SCIENTIFIC INDUSTRIES INC - Quarter Report: 2019 March (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 March 31, 2019

 

 

 

☐	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.

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 May 3, 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 Changes in Shareholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	15
Item 4.	CONTROLS AND PROCEDURES	17
PART II - Other Information
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	17
SIGNATURE		18

 

 

 

 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

	March 31, 2019	June 30, 2018
Current assets:	(Unaudited)
Cash and cash equivalents	$1,354,200	$1,053,100
Investment securities	325,100	314,700
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at March 31, 2019 and June 30, 2018	2,000,400	1,444,100
Contract assets, current	422,300	278,200
Inventories	2,671,300	2,267,900
Prepaid expenses and other current assets	65,800	33,500
Total current assets	6,839,100	5,391,500
Property and equipment, net	281,200	199,500
Intangible assets, net	189,800	338,700
Goodwill	705,300	705,300
Contract assets, less current portion	-	245,400
Other assets	52,500	52,500
Deferred taxes	463,400	392,600
Total assets	$8,531,300	$7,325,500

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:
Accounts payable	$451,400	$428,000
Accrued expenses and taxes, current portion	806,500	657,700
Bank line of credit	50,000	-
Contract liabilities	227,800	63,800
Contingent consideration, current portion	311,000	118,000
Notes payable	700	5,800
Total current liabilities	1,847,400	1,273,300
Accrued expenses, less current portion	-	60,000
Contingent consideration payable, less current portion	664,000	290,000
Total liabilities	2,511,400	1,623,300
Shareholders’ equity:
Common stock, $.05 par value; authorized 7,000,000 shares; issued 1,513,914, outstanding 1,494,112, at March 31, 2019 and June 30, 2018	75,700	75,700
Additional paid-in capital	2,575,800	2,545,900
Accumulated other comprehensive gain (loss)	(12,300)	1,200
Retained earnings	3,433,100	3,131,800
	6,072,300	5,754,600
Less common stock held in treasury at cost, 19,802 shares	52,400	52,400
Total shareholders’ equity	6,019,900	5,702,200
Total liabilities and shareholders’ equity	$8,531,300	$7,325,500

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

 

 

	For the Three Month Period Ended March 31,	For the Three Month Period Ended March 31,	For the Nine Month Period Ended March 31,	For the Nine Month Period Ended March 31,
	2019	2018	2019	2018
Revenues	$3,053,500	$2,099,300	$7,255,300	$5,272,600
Cost of revenues	1,972,400	1,331,500	4,252,700	3,287,300
Gross profit	1,081,100	767,800	3,002,600	1,985,300
Operating expenses:
General and administrative	492,400	470,200	1,371,000	1,306,600
Selling	282,100	263,800	766,400	679,500
Research and development	120,900	117,700	347,600	379,700
Total operating expenses	895,400	851,700	2,485,000	2,365,800
Income (loss) from operations	185,700	(83,900)	517,600	(380,500)
Other income (expense):
Interest income	300	-	3,100	5,600
Other income, net	8,100	500	600	1,900
Interest expense	(600)	(500)	(1,400)	(1,100)
Total other income, net	7,800	-	2,300	6,400
Income (loss) before income tax expense (benefit)	193,500	(83,900)	519,900	(374,100)
Income tax expense (benefit):
Current	179,700	9,700	233,600	17,800
Deferred	(79,800)	(55,900)	(67,800)	(40,400)
Total income tax expense (benefit)	99,900	(46,200)	165,800	(22,600)
Net income (loss)	$93,600	$(37,700)	$354,100	$(351,500)
Basic earnings (loss) per common share	$.06	$(.03)	$.24	$(.24)
Diluted earnings (loss) per common share	$.06	$(.03)	$.23	$(.24)
Cash dividends declared per common share	$-	$-	$.05	$-

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

 

 

 

 

	For the Three Month Period Ended March 31,	For the Three Month Period Ended March 31	For the Nine Month Period Ended March 31,	For the Nine Month Period Ended March 31,
	2019	2018	2019	2018
Net income (loss)	$93,600	$(37,700)	$354,100	$(351,500)
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during period net of tax	7,500	(5,100)	(13,500)	(900)
Comprehensive income (loss)	$101,100	$(42,800)	$340,600	$(352,400)

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

  CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 

 

			Additional	Accumulated  Other				Total
	Common Stock		Paid-in	Comprehensive	Retained	Treasury Stock		Shareholders’
Fiscal Year 2019	Shares	Amount	Capital	Gain (Loss)	Earnings	Shares	Amount	Equity
Balance, July 1, 2018	1,513,914	$75,700	$2,545,900	$1,200	$3,131,800	19,802	$52,400	$5,702,200
Cumulative effect of the adoption of	-	-	-	-	22,000	-	-	22,000
ASU 2016-01 – Financial Instruments
Net income	-	-	-	-	142,000	-	-	142,000
Cash dividend declared, $.05	-	-	-	-	(74,700)	-	-	(74,700)
Unrealized holding loss on investment securities, net of tax	-	-	-	(18,100)	-	-	-	(18,100)
Stock-based compensation	-	-	8,700	-	-	-	-	8,700
Balance, September 30, 2018	1,513,914	75,700	2,554,600	(16,900)	3,221,100	19,802	52,400	5,782,100
Net income	-	-	-	-	118,400	-	-	118,400
Unrealized holding loss on investment securities, net of tax	-	-	-	(2,900)	-	-	-	(2,900)
Stock-based compensation	-	-	9,500	-	-	-	-	9,500
Balance, December 31, 2018	1,513,914	75,700	2,564,100	(19,800)	3,339,500	19,802	52,400	5,907,100
Net income	-	-	-	-	93,600	-	-	93,600
Unrealized holding gain on investment securities, net of tax	-	-	-	7,500	-	-	-	7,500
Stock-based compensation	-	-	11,700	-	-	-	-	11,700
Balance, March 31, 2019	1,513,914	$75,700	$2,575,800	$(12,300)	$3,433,100	19,802	$52,400	$6,019,900

 

  See notes to unaudited condensed consolidated financial statements.

