Attached files
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, 2016
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, 2016 was 1,489,112 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 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 14
ITEM 4 CONTROLS AND PROCEDURES 17
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
March 31, June 30,
2016 2015
_____________ __________
Current Assets: (Unaudited)
Cash and cash equivalents $1,081,000 $ 482,000
Restricted cash 300,000 300,000
Investment securities 282,300 281,800
Trade accounts receivable, net 717,100 1,081,700
Inventories 3,674,900 2,213,700
Prepaid expenses and other current assets 54,800 68,600
Deferred taxes 104,400 114,200
_________ _________
Total current assets 6,214,500 4,542,000
Property and equipment, net 222,300 235,200
Intangible assets, net 1,195,400 1,451,900
Goodwill 705,300 705,300
Other assets 52,500 52,500
Deferred taxes 208,300 154,500
__________ __________
Total assets $8,598,300 $7,141,400
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 422,300 $ 227,600
Customer advances 267,800 76,400
Bank line of credit 970,000 -
Notes payable 200,000 200,000
Accrued expenses and taxes 714,900 519,900
Contingent consideration, current portion 128,900 106,800
__________ __________
Total current liabilities 2,703,900 1,130,700
Contingent consideration, less
current portion 137,300 260,300
__________ __________
Total liabilities 2,841,200 1,391,000
__________ __________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,508,914 outstanding at
March 31, 2016 and June 30, 2015 75,400 75,400
Additional paid-in capital 2,497,900 2,486,700
Accumulated other comprehensive loss ( 5,200) ( 3,300)
Retained earnings 3,241,400 3,244,000
___________ __________
5,809,500 5,802,800
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
__________ __________
Total shareholders' equity 5,757,100 5,750,400
__________ __________
Total liabilities and
shareholders' equity $8,598,300 $7,141,400
========== ==========
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,
______________________ ______________________
2016 2015 2016 2015
__________ __________ __________ __________
Revenues $1,674,300 $1,729,200 $5,146,900 $5,082,400
Cost of sales 993,100 961,900 3,032,900 3,125,800
__________ __________ __________ __________
Gross profit 681,200 767,300 2,114,000 1,956,600
__________ __________ __________ __________
Operating expenses:
General & administrative 426,700 433,900 1,230,500 1,286,500
Selling 196,200 202,200 590,400 726,900
Research & development 93,400 94,500 263,000 317,700
__________ __________ __________ __________
Total operating
expenses 716,300 730,600 2,083,900 2,331,100
__________ __________ __________ __________
Income (loss) from
operations ( 35,100) 36,700 30,100 ( 374,500)
__________ __________ __________ __________
Other income (expense):
Investment income 300 1,100 5,700 10,700
Other 200 ( 4,600) ( 3,000) ( 5,700)
Interest expense ( 13,700) ( 1,600) ( 35,900) ( 4,300)
__________ __________ __________ __________
Total other income,
(expense) net ( 13,200) ( 5,100) ( 33,200) 700
__________ __________ __________ __________
Income (loss) before
income taxes (benefit) ( 48,300) 31,600 ( 3,100) ( 373,800)
__________ __________ __________ __________
Income tax expense (benefit):
Current 2,200 34,800 43,100 ( 56,200)
Deferred ( 13,600) ( 22,200) ( 43,600) ( 37,300)
__________ __________ __________ __________
Total income (loss) tax
expense (benefit) ( 11,400) 12,600 ( 500) ( 93,500)
__________ __________ __________ __________
Net income (loss) ($ 36,900) $ 19,000 ($ 2,600) ($280,300)
========== ========== ========== ==========
Basic earnings (loss) per common
share ($ .02) $ .01 $ .00 ($ .19)
Diluted earnings (loss) per common
share ($ .02) $ .01 $ .00 ($ .19)
Cash dividends declared
per common share $ - $ - $ - $ -
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,
___________________ ______________________
2016 2015 2016 2015
___________________ ______________________
Net income (loss) ($ 36,900) $ 19,000 ($ 2,600) ($ 280,300)
_________ ________ __________ __________
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period,
net of tax 3,000 2,900 ( 1,900) ( 1,600)
_________ ________ __________ __________
Comprehensive income (loss) ($ 33,900) $ 21,900 ($ 4,500) ($ 281,900)
========= ======== ========== ==========
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, 2016 March 31, 2015
_________________ _______________
Operating activities:
Net income loss ($ 2,600) ($ 280,300)
__________ ____________
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss on sale of investments - 4,400
Loss on asset disposal 2,700 -
Depreciation and amortization 319,100 327,200
