10-Q
SCIENTIFIC INDUSTRIES INC (SCND)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT UNDER<br>SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF<br>1934 |
|---|
For the quarterly period ended December 31, 2019
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<br>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<br>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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes ☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
|---|---|
| Non-accelerated filer ☐(Do<br>not check if a smaller reporting company) | Smaller reporting company ☒ |
| Emerging Growth ☐ | |
| Indicate<br>by check mark whether the registrant is a shell company<br>(as defined in Rule 12b-2 of the<br>Act) | Yes☐<br>No ☒ |
| --- | --- |
The number of shares outstanding of the registrant’s common stock, par value $.05 per share (“Common Stock”) as of February 7, 2020 is 1,502,773 shares.
SCIENTIFIC INDUSTRIES, INC.
Table of Contents
| PART I - Financial Information | ||
|---|---|---|
| Item 1. | CONDENSED<br>CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | |
| Condensed<br>Consolidated Balance Sheets | 2 | |
| Condensed<br>Consolidated Statements of Operations | 3 | |
| Condensed<br>Consolidated Statements of Comprehensive Income (Loss) | 4 | |
| Condensed<br>Consolidated Statements of Changes in Shareholders’<br>Equity | 5 | |
| Condensed<br>Consolidated Statements of Cash Flows | 6 | |
| Notes<br>to Unaudited Condensed Consolidated Financial<br>Statements | 7 | |
| Item 2. | MANAGEMENT’S<br>DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF<br>OPERATIONS | 16 |
| Item<br>4. | CONTROLS<br>AND PROCEDURES | 18 |
| PART II - Other Information | ||
| Item 5. | OTHER<br>INFORMATION | |
| Item<br>6. | EXHIBITS<br>AND REPORTS ON FORM 8-K | 18 |
| SIGNATURE | 19 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
| December 31, 2019 | June 30, 2019 | |
|---|---|---|
| Current<br>assets: | (Unaudited) | |
| Cash and cash<br>equivalents | $1,044,000 | $1,602,500 |
| Investment<br>securities | 345,200 | 330,900 |
| Trade accounts<br>receivable, less allowance for doubtful accounts of $11,600<br>at<br><br><br>December 31, 2019<br>and $15,000 at June 30, 2019 | 1,812,500 | 1,974,200 |
| Inventories | 3,003,800 | 2,592,300 |
| Prepaid expenses<br>and other current assets | 62,500 | 91,200 |
| Total current<br>assets | 6,268,000 | 6,591,100 |
| Property and<br>equipment, net | 309,400 | 318,800 |
| Intangible assets,<br>net | 143,200 | 175,000 |
| Goodwill | 705,300 | 705,300 |
| Other<br>assets | 56,000 | 54,700 |
| Deferred<br>taxes | 451,200 | 431,100 |
| Operating lease<br>right-of-use assets | 930,700 | - |
| Total<br>assets | $8,863,800 | $8,276,000 |
LIABILITIES AND SHAREHOLDERS’ EQUITY
| Current<br>liabilities: | ||
|---|---|---|
| Accounts<br>payable | $474,700 | $569,000 |
| Accrued expenses<br>and taxes | 338,500 | 608,300 |
| Contract<br>liabilities | 104,000 | - |
| Contingent<br>consideration, current portion | 268,000 | 268,000 |
| Bank<br>overdraft | - | 140,000 |
| Current portion of<br>operating lease liabilities | 142,700 | - |
| Total current<br>liabilities | 1,327,900 | 1,585,300 |
| Contingent<br>consideration payable, less current portion | 350,000 | 350,000 |
| Operating lease<br>liabilities, less current portion | 855,400 | - |
| Total<br>liabilities | 2,533,300 | 1,935,300 |
| Shareholders’<br>equity: | ||
| Common stock, $.05<br>par value; authorized 7,000,000 shares; issued 1,522,575 and<br>1,513,914 shares, and 1,502,773 and 1,494,112 shares outstanding at<br>December 31, 2019 and June 30, 2019 | 76,100 | 75,700 |
| Additional paid-in capital | 2,634,700 | 2,592,700 |
| Retained earnings | 3,672,100 | 3,724,700 |
| 6,382,900 | 6,393,100 | |
| Less common stock<br>held in treasury at cost, 19,802 shares | 52,400 | 52,400 |
| Total<br>shareholders’ equity | 6,330,500 | 6,340,700 |
| Total liabilities<br>and shareholders’ equity | $8,863,800 | $8,276,000 |
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For<br>the Three<br><br><br>Month<br><br><br>Period<br>Ended<br><br><br>December<br><br><br>31, | For<br>the Three<br><br><br>Month<br><br><br>Period<br>Ended<br><br><br>December<br><br><br>31, | For<br>the Six<br><br><br>Month<br><br><br>Period<br>Ended<br><br><br>December<br><br><br>31, | For<br>the Six<br><br><br>Month<br><br><br>Period<br>Ended<br><br><br>December<br><br><br>31, | |
|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |
| Revenues | $2,272,300 | $2,163,200 | $4,276,500 | $4,201,800 |
| Cost of<br>revenues | 1,180,800 | 1,187,500 | 2,204,600 | 2,280,400 |
| Gross<br>profit | 1,091,500 | 975,700 | 2,071,900 | 1,921,400 |
| Operating<br>expenses: | ||||
| General and<br>administrative | 510,100 | 462,100 | 1,020,300 | 878,600 |
| Selling | 330,500 | 248,200 | 639,600 | 484,300 |
| Research and<br>development | 260,000 | 109,400 | 496,600 | 226,700 |
| Total operating<br>expenses | 1,100,600 | 819,700 | 2,156,500 | 1,589,600 |
| Income (loss) from<br>operations | (9,100) | 156,000 | (84,600) | 331,800 |
| Other income<br>(expense): | ||||
| Interest income | 9,200 | 2,500 | 9,700 | 2,800 |
| Other income (expense), net | 2,900 | (9,300) | 2,200 | (7,400) |
| Interest expense | - | (400) | (800) | |
| Total other income (expense), net | 12,100 | (7,200) | 11,900 | (5,400) |
| Income (loss)<br>before income tax expense (benefit) | 3,000 | 148,800 | (72,700) | 326,400 |
| Income tax expense<br>(benefit): | ||||
| Current | - | 24,400 | - | 53,900 |
| Deferred | (600) | 6,000 | (20,100) | 12,000 |
| Total income tax expense (benefit) | (600) | 30,400 | (20,100) | 65,900 |
| Net income<br>(loss) | $3,600 | $118,400 | $(52,600) | $260,500 |
| Basic earnings<br>(loss) per common share | $.00 | $.08 | $(.04) | $.17 |
| Diluted earnings<br>(loss) per common share | $.00 | $.08 | $(.04) | $.17 |
| Cash dividends<br>declared per common share | $.00 | $.05 | $.00 | $.05 |
See notes to unaudited condensed consolidated financial statements.
