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 June 30, 2018

 

OR

 

[  ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

COMMISSION FILE NO. 0-17629

 

ADM TRONICS UNLIMITED, INC.
(Exact name of registrant as specified in its charter)

 

 Delaware

(State or Other Jurisdiction

of Incorporation or organization)

22-1896032

(I.R.S. Employer

Identification Number)

 

224-S Pegasus Ave., Northvale, New Jersey 07647
(Address of Principal Executive Offices)

 

Registrant's Telephone Number, including area code: (201) 767-6040

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  YES [X] NO [  ]

 

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 (§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 [X] NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer [  ] 

Accelerated filer  [  ]

 

 

 Non-accelerated filer [  ] (Do not check if a smaller reporting company)

Smaller reporting company [X]

 

 

 

Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES [  ] NO [X]

 

State the number of shares outstanding of each of the Issuer's classes of common equity, as of the latest practicable date:

 

67,588,504 shares of Common Stock, $.0005 par value, as of August 20, 2018.

 

 

 

 

 

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY 

 

INDEX

 

 

Page

Number

Part I - Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2018 (unaudited) and March 31, 2018 (audited)

3

 

 

 

 

Condensed Consolidated Statements of Income for the three months ended June 30, 2018 and 2017 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2018 and 2017 (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

13

 

 

 

Item 4.

Controls and Procedures

13

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

14

 

 

 

Item 1A.

Risk Factors

14

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

14

 

 

 

Item 3.

Defaults Upon Senior Securities

14

 

 

 

Item 4.

Mine Safety Disclosures

14

 

 

 

Item 5.

Other Information

14

 

 

 

Item 6.

Exhibits

14

 

 

 

 

 PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

   

June 30,

   

March 31,

 
   

2018

   

2018

 
   

(Unaudited)

    (Audited)  

ASSETS

               
                 

Current assets:

               

Cash and cash equivalents

  $ 1,558,624     $ 1,693,532  

Accounts receivable, net of allowance for doubtful accounts of $125,000

    1,253,142       1,207,493  

Inventories

    288,783       201,023  

Prepaid expenses and other current assets

    24,397       8,522  
                 

Total current assets

    3,124,946       3,110,570  
                 

Property and equipment, net of accumulated depreciation of $79,909 and $70,440, at June 30, 2018 and March 31, 2018, respectively

    123,651       133,120  
                 

Inventories - long-term portion

    111,051       111,051  

Intangible assets, net of accumulated amortization of $10,988 and $10,639, at June 30, 2018 and March 31, 2018, respectively

    9,946       10,295  

Other assets

    91,164       91,464  

Deferred tax asset

    1,095,634       1,095,634  

Total other assets

    1,431,446       1,441,564  
                 

Total assets

  $ 4,556,392     $ 4,552,134  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Capital lease payable

  $ 31,196     $ 31,196  

Line of credit

    35,000       -  

Accounts payable

    258,545       286,964  

Accrued expenses and other current liabilities

    125,518       149,382  

Customer deposits

    122,167       122,167  

Due to stockholder

    137,522       130,551  

Total current liabilities

    709,948       720,260  
                 

Long-term liabilities

               

Capital lease payable, net of current portion

    46,590       54,637  
                 
                 

Total liabilities

    756,538       774,897  
                 

Stockholders' equity:

               

Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding

    -       -  

Common stock, $0.0005 par value; 150,000,000 shares authorized, 67,588,504 shares issued and outstanding

    33,794       33,794  

Additional paid-in capital

    33,294,069       33,294,069  

Accumulated deficit

    (29,528,009 )     (29,550,626 )

Total stockholders' equity

    3,799,854       3,777,237  
                 

Total liabilities and stockholders' equity

  $ 4,556,392     $ 4,552,134  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

 

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited) 

 

 

   

2018

   

2017 (Restated)

 
                 

Net revenues

  $ 756,967     $ 1,146,355  
                 

Cost of sales

    304,421       620,795  
                 

Gross profit

    452,546       525,560  
                 

Operating expenses:

               

Research and development

    109,868       149,957  

Selling, general and administrative

    320,025       364,371  

Depreciation and amortization

    5,557       7,491  
                 

Total operating expenses

    435,450       521,819  
                 

Income from operations

    17,096       3,741  
                 

Other income (expense):

