UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended December 31, 2008
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________ _________________________
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-2217279
____________________________ __________________________________
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
70 Orville Drive, Bohemia, New York 11716
_______________________________________ _______________
(Address of principal executive offices) (Zip Code)
(631)567-4700
_____________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act during the preceding 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
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer Accelerated Filer
____________ _______________
Non-accelerated filer Smaller reporting company X
____________ _______
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
The number of shares outstanding of the issuer's common stock par value,
$0.05 per share, as of February 2, 2009 was 1,185,352 shares.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2008 2008
------------ -----------
Current Assets: (Unaudited)
Cash and cash equivalents $ 346,500 $1,065,500
Investment securities 572,300 682,400
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 as of December 31,
and June 30, 2008 682,800 454,800
Inventories 1,576,100 1,521,400
Prepaid expenses and other current assets 82,700 84,700
Deferred taxes 65,800 31,400
---------- ----------
Total current assets 3,326,200 3,840,200
Property and equipment at cost, less accumulated
depreciation of $622,900 as of December 31, 2008
and $586,900 as of June 30, 2008 235,900 247,400
Intangible assets, less accumulated amortization
of $368,900 as of December 31, 2008, and $299,900
as of June 30, 2008 388,900 454,600
Goodwill 199,600 158,400
Other 46,000 46,000
Deferred taxes 48,600 30,200
---------- ----------
Total assets $4,245,200 $4,776,800
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 207,900 $ 241,800
Customer advances - 379,300
Accrued expenses and taxes 266,200 442,900
Loan payable, bank 50,000 -
Dividends payable 94,500 -
---------- ----------
Total current liabilities 618,600 1,064,000
---------- ----------
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,201,154 issued and outstanding at
December 31, 2008 and June 30, 2008 60,000 60,000
Additional paid-in capital 1,508,600 1,507,000
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 79,500) ( 44,400)
Retained earnings 2,189,900 2,242,600
----------- -----------
3,679,000 3,765,200
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
----------- -----------
Total shareholders' equity 3,626,600 3,712,800
----------- -----------
Total liabilities and
shareholders' equity $4,245,200 $4,776,800
=========== ===========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
--------------------- --------------------
2008 2007 2008 2007
Net sales $1,755,100 $1,845,600 $2,727,400 $3,345,900
Cost of goods sold 1,139,600 1,211,700 1,776,600 2,070,000
---------- ---------- ---------- ----------
Gross profit 615,500 633,900 950,800 1,275,900
---------- ---------- ---------- ----------
Operating Expenses:
General & administrative 249,400 267,700 495,000 513,300
Selling 85,800 123,900 200,100 247,700
Research & development 117,600 119,200 214,200 179,600
---------- ---------- ---------- ----------
452,800 510,800 909,300 940,600
---------- ---------- ---------- ----------
Income from operations 162,700 123,100 41,500 335,300
Interest & other
income, net 6,900 16,900 17,900 29,900
---------- ---------- ---------- ----------
Income before income taxes 169,600 140,000 59,400 365,200
---------- ---------- ---------- ----------
Income tax expense (benefit):
Current 58,100 48,200 36,400 142,200
Deferred ( 8,500) ( 4,400) ( 18,800) ( 19,900)
---------- ---------- ---------- ----------
49,600 43,800 17,600 122,300
---------- ---------- ---------- ----------
Net income $ 120,000 $ 96,200 $ 41,800 $ 242,900
========== ========== ========== ==========
Basic earnings per common
share $ .10 $ .08 $ .04 $ .21
Diluted earnings per common
share $ .10 $ .08 $ .03 $ .20
Cash dividends declared
per common share $ - $ - $ .08 $ .07
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, 2008 December 31, 2007
----------------- -----------------
Operating activities:
Net income $ 41,800 $ 242,900
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 105,000 111,600
Deferred income taxes ( 18,800) ( 19,900)
Stock-based compensation 1,500 1,500
Income tax benefit of stock options
exercised - 7,000
Changes in assets and liabilities:
Accounts receivable (228,000) (404,000)
Inventories ( 54,700) ( 93,200)
Prepaid expenses and other
current assets 2,000 (121,700)
Other assets - ( 400)
Accounts payable ( 33,900) ( 40,000)
Customer advances (379,300) 1,102,300
