Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
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. 001-33088
IVIVI TECHNOLOGIES, INC.
(Name of Small Business Issuer in its Charter)
New Jersey 22-2956711
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or organization) Identification Number)
135 Chestnut Ridge Rd., Montvale, New Jersey 07645
(Address of Principal Executive Offices)
Issuer's Telephone Number, including area code: (201) 476-9600
Indicate by check mark 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 such filing requirements for the past 90 days:
YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
11,241,033 shares of Common Stock, no par value, as of November 19, 2009
IVIVI TECHNOLOGIES, INC.
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements:
Balance Sheets as of September 30, 2009 (Unaudited) and
March 31, 2009 3
Statements of Operations for the three and six months ended
September 30, 2009 and 2008 (Unaudited) 4
Statement of Stockholders' Equity for the six months
ended September 30, 2009 (Unaudited) 5
Statements of Cash Flows for the six months ended
September 30, 2009 and 2008 (Unaudited) 6
Notes to the Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 37
Part II. Other Information 38
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 39
Item 6. Exhibits 40
Signatures 41
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IVIVI TECHNOLOGIES, INC.
BALANCE SHEETS
SEPTEMBER 30, MARCH 31,
2009 2009
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Assets of discontinued operations $ 408,119 $ 894,660
Assets of discontinued operations, held for sale 1,450,941 1,470,125
------------ ------------
Total assets $ 1,859,060 $ 2,364,785
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Liabilities of discontinued operations $ 3,357,218 $ 1,413,688
------------ ------------
Stockholders' (deficiency) equity:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, no par value; 70,000,000 shares
authorized, 11,241,033 shares issued
and outstanding at end of both periods 26,199,461 26,199,461
Additional paid-in capital 15,832,785 13,398,213
Accumulated deficit (43,432,904) (38,549,077)
Treasury stock, at cost, 650,000 shares
outstanding at the end of both periods (97,500) (97,500)
------------ ------------
Total Stockholders' (deficiency) equity (1,498,158) 951,097
------------ ------------
Total Liabilities and Stockholders' (deficiency) equity $ 1,859,060 $ 2,364,785
============ ============
The accompanying notes are an integral part of these unaudited financial statements.
3
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three For the three For the six For the six
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
------------ ------------ ------------ ------------
Continuing Operations $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Discontinued Operations:
Operating loss (967,042) (2,207,956) (2,259,491) (4,455,431)
Interest income 2,619 29,806 6,330 74,966
Interest expense (2,072,820) -- (2,630,666) --
------------ ------------ ------------ ------------
(3,037,243) (2,178,150) (4,883,827) (4,380,465)
------------ ------------ ------------ ------------
Loss from discontinued operations (3,037,243) (2,178,150) (4,883,827) (4,380,465)
------------ ------------ ------------ ------------
Net loss $ (3,037,243) $ (2,178,150) $ (4,883,827) $ (4,380,465)
============ ============ ============ ============
Net loss per share, basic and diluted:
Loss from Continuing Operations $ -- $ -- $ -- $ --
Loss from Discontinued Operations (0.27) (0.20) (0.43) (0.41)
------------ ------------ ------------ ------------
Net loss $ (0.27) $ (0.20) $ (0.43) $ (0.41)
============ ============ ============ ============
Weighted average shares outstanding 11,241,033 10,722,453 11,241,033 10,724,341
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial statements.
4
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Total
Common Stock Additional Stockholders'
----------------------------- Paid-In Accumulated Treasury (Deficiency)
Shares Amount Capital Deficit Stock Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance - April 1, 2009 11,241,033 $ 26,199,461 $ 13,398,213 $(38,549,077) $ (97,500) $ 951,097
Issuance of convertible debt
to Emigrant Capital Corp.,
net of issuance costs of
$330,000 2,170,000 2,170,000
Share based compensation 264,572 264,572
Net loss (4,883,827) (4,883,827)
------------ ------------ ------------ ------------ ------------ ------------
Balance - September 30, 2009 11,241,033 $ 26,199,461 $ 15,832,785 $(43,432,904) $ (97,500) $ (1,498,158)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial statements.
5
IVIVI TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2009 2008
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,883,827) $(4,380,465)
Less: Loss from discontinued operations (4,883,827) (4,380,465)
----------- -----------
Net cash flow result of continuing operations -- --
----------- -----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Adjustments to reconcile net loss from discontinued
operations to net cash used by discontinued operations:
Depreciation and amortization 56,637 161,639
Share based compensation 264,572 609,430
Amortization of deferred revenue -- (31,250)
Accretion of debt discount 2,500,000 --
Bad debt recovery (40,500) --
Write off of deferred revenue from Allergan Settlement -- (310,620)
Other -- (228)
Changes in asset and liability components of discontinued operations:
(Increase) decrease in:
Accounts receivable 99,231 (117,963)
Deposits with and amounts due from affiliate 48 133,131
Inventory 13,020 (139,233)
Equipment in use and under rental agreements 5,911 (192,231)
Receivable relating to litigation settlement 350,000 --
Prepaid expenses 95,583 94,265
Other current assets 30,408 --
Increase (decrease) in:
Accounts payable and accrued expenses (556,467) 149,016
Due to Allergan -- 450,000
Deferred revenue -- 35,640
----------- -----------
(2,065,384) (3,538,869)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES OF DISCONTINUED OPERATIONS:
Purchases of property and equipment -- (7,975)
Increase in restricted cash (339) (796)
Payments for patents and trademarks (115,116) (157,466)
----------- -----------
(115,455) (166,237)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES OF DISCONTINUED OPERATIONS:
Proceeds from issuance of convertible debt to Emigrant Capital
Corp., net of issuance costs of $330,000 2,170,000 --
Exercise of stock options and warrants -- 15,945
----------- -----------
2,170,000 15,945
----------- -----------
Net change in cash and cash equivalents attributable to continuing operations -- --
----------- -----------
Net decrease in cash and cash equivalents attributable to discontinued operations (10,839) (3,689,161)
Cash and cash equivalents included in assets of discontinued operations:
beginning of period 220,136 6,600,154
----------- -----------
end of period $ 209,297 $ 2,910,993
=========== ===========
The accompanying notes are an integral part of these unaudited financial statements.
6
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying 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-Q for smaller
reporting companies (as defined in Rule 12b-2 of the Exchange Act)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 three and six
months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2010.
The accompanying financial statements and related notes 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 our
audited financial statements and related notes thereto included on our Annual
Report on Form 10-K for the fiscal year ended March 31, 2009.
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As reflected in
the accompanying financial statements, we had a net loss of $3,037,243 and
$2,178,150, respectively, for the three months ended September 30, 2009 and 2008
and $4,883,827 and $4,380,465, respectively, for the six months ended September
30, 2009 and 2008 (all of which resulted from our discontinued operations) and a
working capital deficiency of $2,836,423 at September 30, 2009, prior to our
decision to potentially cease operations, and consider all assets as current. We
had a net loss of $7,333,604 and $7,503,091, respectively, all of which arose
from our discontinued operations for the fiscal years ended March 31, 2009 and
2008. We also had a working capital deficiency of $256,136 at March 31, 2009,
which is calculated prior to our decision to potentially cease operations, and
consider all assets as current. At September 30, 2009, we had cash balances of
approximately $209,000 (included in "Assets of Discontinued Operations" not held
for sale) which is not sufficient to meet our current cash requirements for the
next twelve months following the filing of this Form 10-Q on November 19, 2009.
EMIGRANT CAPITAL CORP. DEBT AND FORBEARANCE AGREEMENT
On April 7, 2009, we closed on a $2.5 million loan with Emigrant Capital Corp.
(see Note 2 - Loan Agreement). However, we were not able to generate sufficient
cash flow from our operations to repay principal on this loan of $2,500,000 plus
interest on August 30, 2009.
On September 2, 2009, we announced that we had entered into a Forbearance
Agreement (the "Forbearance Agreement") dated August 31, 2009 with Emigrant
Capital Corp. (the "Lender"). Pursuant to the terms of the Forbearance
Agreement, the Lender had agreed to forbear, through September 9, 2009 (unless a
termination event occurred under the Forbearance Agreement), from requiring us
to repay the principal and interest due under the Convertible Promissory Note
(the "Note") in the principal amount of $2.5 million. The maturity date under
the Note was August 30, 2009.
The Forbearance Agreement also provides for an increase in the interest rate
under the Note to the lesser of (i) 18% or (ii) the maximum rate permitted by
law during the forbearance period. The Lender agreed to the forbearance in order
to provide us with the ability to continue (i) negotiating the Asset Purchase
Agreement transaction with entities affiliated with Mr. Steven M. Gluckstern
(all as more fully described below), our Chairman, President, Chief Executive
Officer and Chief Financial Officer, and (ii) solicit other proposals.
The Forbearance Agreement was amended on September 9, 14, 21, and on September
24, 2009, we announced that we had successfully negotiated the currently
governing Amended and Restated Forbearance Agreement, where the Lender agreed to
extend forbearance through November 30, 2009, which was extended until December
31, 2009, allowing us to complete the transactions described in the Asset
Purchase Agreement, as more fully described below. In addition, in the event we
complete a Superior Proposal under which the purchase price exceeds $3.15
million, we will be obligated to pay Emigrant an additional fee equal to the
lesser of (i) 20% of such excess amount or (ii) $175,000.
7
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
On September 24, 2009 we executed an Asset Purchase Agreement (the "Asset
Purchase Agreement") with Ivivi Technologies, LLC (the "Buyer") an entity
affiliated with Steven M. Gluckstern, our Chairman, President, Chief Executive
Officer and Chief Financial Officer and Ajax Capital, LLC ("Ajax"), an entity
controlled by Steven M. Gluckstern. Pursuant to the terms of such Asset Purchase
Agreement, at the closing, we would sell substantially all of our assets to the
Buyer, other than cash and certain other excluded assets, and the Buyer would
assume certain specified ordinary course liabilities of ours as set forth in
such Asset Purchase Agreement. The aggregate purchase price to be paid to us
under the terms of the Asset Purchase Agreement is expected to equal the sum of
(i) the amount necessary to pay in full the principal, and accrued interest, as
of closing, under our loan with the Lender, which was approximately $2.7 million
as of September 30, 2009 (the "Loan") and (ii) additional cash, however, that
the sum of the amounts specified in clauses (i) and (ii) would not be in excess
of $3.15 million. The closing of the transactions contemplated by the Asset
Purchase Agreement would be subject to certain customary conditions, including
the receipt of approval by our shareholders of the transactions contemplated by
the Asset Purchase Agreement.
On November 17, 2009, we entered into Amendment No. 1 to the Asset Purchase
Agreement. The amendment gives us the right to request advances from Buyer
during the period prior to the closing up to a maximum of $300,000; provided,
that any advances under the agreement will be deducted from the purchase price
payable by Buyer at the closing. As consideration for Buyer's agreement to
advance funds to us until the closing of the transactions contemplated by the
Asset Purchase Agreement, we have agreed to pay up to $0.50 for each $1.00 we
receive as an advance under the Asset Purchase Agreement for the Buyer's legal
expenses; provided that such reimbursement of Buyer's legal expenses shall not
exceed $150,000; provided, further that such expenses shall be pari passu with
our payment obligations to our other creditors. The Company has also agreed to
pay up to $20,000 of Buyer's and Ajax's costs and expenses (including legal fees
and expenses) incurred by Buyer and Ajax in connection with Amendment No. 1. In
the event the Asset Purchase Agreement is terminated prior to the closing, the
Company shall repay the advances as soon as practicable following the date of
such termination with interest at the rate of 8% per annum for each day until
the advances are repaid; provided that any advances that remain unpaid as of the
due date will accrue an interest rate of 12% per annum for each day until
repaid. Our indebtedness pursuant to the advance payments is unsecured and
subordinated in right of payment to Emigrant pursuant to a Subordination
Agreement, dated November 17, 2009, among us, Emigrant and Buyer.
Under the terms of the Asset Purchase Agreement, we and Foundation Ventures, LLC
("Foundation"), our investment banker, would continue to have the right to
solicit other proposals regarding the sale of our assets and equity until
receipt of the approval by our shareholders of the transactions contemplated by
such Asset Purchase Agreement. Prior to the receipt of approval by our
shareholders, we would also have the right to terminate the transaction under
specified circumstances in order to enter into a definitive agreement
implementing a Superior Proposal (to be defined in the Asset Purchase
Agreement). If we terminate the transactions with the Buyer to enter into a
Superior Proposal, we would be required to pay the Buyer a termination fee equal
to $90,000 and, as previously disclosed, in the event we enter into a Superior
Proposal under which the purchase price exceeds $3.15 million, we will be
obligated to pay Emigrant an additional fee equal to the lesser of (i) 20% of
such excess amount or (ii) $175,000.
In connection with the signing of the Asset Purchase Agreement, we have entered
into Voting Agreements (each, a "Voting Agreement") with the Buyer and with
certain of our shareholders, who have the power to vote approximately 39.6% (and
together with our common stock held by Steven M. Gluckstern, approximately
51.3%) of our common stock. Pursuant to each Voting Agreement, the signatory
shareholders would agree to vote their shares of our common stock in favor of
the transactions contemplated by the Asset Purchase Agreement. In the event that
we terminate the transactions with the Buyer in connection with a Superior
Proposal, the Voting Agreements would also terminate.
We are also currently negotiating an extension to the Amended and Restated
Forbearance Agreement with our Lender under which the Lender would agree to
extend the forbearance period in order for us to complete the transactions
contemplated by the proposed Asset Purchase Agreement.
We may not be able to complete the transactions contemplated by the Asset
Purchase Agreement. In the event the transaction with the Buyer is completed,
following the closing, it is likely that our liabilities will exceed our
available cash and our board of directors may elect to liquidate us and utilize
our available cash and assets to repay our outstanding creditors to the extent
8
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
of our remaining assets and then distribute any remaining assets to our
shareholders or any other equity holders, however, we do not believe that there
will be any assets remaining. In addition, following the closing we will remain
liable under our lease for our Montvale, New Jersey office. The lease, which has
a monthly rent of $15,613, will terminate in October 2014. We received a Notice
of Default from the landlord that we are in arrears for unpaid rents for October
and November 2009. The unpaid rent for October and November is expected to be
satisfied through a drawdown by the landlord from a letter of credit held for
their benefit.
In the event we do not successfully complete the transactions contemplated under
the Asset Purchase Agreement or the Amended and Restated Forbearance Agreement
or complete another transaction, we will not be able to meet our obligations
under the Loan and the Lender will have the right to foreclose under the Loan,
which is secured by all of our assets. In such an event, we would have to cease
our operations or file for bankruptcy protection.
If the transactions contemplated by the Asset Purchase Agreement is consummated,
our board of directors may elect to liquidate us and utilize our available cash
and assets to repay our outstanding creditors to the extent of its remaining
assets. Following such repayment, we do not believe that there will be any
assets remaining to distribute to our shareholders or any other equity holders.
In the fourth quarter of 2008, we retained two firms, including Foundation, to
assist us in pursuing alternative strategies and financings relating to our
business. In December 2008, we terminated our relationship with one of the
firms. Through September 30, 2009, we paid $290,000 and issued warrants to one
of the entities including $125,000 of fees relating to our Loan Agreement and
$125,000 of fees relating to our current transaction being negotiated.
