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 MARCH 31, 2004
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 issuer as specified in its charter)
Delaware 04-2217279
________________________ ____________________________________
(State of incorporation) (I.R.S. 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 April 30, 2004: 975,541 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
March 31, 2004
Current Assets:
Cash and cash equivalents $ 325,600
Investment securities 644,700
Trade accounts receivable, less allowance for
doubtful accounts of $7,400 440,900
Inventories 623,000
Prepaid expenses and other current assets 50,600
---------
Total current assets 2,084,800
---------
Property and equipment at cost, less accumulated
depreciation of $432,200 155,700
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $40,300 11,900
Deferred taxes 113,600
Other 66,400
191,900
---------
$2,432,400
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 94,500
Accrued expenses 206,500
----------
Total current liabilities 301,000
----------
Deferred compensation 34,700
----------
Shareholders' equity:
Common stock $.05 par value; authorized
7,000,000 shares; 995,343 issued and outstanding 49,800
Additional paid-in capital 983,400
Accumulated other comprehensive gain, unrealized
holding gain on investment securities 4,800
Retained earnings 1,111,100
---------
2,149,100
Less common stock held in treasury, at cost;
19,802 shares 52,400
---------
2,096,700
---------
$2,432,400
==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
--------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net sales $ 856,900 $ 792,600 $2,600,500 $2,476,600
Cost of goods sold 455,100 471,900 1,379,900 1,469,000
---------- ---------- ---------- ----------
Gross profit 401,800 320,700 1,220,600 1,007,600
---------- ---------- ---------- ----------
Operating Expenses:
General and administrative 170,100 166,600 497,100 637,400
Selling 69,900 63,400 248,400 140,000
Research and development 93,800 63,100 288,500 207,400
---------- ---------- ---------- ----------
333,800 293,100 1,034,000 984,800
---------- ---------- ---------- ----------
Income from operations 68,000 27,600 186,600 22,800
Interest and other income 5,600 2,600 12,700 7,100
---------- ---------- ---------- ----------
Income before income taxes 73,600 30,200 199,300 29,900
Income taxes 25,000 6,400 60,000 6,400
---------- ---------- ---------- ----------
Net income $ 48,600 $ 23,800 $ 139,300 $ 23,500
========== ========== ========== ==========
Net income per common
share - basic $ .05 $ .02 $ .14 $ .02
Net income per common
share - diluted $ .05 $ .02 $ .14 $ .02
Cash dividends declared
per common share $ .05 $ - $ .05 $ -
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods Ended
March 31, 2004 March 31, 2003
-------------- --------------
Operating activities:
Net income $ 139,300 $ 23,500
Adjustments to reconcile net income
to net cash provided by
operating activities:
(Gain) loss on sale of investments 800 ( 800)
Loss on disposal of assets 200 6,400
Depreciation and amortization 52,100 48,500
Change in assets and liabilities:
Accounts receivable ( 31,300) ( 108,700)
Inventories ( 40,800) 76,000
Prepaid expenses and other
current assets 14,000 23,400
Other assets 9,000 25,800
Accounts payable 36,400 ( 8,300)
Accrued expenses 80,200 ( 23,400)
Deferred compensation ( 9,100) ( 21,200)
------------ ------------
Total adjustments 111,500 17,700
------------ ------------
Net cash provided by
operating activities 250,800 41,200
----------- ------------
Investing activities:
Purchase of investment securities,
available for sale ( 171,600) ( 227,000)
Purchase of investment securities,
held to maturity - ( 72,600)
Redemptions of investment securities,
available-for-sale 92,600 80,000
Redemptions of investment securities,
held to maturity 130,800 110,600
Capital expenditures ( 49,400) ( 51,900)
Proceeds from sale of fixed assets 200 31,000
Purchase of intangible assets - ( 12,800)
------------ ------------
Net cash provided by (used in)
investing activities 2,600 ( 142,700)
------------ ------------
Financing activities:
Exercise of stock options 12,900 6,600
Cash dividend declared and paid ( 48,300) -
------------ ------------
Net cash provided by
(used in) financing
activities ( 35,400) 6,600
------------ ------------
Net increase (decrease) in cash and cash
equivalents 218,000 ( 94,900)
Cash and cash equivalents, beginning of year 107,600 296,800
------------ ------------
Cash and cash equivalents, end of period $ 325,600 $ 201,900
============ ============
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 200 $ 29,800
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 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 nine months ended March 31, 2004,
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 76% and 77%
of net sales for the three month periods ended March 31, 2004 and
2003, respectively and 77% and 82% of net sales for the nine month
periods ended March 31, 2004 and 2003, respectively.
