Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒
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QUARTERLY REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
quarterly period ended December 31,
2017
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from ________to________
Commission file number 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Exact
Name of Registrant in Its Charter)
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Delaware
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04-2217279
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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80 Orville Drive, Suite 102, Bohemia, New York
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11716
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(Address of principal executive offices)
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(Zip Code)
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(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 mark whether the registrant(1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☐
(Do not check if a smaller reporting
company)
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Smaller reporting company ☒
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Emerging Growth ☐
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Indicate
by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act)
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Yes☐
No ☒
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The
number of shares outstanding of the registrant’s common
stock, par value $.05 per share (“Common Stock”) as of
February 2, 2018 is 1,494,112 shares.
SCIENTIFIC INDUSTRIES, INC.
Table
of Contents
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PART I - Financial Information
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Item 1.
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CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Condensed
Consolidated Balance Sheets
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1
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Condensed
Consolidated Statements of Operations
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2
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Condensed
Consolidated Statements of Comprehensive Income (Loss)
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3
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Condensed
Consolidated Statements of Cash Flows
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4
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Notes
to Unaudited Condensed Consolidated Financial
Statements
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5
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Item 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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12
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Item 4.
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CONTROLS
AND PROCEDURES
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14
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PART II - Other
Information
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Item 6.
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EXHIBITS
AND REPORTS ON FORM 8-K
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14
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15
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
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Current
assets:
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Cash and cash
equivalents
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$700,700
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$1,025,100
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Investment
securities
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314,700
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295,500
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Trade accounts
receivable, less allowance for doubtful accounts of $11,600 at
December 31, 2017 and June 30, 2017
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1,475,300
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1,424,400
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Inventories
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2,392,600
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1,961,200
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Prepaid
expenses and other current assets
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146,600
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80,300
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Total current
assets
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5,029,900
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4,786,500
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Property and
equipment, net
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235,600
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199,300
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Intangible assets,
net
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458,300
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579,000
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Goodwill
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705,300
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705,300
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Other
assets
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52,500
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52,500
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Deferred
taxes
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488,600
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505,100
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Total
assets
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$6,970,200
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$6,827,700
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current
liabilities:
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Accounts
payable
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$379,400
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$139,200
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Accrued expenses,
current portion
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466,500
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491,000
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Bank
line of credit
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40,000
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-
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Customer
advances
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321,800
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-
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Contingent
consideration, current portion
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33,000
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175,700
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Notes
payable, current portion
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6,800
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6,700
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Total current
liabilities
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1,247,500
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812,600
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Accrued expenses,
less current portion
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60,000
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60,000
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Notes payable, less
current portion
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2,300
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5,800
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Contingent
consideration payable, less current portion
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121,300
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121,300
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Total
liabilities
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1,431,100
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999,700
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Shareholders’
equity:
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Common stock, $.05
par value; authorized 7,000,000 shares; issued 1,513,914 shares
outstanding at December 31, 2017 and June 30, 2017
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75,700
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75,700
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Additional paid-in
capital
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2,536,400
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2,515,900
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Accumulated other
comprehensive income (loss)
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700
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(3,500)
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Retained
earnings
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2,978,700
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3,292,300
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5,591,500
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5,880,400
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Less
common stock held in treasury at cost, 19,802 shares
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52,400
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52,400
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Total
shareholders’ equity
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5,539,100
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5,828,000
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Total
liabilities and shareholders’ equity
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$6,970,200
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$6,827,700
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For
the Three Month Period Ended
December
31,
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For
the Three Month Period Ended
December
31,
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For
the Six Month Period Ended
December
31,
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For
the Six Month Period Ended
December
31,
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Revenues
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$1,892,400
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$2,683,800
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$3,173,300
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$4,242,900
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Cost of
revenues
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1,126,700
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1,888,900
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1,955,900
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2,778,400
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Gross
profit
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765,700
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794,900
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1,217,400
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1,464,500
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Operating
expenses:
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General and
administrative
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407,900
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409,200
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836,300
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821,600
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Selling
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214,600
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224,200
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415,600
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440,900
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Research and
development
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132,900
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105,000
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262,000
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220,400
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Total
operating expenses
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755,400
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738,400
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1,513,900
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1,482,900
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Income
(loss) from operations
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10,300
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56,500
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(296,500)
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(18,400)
