Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
☒
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the
quarterly period ended September
30, 2018
|
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period from ________to________
Commission file number 0-6658
SCIENTIFIC INDUSTRIES,
INC.
(Exact
Name of Registrant as specified in Its Charter)
|
Delaware
|
04-2217279
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
80 Orville Drive, Suite 102, Bohemia, New York
|
11716
|
|
(Address of principal executive offices)
|
(Zip Code)
|
(631) 567-4700
(Registrant’s telephone number, including area
code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate
by check 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 ☒No
☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted 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 ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer ☐
|
Smaller reporting company ☒
|
|
|
Emerging Growth company☐
|
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
|
Indicate
by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act) Yes☐ No
☒
|
|
The
number of shares outstanding of the registrant’s common
stock, par value $.05 per share (“Common Stock”) as of
October 31, 2018 is 1,494,112 shares.
SCIENTIFIC INDUSTRIES, INC.
Table
of Contents
|
PART I - Financial Information
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
3
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations
|
4
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Comprehensive Income (Loss)
|
5
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
6
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial
Statements
|
7
|
|
|
|
|
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
13
|
|
|
|
|
|
|
CONTROLS
AND PROCEDURES
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
EXHIBITS
AND REPORTS ON FORM 8-K
|
14
|
|
|
|
|
|
|
|
15
|
PART I – FINANCIAL INFORMATION
Item 1. Financial
Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$1,507,300
|
$1,053,100
|
|
Investment
securities
|
322,700
|
314,700
|
|
Trade accounts
receivable, less allowance for doubtful accounts of $11,600 at
September 30, 2018 and June 30, 2018
|
1,190,000
|
1,444,100
|
|
Contract assets,
current
|
67,100
|
278,200
|
|
Inventories
|
2,301,000
|
2,267,900
|
|
Prepaid expenses
and other current assets
|
67,000
|
33,500
|
|
Total current
assets
|
5,455,100
|
5,391,500
|
|
|
|
|
|
Property and
equipment, net
|
185,600
|
199,500
|
|
|
|
|
|
Intangible assets,
net
|
278,900
|
338,700
|
|
|
|
|
|
Goodwill
|
705,300
|
705,300
|
|
|
|
|
|
Contract assets,
less current portion
|
245,400
|
245,400
|
|
|
|
|
|
Other
assets
|
52,500
|
52,500
|
|
|
|
|
|
Deferred
taxes
|
386,600
|
392,600
|
|
|
|
|
|
Total
assets
|
$7,309,400
|
$7,325,500
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$362,600
|
$428,000
|
|
Accrued expenses
and taxes, current portion
|
541,900
|
657,700
|
|
Contract
liabilities
|
75,900
|
63,800
|
|
Contingent
consideration, current portion
|
118,000
|
118,000
|
|
Dividends
payable
|
74,700
|
-
|
|
Notes
payable
|
4,200
|
5,800
|
|
Total current
liabilities
|
1,177,300
|
1,273,300
|
|
|
|
|
|
Accrued expenses,
less current portion
|
60,000
|
60,000
|
|
Contingent
consideration payable, less current portion
|
290,000
|
290,000
|
|
|
|
|
|
Total
liabilities
|
1,527,300
|
1,623,300
|
|
Shareholders’
equity:
|
|
|
|
Common stock, $.05
par value; authorized 7,000,000 shares; issued 1,513,914
shares, outstanding 1,494,112 shares at September 30, 2018 and June
30, 2018
|
75,700
|
75,700
|
|
Additional paid-in
capital
|
2,554,600
|
2,545,900
|
|
Accumulated other
comprehensive gain (loss)
|
(16,900)
|
1,200
|
|
Retained
earnings
|
3,221,100
|
3,131,800
|
|
|
5,834,500
|
5,754,600
|
|
Less common stock
held in treasury at cost, 19,802 shares
|
52,400
|
52,400
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ equity
|
5,782,100
|
5,702,200
|
|
|
|
|
|
Total liabilities
and shareholders’ equity
|
$7,309,400
|
$7,325,500
|
