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, 2006
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 5, 2006: 1,000,352 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, 2006
--------------
Current Assets:
Cash and cash equivalents $ 148,200
Investment securities 1,165,800
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 459,500
Inventories 898,400
Prepaid expenses and other current assets 98,200
Deferred taxes 34,000
----------
Total current assets 2,804,100
----------
Property and equipment at cost, less accumulated
depreciation of $482,600 121,200
----------
Other assets and deferred charges:
Intangible assets, less accumulated amortization
of $51,400 20,500
Other 20,600
----------
41,100
----------
$2,966,400
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 90,700
Accrued expenses and taxes 212,100
----------
Total current liabilities 302,800
----------
Deferred taxes 9,000
----------
Shareholders' equity:
Common stock $.05 par value; authorized 7,000,000 shares; 51,000
1,020,154 shares issued and outstanding
Additional paid-in capital 1,008,100
Accumulated other comprehensive loss, unrealized
holding loss on investment securities (8,500)
Retained earnings 1,656,400
---------
2,707,000
Less common stock held in treasury, at cost;
19,802 shares 52,400
---------
2,654,600
---------
$2,966,400
==========
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,
--------------------- ---------------------
2006 2005 2006 2005
---------- -------- ---------- ----------
Net sales $ 919,400 $996,300 $2,737,500 $2,693,200
Cost of goods sold 472,100 478,700 1,368,800 1,369,700
---------- -------- ---------- ----------
Gross profit 447,300 517,600 1,368,700 1,323,500
---------- -------- ---------- ----------
Operating Expenses:
General and administrative 176,700 176,200 563,400 521,600
Selling 54,600 75,500 185,000 224,700
Research and development 72,900 109,000 243,100 279,400
---------- -------- ---------- ----------
304,200 360,700 991,500 1,025,700
---------- -------- ---------- ----------
Income from operations 143,100 156,900 377,200 297,800
Interest and other income,
net 12,600 1,600 31,000 16,100
---------- -------- ---------- ----------
Income before income
taxes 155,700 158,500 408,200 313,900
---------- -------- ---------- ----------
Income tax expense:
Current 41,500 42,000 98,400 56,000
Deferred 12,000 21,800 21,000 43,800
---------- -------- ---------- ----------
53,500 63,800 119,400 99,800
---------- -------- ---------- ----------
Net income $102,200 $ 94,700 $ 288,800 $ 214,100
========== ======== ========== ==========
Basic earnings per common
share $ .10 $ .10 $ .29 $ .22
Diluted earnings per common
share $ .10 $ .09 $ .27 $ .20
Cash dividends declared
per common share $ - $ - $ .09 $ .07
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, 2006 March 31, 2005
Operating activities:
Net income $ 288,800 $ 214,100
---------- ----------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss on sale of investments 2,500 1,300
Depreciation and amortization 61,800 49,200
Deferred income taxes 21,000 43,800
Income tax benefit of stock options
exercised 4,400 1,000
Change in assets and liabilities:
Accounts receivable ( 8,900) ( 146,000)
Inventories ( 98,000) ( 62,600)
Prepaid expenses and other
current assets ( 40,400) 13,300
Other assets 19,400 33,200
Accounts payable 8,300 ( 9,100)
Accrued expenses and taxes ( 25,100) 52,800
Deferred compensation ( 19,400) ( 17,100)
------------ ------------
Total adjustments ( 74,400) ( 40,200)
------------ ------------
Net cash provided by
operating activities 214,400 173,900
Investing activities:
Purchase of investment securities,
available for sale ( 339,200) ( 163,800)
Purchase of investment securities,
held to maturity - ( 113,500)
Redemptions of investment securities,
available-for-sale 123,900 53,200
Redemptions of investment securities,
held to maturity 72,300 55,500
Capital expenditures ( 24,900) ( 54,300)
Purchase of intangible assets ( 4,600) ( 9,100)
------------ ------------
Net cash used in
investing activities ( 172,500) ( 232,000)
Financing activities:
Exercise of stock options 11,500 5,900
Cash dividend declared and paid ( 89,100) ( 68,300)
------------ ------------
Net cash used in
financing activities ( 77,600) ( 62,400)
------------ ------------
Net decrease in cash and cash
equivalents ( 35,700) ( 120,500)
Cash and cash equivalents, beginning of year 183,900 241,400
------------ ------------
Cash and cash equivalents, end of period $ 148,200 $ 120,900
============ ============
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 112,900 $ 51,600
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, 2005. The results for
the three and nine months ended March 31, 2006,
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 73% and 76% of net sales for
the three and nine month periods ended March 31, 2006,
respectively, were derived from the Company's main product, the
Vortex-Genie 2, compared to 78% and 74% in the comparable prior
year periods.
