ADM TRONICS UNLIMITED, INC. - Quarter Report: 2008 December (Form 10-Q)

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COMMISSION FILE NO. 0-17629

 

ADM TRONICS UNLIMITED, INC.

 (Exact name of registrant as specified in its charter)

Delaware	22-1896032
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or organization)	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 o

 

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 o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

 

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

 

YES o NO x

 

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

 

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ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2008				2007				2008				2007
Revenues		$	257,610			$	496,261			$	1,248,140			$	1,189,194
Costs and expenses:
Cost of sales			183,355				352,942				840,835				772,171
Research and development			-				115				-				3,665
Selling, general and administrative			291,791				273,691				892,372				768,208
Total operating expenses			475,146				626,748				1,733,207				1,544,044
Operating loss			(217,536	)			(130,487	)			(485,067	)			(354,850	)
Interest income, net			6,537				21,576				35,178				72,366
Change in fair value of investment
in Ivivi			(650,000	)			-				(10,465,000	)			-
Equity in net loss of Ivivi			-				(594,446	)			-				(1,674,870	)
Net loss before income tax benefit			(860,999	)			(681,348	)			(10,914,889	)			(1,957,354	)
Income tax benefit							--				2,425,188				--
Net loss		$	(860,999	)		$	(703,357	)		$	(8,489,701	)		$	(1,957,354	)
Net loss per share, basic and diluted		$	(0.02	)		$	(0.01	)		$	(0.16	)		$	(0.04	)
Weighted average shares outstanding,
basic and diluted			53,939,537				53,882,037				53,939,537				53,882,037

 

 

The accompanying notes are an integral part of these unaudited

condensed consolidated financial statements.

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ADM TRONICS UNLIMITED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED DECEMBER 31, 2008 AND 2007

(Unaudited)

 

		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(8,489,701	)		$	(1,957,354	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization			22,479				12,461
Deferred income tax benefit			(2,425,188	)			--
Loss from equity investment							1,674,870
Interest accrued on officer loan			--				(1,107	)
Change in fair value of investment in Ivivi			10,465,000				--
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable			(2,720	)			(24,231	)
Inventory			125,470				(484,418	)
Prepaid expenses and other current assets			76,420				27,875
Other assets			--				34,003
Increase (decrease) in:
Accounts payable and accrued expenses			(155,270	)			89,911
Customer deposit – Ivivi			(133,731	)			323,444
Net cash used by operating activities			(517,241	)			(304,546	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(14,888	)			(22,140	)
Collections of advances to related parties			23,456				20,000
Acquired intangible assets			(212,491	)			--
Deposit – restricted cash			(225,650	)			--
Net cash used by investing activities			(429,573	)			(2,140	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable – Bank			200,000				--
Net decrease in cash			(746,814	)			(306,686	)
Cash and cash equivalents, beginning of period			2,072,325				2,498,276
Cash and cash equivalents, end of period		$	1,325,511			$	2,191,590
Cash paid for:
Interest		$	2,677			$	--
Income taxes		$	--			$	4,060
NONCASH FINANCING AND INVESTING ACTIVITIES:
During the nine months ended December 31, 2007, Ivivi recorded an increase in
additional paid-in capital as a result of the recognition of compensation
expense related to option grants to employees and others. We have recorded a
proportional increase in our investment in Ivivi in the amount of $410,558, with
a related credit to additional paid-in capital. We have also recorded a change
of ownership percentage adjustment of $1,259,542.

 

 

The accompanying notes are an integral part of these unaudited

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008

(Unaudited)

 

NOTE 1 - ORGANIZATIONAL MATTERS

ADM Tronics Unlimited, Inc. ("we", "us", the “Company" or "ADM"), was incorporated under the laws of the state of Delaware on November 24, 1969.  We are authorized under our Certificate of Incorporation to issue 150,000,000 common shares, with $.0005 par value, and 5,000,000 preferred shares with $.01 par value.

The accompanying condensed consolidated financial statements as of December 31, 2008 (unaudited) and March 31, 2008 and for the three and nine month periods ended December 31, 2008 and 2007 (unaudited) have been prepared by ADM pursuant to the rules and regulations of the Securities and Exchange Commission (the “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 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.  We believe that the disclosures provided are adequate to make the information presented not misleading.  These financial statements and the information included under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the audited financial statements and explanatory notes for the year ended March 31, 2008 as disclosed in our Annual Report on Form 10-KSB for that year as filed with the SEC, as it may be amended.  The results of the three and nine months ended December 31, 2008 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending March 31, 2009.

