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 September 30, 2007
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 November 5, 2007: 1,145,352 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 SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
September 30, 2007
__________________
Current Assets:
Cash and cash equivalents $ 664,500
Investment securities 722,100
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 681,500
Inventories 1,407,100
Prepaid expenses and other current assets 43,800
Deferred taxes 29,800
_________
Total current assets 3,548,800
Property and equipment at cost, less accumulated
depreciation of $561,600 250,400
Intangible assets, less accumulated amortization
of $192,300 560,600
Goodwill 40,400
Other 49,400
__________
Total assets $4,449,600
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 376,600
Customer advances 265,200
Accrued expenses and taxes 306,500
Dividends payable 80,200
__________
Total current liabilities 1,028,500
__________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,165,154 issued and outstanding 58,200
Additional paid-in capital 1,429,600
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 12,100)
Retained earnings 1,997,800
__________
3,473,500
Less common stock held in treasury, at cost,
19,802 shares 52,400
__________
3,421,100
__________
$4,449,600
==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month
Periods Ended
September 30,
________________________
2007 2006
__________ __________
Net sales $1,500,400 $ 802,900
Cost of goods sold 876,000 388,500
__________ __________
Gross profit 624,400 414,400
__________ __________
Operating Expenses:
General & administrative 228,000 164,500
Selling 123,800 70,300
Research & development 60,400 79,300
__________ __________
412,200 314,100
__________ __________
Income from operations 212,200 100,300
Interest & other
income, net 13,000 14,300
__________ __________
Income before income taxes 225,200 114,600
__________ __________
Income tax expense (benefit):
Current 94,000 37,000
Deferred ( 15,500) -
__________ __________
78,500 37,000
__________ __________
Net income $ 146,700 $ 77,600
========== ==========
Basic earnings per common
share $ .13 $ .08
Diluted earnings per common
share $ .12 $ .07
Cash dividends declared
per common share $ .07 $ .07
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended
Sept. 30 , 2007 Sept. 30, 2006
_______________ ______________
Operating activities:
Net income $ 146,700 $ 77,600
_________ __________
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 55,800 13,000
Deferred income taxes ( 15,500) -
Stock-based compensation 700 -
Changes in assets and liabilities:
Accounts receivable 69,300 ( 152,400)
Inventories (117,500) ( 29,700)
Prepaid expenses and other
current assets 17,400 65,200
Other assets - 100
Accounts payable 144,700 19,100
Customer advances 117,600 -
Accrued expenses and taxes (114,400) 61,200
_________ __________
Total adjustments 158,100 ( 23,500)
_________ __________
Net cash provided by
operating activities 304,800 54,100
_________ __________
Investing activities:
Purchase of investment securities,
available-for-sale ( 6,200) ( 6,000)
Capital expenditures ( 19,200) -
Additions to intangible assets ( 3,600) ( 4,200)
_________ __________
Net cash used in
investing activities ( 29,000) ( 10,200)
_________ __________
Net increase in cash and cash equivalents 275,800 43,900
Cash and cash equivalents,
beginning of period 388,700 227,700
_________ __________
Cash and cash equivalents, end of period $ 664,500 $ 271,600
========= ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 50,400 $ 36,000
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General:
The accompanying unaudited interim condensed consolidated
financial statements are prepared pursuant to the
Securities and Exchange Commission's rules and
regulations for reporting on Form 10-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, 2007. The results for the
three months ended September 30, 2007, are not
necessarily an indication of the results of the full
fiscal year ending June 30, 2008.
1. Significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc., Scientific Packaging
Industries, Inc., an inactive wholly-owned subsidiary and, since
November 30, 2006 (date of acquisition), Altamira Instruments, Inc.
("Altamira"), a Delaware corporation and wholly-owned subsidiary
(all collectively referred to as the "Company"). All material
intercompany balances and transactions have been eliminated.
2. Recent Accounting Pronouncements
In September 2006 the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. SFAS 157 will be applied
prospectively and will be effective for periods beginning after
November 15, 2007. The Company is currently evaluating the
effect, if any, of SFAS 157 on the Company's consolidated financial
statements.
In June 2006, the FASB issued Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement ("SFAS") No. 109." This Interpretation clarifies
the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes." The interpretation describes a
recognition threshold and measurement attribute for the financial
statement disclosure of tax positions taken or expected to be
taken. It also provides for guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosures and transition. FIN No. 48 is effective for
fiscal years beginning after December 15, 2006. On July 1, 2007 we
adopted FIN 48 and the adoption did not result in any adjustments
to the Company's consolidated financial statements.
