ADM TRONICS UNLIMITED, INC. - Quarter Report: 2018 September (Form 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, 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:

 

67,588,492 shares of Common Stock, $.0005 par value, as of November 19, 2018.

 

 

 

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY 

 

INDEX

 

		Page Number
Part I - Financial Information
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets – September 30, 2018 (unaudited) and March 31, 2018 (audited)	3
	Condensed Consolidated Statements of Income for the three and six months ended September 30, 2018 and 2017 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the six months ended September 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	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	14
Item 4.	Controls and Procedures	14
Part II - Other Information
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	15

 

 

 

		September 30,				March 31,
		2018				2018
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,671,904			$	1,693,532
Accounts receivable, net of allowance for doubtful accounts of $125,000			1,220,945				1,207,493
Inventories			380,330				201,023
Prepaid expenses and other current assets			41,794				12,156
Total current assets			3,314,973				3,114,204
Property and equipment, net of accumulated depreciation of $89,347 and $70,440, at September 30, 2018 and March 31, 2018, respectively			114,213				133,120
Inventories - long-term portion			111,051				111,051
Intangible assets, net of accumulated amortization of $11,337 and $10,639, at September 30, 2018 and March 31, 2018, respectively			9,597				10,295
Other assets			90,864				91,464
Deferred tax asset			1,124,000				1,092,000
Total other assets			1,449,725				1,437,930
Total assets		$	4,764,698			$	4,552,134
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease payable		$	31,196			$	31,196
Line of credit			55,105				-
Accounts payable			245,770				286,964
Accrued expenses and other current liabilities			208,233				149,382
Customer deposits			133,573				122,167
Due to stockholder			134,016				130,551
Total current liabilities			807,893				720,260
Long-term liabilities
Capital lease payable, net of current portion			38,544				54,637
Total liabilities			846,437				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, 67,588,492 shares issued and outstanding			33,794				33,794
Additional paid-in capital			33,294,069				33,294,069
Accumulated deficit			(29,409,602	)			(29,550,626	)
Total stockholders' equity			3,918,261				3,777,237
Total liabilities and stockholders' equity		$	4,764,698			$	4,552,134

 

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		Three months ended								Six months ended
		September 30,								September 30,
		2018				2017				2018				2017
Net revenues		$	854,696			$	931,139			$	1,611,663			$	2,077,494
Cost of sales			332,617				351,894				637,038				972,689
Gross profit			522,079				579,245				974,625				1,104,805
Operating expenses:
Research and development			106,715				139,227				216,583				289,184
Selling, general and administrative			328,909				363,183				654,491				735,045
Total operating expenses			435,624				502,410				871,074				1,024,229
Income from operations			86,455				76,835				103,551				80,576
Other income (expense):
Interest income			7,197				4,928				13,446				6,548
Interest and finance expenses			(1,245	)			(727	)			(1,973	)			(1,455	)
Total other income (expense)			5,952				4,201				11,473				5,093
Income before provision for (benefit from) income taxes			92,407				81,036				115,024				85,669
Provision for (benefit from) income taxes:
Current			6,000				2,000				6,000				4,000
Deferred			(32,000	)			79,000				(32,000	)			154,000
Total provision for (benefit from) income taxes			(26,000	)			81,000				(26,000	)			158,000
Net income (loss)		$	118,407			$	36			$	141,024			$	(72,331	)
Basic and diluted earnings per common share:		$	0.00			$	0.00			$	0.00			$	0.00
Weighted average shares of common stock outstanding - basic and diluted			67,588,492				67,588,492				67,588,492				67,588,492

 

