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, 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 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 9, 2007: 1,129,352 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 SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2006
_________________
Current Assets:
Cash and cash equivalents $ 292,700
Investment securities 910,300
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 715,600
Inventories 1,157,800
Prepaid expenses and other current assets 71,200
Deferred taxes 28,100
__________
Total current assets 3,175,700
Property and equipment at cost, less accumulated
depreciation of $516,600 238,800
Intangible assets, less accumulated amortization
of $76,400 667,700
Other 45,700
__________
Total assets $4,127,900
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 261,600
Customer advances 181,800
Accrued expenses and taxes 378,700
Dividends payable 70,000
__________
Total current liabilities 892,100
__________
Deferred taxes 7,300
__________
Negative goodwill 72,700
__________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,145,154 issued and outstanding 57,200
Additional paid-in capital 1,390,500
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 5,500)
Retained earnings 1,766,000
__________
3,208,200
Less common stock held in treasury, at cost,
19,802 shares 52,400
__________
3,155,800
__________
$4,127,900
==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
____________________ ______________________
2006 2005 2006 2005
____________________ ______________________
Net sales $1,263,300 $928,100 $2,066,200 $1,818,100
Cost of goods sold 802,300 463,400 1,190,800 896,700
__________ ________ __________ __________
Gross profit 461,000 464,700 875,400 921,400
__________ ________ __________ __________
Operating Expenses:
General & administrative 207,600 212,700 372,200 386,700
Selling 78,600 66,900 148,800 130,400
Research & development 89,000 78,400 168,400 170,200
__________ ________ __________ __________
375,200 358,000 689,400 687,300
__________ ________ __________ __________
Income from operations 85,800 106,700 186,000 234,100
Interest & other
income, net 17,400 10,900 31,800 18,400
__________ ________ __________ __________
Income before income taxes 103,200 117,600 217,800 252,500
__________ ________ __________ __________
Income tax expense:
Current 32,600 18,900 69,600 56,900
Deferred 1,500 9,000 1,500 9,000
__________ ________ __________ __________
34,100 27,900 71,100 65,900
__________ ________ __________ __________
Net income $ 69,100 $ 89,700 $ 146,700 $ 186,600
========== ======== ========== ==========
Basic earnings per common
share $ .07 $ .09 $ .14 $ .19
Diluted earnings per common
share $ .06 $ .08 $ .14 $ .18
Cash dividends declared
per common share $ - $ - $ .07 $ .09
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended
December 31, 2006 December 31, 2005
_________________ _________________
Operating activities:
Net income $ 146,700 $ 186,600
_________ __________
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain (loss) on sale of investments ( 200) 2,500
Depreciation and amortization 33,500 47,000
Deferred income taxes 1,500 9,000
Income tax benefit of stock options
exercised - 900
Changes in assets and liabilities:
Accounts receivable (284,300) ( 41,800)
Inventories 221,500 ( 2,600)
Prepaid expenses and other
current assets 40,300 8,900
Other assets 18,100 ( 1,600)
Accounts payable ( 45,400) 18,400
Customer advances ( 70,000) -
Accrued expenses and taxes 95,200 ( 46,100)
Deferred compensation - 1,600
__________ __________
Total adjustments 10,200 ( 3,800)
__________ __________
Net cash provided by
operating activities 156,900 182,800
__________ __________
Investing activities:
Net cash used in acquisition of
Altamira Instruments, Inc. (346,500) -
Purchase of investment securities,
available-for-sale ( 11,600) (334,300)
Redemptions of investment securities,
available-for-sale 275,700 123,900
Redemptions of investment securities,
held to maturity - 40,000
Capital expenditures - ( 22,400)
Purchase of intangible assets ( 9,500) ( 4,600)
__________ __________
Net cash used in
investing activities ( 91,900) ( 197,400)
__________ __________
Financing activities,
exercise of stock options - 2,000
__________ __________
Net increase (decrease) in cash
and cash equivalents 65,000 ( 12,600)
Cash and cash equivalents,
beginning of year 227,700 183,900
_________ __________
Cash and cash equivalents, end of period $ 292,700 $ 171,300
========= ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 84,500 $ 99,000
See notes to unaudited condensed consolidated financial statements
3
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-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, 2006. The results for
the three and six months ended December 31, 2006,
are not necessarily an indication of the results
of the full fiscal year ending June 30, 2007.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements
include the accounts of the Company and its subsidiaries:
Scientific Packaging Industries, Inc., a New York corporation
and an inactive wholly owned subsidiary of the Company, and
since November 30, 2006, Altamira Instruments, Inc.