Additional fees may be due to Foundation in the event of a Superior Proposal or
other future successful financing or other transactions by us.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern, which will be dependent on our ability to raise
additional funds to finance our operations or seek alternative transactions. The
accompanying financial statements do not include any adjustments that might be
necessary if we are unable to continue as a going concern.
As previously disclosed, in the event we complete the transactions contemplated
by the Asset Purchase Agreement or the Amended and Restated Forbearance
Agreement, we will not be able to meet our obligations under the Loan and the
Lender will have the right to foreclose under the Loan, which is secured by all
of our assets. In such an event, we would have to cease our operations or file
for bankruptcy protection, management believes that under such circumstances
there will be no assets remaining to distribute to the Company's shareholders or
any other equity holders.
9
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
ORGANIZATIONAL MATTERS
ORGANIZATION
Ivivi Technologies, Inc. ("We", "Us", "the Company" or "Ivivi"), formerly AA
Northvale Medical Associates, Inc., was incorporated under the laws of the state
of New Jersey on March 9, 1989. We are authorized under our Certificate of
Incorporation to issue 70,000,000 common shares, no par value, and 5,000,000
preferred shares, no par value.
NATURE OF BUSINESS
Prior to executing the Asset Purchase Agreement on September 24, 2009 and the
recognition of discontinued operations reporting, the following describes the
nature of our historical business.
We sell and rent non-invasive electro-therapeutic medical devices. These
products are sold or rented primarily through our distributors and customers
located in the United States with additional markets in Mexico.
Our medical devices are subject to extensive and rigorous regulation by the FDA,
as well as other federal and state regulatory bodies. On December 15, 2008, we
announced that we had received FDA 510(k) clearance for our currently marketed
targeted pulsed electromagnetic field (tPEMF(TM)) therapeutic products.
NASDAQ DELISTING
On June 23, 2009, our common stock was suspended from trading on the Nasdaq
Stock Market. On June 26, 2009, our common stock commenced trading on the OTC
Bulletin Board under the symbol IVVI.OB.
FDA MATTERS
On April 3, 2008, we filed a 510(k) submission with the Food and Drug
Administration (FDA) for a small, compact transcutaneous electrical nerve
stimulation(TENS)product utilizing our targeted pulsed electromagnetic field
(tPEMF) therapy technology for the symptomatic relief and management of chronic,
intractable pain, for relief of pain associated with arthritis and for the
adjunctive treatment of post-surgical and post-trauma acute pain. The FDA
requested additional information from us in a letter dated April 25, 2008.
During October 2008, we requested a voluntary withdrawal of this 510(k).
On December 15, 2008, we announced that we had received FDA 510(k) marketing
clearance for our currently marketed tPEMF therapeutic SofPulse products.
On April 9, 2009, the FDA issued an order to manufacturers of remaining
pre-amendments class III devices (including shortwave diathermy devices not
generating deep heat, which is the classification for our SofPulse devices) for
which regulations requiring submission of Premarket Approval Applications (PMA)
have not been issued. The order requires the manufacturers to submit to the FDA,
a summary of, and a citation to, any information known or otherwise available to
them respecting such devices, including adverse safety or effectiveness
information concerning the devices which has not been submitted under the
Federal Food, Drug, and Cosmetic Act. The FDA is requiring the submission of
this information in order to determine, for each device, whether the
classification of the device should be revised to require the submission of a
PMA or a notice of completion of a Product Development Protocol ("PDP"), or
whether the device should be reclassified into class I or II. Summaries and
citations were due by August 7, 2009. We submitted our summary with citations to
the FDA on August 7, 2009 for our shortwave diathermy devices not generating
deep heat, complying with this order. Our products are being marketed during
this process.
On July 2, 2009, we filed a 510(k) submission for marketing clearance with the
FDA for a TENS device known as ISO-TENS which uses tPEMF technology. This new
device is proposed for commercial distribution for the symptomatic relief of
chronic intractable pain; adjunctive treatment of post-surgical or post
traumatic acute pain; and adjunctive therapy in reducing the level of pain
associated with arthritis. We believe the ISO-TENS will enable penetration into
various chronic pain markets if FDA clearance is obtained. The FDA requested
additional information related to this submission which has been provided.
Pursuant to the terms of the APA we will transfer our rights under all of our
FDA approved devices, and form 510(k)submissions to the Buyer.
10
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
On April 1, 2008, the Company adopted the accounting pronouncements with respect
to fair value measurements. For certain of our financial instruments, including
accounts receivable, inventories, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their relatively short
maturities.
INTANGIBLE ASSETS OF DISCONTINUED OPERATION, HELD FOR SALE
Intangible assets consist of patents and trademarks of $925,858, net of
accumulated amortization of $83,151 at September 30, 2009. Amortization expense
of patent and trademarks totaled $759 and $30,204 for the quarters ended
September 30, 2009 and 2008, respectively, and $1,510 and $56,106 for the six
months ended September 30, 2009 and 2008, respectively. Patents and trademarks
are amortized over their legal life once they are issued by the U.S. or other
governmental patent and trademark office. The Company contemplates the sale of
the intangible assets pursuant to the APA discussed above, in this note 1.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES OF DISCONTINUED OPERATIONS
At September 30, 2009, accounts payable and accrued expenses consisted of the
following:
Total
-----------
Research and development $ 132,240
Professional fees 221,529
Intellectual Property 116,929
Compensation and Employee Benefits 19,387
Interest on convertible debt 130,583
Consulting 122,431
Accrued rent 36,978
Deposits with RecoverCare 14,445
Other 27,056
-----------
$ 821,578
===========
At September 30, 2009, our Accounts Payable and Accrued Expenses on our Balance
Sheet includes $14,445 of deposits received from RecoverCare which is the
upfront fee of $535 for each of the 27 Roma units held by RecoverCare on that
date and which were not placed into service by them at September 30, 2009.
11
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
LOSS PER SHARE - CONTINUING AND DISCONTINUED OPERATIONS
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 since their effect is
anti-dilutive.
Per share basic and diluted net loss amounted to $0.27 for the quarter ended
September 30, 2009 and $0.20 for the quarter ended September 30, 2008. Per share
basic and diluted net loss amounted to $0.43 for the six months ended September
30, 2009 and $0.41 for the six months ended September 30, 2008. There were
6,363,534 potential shares and 6,390,855 potential shares that were excluded
from the shares used to calculate diluted earnings per share, as their inclusion
would reduce net loss per share, for the quarters and six months ended September
30, 2009 and 2008, respectively.
COMMON SHARE OPTIONS AND WARRANTS ISSUED SHARE BASED COMPENSATION
We follow the provisions of the pronouncements providing guidance related to
share based payments using the modified prospective method. Under this method,
we recognized compensation cost based on the grant date fair value, using the
Black Scholes option value model, for all share-based payments granted on or
after April 1, 2006 plus any awards granted to employees prior to April 1, 2006
that remained unvested at that time.
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 share-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.
As of September 30, 2009, we have used the following assumptions in the Black
Scholes option pricing model: (i) dividend yield of 0%; (ii) expected volatility
of 44%-313.8%; (iii) average risk free interest rate of 1.78%-5.03%; (iv)
expected life of 1 to 6.5 years; and (v) estimated forfeiture rate of 5%. 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.
During the quarters and six months ended September 30, 2009 and 2008, our share
based compensation expense was allocated to the following component accounts of
discontinued operations:
Quarter Ended Six Months
----------------------------- -----------------------------
Sept. 30, 2009 Sept. 30, 2008 Sept. 30, 2009 Sept. 30, 2008
------------ ------------ ------------ ------------
Cost of rentals $ -- $ 11 $ -- $ 22
Research and development 24,044 (1,039) 49,063 15,819
Sales and marketing 18,323 57,359 36,784 78,237
General and administrative 90,488 243,564 180,812 515,352
------------ ------------ ------------ ------------
$ 132,855 $ 299,895 $ 266,659 $ 609,430
============ ============ ============ ============
12
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 2 - LOAN AGREEMENT
On April 7, 2009, we closed on our $2.5 million loan (the "Financing"); with
Emigrant Capital Corp. being the lender, and all as more fully disclosed in Note
1 with respect to current developments. Under the terms of the loan agreement
between us and the Lender (the "Loan Agreement"), as of the date of this filing,
we have borrowed an aggregate of $2.5 million. Borrowings under the Financing
are evidenced by a note (the "Note"), which bears interest at a rate of 12% per
annum (which, as previously disclosed, increased to 18% after August 30, 2009 in
connection with the Forbearance Agreement described in Note 1). See Note 1 for a
description of the Forbearance Agreement. The Note is currently convertible into
our common stock at a conversion price of $0.23 per share.
In connection with the Financing, we issued warrants to the Lender (the
"Warrants"). The Warrants are currently exercisable for $3.0 million of our
common stock at an exercise price of $0.23 per share. The Warrants also provide
for cashless exercise.
In addition to customary mechanical adjustments with respect to stock splits,
reverse stock splits, recapitalizations, stock dividends, stock combinations and
similar events, the Note and the Warrants provide for certain "weighted average
anti-dilution" adjustments whereby if shares of our common stock or other
securities convertible into or exercisable or exchangeable for shares of our
common stock (such other securities, including, without limitation, convertible
notes, options, stock purchase rights and warrants, "Convertible Securities")
are issued by us other than in connection with certain excluded securities (as
defined in the Note and the Warrant and which include a Qualified Financing and
stock awards under our 2009 Equity Incentive Stock Plan), the conversion price
of the Note and the Warrants will be reduced to reflect the "dilutive" effect of
each such issuance (or deemed issuance upon conversion, exercise or exchange of
such Convertible Securities) of our common stock relative to the holders of the
Note and the Warrants.
Because the convertible debentures included detachable warrants that were
immediately exercisable at an exercise price on the date of loan at $0.23 per
share, which was less than the market value of the shares on that date of $0.29
per share, we determined that warrants to have fair value utilizing the
Black-Scholes option-pricing model in excess of the notes' proceeds of
$2,500,000. We have used the following assumptions in the Black Scholes option
pricing model to determine the fair value of the warrants: (i) dividend yield of
0%; (ii) expected volatility of 41%-506%; (iii) average risk free interest rate
of 3.8%; and, (iv) expected life of 5 months. Consequently, we determined that
the value of the warrants to be $2,500,000, the amount of the proceeds of the
convertible note, which we credited to additional paid-in capital. The fair
value of the immediately convertible warrants is being charged to interest
expense and accreted to the convertible debenture in the accompanying financial
statements from the date of the loan, April 7, 2009, to the extended maturity
date of August 30, 2009. For the quarter and six months ended September 30,
2009, we charged $2,006,904 and $2,500,000, respectively, to interest expense in
our Statement of Operations. The interest expense was accreted to the
convertible debenture liability on our Balance Sheet at September 30, 2009.
In connection with the Financing, Steven Gluckstern, our Chairman, President,
Chief Executive Officer and Chief Financial Officer, and a consultant of ours
(currently one of our employees and an affiliate of the Buyer) entered into a
participation arrangement with the Lender whereby Mr. Gluckstern and the
consultant invested $425,000 and $100,000, respectively with the Lender and
shall have a right to participate with the Lender in the Note and the Warrant.
As a result of such relationship, our Board of Directors, including its
independent members, approved the transactions contemplated by the Loan
Agreement.
NOTE 3 - DEFERRED REVENUE OF DISCONTINUED OPERATIONS
At September 30, 2009, our deferred revenue account balance of $35,640
represents funds received from a customer for an extended one year service
contract fee beginning October 1, 2009. Beginning October 1, 2009, we will
amortize this amount over 12 months on a straight-line basis, and reflect such
revenue in discontinued operations.
13
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 4 - RELATED PARTY TRANSACTIONS
MANAGEMENT SERVICES AGREEMENT
We entered into a management services agreement, dated as of August 15, 2001,
with ADM Tronics Unlimited, Inc. ("ADM) under which ADM provides us and its
subsidiaries, Sonotron Medical Systems, Inc. and Pegasus Laboratories, Inc.,
with management services and allocates portions of its real property facilities
for use by us and the other subsidiaries for the conduct of our respective
businesses. Pursuant to the terms of the APA we will transfer our rights and
obligations under the management services agreement to the Buyer.
The management services provided by ADM under the management services agreement
include administrative, technical, engineering and regulatory services with
respect to our products. We pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM based on a portion of its applicable
costs plus any invoices it receives from third parties specific to us. As we
have added employees to our marketing and sales staff and administrative staff
following the consummation of initial public offering, our reliance on the use
of the management services of ADM has been reduced.
We also use office, manufacturing and storage space in a building located in
Northvale, NJ, currently leased by ADM, pursuant to the terms of the management
services agreement to which we, ADM and two of ADM's subsidiaries are parties.
Pursuant to the management services agreement, ADM determines, on a monthly
basis, the portion of space utilized by us during such month, which may vary
from month to month based upon the amount of inventory being stored by us and
areas used by us for research and development, and we reimburse ADM for our
portion of the lease costs, real property taxes and related costs based upon the
portion of space utilized by us.
ADM determines the portion of space allocated to us and each subsidiary on a
monthly basis, and we and the other subsidiaries are required to reimburse ADM
for our respective portions of the lease costs, real property taxes and related
costs.
The amounts included in general and administrative expense (as a component of
discontinued operations) representing ADM's allocations under our management
services agreement with ADM were $4,630 and $7,339 for the three months ended
September 30, 2009 and 2008, and $15,485 and $25,886 for the six months ended
September 30, 2009 and 2008, respectively.
MANUFACTURING AGREEMENT
We, ADM and one subsidiary of ADM, Sonotron Medical Systems, Inc., are parties
to a second amended and restated manufacturing agreement. Under the terms of the
agreement, ADM 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 us. For each product that ADM manufactures for us, we pay
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 us by ADM, if any, plus
(ii) a labor charge based on ADM's standard hourly manufacturing labor rate,
which we believe is more favorable than could be attained from unaffiliated
third-parties. We generally purchase and provide ADM with all of the raw
materials, parts and components necessary to manufacture our products and as a
result, the manufacturing fee we pay to ADM generally is 120% of the labor rate
charged by ADM. On April 1, 2007, we instituted a procedure whereby ADM invoices
us for finished goods at ADM's costs plus 20%.
Under the terms of the agreement, if ADM is unable to perform its obligations
under our manufacturing agreement or is otherwise in breach of any provision of
our manufacturing agreement, we have the right, without penalty, to engage third
parties to manufacture some or all of our products. In addition, if we elect to
utilize a third-party manufacturer to supplement the manufacturing being
completed by ADM, we have the right to require ADM to accept delivery of our
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. Although we believe that there are a number
of third-party manufacturers available to us, we cannot assure you that we would
be able to secure another manufacturer on terms favorable to us or at all or how
long it will take us to secure such manufacturing. The initial term of the
agreement expired on March 31, 2009, subject to automatic renewals for
additional one-year periods, and which was renewed through March 31, 2010,
unless either party provides three months' prior written notice to the other
prior to the end of the relevant term of its desire to terminate the agreement.