Accrued expenses and taxes ( 73,000) 87,100
----------- ------------
Total adjustments (679,200) 630,300
----------- ------------
Net cash provided by (used in)
operating activities (637,400) 873,200
----------- ------------
Investing activities:
Additional consideration for acquisition of
Altamira Instruments, Inc. (144,900) (102,800)
Purchase of investment securities,
available-for-sale ( 8,900) ( 12,600)
Redemptions of investment securities,
available-for-sale 50,000 -
Capital expenditures ( 24,400) ( 33,300)
Purchase of intangible assets ( 3,400) ( 3,600)
----------- ------------
Net cash used in
investing activities (131,600) ( 152,300)
----------- ------------
Financing activities:
Proceeds from exercise of stock options - 16,000
Proceeds from line of credit, bank 50,000 -
----------- -----------
Net cash provided by
financing activities 50,000 16,000
----------- -----------
Net increase (decrease) in cash
and cash equivalents ( 719,000) 736,900
Cash and cash equivalents,
beginning of year 1,065,500 388,700
----------- -----------
Cash and cash equivalents, end of period $ 346,500 $1,125,600
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 125,000 $ 87,900
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-Q. 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 that they 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, 2008.
The results for the three and six months ended December 31,
2008, are not necessarily an indication of the results of
the full fiscal year ending June 30, 2009.
1. Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc., Altamira Instruments, Inc.
("Altamira"), a Delaware corporation and wholly-owned subsidiary, and
Scientific Packaging Industries, Inc., an inactive wholly-owned
subsidiary (all collectively referred to as the "Company"). All
material intercompany balances and transactions have been eliminated.
Stock-based compensation:
Stock-based compensation is accounted for using Statement of
Financial Accounting Standards No. 123R "Share-Based Payment", which
requires compensation costs related to stock-based payment
transactions to be recognized commencing with the first reporting
period in our fiscal year ended 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.
2. Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements," which defines fair value, establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurement.
SFAS No. 157 does not require any new fair value measurements. The
provisions of SFAS No. 157 are effective for financial statements
issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. In January 2008, the FASB
deferred the effective date for one year for certain non-financial
assets and non-financial liabilities, except those that are
4
recognized or disclosed at fair value in the financial statements on
a recurring basis (at least annually). The adoption of this standard
and such application had no impact on the Company's financial
condition, results of operations, or cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities Including an
Amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159
allows entities to choose to measure eligible financial instruments
at fair value with changes in fair value recognized in earnings of
each subsequent reporting date. The fair value election is
available for most financial assets and liabilities on an
instrument-by-instrument basis and is to be elected on the date the
financial instrument is initially recognized. SFAS 159 is effective
for all entities as of the beginning of a reporting entity's first
fiscal year that begins after November 15, 2007 (with earlier
application permitted under certain circumstances). The adoption of
SFAS No. 159 had no impact on the Company's financial position or
statement of operations.
In April 2008, the FASB issued FSP 142-3, "Determination of the
Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends
the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, "Goodwill and Other
Intangible Assets." FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. The Company is currently
assessing the impact of FSP 142-3 on its financial position and
results of operations.
3. Acquisition of Altamira Instruments, Inc.:
On November 30, 2006, the Company acquired all of the outstanding
capital stock of Altamira. The acquisition was pursuant to a Stock
Purchase Agreement (the "Agreement") whereby the Company paid to the
sellers $400,000, issued to them 125,000 shares of the Company's
Common Stock and agreed to make additional cash payments equal to 5%,
subject to adjustment, of the net sales of Altamira for each of five
periods December 1, 2006 to June 30, 2007, each of the fiscal years
ending June 30, 2008, 2009, and 2010, and July 1, 2010 to November 30,
2010.
