UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended DECEMBER 31, 2003
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Exact name of small business as specified in its charter)
Delaware 04-2217279
(State of incorporation) (IRS Employer Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
(Address of principal executive offices)
(631)567-4700
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of February 6, 2004: 963,541 shares
outstanding of the Company's Common Stock, par value, $ .05.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2003
-----------------
Current Assets:
Cash and cash equivalents $ 288,300
Investment securities 701,700
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 434,400
Inventories 555,200
Prepaid expenses and other current assets 49,400
----------
Total current assets 2,029,000
----------
Property and equipment at cost, less accumulated
depreciation of $423,400 159,500
----------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $39,400 12,900
Deferred Taxes
113,600
Other 83,700
----------
210,200
----------
$2,398,700
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 48,100
Accrued expenses 217,800
----------
Total current liabilities 265,900
----------
Deferred compensation 52,100
----------
Shareholders' equity:
Common stock $.05 par value; authorized 7,000,000 shares;
980,343 issued and outstanding 49,000
Additional paid-in capital 971,200
Accumulated other comprehensive gain, unrealized
holding gain on investment securities 2,100
Retained earnings 1,110,800
----------
2,133,100
Less common stock held in treasury, at cost;
19,802 shares 52,400
----------
2,080,700
----------
$2,398,700
==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
-------------------- ---------------------
2003 2002 2003 2002
-------- --------- ---------- ----------
Net sales $869,700 $833,700 $1,743,600 $1,684,000
Cost of goods sold 468,200 494,600 933,100 997,100
-------- -------- ---------- ----------
Gross profit 401,500 339,100 810,500 686,900
-------- -------- ---------- ----------
Operating Expenses:
General & administrative 162,900 246,100 327,000 470,800
Selling 78,600 44,800 178,500 76,600
Research & development 83,800 56,900 186,400 144,300
-------- -------- ---------- ----------
325,300 347,800 691,900 691,700
-------- -------- ---------- ----------
Income (Loss) from
operations 76,200 ( 8,700) 118,600 ( 4,800)
Interest & other income 4,500 400 7,100 4,500
-------- -------- ---------- ----------
Income (loss) before
income taxes (benefit) 80,700 ( 8,300) 125,700 ( 300)
Income taxes (benefit) 20,000 ( 1,400) 35,000 -
-------- --------- ---------- ----------
Net income (loss) $ 60,700 $ ( 6,900) $ 90,700 $( 300)
======== ========= ========== ==========
Net income (loss) per
common share - basic $ .06 $( .01) $ .09 $ .-
Net income (loss) per
common share - diluted $ .06 $( .01) $ .09 $ .-
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Operating activities:
Net income (loss) $ 90,700 $ ( 300)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
(Gain) loss on sale of investments 800 ( 600)
Loss on disposal of assets - 6,400
Depreciation and amortization 34,900 33,700
Change in assets and liabilities:
Accounts receivable ( 24,800)
(121,100)
Inventories 27,000 ( 21,300)
Prepaid expenses and other
current assets 15,200 14,400
Other assets ( 8,300) 13,000
Accounts payable ( 10,000) 31,900
Accrued expenses 91,500 ( 16,400)
Deferred compensation 8,300 ( 8,500)
Total adjustments 134,600 ( 68,500)
--------- ----------
Net cash provided by (used in)
operating activities 225,300 ( 68,800)
--------- ----------
Investing activities:
Purchase of investment securities,
available-for-sale (137,700) (180,900)
Redemptions of investment securities,
available-for-sale 30,000 52,600
Redemptions of investment securities,
held to maturity 100,800 105,600
Capital expenditures ( 37,700) ( 45,500)
Proceeds from sale of property
and equipment - 29,800
Purchase of intangible assets - ( 3,400)
---------- ----------
Net cash used in
investing activities ( 44,600) ( 41,800)
---------- ----------
Financing activities,
exercise of stock options - 3,700
---------- ----------
Net increase (decrease) in cash
and cash equivalents 180,700 (106,900)
Cash and cash equivalents, beginning of year 107,600 296,800
---------- ----------
Cash and cash equivalents, end of period $ 288,300 $ 189,900
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 200 $ 28,400
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
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-QSB. 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 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-KSB, for the
fiscal year ended June 30, 2003. The results for
the three and six months ended December 31, 2003,
are not necessarily an indication of the results
of the full fiscal year.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements
include the accounts of the Company and Scientific Packaging
Industries, Inc., a New York corporation and an inactive wholly
owned subsidiary of the Company. All intercompany items and
transactions have been eliminated in consolidation.
2. Line of Business and Concentrations:
The Company is engaged in the manufacturing and marketing of
equipment for research in university, hospital and industrial
laboratories. The Company believes that it has only one
reportable segment. Sales of the Company's principal product,
the Vortex-Genie(R) 2 mixer, accounted for approximately 74%
and 86% of net sales for the three month periods ended December
31, 2003 and 2002, respectively, and 76% and 84% of net sales
for the six month periods ended December 31, 2003 and 2002,
respectively.