4
3. Acquisition of Altamira Instruments, Inc.:
On November 30, 2006, the Company acquired all of the outstanding
capital stock of Altamira. The acquisition was pursuant to a Stock
Purchase Agreement dated the same date. The agreement provided for
an acquisition consideration of $400,000 in cash and 125,000 shares
of the Company's Common Stock and additional cash payments equal to
5%, subject to possible adjustment, of the net sales of Altamira
for each of five periods - December 1, 2006 to June 30, 2007, each
of the fiscal years ending June 30, 2008, 2009, and 2010, and July
1, 2010 to November 30, 2010. The Company paid $61,000 for the
period ended June 30, 2007.
Under a separate agreement with the sellers, they agreed to permit
the Company to treat the acquisition of Altamira stock as a
purchase of assets for tax purposes in consideration of which the
Company agreed to reimburse them for their additional tax burden.
The reimbursement amounted to approximately $42,000. The
additional payment was treated as additional acquisition
consideration (see Note 9).
Altamira's principal customers are universities, government
laboratories, and chemical and petrochemical companies. The
products - catalyst research instruments, which are customizable to
the customers' specifications, are sold on a direct basis.
In conjunction with the acquisition of Altamira, management of the
Company, with the assistance of an independent valuation firm,
valued the tangible and intangible assets acquired, including
goodwill, customer relationships, non-compete agreements, and
certain technology, trade names and trademarks. The carrying
amounts of goodwill and other intangible assets are presented in
Note 9, "Goodwill and Other Intangible Assets" which represent the
valuations performed in conjunction with the acquisition. In
addition, other fair market value adjustments were made in
conjunction with the acquisition, primarily adjustments to property
and equipment, and inventory. The acquisition was recorded under
the purchase method of accounting. The net purchase price was
allocated to assets acquired and liabilities assumed based on their
estimated fair market values at the date of the acquisition. The
allocation of the net purchase price as adjusted for the items
described above is as follows:
Current Assets $ 734,000
Property and Equipment 140,300
Non-current Assets 25,100
Goodwill 40,400
Other Intangible Assets 639,000*
Current Liabilities ( 561,900)
___________
Net purchase price $ 1,016,900
===========
* Comprised of $237,000 allocated to customer relationships with a
weighted-average estimated useful life of 10 years, $300,000
allocated to technology including trade names and trade marks with
a useful life of 5 years, and $102,000 allocated to a non-compete
agreement with a useful life of 5 years. The amount allocated to
the customer relationships is being amortized on an accelerated
(declining balance) method and the other intangibles are being
amortized on a straight line basis.
5
Pro forma results
The unaudited pro forma condensed financial information in the
table below summarizes the results of operations of Scientific
Industries, Inc. ("Scientific") and Altamira, on a pro forma basis,
as though the companies had been combined as of July 1, 2006. The
unaudited pro forma condensed financial information presented below
for the three month period ended September 30, 2006 is for informational
purposes only and is not intended to represent or be indicative of
the consolidated results of the operations that would have been achieved
if the acquisition had been completed as of that date:
For the Three Month
Period Ended
September 30, 2006
___________________
Net Sales $1,282,800
Net income $ 8,600
Net income per share - basic $ .01
Net income per share - diluted $ .01
4. Segment Information and Concentrations:
As a result of the acquisition of Altamira, the Company views its
operations as two segments: the manufacture and marketing of
standard benchtop laboratory equipment for research in university,
hospital and industrial laboratories sold primarily through
laboratory equipment distributors ("benchtop laboratory equipment
operations"), and the manufacture and marketing of custom-made
catalyst research instruments for universities, government
laboratories, and chemical and pretrochemical companies sold on a
direct basis ("catalyst research instruments operations").
Substantially all of the management and employees of Altamira were
retained following the acquisition.
Segment information as of and for the three months ended September
30, 2007, is reported as follows:
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
Net Sales $ 947,500 $ 552,900 $ - $1,500,400
Foreign Sales 407,400 347,800 - 755,200
Segment Profit 173,500 51,700 - 225,200
Segment Assets 2,170,300 1,483,300 796,000 4,449,600
Long-Lived Assets
Expenditures 13,900 5,300 - 19,200
Depreciation and
Amortization 13,800 42,000 - 55,800
Approximately 69% and 73% of net sales of the benchtop laboratory
equipment operations for the three month periods ended September
30, 2007 and 2006, respectively, were derived from the Company's
main product, the Vortex-Genie 2 mixer, excluding accessories.
