NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 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 September 30, 2008 (unaudited) and March 31, 2008 and for the three and six month periods ended September 30, 2008 and 2007 (unaudited) have been prepared by ADM pursuant to the rules and regulations of the Securities and Exchange Commission, 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 10-KSB for that year as filed with the SEC, as it may be amended.  The results of the three and six months ended September 30, 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.

 

RECENT ACCOUNTING PRONOUNCEMENTS

On October 10, 2008, the FASB issued Staff Position (“FSP”) FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.  This FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  We have completed our evaluation of the impact of the effect of the adoption of FSP APB 14-1, and have determined it would have no impact on the Company's financial position, results of operations or cash flows.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

7

---

 

NOTE 3 - INVENTORY

 

Inventory at September 30, 2008 (unaudited) consists of the following:

 

		Current				Long Term				Total
Raw materials		$	295,283			$	45,313			$	340,596
Finished goods			70,462				39,230				109,692
		$	365,745			$	84,543			$	450,288

 

Inventory at March 31, 2008 consists of the following:

 

		Current				Long Term				Total
Raw materials		$	361,897			$	39,186			$	401,083
Finished goods			107,506				39,230				146,736
		$	469,403			$	78,416			$	547,819

NOTE 4 - INVESTMENT IN IVIVI

 

Our former majority owned subsidiary, Ivivi Technologies, Inc. (“Ivivi”), filed a Registration Statement with the Securities and Exchange Commission ("SEC") for the initial public offering of a portion of its common stock.  The Registration Statement was declared effective by the SEC on October 18, 2006.  As a result of the consummation of Ivivi's initial public offering, we no longer owned a majority of the outstanding common stock of Ivivi.  Since October 18, 2006, we could exert significant influence based upon the percentage of Ivivi's stock we owned.  As a result, our investment in Ivivi was reported during the period from October 18, 2006 until March 31, 2008 under the equity method of accounting, whereby we recognized our share of Ivivi's earnings or losses as they are incurred.  Effective April 1, 2008 (“the Adoption Date”), we have adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Liabilities” with respect to our investment in Ivivi, whereby we report our investment in Ivivi at fair value.  Management’s reason for electing the fair value option for its investment in Ivivi is to increase the efficiency of our financial reporting responsibilities.  The fair value of our investment in Ivivi at the adoption date was approximately $11,375,000.  The adoption of SFAS No. 159, with respect to our investment in Ivivi, resulted in the recognition of the following:

 

Pre-tax cumulative-effect adjustment to retained earnings:		$	9,220,483
Deferred tax liability:			2,425,188
Post-tax cumulative-effect adjustment to retained earnings:		$	6,795,295

 

As of September 30, 2008, the fair value of our investment in Ivivi was $1,560,000.  Our common shares of Ivivi have not been registered with the SEC and are subject to restriction as a result of securities laws. Subsequent to the date of our financial statements, the fair value of our investment in Ivivi has diminished and its ability to continue as a going concern is unknown.

 

 

		Six Months Ended				Six Months Ended
		September 30, 2008				September 30, 2007
		(unaudited)				(unaudited)
Revenue		$	971,423			$	686,731
Costs and expenses, net			5,351,888				3,906,404
Net loss		$	(4,380,465	)		$	(3,219,673	)
Assets at September 30, 2008		$	5,222,938
Liabilities at September 30, 2008			1,663,798
Equity at September 30, 2008		$	3,559,140
Assets at September 30, 2007		$	6,926,749
Liabilities at September 30, 2007			1,531,873
Equity at September 30, 2007		$	5,394,876

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:

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 September 30, 2008:

			Level 1				Level 2				Level 3
	Investment in Ivivi		$	1,560,000			$	--			$	--

 

NOTE 6 - CONCENTRATIONS

 

During the three month period ended September 30, 2008, Ivivi accounted for approximately 49% of our revenue, and one other customer accounted for approximately 18% or our revenue.  As of September 30, 2008, one customer represented approximately 63% of our accounts receivable.

 

During the three month period ended September 30, 2007, Ivivi accounted for approximately 37% of our revenue, and three other customers accounted for approximately 32% of our revenue.  As of September 30, 2007, two customers represented approximately 50% of our accounts receivable.

 

 

During the six month period ended September 30, 2007, Ivivi accounted for approximately 31% of our revenue, and one other customer accounted for approximately 13% of our revenue.  As of September 30, 2007, two customers represented approximately 50% of our accounts receivable.

 

9

---

 

NOTE 7 - SEGMENT INFORMATION

 

Information about segments is as follows:

 

			Chemical				Electronics				Total
Three months ended September 30, 2008
Revenues from external customers		$	181,025			$	208,504			$	389,589
Segment operating loss			(58,665	)			(121,928	)			(180,593	)
Three months ended September 30, 2007
Revenues from external customers		$	245,474			$	154,373			$	399,847
Segment operating profit (loss)			(119,599	)			23,421				(96,178	)
Six months ended September 30, 2008
Revenues from external customers		$	421,349			$	569,181			$	990,530
Segment operating loss			(116,600	)			(150,931	)			(267,531	)
Six months ended September 30, 2007
Revenues from external customers		$	443,688			$	249,245			$	692,933
Segment operating profit (loss)			(258,850	)			34,487				(224,363	)
Total assets at September 30, 2008		$	3,652,717			$	561,224			$	4,213,941
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 September 30, 2008 and March 31, 2008, ADM was owed $65,655 and $74,299, respectively, from advances made to an officer and his wife and the related accrued interest.  No advances have been made since 2000.  The advances bear interest at an effective rate of approximately 1% per year.  Interest expense for the six months ended September 30, 2008 and 2007 was $443 and $764, 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 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 September 30, 2008 and September 30, 2007, Ivivi had $7,339 and $56,125, respectively, in management services provided to it by ADM pursuant to the management services agreement.  During the six months ended September 30, 2008 and September 30, 2007, Ivivi had $38,739 and $115,865, 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 six months ended September 30, 2008. 

10

---

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 six months ended September 30, 2008 and September 30, 2007 were approximately $190,000 and $152,000, and $515,000 and $213,000, 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		$	240,825

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:

 

			Three Months Ended				Six Months Ended
			September 30, 2008				September 30, 2008
	Revenue		$	427,242			$	1,090,611
	Net loss		$	(4,381,685	)		$	(7,584,624	)
	Net loss per share		$	(0.08	)		$	(0.14	)

 

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.

 

11

---

 

 

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