10-Q 1 siform10q1217-_2918upload.htm SIFORM10Q1217 Blueprint
 
 
 
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, 2017
 
☐
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
 
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 
 
 
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 2, 2018 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
12
 
 
 
Item 4.
CONTROLS AND PROCEDURES
14
 
 
 
PART II - Other Information
 
 
 
Item 6.
EXHIBITS AND REPORTS ON FORM 8-K
14
 
 
 
 
15
 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
 
December 31, 2017
 
 
June 30,
2017
 
Current assets:
 
(Unaudited)
 
 
 
 
Cash and cash equivalents
 $700,700 
 $1,025,100 
Investment securities
  314,700 
  295,500 
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at December 31, 2017 and June 30, 2017
  1,475,300 
  1,424,400 
Inventories
  2,392,600 
  1,961,200 
Prepaid expenses and other current assets
 146,600 
  80,300 
Total current assets
  5,029,900 
  4,786,500 
 
    
    
Property and equipment, net
  235,600 
  199,300 
 
    
    
Intangible assets, net
  458,300 
  579,000 
 
    
    
Goodwill
  705,300 
  705,300 
 
    
    
Other assets
  52,500 
  52,500 
 
    
    
Deferred taxes
  488,600 
  505,100 
 
    
    
Total assets
 $6,970,200 
 $6,827,700 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
Accounts payable
 $379,400 
 $139,200 
Accrued expenses, current portion
  466,500 
  491,000 
    Bank line of credit
  40,000 
  - 
Customer advances
  321,800 
  - 
Contingent consideration, current portion
  33,000 
  175,700 
Notes payable, current portion
  6,800 
  6,700 
 
    
    
Total current liabilities
  1,247,500 
  812,600 
 
    
    
Accrued expenses, less current portion
  60,000 
  60,000 
Notes payable, less current portion
  2,300 
  5,800 
Contingent consideration payable, less current portion
  121,300 
  121,300 
 
    
    
Total liabilities
  1,431,100 
  999,700 
Shareholders’ equity:
    
    
Common stock, $.05 par value; authorized 7,000,000 shares; issued 1,513,914 shares outstanding at December 31, 2017 and June 30, 2017
  75,700 
  75,700 
Additional paid-in capital
  2,536,400 
  2,515,900 
Accumulated other comprehensive income (loss)
  700 
  (3,500)
Retained earnings
 2,978,700 
  3,292,300 
 
  5,591,500 
  5,880,400 
Less common stock held in treasury at cost, 19,802 shares
  52,400 
  52,400 
 
    
    
Total shareholders’ equity
  5,539,100 
  5,828,000 
 
    
    
Total liabilities and shareholders’ equity
 $6,970,200 
 $6,827,700 
See notes to unaudited condensed consolidated financial statements.
 
 
 
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,
 
 
 
2017
 
 
2016
 
 
 
2017
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $1,892,400 
 $2,683,800 
 $3,173,300 
 $4,242,900 
 
    
    
    
    
Cost of revenues
  1,126,700 
  1,888,900 
  1,955,900 
  2,778,400 
 
    
    
    
    
Gross profit
  765,700 
  794,900 
  1,217,400 
  1,464,500 
 
    
    
    
    
Operating expenses:
    
    
    
    
General and administrative
  407,900 
  409,200 
  836,300 
  821,600 
Selling
  214,600 
  224,200 
  415,600 
  440,900 
Research and development
  132,900 
  105,000 
  262,000 
  220,400 
 
    
    
    
    
Total operating expenses
  755,400 
  738,400 
  1,513,900 
  1,482,900 
 
    
    
    
    
Income (loss) from operations
  10,300 
  56,500 
  (296,500)
  (18,400)
 
    
    
    
    
Other income (expense):
    
    
    
    
Interest income
  5,200 
  8,800 
  5,600 
  9,100 
    Other income, net
  1,400 
  400 
  1,400 
  5,700 
    Interest expense
  (500)
  (900)
  (600)
  (1,100)
 
    
    
    
    
Total other income, net
  6,100 
  8,300 
  6,400 
  13,700 
 
    
    
    
    
Income (loss) before income tax expense (benefit)
  16,400 
  64,800 
  (290,100)
  (4,700)
 
    
    
    
    
