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, 2009
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 January 29, 2010 was 1,196,577
shares.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
Page
____
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 12
ITEM 4 CONTROLS AND PROCEDURES 15
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURE 16
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2009 2009
------------ ------------
Current Assets: (Unaudited)
Cash and cash equivalents $ 782,400 $ 738,400
Investment securities 646,700 605,500
Trade accounts receivable, net 548,700 806,700
Inventories 1,761,600 1,598,000
Prepaid expenses and other
current assets 79,100 91,600
Deferred taxes 71,600 63,400
--------- ---------
Total current assets 3,890,100 3,903,600
Property and equipment at cost, net 213,400 241,200
Intangible assets, net 269,900 330,900
Goodwill 310,600 265,400
Other assets 25,700 25,700
Deferred taxes 79,100 64,200
--------- ---------
Total assets $4,788,800 $4,831,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 75,100 $ 137,400
Customer advances 349,500 359,600
Accrued expenses and taxes 269,900 423,500
---------- -----------
Total current liabilities 694,500 920,500
---------- -----------
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
1,216,379 and 1,212,379 issued
and outstanding at December 31,
2009 and June 30, 2009 60,800 60,600
Additional paid-in capital 1,526,300 1,514,300
Accumulated other comprehensive
loss ( 39,000) ( 79,600)
Retained earnings 2,598,600 2,467,600
------------ ----------
4,146,700 3,962,900
Less common stock held in
treasury, at cost,
19,802 shares 52,400 52,400
------------ ----------
Total shareholders'
equity 4,094,300 3,910,500
------------ ----------
Total liabilities and
shareholders' equity $4,788,800 $4,831,000
============ ===========
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,
---------- ---------- ---------- ----------
2009 2008 2009 2008
---------- ---------- ---------- ----------
Net sales $1,827,500 $1,755,100 $3,071,500 $2,727,400
Cost of goods sold 1,055,600 1,139,600 1,763,700 1,776,600
---------- ---------- ---------- ----------
Gross profit 771,900 615,500 1,307,800 950,800
---------- ---------- ---------- ----------
Operating Expenses:
General & administrative 342,700 249,400 572,300 495,000
Selling 134,300 85,800 276,600 200,100
Research & development 80,600 117,600 189,100 214,200
---------- ---------- ---------- ----------
557,600 452,800 1,038,000 909,300
---------- ---------- ---------- ----------
Income from operations 214,300 162,700 269,800 41,500
Interest & other
income, net 9,800 6,900 13,900 17,900
---------- ---------- ---------- ----------
Income before income taxes 224,100 169,600 283,700 59,400
---------- ---------- ---------- ----------
Income tax expense (benefit):
Current 72,700 58,100 97,300 36,400
Deferred ( 7,900) ( 8,500)( 16,400) ( 18,800)
---------- ---------- ---------- ----------
64,800 49,600 80,900 17,600
---------- ---------- ---------- ----------
Net income $ 159,300 $ 120,000 $ 202,800 $ 41,800
========== ========== ========== ==========
Basic earnings per common
share $ .13 $ .10 $ .17 $ .04
Diluted earnings per common
share $ .13 $ .10 $ .17 $ .03
Cash dividends declared
per common share $ - $ - $ .06 $ .08
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, 2009 December 31, 2008
Operating activities:
Net income $ 202,800 $ 41,800
--------- ----------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 102,200 105,000
Deferred income taxes ( 16,400) ( 18,800)
Stock-based compensation 6,500 1,500
Income tax benefit of stock options
exercised 400 -
Changes in assets and liabilities:
Accounts receivable 258,000 ( 228,000)
Inventories (163,600) ( 54,700)
Prepaid expenses and other
current assets 12,500 2,000
Accounts payable ( 62,300) ( 33,900)
Customer advances ( 10,100) ( 379,300)
Accrued expenses and taxes ( 91,700) ( 73,000)
--------- -----------
Total adjustments 35,500 ( 679,200)
--------- -----------
Net cash provided by (used in)
operating activities 238,300 ( 637,400)
--------- -----------
Investing activities:
Additional consideration for acquisition of
Altamira Instruments, Inc. (107,000) ( 144,900)
Purchase of investment securities,
available-for-sale ( 7,400) ( 8,900)
Redemptions of investment securities,
available-for-sale - 50,000
Capital expenditures ( 10,900) ( 24,400)
Purchase of intangible assets ( 2,500) ( 3,400)
--------- ----------
Net cash used in
investing activities (127,800) ( 131,600)
--------- ----------
Financing activities:
Proceeds from exercise of stock options 5,300 -
Proceeds from line of credit, bank - 50,000
Cash dividend declared and paid ( 71,800) -
--------- ----------
Net cash provided by (used in)
financing activities ( 66,500) 50,000
--------- ----------
Net increase (decrease) in cash
and cash equivalents 44,000 ( 719,000)
Cash and cash equivalents,
beginning of year 738,400 1,065,500
-------- ---------
Cash and cash equivalents, end of period $ 782,400 $ 346,500
========= ==========
Cash paid during the period for:
Income Taxes $ 156,800 $ 125,000
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-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-K, for the fiscal year ended June 30, 2009. The
results for the three and six months ended December 31,
2009, are not necessarily an indication of the results of
the full fiscal year ending June 30, 2010.