The Company's export sales (principally Europe and Asia) were
approximately $405,000 and $480,000 for the three month periods
ended December 31, 2003 and 2002, respectively, and $752,000
and $882,000 for the six month periods ended December 31, 2003
and 2002, respectively.
Three of the Company's customers accounted in the aggregate for
55% and 47% of net sales for the three month periods ended
December 31, 2003 and 2002, respectively, and 57% and 50% of
total net sales for the six month periods ended December 31,
2003 and 2002, respectively.
4
3. Inventories:
Inventories for interim financial statement purposes are based
on perpetual inventory records at the end of the applicable
periods. Components of inventory are as follows:
December 31,
2003
------------
Raw Materials $ 469,600
Work in process 33,500
Finished Goods 52,100
------------
$ 555,200
============
4. Net income (loss) per common share:
Basic net income (loss) per common share is computed by
dividing net income (loss) by the weighted-average number of
shares outstanding. Diluted net income per common share
includes the dilutive effect of stock options and a warrant.
Net income (loss) per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
------------------- -----------------
2003 2002 2003 2002
-------- -------
Net income (loss) $ 60,700 ($6,900) $ 90,700 ($ 300)
======== ======= ======== ========
Weighted average common
shares outstanding 960,541 954,541 960,541 952,591
Effect of dilutive
securities 45,279 - 37,119 -
-------- -------- -------- ---------
Weighted average dilutive
common shares outstanding 1,005,820 954,541 997,660 952,591
========= ======== ======== =========
Net income (loss) per
common share - basic $ .06 ($ .01) $ .09 $ -
========= ======== ======== =========
Net income (loss) per
common share - diluted $ .06 ($ .01) $ .09 $ -
========= ======== ======== =========
Unexercised employee stock options to purchase 44,000 shares of
common stock at $1.92 to $2.40 per share were outstanding as of
December 31, 2003, but were not included in the foregoing
computation because the exercise price of each option was
greater than the average market price of the Company's common
stock for the period.
The potential effect of dilution of the incremental shares from
the assumed exercise of stock options was not included in
determining the diluted net loss per common share for the three
and six month periods ended December 31, 2002, because to do so
would be anti-dilutive.
5
5. Comprehensive Income:
There was no significant difference between net income (loss)
and comprehensive income (loss) for the three and six month
periods ended December 31, 2003 and 2002.
6. Stock-Based Compensation Plans:
The Company maintains an Incentive Stock Option Plan which it
accounts for under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based
compensation costs are reflected in net income or loss, as all
options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had
applied the fair value recognition provisions of FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
------------------- -----------------
2003 2002 2003 2002
-------- ------- -------- --------
Net income (loss):
As reported $ 60,700 ($ 6,900) $ 90,700 ($ 300)
Pro Forma 57,600 ( 7,200) 87,400 ( 600)
Net income (loss) per common and
common equivalent share:
Basic - as reported $ .06 ($ .01) $ .09 $ -
Basic - pro forma $ .06 ($ .01) $ .09 $ -
Diluted - as reported $ .06 ($ .01) $ .09 $ -
Diluted - pro forma $ .06 ($ .01) $ .09 $ -
6
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Certain statements contained in this report are not based on
historical facts, but are forward-looking statements that are based
upon various assumptions about future conditions. Actual events in
the future could differ materially from those described in the
forward-looking information. Numerous unknown factors and future
events could cause such differences, including but not limited to,
product demand, market acceptance, impact of competition, the
ability to reach final agreements, adverse economic conditions, and
other factors affecting the Company's business that are beyond the
Company's control. Consequently, no forward-looking statement can
be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
Net cash provided by operating activities was $225,300 for the six
month period of the current fiscal year as compared to $68,800
used in the comparative period for 2002. The principal factors
accounting for the difference were (i) lower increase in accounts
receivable by $96,300 because of a few unusually large sales to a
foreign customer during the three months ended December 31, 2002,
(ii) a difference of $48,300 in inventories due to higher sales
and tighter inventory controls during the current year period and
(iii) a $107,900 increase in accrued expenses mainly due to
customer allowances and income tax accruals. Cash used in
investing activities was $44,600 for the current period as
compared to $41,800 for the six months ended December 31, 2002
reflecting lesser purchases of investment securities during the
current year and a sale in the prior year period of a previously
leased auto related to the termination of the Company's former
chief executive officer. The Company does not ordinarily have
any significant financing activities other than exercises of
incentive stock options. As a result of the foregoing, cash
and cash equivalents increased by $180,700 to $288,300 as of
December 31, 2003 from a balance of $107,600 as of June 30, 2003.
The Company's working capital as of December 31, 2003 increased
$88,100 to $1,763,100 compared to $1,675,000 at June 30, 2003. The
increase was generated from operations. The Company has available
for its working capital needs, a secured bank line of credit of
$200,000 with North Fork Bank which expires on November 1, 2004
with interest at prime, all of which was available as of December
31, 2003. Management believes that the Company will be able to
meet its cash flow needs during the next 12 months from its
available financial resources which include its cash and investment
securities.
