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 March 31,
2018
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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
May 1, 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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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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$678,600
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$1,025,100
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Investment
securities
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309,100
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295,500
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Trade accounts
receivable, less allowance for doubtful accounts of $11,600 at
March 31, 2018
and June 30,
2017
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1,406,700
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1,179,000
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Inventories
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2,701,600
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1,961,200
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Prepaid expenses
and other current assets
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92,300
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80,300
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Total current
assets
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5,188,300
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4,541,100
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Property and
equipment, net
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223,100
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199,300
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Intangible assets,
net
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399,200
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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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Trade accounts
receivable, less current portion
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245,400
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245,400
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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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544,500
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505,100
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Total
assets
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$7,358,300
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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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$394,400
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$139,200
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Accrued expenses,
current portion
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398,200
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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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356,000
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-
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Contingent
consideration, current portion
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215,000
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175,700
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Notes payable,
current portion
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6,900
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6,700
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Total current
liabilities
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1,410,500
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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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600
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5,800
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Contingent
consideration payable, less current portion
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385,000
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121,300
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1,856,100
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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
March 31, 2018 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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2,542,500
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2,515,900
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Accumulated other
comprehensive loss
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(4,400)
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(3,500)
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Retained
earnings
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2,940,800
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3,292,300
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5,554,600
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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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5,502,200
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5,828,000
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Total liabilities
and shareholders’ equity
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$7,358,300
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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
March
31,
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For
the Three
Month Period
Ended
March
31,
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For
the Nine
Month Period
Ended
March
31,
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For
the Nine
Month Period
Ended
March
31,
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Revenues
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$2,099,300
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$1,910,900
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$5,272,600
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$6,153,800
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Cost of
revenues
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1,331,500
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1,054,800
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3,287,300
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3,833,200
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Gross
profit
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767,800
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856,100
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1,985,300
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2,320,600
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Operating
expenses:
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General and
administrative
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470,200
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435,100
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1,306,600
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1,256,700
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Selling
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263,800
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223,900
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679,500
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664,800
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Research and
development
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117,700
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114,100
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379,700
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334,500
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Total operating
expenses
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851,700
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773,100
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2,365,800
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2,256,000
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Income (loss) from
operations
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(83,900)
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83,000
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(380,500)
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64,600
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Other income
(expense):
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Interest
income
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-
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1,100
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5,600
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10,100
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Other
income, net
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500
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-
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1,900
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5,700
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Interest
expense
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(500)
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(1,200)
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(1,100)
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(2,200)
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Total other income
(expense), net
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-
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(100)
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6,400
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13,600
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Income (loss)
before income tax expense (benefit)
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(83,900)
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82,900
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(374,100)
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78,200
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Income tax expense
(benefit):
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Current
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9,700
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38,900
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17,800
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23,400
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Deferred
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(55,900)
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(21,600)
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(40,400)
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(7,400)
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Total income tax
expense (benefit)
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(46,200)
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17,300
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(22,600)
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16,000
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Net income
(loss)
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$(37,700)