NATURE OF BUSINESS

We are a manufacturing and engineering concern whose principal lines of business are the production and sale of chemical products and the manufacture and sale of electronics.  On August 27, 2008, we acquired all of the assets of Action Spas, a manufacturer of electronic controllers for spas and hot tubs, under our fully owned subsidiary Action Industries Unlimited, LLC (“Action”).  With this acquisition, our previous Medical segment was redefined as our Electronics segment, and the ongoing operations of Action are now reported under this segment.

Our Chemical segment is principally comprised of water-based chemical products, used in the food packaging and converting industries.  Our Electronics segment primarily consists of contract manufacturing of electronic devices in accordance with customer specifications and electronic controllers for spas and hot tubs. To a lesser extent, our electronics product line also includes certain proprietary electronic devices used in the treatment of joint pain, postoperative edema, and tinnitus.  All of our products are sold to customers located in the United States, Australia, Asia and Europe.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of ADM Tronics Unlimited, Inc. and its subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates made by management include expected economic life and value of our medical devices, deferred tax assets, option and warrant expenses related to compensation to employees and directors, consultants and investment banks, the value of warrants issued in conjunction with convertible debt, allowance for doubtful accounts, and warranty reserves. Actual results could differ from those estimates.

		Nine Months Ended				Nine Months Ended
		December 31, 2008				December 30, 2007
		unaudited)				(unaudited)
Revenue		$	1,253,204			$	1,080,347
Costs and expenses, net			7,143,144				6,350,824
Net loss		$	(5,589,940	)		$	(5,270,477	)
Assets at December 31, 2008		$	3,453,986
Liabilities at December 31, 2008			1,194,299
Equity at December 31, 2008		$	2,259,687
Assets at December 31, 2007		$	10,524,264
Liabilities at December 31, 2007			1,534,307
Equity at December 31, 2007		$	8,989,957

NOTE 5 – FAIR VALUE MEASUREMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.

In February 2008, the FASB issued FASB Staff Position 157-2, which provides for a one-year deferral of the provisions of Statement No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of Statement No. 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis.

Effective April 1, 2008, the Company adopted the provisions of Statement No. 157 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis. The adoption of the provisions of Statement No. 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis did not materially impact the Company’s consolidated financial position and results of operations.

Statement No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Statement No. 157 describes three levels of inputs that may be used to measure fair value:

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Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2	Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3	Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

The following table presents assets/(liabilities) measured at fair value on a recurring basis at December 31, 2008:

		Level 1				Level 2				Level 3
Investment in Ivivi		$	910,000			$	--			$	--

NOTE 6 - CONCENTRATIONS

During the three month period ended December 31, 2008, four customers accounted for approximately 60% of our revenue.  As of December 31, 2008, two customers represented approximately 68% of our accounts receivable.

During the three month period ended December 31, 2007, Ivivi accounted for approximately 52% of our revenue, and one other customer accounted for approximately 11% of our revenue.  As of December 31, 2007, four customers represented approximately 73% of our accounts receivable.

During the nine month period ended December 31, 2007, Ivivi accounted for approximately 40% of our revenue, and two other customers accounted for approximately 21% of our revenue.

NOTE 7 - SEGMENT INFORMATION

Information about segments is as follows:

		Chemical				Electronics				Total
Three months ended December 31, 2008
Revenues from external customers		$	182,670			$	74,940			$	257,610
Segment operating (loss)			(85,260	)			(132,276	)			(217,536	)
Three months ended December 31, 2007
Revenues from external customers		$	209,031			$	287,230			$	496,261
Segment operating profit (loss)			9,717				(140,204	)			(130,487	)
Nine months ended December 31, 2008
Revenues from external customers		$	604,019			$	644,121			$	1,248,140
Segment operating (loss)			(201,860	)			(283,207	)			(485,067	)
Nine months ended December 31, 2007
Revenues from external customers		$	652,719			$	536,475			$	1,189,194
Segment operating (loss)			(249,133	)			(105,717	)			(354,850	)
Total assets at December 31, 2008		$	2,543,894			$	790,432			$	3,334,326
Total assets at March 31, 2008		$	4,592,031			$	525,704			$	5,117,735

 

NOTE 8 - RELATED PARTY TRANSACTIONS

ADVANCES TO RELATED PARTIES

As of December 31, 2008 and March 31, 2008, ADM was owed $50,843 and $74,299, respectively, from advances including accrued interest made to an officer and to an officer and his wife.  No advances have been made since 2000.  The advances bear interest at an effective rate of approximately 1% per year.  Interest expense for the nine months ended December 31, 2008 and 2007 was $631 and $1,146, respectively.