3
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| For<br>the Three Month Period Ended December 31, 2019 | For<br>the Three Month Period Ended December 31, 2018 | For<br>the<br><br><br>Six Month<br>Period Ended December 31, 2019 | For<br>the<br><br><br>Six Month<br>Period Ended December 31, 2018 | |
|---|---|---|---|---|
| Net income<br>(loss) | $3,600 | $118,400 | $(52,600) | $260,500 |
| Other comprehensive<br>loss: | ||||
| Unrealized holding loss | ||||
| arising during period, | ||||
| net of tax | - | (2,900) | - | (21,000) |
| Comprehensive<br>income (loss) | $3,600 | $115,500 | $(52,600) | $239,500 |
See notes to unaudited condensed consolidated financial statements.
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
| Additional | Accumulated<br><br><br>Other | Total | ||||||
|---|---|---|---|---|---|---|---|---|
| Common<br>Stock | Paid-in | Comprehensive | Retained | Treasury<br>Stock | Shareholders’ | |||
| Fiscal Year<br>2020: | Shares | Amount | Capital | Gain<br>(Loss) | Earnings | Shares | Amount | Equity |
| Balance, July 1,<br>2019 | 1,513,914 | $75,700 | $2,592,700 | $- | $3,724,700 | 19,802 | $52,400 | $6,340,700 |
| Net<br>loss | - | - | - | - | (56,200) | - | - | (56,200) |
| Stock options<br>exercised | 2,000 | 100 | 6,900 | - | - | - | - | 7,000 |
| Stock-based<br>compensation | - | - | 17,700 | - | - | - | - | 17,700 |
| Balance, September<br>30, 2019 | 1,515,914 | 75,800 | 2,617,300 | - | 3,668,500 | 19,802 | 52,400 | 6,309,200 |
| Net<br>income | - | - | - | - | 3,600 | - | - | 3,600 |
| Stock options<br>exercised | 6,661 | 300 | (300) | - | - | - | - | - |
| Stock-based<br>compensation | - | - | 17,700 | - | - | - | - | 17,700 |
| Balance, December<br>31, 2019 | 1,522,575 | $76,100 | $2,634,700 | $ <br>- | $3,672,100 | 19,802 | $52,400 | $6,330,500 |
| Additional | Accumulated<br><br><br>Other | Total | ||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Common<br>Stock | Paid-in | Comprehensive | Retained | Treasury<br>Stock | Shareholders’ | |||
| Fiscal Year<br>2019: | Shares | Amount | Capital | Gain<br>(Loss) | Earnings | Shares | Amount | Equity |
| Balance, July 1,<br>2018 | 1,513,914 | $75,700 | $2,545,900 | $1,200 | $3,131,800 | 19,802 | $52,400 | $5,702,200 |
| Cumulative effect<br>of the adoption of | - | - | - | 22,000 | 22,000 | |||
| ASU 2016-01 –<br>Financial Instruments | ||||||||
| Net<br>income | - | - | - | - | 142,000 | - | - | 142,000 |
| Cash dividend<br>declared, $.05 | - | - | - | - | (74,700) | - | - | (74,700) |
| Unrealized holding<br>loss on investment securities, net of tax | - | - | - | (18,100) | - | - | - | (18,100) |
| Stock-based<br>compensation | - | - | 8,700 | - | - | - | - | 8,700 |
| Balance, September<br>30, 2018 | 1,513,914 | 75,700 | 2,554,600 | (16,900) | 3,221,100 | 19,802 | 52,400 | 5,782,100 |
| Net<br>income | - | - | - | - | 118,400 | - | - | 118,400 |
| Unrealized holding<br>loss on investment securities, net of tax | - | - | - | (2.900) | - | - | - | (2,900) |
| Stock-based<br>compensation | - | - | 9,500 | - | - | - | - | 9,500 |
| Balance, December<br>31, 2018 | 1,513,914 | $75,700 | $2,564,100 | $(19,800) | $3,339,500 | 19,802 | $52,400 | $5,907,100 |
5
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For<br>the Six Month Period Ended December 31, | For<br>the Six Month Period Ended December 31, | |
|---|---|---|
| 2019 | 2018 | |
| Operating<br>activities: | ||
| Net income<br>(loss) | $(52,600) | $260,500 |
| Adjustments<br>to reconcile net income (loss) provided by (used in) operating<br>activities: | ||
| Gain<br>(loss) on sale of investments | (3,100) | 5,000 |
| Unrealized<br>holding gain (loss) on investments | (1,200) | 3,300 |
| Depreciation<br>and amortization | 82,400 | 151,900 |
| Deferred<br>income taxes | (20,100) | 7,100 |
| Stock-based<br>compensation | 35,400 | 18,200 |
| Changes<br>in operating assets and liabilities: | ||
| Trade accounts<br>receivable | 161,700 | 227,600 |
| Contract<br>assets | - | 216,400 |
| Inventories | (411,500) | (456,000) |
| Right - of- use<br>assets | (930,700) | - |
| Prepaid and other<br>current assets | 27,400 | (67,900) |
| Lease<br>liabilities | 998,100 | - |
| Accounts<br>payable | (94,300) | 142,700 |
| Contract<br>liabilities | 104,000 | 50,500 |
| Accrued expenses<br>and taxes | (409,600) | (162,000) |
| Total<br>adjustments | (461,500) | 136,800 |
| Net cash provided<br>by (used in) operating activities | (514,100) | 397,300 |
| Investing<br>activities: | ||
| Redemption<br>of investment securities | 51,900 | 75,100 |
| Purchase of<br>investment securities | (61,800) | (75,200) |
| Capital<br>expenditures | (34,100) | (7,900) |
| Purchase of other<br>intangible assets | (7,400) | (6,300) |
| Net cash used in<br>investing activities | (51,400) | (14,300) |
| Financing<br>activities: | ||
| Proceeds<br>from stock options exercised | 7,000 | - |
