UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended DECEMBER 31, 2004
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from to
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
___________________________________________________________
(Exact name of small business as specified in its charter)
Delaware 04-2217279
________________________ __________________________________
(State of incorporation) (IRS Employer Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
________________________________________
(Address of principal executive offices)
(631)567-4700
___________________________
(Issuer's telephone number)
Not Applicable
________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's
classes of common equity, as of February 6, 2005: 977,207 shares
outstanding of the Company's Common Stock, par value, $ .05.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2004
_________________
Current Assets:
Cash and cash equivalents $ 155,700
Investment securities 940,600
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 470,700
Inventories 693,900
Prepaid expenses and other current assets 64,400
Deferred taxes 57,000
_______________
Total current assets 2,382,300
Property and equipment at cost, less accumulated
depreciation of $415,500 152,200
Deferred taxes 8,800
Intangible assets, less accumulated amortization
of $44,000 17,300
Other 59,700
_______________
$2,620,300
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 119,800
Accrued expenses and taxes 141,500
Dividends payable 68,300
______________
Total current liabilities 329,600
______________
Deferred compensation 39,200
______________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
997,009 issued and outstanding 49,900
Additional paid-in capital 986,600
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 4,200)
Retained earnings 1,271,600
______________
2,303,900
Less common stock held in treasury, at cost,
19,802 shares 52,400
______________
2,251,500
______________
$2,620,300
==============
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2004 2003 2004 2003
________ _________ __________ __________
Net sales $845,100 $869,700 $1,696,900 $1,743,600
Cost of goods sold 436,500 468,200 891,000 933,100
________ ________ __________ __________
Gross profit 408,600 401,500 805,900 810,500
________ ________ __________ __________
Operating Expenses:
General & administrative 167,900 162,900 345,400 327,000
Selling 81,300 78,600 149,200 178,500
Research & development 88,500 83,800 170,400 186,400
________ ________ __________ __________
337,700 325,300 665,000 691,900
________ ________ __________ __________
Income from operations 70,900 76,200 140,900 118,600
Interest & other income 7,900 4,500 14,500 7,100
________ ________ __________ __________
Income before income taxes 78,800 80,700 155,400 125,700
Income tax expense (benefit):
Current ( 4,000) 20,000 14,000 35,000
Deferred 22,000 - 22,000 -
________ ________ __________ __________
18,000 20,000 36,000 35,000
________ _________ __________ __________
Net income $ 60,800 $ 60,700 $ 119,400 $ 90,700
======== ========= ========== ==========
Basic earnings per common
share $ .06 $ .06 $ .12 $ .09
Diluted earnings per common
share $ .06 $ .06 $ .11 $ .09
Cash dividends declared
per common share $ - $ - $ .07 $ -
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended
December 31, 2004 December 31, 2003
_________________ _________________
Operating activities:
Net income $ 119,400 $ 90,700
_________ __________
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss on sale of investments - 800
Depreciation and amortization 32,500 34,900
Change in assets and liabilities:
Deferred income taxes 22,000 -
Income tax benefit of stock options
exercised 500 -
Accounts receivable ( 81,900) ( 24,800)
Inventories ( 27,700) 27,000
Prepaid expenses and other
current assets ( 6,200) 15,200
Other assets 13,100 ( 8,300)
Accounts payable 43,800 ( 10,000)
Accrued expenses and taxes ( 18,600) 91,500
Deferred compensation 3,200 8,300
_________ _________
Total adjustments ( 19,300) 134,600
_________ _________
Net cash provided by
operating activities 100,100 225,300
_________ _________
Investing activities:
Purchase of investment securities,
available-for-sale (111,700) (137,700)
Purchase investment securities,
held to maturity ( 83,100) -
Redemptions of investment securities,
available-for-sale - 30,000
Redemptions of investment securities,
held to maturity 55,500 100,800
Capital expenditures ( 40,900) ( 37,700)
Purchase of intangible assets ( 7,600) -
_________ _________
Net cash used in
investing activities (187,800) ( 44,600)
_________ _________
Financing activities,
exercise of stock options 2,000 -
_________ _________
Net increase (decrease) in cash
and cash equivalents ( 85,700) 180,700
Cash and cash equivalents, beginning
of year 241,400 107,600
_________ _________
Cash and cash equivalents, end of period $ 155,700 $ 288,300
========= =========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 51,600 $ 200
See notes to unaudited condensed consolidated financial
statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
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-QSB. 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 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-KSB, for the
fiscal year ended June 30, 2004. The results for
the three and six months ended December 31, 2004,
are not necessarily an indication of the results
of the full fiscal year.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements
include the accounts of the Company and Scientific Packaging
Industries, Inc., a New York corporation and an inactive wholly
owned subsidiary of the Company. All intercompany items and
transactions have been eliminated in consolidation.
