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, 2014
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), except for a Report
on Form 8-K required to be filed in February 2014 with respect to an
acquisition 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, 2015 was 1,479,112 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 Comprehensive
Income (Loss) 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 15
ITEM 4 CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
EXHIBITS 20
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2014 2014
(Unaudited)
__________ __________
Current Assets:
Cash and cash equivalents $ 244,000 $ 493,700
Investment securities 338,200 415,400
Trade accounts receivable, net 731,000 756,700
Inventories 2,416,100 2,309,200
Prepaid expenses and other current assets 160,500 123,100
Deferred taxes 87,800 86,000
__________ __________
Total current assets 3,977,600 4,184,100
Property and equipment at cost, net 261,100 252,100
Intangible assets, net 1,623,100 1,795,900
Goodwill 705,300 705,300
Other assets 53,600 28,200
Deferred taxes 159,800 146,200
__________ __________
Total assets $6,780,500 $7,111,800
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 422,400 $ 373,700
Customer advances 12,000 89,500
Bank line of credit 250,000 -
Notes payable, current portion - 26,700
Accrued expenses and taxes 293,900 442,800
Contingent consideration, current portion 120,000 109,000
__________ __________
Total current liabilities 1,098,300 1,041,700
Contingent consideration, less
current portion 281,100 391,000
__________ __________
Total liabilities 1,379,400 1,432,700
__________ __________
Shareholders' equity:
Common stock, $.05 par value; authorized
7,000,000 shares; 1,498,914 and 1,488,914
issued and outstanding at December 31, 2014
and at June 30, 2014 74,900 74,400
Additional paid-in capital 2,446,000 2,420,700
Accumulated other comprehensive
gain (loss) ( 3,400) 1,100
Retained earnings 2,936,000 3,235,300
__________ __________
5,453,500 5,731,500
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
__________ __________
Total shareholders' equity 5,401,100 5,679,100
__________ __________
Total liabilities and
Shareholders' equity $6,780,500 $7,111,800
========== ==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
______________________ ______________________
2014 2013 2014 2013
______________________ ______________________
Revenues $1,691,100 $1,747,800 $3,353,200 $3,183,900
Cost of sales 1,081,700 929,700 2,163,900 1,771,600
__________ __________ __________ __________
Gross profit 609,400 818,100 1,189,300 1,412,300
__________ __________ __________ __________
Operating Expenses:
General & administrative 446,400 342,900 852,600 645,900
Selling 229,400 207,900 524,700 404,900
Research & development 116,100 90,800 223,200 188,000
__________ __________ __________ __________
Total operating
expenses 791,900 641,600 1,600,500 1,238,800
__________ __________ __________ __________
Income (loss) from
operations ( 182,500) 176,500 ( 411,200) 173,500
__________ __________ __________ __________
Other income (expense):
Investment income 7,400 5,400 9,600 8,500
Other ( 5,900) 2,200 ( 1,100) 5,900
Interest expense ( 1,400) ( 1,000) ( 2,700) ( 1,800)
__________ _________ _________ ___________
Total other income, net 100 6,600 5,800 12,600
__________ _________ _________ ___________
Income (loss) before
income tax expense
(benefit) ( 182,400) 183,100 ( 405,400) 186,100
___________ _________ _________ ___________
Income tax expense (benefit):
Current ( 33,800) 44,800 ( 91,000) 41,700
Deferred ( 10,600) 3,200 ( 15,100) 7,200
___________ _________ _________ ___________
Total income tax
expense (benefit) ( 44,400) 48,000 ( 106,100) 48,900
___________ _________ _________ ___________
Net income (loss) ($138,000) $ 135,100 ($299,300) $ 137,200
=========== ========== ========== ===========
Basic and diluted earnings
(loss) per common share ($ .09) $ .10 ($ .20) $ .10
Cash dividends declared
per common share $ .00 $ .00 $ .00 $ .08
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
____________________ ____________________
2014 2013 2014 2013
Net income (loss) ($138,000) $135,100 ($299,300) $137,200
__________ ________ __________ ________
Other comprehensive loss:
Unrealized holding loss on investments
arising during period,
net of tax ( 3,800) ( 800) ( 4,500) ( 2,600)
__________ _________ __________ __________
Comprehensive income (loss) ($141,800) $134,300 $303,800) $134,600
========== ========= ========== ==========