14
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
IT SERVICES AGREEMENT
We purchased $4,746 and $190,313 of finished goods and certain components from
ADM at contracted rates during the three months ended September 30, 2009 and
2008, respectively, and $44,873 and $514,927 during the six months ended
September 30, 2009 and 2008, respectively.
Pursuant to the terms of the APA we will transfer our rights and obligations
under the manufacturing agreement to the Buyer.
Effective February 1, 2008, we entered into an agreement to share certain
information technology (IT) costs with ADM. During the six months ended
September 30, 2009 and 2008, there have been no cost reimbursements under this
agreement. Pursuant to the terms of the APA we will transfer our rights and
obligations under the IT cost sharing services agreement to the Buyer.
SERVICES AGREEMENT
Effective August 1, 2009, we entered into an agreement with ADM to provide the
following services and which cancels our Management Services and IT Services
agreements described above:
o ADM will provide us with engineering services, including quality
control and quality assurance services along with regulatory compliance
services, warehouse fulfillment services and network administration
services including hardware and software services.
o ADM will be paid at the rate of $26,000 per month by us for these
services and the four full time engineers and three part time engineers
currently employed by us will be terminated by us.
o The services agreement may be cancelled by either party upon sixty days
notice. Pursuant to the terms of the APA we will transfer our rights
and obligations under this service agreement to the Buyer.
During the three and six months ended September 30, 2009, we paid ADM $52,000
under the terms of this agreement.
Pursuant to the terms of the APA we will transfer our rights and obligations
under the IT cost sharing services agreement to the Buyer.
Our activity with ADM for the quarter and six months ended September 30, 2009 is
summarized as follows, with such assets included in "Assets From Discontinued
Operations:
For the three months ended For the six months ended
September 30, September 30, September 30, September 30,
2009 2008 2009 2008
------------- ------------- ------------- -------------
Balance, beginning of period $ 72,555 $ 145,164 $ 104,321 $ 241,828
Advances to ADM 8,460 68,404 8,460 160,055
Purchases from ADM (4,746) (190,313) (44,873) (514,927)
Charges to ADM 2,964 -- 7,214 --
Charges from ADM (56,630) (9,472) (67,485) (40,894)
Payments to ADM 85,920 94,914 104,183 262,635
Payments from ADM (4,250) -- (7,547) --
------------- ------------- ------------- -------------
Balance, end of period $ 104,273 $ 108,697 $ 104,273 $ 108,697
============= ============= ============= =============
NOTE 5 - CONCENTRATIONS
We maintain cash balances which, at times, exceed federally insured limits.
During the six month period ended September 30, 2009, four customers accounted
for 60% of our direct sales revenue, three customers accounted for 100% of our
rental revenue and one customer accounted for 100% of our sales and revenue
share on RecoverCare contract. During the six month period ended September 30,
2008, two customers accounted for 81% of our direct sales revenue, one customer
accounted for 45% of our rental revenue and one customer accounted for 100% of
our licensing sales and fees revenue. As of September 30, 2009, two customers
accounted for 49% of our accounts receivable and as of September 30, 2008, one
customer accounted for 83% for our accounts receivable. The loss of these major
customers could have a material adverse impact on our operations and cash flow.
15
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB
Accounting Standards Codification ("Codification") as the single source of
authoritative non-governmental U.S. GAAP which was launched on July 1, 2009. The
Codification is a new structure which takes accounting pronouncements and
organizes them by approximately ninety accounting topics. The Codification is
now the single source of authoritative U.S. GAAP. All guidance included in the
Codification is now considered authoritative, even guidance that comes from what
is currently deemed to be a non-authoritative section of a standard. Upon the
Codification's effective date, all non-grandfathered, non-SEC accounting
literature not included in the Codification has become non-authoritative. The
Codification's effective date for interim and annual periods was September 15,
2009. The Codification is for disclosure only and has not impacted the Company's
financial condition or results of operations. The Company has adopted the
Codification, and reflects such adoption throughout this filing.
On October 10, 2008, the FASB issued guidance clarifying the determination of
fair value of a financial asset when the market for that asset is not active. We
have incorporated the guidance and have determined it would have no impact on
the Company's financial position, results of operations or cash flows.
In December 2007, the FASB issued an amendment to the pronouncements governing
the reporting and disclosure requirements relating to non-controlling Interests
in Consolidated Financial Statements. The objective of the amendment is to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards that require the
following changes. The ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity. The amount of consolidated net income (loss) attributable
to the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of operations. When a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary is initially measured at fair value. The gain or loss on
the deconsolidation of the subsidiary is measured using the fair value of any
noncontrolling equity investment rather than the carrying amount of that
retained investment and entities provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. The Company has adopted this amendment effective
April 1, 2009, and it did not have an impact on our condensed consolidated
financial statements.
In December 2007, the FASB issued guidance on business combinations that
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about
business combinations and their effects. To accomplish these objectives, the
statement establishes principles and requirements as to how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The Company has adopted this
pronouncement effective April 1, 2009. The adoption of the pronouncement has not
had an impact on our condensed consolidated financial statements.
16
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
In May 2009, the FASB issued guidance on subsequent events. This guidance
requires an entity to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that existed
at the date of the balance sheet. For nonrecognized subsequent events that must
be disclosed to keep the financial statements from being misleading, an entity
will be required to disclose the nature of the event as well as an estimate of
its financial effect, or a statement that such an estimate cannot be made. In
addition, the pronouncement requires an entity to disclose the date through
which subsequent events have been evaluated. The pronouncement is effective for
the Company beginning in the first quarter of fiscal year 2010 and is required
to be applied prospectively. The Company adopted the pronouncement and has
determined that it has no impact on the Company's financial condition, results
of operations or cash flows.
Management does not believe that any other recently issued, but not yet
effective accounting pronouncement, if adopted, would have a material effect on
the accompanying unaudited financial statements.
NOTE 7 - LEGAL PROCEEDINGS
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a New York
Home Health Care Equipment, or NYHHC, and Harry Ruddy 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. On April 30, 2008, during a conference before the Hon.
Brian R. Martinotti J.S.C. all claims were settled and the terms of the
settlement were placed on the record. The settlement calls for the defendants to
dismiss with prejudice all counterclaims filed against us and to pay us the sum
of $120,000 in installments. The terms provide for an initial payment of $15,000
and the balance to be paid in equal monthly installments of $5,000. In the event
of default defendants shall be liable for an additional payment of $30,000,
interest at the rate of 8% per annum as well as costs and attorney's fees. The
settlement was documented in a written agreement executed by the parties and the
initial payment of $15,000 was paid on June 18, 2008. The defendants defaulted
on the payment due July 2008 and we were advised that the defendants filed for
protection under Chapter 11 of the United States Bankruptcy Code on July 21,
2008. As of September 30, 2009, we have only recognized the cash received. We
have filed our proof of claim with the Bankruptcy Court.
On October 10, 2006, we received a demand for arbitration by Stonefield
Josephson, Inc. with respect to a claim for fees for accounting services in the
amount of $105,707, plus interest and attorney's fees. Stonefield Josephson had
previously invoiced Ivivi for fees for accounting services in an amount which
Ivivi refuted. We pursued claims against Stonefield Josephson. We filed a
complaint against Stonefield Josephson in the Superior Court of New Jersey Law
Division Docket No.BER-l-872-08 on January 31, 2008. A commencement of
arbitration notice initiated by Stonefield Josephson was received by us on March
11, 2008. In March and April motions were filed by us and Stonefield Josephson
which sought various forms of relief including the forum for resolution of the
claims. On June 3, 2008, the court determined that the language in the
engagement agreement constituted a forum selection clause and the claims should
be decided in California. On June 19, 2008, we filed a complaint against
Stonefield Josephson in the Superior Court of California, Los Angeles County. On
July 18, 2008, the court denied our request for reconsideration of the order
dated June 3, 2008.
On January 19, 2009, the arbitrator rendered the award and found in our favor
and determined that no additional fees were owed by Ivivi to Stonefield. The
arbitrator further found Ivivi to be the prevailing party. The award is final.
As a result, at March 31, 2009, we reversed $105,707 which we previously
included in professional fees and accrued expenses for invoices received by us
during the quarters ended March 2006 and December 2005. The entire matter was
settled at mediation on June 23, 2009. We agreed to accept payment of $350,000
in settlement of any and all claims and the parties agreed to dismiss all
pending suits. The settlement was a compromise and Stonefield Josephson did not
admit liability. At March 31, 2009 we recorded the settlement in our Balance
Sheet as Receivable Relating to Litigation Settlement and as a credit to
professional fees - legal in General and Administrative Expense in our Statement
of Operations for the year ended March 31, 2009, all of which was reclassified
into discontinued operations. We received two checks totaling $350,000 on July
7, 2009 in payment of the settlement.
17
IVIVI TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2009
(UNAUDITED)
Subsequent to the announcement of the Asset Purchase Agreement, a purported
shareholder class action complaint, captioned Lehmann v. Gluckstern, et. al.,
was filed by one of our shareholders in the Chancery Division of the Superior
Court of New Jersey in Bergen County, on November 13, 2009, naming us, our
directors, Buyer and Ajax as defendants. The complaint alleges causes of action
against the defendants for breach of their fiduciary duties in connection with
the proposed sale of our assets to Buyer. It also alleges that Buyer and Ajax
aided and abetted the alleged breaches of fiduciary duties by our directors.
Consequently, plaintiff seeks relief including, among other things, (i)
preliminary and permanent injunctions prohibiting consummation of the
transactions contemplated by the Asset Purchase Agreement and (ii) payment of
plaintiff's costs and expenses, including attorneys' and experts' fees. The
lawsuit is in its preliminary stage, and the court has not yet made any
determinations in the matter, including whether to certify the purported class.
We and the Buyer believe that the lawsuit is without merit and intend to defend
vigorously against it.
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.
NOTE 8 - SUBSEQUENT EVENTS
Subsequent Events have been evaluated through November 19, 2009, the date the
financial statements included in this Form 10-Q were filed with the Securities
and Exchange Commission ("SEC"). Also refer to Note 1 to these unaudited
condensed financial statements for details of the APA subsequent event
unrecognized impact.
On November 12, 2009 we were notified by our landlord that as of that date, we
were in default of our lease for failure to pay rent and additional rent
totaling approximately $37,100. As of November 19, 2009, the date the financial
statements included in this Form 10-Q were filed with the Securities and
Exchange Commission ("SEC"), we have not cured this default.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF DISCONTINUED OPERATION'S
FINANCIAL CONDITION AND RESULTS OF DISCONTINUED OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS AND INVOLVES
NUMEROUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED
UNDER "ITEM 1A. BUSINESS-RISK FACTORS" OF OUR ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED MARCH 31, 2009. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q.
SUPERVISION AND REGULATION -- SECURITIES AND EXCHANGE COMMISSION
We maintain a website at www.ivivitechnologies.com. We make available free of
charge on our website all electronic filings with the Securities and Exchange
Commission (including proxy statements and reports on Forms 8-K, 10-K and 10-Q
and any amendments to these reports) as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission. The Securities and Exchange Commission maintains an
internet site (http://www.sec.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the Securities and Exchange Commission.
We have also posted policies, codes and procedures that outline our corporate
governance principles, including the charters of the board's audit and
nominating and corporate governance committees, and our Code of Ethics covering
directors and all employees and the Code of Ethics for senior financial officers
on our website. These materials also are available free of charge in print to
stockholders who request them in writing. The information contained on our
website does not constitute a part of this report.
OVERVIEW
We are an early-stage medical technology company focusing on designing,
developing and commercializing proprietary electrotherapeutic technologies.
Electrotherapeutic technologies employ pulsed electromagnetic signals for
various medical therapeutic applications. As described more fully throughout
this filing, we have entered into an Asset Purchase Agreement on September 24,
2009. Upon the closing of such agreement, we may liquidate, and discontinue all
operations. All further description of the business in the OVERVIEW Section
relates to the operation of the business during points in time prior to
September 24, 2009.
Based on mathematical and biophysical models of the electrochemical properties
of specific biochemical signaling pathways, we develop and design proprietary
tPEMF signals. Research using our tPEMF signals has suggested, and we believe,
that these signals improve specific physiological processes, including those
that generate the body's natural anti-inflammatory response, as well as tissue
repair. Our tPEMF technology is currently utilized to address pathological
conditions, including post operative pain and edema. We are also developing
applications for increasing angiogenesis (new blood vessel growth), a critical
component for tissue growth and repair.
We attempt to protect our technology and products through patents and patent
applications. We have built a portfolio of patents and applications covering our
technology and products, including its hardware design and methods. As of the
date of this report, we have two issued U.S. patents, one petition pending for
one issued U.S. patent and sixteen non-provisional pending U.S. patent
applications covering various embodiments and end use indications for tPEMF and
related signals and configurations.
Our medical devices are subject to extensive and rigorous regulation by the FDA,
as well as other federal and state regulatory bodies. Our currently marketed
devices, the SofPulse M-10, Roma and Torino PEMF products are cleared by the FDA
for the palliative treatment of post-operative pain and edema in superficial
soft tissue. Our devices are also CE marked Conformite Europeenne), cleared by
Health Canada, and ready for commercialization in the European Union ("EU") and
Canada for the promotion of wound healing, reduction of pain and post-operative
edema. Additionally, the Centers for Medicare and Medicaid Services, ("CMS")
provides coverage for regenerative chronic wound (e.g., diabetic ulcers) healing
in medical center settings.
19
On April 9, 2009, the FDA issued an order to manufacturers of remaining
pre-amendments class III devices (including shortwave diathermy devices not
generating deep heat, which is the classification for our SofPulse devices) for
which regulations requiring submission of Premarket Approval Applications (PMA)
have not been issued. The order requires the manufacturers to submit to the FDA,
a summary of, and a citation to, any information known or otherwise available to
them respecting such devices, including adverse safety or effectiveness
information concerning the devices which has not been submitted under the
Federal Food, Drug, and Cosmetic Act. The FDA is requiring the submission of
this information in order to determine, for each device, whether the
classification of the device should be revised to require the submission of a
PMA or a notice of completion of a Product Development Protocol ("PDP"), or
whether the device should be reclassified into class I or II. Summaries and
citations were due by August 7, 2009. We submitted our summary with citations to
the FDA on August 7, 2009 for our shortwave diathermy devices not generating
deep heat, complying with this order. Our products are currently marketed during
this process.
On July 2, 2009, we filed a 510(k) submission for marketing clearance with the
FDA for a TENS device known as ISO-TENS which uses tPEMF technology. This new
device is proposed for commercial distribution for the symptomatic relief of
chronic intractable pain; adjunctive treatment of post-surgical or post
traumatic acute pain; and adjunctive therapy in reducing the level of pain
associated with arthritis. We believe the ISO-TENS will enable penetration into
various chronic pain markets if FDA clearance is obtained. The FDA requested
additional information related to this submission which has been provided.
In addition, the FDA could subject us to other sanctions set forth under
"Government Regulation."
Our products consist of the following three components:
o the proprietary targeted pulsed electromagnetic field (tPEMF) signal;
o a signal generator; and
o applicators.
