SCIENTIFIC INDUSTRIES INC - Quarter Report: 2020 September (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 September 30, 2020

 

 

☐ 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 as specified 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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging Growth company☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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 November 6, 2020 is 2,861,263 shares.

 

 

SCIENTIFIC INDUSTRIES, INC.

 

Table of Contents

 

 

PART I - Financial Information
Item 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations	3
	Condensed Consolidated Statements of Changes in Shareholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
Item 4.	CONTROLS AND PROCEDURES	14
PART II - Other Information
Item 6.	EXHIBITS AND REPORTS ON FORM 8-K	14
SIGNATURE		15

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS

 

	September 30, 2020	June 30, 2020
Current assets:	(Unaudited)
Cash and cash equivalents	$3,355,500	$7,559,700
Investment securities	4,017,700	331,800
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at September 30, 2020 and June 30, 2020	1,171,300	1,064,000
Inventories	2,941,200	2,884,700
Income tax receivable	331,500	334,800
Prepaid expenses and other current assets	134,700	112,300
Total current assets	11,951,900	12,287,300
Property and equipment, net	325,200	279,700
Intangible assets, net	129,000	128,700
Goodwill	705,300	705,300
Other assets	57,900	56,000
Deferred taxes	598,200	537,100
Operating lease right-of-use assets	826,600	803,300
Total assets	$14,594,100	$14,797,400

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

Current liabilities:
Accounts payable	$531,900	$354,700
Accrued expenses	538,000	799,700
Contract liabilities	82,700	89,000
Contingent consideration, current portion	97,600	111,000
Bank overdraft	109,400	43,100
Current portion of operating lease liabilities	161,300	226,900
Payroll Protection Program loan	563,800	563,800
Total current liabilities	2,084,700	2,188,200
Contingent consideration payable, less current portion	247,000	247,000
Operating lease liabilities, less current portion	743,000	640,800
Total liabilities	3,074,700	3,076,000
Shareholders’ equity:
Common stock, $.05 par value; 7,000,000 shares authorized; 2,881,065 shares issued; 2,861,263 shares outstanding at September 30, 2020 and June 30, 2020	144,100	144,100
Additional paid-in capital	8,669,600	8,608,300
Retained earnings	2,758,100	3,021,400
	11,571,800	11,773,800
Less common stock held in treasury at cost, 19,802 shares	52,400	52,400
Total shareholders’ equity	11,519,400	11,721,400
Total liabilities and shareholders’ equity	$14,594,100	$14,797,400

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 September 30, 2020	For the Three Month Period Ended September 30, 2019
Revenues	$2,156,300	$2,004,200
Cost of revenues	1,146,600	1,023,800
Gross profit	1,009,700	980,400
Operating expenses:
General and administrative	579,600	510,200
Selling	521,700	309,100
Research and development	244,300	236,600
Total operating expenses	1,345,600	1,055,900
Loss from operations	(335,900)	(75,500)
Other income (expense):
Other income (expense), net	11,500	(200)
Loss before income tax benefit	(324,400)	(75,700)
Income tax benefit:
Current	-	-
Deferred	(61,100)	(19,500)
Total income tax benefit	(61,100)	(19,500)
Net loss	$(263,300)	$(56,200)
Basic loss per common share	$(.09)	$(.04)
Diluted loss per common share	$(.09)	$(.04)

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

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

 

 

			Additional				Total
	Common Stock		Paid-in	Retained	Treasury Stock		Shareholders’
Fiscal Year 2021	Shares	Amount	Capital	Earnings	Shares	Amount	Equity
Balance, July 1, 2020	2,881,065	$144,100	$8,608,300	$3,021,400	19,802	$52,400	$11,721,400
Net loss	-	-	-	(263,300)	-	-	(263,300)
Stock-based compensation	-	-	61,300	-	-	-	61,300
Balance, September 30, 2020	2,881,065	$144,100	$8,669,600	$2,758,100	19,802	$52,400	$14,594,100

 

 

			Additional				Total
	Common Stock		Paid-in	Retained	Treasury Stock		Shareholders’
Fiscal Year 2019	Shares	Amount	Capital	Earnings	Shares	Amount	Equity
Balance, July 1, 2019	1,513,914	$75,700	$2,592,700	$3,724,700	19,802	$52,400	$6,340,700
Net loss	-	-	-	(56,200)	-	-	(56,200)
Stock options exercised	2,000	100	6,900				7,000
Stock-based compensation	-	-	17,700	-	-	-	17,700
Balance, September 30, 2019	1,515,914	$75,800	$2,617,300	$3,668,500	19,802	$52,400	$6,309,200