See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For the Three
Month Period Ended September 30, 2018
|
For the Three
Month Period Ended September 30, 2017
|
|
|
|
|
|
Revenues
|
$2,038,600
|
$1,280,800
|
|
|
|
|
|
Cost of
revenues
|
1,092,900
|
829,100
|
|
|
|
|
|
Gross
profit
|
945,700
|
451,700
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
General and
administrative
|
416,500
|
428,400
|
|
Selling
|
236,100
|
201,000
|
|
Research and
development
|
117,400
|
129,100
|
|
|
|
|
|
Total operating
expenses
|
770,000
|
758,500
|
|
|
|
|
|
Income (loss) from
operations
|
175,700
|
(306,800)
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
Other income,
net
|
2,200
|
400
|
|
Interest
expense
|
(400)
|
(100)
|
|
|
|
|
|
Total other income,
net
|
1,800
|
300
|
|
|
|
|
|
Income (loss)
before income tax expense (benefit)
|
177,500
|
(306,500)
|
|
|
|
|
|
Income tax expense
(benefit):
|
|
|
|
Current
|
29,500
|
(63,700)
|
|
Deferred
|
6,000
|
(10,200)
|
|
|
|
|
|
Total income tax
expense (benefit)
|
35,500
|
(73,900)
|
|
|
|
|
|
|
$142,000
|
$(232,600)
|
|
|
|
|
Basic earnings
(loss) per common share
|
$.10
|
$(.16)
|
|
|
|
|
|
Diluted earnings
(loss) per common share
|
$.09
|
$(.16)
|
See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMPREHENSIVE
INCOME (LOSS) (UNAUDITED)
|
|
For the Three
Month Period Ended September 30, 2018
|
For the Three
Month Period Ended September 30, 2017
|
|
|
|
|
|
Net income
(loss)
|
$142,000
|
$(232,600)
|
|
|
|
|
|
Other comprehensive
income (loss):
|
|
|
|
Unrealized holding
gain (loss)
|
|
|
|
arising during
period,
|
|
|
|
net of
tax
|
(18,100)
|
2,600
|
|
|
|
|
|
Comprehensive
income (loss)
|
$123,900
|
$(230,000)
|
See
notes to unaudited condensed consolidated financial
statements.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For the Three Month Period Ended
September 30, 2018
|
For the Three Month Period Ended
September 30, 2017
|
|
Operating
activities:
|
|
|
|
Net income
(loss)
|
$142,000
|
$(232,600)
|
|
Adjustments to
reconcile net income (loss) to net
cash provided by
operating activities:
|
|
|
|
Depreciation and
amortization
|
75,900
|
77,100
|
|
Deferred income
taxes
|
6,000
|
(10,200)
|
|
Stock-based
compensation
|
8,700
|
6,200
|
|
Loss on sale of
investments
|
5,000
|
-
|
|
Unrealized holding
gain of investments
|
(6,400)
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Trade accounts
receivable
|
254,100
|
276,800
|
|
Contract assets,
current
|
211,100
|
175,500
|
|
Inventories
|
(33,100)
|
(366,000)
|
|
Prepaid and other
current assets
|
(33,500)
|
(90,500)
|
|
Accounts
payable
|
(65,400)
|
237,700
|
|
Contract
liabilities
|
12,100
|
17,000
|
|
Accrued expenses
and taxes
|
(115,800)
|
12,600
|
|
|
|
|
|
Total
adjustments
|
318,700
|
336,200
|
|
|
|
|
|
Net cash provided
by operating activities
|
460,700
|
103,600
|
|
|
|
|
|
Investing
activities:
|
|
|
|
Purchase of
investment securities, available for sale
|
(75,200)
|
(9,300)
|
|
Redemption of
investment securities, available for sale
|
72,500
|
-
|
|
Capital
expenditures
|
(900)
|
(31,500)
|
|
Purchase of other
intangible assets
|
(1,300)
|
(700)
|
|
|
|
|
|
Net cash used in
investing activities
|
(4,900)
|
(41,500)
|
|
|
|
|
|
Financing
activities:
|
|
|
|
Payments for
contingent consideration
|
-
|
(142,700)
|
|
Principal payments
on notes payable
|
(1,600)
|
(1,600)
|
|
|
|
|
|
Net cash used in
financing activities
|
(1,600)
|
(144,300)
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
454,200
|
(82,200)
|
|
|
|
|
Cash and cash
equivalents, beginning of year
|
1,053,100
|
1,025,100
|
|
|
|
|
Cash and cash
equivalents, end of period
|
$1,507,300
|
$942,900
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash paid during
the period for:
|
|
|
|
Income
taxes
|
$500
|
$15,000
|
|
Interest
|
400
|
100
|
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, 2018. The results for the three months ended
September 30, 2018, are not necessarily an indication of the
results for the full fiscal year ending June 30, 2019.