Altamira's principal customers are universities, government
laboratories, and chemical and petrochemical companies. The
instruments are customized to the customer's specifications, and are
sold on a direct basis.
In conjunction with the acquisition of Altamira, management of the
Company valued the tangible and intangible assets acquired, including
goodwill, customer relationships, non-compete agreements, and certain
technology, trade names and trademarks. The carrying amounts of
goodwill and other intangible assets are presented in Note 8,
"Goodwill and Other Intangible Assets" which represent the valuations
determined in conjunction with the acquisition. In addition, other
fair market value adjustments were made in conjunction with the
acquisition, primarily adjustments to property and equipment, and
inventory.
5
As of December 31, 2008, the adjusted aggregate purchase price of
$1,176,100 was allocated to assets acquired and liabilities assumed as
follows:
Current assets $ 734,000
Property and equipment 140,300
Non-current assets 25,100
Goodwill 199,600
Other intangible assets 639,000*
Current liabilities ( 561,900)
-----------
Adjusted purchase price $1,176,100
===========
*Of the $639,000 of other intangible assets, $237,000 was allocated
to customer relationships with a weighted-average estimated useful
life of 10 years, $300,000 was allocated to technology including
trade names and trademarks with a useful life of 5 years, and
$102,000 was allocated to a non-compete agreement with a useful life
of 5 years. The other intangible assets are being amortized on a
straight-line basis except that the amount allocated to the customer
relationships is being amortized on an accelerated (declining
balance) method.
4. Segment Information and Concentrations:
The Company views its operations as two segments: the manufacture
and marketing of standard benchtop laboratory equipment for research
in university, hospital and industrial laboratories sold primarily
through laboratory equipment distributors ("Benchtop Laboratory
Equipment Operations"), and the manufacture and marketing of custom-
made catalyst research instruments for universities, government
laboratories, and chemical and petrochemical companies sold on a
direct basis ("Catalyst Research Instruments Operations").
Segment information is reported as follows:
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
---------- ----------- --------- ------------
Three months ended December 31, 2008:
Net Sales $1,015,900 $ 739,200 $ - $1,755,100
Foreign Sales 645,200 22,200 - 667,400
Segment Profit 109,400 53,300 6,900 169,600
Segment Assets 2,325,700 1,033,300 886,200 4,245,200
Long-Lived Asset
Expenditures 1,500 17,200 - 18,700
Depreciation and
Amortization 14,500 37,500 - 52,000
6
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
---------- ----------- --------- ------------
Three months ended December 31, 2007:
Net Sales $ 988,800 $ 856,800 $ - $1,845,600
Foreign Sales 579,500 - - 579,500
Segment Profit 29,900 96,400 13,700 140,000
Long-Lived Asset
Expenditures 12,100 2,000 - 14,100
Depreciation and
Amortization 14,800 41,000 - 55,800
Approximately 69% and 71% of net sales of benchtop laboratory
equipment for the three month periods ended December 31, 2008 and
2007, respectively, were derived from the Company's main product,
the Vortex-Genie 2(R) mixer, excluding accessories.
Two benchtop laboratory equipment customers accounted in the
aggregate for approximately 30% of the segment's net sales (17% of
total net sales) and 27% of the segment's net sales (14% of total
net sales) for the three month periods ended December 31, 2008 and
2007, respectively. One of the two customers, a major distributor,
which accounted for approximately 14% and 15% of the segment's net
sales for the three month periods ended December 31, 2008 and 2007,
respectively (8% of total net sales for each period) discontinued
the inclusion of the Company's benchtop laboratory equipment
products in its new catalog which was released in January 2009.
While the customer is continuing to sell the products through its
website, Company advertisements in the distributor's interim
publications, and directly upon customer requests, to mitigate the
possible material adverse effect of the discontinuance, the Company
plans to increase advertisements in the distributor's interim
publications, and expand its selling efforts with a view to
increasing sales to other existing distributors. No assurances can
be given that the Company will be successful in those efforts.
