SCIENTIFIC INDUSTRIES INC - Quarter Report: 2018 December (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2018

 

 

☐	TRANSITION REPORT PURSUANT TO 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 in Its Charter)

 

 

Delaware	04-2217279
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
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 mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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    ☐No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ☒Yes    ☐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 ☐(Do not check if a smaller reporting company)	Smaller reporting company ☒
	Emerging Growth ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)

Yes☐ No ☒

 

The number of shares outstanding of the registrant’s common stock, par value $.05 per share (“Common Stock”) as of February 4, 2019 is 1,494,112 shares.

 

 

 

 

SCIENTIFIC INDUSTRIES, INC.

 

Table of Contents

 

 

PART I - Financial Information
Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	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 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
Item 4.	CONTROLS AND PROCEDURES	15
PART II - Other Information
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	15
SIGNATURE		16

 

   

 

  

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

	December 31, 2018	June 30, 2018
Current assets:	(Unaudited)
Cash and cash equivalents	$1,358,100	$1,053,100
Investment securities	307,800	314,700
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at December 31, 2018 and June 30, 2018	1,216,500	1,444,100
Contract assets, current	307,200	278,200
Inventories	2,723,900	2,267,900
Prepaid expenses and other current assets	101,400	33,500
Total current assets	6,014,900	5,391,500
Property and equipment, net	177,900	199,500
Intangible assets, net	222,600	338,700
Goodwill	705,300	705,300
Contract assets, less current portion	-	245,400
Other assets	52,500	52,500
Deferred taxes	385,500	392,600
Total assets	$7,558,700	$7,325,500

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$570,700	$428,000
Accrued expenses and taxes, current portion	556,100	657,700
Contract liabilities	114,300	63,800
Contingent consideration, current portion	118,000	118,000
Notes payable	2,500	5,800
Total current liabilities	1,361,600	1,273,300
Accrued expenses, less current portion	-	60,000
Contingent consideration payable, less current portion	290,000	290,000
Total liabilities	1,651,600	1,623,300
Shareholders’ equity:
Common stock, $.05 par value; authorized 7,000,000 shares; issued 1,513,914, outstanding 1,494,112 shares at December 31, 2018 and June 30, 2018	75,700	75,700
Additional paid-in capital	2,564,100	2,545,900
Accumulated other comprehensive gain (loss)	(19,800)	1,200
Retained earnings	3,339,500	3,131,800
	5,959,500	5,754,600
Less common stock held in treasury at cost, 19,802 shares	52,400	52,400
Total shareholders’ equity	5,907,100	5,702,200
Total liabilities and shareholders’ equity	$7,558,700	$7,325,500

1

 

 

 

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

	For the Three Month Period Ended December 31,	For the Three Month Period Ended December 31,	For the Six Month Period Ended December 31,	For the Six Month Period Ended December 31,
	2018	2017	2018	2017
Revenues	$2,163,200	$1,892,400	$4,201,800	$3,173,300
Cost of revenues	1,187,500	1,126,700	2,280,400	1,955,900
Gross profit	975,700	765,700	1,921,400	1,217,400
Operating expenses:
General and administrative	462,100	407,900	878,600	836,300
Selling	248,200	214,600	484,300	415,600
Research and development	109,400	132,900	226,700	262,000
Total operating expenses	819,700	755,400	1,589,600	1,513,900
Income (loss) from operations	156,000	10,300	331,800	(296,500)
Other income (expense):
Interest income	2,500	5,200	2,800	5,600
Other income, net	(9,300)	1,400	(7,400)	1,400
Interest expense	(400)	(500)	(800)	(600)
Total other income (expense), net	(7,200)	6,100	(5,400)	6,400
Income (loss) before income tax expense	148,800	16,400	326,400	(290,100)
Income tax expense:
Current	24,400	71,800	53,900	8,000
Deferred	6,000	25,600	12,000	15,500
Total income tax expense	30,400	97,400	65,900	23,500
Net income (loss)	$118,400	$(81,000)	$260,500	$(313,600)
Basic earnings (loss) per common share	$.08	$(.05)	$.17	$(.21)
Diluted earnings (loss) per common share	$.08	$.(05)	$.17	$(.21)
Cash dividends declared per common share	$.05	$.00	$.05	$.00

 

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 Period Ended December 31,	For the Three Month Period Ended December 31,	For the Six Month Period Ended December 31,	For the Six Month Period Ended December 31,
	2018	2017	2018	2017
Net income (loss)	$118,400	$(81,000)	$260,500	$(313,600)
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period,
net of tax	(2,900)	1,600	(21,000)	4,200
Comprehensive Income (loss)	$115,500	$(79,400)	$239,500	$(309,400)

 

See notes to unaudited condensed consolidated financial statements.