| Cash<br>dividend declared and paid | - | (74,700) |
| Principal<br>payments on notes payable | - | (3,300) |
| Net cash provided<br>by (used in) financing activities | 7,000 | (78,000) |
| Net increase<br>(decrease) in cash and cash equivalents | (558,500) | 305,000 |
| Cash and cash<br>equivalents, beginning of year | 1,602,500 | 1,053,100 |
| Cash and cash<br>equivalents, end of period | $1,044,000 | $1,358,100 |
| Supplemental<br>disclosures: | ||
| Cash paid during<br>the period for: | ||
| Income<br>taxes | $37,900 | $39,700 |
| Interest | - | 800 |
| Non-cash financing<br>activities: | ||
| Issuance of 6,661<br>shares of the Company's Common Stock in cashless stock option<br>exercises during the three and six months ended December 31,<br>2019. |
See notes to unaudited condensed consolidated financial statements.
6
| General: | The<br>accompanying unaudited interim condensed consolidated financial<br>statements are prepared pursuant to the Securities and Exchange<br>Commission’s rules and regulations for reporting on Form<br>10-Q. Accordingly, certain information and footnotes required by<br>accounting principles generally accepted in the United States for<br>complete financial statements are not included herein. The Company<br>believes all adjustments necessary for a fair presentation of these<br>interim statements have been included and that they are of a normal<br>and recurring nature. These interim statements should be read in<br>conjunction with the Company’s financial statements and notes<br>thereto, included in its Annual Report on Form 10-K, for the fiscal<br>year ended June 30, 2019. The results for the three and six months<br>ended December 31, 2019, are not necessarily an indication of the<br>results for the full fiscal year ending June 30, 2020. |
|---|
- 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.
Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases, which replaces previous lease guidance in its entirety with ASC 842 and requires lessees to recognize lease assets and lease liabilities for those arrangements classified as operating leases under previous guidance, with the exception of leases with a term of twelve months or less. The Company adopted ASU No. 2016-02 on July 1, 2019 using the additional transition method, which allows prior periods to be presented under previous lease accounting guidance. Refer to Note 8, "Leases", for related disclosures.
R Recent Accounting Pronouncements
In August 2018, the FASB issued 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 is effective for fiscal years beginning after December 15, 2019. Early adoption is 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. We are currently evaluating the impact of adopting this guidance.
- 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 ASC 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.
7
The following table summarizes the Company’s disaggregation of revenues for the three and six months ended December 31, 2019 and 2018.
| Benchtop Laboratory<br>Equipment | Catalyst Research<br>Instruments | Bioprocessing<br><br><br>Systems | Consolidated | |
|---|---|---|---|---|
| Three Months Ended<br>December 31, 2019: | ||||
| Revenues | $1,943,400 | $39,500 | $289,400 | $2,272,300 |
| Foreign<br>Sales | 855,800 | 10,200 | 289,400 | 1,155,400 |
| Three Months Ended<br>December 31, 2018: | ||||
| Revenues | $1,803,100 | $227,200 | $132,900 | $2,163,200 |
| Foreign<br>Sales | 743,600 | 222,900 | 128,600 | 1,095,100 |
| Benchtop Laboratory<br>Equipment | Catalyst Research<br>Instruments | Bioprocessing<br><br><br>Systems | Consolidated | |
| --- | --- | --- | --- | --- |
| Six Months Ended<br>December 31, 2019: | ||||
| Revenues | $3,519,600 | $178,200 | $578,700 | $4,276,500 |
| Foreign<br>Sales | 1,253,400 | 81,900 | 578,700 | 1,914,000 |
| Six Months Ended<br>December 31, 2018: | ||||
| --- | --- | --- | --- | --- |
| Revenues | $3,495,100 | $444,600 | $262,100 | $4,201,800 |
| Foreign<br>Sales | 1,379,300 | 365,200 | 257,100 | 2,001,600 |
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, 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 comprised of one to two years of 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 which normally consists of replacement of small components or software support. Catalyst research instruments are never returned for repairs.
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<br>of the contract, or contracts, with a customer |
|---|---|
| ● | Identification<br>of the performance obligations in the contract |
| ● | Determination<br>of the transaction price |
| ● | Allocation<br>of the transaction price to the performance obligations in the<br>contract |
| ● | Recognition<br>of revenue when, or as, a performance obligation is<br>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.
8
- 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 Operations”).