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.
Subsequent Events Evaluation
Management has reviewed and evaluated material subsequent events
through the financial statement issuance date of February 12,
2010.
2. Recent Accounting Pronouncements:
In January 2010, the FASB issued guidance to amend the
disclosure requirements related to recurring and nonrecurring
fair value measurements. The guidance requires new disclosures
on the transfers of assets and liabilities between Level 1 and
Level 2 (see Note 5) of the fair value measurement hierarchy,
including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuances, and settlements
of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). The
guidance is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements.
These disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within
those fiscal years. Early adoption is permitted. Adoption
of this guidance is not expected to have a material impact
on the Company's condensed consolidated financial statements.
In April 2009, the FASB issued additional accounting guidance
on how to determine fair value of financial assets and
liabilities when the volume and level of activity for an
asset or liability have significantly decreased and how to
identify transactions that are not orderly in light of the
current economic environment. If the Company were to conclude
that there has been a significant decrease in the volume
and level of activity of an asset or liability in relation to
4
normal market activities, quoted market values may not be
representative of fair value and the Company may conclude
that a change in valuation technique or the use of multiple
valuation techniques may be appropriate. The accounting
guidance also clarified the recognition and presentation of
other-than-temporary impairments of securities to bring
consistency to the timing of impairment recognition, and
provide clarity to investors about the credit and noncredit
components of impaired debt securities that are not expected
to be sold. In addition, the accounting guidance required
disclosures about fair value of financial instruments in
annual financial statements of publicly traded companies to
also be disclosed during interim reporting periods. The
Company's adoption of the accounting guidance in July 2009
had no impact on the Company's consolidated financial
statements and only required additional financial statement
disclosures (see Note 5).
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 at the Closing $400,000
in cash, and 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 customizable 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 9, "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.
As of December 31, 2009, the total adjusted aggregate purchase
price, including the additional cash payments of $363,200 which
have been paid or accrued, was allocated to assets acquired
and liabilities assumed as follows:
5
Current assets $ 734,000
Property and equipment 140,300
Non-current assets 25,100
Goodwill 310,600
Other intangible assets 639,000*
Current liabilities ( 561,900)
----------
Adjusted purchase price $1,287,100
==========
*Of the $639,000 of other intangible assets, $237,000 was
allocated to customer relationships with an 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
amount allocated to the customer relationships is being
amortized on an accelerated (declining balance) method and
the other intangibles are being amortized on a straight-line
basis.
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, 2009:
Net Sales $1,156,800 $ 670,700 $ - $1,827,500
Foreign Sales 680,500 23,500 - 704,000
Segment Profit 190,800 23,500 9,800 224,100
Segment Assets 2,216,100 1,464,700 1,108,000 4,788,800
Long-Lived Asset
Expenditures 5,300 - - 5,300
Depreciation and
Amortization 15,400 35,000 - 50,400
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
Approximately 74% and 69% of net sales of benchtop laboratory
equipment for the three month periods ended December 31, 2009
and 2008, 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 the three month periods ended December 31, 2009
and 2008 for approximately 24% of the segment's net sales
(15% of total net sales) and 30% of the segment's net sales
(17% of total net sales), respectively.
