Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended December 31, 2016
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to_________
Commission File Number: 0-6658
__________________________________________
SCIENTIFIC INDUSTRIES, INC.
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-2217279
____________________________ _________________________________
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
80 Orville Drive, Suite 102, Bohemia, New York 11716
______________________________________________ ____________
(Address of principal executive offices) (Zip Code)
(631)567-4700
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
__________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a small reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"small reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated Filer
Non-accelerated filer Smaller reporting company (X)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes X No
The number of shares outstanding of the issuer's common stock par value,
$0.05 per share, as of February 3, 2017 was 1,489,112 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Page
____
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Comprehensive
Income (Loss) 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 13
ITEM 4 CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
EXHIBITS 18
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2016 2016
___________ __________
Current Assets:
Cash and cash equivalents $ 897,100 $ 1,245,000
Investment securities 290,900 290,100
Trade accounts receivable, net 1,668,000 1,231,900
Inventories 2,125,000 2,412,100
Prepaid expenses and other current
assets 122,500 47,200
Deferred taxes 127,500 140,600
__________ ___________
Total current assets 5,231,000 5,366,900
Property and equipment at cost, net 220,200 251,100
Intangible assets, net 758,300 897,600
Goodwill 705,300 705,300
Other assets 52,500 52,500
Deferred taxes 277,500 275,900
__________ __________
Total assets $7,244,800 $7,549,300
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 300,200 $ 342,400
Customer advances 17,000 -
Bank line of credit 250,000 -
Notes payable, current portion 6,500 6,400
Dividends payable 44,700 -
Accrued expenses and taxes, current
portion 510,300 849,700
Contingent consideration, current
portion 161,800 136,500
__________ __________
Total current liabilities 1,290,500 1,335,000
Notes payable, less current portion 9,200 12,500
Contingent consideration payable,
less current portion 67,100 209,800
Accrued expenses, less current portion - 60,000
__________ ___________
Total liabilities 1,366,800 1,617,300
__________ ___________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,508,914 outstanding at
December 31, 2016 and June 30, 2016 75,400 75,400
Additional paid-in capital 2,499,500 2,498,500
Accumulated other comprehensive
income (loss) ( 6,000) 900
Retained earnings 3,361,500 3,409,600
___________ __________
5,930,400 5,984,400
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
___________ __________
Total shareholders' equity 5,878,000 5,932,000
___________ __________
Total liabilities and
shareholders' equity $7,244,800 $7,549,300
========== ==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
______________________ ______________________
2016 2015 2016 2015
______________________ ______________________
Revenues $2,683,800 $2,028,200 $4,242,900 $3,472,600
Cost of revenues 1,888,900 1,190,500 2,778,400 2,039,800
__________ __________ __________ __________
Gross profit 794,900 837,700 1,464,500 1,432,800
__________ __________ __________ __________
Operating Expenses:
General & administrative 409,200 395,700 821,600 803,900
Selling 224,200 227,200 440,900 394,200
Research & development 105,000 84,100 220,400 169,500
__________ __________ __________ __________
Total operating
expenses 738,400 707,000 1,482,900 1,367,600
__________ __________ __________ __________
Income (loss) from
operations 56,500 130,700 ( 18,400) 65,200
__________ __________ __________ __________
Other income (expense):
Interest income 8,800 5,000 9,100 5,400
Other 400 1,400 5,700 ( 3,300)
Interest expense ( 900) ( 14,000) ( 1,100) ( 22,100)
__________ __________ __________ __________
Total other income,
(expense), net 8,300 ( 7,600) 13,700 ( 20,000)
__________ __________ __________ __________
Income (loss) before
income tax expense
(benefit) 64,800 123,100 ( 4,700) 45,200
__________ __________ __________ __________
Income tax expense (benefit):
Current 20,900 40,900 ( 15,400) 40,900
Deferred ( 1,400) ( 12,200) 14,100 ( 30,000)
__________ __________ __________ ___________
Total income tax
expense (benefit) 19,500 28,700 ( 1,300) 10,900
__________ __________ __________ ___________
Net income (loss) $ 45,300 $ 94,400 ($ 3,400) $ 34,300
========== ========== ========== ===========
Basic and diluted earnings
per common share $ .03 $ .06 $ .00 $ .02
Cash dividends declared
per common share $ .03 $ - $ .03 $ -
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
______________________ ____________________
2016 2015 2016 2015