Deferred income tax benefit ( 43,600) ( 37,300)
Stock-based compensation 11,200 10,200
Income tax benefit of stock options exercised - 4,900
Changes in operating assets and liabilities:
Accounts receivable 364,600 ( 72,900)
Inventories (1,461,200) ( 312,100)
Prepaid expenses and other current assets 13,800 11,900
Accounts payable 194,700 ( 48,600)
Customer advances 191,400 235,400
Accrued expenses and taxes 195,000 ( 13,500)
Other assets - ( 24,200)
____________ ____________
Total adjustments ( 212,300) 85,400
____________ ____________
Net cash used in
operating activities ( 214,900) ( 194,900)
____________ ____________
Investing activities:
Redemption of investment securities,
available-for-sale - 127,000
Purchase of investment securities,
available-for-sale ( 2,700) ( 3,800)
Capital expenditures ( 45,100) ( 56,500)
Purchase of intangible assets ( 7,400) ( 4,400)
____________ ____________
Net cash provided by
(used in) investing activities ( 55,200) 62,300
____________ ____________
Financing activities:
Line of credit proceeds 970,000 250,000
Line of credit repayments - ( 150,000)
Payment of contingent consideration ( 100,900) ( 98,900)
Proceeds from exercise of stock options - 18,800
Principal payments on note payable - ( 26,700)
____________ _____________
Net cash provided by (used in) financing
activities 869,100 ( 6,800)
____________ _____________
Net increase (decrease) in cash
and cash equivalents 599,000 ( 139,400)
Cash and cash equivalents, beginning of year 482,000 493,700
__________ __________
Cash and cash equivalents, end of period $1,081,000 $ 354,300
__________ __________
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 35,500 $ 3,500
Interest 27,200 4,300
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, 2015. The results for the three
and nine months ended March 31, 2016, are not necessarily an
indication of the results for the full fiscal year ending
June 30, 2016.
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 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. In July 2015, the FASB deferred
the effective date to fiscal years beginning after December 15, 2018, or the
Company's fiscal year ending June 30, 2020, and early adoption of the
standard is permitted, but not before the original effective date of
December 15, 2017. The Company is evaluating the effect this guidance will
have on the consolidated financial statements and related disclosures.
5
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
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, 2016, 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.
In July 2015, the FASB issued ASU No. 2015-11, "Inventory: Simplifying the
Measurement of Inventory", that requires inventory not measured using
either the last in, first out (LIFO) or the retail inventory method to be
measured at the lower of cost and net realizable value. Net realizable value
is the estimated selling prices in the ordinary course of business, less
reasonably predictable cost of completion, disposal and transportation. The
new standard will be effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years, and will be
applied prospectively. Early adoption is permitted. The Company is
evaluating the impact that this standard will have on its consolidated
financial statements.
In November 2015, the FASB issued new guidance simplifying the balance sheet
classification of deferred taxes. The new guidance requires that deferred
tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. The current requirement that deferred tax
liabilities and assets of a tax-paying component of an entity be offset and
presented as a single amount is not affected by the new guidance. The
guidance is effective for public companies for interim and annual reporting
periods beginning after December 15, 2016, with early adoption permitted as
of the beginning of an interim or annual reporting period. The new guidance
may be applied either prospectively to all deferred tax liabilities and
assets or retrospectively to all periods presented. The Company is
evaluating the impact that the new guidance will have on its consolidated
financial statements and related disclosures.
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. 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.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
"Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting" (ASU 2016-09). Areas for simplification in
this update involve several aspects of accounting for share-based payment
transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement
of cash flows. ASU 2016-09 is effective for interim and annual reporting
periods beginning after December 15, 2016, with early application permitted.