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$65,600
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$(351,500)
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$62,200
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Basic earnings
(loss) per common share
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$(.03)
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$.04
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$(.24)
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$.04
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Diluted earnings
(loss) per common share
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$(.03)
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$.04
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$(.24)
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$.04
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Cash dividends
declared per common share
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$-
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$.03
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$-
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$.03
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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For
the Three Month
Period
Ended
March
31,
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For
the Three Month
Period
Ended
March 31
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For
the Nine
Month Period
Ended
March
31,
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For
the Nine
Month Period
Ended
March
31,
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Net income
(loss)
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$(37,700)
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$65,600
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$(351,500)
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$62,200
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Other comprehensive
income (loss):
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Unrealized holding
gain (loss) arising during period net of tax
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(5,100)
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1,300
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(900)
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(5,600)
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Comprehensive
income (loss)
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$(42,800)
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$66,900
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$(352,400)
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$56,600
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See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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For
the Nine
Month Period
Ended
March
31,
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For
the Nine
Month Period
Ended
March
31,
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Operating
activities:
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Net income
(loss)
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$(351,500)
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$62,200
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Adjustments to
reconcile net income (loss) to net
cash provided by
(used in) operating activities:
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Gain
on sale of investment
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-
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(3,200)
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Depreciation and
amortization
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230,100
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276,500
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Deferred income tax
expense
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(39,400)
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(7,400)
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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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18,600
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1,300
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Change in fair
value of contingent consideration
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445,700
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-
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Changes in
operating assets and liabilities:
|
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Trade accounts
receivable
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(227,700)
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149,600
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Inventories
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(740,400)
|
206,200
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Prepaid expenses
and other current assets
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(12,000)
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(25,900)
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Accounts
payable
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255,200
|
700
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Long term accounts
receivable
|
-
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(245,400)
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Customer
advances
|
356,000
|
107,900
|
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Accrued
expenses
|
(92,800)
|
(317,700)
|
|
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Total
adjustments
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201,300
|
142,600
|
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Net cash provided
by (used in) operating activities
|
(150,200)
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204,800
|
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Investing
activities:
|
|
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Redemption
of investment securities, available-for-sale
|
-
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11,100
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Purchase
of investment securities, available -for -sale
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(14,500)
|
(18,700)
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Capital
expenditures
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(70,500)
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(18,200)
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Purchase
of intangible assets
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(3,600)
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(12,800)
|
|
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Net cash used in
investing activities
|
(88,600)
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(38,600)
|
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Financing
activities:
|
|
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Line
of credit proceeds
|
40,000
|
250,000
|
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Line
of credit repayments
|
-
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(250,000)
|
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Payments
for contingent consideration
|
(142,700)
|
(166,100)
|
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Cash
dividend declared and paid
|
-
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(44,500)
|
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Proceeds
from exercise of stock options
|
-
|
15,500
|
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Principal
payments on notes payable
|
(5,000)
|
(4,800)
|
|
|
|
|
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Net cash used in
financing activities
|
(107,700)
|
(199,900)
|
|
|
|
|
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Net decrease in
cash and cash equivalents
|
(346,500)
|
(33,700)
|
|
|
|
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Cash and cash
equivalents, beginning of year
|
1,025,100
|
1,245,000
|
|
|
|
|
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Cash and cash
equivalents, end of period
|
$678,600
|
$1,211,300
|
|
|
|
|
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Cash paid during
the period for:
|
|
|
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Income
taxes
|
$16,000
|
$213,500
|
|
Interest
|
1,100
|
2,200
|
See
notes to unaudited condensed consolidated financial
statements
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, 2017. The results for the three months and nine
months ended March 31, 2018, are not necessarily an indication of
the results for the full fiscal year ending June 30,
2018.
|
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 collectability, 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 adoption
of this ASU had no impact on the Company's Condensed Consolidated
Statements of Cash Flows.
Adopted Accounting Pronoucements
In
November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of
Deferred Taxes" (“ASU 2015-17") which was effective
for fiscal years beginning 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 retrospective 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 March 31,
2018. However, 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 nine months ended
March 31, 2018 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.
Reclassification
Accounts receivable of $245,400 was reclassified from current to
long-term assets on the balance sheet as of June 30, 2017 to
conform to the current period's presentation.
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
March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,550,700
|
$110,700
|
$437,900
|
$-
|
$2,099,300
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
620,200
|
105,400
|
-
|
-
|
725,600
|
|
|
|
|
|
|
|
|
Income (Loss)
From
Operations
|
78,200
|
(74,400)
|
(87,700)
|
-
|
(83,900)
|
|
|
|
|
|
|
|
|
Assets
|
3,930,600
|
1,680,800
|
893,300
|
853,600
|
7,358,300
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
4,500
|
-
|
-
|
-
|
4,500
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
67,400
|
(800)
|
9,400
|
-
|
76,000
|
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
Three Months Ended
March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,410,800
|
$359,800
|
$140,300
|
$-
|
$1,910,900
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
611,400
|
37,100
|
-
|
-
|
648,500
|
|
|
|
|
|
|
|
|
Income (Loss)
From
Operations
|
88,900
|
(82,400)
|
76,500
|
-
|
83,000
|
|
|
|
|
|
|
|
|
Assets
|
4,170,900
|
1,822,200
|
485,700
|
719,200
|
7,198,000
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
4,600
|
-
|
7,000
|
-
|
11,600
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
73,500
|
1,600
|
12,000
|
-
|
87,100
|
Approximately
53% and 54% of net benchtop laboratory equipment sales (39% and 40%
of total revenues) for the three month periods ended March 31, 2018
and 2017, respectively, were derived from the Company’s main
product, the Vortex-Genie 2 mixer, excluding
accessories.
Approximately
21% of total benchtop laboratory equipment sales (16% of total
revenues) were derived from the Torbal Scales Division for both the
three months ended March 31, 2018 and 2017,
respectively.