 

  

 

 

 

 

SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

	For the Three Month Period Ended September 30, 2020	For the Three Month Period Ended September 30, 2019
Operating activities:
Net loss	$(263,300)	$(56,200)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	40,600	41,000
Deferred income taxes	(61,100)	(19,500)
Stock-based compensation	61,300	17,700
(Gain) loss on sale of investments	(16,800)	800
Unrealized holding (gain) loss of investments	20,900	(2,300)
Changes in operating assets and liabilities:
Trade accounts receivable	(107,300)	106,400
Income tax receivable	3,300	-
Right -of- use assets	(23,300)	(902,500)
Lease liability	36,600	969,100
Inventories	(56,500)	(120,800)
Prepaid and other assets	(24,300)	(6,800)
Accounts payable	177,200	(111,800)
Contract liabilities	(6,300)	62,000
Bank overdraft	66,300	-
Accrued expenses	(261,700)	(301,200)
Total adjustments	(151,100)	(267,900)
Net cash used in operating activities	(414,400)	(324,100)
Investing activities:
Purchase of investment securities	(3,723,500)	(25,000)
Redemption of investment securities	33,800	23,800
Capital expenditures	(70,500)	(17,000)
Purchase of other intangible assets	(16,200)	(7,500)
Net cash used in investing activities	(3,776,400)	(25,700)
Financing activities:
Proceeds from stock options exercised	-	7,000
Payments of contingent consideration	(13,400)	-
Net cash provided by (used in) financing activities	(13,400)	7,000
Net decrease in cash and cash equivalents	(4,204,200)	(342,800)
Cash and cash equivalents, beginning of year	7,559,700	1,602,500
Cash and cash equivalents, end of period	$3,355,500	$1,259,700
Supplemental disclosures:
Cash paid during the period for:
Income taxes	$500	$40,900
Interest	-	-

 

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, 2020. The results for the three months ended September 30, 2020, are not necessarily an indication of the results for the full fiscal year ending June 30, 2021.

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.

 

COVID-19 Pandemic

 

The challenges posed by the COVID-19 pandemic on the global economy began to impact the Company’s operations at the end of the third quarter of the year ended June 30, 2020.  At that time, the Company took appropriate action and put plans in place to diminish the effects of COVID-19 on its operations, enabling the Company to continue to operate with minor or temporary disruptions to its operations. The Company took immediate action as it pertains to COVID-19 preparedness by implementing the Center for Disease Control’s guidelines for employers in order to protect the Company’s employees’ health and safety, with actions such as implementing work from home, social distancing in the workplace, requiring self -quarantine for any employee showing symptoms, wearing face coverings, and training employees on maintaining a healthy work environment. However, if an employee becomes infected in the future, and the Company is forced to shut down for a period of time, it could have a short-term negative impact on operations. At the beginning of the pandemic, the Catalyst Research Instruments and Bioprocessing Systems Operations were shut down due to state mandates, however, the impact on operations was immaterial, and the Company has been able to retain its employees without furloughs or layoffs, in part, due to the Company’s receipt of a $563,800 loan under the Federal Government’s Paycheck Protection Program. The Company has not experienced and does not anticipate any material impact on its ability to collect its accounts receivable due to the nature of its customers, which are primarily distributors of laboratory equipment and supplies that have the ability to pay. However, there were some delays in receiving some accounts receivable due for catalyst research instruments due to customer shutdowns, and there was a material negative impact on the revenues of the Catalyst Research Instruments operations. The Company has not experienced and does not anticipate any material impairment to its tangible and intangible assets, system of internal controls, supply chain, or delivery and distribution of its products as a result of COVID-19, however the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration or worsening of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.

 

Adopted Accounting Pronouncements

 

In August 2018, the The Financial Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement", which is part of the FASB disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify, and add certain disclosure requirements related to fair value measurements covered in Topic 820, "Fair Value Measurement." The new standard was effective for fiscal years beginning after December 15, 2019. Early adoption was permitted for either the entire standard or only the requirements that modify or eliminate the disclosure requirements, with certain requirements applied prospectively, and all other requirements applied retrospectively to all periods presented. The adoption of this standard on July 1, 2020 did not have a material impact on the Company’s financial statements. 

 

R Recent Accounting Pronouncements

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is designed to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years; this ASU allows for early adoption in any interim period after issuance of the update. The Company is currently evaluating the impact of adopting this guidance.