Income tax expense (benefit):
    
    
    
    
Current
   71,800 
  20,900 
 8,000
  (15,400)
Deferred
 25,600 
  (1,400)
  15,500 
  14,100 
 
    
    
    
    
Total income tax expense (benefit)   
                    97,400
  19,500 
 23,500
  (1,300)
 
    
    
    
    
Net income (loss)
 $(81,000)
 $45,300 
 $(313,600)
 $(3,400)
 
    
    
    
    
Basic earnings (loss) per common share
 $(.05)
 $.03 
 $(.21)
 $.00 
 
    
    
    
    
Diluted earnings (loss) per common share
 $.(05)
 $.03 
 $(.21)
 $.00 
 
    
    
    
    
Cash dividends declared per common share
 $.00 
 $.03 
 $.00 
 $.03 
 
See notes to unaudited condensed consolidated financial statements.
 
 
 
 
 
2
 
 
 
 
 
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
 
 
 
 
For the Three Month 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,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 $(81,000)
 $45,300 
 $(313,600)
 $(3,400)
 
    
    
    
    
Other comprehensive income (loss):
    
    
    
    
Unrealized holding gain (loss)
    
    
    
    
arising during period,
    
    
    
    
net of tax
  1,600 
  (8,000)
  4,200 
  (6,900)
 
    
    
    
    
Comprehensive Income (loss)
 $(79,400)
 $37,300 
 $(309,400)
 $(10,300)
 
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,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
Net loss
 $(313,600)
 $(3,400)
Adjustments to reconcile net loss to net
cash used in operating activities:
    
    
           Loss on sale of investment
  - 
  (2,600)
Depreciation and amortization
  154,100 
  189,500 
Deferred income taxes
  16,500 
  14,100 
Income tax benefit of stock options exercised
  8,000 
  - 
Stock-based compensation
  12,400 
  1,000 
    Changes in operating assets and liabilities:
    
    
Trade accounts receivable
  (50,900)
  (436,100)
Inventories
  (431,400)
  287,100 
Prepaid expenses and other current assets
  (66,300)
  (75,300)
Accounts payable
  240,200 
  (42,200)
Customer advances
  321,800 
  17,000 
Accrued expenses
  (24,500)
  (399,400)
 
    
    
Total adjustments
 179,900 
  (446,900)
 
    
    
Net cash used in operating activities
  (133,700)
  (450,300)
 
    
    
Investing activities:
    
    
       Redemption of investment securities, available-for-sale
  - 
  11,100 
Purchase of investment securities, available for sale
  (15,000)
  (18,700)
Capital expenditures
  (68,100)
  (4,700)
Purchase of other intangible assets
  (1,500)
  (14,700)
 
    
    
Net cash used in investing activities
  (84,600)
  (27,000)
 
    
    
Financing activities:
    
    
       Line of credit proceeds
  40,000 
  250,000 
       Payments for contingent consideration
  (142,700)
  (117,400)
       Principal payments on notes payable
  (3,400)
  (3,200)
 
    
    
Net cash provided by (used in) financing activities
  (106,100)
  129,400 
 
    
    
Net decrease in cash and cash equivalents
  (324,400)
  (347,900)
 
    
    
Cash and cash equivalents, beginning of year
  1,025,100 
  1,245,000 
 
    
    
Cash and cash equivalents, end of period
  $700,700 
 $897,100 
 
    
    
 
Supplemental disclosures:
    
    
 
    
    
Cash paid during the period for:
    
    
Income taxes
 $16,000 
 $186,000 
Interest
  600 
  1,100 
 
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, 2017. The results for the three months and six months ended December 31, 2017, are not necessarily an indication of the results for the full fiscal year ending June 30, 2018.
 
1. Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The accompanying condensed 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 January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain portions of the ASU related to financial liabilities. The Company is currently evaluating the impact of the provisions of this new standard on the consolidated financial statements.
 
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 effect of the new standard.
 