               

Interest income

    6,249       1,620  

Interest expense

    (728 )     (728 )

Total other income (expense)

    5,521       892  
                 

Income before provision for income taxes

    22,617       4,633  
                 

Provision for income taxes:

               

Current

    -       2,000  
                 

Total provision for income taxes

    -       2,000  
                 

Net income

  $ 22,617     $ 2,633  
                 

Basic and diluted earnings per common share:

  $ 0.00     $ 0.00  
                 

Weighted average shares of common stock outstanding - basic

    67,588,504       67,588,504  
                 

Weighted average shares of common stock outstanding - diluted

    67,588,504       67,588,504  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

 

 ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited)

 

 

   

2018

   

2017 (Restated)

 

Cash flows from operating activities:

               

Net income

  $ 22,617     $ 2,633  

Adjustments to reconcile net income to net cash used in operating activities:

               

Depreciation and amortization

    9,818       11,223  

Changes in operating assets and liabilities balances:

               

Accounts receivable

    (45,649 )     (165,615 )

Inventories

    (87,760 )     83,677  

Prepaid expenses and other current assets

    (15,575 )     29,511  

Accounts payable

    (28,419 )     (93,824 )

Accrued expenses and other current liabilities

    (23,864 )     (6,962 )
                 

Net cash used in operating activities

    (168,832 )     (139,357 )
                 
                 

Cash flows provided by (used) in financing activities:

               

Repayments on capital lease payable

    (8,047 )     (4,733 )

Borrowing on line of credit

    35,000       -  

Borrowings from (repayments to) stockholder

    6,971       (87,863 )
                 

Net cash provided by (used in) financing activities

    33,924       (92,596 )
                 

Net decrease in cash and cash equivalents

    (134,908 )     (231,953 )
                 

Cash and cash equivalents - beginning of period

    1,693,532       1,982,276  
                 

Cash and cash equivalents - end of period

  $ 1,558,624     $ 1,750,323  
                 
                 

Cash paid for:

               

Interest

  $ 728     $ 728  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 

 

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

JUNE 30, 2018 AND MARCH 31, 2018

 

 

NOTE 1 - NATURE OF BUSINESS

 

ADM Tronics Unlimited, Inc., incorporated under the laws of the state of Delaware on November 24, 1969, and subsidiary (collectively, "we", "us", the “Company" or "ADM"), is a technology-based developer and manufacturer of diversified lines of products and derive revenues from the production and sale of electronics for medical devices and other applications; environmentally safe chemical products for industrial, medical and cosmetic uses; and, research, development, regulatory and engineering services.

 

The accompanying unaudited condensed consolidated financial statements have been prepared by ADM pursuant to generally accepted accounting principles in the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”) including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the condensed financial position and operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and explanatory notes for the year ended March 31, 2018 as disclosed in our annual report on Form 10-K for that year. The operating results and cash flows for the three months ended June 30, 2018 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending March 31, 2019. 

 

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

 

The condensed consolidated financial statements include the accounts of ADM Tronics Unlimited, Inc. and its wholly owned subsidiary Sonotron Medical Systems, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES

 

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Significant estimates made by management include expected economic life and value of our medical devices, reserves, deferred tax assets, valuation allowance, impairment of long lived assets, fair value of equity instruments issued to consultants for services and fair value of equity instruments issued to others, option and warrant expenses related to compensation to employees and directors, consultants and investment banks, allowance for doubtful accounts, and warranty reserves. Actual results could differ from those estimates.  

 

REVENUE RECOGNITION

 

CHEMICAL PRODUCTS:

 

Revenues are recognized when products are shipped to end users. Shipments to distributors are recognized as revenue when no right of return exists.

  

ELECTRONICS: 

 

We recognize revenue from the sale of our electronic products when they are shipped to the purchaser. We offer a limited 90-day warranty on our electronics products and a limited 5-year warranty on our electronic controllers for spas and hot tubs. We have no other post shipment obligations. Based on prior experience, no amounts have been accrued for potential warranty costs and actual costs were less than $2,000, for each of the three months ended June 30, 2018 and 2017. For contract manufacturing, revenues are recognized after shipment of the completed products. 