For the
three months ended March 31, 2018 and 2017, respectively, two
customers accounted in the aggregate for approximately 17% and 15%
of net sales of the Benchtop Laboratory Equipment Operations (13%
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 two
and two different customers during the three months ended March 31,
2018 and 2017, accounted for approximately 89% and 76% of the
Catalyst Research Instrument Operations’ revenues and 5% and
14% of the Company’s total revenues,
respectively.
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
Nine Months Ended
March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$4,436,300
|
$293,000
|
$543,300
|
$-
|
$5,272,600
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
1,937,800
|
114,400
|
-
|
-
|
2,052,200
|
|
|
|
|
|
|
|
|
Income (Loss)
From
Operations
|
106,300
|
(361,900)
|
(124,900)
|
-
|
(380,500)
|
|
|
|
|
|
|
|
|
Assets
|
3,930,600
|
1,680,800
|
893,300
|
853,600
|
7,358,300
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
69,700
|
1,900
|
2,500
|
-
|
74,100
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
199,300
|
2,700
|
28,100
|
-
|
230,100
|
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
|
|
|
|
Nine Months Ended March
31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$4,334,400
|
$1,629,400
|
$190,000
|
$-
|
$6,153,800
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
1,924,400
|
52,200
|
-
|
-
|
1,976,600
|
|
|
|
|
|
|
|
|
Income (Loss)
From
Operations
|
252,900
|
(197,400)
|
9,100
|
-
|
64,600
|
|
|
|
|
|
|
|
|
Assets
|
4,170,900
|
1,822,200
|
485,700
|
719,200
|
7,198,000
|
|
|
|
|
|
|
|
|
Long-Lived
Asset
Expenditures
|
18,200
|
-
|
12,800
|
-
|
31,000
|
|
|
|
|
|
|
|
|
Depreciation
and
Amortization
|
226,900
|
12,600
|
37,000
|
-
|
276,500
|
Approximately
51% and 53% of net benchtop laboratory equipment sales (43% and 37%
of total revenues) for the nine month periods ended March 31, 2018
and 2017, respectively, were derived from the Company’s main
product, the Vortex-Genie 2 mixer, excluding
accessories.
Approximately
22% and 23% of total benchtop laboratory equipment sales (19% and
16% of total revenues) were derived from the Torbal Scales Division
for the nine months ended March 31, 2018 and 2017, respectively.
For the nine months ended March 31, 2018 and 2017, respectively,
two customers accounted in the aggregate for approximately 16% of
net sales of the Benchtop Laboratory Equipment Operations (14% 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 three
and four customers during the nine months ended March 31, 2018 and
2017, accounted for approximately 79% and 92% of the Catalyst
Research Instrument Operations’ revenues and 4% and 24% 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 March 31, 2018 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 March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$678,600
|
$678,600
|
$-
|
$-
|
|
Available-for- sale
securities
|
309,100
|
309,100
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$987,700
|
$987,700
|
$-
|
$-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
$600,000
|
$-
|
$-
|
$600,000
|
|
|
|
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 nine
months ended March 31, 2018 and 2017 in Level 3 financial
liabilities of the Company:
|
|
|
|
|
Beginning
balance
|
$297,000
|
$346,300
|
|
Increase in
contingent consideration liability
|
445,700
|
-
|
|
Payments
|
(142,700)
|
(166,100)
|
|
|
|
|
|
Ending
balance
|
$600,000
|
$180,200
|
Investments
in marketable securities classified as available-for-sale by
security type at March 31, 2018 and June 30, 2017 consisted of the
following:
|
|
|
|
Unrealized Holding
Gain (Loss)
|
|
At March 31,
2018:
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
Equity
securities
|
$45,700
|
$63,300
|
$17,600
|
|
Mutual
funds
|
267,800
|
245,800
|
(22,000)
|
|
|
|
|
|
|
|
$313,500
|
$309,100
|
$(4,400)
|
|
|
|
|
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
|
$1,525,400
|
$1,373,800
|
|
Work-in-process
|
831,000
|
166,500
|
|
Finished
goods
|
345,200
|
420,900
|
|
|
|
|
|
|
$2,701,600
|
$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 March 31, 2018 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 March 31,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
trademarks
|
5/10
yrs.
|
$662,800
|
$595,300
|
$67,500
|
|
Trade
names
|
6 yrs.
|
140,000
|
95,300
|
44,700
|
|
Websites
|
5 yrs.
