134,401, respectively.
Also, the fair value of the warrants has been recorded at $1,091,035 at
December 31, 2004, and an expense for the three and nine months ended
December 31, 2004 of $840,539 and $713,187, respectively, has been
recorded. As a result of these corrections, net loss for the three and
nine months ended December 31, 2004 has increased by $933,980 and
$847,588, respectively, to $1,655,079 and $1,997,969, respectively, and
loss per share increased to $0.03 and $0.04, respectively, from $0.01 and
$0.02, respectively.
Changes to the balance sheet at December 31, 2004 resulting from these
corrections are as follows:
As reported Restated
Unamortized debt discount $ -- $ 987,742
Deferred financing costs
and other assets 526,055 587,355
Warrants issued with
registration rights -- 1,091,035
Deferred compensation -- 280,023
Capital in excess of
par value 6,832,368 7,917,986
Accumulated deficit (7,188,268) (8,035,856)
Note 2. Segment Information
Information about segment information is as follows:
Nine Months Ended December 31, 2004: CHEMICAL MEDICAL TOTAL
Revenues from external customers $659,414 $ 327,753 $ 987,166
Segment profit (loss) 165,711 (2,163,680) (1,997,969)
Identifiable asstes 760,076 2,966,045 3,726,121
Nine Months Ended December 31, 2003:
Revenues from external customers 667,635 163,168 830,803
Segment profit (loss) (83,339) (74,770) (158,109)
Three Months Ended December 31, 2004:
Revenues from external customers 222,927 111,256 334,183
Segment profit (loss) 45,335 (1,700,414)
(1,655,079)
Three Months Ended December 31, 2003:
Revenues from external customers 200,888 36,133 237,021
Segment profit (loss) (25,022) (52,041) (77,063)
Note 3. Private Placement Offering
In December 2004, the Company, together with one if its subsidiaries,
Ivivi, completed a private placement (the "December Private Placement")
pursuant to which they issued unsecured convertible notes in an aggregate
principal amount of $3,637,500 and realized net proceeds of approximately
$3,150,000 from the sale of the notes. The notes issued in the private
placement are joint unsecured convertible notes of the Company and Ivivi
and bear interest at an annual rate of 6%. Interest on the notes is
payable quarterly in cash or shares of common stock of Ivivi, at the
direction of the holder. The notes are due and payable at various times
from July 2009 through December 2009, unless earlier converted. In
February 2005, the Company and Ivivi issued an additional $2,450,000
principal amount of notes (the "February Private Placement") and realized
net proceeds of approximately $2,165,000 from the sale of the notes,
which have primarily the same terms as the notes issued in the December
Private Placement. The notes issued in the February Private Placement
are due and payable in February 2010, unless earlier converted.
The principal and accrued interest on the notes will either be: (i)
convertible into the Company's common stock at $.29 per share or (ii)
convertible into Ivivi's common stock at $8.30 per share. For each note
in the principal amount of $100,000 issued in the private placements, one
warrant for the purchase of up to 344,828 shares of the Company's common
stock at $.41 per share (the "Company Warrant") and one warrant for the
purchase of up to 12,048 shares of Ivivi's common stock at $5.70 per
share (the "Ivivi Warrant") were issued. Each of the Company Warrants
and the Ivivi Warrants provides that in addition to paying the exercise
price upon exercise of the warrant, the holder must surrender the non-
exercised warrant (i.e., either the Company Warrant or the Ivivi Warrant,
as the case may be).
The Company and Ivivi have executed registration rights agreements with
the investors which require the registration for resale of the securities
sold in the private placement. In the event that the Company and Ivivi
fail to satisfy certain covenants related to the registration of the
common stock underlying the notes and warrants on behalf of the holders,
the number of shares of common stock underlying the notes and warrants
will be increased. The notes contain customary operating covenants. As
of February 14, 2005, the Company and Ivivi were in material compliance
with the covenants contained in the notes.