______________________ ____________________
Net income (loss) $ 45,300 $ 94,400 ($ 3,400) $ 34,300
Other comprehensive income (loss):
Unrealized holding loss on
investments arising during period,
net of tax ( 8,000) ( 1,100) ( 6,900) ( 4,900)
_________ __________ __________ __________
Comprehensive income (loss) $ 37,300 $ 93,300 ($ 10,300) $ 29,400
========= ========== ========== ==========
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
______________________ ______________________
2016 2015
______________________ ______________________
Operating activities:
Net income (loss) ($ 3,400) $ 34,300
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss on asset disposal - 2,700
Loss on sale of investments ( 2,600) -
Depreciation and amortization 189,500 210,800
Deferred income tax benefit expense 14,100 (30,000)
Stock-based compensation 1,000 1,200
Changes in operating assets and liabilities:
Accounts receivable (436,100) 211,600
Inventories 287,100 (1,048,800)
Prepaid expenses and other
current assets (75,300) 13,000
Accounts payable (42,200) 144,500
Customer advances 17,000 33,700
Accrued expenses and taxes (399,400) 259,600
__________ ___________
Total adjustments (446,900) (201,700)
__________ ___________
Net cash used in operating
activities (450,300) (167,400)
__________ ___________
Investing activities:
Redemption of investment securities,
available-for-sale 11,100 -
Purchase of investment securities,
available-for-sale (18,700) (2,700)
Capital expenditures ( 4,700) (8,400)
Purchase of other intangible assets (14,700) (5,700)
__________ ___________
Net cash used in
investing activities (27,000) (16,800)
__________ ___________
Financing activities:
Line of credit proceeds 250,000 470,000
Payment of contingent consideration (117,400) (100,900)
Principal payments on note payable (3,200) -
__________ ___________
Net cash provided by financing
activities 129,400 369,100
__________ ___________
Net increase (decrease) in cash
and cash equivalents (347,900) 184,900
Cash and cash equivalents,
beginning of year 1,245,000 482,000
__________ ___________
Cash and cash equivalents, end of period $ 897,100 $ 666,900
========== ===========
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 186,000 $ 18,500
Interest 1,100 4,400
See notes to unaudited condensed consolidated financial statements
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General: The accompanying unaudited interim condensed consolidated
financial statements are prepared pursuant to the Securities
and Exchange Commission?s rules and regulations for reporting
on Form 10-Q. Accordingly, certain information and footnotes
required by accounting principles generally accepted in the
United States for complete financial statements are not
included herein. The Company believes all adjustments
necessary for a fair presentation of these interim statements
have been included and that they are of a normal and
recurring nature. These interim statements should be read in
conjunction with the Company's financial statements and notes
thereto, included in its Annual Report on Form 10-K, for the
fiscal year ended June 30, 2016. The results for the three
and six months ended December 31, 2016, are not necessarily
an indication of the results for the full fiscal year ending
June 30, 2017.
1. Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc., Scientific Packaging
Industries, Inc., an inactive wholly-owned subsidiary, Altamira
Instruments, Inc. ("Altamira"), a Delaware corporation and wholly-
owned subsidiary, and Scientific Bioprocessing, Inc. ("SBI"), a
Delaware corporation and wholly-owned subsidiary, (all collectively
referred to as the "Company"). All material intercompany balances
and transactions have been eliminated.
2. New Accounting Pronouncements:
In March 2016, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation
- Stock Compensation(Topic 718): Improvements to Employee Share-Based
Payment Accounting" (ASU 2016-09). Areas for simplification in this
update involve several aspects of accounting for share-based payment
transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on
the statement of cash flows. ASU 2016-09 is effective for interim
and annual reporting periods beginning after December 15, 2016, with
early application permitted. The Company is currently evaluating the
timing, impact and method of applying this guidance on its
consolidated financial statements.
In February 2016, the FASB issued authoritative guidance that requires
lessees to account for most leases on their balance sheets with the
liability being equal to the present value of the lease payments.
The right-of-use asset will be based on the lease liability adjusted
for certain costs such as direct costs. Lease expense will be
recognized similar to current accounting guidance with operating
leases resulting in a straight-line expense and financing leases
resulting in a front-loaded expense similar to the current
accounting for capital leases. This guidance become effective
for the Company's fiscal 2020 first quarter, with early adoption
permitted.