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Other income
(expense):
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Interest
income
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5,200
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8,800
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5,600
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9,100
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Other
income, net
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1,400
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400
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1,400
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5,700
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Interest
expense
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(500)
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(900)
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(600)
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(1,100)
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Total
other income, net
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6,100
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8,300
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6,400
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13,700
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Income
(loss) before income tax expense (benefit)
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16,400
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64,800
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(290,100)
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(4,700)
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Income tax expense
(benefit):
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Current
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71,800
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20,900
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8,000
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(15,400)
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Deferred
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25,600
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(1,400)
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15,500
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14,100
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Total
income tax expense (benefit)
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97,400
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19,500
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23,500
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(1,300)
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Net
income (loss)
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$(81,000)
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$45,300
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$(313,600)
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$(3,400)
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Basic
earnings (loss) per common share
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$(.05)
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$.03
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$(.21)
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$.00
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Diluted
earnings (loss) per common share
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$.(05)
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$.03
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$(.21)
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$.00
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Cash
dividends declared per common share
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$.00
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$.03
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$.00
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$.03
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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For
the Three Month Period Ended
December
31,
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For
the Three Month Period Ended
December
31,
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For
the Six Month Period Ended
December
31,
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For
the Six Month Period Ended
December
31,
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Net income
(loss)
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$(81,000)
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$45,300
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$(313,600)
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$(3,400)
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Other comprehensive
income (loss):
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Unrealized holding
gain (loss)
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arising during
period,
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net of
tax
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1,600
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(8,000)
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4,200
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(6,900)
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Comprehensive
Income (loss)
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$(79,400)
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$37,300
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$(309,400)
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$(10,300)
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For
the Six
Month Period
Ended
December
31,
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For
the Six
Month Period
Ended
December
31,
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Operating
activities:
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Net
loss
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$(313,600)
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$(3,400)
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Adjustments to
reconcile net loss to net
cash used in
operating activities:
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Loss
on sale of investment
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-
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(2,600)
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Depreciation and
amortization
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154,100
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189,500
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Deferred income
taxes
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16,500
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14,100
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Income tax benefit
of stock options exercised
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8,000
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-
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Stock-based
compensation
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12,400
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1,000
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Changes
in operating assets and liabilities:
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Trade accounts
receivable
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(50,900)
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(436,100)
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Inventories
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(431,400)
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287,100
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Prepaid expenses
and other current assets
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(66,300)
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(75,300)
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Accounts
payable
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240,200
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(42,200)
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Customer
advances
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321,800
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17,000
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Accrued
expenses
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(24,500)
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(399,400)
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Total
adjustments
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179,900
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(446,900)
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Net
cash used in operating activities
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(133,700)
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(450,300)
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Investing
activities:
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Redemption
of investment securities, available-for-sale
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-
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11,100
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Purchase of
investment securities, available for sale
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(15,000)
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(18,700)
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Capital
expenditures
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(68,100)
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(4,700)
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Purchase of other
intangible assets
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(1,500)
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(14,700)
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Net
cash used in investing activities
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(84,600)
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(27,000)
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Financing
activities:
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Line
of credit proceeds
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40,000
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250,000
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Payments
for contingent consideration
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(142,700)
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(117,400)
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Principal
payments on notes payable
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(3,400)
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(3,200)
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Net
cash provided by (used in) financing activities
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(106,100)
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129,400
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Net decrease in
cash and cash equivalents
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(324,400)
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(347,900)
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Cash
and cash equivalents, beginning of year
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1,025,100
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1,245,000
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Cash
and cash equivalents, end of period
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$700,700
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$897,100
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Supplemental
disclosures:
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Cash paid during
the period for:
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Income
taxes
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$16,000
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$186,000
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Interest
|
600
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1,100
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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General:
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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, 2017. The results for the three months and six
months ended December 31, 2017, are not necessarily an indication
of the results for the full fiscal year ending June 30,
2018.
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1. Summary of Significant
Accounting Policies
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of Scientific Industries, Inc., Altamira Instruments,
Inc. (“Altamira”), a Delaware corporation and
wholly-owned subsidiary, Scientific Bioprocessing, Inc.
(“SBI”), a Delaware corporation and wholly-owned
subsidiary, and Scientific Packaging Industries, Inc., an inactive
wholly-owned subsidiary (all collectively referred to as the
“Company”). All material intercompany balances and
transactions have been eliminated.