The signal generator produces a specific tPEMF signal that is pulsed through the
applicator. The applicator transmits the tPEMF signal into the soft tissue
target, penetrating medical dressings, casts, coverings, clothing and virtually
all other non-metallic materials. Our products can be used immediately following
acute injury, trauma and surgical wounds, as well as in chronic conditions, and
requires no alteration of standard clinical practices to accommodate the therapy
provided by tPEMF. We have performed rigorous scientific and clinical studies
designed to optimize tPEMF signal parameters. These studies have allowed us to
develop portable, easy to use products, which have greatly expanded
post-operative applications. Product cost has been reduced which may lower the
cost of healthcare utilizing our product. We continue to focus our research and
development activities on optimizing the signal parameters of our tPEMF
technology in order to produce improved clinical outcomes and smaller more
efficient, less costly, products utilizing less power.
Since the mid-1990s, our products have been used in over 1,000,000 treatments
(15 minute application to a single target area of a patient is one treatment) by
healthcare professionals on medical conditions, such as:
o acute or chronic wounds, including post surgical wounds;
o edema and pain following plastic and reconstructive surgery; and
o pain associated with the inflammatory phase of chronic conditions.
We are currently a party to, and intend to continue to seek, agreements with
distributors to assist us in the marketing and distribution of our products. As
of the date of this report, we have engaged two domestic third-party
distributors to assist us in marketing our products in the United States in the
chronic wound care market and one distributor in Mexico to assist us in
marketing our products. We are also actively pursuing exclusive arrangements
with strategic partners we believe have leading positions in our target markets,
in order to establish nationwide, and in some cases worldwide, marketing and
distribution channels for our products. Generally, under these arrangements, the
strategic partners would be responsible for marketing, distributing and selling
our products while we continue to provide the related technology, products and
technical support. Through this approach, we expect to achieve broader marketing
and distribution capabilities in multiple target markets.
20
GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As reflected in
the accompanying financial statements, we had a net loss of $3,037,243 and
$2,178,150, respectively, for the three months ended September 30, 2009 and 2008
and $4,883,827 and $4,380,465, respectively, for the six months ended September
30, 2009 and 2008 (all of which resulted from our discontinued operations) and a
working capital deficiency of $2,836,423 at September 30, 2009, prior to our
decision to potentially cease operations, and consider all assets as current. We
had a net loss from discontinued operations of $7,333,604 and $7,503,091,
respectively, for the fiscal years ended March 31, 2009 and 2008. We also had a
working capital deficiency of $256,136 at March 31, 2009, which is calculated
prior to our decision to potentially cease operations, and consider all assets
as current. At September 30, 2009, we had cash balances of approximately
$209,000 (included in "Assets of Discontinued Operations" not held for sale)
which is not sufficient to meet our current cash requirements for the next
twelve months following the filing of this Form 10-Q on November 19, 2009.
On April 7, 2009, we closed on a $2.5 million loan with Emigrant Capital Corp.
(see Note 2 - Loan Agreement). However, we were not able to generate sufficient
cash flow from our operations to repay principal on this loan of $2,500,000 plus
interest on August 30, 2009.
On September 2, 2009, we announced that we had entered into a Forbearance
Agreement (the "Forbearance Agreement") dated August 31, 2009 with Emigrant
Capital Corp. (the "Lender"). Pursuant to the terms of the Forbearance
Agreement, the Lender had agreed to forbear, through September 9, 2009 (unless a
termination event occurred under the Forbearance Agreement), from requiring us
to repay the principal and interest due under the Convertible Promissory Note
(the "Note") in the principal amount of $2.5 million. The maturity date under
the Note was August 30, 2009.
The Forbearance Agreement also provides for an increase in the interest rate
under the Note to the lesser of (i) 18% or (ii) the maximum rate permitted by
law during the forbearance period. The Lender agreed to the forbearance in order
to provide us with the ability to continue (i) negotiating the Asset Purchase
Agreement transaction with entities affiliated with Mr. Steven M. Gluckstern
(all as more fully described below), our Chairman, President, Chief Executive
Officer and Chief Financial Officer, and (ii) solicit other proposals.
The Forbearance Agreement was amended on September 9, 14, 21, and on September
24, 2009, we announced that we had successfully negotiated the currently
governing Amended and Restated Forbearance Agreement, where the Lender agreed to
extend forbearance through November 30, 2009, which was extended until December
31, 2009 allowing us to complete the transactions described in the Asset
Purchase Agreement, as more fully described below. In addition, in the event we
complete a Superior Proposal under which the purchase price exceeds $3.15
million, we will be obligated to pay Emigrant an additional fee equal to the
lesser of (i) 20% of such excess amount or (ii) $175,000.
On September 24, 2009 we executed an Asset Purchase Agreement (the "Asset
Purchase Agreement") with Ivivi Technologies, LLC (the "Buyer") an entity
affiliated with Steven M. Gluckstern, our Chairman, President, Chief Executive
Officer and Chief Financial Officer and Ajax Capital, LLC ("Ajax"), an entity
controlled by Steven M. Gluckstern. our Chairman, President, Chief Executive
Officer and Chief Financial Officer. Pursuant to the terms of the Asset Purchase
Agreement, at the closing, we would sell substantially all of our assets, other
than cash and certain other excluded assets, to the Buyer and the Buyer would
assume certain specified ordinary course liabilities of ours as set forth in
such Asset Purchase Agreement. The aggregate purchase price to be paid to us
under the terms of the proposed Asset Purchase Agreement is expected to equal
the sum of (i) the amount necessary to pay in full the principal, and accrued
interest, as of closing, under our loan with the Lender, which was approximately
$2.7 million as of September 30, 2009 (the "Loan") and (ii) additional cash;
provided, however, that the sum of the a mounts specified in clauses (i) and
(ii) would not be in excess of $3.15 million. The closing of the transactions
contemplated by the proposed Asset Purchase Agreement would be subject to
certain customary conditions, including the receipt of approval by our
shareholders of the transactions contemplated by the proposed Asset Purchase
Agreement.
On November 17, 2009, we entered into Amendment No. 1 to the Asset Purchase
Agreement. The amendment gives us the right to request advances from Buyer
during the period prior to the closing up to a maximum of $300,000; provided,
that any advances under the agreement will be deducted from the purchase price
payable by Buyer at the closing. As consideration for Buyer's agreement to
advance funds to us until the closing of the transactions contemplated by the
Asset Purchase Agreement, we have agreed to pay up to $0.50 for each $1.00 we
receive as an advance under the Asset Purchase Agreement for the Buyer's legal
expenses; provided that such reimbursement of Buyer's legal expenses shall not
exceed $150,000; provided, further that such expenses shall be pari passu with
our payment obligations to our other creditors. The Company has also agreed to
pay up to $20,000 of Buyer's and Ajax's costs and expenses (including legal fees
and expenses) incurred by Buyer and Ajax in connection with Amendment No. 1. In
the event the Asset Purchase Agreement is terminated prior to the closing, the
Company shall repay the advances as soon as practicable following the date of
such termination with interest at the rate of 8% per annum for each day until
the advances are repaid; provided that any advances that remain unpaid as of the
due date will accrue an interest rate of 12% per annum for each day until
repaid. Our indebtedness pursuant to the advance payments is unsecured and
subordinated in right of payment to Emigrant pursuant to a Subordination
Agreement, dated November 17, 2009, among us, Emigrant and Buyer.
21
Under the terms of the Asset Purchase Agreement, we and Foundation Ventures, LLC
("Foundation"), our investment banker, would continue to have the right to
solicit other proposals regarding the sale of our assets and equity until
receipt of the approval by our shareholders of the transactions contemplated by
such Asset Purchase Agreement. Prior to the receipt of approval by our
shareholders, we would also have the right to terminate the transaction under
specified circumstances in order to enter into a definitive agreement
implementing a Superior Proposal (as defined in the Asset Purchase Agreement).
If we terminate the transactions with the Buyer to enter into a Superior
Proposal, we would be required to pay the Buyer a termination fee equal
to $90,000, and as previously disclosed, in the event we enter into a Superior
Proposal under which the purchase price exceeds $3.15 million, we will be
obligated to pay Emigrant an additional fee equal to the lesser of (i) 20% of
such excess amount or (ii) $175,000.
In connection with the signing of the Asset Purchase Agreement, we have entered
into Voting Agreements (each, a "Voting Agreement")with the Buyer, and with
certain of our shareholders, who have the power to vote approximately 40.0% (and
together with our common stock held by Steven M. Gluckstern, approximately
51.8%) of our common stock. Pursuant to each Voting Agreement, the signatory
shareholders would agree to vote their shares of our common stock in favor of
the transactions contemplated by the Asset Purchase Agreement. In the event that
we terminate the transactions with the Buyer in connection with a Superior
Proposal, the Voting Agreements would also terminate.
We may not be able to complete the transactions contemplated by the Asset
Purchase Agreement. In the event the transaction with the Buyer is completed,
following the closing, it is likely that our liabilities will exceed our
available cash and our board of directors may elect to liquidate us and utilize
our available cash and assets to repay our outstanding creditors to the extent
of our remaining assets and then distribute any remaining assets to our
shareholders or any other equity holders, however, we do not believe that there
will be any assets remaining. We anticipate the settling and payment of
liabilities will exhaust our available liquidity as such time. In addition,
following the closing we will remain liable under our lease for our Montvale,
New Jersey office. The lease, which has a monthly rent of $15,613, will
terminate in October 2014. We received a Notice of Default from the landlord
that we are in arrears for unpaid rents for October and November 2009. The
unpaid rent for October and November is expected to be satisfied through a
drawdown by the landlord from a letter of credit held for their benefit.
In the event we do not successfully complete the transaction contemplated by the
Asset Purchase Agreement or the Amended and Restated Forbearance Agreement and
complete the transactions contemplated by such agreements or complete another
transaction, we will not be able to meet our obligations under the Loan and the
Lender will have the right to foreclose under the Loan, which is secured by all
of our assets. In such an event, we would have to cease our operations or file
for bankruptcy protection.
In the fourth quarter of 2008, we retained two firms, including Foundation, to
assist us in pursuing alternative strategies and financings relating to our
business. In December 2008, we terminated our relationship with one of the
firms. Through September 30, 2009, we paid $290,000 and issued warrants to one
of the entities including $125,000 of fees relating to our Loan Agreement and
$125,000 of fees relating to our current transaction being negotiated.
Additional fees may be due to Foundation in the event of a Superior Proposal or
other future successful financing or other transactions by us.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern, which will be dependent on our ability to raise
additional funds to finance our operations or seek alternative transactions. The
accompanying financial statements do not include any adjustments that might be
necessary if we are unable to continue as a going concern.
Loan Agreement
--------------
On April 7, 2009, we closed on our $2.5 million loan (the "Financing") with the
Lender. Under the terms of the loan agreement between us and the Lender (the
"Loan Agreement"), we have borrowed an aggregate of $2.5 million. Borrowings
under the Financing are evidenced by a note (the "Note"), which bears interest
at a rate of 12% per annum (which, as previously disclosed, increased to 18%
after August 31, 2009 in connection with the Forbearance Agreement described in
Note 1). The Note is currently convertible into our common stock at a conversion
price of $0.23 per share.
In connection with the Financing, we issued warrants to the Lender (the
"Warrants"). The Warrants are currently exercisable for $3.0 million of our
common stock at an exercise price of $0.23 per share.
22
In addition to customary mechanical adjustments with respect to stock splits,
reverse stock splits, recapitalizations, stock dividends, stock combinations and
similar events, the Note and the Warrants provide for certain "weighted average
anti-dilution" adjustments whereby if shares of our common stock or other
securities convertible into or exercisable or exchangeable for shares of our
common stock (such other securities, including, without limitation, convertible
notes, options, stock purchase rights and warrants, "Convertible Securities")
are issued by us other than in connection with certain excluded securities (as
defined in the Note and the Warrant and which include a Qualified Financing and
stock awards under our 2009 Equity Incentive Stock Plan), the conversion price
of the Note and the Warrants will be reduced to reflect the "dilutive" effect of
each such issuance (or deemed issuance upon conversion, exercise or exchange of
such Convertible Securities) of our common stock relative to the holders of the
Note and the Warrants.
Because the convertible debentures included detachable warrants that were
immediately exercisable at an exercise price on the date of loan at $0.23 per
share, which was less than the market value of the shares on that date of $0.29
per share, we determined that warrants to have fair value utilizing the
Black-Scholes option-pricing model in excess of the notes' proceeds of
$2,500,000. We have used the following assumptions in the Black Scholes option
pricing model to determine the fair value of the warrants: (i) dividend yield of
0%; (ii) expected volatility of 41%-506%; (iii) average risk free interest rate
of 3.8%; and, (iv) expected life of 5 months. Consequently, we determined that
the value of the warrants to be $2,500,000, the amount of the proceeds of the
convertible note, which we credited to additional paid-in capital. The fair
value of the immediately convertible warrants is being charged to interest
expense and accreted to the convertible debenture in the accompanying financial
statements from the date of the loan, April 7, 2009, to the extended maturity
date of August 30, 2009. For the three and six months ended September 30, 2009,
we charged $2,006,904 and $2,500,000, respectively, to interest expense from
discontinued operations in our Statement of Operations. This amount was accreted
to the convertible debenture liability, a liability component of discontinued
operations, on our Balance Sheet at September 30, 2009.
In connection with the Financing, Steven Gluckstern, our Chairman, President,
Chief Executive Officer and Chief Financial Officer, and a consultant of ours
(currently one of our employees and an affiliate of the Buyer) entered into a
participation arrangement with the Lender whereby Mr. Gluckstern and the
consultant invested $425,000 and $100,000, respectively with the Lender and
shall have a right to participate with the Lender in the Note and the Warrant.
As a result of such relationship, our Board of Directors, including its
independent members, approved the transactions contemplated by the Loan
Agreement.
Nasdaq Delisting
----------------
On June 23, 2009, our common stock was suspended from trading on the Nasdaq
Stock Market. On June 26, 2009, our common stock commenced trading on the OTC
Bulletin Board under the symbol IVVI.OB.
FDA MATTERS
-----------
All of our submissions are being sold under the terms of the Asset Purchase
Agreement.
On April 3, 2008, we filed a 510(k) submission with the Food and Drug
Administration (FDA) for a small, compact transcutaneous electrical nerve
stimulation (TENS) product utilizing our targeted pulsed electromagnetic field
(tPEMF) therapy technology for the symptomatic relief and management of chronic,
intractable pain, for relief of pain associated with arthritis and for the
adjunctive treatment of post-surgical and post-trauma acute pain. The FDA
requested additional information from us in a letter dated April 25, 2008.
During October 2008, we requested a voluntary withdrawal of this 510(k).
On December 15, 2008, we announced that we had received FDA 510(k) marketing
clearance for our currently marketed tPEMF therapeutic SofPulse products.
