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, 2014
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
___________ ______________
Commission File Number: 0-6658
___________________________
SCIENTIFIC INDUSTRIES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 04-2217279
____________________________ _________________________________
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
70 Orville Drive, Bohemia, New York 11716
________________________________________ __________
(Address of principal executive offices) (Zip Code)
(631)567-4700
____________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), except
for a Report on Form 8-K required to be filed in February 2014 with
respect to an acquisition and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ].
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of Alarge 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 April 25, 2014 was 1,469,112 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
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 Unaudited Condensed Consolidated Financial
Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 13
ITEM 4 CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURE 17
EXHIBITS 18
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, June 30,
2014 2013
(Unaudited)
___________ __________
Current Assets:
Cash and cash equivalents $ 343,000 $ 927,300
Investment securities 474,000 908,400
Trade accounts receivable, net 1,135,300 815,900
Inventories 2,249,300 1,705,600
Prepaid expenses and other current assets 125,900 59,000
Deferred taxes 89,000 86,600
__________ __________
Total current assets 4,416,500 4,502,800
Property and equipment at cost, net 272,400 156,500
Intangible assets, net 1,883,000 773,500
Goodwill 705,300 589,900
Other assets 24,100 24,100
Deferred taxes 111,800 106,200
__________ __________
Total assets $7,413,100 $6,153,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 234,700 $ 156,800
Customer advances 271,900 15,900
Bank line of credit 80,000 -
Notes payable, current 46,500 78,300
Accrued expenses and taxes 427,600 407,700
Contingent consideration payable, current 120,000 19,000
__________ __________
Total current liabilities 1,180,700 677,700
Contingent consideration payable,
less current portion 408,700 51,600
Notes payable, less current portion - 26,700
__________ __________
Total liabilities 1,589,400 756,000
__________ __________
Shareholders' equity:
Common stock, $.05 par value; authorized
7,000,000 shares;
1,488,914 issued and outstanding at
March 31, 2014 and 1,357,465 at
June 30, 2013 74,400 67,900
Additional paid-in capital 2,419,700 1,977,100
Accumulated other comprehensive loss ( 6,100) ( 13,600)
Retained earnings 3,388,100 3,418,000
__________ __________
5,876,100 5,449,400
Less common stock held in treasury, at cost,
19,802 shares 52,400 52,400
__________ __________
Total shareholders' equity 5,823,700 5,397,000
Total liabilities and __________ __________
shareholders' equity $7,413,100 $6,153,000
========== ==========
See notes to unaudited condensed consolidated financial statements
1
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
______________________ ______________________
2014 2013 2014 2013
__________ __________ __________ __________
Revenues $1,786,300 $1,626,100 $4,970,200 $4,854,700
Cost of sales 1,088,900 810,700 2,860,500 2,744,700
__________ __________ __________ __________
Gross profit 697,400 815,400 2,109,700 2,110,000
__________ __________ __________ __________
Operating Expenses:
General & administrative 461,800 320,800 1,108,100 910,000
Selling 198,000 188,600 602,800 536,000
Research & development 113,800 100,800 301,900 356,000
__________ __________ __________ __________
Total operating
expenses 773,600 610,200 2,012,800 1,802,000
__________ __________ __________ __________
Income (loss) from
operations ( 76,200) 205,200 96,900 308,000
__________ __________ __________ __________
Other income (expense):
Investment income 1,000 5,700 19,500 11,600
Other ( 3,700) 600 ( 7,700) 1,500
Interest expense ( 900) ( 1,100) ( 2,400) ( 3,800)
__________ __________ __________ __________
Total other income
(expense), net ( 3,600) 5,200 9,400 9,300
__________ __________ __________ __________
Income (loss) before
income taxes (benefit) ( 79,800) 210,400 106,300 317,300
__________ __________ __________ __________
Income tax expense (benefit):