2. Line of Business and Concentrations:
The Company is engaged in the manufacturing and marketing of
equipment for research in university, hospital and industrial
laboratories. The Company believes that it has only one
reportable segment. Sales of the Company's principal product,
the Vortex-Genie(R) 2 mixer, amounted to approximately $609,000
and $663,000 for the three month periods ended December 31,
2004 and 2003, respectively, and $1,235,000 and $1,363,000 for
the six month periods ended December 31, 2004 and 2003,
respectively.
The Company's export sales (principally Europe and Asia) were
approximately $435,000 and $405,000 for the three month periods
ended December 31, 2004 and 2003, respectively, and $748,000
and $752,000 for the six month periods ended December 31, 2004
and 2003, respectively.
Three of the Company's customers accounted in the aggregate for
49% and 55% of net sales for the three month periods ended
December 31, 2004 and 2003, respectively, and 49% and 57% of
total net sales for the six month periods ended December 31,
2004 and 2003, respectively.
4
3. Inventories:
Inventories for interim financial statement purposes are based
on perpetual inventory records at the end of the applicable
periods. Components of inventory are as follows:
December 31,
2004
___________
Raw Materials $ 611,600
Work in process 37,300
Finished Goods 45,000
___________
$ 693,900
===========
4. Earnings per common share:
Basic earnings per common share is computed by dividing net
income by the weighted-average number of shares outstanding.
Diluted earnings per common share includes the dilutive effect
of stock options and a warrant.
Earnings per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2004 2003 2004 2003
________ ________ ________ ________
Net income $ 60,800 $ 60,700 $119,400 $ 90,700
======== ======== ======== ========
Weighted average common
shares outstanding 976,736 960,541 976,139 960,541
Effect of dilutive
securities 76,536 45,279 72,837 37,119
________ ________ ________ ________
Weighted average dilutive
common shares outstanding 1,053,272 1,005,820 1,048,975 997,660
========= ========= ========= ========
Basic earnings per
common share $ .06 $ .06 $ .12 $ .09
Diluted earnings per
common share $ .06 $ .06 $ .11 $ .09
Unexercised employee stock options to purchase 44,000 shares of
common stock at $1.92 to $2.40 per share were outstanding as of
December 31, 2003, but were not included in the foregoing
computation because the exercise price of each option was
greater than the average market price of the Company's common
stock for the related period.
All options outstanding as of December 31, 2004 were included
in the foregoing computation.
5
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and six month periods ended
December 31, 2004 and 2003.
6. Stock-Based Compensation Plans:
The Company maintains an Incentive Stock Option Plan which it
accounts for under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based
compensation costs are reflected in net income, as all options
granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based
employee compensation:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2004 2003 2004 2003
________ ________ _______ ________
Net income:
As reported $ 60,800 $ 60,700 $119,400 $ 90,700
Pro Forma 60,300 57,600 118,400 87,400
Earnings per common and
common equivalent share:
Basic - as reported $ .06 $ .06 $ .12 $ .09
Basic - pro forma $ .06 $ .06 $ .12 $ .09
Diluted - as reported $ .06 $ .06 $ .11 $ .09
Diluted - pro forma $ .06 $ .06 $ .11 $ .09
On December 16, 2004, the Financial Accounting Standards Board
issued Statement No. 123 (revised 2004) that will require
compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards will be measured each
reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award.
Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes APB Opinion No. 25,
accounting for Stock Issued to Employees. SFAS 123(R) is effective
as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently assessing the
impact of adopting SFAS 123(R).
6
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
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, 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
Net cash provided by operating activities was $100,100 for the six
month period of the current fiscal year as compared to $225,300 in
the comparative period for 2003. The principal factors accounting
for the difference were (i) a $57,100 increase in accounts
receivable due to higher sales in December 2004 than in December
2003, (ii) $54,700 increase in inventory and (iii) a difference of
$110,100 in accrued expenses mainly due to various higher accruals
including customer allowances, trade shows, and income taxes in the
prior year's six month period. Cash used in investing activities
was $187,800 for the current period as compared to $44,600 for the
six months ended December 31, 2003 reflecting higher purchases and
lower redemptions of investment securities during the current year.
The Company does not ordinarily have any significant financing
activities other than exercises of incentive stock options. As a
result of the foregoing, cash and cash equivalents decreased by
$85,700 to $155,700 as of December 31, 2004 from a balance of
$241,400 as of June 30, 2004.
On September 21, 2004, the Board of Directors of the Company
declared a cash dividend of $.07 per share of Common Stock which
was paid on January 14, 2005 to holders of record as of the close
of business on October 20, 2004.
The Company's working capital as of December 31, 2004 increased
$69,400 to $2,052,700 from $1,983,300 at June 30, 2004. The
increase was mainly due to higher income from operations, partially
offset by the dividend declared. The Company has available a
secured bank line of credit of $200,000 with North Fork Bank with
interest at prime, all of which was available as of December 31,
2004. The Company has never borrowed under this line of credit.
Management believes that the Company will be able to meet its cash
flow needs during the 12 months ended December 31, 2005 from its
available financial resources which include its cash and investment
securities.
