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, 2005
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 May 6, 2005: 980,207 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, 2005
Current Assets:
Cash and cash equivalents $ 120,900
Investment securities 965,400
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 534,800
Inventories 728,800
Prepaid expenses and other current assets 44,900
Deferred taxes 57,000
---------
Total current assets 2,451,800
---------
Property and equipment at cost, less accumulated
depreciation of $428,700 150,600
---------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $45,300 17,500
Other 39,600
57,100
----------
$2,659,500
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 66,900
Accrued expenses and taxes 212,900
----------
Total current liabilities 279,800
----------
Deferred compensation 18,900
----------
Deferred taxes 13,000
----------
Shareholders' equity:
Common stock $.05 par value; authorized
7,000,000 shares; 1,000,009 issued and 50,000
outstanding
Additional paid-in capital 990,900
Accumulated other comprehensive loss,
unrealized holding loss on investment
securities (7,000)
Retained earnings 1,366,300
---------
2,400,200
Less common stock held in treasury, at cost;
19,802 shares 52,400
---------
2,347,800
---------
$2,659,500
==========
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,
2005 2004 2005 2004
---------- --------- ---------- ----------
Net sales $ 996,300 $856,900 $2,693,200 $2,600,500
Cost of goods sold 478,700 455,100 1,369,700 1,379,900
---------- -------- ---------- ----------
Gross profit 517,600 401,800 1,323,500 1,220,600
---------- -------- ---------- ----------
Operating Expenses:
General and administrative 176,200 170,100 521,600 497,100
Selling 75,500 69,900 224,700 248,400
Research and development 109,000 93,800 279,400 288,500
---------- -------- ---------- ----------
360,700 333,800 1,025,700 1,034,000
---------- -------- ---------- ----------
Income from operations 156,900 68,000 297,800 186,600
Interest and other income,
net 1,600 5,600 16,100 12,700
---------- -------- ---------- ----------
Income before income
taxes 158,500 73,600 313,900 199,300
---------- -------- ---------- ----------
Income tax expense:
Current 42,000 25,000 56,000 60,000
Deferred 21,800 - 43,800 -
---------- -------- ---------- ----------
63,800 25,000 99,800 60,000
---------- -------- ---------- ----------
Net income $ 94,700 $ 48,600 $ 214,100 $ 139,300
========== ======== ========== ==========
Basic earnings per common
share $ .10 $ .05 $ .22 $ .14
Diluted earnings per common
share $ .09 $ .05 $ .20 $ .14
Cash dividends declared
per common share $ - $ .05 $ .07 $ .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, 2005 March 31, 2004
-------------- --------------
Operating activities:
Net income $ 214,100 $139,300
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss on sale of investments 1,300 800
Loss on disposal of assets - 200
Depreciation and amortization 49,200 52,100
Deferred income taxes 43,800 -
Income tax benefit of stock options
exercised 1,000 -
Change in assets and liabilities:
Accounts receivable ( 146,000) ( 31,300)
Inventories ( 62,600) ( 40,800)
Prepaid expenses and other
current assets 13,300 14,000
Other assets 33,200 9,000
Accounts payable ( 9,100) 36,400
Accrued expenses and taxes 52,800 80,200
Deferred compensation ( 17,100) ( 9,100)
------------ ------------
Total adjustments ( 40,200) 111,500
------------ ------------
Net cash provided by
operating activities 173,900 250,800
------------ ------------
Investing activities:
Purchase of investment securities,
available for sale ( 163,800) ( 171,600)
Purchase of investment securities,
held to maturity ( 113,500) -
Redemptions of investment securities,
available-for-sale 53,200 92,600
Redemptions of investment securities,
held to maturity 55,500 130,800
Capital expenditures ( 54,300) ( 49,400)
Proceeds from sale of fixed assets - 200
Purchase of intangible assets ( 9,100) -
------------ ------------
Net cash provided by (used in)
investing activities ( 232,000) 2,600
------------ ------------
Financing activities:
Exercise of stock options 5,900 12,900
Cash dividend declared and paid ( 68,300) ( 48,300)
------------ ------------
Net cash used in
financing activities ( 62,400) ( 35,400)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ( 120,500) 218,000
Cash and cash equivalents, beginning of year 241,400 107,600
------------- ------------
Cash and cash equivalents, end of period $ 120,900 $ 325,600
============= ============
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 51,600 $ 200
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, 2004. The results for
the three and nine months ended March 31, 2005,
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 which is 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 manufacture and marketing of
equipment for research in university, hospital and industrial
laboratories. The Company believes that it has only one
reportable segment. Approximately 77.7% and 73.6% of net sales
for the three and nine month periods ended March 31, 2005,
respectively, were derived from the Company's main product, the
Vortex-Genie 2(TM), compared to 75.6% and 77.4% in the comparable
prior year periods.
