NOTE2- 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 US GAAP and, accordingly, requires 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 and related valuation allowance, write down of inventory, impairment of long livedlong-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.

CREDIT RISKFAIR VALUE OF FINANCIAL INSTRUMENTS

FinancialFor certain of our financial instruments, that potentially subject usincluding accounts receivable, accounts payable, and accrued expenses, the carrying amounts approximate fair value due to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.their relatively short maturities.

CASH AND CASH EQUIVALENTS

For financial statement purposes, the Company considers as cashCash equivalents allare comprised of  highly liquid investments with an original maturitymaturities of three months or less when purchased. We maintain our cash in bank deposit accounts, which at inception. The Company deposits cash and cash equivalents with high credit quality financial institutions and believes thattimes, may exceed federally insured limits. We have not experienced any amounts in excesslosses to date as a result of insurance limitations to be at minimal risk.this policy. Cash and cash equivalents held atin these accounts are currentcurrently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At December 31, 2019,2020, approximately $1,288,000$1,303,000 exceeded the FDIC limit.

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The carrying amounts of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed the due date and estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to expenses and a credit to a valuation allowance, based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. 

REVENUE RECOGNITION 

ADM extends credit terms to our customers based on their credit worthiness. 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 shipmentwhen they are shipped to a customer because that is when the customer obtains control of the promised good.purchaser. We offer a limited 90-day warranty on our electronics products.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 sales of our electronic products have been de minimus. 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 the three and nine months ended December 31, 2019 and 2018. For contract manufacturing, revenues are recognized after shipmentshipments of the completed products.

Amounts received from customers in advance of our 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 $310,000$215,000 as of March 31, 2020 were recognized as revenues during the nine months ended December 31, 2019.2020.

CHEMICAL PRODUCTS:

Revenues are recognized when products are shipped to end users. Shipments to distributors are recognized as revenue 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 servicesapplicable performance obligations are provided.satisfied.  

All revenue is recognized net of discounts.

WARRANTY LIABILITIES

The Company’s provision for estimated future warranty costs is based upon historical relationship of warranty claims to sales. Based upon historical experience, the Company has concluded that no warranty liability is required as of the condensed consolidated balance sheet dates. However, the Company periodically reviews the adequacy of its product warranties and will record an accrued warranty reserve if necessary. Based on prior experience, no amounts have been accrued for potential warranty costs and actual costs were less than $2,000, for the three and nine months ended December 31, 2020 and 2019.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) and net realizable value. Inventories that are expected to be sold within one operating cycle (1 year) are classified as a current asset. Inventories that are not expected to be sold within 1 year, based on historical trends, are classified as Inventories - long term portion. Obsolete inventory is written off based on prior and expected future usage.

PROPERTY AND EQUIPMENT

We record our property and equipment at historical cost. We expense maintenance and repairs as incurred. Depreciation is provided for by the straight-line method over five to seven years, the estimated useful lives of the property and equipment.

Paycheck Protection Program Loan

The Company has obtained a Paycheck Protection Program loan during May 2020 from the Small Business Administration in the amount of $381,000. Management has elected to record the loan under FASB ASC 470, Debt and in the event the Company is successful in receiving forgiveness, will treat the qualifying amounts as a gain upon extinguishment in accordance with ASC 405, Liabilities. As of December 31, 2020, management believes that all expenses have met the criteria of qualifying expenses as set forth by the terms of the loan.

INTANGIBLE ASSETS 

Intangible assets are reviewed for impairment annually whenever changes in circumstances indicate that the carrying amount may not be recoverable. In reviewing for impairment, the Company compares the carrying value of the relevant asset to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and its carrying value. Although the Company experienced a decrease in sales due to the COVID-19 pandemic, there is no impairment loss for the nine months ended December 31, 2020.

ADVERTISING COSTS 

Advertising costs are expensed as incurred and amounted to $6,079 and $9,936 and $25,779 and $33,108 for the three and nine months ended December 31, 2020 and 2019, respectively.

INCOME TAXES

We report the results of our operations as part of a consolidated Federal tax return with our subsidiary. Deferred income taxes result primarily from temporary differences between financial and tax reporting. Deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates. A valuation allowance is recorded to reduce a deferred tax asset to that portion that is expected to more likely than not be realized.

The Company has adopted the authoritative accounting guidance with respect to accounting for uncertainty in income taxes, which clarified the accounting and disclosures for uncertain tax positions related to income taxes recognized in the consolidated financial statements and addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company files income tax returns in several jurisdictions. The Company’s tax returns remain subject to examination, by major jurisdiction, for the years ended March 31, as follows:

There are currently no tax years under examination by any major tax jurisdictions.

The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2020, and 2019, the Company has no accrued interest or penalties related to uncertain tax positions.

NET EARNINGS PER SHARE

BasicWe compute basic earnings per share is calculated based onby dividing net income/loss by the weighted average number of common shares outstanding during the periods.outstanding. 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. Common equivalent shares are excluded from the computation of net earnings per share if their effect is anti-dilutive. 

Per share basic and diluted earnings amounted to $0.00$(0.00) for the three and nine months ended December 31, 20192020 and December 31, 2018,2019, respectively.

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 leasee 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 the 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 capital lease treatment under ASC Topic 840, Leases. See Note 9 for further 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, current operating lease liabilities,liability – current, and noncurrent operating lease liabilitiesliability – noncurrent on the Company’s Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities 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 provide an implicit rate, the Company estimates its 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 lease term. The Company defines a short-term lease as a lease that, at

RECLASSIFICATION

Certain amounts in the commencement date, has a lease term of 12 months or less and does not contain an optionprior periods presented have been reclassified to purchaseconform to the underlying asset that the lease is reasonably certain to exercise, and recognizes short-term lease payments as an expensecurrent period financial statement presentation.  These reclassifications have no effect on a straight-line basis over the lease term. Lease and nonlease components are generally accounted for separately.previously reported net income.

RECENT ACCOUNTING PRONOUNCEMENTS

Lease Accounting. 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 transition method that 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 adoption of this guidance had a material impact on the Company’s Condensed Consolidated Balance Sheet beginning April 1, 2019. Prior periods were not restated. See Note 6 for further discussion of leases.

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 potentialadopted this ASU as of April 1, 2020 and it has no impact on the Company’s consolidated financial statements.

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.