Recent Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2016-01, “Financial
Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities”.
The update addresses certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. For public
business entities, the amendments in this update are effective for
fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Early adoption is permitted only
for certain portions of the ASU related to financial liabilities.
The Company is currently evaluating the impact of the provisions of
this new standard on the consolidated financial
statements.
In
February 2016, the FASB issued ASU No. 2016-02,
“Leases” (Topic 842). The FASB issued this update to
increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. The
updated guidance is effective for annual periods beginning after
December 15, 2018, including interim periods within those fiscal
years. Early adoption of the update is permitted. The Company is
currently evaluating the effect of the new standard.
In
April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers:
Identifying Performance Obligations and Licensing (Topic
606)”. In March 2016, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers: Principal versus
Agent Considerations (Reporting Revenue Gross verses Net) (Topic
606)”. These amendments provide additional clarification and
implementation guidance on the previously issued ASU 2014-09,
“Revenue from Contracts with Customers”. The amendments
in ASU 2016-10 provide clarifying guidance on materiality of
performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and
determining whether an entity’s promise to grant a license
provides a customer with either a right to use an entity’s
intellectual property or a right to access an entity’s
intellectual property. The amendments in ASU 2016-08 clarify how an
entity should identify the specified good or service for the
principal versus agent evaluation and how it should apply the
control principle to certain types of arrangements. The adoption of
ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s
adoption of ASU 2014-09. The Company has performed a review
of the requirements of the new guidance and has identified which of
its revenue streams will be within the scope of ASC 606. The
Company has applied the five-step model of the new standard to a
selection of contracts within each of its revenue streams and has
compared the results to its current accounting practices. Based on
this analysis, the Company does not currently expect a material
impact on the Company’s consolidated financial statements.
The Company is expecting to utilize the modified retrospective
transition method of adoption. The Company is continuing to work
through the remaining steps of the adoption plan to facilitate
adoption effective July 1, 2018. As part of this, the Company is
assessing changes that might be necessary to information technology
systems, processes, and internal controls to capture new data and
address changes in financial reporting. The Company will be
revising its revenue recognition accounting policy and expanding
revenue disclosures to reflect the requirements of ASC 606, which
include disclosures related to the nature, amount, timing and
uncertainty of revenue and cash flows arising from contracts with
customers. Additionally, qualitative and quantitative disclosures
are required about customer contracts, significant judgements and
assets recognized from the costs to obtain or fulfill a
contract.
In May
2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical
Expedients”, which narrowly amended the revenue
recognition guidance regarding collectibility, noncash
consideration, presentation of sales tax and transition and is
effective during the same period as ASU 2014-09.
The
Company is currently evaluating the effect of the
standard.
In
August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and
Cash Payments”. This update provides guidance on how
to record eight specific cash flow issues. This update is effective
for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted and
a retrospective transition method to each period should be
presented. The Company is currently evaluating the effect of this
update on its consolidated financial statements.
In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic
230)”, requiring that the statement of cash flows
explain the change in the total cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. This guidance is effective for fiscal years, and
interim reporting periods therein, beginning after December 15,
2017 with early adoption permitted. The provisions of this guidance
are to be applied using a retrospective approach which requires
application of the guidance for all periods presented. The Company
is currently evaluating the impact of the new standard and does not
expect the adoption will have a material effect on its consolidated
financial statements and disclosures.
Adopted Accounting Pronoucements
In
November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of
Derffered Taxes" (ASU 2015-17") which was effective for
fiscal years begining December 15, 2016 (fiscal 2018 for the
Company). ASU 2015-17 required that deferred tax assets and
liabilities be net and classified as noncurrent on the balance
sheet rather than presenting deferred taxes into current and
noncurrent amounts. The Company adopted ASU 2015-07 effective for
the first fiscal quarter of the year ending June 30, 2018. The
Company applied the new guidance on a respective basis, resulting
in a reclassification of current deferred tax assets totaling
$129,000 against long term deferred tax assets in the Company's
Condensed Consolidated Balance Sheet as of June 30, 2017. The
adoption of this ASU had no impact on the Company’s Condensed
Consolidated Statement of Operations.