6
Two customers accounted in the aggregate for approximately 37% and
34% of the benchtop laboratory equipment operations' net sales for
the three month periods ended September 30, 2007 and 2006,
respectively. Sales of the catalyst research instruments operations
are generally comprised of a few very large orders amounting on
average to over $100,000 to a limited numbers of customers, who
differ from period to period.
The Company's consolidated export sales (principally Europe and
Asia) were approximately $755,200 and $339,900 for the three month
periods ended September 30, 2007 and 2006, respectively.
5. Inventories:
Inventories for interim financial statement purposes are based on
perpetual inventory records at the end of the applicable period.
Components of inventory are as follows:
September 30,
2007
____________
Raw Materials $ 849,500
Work in process 392,600
Finished Goods 165,000
___________
$ 1,407,100
===========
6. Earnings per common share:
Basic earnings per common share are computed by dividing net income
by the weighted-average number of shares outstanding. Diluted
earnings per common share include the dilutive effect of stock
options.
Earnings per common share was computed as follows:
For the Three Month
Periods Ended
September 30,
__________________________
2007 2006
Net income $ 146,700 $ 77,600
========== ==========
Weighted average common
shares outstanding 1,145,352 1,000,352
Effect of dilutive
securities 53,285 58,968
__________ __________
Weighted average dilutive
common shares outstanding 1,198,637 1,059,320
========== ==========
Basic earnings per
common share $ .13 $ .08
========== ==========
Diluted earnings per
common share $ .12 $ .07
========== ==========
7. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three month periods ended September
30, 2007 and 2006.
7
8. Stock-Based Compensation Plans:
The Company maintains an Incentive Stock Option Plan which through
the fiscal year ended June 30, 2006 grants were accounted for under
the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. Under this method, no stock-based compensation
costs were reflected in net income, as all options granted under
those plans had an exercise price equal to the fair market value of
the underlying common stock on the date of grant.
Any stock-based compensation transaction subsequent to June 30,
2006 is accounted for using Statement of Financial Accounting
Standards No. 123(R) "Share-Based Payment". This statement, issued
on December 16, 2004, by the Financial Accounting Standards Board,
requires compensation costs related to stock-based payment
transactions to be recognized commencing with the first reporting
period in our fiscal year ended June 30, 2007. With limited
exceptions, the amount of compensation cost is 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 costs are 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. The Company incurred
stock-based compensation costs of $700 for the three months ended
September 30, 2007. No stock-based compensation costs were incurred
for the three months ended September 30, 2006.
9. Goodwill and Other Intangible Assets
In conjunction with the acquisition of Altamira, management of the
Company, with the assistance of an independent valuation firm,
valued the tangible and intangible assets acquired, including
customer relationships, non-compete agreements and technology which
encompasses trade names, trademarks and licenses. The valuation
resulted in an initial negative goodwill of approximately $91,500
on the date of acquisition which was subsequently adjusted to
goodwill of $40,400 at September 30, 2007. The Stock Purchase
Agreement provides contingent future payments to the former
shareholders equal to 5% of net sales of the catalyst research
instrument operations subject to certain limits, during each of the
five periods. Payments for the first period of December 1, 2006 to
June 30, 2007 amounted to $61,000. Additional accrued
consideration for the first quarter of the second period amounted
to $31,000.
8
The components of intangible assets as of September 30, 2007 are as
follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ________
Technology 5 yrs. $300,000 $ 50,000 $250,000
Customer relationships 10 yrs. 237,000 53,200 183,800
Non-compete agreement 5 yrs. 102,000 17,000 85,000
Other intangible assets 5 yrs. 113,900 72,100 41,800
________ ___________ ________
$752,900 $ 192,300 $560,600
======== =========== ========
Total amortization expense was $39,800 and $3,000 for the three months
ended September 30, 2007 and 2006, respectively. As of September 30,
2007, estimated future amortization expense related to intangible
assets is $99,600 for the remainder of fiscal year ending June 30,
2008, $131,000 for fiscal 2009, $119,300 for fiscal 2010, $107,500 for
fiscal 2011, $50,200 for fiscal 2012, and $53,000 thereafter.