|
1. Summary of Significant
Accounting Policies
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of Scientific Industries, Inc., Altamira Instruments, Inc.
(“Altamira”), a Delaware corporation and wholly-owned
subsidiary, and 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
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 impact of the new standard.
In July
2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing
Liabilities from Equity (Topic 480) and Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with
Down Round Features; II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception”. Part I of this
update addresses the complexity of accounting for certain financial
instruments with down round features. Down round features are
features of certain equity-linked instruments (or embedded
features) that result in the strike price being reduced on the
basis of the pricing of future equity offerings. Current accounting
guidance creates cost and complexity for entities that issue
financial instruments (such as warrants and convertible
instruments) with down round features that require fair value
measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity, because of the existence of
extensive pending content in the FASB Accounting Standards
Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable
financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in
Part II of this update do not have an accounting effect. This ASU
is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2018. The Company is evaluating
the effect that ASU 2017-11 will have on its financial statements
and related disclosures.
Adopted Accounting Pronouncements
In
January 2016, the 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 adopted this pronouncement during the interim period
September 30, 2018, which resulted in a $22,000 cumulative effect
adjustment to retained earnings in the condensed consolidated
balance sheet as of the beginning of the fiscal year of
adoption.
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 Company
adopted the provisions of these pronouncements on July 1, 2018,
using the modified retrospective approach. Revenue from the
Company’s sales continue to generally be recognized when
products are shipped (i.e. point in time). As such, the adoption of
ASU 2016-10 had no material impact to the Company’s financial
position or results of operations; however, the Company has now
presented the disclosures required by this new standard, refer to
Note 2.
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 adoption of this ASU had no impact on the
Company’s 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 consolidated
financial statements.
Reclassification
Trade accounts receivable, current of $67,100 and $278,200, and
trade accounts receivable, long term of $245,400 for both periods
were reclassified to contract assets, current; and contract assets,
less current portion, respectively, on the balance sheet as of
September 30, and June 30, 2018. Customer advances were
reclassified to contract liabilities as of September 30, and June
30, 2018.
2. Revenue
The
Company’s revenues are comprised of product sales (Benchtop
Laboratory Equipment Operations) as well as products and related
services such as installation and training as is customary for its
customers of the Catalyst Research Instruments Operations. In
addition the Company’s Bioprocessing Systems
Operations’ revenues are comprised of royalty revenues. All
revenue is recognized when the Company satisfies its performance
obligation(s) under the contract (either implicit or explicit) by
transferring the promised product or service to its customer either
when (or as) its customer obtains control of the product or
service. A performance obligation is a promise in a contract to
transfer a distinct product or service to a customer. A
contract’s transaction price is allocated to each distinct
performance obligation. The majority of the Company’s
contracts have a single performance obligation, as the promise to
transfer products or services is not separately identifiable from
other promises in the contract and, therefore, not distinct. For
contracts with multiple performance obligations, the Company
allocates the contract’s transaction price to each
performance obligation using the Company’s best estimate of
standalone selling price for each distinct product or service in
the contract, which is generally based on an observable
price.