 

ENGINEERING SERVICES: 

 

We provide certain engineering services, including research, development, quality control, and quality assurance services along with regulatory compliance services. We recognize revenue from engineering services as the services are provided. 

 

6

 

 

EARNINGS PER SHARE

 

Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share is computed similar to basic earnings 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.

  

Per share basic and diluted earnings amounted to $0.00 for both the three months ended June 30, 2018 and June 30, 2017, respectively. There were 3,000,000 common stock equivalents at June 30, 2018 and 2017, respectively.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Effective April 1, 2018 the Company adopted ASC Topic 606 “Revenue from Contracts with Customers”, using the modified retrospective method. This guidance supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The Company has drafted its accounting policy for the new standard based on a detailed review of its business and contracts. Based on the new guidance, the Company will continue recognizing revenue at the time it’s products are shipped, and therefore adoption of the standard did not have a material impact on its financial statements and is not expected to have a material impact in the future.

 

In July 2015, the FASB issued ASU 2015 - 11, “ Inventory. Simplifying the Measurement of Inventory.” This amendment requires companies to measure inventory at the lower of cost and net realizable value. The Company adopted this amendment in April 2017, and the implementation did not have a material impact on the Company's financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases”, which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate and manufacturing equipment, to recognize both assets and liabilities on their balance sheet for the rights to use those assets for the lease term and obligations to make the lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. This ASU will be adopted by the Company in April 2019. We do not believe that this ASU will have a material impact on our financial statements.

 

In June 2016, the FASB issued ASU-2016-13 “Financial Instruments – Credit Losses”. This guidance affects organizations that hold financial assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income. The guidance requires organizations to measure all expected credit losses for financial instruments at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. It is effective for fiscal years beginning after December 15, 2019. The Company is evaluating the potential impact on the Company’s financial statements.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This guidance gives businesses the option of reclassifying to retained earnings the so-called “stranded tax effects” left in accumulated other comprehensive income due to the reduction in the corporate income tax rate resulting from the 2017 Tax Cuts and Jobs Act. This amendment is effective for all organizations for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is allowed. We do not believe that this ASU will have a material impact on our financial statements.

 

In June 2018, the FASB issued ASU 2018-07, “Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This guidance intends to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This amendment is effective for public companies with fiscal years beginning after December 15, 2018, include interim period within that fiscal year. Early adoption is permitted. This ASU does not apply to the company at this time.

 

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 consolidated financial statements.

 

7

 

 

 

NOTE 3 - INVENTORIES       

 

Inventories at June 30, 2018 consisted of the following:

 

   

Current

   

Long Term

   

Total

 

Raw materials

  $ 209,879     $ 109,908     $ 319,787  

Finished goods

    78,904       1,143       80,047  
    $ 288,783     $ 111,051     $ 399,834  

 

Inventories at March 31, 2018 consisted of the following:

 

   

Current

   

Long Term

   

Total

 

Raw materials

  $ 168,640     $ 110,433     $ 279,073  

Finished goods

    32,383       618.00       33,001  
    $ 201,023     $ 111,051     $ 312,074  

 

The Company values its inventories at the lower of cost and net realizable value using the first in, first out (“FIFO”) method.

 

 

 

 

NOTE 4 – CONCENTRATIONS

 

During the three months ended  June 30, 2018 two customers accounted for 52% of our net revenue. During the three months ended June 30, 2017 two customers accounted for 60% of our net revenue.

 

As of June 30, 2018, three customers represented 97% of our accounts receivable.

 

As of March 31, 2018, two customers represented 93% of our accounts receivable.

 

The Company’s customer base is comprised of foreign and domestic entities with diverse demographics. Net revenues from foreign customers for the three months ended June 30, 2018 was $101,965 or 13%

 

Revenues from foreign customers represented $68,381 of net revenue or 6% for the three months ended June 30, 2017

 

As of  June 30, 2018, and March 31, 2018, accounts receivable included $32,251 and $39,995, respectively, from foreign customers.

 

 

 

NOTE 5 - Net Revenues and Segment Information

 

No sales to an individual customer or country other than the U.S. accounted for more than 10% of net revenue during the three months ended June 30, 2018 and 2017.  Net revenue, classified by geography, is as follows:

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 

Net revenue - in the U.S.