5
This guidance must be adopted using a modified retrospective
transition approach for leases that exist or are entered into
after the beginning of the earliest comparative period in the
financial statements, and provides for certain practical
expedients. The Company is currently evaluating the timing,
impact and method of applying this guidance on its consolidated
financial statements.
In November 2015, the FASB issued new guidance simplifying the
balance sheet classification of deferred taxes. The new guidance
requires that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position.
The current requirement that deferred tax liabilities and assets
of a tax-paying component of an entity be offset and presented
as a single amount is not affected by the new guidance. The
guidance is effective for public companies for interim and annual
reporting periods beginning after December 15, 2016, with early
adoption permitted as of the beginning of an interim or annual
reporting period. The new guidance may be applied either
prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company does not
expect the adoption to have a material impact on its financial
condition, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory:
Simplifying the Measurement of Inventory", that requires inventory
not measured using either the last in, first out (LIFO) or the
retail inventory method to be measured at the lower of cost and
net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably
predictable cost of completion, disposal and transportation. The
new standard will be effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal
years, and will be applied prospectively. Early adoption is permitted.
The Company does not expect the adoption to have a material impact
on its financial condition, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from
Contracts with Customers amending revenue recognition requirements
for multiple-deliverable revenue arrangements. This update provides
guidance on how revenue is recognized to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in
exchange for the goods or services. This determination is made in
five steps: (i) identify the contract with the customer;
(ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v)
recognize revenue when (or as) the entity satisfies a performance
obligation. In July 2015, the FASB deferred the effective date to
fiscal years beginning after December 15, 2018 and early adoption
of the standard is permitted, but not before the original effective
date of December 15, 2017. The Company is evaluating the effect
this guidance will have on the consolidated financial statements and
related disclosures.
6
3. Segment Information and Concentrations:
The Company views its operations as three segments: the manufacture
and marketing of standard benchtop laboratory equipment for research
in university, hospital and industrial laboratories sold primarily
through laboratory equipment distributors ("Benchtop Laboratory
Equipment"), the manufacture and marketing of custom-made catalyst
research instruments for universities, government laboratories, and
chemical and petrochemical companies sold on a direct basis
("Catalyst Research Instruments") and the marketing and production of
bioprocessing systems for laboratory research in the biotechnology
industry sold directly to customers and through distributors
("Bioprocessing Systems").
Segment information is reported as follows (foreign sales are principally
to customers in Europe and Asia):
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended December 31, 2016:
Revenues $1,466,800 $1,192,100 $ 24,900 $ - $2,683,800
Foreign Sales 751,800 10,300 - - 762,100
Income (Loss) from
Operations 62,600 26,600 ( 32,700) - 56,500
Assets 4,131,400 1,982,800 434,700 695,900 7,244,800
Long-Lived Asset
Expenditures 5,200 - 5,800 - 11,000
Depreciation and
Amortization 76,700 4,500 12,600 - 93,800
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended December 31, 2015:
Revenues $1,583,500 $ 414,500 $ 30,200 $ - $2,028,200
Foreign Sales 764,400 105,500 - - 869,900
Income (Loss) from
Operations 187,700 ( 10,100) ( 32,900) ( 14,000) 130,700
Assets 4,352,600 2,319,200 728,800 578,300 7,978,900
Long-Lived Asset
Expenditures 1,900 - 5,700 - 7,600
Depreciation and
Amortization 74,200 7,000 24,400 - 105,600
Approximately 55% and 53% of net sales of benchtop laboratory equipment
(30% and 41% of total revenues) for the three month periods ended December
31,2016 and 2015, respectively, were derived from the Company's main product,
the Vortex-Genie 2(R) mixer, excluding accessories.
7
Approximately 21% and 19% of net sales of benchtop laboratory equipment
(11% and 15% of total net revenues) were derived from Torbal brand products
for the three months ended December 31, 2016 and 2015, respectively.