Segment information is reported as follows:
| Benchtop Laboratory<br>Equipment | Catalyst Research<br>Instruments | Bioprocessing<br><br><br>Systems | Corporate<br><br><br>And<br><br><br>Other | Consolidated | |
|---|---|---|---|---|---|
| Three Months Ended<br>December 31, 2019: | |||||
| Revenues | $1,943,400 | $39,500 | $289,400 | $- | $2,272,300 |
| Foreign<br>Sales | 855,800 | 10,200 | 289,400 | - | 1,155,400 |
| Income (Loss) From<br>Operations | 179,400 | (170,400) | (18,100) | - | (9,100) |
| Assets | 5,551,100 | 1,166,300 | 1,350,000 | 796,400 | 8,863,800 |
| Long-Lived Asset<br>Expenditures | 14,100 | - | 2,900 | - | 17,000 |
| Depreciation and<br>Amortization | 30,800 | 200 | 10,400 | - | 41,400 |
| Benchtop Laboratory<br>Equipment | Catalyst<br>Research<br><br><br>Instruments | Bioprocessing<br><br><br>Systems | Corporate And<br>Other | Consolidated | |
| --- | --- | --- | --- | --- | --- |
| Three Months Ended<br>December 31, 2018: | |||||
| Revenues | $1,803,100 | $227,200 | $132,900 | $- | $2,163,200 |
| Foreign<br>Sales | 743,600 | 222,900 | 128,600 | - | 1,095,100 |
| Income (Loss) From<br>Operations | 148,600 | (48,300) | 55,700 | - | 156,000 |
| Assets | 4,762,000 | 1,376,100 | 727,300 | 693,300 | 7,558,700 |
| Long-Lived Asset<br>Expenditures | 10,800 | 1,200 | - | - | 12,000 |
| Depreciation and<br>Amortization | 66,400 | 200 | 9,400 | - | 76,000 |
Approximately 50% and 51% of total benchtop laboratory equipment sales (42% and 42% of total revenues) for the three month periods ended December 31, 2019 and 2018, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
Approximately 24% and 25% of total benchtop laboratory equipment sales (21% and 21% of total revenues) were derived from the Torbal Scales Division for the three months ended December 31, 2019 and 2018, respectively.
For the three months ended December 31, 2019 and 2018, respectively, three customers accounted for approximately 27% and 21% of net sales of the Benchtop Laboratory Equipment Operations (23% and 18% 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 two customers during the three months ended December 31, 2019 and 2018, accounted for approximately 66% and 96% of the Catalyst Research Instrument Operations’ revenues and 1% and 10% of the Company’s total revenues, respectively.
9
| Benchtop Laboratory<br>Equipment | Catalyst Research<br>Instruments | Bioprocessing<br><br><br>Systems | Corporate And<br>Other | Consolidated | |
|---|---|---|---|---|---|
| Six Months Ended<br>December 31, 2019: | |||||
| Revenues | $3,519,600 | $178,200 | $578,700 | $- | $4,276,500 |
| Foreign<br>Sales | 1,253,400 | 81,900 | 578,700 | - | 1,914,000 |
| Income (Loss) From<br>Operations | 192,300 | (260,700) | (16,200) | - | (84,600) |
| Assets | 5,551,100 | 1,166,300 | 1,350,000 | 796,400 | 8,863,800 |
| Long-Lived Asset<br>Expenditures | 21,900 | - | 19,600 | - | 41,500 |
| Depreciation and<br>Amortization | 61,300 | 600 | 20,500 | - | 82,400 |
| Benchtop Laboratory<br>Equipment | Catalyst Research<br>Instruments | Bioprocessing<br><br><br>Systems | Corporate And<br>Other | Consolidated | |
| --- | --- | --- | --- | --- | --- |
| Six Months Ended<br>December 31, 2018: | |||||
| Revenues | $3,495,100 | $444,600 | $262,100 | $- | $4,201,800 |
| Foreign<br>Sales | 1,379,300 | 365,200 | 257,100 | - | 2,001,600 |
| Income (Loss) From<br>Operations | 324,200 | (111,300) | 118,900 | - | 331,800 |
| Assets | 4,762,000 | 1,376,100 | 727,300 | 693,300 | 7,558,700 |
| Long-Lived Asset<br>Expenditures | 13,000 | 1,200 | - | - | 14,200 |
| Depreciation and<br>Amortization | 132,700 | 400 | 18,800 | - | 151,900 |
Approximately 43% and 50% total benchtop laboratory equipment sales (36% and 41% of total revenues) for both six month periods ended December 31, 2019 and 2018, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
Approximately 28% and 25% of total benchtop laboratory equipment sales (23% and 21% of total revenues) were derived from the Torbal Scales Division for both the six months ended December 31, 2019 and 2018, respectively. For the six months ended December 31, 2019 and 2018, respectively, three customers accounted for approximately 25% and 22% of net sales of the Benchtop Laboratory Equipment Operations for both six month periods ended December 31, 2019 and 2018 (21% and 18% of the Company’s total revenues), respectively.
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 three and five customers during the six months ended December 31, 2019 and 2018, accounted for approximately 84% and 90% of the Catalyst Research Instrument Operations’ revenues and 4% and 10% of the Company’s total revenues, respectively.
- 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.
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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, 2019 and June 30, 2019 according to the valuation techniques the Company used to determine their fair values:
| Fair<br>Value Measurements Using Inputs Considered as | ||||
|---|---|---|---|---|
| Fair<br>Value at December 31, 2019 | Level 1 | Level 2 | Level 3 | |
| Assets: | ||||
| Cash and cash<br>equivalents | $1,044,000 | $1,044,000 | $- | $- |
| Investment<br>Securities | 345,200 | 345,200 | - | - |
| Total | $1,389,200 | $1,389,200 | $- | $- |
| Liabilities: | ||||
| Contingent<br>consideration | $618,000 | $- | $- | $618,000 |
| Fair<br>Value Measurements Using Inputs Considered as | ||||
| --- | --- | --- | --- | --- |
| Fair<br>Value at June 30, 2019 | Level 1 | Level 2 | Level 3 | |
| Assets: | ||||
| Cash and cash<br>equivalents | $1,602,500 | $1,602,500 | $- | $- |
| Investment<br>securities | 330,900 | 330,900 | - | - |
| Total | $1,933,400 | $1,933,400 | $- | $- |
| Liabilities: | ||||
| Contingent<br>consideration | $618,000 | $- | $- | $618,000 |
Investments in marketable securities classified as available for sale by security type at December 31, 2019 and June 30, 2019 consisted of the following:
| Cost | Fair<br>Value | Unrealized Holding<br>Gain (Loss) | |
|---|---|---|---|
| At December 31,<br>2019: | |||
| Equity<br>securities | $79,500 | $109,500 | $30,000 |
| Mutual<br>funds | 251,000 | 235,700 | (15,300) |
| $330,500 | $345,200 | $14,700 |
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| Cost | Fair<br>Value | Unrealized Holding<br>Gain (Loss) | |
|---|---|---|---|
| At June 30,<br>2019: | |||
| Equity<br>securities | $47,100 | $72,000 | $24,900 |
| Mutual<br>funds | 292,300 | 258,900 | (33,400) |
| $339,400 | $330,900 | $(8,500) |
- 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,<br>2019 | June<br>30,2019 | |
|---|---|---|
| Raw<br>materials | $1,927,500 | $1,738,300 |
| Work-in-process | 340,400 | 106,400 |
| Finished<br>goods | 735,900 | 747,600 |
| $3,003,800 | $2,592,300 |
- 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, 2019 and June 30, 2019, all of which is expected to be deductible for tax purposes.