As additional consideration for the purchase of the notes, the Company
granted to the purchasers warrants entitling them to purchase 12,543,103
common shares at the price of $0.41 per share. These warrants lapse if
unexercised after five years, or upon an effective registration statement
of Ivivi. A registration rights agreement was executed requiring the
Company to register the shares of its common stock underlying the notes
and warrants so as to permit the public resale thereof. In accordance
with EITF 00-27, a portion of the proceeds was allocated to the warrant
liability based on its fair value, which totaled $377,848 using the
Black-Scholes option pricing model. The remaining balance was allocated
to the convertible notes and was used to compute the beneficial
conversion feature. The Company attributed a beneficial conversion
feature of $690,620 to the convertible notes based upon the difference
between the effective conversion price of those shares and the closing
price of the Company's common shares on the date of issuance. The
assumptions used in the Black-Scholes model are as follows: (1) dividend
yield of 0%; (2) expected volatility of 64%, (3) risk-free interest rate
of 1.5%, and (4) expected life of six months. The total debt discount
of $1,068,468 is being amortized over the term of the notes. During the
three and nine months ended December 31, 2004, amortization as interest
expense amounted to $47,066 and $80,726, respectively.
Since the warrant is a contract requiring settlement through the delivery
of registered shares, and the delivery of such registered shares was not
deemed controllable by the Company, the Company recorded the net value of
the warrants at the date of issuance as a warrant liability on the
balance sheet $377,848 and included the change in fair value from the
date of issuance to December 31, 2004 in other income (expense), in
accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock". The fair value of the warrants was $1,091,035 at
December 31, 2004.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the Company's operations and financial
condition should be read in conjunction with the Financial Statements and
notes thereto included elsewhere in this Quarterly Report on Form 10-QSB.
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking
statements within the meaning of the "safe harbor" provisions under
section 21E of the Securities and Exchange Act of 1934 and the Private
Securities Litigation Act of 1995. The Company uses forward-looking
statements in its description of its plans and objectives for future
operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may", "expects",
"believes", "anticipates", "intends", "forecasts", "projects", or similar
terms, variations of such terms or the negative of such terms. These
forward-looking statements are based on management's current
expectations and are subject to factors and uncertainties which could
cause actual results to differ materially from those described in such
forward-looking statements. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions
to any forward-looking statements contained in this Form 10-QSB 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 Risk Factors set forth in Exhibit 99.1 and elsewhere in,
or incorporated by reference into the Company's Annual Report on Form
10-KSB/A.
Critical Accounting Policies
Revenue Recognition:
Sales revenues are recognized when products are shipped to end users and
rental and lease revenues are recognized principally on either a
monthly or a pay-per use basis in accordance with individual rental or
lease agreements and are recognized on a monthly basis as earned.
Shipments to distributors are recognized as sales where no right of
return exits. This is generally the case with sales of chemicals. This
is generally not the case with sales of the SofPulse units. The Company
recognizes revenue from the sale of the SofPulse products when the
products are shipped to end users. An increasing amount of rental
revenue is recognized on a fixed monthly recurring basis as product is
utilized by the end-user. Sales returns have been immaterial. Lease
revenues through third party distributors have also been immaterial and
there have been no sales through third party distributors. The Company's
products are principally shipped on a "freight collect" basis. Shipping
and handling charges and costs are immaterial.
Use of Estimates:
The Company's discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have
been prepared in accordance with accounting principles generally accepted
in the United states of America. The preparation of these consolidated
financial statements requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities.
On an ongoing basis, the Company evaluates its estimates, including those
related to reserves, deferred tax assets and valuation allowance,
impairment of long-lived assets, fair value of equity instruments issued
to consultants for services and fair value of equity instruments issued
to others. The Company bases its estimates on historical experience and
on various other assumptions that the Company believes to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, the
Company believes that its estimates, including those for the above-
described items, are reasonable.
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 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 the Company itself and its three subsidiaries,
Ivivi Technologies, Inc., Pegasus Laboratories, Inc. and Sonotron Medical
Systems, Inc.
The December 31, 2004 financial statements have been restated to record a
beneficial conversion feature related to the Company's convertible notes
payable and to record an additional discount related to the fair value of
warrants issued with the debt. See Note 1 of the Notes to the Company's
Consolidated Financial Statements contained in Item 1 of this Amendment
No. 1 for a discussion of the restatement.
Liquidity and Capital Resources
At December 31, 2004, the Company had cash and equivalents of $2,032,406
as compared to $90,081 at March 31, 2004. The increase was primarily the
result of net proceeds of of $3,161,718 from a private placement of
unsecured convertible notes which was completed in December 2004 offset
by increased personnel, research and development and marketing activities
of $1,190,947 at the Company's subsidiary, Ivivi Technologies, Inc.