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended
December 31, 2014 December 31, 2013
_________________ _______________
Operating activities:
Net income (loss) ($ 299,300) $ 137,200
____________ __________
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Loss on sale of investments 1,300 10,500
Depreciation and amortization 220,100 88,500
Deferred income tax (benefit) ( 15,100) 7,200
Stock-based compensation 2,100 10,200
Income tax benefit of stock options exercised 4,900 -
Changes in operating assets and liabilities:
Accounts receivable 25,700 ( 110,900)
Inventories ( 106,900) ( 165,600)
Prepaid expenses and other current assets ( 37,200) ( 25,300)
Other assets ( 25,400) -
Accounts payable 48,700 ( 5,700)
Customer advances ( 77,500) 194,800
Accrued expenses ( 149,200) ( 94,100)
____________ ____________
Total adjustments ( 108,500) ( 90,400)
____________ ____________
Net cash provided by (used in)
operating activities ( 407,800) 46,800
____________ ____________
Investing activities:
Purchase of investment securities,
available-for-sale ( 3,800) ( 24,300)
Capital expenditures ( 52,900) ( 24,600)
Purchase of intangible assets ( 3,400) ( 1,900)
Redemption of investment securities, available
for sale 75,000 275,300
____________ _____________
Net cash provided by investing
activities 14,900 224,500
____________ _____________
Financing activities:
Line of credit proceeds 250,000 50,000
Payment of contingent consideration ( 98,900) -
Proceeds from exercise of stock options 18,800 6,700
Cash dividend declared and paid - ( 107,400)
Principal payments on note payable ( 26,700) ( 38,900)
____________ _____________
Net cash provided by (used in) financing
activities 143,200 ( 89,600)
____________ _____________
See notes to unaudited condensed consolidated financial statements
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Month Periods Ended
December 31, 2014 December 31, 2013
_________________ _________________
Net increase (decrease) in cash
and cash equivalents ( 249,700) 181,700
Cash and cash equivalents, beginning of year 493,700 927,300
__________ __________
Cash and cash equivalents, end of period $ 244,000 $1,109,000
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 3,500 $ 100,000
Interest 2,700 1,800
Non-cash investing and financing activities (Note 3)
See notes to unaudited condensed consolidated financial statements
5
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, 2014. The results for the three
and six months ended December 31, 2014, are not necessarily
an indication of the results for the full fiscal year ending
June 30, 2015.
1. Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc. ("Scientific", a Delaware
corporation), Altamira Instruments, Inc.("Altamira", a wholly-owned
subsidiary and Delaware corporation), Scientific Packaging Industries,
Inc. (an inactive wholly-owned subsidiary and New York corporation)
and Scientific Bioprocessing, Inc. ("SBI", a wholly-owned subsidiary
and Delaware corporation). All are collectively referred to as the
"Company". All material intercompany balances and transactions have
been eliminated.
2. New Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers amending revenue recognition requirements for multiple-
deliverable revenue arrangements. This update provides guidance on
how revenue is recognized to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for the goods
or services. This determination is made in five steps: (i) identify
the contract with the customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation. The update is effective for the
Company beginning July 1, 2017. Early adoption is not permitted.
The Company is currently evaluating the impact this guidance may
have on its financial condition and results of operations.
In June 2014, the FASB issued ASU 2014-12, Compensation - Stock
Compensation (Topic 718): Accounting for Share-Based Payments When
the Terms of an Award Provide that a Performance Target Could be
Achieved After the Requisite Service Period. This update affects
reporting entities that grant their
6
employee's targets that affects vesting could be achieved after the
requisite service period. The new standard requires that a
performance target that affects vesting and that could be achieved
after the requisite services period be treated as a performance
condition. The new standard will be effective for the Company
beginning July 1, 2015, and early adoption is permitted. The
Company expects the adoption will not have a material impact
on its financial condition, results of operations or cash flows.