 

  3

 

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the Six Month Period Ended December 31,	For the Six Month Period Ended December 31,
	2018	2017
Operating activities:
Net income (loss)	$260,500	$(313,600)
Adjustments to reconcile net income (loss) provided by (used in) operating activities:
Loss on sale of investments	5,000	-
Depreciation and amortization	151,900	154,100
Unrealized holding gain of investments	3,300	-
Deferred income taxes	7,100	16,500
Income tax benefit of stock options exercised	-	8,000
Stock-based compensation	18,200	12,400
Changes in operating assets and liabilities:
Trade accounts receivable	227,600	(184,000)
Contract assets	216,400	133,100
Inventories	(456,000)	(431,400)
Prepaid and other current assets	(67,900)	(66,300)
Accounts payable	142,700	240,200
Contract liabilities	50,500	321,800
Accrued expenses and taxes	(162,000)	(24,500)
Total adjustments	136,800	179,900
Net cash provided by (used in) operating activities	397,300	(133,700)
Investing activities:
Redemption of investment securities, available-for-sale	2,700	-
Purchase of investment securities, available-for- sale	(75,200)	(15,000)
Sale of investment securities, available-for-sale	72,400
Capital expenditures	(7,900)	(68,100)
Purchase of other intangible assets	(6,300)	(1,500)
Net cash used in investing activities	(14,300)	(84,600)
Financing activities:
Line of credit proceeds	-	40,000
Payments for contingent consideration	-	(142,700)
Cash dividend declared and paid	(74,700)	-
Principal payments on notes payable	(3,300)	(3,400)
Net cash used in financing activities	(78,000)	(106,100)
Net increase (decrease) in cash and cash equivalents	305,000	(324,400)
Cash and cash equivalents, beginning of year	1,053,100	1,025,100
Cash and cash equivalents, end of period	$1,358,100	$700,700
Supplemental disclosures:
Cash paid during the period for:
Income taxes	$39,700	$16,000
Interest	800	600

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, 2018. The results for the three months and six months ended December 31, 2018, are not necessarily an indication of the results for the full fiscal year ending June 30, 2019.

 

1. Summary of Significant Accounting Policies

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Scientific Industries, Inc., Altamira Instruments, Inc. (“Altamira”), a Delaware corporation and wholly-owned subsidiary, and Scientific Bioprocessing, Inc. (“SBI”), a Delaware corporation and wholly-owned subsidiary, and Scientific Packaging Industries, Inc., an inactive wholly-owned subsidiary (all collectively referred to as the “Company”). All material intercompany balances and transactions have been eliminated.

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.

 

Adopted Accounting Pronouncements

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company adopted the provisions of these pronouncements on July 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized when products are shipped (i.e. point in time). As such, the adoption of ASU 2016-10 had no material impact to the Company’s financial position or results of operations; however, the Company has now presented the disclosures required by this new standard, refer to Note 2.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted and a retrospective transition method to each period should be presented. The adoption of this ASU had no impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The adoption of this ASU had no impact on the Company’s consolidated financial statements.

Reclassification

 

Trade accounts receivable, current of $307,200 and $278,200, and trade accounts receivable, long term of $245,400 for the year ended June 30, 2018 were reclassified to contract assets, current; and contract assets, less current portion, respectively, on the balance sheet as of December 31, and June 30, 2018. Customer advances were reclassified to contract liabilities as of December 31, and June 30, 2018.

 2. Revenue

The Company’s revenues are comprised of product sales (Benchtop Laboratory Equipment Operations) as well as products and related services such as installation and training as is customary for its customers of the Catalyst Research Instruments Operations. In addition, the Company’s Bioprocessing Systems Operations’ revenues are comprised of royalty revenues. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract (either implicit or explicit) by transferring the promised product or service to its customer either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of the Company’s contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using the Company’s best estimate of standalone selling price for each distinct product or service in the contract, which is generally based on an observable price.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances, customer discounts, and incentives. Revenue from the Bioprocessing Systems Operations are recognized over time based on Management’s judgment and estimates.

