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, 2017
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)
80 Orville Drive, Suite 102, 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 May 1, 2017 was 1,494,112 shares.
TABLE OF CONTENTS
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 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 12
ITEM 4 CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
EXHIBITS 18
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2017 2016
(Unaudited)
___________ __________
Current Assets:
Cash and cash equivalents $1,211,300 $ 1,245,000
Investment securities 294,000 290,100
Trade accounts receivable, net 1,327,700 1,231,900
Inventories 2,205,900 2,412,100
Prepaid expenses and other current
assets 73,100 47,200
Deferred taxes 141,000 140,600
__________ ___________
Total current assets 5,253,000 5,366,900
Property and equipment at cost, net 212,900 251,100
Intangible assets, net 690,200 897,600
Goodwill 705,300 705,300
Other assets 52,500 52,500
Deferred taxes 284,200 275,900
__________ __________
Total assets $7,198,000 $7,549,300
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 343,100 $ 342,400
Customer advances 107,900 -
Notes payable, current portion 6,600 6,400
Accrued expenses, current
portion 532,000 849,700
Contingent consideration, current
portion 16,000 136,500
__________ __________
Total current liabilities 1,005,600 1,335,000
Notes payable, less current portion 7,500 12,500
Accrued expenses, less current portion 60,000 60,000
Contingent consideration payable,
less current portion 164,200 209,800
__________ ___________
Total liabilities 1,237,300 1,617,300
__________ ___________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,513,914 and 1,508,914 issued
and outstanding at March 31, 2017
and June 30, 2016 75,700 75,400
Additional paid-in capital 2,515,000 2,498,500
Accumulated other comprehensive
income (loss) ( 4,700) 900
Retained earnings 3,427,100 3,409,600
___________ __________
6,013,100 5,984,400
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
___________ __________
Total shareholders' equity 5,960,700 5,932,000
___________ __________
Total liabilities and
shareholders' equity $7,198,000 $7,549,300
========== ==========
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 Nine Month
Periods Ended Periods Ended
March 31, March 31,
______________________ _____________________
2017 2016 2017 2016
______________________ _____________________
Revenues $1,910,900 $1,674,300 $6,153,800 $5,146,900
Cost of revenues 1,054,800 993,100 3,833,200 3,032,900
__________ __________ __________ __________
Gross profit 856,100 681,200 2,320,600 2,114,000
__________ __________ __________ __________
Operating expenses:
General & administrative 435,100 426,700 1,256,700 1,230,500
Selling 223,900 196,200 664,800 590,400
Research & development 114,100 93,400 334,500 263,000
__________ __________ __________ __________
Total operating
expenses 773,100 716,300 2,256,000 2,083,900
__________ __________ __________ __________
Income (loss) from
operations 83,000 ( 35,100) 64,600 30,100
__________ __________ __________ __________
Other income (expense):
Investment income 1,100 300 10,100 5,700
Other - 200 5,700 ( 3,000)
Interest expense ( 1,200) ( 13,700) ( 2,200) ( 35,900)
__________ __________ _________ __________
Total other income,
(expense) net ( 100) ( 13,200) 13,600 ( 33,200)
__________ __________ _________ __________
Income (loss) before
income taxes (benefit) 82,900 ( 48,300) 78,200 ( 3,100)
__________ __________ _________ __________
Income tax expense (benefit):
Current 38,900 2,200 23,400 43,100
Deferred ( 21,600) ( 13,600) ( 7,400) ( 43,600)
__________ __________ _________ __________
Total income tax
expense (benefit) 17,300 ( 11,400) 16,000 ( 500)
__________ __________ _________ __________
Net income (loss) $ 65,600 ($ 36,900) $ 62,200 ($ 2,600)
========== ========== ========= ==========
Basic earnings (loss) per common
share $ .04 ($ .02) $ .04 ($ .00)
Diluted earnings (loss) per common
share $ .04 ($ .02) $ .04 ($ .00)
Cash dividends declared
per common share $ .03 $ - $ .03 $ -
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 Nine Month
Periods Ended Periods Ended
March 31, March 31,
____________________ ______________________
2017 2016 2017 2016
____________________ ______________________
Net income (loss) $ 65,600 ($ 36,900) $ 62,200 ($ 2,600)
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period,
net of tax 1,300 3,000 ( 5,600) ( 1,900)