3. Acquisition:
On February 26, 2014, the Company acquired substantially all
the assets of a privately owned company consisting principally
of inventory, fixed assets, and intangible assets related to
the production and sale of a variety of laboratory and pharmacy
balances and scales. The acquisition was pursuant to an asset
purchase agreement whereby the Company paid the sellers $700,000
in cash, 126,449 shares of Common Stock valued at $427,500 (of
which 31,612 are held in escrow for one year) and agreed to make
additional cash payment based on a percentage of net sales of
the business acquired equal to 8% for the period ending June 30,
2014 annualized amounting to $98,900, 9% for the year ending
June 30, 2015, 10% for the year ending June 30, 2016 and 11%
for the year ending June 30, 2017, estimated at a present
value of $460,000 on the date of acquisition. Payments
related to this contingent consideration for each period
are due in September following the fiscal year.
The products, which are similar to the Company's other Benchtop
Laboratory Equipment, and in many cases used by the same customers,
are marketed under the Torbal(R) brand. The principal customers
are pharmacies, pharmacy schools, universities, government
laboratories, and industries utilizing precision scales. The
products are sold primarily on a direct basis, including through
the Company's e-commerce site.
The Company allocated the purchase price based on its
valuation of the assets acquired, as follows:
Current assets $ 144,000
Property and equipment 118,100
Goodwill* 115,400
Other intangible assets 1,210,000
__________
Total Purchase Price $1,587,500
==========
*See Note 8, "Goodwill and Other Intangible Assets".
Of the $1,210,000 of the acquired other intangible assets,
$570,000 was assigned to technology and websites with a useful
life of 5 years, $120,000 was assigned to customer relationships
with an estimated useful life of 9 years, $140,000 was assigned
to the trade name with an estimated useful life of 6 years,
$110,000 was assigned to the IPR&D with an estimated useful
life of 3 years, and $270,000 was assigned to non-compete
agreements with an estimated useful life of 5 years.
In connection with the acquisition, the Company entered into a
three-year employment agreement with the previous Chief Operating
Officer of the acquired business as President of the Company's
new Torbal Division and Director of Marketing for the Company.
The agreement may be extended by mutual consent for an additional
two years.
7
The Company was unable to obtain audited financial statements
of the business acquired in connection with the acquisition.
The inability to include the related audited financial statements
as required by the Securities Exchange Act of 1934 in the related
Report on Form 8-K filing resulted in the inability of the
Company to register under the Securities Act of 1933, as amended,
offerings of the Company's securities during the one year period
ending February 2015.
Pro forma results
The unaudited pro forma condensed consolidated financial
information in the table below summarizes the consolidated
results of operations of the Company including its new Torbal
Division, on a pro forma basis, as though the companies had
been consolidated as of the beginning of the fiscal year
ended June 30, 2014. The unaudited pro forma condensed
financial information presented below is for informational
purposes only and is not intended to represent or be
indicative of the consolidated results of the operations
that would have been achieved if the acquisition had been
completed as of the commencement of the fiscal year presented.
In addition, the Company was unable to obtain audited historical
information and, therefore the information presented is based
on management's best judgment.
For the Three Month For the Six Month
Period Ended Period Ended
December 31, 2013 December 31, 2013
___________________ _________________
Net Revenues $1,955,500 $3,647,600
Net Income $ 85,800 $ 49,000
Net earnings per share
- basic $ .06 $ .03
Net earnings per share
- diluted $ .06 $ .03
4. Segment Information and Concentrations:
The Company views its operations as three 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"), 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") and the marketing and production of
bioprocessing systems for laboratory research in the
biotechnology industry sold directly to customers and through
distributors ("Bioprocessing Systems").
