UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
( X )QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended: DECEMBER 31, 2005
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from________to_________
Commission File Number: 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Exact name of small business as specified in its charter)
Delaware 04-2217279
(State of incorporation) (IRS Employer Identification No.)
70 ORVILLE DRIVE, BOHEMIA, NEW YORK 11716
(Address of principal executive offices)
(631)567-4700
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 ( X ) No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of February 3, 2006: 991,352 shares
outstanding of the Company's Common Stock, par value, $ .05.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
December 31, 2005
_________________
Current Assets:
Cash and cash equivalents $ 171,300
Investment securities 1,195,000
Trade accounts receivable, less allowance for
doubtful accounts of $11,600 492,400
Inventories 803,000
Prepaid expenses and other current assets 48,900
Deferred taxes 40,200
---------
Total current assets 2,750,800
Property and equipment at cost, less accumulated
depreciation of $469,700 131,700
Intangible assets, less accumulated amortization
of $49,700 20,300
Other 41,600
----------
Total assets $2,944,400
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 104,800
Accrued expenses and taxes 187,100
Dividends payable 89,000
----------
Total current liabilities 380,900
----------
Deferred compensation 21,000
----------
Deferred taxes 3,200
----------
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,011,154 issued and outstanding 50,600
Additional paid-in capital 993,500
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 6,600)
Retained earnings 1,554,200
---------
2,591,700
Less common stock held in treasury, at cost,
19,802 shares 52,400
---------
2,539,300
---------
$2,944,400
==========
See notes to unaudited condensed consolidated financial statements
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2005 2004 2005 2004
-------- -------- ---------- ----------
Net sales $928,100 $845,100 $1,818,100 $1,696,900
Cost of goods sold 463,400 436,500 896,700 891,000
-------- -------- ---------- ----------
Gross profit 464,700 408,600 921,400 805,900
-------- -------- ---------- ----------
Operating Expenses:
General & administrative 212,700 167,900 386,700 345,400
Selling 66,900 81,300 130,400 149,200
Research & development 78,400 88,500 170,200 170,400
------- ------- ------- -------
358,000 337,700 687,300 665,000
Income from operations 106,700 70,900 234,100 140,900
Interest & other
income, net 10,900 7,900 18,400 14,500
------- ------- ------- -------
Income before income taxes 117,600 78,800 252,500 155,400
------- ------- ------- -------
Income tax expense (benefit):
Current 18,900 ( 4,000) 56,900 14,000
Deferred 9,000 22,000 9,000 22,000
------- ------- ------- -------
27,900 18,000 65,900 36,000
-------- -------- ---------- ----------
Net income $ 89,700 $ 60,800 $ 186,600 $ 119,400
======== ======== ========== ==========
Basic earnings per common
share $ .09 $ .06 $ .19 $ .12
Diluted earnings per common
share $ .08 $ .06 $ .18 $ .11
Cash dividends declared
per common share $ - $ - $ .09 $ .07
See notes to unaudited condensed consolidated financial statements
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended
December 31, 2005 December 31, 2004
----------------- -----------------
Operating activities:
Net income $ 186,600 $ 119,400
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss on sale of investments 2,500 -
Depreciation and amortization 47,000 32,500
Deferred income taxes 9,000 22,000
Income tax benefit of stock options
exercised 900 500
Changes in assets and liabilities:
Accounts receivable ( 41,800) ( 81,900)
Inventories ( 2,600) ( 27,700)
Prepaid expenses and other
current assets 8,900 ( 6,200)
Other assets ( 1,600) 13,100
Accounts payable 18,400 43,800
Accrued expenses and taxes ( 46,100) ( 18,600)
Deferred compensation 1,600 3,200
--------- ---------
Total adjustments ( 3,800) ( 19,300)
--------- ---------
Net cash provided by
operating activities 182,800 100,100
--------- ---------
Investing activities:
Purchase of investment securities,
available-for-sale (334,300) (111,700)
Purchase investment securities,
held to maturity - ( 83,100)
Redemptions of investment securities,
available-for-sale 123,900 -
Redemptions of investment securities,
held to maturity 40,000 55,500
Capital expenditures ( 22,400) ( 40,900)
Purchase of intangible assets ( 4,600) ( 7,600)
--------- ---------
Net cash used in
investing activities (197,400) (187,800)
--------- ---------
Financing activities,
exercise of stock options 2,000 2,000
--------- ---------
Net decrease in cash
and cash equivalents ( 12,600) ( 85,700)
Cash and cash equivalents, beginning
of year 183,900 241,400
--------- ---------
Cash and cash equivalents, end
of period $ 171,300 $ 155,700
========= =========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 99,000 $ 51,600
See notes to unaudited condensed consolidated financial statements
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
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-QSB. 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 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-KSB, for the
fiscal year ended June 30, 2005. The results for
the three and six months ended December 31, 2005,
are not necessarily an indication of the results
of the full fiscal year ending June 30, 2006.
1. Significant accounting policies:
Principles of consolidation:
The accompanying condensed consolidated financial statements
include the accounts of the Company and Scientific Packaging
Industries, Inc., a New York corporation and an inactive wholly
owned subsidiary of the Company. All intercompany items and
transactions have been eliminated in consolidation.
