Part I. Financial Information Page Number
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of our operations and financial condition should be
read in conjunction with the Financial Statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-QSB.
Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of the "safe harbor" provisions under section 21E of the Securities
and Exchange Act of 1934 and the Private Securities Litigation Reform Act of
1995 under Section 27A of the Securities Act of 1933, as amended. We use
forward-looking statements in our description of our plans and objectives for
future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may", "expects", "believes",
"anticipates", "intends", "forecasts", "projects", or similar terms, variations
of such terms or the negative of such terms. These forward- looking statements
are based on management's current expectations and are subject to factors and
uncertainties which could cause actual results to differ materially from those
described in such forward-looking statements. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained in this report to reflect any change in our
expectations or any changes in events, conditions or circumstances on which any
forward-looking statement is based. Factors which could cause such results to
differ materially from those described in the forward- looking statements
include those set forth under "Risk Factors" in our Annual Report on Form 10-KSB
and our other filings with the Securities and Exchange Commission.
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-KSB and
10-QSB 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.
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OVERVIEW
We are an early-stage medical technology company focusing on designing,
developing and commercializing proprietary electrotherapeutic technologies.
Electrotherapeutic technologies use electric or electromagnetic signals to help
relieve pain, swelling and inflammation and promote healing processes and tissue
regeneration. We have focused our research and development activities on pulsed
electromagnetic field, or PEMF technology. This technology utilizes a magnetic
field that is turned on and off rapidly to create a therapeutic electrical
current in injured tissue, which then stimulates biochemical and physiological
processes to help repair injured soft tissue and reduce related pain. We are
currently marketing products utilizing our PEMF technology to the chronic wound
and plastic and reconstructive surgery markets. We are developing proprietary
technology for other therapeutic medical markets.
While we have conducted research and development and performed sales and
marketing activities, we have generated limited revenues to date and have
incurred significant losses since our inception. At September 30, 2007, we had
an accumulated deficit of approximately $26.9 million. We expect to incur
additional operating losses, as well as negative cash flow from operations for
the foreseeable future as we continue to expand our marketing efforts with
respect to our products and to continue our research and development of
additional applications for our products, as well as new products utilizing our
PEMF technology. We are focusing our research and development activities on
optimizing the signal parameters of our PEMF technology, enabling us to produce
improved clinical outcomes and produce a smaller more efficient product
utilizing less power.
Our revenues to date have been primarily generated through monthly or daily
rental programs and by selling our products through our distributors and by
direct sale utilizing our sales force. We expect future revenues to be generated
through monthly and daily rental programs as well as the sale of our products
through our distributors and sales people to long-term care nursing facilities,
long-term acute care hospitals, rehabilitation hospitals, acute care facilities,
home health users and individual patients. In addition, we expect revenues also
to be generated through the sale of certain of our products to plastic surgery
patients and physicians.
17
On November 9, 2006, we entered into an exclusive worldwide distribution
agreement with a wholly-owned subsidiary of Allergan, Inc., a global healthcare
company that discovers, develops and commercializes pharmaceutical and medical
device products in specialty markets. Pursuant to the Agreement, we granted
Allergan's subsidiary, Inamed Medical Products Corporation and its affiliates
the exclusive worldwide right to market, sell and distribute certain of our
products, including all improvements, line extensions and future generations
thereof in conjunction with any aesthetic or bariatric medical procedures in the
Marketing Territory. In November 2006, we received $500,000 under the terms of
this Agreement which has been recorded as deferred revenue in our balance sheet
and is being amortized over 8 years. We anticipate receiving additional revenues
under this agreement including up to $1 million when commercialization of our
product begins with Allergan into certain geographic markets. During September,
2007 we received an initial order from Allergan for 20,000 Torino units.