The Company's export sales (principally Europe and Asia) were
approximately $414,000 and $341,700 for the three month periods
ended March 31, 2004 and 2003, respectively, and $1,165,800 and
$1,224,000 for the nine month periods ended March 31, 2004 and
2003, respectively.
Three of the Company's customers accounted in the aggregate
for 49% and 53% of net sales for the three month periods ended
March 31, 2004 and 2003, respectively, and 54% and 51% of total
net sales for the nine month periods ended March 31, 2004 and
2003, respectively.
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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:
March 31, 2004
--------------
Raw Materials $ 543,400
Work in process 34,800
Finished Goods 44,800
--------------
$ 623,000
==============
4. Net income per common share:
Basic net income per common share is computed by dividing net
income 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 per common share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
------------------- -------------------
2004 2003 2004 2003
------------------- -------------------
Net income $ 48,600 $ 23,800 $ 139,300 $ 23,500
======== ========= ========= =========
Weighted average common
shares outstanding 964,398 957,474 961,817 954,180
Effect of dilutive
securities 72,676 32,776 48,971 41,865
-------- --------- -------- ---------
Weighted average
dilutive common shares
outstanding 1,037,074 990,250 1,010,788 996,045
========= ========= ========= =========
Net income per common
share - basic $ .05 $ .02 $ .14 $ .02
Net income per common
share - diluted $ .05 $ .02 $ .14 $ .02
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and nine month periods ended
March 31, 2004 and 2003.
5
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, 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 and earnings 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 Nine Month
Periods Ended Periods Ended
March 31, March 31,
------------------- ------------------
2004 2003 2004 2003
Net income:
As reported $ 48,600 $23,800 $139,300 $23,500
Pro Forma 48,300 23,500 135,700 23,000
Net income per common and
common equivalent share:
Basic - as reported $ .05 $ .02 $ .14 $ .02
Basic - pro forma $ .05 $ .02 $ .14 $ .02
Diluted - as reported $ .05 $ .02 $ .14 $ .02
Diluted - pro forma $ .05 $ .02 $ .13 $ .02
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, success of
marketing strategy, 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 $250,800 for the
nine month period of the current fiscal year as compared to
$41,200 in the comparative period for 2003. The principal factors
accounting for the difference were (i) higher net income, (ii)
lower increase in accounts receivable by $77,400 because of an
unusually large sale to a foreign customer during the three months
ended March 31, 2003,and (iii) a $103,600 increase in accrued
expenses mainly due to customer allowances and income tax
accruals. Cash provided by investing activities was $2,600 for
the current period as compared to $142,700 (used in) the nine
months ended March 31, 2003 reflecting lesser purchases of
investment securities and greater amount of redemptions 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 principal reason that cash (used in)
financing activities was $35,400 compared to cash provided of
$6,600 in the prior year period was the $48,300 cash dividend
declared and paid in March 2004. As a result of the foregoing,
cash and cash equivalents increased by $218,000 to $325,600 as of
March 31, 2004 from a balance of $107,600 as of June 30, 2003.
The Company's working capital as of March 31, 2004 increased
$108,800 to $1,783,800 compared to $1,675,000 at June 30, 2003.
The increase was generated from profitable operations, partially
offset by the cash dividend. 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 March 31,
2004. 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.
7
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Results of Operations
Financial Overview
Commencing in January 2003, the Company substantially increased
its marketing and product development efforts and expenditures
under its revised strategy for sales growth with (i) the
employment of a Director of Sales and Marketing, (ii) an expanded
promotion and advertising program, and (iii) increased commitment
of funds to research and development activity.
The Company also intensified its efforts to increase the Company's
profitability by continuing to seek economies through a search for
alternative, lower cost quality sources for its material
components (mostly from overseas), and evaluating its labor
requirements on an ongoing basis for achievement of overall cost
reductions.
Primarily as a result of these factors, the Company reflected
increases for the three and nine month periods ended March 31,
2004 over the three and nine month periods ended March 31, 2003 as
follows:
* Increases in net sales of 8.1% and 5%, respectively.
* Increases in gross profit margin percentages of 6.4%
and 6.2%, respectively.
* Increases in selling expenses of 10.3% and 77.4%,
respectively.
* Increases in research and development expenses of
48.7% and 39.1%, respectively.