On
December 22, 2017, the Staff of the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 118,
“Income Tax Accounting
Implications of the Tax Cuts and Jobs Act, or SAB
118,” which addresses
situations where the accounting under the FASB, Accounting
Standards Codification No. 740, Income Taxes, or ASC 740 is incomplete
for certain income tax effects of Public Law No. 115-97, commonly
referred to as the Tax Cuts and Jobs Act, or the 2017 Tax Act, by
the time an entity issues its financial statements for the fiscal
period that includes the date the 2017 Tax Act was
enacted.
Under
ASC 740, entities are required to adjust current and deferred tax
assets and liabilities for the effects of changes in tax laws or
rates at their date of enactment. However, pursuant to SAB 118, if
an entity does not have the necessary information available,
prepared, or analyzed for certain income tax effects of the 2017
Tax Act at the time an entity’s financial statements are
issued, an entity shall apply ASC 740 based on the provisions of
the tax laws that were in effect immediately prior to the enactment
of the 2017 Tax Act. If the accounting for certain income tax
effects of the 2017 Tax Act is incomplete, but an entity can
determine a reasonable estimate for those effects, an entity can
record provisional amounts during a measurement period, which ends
on the earlier of when an entity has obtained, prepared, and
analyzed the information necessary to complete the accounting
requirements of ASC 740 and December 22, 2017.
The
2017 Tax Act includes significant changes to the U.S. income tax
system. The 2017 Tax Act contains numerous provisions impacting the
Company, the most significant of which reduces the Federal
corporate statutory rate from 35% to 21%. The Company is a
fiscal-year end taxpayer and is required to use a blended statutory
federal tax rate, inclusive of the Federal rate change enacted on
December 22, 2017 to compute its effective rate for the three and
six months ended December 31, 2017. The various provisions under
the 2017 Tax Act most relevant to the Company have been considered
in the preparation of the financial statements as of December 31,
2017. However, as of December 31, 2017, the Company had not
completed its accounting for the tax effects of the enactment of
2017 Tax act. The Company’s provision for income taxes for
the three and six months ended December 31, 2017 is based on
reasonable estimates of the effects of its implementation and
existing deferred tax balances. The Company estimates it will
record a one-time non-cash charge of approximately $30,000 for the
fiscal year ended June 30, 2018 due to an estimated reduction in
deferred tax assets as a result of the reduction in the Federal tax
rate. We expect to complete our accounting during the one year
measurement period from the enactment date.
2. 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 and laboratory and
pharmacy balances and scales (“Benchtop Laboratory Equipment
Operations”), 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
Operations”) and the design and marketing of bioprocessing
systems and products and related royalty income
(“Bioprocessing Systems”).
Segment
information is reported as follows:
|
|
Benchtop
Laboratory
Equipment
|
Catalyst
Research
Instruments
|
|
|
|
|
Three Months
Ended December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,686,200
|
$153,500
|
$52,700
|
$-
|
$1,892,400
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
815,300
|
2,600
|
-
|
-
|
817,900
|
|
|
|
|
|
|
|
|
Income
(Loss) From
Operations
|
122,000
|
(103,400)
|
(8,300)
|
-
|
10,300
|
|
|
|
|
|
|
|
|
Assets
|
4,085,800
|
1,613,200
|
467,900
|
803,300
|
6,970,200
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
33,000
|
1,900
|
2,500
|
-
|
37,400
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
67,000
|
700
|
9,300
|
-
|
77,000
|
|
|
Benchtop
Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
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
|
Approximately
31% and 55% of net benchtop laboratory equipment sales (48% and 30%
of total revenues) for the three month periods ended December 31,
2017 and 2016, respectively, were derived from the Company’s
main product, the Vortex-Genie 2 mixer, excluding
accessories.
Approximately
12% and 21% of total benchtop laboratory equipment sales (19% and
11% of total revenues) were derived from the Torbal Scales Division
for the three months ended December 31, 2017 and 2016,
respectively.
For the
three months ended December 31, 2017 and 2016, respectively, two
customers accounted in the aggregate for approximately 10% and 17%
of net sales of the Benchtop Laboratory Equipment Operations (15%
and 9% of the Company’s total revenues). Sales of catalyst
research instruments generally comprise a few very large orders
averaging approximately $50,000 per order to a limited number of
customers, who differ from order to order. Sales to one and three
customers during the three months ended December 31, 2017 and 2016,
accounted for approximately 74% and 99% of the Catalyst Research
Instrument Operations’ revenues and 7% and 44% of the
Company’s total revenues, respectively.