On April 9, 2009, the FDA issued an order to manufacturers of remaining
pre-amendments class III devices (including shortwave diathermy devices not
generating deep heat, which is the classification for our SofPulse devices) for
which regulations requiring submission of Premarket Approval Applications (PMA)
have not been issued. The order requires the manufacturers to submit to the FDA,
a summary of, and a citation to, any information known or otherwise available to
them respecting such devices, including adverse safety or effectiveness
information concerning the devices which has not been submitted under the
Federal Food, Drug, and Cosmetic Act. The FDA is requiring the submission of
this information in order to determine, for each device, whether the
classification of the device should be revised to require the submission of a
23
PMA or a notice of completion of a Product Development Protocol ("PDP"), or
whether the device should be reclassified into class I or II. Summaries and
citations were due by August 7, 2009. We submitted our summary with citations to
the FDA on August 7, 2009 for our shortwave diathermy devices not generating
deep heat, complying with this order. Our products are currently marketed during
this process.
On July 2, 2009, we filed a 510(k) submission for marketing clearance with the
FDA for a TENS device known as ISO-TENS which uses tPEMF technology. This new
device is proposed for commercial distribution for the symptomatic relief of
chronic intractable pain; adjunctive treatment of post-surgical or post
traumatic acute pain; and adjunctive therapy in reducing the level of pain
associated with arthritis. We believe the ISO-TENS will enable penetration into
various chronic pain markets if FDA clearance is obtained. The FDA requested
additional information related to this submission which has been provided.
We continue to be engaged in research and development activities for additional
medical applications of our technology and we expect to file 510(k) submissions
or other marketing applications for such additional uses in the future, with the
future benefits, if any, inuring to the Buyer.
RECOVERCARE CONTRACT
--------------------
Under the terms of the Asset Purchase Agreement, our rights under the
RecoverCare Contract are being assigned to buyer.
On December 18, 2008, we signed a distribution agreement with RecoverCare (the
"Contract") to exclusively sell or rent our products into long term acute care
hospitals (LTACHS) in the United States and the non-exclusive right to sell or
rent our products into acute care facilities and Veterans Administration long
term care facilities in the Unites States.
Effective January 1, 2009, we transferred our rental agreements with current
customers in these markets to RecoverCare. The Contract has a three year term
and the distribution and revenue share portion of the Contract is effective
January 1, 2009, with an upfront fee to RecoverCare of $26,000 for certain
expenses incurred by them on our behalf. Under the terms of the Contract, we
have an obligation to repurchase new Roma units for $535 from RecoverCare in the
event the Contract is terminated by mutual consent of the parties. At the
termination of the Contract, used Roma units may be purchased by us at reduced
rates at our discretion.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Estimates are used for, but not
limited to, the accounting for the allowance for doubtful accounts, inventories,
income taxes and loss contingencies. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Estimates are used for, but not
limited to, the accounting for the allowance for doubtful accounts, inventories,
income taxes and loss contingencies. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of our financial statements:
o In applying the pronouncements related to the accounting for the
impairment or disposal of long lived assets, we have determined that
all of the Company's assets and liabilities, and all of its operating
activities and cash flows are the result of discontinued operations,
pursuant to the Company's asset disposition plans under the APA, all as
more fully described in Note 1 to the unaudited condensed financial
statements, and elsewhere within in the Form 10-Q. Post APA closing,
the Company believes that it will be required to liquidate its
remaining assets from discontinued operations in partial satisfaction
of its liabilities resulting from discontinued operations and cease all
profit motivated activities, and remain as a "public shell".
24
o We recognize revenue from rental and direct sale of our products from
distributors of our products and a revenue share arrangement with
RecoverCare.
o Rental revenue is recognized as earned on either a monthly or
pay-per-use basis in accordance with individual customer agreements or
in accordance with our distributor agreements. Rental revenue
recognition commences after the end of the trial period. All of our
rentals are terminable by either party at any time.
o Direct sales revenue is recognized when our products are shipped to end
users including medical facilities and distributors. Shipping and
handling charges and costs have not been material. We have no post
shipment obligations except the warranty we provide with each unit and
sales returns have been immaterial.
o We record our sales and revenue share in our agreement with RecoverCare
as follows:
RecoverCare purchases Torinos, Applicators and other disposable equipment from
us at stated prices and revenue is recorded in Sales and Revenue Share on
RecoverCare Contract at the time this inventory is shipped to RecoverCare.
Rental accounts we serviced as of January 1, 2009 will continue to be serviced
by RecoverCare and we will share the revenue collected by RecoverCare on these
accounts subject to the terms of the Contract. Our revenue share on these
accounts is recorded by us upon receipt by us of the rental invoices sent by
RecoverCare to these customers.
After January 1, 2009, RecoverCare will request Roma units from us for rental or
sales to their customers. RecoverCare has agreed to pay us an upfront fee of
$535 for each Roma unit sent to them which is recorded by us as deposits from
RecoverCare in Accounts Payable and Accrued Expenses in our Balance Sheet and
these Roma units are included in Equipment in Use or Under Rental Agreements in
our Balance Sheet until such time as we are notified by RecoverCare that the
Roma unit is "in use" by a customer of RecoverCare. Once we receive notification
that a Roma unit is "in use", we record the $535 in Sales and Revenue Share on
RecoverCare Contract and our cost to Cost of Sales on RecoverCare Contract in
our Statement of Operations.
In addition, we record a revenue share (a percentage of the amount invoiced by
RecoverCare less the $535 upfront fee previously received), in Sales and Revenue
Share on RecoverCare Contract in our Statement of Operations, based upon the
Contract, each month upon notification from RecoverCare that a Roma unit has
been rented by their customer and a copy of the invoice is sent to us by
RecoverCare. In the event RecoverCare sells a Roma unit, then we record the sale
in Sales and Revenue Share on RecoverCare Contract in our Statement of
Operations at fixed prices, as defined in the Contract, for the sale of a Roma
unit by RecoverCare.
o We record in our Accounts Payable and Accrued Expenses on our Balance
Sheet the deposits received from RecoverCare which represent the
upfront fee of $535 for each Roma unit held by RecoverCare and which
were not placed into service by them.
o We provide an allowance for doubtful accounts determined primarily
through specific identification. We review our long lived assets for
impairment annually and at March 31, 2009, no impairment was noted.
o Assets of Discontinued Operations - held for sale include inventory and
equipment in use or under rental agreements which consists of our
electroceutical units and accessories rented to third parties and Roma
units held by RecoverCare that were not "in use". Rented equipment is
depreciated on a straight-line basis over three years, the estimated
useful lives of the units.
o Net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding plus common stock
equivalents representing shares issuable upon the assumed exercise of
stock options and warrants. Common stock equivalents were not included
for the reporting periods, as their effect would be anti-dilutive.
o We adopted, in a prior fiscal year, the pronouncement related to the
fair valve recognition provisions for accounting for stock based
compensation to account for compensation costs under our stock option
plans. As of September 30, 2009, we have used the following assumptions
in the Black Scholes option pricing model: (i) dividend yield of 0%;
(ii) expected volatility of 44%-315.8%; (iii) average risk free
interest rate of 1.78%-5.03%; (iv) expected life of 1 to 6.5 years; and
(v) estimated forfeiture rate of 5%.
25
o On April 1, 2008, the Company adopted the accounting pronouncement with
respect to fair valve measurements for certain of our financial
instruments, the carrying amounts approximate fair valve due to their
relatively short maturities.
o 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.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 2009, the Financial Accounting Standards Board ("FASB") issued the FASB
Accounting Standards Codification ("Codification") as the single source of
authoritative non-governmental U.S. GAAP which was launched on July 1, 2009. The
Codification is a new structure which takes accounting pronouncements and
organizes them by approximately ninety accounting topics. The Codification is
now the single source of authoritative U.S. GAAP. All guidance included in the
Codification is now considered authoritative, even guidance that comes from what
is currently deemed to be a non-authoritative section of a standard. Upon the
Codification's effective date, all non-grandfathered, non-SEC accounting
literature not included in the Codification has become non-authoritative. The
Codification's effective date for interim and annual periods was September 15,
2009. The Codification is for disclosure only and has not impacted the Company's
financial condition or results of operations. The Company has adopted the
Codification, and reflects such adoption throughout this filing.
On October 10, 2008, the FASB issued guidance clarifying the determination of
fair value of a financial asset when the market for that asset is not active. We
have incorporated the guidance and have determined it would have no impact on
the Company's financial position, results of operations or cash flows.
In December 2007, the FASB issued an amendment to the pronouncements governing
the reporting and disclosure requirements relating to non-controlling Interests
in Consolidated Financial Statements. The objective of the amendment is to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements by establishing accounting and reporting standards that require the
following changes. The ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity. The amount of consolidated net income (loss) attributable
to the parent and to the noncontrolling interest be clearly identified and
presented on the face of the consolidated statement of operations. When a
subsidiary is deconsolidated, any retained noncontrolling equity investment in
the former subsidiary is initially measured at fair value. The gain or loss on
the deconsolidation of the subsidiary is measured using the fair value of any
noncontrolling equity investment rather than the carrying amount of that
retained investment and entities provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. The Company has adopted this amendment effective
April 1, 2009, and it did not have an impact on our condensed consolidated
financial statements.
26
In December 2007, the FASB issued guidance on business combinations that
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about
business combinations and their effects. To accomplish these objectives, the
statement establishes principles and requirements as to how the acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree, recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The Company has adopted this
pronouncement effective April 1, 2009. The adoption of the pronouncement has not
had an impact on our condensed consolidated financial statements.
In May 2009, the FASB issued guidance on subsequent events. This guidance
requires an entity to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that existed
at the date of the balance sheet. For nonrecognized subsequent events that must
be disclosed to keep the financial statements from being misleading, an entity
will be required to disclose the nature of the event as well as an estimate of
its financial effect, or a statement that such an estimate cannot be made. In
addition, the pronouncement requires an entity to disclose the date through
which subsequent events have been evaluated. The pronouncement is effective for
the Company beginning in the first quarter of fiscal year 2010 and is required
to be applied prospectively. The Company adopted the pronouncement and has
determined that it has no impact on the Company's financial condition, results
of operations or cash flows.
Management does not believe that any other recently issued, but not yet
effective accounting pronouncement, if adopted, would have a material effect on
the accompanying unaudited condensed consolidated financial statements.
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS OF CONTINUING OPERATIONS - NONE
In September 2009, we decided to discontinue operations and seek a buyer for our
business or its assets; and, accordingly, we have no continuing operations.
RESULTS OF OPERATIONS OF DISCONTINUED OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2009 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2008
NET LOSS - Net loss increased $859,093 to $3,037,243, or $0.27 per share, for
the quarter ended September 30, 2009 compared to $2,178,150, or $0.20 per share,
for the quarter ended September 30, 2008. The increase in net loss primarily
resulted from (i) decreases in our loss from discontinued operations of
$1,240,914, or 56%, partially offset by (ii) decreases in interest income of
$27,187, or 91%, and (iii) increase in interest expense of $2,072,820, or 100%.
DISCONTINUED OPERATIONS COMPONENT ANALYSIS AND DISCUSSION
REVENUE FROM DISCONTINUED OPERATIONS- Total revenue decreased by $443,463, or
75%, to $144,764 for the quarter ended September 30, 2009 as compared to
$588,227 for the quarter ended September 30, 2008. The decrease in revenue was
due to (i) a decrease in our licensing sales and fees of $15,625, or 100%, as a
result of our termination of our agreement with Allergan on November 19, 2008,
(ii) a decrease in our rental revenue of $153,161, or 94%, as a result of the
reduction in our sales and marketing staff and the transition of our wound care
marketing efforts under the terms of our agreement with RecoverCare, and (iii) a
decrease in our direct sales of $355,314, or 87%, as a result of a one time sale
in 2008 which did not repeat in 2009, partially offset by an increase in our
sales and revenue share on the RecoverCare contract of $80,637, or 100%.
27
On December 18, 2008, we signed a distribution agreement with RecoverCare (the
"Contract") to exclusively sell or rent our products into long term acute care
hospitals (LTACHS) in the United States and the non-exclusive right to sell or
rent our products into acute care facilities and Veterans Administration long
term care facilities in the Unites States.
Effective January 1, 2009, we transferred our rental agreements with current
customers in these markets to RecoverCare. The Contract has a three year term
and the distribution and revenue share portion of the Contract is effective
January 1, 2009, with an upfront fee to RecoverCare of $26,000 for certain
expenses incurred by them on our behalf. Under the terms of the Contract, we
have an obligation to repurchase new Roma units for $535 from RecoverCare in the
event the Contract is terminated by mutual consent of the parties. At the
termination of the Contract, used Roma units may be purchased by us at reduced
rates at our discretion.
RecoverCare purchases Torinos, Applicators and other disposable equipment from
us at stated prices and revenue is recorded in Sales and Revenue Share on
RecoverCare Contract at the time this inventory is shipped to RecoverCare.
Rental accounts we serviced as of January 1, 2009 will continue to be serviced
by RecoverCare and we will share the revenue collected by RecoverCare on these
accounts subject to the terms of the Contract. Our revenue share on these
accounts is recorded by us upon receipt by us of the rental invoices sent by
RecoverCare to these customers.
After January 1, 2009, RecoverCare will request Roma units from us for rental or
sales to their customers. RecoverCare has agreed to pay us an upfront fee of
$535 for each Roma unit sent to them which is recorded by us as deposits from
RecoverCare in Accounts Payable and Accrued Expenses in our Balance Sheet and
these Roma units are included in Equipment in Use or Under Rental Agreements in
our Balance Sheet until such time as we are notified by RecoverCare that the
Roma unit is "in use" by a customer of RecoverCare. Once we receive notification
that a Roma unit is "in use", we record the $535 in Sales and Revenue Share on
RecoverCare Contract and our cost to Cost of Sales on RecoverCare Contract in
our Statement of Operations.
In addition, we record a revenue share (a percentage of the amount invoiced by
RecoverCare less the $535 upfront fee previously received), in Sales and Revenue
Share on RecoverCare Contract in our Statement of Operations, based upon the
Contract, each month upon notification from RecoverCare that a Roma unit has
been rented by their customer and a copy of the invoice is sent to us by
RecoverCare. In the event RecoverCare sells a Roma unit, then we record the sale
in Sales and Revenue Share on RecoverCare Contract in our Statement of
Operations at fixed prices, as defined in the Contract, for the sale of a Roma
unit by RecoverCare.
Under the terms of the Contract, we shipped 64 Roma units to RecoverCare during
the period January 1, 2009 through September 30, 2009, of which 37 Roma units
were "in use" by RecoverCare customers at September 30, 2009. During the quarter
ended September 30, 2009, we recorded $16,320 as Sales and Revenue Share on
RecoverCare Contract in our Statement of Operations from the sale of Torinos,
Applicators and other disposable equipment to RecoverCare during the quarter
ended September 30, 2009. Further, we recorded $64,317 as Sales and Revenue
Share on RecoverCare Contract in our Statement of Operations for the quarter
ended September 30, 2009. This revenue represents our portion of the revenue
share for the period July through September 2009, from accounts we transferred
to RecoverCare on January 1, 2009.
At September 30, 2009, our Balance Sheet included a liability of $14,445 for
deposits received from RecoverCare which is the upfront fee of $535 for each of
the 27 Roma units held by RecoverCare on that date and which, were not placed
into service by them at September 30, 2009.
Under the terms of the Asset Purchase Agreement, our rights under the
RecoverCare Contract will be assigned to buyer.