The Company's export sales (principally Europe and Asia) were
approximately $424,600 and $448,400 for the three month periods
ended March 31, 2006 and 2005, respectively, and $1,207,700 and
$1,196,800 for the nine month periods ended March 31, 2006 and
2005, respectively.
Three of the Company's customers accounted in the aggregate
for 49% of net sales for both of the three month periods ended
March 31, 2006 and 2005, and 49% and 51% of net sales for the nine
month periods ended March 31, 2006 and 2005, respectively (see
Financial Overview).
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, 2006:
March 31, 2006
--------------
Raw Materials $ 781,300
Work in process 29,400
Finished Goods 87,700
--------------
$ 898,400
==============
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, which was exercised at the end of
September 2005.
Earnings per common share were computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
2006 2005 2006 2005
-------------------- --------------------
Net income $ 102,200 $ 94,700 $ 288,800 $ 214,100
========= ========= ========= =========
Weighted average common
shares outstanding 995,652 979,640 988,972 977,278
Effect of dilutive
securities 79,175 74,972 78,588 73,547
--------- --------- --------- ---------
Weighted average dilutive
common shares outstanding 1,074,827 1,054,612 1,067,560 1,050,825
========= ========= ========= =========
Basic earnings per common
share $ .10 $ .10 $ .29 $ .22
====== ====== ====== ======
Diluted earnings per common
share $ .10 $ .09 $ .27 $ .20
====== ====== ====== ======
All options outstanding as of March 31, 2006 and 2005 were
included in the foregoing computations. A warrant for the
exercise of 17,391 shares was included in the calculation for the
periods prior to its exercise in September 2005.
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and nine month periods ended
March 31, 2006 and 2005.
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,
------------------- ------------------
2006 2005 2006 2005
------------------- ------------------
Net income:
As reported $102,200 $94,700 $288,800 $214,100
Pro Forma 102,200 94,200 287,900 212,600
Earnings per common and
common equivalent share:
Basic - as reported $ .10 $ .10 $ .29 $ .22
Basic - pro forma $ .10 $ .10 $ .29 $ .22
Diluted - as reported $ .10 $ .09 $ .27 $ .20
Diluted - pro forma $ .10 $ .09 $ .27 $ .20
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 for the Company's fiscal year beginning
July 1, 2006. The Company is currently assessing the impact which
SFAS 123(R) will have.
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 increased to $214,400
for the nine months ended March 31, 2006 as compared to $173,900
for the same nine month period of the prior fiscal year; the
increase of $40,500 was primarily due to higher income. Cash used
in investing activities was $172,500 for the current nine month
period as compared to $232,000 for the nine months ended March 31,
2005, a decrease of $59,500, mainly as a result of higher
redemptions of investment securities during the current nine month
period. Cash used in financing activities for the nine months
ended March 31, 2006 was $77,600, compared to $62,400 for the
prior year's nine month period, an increase of $15,200 due to the
higher cash dividend paid in the 2006 period. As a result of the
foregoing, cash and cash equivalents decreased by $35,700 to
$148,200 as of March 31, 2006 from a balance of $183,900 as of
June 30, 2005.
The Company's working capital as of March 31, 2006 increased
$252,500 to $2,501,300 from $2,248,800 at June 30, 2005, mainly
due to income from 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 with interest at prime, all of which was available as of
March 31, 2006. The Company has never borrowed under this line of
credit. Management believes that the Company will be able to meet
its cash flow needs for its operations 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
Due mainly to higher sales, lower operating expenses, and higher
interest income, the Company achieved income before income taxes
of $408,200 for the nine months ended March 31, 2006 compared to
$313,900 for the nine months ended March 31, 2005. Income before
income taxes for the three month comparison period ended March 31,
2006, however, was approximately the same at $155,700 compared to
$158,500.
The Company was recently informed by its principal customer and
distributor for more than 30 years of a change in its selling and
marketing methods. While the distributor will continue to offer
the Vortex-Genie(R) 2 Mixer, it will discontinue the product's
current catalogue number which has been associated with the
product for many years and assign it a different catalogue number.