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
Six Months
Ended December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$2,885,600
|
$182,300
|
$105,400
|
$-
|
$3,173,300
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
1,317,600
|
9,000
|
-
|
-
|
1,326,600
|
|
|
|
|
|
|
|
|
Income
(Loss) From
Operations
|
28,100
|
(287,500)
|
(37,100)
|
-
|
(296,500)
|
|
|
|
|
|
|
|
|
Assets
|
4,085,800
|
1,613,200
|
467,900
|
803,300
|
6,970,200
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
65,200
|
1,900
|
2,500
|
-
|
69,600
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
131,900
|
3,500
|
18,700
|
-
|
154,100
|
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
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
|
Approximately
36% and 52% of net benchtop laboratory equipment sales (46% and 36%
of total revenues) for the six month periods ended December 31,
2017 and 2016, respectively, were derived from the Company’s
main product, the Vortex-Genie 2 mixer, excluding
accessories.
Approximately
16% and 23% of total benchtop laboratory equipment sales (21% and
16% of total revenues) were derived from the Torbal Scales Division
for the six months ended December 31, 2017 and 2016, respectively.
For the six months ended December 31, 2017 and 2016, respectively,
two customers accounted in the aggregate for approximately 11% and
16% of net sales of the Benchtop Laboratory Equipment Operations
(15% and 11% of the Company’s total revenues).
Sales
of catalyst research instruments generally comprise a few very
large orders averaging approximately $50,000 per order to a limited
number of customers, who differ from order to order. Sales to one
and six customers during the six months ended December 31, 2017 and
2016, accounted for approximately 64% and 97% of the Catalyst
Research Instrument Operations’ revenues and 4% and 29% of
the Company’s total revenues, respectively.
3. 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.
In
valuing assets and liabilities, the Company is required to maximize
the use of quoted market prices and minimize the use of
unobservable inputs. The Company calculated the fair value of its
Level 1 and 2 instruments based on the exchange traded price of
similar or identical instruments where available or based on other
observable instruments. These calculations take into consideration
the credit risk of both the Company and its counterparties. The
Company has not changed its valuation techniques in measuring the
fair value of any financial assets and liabilities during the
period.
The
fair value of the contingent consideration obligations are based on
a probability weighted approach derived from the estimates of
earn-out criteria and the probability assessment with respect to
the likelihood of achieving those criteria. The measurement is
based on significant inputs that are not observable in the market,
therefore, the Company classifies this liability as Level 3 in the
following tables.
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, 2017 and June 30,
2017 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, 2017
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$700,700
|
$700,700
|
$-
|
$-
|
|
Available for sale
securities
|
314,700
|
314,700
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$1,015,400
|
$1,015,400
|
$-
|
$-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
$154,300
|
$-
|
$-
|
$154,300
|
|
|
|
Fair
Value Measurements Using Inputs Considered as
|
|
|
Fair
Value at June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$1,025,100
|
$1,025,100
|
$-
|
$-
|
|
Available for sale
securities
|
295,500
|
295,500
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$1,320,600
|
$1,320,600
|
$-
|
$-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
$297,000
|
$-
|
$-
|
$297,000
|
The
following table sets forth an analysis of changes during the six
months ended December 31, 2017 and 2016 in Level 3 financial
liabilities of the Company:
|
|
|
|
|
Beginning
balance
|
$297,000
|
$346,300
|
|
Payments
|
(142,700)
|
(117,400)
|
|
|
|
|
|
Ending
balance
|
$154,300
|
$228,900
|
Investments
in marketable securities classified as available-for-sale by
security type at December 31, 2017 and June 30, 2017 consisted of
the following:
|
|
|
|
Unrealized Holding
Gain (Loss)
|
|
At December 31,
2017:
|
|
|
|
|
Available for
sale:
|
|
|
|
|
Equity
securities
|
$46,300
|
$66,800
|
$20,500
|
|
Mutual
funds
|
267,700
|
247,900
|
(19,800)
|
|
|
|
|
|
|
|
$314,000
|
$314,700
|
$700
|
|
|
|
|
Unrealized Holding
Gain (Loss)
|
|
At June 30,
2017:
|
|
|
|
|
Available for
sale:
|
|
|
|
|
Equity
securities
|
$37,000
|
$50,800
|
$13,800
|
|
Mutual
funds
|
262,000
|
244,700
|
(17,300)
|
|
|
|
|
|
|
|
$299,000
|
$295,500
|
$(3,500)
|
4. Inventories
Inventories
are valued at the lower of cost (determined on a first-in,
first-out basis) or net realizable value, and have been reduced by
an allowance for excess and obsolete inventories. The estimate is
based on managements review of inventories on hand compared to
estimated future usage and sales. Cost of work-in-process and
finished goods inventories include material, labor, and
manufacturing overhead.