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 adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09.  The Company has performed a review of the requirements of the new guidance and has identified which of its revenue streams will be within the scope of ASC 606. The Company has applied the five-step model of the new standard to a selection of contracts within each of its revenue streams and has compared the results to its current accounting practices. Based on this analysis, the Company does not currently expect a material impact on the Company’s consolidated financial statements. The Company is expecting to utilize the modified retrospective transition method of adoption. The Company is continuing to work through the remaining steps of the adoption plan to facilitate adoption effective July 1, 2018. As part of this, the Company is assessing changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting. The Company will be revising its revenue recognition accounting policy and expanding revenue disclosures to reflect the requirements of ASC 606, which include disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgements and assets recognized from the costs to obtain or fulfill a contract.
 
In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectibility, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the effect of the standard.

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 Company is currently evaluating the effect of this update on its 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 Company is currently evaluating the impact of the new standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
 
 
5
 
 
Adopted Accounting Pronoucements
 
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes: Balance Sheet Classification of Derffered Taxes" (ASU 2015-17") which was effective for fiscal years begining December 15, 2016 (fiscal 2018 for the Company). ASU 2015-17 required that deferred tax assets and liabilities be net and classified as noncurrent on the balance sheet rather than presenting deferred taxes into current and noncurrent amounts. The Company adopted ASU 2015-07 effective for the first fiscal quarter of the year ending June 30, 2018. The Company applied the new guidance on a respective basis, resulting in a reclassification of current deferred tax assets totaling $129,000 against long term deferred tax assets in the Company's Condensed Consolidated Balance Sheet as of June 30, 2017. The adoption of this ASU had no impact on the Company’s Condensed Consolidated Statement of Operations.
 
On December 22, 2017, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act, or SAB 118,” which addresses situations where the accounting under the FASB, Accounting Standards Codification No. 740, Income Taxes, or ASC 740 is incomplete for certain income tax effects of Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act, or the 2017 Tax Act, by the time an entity issues its financial statements for the fiscal period that includes the date the 2017 Tax Act was enacted.
 
Under ASC 740, entities are required to adjust current and deferred tax assets and liabilities for the effects of changes in tax laws or rates at their date of enactment. However, pursuant to SAB 118, if an entity does not have the necessary information available, prepared, or analyzed for certain income tax effects of the 2017 Tax Act at the time an entity’s financial statements are issued, an entity shall apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the 2017 Tax Act. If the accounting for certain income tax effects of the 2017 Tax Act is incomplete, but an entity can determine a reasonable estimate for those effects, an entity can record provisional amounts during a measurement period, which ends on the earlier of when an entity has obtained, prepared, and analyzed the information necessary to complete the accounting requirements of ASC 740 and December 22, 2017.
 
The 2017 Tax Act includes significant changes to the U.S. income tax system. The 2017 Tax Act contains numerous provisions impacting the Company, the most significant of which reduces the Federal corporate statutory rate from 35% to 21%. The Company is a fiscal-year end taxpayer and is required to use a blended statutory federal tax rate, inclusive of the Federal rate change enacted on December 22, 2017 to compute its effective rate for the three and six months ended December 31, 2017. The various provisions under the 2017 Tax Act most relevant to the Company have been considered in the preparation of the financial statements as of December 31, 2017. However, as of December 31, 2017, the Company had not completed its accounting for the tax effects of the enactment of 2017 Tax act. The Company’s provision for income taxes for the three and six months ended December 31, 2017 is based on reasonable estimates of the effects of its implementation and existing deferred tax balances. The Company estimates it will record a one-time non-cash charge of approximately $30,000 for the fiscal year ended June 30, 2018 due to an estimated reduction in deferred tax assets as a result of the reduction in the Federal tax rate. We expect to complete our accounting during the one year measurement period from the enactment date.
 
2. 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”).
 
 
6
 
 
 
Segment information is reported as follows:
 
 
 
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 
 
 
 
 
 
Benchtop Laboratory
Equipment
 
 
Catalyst Research Instruments
 
 
Bioprocessing
Systems
 
 
Corporate
And Other
 
 
Consolidated
 
Three Months Ended December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $1,466,800 
 $1,192,100 
 $24,900 
 $- 
 $2,683,800 
 
    
    
    
    
    
Foreign Sales
  751,800 
  10,300 
  - 
  - 
  762,100 
 
    
    
    
    
    
    Income (Loss) From
    Operations
  62,600 
  26,600 
  (32,700)
  - 
  56,500 
 
    
    
    
    