Segment information is reported as follows (foreign sales are
principally to customers in Europe and Asia):
8
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended December 31, 2014:
Revenues $1,247,000 $ 419,600 $ 24,500 $ - $1,691,100
Foreign Sales 722,400 315,700 - - 1,038,100
Loss from
Operations ( 67,200 ( 70,600) ( 44,700) - ( 182,500)
Assets 4,032,700 1,387,900 774,100 585,800 6,780,500
Long-Lived Asset
Expenditures 33,200 - 2,300 - 35,500
Depreciation and
Amortization 76,300 9,200 24,500 - 110,000
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended December 31, 2013:
Revenues $1,154,000 $ 463,400 $ 130,400 $ - $1,747,800
Foreign Sales 823,400 88,900 - - 912,300
Income (Loss)
from Operations 119,800 2,100 64,600 ( 10,000) 176,500
Assets 2,787,400 1,704,400 981,600 829,800 6,303,200
Long-Lived Asset
Expenditures 10,100 - 6,000 - 16,100
Depreciation and
Amortization 11,600 8,500 24,200 - 44,300
Approximately 50% and 65% of net sales of benchtop laboratory equipment
(37% and 43% of total revenues) for the three month periods ended
December 31, 2014 and 2013, respectively, were derived from the
Company's main product, the Vortex-Genie 2(R) mixer, excluding accessories.
Approximately 21% of total benchtop laboratory equipment sales were
derived from Torbal brand products for the three months ended December
31, 2014.
Two customers accounted in the aggregate for approximately 18% and 25%
of the net sales of the Benchtop Laboratory Equipment Operations and 13%
and 17% of total revenues for the three months ended December 31, 2014,
and 2013, respectively. Sales of catalyst research instruments generally
comprise a few very large orders averaging at least $100,000 per order
to a limited number of customers, who differ from order to order. Sales
to four customers and three other customers represented approximately
84% and 91% of the Catalyst Research Instrument Operations' net sales,
respectively, and 21% and 24% of total revenues for the
three months ended December 31, 2014 and 2013, respectively.
9
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Six months ended December 31, 2014:
Revenues $2,333,400 $ 970,700 $ 49,100 $ - $3,353,200
Foreign Sales 1,133,500 759,200 - - 1,892,700
Loss from
Operations ( 185,300 ( 140,800) ( 85,100) - ( 411,200)
Assets 4,032,700 1,387,900 774,100 585,800 6,780,500
Long-Lived Asset
Expenditures 51,500 900 3,900 - 56,300
Depreciation and
Amortization 152,300 19,000 48,800 - 220,100
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Six months ended December 31, 2013:
Revenues $2,223,700 $ 803,100 $ 157,100 $ - $3,183,900
Foreign Sales 1,444,200 162,400 2,000 - 1,608,600
Income (Loss)
from Operations 238,100 ( 101,900) 47,800 ( 10,500) 173,500
Assets 2,787,400 1,704,400 981,600 829,800 6,303,200
Long-Lived Asset
Expenditures 20,000 - 6,500 - 26,500
Depreciation and
Amortization 22,600 17,600 48,300 - 88,500
Approximately 48% and 66% of net sales of benchtop laboratory equipment
(33% and 46% of total revenues) for the six month periods ended December
31, 2014 and 2013, respectively, were derived from the segment's main
product, the Vortex-Genie 2(R) mixer, excluding accessories.
Two benchtop laboratory equipment customers, accounted in the aggregate
for approximately 16% and 21% of the segment's net sales for the six
month periods ended December 31, 2014 and 2013, and 11% and 14%, of
total revenues for the six month periods ended December 31, 2014 and
2013, respectively.
Approximately 20% of total benchtop laboratory equipment sales were
derived from Torbal brand products for the six months ended December
31, 2014.
For the six month periods ended Decmeber 31, 2014 and 2013, catalyst
research Instruments sales to eight and six different customers in each
of the six month periods, accounted for approximately 97% and 92% of the
segment's net sales and 28% and 23% of total revenues, respectively.