________ _________ __________ __________
Comprehensive income (loss) $ 66,900 ($ 33,900) $ 56,600 ($ 4,500)
======== ========= ========== ==========
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Month Periods Ended
March 31, 2017 March 31, 2016
______________ ______________
Operating activities:
Net Income (loss) $ 62,200 ($ 2,600)
_________ ___________
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Gain on sale of investments ( 3,200) -
Loss on asset disposal - 2,700
Depreciation and amortization 276,500 319,100
Deferred income tax expense ( 7,400) ( 43,600)
Stock-based compensation 1,300 11,200
Changes in operating assets and liabilities:
Accounts receivable ( 95,800) 364,600
Inventories 206,200 (1,461,200)
Prepaid expenses and other current
assets ( 25,900) 13,800
Accounts payable 700 194,700
Customer advances 107,900 191,400
Accrued expenses ( 317,700) 195,000
__________ __________
Total adjustments 142,600 ( 212,300)
__________ __________
Net cash provided by (used in)
operating activities 204,800 ( 214,900)
__________ __________
Investing activities:
Redemption of investment securities,
available-for-sale 11,100 -
Purchase of investment securities,
available-for-sale ( 18,700) ( 2,700)
Capital expenditures ( 18,200) ( 45,100)
Purchase of intangible assets ( 12,800) ( 7,400)
___________ __________
Net cash used in investing
activities ( 38,600) ( 55,200)
___________ __________
Financing activities:
Line of credit proceeds 250,000 970,000
Line of credit repayments ( 250,000) -
Cash dividend declared and paid ( 44,500) -
Payments of contingent consideration ( 166,100) ( 100,900)
Proceeds from exercise of stock options 15,500 -
Principal payments on note payable ( 4,800) -
___________ ___________
Net cash provided by (used in)
financing activities ( 199,900) 869,100
___________ ___________
Net increase (decrease) in cash and cash
equivalents ( 33,700) 599,000
Cash and cash equivalents, beginning
of year 1,245,000 482,000
___________ ___________
Cash and cash equivalents, end
of period $1,211,300 $1,081,000
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 213,500 $ 35,500
Interest 2,200 27,200
See notes to unaudited condensed consolidated financial statements
4
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, 2016. The results for the three
and nine months ended March 31, 2017, are not necessarily an
indication of the results for the full fiscal year ending
June 30, 2017.
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. Recent Accounting Pronouncements:
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and
Other, (Topic 350): Simplifying the Test for Goodwill Impairment, which is
intended to simplify the subsequent measurement and impairment of goodwill.
The ASU simplifies the complexity of evaluating goodwill for impairment by
eliminating the second step of the impairment test, which compares the
implied fair value of a reporting unit's goodwill to the carrying amount of
that goodwill. Instead, the ASU requires entities to compare the fair value
of a reporting unit to its carrying amount in order to determine the amount
of goodwill impairment recognized. ASU No. 2017-04 is effective for fiscal
years and interim periods within those years beginning after December 15,
2019. Early adoption of all the amendments for ASU 2017-04 is permitted.
Amendments must be applied prospectively. The Company is in process of
assessing the impact of the adoption of ASU No. 2017-04 on its financial
position, results of operations and cash flows.
In February 2016, the FASB issued authoritative guidance that requires
lessees to account for most leases on their balance sheets with the
liability being equal to the present value of the lease payments. The
right-of-use asset will be based on the lease liability adjusted for certain
costs such as direct costs. Lease expense will be recognized similar to
current accounting guidance with operating leases resulting in a straight-
line expense and financing leases resulting in a front-loaded expense
similar to the current accounting for capital leases. This guidance becomes
effective for the Company's fiscal 2020 first quarter, with early adoption
permitted.
5
This guidance must be adopted using a modified retrospective transition
approach for leases that exist or are entered into after the beginning of
the earliest comparative period in the financial statements, and provides
for certain practical expedients. The Company is currently evaluating the
timing, impact and method of applying this guidance on its consolidated
financial statements.