    
Assets
  4,131,400 
  1,982,800 
  434,700 
  695,900 
 7,244,800 
 
    
    
    
    
    
    Long-Lived Asset
    Expenditures
  5,200 
  - 
  5,800 
  - 
  11,000 
 
    
    
    
    
    
    Depreciation and
    Amortization
  76,700 
  4,500 
  12,600 
  - 
  93,800 
 
Approximately 31% and 55% of net benchtop laboratory equipment sales (48% and 30% of total revenues) for the three month periods ended December 31, 2017 and 2016, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
 
Approximately 12% and 21% of total benchtop laboratory equipment sales (19% and 11% of total revenues) were derived from the Torbal Scales Division for the three months ended December 31, 2017 and 2016, respectively.
 
For the three months ended December 31, 2017 and 2016, respectively, two customers accounted in the aggregate for approximately 10% and 17% of net sales of the Benchtop Laboratory Equipment Operations (15% and 9% 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 one and three customers during the three months ended December 31, 2017 and 2016, accounted for approximately 74% and 99% of the Catalyst Research Instrument Operations’ revenues and 7% and 44% of the Company’s total revenues, respectively.
 
 
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 
 
 
 
 
Benchtop Laboratory Equipment
 
 
Catalyst Research Instruments
 
 
Bioprocessing
Systems
 
 
Corporate
And Other
 
 
Consolidated
 
Six Months Ended December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $2,923,600 
 $1,269,600 
 $49,700 
 $- 
 $4,242,900 
 
    
    
    
    
    
Foreign Sales
  1,313,000 
  15,100 
  - 
  - 
  1,328,100 
 
    
    
    
    
    
    Income (Loss) From
    Operations
  164,000 
  (115,000)
  (67,400)
  - 
  (18,400)
 
    
    
    
    
    
Assets
  4,131,400 
  1,982,800 
  434,700 
  695,900 
  7,244,800 
 
    
    
    
    
    
    Long-Lived Asset
    Expenditures
  13,600 
  - 
  5,800 
  - 
  19,400 
 
    
    
    
    
    
    Depreciation and
    Amortization
  153,400 
  11,100 
  25,000 
  - 
  189,500 
 
Approximately 36% and 52% of net benchtop laboratory equipment sales (46% and 36% of total revenues) for the six month periods ended December 31, 2017 and 2016, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
 
Approximately 16% and 23% of total benchtop laboratory equipment sales (21% and 16% of total revenues) were derived from the Torbal Scales Division for the six months ended December 31, 2017 and 2016, respectively. For the six months ended December 31, 2017 and 2016, respectively, two customers accounted in the aggregate for approximately 11% and 16% of net sales of the Benchtop Laboratory Equipment Operations (15% and 11% 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 one and six customers during the six months ended December 31, 2017 and 2016, accounted for approximately 64% and 97% of the Catalyst Research Instrument Operations’ revenues and 4% and 29% of the Company’s total revenues, respectively.
 
 
3. 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:
 
 
8
 
 
 
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 December 31, 2017 and June 30, 2017 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, 2017
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $700,700 
 $700,700 
 $- 
 $- 
Available for sale securities
  314,700 
  314,700 
  - 
  - 
 
    
    
    
    
Total
 $1,015,400 
 $1,015,400 
 $- 
 $- 
 
    
    
    
    
Liabilities:
    
    
    
    
 
    
    
    
    
Contingent consideration
 $154,300 
 $- 
 $- 
 $154,300 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Inputs Considered as
 
 
 
Fair Value at June 30, 2017
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $1,025,100 
 $1,025,100 
 $- 
 $- 
Available for sale securities
  295,500 
  295,500 
  - 
  - 
 
    
    
    
    
Total
 $1,320,600 
 $1,320,600 
 $- 
 $- 
 
    
    
    
    
Liabilities:
    
    
    
    
 
    
    
    
    
Contingent consideration
 $297,000 
 $- 
 $- 
 $297,000 
 
 
 
 
9
 
 
The following table sets forth an analysis of changes during the six months ended December 31, 2017 and 2016 in Level 3 financial liabilities of the Company:
 
 
2017
 
 
2016
 
Beginning balance
 $297,000 
 $346,300 
Payments
  (142,700)
  (117,400)
 
    
    