Our ability to increase our revenues from rental and sales of our current
products and other products developed by us will depend on a number of factors,
including our ability to increase market penetration of our current products,
our ability to enter into marketing and distribution agreements in our target
markets with companies such as Allergan as well as our ability to develop and
commercialize new products and technologies. Physicians and other healthcare
professionals may not use our products or other potential products and
technologies developed by us unless they determine that the clinical benefits to
the patient are greater than those available from competing products or
therapies or represent equal efficacy with lower cost. We have achieved full
enrollment of our cardiac study at The Cleveland Clinic Florida where we are
utilizing PEMF to treat patients with ischemic cardiomyopathy. We believe that
PEMF's effects of improving blood flow and regeneration of new blood vessels
could prove useful for these patients for which there are no alternatives. Given
the length of the trial, as well as the post-trial review period, the earliest
data could be analyzed and available is four months after the final patient is
enrolled. As a result, we would anticipate results likely being available in our
fourth fiscal quarter of our fiscal year ending March 31, 2008, however, we
cannot assure when results of the study will be available.
Even if the advantage of our products and technologies is established as
clinically and fiscally significant, physicians and other healthcare
professionals may not elect to use our products and technologies developed by us
for any number of reasons. The rate of adoption and acceptance of our products
and technologies may be affected adversely by perceived issues relating to
quality and safety, consumers' reluctance to invest in new products and
technologies, the level of third-party reimbursement and widespread acceptance
of other products and technologies. Broad market acceptance of our current
products and other products and technologies developed by us in the future may
require the education and training of numerous physicians and other healthcare
professionals, as well as conducting or sponsoring clinical and cost-benefit
studies to demonstrate the effectiveness and efficiency of such products and
technologies. The amount of time required to complete such training and studies
could be costly and result in a delay or dampening of such market acceptance.
Moreover, healthcare payers" approval of use for our products and technologies
in development may be an important factor in establishing market acceptance.
18
While commercial insurance companies make their own decisions regarding
which medical procedures, technologies and services to cover, commercial payers'
often apply standards similar to those adopted by the Centers for Medicare and
Medicaid Services, or CMS in determining Medicare coverage. The Medicare statute
prohibits payment for any medical procedures, technologies or services that are
not reasonable and necessary for the diagnosis or treatment of illness or
injury. In 1997, CMS, which is responsible for administering the Medicare
program, had interpreted this provision to deny Medicare coverage of procedures
that, among other things, are not deemed safe and effective treatments for the
conditions for which they are being used, or which are still investigational.
However, in July 2004, CMS reinstated Medicare reimbursement for the use of the
technology used in our products in the treatment of non-healing wounds under
certain conditions.
CMS has established a variety of conditions for Medicare coverage of the
technology used in our products. These conditions depend, in part, on the
setting in which the service is provided. For example, in 2004, CMS added
electromagnetic therapy as a type of service payable in the home health setting,
but subject to Medicare's consolidated home health billing provisions. Thus,
Medicare will not pay separately for electromagnetic therapy services if the
service is billed under a home health plan of care provided by a home health
agency. Rather, the home health agency must pay for the electromagnetic therapy
as part of the consolidated payment made to the home health agency for the
entire range of home health services under the patient's care plan.
We retained consulting companies specializing in CMS reimbursement and
coverage matters to assist us in arranging and preparing for meetings with CMS
to request that CMS cover electromagnetic therapy for wound treatment separately
in the home health setting. In May 2006, and again in November 2007, with the
assistance of our consultants, we held a meeting with CMS and made a
presentation in support of reimbursement for the home health use of the
technology used in our products. As of the date of this filing, we have not
received any feedback from CMS as to whether CMS intends to reimburse for the
use of the technology used in our products separately in the home health
setting. Even if CMS were to approve separate reimbursement of electromagnetic
therapy in the home health setting, the regulatory environment could change and
CMS might deny all coverage for electromagnetic therapy as treatment of chronic
wounds, whether for home health use or otherwise, which could limit the amount
of coverage patients or providers are entitled to receive. Either of these
events would materially and adversely affect our revenues and operating results.
We cannot predict when, if ever, CMS will allow for reimbursement for the
use of the technology in our products in the home, or what additional
legislation or regulations, if any, may be enacted or adopted in the future
relating to our business or the healthcare industry, including third-party
coverage and reimbursement, or what effect any such legislation or regulations
may have on us. Furthermore, significant uncertainty exists as to the coverage
status of newly approved healthcare products, and there can be no assurance that
19
adequate third-party coverage will be available with respect to any of our
future products or new applications for our present products. In currently
non-capitated markets, failure by physicians, hospitals, nursing homes and other
users of our products to obtain sufficient reimbursement for treatments using
our technologies would materially and adversely affect our revenues and
operating results. Alternatively, as the U.S. medical system moves to more
fixed-cost models, such as payment based on diagnosis related groups,
prospective payment systems or expanded forms of capitation, the market
landscape may be altered, and the amount we can charge for our products may be
limited and cause our revenues and operating results to be materially and
adversely affected.