  $ 655,002     $ 1,077,974  

Net revenue - outside the U.S.

    101,965       68,381  
    $ 756,967     $ 1,146,355  

 

Net revenue by products and services is as follows:

 

   

Three Months Ended

 
   

June 30,

 
   

2018

   

2017

 

Net revenue - products

  $ 508,137     $ 801,947  

Net revenue - services

    248,830       344,408  
    $ 756,967     $ 1,146,355  

 

Net revenue by segment is as follows:

 

   

Chemical

   

Electronics

   

Engineering

   

Total

 

Three months ended June 30, 2018

                               

Revenue from external customers

  $ 359,171     $ 148,966     $ 248,830     $ 756,967  

Segment operating income

  $ 40,575     $ (62,843 )   $ 39,364     $ 17,096  
                                 

Three months ended June 30, 2017

                               

Revenue from external customers

  $ 308,355     $ 493,592     $ 344,408     $ 1,146,355  

Segment operating income

  $ 65,446     $ (140,271 )   $ 78,566     $ 3,741  
                                 
Total assets at June 30, 2018   $ 2,161,949     $ 896,667     $ 1,497,776     $ 4,556,392  
                                 
Total assets at March 31, 2018   $ 1,687,276     $ 1,280,908     $ 1,583,950     $ 4,552,134  

 

8

 

 

 

 NOTE 6 - OPTIONS OUTSTANDING 

 

On September 2, 2015, ADM granted 3,000,000 stock options to employees at an exercise price of $0.20 per option and with a term of three years. The options were valued at $598,699 using the Black Scholes option pricing model with the following assumptions: risk free interest rate of 2.03%, volatility of 353%, estimated useful life of 3 years and dividend rate of 0%. 

 

 

 

The following table summarizes information on all common share purchase options issued by us for the three month period ended June 30, 2018 and the year ended March 31, 2018.

  

   

June 30, 2018

   

March 31, 2018

 
   

# of Shares

   

Weighted

Average

Exercise Price

   

# of Shares

   

Weighted

Average

Exercise Price

 
                                 

Outstanding, beginning of period/year

    3,000,000     $ 0.20       3,000,000     $ 0.20  
                                 

Issued

    -       -       -       -  
                                 

Exercised

    -       -       -       -  
                                 

Expired

     -       -       -       -  
                                 

Outstanding, end of period/year

    3,000,000     $ 0.20       3,000,000     $ 0.20  
                                 

Exercisable, end of period/year

    3,000,000     $ 0.20       3,000,000     $ 0.20  

 

 

 

 NOTE 7 - COMMITMENTS AND CONTINGENCIES

 

We lease our office and manufacturing facility under a non-cancelable operating lease, which expires on June 30, 2028. The Company’s future minimum lease commitment at June 30, 2018 is as follows: 

 

For the twelve-month period ended June 30,

 

Amount

 

2019

  $ 101,875  

2020

    101,875  

2021

    101,875  

2022

    101,875  

2023

    101,875  

Thereafter

    534,375  
         
    $ 1,043,750  

 

Rent and real estate tax expense for all facilities for the three months ended June 30, 2018 and 2017 was approximately $35,000 and $32,000, respectively. 

 

On December 2, 2016, the Company entered into a capital lease agreement with a commercial bank in the amount of $85,680, including $6,930 in deferred interest, for the purchase of certain property and equipment. The lease has a term of forty-eight (48) months and is payable in forty-eight equal installments of $1,785. The balance of this obligation as of  June 30, 2018, was $47,578.

 

On December 2, 2016, the Company entered into a capital lease agreement with a commercial bank in the amount of $54,710, including $4,710 in deferred interest, for the purchase of certain property and equipment. The lease has a term of forty-eight (48) months and is payable in forty-eight equal installments of $1,139. The balance of this obligation as of  June 30, 2018, was $30,208. 

 

9

 

 

 

NOTE 8 – LINE OF CREDIT

 

On June 15, 2018, the Company obtained an unsecured revolving line of credit, with a limit of $400,000.  The line expires May 16, 2019, renewing automatically every year.  The Company is required to make monthly interest payments, at a rate of 5.37%.  Any unpaid principal will be due upon maturity.  At June 30, 2018, the outstanding balance was $35,000.