The components of other intangible assets are as follows:
| Useful<br><br><br>Lives | Cost | Accumulated<br>Amortization | Net | |
|---|---|---|---|---|
| At December 31,<br>2019: | ||||
| Technology,<br>trademarks | 5/10<br>yrs. | $663,800 | $661,800 | $2,000 |
| Trade<br>names | 6 yrs. | 140,000 | 136,200 | 3,800 |
| Websites | 5 yrs. | 210,000 | 210,000 | - |
| Customer<br>relationships | 9/10<br>yrs. | 357,000 | 314,700 | 42,300 |
| Sublicense<br>agreements | 10<br>yrs. | 294,000 | 238,900 | 55,100 |
| Non-compete<br>agreements | 5 yrs. | 384,000 | 384,000 | - |
| IPR&D | 3 yrs. | 110,000 | 110,000 | - |
| Other intangible<br>assets | 5 yrs. | 229,200 | 189,200 | 40,000 |
| $2,388,000 | $2,244,800 | $143,200 |
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| Useful<br><br><br>Lives | Cost | Accumulated<br>Amortization | Net | |
|---|---|---|---|---|
| At June 30,<br>2019: | ||||
| Technology,<br>trademarks | 5/10<br>yrs. | $663,800 | $661,700 | $2,100 |
| Trade<br>names | 6 yrs. | 140,000 | 124,400 | 15,600 |
| Websites | 5 yrs. | 210,000 | 210,000 | - |
| Customer<br>relationships | 9/10<br>yrs. | 357,000 | 308,100 | 48,900 |
| Sublicense<br>agreements | 10<br>yrs. | 294,000 | 224,100 | 69,900 |
| Non-compete<br>agreements | 5 yrs. | 384,000 | 384,000 | - |
| IPR&D | 3 yrs. | 110,000 | 110,000 | - |
| Other intangible<br>assets | 5 yrs. | 221,700 | 183,200 | 38,500 |
| $2,380,500 | $2,205,500 | $175,000 |
Total amortization expense was $19,800 and $61,300 for the three months ended December 31, 2019 and 2018, respectively, and $39,300 and $122,300 for the six months ended December 31, 2019 and 2018, respectively. As of December 31, 2019, estimated future amortization expense related to intangible assets is $31,200 for the remainder of the fiscal year ending June 30, 2020, $54,300 for fiscal 2021, $31,700 for fiscal 2022, $15,000 for fiscal 2023 and $11,000 for fiscal 2024.
13
- Earnings (Loss) Per Common Share
Earnings (loss) per common share data was computed as follows:
| For<br>the Three Month Period Ended<br><br><br>December 31,<br>2019 | For<br>the Three Month Period Ended<br><br><br>December 31,<br>2018 | For<br>the Six Month Period Ended<br><br><br>December 31,<br>2019 | For<br>the Six Month Period Ended<br><br><br>December 31,<br>2018 | |
|---|---|---|---|---|
| Net income<br>(loss) | $3,600 | $118,400 | $(52,600) | $260,500 |
| Weighted average<br>common shares outstanding | 1,499,396 | 1,494,112 | 1,496,718 | 1,494,112 |
| Effect of dilutive<br>securities | 58,330 | 18,839 | - | 11,368 |
| Weighted average<br>dilutive common shares outstanding | 1,557,726 | 1,512,951 | 1,496,718 | 1,505,480 |
| Basic earnings<br>(loss) per common share | $.00 | $.08 | $(.04) | $.17 |
| Diluted earnings<br>(loss) per common share | $.00 | $.08 | $(.04) | $.17 |
During the six months ended December 31, 2019, the company did not include 51,269 dilutive shares of Common Stock because the effect would be anti-dilutive due to the loss during the period. There were no dilutive shares excluded during the six month period ended December 31, 2018 as well as for the three months periods ended December 31, 2019 and 2018.
- Leases
On July 1, 2019 the Company adopted the new accounting pronouncement as it relates to its leases which requires a lessee to recognize 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 and expands disclosure of key information about leasing arrangements.
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 another facility in Pittsburgh, Pennsylvania for its Bioprocessing Systems Operations through May 2021. In addition, the Company had a lease for its Torbal Division of the Benchtop Laboratory Equipment Operations which was mutually terminated early effective as of October 31, 2019 and a new lease for a similar sales and administration office was entered into as of November 1, 2019 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.
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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 December 31, 2019, the weighted-average remaining lease term for operating lease liabilities was approximately 4 years and the weighted-average discount rate was 5.0%. Total cash payments under these leases were $73,400 and $141,800 for the three and six month periods ended December 31, 2019 of which $74,200 and $142,500 were recorded as leases expense.