6
The Company is currently evaluating the timing, impact and method of
applying this guidance on its consolidated financial statements.
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 and agreed to make
additional cash payment based on a percentage of net sales of the business
acquired equal to 8% for the period ended June 30, 2014 annualized, 9% for
the year ended 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. Contingent
consideration payments amounted to $100,900 and $98,900 during the nine month
periods ended March 31, 2016 and 2015, respectively.
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 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
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):
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
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended March 31, 2015:
Revenues $1,558,000 $ 144,600 $ 26,600 $ - $1,729,200
Foreign Sales 813,900 81,100 - - 895,000
Income(Loss)from
Operations 120,600 ( 50,400) ( 33,500) - 36,700
Assets 4,165,700 1,506,700 783,400 555,800 7,011,600
Long-Lived Asset
Expenditures 900 - 3,700 - 4,600
Depreciation and
Amortization 74,700 7,900 24,500 - 107,100
Approximately 50% and 53% of net sales of benchtop laboratory equipment
for the three month periods ended March 31, 2016 and 2015, respectively,
were derived from the Company's main product, the Vortex-Genie 2 mixer,
excluding accessories.
Approximately 22% and 21% of total benchtop laboratory equipment sales
were derived from the Torbal Scales Division for the three months ended
March 31, 2016 and 2015, respectively.
8
Two benchtop laboratory equipment customers accounted for approximately 19%
and 18% of the segment's net sales for the three month periods ended March
31, 2016 and 2015 (15% and 17% 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, 2016
and two different customers in the three months ended March 31, 2015,
accounted respectively for 86% and 64% of the segment's net sales for each
of the periods (19% and 5% of total revenues for the respective periods).
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
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ __________
Nine months ended March 31, 2015:
Revenues $3,891,400 $1,115,300 $ 75,700 $ - $5,082,400
Foreign Sales 1,947,400 840,300 - - 2,787,700
Loss from
Operations ( 64,700) ( 191,200) ( 118,600) - ( 374,500)
Assets 4,165,700 1,506,700 783,400 555,800 7,011,600
Long-Lived Asset
Expenditures 52,400 900 7,600 - 60,900
Depreciation and
Amortization 227,000 26,900 73,300 - 327,200
Approximately 50% of net sales of benchtop laboratory equipment for both
the nine month periods ended March 31, 2016 and 2015, were derived from
sales of the Company's main product, the Vortex-Genie 2 mixer, excluding
accessories.
Approximately 21% and 20% of total benchtop laboratory equipment sales
for the nine months ended March 31, 2016 and 2015, respectively, were
derived from sales of the Torbal Scales Division.
Two benchtop laboratory equipment customers, accounted for approximately
15% and 17% of the segment's net sales (12% and 13% of total revenues)
for the nine month periods ended March 31, 2016 and 2015, respectively.
Sales of catalyst research instruments to four customers in the nine
months ended March 31, 2016 and to seven other customers in the nine
months ended March 31, 2015 accounted for approximately 87% and 97% of
that segment's net sales (16% and 19% of total revenues) for the
respective nine month periods.
9
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.