Revenue
is measured as the amount of consideration the Company expects to
receive in exchange for transferring products or providing
services. As such, revenue is recorded net of returns, allowances,
customer discounts, and incentives. Revenue from the Bioprocessing
Systems Operations are recognized over time based on
Management’s judgment and estimates.
3. Segment Information and
Concentrations
The
Company views its operations as three segments: the manufacture and
marketing of standard benchtop laboratory equipment for research in
university, hospital and industrial laboratories sold primarily
through laboratory equipment distributors 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
|
Bioprocessing
Systems
|
Corporate
And Other
|
Consolidated
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,691,900
|
$217,500
|
$129,200
|
$-
|
$2,038,600
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
635,700
|
142,300
|
-
|
-
|
778,000
|
|
|
|
|
|
|
|
|
Income (Loss) From Operations
|
175,400
|
(62,900)
|
63,200
|
-
|
175,700
|
|
|
|
|
|
|
|
|
Assets
|
4,633,500
|
1,343,100
|
623,500
|
709,300
|
7,309,400
|
|
|
|
|
|
|
|
|
Long-Lived Asset Expenditures
|
2,200
|
-
|
-
|
-
|
2,200
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
66,300
|
200
|
9,400
|
-
|
75,900
|
|
|
Benchtop Laboratory
Equipment
|
Catalyst Research
Instruments
|
Bioprocessing
Systems
|
Corporate
And Other
|
Consolidated
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,199,400
|
$28,700
|
$52,700
|
$-
|
$1,280,800
|
|
|
|
|
|
|
|
|
Foreign
Sales
|
502,300
|
6,400
|
-
|
-
|
508,700
|
|
|
|
|
|
|
|
|
Loss From Operations
|
(93,900)
|
(184,100)
|
(28,800)
|
-
|
(306,800)
|
|
|
|
|
|
|
|
|
Assets
|
4,041,800
|
1,425,400
|
437,000
|
822,700
|
6,726,900
|
|
|
|
|
|
|
|
|
Long-Lived Asset Expenditures
|
32,200
|
-
|
-
|
-
|
32,200
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
64,900
|
2,800
|
9,400
|
-
|
77,100
|
Approximately
49% and 46% of net sales of benchtop laboratory equipment for the
three month periods ended September 30, 2018 and 2017,
respectively, were derived from the Company’s main product,
the Vortex-Genie 2 mixer, excluding accessories.
For the
three months ended September 30, 2018 and 2017, respectively, three
customers accounted in the aggregate for approximately 23% and 22%
of net sales of the Benchtop Laboratory Equipment Operations (19%
and 21% 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 customers
during the three months ended September 30, 2018 accounted for
approximately 83% of the Catalyst Research Instrument
Operations’ revenues and 9% of the Company’s total
revenues. There was no significant customer sale during the three
months ended September 30, 2017.
4. Fair Value of Financial
Instruments
The
FASB defines the fair value of financial instruments as the amount
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. Fair value measurements do not include
transaction costs.
The
accounting guidance also expands the disclosure requirements around
fair value and establishes a fair value hierarchy for valuation
inputs. The hierarchy prioritizes the inputs into three levels
based on the extent to which inputs used in measuring fair value
are observable in the market. Each fair value measurement is
reported in one of the three levels, which is determined by the
lowest level input that is significant to the fair value
measurement in its entirety. These levels are described
below:
Level 1
- Inputs that are based upon unadjusted quoted prices for identical
instruments traded in active markets.
Level 2
- Quoted prices in markets that are not considered to be active or
financial instruments for which all significant inputs are
observable, either directly or indirectly.