Results of Operations
Financial Overview
Operations for the three and six month periods ended December 31,
2003 benefitted from both the significant increase in sales of our
new products, especially our Disruptor Genie(TM), Vortex-Genie(R)
1, and Vortex-Genie 2T, and cost savings resulting from the
increasing overseas purchases of more material components of our
principal product. New product sales amounted to $178,900 and
$313,700 for the three and six month periods ended December 31,
2003 as compared to $75,600 and $171,300 for the comparable periods
last year. Net sales of the Company's principal product, the
Vortex-Genie 2 mixer, were lower than the prior year's comparable
three and six month periods. This reduction was due to the larger
than usual orders from an overseas customer for the mixer during
the three months ended December 31, 2002.
7
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
The Three Months Ended December 31, 2003 Compared with the Three
Months Ended December 31, 2002.
The Company's net sales for the three months ended December 31,
2003 of $869,700, an increase of $36,000 (4.3%) from $833,700 for
the three months ended December 31, 2002, was primarily the result
of increased sales of the Company's new products. Gross profit of
$401,500 for the three months ended December 31, 2003, an increase
to 46.2% from 40.7% or $339,100 for the three months ended December
31, 2002, was primarily due to increased overseas purchases of
material components for the Vortex-Genie 2 mixer at lower cost, and
the change in the sales mix to more new products with higher profit
margins.
General and administrative expenses for the three months ended
December 31, 2003 decreased by $83,200 (33.8%) to $162,900 compared
to $246,100 for the three months ended December 31, 2002. The
prior year period included $72,300 of proxy costs incurred in the
successful defense of a proxy contest initiated by the Company's
former chief executive officer ("former CEO") as well as certain
other costs incurred in connection with his termination of
employment in August 2002.
Selling expenses for the three months ended December 31, 2003
increased $33,800 (75.4%) to $78,600, as compared to $44,800 for
the three months ended December 31, 2002, as a result of the
Company's expansion of its sales and marketing functions including
the hiring of a new director of sales and marketing in January
2003, advertising and other marketing expenses.
Research and development expenses increased by $26,900 (47.3%) to
$83,800 for the three months ended December 31, 2003 from $56,900
for the comparable prior year period as a result of increased new
product development.
As a result of the foregoing, the Company's income before income
taxes increased $89,000 to $80,700 for the three months ended
December 31, 2003 compared to a $8,300 loss for the three months
ended December 31, 2002.
Income tax expense for the three months ended December 31, 2003 was
$20,000 as a result of the income for the period compared to a
$1,400 tax benefit for the comparable period last year resulting
from the loss suffered during that period.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
The Six Months Ended December 31, 2003 Compared with the Six Months
Ended December 31, 2002.
Net sales increased $59,600 (3.5%) to $1,743,600 for the six months
ended December 31, 2003 compared to $1,684,000 for the six months
ended December 31, 2002 primarily due to higher sales of the
Company's new products.
The gross profit of 46.5% for the six months ended December 31,
2003, was higher than the gross profit of 40.8% for the six months
ended December 31, 2002 primarily due to increased overseas
purchases of material components for the Vortex-Genie 2 mixer at
lower cost, and the change in the sales mix to more new products
with higher profit margins.
General and administrative expenses for the six months ended
December 31, 2003 were $327,000, a decrease of $143,800 (30.5%)
from $470,800 for the six months ended December 31, 2002 mostly
because the prior year included $72,300 of proxy costs incurred in
connection with the proxy contest initiated by the former CEO, and
costs incurred in connection with his termination of employment in
August 2002.
Selling expenses for the six months ended December 31, 2003
increased $101,900 (133%) to $178,500, from $76,600 for the six
months ended December 31, 2002, the result of the Company's
expansion of its sales and marketing functions including the hiring
of a new director of sales and marketing in January 2003,
advertising and other marketing activities.
Research and development expenses increased by $42,100 (29.2%) to
$186,400 for the six months ended December 31, 2003 from $144,300
for the comparable prior year period as a result of increased new
product development.
As a result of the foregoing, the Company's income before income
taxes was $125,700 for the six months ended December 31, 2003
compared to a loss of $300 for the six months ended December 31,
2002.
As a result of the income for the period, the six month results
reflect income tax expense of $35,000, while the prior comparable
period did not reflect any income tax expense or benefit.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2003 Annual Meeting of Stockholders held on
December 1, 2003, stockholders (i) re-elected as Class A Directors:
Mr. Arthur M. Borden by 519,373 shares "For" and 156,448 shares
"Withheld", and Mr. James S. Segasture by 522,844 shares "For" and
152,977 shares "Withheld", each to serve until the Annual Meeting
of Stockholders with respect to the fiscal year ending June 30,
2006, and the due election and qualification of their successors;
and (ii) ratified the appointment of Nussbaum Yates & Wolpow P.C.
as the independent auditors with respect to the financial
statements of the Company for the year ending June 30, 2004 by a
vote of 669,491 shares "For", 6,557 shares "Against", and no shares
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number: Description
31.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive
Officer and Chief Financial
Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
10
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Scientific Industries, Inc.
---------------------------
Registrant
/s/Helena R. Santos
-------------------
Helena R. Santos
President, Chief Executive Officer
and Treasurer
Principal Executive, Financial and
Accounting Officer
Date: February 13, 2004
11