("Ivivi").
In December 2004, the Company, together with one if its subsidiaries,
Ivivi, completed a private placement (the "December Private Placement")
pursuant to which they issued unsecured convertible notes in an aggregate
principal amount of $3,637,500 and realized net proceeds of approximately
$3,150,000 from the sale of the notes. The notes issued in the private
placement are joint unsecured convertible notes of the Company and Ivivi
and bear interest at an annual rate of 6%. Interest on the notes is
payable quarterly in cash or shares of common stock of Ivivi, at the
direction of the holder. The notes are due and payable at various times
from July 2009 through December 2009, unless earlier converted. In
February 2005, the Company and Ivivi issued an additional $2,450,000
principal amount of notes (the "February Private Placement") and realized
net proceeds of approximately $2,165,000 from the sale of the notes,
which have primarily the same terms as the notes issued in the December
Private Placement. The notes issued in the February Private Placement
are due and payable in February 2010, unless earlier converted.
The principal and accrued interest on the notes will either be: (i)
convertible into the Company's common stock at $.29 per share or (ii)
convertible into Ivivi's common stock at $8.30 per share. For each note
in the principal amount of $100,000 issued in the private placements, one
warrant for the purchase of up to 344,828 shares of the Company's common
stock at $.41 per share (the "Company Warrant") and one warrant for the
purchase of up to 12,048 shares of Ivivi's common stock at $5.70 per
share (the "Ivivi Warrant") were issued. Each of the Company Warrants
and the Ivivi Warrants provides that in addition to paying the exercise
price upon exercise of the warrant, the holder must surrender the non-
exercised warrant (i.e., either the Company Warrant or the Ivivi Warrant,
as the case may be).
The Company and Ivivi have executed registration rights agreements with
the investors which require the registration for resale of the securities
sold in the private placement. In the event that the Company and Ivivi
fail to satisfy certain covenants related to the registration of the
common stock underlying the notes and warrants on behalf of the holders,
the number of shares of common stock underlying the notes and warrants
will be increased. The notes contain customary operating covenants. As
of February 14, 2005, the Company and Ivivi were in material compliance
with the covenants contained in the notes.
Operating Activities
Net cash flows used in operating activities were $1,187,384 for the nine
months ended December 31, 2004 as compared to $17,565 provided by
operating activities for the nine months ended December 31, 2003. Cash
used in operating activities primarily resulted from the net loss for the
period of $1,997,969, partially offset by non-cash charges. The
significant increase in operating expenses relates to the medical device
subsidiary's (Ivivi) expansion; principally salaries of added personnel,
consulting fees and research and development expense resulted in a net
cash outflow from operating activities.
Investing Activities
Investing activities during the nine months ended December 31, 2004 were
$31,793 as compared to zero for the nine months ended December 31, 2003.
The increase resulted from the purchases of property and equipment.
Financing Activities
Cash flows provided by financing activities for the nine months ended
December 31, 2004 were $3,161,502 as compared to $750 for the nine months
ended December 31, 2003 The increase resulted from $3,637,500 received
from private placements of unsecured convertible notes of the Company and
Ivivi reduced by deferred loan fees related thereto.
The proceeds of the private placements are being used primarily for sales
and marketing activities of Ivivi, for research
6
and development of potential products being developed by Ivivi and to
repay a portion of indebtedness owed to the Company by Ivivi. The
Company will need to obtain additional capital to continue to operate and
grow its business, including the business of its subsidiaries, and its
ability to obtain additional financing in the future will depend in part
upon the prevailing capital market conditions, as well as its and its
subsidiaries' business performance. In February 2005, the Company's
subsidiary, Ivivi, filed a registration statement with the Securities and
Exchange Commission related to the proposed initial public offering of
Ivivi's common stock. There can be no assurance that the Company
or Ivivi will be successful in their efforts to arrange additional
financing, including through the proposed initial public offering of
Ivivi's common stock, on terms satisfactory to the Company and/or Ivivi
or at all.