Sales of catalyst research instruments are generally pursuant to
large orders averaging more than $100,000 per order to a limited
numbers of customers. Three and two customers accounted for 96% and
84% of that segment's net sales (38% and 39% of total net sales) for
the three months ended December 31, 2008 and 2007, respectively.
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
---------- ----------- --------- ------------
Six months ended December 31, 2008:
Net Sales $1,902,400 $ 825,000 $ - $2,727,400
Foreign Sales 1,125,700 91,500 - 1,217,200
Segment Profit (Loss) 201,700 ( 157,900) 15,600 59,400
Segment Assets 2,325,700 1,033,300 886,200 4,245,200
Long-Lived Asset
Expenditures 4,600 19,800 - 24,400
Depreciation and
Amortization 29,500 75,500 - 105,000
7
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
---------- ----------- --------- ------------
Six months ended December 31, 2007:
Net Sales $1,936,300 $1,409,600 $ - $3,345,900
Foreign Sales 986,900 347,800 - 1,334,700
Segment Profit 193,500 147,600 24,100 365,200
Long-Lived Asset
Expenditures 26,000 7,300 - 33,300
Depreciation and
Amortization 28,600 83,000 - 111,600
Approximately 69% and 70% of net sales of benchtop laboratory
equipment for the six month periods ended December 31, 2008 and
2007, respectively, were derived from the Company's main product,
the Vortex-Genie 2(R) mixer, excluding accessories.
Two benchtop laboratory equipment customers, accounted in the
aggregate for approximately 31% of the segment's net sales for each
six month period (22% and 18% of total net sales for the 2008 and
2007 periods, respectively). One of the two, the major distributor
discussed in this footnote (which discontinued the inclusion of the
Company's products in its new catalog), accounted for approximately
17% and 20% of the segment's net sales for the 2008 and 2007 six
month periods, respectively, (12% of total net sales for each
period).
Sales of catalyst research instruments to three customers, accounted
for approximately 78% of that segment's net sales (23% of total net
sales) for the six months ended December 31, 2008. Sales to three
other customers accounted for 72% of the segment's net sales (30% of
total net sales) for the six month period ended December 31, 2007.
The Company's foreign sales are principally made to customers in
Europe and Asia.
5. Inventories:
Inventories for interim financial statement purposes are based on
perpetual inventory records at the end of the applicable period.
Components of inventory are as follows:
December 31, June 30,
2008 2008
------------ -----------
Raw Materials $1,120,200 $1,037,900
Work in process 298,100 288,600
Finished Goods 157,800 194,900
---------- -----------
$1,576,100 $1,521,400
========== ===========
6. 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, if any.
8
Earnings (loss) per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
------------------- -------------------
2008 2007 2008 2007
------------------- -------------------
Net income $ 120,000 $ 96,200 $ 41,800 $ 242,900
Weighted average common
shares outstanding 1,181,352 1,145,569 1,181,352 1,145,461
Effect of dilutive
securities 28,246 52,901 32,516 53,093
--------- --------- --------- ---------
Weighted average dilutive
common shares outstanding 1,209,598 1,198,470 1,213,868 1,198,554
========= ========= ========= =========
Basic earnings per
common share $ .10 $ .08 $ .04 $ .21
======= ======= ======= =======
Diluted earnings per
common share $ .10 $ .08 $ .03 $ .20
======= ======= ======= =======
Approximately 6,500 shares of the Company's common stock issuable
upon the exercise of outstanding options were excluded from the
calculation of diluted earnings per common share for the three and
six months ended December 31, 2008, because the effect would be
anti-dilutive.