2. Line of Business and Concentrations:
The Company is engaged in manufacturing and marketing of
equipment for research in university, hospital and industrial
laboratories. The Company believes that it has only one
reportable segment. Approximately 75% and 72% of net sales for
the three month periods ended December 31, 2005 and 2004,
respectively, were derived from the Company's main product, the
Vortex-Genie(R) 2 mixer, excluding accessories, and approximately
71% and 73% for the six month periods ended December 31, 2005
and 2004, respectively.
The Company's export sales (principally Europe and Asia) were
approximately $434,000 and $435,000 for the three month periods
ended December 31, 2005 and 2004, respectively, and $783,000
and $748,000 for the six month periods ended December 31, 2005
and 2004, respectively.
Three of the Company's customers accounted in the aggregate for
46% and 49% of net sales for the three month periods ended
December 31, 2005 and 2004, respectively, and 49% of total net
sales for each of the six month periods ended December 31, 2005
and 2004.
4
3. Inventories:
Inventories for interim financial statement purposes are based
on perpetual inventory records at the end of the applicable
periods. Components of inventory are as follows:
December 31,
2005
------------
Raw Materials $ 634,200
Work in process 44,800
Finished Goods 124,000
----------
$ 803,000
==========
4. Earnings per common share:
Basic earnings per common share are computed by dividing net
income by the weighted-average number of shares outstanding.
Diluted earnings per common share include the dilutive effect
of stock options and a warrant, which was exercised at the end
of September, 2005.
Earnings per common share was computed as follows:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 89,700 $ 60,800 $186,600 $119,400
======== ======== ======== ========
Weighted average common
shares outstanding 991,098 976,736 985,704 976,139
Effect of dilutive
securities 76,072 76,536 78,294 72,837
--------- --------- --------- ---------
Weighted average dilutive
common shares outstanding 1,067,170 1,053,272 1,063,998 1,048,976
========= ========= ========= =========
Basic earnings per
common share $ .09 $ .06 $ .19 $ .12
======= ======= ======= =======
Diluted earnings per
common share $ .08 $ .06 $ .18 $ .11
======= ======= ======= =======
All options outstanding as of December 31, 2005 and 2004 were
included in the foregoing computations. The warrant was
included in the calculation for the periods prior to its
exercise in September 2005.
5
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three and six month periods ended
December 31, 2005 and 2004.
6. Stock-Based Compensation Plans:
The Company maintains an Incentive Stock Option Plan which it
accounts for under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based
compensation costs are reflected in net income, as all options
granted under those plans had an exercise price equal to the
market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based
employee compensation:
For the Three Month For the Six Month
Periods Ended Periods Ended
December 31, December 31,
2005 2004 2005 2004
-------- -------- -------- ---------
Net income:
As reported $ 89,700 $ 60,800 $186,600 $119,400
Pro Forma 89,300 60,300 185,700 118,400
Earnings per common and
common equivalent share:
Basic - as reported $ .09 $ .06 $ .19 $ .12
Basic - pro forma $ .09 $ .06 $ .19 $ .12
Diluted - as reported $ .08 $ .06 $ .18 $ .11
Diluted - pro forma $ .08 $ .06 $ .17 $ .11
On December 16, 2004, the Financial Accounting Standards Board
issued Statement No. 123 (revised 2004) that will require
compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards will be measured each
reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award.
Statement 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes APB Opinion No. 25,
accounting for Stock Issued to Employees. SFAS 123(R) is effective
at the beginning of the next fiscal year that begins after December
15, 2005. The Company is currently assessing the impact of
adopting SFAS 123(R).
6
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Certain statements contained in this report are not based on
historical facts, but are forward-looking statements that are based
upon various assumptions about future conditions. Actual events in
the future could differ materially from those described in the
forward-looking information. Numerous unknown factors and future
events could cause such differences, including but not limited to,
product demand, market acceptance, impact of competition, the
ability to reach final agreements, adverse economic conditions, and
other factors affecting the Company's business that are beyond the
Company's control. Consequently, no forward-looking statement can
be guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $12,600 to $171,300 as of
December 31, 2005 from $183,900 as of June 30, 2005.
Net cash provided by operating activities was $182,800 for the six
month period of the current fiscal year as compared to $100,100 in
the comparative period for 2004. The principal factors accounting
for the difference was higher income and less of an increase in
accounts receivable in 2005. Cash used in investing activities was
$197,400 for the current period as compared to $187,800 for the six
months ended December 31, 2004 principally due to increased
purchases of investment securities during the current year.
On September 27, 2005, the Board of Directors of the Company
declared a cash dividend of $.09 per share of Common Stock which
was paid on January 13, 2006 to holders of record as of the close
of business on October 27, 2005.