("Altamira"), a Delaware corporation and wholly owned
subsidiary of the Company from the date of acquisition
(November 30, 2006). All intercompany items and transactions
have been eliminated in consolidation.
2. Acquisition of Altamira Instruments, Inc.
On November 30, 2006, the Company acquired the outstanding
capital stock of Altamira, a privately held Delaware
corporation engaged from its facility in Pittsburgh,
Pennsylvania, in the production and sale of a variety of custom
catalyst research instruments. The acquisition was pursuant to
a Stock Purchase Agreement dated as of November 30, 2006 (the
"Agreement") whereby the Company paid the previous holders of
capital stock of Altamira $400,000 in cash, issued 125,000
shares of Common Stock and agreed to make additional cash
payments equal to 5%, subject to possible adjustment, of the
net sales of Altamira for each of five periods - the first
period is December 1, 2006 through June 30, 2007, the next
three are to be each of the years ending June 30, 2008, June
30, 2009 and June 30, 2010 and the fifth period is to be July
1, 2010 through November 30, 2010.
Altamira's principal customers are universities, government
laboratories, and chemical and petrochemical companies. The
instruments which are customizable to the customers'
specifications, are sold on a direct basis.
4
In conjunction with the acquisition of Altamira, management of
the Company, with the assistance of an independent valuation
firm, valued the tangible and intangible assets acquired.
Assets identified through this valuation process included
goodwill, customer relationships, non-compete agreements, and
certain technology, trade names and trade marks. The carrying
amounts of goodwill and other intangible assets are presented
in "Note 8. Goodwill and Other Intangible Assets" which
represent the preliminary valuations performed in conjunction
with the acquisition. In addition, other fair market value
adjustments were made in conjunction with the acquisition,
which primarily include adjustments to property and equipment,
and inventory. The Company anticipates that an election will
be made to treat the acquisition of Altamira stock as a
purchase of assets for tax purposes. If the election is not
made, a deferred tax liability of approximately $325,000 would
have to be recorded along with a corresponding increase to
goodwill.
The acquisition was recorded under the purchase method of
accounting. The preliminary net purchase price has been
allocated to assets acquired and liabilities assumed based on
the estimated fair market value at the date of the acquisition
of Altamira. The preliminary allocation of the net purchase
price is as follows:
Current Assets $ 734,000
Property and Equipment 140,300
Non-current Assets 25,100
Negative Goodwill ( 91,500)
Other Intangible Assets 639,000 *
Current Liabilities ( 561,900)
__________
Preliminary Net Purchase Price $ 885,000
==========
* Of the $639,000 of acquired other intangible assets,
$237,000 was assigned to customer relationships with a
weighted-average estimated useful life of 10 years, $300,000
was assigned to technology including trade names and trade
marks with a useful life of 5 years, and $102,000 was assigned
to a non-compete agreement with a useful life of 5 years. The
amounts assigned to the customer relationships are being
amortized on an accelerated (declining balance) method and the
other intangibles are being amortized on a straight line basis.