Sales of catalyst research instruments are generally pursuant
to large orders averaging more than $100,000 per order to a
limited numbers of customers. Sales to three customers who
differed from period-to-period accounted for 69% and 93% of
that segment's net sales (34% and 38% of total net sales)
for the three month periods ended December 31, 2009 and 2008,
respectively.
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
---------- ----------- --------- ------------
Six months ended December 31, 2009:
Net Sales $2,168,400 $ 903,100 $ - $3,071,500
Foreign Sales 1,191,300 169,100 - 1,360,400
Segment Profit (Loss) 310,200 ( 40,400) 13,900 283,700
Segment Assets 2,216,100 1,464,700 1,108,000 4,788,800
Long-Lived Asset
Expenditures 13,400 - - 13,400
Depreciation and
Amortization 31,400 70,800 - 102,200
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 8,000 19,800 - 27,800
Depreciation and
Amortization 29,500 75,500 - 105,000
Approximately 70% of net sales of benchtop laboratory equipment
for each of the six month periods ended December 31, 2009 and
2008, 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 29% and 31% of the segment's net
sales for the six month periods ended December 31, 2009 and
2008, respectively (20% and 22% of total net sales for the
2009 and 2008 periods, respectively).
7
Sales of catalyst research instruments to five different
customers, accounted for approximately 78% of that segment's
net sales (27% of total net sales) for the six months ended
December 31, 2009. Sales to three other customers accounted
for 78% of the segment's net sales (23% of total net sales)
for the six month period ended December 31, 2008.
The Company's foreign sales are principally made to customers
in Europe and Asia.
5. Fair Value of Financial Instruments:
The FASB defines the fair value of financial instruments as
the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements
do not include transaction costs.
The accounting guidance also expands the disclosure
requirements concerning fair value and establishes a fair
value hierarchy of valuation inputs. The hierarchy prioritizes
the inputs into three levels based on the extent to which
inputs used in measuring fair value are observable in the market.
Each fair value measurement is reported in one of the three
levels, which is determined by the lowest level input that is
significant to the fair value measurement in its entirety.
These levels are as follows:
Level 1 Inputs that are based upon unadjusted quoted prices for
identical instruments traded in active markets.
Level 2 Quoted prices in markets that are not considered to be
active or financial instruments for which all
significant inputs are observable, either directly or
indirectly.
Level 3 Prices or valuation that require inputs that are both
significant to the fair value measurement and
unobservable.
The following tables set forth by level within the fair value
hierarchy the Company's financial assets that were accounted for
at fair value on a recurring basis at December 31, 2009 and June
30, 2009 according to the valuation techniques the Company used to
determine their fair values:
Fair Value Measurements Using Inputs
Considered as
Fair Value at
December 31, 2009 Level 1 Level 2 Level 3
----------------- --------- ------- -------
Cash and cash equivalents $ 782,400 $ 782,400 $ - $ -
Available for sale securities 646,700 646,700 - -
---------- ---------- ------- -------
Total $1,429,100 $1,429,100 $ - $ -
========== ========== ======= =======
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2009 Level 1 Level 2 Level 3
------------- --------- ------- -------
Cash and cash equivalents $ 738,400 $ 738,400 $ - $ -
Available for sale securities 605,500 605,500 - -
---------- --------- ------- -------
Total $1,343,900 $1,343,900 $ - $ -
========== ========== ======= =======
8
Investments in marketable securities classified as available-for-
sale by security type at December 31, 2009 and June 30, 2009
consisted of the following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
--------- --------- ------------
At December 31, 2009:
Available for sale:
Equity securities $ 7,800 $ 9,900 $ 2,100
Mutual funds 677,900 636,800 (41,100)
--------- --------- -----------
$ 685,700 $ 646,700 $ (39,000)
========= ========= ===========
Unrealized
Fair Holding Gain
Cost Value (Loss)
-------- --------- ------------
At June 30, 2009:
Available for sale:
Equity securities $ 6,200 $ 8,900 $ 2,700
Mutual funds 678,900 596,600 (82,300)
--------- --------- -----------
$ 685,100 $ 605,500 $ (79,600)
========= ========= ===========
6. 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,
2009 2009
------------ -----------
Raw Materials $ 964,500 $ 1,068,500
Work in process 642,900 321,000
Finished Goods 154,200 208,500
---------- -----------
$1,761,600 $ 1,598,000
========== ===========
7. 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.