 

 

NOTE 9 - INCOME TAXES

 

At  June 30, 2018, the Company had federal net operating loss carry-forwards ("NOL")'s of approximately $1,950,000. These NOLs may be used to offset future taxable income and thereby reduce or eliminate our federal income taxes otherwise payable. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Ultimate utilization of such NOLs and research and development credits is dependent upon the Company's ability to generate taxable income in future periods and may be significantly curtailed if a significant change in ownership occurs.

  

The Company provides a partial valuation allowance for the deferred tax asset resulting from the uncertainty that the stock-based compensation will be deductible. During the three months ended June 30, 2018, the Company utilized approximately $22,000 in net operating losses and expects to utilize the entire $1,950,000 before expiration.

 

The effective rates were approximately 0% for the three months ended June 30, 2018 and 2017, respectively.

 

 

NOTE 10 – DUE TO STOCKHOLDER

 

The Company’s President has been deferring his salary and bonuses periodically to assist the Company’s cash flow. There are no repayment terms or interest accruing on this liability.

   

 

NOTE 11 – RESTATEMENTS

 

During the audit of March 31, 2018, it was discovered that there were certain inventory and segment allocation errors during the previous quarters. The June 2017 condensed consolidated statements of income and cash flows reflects these restatements.

 

 

NOTE 12 – SUBSEQUENT EVENTS

 

We evaluated all subsequent events from the date of the condensed consolidated balance sheet through the issuance date and determined that there are no events or transactions occurring during the subsequent event reporting period which require recognition or disclosure in the condensed consolidated financial statements. 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our operations and financial condition should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. 

  

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the "safe harbor" provisions under section 21E of the Securities and Exchange Act of 1934 and the Private Securities Litigation Act of 1995. We use forward-looking statements in our description of our plans and objectives for future operations and assumptions underlying these plans and objectives. Forward-looking terminology includes the words "may", "expects", "believes", "anticipates", "intends", "forecasts", "projects", or similar terms, variations of such terms or the negative of such terms. These forward-looking statements are based on management's current expectations and are subject to factors and uncertainties which could cause actual results to differ materially from those described in such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Form 10-Q to reflect any change in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. Factors which could cause such results to differ materially from those described in the forward-looking statements include those set forth under "Item. 1 Description of Business – Risk Factors" and elsewhere in or incorporated by reference into our Annual Report on Form 10-K for the year ended March 31, 2017.   

  

CRITICAL ACCOUNTING POLICIES

 

REVENUE RECOGNITION

We recognize revenue from engineering services on a project or monthly basis and contract manufacturing revenues are recognized after shipment of completed products. For the sale of our electronic products, revenues are recognized when they are shipped to the purchaser. Shipping and handling charges and costs are de minimis. We offer a limited 90-day warranty on our electronics products and a limited 5-year warranty on our electronic controllers for spas and hot tubs. Historically, the amount of warranty revenue included in the sales of our electronic products have been de minimis. We have no other post shipment obligations and sales returns have been de minimis.

 

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Revenues from sales of chemical products are recognized when products are shipped to end users.  Shipments to distributors are recognized as sales where no right of return exists.

  

USE OF ESTIMATES

 

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, impairment of long-lived assets, fair value of equity instruments issued to consultants for services and fair value of equity instruments issued to others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above described items, are reasonable.

 

BUSINESS OVERVIEW

 

The Company is a technology-based developer and manufacturer of diversified lines of products and derives revenue from the production and sale of electronics for medical devices and other applications; environmentally safe chemical products for industrial, medical and cosmetic uses; and, research, development, regulatory and engineering services.

 

The Company is a corporation that was organized under the laws of the State of Delaware on November 24, 1969. Our operations are conducted through ADM Tronics Unlimited, Inc. ("ADM") and its subsidiary Sonotron Medical Systems, Inc. ("SMI").  