Current ( 1,400) 53,600 40,200 74,800
Deferred ( 18,700) 6,700 ( 11,400) 16,200
__________ __________ __________ __________
Total income (loss) tax
expense (benefit) ( 20,100) 60,300 28,800 91,000
__________ __________ __________ __________
Net income (loss) ($ 59,700) $ 150,100 $ 77,500 $ 226,300
========== ========== ========== ==========
Basic earnings (loss) per common
share ($ .04) $ .11 $ .06 $ .17
Diluted earnings (loss) per common
share ($ .04) $ .11 $ .06 $ .17
Cash dividends declared
per common share $ .00 $ .00 $ .08 $ .03
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
___________________ ____________________
2014 2013 2014 2013
___________________ ____________________
Net income (loss) ($ 59,700) $150,100 $ 77,500 $ 226,300
Other comprehensive income:
Unrealized holding gain
arising during period,
net of tax 10,100 3,900 7,500 16,800
_________ ________ _________ _________
Comprehensive income (loss) ($ 49,600) $154,000 $ 85,000 $ 243,100
========= ======== ========= =========
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, 2014 March 31, 2013
______________ ______________
Operating activities:
Net income $ 77,500 $ 226,300
_________ __________
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Loss on sale of investments 17,300 7,400
Depreciation and amortization 154,000 132,400
Deferred income tax (benefit) ( 11,400) 16,200
Stock-based compensation 14,900 7,600
Changes in operating assets and liabilities,
net of effect of acquisition:
Accounts receivable ( 319,400) ( 108,200)
Inventories ( 399,700) ( 631,500)
Prepaid expenses and other current assets ( 66,900) 104,200
Accounts payable 77,900 24,800
Customer advances 256,000 404,700
Accrued expenses and taxes 19,900 143,700
Other assets - 1,600
___________ ___________
Total adjustments ( 257,400) 102,900
___________ ___________
Net cash provided by (used in) operating
activities ( 179,900) 329,200
___________ ___________
Investing activities:
Cash paid for asset acquisition ( 700,000) -
Redemption of investment securities,
available-for-sale 450,900 717,600
Purchase of investment securities,
available-for-sale ( 25,000) ( 716,900)
Capital expenditures ( 47,100) ( 28,100)
Purchase of other intangible assets ( 2,900) ( 2,100)
___________ ___________
Net cash used in investing activities ( 324,100) ( 29,500)
___________ ___________
Financing activities:
Line of credit proceeds 150,000 -
Line of credit repayments ( 70,000) -
Payments of contingent consideration ( 1,100) ( 25,900)
Proceeds from exercise of stock options 6,700 -
Cash dividend declared and paid ( 107,400) ( 40,100)
Principal payments on note payable ( 58,500) ( 56,600)
___________ ___________
Net cash used in financing activities ( 80,300) ( 122,600)
____________ ___________
Net increase (decrease) in cash
and cash equivalents ( 584,300) 177,100
Cash and cash equivalents, beginning of year 927,300 769,300
____________ ___________
Cash and cash equivalents, end of period $ 343,000 $ 946,400
============ ===========
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 152,100 $ -
Interest 2,400 3,800
See Note 2 for non-cash investing and financing activities in connection
with an asset acquisition.
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, 2013. The results for the three and nine months ended
March 31, 2014, are not necessarily an indication of the results
for the full fiscal year ending June 30, 2014.
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), and its wholly-owned subsidiaries, Altamira
Instruments, Inc.("Altamira", a Delaware corporation), Scientific
Packaging Industries, Inc. (an inactive New York corporation) and
Scientific Bioprocessing, Inc., ("SBI", a Delaware corporation).
All are collectively referred to as the "Company". All material
intercompany balances and transactions have been eliminated.
2. New Accounting Pronouncements:
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740),
which clarifies the presentation requirements of unrecognized tax
benefits when a net operating loss carries forward, a similar tax
loss, or a tax credit carry forward exists at the reporting date.
The amendments in this ASU are effective for fiscal years, and
interim periods within those years, beginning after December 15,
2013 and should be applied prospectively. The adoption of this
ASU did not have a material impact to the Company's consolidated
financial statements.
