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 March 31, 2010
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 April 30, 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
March 31, June 30,
2010 2009
________ ________
Current Assets: (Unaudited)
Cash and cash equivalents $ 634,900 $ 738,400
Investment securities 660,200 605,500
Trade accounts receivable, net 522,900 806,700
Inventories 2,120,500 1,598,000
Prepaid expenses and other current assets 69,500 91,600
Deferred taxes 70,400 63,400
__________ __________
Total current assets 4,078,400 3,903,600
Property and equipment at cost, net 206,300 241,200
Intangible assets, net 241,600 330,900
Goodwill 316,800 265,400
Other assets 25,700 25,700
Deferred taxes 91,800 64,200
__________ __________
Total assets $4,960,600 $4,831,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 140,400 $ 137,400
Customer advances 495,800 359,600
Accrued expenses and taxes 227,000 423,500
__________ __________
Total current liabilities 863,200 920,500
__________ __________
Shareholders' equity:
Common stock, $.05 par value; authorized
7,000,000 shares; 1,216,379 and 1,212,379
issued and outstanding at March 31, 2010
and June 30, 2009 60,800 60,600
Additional paid-in capital 1,529,300 1,514,300
Accumulated other comprehensive loss ( 32,100) ( 79,600)
Retained earnings 2,591,800 2,467,600
___________ __________
4,149,800 3,962,900
Less common stock held in treasury,
at cost, 19,802 shares 52,400 52,400
___________ __________
Total shareholders' equity 4,097,400 3,910,500
___________ __________
Total liabilities and
shareholders' equity $4,960,600 $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 Nine Month
Periods Ended Periods Ended
March 31, March 31,
______________________ ______________________
2010 2009 2010 2009
______________________ ______________________
Net sales $1,137,600 $1,423,700 $4,209,100 $4,151,000
Cost of goods sold 659,600 866,400 2,423,300 2,642,900
__________ __________ __________ __________
Gross profit 478,000 557,300 1,785,800 1,508,100
__________ __________ __________ __________
Operating Expenses:
General & administrative 275,100 272,000 847,300 767,100
Selling 141,800 114,400 418,400 314,400
Research & development 82,300 103,500 271,500 317,700
__________ __________ __________ __________
499,200 489,900 1,537,200 1,399,200
__________ __________ __________ __________
Income (loss)
from operations ( 21,200) 67,400 248,600 108,900
Interest & other
income, net 10,300 4,700 24,200 22,600
__________ __________ __________ __________
Income (loss)
before income taxes ( 10,900) 72,100 272,800 131,500
__________ __________ __________ __________
Income tax expense (benefit):
Current 10,500 28,100 107,800 64,500
Deferred ( 14,600) ( 13,000)( 31,000) ( 31,700)
___________ __________ __________ __________
( 4,100) 15,100 76,800 32,800
___________ __________ __________ __________
Net income (loss) ($ 6,800) $ 57,000 $ 196,000 $ 98,700
=========== ========== ========== ==========
Basic earnings (loss)
Per common share ($ .01) $ .05 $ .16 $ .08
Diluted earnings (loss)
Per common share ($ .01) $ .05 $ .16 $ .08
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 Nine Month Periods Ended
_________________________________
March 31, 2010 March 31, 2009
______________ ______________
Operating activities:
Net income $ 196,000 $ 98,700
_________ __________
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 149,900 155,000
Deferred income taxes ( 31,000) ( 31,700)
Stock-based compensation 9,500 2,700
Income tax benefit of stock options
exercised 400 2,000
Changes in operating assets and liabilities:
Accounts receivable 283,800 (194,900)
Inventories (522,500) (304,100)
Prepaid expenses and other
current assets 22,100 5,900
Accounts payable 3,000 ( 20,700)
Customer advances 136,300 (201,500)
Accrued expenses and taxes (140,800) ( 36,600)
_________ _________
Total adjustments ( 89,300) (623,900)
_________ _________
Net cash provided by (used in)
operating activities 106,700 (525,200)
_________ _________
Investing activities:
Additional consideration for
Altamira Instruments, Inc. acquisition (107,000) (144,900)
Purchase of investment securities,
available-for-sale ( 11,000) ( 13,600)
Redemptions of investment securities,
available-for-sale - 50,000
Capital expenditures ( 22,400) ( 32,300)
Purchase of intangible assets ( 3,300) ( 8,200)
_________ _________
Net cash used in
investing activities (143,700) (149,000)
_________ _________
Financing activities:
Proceeds from exercise of stock options 5,300 3,300
Proceeds from line of credit, bank - 50,000
Cash dividends declared and paid ( 71,800) ( 94,500)
_________ _________
Net cash used in ( 66,500) ( 41,200)
financing activities _________ _________
Net decrease in cash
and cash equivalents ( 103,500) (715,400)
Cash and cash equivalents, beginning
of year 738,400 1,065,500
_________ _________
Cash and cash equivalents, end
of period $ 634,900 $ 350,100
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 263,300 $ 125,000
See notes to condensed consolidated financial statements (unaudited)
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 nine months ended March 31, 2010,
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.