 

 

2. Revenue

 

The Company records revenues in accordance with Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers, as amended” (“ASC Topic 606”). In accordance with Topic 606, the Company accounts for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable that the Company will collect substantially all of the consideration to which it is entitled. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.

 

Nature of Products and Services

 

We generate revenues from the following sources: (1) Benchtop Laboratory Equipment, (2) Catalyst Research Instruments, and (3) Royalties.

 

The following table summarizes the Company’s disaggregation of revenues for the three months ended September 30, 2020 and 2019.

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended September 30, 2020:
Revenues	$1,930,300	$137,100	$88,900	$-	$2,156,300
Foreign Sales	631,900	57,200	86,300	-	775,400

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended September 30, 2019:
Revenues	$1,576,200	$138,700	$289,300	$-	$2,004,200
Foreign Sales	397,600	71,700	-	-	469,300

 

Benchtop Laboratory Equipment sales are comprised primarily of standard benchtop laboratory equipment from its stock to laboratory equipment distributors, or to end users primarily via e-commerce. The sales cycle from time of receipt of order to shipment is very short varying from a day to a few weeks. Customers either pay by credit card (online sales) or net 30-90 days, depending on the customer. Once the item is shipped under the FOB terms specified in the order, which is primarily “FOB Factory”, other than a standard warranty, there are no other obligations to the customer. The standard warranty is typically for a period of, one to two years for parts and labor and is deemed immaterial.

 

Catalyst Research Instrument sales are comprised primarily of large instruments which begin with a standard model and then are customized to a customer’s specifications. The sales cycle can be quite long, typically ranging from one to three months, from the time an order is received to the time the instrument is shipped to the customer. Payment terms vary from customer to customer and can include advance payments which are recorded as contract liabilities. Some contracts call for training and installation, which is considered ancillary and not a material part of the contract. Due to the size and nature of the instruments, the Company subjects the instruments to an extensive factory acceptance testing process prior to shipment to ensure that they are fully operational once they reach the customer’s site. Normally, the Company warrantees its instruments for a period of twelve months for parts and labor the fulfillment of which normally consists of replacement of small components or software support.

 

Royalty revenues pertain to royalties earned by the Company, which are paid on a calendar year basis, under a licensing agreement from a single licensee and its sublicenses. The Company is then obligated to pay 50% of all royalties received to the entity that licenses the intellectual property to the Company. During the year, the Company’s management uses its best judgement to estimate the royalty revenues earned during the period.

 

The Company determines revenue recognition through the following steps:

 

	●	Identification of the contract, or contracts, with a customer
	●	Identification of the performance obligations in the contract
	●	Determination of the transaction price
	●	Allocation of the transaction price to the performance obligations in the contract
	●	Recognition of revenue when, or as, a performance obligation is satisfied

 

 

 

 

The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the FASB, in applying ASC Topic 606: 1) all revenues are recorded net of returns, allowances, customer discounts, and incentives; 2) although sales and other taxes are immaterial, the Company accounts for amounts collected from customers for sales and other taxes, if any, net of related amounts remitted to tax authorities; 3) the Company expenses costs to obtain a contract as they are incurred if the expected period of benefit, and therefore the amortization period, is one year or less; 4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs fall within selling expenses; 5) the Company is always considered the principal and never an agent, because it has full control and responsibility until title is transferred to the customer; 6) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer such as is the case with catalyst instruments.

 

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 September 30, 2020:
Revenues	$1,930,300	$137,100	$88,900	$-	$2,156,300
Foreign Sales	631,900	57,200	86,300	-	775,400
Income (Loss) From Operations	383,800	(135,200)	(532,300)	(52,200)	(335,900)
Assets	5,871,900	996,000	775,700	6,950,500	14,594,100
Long-Lived Asset Expenditures	21,800	-	64,900	-	86,700
Depreciation and Amortization	26,300	300	14,000	-	40,600

 

 

	Benchtop Laboratory Equipment	Catalyst Research Instruments	Bioprocessing Systems	Corporate And Other	Consolidated
Three Months Ended September 30, 2019:
Revenues	$1,576,200	$138,700	$289,300	$-	$2,004,200
Foreign Sales	397,600	71,700	-	-	469,300
Income (Loss) From Operations	12,900	(90,200)	1,800	-	(75,500)
Assets	5,589,400	1,400,900	1,088,100	784,200	8,862,600
Long-Lived Asset Expenditures	7,800	-	16,700	-	24,500
Depreciation and Amortization	30,500	400	10,100	-	41,000

 

Approximately 47% and 36% of net sales of Benchtop Laboratory Equipment for the three month periods ended September 30, 2020 and 2019, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.