Two customers accounted in the aggregate for approximately 17% and 14% of
the net sales of the Benchtop Laboratory Equipment Operations (9% and 11%
of total net revenues) for the three months ended December 31, 2016 and
2015, respectively. Sales of catalyst research instruments generally
comprise a few very large orders averaging at least $100,000 per order
to a limited number of customers, who differ from order to order. Sales
to three and two customers (one of which is the same) represented
approximately 99% and 92% of the Catalyst Research Instrument Operations'
net sales, respectively, and 44% and 19% of total revenues for the
three months ended December 31, 2016 and 2015, respectively.
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Six months ended December 31, 2016:
Revenues $2,923,600 $1,269,600 $ 49,700 $ - $4,242,900
Foreign Sales 1,313,000 15,100 - - 1,328,100
Income (Loss) from
Operations 164,000 ( 115,000) ( 67,400) - ( 18,400)
Assets 4,131,400 1,982,800 434,700 695,900 7,244,800
Long-Lived Asset
Expenditures 13,600 - 5,800 - 19,400
Depreciation and
Amortization 153,400 11,100 25,000 - 189,500
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Six months ended December 31, 2015:
Revenues $2,846,500 $ 567,500 $ 58,600 $ - $3,472,600
Foreign Sales 1,363,400 113,300 - - 1,476,700
Income (Loss) from
Operations 242,400 ( 92,200) ( 62,900) ( 22,100) 65,200
Assets 4,352,600 2,319,200 728,800 578,300 7,978,900
Long-Lived Asset
Expenditures 8,400 - 5,700 - 14,100
Depreciation and
Amortization 148,000 13,900 48,900 - 210,800
Approximately 52% and 50% of net sales of benchtop laboratory equipment (36%
and 41% of total revenues) for the six month periods ended December 31, 2016
and 2015, respectively, were derived from the segment's main product, the
Vortex-Genie 2(R) mixer, excluding accessories.
Two benchtop laboratory equipment customers, accounted in the aggregate for
approximately 16% and 13% of the segment?s net sales for the six month periods
ended December 31, 2016 and 2015, and 11% of total revenues for both periods.
8
Approximately 23% and 20% of net sales of benchtop laboratory equipment (16% of
total revenues for both periods) were derived from Torbal brand products for
the six months ended December 31, 2016 and 2015, respectively.
For the six month periods ended December 31, 2016 and 2015, catalyst research
each of the six month periods, accounted for approximately 97% and 88% of the
segment?s net sales and 29% and 14% of total revenues, respectively.
4. Fair Value of Financial Instruments:
The FASB defines the fair value of financial instruments as the amount that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
Fair value measurements do not include transaction costs.
The accounting guidance also expands the disclosure requirements around fair
value and establishes a fair value hierarchy for valuation inputs. The
hierarchy prioritizes the inputs into three levels based on the extent to
which inputs used in measuring fair value are observable in the market. Each
fair value measurement is reported in one of the three levels, which is
determined by the lowest level input that is significant to the fair value
measurement in its entirety. These levels are described below:
Level 1 Inputs that are based upon unadjusted quoted prices for
identical instruments traded in active markets.
Level 2 Quoted prices in markets that are not considered to be
active or financial instruments for which all significant inputs are
observable, either directly or indirectly.
Level 3 Prices or valuation that require inputs that are both
significant to the fair value measurement and unobservable.