It will also exclude the product from future printed catalogues;
however, the product will still appear on its website. The
Company believes that the distributor intends to market and
promote a competitive private label product. As a result of the
change, the distributor will no longer purchase products from the
Company for inventory; all sales to the distributor's customers
will be filled by the Company through direct shipment. Sales to
the distributor of the Company's products, predominantly the
Vortex-Genie(R) 2 Mixer and related accessories, accounted for
approximately 23% and 24% of the Company's revenues for the three
and nine month periods ended March 31, 2006 respectively, and 25%
and 23% for the comparable three and nine month periods of the
prior year. The Company is undertaking measures to mitigate the
expected impact on sales and income, including an increase in its
direct selling efforts and working with other distributors to
increase their distribution of the Company's products.
The Three Months Ended March 31, 2006 Compared with the Three
Months Ended March 31, 2005.
Net sales for the three months ended March 31, 2006 decreased by
$76,900 (7.7%) to $919,400 as compared with $996,300 for the three
months ended March 31, 2005, primarily due to the unusually high
level of orders filled in the quarter ended March 31, 2005 due to
a temporary supplier problem in the previous quarter. Due
primarily to increasing raw material costs, the gross profit
margin was reduced to 48.7% ($447,300) for the three months ended
March 31, 2006, from 52.0% ($517,600) for the three months ended
March 31, 2005.
The amounts of general and administrative expenses for the three
month comparative periods were substantially the same, $176,700
for the March 31, 2006 quarter and $176,200 for the March 31, 2005
quarter.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Selling expenses for the three months ended March 31, 2006
decreased by $20,900 (27.7%) to $54,600 as compared to $75,500 for
the three months ended March 31, 2005, mainly due to lower salary
expense and costs related to trade shows. The reduction in salary
expense resulted from the resignation in February 2006 of the
Marketing Director, and subsequent hiring of a replacement at a
lower salary.
Research and development expenses for the three months ended March
31, 2006 were $36,100 (33.1%) lower at $72,900 compared to
$109,000 for the prior year's three month period, during which
substantial expenses were incurred in the development of the
Multi-MicroPlate Genie Mixer.
Interest and other income increased to $12,600 for the three
months ended March 31, 2006 from $1,600 for the prior year's three
month period due to higher interest rates and higher balances of
investment securities.
Income tax expense for the three months ended March 31, 2006 was
$53,500 as compared with $63,800 for the prior year's quarter.
As a result of the foregoing, net income was $7,500 greater,
$102,200 for the three months ended March 31, 2006 compared to
$94,700 for the year earlier quarter.
The Nine Months Ended March 31, 2006 Compared with the Nine Months
Ended March 31, 2005.
Net sales increased $44,300 (1.6%) to $2,737,500 for the nine
months ended March 31, 2006 compared to $2,693,200 for the nine
months ended March 31, 2005, primarily due to a further increase
in sales of new products.
The gross profit margin of 50.0% for the nine months ended March
31, 2006, was slightly higher than the gross profit margin of
49.1% for the nine months ended March 31, 2005 due mainly to lower
overhead costs.
General and administrative expenses for the nine months ended
March 31, 2006 were $563,400, an increase of $41,800 (8.0%), as
compared with $521,600 for the nine months ended March 31, 2005
mainly as a result of an increase in costs for investigating
business opportunities.
Selling expenses for the nine months ended March 31, 2006 were
$185,000 or $39,700 (17.7%) less than $224,700 for the nine months
ended March 31, 2005, due mostly to lower trade show costs and
salary expense; the latter due to the change in marketing
personnel during the quarter.
9
Research and development expenses were $243,100 for the nine
months ended March 31, 2006, $36,300 (13.0%) less than $279,400
for the comparable prior year period during which substantial
development costs for the new Multi-MicroPlate Genie(TM) were
incurred.
Interest and other income increased $14,900 to $31,000 for the
nine months ended March 31, 2006 compared to $16,100 for the nine
months ended March 31, 2005 due to higher interest rates and
balances of investment securities.
Income before income taxes increased $94,300 (30.0%) to $408,200
for the nine months ended March 31, 2006 compared to $313,900 for
the nine months ended March 31, 2005, and as a result, income tax
expense was $119,400 for the nine months ended March 31, 2006,
compared to $99,800 for the prior year comparable nine month period.
As a result of the foregoing, net income increased by $74,700
(34.9%) to $288,800 for the nine months ended March 31, 2006 from
$214,100 for the nine months ended March 31, 2005.
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.
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:
During the three months ended March 31,
2006, Registrant filed a report on Form 8-K
on February 14, 2006 reporting under Item
5.02.
On May 5, 2006, Registrant filed a
report on Form 8-K, reporting under
Item 8.01.
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 12, 2006
12