2. Recent Accounting Pronouncements:
In February 2010, the Financial Accounting Standard Board
("FASB") issued guidance which removed the requirement to
disclose the date through which subsequent events have been
evaluated in both issued and revised financial statements
for companies that file financial statements with the
Securities and Exchange Commission ("SEC"). This new guidance
was effective immediately. The Company evaluates subsequent
events through the date that the Company's financial
statements are filed with the SEC.
In April 2009, the FASB issued 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 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
4
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).
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.
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 March 31, 2010, the total adjusted aggregate purchase
price, including the additional payments of $369,500 which have
been paid or accrued, since the acquisition 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 316,800
Other intangible assets 639,000*
Current liabilities ( 561,900)
___________
Adjusted purchase price $1,293,300
===========
*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 March 31, 2010:
Net Sales $1,011,900 $ 125,700 $ - $1,137,600
Foreign Sales 585,600 27,900 - 613,500
Profit(Loss) 123,400 ( 144,600) 10,300 ( 10,900)
Assets 2,279,900 1,858,300 822,400 4,960,600
Long-Lived Asset
Expenditures 11,400 - - 11,400
Depreciation and
Amortization 14,100 33,400 - 47,500
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
Three months ended March 31, 2009:
Net Sales $ 928,000 $ 495,700 $ - $1,423,700
Foreign Sales 547,400 162,500 - 709,900
Profit(Loss) 93,800 ( 26,400) 4,700 72,100
Assets 2,200,200 1,337,400 925,700 4,463,300
Long-Lived Asset
Expenditures 8,000 - - 8,000
Depreciation and
Amortization 14,500 35,600 - 50,100
6
Approximately 64% and 67% of net sales of benchtop laboratory
equipment for the three month periods ended March 31, 2010 and 2009,
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 March 31, 2010 and 2009
for approximately 32% and 26% of the segment's net sales,
respectively, (29% and 23% of total net sales, respectively.)
Accounts receivable from these two customers accounted for
approximately 29% of total accounts receivable at March 31, 2010 and
16% at June 30, 2009, 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 for the three month period ended March
31, 2010 to one customer accounted for 47% of the segment's net
sales (5% of total net sales and 11% of total accounts receivable at
March 31, 2010.) Sales to three customers, combined accounted for
96% of that segment's net sales (33% of total net sales) for the
three month period ended March 31, 2009 and none of the accounts
receivable at June 30, 2009.)