Level 3
- Prices or valuation that require inputs that are both significant
to the fair value measurement and unobservable.
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 September 30, 2018 and June 30,
2018 according to the valuation techniques the Company used to
determine their fair values:
|
|
|
Fair Value Measurements Using
Inputs Considered as
|
|
|
Fair Value at September 30,
2018
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$1,507,300
|
$1,507,300
|
$-
|
$-
|
|
Available for sale
securities
|
322,700
|
322,700
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$1,830,000
|
$1,830,000
|
$-
|
$-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration
|
$408,000
|
$-
|
$-
|
$408,000
|
|
|
|
Fair Value Measurements Using
Inputs Considered as
|
|
|
Fair Value at June 30,
2018
|
Level 1
|
Level 2
|
Level 3
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$1,053,100
|
$1,053,100
|
$-
|
$-
|
|
Available for sale
securities
|
314,700
|
314,700
|
-
|
-
|
|
|
|
|
|
|
|
Total
|
$1,367,800
|
$1,367,800
|
$-
|
$-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
$408,000
|
$-
|
$-
|
$408,000
|
The
following table sets forth an analysis of changes during the three
months ended September 30, 2018 and 2017 in Level 3 financial
liabilities of the Company:
|
|
2018
|
2017
|
|
Beginning
balance
|
$408,000
|
$297,000
|
|
Payments
|
-
|
(142,700)
|
|
|
|
|
|
Ending
balance
|
$408,000
|
$154,300
|
Investments
in marketable securities classified as available-for-sale by
security type at September 30, 2018 and June 30, 2018 consisted of
the following:
|
|
Cost
|
Fair Value
|
Unrealized Holding Gain
(Loss)
|
|
At September 30,
2018:
|
|
|
|
|
Available for
sale:
|
|
|
|
|
Equity
securities
|
$48,500
|
$76,800
|
$28,300
|
|
|
262,800
|
245,900
|
(16,900)
|
|
|
|
|
|
|
|
$311,300
|
$322,700
|
$11,400
|
|
|
Cost
|
Fair Value
|
Unrealized Holding Gain
(Loss)
|
|
At June 30,
2018:
|
|
|
|
|
Available for
sale:
|
|
|
|
|
Equity
securities
|
$45,700
|
$67,800
|
$22,100
|
|
|
267,800
|
246,900
|
(20,900)
|
|
|
|
|
|
|
|
$313,500
|
$314,700
|
$1,200
|
5. Inventories
|
|
September 30,
2018
|
June 30, 2018
|
|
|
|
|
|
Raw
materials
|
$1,312,700
|
$1,488,000
|
|
Work-in-process
|
425,900
|
352,700
|
|
|
562,400
|
427,200
|
|
|
|
|
|
|
$2,301,000
|
$2,267,900
|
6. 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 September 30, 2018
and June 30, 2018, all of which is expected to be deductible for
tax purposes.
The
components of other intangible assets are as follows:
|
|
Useful
Lives
|
Cost
|
Accumulated
Amortization
|
Net
|
|
At September 30,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
trademarks
|
5/10
yrs.
|
$662,800
|
$631,500
|
$31,300
|
|
Trade
names
|
6 yrs.
|
140,000
|
106,900
|
33,100
|
|
Websites
|
5 yrs.
|
210,000
|
192,500
|
17,500
|
|
Customer
relationships
|
9/10
yrs.
|
357,000
|
298,100
|
58,900
|
|
Sublicense
agreements
|
10
yrs.
|
294,000
|
202,100
|
91,900
|
|
Non-compete
agreements
|
5 yrs.
|
384,000
|
361,500
|
22,500
|
|
IPR&D
|
3 yrs.
|
110,000
|
110,000
|
-
|
|
|
5 yrs.