  

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2018 AS COMPARED TO JUNE 30, 2017  

  

For the three months ended June 30, 2018

                         
   

Chemical

   

Electronics

   

Engineering

   

Total

 

Revenue

  $ 359,171     $ 148,966     $ 248,830     $ 756,967  

Cost of Sales

    111,980       126,115       66,326       304,421  

Gross Profit

    247,191       22,851       182,504       452,546  

Gross Profit Percentage

    69 %     15 %     73 %     60 %
                                 

Operating Expenses

    206,616       85,693       143,141       435,450  

Operating Income (Loss)

    40,575       (62,842 )     39,363       17,096  

Other income (expenses)

    2,620       1,086       1,815       5,521  

Income before provision for income taxes

  $ 43,195     $ (61,756 )   $ 41,178     $ 22,617  

 

 

For the three months ended June 30, 2017

                         
   

Chemical

   

Electronics

   

Engineering

   

Total

 

Revenue

  $ 308,355     $ 493,592     $ 344,408     $ 1,146,355  

Cost of Sales

    107,995       397,640       115,160       620,795  

Gross Profit

    200,360       95,952       229,248       525,560  

Gross Profit Percentage

    65 %     19 %     67 %     46 %
                                 

Operating Expenses

    134,914       236,223       150,682       521,819  

Operating Income (Loss)

    65,446       (140,271 )     78,566       3,741  

Other income (expenses)

    240       384       268       892  

Income (loss) before benefit from income taxes

  $ 65,686     $ (139,887 )   $ 78,834     $ 4,633  

 

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Variance

                               
   

Chemical

   

Electronics

   

Engineering

   

Total

 

Revenue

  $ 50,816     $ (344,626 )   $ (95,578 )   $ (389,388 )

Cost of Sales

    3,985       (271,525 )     (48,834 )     (316,374 )

Gross Profit

    46,831       (73,101 )     (46,744 )     (73,014 )

Gross Profit Percentage

    4 %     -4 %     7 %     14 %
                                 

Operating Expenses

    71,702       (150,530 )     (7,541 )     (86,369 )

Operating Income (Loss)

    (24,871 )     77,429       (39,203 )     13,355  

Other income (expenses)

    2,380       702       1,547       4,629  

Income (loss) before benefit from income taxes

  $ (22,491 )   $ 78,131     $ (37,656 )   $ 17,984  

 

Revenues for the three months ended June 30, 2018 decreased by $389,388.

 

For the three months ended June 30, 2018, the decrease of $389,388 is a result of reduces sales of $344,626 in the electronics segment and $95,578 in the engineering segment, partially offset by increased revenues in the chemical segment of $50,816. The decrease in the electronics segment and increase in the chemical segment is primarily the result of the changes in customer ordering patterns.

 

Gross profit for the three months ended June 30, 2018 decreased by $73,014. The decrease in gross profit resulted from lower sales for the three-month period.

 

We are highly dependent upon certain customers. During the three months ended  June 30, 2018, two customers accounted for 52% of our net revenue. During the three months ended June 30, 2017, two customers accounted for 60% of our net revenue.

 

The complete loss of or significant reduction in business from, or a material adverse change in the financial condition of any of our customers could cause a material and adverse change in our revenues and operating results.

 

Income from operations for the three months ended June 30, 2018 increased by $13,355. The increase in operating income for the three-month period is from reduced operating expenses.

 

Interest income increased $4,629 for the three months ended June 30, 2018. The increase is due to increased funds invested in a money market account.

 

The foregoing resulted in net income before provision for income taxes for the three months ended June 30, 2018 of $22,617. Earnings per share were $0.00 for the three months ended June 30, 2018 and 2017, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES   

 

At June 30, 2018, we had cash and cash equivalents of $1,558,624 as compared to $1,693,532 at March 31, 2018. The $134,908 decrease was primarily the result of cash used in operations during the three-month period in the amount of $168,832, coupled by cash used in financing activities of $33,924. Our cash will continue to be used for increased marketing costs, and the related administrative expenses all in an attempt to increase our revenue, as well as increased expenditures for our internal R&D.  We expect to have enough cash to fund operations for the next twelve months.    

 

Future Sources of Liquidity:

 

We expect that growth in profitable revenues and continued focus on new customers will enable us to continue to generate cash flows from operating activities during fiscal 2019. 