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
Nine months ended March 31, 2010:
Net Sales $3,180,200 $1,028,900 $ - $4,209,100
Foreign Sales 1,776,900 119,400 - 1,896,300
Profit (Loss) 433,700 ( 185,100) 24,200 272,800
Assets 2,279,900 1,858,300 822,400 4,960,600
Long-Lived Asset
Expenditures 22,400 - - 22,400
Depreciation and
Amortization 45,500 104,400 - 149,900
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
Nine months ended March 31, 2009:
Net Sales $2,830,400 $1,320,600 $ - $4,151,000
Foreign Sales 1,673,000 254,000 - 1,927,000
Profit(Loss) 293,600 ( 184,700) 22,600 131,500
Assets 2,200,200 1,337,400 925,700 4,463,300
Long-Lived Asset
Expenditures 12,500 19,800 - 32,300
Depreciation and
Amortization 43,900 111,100 - 155,000
Approximately 68% of net sales of benchtop laboratory equipment for
each of the nine month periods ended March 31, 2010 and 2009,
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% and 29% of the segment's net sales
for the nine month periods ended March 31, 2010 and 2009,
respectively, (23% and 20% of total net sales for the 2010 and 2009
periods, respectively).
7
Sales of catalyst research instruments to three different customers,
accounted for approximately 65% of that segment's net sales (16% of
total net sales) for the nine months ended March 31, 2010. Sales to
three other customers accounted for 27% of the segment's net sales
(12% of total net sales) for the nine month period ended March 31,
2009.
The Company's foreign sales are principally made to customers in
Europe and Asia.
More than a majority of the net sales of the Benchtop Laboratory
Equipment Operations' are foreign sales. While changes in political
and economic conditions in countries in which the customers are
located could have a negative impact on the Company's sales and
results, the Company does not believe it is a material risk,
particularly since the sales are effected in United States Dollars
through distributors.
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 valuations 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 March 31, 2010 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
March 31, 2010 Level 1 Level 2 Level 3
______________ __________ _______ ________
Cash and cash equivalents $ 634,900 $ 634,900 $ - $ -
Available for sale securities 660,200 660,200 - -
__________ __________ ______ _______
Total $1,295,100 $1,295,100 $ - $ -
========== ========== ====== =======
8
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 $ - $ -
============== ========== ======= ========
Investments in marketable securities classified as available-for-sale by
security type at March 31, 2010 and June 30, 2009 consisted of the
following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
_________ _________ ____________
At March 31, 2010:
Available for sale:
Equity securities $ 7,800 $ 10,600 $ 2,800
Mutual funds 684,500 649,600 (34,900)
_________ _________ ____________
$ 692,300 $ 660,200 $ (32,100)
========= ========= =============
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 are based on perpetual inventory records at the end of the
applicable periods. Components of inventory are as follows:
March 31, June 30,
2010 2009
____________ ___________
Raw Materials $1,000,700 $ 1,068,500
Work in process 968,600 321,000
Finished Goods 151,200 208,500
__________ ___________
$2,120,500 $ 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 (Loss) per common share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
_____________________ _____________________
2010 2009 2010 2009
___________ _________ ___________ ________
Net income (loss) ($ 6,800) $ 57,000 $ 196,000 $ 98,700
=========== ========= =========== ========
Weighted average common
shares outstanding 1,196,577 1,184,730 1,195,876 1,182,461
Effect of dilutive
securities - 22,182 15,738 29,071
_________ _________ _________ _________
Weighted average
dilutive common shares
outstanding 1,196,577 1,206,912 1,211,614 1,211,532
========= ========= ========= =========
Basic earnings (loss) per
common share ($ .01) $ .05 $ .16 $ .08
======== ====== ====== ======
Diluted earnings (loss) per
common share ($ .01) $ .05 $ .16 $ .08
========= ====== ====== ======
Approximately 53,000 and 6,500, respectively, 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 March 31, 2010 and 2009, because the
effect would be anti-dilutive. Approximately 23,000 and 6,500
shares, respectively, 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 nine
months ended March 31, 2010 and 2009, 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 or loss and any changes
in equity from non-owner sources that are not recorded in the
income statement (such as changes in net unrealized gains or
losses on securities.) The Company's only source of other
comprehensive income or loss is the net unrealized gain or loss
on securities. The components of comprehensive income (loss)
were as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
____________________ __________________
2010 2009 2010 2009
____________________ __________________
Net Income (Loss) ($ 6,800) $ 57,000 $196,000 $ 98,700
Other comprehensive income(loss):
Unrealized holding gain
(loss) arising during