|
210,000
|
171,500
|
38,500
|
|
Customer
relationships
|
9/10
yrs.
|
357,000
|
291,400
|
65,600
|
|
Sublicense
agreements
|
10
yrs.
|
294,000
|
187,400
|
106,600
|
|
Non-compete
agreements
|
5 yrs.
|
384,000
|
334,500
|
49,500
|
|
IPR&D
|
3 yrs.
|
110,000
|
110,000
|
-
|
|
Other intangible
assets
|
5 yrs.
|
198,000
|
171,200
|
26,800
|
|
|
|
|
|
|
|
$2,355,800
|
$1,956,600
|
$399,200
|
|
|
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 $61,200 and $69,900 for the three months
ended March 31, 2018 and 2017, respectively and $183,400 and
$224,000 for the nine months ended March 31, 2018 and 2017,
respectively. As of March 31, 2018, estimated future amortization
expense related to intangible assets is $60,200 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 $12,800 thereafter.
6. Earnings (Loss) Per
Common Share
Earnings
(loss) per common share data was computed as follows:
|
|
For
the Three Month Period Ended
March 31,
2018
|
For
the Three Month Period Ended
March 31,
2017
|
For
the Nine Month Period Ended
March 31,
2018
|
For
the Nine Month Period Ended
March 31,
2017
|
|
|
|
|
|
|
|
Net income
(loss)
|
$(37,700)
|
$65,600
|
$(351,500)
|
$62,200
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
1,494,112
|
1,492,334
|
1,494,112
|
1,490,189
|
|
Effect of dilutive
securities
|
-
|
38
|
-
|
1,309
|
|
Weighted average
dilutive common shares outstanding
|
1,494,112
|
1,492,372
|
1,494,112
|
1,491,498
|
|
|
|
|
|
|
|
Basic earnings
(loss) per common share
|
$(.03)
|
$.04
|
$(.24)
|
$.04
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per common share
|
$(.03)
|
$.04
|
$(.24)
|
$.04
|
Approximately
82,000 and 33,500 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
nine month periods ended March 31, 2018 and 2017, 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 a loss before income tax benefit of $83,900
for the three months ended March 31, 2018 compared to income before
tax expense of $82,900 for the three months ended March 31, 2017,
primarily due to increase in contingent consideration liability
resulting from increased royalty revenues for the Bioprocessing
Systems Operations. The Company reflected a loss before income tax
benefit of $374,100 for the nine months ended March 31, 2018
compared to income before income tax expense of $78,200 for the
nine months ended March 31, 2017 mainly due to the increase in
contingent consideration liability for the Bioprocessing Systems
Operations and reduced income from the Catalyst Research
Instruments Operations resulting from decreased catalyst research
instrument sales. The results reflected total non-cash amounts
for depreciation, amortization and contingent consideration
liability adjustments totaling $521,700 and $675,800 for the three
and nine month periods ended March 31, 2018 compared to $87,100 and
$276,500 for the corressponding three and nine month periods in
2017.
Results of Operations.
The Three months ended March 31, 2018 Compared with The Three
Months Ended March 31, 2017
Net
revenues for the three months ended March 31, 2018 increased
$188,400 (9.9%) to $2,099,300 from $1,910,900 for the three months
ended March 31, 2017, reflecting an increase of $297,600 in royalty
revenues earned by the Bioprocessing Systems Operations, $139,900
increase in net sales of benchtop laboratory equipment, partially
offset by a $249,100 decrease in catalyst research instruments
sales due to decreased orders from Original Equipment Manufacturer
("OEM") customers and lack of large orders. As of March 31, 2018,
the order backlog for catalyst research instruments was $1,175,800,
all of which is expected to be shipped during fiscal year ending
June 30, 2018, compared to $431,200 as of March 31,
2017.
The
overall gross profit percentage for the three months ended March
31, 2018 was 36.6% compared to 44.8% for the three months ended
March 31, 2017 due to adjustment for increased contingent
consideration from increased royalty revenues for the Bioprocessing
Systems Operations.
General
and administrative expenses increased by $35,100 (8.1%) to $470,200
for the three months ended March 31, 2018 compared to
$435,100 for the three months ended March 31, 2017 due to various
incremental increases across the three operational
segments.
Selling
expenses for the three months ended March 31, 2018 increased
$39,900 (17.8%) to $263,800 from $223,900 for the three months
ended March 31, 2017, due to higher selling and marketing expenses
by the Benchtop Laboratory Equipment Operations primarily for new
products.