We may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products or
technologies. Although the FDA has cleared the use of our SofPulse technology
for the treatment of edema and pain in soft tissue, we may not be able to obtain
regulatory clearance or approval of new products or technologies or new
treatments through existing products. The completion of the development of any
new products or technologies or new uses of existing products will remain
subject to all the risks associated with the commercialization of new products
based on innovative technologies, including:
o our ability to fund, complete and establish research that supports the
efficacy of new technologies and products;
o our ability to obtain regulatory approval or clearance of such
technologies and products, if needed;
o our ability to obtain market acceptance of such new technologies and
products;
o our ability to effectively and efficiently market and distribute such
new products;
o the ability of ADM Tronics Unlimited, Inc. ("ADM") or other
manufacturers utilized by us to effectively and efficiently
manufacture such new products; and
o our ability to sell such new products at competitive prices that
exceed our per-unit costs for such products.
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.
20
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 We recognize revenue primarily from the rental and sales of our products.
Rental revenue is recognized as earned on either a monthly or pay-per-use basis
in accordance with individual customer agreements. In most cases, we allow the
rental end-user to evaluate our equipment on a trial basis, during which time we
provide any demonstration or education necessary for the use of our equipment.
Rental revenue recognition commences after the end of the trial period. All of
our rentals are terminable by either party at any time. When we use a third
party to bill insurance companies, we still recognize revenue as our products
are used. When certain of our distributors bill end users, we recognize rental
revenue when we are paid by the distributor. When the amount we earn is fixed,
we recognize revenue net of commissions paid to distributors.
Sales are recognized when our products are shipped to end-users including
medical facilities and distributors. Shipping and handling charges and costs are
immaterial. We have no post shipment obligations and sales returns have been
immaterial.
We provide an allowance for doubtful accounts determined primarily through
specific identification and evaluation of significant past due accounts,
supplemented by an estimate applied to the remaining balance of past due
accounts.
o Our products held for sale are included in the balance sheet under
"Inventory". At September 30, 2007, we also had fully depreciated equipment held
for rental, which are our products that are rented to third parties, used
internally and loaned out for marketing and testing.
o We apply Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS 128). 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 In April 2006, we adopted the fair value recognition provisions of SFAS
No. 123(R), Accounting for Stock-based Compensation, to account for compensation
costs under our stock option plans. We previously utilized the intrinsic value
method under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (as amended).
21
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.
o For share based instruments carried at fair value in the financial
statements, we used the Black Scholes option pricing model to value our stock
purchase warrants. As of September 30, 2007, we have used the following
assumptions in the Black Scholes option pricing model: (i) dividend yield of 0%;
(ii) expected volatility of 44%-67%; (iii) average risk free interest rate of
3.62%-4.75%; (iv) expected life of 1.5 to 5 years; and (v) estimated forfeiture
rate of 5%.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2006
Net loss decreased $290,531, or 14%, to $1,807,065 or $0.19 per share, for
the three months ended September 30, 2007 compared to a net loss of $2,097,596,
or $0.44 per share, for the three months ended September, 30 2006. The decrease
in net loss primarily resulted from (i)decreases in financing costs of $755,669,
and (ii)decreases in share based compensation of $293,301, or 39%, (iii)
decreases in cost of sales of $9,125, or 55%, (iv) decreases in cost of rentals
of $4,654, or 47%, (v) increases in interest income of $66,335, or 3,700%,
partially offset by (vi)increases in research and development expenses of
$77,742 or 25%, (vii)increases in selling and marketing expenses of $209,797, or
78%, (viii)increases in depreciation and amortization $7,458, or
102%,(ix)increases in general and administrative expenses of $400,755 or 115%
and (x) decreases in revenues of $142,801, or 39% for the three months ended
September 30, 2007 as compared to the three months ended September 30, 2006.