3. Acquisition:
On February 26, 2014, the Company acquired substantially all the
assets of a privately held company (the "Seller") engaged in the
production and sale of a variety of laboratory and pharmacy balances
and scales from its facility in Clifton, New Jersey. The acquisition
was pursuant to an asset purchase agreement (the "Agreement") between
the Company and the Seller and the principal stockholders of the
Seller whereby the Company paid the Seller $700,000 in cash,
126,449 shares of Common Stock valued at $427,500 (of which 31,612
are held in escrow for one year) and agreed to make additional cash
payments based on a percentage of net sales of the business acquired
equal to 8% for the period ending June 30, 2014 annualized, 9% for
the year ending June 30, 2015, 10% for the year ending June 30, 2016,
and 11% for the year ending June 30, 2017, estimated at a present
value of $460,000 on the date of acquisition.
5
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 a precision scale. The products are sold
primarily on a direct basis, including through the Company's
e-commerce site.
Management of 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
___________
Net Assets Acquired $ 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 a estimated useful
life of 9 years, $140,000 was assigned to the trade name with a useful
life of 5 years, $110,000 was assigned to the IPR&D (intellectual
property, and research and development) with a useful life of 3 years,
and $270,000 was assigned to non-compete agreements with a useful
life of 5 years.
In connection with the acquisition, the Company entered into a
three-year employment agreement with the Chief Operating Officer of
the Seller as President of the Company's new Torbal Scales Division
and Director of Marketing for the Company. The agreement may be
extended by mutual consent for an additional two years.
Pro forma results
The unaudited pro forma condensed consolidated financial information
in the table below summarizes the consolidated results of operations
of the Company and its new Torbal Scales Division, as though the
companies had been combined as of the beginning of each of the periods
presented. The Company's results of operations for the three and
nine months ended March 31, 2014 include the results of the Torbal
Scales Division since February 26, 2014, the date of acquisition.
The unaudited pro forma financial information presented below is
for informational purposes only and is not intended to represent or
be indicative of the consolidated results of the operations that
would have been achieved if the acquisition had been completed as
of the commencement of the periods presented. In addition, the
Company was unable to obtain audited historical financial
statements and, therefore, information presented is based on
management's best judgment using the unaudited financial
information provided and management's expectations.
6
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
______________________ ______________________
2014 2013 2014 2013
______________________ ______________________
Net Sales $2,006,300 $1,956,100 $5,900,200 $5,934,700
Net Income (loss) ($ 73,100) $ 136,200 $ 59,600 $ 213,100
Net income (loss per share
- basic ($ .05) $ .09 $ .04 $ .15
Net income (loss) per share
- diluted ($ .05) $ .09 $ .04 $ .15
4. Segment Information and Concentrations:
The Company views its operations as three segments: the manufacture and
marketing of standard benchtop laboratory equipment including the balances
and scales by its Torbal Scales Division for research in university, hospital
and industrial laboratories sold primarily through laboratory equipment
distributors and on a direct basis ("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:
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended March 31, 2014:
Revenues $1,177,400 $ 603,900 $ 5,000 $ - $1,786,300
Foreign Sales 604,900 198,800 - - 803,700
Income(Loss)from
Operations 61,400 ( 10,600) ( 58,000) ( 69,000) ( 76,200)
Assets 4,017,100 1,847,900 873,300 674,800 7,413,100
Long-Lived Asset
Expenditures 1,454,700 11,300 1,000 - 1,467,000
Depreciation and
Amortization 32,700 8,500 24,300 - 65,500
7
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Three months ended March 31, 2013:
Revenues $1,229,800 $ 360,600 $ 35,700 $ - $1,626,100
Foreign Sales 645,300 107,300 - - 752,600
Income(Loss)from
Operations 243,300 3,600 ( 41,700) - 205,200
Assets 2,719,500 1,932,600 904,600 916,800 6,473,500
Long-Lived Asset
Expenditures 1,700 1,200 - - 2,900
Depreciation and
Amortization 10,700 8,700 24,000 - 43,400
Approximately 57% and 71% of net sales of benchtop laboratory equipment
for the three month periods ended March 31, 2014 and 2013, respectively,
were derived from the Company's main product, the Vortex-Genie 2 mixer,
excluding accessories.
Approximately 13% of total benchtop laboratory equipment sales were
derived from the new Torbal Scales Division for the three months ended
March 31, 2014.