Ending balance
 $154,300 
 $228,900 
 
Investments in marketable securities classified as available-for-sale by security type at December 31, 2017 and June 30, 2017 consisted of the following:
 
 
Cost
 
 
Fair Value
 
 
Unrealized Holding Gain (Loss)
 
At December 31, 2017:
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
Equity securities
 $46,300 
 $66,800 
 $20,500 
Mutual funds
  267,700 
  247,900 
  (19,800)
 
    
    
    
 
 $314,000 
 $314,700 
 $700 
 
 
 
Cost
 
 
Fair Value
 
 
Unrealized Holding Gain (Loss)
 
At June 30, 2017:
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
Equity securities
 $37,000 
 $50,800 
 $13,800 
Mutual funds
  262,000 
  244,700 
  (17,300)
 
    
    
    
 
 $299,000 
 $295,500 
 $(3,500)
 
4. 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, 2017
 
 
June 30, 2017
 
 
 
 
 
 
 
 
Raw materials
 $1,502,000 
 $1,373,800 
Work-in-process
  476,300 
  166,500 
Finished goods
  414,300 
  420,900 
 
    
    
 
 $2,392,600 
 $1,961,200 
   
5. 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, 2017 and June 30, 2017, 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, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology, trademarks
5/10 yrs.
 $662,800 
 $577,300 
 $85,500 
Trade names
6 yrs.
  140,000 
  89,400 
  50,600 
Websites
5 yrs.
  210,000 
  161,000 
  49,000 
Customer relationships
9/10 yrs.
  357,000 
  288,100 
  68,900 
Sublicense agreements
10 yrs.
  294,000 
  180,100 
  113,900 
Non-compete agreements
5 yrs.
  384,000 
  321,000 
  63,000 
IPR&D
3 yrs.
  110,000 
  110,000 
  - 
Other intangible assets
5 yrs.
  196,000 
  168,600 
  27,400 
 
    
    
    
 
 $2,353,800 
 $1,895,500 
 $458,300 
 
 
10
 
 
 
 
Useful
Lives
 
Cost
 
 
Accumulated Amortization
 
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology, trademarks
5/10 yrs.
 $662,800 
 $541,100 
 $121,700 
Trade names
6 yrs.
  140,000 
  77,800 
  62,200 
Websites
5 yrs.
  210,000 
  140,000 
  70,000 
Customer relationships
9/10 yrs.
  357,000 
  281,400 
  75,600 
Sublicense agreements
10 yrs.
  294,000 
  165,400 
  128,600 
Non-compete agreements
5 yrs.
  384,000 
  294,000 
  90,000 
IPR&D
3 yrs.
  110,000 
  110,000 
  - 
Other intangible assets
5 yrs.
  194,500 
  163,600 
  30,900 
 
    
    
    
 
 $2,352,300 
 $1,773,300 
 $579,000 
 
Total amortization expense was $61,100 and $76,200 for the three months ended December 31, 2017 and 2016, respectively and $122,200 and $154,100 for the six months ended December 31, 2017 and 2016, respectively. As of December 31, 2017, estimated future amortization expense related to intangible assets is $124,700 for the remainder of the fiscal year ending June 30, 2018, $185,800 for fiscal 2019, $65,400 for fiscal 2020, $48,000 for fiscal 2021, $27,000 for fiscal 2022, and $7,400 thereafter.
 
 
 
6. Earnings (Loss) Per Common Share
 
Earnings (loss) per common share data was computed as follows:
 
 
For the Three Month Period Ended December 31, 2017
 
 
 
For the Three Month Period Ended December 31, 2016
 
 
 
 
For the Six Month Period Ended December 31, 2017
 
 
For the Six Month Period Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Net income (loss)
 $(81,000)
 $45,300 
 $(313,600)
 $(3,400)
 
    
    
    
    
   Weighted average common shares outstanding
  1,494,112 
  1,489,112 
  1,494,112 
  1,489,112 
 
    
    
    
    
Basic and diluted earnings (loss) per common share
 $(.05)
 $.03 
 $(.21)
 $(.00)
 
Approximately 82,000 and 43,500 shares of the Company's common stock issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share for the three and six month periods ended December 31, 2017 and 2016, respectively, because the effect would be anti-dilutive.
 