These increases in sales and gross profit margins were the
principal reason for the improvement in net income to $48,600 and
$139,300 for the three and nine months ended March 31, 2004 from
$23,800 and $23,500, respectively for the year earlier comparable
periods.
The Three Months Ended March 31, 2004 Compared with the Three
Months Ended March 31, 2003.
Net sales for the three months ended March 31, 2004 increased by
$64,300 (8.1%) to $856,900 from $792,600 for the three months
ended March 31, 2003, primarily the result of a $40,000 increase
to $648,000 in sales of our Vortex-Genie 2(R) mixer, mainly to
overseas customers, a $31,000 increase to $151,000 from $123,000
in sales of our new products, especially the Vortex Genie(R) 1 and
Vortex-Genie 2T, and higher product accessory sales for all of our
products. The gross profit was $401,800 for the three months
ended March 31, 2004, a gross profit margin of 46.9% as compared
with $320,700, a gross profit margin of 40.5% for the three months
ended March 31, 2003, primarily due to increased overseas
purchases of material components for the Vortex-Genie(R) 2 mixer
at lower cost, and lower labor and labor related costs.
There was little change in general and administrative expenses for
the three months ended March 31, 2004 - a slight increase of
$3,500 to $170,100 from $166,600 for the three months ended March
31, 2003.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Selling expenses for the three months ended March 31, 2004
increased $6,500 (10.3%) to $69,900 as compared to $63,400 for the
three months ended March 31, 2003, mainly due to advertising
expenses which the company began incurring at the end of fiscal
year 2003.
Research and development expenses increased by $30,700 (48.7%) to
$93,800 for the three months ended March 31, 2004 from $63,100 for
the comparable prior year period as a result of increased new
product development.
The Company's income before income taxes increased $43,400 (144%)
to $73,600 for the three months ended March 31, 2004 compared to
$30,200 for the three months ended March 31, 2003.
The increase in income tax expense for the three months ended
March 31, 2004 to $25,000 from $6,400 was a result of the higher
income for the current period.
As a result of the foregoing, net income was $48,600 as compared
to $23,800 for the comparable period last year.
The Nine Months Ended March 31, 2004 Compared with the Nine Months
Ended March 31, 2003.
Net sales increased $123,900 (5.0%) to $2,600,500 for the nine
months ended March 31, 2004 compared to $2,476,600 for the nine
months ended March 31, 2003, primarily due to a $170,000 increase
to $464,000 from $294,000 in sales of our new products, especially
the Disruptor Genie(TM), Vortex Genie 1 and Vortex Genie 2T and
product accessories for all of our products, offset slightly by a
$24,000 decline to $2,011,000 in the sales of our Vortex-Genie 2
mixer and certain customer allowances.
The gross profit margin of 46.9% for the nine months ended March
31, 2004, was higher than the gross profit margin of 40.7% for the
nine months ended March 31, 2003 primarily due to higher margins
on average of our new products, increased overseas purchases of
material components for the Vortex-Genie 2 mixer at lower cost,
and lower labor and labor related costs.
General and administrative expenses for the nine months ended
March 31, 2004 were $497,100, a decrease of $140,300 (22.0%) from
$637,400 for the nine months ended March 31,2003 which period
suffered $72,300 of proxy costs in connection with the proxy
contest initiated by the former Chief Executive Officer, and costs
incurred in connection with termination of his employment in
August 2002.
Selling expenses for the nine months ended March 31, 2004
increased $108,400 (77.4%) to $248,400, from $140,000 for the nine
months ended March 31, 2003, 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, incurrence of
advertising expenses and other marketing activities.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Research and development expenses increased by $81,100 (39.1%) to
$288,500 for the nine months ended March 31, 2004 from $207,400
for the comparable prior year period as a result of increased new
product development.
The Company's income before income taxes increased to $199,300 for
the nine months ended March 31, 2004 compared to $29,900 for the
nine months ended March 31, 2003.
As a result of the higher income for the period, income tax
expense was $60,000, compared to $6,400 in the prior year
comparable period.
As a result of the foregoing, net income increased to $139,300
from $23,500 for the nine month year earlier comparable period.
10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number: Description
31.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive
Officer and Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Registrant filed reports on Form 8-K on
February 26, 2004 and March 3, 2004
reporting under Item 5, Other Events
and Regulation FD Disclosure.
11
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,
Treasurer, and Chief Financial Officer
Date: May 17, 2004
14