9
Earnings per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2009 2008 2009 2008
--------- ---------- ---------- ----------
Net income $ 159,300 $ 120,000 $ 202,800 $ 41,800
========= ========== ========== =========
Weighted average common
shares outstanding 1,196,577 1,181,352 1,195,534 1,181,352
Effect of dilutive
securities 19,553 28,246 14,888 32,516
--------- --------- --------- ---------
Weighted average dilutive
common shares outstanding 1,216,130 1,209,598 1,210,422 1,213,868
========= ========= ========= =========
Basic earnings per
common share $ .13 $ .10 $ .17 $ .04
======= ======= ======= =======
Diluted earnings per
common share $ .13 $ .10 $ .17 $ .03
======= ======= ======= =======
Approximately 1,500 and 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 months ended December 31, 2009 and
2008, because the effect would be anti-dilutive. Approximately
20,500 and 1,500 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
six months ended December 31, 2009 and 2008, because the
effect would be anti-dilutive.
8. Comprehensive Income (Loss):
The FASB established 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,
------------------- ------------------
2009 2008 2009 2008
-------- -------- -------- --------
Net Income $159,300 $120,000 $202,800 $ 41,800
Other comprehensive income(loss):
Unrealized holding gain
(loss) arising during
period, net of tax 4,500 ( 32,200) 40,600 ( 48,400)
--------- -------- -------- --------
Comprehensive income (loss) $ 163,800 $ 87,800 $243,400 ($ 6,600)
========= ======== ======== ========
10
9. Goodwill and Other Intangible Assets:
In conjunction with the acquisition of Altamira, management of
the Company valued the tangible and intangible assets acquired,
including customer relationships, non-compete agreements and
technology which encompasses trade names, trademarks and
licenses. The valuation resulted in an initial negative
goodwill of approximately $91,500 on the date of acquisition
which was subsequently adjusted to positive goodwill of
$310,600 and $265,400 at December 31, 2009 and June 30, 2009,
respectively, all of which is deductible for tax purposes.
The related agreement provides for contingent payments to the
former shareholders based on net sales for five designated
periods of the Catalyst Research Instrument Operations subject
to certain limits, which are expected to be earned and paid.
Additional consideration amounted to $45,200 and $41,200
for the six months ended December 31, 2009, and 2008,
respectively.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
------ -------- ------------ --------
At December 31, 2009:
Technology 5 yrs. $300,000 $185,000 $115,000
Customer relationships 10 yrs. 237,000 145,200 91,800
Non-compete agreement 5 yrs. 102,000 62,900 39,100
Other intangible assets 5 yrs. 127,000 103,000 24,000
-------- -------- --------
$766,000 $496,100 $269,900
-------- -------- --------
Useful Accumulated
Lives Cost Amortization Net
------ -------- ------------ ---------
At June 30, 2009:
Technology 5 yrs. $300,000 $155,000 $145,000
Customer relationships 10 yrs. 237,000 129,200 107,800
Non-compete agreement 5 yrs. 102,000 52,700 49,300
Other intangible assets 5 yrs. 124,400 95,600 28,800
-------- -------- --------
$763,400 $432,500 $330,900
-------- -------- --------
Total amortization expense was $31,400 and $34,100 for the three
months ended December 31, 2009 and 2008, respectively and $63,400
and $69,000 for the six months ended December 31, 2009 and 2008,
respectively. As of December 31, 2009, estimated future amortization
expense related to intangible assets is $57,800 for the remaining
six months of the fiscal year ending June 30, 2010, $109,500 for
fiscal 2011, $52,600 for fiscal 2012, $13,000 for fiscal 2013,
$9,300 for fiscal 2014, and $27,700 thereafter.