 

3. Segment Information and Concentrations

 

The Company views its operations as three segments: the manufacture and marketing of standard benchtop laboratory equipment for research in university, hospital and industrial laboratories sold primarily through laboratory equipment distributors and laboratory and pharmacy balances and scales (“Benchtop Laboratory Equipment Operations”), 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 Operations”) and the design and marketing of bioprocessing systems and products and related royalty income (“Bioprocessing Systems”).

 

Segment information is reported as follows:

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended December 31, 2018:
Revenues	$1,803,100	$227,200	$132,900	$-	$2,163,200
Foreign Sales	743,600	222,900	-	-	966,500
Income (Loss) From Operations	148,600	(48,300)	55,700	-	156,000
Assets	4,762,000	1,376,100	727,300	693,300	7,558,700
Long-Lived Asset Expenditures	10,800	1,200	-	-	12,000
Depreciation and Amortization	66,400	200	9,400	-	76,000

 

  6

 

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended December 31, 2017:
Revenues	$1,686,200	$153,500	$52,700	$-	$1,892,400
Foreign Sales	815,300	2,600	-	-	817,900
Income (Loss) From Operations	122,000	(103,400)	(8,300)	-	10,300
Assets	4,085,800	1,613,200	467,900	803,300	6,970,200
Long-Lived Asset Expenditures	33,000	1,900	2,500	-	37,400
Depreciation and Amortization	67,000	700	9,300	-	77,000

 

Approximately 51% and 53% of total benchtop laboratory equipment sales (42% and 48% of total revenues) for the three month periods ended December 31, 2018 and 2017, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.

 

Approximately 25% and 21% of total benchtop laboratory equipment sales (21% and 19% of total revenues) were derived from the Torbal Scales Division for the three months ended December 31, 2018 and 2017, respectively.

 

For the three months ended December 31, 2018 and 2017, respectively, three customers accounted for approximately 21% and 22% of net sales of the Benchtop Laboratory Equipment Operations (18% and 20% of the Company’s total revenues). Sales of catalyst research instruments generally comprise a few very large orders averaging approximately $50,000 per order to a limited number of customers, who differ from order to order. Sales to two and one customer during the three months ended December 31, 2018 and 2017, accounted for approximately 96% and 74% of the Catalyst Research Instrument Operations’ revenues and 10% and 7% of the Company’s total revenues, respectively.

 

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Six Months Ended December 31, 2018:
Revenues	$3,495,100	$444,600	$262,100	$-	$4,201,800
Foreign Sales	1,379,300	365,200	-	-	1,744,500
Income (Loss) From Operations	324,200	(111,300)	118,900	-	331,800
Assets	4,762,000	1,376,100	727,300	693,300	7,558,700
Long-Lived Asset Expenditures	13,000	1,200	-	-	14,200
Depreciation and Amortization	132,700	400	18,800	-	151,900

 

  7

 

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Six Months Ended December 31, 2017:
Revenues	$2,885,600	$182,300	$105,400	$-	$3,173,300
Foreign Sales	1,317,600	9,000	-	-	1,326,600
Income (Loss) From Operations	28,100	(287,500)	(37,100)	-	(296,500)
Assets	4,085,800	1,613,200	467,900	803,300	6,970,200
Long-Lived Asset Expenditures	65,200	1,900	2,500	-	69,600
Depreciation and Amortization	131,900	3,500	18,700	-	154,100

 

Approximately 50% total benchtop laboratory equipment sales (41% and 46% of total revenues) for both six month periods ended December 31, 2018 and 2017, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.

 

Approximately 25% and 23% of total benchtop laboratory equipment sales (21% of total revenues) were derived from the Torbal Scales Division for both the six months ended December 31, 2018 and 2017, respectively. For the six months ended December 31, 2018 and 2017, respectively, three customers accountedy for approximately 22% of net sales of the Benchtop Laboratory Equipment Operations for both six month periods ended December 31, 2018 and 2017 (18% and 20% of the Company’s total revenues), respectively.

 

Sales of catalyst research instruments generally comprise a few very large orders averaging approximately $50,000 per order to a limited number of customers, who differ from order to order. Sales to five and one customer during the six months ended December 31, 2018 and 2017, accounted for approximately 90% and 64% of the Catalyst Research Instrument Operations’ revenues and 10% and 4% of the Company’s total revenues, respectively.

 

4. Fair Value of Financial Instruments

 

The FASB defines the fair value of financial instruments as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements do not include transaction costs.

 

The accounting guidance also expands the disclosure requirements around fair value and establishes a fair value hierarchy for 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 valuation that require inputs that are both significant to the fair value measurement and unobservable.