The following tables set forth by level within the fair value hierarchy the
Company's financial assets that were accounted for at fair value on a
recurring basis at December 31, 2016 and June 30, 2016 according to the
valuation techniques the Company used to determine their fair values:
Fair Value Measurements Using Inputs
Considered as
Fair Value at
December 31, 2016 Level 1 Level 2 Level 3
_________________ ________ _______ ________
Assets:
Cash and cash equivalents $ 897,100 $ 897,100 $ - $ -
Available for sale securities 290,900 290,900 - -
__________ __________ _______ ________
Total $1,188,000 $1,188,000 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 228,900 $ - $ - $228,900
========== ========== ======= ========
9
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2016 Level 1 Level 2 Level 3
______________ __________ _______ ________
Assets:
Cash and cash equivalents $1,245,000 $1,245,000 $ - $ -
Available for sale securities 290,100 290,100 - -
__________ __________ _______ ________
Total $1,535,100 $1,535,100 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 346,300 $ - $ - $346,300
========== ========== ======= ========
The following table sets forth an analysis of changes during the six months
ended December 31, 2016, Level 3 financial liabilities of the Company:
Beginning balance, June 30, 2016 $346,300
Payments (117,400)
_________
Ending Balance, December 31, 2016 $228,900
=========
Investments in marketable securities classified as available-for-sale by
security type at December 31, 2016 and June 30, 2016 consisted of the
following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At December 31, 2016:
Available for sale:
Equity securities $ 36,500 $ 48,500 $ 12,000
Mutual funds 260,400 242,400 (18,000)
__________ _________ __________
$ 296,900 $ 290,900 $( 6,000)
========== ========= ==========
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2016:
Available for sale:
Equity securities $ 29,300 $ 40,700 $ 11,400
Mutual funds 259,900 249,400 (10,500)
__________ _________ __________
$ 289,200 $ 290,100 $ 900
========== ========= ==========
5. Inventories:
Inventories for financial statement purposes are based on perpetual
inventory records at December 31, 2016 and based on a physical count as
of June 30, 2016. Components of inventory are as follows:
December 31, June 30,
2016 2016
____________ __________
Raw Materials $1,365,900 $1,529,800
Work in process 392,600 425,300
Finished Goods 366,500 457,000
____________ __________
$2,125,000 $2,412,100
============ ==========
10
6. Earnings (loss) per common share:
Basic earnings (loss) per common share are computed by dividing net income
(loss) by the weighted-average number of shares outstanding. Diluted
earnings per common share include the dilutive effect of stock options, if
any.
Earnings (loss) per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Period Ended
December 31, December 31,
________________________________________________
2016 2015 2016 2015
___________ __________ ____________ ___________
Net income (loss) $ 45,300 $ 94,400 ($ 3,400) $ 34,300
=========== ========== ============ ===========
Weighted average common
shares outstanding 1,489,112 1,489,112 1,489,112 1,489,112
Dilutive securities - - - -
___________ __________ ____________ ___________
Weighted average dilutive
common shares outstanding 1,489,112 1,489,112 1,489,112 1,489,112
=========== ========== ============ ===========
Basic and diluted earnings
(loss) per common share $ .03 $ .06 ($ .00) $ .02
====== ====== ======== ======
Approximately 43,500 and 38,500 shares of the Company's Common Stock
issuable upon the exercise of outstanding stock options were excluded from
the calculation of diluted earnings per common share for the three and six
month periods ended December 31, 2016 and 2015, respectively, because the
effect would be anti-dilutive.
7. Goodwill and Other Intangible Assets:
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in connection with the Company's acquisitions.
Goodwill amounted to $705,300 as of December 31, 2016 and June 30, 2016,
all of which is expected to be deductible for tax purposes.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
________ __________ _____________ _________
At December 31, 2016:
Technology, trademarks 5/10 yrs. $ 722,800 $ 510,900 $ 211,900
Trade names 6 yrs. 140,000 66,100 73,900
Websites 5 yrs. 210,000 119,000 91,000
Customer relationships 9/10 yrs. 357,000 274,800 82,200
Sublicense agreements 10 yrs. 294,000 150,700 143,300
Non-compete agreements 5 yrs. 384,000 267,300 116,700
Intellectual Property,
Research & Development
(IPR&D) 3 yrs. 110,000 103,900 6,100
Other intangible assets 5 yrs. 192,700 159,500 33,200
__________ __________ __________
$2,410,500 $1,652,200 $ 758,300
========== ========== ==========
11
Useful Accumulated
Lives Cost Amortization Net
_________ __________ ____________ __________
At June 30, 2016:
Technology, trademarks 5/10 yrs. $ 722,800 $ 468,800 $ 254,000
Trade names 6 yrs. 140,000 54,400 85,600
Websites 5 yrs. 210,000 98,000 112,000
Customer relationships 9/10 yrs. 357,000 261,600 95,400
Sublicense agreements 10 yrs. 294,000 136,000 158,000
Non-compete agreements 5 yrs. 384,000 239,100 144,900
Intellectual Property,
Research & Development
(IPR&D) 3 yrs. 110,000 85,500 24,500
Other intangible assets 5 yrs. 177,900 154,700 23,200
__________ __________ __________
$2,395,700 $1,498,100 $ 897,600
========== ========== ==========
Total amortization expense was $76,200 and $87,500 for the three months
ended December 31, 2016 and 2015, respectively and $154,100 and $173,800
for the six months ended December 31, 2016 and 2015, respectively. As of
December 31, 2016, estimated future amortization expense related to
intangible assets is $143,300 for the remainder of the fiscal year ending
June 30, 2017, $288,500 for fiscal 2018, $210,600 for fiscal 2019, $45,100
for fiscal 2020, $43,500 for fiscal 2021 and $27,300 thereafter.