9
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 by $275,800 to $664,500 as of
September 30, 2007 from $388,700 as of June 30, 2007.
Net cash provided by operating activities was $304,800 for the three
months ended September 30, 2007 as compared to $54,100 for the
comparable three month period in 2006, mainly the result of greater
income and higher balances of accounts payable and customer advances
partially offset by higher inventories and accrued expenses. Cash used
in investing activities was $29,000 for the three months ended
September 30, 2007 as compared to cash used of $10,200 for the three
months ended September 30, 2006, primarily the result of higher capital
expenditures.
On September 30, 2007, the Board of Directors of the Company declared a
cash dividend of $.07 per share of Common Stock payable on January 14,
2008 to holders of record as of the close of business on October 18,
2007.
The Company's working capital of $2,520,300 as of September 30, 2007
increased slightly by $59,800 from the working capital of $2,460,500 at
June 30, 2007. The Company has available for its working capital
needs, a secured bank line of credit of $200,000 with North Fork Bank
with interest at prime, all of which was available as of September 30,
2007. 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 ending September 30, 2008 from its available
financial resources which include its cash and investment securities.
9
Results of Operations
Financial Overview
As a result of the Company's acquisition on November 30, 2006 of
Altamira, the Company's consolidated results for the three months ended
September 30, 2007 include the results of Altamira and the depreciation
and amortization related to the newly acquired assets.
Due mainly to higher sales and lower operating expenses for the
benchtop laboratory equipment operations and profitable operating
results from its new catalyst research instruments operations, which is
conducted by Altamira, the Company's income before income taxes for the
three months ended September 30, 2007 was $225,200, nearly double the
income before income taxes of $114,600 for the three months ended
September 30, 2006.
The Three Months Ended September 30, 2007 Compared With the Three
Months Ended September 30, 2006
Net sales for the three months ended September 30, 2007 increased by
$697,500 (86.9%) to $1,500,400 as compared with $802,900 for the three
months ended September 30, 2006 as a result of the revenues of the
newly acquired catalyst research instruments operations, and a $144,600
(18.0%) increase in sales of the Company's benchtop laboratory
equipment operations. Sales of the catalyst research instruments
differ from those of the benchtop laboratory equipment in that sales of
the catalyst research instruments are comprised of a small number of
larger orders, typically averaging over $100,000 each; hence sales
revenues can vary greatly from month to month. As of September 30,
2007, there was an order backlog of $631,000 for catalyst research
instruments.
The gross profit percentage for the three months ended September 30,
2007 decreased to 41.6% compared to 51.6% for the three months ended
September 30, 2006, mainly as a result of (i) the comparatively lower
gross profit percentage for the catalyst research instruments
operations whose products typically yield a gross profit ranging from
30% to 35%, and (ii) higher raw material costs incurred by the benchtop
laboratory equipment operations.
General and administrative expenses for the three months ended
September 30, 2007 increased by $63,500 (38.6%) to $228,000 from
$164,500 for the comparable period last year, principally the result of
the expenses of the newly acquired catalyst research instruments
operations and higher salaries and directors fees expenses.
Selling expenses for the three months ended September 30, 2007
increased by $53,500 (76.1%) to $123,800 from $70,300 for the three
months ended September 30, 2006, as a result of the addition of selling
expenses of the catalyst research instruments operations. Selling
expenses for the benchtop laboratory equipment operations decreased by
approximately $15,400 mostly as result of lower advertising expense
for the three months ended September 30, 2007.
Research and development expenses for the three months ended September
30, 2007 were $60,400, a decrease of $18,900 (23.8%) from $79,300 for
the three months ended September 30, 2006, due mainly to lower research
and development payroll.
10
Interest and other income for the three month periods ended September
30, 2007 and September 30, 2006, was $13,000 and $14,300, respectively.
Income tax expense for the three months ended September 30, 2007 was
$78,500 compared to $37,000 for the three months ended September 30,
2006, mainly due to the higher income and the fact that certain tax
credits are no longer available.
As a result of the foregoing, net income for the three months ended
September 30, 2007 was $146,700, an increase of $69,100 (89%) from
$77,600 for the three months ended September 30, 2006.
Item 3. 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 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.
There was no change in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting.
11
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:
Registrant did not file during the three
months ended September 30, 2007 any Report on
Form 8-K, except it filed on September 24, 2007 a
Report on Form 8-K, reporting under Item
8.01.
12
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: November 14, 2007
13