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 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, 2016 and June 30, 2015 according to
the valuation techniques the Company used to determine their fair values:
Fair Value Measurements Using Inputs
Considered as
Assets:
Fair Value at
March 31, 2016 Level 1 Level 2 Level 3
______________ __________ _______ ________
Cash and cash equivalents $1,081,000 $1,081,000 $ - $ -
Restricted cash 300,000 300,000 - -
Available for sale securities 282,300 282,300 - -
__________ __________ _______ _________
Total $1,663,300 $1,663,300 $ - $ -
========== ========== ======== =========
Liabilities:
Contingent consideration $ 266,200 $ - $ - $266,200
========== ========== ======== =========
Fair Value Measurements Using Inputs
Considered as
Assets:
Fair Value at
June 30, 2015 Level 1 Level 2 Level 3
______________ __________ _______ ________
Cash and cash equivalents $ 482,000 $ 482,000 $ - $ -
Restricted cash 300,000 300,000 - -
Available for sale securities 281,800 281,800 - -
__________ __________ _______ ________
Total $1,063,800 $1,063,800 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 367,100 $ - $ - $367,100
========== ========== ======= ========
10
Investments in marketable securities classified as available-for-sale
by security type at March 31, 2016 and June 30, 2015 consisted of
the following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At March 31, 2016:
Available for sale:
Equity securities $ 29,300 $ 39,700 $ 10,400
Mutual funds 258,200 242,600 (15,600)
_________ _________ ____________
$ 287,500 $ 282,300 $ ( 5,200)
========= ========= ============
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2015:
Available for sale:
Equity securities $ 29,300 $ 35,800 $ 6,500
Mutual funds 255,800 246,000 ( 9,800)
__________ _________ __________
$ 285,100 $ 281,800 $ ( 3,300)
========== ========= ==========
6. Inventories:
At interim reporting periods, inventories for financial statement
purposes are based on perpetual inventory records. Components of i
nventory are as follows:
March 31, June 30,
2016 2015
____________ __________
Raw Materials $1,465,500 $1,420,800
Work in process 1,805,700 442,900
Finished Goods 403,700 350,000
__________ __________
$3,674,900 $2,213,700
========== ==========
7. Earnings (Loss) per common share:
Basic earnings (loss) per common share are computed by dividing net income
(loss) by the weighted-average number of shares outstanding. Diluted
earnings (loss) per common share include the dilutive effect of stock
options, if any.
11
Earnings (Loss) per common share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
_____________________ ____________________
2016 2015 2016 2015
_____________________ ____________________
Net income (loss) ($ 36,900) $ 19,000 ($ 2,600) ($ 280,300)
=========== ========= ========== ===========
Weighted average common
shares outstanding 1,489,112 1,479,112 1,489,112 1,477,375
Effect of dilutive
securities - - - -
_________ _________ _________ _________
Weighted average dilutive
common shares outstanding 1,489,112 1,479,112 1,489,112 1,477,375
========= ========= ========= =========
Basic earnings (loss) per
common share ($ .02) $ .01 $ .00 ($ .19)
========= ======= ========= =========
Diluted earnings (loss) per
common share ($ .02) $ .01 $ .00 ($ .19)
========= ======= ========= =========
Approximately 38,500 and 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 nine month periods ended March 31, 2016 and 2015, 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
acquisitions. Goodwill amounted to $705,300 as of March 31, 2016
and June 30, 2015, 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, 2016:
Technology, trademarks 5/10 yrs. $1,215,800 $ 715,900 $ 499,900
Trade names 6 yrs. 140,000 46,700 93,300
Websites 5 yrs. 210,000 87,500 122,500
Customer relationships 9/10 yrs. 357,000 254,100 102,900
Sublicense agreements 10 yrs. 294,000 128,600 165,400
Non-compete agreements 5 yrs. 384,000 225,000 159,000
intellectual property,
research & development
(IPR&D) 3 yrs. 110,000 76,300 33,700
Other intangible assets 5 yrs. 171,400 152,700 18,700
__________ __________ __________
$2,882,200 $1,686,800 $1,195,400
========== ========== ==========
12
Useful Accumulated
Lives Cost Amortization Net
______ __________ ____________ _________
At June 30, 2015:
Technology, trademarks 5/10 yrs. $1,226,800 $ 624,200 $ 602,600
Trade names 6 yrs. 140,000 31,100 108,900
Websites 5 yrs. 210,000 56,000 154,000
Customer relationships 9/10 yrs. 357,000 236,200 120,800
Sublicense agreements 10 yrs. 294,000 106,600 187,400
Non-compete agreements 5 yrs. 384,000 182,700 201,300
Intellectual property,
research & development
(IPR&D) 3 yrs. 110,000 48,900 61,100
Other intangible assets 5 yrs. 164,000 148,200 15,800
__________ __________ __________
$2,885,800 $1,433,900 $1,451,900
========== ========== ==========
Total amortization expense was $89,400 and $86,900 for the three months
ended March 31, 2016 and 2015, respectively and $263,200 for both the nine
months ended March 31, 2016 and 2015. As of March 31, 2016, estimated
future amortization expense related to intangible assets is $71,200 for
the remainder of the fiscal year ending June 30, 2016, $337,000 for fiscal
2017, $324,000 for fiscal 2018, $246,600 for fiscal 2019, $80,400 for
fiscal 2020, and $136,200 thereafter.