12
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operations
Certain statements contained in this report are not based on historical
facts, but are forward-looking statements that are based upon various
assumptions about future conditions. Actual events in the future could
differ materially from those described in the forward-looking information.
Numerous unknown factors and future events could cause such differences,
including but not limited to, product demand, market acceptance, impact
of competition, the ability to reach final agreements, the ability to
finance and produce to customers' specifications catalyst research
instruments, and to develop marketable bioprocessing systems, adverse
economic conditions, and other factors affecting the Company's business
that are beyond the Company's control. Consequently, no forward-looking
statement can be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $347,900 to $897,100 as of December
31, 2016 from $1,245,000 as of June 30, 2016.
Net cash used in operating activities was $450,300 for the six months ended
December 31, 2016 compared to $167,400 used during the six months ended
December 31, 2015. The current year period reflected a loss as compared to
income in the prior year period, higher accounts receivable balances,
increased prepayments to vendors, and lower accounts payable and decreased
accrued expense items, partially offset by lower inventories. Cash used
in investing activities was $27,000 for the six months ended December 31,
2016 compared to $16,800 for the six months ended December 31, 2015
primarily due to fixed asset and intangibles purchases. Cash provided by
financing activities was $129,300 for the six months ended December 31,
2016 compared to $184,900 for the six months ended December 31, 2015
primarily due to lower amounts of line of credit proceeds and higher
contingent consideration payments.
The Company's working capital decreased by $91,400 to $3,940,500 at
December 31, 2016 from $4,031,900 at June 30, 2016.
The Company has two lines of credit through June 2017 with First National
Bank of Pennsylvania - an Export-Related Revolving Line of Credit which is
guaranteed by the Export-Import Bank of the United States which provides
for export-related borrowings of up to $200,000, bearing interest at prime
plus 1% and an annual fee of 1.75% and a second one-year Demand Line of
Creditwhich provides for borrowings of up to $300,000 for regular working
capital needs, bearing interest at prime, currently 3.75%. Advances on
both lines are secured by a pledge of the Company's assets including
inventory, accounts, chattel paper, equipment and general intangibles
of the Company. As of December 31, 2016 the Company had $250,000
outstanding which was paid in January 2017.
Management believes that the Company will be able to meet its cash flow
needs during the next 12 months from its available financial resources
which include its cash and investment securities, lines of credit, and
operations.
13
Results of Operations
Financial Overview
The Company recorded income before income tax expense of $64,800 and
$123,100 for the three month periods ended December 31, 2016 and 2015,
respectively; and loss before income tax benefit of $4,700 and income
before income tax expense of $45,200 for the six month periods ended
December 31, 2016 and 2015, respectively primarily due to lower gross
profit amounts generated by the Benchtop Laboratory Equipment Operations
and higher operating expenses. The results reflect non-cash amounts for
depreciation and amortization of $93,800 and $189,500 for the three and
six months ended December 31, 2015 compared to $105,600 and $210,800
respectively.
The Three Months Ended December 31, 2016 Compared With the Three Months
Ended December 31, 2015
Net revenues for the three months ended December 31, 2016 increased by
$655,600 (32.3%) to $2,683,800 from $2,028,200 for the three months
ended December 31, 2015, primarily as a result of a $777,600 increase
in sales of catalyst research instruments, partially offset by decreases
of $116,700 and $5,300 in sales and revenues of benchtop laboratory
equipment and bioprocessing products. Sales of the benchtop laboratory
equipment products generally are pursuant to many small purchase orders
from distributors, while catalyst research instruments are sold pursuant
to a small number of larger orders, typically averaging over $100,000
each, resulting in significant swings in revenues. The backlog of orders
for catalyst research instruments was $397,300 at December 31, 2016
compared to $3,102,000 as of December 31, 2015, the majority of which
are anticipated to be delivered by June 30, 2017.
The gross profit percentage for the three months ended December 31, 2016
decreased to 29.6% compared to 41.3% for the year earlier three month
period primarily due to lower gross profit margins by the Catalyst Research
Instrument Operations due to sales mix.