3. 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):
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended March 31, 2017:
Revenues $1,410,800 $ 359,800 $ 140,300 $ - $1,910,900
Foreign Sales 611,400 37,100 - - 648,500
Income(Loss)from
Operations 88,900 ( 82,400) 76,500 - 83,000
Assets 4,170,900 1,822,200 485,700 719,200 7,198,000
Long-Lived Asset
Expenditures 4,600 - 7,000 - 11,600
Depreciation and
Amortization 73,500 1,600 12,000 - 87,100
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended March 31, 2016:
Revenues $1,279,300 $ 364,900 $ 30,100 $ - $1,674,300
Foreign Sales 597,300 25,900 - - 623,200
Income(Loss)from
Operations 2,800 5,500 ( 29,600) ( 13,800) ( 35,100)
Assets 4,358,700 2,898,400 746,200 595,000 8,598,300
Long-Lived Asset
Expenditures 31,500 3,200 3,700 - 38,400
Depreciation and
Amortization 74,800 9,000 24,500 - 108,300
6
Approximately 54% and 50% of net sales of benchtop laboratory equipment
for the three month periods ended March 31, 2017 and 2016, respectively,
were derived from the Company's main product, the Vortex-Genie 2 mixer,
excluding accessories.
Approximately 21% and 22% of total benchtop laboratory equipment sales
were derived from the Torbal Scales Division for the three months ended
March 31, 2017 and 2016, respectively.
Two benchtop laboratory equipment customers accounted for approximately
15% and 19% of the segment's net sales for the three month periods ended
March 31, 2017 and 2016 (11% and 15% of total revenues, respectively,
for the periods).
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 two customers in the three months ended March 31,
2017 and two different customers in the three months ended March 31,
2016, accounted respectively for 76% and 86% of the segment?s net
sales for each of the periods (14% and 19% of total revenues,
respectively, for the periods).
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ __________
Nine months ended March 31, 2017:
Revenues $4,334,400 $1,629,400 $ 190,000 $ - $6,153,800
Foreign Sales 1,924,400 52,200 - - 1,976,600
Income(Loss)from
Operations 252,900 ( 197,400) 9,100 - 64,600
Assets 4,170,900 1,822,200 485,700 719,200 7,198,000
Long-Lived Asset
Expenditures 18,200 - 12,800 - 31,000
Depreciation and
Amortization 226,900 12,700 37,000 - 276,600
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ __________
Nine months ended March 31, 2016:
Revenues $4,125,900 $ 932,300 $ 88,700 $ - $5,146,900
Foreign Sales 1,960,700 139,200 - - 2,099,900
Income(Loss)from
Operations 245,200 ( 86,700) ( 92,500) ( 35,900) 30,100
Assets 4,358,700 2,898,400 746,200 595,000 8,598,300
Long-Lived Asset
Expenditures 39,900 3,200 9,400 - 52,500
Depreciation and
Amortization 222,800 22,900 73,400 - 319,100
Approximately 53% and 50% of net sales of benchtop laboratory equipment
for the nine month periods ended March 31, 2017 and 2016,respectively,
were derived from sales of the Company's main product, the Vortex-Genie 2
mixer, excluding accessories.
7
Approximately 23% and 21% of total benchtop laboratory equipment sales
for the nine months ended March 31, 2017 and 2016, respectively, were
derived from sales of the Torbal Scales Division.
Two benchtop laboratory equipment customers, accounted for approximately
11% and 15% of the segment?s net sales (8% and 12% of total revenues)
for the nine month periods ended March 31, 2017 and 2016, respectively.
Sales of catalyst research instruments to four customers in the nine
months ended March 31, 2017 and to four other customers in the nine
months ended March 31, 2016 accounted for approximately 92% and 87% of
that segment's net sales (24% and 16% of total revenues) for the
respective nine month periods.
The Company's foreign sales are principally made to customers in Europe
and Asia. The Company also has an arrangement with a supplier for
annual minimum purchase commitments through February 2020 which the
Company has already met for the current year.
