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 SEPTEMBER 30, 2006
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 issuer as specified in its charter)
Delaware 04-2217279
(State of incorporation) (I.R.S. 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 October 27, 2006: 1,000,352 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
September 30, 2006
Current Assets:
Cash and cash equivalents $ 271,600
Investment securities 1,180,200
Trade accounts receivable, less allowance for
doubtful accounts of $10,600 466,300
Inventories 960,000
Prepaid expenses and other current assets 38,700
Deferred taxes 27,800
__________
Total current assets 2,944,600
Property and equipment at cost, less accumulated
depreciation of $504,900 112,300
Intangible assets, less accumulated amortization
of $77,200 41,400
Other 38,600
__________
Total assets $3,136,900
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 87,200
Accrued expenses and taxes 273,500
Dividends payable 70,000
__________
Total current liabilities 430,700
__________
Deferred taxes 5,500
__________
Shareholders' equity:
Common stock, $.05 par value; authorized 7,000,000 shares;
1,020,154 issued and outstanding 51,000
Additional paid-in capital 1,010,500
Accumulated other comprehensive loss, unrealized
holding loss on investment securities ( 5,300)
Retained earnings 1,696,900
__________
2,753,100
Less common stock held in treasury, at cost,
19,802 shares 52,400
__________
Total shareholders' equity 2,700,700
__________
Total liabilities and shareholders' equity $3,136,900
==========
See notes to unaudited condensed consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Periods Ended
September 30, 2006 September 30, 2005
Net sales $ 802,900 $ 890,000
Cost of goods sold 388,500 433,300
__________ ___________
Gross profit 414,400 456,700
__________ ___________
Operating Expenses:
General and administrative 164,500 174,000
Selling 70,300 63,500
Research and development 79,300 91,800
__________ ___________
314,100 329,300
__________ ___________
Income from operations 100,300 127,400
Interest and other income, net 14,300 7,500
__________ ___________
Income before income taxes 114,600 134,900
Income taxes, all current 37,000 38,000
__________ ___________
Net income $ 77,600 $ 96,900
========== ===========
Basic earnings per common
share $ .08 $ .10
Diluted earnings per common
share $ .07 $ .09
Cash dividends declared per common
share $ .07 $ .09
See notes to unaudited condensed consolidated financial statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended
September 30, 2006 September 30, 2005
Operating activities:
Net income $ 77,600 $ 96,900
________ _________
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Loss on sale of investments - 2,500
Depreciation and amortization 13,000 16,400
Change in assets and liabilities:
Accounts receivable ( 152,400) ( 101,900)
Inventories ( 29,700) ( 52,300)
Prepaid expenses and other
current assets 65,200 8,000
Other assets 100 ( 1,100)
Accounts payable 19,100 11,100
Accrued expenses and taxes 61,200 1,700
Deferred compensation - 1,100
__________ __________
Total adjustments ( 23,500) ( 114,500)
__________ __________
Net cash provided by (used in)
operating activities 54,100 ( 17,600)
__________ __________
Investing activities:
Purchase of investment securities,
available for sale ( 6,000) ( 154,300)
Redemptions of investment securities,
available for sale - 123,900
Redemptions of investment securities,
held to maturity - 15,000
Capital expenditures - ( 3,400)
Purchase of intangible assets ( 4,200) ( 17,800)
__________ __________
Net cash used in investing
activities ( 10,200) ( 36,600)
__________ __________
Net (decrease) increase
in cash and cash equivalents 43,900 ( 54,200)
Cash and cash equivalents,
beginning of year 227,700 183,900
__________ __________
Cash and cash equivalents, end of period $ 271,600 $ 129,700
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Income Taxes $ 36,000 $ 58,300
See notes to unaudited condensed consolidated financial statements
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, 2006. The results
for the three months ended September 30, 2006,
are not necessarily an indication of the results
that may be expected for the full fiscal year
ending June 30, 2007.
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 which is 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 is has only one
reportable segment. Approximately 73% and 67% of net sales
for the three month periods ended September 30, 2006 and 2005,
respectively, were derived from the Company's main product,
the Vortex-Genie 2(R) mixer, excluding accessories.