Pro forma results
The unaudited pro forma condensed financial information in the
table below summarizes the combined results of operations of
Scientific Industries, Inc. ("Scientific") and Altamira, on a
pro forma basis, as though the companies had been combined as
of the beginning of each of the periods presented, giving
effect to the Company's acquisition of Altamira on November 30,
2006. The unaudited pro forma condensed financial information
presented below is for informational purposes only and is not
intended to represent or be indicative of the consolidated
results of the operations that would have been achieved if the
acquisition had been completed as of the dates presented:
5
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
_______________________ _____________________
2006 2005 2006 2005
__________ __________ __________ __________
Net Sales $1,808,700 $1,319,000 $3,091,500 $2,415,800
Net income $ 219,200 $ 65,500 $ 205,700 $ 63,000
Net income per share
- basic $ .19 $ .06 $ .18 $ .06
Net income per share
- diluted $ .18 $ .05 $ .17 $ .05
3. Line of Business and Concentrations:
As a result of the acquisition of Altamira, the Company now views
its operations as principally two segments: the manufacturing and
marketing of standard benchtop laboratory equipment for research in
university, hospital and industrial laboratories sold primarily
through laboratory equipment distributors ("laboratory equipment
operations"), and the manufacturing and marketing of custom-made
catalyst research instruments for research in universities,
government laboratories, and chemical and pretrochemical companies
sold on a direct basis ("catalyst research instruments
operations"). Substantially all of the management and employees of
Altamira were retained subsequent to the acquisition.
Segment information is reported as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
_______________________ _____________________
2006 2005 2006 2005
Net Sales:
Laboratory equipment(1) $ 887,000 $ 928,100 $1,689,900 $1,818,100
Catalyst research
instruments 376,300 - 376,300 -
Net Income:
Laboratory equipment $ 108,800 $ 89,700 $ 186,400 $ 186,600
Catalyst research
instruments ( 39,700) - ( 39,700) -
Segment Assets: December 31, 2006
_________________
Laboratory equipment $3,667,700
Catalyst research
instruments 460,200
6
(1) Approximately 70% and 75% of net sales for the laboratory
equipment operations for the three month periods ended December
31, 2006 and 2005, respectively, were derived from the
Company's main product, the Vortex-Genie 2(R) mixer, excluding
accessories, and approximately 71% for the laboratory equipment
operations for each of the six month periods ended December 31,
2006 and 2005. In addition, three of the customers for the
laboratory equipment operations accounted in the aggregate for
28% and 46% of total net sales of laboratory equipment
operations for the three month periods ended December 31, 2006
and 2005, respectively, and 31% and 49% of total net sales for
the six month periods ended December 31, 2006 and 2005,
respectively.
The Company's consolidated export sales (principally Europe and
Asia) were approximately $599,900 and $434,000 for the three
month periods ended December 31, 2006 and 2005, respectively,
and $939,800 and $783,000 for the six month periods ended
December 31, 2006 and 2005, respectively.
4. 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,
2006
___________
Raw Materials $ 758,200
Work in process 315,400
Finished Goods 84,200
___________
$ 1,157,800
===========
5. 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 include the dilutive effect
of stock options and a warrant which was exercised at the end
of September, 2005.
Earnings per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
___________________ __________________
2006 2005 2006 2005
Net income $ 69,100 $ 89,700 $ 146,700 $186,600
======== ======== ========= ========
Weighted average common
shares outstanding 1,043,830 991,098 1,022,091 985,704
Effect of dilutive
securities 66,899 76,072 62,933 78,294
_________ _________ _________ ________
Weighted average dilutive
common shares outstanding 1,110,729 1,067,170 1,085,024 1,063,998
========= ========= ========= =========
Basic earnings per
common share $ .07 $ .09 $ .14 $ .19
Diluted earnings per
common share $ .06 $ .08 $ .14 $ .18
7
6. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and six month periods ended
December 31, 2006 and 2005.
7. Stock-Based Compensation Plans:
The Company maintains an Incentive Stock Option Plan which
through the fiscal year ended June 30, 2006 the grants were
accounted for under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under this method, no
stock-based compensation costs were reflected in net income, as
all options granted under those plans had an exercise price
equal to the fair 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(R), "Accounting for Stock-Based Compensation," to
stock-based employee compensation in the prior period:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
___________________ _________________
2005 2005
___________________ _________________
Net income:
As reported $ 89,700 $186,600
Pro Forma 89,300 185,700
Earnings per common and
common equivalent share:
Basic - as reported $ .09 $ .19
Basic - pro forma $ .09 $ .19
Diluted - as reported $ .08 $ .18
Diluted - pro forma $ .08 $ .17
Any stock-based compensation transaction subsequent to June 30,
2006 is to be accounted for using Statement of Financial
Accounting Standards No. 123(R). This statement, issued on
December 16, 2004, by the Financial Accounting Standards Board,
requires compensation costs related to stock-based payment
transactions to be recognized commencing with the first
reporting period in our fiscal year ending June 30, 2007. With
limited exceptions, the amount of compensation cost is 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 costs are
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. The Company did not incur any stock-based
compensation costs for the three and six months ended December
30, 2006.