Results of Operations
Quarter Ended December 31, 2004
Revenues
Revenues were $334,183 in 2004 as compared to $237,021 in 2003
representing an increase of $97,162 or 41%. Revenues from the Company's
medical technology activities increased $75,123 and chemical revenues
increased $22,039 in 2004 as compared to 2003. The increase in revenues
from the Company's medical technology activities was due to higher rental
revenues for Ivivi's medical products resulting from increased marketing
and sales efforts. Chemical revenues increased due to new customers for
the Company's water-based chemical products.
Gross Profit
Gross profit of $164,781 in 2004 as compared to $110,596 in 2003 was
$54,185 or 49% above the gross profit in 2003. Gross profit was 49% of
revenues in 2004 as compared with 47% of revenues in 2003. The increase
in gross profit margin was primarily due to the increase in rental
revenues of the Company's medical device products already in stock
thereby resulting in higher gross margins as well as the product mix of
chemical products sold with a higher gross margin.
Operating (Loss)
Operating loss in 2004 was ($680,915) compared to ($77,063) in 2003.
Selling, general and administrative expenses increased by $658,037
primarily due to the significant increase in personnel, marketing,
research and development
and overhead costs from the Company's Ivivi subsidiary.
Other Income (Expense)
Net other expense in 2004 was $974,164 as compared to income of $3,770 in
2003. Other net expense for 2004 was primarily from a change in fair
value of the warrant liability of $840,539, amortization of debt discount
and costs of $78,703 and from payments interest accrued on the
convertible notes issued in the private placement partially offset by
interest earned from amounts invested in money market funds.
Results of Operations
Nine Months Ended December 31, 2004
Revenues
Revenues were $987,166 as compared to $830,803 in 2003 representing an
increase of $156,363 or 19%. Revenues from the Company's medical
technology activities increased $164,585 offset by a decrease in chemical
revenues of $8,221. The increase in revenues from the Company's medical
technology activities was due to higher rental revenues for Ivivi's
medical product resulting from increased marketing and sales efforts.
Chemical revenues decreased due to reduced volume of orders from certain
of the Company's chemical customers.
Gross Profit
Gross profit of $451,994 in 2004 as compared to $372,804 in 2003 was
$79,190 or 21% higher than the gross profit in 2003. Gross profit was
46% of revenues in 2004 and 45% in 2003. The gross profit margin in 2004
was comparable to the gross profit margin in 2003.
7
Operating (Loss)
Operating loss was ($1,150,143) in 2004 compared to ($158,109) in 2003.
Selling, general and administrative expenses increased by $1,071,224
primarily due to the significant increase in personnel, marketing,
research and
development and overhead costs from the Company's Ivivi subsidiary.
Other Income (Expense)
Net other expense in 2004 was $847,826 as compared to income of $3,934 in
2003. Other net expense for 2004 was primarily from a change in fair
value of the warrant liability of $713,187, amortization of debt discount
and costs of $119,663 and from payments interest accrued on the
convertible notes issued in the private placement partially offset by
interest earned from amounts invested in money market funds.
The Company's revenues, operations and cash flows over the past few
years have declined. Management has recognized the situation and has
developed a business plan to enhance the activities of one of its
subsidiaries which markets the SofPulse medical device. In December
2004 and February 2005, the Company, together with Ivivi, its
majority-owned subsidiary, completed two private placements pursuant
to which they issued, jointly and severally, unsecured convertible
notes in an aggregate principal amount of $3,637,500 and $2,450,000,
respectively. The private placements were completed in seven separate
closings from July 2004 through February 2005. 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. Approximately $448,000 of the net
proceeds of the private placements were used to repay a portion of its
indebtedness to the Company. The liability for such borrowings
has been recorded in the Company's financial statements. The notes are
due and payable five years from the date of issuance, unless
earlier converted. The notes bear interest at 6% per annum and under
certain circumstances, the principal and accrued interest on the notes
will either be: (i) convertible into the Company's common stock at
$.29 per share or (ii) convertible into Ivivi's common stock at $8.30
per share. For each Note in the principal amount of $100,000
issued in the private placements, one warrant for the purchase of
up to 344,828 shares of the Company's common stock at $.41 per share
(the "Company Warrant") and one warrant for the purchase of up to 12,048
shares of Ivivi's common stock at $5.70 per share (the "Ivivi
Warrant") were issued. Each of the Company Warrants and the
Ivivi Warrants provides that in addition to paying the exercise
price, the holder must surrender the non-exercised warrant (i.e.,
either the Company Warrant or the Ivivi Warrant).
