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, 2018.
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.
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 AND
NINE MONTHS
ENDED
DECEMBER 31
, 2018 AS COMPARED TO
DECEMBER 31
, 2017
Revenues for the three months ended December 31, 2018 decreased by $281,504. The decrease is a result of reduced sales of $188,227 in the engineering segment and reduced sales of $151,371 in the chemical segment, partially offset by increased revenues in the electronics of $58,094. The decrease in the engineering and chemical segments and increase in the electronics segment is primarily the result of the changes in customer ordering patterns.
Gross profit for the three months ended December 31, 2018 decreased by $317,004. The decrease in gross profit resulted from decreased sales and a write-off of inventory during the quarter.
Revenues for the nine months ended December 31, 2018 decreased by $747,335. The decrease is a result of reduced sales of $529,956 and $200,994 in the electronics and engineering segments, respectively, partially offset by an increase of $16,385 in the chemical segment. The decrease in the electronics segment is primarily due to project completion in the prior year for one customer.
Gross profit for the nine months ended December 31, 2018 decreased by $447,184 due to decreased sales.
We are highly dependent upon certain customers. During the three months ended December 31, 2018 two customers accounted for 61% of our net revenue. During the nine months ended December 31, 2018 two customers accounted for 56% of our net revenue. Net revenues from foreign customers for the three and nine months ended December 31, 2018 was $77,275 or 10% and $324,814 or 14%.
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 and nine months ended December 31, 2018 decreased by $363,697 and $280,722, respectively. The decrease in operating income for the three and nine-month periods is from reduced sales expenses.
Interest income increased $1,588 and $8,486 for the three and nine months ended December 31, 2018, respectively. The increase is due to increased funds invested in a money market account.
The foregoing resulted in net loss before provision for income taxes for the three and nine months ended December 31, 2018 of $213,914 and $98,890, respectively. Earnings per share were $0.00 for the three and nine months ended December 31, 2018 and 2017, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2018, we had cash and cash equivalents of $1,480,778 as compared to $1,693,532 at March 31, 2018. The $212,754 decrease was primarily the result of cash used in operations during the nine-month period in the amount of $188,613, coupled with cash provided in financing activities of $24,141. 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.
Based on current expectations, we believe that our existing cash of $1,480,778 as of December 31, 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 $188,613 for the nine months ended December 31, 2018, as compared to net cash used by operating activities of $337,111 for the nine months ended December 31, 2017. The cash used during the nine months ended December 31, 2018 was primarily due to net loss of $1,890 offset by depreciation and amortization of $29,331 and by deferred tax assets of $(97,000) coupled with an increase in net operating liabilities of $95,413, coupled with a decrease in net operating assets of $214,466.
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 nine months ended December 31, 2018.
FINANCING ACTIVITIES
For the nine months ended December 31, 2018, net cash used by financing activities was $24,141 due to 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 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, 2018, 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.
The determination that our disclosure controls and procedures were not effective as of December 31, 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 December 31, 2018, and March 31, 2018 and the related condensed consolidated statements of operations, and cash flows for the nine months ended December 31, 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 matter was settled on January 9, 2019 for $15,000.
In July, the Company filed a complaint for damages, attorney's fees, costs and a declaratory judgement against Securities Transfer Corporation (STC) to compel STC to release the Company's stock transfer records to a new transfer agent. STC refused to do so unless a termination fee of $10,578.76 was paid by the Company, although the agreement between STC and the Company provides for a termination fee of $500. STC filed a counterclaim for damages in the above amount plus approximately $4,000 in unpaid fees. The Company believes the counterclaim is without merit. On November 30, 2018, the declamatory judgement was decided in favor of the Company and STC released the Company’s stock transfer records to the new transfer agent in December 2018. Although the declaratory judgement was decided in favor of the Company, the lawsuit and counterclaim are in the early stages and additional information 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.
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101.INS**
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XBRL Instance
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101.SCH**
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XBRL Taxonomy Extension Schema
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101.CAL**
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XBRL Taxonomy Extension Calculation
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101.DEF**
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XBRL Taxonomy Extension Definition
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101.LAB**
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XBRL Taxonomy Extension Labels
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101.PRE**
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XBRL Taxonomy Extension Presentation
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** 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.