MANAGEMENT SERVICES AGREEMENT

ADM entered into a management services agreement with Ivivi, as of August 15, 2001, as amended, under which ADM provides Ivivi with management services and allocates portions of its real property facilities for use by Ivivi for the conduct of its business. The management

 

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services provided by ADM under the management services agreement include managerial and administrative services, marketing and sales services, clerical and communication services, the maintenance of a checking account and the writing of checks, the maintenance of accounting records and other services in the ordinary course of business. Ivivi pays ADM for such services on a monthly basis pursuant to an allocation determined by ADM and Ivivi based on a portion of its applicable costs plus any invoices it receives from third parties specific to Ivivi. ADM and Ivivi also use office, manufacturing and storage space in a building located in Northvale, New Jersey, currently leased by ADM, pursuant to the terms of the management services agreement. ADM determines the portion of space allocated to Ivivi on a monthly basis, and Ivivi is required to reimburse ADM for its portion of the lease costs, real property taxes and related costs.

During the three months ended December 31, 2008 and December 31, 2007, Ivivi had $10,809 and $55,781, respectively, in management services provided to it by ADM pursuant to the management services agreement.  During the nine months ended December 31, 2008 and December 31, 2007, Ivivi had $36,695 and $171,646, respectively, in management services provided to it by ADM pursuant to the management services agreement.  

INFORMATION TECHNOLOGY SERVICE AGREEMENT

ADM entered into an information technology (“IT”) service agreement with Ivivi on February 1, 2008, pursuant to which Ivivi, in conjunction with its outside IT professionals, will service ADM’s IT needs on an as needed basis.  Ivivi will invoice ADM monthly for any time it spends in providing such services to ADM. The rate that Ivivi will charge ADM will be determined at date of invoice. Such invoices that Ivivi issues ADM, with respect to such services, will be due within 30 days. IT services include, but are not limited to: computer hardware and software related issues, network administration, e-mail hosting and administration, telephone and cabling installations and maintenance.  There were no charges under this agreement for the three and nine months ended December 31, 2008. 

MANUFACTURING AGREEMENT

ADM and Ivivi are parties to a manufacturing agreement, dated as of August 15, 2001, and as amended in February, 2005. Under the terms of the agreement, ADM has agreed to serve as the exclusive manufacturer of all current and future medical and nonmedical electronic and other electronics or products to be sold or rented by Ivivi. For each product that ADM manufactures, Ivivi pays 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 such entity by ADM, if any, plus (ii) a labor charge based on ADM's standard hourly manufacturing labor rate, which ADM believes is more favorable than could be attained from unaffiliated third parties. Under the terms of the agreement, if ADM is unable to perform its obligations to Ivivi under the manufacturing agreement or is otherwise in breach of any provision of the manufacturing agreement, Ivivi has the right, without penalty, to engage third parties to manufacture some or all of its products. In addition, if Ivivi elects to utilize a third-party manufacturer to supplement the manufacturing being completed by ADM, Ivivi has the right to require ADM to accept delivery of its 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.

Pursuant to the manufacturing agreement, sales and manufacturing charges to Ivivi during the three and nine months ended December 31, 2008 and December 31, 2007 were approximately $2,896 and $247,799, and $517,823 and $459,702, respectively.

NOTE 9 – ACQUISITIONS

On August 27, 2008, we acquired all of the assets of Action Spas, a manufacturer of electronic controllers for spas and hot tubs, under our fully owned subsidiary Action Industries Unlimited, LLC (“Action”) for $265,000.  From this date, all of the operations of Action are included in our consolidated financial statements.  We acquired Action to continue to expand our electronics segment operations, and for the opportunity to expand its operations into the OEM market.  The fair value assigned to the acquired assets was as follows:

Inventory		$	19,184
Equipment			9,140
Non-Compete Agreement			50,000
Controller design			100,000
Customer list			62,491
Total		$	240,815

The remaining costs were expensed.

The following table shows the Company’s pro forma unaudited operating revenue, net loss and loss per share, assuming the acquisition of Action Spas had been made April 1, 2008:

 

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			Nine Months Ended
			December 31, 2008
	Revenue		$	1,348,221
	Net Loss		$	(8,445,623	)
	Net loss per share			(0.16	)

 

NOTE 10 – NOTE PAYABLE, BANK

On August 21, 2008, the Company entered into a note payable with a commercial bank in the amount of $200,000.  This note bears interest at a rate of 2.98% and is secured by cash on deposit with the institution, which is classified as restricted cash.  Amounts outstanding under the note are payable on demand, and interest is payable monthly.

ITEM 1. LEGAL PROCEEDINGS.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS.

(a) Exhibit No.

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

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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
	February 23, 2009

 

 

 

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