 
11
 
 
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 income before income tax expense of $16,400 for the three months ended December 31, 2017 compared to $64,800 for the three months ended December 31, 2016, primarily due to lack of sales of catalyst research instruments during the period and product development expenses for a new automated pill counter for the Laboratory Equipment Operations. The Company reflected a loss before income tax benefit of $290,100 for the six months ended December 31, 2017 compared to $4,700 for the six months ended December 31, 2016 mainly due to decreased catalyst research instrument sales and product development costs as previously discussed. The results reflected total non-cash amounts for depreciation and amortization of $77,000 and $154,100 for the three and six month periods ended December 31, 2017 compared to $93,800 and $189,500 for the corresponding three and six month periods in 2016.
 
Results of Operations.
 
The Three Months Ended December 31, 2017 Compared with The Three Months Ended December 31, 2016
 
Net revenues for the three months ended December 31, 2017 decreased $791,400 (29.5%) to $1,892,400 from $2,683,800 for the three months ended December 31, 2016, reflecting a decrease of $1,038,600 in net sales of catalyst research instruments due to decreased orders from Original Equipment Manufacturer OEM customers and lack of large orders, partially offset by increased sales of benchtop laboratory equipment of $219,400 and bioprocessing royalties of $27,800. The benchtop laboratory equipment sales reflected $359,900 of Torbal brand product sales for the three months ended December 31, 2017, compared to $303,500 in the three months ended December 31, 2016. As of December 31, 2017, the order backlog for catalyst research instruments was $752,500, all of which is expected to be shipped during fiscal year ending June 30, 2018, compared to $397,300 as of December 31, 2016.
 
The overall gross profit percentage for the three months ended December 31, 2017 was 40.5% compared to 29.6% for the three months ended December 31, 2016. The current year period gross margin for the Benchtop Laboratory Equipment Operations was higher due to the effect of the allocation of fixed costs on higher sales. The catalyst research instruments was negatively impacted by the lower sales.
 
General and administrative expenses for the three months ended December 31, 2017 amounted to $407,900 compared to $409,200 for the three months ended December 31, 2016.
 
Selling expenses for the three months ended December 31, 2017 decreased $9,600 (4.3%) to $214,600 from $224,200 for the three months ended December 31, 2016, due to lower sales related expenses for the Catalyst Research Instruments Operations.
 
Research and development expenses increased by $27,900 (26.6%) to $132,900 for the three months ended December 31, 2017 compared to $105,000 for the three months ended December 31, 2016, primarily due to increased new product development costs incurred by the Benchtop Laboratory Equipment Operations related to the Torbal Scales Division.
 
Total other income decreased by $2,200 (26.5%) from $8,300 for the three months ended December 31, 2016 to $6,100 for the three months ended December 31, 2017 due to lower interest on its investment securities.
 
The Company reflected an income tax expense of $97,400 for the three months ended December 31, 2017 compared to income tax expense of $19,500 for the three months ended December 31, 2016, primarily due to a revision  of the estimate of the Company's expected annual income.
 
As a result of the foregoing, the Company recorded a net loss of $81,000 for the three months ended December 31, 2017 compared to net income $45,300 for the three months ended December 31, 2016.
 
The Six Months Ended December 31, 2017 Compared with The Six Months Ended December 31, 2016
 
Net revenues for the six months ended December 31, 2017 decreased $1,069,600 (25.2%) to $3,173,300 from $4,242,900 for the six months ended December 31, 2016, reflecting a decrease of $1,087,300 in net sales of catalyst research instruments due to decreased orders from Original Equipment Manufacturer OEM customers and lack of large orders, and a decrease of $38,000 in sales of benchtop laboratory equipment derived from the Torbal Division, partially offset by a $55,700 increase in bioprocessing royalties. The benchtop laboratory equipment sales reflected $664,200 of Torbal brand product sales for the six months ended December 31, 2017, compared to $685,500 in the six months ended December 31, 2016.
 
The overall gross profit percentage for the six months ended December 31, 2017 was 38.4% compared to 34.5% for the six months ended December 31, 2016  as a result of the Benchtop Laboratory Equipment Operations (which is sold at higher margins) consisting of a higher percentage of total sales for the year.
 