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		2018				2017
Cash flows from operating activities:
Net income (loss)		$	141,024			$	(72,331	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			19,605				19,869
Deferred taxes			(32,000	)			154,000
(Increase) decrease in operating assets:
Accounts receivable			(13,452	)			(434,277	)
Inventories			(179,307	)			185,146
Prepaid expenses and other current assets			(29,038	)			26,234
(Increase) decrease in operating liabilities:
Accounts payable			(41,194	)			19,799
Customer deposits			11,406				-
Accrued expenses and other current liabilities			58,851				14,315
Due to shareholder			3,465				(82,950	)
Net cash (used in) operating activities			(60,640	)			(170,195	)
Cash flows from investing activities:
Net cash provided by (used in) investing activities			-				-
Cash flows from financing activities:
Proceeds from line of credit			80,518				-
Repayments of line of credit			(25,413	)			-
Repayments on capital lease payable			(16,093	)			(12,781	)
Net cash provided by (used in) financing activities			39,012				(12,781	)
Net (decrease) in cash and cash equivalents			(21,628	)			(182,976	)
Cash and cash equivalents - beginning of period			1,693,532				1,982,276
Cash and cash equivalents - end of period		$	1,671,904			$	1,799,300
Cash paid for:
Interest		$	1,973			$	1,455

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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 and six months ended September 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 

 

In May 2014, the FASB issued guidance codified in ASC 606 which amends the guidance in former ASC 605, “Revenue Recognition.” The core principle of the standard is to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also requires additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

We typically extend credit terms to our customers based on their credit worthiness and generally do not receive advance payments. As such, we record accounts receivable at the time of shipment, when our right to the consideration becomes unconditional. Accounts receivable from our customers are typically due within 30 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends, and our assessment of our customers' creditworthiness.

 

CHEMICAL PRODUCTS:

 

Revenues are recognized upon shipment to a customer because that is when the customer obtains control of the promised good.

  

ELECTRONICS: 

 

We recognize revenue from the sale of our electronic products upon shipment to a customer because that is when the customer obtains control of the promised good. We offer a limited 90-day warranty on our electronics products. 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 and six months ended September 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. 

 

 

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 and six months ended September 30, 2018 and September 30, 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 its products are shipped, and therefore adoption of the standard did not have a material impact on its consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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.

 

 

 

NOTE 3 - INVENTORIES       

 

Inventories at September 30, 2018 consisted of the following:

 

 

Inventories at March 31, 2018 consisted of the following:

 

 

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 September 30, 2018 one customer accounted for 39% of our net revenue. During the six months ended  September 30, 2018 two customers accounted for 49% of our net revenue.

 

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

 

During the three months ended September 30, 2017 three customers accounted for 49% of our revenue. During the six months ended September 30, 2017 three customers accounted for 47% of our revenue.

 

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 and six months ended September 30, 2018 was $144,977 or 17% and $247,539 or 15%, respectively.

 

Revenues from foreign customers for the three and six months ended September 30, 2017 was $90,625 or 8% and $158,657 or 7%, respectively.

 

As of  September 30, 2018, and March 31, 2018, accounts receivable included $37,801 and $39,995, respectively, from foreign customers.

 

NOTE 5 - DISAGGREGATED REVENUES AND SEGMENT INFORMATION

 

The following tables show the Company's revenues disaggregated by reportable segment and by product and service type:

 

 

 

 

Information about segments is as follows:

 

 

 

 

 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 options expired on September 30, 2018.

 

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

  

 

 

 

 

 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 September 30, 2018 is as follows: 

 

 

 

Rent and real estate tax expense for all facilities for the three and six months ended September 30, 2018 and 2017 was approximately $19,000 and $36,000 and $32,000 and $60,000, 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  September 30, 2018, was $42,656.

 

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  September 30, 2018, was $27,083. 

  

 

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 September 30, 2018, the outstanding balance was $55,105.

 

NOTE 9 - INCOME TAXES

 

At  September 30, 2018, the Company had federal net operating loss carry-forwards ("NOL")'s of approximately $2,103,000. 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.

  

During the six months ended September 30, 2018, the Company utilized approximately $115,000 in net operating losses and expects to utilize the entire $2,103,000 before expiration.

 

The effective rates were approximately (23%) and 184% for the six months ended September 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 September 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. 

 

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