10
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
around 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 described below:
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, 2014 and June 30, 2014 according
to the valuation techniques the Company used to determine their fair
values:
Fair Value Measurements Using Inputs
Considered as
Assets:
Fair Value at
December 30, 2014 Level 1 Level 2 Level 3
______________ __________ ________ ________
Cash and cash equivalents $ 244,000 $ 244,000 $ - $ -
Available for sale securities 338,200 338,200 - -
__________ __________ ________ ________
Total $ 582,200 $ 582,200 $ - $ -
========== ========== ======== ========
Liabilities:
Contingent consideration $ 401,100 $ - $ - $401,100
========== ========== ======== ========
Fair Value Measurements Using Inputs
Considered as
Assets:
Fair Value at
June 30, 2014 Level 1 Level 2 Level 3
______________ __________ ________ ________
Cash and cash equivalents $ 493,700 $ 493,700 $ - $ -
Available for sale securities 415,400 415,400 - -
__________ __________ ________ ________
Total $ 909,100 $ 909,100 $ - $ -
========== ========== ======== ========
Liabilities:
Contingent consideration $ 500,000 $ - $ - $500,000
========== ========== ======== ========
11
Investments in marketable securities classified as available-for-sale by
security type at December 31, 2014 and June 30, 2014 consisted of the
following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At December 30, 2014:
Available for sale:
Equity securities $ 29,300 $ 38,500 $ 9,200
Mutual funds 312,300 299,700 ( 12,600)
_________ _________ ___________
$ 341,600 $ 338,200 ($ 3,400)
========= ========= ===========
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2014:
Available for sale:
Equity securities $ 29,300 $ 38,500 $ 9,200
Mutual funds 385,000 376,900 ( 8,100)
_________ _________ ___________
$ 414,300 $ 415,400 $ 1,100
========= ========= ===========
6. Inventories:
Inventories for financial statement purposes are based on perpetual
inventory records at December 31, 2014 and based on a physical count as
of June 30, 2014. Components of inventory are as follows:
December 31, June 30,
2014 2014
__________ __________
Raw Materials $1,568,600 $1,617,100
Work in process 535,900 366,200
Finished Goods 311,600 325,900
__________ __________
$2,416,100 $2,309,200
========== ==========
7. Earnings (loss) per common share:
Basic earnings (loss) per common share are computed by dividing net
income (loss) by the weighted-average number of shares outstanding.
Diluted earnings per common share include the dilutive effect of stock
options, if any.
12
Earnings (loss) per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Period Ended
December 31, December 31,
2014 2013 2014 2013
_______________________ ______________________
Net income (loss) ($ 138,000) $ 135,100 ($ 299,300) $ 137,200
============= ========= =========== ==========
Weighted average common
shares outstanding 1,479,112 1,342,663 1,475,960 1,340,163
Dilutive securities - 6,327 - 6,867
_________ _________ _________ _________
Weighted average dilutive
common shares outstanding 1,479,112 1,348,990 1,475,960 1,347,030
========= ========= ========= =========
Basic and diluted earnings
(loss) per common share ($ .09) $ .10 ($ .20) $ .10
======== ====== ======== ======
Approximately 51,000 shares of the Company's Common Stock issuable upon the
exercise of outstanding stock options were excluded from the calculation of
diluted earnings per common share for the three and six month periods ended
December 31, 2014, because the effect would be anti-dilutive.
Approximately 5,000 and 28,500 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 each of the three and
six month periods ended December 31, 2013, because the effect would be
anti-dilutive.
8. Goodwill and Other Intangible Assets:
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in connection with the Company's acquisition of
Altamira and SBI's acquisition of assets. Goodwill amounted to $705,300
as of December 31, 2014 and June 30, 2014, all of which is deductible for
tax purposes.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
________ __________ ____________ _________
At December 31, 2014:
Technology, trademarks 5/10 yrs. $1,226,800 $ 556,600 $ 670,200
Trade names 6 yrs. 140,000 19,400 120,600
Websites 5 yrs. 210,000 35,000 175,000
Customer relationships 9/10 yrs. 357,000 227,300 129,700
Sublicense agreements 10 yrs. 294,000 91,900 202,100
Non-compete agreements 5 yrs. 384,000 154,500 229,500
IPR&D 3 yrs. 110,000 30,500 79,500
Other intangible assets 5 yrs. 160,800 144,300 16,500
__________ __________ __________
$2,882,600 $1,259,500 $1,623,100
========== ========== ==========
13
Useful Accumulated
Lives Cost Amortization Net
________ __________ ____________ _________
At June 30, 2014:
Technology, trademarks 5/10 yrs. $1,226,800 $ 489,100 $ 737,700
Trade names 6 yrs. 140,000 7,800 132,200
Websites 5 yrs. 210,000 14,000 196,000
Customer relationships 9/10 yrs. 357,000 215,800 141,200
Sublicense agreements 10 yrs. 294,000 77,200 216,800
Non-compete agreements 5 yrs. 384,000 126,300 257,700
IPR&D 3 yrs. 110,000 12,200 97,800
Other intangible assets 5 yrs. 157,400 140,900 16,500
__________ __________ __________
$2,879,200 $1,083,300 $1,795,900
========== ========== ==========
Total amortization expense was $88,200 and $28,100 for the three months
ended December 31, 2014 and 2013, respectively and $176,300 and $56,200
for the six months ended December 31, 2014 and 2013, respectively. As
of December 31, 2014, estimated future amortization expense related to
intangible assets is $174,400 for the remainder of the fiscal year
ending June 30, 2015, $352,400 for fiscal 2016, $337,100 for fiscal
2017, $323,300 for fiscal 2018, $244,800 for fiscal 2019, and $191,100
thereafter.