Total revenue decreased $142,801, or 39%, to $225,732 for the three months
ended September 30, 2007 as compared to $368,533 for the three months ended
September 30, 2006. The decrease in revenue was due to a decrease in unit sales
of our products as well as a reduction in revenue from rental customers,
partially offset by sales of our Torino disposable product and the recognition
of licensing revenue from the initial milestone payment under our Allergan
agreement, both of which had no impact the previous quarter ended September 30,
2006.
Cost of sales decreased $9,125, or 55%, to $7,533 for the three months
ended September 30, 2007 from $16,758 for the three months ended September 30,
2006 due to a decrease in unit sales. Purchases of finished goods from ADM for
the three months ended September 30, 2007 were $151,796.
Cost of rentals decreased $4,654, or 47%, to $5,428 for the three months
ended September 30, 2007 from $9,902 for the three months ended September 30,
2006 due to a decrease in the number of units out on rental for the three months
ended September 30, 2007 compared to the number of units out on rental for the
three months ended September 30, 2006. Cost of rental revenue consists primarily
of the cost of electronics and other components and wages relating to the
manufacture of our products by third parties, including ADM. Cost of rental
revenue for the three months ended September 30, 2007 and 2006 included charges
from ADM under our management services agreement.
Depreciation and amortization increased $7,458, or 102%, to $14,785 for the
three months ended September 30, 2007 from $7,327 for the three months ended
September 30, 2006. The increase was attributable to purchases of fixed assets
as well as amortizing deferred costs relating to our distribution agreement with
Allergan.
Research and development costs increased $77,742, or 25%, to $383,373 for
the three months ended September 30, 2007 from $305,631 for the three months
ended September 30, 2006. The increase included increased salaries of
approximately $66,000 resulting from the cessation of salary cost reduction
initiatives in the prior quarter and five additional employees in the current
quarter; increased consulting costs of approximately $54,000, partially offset
by a reduction of approximately $123,000 in research and development costs
primarily due to a $200,000 accrual in the prior quarter for our trial at the
Cleveland Clinic offset by current charges of approximately $44,000 for
consultants assisting in our meeting with CMS for Medicaid/Medicare
reimbursement, approximately $13,000 to design our consumer product, and $17,000
for animal research conducted at Indiana University.
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Financing costs decreased $755,669 for the three months ended September 30,
2007 to $0 from costs of $755,669 during the three months ended September 30,
2006. Interest and financing costs of $755,669 for the three months ended
September 30, 2007 were eliminated due to (i) elimination of interest expense on
the convertible notes issued by us and converted upon the effectiveness of our
IPO, (ii) the elimination of borrowing under promissory notes issued by us, and
(iii) a decrease of additional shares issuable under the convertible notes for
failure to register the underlying securities, which were issued during the
quarter ended December 31, 2006.
Interest income increased $66,635, or 3,700%, to $68,128 for the three
months ended September 30, 2007 from $1,793 for the three months ended September
30, 2006 due to our investments in money market accounts with proceeds from our
IPO.
Selling and marketing expenses increased $209,797, or 78%, to $477,358 the
three months ended September 30, 2007 as compared to $267,561 for the three
months ended September 30, 2006. The increase resulted from increased salaries
of approximately $115,000 with a headcount increase of nine sales and sales
related administrative personnel, advertising and promotional expenses of
approximately $12,000, samples of product of approximately $63,000, the majority
of which was SofPulse units delivered to Allergan under our licensing agreement,
and recruiting costs of approximately $49,000 partially offset by decreases in
royalties and commissions of approximately $36,000.
General and administrative expenses increased $400,755 or 115% to $748,636
for the three months ended September 30, 2007 as compared to $347,881 for the
three months ended September 30, 2006. The increase resulted primarily from
increases in salaries of approximately $117,000 with the addition of a CFO and
Controller, as well as salary increases for other executives that were part of
the salary reduction program in the prior year. Other increases included
investor and public relations expense of approximately $90,000, general
liability insurance of approximately $34,000, travel and entertainment of
approximately $36,000, employee benefits and payroll taxes of approximately
$27,000, professional fees of approximately $101,000. General and administrative
expenses for the three months ended September 30, 2007 and 2006 reflect charges
of $17,782 and $24,239, and salary allocations of $38,343 and $41,277,
respectively from ADM under our management services agreement.