 

Approximately 27% and 33% of total Benchtop Laboratory Equipment sales were derived from the Torbal Scales Division for the three months ended September 30, 2020 and 2019, respectively.

For the three months ended September 30, 2020 and 2019, respectively, three customers accounted for approximately 23% (both periods) of net sales of the Benchtop Laboratory Equipment Operations (21% and 18% of the Company’s total revenues). Sales of Catalyst Research Instruments are generally comprised of 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 customers during the three months ended September 30, 2020 accounted for approximately 88% of the Catalyst Research Instruments Operations revenues and 6% of the Company’s total revenues. Sales to two other customers during the three months ended September 30, 2019 accounted for approximately 90% of the Catalyst Research Instrument Operations’ revenues and 6% of the Company’s total revenues.

 

 

 

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.

 

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 September 30, 2020 and June 30, 2020 according to the valuation techniques the Company used to determine their fair values:

		Fair Value Measurements Using Inputs Considered as
	Fair Value at September 30, 2020	Level 1	Level 2	Level 3
Assets:
Cash and cash equivalents	$3,355,500	$3,355,500	$-	$-
Investment securities	4,017,700	4,017,700	-	-
Total	$7,373,200	$7,373,200	$-	$-
Liabilities:
Contingent consideration	$344,600	$-	$-	$344,600

 

Payments amounting to $13,400 for contingent consideration were made during the three months ended September 30, 2020.

 

		Fair Value Measurements Using Inputs Considered as
	Fair Value at June 30, 2020	Level 1	Level 2	Level 3
Assets:
Cash and cash equivalents	$7,559,700	$7,559,700	$-	$-
Investment securities	331,800	331,800	-	-
Total	$7,891,500	$7,891,500	$-	$-
Liabilities:
Contingent consideration	$358,000	$-	$-	$358,000

 

 

 

 

Investments in marketable securities classified as available-for-sale by security type at September 30, 2020 and June 30, 2020 consisted of the following:

 

	Cost	Fair Value	Unrealized Holding Gain (Loss)
At September 30, 2020:
Equity securities	$110,800	$118,400	$7,600
Mutual and bond funds	3,876,200	3,899,300	23,100
	$3,987,000	$4,017,700	$30,700

 

 

	Cost	Fair Value	Unrealized Holding Gain (Loss)
At June 30, 2020:
Equity securities	$77,600	$101,900	$24,300
Mutual funds	250,300	229,900	(20,400)
	$327,900	$331,800	$3,900

 

 

5. Inventories

 

	September 30,2020	June 30,2020
Raw materials	$1,883,500	$1,838,500
Work-in-process	323,500	228,600
Finished goods	734,200	817,600
	$2,941,200	$2,884,700

 

 

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 September 30, 2020 and June 30, 2020, 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 September 30, 2020:
Technology, trademarks	5/10 yrs.	$664,700	$662,000	$2,700
Trade names	6 yrs.	140,000	140,000	-
Websites	5 yrs.	210,000	210,000	-
Customer relationships	9/10 yrs.	357,000	324,800	32,200
Sublicense agreements	10 yrs.	294,000	260,900	33,100
Non-compete agreements	5 yrs.	384,000	384,000	-
IPR&D	3 yrs.	110,000	110,000	-
Other intangible assets	5 yrs.	262,700	201,700	61,000
		$2,422,400	$2,293,400	$129,000

 

  

 

 

	Useful Lives	Cost	Accumulated Amortization	Net
At June 30, 2020:
Technology, trademarks	5/10 yrs.	$664,700	$662,000	$2,700
Trade names	6 yrs.	140,000	140,000	-
Websites	5 yrs.	210,000	210,000	-
Customer relationships	9/10 yrs.	357,000	321,400	35,600
Sublicense agreements	10 yrs.	294,000	253,600	40,400
Non-compete agreements	5 yrs.	384,000	384,000	-
IPR&D	3 yrs.	110,000	110,000	-
Other intangible assets	5 yrs.	246,600	196,600	50,000
		$2,406,300	$2,277,600	$128,700

 

Total amortization expense was $15,800 and $19,500 for the three months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, estimated future amortization expense related to intangible assets is $44,000 for the remainder of the fiscal year ending, June 30, 2021, $36,800 for fiscal 2022, $20,200 for fiscal 2023, $16,400 for fiscal 2024 and $11,600 for fiscal 2025.