 

If we do not generate sufficient cash from operations, face unanticipated cash needs or do not otherwise have sufficient cash, we may need to consider the sale of certain intellectual property which does not support the Company’s operations. In addition, we have the ability to reduce certain expenses depending on the level of business operation.

 

12

 

 

Based on current expectations, we believe that our existing cash of $1,558,624 as of June 30, 2018, and other potential sources of cash will be sufficient to meet our cash requirements. Our ability to meet these requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

  

OPERATING ACTIVITIES 

 

Net cash used in operating activities was $168,832 for the three months ended June 30, 2018, as compared to net cash used by operating activities of $227,220 for the three months ended June 30, 2017.  The cash used during the three months ended June 30, 2018 was primarily due to net income of $22,617 plus depreciation and amortization of $9,818 and deferred tax assets of $1,095,634 coupled with a decrease in net operating liabilities of $10,312, coupled by a decrease in net operating assets of $148,984.

 

In addition, we have increased our internal R&D expenditures as we are now devoting more of our engineering resources to advance our own proprietary medical device technologies.

 

INVESTING ACTIVITIES

 

No cash was provided for or used in investing activities for the three months ended June 30, 2018.

 

FINANCING ACTIVITIES

 

For the three months ended June 30, 2018, net cash used in financing activities was $33,924. Cash was used for repayments on capital lease obligations.  

 

OFF BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements that have had 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.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable and our investment in ITI. We have no control over the market value of our investment in ITI. 

 

Cash and cash equivalents – For financial statement purposes, the Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less at inception. The Company deposits cash and cash equivalents with high credit quality financial institutions and believes that any amounts in excess of insurance limitations to be at minimal risk. Cash and cash equivalents held at these accounts are current insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At June 30, 2018, approximately $1,385,000 exceeded the FDIC limit.

 

Our sales are materially dependent on a small group of customers, as noted in Note 4 of our condensed consolidated financial statements. We monitor our credit risk associated with our receivables on a routine basis. We also maintain credit controls for evaluating and granting customer credit. 

 

ITEM 4. CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Ru1e 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were not effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the "SEC") (1) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. During the quarterly period ended December 31, 2017, there were no changes in the Company's internal control over financial reporting which materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 

 

13

 

 

The determination that our disclosure controls and procedures were not effective as of June 30, 2018, is a result of:

 

a. Deficiencies in Internal Control Structure Environment. During the current year, the Company’s focus was on expanding their customer base to initiate revenue production.  

 

b. Inadequate staffing and supervision within the accounting operations of our company. The relatively small number of employees who are responsible for accounting functions prevents the Company from segregating duties within its internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.  The Company’s plan is to expand its accounting operations as the business of the Company expands. 

 

The Company believes that the financial statements present fairly, in all material respects, the Company’s condensed consolidated balance sheets as of June 30, 2018, and March 31, 2018 and the related condensed consolidated statements of operations, and cash flows for the three months ended June 30, 2018 and 2017, in conformity with generally accepted accounting principles, notwithstanding the material weaknesses we identified. 

  

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS 

 

During September 2017, a suit was filed by a vendor for $33,000 claiming non-payment for services regarding investor relations and marketing.  The Company has filed a countersuit for $12,000 and 300,000 shares of its common stock, paid to the vendor due to lack of performance and other factors.  The Company believes the suit is without merit and intends to vigorously pursue its counterclaims.  As the lawsuit is in the initial stages, additional detail is not available at this time.

 

ITEM 1A. RISK FACTORS

 

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, 2018. 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

None 

 

ITEM 6. EXHIBITS.

 

(a) Exhibit No.

 

31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS**

XBRL Instance

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation

101.DEF**

XBRL Taxonomy Extension Definition

101.LAB**

XBRL Taxonomy Extension Labels

101.PRE**

XBRL Taxonomy Extension Presentation

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

14

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ADM TRONICS UNLIMITED, INC.

 

 

(Registrant)

 

 

 

 

 

 

 

  

 

 

By:

/s/ Andre' DiMino

 

 

 

Andre' DiMino, Chief Executive

 

 

 

Officer and Chief Financial Officer

 

 

Dated:

Northvale, New Jersey

 

August 20, 2018

 

15