The Company’s approximate future minimum rental payments under all leases existing at December 31, 2019 through January 2025 are as follows:
| Fiscal year ending June 30, | Amount |
|---|---|
| Remainder of 2020 | $153,900 |
| 2021 | 265,800 |
| 2022 | 210,600 |
| 2023 | 198,900 |
| 2024 | 195,900 |
| 2025 | 91,600 |
| Total future minimum payments | 1,116,700 |
| Less: Imputed interest | 118,600 |
| Total Present Value of Operating Lease Liabilities | 998,100 |
15
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 $3,000 for the three months ended December 31, 2019 compared to $148,800 for the three months ended December 31, 2018, primarily due to lower sales for Catalyst Instruments during the quarter, and significantly higher operating expenses for the Bioprocessing Systems Operations, partially offset by increased sales for the Benchtop Laboratory Equipment Operations. The Company reflected a loss before income tax benefit of $72,700 for the six months ended December 31, 2019 compared to income before income tax expense of $326,400 for the six months ended December 31, 2018 primarily due to lower sales for the Catalyst Research Instruments Operations and increased operating expenses for the Bioprocessing Systems Operations. In the last quarter of the Company’s fiscal year ended June 30, 2019, the Company began to invest in its Bioprocessing Systems Operations with staffing, facilities, and new product development. The results reflected total non-cash amounts for depreciation and amortization of $41,400 and $82,400 for the three and six month periods ended December 31, 2019 compared to $76,000 and $151,900 for the corresponding three and six month periods in 2018.
Results of Operations
The Three Months Ended December 31, 2019 Compared With The Three Months Ended December 31, 2018
Net revenues for the three months ended December 31, 2019 increased $109,100 (5.0%) to $2,272,300 from $ 2,163,200 for the three months ended December 31, 2018, reflecting increased earned royalties of $156,500 by the Bioprocessing Systems Operations, increased sales of benchtop laboratory equipment of $140,300, partially offset by a $187,700 decrease in net sales of catalyst research instruments. The benchtop laboratory equipment sales reflected $476,100 and $458,700 of Torbal brand product gross sales for the three months ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, the order backlog for catalyst research instruments was $516,800, substantially all of which is expected to be shipped during fiscal year ending June 30, 2020, compared to $617,400 as of December 31, 2018.
The overall gross profit percentage for the three months ended December 31, 2019 increased to 48.0% compared to 45.1% for the three months ended December 31, 2018. The Benchtop Laboratory Equipment Operations reflected lower overhead cost during the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The gross profit for the Catalyst Research Instruments Operations was negative during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 due to low sales during the quarter.
General and administrative expenses for the three months ended December 31, 2019 increased by $48,000 (10.4%) to $510,100 compared to $462,100 for the three months ended December 31, 2018, due to staffing and other administrative costs incurred by the Scientific Bioprocessing Systems Operations.
Selling expenses for the three months ended December 31, 2019 increased $82,300 (33.2%) to $330,500 from $248,200 for the three months ended December 31, 2018, due to new marketing expenses for the Bioprocessing Systems Operations, increased sales expenses by the Catalyst Research Instruments Operations and increased online advertising expenses for the Benchtop Laboratory Equipment Operations.
Research and development expenses increased by $150,600 (137.7%) to $260,000 for the three months ended December 31, 2019 compared to $109,400 for the three months ended December 31, 2018, primarily due to the ramp up in product development activities by the Bioprocessing Systems Operations which included staffing, facilities, and materials.
Total other income (expense), net was $12,100 for the three months ended December 31, 2019 compared to ($7,200) for the three months ended December 31, 2018 due to increased interest and dividend income generated from investment securities.
The Company reflected an income tax benefit of $600 for the three months ended December 31, 2019 compared to expense of $30,400 for the three months ended December 31, 2018 due to much lower income.
16
As a result of the foregoing, the Company recorded net income of $3,600 for the three months ended December 31, 2019 compared to $118,400 for the three months ended December 31, 2018.
The Six Months Ended December 31, 2019 Compared With The Six Months Ended December 31, 2018
Net revenues for the six months ended December 31, 2019 increased $74,700 (1.8%) to $4,276,500 from $4,201,800 for the six months ended December 31, 2018, reflecting an increase of $316,600 in earned royalties by the Bioprocessing Systems Operations, $24,500 increase in net sales of benchtop laboratory equipment, partially offset by a $266,400 decrease in net sales of catalyst research instruments. The benchtop laboratory equipment sales reflected $998,500 of Torbal brand product gross sales for the six months ended December 31, 2019, compared to $884,000 in the six months ended December 31, 2018. The increase in royalty revenues is due to the expectation of continued increased royalties from sublicenses. The Benchtop Laboratory Equipment Operations’s sales growth slowed due to slower order input from Asian markets, particularly China, and softer sales in Europe and Middle East. The Catalyst Research Instruments Operations suffered from low order input in the beginning of the year, particularly from China, however, the Company appointed a new China sales representative in China at the end of the period as well as several other sales representatives around the world. As of December 31, 2019, the order backlog for catalyst research instruments was $516,800, substantially all of which is expected to be shipped during fiscal year ending June 30, 2020, compared to $617,400 as of December 31, 2018.
The overall gross profit percentage for the six months ended December 31, 2019 was 48.4% compared to 45.7% for the six months ended December 31, 2018. The Benchtop Laboratory Equipment Operations reflected lower overhead cost during the six months ended December 31, 2019 compared to the six months ended December 31, 2018. The gross profit for the Catalyst Research Instruments was negative during the six months ended December 31, 2019 compared to the six months ended December 31, 2018 due to low sales during the current six month period.
General and administrative expenses for the six months ended December 31, 2019 increased $141,700 (16.1%) to $1,020,300 from $878,600 for the six months ended December 31, 2018 due to staffing and other administrative costs incurred by the Bioprocessing Systems Operations and legal and other corporate expenses related to strategic initiatives.