General and administrative expenses for the three month comparative periods
ended December 31, 2016 and December 31, 2015 increased by $13,500 (3.4%)
to $409,200 from $395,700 primarily due to various expenses incurred by the
Benchtop Laboratory Equipment Operations.
Selling expenses for the three months ended December 31, 2016 amounted to
$224,200 compared to $227,200 for the three months ended December 31, 2015.
Research and development expenses for the three months ended December 31,
2016 increased $20,900 (24.9%) to $105,000 from $84,100 for the three
months ended December 31, 2015, primarily the result of increased new
product development by the Company's Benchtop Laboratory Equipment
Operations and the Bioprocessing Systems Operations.
Total other income (expense), net for the three month period ended December
31, 2016 increased by $15,900 to $8,300 from ($7,600) for the three month
period ended December 31, 2015 due to decreased interest expense as a
result of less borrowings.
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For the three months ended December 31, 2016, income tax expense was $19,500
compared to $28,700 for the three months ended December 31, 2015 due to the
decreased income for the period.
As a result, the net income for the three months ended December 31, 2016
was $45,300 compared to $94,400 for the three months ended December 31,
2015.
The Six Months Ended December 31, 2016 Compared With the Six Months
Ended December 31, 2015
Net revenues for the six months ended December 31, 2016 increased by
$770,300 (22.2%) to $4,242,900 compared to $3,472,600 for the six months
ended December 31, 2015, primarily due to increases of $702,100 and $77,100
in sales of catalyst research instruments and benchtop laboratory equipment,
respectively, partially offset by a $8,900 decrease in revenues of the
Bioprocessing Systems Operations. Sales of benchtop laboratory equipment
products generally are comprised of many small purchase orders from
distributors, while sales of catalyst research instruments are comprised of
a small number of large orders, typically averaging over $100,000 each,
resulting in significant swings in revenues.
The gross profit percentage for the six months ended December 31, 2016
decreased to 34.5% compared to 41.3% for the six months ended December 31,
2015, primarily due to lower gross profit margins by the Catalyst Research
Instrument Operations due to sales mix.
General and administrative expenses increased by $17,700 (2.2%) to $821,600
for the six months ended December 31, 2016 from $803,900 for the comparable
period of the prior year, primarily due to various expenses incurred by the
Benchtop Laboratory Equipment Operations.
Selling expenses for the six months ended December 31, 2016 increased by
$46,700 (11.8%) to $440,900 from $394,200 for the six months ended December
31, 2015, primarily due to online advertising for the Benchtop Laboratory
Equipment Operations.
Research and development expenses for the six months ended December 31,
2016 increased by $50,900 (30.0%) to $220,400 compared to $169,500 for the
six months ended December 31, 2015, primarily the result of increased new
product development by the Company's Benchtop Laboratory Equipment
Operations and the Bioprocessing Systems Operations.
Total other income (expense), net, for the six month period ended December
31, 2016 increased to $13,700 from ($20,000) for the six months ended
December 31, 2015 primarily due to decreased interest expense and
miscellaneous income items.
For the six month period ended December 31, 2016 the income tax benefit was
$1,300 compared to income tax expense of $10,900 for the comparable period of
the prior fiscal year due to the loss during the current year period compared
to income in the prior year.
As a result, the net loss for the six months ended December 31, 2016 was
$3,400 compared to net income of $34,300 for the six months ended December
31, 2015.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, based on an evaluation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934), the Chief Executive and Chief Financial
Officer of the Company has concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in its Exchange Act reports is recorded, processed, summarized and
reported within the applicable time periods specified by the SEC's rules and
forms. The Company also concluded that information required to be disclosed in
such reports is accumulated and communicated to the Company's management,
including its principal executive and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There was no change in
the Company's internal controls over financial reporting that occurred during
the most recently completed fiscal quarter that materially affected or is
reasonably likely to materially affect the Company's internal controls over
financial reporting.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number: Description
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 Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Report dated November 15, 2016 reporting under Item 8.01.
Report dated January 15, 2017 reporting under Item 8.01.
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SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Scientific Industries, Inc.
Registrant
/s/ Helena R. Santos
____________________________
Helena R. Santos
President, Chief Executive Officer
and Treasurer
Principal Executive, Financial and
Accounting Officer
Date: February 10, 2017
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