Two benchtop laboratory equipment customers accounted for approximately
22% and 27% of the segment's net sales for the three month periods
ended March 31, 2014 and 2013 (15% and 20% of total net sales,
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,
2014 and three different customers in the three months ended March 31,
2013, accounted respectively for 94% and 92% of the segment's net sales
for each of the periods (32% and 20% of total net sales for the
respective periods).
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Nine months ended March 31, 2014:
Revenues $3,401,200 $1,406,900 $ 162,100 $ - $4,970,200
Foreign Sales 2,049,100 367,100 2,000 - 2,418,200
Income(Loss)from
Operations 299,100 ( 112,500) ( 10,200) ( 79,500) 96,900
Assets 4,017,100 1,847,900 873,300 674,800 7,413,100
Long-Lived Asset
Expenditures 1,474,700 11,300 7,500 - 1,493,500
Depreciation and
Amortization 55,300 26,100 72,600 - 154,000
8
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ ___________
Nine months ended March 31, 2013:
Revenues $3,459,500 $1,309,700 $ 85,500 $ - $4,854,700
Foreign Sales 2,014,900 626,400 - - 2,641,300
Income(Loss)from
Operations 518,100 ( 62,500) ( 147,600) - 308,000
Assets 2,719,500 1,932,600 904,600 916,800 6,473,500
Long-Lived Asset
Expenditures 10,900 19,300 - - 30,200
Depreciation and
Amortization 33,300 27,200 71,900 - 132,400
Approximately 63% and 69% of net sales of benchtop laboratory equipment
for the nine month periods ended March 31, 2014 and 2013, respectively,
were derived from sales of the Company's main product, the Vortex-Genie 2
mixer, excluding accessories.
Approximately 4% of total benchtop laboratory equipment sales for the
nine months ended March 31, 2014 were derived from sales since acquisition
in February 2014 of the new Torbal Scales Division.
Two benchtop laboratory equipment customers, accounted for approximately
21% and 24% of the segment's net sales (14% and 17% of total net sales)
for the nine month periods ended March 31, 2014 and 2013, respectively.
Sales of catalyst research instruments to three customers in the nine
months ended March 31, 2014 and to three other customers in the nine
months ended March 31, 2013 accounted for approximately 59% and 49%
of that segment's net sales (17% and 13% of total net sales) for the
respective nine month periods.
The Company's foreign sales are principally made to customers in Europe
and Asia. The Company also has an arrangement with a supplier for annual
minimum purchase commitments through February 2020 which the Company has
already met for the current year.
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.
9
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, 2014 and June 30, 2013
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, 2014 Level 1 Level 2 Level 3
______________ __________ ________ _________
Cash and cash equivalents $ 343,000 $ 343,000 $ - $ -
Available for sale securities 474,000 474,000 - -
__________ __________ ________ _________
Total $ 817,000 $ 817,000 $ - $ -
Liabilities:
Contingent consideration $ 528,700 $ - $ - $528,700
========== ========== ======== =========
Fair Value Measurements Using Inputs
Considered as
Assets:
Fair Value at
March 31, 2014 Level 1 Level 2 Level 3
______________ __________ ________ _________
Cash and cash equivalents $ 927,300 $ 927,300 $ - $ -
Available for sale securities 908,400 908,400 - -
__________ __________ ________ _________
Total $1,835,700 $1,835,700 $ - $ -
========== ========== ======== =========
Liabilities:
Contingent consideration $ 70,600 $ - $ - $ 70,600
========== ========== ======== =========
Investments in marketable securities classified as available-for-sale by
security type at March 31, 2014 and June 30, 2013 consisted of the
following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At March 31, 2014:
Available for sale:
Equity securities $ 29,300 $ 37,400 $ 8,100
Mutual funds 450,800 436,600 ( 14,200)
_________ _________ ___________
$ 480,100 $ 474,000 ($ 6,100)
========= ========= ===========
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2013:
Available for sale:
Equity securities $ 29,300 $ 33,200 $ 3,900
Mutual funds 892,700 875,200 (17,500)
_________ _________ ___________
$ 922,000 $ 908,400 $ (13,600)
========= ========= ===========
10
6. Inventories:
At interim reporting periods, inventories for financial statement purposes
are based on perpetual inventory records. Components of inventory are as
follows:
March 31, June 30,
2014 2013
__________ __________
Raw Materials $1,507,700 $1,336,800
Work in process 504,600 254,000
Finished Goods 237,000 114,800
__________ __________
$2,249,300 $1,705,600
========== ==========
7. Earnings (Loss) per common share:
Basic earnings (loss) per common share are computed by dividing net
income (loss) by the weighted-average number of shares outstanding.