We recorded $0 and $15,625 in the quarters ended September 30, 2009 and 2008,
respectively, which represents the amortized portion of the initial milestone
payment of $500,000 that was received from Allergan in November 2006 and is
included in sales to licensee and fees on our Statements of Operations. On
November 19, 2008 we terminated our agreement with Allergan.
COST OF RENTALS FROM DISCONTINUED OPERATIONS- Cost of rentals decreased $7,276,
or 63%, to $4,290 for the quarter ended September 30, 2009 from $11,566 for the
quarter ended September 30, 2008, primarily as a result of the implementation of
our agreement with RecoverCare. Our cost of rentals for the quarter ended
September 30, 2008 included depreciation of Roma units under rental agreements
of $5,074.
28
DISCONTINUED OPERATIONS COST OF DIRECT SALES - Cost of direct sales decreased
$48,832 or 87%, to $7,314 for the quarter ended September 30, 2009 from $56,146
for the quarter ended September 30, 2008 as a result of the implementation of
our agreement with RecoverCare and the mix of products sold and the unit cost of
these products during the quarter ended September 30, 2009 versus the prior year
period.
DISCONTINUED OPERATIONS COSTS OF SALES ON RECOVERCARE CONTRACT - Cost of sales
on RecoverCare contract increased $7,001, or 100%, to $7,001 for the quarter
ended September 30, 2009 from $0 for the quarter ended September 30, 2008 as a
result of the implementation of our agreement with RecoverCare. Our cost of
sales on RecoverCare contract for the quarter ended September 30, 2009 consisted
of product costs of $2,866 and depreciation on our Roma units under rental
agreements of $4,135.
DISCONTINUED OPERATIONS COSTS OF LICENSING SALES AND FEES - During the quarter
ended September 30, 2008, as a result of the termination of our contract with
Allergan, we credited our cost of licensing sales and fees a net amount of
$46,957 as a result of the return of goods from Allergan in the amount of
$447,926 partially offset by inventory write downs of $387,969 and estimated
freight of $13,000.
DISCONTINUED OPERATIONS LOSS ON TERMINATION OF ALLERGAN CONTRACT - During the
quarter ended September 30, 2008, as a result of the termination of our contract
with Allergan, we charged our loss on termination of Allergan contract a net
amount of $139,380 as a result of the termination payment to repurchase the
inventory from Allergan in the amount of $450,000 and $69,588 for the deferred
licensing cost balance at September 30, 2008 related to the Allergan contract,
partially offset by $380,208 representing for the deferred revenue balance at
September 30, 2008 related to the Allergan contract.
DISCONTINUED OPERATIONS RESEARCH AND DEVELOPMENT COSTS - Research and
development expense decreased $158,777, or 31%, to $346,250 for the quarter
ended September 30, 2009 from $505,027 for the quarter ended September 30, 2008.
The decrease resulted primarily from decreases in consulting expenses of
$66,547, decreases in salary and salary related expenses of $69,053, decreased
patent amortization expense of $26,570, decreases in research and development
studies of $48,969, decreases in travel costs of $7,769 and decreases in
depreciation and amortization of $9,818, partially offset by increased share
based compensation expense of $22,065 and increased cost for the services
agreement with ADM of $52,000.
SELLING AND MARKETING EXPENSES OF DISCONTINUED OPERATIONS - Sales and marketing
expenses decreased $577,209, or 83%, to $119,855, for the quarter ended
September 30, 2009 as compared to $697,064 for the quarter ended September 30,
2008. The decrease resulted primarily from decreased salary and salary related
costs of $322,944, decreased travel costs of $65,584, decreased commission
expenses of $20,306, a decrease in advertising costs of $21,023, decreased
marketing costs of $24,418, a decrease in consulting expenses of $77,879, a
decrease in share based compensation of $39,037, and decreases in depreciation
and amortization expense of $4,778. The decreases in our sales and marketing
expenses during the quarter ended September 30, 2009 as compared with the
quarter ended September 30, 2008 resulted primarily from the reduction in our
sales force of seven sales and sales related administrative personnel which
occurred on August 31, 2008 and the implementation of our agreement with
RecoverCare.
GENERAL AND ADMINISTRATIVE EXPENSES OF DISCONTINUED OPERATIONS- General and
administrative expenses decreased $806,862, or 56%, to $627,095 for the quarter
ended September 30, 2009 as compared to $1,433,957 for the quarter ended
September 30, 2008. The decrease resulted primarily from decreases in salary and
salary related costs of $41,513, decreased rent and occupancy expenses of
$12,140, decreased share based compensation expense of $153,085, decreased
investor relations expenses of $48,405, decreased public relations expenses of
$7,875, decreased legal fees expense of $126,057, decreased consulting expenses
of $30,596, decreased travel related expenses of $24,727, decreased contribution
expense of $325,804 and decreased general office expenses of $17,433 (primarily
decreased telephone expenses of $2,224, decreased computer expenses of $12,094
and decreased expenses for office supplies and equipment of $6,119), partially
offset by increased insurance expense of $7,157 and increase in accounting fee
expense of $13,425.
DISCONTINUED OPERATIONS INTEREST INCOME - Interest income decreased $27,187, or
91%, to $2,619 from $29,806 as a result of lower cash balances in our money
market accounts and lower interest rates on our deposits during the quarter
ended September 30, 2009 as compared to the quarter ended September 30, 2008.
DISCONTINUED OPERATIONS INTEREST EXPENSE - Interest expense increased
$2,072,820, or 100%, to $2,072,820 from $0 as a result of our accrual of
interest expense, in the amount of $65,916, on our convertible debt issued to
Emigrant Capital Corp. at the default interest rate of 18% per annum and the
accretion of the effective interest on the debt discount due to the convertible
feature of the note and the valuation of attached warrants in the amount of
$2,006,904.
29
RESULTS OF OPERATIONS OF DISCONTINUED OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2008
NET LOSS - Net loss increased $503,362 to $4,883,827, or $0.43 per share, for
the six months ended September 30, 2009 compared to $4,380,465, or $0.41 per
share, for the six months ended September 30, 2008. The increase in net loss
primarily resulted from (i) decreases in our loss from discontinued operations
of $2,195,940, or 49%, partially offset by (ii) decreases in interest income of
$68,636, or 92%, and (iii) increase in interest expense of $2,630,666, or 100%.
DISCONTINUED OPERATIONS COMPONENT ANALYSIS AND DISCUSSION
REVENUE FROM DISCONTINUED OPERATIONS- Total revenue decreased by $692,301, or
71%, to $279,122 for the six months ended September 30, 2009 as compared to
$971,423 for the six months ended September 30, 2008. The decrease in revenue
was due to (i) a decrease in our licensing sales and fees of $131,036, or 100%,
as a result of our termination of our agreement with Allergan on November 19,
2008, (ii) a decrease in our rental revenue of $317,517, or 96%, as a result of
the reduction in our sales and marketing staff and the transition of our wound
care marketing efforts under the terms of our agreement with RecoverCare, and
(iii) a decrease in our direct sales of $415,662, or 82%, primarily as a result
of a one time sale in 2008 which did not repeat in 2009, partially offset by an
increase in our sales and revenue share on the RecoverCare contract of $171,914,
or 100%.
On December 18, 2008, we signed a distribution agreement with RecoverCare (the
"Contract") to exclusively sell or rent our products into long term acute care
hospitals (LTACHS) in the United States and the non-exclusive right to sell or
rent our products into acute care facilities and Veterans Administration long
term care facilities in the Unites States.
Effective January 1, 2009, we transferred our rental agreements with current
customers in these markets to RecoverCare. The Contract has a three year term
and the distribution and revenue share portion of the Contract is effective
January 1, 2009, with an upfront fee to RecoverCare of $26,000 for certain
expenses incurred by them on our behalf. Under the terms of the Contract, we
have an obligation to repurchase new Roma units for $535 from RecoverCare in the
event the Contract is terminated by mutual consent of the parties. At the
termination of the Contract, used Roma units may be purchased by us at reduced
rates at our discretion.
RecoverCare purchases Torinos, Applicators and other disposable equipment from
us at stated prices and revenue is recorded in Sales and Revenue Share on
RecoverCare Contract at the time this inventory is shipped to RecoverCare.
Rental accounts we serviced as of January 1, 2009 will continue to be serviced
by RecoverCare and we will share the revenue collected by RecoverCare on these
accounts subject to the terms of the Contract. Our revenue share on these
accounts is recorded by us upon receipt by us of the rental invoices sent by
RecoverCare to these customers.
After January 1, 2009, RecoverCare will request Roma units from us for rental or
sales to their customers. RecoverCare has agreed to pay us an upfront fee of
$535 for each Roma unit sent to them which is recorded by us as deposits from
RecoverCare in Accounts Payable and Accrued Expenses in our Balance Sheet and
these Roma units are included in Equipment in Use or Under Rental Agreements in
our Balance Sheet until such time as we are notified by RecoverCare that the
Roma unit is "in use" by a customer of RecoverCare. Once we receive notification
that a Roma unit is "in use", we record the $535 in Sales and Revenue Share on
RecoverCare Contract and our cost to Cost of Sales on RecoverCare Contract in
our Statement of Operations.
In addition, we record a revenue share (a percentage of the amount invoiced by
RecoverCare less the $535 upfront fee previously received), in Sales and Revenue
Share on RecoverCare Contract in our Statement of Operations, based upon the
Contract, each month upon notification from RecoverCare that a Roma unit has
been rented by their customer and a copy of the invoice is sent to us by
RecoverCare. In the event RecoverCare sells a Roma unit, then we record the sale
in Sales and Revenue Share on RecoverCare Contract in our Statement of
Operations at fixed prices, as defined in the Contract, for the sale of a Roma
unit by RecoverCare.
30
Under the terms of the Contract, we shipped 64 Roma units to RecoverCare during
the period January 1, 2009 through September 30, 2009, of which 37 Roma units
were "in use" by RecoverCare customers at September 30, 2009. During the six
months ended September 30, 2009, we recorded $10,700 as Sales and Revenue Share
on RecoverCare Contract in our Statement of Operations for the 20 Roma units
that were placed "in use" during the quarter. In addition, we recorded $27,187
as Sales and Revenue Share on RecoverCare Contract in our Statement of
Operations from the sale of Torinos, Applicators and other disposable equipment
to RecoverCare during the six months ended September 30, 2009. Further, we
recorded $134,027 as Sales and Revenue Share on RecoverCare Contract in our
Statement of Operations for the six months ended September 30, 2009. This
revenue represents our portion of the revenue share for the period April through
September 2009, from accounts we transferred to RecoverCare on January 1, 2009.
At September 30, 2009, our Balance Sheet included a liability of $14,445 for
deposits received from RecoverCare which is the upfront fee of $535 for each of
the 27 Roma units held by RecoverCare on that date and which, were not placed
into service by them at September 30, 2009.
Under the terms of the Asset Purchase Agreement, our rights under the
RecoverCare Contract will be assigned to buyer.
We recorded licensing sales and fees of $0 and $131,036 in the six months ended
September 30, 2009 and 2008, respectively. During 2008 we recorded revenues from
sales of our products to Allergan of $94,277, royalties received from Allergan
of $5,509 and $31,250 as the amortized portion of the milestone payment of
$500,000 that was received from Allergan in November 2006.
COST OF RENTALS FROM DISCONTINUED OPERATIONS- Cost of rentals decreased $17,490,
or 80%, to $4,290 for the six months ended September 30, 2009 from $21,780 for
the six months ended September 30, 2008, primarily as a result of the
implementation of our agreement with RecoverCare. Our cost of rentals for the
six months ended September 30, 2008 included depreciation of Roma units under
rental agreements of $11,284.
DISCONTINUED OPERATIONS COST OF DIRECT SALES - Cost of direct sales decreased
$54,784 or 80%, to $13,622 for the six months ended September 30, 2009 from
$68,406 for the six months ended September 30, 2008 as a result of the
implementation of our agreement with RecoverCare and the mix of products sold
and the unit cost of these products during the six months ended September 30,
2009 versus the prior year period.
DISCONTINUED OPERATIONS COSTS OF SALES ON RECOVERCARE CONTRACT - Cost of sales
on RecoverCare contract increased $19,374, or 100%, to $19,374 for the six
months ended September 30, 2009 from $0 for the six months ended September 30,
2008 as a result of the implementation of our agreement with RecoverCare. Our
cost of sales on RecoverCare contract for the six months ended September 30,
2009 consisted of product costs of $11,067 and depreciation on our Roma units
under rental agreements of $8,307.
DISCONTINUED OPERATIONS COSTS OF LICENSING SALES AND FEES - During the six
months ended September 30, 2009, as a result of the termination of our contract
with Allergan, we charged our cost of licensing sales a net amount of $82,813,
which represented cost product sales during the period of $129,770 less a credit
of $46,957, which is the net result of the return of goods from Allergan
partially offset in the amount of $447,926 offset by inventory write downs of
$387,969 and estimated freight of $13,000.
DISCONTINUED OPERATIONS LOSS ON TERMINATION OF ALLERGAN CONTRACT - During the
six months ended September 30, 2008, as a result of the termination of our
contract with Allergan, we charged our loss on termination of Allergan contract
a net amount of $139,380 as a result of the termination payment to repurchase
the inventory from Allergan in the amount of $450,000 and $69,588 for the
deferred licensing cost balance at September 30, 2008 related to the Allergan
contract, partially offset by $380,208 representing for the deferred revenue
balance at September 30, 2008 related to the Allergan contract.
DISCONTINUED OPERATIONS RESEARCH AND DEVELOPMENT COSTS - Research and
development expense decreased $196,090, or 19%, to $840,005 for the six months
ended September 30, 2009 from $1,036,095 for the six months ended September 30,
2008. The decrease resulted primarily from decreases in consulting expenses of
$103,619, decreases in salary and salary related expenses of $85,393, decreased
patent amortization expense of $48,846, decreases in research and development
studies of $28,094, and decreases in depreciation and amortization of $12,794,
partially offset by increased share based compensation expense of $30,222,
increased cost for the services agreement with ADM of $52,000 and increases in
travel costs of $3,508.
31
SELLING AND MARKETING EXPENSES OF DISCONTINUED OPERATIONS - Sales and marketing
expenses decreased $1,161,860, or 85%, to $212,426, for the six months ended
September 30, 2009 as compared to $1,374,286 for the six months ended September
30, 2008. The decrease resulted primarily from decreased salary and salary
related costs of $571,121, decreased travel costs of $164,597, decreased
commission expenses of $53,604, a decrease in advertising costs of $62,639,
decreased marketing costs of $68,375, a decrease in consulting expenses of
$138,455, a decrease in freight costs of $6,090, a decrease in warranty and
repair costs of $3,181, a decrease in bad debt expense of $40,272, a decrease in
share based compensation of $43,046, and decreases in depreciation and
amortization expense of $10,654. The decreases in our sales and marketing
expenses during the six months ended September 30, 2009 as compared with the six
months ended September 30, 2008 resulted primarily from the reduction in our
sales force of seven sales and sales related administrative personnel which
occurred on August 31, 2008 and the implementation of our agreement with
RecoverCare.