Share based compensation decreased $293,301, or 39%, to $463,992 for the three
months ended September 30, 2007 from $757,293 during the three months ended
September 30, 2006, due the value of options granted in the prior year period
which vested immediately.
SIX MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2006
Net loss decreased $755,882, or 19%, to $3,219,672 or $0.34 per share, for
the six months ended September 30, 2007 compared to a net loss of $3,975,554, or
$0.84 per share, for the six months ended September, 30 2006. The decrease in
net loss primarily resulted from (i)increases in revenues of $100,779, or 17%,
(ii) decreases in financing costs of $1,633,266, (iii)decreases in share based
compensation of $180,181, or 18%, (iv) decreases in cost of rentals of $10,068,
or 27%, and (v) increases in interest income of $146,079, or 4,254%, partially
offset by (vi)increases in research and development expenses of $166,183 or 29%,
(vii) increases in selling and marketing expenses of $389,577, or 80%, (viii)
increases in depreciation and amortization of $14,684, or 150%,(ix)increases in
general and administrative expenses of $695,811, or 85% and (x) increases in
cost of sales of $48,237, or 150%, for the six months ended September 30, 2007
as compared to the six months ended September 30, 2006.
Total revenue increased $100,779, or 17%, to $686,731 for the six months
ended September 30, 2007 as compared to $585,952 for the six months ended
September 30, 2006. The increase in revenue was due to an increase in sales of
our products along with sales of our Torino disposable units and the recognition
of licensing revenue from the initial milestone payment under our Allergan
Agreement which did not impact the six month period ended September 30, 2006
partially offset by a reduction in revenue from rental customers.
Cost of sales increased $48,237, or 156%, to $79,130 for the six months
ended September 30, 2007 from $30,893 for the six months ended September 30,
2006 due to an increase in unit sales. Purchases of finished goods from ADM for
the six months ended September 30, 2007 were $213,395.
Cost of rentals decreased $10,068, or 27%, to $27,306 for the six months
ended September 30, 2007 from $37,374 for the six months ended September 30,
2006 due to a decrease in the number of units rented for the six months ended
September 30, 2007 compared to the number of units rented for the six months
ended September 30, 2006. Cost of rental revenue consists primarily of the cost
of electronics and other components and wages relating to the manufacture of our
products by third parties, including ADM. Cost of rental revenue for the six
months ended September 30, 2007 and 2006 included charges of $3,807 and $47,503,
respectively from ADM under our management services agreement.
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Depreciation and amortization increased $14,684, or 150%, to $24,447 for
the six months ended September 30, 2007 from $9,763 for the six months ended
September 30, 2006. The increase was attributable to purchases of fixed assets
as well as amortizing deferred costs relating to our distribution agreement with
Allergan.
Research and development costs increased $166,183, or 29%, to $741,544 for
the six months ended September 30, 2007 from $575,361 for the six months ended
September 30, 2006. The increase included increased salaries of approximately
$159,000 resulting
from the cessation of salary cost reduction initiatives in the prior six month
period and additional five employees in the current six month period; increased
consulting costs of approximately $202,000; partially offset by a reduction of
approximately $174,000 in research and development costs primarily due to a
$300,000 accrual in the prior six month period for our trial at the Cleveland
Clinic.
Financing costs decreased $1,633,266 for the six months ended September 30,
2007 to $0 from costs of $1,633,266 during the six months ended September 30,
2006. Finance costs for the six months ended September 30, 2006 were eliminated
due to (1) the elimination of interest expense on the convertible notes issued
by us and converted upon the effectiveness of our IPO, (ii) the elimination of
borrowing under promissory notes issued by us, and (iii) a decrease of
additional shares issuable under the convertible notes for failure to register
the underlying securities, which were issued during the quarter ended December
31, 2006.
Interest income increased $146,079, or 4,254%, to $149,513 for the six
months ended September 30, 2007 from $3,434 for the six months ended September
30, 2006 due to our investments in money market accounts with proceeds from our
IPO.