8
8. Goodwill and Other Intangible Assets
In conjunction with the acquisition of Altamira, management of
the Company, with the assistance of an independent valuation
firm, valued the tangible and intangible assets acquired.
Assets identified through this valuation process included
customer relationships, technology which encompasses trade
names, trade marks, and licenses, and non-compete agreements.
The valuation resulted in negative goodwill of approximately
$91,500. However, the acquisition's stock purchase agreement
provides for contingent future payments based on net sales
subject to certain limits, which are expected to be earned and
paid and the negative goodwill is eventually expected to be
fully eliminated. Management estimates that the acquisition of
Altamira will ultimately result in goodwill of approximately
$300,000 to $400,000. As of December 31, 2006 the negative
goodwill, which has been classified as a deferred
credit, was reduced to $72,700 as a result of additional
contingent consideration earned.
In accordance with Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets,", goodwill and
other intangible assets are tested for impairment on an annual
basis, or earlier if indicators of impairment exist. As of
December 31, 2006, the Company determined that there were no
current indicators of impairment. In assessing the
recoverability of goodwill and purchased intangible assets,
management must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the
respective assets. It is reasonably possible that these
estimates, or their related assumptions, may change in the
future, in which we may be required to record impairment
charges for these assets.
The Company's amortizable other intangible assets are amortized
using straight line and accelerated amortization methods based
on expected benefits derived from each intangible asset.
The components of purchased intangible assets as of December
31, 2006 were as follows:
Gross Accum- Net
Useful Carrying ulated Carrying
Lives Amount Amortizaton Amount
______ ________ ___________ ________
Technology 5 yrs. $300,000 $ 5,000 $295,000
Customer relationships 10 yrs. 237,000 5,300 231,700
Non-Compete agreement 5 yrs. 102,000 1,700 100,300
Other Intangible Assets 5 yrs. 105,100 64,400 40,700
________ _______ ________
$744,100 $76,400 $667,700
======== ======= ========
Total amortization expense related to intangible assets was
$17,200 and $20,200 for the three and six months ended December
31, 2006 and $1,600 and $3,100 for the three and six months
ended December 31, 2005. As of December 31, 2006, estimated
future amortization expense related to intangible assets is
$78,400 for the remainder of fiscal 2007, $146,800 for fiscal
2008, $132,000 for fiscal 2009, $122,300 for fiscal 2010,
$100,800 for fiscal 2011, $55,200 for fiscal 2012 and $32,200
thereafter.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
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, the ability to produce and
finance catalyst research instruments to customers' satisfaction,
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
Cash and cash equivalents increased by $65,000 to $292,700 as of
December 31, 2006 from $227,700 as of June 30, 2006.
Net cash provided by operating activities was $156,900 for the six
month period of the current fiscal year as compared to $182,800 in
the comparative period for 2005, mainly the result of higher
balances of accounts receivable, partially offset by higher
inventories and accrued expenses. Cash used in investing activities
was $91,900 for the current period as compared to $197,400 for the
six months ended December 31, 2005. The Company used net cash of
$346,500 in connection with the acquisition of Altamira, for which
redemptions of investment securities amounting to $275,700 were
effected, with the remaining cash utilized from operations.
On September 29, 2006, the Board of Directors of the Company
declared a cash dividend of $.07 per share of Common Stock payable
on January 12, 2007 to holders of record as of the close of
business on October 30, 2006.
The Company's working capital of $2,283,600 as of December 31, 2006
decreased $205,500 from the working capital of $2,489,100 at June
30, 2006, mostly due to the acquisition of Altamira. 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 December 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 during the
next 12 months from its available financial resources which include
its cash and investment securities.