The Company's export sales (principally Europe and Asia) were
approximately $448,400 and $414,000 for the three month periods
ended March 31, 2005 and 2004, respectively, and $1,196,800 and
$1,165,800 for the nine month periods ended March 31, 2005 and
2004, respectively.
Three of the Company's customers accounted in the aggregate
for 53% and 49% of net sales for the three month periods ended
March 31, 2005 and 2004, respectively, and 51% and 54% of net
sales for the nine month periods ended March 31, 2005 and 2004,
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. Components of inventory are as
follows at March 31, 2005:
March 31, 2005
--------------
Raw Materials $ 561,300
Work in process 39,700
Finished Goods 127,800
------------
$ 728,800
============
4. Earnings per common share:
Basic earnings per common share are computed by dividing net
income by the weighted-average number of shares outstanding.
Diluted earnings per common share includes the dilutive effect of
stock options and a warrant.
Earnings per common share were computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
---------------------- --------------------
2005 2004 2005 2004
Net income $ 94,700 $ 48,600 $ 214,100 $ 139,300
========= ========= ========= =========
Weighted average common
shares outstanding 979,640 964,398 977,278 961,817
Effect of dilutive
securities 74,972 72,676 73,547 48,971
---------- -------- --------- ---------
Weighted average dilutive
common shares outstanding 1,054,612 1,037,074 1,050,825 1,010,788
========== ========= ========= =========
Basic earnings per common
share $ .10 $ .05 $ .22 $ .14
======= ======= ======= =======
Diluted earnings per common
share $ .09 $ .05 $ .20 $ .14
======= ======= ======= =======
All options and the warrant outstanding as of March 31, 2005 and
2004 were included in the foregoing computations.
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and nine month periods ended
March 31, 2005 and 2004.
5
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Stock-Based Compensation Plans:
The Company maintains a 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,
------------------- ------------------
2005 2004 2005 2004
-------- ------- -------- --------
Net income:
As reported $ 94,700 $48,600 $214,100 $139,300
Pro Forma 94,200 48,300 212,600 135,700
Earnings per common and
common equivalent share:
Basic - as reported $ .10 $ .05 $ .22 $ .14
Basic - pro forma $ .10 $ .05 $ .22 $ .14
Diluted - as reported $ .09 $ .05 $ .20 $ .14
Diluted - pro forma $ .09 $ .05 $ .20 $ .13
On December 16, 2004, the Financial Accounting Standards Board
issued Statement No. 123 (revised 2004) that will require
compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be
measured each reporting period. Compensation cost will be
recognized over the period that an employee provides service in
exchange for the award. Statement 123(R) replaces FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supercedes
APB Opinion No. 25, accounting for Stock Issued to Employees.
SFAS 123(R) is effective at the beginning of the next fiscal year
that begins after December 15, 2005. The Company is currently
assessing the impact of adopting SFAS 123(R).
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, relationships with
principal customers, 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 $173,900 for the
nine month period of the current fiscal year as compared to
$250,800 for the comparative period of the prior fiscal year. The
principal factors accounting for the difference were higher
accounts receivable at March 31, 2005 compared to year end,
partially offset by higher net income for the current ine month
period. Cash used in investing activities was $232,000 for
the current period as compared to $2,600 provided in the nine
months ended March 31, 2004 reflecting during the current year
greater amounts of purchases of investment securities and a lower
amount of redemptions. The principal reason that cash used in
financing activities was $62,400 compared to $35,400 for the
prior year period was the higher cash dividend paid in 2005.
As a result of the foregoing, cash and cash equivalents decreased
by $120,500 to $120,900 as of March 31, 2005 from a balance of
$241,400 as of June 30, 2004.
The Company's working capital as of March 31, 2005 increased
$188,700 to $2,172,000 from $1,983,300 at June 30, 2004. The
increase was generated by profitable operations, partially offset
by the cash dividend and capital expenditures. The Company has
available for its working capital needs, a secured bank line of
credit of $200,000 with North Fork Bank with interest at prime,
all of which was available as of March 31, 2005. The Company has
never borrowed under this line of credit. 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
Income before income taxes increased 115% to $158,500 for the
three months ended March 31, 2005 compared to $73,600 for the
three months ended March 31, 2004 as a result of higher sales and
a higher gross profit percentage. The increase in sales was
principally the result of the fulfillment of the previously reported
unusually high level of order backlog at December 31, 2004 due to a
temporary supplier problem. The order backlog at the end of the
current quarter was insignificant. The higher gross profit percentage
arose primarily from lower material and overhead costs and, to some
extent, certain price increases.