7. Comprehensive Income (Loss):
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes standards for disclosure of
comprehensive income or loss, which includes net income and any
changes in equity from non-owner sources that are not recorded in
the income statement (such as changes in the net unrealized gains or
losses on securities.) The Company's only source of other
comprehensive income is the net unrealized gain or loss on
securities. The components of comprehensive income (loss) were as
follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
-------------------- ------------------
2008 2007 2008 2007
-------------------- ------------------
Net Income $120,000 $ 96,200 $ 41,800 $242,900
--------- --------- -------- --------
Other comprehensive (loss):
Unrealized holding
loss arising during
period, net of tax ( 32,200) ( 6,200) ( 48,400) ( 8,400)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 87,800 $ 90,000 ($ 6,600) $234,500
========== ========== ========== ==========
8. Goodwill and Other Intangible Assets:
In conjunction with the acquisition of Altamira, management of the
Company evaluated the tangible and intangible assets acquired,
including customer relationships, non-compete agreements and
technology which encompasses trade names, trademarks and licenses.
The acquisition agreement provides contingent additional payments to
9
shareholders based on net sales of the catalyst research instrument
operations subject to certain limits, which are expected to be
earned and paid. Additional consideration accrued for the six months
ended December 31, 2008 amounted to $41,200, which resulted in an
increase of goodwill to $199,600 at December 31, 2008 from $158,400
at June 30, 2008.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
------- -------- ------------ ---------
At December 31, 2008:
Technology 5 yrs. $300,000 $125,000 $175,000
Customer relationships 10 yrs. 237,000 112,600 124,400
Non-compete agreement 5 yrs. 102,000 42,500 59,500
Other intangible assets 5 yrs. 118,800 88,800 30,000
-------- -------- --------
$757,800 $368,900 $388,900
-------- -------- --------
Useful Accumulated
Lives Cost Amortization Net
------- -------- ------------ ---------
At June 30, 2008:
Technology 5 yrs. $300,000 $ 95,000 $205,000
Customer relationships 10 yrs. 237,000 90,600 146,400
Non-compete agreement 5 yrs. 102,000 32,300 69,700
Other intangible assets 5 yrs. 115,500 82,000 33,500
-------- -------- --------
$754,500 $299,900 $454,600
-------- -------- --------
Total amortization expense was $34,100 and $38,300 for the three months
ended December 31, 2008 and 2007, respectively and $69,000 and $78,100
for the six months ended December 31, 2008 and 2007, respectively. As of
December 31, 2008, estimated future amortization expense related to
intangible assets is $62,300 for the last six months of fiscal year
ending June 30, 2009, $119,600 for fiscal 2010, $107,900 for fiscal 2011,
$51,000 for fiscal 2012, $11,500 for fiscal 2013, and $36,600 thereafter.
9. Line of Credit
The Company has a line of credit with Capital One Bank, N.A.
("Bank"), which provides for maximum borrowings of up to $500,000.
Interest is charged at the Bank's prime rate, which was 3.25% as of
December 31, 2008. The Company had borrowings outstanding of $50,000
under this line of credit as of December 31, 2008.
The line of credit is collaterized by the Company's assets to the
extent borrowed and outstanding and all outstanding amounts are due
and payable on November 1, 2009.
10
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 finance and produce 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 decreased by $719,000 to $346,500 as of
December 31, 2008 from $1,065,500 as of June 30, 2008 primarily due to
the significant use in the 2008 period of cash advanced in the prior year
period and significantly lower new cash advances from catalyst research
instruments customers.
Net cash used in operating activities was $637,400 for the six months
ended December 31, 2008 as compared to net cash provided by operating
activities of $873,200 for the comparable six month period in 2007; the
change was due mainly to the use of a substantial amount of the cash
advanced in the prior year period from catalyst research instruments
customers, and lower income. Cash used in investing activities was
$131,600 for the six months ended December 31, 2008, compared to $152,300
for the six months ended December 31, 2007 mainly due to investment
redemptions during the current year period. Net cash provided by
financing activities increased to $50,000 compared to $16,000 for the
2007 period due to a $50,000 borrowing under the Company's line of credit
with its bank.
On September 26, 2008, the Board of Directors of the Company declared a
cash dividend of $.08 per share of Common Stock which was paid on January
15, 2009 to holders of record as of the close of business on October 27,
2008.