Selling and marketing expenses increased $389,577, or 80%, to $877,632 for
the six months ended September 30, 2007 as compared to $488,055 for the six
months ended September 30, 2006. The increase resulted from increased salaries
of approximately $225,000 with a headcount increase of nine sales and sales
related administrative personnel, increases in recruiting fees of $79,000,
advertising and promotional expenses of approximately $69,000, samples of
product of approximately $75,000, the majority of which were Torino units
delivered to Allergan under our licensing agreement, partially offset by
decreases in royalties and commissions of $85,000.
General and administrative expenses increased $695,811, or 85%, to
$1,510,333 for the six months ended September 30, 2007 as compared to $814,522
for the six months ended September 30, 2006. The increase resulted primarily
from increases in salaries of approximately $274,000 with the addition of a CFO
and Controller, as well as salary increases for other executives that were part
of the salary reduction program in prior year, travel and entertainment of
approximately $55,000 and other employee health and welfare benefits and payroll
taxes of approximately $49,000. Other increases included investor and public
relations expense of approximately $160,000, general liability insurance of
approximately $76,000, 401K employer match accrual of approximately $31,000, and
professional consulting fees of approximately $61,000. General and
administrative expenses for the six months ended September 30, 2007 and 2006
reflect inter-company allocations of $39,446 and $42,184 and salary allocations
of $76,419 and $82,713, respectively. Inter-company allocation for the six
months ended September 30, 2007 and 2006 consisted of amounts payable to ADM
under our management services agreement.
Share based compensation decreased $180,181, or 18%, to $795,525 for the six
months ended September 30, 2007 from $975,706 for the six months ended September
30, 2006 due to expenses under FAS 123(R) for common stock options issued by us.
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LIQUIDITY AND CAPITAL RESOURCES
We have had significant operating losses for the fiscal years ended March
31, 2007 and 2006, as well as for the six months ended September 30, 2007 and
2006. As of September 30, 2007, we had an accumulated deficit of approximately
$26.9 million. Our continuing operating losses have been funded principally
through the proceeds of our private placement financings, our IPO and other
arrangements. We have only generated limited revenues of $1,182,340 and $786,512
for the years ended March 31, 2007 and 2006 and $686,731 and $585,952 for for
the six months ended September 30, 2007 and 2006, respectively, primarily from
the rental and sale of our products, and we expect to incur additional operating
losses, as well as negative cash flow from operations, for the foreseeable
future, as we continue to expand our marketing efforts with respect to our
products and continue our research and development of additional applications
for our technology and other technologies that we may develop in the future. We
do not expect to be able to generate sufficient cash flow from our operations
during the next twelve-month period; however, we believe that the proceeds from
our IPO and private placements, combined with our expected revenues, will be
sufficient to fund our operations for at least the next 12 months.
As of September 30, 2007, we had cash and cash equivalents of $5.3 million
as compared to cash and cash equivalents of $8.3 million at March 31, 2007. The
decrease of $3.0 million in cash and cash equivalents during the six month
period ended September 30, 2007 was due to approximately $2.4 million in cash
used by operating activities, and $0.6 million in cash used by investing
activities for fixed assets purchases and intellectual property.
Net cash used by operating activities was approximately $2.4 million during
the six months ended September 30, 2007 compared to the net cash used by
operating activities of approximately $0.3 million during the six months ended
September 30, 2006. This increase was due to increases in research and
development, sales and marketing and general and administrative expenses as
previously noted, partially offset by non-cash charges from changes in fair
value of warrant and registration rights liabilities, share based financing
penalties and amortization of loan costs and discounts in the prior year.
Net cash used by investing activities was $641,640 during the six months
ended September 30, 2007 compared to no investing activities during the six
months ended September 30, 2006, the increase of which was due to purchases of
production equipment and computer equipment of $302,560, purchases for equipment
in use and under rental agreements of $83,654 and payments related to our
patents and trademarks and other intangible assets of $208,588 and $46,838 for
restricted cash securing a letter of credit required under our lease for our
corporate headquarters.