Selling expenses for the six months ended December 31, 2019 increased $155,300 (32.1%) to $639,600 from $484,300 for the six months ended December 31, 2018, mainly due to new marketing expenses for the Bioprocessing Systems Operations, increased sales expenses by the Catalyst Research Instruments Operations and increased online advertising expenses for the Benchtop Laboratory Equipment Operations.
Research and development expenses increased by $269,900 (119.1%) to $496,600 for the six months ended December 31, 2019 compared to $226,700 for the six months ended December 31, 2018, primarily due to to the ramp up in product development activities by the Bioprocessing Systems Operations which included staffing, facilities, and materials.
Total other income (expense), net was $11,900 for the six months ended December 31, 2019 compared to ($5,400) for the six months ended December 31, 2018 principally due to increased interest income on investments, compared to realized losses on investment securities in the prior year period.
The Company reflected income tax benefit of $20,100 for the six months ended December 31, 2019 compared to $65,900 income tax expense for the six months ended December 31, 2018, primarily due to the loss during the current year period compared to income in the prior year period.
As a result of the foregoing, the Company recorded a net loss of $52,600 for the six months ended December 31, 2019 compared to net income of $260,500 for the six months ended December 31, 2018.
Liquidity and Capital Resources. Cash and cash equivalents decreased by $558,500 to $1,044,000 as of December 31, 2019 from $1,602,500 as of June 30, 2019 primarily due to the loss during the period, increased investment in the Bioprocessing Systems Operations, and increased inventories, particularly for a new product of the Benchtop Laboratory Equipment Operations.
Net cash used in operating activities was $514,100 for the six months ended December 31, 2019 compared to net cash provided by operating activities $397,300 during the six months ended December 31, 2018. The net cash used was primarily a result of the loss for the period and higher inventories. Net cash used in investing activities was $51,400 for the six months ended December 31, 2019 compared to $14,300 used during the six months ended December 31, 2018 principally due to an increased capital purchases by the Benchtop Laboratory Equipment Operations and the Bioprocessing Systems Operations during the current period. The Company provided $7,000 in financing activities in the six months ended December 31, 2019 compared to $78,000 used in the six months ended December 31, 2018 mainly due to a cash dividend payment in the prior year.
The Company's working capital decreased by $65,700 to $4,940,100 as of December 31, 2019 compared to $5,005,800, as of June 30, 2019 mainly due to the loss during the period.
The Company has a Demand Line of Credit through December 2020 with First National Bank of Pennsylvania which provides for borrowings of up to $300,000 for regular working capital needs, bearing interest at prime, 4.75% currently. 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, 2019, no borrowings were outstanding under such line.
Management believes that the Company will be able to meet its cash flow needs during the 12 months ending December 31, 2020 from its available financial resources including the lines of credit, its cash and investment securities, and operations, unless there is a material reduction in its cash inflows including expected royalty streams, or a material increase in expenditures for the Bioprocessing Systems Operations.
17
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.
As a result of our adoption of the new revenue standard (Topic 606), we implemented controls to ensure adequate evaluation of contracts and assessment of the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate its adoption on July 1, 2018. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the period covered by this Quarterly Report or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
As a result of our adoption of the new leases standard (Topic 842), we implemented controls to ensure adequate review and assessment of contracts containing leases and calculations of assets and liabilities related to the Company's leases as well as required disclosures within the Company's financial statements to facilitate its adoption on July 1, 2019. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the period covered by this Quarterly Report or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 5. Other Information
Scientific Bioprocessing, Inc. a wholly-owned subsidiary of the Company, has entered into a monthly retainer agreement effective as of January 1, 2020 through December 31, 2020 with Mr. Joseph G. Cremonese, a Director since November 2002, through his affiliate, Laboratory Innovation Company, Ltd. The agreement provides for consulting services as to the operations of Scientific Bioprocessing, Inc. at a monthly fee of $9,000 plus the issuance of 20,000 stock options to Mr. Cremonese. The agreement incorporates non-competition and confidentiality clauses.
Item 6. Exhibits and ReportsForm 8-K.
| Exhibit<br>Number | Description |
|---|---|
| 31.1 | Certification<br>of Chief Executive Officer and Chief Financial Officer pursuant to<br>Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification<br>of Chief Executive Officer and Chief Financial Officer pursuant to<br>Section 906 of the Sarbanes-Oxley Act of 2002 |
| 10<br>(d)-12 | Monthly<br>Retainer Agreement between the Company and Mr. Joseph Cremonese and<br>affiliates |
Reports on Form 8-K:
Report dated December 11, 2019 reporting under item 1.01.