10. Note Payable
On January 20, 2010, the Company and Capital One Bank, N.A.
("Bank") agreed to extend through January 3, 2011 in the form
of a restatement, the Company's existing promissory note,
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, 2009 and advances are at the discretion
of the Bank. The Company had no borrowings outstanding as of
December 31, 2009 and June 30, 2009.
The borrowings are collaterized by the Company's assets to the
extent of amounts borrowed and outstanding and all outstanding
amounts are due and payable on January 3, 2011.
11
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 increased by $44,000 to $782,400 as of
December 31, 2009 from $738,400 as of June 30, 2009.
Net cash provided by operating activities was $238,300 for the six
months ended December 31, 2009 as compared to net cash used in
operating activities of $637,400 for the comparable six month
period in 2008, due mainly to the income generated during the
current year period, lower accounts receivable balances and monies
received in advance from customers of Altamira with respect to their
orders. Cash used in investing activities was $127,800 for the six
month period ended December 31, 2009 compared to $131,600 for the
six month period ended December 31, 2008 primarily due to a lower
amount of additional contingent consideration paid for the
acquisition of Altamira Instruments, Inc.
On September 17, 2009, the Board of Directors of the Company declared
a cash dividend of $.06 per share of Common Stock which was paid on
December 21, 2009 to holders of record as of the close of business
on October 23, 2009. Net cash used in financing activities for the
six months ended December 31, 2009 was $66,500 compared to $50,000
provided by financing activities for the comparable period last
year primarily due to the foregoing cash dividend. (The previous
year's cash dividend was paid in January 2009).
The Company's working capital increased by $212,500 to $3,195,600
as of December 31, 2009 from the working capital of $2,983,100 at
June 30, 2009 mainly as result of the income for the six months
ended December 31, 2009. Pursuant to a promissory note with Capital
One Bank, N.A. which was restated in January 2010 and extended
from November 1, 2009 to January 3, 2011, at the request of the
Company, the Bank at its sole discretion may extend to the Company
advances not to exceed an aggregate of $500,000. The advances are
to be secured by the Company's assets and bear interest at the
Bank's prime rate. Management believes that the Company will be
able to meet its cash flow needs for the next 12 months from its
available financial resources including the restated promissory
note and investment securities.
12
Results of Operations
_____________________
Financial Overview
The Company recorded higher pre-tax income of $224,100 and $283,700,
respectively, for the three and six month periods ended December 31,
2009 compared to $169,600 and $59,400 for the 2008 periods. For the
comparative three month periods, the segment profit of the Benchtop
Laboratory Equipment Operations increased by $81,400 to $190,800 from
$109,400 due to higher sales and increased gross margins, while the
segment profit of the Catalyst Research Instruments Operations of the
current year's three month period was $23,500 compared to $53,300
for the same period of the prior fiscal year due to lower sales.
For the comparative six month periods, the Benchtop Laboratory
Equipment Operations segment profit increased by $108,500 to $310,200
from $201,700 for the comparable six month period of the prior fiscal
year, resulting from higher sales and gross margins. The Catalyst
Research Instruments Operations recorded a loss of $40,400 for the
six month period ended December 31, 2009 compared to a loss of
$157,900 for the same six month period of the prior fiscal year,
such reduction resulted from an increase in sales and lower expenses
including research and development. As of December 31, 2009, the
Catalyst Research Instrument Operations had an order backlog of
$1,200,000, (substantially all of which is expected to be fulfilled
by the end of fiscal year 2010), compared to $828,000 as of
December 31, 2008.
The Three Months Ended December 31, 2009 Compared With the Three
Months Ended December 31, 2008
Net sales for the three months ended December 31, 2009 increased
$72,400 (4.1%) to $1,827,500 from $1,755,100 for the three months
ended December 31, 2008 as a result of an increase of $140,900 in
sales of benchtop laboratory equipment, partially offset by a
$68,500 reduction in sales of catalyst research instruments.