Diluted earnings (loss) per common share include the dilutive effect
of stock options, if any.
Earnings (Loss) per common share was computed as follows:
For the Three Month For the Nine Month
Periods Ended Periods Ended
March 31, March 31,
______________________ ______________________
2014 2013 2014 2013
___________ __________ __________ ___________
Net income (loss) ($ 59,700) $ 150,100 $ 77,500 $ 226,300
___________ __________ __________ ___________
Weighted average common
shares outstanding 1,390,433 1,337,663 1,382,519 1,336,844
Effect of dilutive
securities - 4,701 9,741 4,543
___________ __________ __________ ___________
Weighted average dilutive
common shares outstanding 1,390,433 1,342,364 1,392,260 1,341,387
=========== ========== ========== ===========
Basic earnings (loss) per
common share ($ .04) $ .11 $ .06 $ .17
========= ======= ======= ========
Diluted earnings (loss) per
common share ($ .04) $ .11 $ .06 $ .17
========= ======= ======= ========
Approximately 61,000 shares of the Company's common stock issuable upon
the exercise of outstanding options were excluded from the calculation
of diluted loss per common share, for the three month period ended March 31,
2014, because the effect would be anti-dilutive due to the loss for the
period.
Approximately 40,000 shares of the Company's common stock issuable upon
the exercise of outstanding options were excluded from the calculation
of diluted earnings per common share for each of the three and nine month
periods ended March 31, 2013, because the effect would be anti-dilutive.
8. Goodwill and Other Intangible Assets:
Goodwill represents the excess of the purchase price over the fair value
of the net assets acquired in connection with the Company's acquisitions.
Goodwill amounted to $705,300 and $589,900 as of March 31, 2014 and June
30, 2013, respectively, all of which is deductible for tax purposes.
11
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
__________ _________ ____________ _________
At March 31, 2014:
Technology, trademarks 5/10 yrs. $1,226,800 $ 455,300 $ 771,500
Trade names 6 yrs. 140,000 1,900 138,100
Websites 5 yrs. 210,000 3,500 206,500
Customer relationships 9/10 yrs. 357,000 210,700 146,300
Sublicense agreements 10 yrs. 294,000 69,800 224,200
Non-compete agreements 5 yrs. 384,000 112,200 271,800
IPR&D 3 yrs. 110,000 3,100 106,900
Other intangible assets 5 yrs. 157,400 139,700 17,700
__________ ___________ __________
$2,879,200 $ 996,200 $1,883,000
========== =========== ==========
Useful Accumulated
Lives Cost Amortization Net
__________ _________ ____________ _________
At June 30, 2013:
Technology, trademarks 5/10 yrs. $ 865,400 $ 402,100 $ 463,300
Customer relationships 10 yrs. 237,000 203,200 33,800
Sublicense agreements 10 yrs. 294,000 47,800 246,200
Non-compete agreements 5 yrs. 114,000 105,900 8,100
Other intangible assets 5 yrs. 156,000 133,900 22,100
__________ __________ _________
$1,666,400 $ 892,900 $ 773,500
========== ========== =========
Total amortization expense was $47,500 and $27,900 for the three months
ended March 31, 2014 and 2013, respectively and $103,400 and $85,200 for
the nine months ended March 31, 2014 and 2013, respectively. As of March
31, 2014, estimated future amortization expense related to intangible assets
is $87,500 for the remainder of the fiscal year ending June 30, 2014,
$347,600 for fiscal 2015, $351,800 for fiscal 2016, $336,600 for fiscal
2017, $322,100 for fiscal 2018, and $437,400 thereafter.