Income before income taxes increased 58% to $313,900 for the nine
months ended March 31, 2005 compared to $199,300 for the three
months ended March 31, 2004 also primarily as a result of higher
sales due in large part to greater sales of new products and
accessories and an increased gross profit percentage in the
current nine month period for the reasons discussed above.
The Three Months Ended March 31, 2005 Compared with the Three
Months Ended March 31, 2004.
Net sales for the three months ended March 31, 2005 increased by
$139,400 (16.3%) to $996,300 as compared with $856,900 for the
three months ended March 31, 2004, primarily due to the
fulfillment of the previously reported unusually high level of
order backlog at the end of the prior quarter due to a temporary
supplier problem. The gross profit was $517,600 for the three
months ended March 31, 2005,(a 52.0% gross profit margin) compared
with $401,800, (a 46.9% gross profit margin) for the three months
ended March 31, 2004, due principally to lower material and
overhead costs and to some extent, certain price increases.
General and administrative expenses for the three months ended
March 31, 2005 increased slightly by $6,100 (3.6%) to $176,200
compared with $170,100 for the prior year's quarter due primarily
to increased salaries and insurance expenses.
Selling expenses for the three months ended March 31, 2005
increased $5,600 (8.0%) to $75,500 as compared to $69,900 for the
three months ended March 31, 2004, mainly due to expansion of
marketing programs to include advertisements in various trade and
distributor publications.
Research and development expenses increased by $15,200 (16.2%) to
$109,000 for the three months ended March 31, 2005 as compared
with $93,800 for the prior year period as a result of greater new
product development efforts.
As a result of the foregoing, the Company's income before income
taxes increased $84,900 (115%) to $158,500 for the three months
ended March 31, 2005 compared to $73,600 for the three months
ended March 31, 2004.
In view of the higher income and increase in the effective tax
rate, income tax expense for the three months ended March 31, 2005
increased to $63,800 as compared with $25,000 for the prior year's
quarter.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
The Nine Months Ended March 31, 2005 Compared with the Nine Months
Ended March 31, 2004.
Net sales increased $92,700 (3.6%) to $2,693,200 for the nine
months ended March 31, 2005 compared to $2,600,500 for the nine
months ended March 31, 2004, primarily due to increased sales of
our new products and product accessories.
The gross profit margin of 49.1% for the nine months ended March
31, 2005, was higher than the gross profit margin of 46.9% for the
nine months ended March 31, 2004 due mainly to lower material,
labor, and overhead costs and to some extent, certain price increases.
General and administrative expenses for the nine months ended
March 31, 2005 were $521,600, an increase of $4,500 (4.9%), as
compared with $497,100 for the nine months ended March 31, 2004
due primarily to increased salaries and insurance expenses.
Selling expenses for the nine months ended March 31, 2005
decreased $23,700 (9.5%) to $224,700, as compared with $248,400
for the nine months ended March 31, 2004, due to lower advertising
expenses during the first six months of the current year's nine
month period and the new website and sales training expenses
incurred last year.
Research and development expenses decreased slightly by $9,100
(3.3%) to $279,400 for the nine months ended March 31, 2005 as
compared with $288,500 for the comparable prior year period
despite an overall increase in our research and development
effort, which however, was more than offset by the significant
expenditures incurred in the development of the new MicroPlate
Genie(TM) during the first half of last fiscal year.
As a result of the foregoing, the Company's income before income
taxes increased $114,600 (57.5%) to $313,900 for the nine months
ended March 31, 2005 compared to $199,300 for the nine months
ended March 31, 2004.
As a result of the higher income and increase in the effective tax
rate for the period, income tax expense was $99,800, compared to
$60,000 for the prior year comparable period.
ITEM 3. 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 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.
There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal
quarter that materially affected or is reasonably likely to
materially affect the Company's internal controls over financial
reporting.
9
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:
During the three months ended March 31,
2005, Registrant filed a report on Form 8-K
on March 23, 2005 reporting under Item
1.01, Entry into a Material Definitive
Agreement.
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,
Treasurer, and Chief Financial Officer
Date: May 16, 2005