13
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operations
Certain statements contained in this report are not based on
historical facts, but are forward-looking statements that are based
upon various assumptions about future conditions. Actual events in
the future could differ materially from those described in the
forward-looking information. Numerous unknown factors and future
events could cause such differences, including but not limited to,
product demand, market acceptance, impact of competition, the ability
to reach final agreements, the ability to finance and produce catalyst
research instruments to customers' satisfaction, adverse economic
conditions, and other factors affecting the Company's business that
are beyond the Company's control. Consequently, no forward-looking
statement can be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
_______________________________
Cash and cash equivalents increased $599,000 to $1,081,000 as of March
31, 2016 from $482,000 as of June 30, 2015.
Operating activities used cash of $214,900 for the nine month period
ended March 31, 2016 as compared to the $194,900 for the nine month
period ended March 31, 2015. The current year period reflected higher
amounts of work-in-progress inventories for the Catalyst Research
Instruments Operations related to a significant impending order to be
shipped overseas, partially offset by lower accounts receivable
balances and increases in accounts payable, customer advances, and
accrued expenses. Net cash used in investing activities was $55,200
for the nine months ended March 31, 2016 compared to net cash provided
of $62,300 for the comparable period last year primarily due to the
lack of investment securities redemptions in the current year. Net
cash provided by financing activities was $869,100 for the nine months
ended March 31, 2016 compared to $6,800 used in the comparable prior
year period primarily due to the proceeds from the export-related line
of credit to finance the inventories for a significant catalyst
research instrument order for overseas.
The Company's working capital increased by $99,300 to $3,510,600 as of
March 31, 2016 from $3,411,300 at June 30, 2015.
The Company has two lines of credit with First National Bank of
Pennsylvania - 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 $998,500 bearing
interest at prime plus 2% (currently 5.50%) and an annual fee of
1.75%; and 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 prime, which is collaterized by a cash collateral
account of $300,000 which will be released upon certain financial
criteria being met or the line being paid and terminated, which ever
comes first. Advances on both lines are also 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,
14
2016 $970,000 was outstanding under the Export-Related line and no
borrowings were made under the second 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, including its cash and cash equivalents, the line of credit
and investment securities.
Results of Operations
_____________________
Financial Overview
The Company reported a loss before income tax benefit amounting to
$48,300 and $3,100, respectively, for the three and nine month periods
ended March 31, 2016, compared to $31,600 of income before income tax
expense and a $373,800 loss before income tax benefit for the three
and nine month periods ended March 31, 2015, respectively. The results
reflect non-cash amounts for depreciation and amortization of $108,300
and $319,100 for the three and nine months ended March 31, 2016
compared to $107,100 and $327,200 for the prior periods, respectively.
The loss for the current three month period compared to the prior year
period's income is due primarily to lower sales of benchtop laboratory
equipment compared to the prior year period which benefitted from an
unusual backlog related to the facility move in the prior year, and
lower overseas sales of benchtop laboratory equipment. The
improvement in the current year nine month period's operating results
is primarily due to higher sales and margins generated by the Benchtop
Laboratory Equipment Operations which benefitted from some large
orders from overseas and the absence of moving expenses incurred in
the prior year period.
The Three Months Ended March 31, 2016 Compared With the Three Months
Ended March 31, 2015
____________________________________________________________________
Net revenues for the three months ended March 31, 2016 decreased by
$54,900 (3.2%) to $1,674,300 from $1,729,200 for the three months
ended March 31, 2015 as a result of a $278,700 decrease in benchtop
laboratory equipment sales, partially offset by increases of $220,300
and $3,500 in catalyst research instrument sales and bioprocessing
systems revenues, respectively. Sales of benchtop laboratory equipment
products generally comprise many small 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 $3,027,000 as of March 31, 2016, most of
which is expected to be delivered by fiscal year end, as compared to
the backlog of $1,154,000 as of March 31, 2015. The Benchtop
Laboratory Equipment Operations sales included $248,300 and $287,500
of Torbal brand product sales for the three months ended March 31,
2016 and 2015, respectively.