The Company's working capital decreased by $68,600 to $2,707,600 as of
December 31, 2008 from working capital of $2,776,200 at June 30, 2008
mostly due to lower income for the six months ended December 31, 2008.
The Company has available for its working capital needs, a new one-year
line of credit of $500,000 with Capital One Bank, N.A. replacing an
unused $200,000 line of credit originally made available to the Company
in November 2003. The Company had borrowings of $50,000 outstanding
under this line at December 31, 2008. Advances under the line are
secured by the Company's assets and bears interest at the bank's prime
rate. Management believes that the Company will be able to meet its cash
flow needs during the 12 months ending December 31, 2009 from its
available financial resources including the remaining line of credit
amount, its cash and investment securities, and operations.
11
Results of Operations
---------------------
Financial Overview
------------------
The Company's income before income taxes was $169,600 and $59,400,
respectively, for the three and six month periods ended December 31, 2008
compared to $140,000 and $365,200 for the 2007 periods. For the
comparative three month periods, the benchtop laboratory equipment
operations had an increase in profits of $79,500 (266%) principally due
to higher sales and gross margins, and lower research and development
expenses, while the catalyst research instruments operations experienced
a decrease in profits of $43,100 (45%), mainly the result of lower sales.
For the comparative six month periods, the benchtop laboratory equipment
operations' profits were approximately the same. The catalyst research
instruments operations, however, incurred a loss of $157,900 for the six
months ended December 31, 2008 as compared to a profit of $147,600 for
the prior year six month period. The loss was the result of lower sales
due to slower order input and to a lesser extent, increased research and
development expenses for new product development, which was partially
offset by lower sales commissions. Sales by the catalyst research
instrument operations comprise a small number of large orders, (typically
averaging more than $100,000 each) and as a result, the segment
experiences significant swings in its revenues and results. As of
December 31, 2008, backlog for this segment was $828,000, substantially
all of which is expected to be shipped and recognized in the current
fiscal year.
While the slowdown in the nation's economy has had to date only a limited
adverse effect on the Company's operations, no representation can be made
as to the adverse effect and its duration on the Company's results
particularly as to research grants to customers which fund in part their
benchtop laboratory equipment purchases and the financings of potential
customers for the purchase of catalyst research instruments.
The Three Months Ended September 30, 2008 Compared With the Three Months
Ended September 30, 2007
------------------------------------------------------------------------
Net sales for the three months ended December 31, 2008 decreased $90,500
(4.9%) to $1,755,100 from $1,845,600 for the three months ended December
31, 2007 as a result of lower sales of catalyst research instruments.
Sales of benchtop laboratory equipment products generally are pursuant to
many small purchase orders from distributors. The Company learned in
January 2009 that the new catalog of one of its distributors, to which
the Company had sales accounting for 14% and 15% of the segment's net
sales for the three months ended December 31, 2008 and 2007,
respectively, no longer includes the Company's products. The products
will continue to be offered by the distributor through its website,
advertisements in distributor's interim publications, and by telephone
inquiries. To mitigate the possible adverse effect, the Company plans to
increase its advertisements in the distributor's interim publications and
expand its selling efforts to other distributors. No assurances can be
given that such efforts will be successful.
Sales of the catalyst research instruments are comprised of a small
number of larger orders, typically averaging over $100,000 each; hence
sales revenues are subject to significant swings. As of December 31, 2008
there was a backlog of $828,000 for catalyst research instruments
(substantially all of which is expected to be shipped and recognized in
the current fiscal year) compared to $1,600,000 as of December 31, 2007.
12
The gross profit percentage for the three months ended December 31, 2008
increased to 35.1% from 34.3% for the three months ended December 31,
2007, mainly due to lower direct labor and overhead costs for the
benchtop laboratory equipment operations and the product mix for the
catalyst research instrument operations.
General and administrative expenses ("G&A") for the three month
comparative periods ended December 31, 2008 and December 31, 2007
decreased slightly by $18,300 (6.8%) to $249,400 from $267,700 primarily
as a result of lower executive compensation.