10
Results of Operations
Financial Overview
As previously reported, during the quarter ended December 31, 2006,
the Company acquired 100% of the outstanding capital stock of
Altamira, and as a result, the results of Altamira from the date of
acquisition (November 30, 2006) are reflected in the consolidated
results of the Company. In addition, the consolidated results
reflect certain adjustments related to the recording of the
acquisition, including adjustments of inventory and fixed assets to
fair market values, purchased intangible assets, and related
depreciation and amortization.
The Three Months Ended December 31, 2006 Compared with the Three
Months Ended December 31, 2005.
The Company's net sales for the three months ended December 31,
2006 increased by $335,200 (36.1%) to $1,263,300 compared with
$928,100 for the three months ended December 31, 2005 as a result
of the revenues from the Altamira operation for December 2006,
partially offset by a $41,100 (4.4%) decrease in the net sales of
the laboratory equipment operations due to the discontinuance of
purchases by our previous major laboratory equipment distributor,
partially offset by increased sales to other distributors and
higher direct sales. Altamira's revenues, unlike the laboratory
equipment revenues, are subject to great volatility from month to
month because revenues for the catalyst instrument operations are
mostly comprised of large orders, which typically average over
$100,000 each.
The gross profit percentage for the three months ended December 31,
2006 decreased to 36.5% compared to 50.1% for the three months
ended December 31, 2005. At the date of Altamira's acquisition, the
work-in-progress was adjusted upwards to fair value so that the
adjusted value would allow for the Company's profit allowance upon
completing the manufacture of orders in process. All significant
selling efforts were performed by Altamira prior to acquisition.
The Company recognizes revenue upon shipment of goods, passage of
title and customer acceptance. While revenue has been reported by
the Company for Altamira's sales post acquisition, a significant
portion of the gross profit has been attributed to the period
prior to acquisition. Accordingly, the gross profit for the period
was lower than normal by $106,500. Moreover, gross profit for the
quarter ended March 31, 2007 is expected to be reduced by $65,000
for the reasons described above. In addition, Altamira's normal
gross profit percentage can vary significantly depending on the
type of job, while the gross profit percentage for the laboratory
equipment operations for the three months ended December 31, 2006
and December 31, 2005 was 50.9% and 50.1%, respectively.
General and administrative expenses for the three months ended
December 31, 2006 were $207,600, a decrease of $5,100 (2.4%) from
$212,700 for the three months ended December 31, 2005, primarily
due to higher costs incurred by the Company during 2005 in pursuit
of business opportunities. The current year's three month period
includes approximately $17,200 of expenses of Altamira subsequent
to the acquisition date.
11
Selling expenses for the three months ended December 31, 2006
totaled $78,600, an increase of $11,700 (17.5%) from $66,900 for
the three months ended December 31, 2005 mainly due to selling
expenses of $24,300 of the acquired operation for December 2006,
partially offset by lower expenses of our laboratory equipment
operation.
Research and development expenses for the three months ended
December 31, 2006 increased by $10,600 (13.5%) to $89,000 as
compared to $78,400 for the three months ended December 31, 2005 as
a result of the expenses incurred in developing our licensed
disposable sensor products.
Interest and other income increased $6,500 (59.6%) to $17,400 for
the three months ended December 31, 2006 compared with $10,900 for
the three months ended December 31, 2005 mainly due to higher
interest rates and balances of investment securities for the
majority of the current year's period.
As a result of the above, the Company's income before income taxes
was $103,200 for the three months ended December 31, 2006, a decrease
of $14,400 (12.2%) as compared to $117,600 for the three months ended
December 31, 2005.
Income taxes were $34,100 for the three months ended December 31,
2006 compared to $27,900 for the comparable period last year,
mainly because the anticipated rate in the 2005 period was based on
slightly lower rate for the year.
As a result of the above, the Company's net income was $69,100 for
the three months ended December 31, 2006, a decrease of $20,600
(23.0%) as compared to $89,700 for the three months ended
December 31, 2005.
The Six Months Ended December 31, 2006 Compared with the Six Months
Ended December 31, 2005.