|
|
|
|
|
|
|
|
|
Raw
materials
|
$1,502,000
|
$1,373,800
|
|
Work-in-process
|
476,300
|
166,500
|
|
Finished
goods
|
414,300
|
420,900
|
|
|
|
|
|
|
$2,392,600
|
$1,961,200
|
5. 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 at December 31, 2017
and June 30, 2017, all of which is expected to be deductible for
tax purposes.
The
components of other intangible assets are as follows:
|
|
Useful
Lives
|
|
|
|
|
At December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
trademarks
|
5/10
yrs.
|
$662,800
|
$577,300
|
$85,500
|
|
Trade
names
|
6 yrs.
|
140,000
|
89,400
|
50,600
|
|
Websites
|
5 yrs.
|
210,000
|
161,000
|
49,000
|
|
Customer
relationships
|
9/10
yrs.
|
357,000
|
288,100
|
68,900
|
|
Sublicense
agreements
|
10
yrs.
|
294,000
|
180,100
|
113,900
|
|
Non-compete
agreements
|
5 yrs.
|
384,000
|
321,000
|
63,000
|
|
IPR&D
|
3 yrs.
|
110,000
|
110,000
|
-
|
|
Other
intangible assets
|
5
yrs.
|
196,000
|
168,600
|
27,400
|
|
|
|
|
|
|
|
$2,353,800
|
$1,895,500
|
$458,300
|
|
|
Useful
Lives
|
|
|
|
|
|
|
|
|
|
|
At June 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
trademarks
|
5/10
yrs.
|
$662,800
|
$541,100
|
$121,700
|
|
Trade
names
|
6 yrs.
|
140,000
|
77,800
|
62,200
|
|
Websites
|
5 yrs.
|
210,000
|
140,000
|
70,000
|
|
Customer
relationships
|
9/10
yrs.
|
357,000
|
281,400
|
75,600
|
|
Sublicense
agreements
|
10
yrs.
|
294,000
|
165,400
|
128,600
|
|
Non-compete
agreements
|
5 yrs.
|
384,000
|
294,000
|
90,000
|
|
IPR&D
|
3 yrs.
|
110,000
|
110,000
|
-
|
|
Other
intangible assets
|
5
yrs.
|
194,500
|
163,600
|
30,900
|
|
|
|
|
|
|
|
$2,352,300
|
$1,773,300
|
$579,000
|
Total
amortization expense was $61,100 and $76,200 for the three months
ended December 31, 2017 and 2016, respectively and $122,200 and
$154,100 for the six months ended December 31, 2017 and 2016,
respectively. As of December 31, 2017, estimated future
amortization expense related to intangible assets is $124,700 for
the remainder of the fiscal year ending June 30, 2018, $185,800 for
fiscal 2019, $65,400 for fiscal 2020, $48,000 for fiscal 2021,
$27,000 for fiscal 2022, and $7,400 thereafter.
6. Earnings (Loss) Per
Common Share
Earnings
(loss) per common share data was computed as follows:
|
|
For
the Three Month Period Ended December 31, 2017
|
For
the Three Month Period Ended December 31, 2016
|
For
the Six Month Period Ended December 31, 2017
|
For
the Six Month Period Ended December 31, 2016
|
|
|
|
|
|
|
|
Net
income (loss)
|
$(81,000)
|
$45,300
|
$(313,600)
|
$(3,400)
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
1,494,112
|
1,489,112
|
1,494,112
|
1,489,112
|
|
|
|
|
|
|
|
Basic
and diluted earnings (loss) per common share
|
$(.05)
|
$.03
|
$(.21)
|
$(.00)
|
Approximately
82,000 and 43,500 shares of the Company's common stock issuable
upon the exercise of outstanding options were excluded from the
calculation of diluted earnings per common share for the three and
six month periods ended December 31, 2017 and 2016, respectively,
because the effect would be anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking statements. 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,
success of marketing strategy, success of expansion efforts, impact
of competition, adverse economic conditions, and other factors
affecting the Company’s business that are beyond the
Company’s control, which are discussed elsewhere in this
report. Consequently, no forward-looking statement can be
guaranteed. The Company undertakes no obligation to publicly update
forward-looking statements, whether as a result of new information,
future events or otherwise. This Management’s Discussion and
Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Company’s financial statements
and the related notes included elsewhere in this
report.