The Company's export sales (principally Europe and Asia) were
approximately $339,900 and $349,500 (42% and 39% of net sales)
for the three month periods ended September 30, 2006 and 2005,
respectively.
Two of the Company's customers accounted in the aggregate for
34% of net sales for the three month period ended September
30, 2006. Three of the Company's customers accounted in the
aggregate for 52% of net sales for the three month period
ended September 30, 2005.
During the fourth quarter of fiscal 2006, the Company's
principal customer and distributor advised the Company that it
would no longer market and buy the Company's products. Sales
to this customer accounted for approximately 28% of net sales
for the three months ended September 30, 2005. There were no
sales to this customer in the three months ended September 30,
2006.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories:
Inventories for interim financial statement purposes are based
on perpetual inventory records. Components of inventory are as
follows:
September 30, 2006
Raw Materials $ 866,300
Work in process 32,400
Finished Goods 61,300
____________
$ 960,000
============
4. Earnings per common share:
Basic earnings per common share is computed by dividing net
income by the weighted-average number of shares outstanding.
Diluted earnings per common share includes the dilutive effect
of stock options and a warrant, which was exercised during the
three months ended September 30, 2005.
Earnings per common share was computed as follows:
For the Three Month Periods Ended
September 30, 2006 September 30, 2005
Net income $ 77,600 $ 96,900
========== ==========
Weighted average common
shares outstanding 1,000,352 980,310
Effect of dilutive
securities 58,968 80,515
__________ __________
Weighted average dilutive
common shares outstanding 1,059,320 1,060,825
========== ==========
Basic earnings per common
share $ .08 $ .10
======= =======
Diluted earnings per common
share $ .07 $ .09
======= =======
All options outstanding for the three months ended September 30,
2006 and the options and warrant outstanding during the three
months ended September 30, 2005 were included in the foregoing
computations on a weighted average basis.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Comprehensive Income:
There was no significant difference between net income and
comprehensive income for the three month periods ended
September 30, 2006 and 2005.
6. Stock-Based Compensation Plans
The Company maintains an Incentive Stock Option Plan which
through the fiscal year ended June 30, 2006 it accounted for
under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Under this method, no stock-based
compensation costs were reflected in net income, as all
options granted under those plans had an exercise price equal
to the fair 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 in the prior period:
For the Three Month Period Ended
September 30, 2005
Net income:
As reported $ 96,900
Pro Forma 96,400
Earnings per common and
common equivalent share:
Basic - as reported $ .10
Basic - pro forma $ .10
Diluted - as reported $ .09
Diluted - pro forma $ .09
Any stock-based compensation transaction subsequent to June 30,
2006 is to be accounted for using Statement of Financial
Accounting Standards No. 123(R)). This statement, issued on
December 16, 2004, by the Financial Accounting Standards Board,
requires compensation costs related to stock-based payment
transactions to be recognized commencing with our fiscal year
ending June 30, 2007. With limited exceptions, the amount
of compensation cost is 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 are 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. The Company did not incur any
stock-based compensation costs for the three months ended
September 30, 2006.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 our financial
statements and the related notes included elsewhere in this report.
Liquidity and Capital Resources
Net cash provided by operating activities increased by $71,700 to
$54,100 for the three month period of the current fiscal year as
compared to ($17,600) used in operating activities in the
comparative period of the prior fiscal year. The principal
factors accounting for the difference were lower prepaid expenses
and other assets and higher accrued expenses and taxes at
September 30, 2006 compared to year end, partially offset by
higher accounts receivable. Cash used in investing activities was
($10,200) for the three months ended September 30, 2006 as
compared to ($36,600) used in the three months ended September 30,
2005 reflecting lower net purchases of investment securities and
lower capital expenditures during the current year three month
period. As a result of the foregoing, cash and cash equivalents
increased by $43,900 to $271,600 as of September 30, 2006 from a
balance of $227,700 as of June 30, 2006 as compared to a balance
of $129,700 as of September 30, 2005, reflecting a $54,200
decrease from $183,900 as of June 30, 2005.