The gross profit for the three months ended March 31, 2016 was 40.7%
compared to 44.4% for the three months ended March 31, 2015, due
primarily to sales mix, partially offset by lower overhead costs of
the Benchtop Laboratory Equipment Operations.
General and administrative expenses for the three months ended March
31, 2016 decreased $7,200 (1.7%) to $426,700 compared to $433,900 for
the three months ended March 31, 2015, primarily due to decreased
travel expenses for the Bioprocessing Systems Operations.
15
Selling expenses for the three months ended March 31, 2016 decreased
$6,000 (3.0%) to $196,200 from $202,200 for the three months ended
March 31, 2015, primarily due to decreased sales commissions for
catalyst research instruments due to sales mix.
Research and development expenses for the three months ended March 31,
2016 decreased slightly to $93,400 from $94,500 for the three months
ended March 31, 2015.
Total other expense amounted to $13,200 for the three months ended
March 31, 2016 compared to expense of $5,100 for the three months
ended March 31, 2015 due primarily to increased interest expense.
The Company recorded an income tax benefit of $11,400 for the three
months ended March 31, 2016 compared to income tax expense of $12,600
for the three months ended March 31, 2015 due to the loss for the
current period.
As a result of the foregoing, the net loss was $36,900 for the three
months ended March 31, 2016, compared to net income of $19,000 for the
three months ended March 31, 2015.
Nine Months Ended March 31, 2016 Compared With the Nine Months Ended
March 31, 2015
____________________________________________________________________
Net revenues increased by $64,500 (1.3%) to $5,146,900 for the nine
months ended March 31, 2016 compared to $5,082,400 for the nine months
ended March 31, 2015, due to increases of $234,500 in benchtop
laboratory equipment and $13,000 in bioprocessing revenues; partially
offset by decreases of $183,000 in catalyst research instrument sales.
The 2016 benchtop laboratory equipment sales included $850,500 of
Torbal brand product sales compared to $797,300 in the prior year
period.
The gross profit percentage for the nine months ended March 31, 2016
increased to 41.1% compared to 38.5% for the nine months ended March
31, 2015, due principally to product mix and lower overhead costs of
the Benchtop Laboratory Equipment Operations.
General and administrative expenses decreased by $56,000 (4.4%) to
$1,230,500 for the nine months ended March 31, 2016 from $1,286,500
for the comparable period of the prior year, due primarily to the
absence of the costs associated with the move of the Company's
principal facility in the prior year.
Selling expenses for the nine months ended March 31, 2016 decreased by
$136,500 (18.8%) to $590,400 from $726,900 for the nine months ended
March 31, 2015, primarily the result of decreased commissions due to
sales mix and exhibitions expense for the Catalyst Research
Instruments Operations.
Research and development expenses for the nine months ended March 31,
2016 decreased by $54,700 (17.2%) to $263,000 from $317,700 for the
nine months ended March 31, 2015, primarily due to decreased new
product development expenses by the Company's Benchtop Laboratory
Equipment Operations as new products were completed and are being
launched.
16
Total other expense was $33,200 for the nine month period ended March
31, 2016 compared to income of $700 for the nine month period ended
March 31, 2015 due to the increased interest expense.
Income tax benefit for the nine months ended March 31, 2016 was $500
compared to $93,500 for the nine months ended March 31, 2015.
As a result of the foregoing, the net loss for the nine months ended
March 31, 2016 was $2,600 compared to $280,300 for the nine months
ended March 31, 2015.
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.
17
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number: Description
4(c) Amendment to the Company's 2012 Stock
Option Plan.
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:
Filed on January 12, 2016 reporting under
Items 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: May 12, 2016
19