The Company's net sales for the six months ended December 31, 2006
increased by $248,100 (13.7%) to $2,066,200 compared with
$1,818,100 for the six months ended December 31, 2005 as a result
of the revenues of $376,300 of the acquired catalyst research
instrument operations for December 2006, partially offset by a
$128,200 (7.1%) decrease in net sales of our laboratory equipment
operations, the result of the discontinuance of purchases by our
previous major customer. The loss of such sales was partially
offset by increased sales to other distributors and higher direct
sales. The acquired operation's revenues are subject to great
volatility from month to month because its revenues are mostly
comprised of a few orders, which typically average over $100,000 each.
The gross profit percentage for the six months ended December 31,
2006 decreased to 42.4% compared to 50.7% for the six months ended
December 31, 2005. At the date of Altamira's acquisition, the
work-in-progress was adjusted upwards to fair value so that the
adjusted value would allow for the Company's profit allowance upon
completing the manufacture of orders in process. All significant
selling efforts were performed by Altamira prior to acquisition.
The Company recognizes revenue upon shipment of goods, passage of
title and customer acceptance. While revenue has been reported by
the Company for Altamira's sales post acquisition, a significant
portion of the earnings thereon have been attributed to the period
prior to acquisition. Accordingly, the gross profit for the period
was lower than normal by $106,500. Moreover, gross profit for the
quarter ended
12
March 31, 2007 is expected to be reduced by $65,000 for the reasons
described above. The normal gross profit percentage for the
Altamira operation can vary significantly depending on the type
of job. The gross profit percentage for the six months ended
December 31, 2006 for the laboratory equipment operations was
51.2%, a slight increase from 50.7% for the comparable period
last year, mostly as a result of lower factory overhead.
General and administrative expenses for the six months ended
December 31, 2006 were $372,200, a decrease of $14,500 (3.7%) from
$386,700 for the six months ended December 31, 2005, primarily due
to the higher costs incurred by the Company in pursuit of business
opportunities in the prior year's comparable period. The current
year's three month period includes approximately $17,200 of
expenses of Altamira subsequent to the acquisition date.
Selling expenses for the six months ended December 31, 2006 totaled
$148,800, an increase of $18,400 (14.1%) from $130,400 for the six
months ended December 31, 2005 mainly due to selling expenses of
$24,300 for December 2006 incurred by the acquired operation,
partially offset by a reduction of selling expenses of the
laboratory equipment operations.
There was no material change in research and development expenses-
$168,400 for the six months ended December 31, 2006 compared with
$170,200 for the prior year's six month period.
Interest and other income increased $13,400 (72.8%) to $31,800 for
the six months ended December 31, 2006 compared with $18,400 for
the six months ended December 31, 2005 mainly due to higher
interest rates and balances of investment securities for most of
the 2006 period.
As a result of the above, the Company's income before income taxes
was $217,800 for the six months ended December 31, 2006, a decrease
of $34,700 (13.7%) as compared to $252,500 for the six months ended
December 31, 2005.
Income taxes were $71,100 for the six months ended December 31,
2006 compared to $65,900 for the comparable period last year,
mainly because the anticipated rate in the 2005 period was based on
a slightly lower rate for fiscal 2006.
As a result of the above, the Company's net income was $146,700 for
the six months ended December 31, 2006, a decrease of $39,900 (21.4%)
as compared to $186,600 for the six months ended December 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.
13
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.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2006 Annual Meeting of Stockholders held on
December 4, 2006, stockholders (i) re-elected as Class C Directors
to serve until the Annual Meeting of Stockholders with respect to
the fiscal year ending June 30, 2009 and the due election and
qualification of their successors, namely Mr. Arthur M. Borden by
610,031 shares "For" and 144,148 shares "Withheld" and Mr. James S.
Segasture by 614,533 shares "For", and 139,646 shares "Withheld";
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, 2007 by a
vote of 754,048 shares "For", 0 shares "Against", and 131 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.
(b) Reports on Form 8-K:
Registrant filed during the three months
ended December 31, 2006 the following
reports on Form 8-K:
Filed on December 29, 2006 reporting
under Item 1,01.
Filed on December 5, 2006 reporting
under Items 2.01, 3.02, 5.01, and 9.01.
Filed on December 4, 2006 reporting
under Item 7.01.
14
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
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 20, 2007
15