GENERAL AND ADMINISTRATIVE EXPENSES OF DISCONTINUED OPERATIONS- General and
administrative expenses decreased $1,255,199, or 46%, to $1,448,895 for the six
months ended September 30, 2009 as compared to $2,704,904 for the six months
ended September 30, 2008. The decrease resulted primarily from decreases in
salary and salary related costs of $161,523, decreased rent and occupancy
expenses of $20,493, decreased share based compensation expense of $334,446,
decreased investor relations expenses of $89,669, decreased public relations
expenses of $39,929, decreased legal fees expense of $190,540, decrease in
accounting fee expense of $30,019, decreased consulting expenses of $4,105,
decreased travel related expenses of $9,747, decreased contribution expense of
$325,804 and decreased general office expenses of $45,557 (primarily decreased
telephone expenses of $7,944, decreased computer expenses of $20,472, decreased
postage expense of $4,080 and decreased expenses for office supplies and
equipment of $12,467).
DISCONTINUED OPERATIONS INTEREST INCOME - Interest income decreased $68,636, or
92%, to $6,330 from $74,966 as a result of lower cash balances in our money
market accounts and lower interest rates on our deposits during the six months
ended September 30, 2009 as compared to the six months ended September 30, 2008.
DISCONTINUED OPERATIONS INTEREST EXPENSE - Interest expense increased
$2,630,666, or 100%, to $2,630,666 from $0 as a result of our accrual of
interest expense, in the amount of $130,666, on our convertible debt issued to
Emigrant Capital Corp. at the default interest rate of 18% per annum and the
accretion of the effective interest on the debt discount due to the convertible
feature of the note and the valuation of attached warrants in the amount of
$2,500,000.
LIQUIDITY AND CAPITAL RESOURCES
Currently, we have $2.5 million of debt outstanding under our Loan Agreement. On
September 2, 2009, we announced that we had entered into a Forbearance Agreement
(the "Forbearance Agreement") dated August 31, 2009 with Emigrant Capital Corp.
(the "Lender"). Pursuant to the terms of the Forbearance Agreement, the Lender
had agreed to forbear, through September 9, 2009 (unless a termination event
occurred under the Forbearance Agreement), from requiring us to repay the
principal and interest due under the Convertible Promissory Note (the "Note") in
the principal amount of $2.5 million. The maturity date under the Note was
August 30, 2009.
The Forbearance Agreement also provides for an increase in the interest rate
under the Note to the lesser of (i) 18% or (ii) the maximum rate permitted by
law during the forbearance period. The Lender agreed to the forbearance in order
to provide us with the ability to continue (i) negotiating the Asset Purchase
Agreement transaction with entities affiliated with Mr. Steven M. Gluckstern
(all as more fully described below), our Chairman, President, Chief Executive
Officer and Chief Financial Officer, and (ii) solicit other proposals.
The Forbearance Agreement was amended on September 9, 14, 21, and on September
24, 2009, we announced that we had successfully negotiated the currently
governing Amended and Restated Forbearance Agreement, where the Lender agreed to
extend forbearance through November 30, 2009, which was extended until December
31, 2009, allowing us to complete the transactions described in the Asset
Purchase Agreement, as more fully described below. In addition, in the event we
complete a Superior Proposal under which the purchase price exceeds $3.15
million, we will be obligated to pay Emigrant an additional fee equal to the
lesser of (i) 20% of such excess amount or (ii) $175,000.
32
On September 24, 2009 we executed an Asset Purchase Agreement (the "Asset
Purchase Agreement") with Ivivi Technologies, LLC (the "Buyer") an entity
affiliated with Steven M. Gluckstern, our Chairman, President, Chief Executive
Officer and Chief Financial Officer and Ajax Capital, LLC ("Ajax"), an entity
controlled by Steven M. Gluckstern. Pursuant to the terms of such Asset Purchase
Agreement, at the closing, we would sell substantially all of our assets to the
Buyer, other than cash and certain other excluded assets, and the Buyer would
assume certain specified ordinary course liabilities of ours as set forth in
such Asset Purchase Agreement. The aggregate purchase price to be paid to us
under the terms of the Asset Purchase Agreement is expected to equal the sum of
(i) the amount necessary to pay in full the principal, and accrued interest, as
of closing, under our loan with the Lender, which was approximately $2.7 million
as of September 30, 2009 (the "Loan") and (ii) additional cash, however, that
the sum of the amounts specified in clauses (i) and (ii) would not be in excess
of $3.15 million. The closing of the transactions contemplated by the Asset
Purchase Agreement would be subject to certain customary conditions, including
the receipt of approval by our shareholders of the transactions contemplated by
the Asset Purchase Agreement.
On November 17, 2009, we entered into Amendment No. 1 to the Asset Purchase
Agreement. The amendment gives us the right to request advances from Buyer
during the period prior to the closing up to a maximum of $300,000; provided,
that any advances under the agreement will be deducted from the purchase price
payable by Buyer at the closing. As consideration for Buyer's agreement to
advance funds to us until the closing of the transactions contemplated by the
Asset Purchase Agreement, we have agreed to pay up to $0.50 for each $1.00 we
receive as an advance under the Asset Purchase Agreement for the Buyer's legal
expenses; provided that such reimbursement of Buyer's legal expenses shall not
exceed $150,000; provided, further that such expenses shall be pari passu with
our payment obligations to our other creditors. The Company has also agreed to
pay up to $20,000 of Buyer's and Ajax's costs and expenses (including legal fees
and expenses) incurred by Buyer and Ajax in connection with Amendment No. 1. In
the event the Asset Purchase Agreement is terminated prior to the closing, the
Company shall repay the advances as soon as practicable following the date of
such termination with interest at the rate of 8% per annum for each day until
the advances are repaid; provided that any advances that remain unpaid as of the
due date will accrue an interest rate of 12% per annum for each day until
repaid. Our indebtedness pursuant to the advance payments is unsecured and
subordinated in right of payment to Emigrant pursuant to a Subordination
Agreement, dated November 17, 2009, among us, Emigrant and Buyer.
Under the terms of the Asset Purchase Agreement, we and Foundation Ventures, LLC
("Foundation"), our investment banker, would continue to have the right to
solicit other proposals regarding the sale of our assets and equity until
receipt of the approval by our shareholders of the transactions contemplated by
such Asset Purchase Agreement. Prior to the receipt of approval by our
shareholders, we would also have the right to terminate the transaction under
specified circumstances in order to enter into a definitive agreement
implementing a Superior Proposal (to be defined in the Asset Purchase
Agreement). If we terminate the transactions with the Buyer to enter into a
Superior Proposal, we would be required to pay the Buyer a termination fee equal
to $90,000 and, as previously disclosed, in the event we enter into a Superior
Proposal under which the purchase price exceeds $3.15 million, we will be
obligated to pay Emigrant an additional fee equal to the lesser of (i) 20% of
such excess amount or (ii) $175,000.
In connection with the signing of the Asset Purchase Agreement, we have entered
into Voting Agreements (each, a "Voting Agreement") with the Buyer and with
certain of our shareholders, who have the power to vote approximately 39.6% (and
together with our common stock held by Steven M. Gluckstern, approximately
51.3%) of our common stock. Pursuant to each Voting Agreement, the signatory
shareholders would agree to vote their shares of our common stock in favor of
the transactions contemplated by the Asset Purchase Agreement. In the event that
we terminate the transactions with the Buyer in connection with a Superior
Proposal, the Voting Agreements would also terminate.
We may not be able to complete the transactions contemplated by the Asset
Purchase Agreement. In the event the transaction with the Buyer is completed,
following the closing, it is likely that our liabilities will exceed our
available cash and our board of directors may elect to liquidate us and utilize
our available cash and assets to repay our outstanding creditors to the extent
of our remaining assets and then distribute any remaining assets to our
shareholders or any other equity holders, however, we do not believe that there
will be any assets remaining. In addition, following the closing we will remain
liable under our lease for our Montvale, New Jersey office. The lease, which has
a monthly rent of $15,613, will terminate in October 2014. We received a Notice
of Default from the landlord that we are in arrears for unpaid rents for October
and November 2009. The unpaid rent for October and November is expected to be
satisfied through a drawdown by the landlord from a letter of credit held for
their benefit.
In the event we do not successfully complete the transactions contemplated under
the Asset Purchase Agreement or the Amended and Restated Forbearance Agreement
or complete another transaction, we will not be able to meet our obligations
under the Loan and the Lender will have the right to foreclose under the Loan,
which is secured by all of our assets. In such an event, we would have to cease
our operations or file for bankruptcy protection.
33
If the transactions contemplated by the Asset Purchase Agreement is consummated,
our board of directors may elect to liquidate us and utilize its available cash
and assets to repay our outstanding creditors to the extent of its remaining
assets. Following such repayment, we do not believe that there will be any
assets remaining to distribute to our shareholders or any other equity holders.
As a result, the only way a shareholder may be able to receive value for their
shares of common stock, is to attempt to sell their shares of common stock into
the open market to the extent a market for our common stock exists. In addition,
shareholders who object to the transaction contemplated by the Asset Purchase
Agreement may elect to exercise their appraisal rights, which are described in
the proxy statement currently being filed with the Securities and Exchange
Commission. In the exercise of their appraisal rights, shareholders can seek
fair value for their common stock. However, even if a shareholder sought to
exercise their appraisal rights, we do not believe that the common stock will
have any value following the transaction since we do not believe that there will
be any assets remaining to distribute to our shareholders after repaying its
outstanding creditors and, even if a shareholder was successful in an appraisal
proceeding, we do not believe that any assets would be available to satisfy the
award.
As reflected in the accompanying financial statements, we had a net loss of
$3,037,243 and $2,178,150, respectively, for the three months ended September
30, 2009 and 2008 and $4,883,827 and $4,380,465, respectively, for the six
months ended September 30, 2009 and 2008 (all of which resulted from our
discontinued operations) and a working capital deficiency of $2,836,423 at
September 30, 2009, prior to our decision to potentially cease operations, and
consider all assets as current. We had a net loss of $7,333,604 and $7,503,091,
respectively, all of which arose from our discontinued operations for the fiscal
years ended March 31, 2009 and 2008. We also had a working capital deficiency of
$256,136 at March 31, 2009, which is calculated prior to our decision to
potentially cease operations, and consider all assets as current. At September
30, 2009, we had cash balances of approximately $209,000 (included in "Assets of
Discontinued Operations" not held for sale) which is not sufficient to meet our
current cash requirements for the next twelve months following the filing of
this Form 10-Q on November 19, 2009.
On April 7, 2009, we closed on a $2.5 million loan with Emigrant Capital Corp.
(see Note 2 - Loan Agreement). However, we were not able to generate sufficient
cash flow from our operations to repay principal on this loan of $2,500,000 plus
interest on August 30, 2009.
In the fourth quarter of 2008, we retained two firms, including Foundation, to
assist us in pursuing alternative strategies and financings relating to our
business. In December 2008, we terminated our relationship with one of the
firms. Through September 30, 2009, we paid $290,000 and issued warrants to one
of the entities including $125,000 of fees relating to our Loan Agreement and
$125,000 of fees relating to our current transaction being negotiated.
Additional fees may be due to Foundation in the event of a Superior Proposal or
other future successful financing or other transactions by us.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern, which will be dependent on our ability to raise
additional funds to finance our operations or seek alternative transactions. The
accompanying financial statements do not include any adjustments that might be
necessary if we are unable to continue as a going concern.
As of September 30, 2009, we had cash and cash equivalents of approximately
$209,000 (included in "Assets of Discontinued Operations" not held for sale) as
compared to cash and cash equivalents of approximately $2,911,000 at September
30, 2008. There was no source or use of cash attributable to continuing
operations for the six months ended September 30, 2009 and 2008.
Net cash used in discontinued operations was approximately $2.1 million during
the six months ended September 30, 2009 compared to approximately $3.5 million
during the six months ended September 30, 2008.
Net cash used in discontinued operations during the six months ended September
30, 2009 resulted primarily from our net loss of approximately $4.9 million
during the period and decreases in accounts payable and accrued expenses of
approximately $556,000, partially offset by decreases in equipment in use or
under rental agreements of approximately $6,000, decreases in accounts
receivable of approximately $99,000, decreases in prepaid expenses and other
current assets of approximately $126,000, decreases in receivable related to
litigation settlement of $350,000, decreases in inventory of approximately
$13,000, and by non-cash charges of approximately $2,780,000.
34
Net cash used in discontinued operations during the six months ended September
30, 2008 resulted primarily from our net loss of approximately $4.4 million,
increases in accounts receivable of approximately $118,000 increases in
inventory of approximately $139,000, increases in equipment in use or under
rental agreements of approximately $192,000, partially offset by a decreases in
deposits with and amounts due from affiliate of approximately $133,000,
decreases in prepaid expenses and other current assets of approximately $94,000,
increases in accounts payable and accrued expenses of approximately $149,000, an
increase in the amount due Allergan of $450,000, an increase in deferred revenue
of approximately $36,000, and by non-cash charges of approximately $429,000.
Net cash used in discontinued operations for investing activities during the six
months ended September 30, 2009 resulted primarily from the purchase of and
payments for patents and trademarks of approximately $115,000. Net cash used for
investing activities during the six months ended September 30, 2008 resulted
from purchases of property, plant and equipment of approximately $8,000 and
payments for patents and trademarks of approximately $157,000.
Net cash provided by discontinued operations for financing activities was
$2,170,000 during the six months ended September 30, 2009 compared to net cash
provided by financing activities of $16,000 during the six months ended
September 30, 2008. The net proceeds of $2,170,000 came from the issuance of
convertible debt to Emigrant Capital Corp., net of issuance costs of $330,000
comprised of investment banker fees of $250,000 and legal fees of approximately
$80,000.
We have funded research and development at various facilities. Under the terms
of the Asset Purchase Agreement we are responsible for all expenses incurred by
the facilities up until the closing of the Asset Purchase Agreement. At Closing,
the benefits of our research and development will inure to the buyer.
During the fiscal year ended March 31, 2009, we paid $100,000 to MD Imaging
Network for a Cardiovascular - EFFECT trial and image storage. We did not make
any payments to MD Imaging Network for a Cardiovascular - EFFECT trial and image
storage during the six months ended September 30, 2009. Further, we paid $50,000
to Stanford University during fiscal year ended March 31, 2009 and $12,000
during the six months ended September 30, 2009. At September 30, 2009 we have
accrued an additional $12,000 for a basic research study. These amounts may be
increased if we expand our current studies or if we pursue additional studies
and we will need to raise additional capital in such circumstances. This
research may not be completed within our projected cost and our available funds
will limit the amount of research to be performed in the future.
We were a party to a sponsored research agreement with Montefiore Medical Center
pursuant to which we funded research in the fields of pulsed electro-magnetic
frequencies at Montefiore Medical Center's Department of Plastic Surgery that
commenced on October 17, 2004 and expires on December 31, 2009. We were notified
prior to our fiscal year ended March 31, 2007, that the research being conducted
at Montefiore Medical Center's Department of Plastic Surgery has concluded and
this agreement will not be renewed. We paid $70,000 during the fiscal year ended
March 31, 2009 representing our final payment.
We fund research in the field of neurosurgery under the supervision of Dr.