14
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 to customers' specifications
catalyst research instruments, and to develop marketable
bioprocessing systems, 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 $249,700 to $244,000 as
of December 31, 2014 from $493,700 as of June 30, 2014.
Net cash used in operating activities was $407,800 for the
six months ended December 31, 2014 as compared to $46,800
provided by operating activities for the six months ended
December 31, 2013, primarily due to the loss in the current
period. Cash provided by investing activities was $14,900 for
the six month period ended December 31, 2014 compared to
$224,500 for the six month period ended December 31, 2013,
mainly due to lower amount of investment securities
redemptions. The Company reflected cash provided by financing
activities of $143,200 in the current year period compared
to $89,600 used in the prior year comparable period,
primarily due to the borrowing under the Company's bank
line of credit, and the absence of a dividend payout this year,
partially offset by the contingent consideration payment
related to the Torbal Division asset acquisition.
The Company's working capital decreased by $263,000 to
$2,879,400 as of December 31, 2014 from working capital of
$3,142,400 at June 30, 2014, mainly due to the loss during
the period.
The Company has a line of credit with Bank of America Merrill
Lynch which provides for maximum borrowings of up to $700,000,
bearing interest at 3.00 percentage points above the LIBOR
Index, 3.16% as of December 31, 2014 and is secured by a
pledge of collateral consisting of the inventory, accounts,
chattel paper, equipment and fixtures of the Company.
Outstanding amounts are due and payable by November 30, 2015
with a requirement that the Company is to reduce the outstanding
principal balance to zero during the 30 day period ending on
the expiration date of the promissory note. As of December 31,
2014, $250,000 was due under this line.
Management believes that the Company will be able to meet its
cash flow needs during the next 12 months from its available
financial resources which include its cash and investment
securities and line of credit.
15
Results of Operations
Financial Overview
The Company recorded a net loss of $182,400 and $405,400
before income tax benefit for the three and six month periods
ended December 31, 2014 compared to income before income tax
of $183,100 and $186,100 for the three and six month periods
ended December 31, 2013 due to losses in each of its business
segments, which included non-cash amounts of $110,000 and
$220,100 for depreciation and amortization expenses for the
current three and six month periods, respectively, the
majority of which pertained to amortization of the Torbal
Division assets, compared to $44,300 and $88,500, respectively
for the same periods last year.
The Three Months Ended December 31, 2014 Compared With the
Three Months Ended December 31, 2013
Net revenues for the three months ended December 31, 2014
decreased by $56,700 (3.2%) to $1,691,100 from $1,747,800 for
the three months ended December 31, 2013 as a result of a $105,900
decrease in revenues by the Bioprocessing Systems Operations,
a decrease of $43,800 in catalyst research instruments sales,
offset by a $93,000 net increase in sales of benchtop laboratory
products, which included $256,000 in new Torbal brand product
sales. Sales of the benchtop laboratory equipment products
generally are pursuant to many small purchase orders from
distributors, while catalyst research instruments are sold
pursuant to a small number of larger orders, typically averaging
over $100,000 each, resulting in significant swings in revenues.
The backlog of orders for catalyst research instruments was
$949,000 as of December 31, 2014, all of which are anticipated
to be delivered by June 30, 2015; the backlog as of December
31, 2013 was $1,063,900. The revenues generated by the
Bioprocessing Systems Operations in the prior comparable
period included a one-time order for prototype bioprocessing
products of approximately $100,000. Although typically
there is no significant backlog of orders for the Benchtop
Laboratory Equipment Operations, due to the production delays
caused by the facilities move during the quarter and a
significant amount of orders received towards the end of the
quarter, the Company had a backlog of such products of
approximately $600,000 as of December 31, 2014.