4. 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 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 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 and liabilities that were accounted for
at fair value on a recurring basis at March 31, 2017 and June 30, 2016
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, 2017 Level 1 Level 2 Level 3
______________ __________ _______ ________
Assets:
Cash and cash equivalents $1,211,300 $1,211,300 $ - $ -
Available for sale securities 294,000 294,000 - -
Total $1,505,300 $1,505,300 $ - $ -
Liabilities:
Contingent consideration $ 180,200 $ - $ - $180,200
8
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2016 Level 1 Level 2 Level 3
______________ __________ _______ ________
Assets:
Cash and cash equivalents $1,245,000 $1,245,000 $ - $ -
Available for sale securities 290,100 290,100 - -
__________ __________ _______ ________
Total $1,535,100 $1,535,100 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 346,300 $ - $ - $346,300
========== ========== ======= ========
The following table sets forth an analysis of changes during the nine
months ended March 31, 2017, Level 3 financial liabilities of the
Company:
Beginning balance, June 30, 2016 $346,300
Payments (166,100)
_________
Ending Balance, March 31, 2017 $180,200
=========
Investments in marketable securities classified as available-for-sale
by security type at March 31, 2017 and June 30, 2016 consisted of the
following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At March 31, 2017:
Available for sale:
Equity securities $ 37,000 $ 49,500 $ 12,500
Mutual funds 261,700 244,500 ( 17,200)
_________ _________ ___________
$ 298,700 $ 294,000 ($ 4,700)
========= ========= ===========
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2016:
Available for sale:
Equity securities $ 29,300 $ 40,700 $ 11,400
Mutual funds 259,900 249,400 (10,500)
__________ _________ __________
$ 289,200 $ 290,100 $ 900
========== ========= ==========
5. Inventories:
At interim reporting periods, inventories for financial statement purposes
are based on perpetual inventory records. Components of inventory are as
follows:
March 31, June 30,
2017 2016
__________ ___________
Raw Materials $1,364,900 $1,529,800
Work in process 429,500 425,300
Finished Goods 411,500 457,000
__________ __________
$2,205,900 $2,412,100
========== ==========
9
6. 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 (loss) per common share include the dilutive effect
of stock options, if any.
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,
___________________ _____________________
2017 2016 2017 2016
___________________ _____________________
Net income (loss) $ 65,600 ($ 36,900) $ 62,200 ($ 2,600)
======== ========= ======== =========
Weighted average common
shares outstanding 1,492,334 1,489,112 1,490,189 1,489,112
Effect of dilutive
securities 38 - 1,309 -
_________ _________ _________ _________
Weighted average dilutive
common shares outstanding 1,492,372 1,489,112 1,491,498 1,489,112
========= ========= ========= =========
Basic earnings (loss) per
common share $ .04 ($ .02) $ .04 ($ .00)
====== ======= ====== =======
Diluted earnings (loss) per
common share $ .04 ($ .02) $ .04 ($ .00)
====== ======= ====== =======
Approximately 33,500 and 38,500 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 nine month periods ended March 31, 2017 and 2016, respectively,
because the effect would be anti-dilutive.
7. 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
acquisitions. Goodwill amounted to $705,300 as of March 31, 2017
and June 30, 2016, respectively, all of which is deductible for
tax purposes.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
_________ __________ ____________ __________
At March 31, 2017:
Technology, trademarks 5/10 yrs. $ 722,800 $ 532,000 $ 190,800
Trade names 6 yrs. 140,000 71,900 68,100
Websites 5 yrs. 210,000 129,500 80,500
Customer relationships 9/10 yrs. 357,000 278,100 78,900
Sublicense agreements 10 yrs. 294,000 158,000 136,000
Non-compete agreements 5 yrs. 384,000 280,500 103,500
Intellectual property,
research & development
(IPR&D) 3 yrs. 110,000 110,000 -
Other intangible assets 5 yrs. 194,500 162,100 32,400
__________ __________ __________
$2,412,300 $1,722,100 $ 690,200
========== ========== ==========
10
Useful Accumulated
Lives Cost Amortization Net
_________ __________ ____________ __________
At June 30, 2016:
Technology, trademarks 5/10 yrs. $ 722,800 $ 468,800 $ 254,000
Trade names 6 yrs. 140,000 54,400 85,600
Websites 5 yrs. 210,000 98,000 112,000
Customer relationships 9/10 yrs. 357,000 261,600 95,400
Sublicense agreements 10 yrs. 294,000 136,000 158,000
Non-compete agreements 5 yrs. 384,000 239,100 144,900
Intellectual Property,
Research & Development
(IPR&D) 3 yrs. 110,000 85,500 24,500
Other intangible assets 5 yrs. 177,900 154,700 23,200
__________ __________ __________
$2,395,700 $1,498,100 $ 897,600
========== ========== ==========
Total amortization expense was $69,900 and $89,400 for the three months
ended March 31, 2017 and 2016, respectively and $224,000 and $263,200
for the nine months ended March 31, 2017 and 2016, respectively. As of
March 31, 2017, estimated future amortization expense related to
intangible assets is $73,400 for the remainder of the fiscal year
ending June 30, 2017, $288,500 for fiscal 2018, $210,600 for fiscal
2019, $45,100 for fiscal 2020, $43,500 for fiscal 2021, and $29,100
thereafter.
