10-Q 1 ivivi_10q-093009.txt IVIVI 10-Q 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) 41

Filing Compare · Montvale Technologies, Inc.