The Company's working capital as of December 31, 2005 increased
$121,100 to $2,369,900 from $2,248,800 at June 30, 2005. The
increase was mainly due to income from operations, partially offset
by the accrual for the declared dividend. The Company has
available a secured bank line of credit of $200,000 with North Fork
Bank with interest at prime, all of which was available as of
December 31, 2005. The Company has never borrowed under this line
of credit. Management believes that the Company will be able to
meet its cash flow needs during the 12 months ended December 31,
2005 from funds generated by operations and its available financial
resources which include its cash and investment securities.
7
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Results of Operations
Financial Overview
Due mainly to higher sales and gross profit margins, the Company
achieved net income of $89,700 and $186,600 for the three and six
month periods ended December 31, 2005 - increases of $28,900 (48%)
and $67,200 (56%) over the comparable periods last year.
The Three Months Ended December 31, 2005 Compared with the Three
Months Ended December 31, 2004.
The Company's net sales for the three months ended December 31,
2005 increased by $83,000 (9.8%) to $928,100 compared with $845,100
for the three months ended December 31, 2004 primarily as a result
of higher domestic sales of the Vortex-Genie(R) 2 mixer and a
reduction in the prior year period's sales due to production
interruptions caused by a supplier.
The gross profit percentage for the three months ended December 31,
2005 increased to 50.1% compared to 48.3% for the three months
ended December 31, 2004, mainly as a result of lower production
costs and increased selling prices of certain products.
General and administrative expenses for the three months ended
December 31, 2005 were higher by $44,800 (26.7%) for the current
year's three month period - $212,700 compared to $167,900 for the
three months ended December 31, 2004 - due primarily to higher
costs incurred in pursuit of business opportunities.
Selling expenses for the three months ended December 31, 2005
decreased by $14,400 (17.7%) to $66,900 as compared with $81,300
for the three months ended December 31, 2004 due to lower costs
related to trade shows.
Research and development expenses for the three months ended
December 31, 2005 decreased by $10,100 (11.4%) to $78,400 as
compared to $88,500 for the three months ended December 31, 2004 as
a result of the substantial expenditures incurred in the prior
period on the Multi-MicroPlate Genie(R) mixer.
As a result of the foregoing, the Company's income before income
taxes increased by $38,800 (49.2%) to $117,600 for the three months
ended December 31, 2005 compared to $78,800 for the three months
ended December 31, 2004.
Income taxes were $27,900 for the three months ended December 31,
2005 compared to $18,000 for the comparable period last year.
The Company's net income increased by $28,900 (47.5%) to $89,700
for the three months ended December 31, 2005 compared to $60,800
for the three months ended December 31, 2004.
8
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
The Six Months Ended December 31, 2005 Compared with the Six Months
Ended December 31, 2004.
The increase of $121,200 (7.1%) in the Company's net sales for the six
months ended December 31, 2005 to $1,818,100 as compared with
$1,696,900 for the six months ended December 31, 2004 was
principally due to increased sales of new products in the first
quarter and higher domestic sales of the Vortex-Genie 2 mixer in
the second quarter of this year and the reduction in the prior
year's second quarter sales due to production interruptions caused
by a supplier. The gross profit percentage for the six months
ended December 31, 2005 improved to 50.7% compared to 47.5% for the
prior year's period, mainly as a result of lower production costs
and increased selling prices of certain products.
General and administrative expenses for the six months ended
December 31, 2005 increased by $41,300 (12.0%) to $386,700 as
compared with $345,400 for the prior year's six-month period,
mainly as a result of higher costs incurred in pursuit of business
opportunities.
Selling expenses decreased by $18,800 (12.6%) from $149,200 to
$130,400 between the comparative six month periods, due mostly to
lower costs related to trade shows.
As a result of the foregoing, the Company's income before income
taxes increased by $97,100(62.5%) to $252,500 for the six months
ended December 31, 2005 compared to $155,400 for the six months
ended December 31, 2004 and the income tax provision for the six
months ended December 31, 2005 was $65,900 compared to $36,000 for
the prior year's period.
Net income for the current year's six month period increased by
$67,200 (56.3%) to $186,600 compared to $119,400 for the same
period last year.
ITEM 3. 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 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.
There was no change in the Company's internal controls over
financial reporting that occurred during the most recent fiscal
quarter that materially affected or is reasonably likely to
materially affect the Company's internal controls over financial
reporting.
9
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2005 Annual Meeting of Stockholders held on
December 2, 2005, stockholders (i) re-elected as Class C Directors
to serve until the Annual Meeting of Stockholders with respect to
the fiscal year ending June 30, 2008 and the due election and
qualification of their successors: Mr. Joseph G. Cremonese by
594,365 shares "For" and 140,877 shares "Withheld" and Mr. Roger B.
Knowles by 593,821 shares "For", and 141,421 shares "Withheld"; and
(ii) ratified the appointment of Nussbaum Yates & Wolpow P.C. as
the independent auditors with respect to the financial statements
of the Company for the year ending June 30, 2006 by a vote of
733,095 shares "For", 0 shares "Against", and 147 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number: Description
31.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
10
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Scientific Industries, Inc.
Registrant
/s/Helena R. Santos
___________________
Helena R. Santos
President, Chief Executive Officer
and Treasurer
Principal Executive, Financial and
Accounting Officer
Date: February 14, 2006
11