 

7. Loss Per Common Share

 

Loss per common share data was computed as follows:

 

	For the Three Months Ended September 30, 2020	For the Three Months Ended September 30, 2019
Loss	$(263,300)	$(56,200)
Weighted average common shares outstanding	2,861,263	1,494,212
Basic loss per common share	(.09)	(.04)
Diluted loss per common share	(.09)	(.04)

 

Approximately 126,700 and 1,349,850 shares of the Company's common stock issuable upon the exercise of options and warrants, respectively, were excluded from the calculation because the effect would be anti-dilutive due to the loss for the three months ended September 30, 2020. Approximately, 44,200 shares of the Company’s common stock issuable upon the exercise of outstanding options were excluded from the calculation for the three months ended September 30, 2019 because they were anti-dilutive.

 

  

8. Leases

 

The Company recognizes all long-term leases on its balance sheet as a liability for its lease obligation, measured at the present value of lease payments not yet paid, and a corresponding asset representing its right to use the underlying asset over the lease term.

 

The Company leases certain properties consisting principally of a facility in Bohemia, New York (headquarters) through January 2025, a facility in Pittsburgh, Pennsylvania for its Catalyst Research Instrument Operations through November 2020 and on a month to month basis thereafter, and another facility in Pittsburgh, Pennsylvania for its Bioprocessing Systems Operations through May 2023, and a sales and administration office in Orangeburg, New York for its Torbal Division of the Benchtop Laboratory Equipment Operations through October 2022. There are no renewal options with any of the leases, no residual values or significant restrictions or covenants other than those customary in such arrangements, and no non-cash activities, and any rent escalations incorporated within the leases are included in the calculation of the future minimum lease payments, as further described below. All of the Company’s leases are deemed operating leases.

 

The Company determines whether an agreement contains a lease at inception based on the Company’s right to obtain substantially all of the economic benefits from the use of the identified asset and its right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the Right-Of-Use (“ROU”) assets represent the Company’s right to use the underlying assets for the respective lease terms. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. The ROU asset is further adjusted to account for previously recorded lease expenses such as deferred rent and other lease liabilities. As the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate of 5.0% as the discount rate to calculate the present value of future lease payments, which was the interest rate that its bank would charge for a similar loan.

 

 

 

 

 

The Company elected not to recognize a ROU asset and a lease liability for leases with an initial term of twelve months or less. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses or payments based on an excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expenses in the period incurred. The Company’s lease agreements do not contain residual value guarantees.

 

The Company elected available practical expedients for existing or expired contracts of lessees wherein the Company is not required to reassess whether such contracts contain leases, the lease classification or the initial direct costs. The Company is not utilizing the practical expedient which allows the use of hindsight by lessees and lessors in determining the lease term and in assessing impairment of its ROU assets. The Company utilized the transition method allowing entities to only apply the new lease standard in the year of adoption.

 

As of September 30, 2020, the weighted-average remaining lease term for operating lease liabilities was approximately 3.5 years and the weighted-average discount rate was 5.0%. Total cash payments under these leases were $78,600, of which $78,800 was recorded as leases expense.

 

The Company’s approximate future minimum rental payments under all leases existing at September 30, 2020 through February 2025 are as follows:

 

 

Fiscal year ending June 30,	Amount
Remainder of 2021	$204,200
2022	260,300
2023	245,300
2024	195,900
2025	91,600
Total future minimum payments	997,300
Less: Imputed interest	93,000
Total Present Value of Operating Lease Liabilities	904,300

  

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking statements. 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, success of marketing strategy, success of expansion efforts, impact of competition, adverse economic conditions, and other factors affecting the Company’s business that are beyond the Company’s control, which are discussed elsewhere in this report. Consequently, no forward-looking statement can be guaranteed. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company’s financial statements and the related notes included elsewhere in this report.

 

Overview. The Company reflected a loss before income tax benefit of $324,400 for the three months ended September 30, 2020 compared to a loss before income tax benefit of $75,500 for the three months ended September 30, 2019, primarily due to increased operating expenses incurred by the Company’s Bioprocessing Systems Operations, partially offset by increased income from the Benchtop Laboratory Equipment Operations resulting from increased orders for its Genie™ brand products. The Bioprocessing Systems Operations continues to expand its operations with additional personnel and infrastructure and investing in sales and marketing.