General and administrative expenses for the six months ended December 31, 2017 increased slightly by $14,700 (1.8%) to $836,300 compared to $821,600 for the six months ended December 31, 2016.
 
Selling expenses for the six months ended December 31, 2017 decreased $25,300 (5.7%) to $415,600 from $440,900 for the six months ended December 31, 2016, due to lower sales related expenses for the Catalyst Research Instruments Operations.
 
12
 
 
 
Research and development expenses increased by $41,600 (18.9%) to $262,000 for the six months ended December 31, 2017 compared to $220,400 for the six months ended December 31, 2016, primarily due to increased new product development costs incurred by the Benchtop Laboratory Equipment Operations related to the Torbal Scales Division.
 
Total other income decreased by $7,300 (53.3%) from $13,700 for the six months ended December 31, 2016 to $6,400 for the six months ended December 31, 2017 due to lower interest on its investment securities and miscellaneous income items.
 
The Company reflected an income tax expense of $23,500 for the six months ended December 31, 2017 compared to an income tax benefit of $1,300 for the six months ended December 31, 2016, primarily due to the statutory federal tax rate change resulting from the recently enacted 2017 Tax Act, including a write off of deferred tax assets of $15,500.
 
As a result of the foregoing, the Company recorded a net loss of $313,600 for the six months ended December 31, 2017 compared to $3,400 for the six months ended December 31, 2016.
 
Liquidity and Capital Resources. Cash and cash equivalents decreased by $324,400 to $700,700 as of December 31, 2017 from $1,025,100 as of June 30, 2017 primarily due to decreased cash generated by the Catalyst Research Instrument Operations and increased inventories.
 
Net cash used in operating activities was $133,700 for the six months ended December 31, 2017 compared to $450,300 used during the six months ended December 31, 2016. The current period reflected higher accounts payable and customer advances, partially offset by increased prepaid expenses and higher inventories. Net cash used in investing activities was $84,600 for the six months ended December 31, 2017 compared to $27,000 used during the six months ended December 31, 2016 principally due to new capital equipment purchased during the current year period by the Benchtop Laboratory Equipment Operations. The Company used $106,100 in financing activities in the six months ended December 31, 2017 compared to cash provided of $129,400 in the six months ended December 31, 2016 mainly due to decreased proceeds under the line of credit in the current year.
 
The Company's working capital decreased by $191,500 to $3,782,400 as of December 31, 2017 compared to $3,973,900, as of June 30, 2017 due to increased capital expenditures and a net loss incurred during the current period.
 
The Company has a Demand Line of Credit through June 2018 with First National Bank of Pennsylvania which provides for borrowings of up to $300,000 for regular working capital needs, bearing interest at prime, currently 4.5%. Advances on the line, are secured by a pledge of the Company’s assets including inventory, accounts, chattel paper, equipment and general intangibles of the Company. As of December 31, 2017 $40,000 which was borrowed by our subsidiary, Altamira Instruments, was outstanding under such line. In addition, the Company utilized $245,400 of its borrowing availability under the line as collateral for a warranty standby letter of credit required during a two year warranty period as a condition of sale for a large order of catalyst research instruments shipped in a prior fiscal year and installed in the first quarter of fiscal 2018, leaving an available borrowing balance of $14,600 under the line of credit.
 
Management believes that the Company will be able to meet its cash flow needs during the 12 months ending June 30, 2018 from its available financial resources including its line of credit, its cash and investment securities, and operations.
 
 
13
 
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, based on an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive and Chief Financial Officer of the Company has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC's rules and forms. The Company also concluded that information required to be disclosed in such reports is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Control Over Financial Reporting. There was no change in the Company's internal controls over financial reporting that occurred during the most recently completed fiscal quarter that materially affected or is reasonably likely to materially affect the Company's internal controls over financial reporting.
 
 
PART II – OTHER INFORMATION
 
Item 6. Exhibits and Reports on Form 8-K
 
 
Reports on Form 8-K: None
 
14
 
 
 
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: February 14, 2018
 
SCIENTIFIC INDUSTRIES, INC.
(Registrant)
 
/s/ Helena R. Santos
 
 
Helena R. Santos
President, Chief Executive Officer, Treasurer
Chief Financial and Principal Accounting Officer
 
 
 
 
 
 
 
 
 
15