12
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operations
Certain statements contained in this report are not based on
historical facts, but are forward-looking statements that are based
upon various assumptions about future conditions. Actual events in
the future could differ materially from those described in the
forward-looking information. Numerous unknown factors and future
events could cause such differences, including but not limited to,
product demand, market acceptance, impact of competition, the ability
to reach final agreements, the ability to finance and produce catalyst
research instruments to customers' satisfaction, adverse economic
conditions, and other factors affecting the Company's business that
are beyond the Company's control. Consequently, no forward-looking
statement can be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
Cash and cash equivalents decreased $584,300 to $343,000 as of March
31, 2014 from $927,300 as of June 30, 2013.
Operating activities used cash of $179,900 for the nine month period
ended March 31, 2014 as compared to the $329,200 of cash provided for
the nine month period ended March 31, 2013, due mainly to lower income
in the 2014 period, higher balances of accounts receivable and
inventories and decreases in customer advances. The increase in cash
used in investing activities to $324,100 for the nine month period
ended March 31, 2014 compared to $29,500 for the nine month period
ended March 31, 2013 was primarily due to the acquisition. Cash used
in financing activities was $80,300 for the nine month period ended
March 31, 2014 compared to $122,600 for the nine month period ended
March 31, 2013, due primarily to the line of credit proceeds partially
offset by an increased dividend payment.
On September 20, 2013, the Board of Directors of the Company declared
a cash dividend of $.08 per share of Common Stock which was paid on
November 4, 2013 to holders of record as of the close of business on
October 11, 2013.
The Company's working capital decreased by $589,300 to $3,235,800 as
of March 31, 2014 from $3,825,100 at June 30, 2013 mainly due to the
assets purchased of the new Torbal Scales Division.
The Company has a line of credit with its bank, JPMorgan Chase Bank,
N.A. which provides for maximum borrowings of up to $700,000, bearing
interest at 3.05 percentage points above a defined LIBOR Index. The
interest rate as of March 31, 2014 was approximately 3.20% and any
borrowing is to be secured by a pledge of collateral consisting of the
inventory, accounts, chattel paper, equipment and general intangibles
of the Company. Outstanding amounts are due and payable by June 14,
2014, the expiration date of the line. As of March 31, 2014,
$80,000 was outstanding under the line. There were no borrowings at
June 30, 2013. The Company is currently negotiating line of credit
terms with several financial institutions, since the Company
anticipates that the line will not be renewed.
13
Management believes that the Company will be able to meet its cash
flow needs for the 12 months ended March 31, 2015 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 recorded a loss before income taxes of $79,800 for the
three month period ended March 31, 2014, compared to income before
income taxes of $210,400 for the comparative period last year,
primarily as a result of reduced sales of benchtop laboratory
equipment, expenses related to the asset acquisition discussed in Note
2 and the related amortization expense. For the comparative nine
month period ended March 31, 2014, the Company reflected income before
income taxes of $106,300 compared to $317,300 for the comparable 2013
period, the lower income principally the result of reduced sales of
benchtop laboratory equipment and catalyst research instruments, and
the expenses related to the asset acquisition, partially offset by the
profit derived from an order for bioprocessing product prototypes
during the period that had minimal costs associated with the order,
since the costs had been previously expensed as product development
costs.
The Three Months Ended March 31, 2014 Compared With the Three Months
Ended March 31, 2013
Net sales for the three months ended March 31, 2014 increased by
$160,200 (9.9%) to $1,786,300 from $1,626,100 for the three months
ended March 31, 2013 as a result of a $243,300 increase in catalyst
research instrument sales, partially offset by decreases of $52,400
and $30,700 in laboratory equipment sales and bioprocessing systems
revenues, respectively. The results for the three months ended March
31, 2014 included one month of laboratory balance sales. 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 $505,200 as of
March 31, 2014, most of which is expected to be delivered by fiscal
year end, as compared to the backlog of $1,340,000 as of March 31,
2013, all of which was delivered by June 30, 2013.
The gross profit for the three months ended March 31, 2014 was 39.0%
compared to 50.1% for the three months ended March 31, 2013, the
reduction primarily the result of lower sales and higher overhead
expenses of the Benchtop Laboratory Equipment Operations.
General and administrative expenses for the three months ended March
31, 2014 increased $141,000 (44.0%) to $461,800 compared to $320,800
for the three months ended March 31, 2013, primarily due to the costs
related to the asset acquisition.