The decrease in gross profit percentage for the three months
ended December 31, 2014 to 36.0% from 46.8% for the year earlier
three month period was primarily due to the product mix of
the Benchtop Laboratory Equipment Operations, which include in
the current year Torbal brand products at lower gross margins and
lower profit margins in the Catalyst Research Instruments
Operations, due to higher overhead costs.
General and administrative expenses for the three month
comparative periods ended December 31, 2014 and December
31, 2013 increased by $103,500 (30.1%) to $446,400 from
$342,900 primarily due to expenses incurred in the 2014
period by the Torbal Division of the Benchtop Laboratory
Equipment Operations and costs associated with the Bohemia
facility move in November.
Selling expenses for the three months ended December 31, 2014
increased by $21,500 (10.3%) to $229,400 from $207,900 for the
three months ended December 31, 2013, primarily the result of
selling expenses incurred by the Torbal Division of the Benchtop
Laboratory Equipment Operations.
16
Research and development expenses for the three months ended
December 31, 2014 increased $25,300 (27.9%) to $116,100 from
$90,800 for the three months ended December 31, 2013,
primarily the result of increased product development by the
Company?s Bioprocessing Systems Operations.
Total other income, net for the three month period ended
December 31, 2014 decreased by $6,500 to $100 from $6,600 for
the three month period ended December 31, 2013.
For the three months ended December 31, 2014, the income tax
benefit was $44,400 compared to income tax expense of $48,000
for the three months ended December 31, 2013 due to the loss
for the period.
As a result, the net loss for the three months ended December
31, 2014 was $138,000 compared to a net income of $135,100 for
the three months ended December 31, 2013.
The Six Months Ended December 31, 2014 Compared With the Six
Months Ended December 31, 2013
Net revenues for the six months ended December 31, 2014
increased by $169,300 (5.3%) to $3,353,200 compared to
$3,183,900 for the six months ended December 31, 2013,
primarily due to increases of $167,500 and $109,800 in
sales of catalyst research instruments and benchtop laboratory
equipment, respectively, partially offset by decreased revenues
of $108,000 of the Bioprocessing Systems Operations, which
benefitted from a one-time order in the prior comparable period.
The 2014 benchtop laboratory equipment sales included $467,500
of Torbal brand product 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, resulting
in significant swings in revenues.
The gross profit percentage for the six months ended December
31, 2014 decreased to 35.4% compared to 44.4% for the six
months ended December 31, 2013, due principally to product mix
of the Benchtop Laboratory Equipment Operations, which include
in the current year Torbal brand products at lower gross margins.
General and administrative expenses increased by $206,700
(32.0%) to $852,600 for the six months ended December 31, 2014
from $645,900 for the comparable period of the prior year, due
to the expenses of the new Torbal Division of the Benchtop
Laboratory Equipment Operations, and costs associated with
the Bohemia facility move in November.
Selling expenses for the six months ended December 31, 2014
increased by $119,800 (29.6%) to $524,700 from $404,900 for
the six months ended December 31, 2013, primarily the result
of expenses of the new Torbal Division of the Benchtop
Laboratory Equipment Operations, and commissions and
exhibitions expense for the Catalyst Research Instruments
Operations.
Research and development expenses for the six months ended
December 31, 2014 increased $35,200 (18.7%) to $223,200
compared to $188,000 for the six months ended December 31,
2013, primarily the result of increased product development
by the Company's Bioprocessing Systems Operations.
17
Total other income, net for the six month period ended
December 31, 2014 decreased by $6,800 to $5,800 from $12,600
for the six month period ended December 31, 2013.
As a result, income tax benefit for the six month period
ended December 31, 2014 was $106,100 compared to $48,900
income tax expense for the comparable period of the prior
fiscal year, and net loss for the six months ended December
31, 2014 was $299,300 compared to net income of $137,200 for
the six months ended December 31, 2013.
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:
Report dated January 16, 2015 reporting under Item
1.01 and 5.07.
18
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, 2015
19