Pursuant to the terms of the private placements completed in each of
December 2004 and February 2005, the number of shares of the Company's
common stock issuable upon conversion of the notes and exercise of the
warrants will increase by 1% for each 30 day period, or portion
thereof, following the 90th day of a demand for registration of the
shares of the Company's common stock underlying the notes and warrants
and such registration statement is not declared effective. In addition
the number of shares of Ivivi's common stock issuable upon conversion of
the notes and exercise of the warrants issued in December 2004 and
February 2005 will increase by 2%, for each 30-day period, or portion
thereof, after March 1, 2005 and June 30, 2005 that a registration
statement covering the shares of the Company's common stock and the
shares of Ivivi's common stock, respectively, underlying securities
issued in the private placement is not declared effective.
The notes issued in the private placements contain covenants that limit
each of the Company's and Ivivi's ability to take certain actions
without the consent of the holders of the notes, including:
o incurring additional indebtedness for borrowed money, except in
the ordinary course of business;
o merging, selling substantially all of its assets or
acquiring another entity;
o making loans or investments;
o paying dividends or making distributions;
o incurring liens on its assets;
o making capital expenditures;
o entering into certain transactions with affiliates; and
o materially changing its business.
As of February 14, 2005, each of the Company and Ivivi was in material
compliance with the covenants contained in the notes. These covenants
will terminate upon conversion of the notes upon consummation of this
offering.
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 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
On September 2, 2005, in response to a comment letter from the
staff of the Securities and Exchange Commission that, among other things,
requested information regarding the accounting for the fair value of
warrants issued with convertible debt and a beneficial conversion feature
related to convertible debt issued by the Company, the Board of Directors
of the Company (the "Board"), on the recommendation of the Company's
management and after discussions with its independent auditors, made an
internal determination and concluded that the financial statements
contained in the Company's Quarterly Report on Form 10-QSB for the
Company's fiscal quarters ended September 30, 2004, December 31, 2004 and
June 30, 2005 (the "Form 10-QSBs") and the financial statements
previously audited by the Company's prior auditors and contained in the
Company's Annual Report on Form 10-KSB for the Company's fiscal year
ended March 31, 2005 (the "Form 10-KSB"), required restatement primarily
related to the accounting for the fair value of warrants issued with
convertible debt and a beneficial conversion feature related to the
convertible debt issued with respect to the financing for the Company's
subsidiary, Ivivi Technologies, Inc. as previously accounted for by the
Company. The restatements are described in Note 1 of the Notes to
Consolidated Financial Statements.
In the Company's Form 10-QSB for the quarter ended December 31,
2004, 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) were 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. However, in connection with the Company's
determination to restate the financial statements contained in the Form
10-QSBs and the Form 10-KSB, the Company's management, including the
principal executive officer and principal financial officer, reevaluated
its disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) 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 accumulated and communicated 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 the reevaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of December 31, 2004, the Company's principal executive
officer and principal financial officer concluded that, solely because
there was a material weakness resulting from the Company not properly
recording the transaction described above under generally accepted
accounting principles, such disclosure controls and procedures were not
effective in ensuring that the information required to be disclosed by
the Company in the reports that it files or submits under the Exchange
Act is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, to
ensure that such information is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms. The
Company has taken steps to remediate the material weakness. See "Changes
in Internal Controls Over Financial Reporting."
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial
reporting that occurred during our last fiscal quarter to which this
Quarterly Report on Form 10-QSB relates that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.
However, as a result of the reevaluation of the effectiveness of the
Company's internal control over financial reporting as of the end of the
fiscal year ended March 31, 2005, the management of the Company,
including the principal executive officer and principal financial
officer, concluded that the need for a restatement of the financial
statements contained in the Form 10-QSBs and the Form 10-KSB were the
result of a material weakness in the internal control over financial
reporting. A material weakness in internal control is a significant
deficiency, or combination of significant deficiencies, that result in
more than a remote likelihood that a material misstatement of the
financial statements would not be prevented or detected on a timely basis
by the Company. The Company's reconciliation and review processes were
not adequate to detect the failure to record the beneficial conversion
feature of the convertible debt and the additional amount related to the
fair value of warrants in the Company's financial statements contained in
the Form 10-QSBs and Form 10-KSB.