7
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Results of Operations
Financial Overview
Income before income taxes of $78,800 for the three months ended
December 31, 2004 was only $1,900 less than $80,700 for the
comparable quarter last year, mainly as a result of a slight
increase in operating expenses during the quarter. Production
interruptions due to problems with a supplier, which were
subsequently corrected caused a 3% reduction in net sales for the
current quarter from those of the comparable prior year period.
The interruption in turn, resulted in a build-up of backlog to
$272,000 as of December 31, 2004, which was filled completely in
January 2005. Order backlog is normally not a significant factor
for the Company due to the nature of its products.
Income before income taxes of $155,400 for the six months ended
December 31, 2004 was $29,700 (23.6%) higher than $125,700 for the
prior year's six month period, as a result of a reduction in
operating expenses principally effected during the first three
months of the period. The production interruption as well as lower
foreign sales in the first quarter also caused a slight decrease in
net sales for the current six month period compared to the year
earlier period. The Company continues to feel competitive
pressures from the private label brand products offered by its two
major distributors and no representation can be made as to the
adverse effect, if any, recent acquisitions by and ownership
changes in these two customers will have on our future sales.
The Three Months Ended December 31, 2004 Compared with the Three
Months Ended December 31, 2003.
Principally as a result of the production interruptions which was
due to a problem suffered by a supplier but, subsequently resolved,
net sales for the three months ended December 31, 2004, decreased
2.8% to $845,100 from $869,700 for the three months ended December
31, 2003.
Gross profit margins increased from 46.2% to 48.3% between the two
comparable periods resulting in a $7,100 increase in gross profit
from $401,500 to $408,600. The higher margin was primarily due to
lower indirect labor costs in this year's quarter and higher
regulatory testing costs in the prior year's comparable quarter.
The production delay, however, resulted in a backlog of $272,000 at
the end of the period, which was filled in January 2005. Due to
the quick turnaround between receipt of an order and shipment,
backlog normally is not a material factor in the Company's operation.
General and administrative expenses for the three months ended
December 31, 2004 were only 3.1% higher ($5,000) for the current
year's three month period, $167,900 compared to $162,900,
reflecting small increases in salaries and other expenses.
Selling expenses for the three months ended December 31, 2004
increased slightly by $2,700 (3.4%) from $78,600 to $81,300 due to
purchases of promotional items during the current year's quarter.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Our continued new product development efforts resulted in a 5.6%
($4,700) increase in research and development expenses from $83,800
to $88,500 between the comparable quarters.
As a result of the foregoing, the Company's income before income
taxes decreased by only $1,900 to $78,800 for the three months
ended December 31, 2004 compared to $80,700 for the three months
ended December 31, 2003.
The Six Months Ended December 31, 2004 Compared with the Six Months
Ended December 31, 2003.
The 2.7% decrease in net sales from $1,743,600 for the six months
ended December 31, 2003 to $1,696,900 for the six months ended
December 31, 2004 was due to lower foreign sales in the first
quarter of the current fiscal year, and a production interruption
resulting from supplier related problems which were subsequently
resolved. As a result, our order backlog at the end of the period
was high at $272,000, which were filled in January 2005.
Our gross profit margin increased from 46.5% to 47.5% between the
comparable six month periods due primarily to lower indirect labor
costs during the current six month period and higher regulatory
testing costs in the prior year.
General and administrative expenses increased by $18,400 (5.6%)
from $327,000 to $345,400 due to increases primarily in salaries
and insurance.
Selling expenses decreased by $29,300 (16.4%) from $178,500 to
$149,200 between the comparative six month periods, due to less
advertising during the current year's six month period. However,
advertising activity is expected to increase in the second half of
the current fiscal year.
As a result of the significant development work for the new
MicroPlate Genie(TM) mixer performed during the first half of last
fiscal year, research and development expenses decreased by $16,000
(8.6%) to $170,400 for the six months ended December 31, 2004 from
$186,400 for the comparable prior year period.
As a result of the foregoing, the Company's income before income
taxes increased by 23.6% to $155,400 for the six months ended
December 31, 2004 compared to $125,700 for the six months ended
December 31, 2003.
Net income for the first six months of the current fiscal year
reflects income tax expense of $36,000, compared to $35,000 in the
prior year due to higher expected tax credits in the current year.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2004 Annual Meeting of Stockholders held on
December 2, 2004, stockholders (i) re-elected as Class B Director:
Mr. Joseph I. Kesselman by 559,439 shares "For" and 157,026 shares
"Withheld"to serve until the Annual Meeting of Stockholders with
respect to the fiscal year ending June 30, 2007, and the due
election and qualification of his successor; and (ii) ratified the
appointment of Nussbaum Yates & Wolpow P.C. as the independent
auditors with respect to the financial statements of the Company
for the year ending June 30, 2005 by a vote of 716,139 shares
"For", 120 shares "Against", and 206 shares abstaining.
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:
None.
10
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
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 14, 2005
11