PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

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

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 30192020 AND 20182019

(Unaudited) 

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

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE THREE MONTHS ENDED JUNE 30, 2020

(Unaudited)

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

ADM TRONICS UNLIMITED, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED JUNE 30, 20120920 AND 20189

(Unaudited)

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

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

At June 30, 2019 and March 31, 2019, accounts receivable included $46,693 and $405, respectively, from foreign customers.

Rent and real estate tax expense for all facilities for the three monthsyears ended June 30, 20192020 and 20182019 was approximately $33,000$18,000 and $32,000, respectively. 

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, 2019.   

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

ELECTRONICS: 

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 contract manufacturing 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.minimus. We have no other post shipment obligations and sales returns have been de minimis.obligations. 

RevenuesAmounts received from salescustomers in advance of chemical productsour satisfaction of applicable performance obligations are recorded as customer deposits. Such amounts are recognized as revenues when the related performance obligations are satisfied. Customer deposits of approximately $93,715 as of March 31, 2020 were recognized as revenues during the three months ended June 30, 2020.

CHEMICAL PRODUCTS:

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

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 on a monthly basis over time as the applicable performance obligations are satisfied.  

All revenue is recognized net of discounts.

USE OF ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon ourThese unaudited 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 statementsUS GAAP and, accordingly, requires usmanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluateSignificant estimates made by management include expected economic life and value of our estimates, including those related to reserves,of our deferred tax assets and related valuation allowance, write down of inventory, impairment of long-lived assets, fairallowance for doubtful accounts, and warranty reserves. Actual results could differ from those estimates. 

LEASES

In February 2016, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which changes financial reporting as it relates to leasing transactions. Under the new guidance, lessees are required to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. The Company adopted this guidance as of April 1, 2019, using the modified retrospective approach which allowed it to initially apply the guidance as of the adoption date. The Company elected the package of practical expedients available under the new standard, which allowed the Company to forgo a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases.

The Company made a policy election to recognize short-term lease payments as an expense on a straight-line basis over the lease term. The Company defines a short-term lease as a lease that, at the commencement date, has a lease term of twelve months or less and does not contain an option to purchase the underlying asset that the lease is reasonably certain to exercise. Related variable lease payments are recognized in the period in which the obligation is incurred. 

The Company's lease agreement contains related non-lease components (e.g. taxes, etc.). The Company separates lease components and non-lease components for all underlying asset classes.

The adoption of this guidance had a material impact on the Company's Condensed Consolidated Balance Sheet beginning April 1, 2019 when the Company recognized (a) a lease liability of $771,098, which represents the present value of equity instruments issuedthe remaining lease payments of $967,344, discounted using the Company's incremental borrowing rate of 5% and (b) the related right-of-use asset of $771,098 which represents the lease liability. Prior periods were not restated. Adoption of this standard had no change on financing leases previously subject to consultantscapital lease treatment under ASC Topic 840, Leases. See Note 9 for servicesfurther discussion of leases. 

The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liability – current, and fair value of equity instruments issuedoperating lease liability – noncurrent on the Company’s condensed consolidated balance sheets. ROU assets represent the Company’s right to others. We base our estimates on historical experienceuse an underlying asset for the lease term and on various other assumptions that we believelease liabilities represent the Company’s obligation to be reasonable undermake lease payments arising from the circumstances, the results of which form the basis for making judgments about the carrying value oflease. Operating lease ROU assets and liabilities that are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not readily apparent from other sources. Actual results may differ from theseprovide an implicit rate, the Company estimates under different assumptions or conditions; however, we believe that our estimates, including thoseits collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The operating lease ROU assets include any payments made before the commencement date and exclude lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the above described items, are reasonable.lease term.

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 has increased internal research and development by utilizing their engineering resources to advance their own proprietary medical device technologies.

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"Sonotron").  

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 20192020 AS COMPARED TO JUNE 30, 20182019  

Revenues for the three months ended June 30, 2019 increased2020 decreased by $73,854.$261,728. The increasedecrease is a result of increaseddecreased sales of $39,592$201,109 in the engineeringChemical segment increased sales of $28,461and $193,914 in the chemicalEngineering segment and increased revenuesoffset by an increase of $133,295 in the electronics of $5,801. The increases are primarily the result of the changes in customer ordering patterns.