|
199,300
|
175,600
|
23,700
|
|
|
|
|
|
|
|
$2,357,100
|
$2,078,200
|
$278,900
|
|
|
Useful
Lives
|
Cost
|
Accumulated
Amortization
|
Net
|
|
|
|
|
|
|
|
At June 30,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
Technology,
trademarks
|
5/10
yrs.
|
$662,800
|
$613,400
|
$49,400
|
|
Trade
names
|
6 yrs.
|
140,000
|
101,100
|
38,900
|
|
Websites
|
5 yrs.
|
210,000
|
182,000
|
28,000
|
|
Customer
relationships
|
9/10
yrs.
|
357,000
|
294,800
|
62,200
|
|
Sublicense
agreements
|
10
yrs.
|
294,000
|
194,800
|
99,200
|
|
Non-compete
agreements
|
5 yrs.
|
384,000
|
348,000
|
36,000
|
|
IPR&D
|
3 yrs.
|
110,000
|
110,000
|
-
|
|
|
5 yrs.
|
198,100
|
173,100
|
25,000
|
|
|
|
|
|
|
|
$2,355,900
|
$2,017,200
|
$338,700
|
Total
amortization expense was $61,000 and $61,100 for the three months
ended September 30, 2018 and 2017, respectively. As of September
30, 2018, estimated future amortization expense related to
intangible assets is $125,900 for the remainder of the fiscal year
ending June 30, 2019, $66,400 for fiscal 2020, $49,100 for fiscal
2021, $26,100 for fiscal 2022, $9,800 for fiscal 2023, and $1,600
thereafter.
7. Income (Loss) Per
Common Share
Income
(Loss) per common share data was computed as follows:
|
|
For the Three Months Ended
September 30, 2018
|
For the Three Months Ended
September 30, 2017
|
|
|
|
|
|
|
$142,000
|
$(232,600)
|
|
|
|
|
|
Weighted average
common shares outstanding
|
1,494,112
|
1,494,112
|
Effect of dilutive
securities
|
3,897
|
-
|
|
Weighted average
dilutive common shares outstanding
|
1,498,009
|
1,494,112
|
|
|
|
|
Basic earnings
(loss) per common share
|
$.10
|
$(.16)
|
Diluted earnings
(loss) per common share
|
$.09
|
$(.16)
|
Approximately
92,000 and 82,000 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
months ended September 30, 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 income before tax expense of
$177,500 for the three months ended September 30, 2018 compared to
a loss before income tax benefit of $306,500 for the three months
ended September 30, 2017, primarily the result of increased
revenues across all business segments. The results reflected total
non-cash amounts for depreciation and amortization of
$75,900 and $77,100
for the three months ended September 30, 2018 and 2017,
respectively.
Results of Operations. Net revenues for the three months
ended September 30, 2018 increased $757,800 (59.2%) to $2,038,600
from $1,280,800 for the three months ended September 30, 2017,
reflecting an increase of $492,500 (41.1%) in net sales of benchtop
laboratory equipment. The benchtop laboratory equipment sales
reflected $425,300 of Torbal brand product sales for the three
months ended September 30, 2018, compared to $304,200 in the three
months ended September 30, 2017 as a result of continued growth in
sales of the new force gauges product line. Sales of catalyst
research instruments increased by $188,800 to $217,500 for the
three months ended September 30, 2018 compared to $28,700 for the
three months ended September 30, 2017 because there were no large
orders shipped during the prior year period. As of September 30,
2018, the order backlog for catalyst research instruments was
$329,400, all of which is expected to be shipped during the fiscal
year ending June 30, 2019, compared to $323,900 as of September 30,
2017. Revenues derived from the Bioprocessing Systems Operations
which comprise primarily of net royalties accrued from sublicensees
increased by $76,500 (145.2%) to $129,200 for the three months
ended September 30, 2018 compared to $52,700 for the three months
ended September 30, 2017.