  

 

 

 

 

 

  CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 

  

			Additional	Accumulated  Other				Total
	Common Stock		Paid-in	Comprehensive	Retained	Treasury Stock		Shareholders’
Fiscal Year 2018	Shares	Amount	Capital	Gain (Loss)	Earnings	Shares	Amount	Equity
Balance, July 1, 2017	1,513,914	$75,700	$2,515,900	$(3,500)	$3,292,300	19,802	$52,400	$5,828,000
Net loss	-	-	-	-	(232,600)	-	-	(232,600)
Unrealized holding gain on investment securities, net of tax	-	-	-	2,600	-	-	-	2,600
Stock-based compensation	-	-	6,300	-	-	-	-	6,300
Balance, September 30, 2017	1,513,914	75,700	2,522,200	(900)	3,059,700	19,802	52,400	5,604,300
Net loss	-	-	-	-	(81,000)	-	-	(81,000)
Unrealized holding gain on investment securities, net of tax	-	-	-	1,600	-	-	-	1,600
Stock-based compensation	-	-	6,200	-	-	-	-	6,200
Tax benefit of stock option exercised	-	-	8,000	-	-	-	-	8,000
Balance, December 31, 2017	1,513,914	75,700	2,536,400	700	2,978,700	19,802	52,400	5,539,100
Net loss	-	-	-	-	(37,900)	-	-	(37,900)
Unrealized holding loss on investment securities, net of tax	-	-	-	(5,100)	-	-	-	(5,100)
Stock-based compensation	-	-	6,100	-	-	-	-	6,100
Balance, March 31, 2018	1,513,914	$75,700	$2,542,500	$(4,400)	$2,940,800	19,802	$52,400	$5,502,200

 

  See notes to unaudited condensed consolidated financial statements.

 

 

 

 

  SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

	For the Nine Month Period Ended March 31,	For the Nine Month Period Ended March 31,
	2019	2018
Operating activities:
Net income (loss)	$354,100	$(351,500)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss on sale of investments	5,000	-
Depreciation and amortization	218,200	230,100
Deferred income tax expense	(70,800)	(39,400)
Unrealized holding gain on investments	(4,200)	-
Income tax benefit of stock options exercised	-	8,000
Stock-based compensation	29,900	18,600
Change in fair value of contingent consideration	567,000	445,700
Changes in operating assets and liabilities:
Trade accounts receivable	(556,300)	(227,700)
Contract assets	101,300	-
Inventories	(403,400)	(740,400)
Prepaid and other current assets	(32,300)	(12,000)
Accounts payable	23,400	255,200
Contract liabilities	164,000	356,000
Accrued expenses and taxes	88,800	(92,800)
Total adjustments	130,600	201,300
Net cash provided by (used in) operating activities	484,700	(150,200)
Investing activities:
Sale of investment securities, available-for-sale	72,400	-
Purchase of investment securities, available-for-sale	(75,200)	(14,500)
Capital expenditures	(129,600)	(70,500)
Purchase of intangible assets	(21,400)	(3,600)
Net cash used in investing activities	(153,800)	(88,600)
Financing activities:
Line of credit proceeds	50,000	40,000
Payments for contingent consideration	-	(142,700)
Cash dividend declared and paid	(74,700)	-
Principal payments on notes payable	(5,100)	(5,000)
Net cash used in financing activities	(29,800)	(107,700)
Net increase (decrease) in cash and cash equivalents	301,100	(346,500)
Cash and cash equivalents, beginning of year	1,053,100	1,025,100
Cash and cash equivalents, end of period	$1,354,200	$678,600
Cash paid during the period for:
Income taxes	$59,200	$16,000
Interest	1,400	1,100

 

See notes to unaudited condensed consolidated financial statements.

 

 

  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 nine months ended March 31, 2019  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, 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 theentire 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 expects that the adoption of this ASU will have no material inpact to the Company's financial statement.

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 $422,300 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

March 31, 2019 and June 30, 2018. Customer advances of $63,800 were reclassified to contract liabilities as of March 31, 2019 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 March 31, 2019:
Revenues	$1,732,400	$508,600	$812,500	$-	$3,053,500
Foreign Sales	682,300	346,400	-	-	1,028,700
Income (Loss) From Operations	57,900	(35,200)	163,000	-	185,700
Assets	4,656,600	1,583,100	1,503,100	788,500	8,531,300
Long-Lived Asset Expenditures	132,900	1,000	2,900	-	136,800
Depreciation and Amortization	56,500	200	9,600	-	66,300

  

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended March 31, 2018:
Revenues	$1,550,700	$110,700	$437,900	$-	$2,099,300
Foreign Sales	620,200	105,400	-	-	725,600
Income (Loss) From Operations	78,200	(74,400)	(87,700)	-	(83,900)
Assets	3,930,600	1,680,800	893,300	853,600	7,358,300
Long-Lived Asset Expenditures	4,500	-	-	-	4,500
Depreciation and Amortization	67,400	(800)	9,400	-	76,000