 

In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company calculated the fair value of its Level 1 and 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. These calculations take into consideration the credit risk of both the Company and its counterparties. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

  8

 

The fair value of the contingent consideration obligations are based on a probability weighted approach derived from the estimates of earn-out criteria and the probability assessment with respect to the likelihood of achieving those criteria. The measurement is based on significant inputs that are not observable in the market, therefore, the Company classifies this liability as Level 3 in the following tables.

 

The following tables set forth by level within the fair value hierarchy the Company’s financial assets that were accounted for at fair value on a recurring basis at December 31, 2018 and June 30, 2018 according to the valuation techniques the Company used to determine their fair values:

 

		Fair Value Measurements Using Inputs Considered as
	Fair Value at December 31, 2018	Level 1	Level 2	Level 3
Assets:
Cash and cash equivalents	$1,358,100	$1,358,100	$-	$-
Available for sale securities	307,800	307,800	-	-
Total	$1,665,900	$1,665,900	$-	$-
Liabilities:
Contingent consideration	$408,000	$-	$-	$408,000

 

 

		Fair Value Measurements Using Inputs Considered as
	Fair Value at June 30, 2018	Level 1	Level 2	Level 3
Assets:
Cash and cash equivalents	$1,053,100	$1,053,100	$-	$-
Available for sale securities	314,700	314,700	-	-
Total	$1,367,800	$1,367,800	$-	$-
Liabilities:
Contingent consideration	$408,000	$-	$-	$408,000

 

 

The following table sets forth an analysis of changes during the six months ended December 31, 2018 and 2017 in Level 3 financial liabilities of the Company:

 

	December 31, 2018	December 31, 2017
Beginning balance	$408,000	$297,000
Payments	-	(142,700)
Ending balance	$408,000	$154,300

 

  9

 

 

Investments in marketable securities classified as available for sale by security type at December 31, 2018 and June 30, 2018 consisted of the following:

 

	Cost	Fair Value	Unrealized Holding Gain (Loss)
At December 31, 2018:
Available for sale:
Equity securities	$48,700	$67,100	$18,400
Mutual funds	260,500	240,700	(19,800)
	$309,200	$307,800	$(1,400)

 

 

	Cost	Fair Value	Unrealized Holding Gain (Loss)
At June 30, 2018:
Available for sale:
Equity securities	$45,700	$67,800	$22,100
Mutual funds	267,800	246,900	(20,900)
	$313,500	$314,700	$1,200

 

5. Inventories

 

Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or net realizable value, and have been reduced by an allowance for excess and obsolete inventories. The estimate is based on managements review of inventories on hand compared to estimated future usage and sales. Cost of work-in-process and finished goods inventories include material, labor, and manufacturing overhead.

 

	December 31, 2018	June 30, 2018
Raw materials	$1,554,000	$1,488,000
Work-in-process	555,300	352,700
Finished goods	614,600	427,200
	$2,723,900	$2,267,900

 

  10

 

 

6. 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 at December 31, 2018 and June 30, 2018, all of which is expected to be deductible for tax purposes.

 

The components of other intangible assets are as follows:

 

	Useful Lives	Cost	Accumulated Amortization	Net
At December 31, 2018:
Technology, trademarks	5/10 yrs.	$662,800	$649,500	$13,300
Trade names	6 yrs.	140,000	112,800	27,200
Websites	5 yrs.	210,000	203,000	7,000
Customer relationships	9/10 yrs.	357,000	301,400	55,600
Sublicense agreements	10 yrs.	294,000	209,500	84,500
Non-compete agreements	5 yrs.	384,000	375,000	9,000
IPR&D	3 yrs.	110,000	110,000	-
Other intangible assets	5 yrs.	204,300	178,300	26,000
		$2,362,100	$2,139,500	$222,600

 

 

 

 

	Useful Lives	Cost	Accumulated Amortization	Net
At June 30, 2018:
Technology, trademarks	5/10 yrs.	$662,800	$613,400	$49,400
Trade names	6 yrs.	140,000	101,100	38,900
Websites	5 yrs.	210,000	182,000	28,000
Customer relationships	9/10 yrs.	357,000	294,800	62,200
Sublicense agreements	10 yrs.	294,000	194,800	99,200
Non-compete agreements	5 yrs.	384,000	348,000	36,000
IPR&D	3 yrs.	110,000	110,000	-
Other intangible assets	5 yrs.	198,100	173,100	25,000
		$2,355,900	$2,017,200	$338,700