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 $33,700 to $1,211,300 as of March 31,
2017 from $1,245,000 as of June 30, 2016.
Operating activities provided cash of $204,800 for the nine month period
ended March 31, 2017 as compared to the $214,900 used during the nine month
period ended March 31, 2016. The current year period reflected income from
operations and significantly lower amounts of work-in-progress inventories
for the Catalyst Research Instruments Operations related to a significant
order shipped last year, partially offset by higher amounts in accrued
expenses. Net cash used in investing activities was $38,600 for the nine
months ended March 31, 2017 compared to $55,200 for the comparable period
last year primarily due to decreased capital expenditures in the current
year period. Net cash used in financing activities was $199,900 for the
nine months ended March 31, 2017 compared to $869,100 provided by financing
activities in the comparable prior year period primarily due to the proceeds
from the export-related line of credit to finance the inventories discussed
above in the prior year period and higher contingent consideration paid.
The Company's working capital increased by $215,500 to $4,247,400 as of
March 31, 2017 from $4,031,900 at June 30, 2016.
The Company has two lines of credit through June 2017 with First National
Bank of Pennsylvania comprised of (i) an Export-Related Revolving Line of
Credit which is guaranteed by the Export-Import Bank of the United States
which provides for export-related borrowings of up to $200,000, bearing
interest at the prime rate plus 1% and an annual fee of 1.75% and (ii) a
second one-year Demand Line of Credit which provides for borrowings of up
to $300,000 for regular working capital needs, bearing interest at the
prime rate, currently 4.0%. Advances on both lines are secured by a
pledge of the Company's assets including inventory, accounts, chattel
paper, equipment and general intangibles of the Company. As of March
31, 2017 and June 30, 2016, the Company had no borrowings outstanding.
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, income from operations,
and the lines of credit which are expected to be renewed.
12
Results of Operations
Financial Overview
The Company recorded income before income tax expense of $82,900 and a loss
before income tax benefit of $48,300 for the three month periods ended
March 31, 2017 and 2016, respectively; and income before income tax of
$78,200 and a loss before income tax benefit of $3,100 for the nine month
periods ended March 31, 2017 and 2016, respectively, primarily due to higher
sales and gross profit margins of benchtop laboratory equipment and higher
royalties earned by the Bioprocessing Systems Operations, partially offset
by increased losses by the Catalyst Research Instruments Operations due
principally to lower gross margins. The results reflect non-cash amounts
for depreciation and amortization of $87,100 and $108,300 for the three
months ended March 31, 2017 and 2016, respectively, and $276,600 and
$319,100 for the nine months ended March 31, 2017 and 2016, respectively.
The Three Months Ended March 31, 2017 Compared With the Three Months Ended
March 31, 2016
Net revenues for the three months ended March 31, 2017 increased by
$236,600 (14.1%) to $1,910,900 from $1,674,300 for the three months ended
March 31, 2016, as a result of a $131,500 increase in sales of benchtop
laboratory equipment and $110,200 increase in royalties earned by the
Bioprocessing Systems Operations, partially offset by a decrease of $5,100
in catalyst research instruments 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 $431,200 at March 31, 2017 compared
to $3,027,000 as of March 31, 2016, all of which is anticipated to be
delivered by June 30, 2017. Revenues derived by the Bioprocessing Systems
Operations pertain to royalties earned from sublicenses.