On September 29, 2006, the Board of Directors of the Company
declared a cash dividend of $.07 per share of Common Stock payable
on January 12, 2007 to holders of record as of the close of
business on October 30, 2006.
The Company's working capital of $2,513,900 as of September 30,
2006 was similar to the working capital of $2,489,100 at June 30,
2006. The Company has available for its working capital needs, a
secured bank line of credit of $200,000 with North Fork Bank with
interest at prime, all of which was available as of September 30,
2006. 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 next 12 months from its available financial
resources which include its cash and investment securities.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
If a proposed acquisition, the subject of an outstanding agreement
in principle, is consummated, the acquisition consideration will
be 125,000 shares of the Company's Common Stock and payment by the
Company in cash of $400,000 plus four future annual contingent
payments based on net sales of the acquired entity.
Financial Overview
The income before income taxes for the quarter September 30,
2006,(the "September 30, 2006 Quarter") was $114,600, a 15%
decrease from $134,900 for the three months ended September 30,
2005 (the "September 30, 2005 Quarter") principally the result of
a $87,100 reduction in net sales ($802,900 compared to $890,000).
During the fourth quarter of fiscal 2006, the Company was informed
by its then principal customer and distributor for more than 30
years of its decision to discontinue marketing the Company's
products, which the Company believes was the result of a change in
its marketing and selling focus to its private label products. As
a result, there were no sales to this customer during the
September 30, 2006 Quarter as compared to approximately $253,000
of sales to this customer during the September 30, 2005 Quarter.
To diminish the impact, the Company has pursued other selling
outlets including appointing new distributors, increasing sales to
distributors through cooperative promotional efforts and other
agreements, increased advertising activity, and expanded direct
selling efforts.
Results of Operations
The Three Months Ended September 30, 2006 Compared with the Three
Months Ended September 30, 2005
The Company's net sales for the three months ended September 30,
2006 (the " September 30, 2006 Quarter") decreased $87,100 (9.8%)
to $802,900 from $890,000 for the three months ended September 30,
2005 (the "September 30, 2005 Quarter"), principally the result of
a $253,000 decrease in sales to our previous major customer,
partially offset by increased sales to other distributors and
higher direct sales. The gross profit percentage for the
September 30, 2006 Quarter was 51.6% compared to 51.3% for the
September 30, 2005 Quarter, mainly the result of higher direct
sales and lower dealer discounts.
General and administrative expenses for the September 30, 2006
Quarter were $164,500, a decrease of $9,500 (5.5%) from $174,000
for the September 30, 2005 Quarter due to lower legal expenses.
Selling expenses of $70,300 for the September 30, 2006 Quarter
were $6,800 (10.7%) higher than $63,500 for the September 30, 2005
Quarter primarily due to higher advertising expenses.
Lower contract engineering costs was the principal reason for the
$12,500 (13.6%) decrease in research and development expenses for
the September 30, 2006 Quarter to $79,300 from $91,800 for the
September 30, 2005 Quarter.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
Interest and other income increased $6,800 to $14,300 for the
September 30, 2006 Quarter compared with $7,500 for the September
30, 2005 Quarter mainly due to higher interest rates and balances
of investment securities.
As a result of the foregoing, income before income taxes was
$114,600 for the September 30, 2006 Quarter, reflecting a $20,300
(15.0%) decrease from $134,900 for the September 30, 2005 Quarter.
Income taxes amounted to $37,000 (32.3% effective rate) for the
September 30, 2006 Quarter as compared to $38,000 (28.2% effective
rate) for the comparable period last year. The higher tax rate
was principally due to no research and development credits
available during the September 30, 2006 Quarter. Net income,
accordingly, for the September 30, 2006 Quarter was $77,600,
a 19.9% decrease from $96,900 for the September 30, 2005 Quarter.
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.
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
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:
Registrant filed a report on Form 8-K on August
7, 2006 reporting under Item 8.01, Other Events.
SIGNATURE
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Scientific Industries, Inc.
___________________________
Registrant
Date November 14, 2006
/s/Helena R. Santos
___________________
Helena R. Santos
President, Chief Executive Officer
and Treasurer
Chief Financial and Principal
Accounting Officer