The Company has taken steps to remediate the material weakness by (i)
retaining a certified public accountant as a consultant to assist with
the Company's financial reporting obligations and improvement of its
internal controls over financial reporting and (ii) hiring a certified
public accountant as a part-time employee responsible for assisting
management with internal controls, financial reporting and closing the
Company's books and records. The Company believes that these remedial
steps will help correct the material weakness described above. However,
the Company cannot assure that it will not in the future identify further
material weaknesses in its internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In December 2004, the Company, together with one if its subsidiaries,
Ivivi, completed a private placement pursuant to which they issued
unsecured convertible notes in an aggregate principal amount of
$3,637,500 and realized net proceeds of approximately $3,150,000 from the
sale of the notes to institutional and accredited investors. The notes
issued in the private placement are joint unsecured convertible notes of
the Company and Ivivi and bear interest at an annual rate of 6%.
Interest on the notes is payable quarterly in cash or shares of common
stock of Ivivi, at the direction of the holder. The notes are due and
payable at various times from July 2009 through December 2009, unless
earlier converted. In February 2005, the Company and Ivivi issued an
additional $2,450,000 principal amount of notes to institutional
investors and realized net proceeds of approximately $2,165,000 from the
sale of the notes, which have primarily the same terms as the notes
issued in the December Private Placement. The notes issued in February
are due and payable in February 2010, unless earlier converted.
The principal and accrued interest on the notes will either be: (i)
convertible into the Company's common stock at $.29
8
per share or (ii) convertible into Ivivi's common stock at $8.30 per
share. For each note in the principal amount of $100,000 issued in the
private placements, one warrant for the purchase of up to 344,828 shares
of the Company's common stock at $.41 per share (the "Company Warrant")
and one warrant for the purchase of up to 12,048 shares of Ivivi's common
stock at $5.70 per share (the "Ivivi Warrant") were issued. Each of the
Company Warrants and the Ivivi Warrants provides that in addition to
paying the exercise price upon exercise of the warrant, the holder must
surrender the non-exercised warrant relating to the other company(i.e.,
either the Company Warrant or the Ivivi Warrant, as the case may be).
Maxim Group, LLC, an NASD member firm ("Maxim Group"), acted as exclusive
placement agent with respect to the private placements. In connection
with the December Private Placement, Maxim Group received an aggregate of
approximately $400,125 in commissions, fees and other expense
reimbursements and received warrants for the purchase of: (i) 1,003,450
shares of Company common stock at an exercise price of $0.29 per share,
(ii) 1,003,450 shares of Company common stock at an exercise price of
$0.41 per share, (iii) 35,060 shares of Ivivi common stock at an exercise
price of $8.30 per share and (iv) 35,060 shares' Ivivi common stock at an
exercise price of $5.70 per share. In connection with the February 2005
private placement, Maxim Group received cash commissions, non accountable
expense allowance and warrants for the initial $2,250,000 and received no
cash commission, non-accountable expense allowance or warrants with
respect to $200,000 received in such offering. In connection with the
February private placement, Maxim Group received an aggregate of
approximately $247,500 in commissions, fees and other expense
reimbursements and received warrants for the purchase of: (i) 620,690
shares of Company common stock at an exercise price of $0.29 per share,
(ii) 620,690 shares of Company common stock at an exercise price of $0.41
per share, (iii) 21,687 shares of Ivivi common stock at an exercise price
of $8.30 per share and (iv) 21,687 shares of Ivivi common stock at an
exercise price of $5.70 per share.
In addition, the Company issued 2,000,000 shares of its common stock to a
consulting firm for $1,000 and consulting services.
The issuances of the securities in connection with these transactions
were considered to be exempt from registration under the Securities Act
of 1933, as amended (the "Securities Act"), in reliance on Section 4(2)
of the Securities Act or Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering. The
recipients of securities in each of these transactions represented their
intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in these transactions. All recipients either received
adequate information about the Company or had access to such information.
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADM Tronics Unlimited, Inc.
By: \s\ Andre' DiMino,
Chief Executive Officer and
Dated: Northvale, New Jersey Chief Financial Officer
December 9, 2005