Overview.
The Company reflected income before income tax expense of $16,400
for the three months ended December 31, 2017 compared to $64,800
for the three months ended December 31, 2016, primarily due to lack
of sales of catalyst research instruments during the period and
product development expenses for a new automated pill counter for
the Laboratory Equipment Operations. The Company reflected a loss
before income tax benefit of $290,100 for the six months ended
December 31, 2017 compared to $4,700 for the six months ended
December 31, 2016 mainly due to decreased catalyst research
instrument sales and product development costs as previously
discussed. The results reflected total non-cash amounts for
depreciation and amortization of $77,000 and $154,100 for the three
and six month periods ended December 31, 2017 compared to $93,800
and $189,500 for the corresponding three and six month periods in
2016.
Results of Operations.
The Three Months Ended December 31, 2017 Compared with The Three
Months Ended December 31, 2016
Net
revenues for the three months ended December 31, 2017 decreased
$791,400 (29.5%) to $1,892,400 from $2,683,800 for the three months
ended December 31, 2016, reflecting a decrease of $1,038,600 in net
sales of catalyst research instruments due to decreased orders from
Original Equipment Manufacturer OEM customers and lack of large
orders, partially offset by increased sales of benchtop laboratory
equipment of $219,400 and bioprocessing royalties of $27,800. The
benchtop laboratory equipment sales reflected $359,900 of Torbal
brand product sales for the three months ended December 31, 2017,
compared to $303,500 in the three months ended December 31, 2016.
As of December 31, 2017, the order backlog for catalyst research
instruments was $752,500, all of which is expected to be shipped
during fiscal year ending June 30, 2018, compared to $397,300 as of
December 31, 2016.
The
overall gross profit percentage for the three months ended December
31, 2017 was 40.5% compared to 29.6% for the three months ended
December 31, 2016. The current year period gross margin for the
Benchtop Laboratory Equipment Operations was higher due to the
effect of the allocation of fixed costs on higher sales. The
catalyst research instruments was negatively impacted by the lower
sales.
General
and administrative expenses for the three months ended December 31,
2017 amounted to $407,900 compared to $409,200 for the three months
ended December 31, 2016.
Selling
expenses for the three months ended December 31, 2017 decreased
$9,600 (4.3%) to $214,600 from $224,200 for the three months ended
December 31, 2016, due to lower sales related expenses for the
Catalyst Research Instruments Operations.
Research
and development expenses increased by $27,900 (26.6%) to $132,900
for the three months ended December 31, 2017 compared to $105,000
for the three months ended December 31, 2016, primarily due to
increased new product development costs incurred by the Benchtop
Laboratory Equipment Operations related to the Torbal Scales
Division.
Total
other income decreased by $2,200 (26.5%) from $8,300 for the three
months ended December 31, 2016 to $6,100 for the three months ended
December 31, 2017 due to lower interest on its investment
securities.
The
Company reflected an income tax expense of $97,400 for the three
months ended December 31, 2017 compared to income tax expense of
$19,500 for the three months ended December 31, 2016, primarily due
to a revision of the estimate of the Company's expected
annual income.
As a
result of the foregoing, the Company recorded a net loss of $81,000
for the three months ended December 31, 2017 compared to net income
$45,300 for the three months ended December 31, 2016.
The Six Months Ended December 31, 2017 Compared with The Six Months
Ended December 31, 2016
Net
revenues for the six months ended December 31, 2017 decreased
$1,069,600 (25.2%) to $3,173,300 from $4,242,900 for the six months
ended December 31, 2016, reflecting a decrease of $1,087,300 in net
sales of catalyst research instruments due to decreased orders from
Original Equipment Manufacturer OEM customers and lack of large
orders, and a decrease of $38,000 in sales of benchtop laboratory
equipment derived from the Torbal Division, partially offset by a
$55,700 increase in bioprocessing royalties. The benchtop
laboratory equipment sales reflected $664,200 of Torbal brand
product sales for the six months ended December 31, 2017, compared
to $685,500 in the six months ended December 31, 2016.