Casper, of Montefiore Medical Center's Department of Neurosurgery. Dr. Casper
also uses our product in this research. The research will be conducted over a
period of several years but our funding is determined yearly, based on annual
budgets mutually approved. We expensed $70,000 and $158,500 during the six
months ended September 30, 2009 and 2008, respectively, to continue Dr. Casper's
research. During the six months ended September 30, 2009 and 2008, we have paid
$50,000 and $158,500, respectively. During October 2009 we reached agreement
with Montefiore Medical Center's Department of Neurosurgery to limit our
commitment to fund this research. Accordingly, at September 30, 2009 we accrued
$20,000 for this research.
In June, 2007, we entered into a Research Agreement with Indiana State
University to conduct randomized, double-blind animal wound studies to assist us
in determining optimal signal configurations and dosing regimens. The total cost
of the research studies is approximately $137,000 of which we expensed
approximately $12,000 and $18,000 during the six months ended September 30, 2009
and 2008, respectively. For the six months ended September 30, 2009 and 2008,
respectively, we have paid approximately $40,000 and $74,000 towards this
research. The research has concluded and we made our final payment of
approximately $40,000 during July 2009.
35
On May 1, 2008 we signed a research agreement with the Henry Ford Health System.
The principal investigator, Dr. Fred Nelson in the Department of Orthopedics Has
been studying our prototype device using targeted tPEMF signal configurations on
human patients, with established osteoarthritis of the knee, who are active at
least part of the day. We received IRB approval at The Henry Ford Health System
to begin the double- blind randomized controlled study and the institution began
enrolling patients during August 2008. The study has completed and the total
cost of the research with the Henry Ford Health System is approximately $73,000.
For the six months ended September 30, 2009, we have paid $0 towards this
research and we accrued approximately $46,000 as of September 30, 2009 for the
research performed through September 30, 2009.
We entered into a management services agreement, dated as of August 15, 2001,
with ADM Tronics Unlimited, Inc. ("ADM) under which ADM provides us and its
subsidiaries, Sonotron Medical Systems, Inc. and Pegasus Laboratories, Inc.,
with management services and allocates portions of its real property facilities
for use by us and the other subsidiaries for the conduct of our respective
businesses. Pursuant to the terms of the APA we will transfer our rights and
obligations under the management services agreement to the Buyer.
The management services provided by ADM under the management services agreement
include administrative, technical, engineering and regulatory services with
respect to our products. We pay ADM for such services on a monthly basis
pursuant to an allocation determined by ADM based on a portion of its applicable
costs plus any invoices it receives from third parties specific to us. As we
have added employees to our marketing and sales staff and administrative staff
following the consummation of initial public offering, our reliance on the use
of the management services of ADM has been reduced.
We also use office, manufacturing and storage space in a building located in
Northvale, NJ, currently leased by ADM, pursuant to the terms of the management
services agreement to which we, ADM and two of ADM's subsidiaries are parties.
Pursuant to the management services agreement, ADM determines, on a monthly
basis, the portion of space utilized by us during such month, which may vary
from month to month based upon the amount of inventory being stored by us and
areas used by us for research and development, and we reimburse ADM for our
portion of the lease costs, real property taxes and related costs based upon the
portion of space utilized by us.
ADM determines the portion of space allocated to us and each subsidiary on a
monthly basis, and we and the other subsidiaries are required to reimburse ADM
for our respective portions of the lease costs, real property taxes and related
costs.
The amounts included in general and administrative expense (as a component of
discontinued operations) representing ADM's allocations under our management
services agreement with ADM were $4,630 and $7,339 for the three months ended
September 30, 2009 and 2008, and $15,485 and $25,886 for the six months ended
September 30, 2009 and 2008, respectively.
We, ADM and one subsidiary of ADM, Sonotron Medical Systems, Inc., are parties
to a second amended and restated manufacturing agreement. Under the terms of the
agreement, ADM 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 us. For each product that ADM manufactures for us, we pay
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 us by ADM, if any, plus
(ii) a labor charge based on ADM's standard hourly manufacturing labor rate,
which we believe is more favorable than could be attained from unaffiliated
third-parties. We generally purchase and provide ADM with all of the raw
materials, parts and components necessary to manufacture our products and as a
result, the manufacturing fee we pay to ADM generally is 120% of the labor rate
charged by ADM. On April 1, 2007, we instituted a procedure whereby ADM invoices
us for finished goods at ADM's costs plus 20%.
Under the terms of the agreement, if ADM is unable to perform its obligations
under our manufacturing agreement or is otherwise in breach of any provision of
our manufacturing agreement, we have the right, without penalty, to engage third
parties to manufacture some or all of our products. In addition, if we elect to
utilize a third-party manufacturer to supplement the manufacturing being
completed by ADM, we have the right to require ADM to accept delivery of our
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. Although we believe that there are a number
of third-party manufacturers available to us, we cannot assure you that we would
be able to secure another manufacturer on terms favorable to us or at all or how
long it will take us to secure such manufacturing. The initial term of the
agreement expires on March 31, 2009, subject to automatic renewals for
additional one-year periods, and which was renewed through March 31, 2010,
unless either party provides three months' prior written notice to the other
prior to the end of the relevant term of its desire to terminate the agreement.
36
We purchased $4,746 and $190,313 of finished goods and certain components from
ADM at contracted rates during the three months ended September 30, 2009 and
2008, respectively, and $44,873 and $514,927 during the six months ended
September 30, 2009 and 2008, respectively.
Pursuant to the terms of the APA we will transfer our rights and obligations
under the manufacturing agreement to the Buyer.
Effective February 1, 2008, we entered into an agreement to share certain
information technology (IT) costs with ADM. During the six months ended
September 30, 2009 and 2008, there have been no cost reimbursements under this
agreement. Pursuant to the terms of the APA we will transfer our rights and
obligations under the IT cost sharing agreement to the Buyer.
Effective August 1, 2009, we entered into an agreement with ADM to provide the
following services and which cancels our Management Services and IT Services
agreements described above:
O ADM will provide us with engineering services, including quality control and
quality assurance services along with regulatory compliance services, warehouse
fulfillment services and network administration services including hardware and
software services.
O ADM will be paid at the rate of $26,000 per month by us for these services and
the four full time engineers and three part time engineers currently employed by
us will be terminated by us. It is expected that these four full time engineers
will be employed by ADM.
O The services agreement may be cancelled by either party upon sixty days
notice. Pursuant to the terms of the APA we will transfer our rights and
obligations under the services agreement to the Buyer.
During the three and six months ended September 30, 2009, we paid ADM $52,000
under the terms of this agreement.
Pursuant to the terms of the APA we will transfer our rights and obligations
under the IT cost sharing services agreement to the Buyer.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK RELATED TO INTEREST RATES AND FOREIGN CURRENCY
We are exposed to market risks related to changes in interest rates; however, we
believe those risks to be not material in relation to our operations. We do not
have any derivative financial instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules
13(d)-15(e) under the Exchange Act that are designed to ensure that information
required to be disclosed in our Exchange Act reports are recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Management necessarily applies its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation, with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-15. Based upon that evaluation as of September 30, 2009, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective, at the reasonable assurance level, in ensuring that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our
management including our Chief Executive Officer and Chief Financial Officer, to
ensure that such information is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
37
We will continue to review and evaluate the design and effectiveness of our
disclosure controls and procedures on an ongoing basis and to improve our
controls and procedures over time and correct any deficiencies that we may
discover in the future. Our goal is to ensure that our senior management has
timely access to all material financial and non-financial information concerning
our business. While we believe the present design of our disclosure controls and
procedures is effective to achieve our goals, future events affecting our
business may cause us to modify our disclosure controls and procedures.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting
that occurred during our the fiscal quarter ended June 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
INTEREST RATE RISK
As of September 30, 2009, our cash included approximately $209,000 of money
market bank accounts. Due to the fact that money market accounts are available
for withdrawals on a daily basis and traditional the investments are of a
short-term duration, an immediate 10% change in interest rates would not have a
material effect on the fair market value of our money market accounts.
Therefore, we would not expect our operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on our money market accounts. Our loan with Emigrant Capital
Corp. is at a fixed interest rate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On August 17, 2005, we filed a complaint against Conva-Aids, Inc. t/a New York
Home Health Care Equipment, or NYHHC, and Harry Ruddy 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. On April 30, 2008, during a conference before the Hon.
Brian R. Martinotti J.S.C. all claims were settled and the terms of the
settlement were placed on the record. The settlement calls for the defendants to
dismiss with prejudice all counterclaims filed against us and to pay us the sum
of $120,000 in installments. The terms provide for an initial payment of $15,000
and the balance to be paid in equal monthly installments of $5,000. In the event
of default defendants shall be liable for an additional payment of $30,000,
interest at the rate of 8% per annum as well as costs and attorney's fees. The
settlement was documented in a written agreement executed by the parties and the
initial payment of $15,000 was paid on June 18, 2008. The defendants defaulted
on the payment due July 2008 and we were advised that the defendants filed for
protection under Chapter 11 of the United States Bankruptcy Code on July 21,
2008. As of June 30, 2009, we have only recognized the cash received. We have
filed our proof of claim with the Bankruptcy Court.
On October 10, 2006, we received a demand for arbitration by Stonefield
Josephson, Inc. with respect to a claim for fees for accounting services in the
amount of $105,707, plus interest and attorney's fees. Stonefield Josephson had
previously invoiced Ivivi for fees for accounting services in an amount which
Ivivi refuted. We pursued claims against Stonefield Josephson. We filed a
complaint against Stonefield Josephson in the Superior Court of New Jersey Law
Division Docket No.BER-l-872-08 on January 31, 2008. A commencement of
arbitration notice initiated by Stonefield Josephson was received by us on March
11, 2008. In March and April motions were filed by us and Stonefield Josephson
which sought various forms of relief including the forum for resolution of the
claims. On June 3, 2008, the court determined that the language in the
engagement agreement constituted a forum selection clause and the claims should
be decided in California. On June 19, 2008, we filed a complaint against
Stonefield Josephson in the Superior Court of California, Los Angeles County. On
July 18, 2008, the court denied our request for reconsideration of the order
dated June 3, 2008. On January 19, 2009, the arbitrator rendered the award and
found in our favor and determined that no additional fees were owed by Ivivi to
Stonefield. The arbitrator further found Ivivi to be the prevailing party. The
award is final. As a result, at March 31, 2009, we reversed $105,707 which we
previously included in professional fees and Accrued expenses for invoices
received by us during the quarters ended March 2006 and December 2005. The
entire matter was settled at mediation on June 23, 2009. We agreed to accept
payment of $350,000 in settlement of any and all claims and the parties agreed
to dismiss all pending suits. The settlement was a compromise and Stonefield
Josephson did not admit liability. At June 30, 2009 we recorded the settlement
in our Balance Sheet as as a component of Assets of Discontinued Operations not
held for sale. We received two checks totaling $350,000 on July 7, 2009 in
payment of the settlement.
38
Subsequent to the announcement of the Asset Purchase Agreement, a purported
shareholder class action complaint, captioned Lehmann v. Gluckstern, et. al.,
was filed by one of our shareholders in the Chancery Division of the Superior
Court of New Jersey in Bergen County, on November 13, 2009, naming us, our
directors, Buyer and Ajax as defendants. The complaint alleges causes of action
against the defendants for breach of their fiduciary duties in connection with
the proposed sale of our assets to Buyer. It also alleges that Buyer and Ajax
aided and abetted the alleged breaches of fiduciary duties by our directors.
Consequently, plaintiff seeks relief including, among other things, (i)
preliminary and permanent injunctions prohibiting consummation of the
transactions contemplated by the Asset Purchase Agreement and (ii) payment of
plaintiff's costs and expenses, including attorneys' and experts' fees. The
lawsuit is in its preliminary stage, and the court has not yet made any
determinations in the matter, including whether to certify the purported class.
We and the Buyer believe that the lawsuit is without merit and intend to defend
vigorously against it.
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.
ITEM 1A. RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH THE
OTHER INFORMATION CONTAINED IN THIS INTERIM REPORT ON FORM 10-Q, AND OUR ANNUAL
REPORT FOR THE YEAR ENDED MARCH 31, 2009 AS FILED ON FORM 10-K, BEFORE BUYING
OUR COMMON STOCK. THESE RISKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE VALUE OF OUR
COMMON STOCK.
EXCEPT AS SET FORTH BELOW, THERE HAVE BEEN NO MATERIAL CHANGES TO THE RISK
FACTORS CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31,
2009.
RISKS AFFECTING OUR BUSINESS
WE MAY BE REQUIRED TO LIQUIDATE OUR ASSETS FROM DISCONTINUED OPERATIONS IN
PARTIAL SETTLEMNT OF OUR ASSOCIATED LIABILITIES
If we are required to liquidate, the fair value of our liabilities may exceed
the fair value of the assets, and our shareholders' may not receive any return
of capital upon liquidation.
IF WE ARE UNABLE TO REPAY OUR OUTSTANDING LOAN BY THE EXTENDED DUE DATE, WE WILL
BE IN DEFAULT UNDER OUR LOAN AGREEMENT WITH OUR LENDER
We have $2.5 million of debt outstanding under our loan agreement. The loan
matured, plus interest, on August 30, 2009 but, the Lender has granted us a
forbearance through November 30, 2009 and we are currently negotiating a further
extension.
There can be no assurance that we will be able to complete the negotiations of
the proposed Asset Purchase Agreement or the proposed Amended and Restated
Forbearance Agreement described in Note 1 of our financial statements or what
the final terms under such agreements will be. In addition, even if we enter
into the Asset Purchase Agreement, we may not be able to complete the
transactions contemplated by such proposed Asset Purchase Agreement. In the
event the transaction with the Buyer is completed, following the closing, our
board of directors may elect to liquidate us and utilize our available cash and
assets to repay our outstanding creditors to the extent of our remaining assets
and then distribute any remaining assets to our shareholders or any other equity
holders, however, we do not believe that there will be any assets remaining.
However, following the closing, it is likely that our liabilities will exceed
our available cash. In addition, following the closing we will remain liable
under our lease for our Montvale, New Jersey office. The lease, which has a
monthly rent of $15,613, will terminate in October 2014. We received a Notice
of Default from the landlord that we are in arrears for unpaid rents in October
and November 2009. The unpaid rent for October and November is expected to be
satisfied through a drawdown by the landlord from a letter of credit held for
their benefit.
In the event we do not successfully complete the negotiation of the proposed
Asset Purchase Agreement or the proposed Amended and Restated Forbearance
Agreement and complete the transactions contemplated by such agreements or
complete another transaction, we will not be able to meet our obligations under
the Loan and the Lender will have the right to foreclose under the Loan, which
is secured by all of our assets. In such an event, we would have to cease our
operations or file for bankruptcy protection.
39
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
10.1 Amendment No. 1 dated November 17, 2009 to the Asset Purchase
Agreement dated September 24, 2009 among Ivivi Technologies,
Inc., Ivivi Technologies, LLC and Ajax Capital LLC *
31.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 *
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
-----------------
* Filed herewith.
40
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.
IVIVI TECHNOLOGIES INC.
(Registrant)
Dated: November 19, 2009
By: /s/ Steven Gluckstern
--------------------------
Steven Gluckstern President,
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
4