Selling expenses for the three months ended March 31, 2014 increased
$9,400 (5.0%) to $198,000 from $188,600 for the three months ended
March 31, 2013, primarily the result of increased dealer-related
activities for the Benchtop Laboratory Equipment Operations.
14
Research and development expenses for the three months ended March 31,
2014 increased to $113,800 from $100,800 for the three months ended
March 31, 2013, primarily the result of increased new product
development activity by the Benchtop Laboratory Equipment Operations.
Total other income (expense) amounted to expense of $3,600 for the
three months ended March 31, 2014 compared to income of $5,200 for the
prior year period.
The Company recorded an income tax benefit of $20,100 for the three
months ended March 31, 2014 compared to an income tax expense of
$60,300 for the three months ended March 31, 2013 due to the losses in
the current year period.
As a result of the foregoing, the net loss was $59,700 for the three
months ended March 31, 2014, compared to net income of $150,100 for
the three months ended March 31, 2013.
Nine Months Ended March 31, 2014 Compared With the Nine Months Ended
March 31, 2013
Net sales increased by $115,500 (2.4%) to $4,970,200 for the nine
months ended March 31, 2014 compared to $4,854,700 for the nine months
ended March 31, 2013, due to increases of $97,200 in catalyst research
instrument sales and $76,600 in bioprocessing systems revenues;
partially offset by a decrease of $58,300 in benchtop laboratory
equipment sales despite the addition of one month of sales of
laboratory balance products. The revenues generated by the
Bioprocessing Systems Operations benefitted from a one-time order for
prototype bioprocessing products of approximately $100,000, with the
remaining revenues being derived from royalties. The products related
to the order are still under development. Sales of benchtop
laboratory equipment products generally are comprised of many small
purchase orders from distributors, while sales of catalyst research
instruments are comprised of a small number of large orders, typically
averaging over $100,000 each, resulting in significant swings in
revenues.
The gross profit percentage for the nine months ended March 31, 2014
was 42.5%, compared to 43.5% for the prior year nine month period due
to lower margins for the Catalyst Research Instruments Operations.
General and administrative expenses increased by $198,100 (21.8%) to
$1,108,100 for the nine months ended March 31, 2014 from $910,000 for
the comparable period last year, mostly as a result of costs related
to the asset acquisition.
Selling expenses for the nine months ended March 31, 2014 increased by
$66,800 (12.5%) to $602,800 compared to $536,000 for the nine months
ended March 31, 2013, primarily the result of increased dealer-related
activities for the Benchtop Laboratory Equipment Operations, and
commissions and exhibitions expense for the Catalyst Research
Instruments Operations.
Research and development expenses for the nine months ended March 31,
2014 decreased by $54,100 (15.2%) to $301,900 from $356,000 for the
nine months ended March 31, 2013, primarily the result of a reduction
in product development expenses by the Company's Bioprocessing Systems
Operations due to the use of lower-cost consultants.
15
Total other income was approximately $9,400 and $9,300, respectively,
for the nine month comparative periods ended March 31, 2014 and 2013.
Income tax expense for the nine months ended March 31, 2014 was
$28,800 compared to income tax expense of $91,000 for the nine months
ended March 31, 2013 due to the reduction in profits generated for the
period.
As a result of the foregoing, net income for the nine months ended
March 31, 2014 was $77,500 compared to a $226,300 for the nine months
ended March 31, 2013.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of
the period covered by this report, based on an evaluation of the
Company's disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the
Chief Executive and Chief Financial Officer of the Company has
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
Company in its Exchange Act reports is recorded, processed, summarized
and reported within the applicable time periods specified by the SEC's
rules and forms. The Company also concluded that information required
to be disclosed in such reports is accumulated and communicated to the
Company's management, including its principal executive and principal
financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting. There was no
change in the Company's internal controls over financial reporting
that occurred during the most recently completed fiscal quarter that
materially affected or is reasonably likely to materially affect the
Company's internal controls over financial reporting.
Part II B 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:
Filed on February 28, 2014 reporting under
Items 1.01 and 2.01.
16
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 15, 2014