Sales of benchtop laboratory equipment products generally are
pursuant to many small purchase orders from distributors, while
sales of the catalyst research instruments are comprised of a
small number of larger orders, typically averaging over
$100,000 each; hence its sales revenues are subject to significant
swings.
The Company's gross profit percentage for the three months ended
December 31, 2009 increased to 42.2% from 35.1% for the three
months ended December 31, 2008, due primarily to lower material
costs and fixed overhead spread over higher sales for benchtop
laboratory equipment, and lower indirect engineering costs for
the Catalyst Research Instruments Operations.
General and administrative expenses ("G&A") for the three month
comparative periods ended December 31, 2009 and December 31, 2008
increased by $93,300 (37.4%) to $342,700 from $249,400 primarily as
a result of higher salaries and consulting costs for Sarbanes-Oxley
for the 2009 period.
Selling expenses for the three months ended December 31, 2009
increased $48,500 (56.5%) to $134,300 compared to $85,800 for the
three months ended December 31, 2008, due primarily to the addition
of a new Sales Manager for the Benchtop Laboratory Equipment
Operations.
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Research and development expenses decreased $37,000 (31.5%) to
$80,600 for the three months ended December 31, 2009 compared to
$117,600 for the three months ended December 31, 2008 as a result
of reduced new product development activity for both business
segments.
Interest and other income for the three months ended December 31,
2009 increased $2,900 (42.0%) to $9,800 from $6,900 for the three
months ended December 31, 2008 primarily due to the rental income
derived from new sublease for the Bohemia, NY location.
Income tax expense for the three months ended December 31, 2009
was $64,800 compared to $49,600 for the three months ended
December 31, 2008, mainly due to the higher income.
As a result of the foregoing, net income for the three months
ended December 31, 2009 was $159,300, an increase of $39,300
(32.8%) from $120,000 for the three months ended December 31,
2008.
The Six Months Ended December 31, 2009 Compared With the Six
Months Ended December 31, 2008
Net sales for the six months ended December 31, 2009 increased
by $344,100 (12.6%) to $3,071,500 compared to $2,727,400 for the
six months ended December 31, 2008, due to a $266,000 increase
in benchtop laboratory equipment net sales, and a $78,100 increase
in catalyst research instruments net sales. Sales of benchtop
laboratory equipment products generally are comprised of many small
purchase orders from distributors, while 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.
The gross profit percentage for the six months ended December 31,
2009 increased to 42.6% compared to 34.9% for the six months
ended December 31, 2008, due primarily to lower material costs
and fixed overhead spread over higher sales for benchtop
laboratory equipment, and lower indirect engineering costs for
the Catalyst Research Instruments Operations.
G & A expenses increased by $77,300 (15.6%) to $572,300 for the
six months ended December 31, 2009 from $495,000 for the comparable
period last year, primarily as a result of higher salaries and
consulting costs for Sarbanes-Oxley.
Selling expenses for the six months ended December 31, 2009
increased by $76,500 (38.2%) to $276,600 from $200,100 for the
six months ended December 31, 2008, due primarily to the addition
in 2009 of a new Sales Manager for the Benchtop Laboratory Equipment
Operations.
Research and development expenses for the six months ended December
31, 2009 decreased $25,100 (11.7%) to $189,100 compared to $214,200
for the six months ended December 31, 2008, primarily the result
of reduced new product development activity for the Catalyst
Research Instruments Operations.
Interest and other income for the six month period ended December
31, 2009 decreased by $4,000 (22.3%) to $13,900 compared to $17,900
for the six months ended December 31, 2008, mainly as a result of
lower returns on investment securities.
14
Income tax expense for the six months ended December 31, 2009 was
$80,900 compared to $17,600 for the six months ended December 31,
2008, mainly due to the higher income.
Interest and other income for the three months ended December 31,
2009 increased $2,900 (42.0%) to $9,800 from $6,900 for the three
months ended December 31, 2008 primarily due to the rental income
derived from new sublease for the Bohemia, NY location.
As a result of the foregoing, net income for the six months ended
December 31, 2009 was $202,800, an increase of $161,000 (385.2%)
from $41,800 for the six months ended December 31, 2008.
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 recently completed 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 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 January 20, 2009 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 12, 2010
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