Net cash provided by financing activities was $32,141 during the six months
ended September 30, 2007 primarily from stock option exercises compared to net
cash used in financing activities of $251,541 for the six months ended September
30, 2006, from the deferred offering costs offset by proceeds from notes and
affiliate advances.
Our business is capital intensive and we will likely require
additional financing in order to:
o fund research and development;
o expand sales and marketing activities;
o develop new or enhanced technologies or products;
o maintain and establish regulatory compliance;
o respond to competitive pressures; and
o acquire complementary technologies or take advantage of unanticipated
opportunities.
Our need for additional capital will depend on:
o the costs and progress of our research and development efforts;
o the preparation of pre-market application submissions to the FDA for
our new products and technologies;
o the number and types of product development programs undertaken;
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o the number of products to be manufactured for sale or rental;
o the costs and timing of expansion of sales and marketing activities;
o the amount of revenues from sales of our existing and potentially new
products;
o the cost of obtaining, maintaining, enforcing and defending patents
and other intellectual property rights;
o competing technological and market developments; and
o developments related to regulatory and third-party coverage matters.
In order to keep our operating expenses manageable, we entered into a
management services agreement, dated as of August 15, 2001, as amended, with ADM
under which ADM provided us and its other subsidiaries, with management services
and allocated portions of its real property facilities for use by us and the
other subsidiaries for the conduct of our respective businesses.
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 and us, based on a portion of its
applicable costs plus any invoices it receives from third parties specific to
us. As we intend to add employees to our administrative staff, we expect our
reliance on the use of the management services of ADM to be reduced
significantly.
We also use office, manufacturing and storage space in a building located
in Northvale, New Jersey, currently leased by ADM, pursuant to the terms of the
management services agreement. ADM determines the portion of space allocated to
us and each other 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.
We incurred $56,125 and $115,865 for management services and the use of
real property provided to us by ADM pursuant to the management services
agreement during the three and six months ended September 30, 2007.
In addition, we are a party to a manufacturing agreement with ADM, dated as
of August 15, 2001, and as amended and restated in May 2006, under which we
utilize ADM as our manufacturer of all of our current and future medical and
non-medical electronic and other devices or products. 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, 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.
Purchases of Finished Goods from ADM for the three and six months ended
September 30, 2007 were $151,796 and $213,395, respectively.
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On October 18, 2007, we issued one million shares of our common stock at a
price per share of $5 in a private placement transaction with an institutional
investor raising approximately $4.9 million, net of expenses. We have agreed to
file a registration statement covering the resale of shares of common stock
issued in the private placement within 60 days of October 18, 2007 and use
commercially reasonable efforts to cause the registration to be declared
effective within 120 days of closing (or 150 days upon other events taking
place). In the event we fail to meet the filing effectiveness deadlines, we will
be subject to customary penalties.
Although we expect that the net proceeds of the IPO and private placements,
together with our available funds and funds generated from our operations, will
be sufficient to meet our anticipated needs for at least the next 12 months, we
may need to obtain additional capital to continue to operate and grow our
business. Our cash requirements may vary materially from those currently
anticipated due to changes in our operations, including our marketing and
distribution activities, product development, expansion of our personnel and the
timing of our receipt of revenues. Our ability to obtain additional financing in
the future will depend in part upon the prevailing capital market conditions, as
well as our business performance. There can be no assurance that we will be
successful in our efforts to arrange additional financing on terms satisfactory
to us or at all.
We are planning to move our headquarters to Montvale, New Jersey on or
about November 15, 2007. In June 2007, we entered into a lease pursuant to
which, we will rent 7,494 square feet of office space. The term of the lease
began on October 5, 2007 and expires on or about November 1, 2014, subject to
our option to renew the lease for an additional five year period on terms and
conditions set forth therein. Pursuant to the lease, we are required to pay rent
in the amount of $14,051 per month during the first two years of the term, with
the exception of month 13 at no cost, and $15,613 per month thereafter. The cost
of moving is not material to our results of operations. Following our move, we
intend to retain certain office and laboratory space at our existing facility in
Northvale, New Jersey.
We have a letter of credit as required by the lease and which is secured by
$46,838 shown as restricted cash on our balance sheet.
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.
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