GrossElectronics segment.Gross profit for the three months ended June 30, 20192020 decreased by $17,734.$267,222. The decrease in gross profit resulted primarily from increased labor costsdecreased sales in Chemical and a write-off of inventory duringEngineering related to the quarter of $15,639.COVID-19 pandemic.

We are highly dependent upon certain customers. During the three months ended June 30, 2020, two customers accounted for 54% of our net revenue. Net revenues from foreign customers for the three months ended June 30, 2020 was $24,666 or 4%.

During the three months ended June 30, 2019 two customers accounted for 60% of our net revenue. Net revenues from foreign customers for the three months ended June 30, 2019 was $125,372 or 15%.

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, 2020 decreased by $253,155. The decrease in operating income for the three-month period is from a decrease in income from the Chemical segment of $116,538, a decrease in income of $61,460 from the Electronic segments and a decrease of $75,157 from Engineering.

Income from operations for the three months ended June 30, 2019 increased by $52,189. The increase in operating income for the three-month period is frommainly attributable to a decrease of the following expenses: approximately $37,000 in consulting fees, $8,000 in health insurance,  $2,000and $7,000 in royalties and $4,000 in traveladvertising expenses.

InterestOther income increased $904$8,150 for the three months ended June 30, 2019.2020. The increase is primarily due to increasedEIDL grant of $10,000 offset by decrease in funds invested in a money market account. Interest expense increased $941 primarily due to increased balance in the line of credit.

The foregoing resulted in a net incomeloss before provision for income taxes for the three months ended June 30, 20192020 of $52,769.$170,236. Earnings per share were $(0.00) and $0.00 for the three months ended June 30, 20192020 and 2018,2019, respectively.

LIQUIDITY AND CAPITAL RESOURCES   

At June 30, 2019,2020, we had cash and cash equivalents of $1,456,633$1,575,472 as compared to $1,555,687$1,438,714 at March 31, 2019.2020. The $99,054 decrease$136,758 increase was primarily the result of cash provided byused in operations during the three-month period in the amount of $43,755,$261,196, offset with cash usedprovided in financing activities of $142,809.$397,954. Our cash will continue to be used for increased marketing costs, and the related administrative expensesincreased production labor costs 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 inwith profitable revenuescustomers and continued focus on new customers will enable us to continue to generate cash flows from operating activities during fiscal 2020. 

Based on current expectations, we believe that our existing cash and cash equivalents of $1,456,633$1,575,472 as of June 30, 2019,2020, 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 by operating activities was $261,196 for the three months ended June 30, 2020, as compared to net cash provided by operating activities wasof $43,755 for the three months ended June 30, 2019, as compared to net2019.  The cash used by operating activities of $168,832 for the three months ended June 30, 2018.  The cash provided during the three months ended June 30, 20192020 was primarily due to net incomeloss of $52,769 plus$115,736 less depreciation and amortization of $9,725$9,995 coupled with an increasea decrease in net operating liabilities of $1,116,070, coupled with a$56,763 and an increase in net operating assets of $1,171,448.$96,753.

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, 2019.2020.

FINANCING ACTIVITIES

For the three months ended June 30, 2019,2020, net cash usedprovided by financing activities was $142,809$397,954 due to proceeds from the line of credit of $25,000, proceeds from the PPP loan of $381,000 offset by repayments on capital lease obligations and the line of credit.$8,046. 

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 and accounts receivable and our investment in ITI. We have no control over the market value of our investment in ITI. receivable.

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, 2019,2020, approximately $1,334,000$1,295,000 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, 2018,June 30, 2020, 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 June 30, 2019,2020, 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, 2019,2020, and March 31, 20192020 and the related condensed consolidated statements of income, and cash flows for the three months ended June 30, 20192020 and 2018,2019, 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

In July 2018,November 2019, the Company filed a complaint forcivil suit in the Superior Court of New Jersey against an accounting firm seeking a declaratory judgement from the court that no sum is due to the accounting firm, plus damages, attorney's fees and costs and a declaratory judgement against Securities Transfer Corporation (STC)with respect 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 $10,578.76foregoing. This matter was paidsettled by mutual agreement for 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 recordsto pay $7,500 to the new transfer agent in December 2018. Althoughdefendant. All claims were dismissed by both parties on June 2, 2020. Other than the declaratory judgement was decided in favor of the Company, the lawsuit and counterclaimforegoing, there are in the early stages and additional informationno pending material legal proceedings or environmental investigations to which we are a party or to which our property is not available at this time.subject.

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, 2019.2020. 

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.

** 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.

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.

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