period, net of tax 6,900 ( 400) 47,500 ( 48,800)
_________ _________ ________ __________
Comprehensive income $ 100 $ 56,600 $243,500 $ 49,900
========= ========= ======== ==========
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 $316,800 and $265,400 at March 31, 2010 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. The
additional consideration amounted to $51,400 and $66,000 for the
nine month periods ended March 31, 2010, and 2009, respectively.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
________ _______ ____________ ________
At March 31, 2010:
Technology 5 yrs. $300,000 $200,000 $100,000
Customer relationships 10 yrs. 237,000 151,100 85,900
Non-compete agreement 5 yrs. 102,000 68,000 34,000
Other intangible assets 5 yrs. 127,700 106,000 21,700
________ ________ ________
$766,700 $525,100 $241,600
________ ________ ________
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 $29,000 and $31,800 for the three months
ended March 31, 2010 and 2009, respectively and $92,600 and $100,800
for the nine months ended March 31, 2010 and 2009, respectively. As of
March 31, 2010, estimated future amortization expense related to
intangible assets is $28,800 for the remaining three 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
$28,400 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. Advances requested by the Company
are at the discretion of the Bank. Interest is charged at the
Bank's prime rate, which was 3.25% as of March 31, 2010. The
Company had no borrowings outstanding as of March 31, 2010 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 decreased by $103,500 to $634,900 as of
March 31, 2010 from $738,400 as of June 30, 2009.
Net cash provided by operating activities was $106,700 for the nine
month period ended March 31, 2010 as compared to net cash used in
operating activities of $525,200 for the nine month period ended March
31, 2009, due mainly to the income for the current fiscal year period,
lower accounts receivable balances and an increase in advances from
customers of Altamira with respect to their orders. Cash used in
investing activities was $143,700 for the nine month period ended
March 31, 2010 compared to $149,000 for the nine month period ended
March 31, 2009, primarily the result of the smaller amount of
additional contingent consideration paid post-closing for the
acquisition of Altamira.
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 nine month period ended March 31, 2010 was
$66,500 compared to $41,200 used for the nine month period ended
March 31, 2009, primarily due to the $50,000 advance under the line
of credit made in the earlier period.
The Company's working capital increased by $232,100 to $3,215,200
as of March 31, 2010 from working capital of $2,983,100 at June 30,
2009 mainly the result of the income for the nine months ended
March 31, 2010. 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 a pretax loss of $10,900 for the three month
period ended March 31, 2010 compared to pretax income of $72,100 for
the three month period ended March 31, 2009 principally due to a loss
incurred by the Catalyst Research Instruments segment of $144,600
compared to a $26,400 loss for the same three month period last year;
the greater loss caused by a reduction in net sales and gross margins
for the segment. For the comparative three month periods, the segment
profit of the Benchtop Laboratory Equipment operations increased to
$123,400 from $93,800 last year due to higher sales and increased
gross margins.
For the comparative nine month periods, the Benchtop Laboratory
Equipment Operations profit increased by $140,100 to $433,700
from $293,600, the result of higher sales and gross margins while the
Catalyst Research Instruments Operations recorded a loss of $185,100
for the nine month period ended March 31, 2010 compared to a loss of
$184,700 for the nine month period ended March 31, 2009. As of
March 31, 2010, the Catalyst Research Instrument Operations had an
order backlog of $1,600,000. A majority of the March 31, 2010
backlog is expected to be filled by the end of the current fiscal
year, including a $555,000 order, which because of customer-related
delays and unbillable changes will result in lower overall gross
margins for the segment and the Company. This backlog has also
resulted in an increase in work-in-process inventory at March
31, 2010 compared to June 30, 2009.
Three Months Ended March 31, 2010 Compared With the Three
Months Ended March 31, 2009
____________________________________________________________
Net sales for the three months ended March 31, 2010 decreased by
$286,100 (20.1%) to $1,137,600 compared to $1,423,700 for the
three months ended March 31, 2009 as a result of a $370,000
decrease in sales of catalyst research instruments, partially
offset by an $83,900 increase in sales of benchtop laboratory
equipment. Sales of benchtop laboratory equipment products
generally are comprised of small purchase orders from
distributors, while sales of the catalyst research instruments
are comprised of a small number of large orders, typically
averaging over $100,000 each; subjecting the segment's revenues
to material fluctuations.