Selling expenses for the three months ended December 31, 2008 decreased
$38,100 (30.8%) to $85,800 compared to $123,900 for the three months
ended December 31, 2007, due primarily to lower commissions with respect
to sales of catalyst research instruments. The Company intends to expand
its benchtop laboratory equipment sales efforts to include the engagement
of one full-time sales person.
Interest and other income for the three months ended December 31, 2008
decreased by $10,000 (59.2%) to $6,900 compared to $16,900 for the three
months ended December 31, 2007 as a result of the reduction of the
balances of cash and investments.
Income tax expense for the three months ended December 31, 2008 was
$49,600 compared to $43,800 for the three months ended December 31, 2007,
mainly due to the higher income.
As a result of the foregoing, net income for the three months ended
December 31, 2008 was $120,000, an increase of $23,800 (24.7%) from
$96,200 for the three months ended December 31, 2007.
The Six Months Ended December 31, 2008 Compared With the Six Months Ended
December 31, 2007
-------------------------------------------------------------------------
Net sales for the six months ended December 31, 2008 decreased by
$618,500 (18.5%)to $2,727,400 compared to $3,345,900 for the six months
ended December 31, 2007, due to a $584,600 reduction in catalyst research
instruments net sales, and a $33,900 reduction in benchtop laboratory
equipment sales. Sales of benchtop laboratory equipment products
generally are comprised of many small purchase orders from distributors.
The Company learned in January 2009 that the new catalog of one of its
distributors, sales to which accounted for 17% and 20% of the segment's
net sales for the six month periods ended December 31, 2008, and 2007,
respectively, no longer includes the Company's products. The products
will continue to be offered by the distributors through its website,
advertisements in distributor's interim publications, and by telephone
inquiries. To mitigate the possible adverse effect, the Company plans to
increase its advertisements in the distributor's interim publications and
expand its selling efforts to other distributors. No assurances can be
given that such efforts will be successful.
Sales of catalyst research instruments are comprised of a small number of
large orders, typically averaging over $100,000 each; hence revenues are
subject to significant swings. As of December 31, 2008 there was a
backlog of $828,000 for the catalyst research instruments compared to
$1,600,000 as of December 31, 2007.
13
The gross profit percentage for the six months ended December 31, 2008
decreased to 34.9% compared to 38.1% for the six months ended December
31, 2007, mainly due to lower net sales for the catalyst research
instruments operations.
G & A expenses for the six months ended December 31, 2008 decreased
slightly by $18,300 (3.6%) to $495,000 from $513,300 for the comparable
period last year, primarily as a result of lower executive compensation.
Selling expenses for the six months ended December 31, 2008 decreased by
$47,600 (19.2%) to $200,100 from $247,700 for the six months ended
December 31, 2007, due primarily to lower commissions with respect to
catalyst research instruments sales.
Research and development expenses for the six months ended December 31,
2008 increased $34,600 (19.3%) to $214,200 compared to $179,600 for the
six months ended December 31, 2007, primarily the result of an increase
in catalyst research instruments product development.
Interest and other income for the six month periods ended December 31,
2008 decreased by $12,000 (40.1%) to $17,900 compared to $29,900 for the
six months ended December 31, 2007, mainly the effect of smaller cash and
investment securities balances.
Income tax expense for the six months ended December 31, 2008 was $17,600
compared to $122,300 for the six months ended December
31, 2007, mainly due to the lower income.
As a result of the foregoing, net income for the six months ended
December 31, 2008 was $41,800, a decrease of $201,100 (82.8%) from
$242,900 for the six months ended December 31, 2007.
Item 4. Controls and Procedures
Evaluation of Disclosure 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 has 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. The
Company also concluded that information required to be disclosed in such
reports is accumulated and communicated to the Company's management,
including its principal executive and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. 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.
14
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:
On October 30, 2008 Registrant filed a Report
on Form 8-K, reporting under Item 1.01.
15
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 13, 2009
16