The
overall gross profit percentage for the six months ended December
31, 2017 was 38.4% compared to 34.5% for the six months ended
December 31, 2016 as a result of the Benchtop Laboratory
Equipment Operations (which is sold at higher margins) consisting
of a higher percentage of total sales for the year.
General
and administrative expenses for the six months ended December 31,
2017 increased slightly by $14,700 (1.8%) to $836,300 compared to
$821,600 for the six months ended December 31, 2016.
Selling
expenses for the six months ended December 31, 2017 decreased
$25,300 (5.7%) to $415,600 from $440,900 for the six months ended
December 31, 2016, due to lower sales related expenses for the
Catalyst Research Instruments Operations.
Research
and development expenses increased by $41,600 (18.9%) to $262,000
for the six months ended December 31, 2017 compared to $220,400 for
the six months ended December 31, 2016, primarily due to increased
new product development costs incurred by the Benchtop Laboratory
Equipment Operations related to the Torbal Scales
Division.
Total
other income decreased by $7,300 (53.3%) from $13,700 for the six
months ended December 31, 2016 to $6,400 for the six months ended
December 31, 2017 due to lower interest on its investment
securities and miscellaneous income items.
The
Company reflected an income tax expense of $23,500 for the six
months ended December 31, 2017 compared to an income tax benefit of
$1,300 for the six months ended December 31, 2016, primarily due to
the statutory federal tax rate change resulting from the recently
enacted 2017 Tax Act, including a write off of deferred tax assets
of $15,500.
As a
result of the foregoing, the Company recorded a net loss of
$313,600 for the six months ended December 31, 2017 compared to
$3,400 for the six months ended December 31, 2016.
Liquidity and Capital Resources. Cash and cash equivalents
decreased by $324,400 to $700,700 as of December 31, 2017 from
$1,025,100 as of June 30, 2017 primarily due to decreased cash
generated by the Catalyst Research Instrument Operations and
increased inventories.
Net cash used in operating activities was $133,700 for the six
months ended December 31, 2017 compared to $450,300 used during the
six months ended December 31, 2016. The current period reflected
higher accounts payable and customer advances, partially offset by
increased prepaid expenses and higher inventories. Net cash used in
investing activities was $84,600 for the six months ended December
31, 2017 compared to $27,000 used during the six months ended
December 31, 2016 principally due to new capital equipment
purchased during the current year period by the Benchtop Laboratory
Equipment Operations. The Company used $106,100 in financing
activities in the six months ended December 31, 2017 compared to
cash provided of $129,400 in the six months ended December 31, 2016
mainly due to decreased proceeds under the line of credit in the
current year.
The Company's working capital decreased by $191,500 to $3,782,400
as of December 31, 2017 compared to $3,973,900, as of June 30, 2017
due to increased capital expenditures and a net loss incurred
during the current period.
The Company has a Demand Line of Credit through June 2018 with
First National Bank of Pennsylvania which provides for borrowings
of up to $300,000 for regular working capital needs, bearing
interest at prime, currently 4.5%. Advances on the line, 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, 2017 $40,000 which
was borrowed by our subsidiary, Altamira Instruments, was
outstanding under such line. In addition, the Company utilized
$245,400 of its borrowing availability under the line as collateral
for a warranty standby letter of credit required during a two year
warranty period as a condition of sale for a large order of
catalyst research instruments shipped in a prior fiscal year and
installed in the first quarter of fiscal 2018, leaving an available
borrowing balance of $14,600 under the line of credit.
Management believes that the Company will be able to meet its cash
flow needs during the 12 months ending June 30, 2018 from its
available financial resources including its line of credit, its
cash and investment securities, and operations.
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
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Exhibit
Number
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Description
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Reports
on Form 8-K: None
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Date:
February 14, 2018
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SCIENTIFIC
INDUSTRIES, INC.
(Registrant)
/s/
Helena R. Santos
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Helena
R. Santos
President,
Chief Executive Officer, Treasurer
Chief
Financial and Principal Accounting Officer
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