The
gross profit percentage for the three months ended September 30,
2018 was 46.4% compared to 35.3% for the three months ended
September 30, 2017. The current period gross margin reflected
increased gross profit margin percentage for the Benchtop
Laboratory Operations as a result of higher sales and lower
overhead costs. The gross profit margin percentage for catalyst
research instruments was higher for the current period compared to
the same period last year because the prior year period was
negatively impacted by fixed overhead on significantly lower
sales.
General
and administrative expenses for the three months ended September
30, 2018 amounted to $416,500 compared to $428,400 for the three
months ended September 30, 2017 due to various minor decreases in
expenses for the Bioprocessing Systems Operations and the Catalyst
Research Instruments Operations.
Selling
expenses for the three months ended September 30, 2018 increased
$35,100 (17.5%) to $236,100 from $201,000 for the three months
ended September 30, 2017 primarily due to increased sales and
marketing activities by the Benchtop Laboratory Equipment
Operations.
Research
and development expenses decreased by $11,700 (9.1%) to $117,400
for the three months ended September 30, 2018 compared to $129,100
for the three months ended September 30, 2017, primarily because of
reduced new product development activities in the current year
period for benchtop laboratory equipment.
Total
other income was $1,800 for the three months ended September 30,
2018 compared to $300 for the three months ended September 30,
2017, due primarily to unrealized holding gains on equity
securities.
The
Company reflected income tax expense of $35,500 for the three
months ended September 30, 2018 compared to a tax benefit of
$73,900 for the three months ended September 30, 2017, primarily
due to the income generated during the three months ended September
30, 2018.
As a
result of the foregoing, the Company recorded net income of
$142,000 for the three months ended September 30, 2018 compared to
a net loss of $232,600 for the three months ended September 30,
2017.
Liquidity and Capital Resources. Cash and cash equivalents
increased by $454,200 to $1,507,300 as of September 30, 2018 from
$1,053,100 as of June 30, 2018.
Net cash provided by operating activities was $460,700 for the
three months ended September 30, 2018 compared to $103,600 used
during the three months ended September 30, 2017, primarily as a
result of the income for the current year period. Net cash
used in investing activities was $4,900 for the three months ended
September 30, 2018 compared to $41,500 used during the three months
ended September 30, 2017 principally due to new capital equipment
purchased during the prior year period by the Benchtop Laboratory
Equipment Operations. The Company used $1,600 in financing
activities in the three months ended September 30, 2018 compared to
$144,300 in the three months ended September 30, 2017 due to the
contingent consideration paid in the prior year
period.
The Company's working capital increased by $159,600 to $4,277,800
as of September 30, 2018 compared to $4,118,200, as of June 30,
2018 due to the income generated during the period.
The Company has a Demand Line of Credit through December 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 5.25%. 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 September 30, 2018 no borrowings
were outstanding under such line.
Management believes that the Company will be able to meet its cash
flow needs during the 12 months ending September 30, 2019 from its
available financial resources including the lines 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.
As a result of our adoption of the new revenue standard (Topic
606), we implemented controls to ensure adequate evaluation of
contracts and assessment of the impact of the new accounting
standard related to revenue recognition on our financial statements
to facilitate its adoption on July 1, 2018. There were no
significant changes to our internal control over financial
reporting due to the adoption of the new standard, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the
period covered by this Quarterly Report or in other factors that
have materially affected, or are reasonably likely to materially
affect, our internal controls over financial
reporting.
PART II – OTHER
INFORMATION
Item 6. Exhibits and Reports on Form
8-K
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
Reports
on Form 8-K:
Report
dated September 28, 2018 reporting under item 8.01
SIGNATURE
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.
|
Date:
November 13, 2018
|
SCIENTIFIC
INDUSTRIES, INC.
(Registrant)
/s/
Helena R. Santos
|
|
|
|
Helena
R. Santos
President,
Chief Executive Officer, Treasurer
Chief
Financial and Principal Accounting Officer
|
|