The gross profit percentage for the three months ended March 31,
2010 increased to 42.0% compared to 39.1% for the three months
ended March 31, 2009, due primarily to lower material costs and
the benefit of having fixed overhead spread over the increased
sales of the Benchtop Laboratory Equipment Operations for the
current fiscal year period.
General and administrative ("G&A") were substantially the same
(a $3,100 increase) for the three month comparative periods.
Selling expenses for the three months ended March 31, 2010
increased by $27,400 (24.0%) to $141,800 compared to $114,400
for the three months ended March 31, 2009, due primarily to
the addition in June, 2009 of a Sales Manager for the
Benchtop Laboratory Equipment Operations.
Research and development expenses for the three months ended
March 31, 2010 decreased by $21,200 (20.5%) to $82,300 compared
to $103,500 for the three months ended March 31, 2009, primarily
the result of reduced new product development activity by the
Catalyst Research Instruments operations.
Interest and other income for the three months ended March
31, 2010 increased by $5,600 to $10,300 from $4,700 for the
three months ended March 31, 2009 primarily due to the rental
income from a new subtenant at the Company's New York facility.
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The loss for the three months ended March 31, 2010 resulted in a tax
benefit of $4,100 as compared to $15,100 income tax expense for the
three months ended March 31, 2009.
As a result of the foregoing, the Company recorded a net loss for
the three months ended March 31, 2010 of $6,800 compared to net income
of $57,000 for the three months ended March 31, 2009.
Nine Months Ended March 31, 2010 Compared With the Nine Months
Ended March 31, 2009
___________________________________________________________________
Net sales for the nine months ended March 31, 2010 increased by
$58,100 (1.4%) to $4,209,100 compared to $4,151,000 for the nine
months ended March 31, 2009, as a result of the $349,800 increase
in benchtop laboratory equipment net sales, partially offset by a
decrease of $291,700 in catalyst research instruments net sales.
Sales of benchtop laboratory equipment products generally are
comprised of 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; subjecting the
segment's revenues to material fluctuations.
The gross profit percentage for the nine months ended March 31, 2010
increased to 42.4% compared to 36.3% for the nine months ended March
31, 2009, due primarily to lower material costs and the benefit of
having fixed overhead spread over the increased sales of the Benchtop
Laboratory Equipment Operations for the current fiscal year period.
G&A expenses increased by $80,200 (10.5%) to $847,300 for the nine
months ended March 31, 2010 from $767,100 for the comparable period of
the prior fiscal year, primarily as a result of higher salaries and
slight increases in the other expenses.
Selling expenses for the nine months ended March 31, 2010 increased
by $104,000 (33.1%) to $418,400 compared to $314,400 for the nine
months ended March 31, 2009, due primarily to the addition in June,
2009 of a Sales Manager for the Benchtop Laboratory Equipment
Operations.
Research and development expenses for the nine months ended March
31, 2010 decreased by $46,200 (14.5%) to $271,500 as compared to
$317,700 for the nine months ended March 31, 2009, primarily the
result of reduced new product development activity by the Catalyst
Research Instruments Operations.
Interest and other income for the nine months ended March 31, 2010
increased by $1,600 to $24,200 from $22,600 for the nine months
ended March 31, 2009, primarily due to the rental income derived
from a new subtenant at the Company's New York facility, and the
interest earned on cash advances from the Catalyst Research
Instruments Operations customers.
The higher income for the nine months ended March 31, 2010
resulted in an increase in income tax expense to $76,800 for the
nine months ended March 31, 2010 as compared to $32,800 for the
nine months ended March 31, 2009.
As a result of the foregoing, net income for the nine months
ended March 31, 2010 increased by $97,300 (98.6%) to $196,000
as compared with $98,700 for the nine months ended March 31, 2009.
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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, 2010 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: May 14, 2010
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