 

Results of Operations. Net revenues for the three months ended September 30, 2020 increased $152,100 (7.6%) to $2,156,300 from $2,004,200 for the three months ended September 30, 2019, reflecting an increase of $354,100 (22.5%) in net sales of Benchtop Laboratory Equipment primarily due to sales of its Genie brand products, which are used in COVID related research and testing. The Benchtop Laboratory Equipment sales reflected $517,700 of Torbal® brand product sales for the three months ended September 30, 2020, compared to $522,400 in the three months ended September 30, 2019 due to decreased sales of pharmacy scales, partially offset by increased sales of its new automated pill counter. Sales of Catalyst Research Instruments decreased slightly by $1,600 to $137,100 for the three months ended September 30, 2020 compared to $138,700 for the three months ended September 30, 2019 with an order backlog for Catalyst Research Instruments of $263,500, all of which is expected to be shipped during the fiscal year ending June 30, 2021, compared to $173,500 as of September 30, 2019. Revenues derived from the Bioprocessing Systems Operations which are comprised primarily of net royalties accrued from sublicenses decreased by $200,400 (69.3%) to $88,900 for the three months ended September 30, 2020 compared to $289,300 for the three months ended September 30, 2019 due to decreased royalties resulting from the termination of the Company’s previously held European patent.

 

The gross profit percentage on a combined basis was 46.8% for the three months ended September 30, 2020 compared to 48.9% for the three months ended September 30, 2019 due primarily to lower margins on the Catalyst Research Instruments. However, gross margins for the Benchtop Laboratory Equipment Operations were higher due to increased sales, particularly of higher margin products.

 

General and administrative expenses for the three months ended September 30, 2020 increased by $69,400 (13.6%) to $579,600 compared to $510,200 for the three months ended September 30, 2019 mainly due to the expansion of the Scientific Bioprocessing Operations with increased personnel and related expenses, and corporate expenses

.

Selling expenses for the three months ended September 30, 2020 increased $212,600 (68.8%) to $521,700 from $309,100 for the three months ended September 30, 2019 primarily due to increased sales and marketing costs related to new personnel, websites, market research, and advertising expenditures by the Bioprocessing Systems Operations.

 

Research and development expenses increased by $7,700 (3.3%) to $244,300 for the three months ended September 30, 2020 compared to $236,600 for the three months ended September 30, 2019, mainly due to product development activities by the Bioprocessing Systems Operations.

 

The Company reflected an income tax benefit of $61,100 for the three months ended September 30, 2020 compared to $19,500 for the three months ended September 30, 2019, primarily due to the increased loss generated during the current period.

 

As a result of the foregoing, the Company recorded a net loss of $263,300 for the three months ended September 30, 2020 compared to a net loss of $56,200 for the three months ended September 30, 2019.

 

Liquidity and Capital Resources. Cash and cash equivalents decreased by $4,204,200 to $3,355,500 as of September 30, 2020 from $7,559,700 as of June 30, 2020, due primarily to converting cash on-hand to short term liquid investments.

 

Net cash used in operating activities was $414,400 for the three months ended September 30, 2020 compared to $324,100 during the three months ended September 30, 2019, primarily as a result of the increased loss incurred for the current period. Net cash used in investing activities was $3,776,400 for the three months ended September 30, 2020 compared to $25,700 used during the three months ended September 30, 2019 principally due to purchases of investments, and to a lesser extent new capital equipment purchases by the Bioprocessing Systems Operations. Net cash used in financing activities was $13,400 for the three months ended September 30, 2020 all due to contingent consideration payments made to sellers of the Bioprocessing Systems Operations, compared to cash proceeds of $7,000 during the three months ended September 30, 2019 from exercises of stock options.

 

The Company's working capital decreased by $231,900 to $9,867,200 as of September 30, 2020 compared to $10,099,100, as of June 30, 2020 due to the loss generated during the period.

 

 

 

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.

 

 

PART II – OTHER INFORMATION

 

Item 6. Exhibits and Reports on Form 8-K

 

 

Exhibit Number		Description
31.		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

Reports on Form 8-K:

 

Current Report filed on Form 8-K dated July 22, 2020 reporting under Items 1.01 and 5.2.

 

Current Report filed on Form 8-K dated August 13, 2020 reporting under Item 5.03.

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Date: November 23, 2020	SCIENTIFIC INDUSTRIES, INC. (Registrant)   /s/ Helena R. Santos
	Helena R. Santos President, Chief Executive Officer, Chief Financial Officer and Treasurer