Research
and development expenses amounted to $117,700 for the three months
ended March 31, 2018 and $114,100 for the three months ended March
31, 2017.
The
Company reflected an income tax benefit of $46,200 for the three
months ended March 31, 2018 compared to income tax expense of
$17,300 for the three months ended March 31, 2017, primarily due to
the loss for the period.
As a
result of the foregoing, the Company recorded a net loss of $37,700
for the three months ended March 31, 2018 compared to net income of
$65,600 for the three months ended March 31, 2017.
The Nine months ended March 31, 2018 Compared with The Nine months
ended March 31, 2017
Net
revenues for the nine months ended March 31, 2018 decreased
$881,200 (14.3%) to $5,272,600 from $6,153,800 for the nine months
ended March 31, 2017, reflecting a decrease of $1,336,400 in net
sales of catalyst research instruments due to decreased orders from
OEM customers and lack of large orders during the beginning
of the year, partially offset by an increase of $101,900 in sales
of benchtop laboratory equipment and $353,300 increase in
bioprocessing royalties earned.
The
overall gross profit percentage for both the nine months ended
March 31, 2018 and 2017 was 37.7%.
General
and administrative expenses for the nine months ended March 31,
2018 increased $49,900 (4.0%) to $1,306,600 compared to $1,256,700
for the nine months ended March 31, 2017 due to various incremental
increases across the three operational segments.
Selling
expenses for the nine months ended March 31, 2018 increased $14,700
(2.2%) to $679,500 from $664,800 for the nine months ended March
31, 2017, due to higher selling and marketing expenses by the
Benchtop Laboratory Equipment Operations primarily for new
products.
Research
and development expenses increased by $45,200 (13.5%) to $379,700
for the nine months ended March 31, 2018 compared to $334,500 for
the nine months ended March 31, 2017, 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 $7,200 (52.9%) to $6,400 for the nine
months ended March 31, 2018 from $13,600 for the nine months ended
March 31, 2018 due to a gain on a sale of investment securities
last year.
The
Company reflected an income tax benefit of $22,600 for the nine
months ended March 31, 2018 compared to $16,000 tax expense for the
nine months ended March 31, 2017, primarily due to the loss for the
period.
As a
result of the foregoing, the Company recorded a net loss of
$351,500 for the nine months ended March 31, 2018 compared to net
income of $62,200 for the nine months ended March 31,
2017.
Liquidity and Capital Resources. Cash and cash equivalents
decreased by $346,500 to $678,600 as of March 31, 2018 from
$1,025,100 as of June 30, 2017 primarily due to increased
inventories partially offset by customer advances.
Net cash used in operating activities was $150,200 for the nine
months ended March 31, 2018 compared to $204,800 provided during
the nine months ended March 31, 2017. The current period reflected
increased inventories due to new products and work in process for
catalyst research instruments partially offset by an adjustment to
the fair value of contingent consideration liability and customer
advances. Net cash used in investing activities was $88,600 for the
nine months ended March 31, 2018 compared to $38,600 used during
the nine months ended March 31, 2017 principally due to new capital
equipment purchased during the current year period by the Benchtop
Laboratory Equipment Operations. The Company used $107,700 in
financing activities in the nine months ended March 31, 2018
compared to $199,900 in the nine months ended March 31, 2017,
principally because the Company paid a dividend last year, and paid
more in contingent consideration in last year’s same
period.
The Company's working capital amounted to $3,777,800 as of March
31, 2018 and $3,728,500, as of June 30, 2017.
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 4.75%. 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 March 31, 2018 $40,000 which was
borrowed by our subsidiary, Altamira Instruments, was outstanding
under such line.
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, the Company's management
performed an evaluation of the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based
on this evaluation, the Chief Executive and Chief Financial Officer
of the Company has concluded that the Company's disclosure controls
and procedures were not effective as of March 31, 2018, because of
the identification of a material weakness in internal control over
financial reporting which related to the accounting for the fair
market value of a contingent consideration liability related to its
Bioprocessing Systems Operations. Notwithstanding the
material weakness that existed as of March 31, 2018, the Chief
Executive and Chief Financial Officer of the Company has concluded
that the financial statements included in this Quarterly Report on
Form 10-Q present fairly, in all material respects, the financial
position, results of operations, and cash flows of the Company and
its subsidiaries in conformity with accounting principles generally
accepted in the United States of America ("GAAP").
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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Certification
of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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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:
May 15, 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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