The gross profit percentage for the three months ended March 31, 2017 was
44.8% compared to 40.7% for the three months ended March 31, 2016,
reflecting increased margins for the Benchtop Laboratory Equipment and
lower gross margins for catalyst research instruments as a result of
sales mix. All the revenues derived by the Bioprocessing Systems
Operations related to net royalties earned.
General and administrative expenses for the three months ended March 31,
2017 amounted to $435,100 compared to $426,700 for the three months ended
March 31, 2016.
Selling expenses for the three months ended March 31, 2017 increased
$27,700 (14.1%) to $223,900 compared to $196,200 for the three months
ended March 31, 2016 principally due to increased online marketing
activities by the Benchtop Laboratory Equipment Operations and trade
show activity by the Catalyst Research Instruments Operations.
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Research and development expenses for the three months ended March 31,
2017 increased $20,700 (22.2%) to $114,100 from $93,400 for the three
months ended March 31, 2016, primarily the result of increased new
product development expenses incurred by the Company's Bioprocessing
Systems Operations.
Total other income (expense), net for the three month period ended
March 31, 2017 was ($100) compared to ($13,200) for the three month
period ended March 31, 2016 due to decreased interest expense as a
result of less borrowings during the current period.
For the three months ended March 31, 2017, income tax expense was
$17,300 compared to tax benefit of $11,400 for the prior year
comparative period due to income for the current year period.
As a result, the net income for the three months ended March 31,
2017 was $65,600 compared to a loss of $36,900 for the three months
ended March 31, 2016.
The Nine Months Ended March 31, 2017 Compared With the Nine Months
Ended March 31, 2016
Net revenues for the nine months ended March 31, 2017 increased by
$1,006,900 (19.6%) to $6,153,800 compared to $5,146,900 for the
nine months ended December 31, 2015, due to increases of $697,100,
$208,500 and $101,300 in sales of catalyst research instruments,
benchtop laboratory equipment, and bioprocessing systems royalties,
respectively.
The gross profit percentage for the nine months ended March 31, 2017
decreased to 37.7% compared to 41.1% for the nine months ended March 31,
2016, reflecting lower gross margins for catalyst research instruments
as a result of sales mix and increased margins for the Benchtop
Laboratory Equipment.
All the revenues derived by the Bioprocessing Systems Operations
related to net royalties earned.
General and administrative expenses increased by $26,200 (2.1%) to
$1,256,700 for the nine months ended March 31, 2017 from $1,230,500
for the comparable period of the prior year, primarily due to
various expenses incurred by the Benchtop Laboratory Equipment
Operations.
Selling expenses for the nine months ended March 31, 2017 increased
by $74,400 (12.6%) to $664,800 from $590,400 for the nine months
ended March 31, 2016, principally due to online marketing activities
by the Benchtop Laboratory Equipment Operations and trade show
activity by the Catalyst Research Instruments Operations.
Research and development expenses for the nine months ended March
31,2017 increased by $71,500 (27.2%) to $334,500 compared to
$263,000 for the nine months ended March 31, 2016, primarily the
result of increased new product development by the Company's
Bioprocessing Systems Operations and the Benchtop Laboratory
Equipment Operations.
Total other income (expense), net, for the nine month period ended
March 31, 2017 increased to $13,600 from ($33,200) for the nine
months ended March 31, 2016 primarily due to decreased interest
expense.
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For the nine month period ended March 31, 2017, the income tax
expense was $16,000 compared to income tax benefit of $500 for the
comparable period of the prior fiscal year due to income during the
current year period.
As a result, net income for the nine months ended March 31, 2017 was
$62,200 compared to a net loss of $2,600 for the nine months ended
March 31, 2016.
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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:
Report dated February 10, 2017 reporting under Item 1.01.
Report dated January 15, 2017 reporting under Item 8.01.
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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 12, 2017
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