18
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:<br>February 13, 2020 | SCIENTIFIC<br>INDUSTRIES, INC.<br><br><br>(Registrant)<br><br><br><br><br><br>/s/<br>Helena R. Santos |
|---|---|
| Helena<br>R. Santos<br><br><br>President,<br>Chief Executive Officer, Treasurer<br><br><br>Chief<br>Financial and Principal Accounting Officer |
19
Blueprint
Exhibit 31.0
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT
I, Helena R. Santos, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Scientific<br>Industries, Inc.; | |
|---|---|---|
| 2. | Based on my knowledge, this report does not contain any untrue<br>statement of a material fact or omit to state a material fact<br>necessary to make the statements made, in light of the<br>circumstances under which such statements were made, not misleading<br>with respect to the period covered by this report; | |
| --- | --- | |
| 3. | Based on my knowledge, the financial statements, and other<br>financial information included in this report, fairly present in<br>all material respects the financial condition, results of<br>operations and cash flows of the registrant as of, and for, the<br>periods presented in this report; | |
| --- | --- | |
| 4. | I am responsible for establishing and maintaining disclosure<br>controls and procedures (as defined in Securities Exchange Act<br>Rules 13a-15(e) and 15d-15(e)) and internal control over financial<br>reporting (as defined in Exchange Act Rules 13a-15(f) and<br>15d-15(f)) for the registrant and have: | |
| --- | --- | |
| a) | Designed such disclosure controls and procedures, or caused such<br>disclosure controls and procedures to be designed under my<br>supervision, to ensure that material information relating to the<br>registrant, including its consolidated subsidiaries, is made known<br>to me by others within those entities, particularly during the<br>period in which this report is being prepared; | |
| --- | --- | |
| b) | Designed such internal control over financial reporting, or caused<br>such internal control over financial reporting to be designed under<br>my supervision, to provide reasonable assurance regarding the<br>reliability of financial reporting and the preparation of financial<br>statements for external purpose in accordance with generally<br>accepted accounting principles; | |
| --- | --- | |
| c) | Evaluated the effectiveness of the registrant’s disclosure<br>controls and procedures, and presented in this report my<br>conclusions about the effectiveness of the disclosure controls and<br>procedures, as of the end of the period covered by this report<br>based on such evaluation; and | |
| --- | --- | |
| d) | Disclosed in this report any change in the registrant’s<br>internal control over financial reporting (that occurred during the<br>registrant’s most recent fiscal quarter (the<br>registrant’s fourth fiscal quarter) that has materially<br>affected, or is reasonable likely to materially affect, the<br>registrant’s internal control over financial reporting;<br>and | |
| --- | --- | |
| 5. | I have disclosed, based on my most recent evaluation of internal<br>control over financial reporting, to the registrant’s<br>auditors and the audit committee of the registrant’s Board of<br>Directors (or persons performing the equivalent<br>functions); | |
| --- | --- | |
| a) | All significant deficiencies and material weaknesses in the design<br>or operation of internal control over financial reporting which are<br>reasonably likely to adversely affect the registrant’s<br>ability to record, process, summarize and report financial<br>information; and | |
| --- | --- | |
| b) | Any fraud, whether or not material, that involves management or<br>other employees who have a significant role in the<br>registrant’s internal control over financial<br>reporting. | |
| --- | --- | |
| Scientific Industries, Inc. | ||
| --- | --- | --- |
| Date: February 13, 2020 | By: | /s/ Helena R. Santos |
| Helena R. Santos | ||
| Chief Executive Officer and | ||
| Chief Financial Officer |
Blueprint
Exhibit 32.0
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT
I, Helena R. Santos, the Chief Executive Officer and Chief Financial Officer of Scientific Industries, Inc. (the “Company”), certify, to the best of my knowledge that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of the Company<br>for the year ended December 31, 2019 (the “Quarterly<br>Report”); | |
|---|---|---|
| 2. | the Quarterly Report fully complies with the requirements of<br>Section 13(a) or 15(d) of the Securities Exchange Act of 1934;<br>and | |
| --- | --- | |
| 3. | the information contained in the Quarterly Report fairly presents,<br>in all material respects, the financial condition and results of<br>operations of Scientific Industries, Inc. | |
| --- | --- | |
| Scientific Industries, Inc. | ||
| --- | --- | --- |
| Date: February 13, 2020 | By: | /s/ Helena R. Santos |
| Helena R. Santos | ||
| Chief Executive Officer and | ||
| Chief Financial Officer |
Blueprint
MONTHLY RETAINER AGREEMENT
Monthly Retainer Agreement dated as of January 1, 2020 between Scientific Bioprocessing, Inc., a Delaware Corporation (the “Company”), and Joseph G. Cremonese (“JC”) and Laboratory Innovation Company, Ltd., a Pennsylvania sub-chapter S corporation, of which JC is President, director and sole stockholder (“LIC”).
Whereas, JC through LIC (collectively the “Consultants”), the Company and Scientific Industries, Inc., a Delaware Corporation (“Scientific”), desire that the Consultants provide consulting services to the Company, a wholly-owned subsidiary of Scientific.
IT IS HEREBY AGREED as follows:
1. Consultants will provide pursuant to this Agreement consulting services at the request of the Company with respect to the development and marketing of products of the Company for the 12-month period ending December 31, 2020.
2. (a) The aggregate payment for the foregoing service should be made to (i) Laboratory Innovation Company, P.O. Box 1907, Greensburg, PA 15601-6907, at the rate of $4,800.00 per month and (ii) Joseph G. Cremonese, P. O. Box 1907, Greensburg PA 15601-6907, at the rate of $4,200.00 per month, in each case payable within 10 days of the calendar month in which the services are rendered.
(b) In the event of a termination of this Agreement on a date other than December 31, 2020, the determination of the deficiency shall be based on a pro rata portion determined by the number of months and fraction of a month, if any, from January 1, 2020 to the termination date.
(c) As soon as reasonably practicable following the date of this Agreement, Scientific shall grant to JC non-qualified options (the “Stock Options”) to purchase up to 20,000 shares of common stock of Scientific, par value $.05 per share (the “Common Stock”), exercisable at an exercise price equal to the fair market value of the shares of Common Stock on the date of grant, pursuant to Scientific’s 2012 Stock Option Plan, as amended. Any unvested Stock Options shall accelerate upon the occurrence of a change in control of Scientific.
3. Expenses will be submitted on an expense report with original receipts. Routine expenses will include: internet, telephone, public transportation, taxi fares, hotels, parking, tolls and auto mileage at the then standard mileage rate for business miles driven set forth by the Internal Revenue Service in IR-2008-131. Meals will only be submitted as an expense item during trade shows or required Company meetings. All expenses are subject to approval by an authorized officer of the Company with air travel charges and other expenditures to be pre-approved.
4. A Summary Plan of Consulting Services and Duties will be provided at the beginning of each quarter of the year and will be defined and agreed upon with the President of the Company.
5. The previously executed Confidentiality Information Agreement and Non-Competition Agreement by Scientific and the Consultant, in the form of Exhibits A and B hereto shall remain in effect shall survive the expiration or termination of the Agreement for whatever reason and any and all references to Scientific therein shall apply equally to the Company.
6. This Monthly Retainer Agreement shall terminate, except as to Section 5, on December 31, 2020 unless terminated earlier by either the Company or the Consultants on at least 60 days prior written notice.
| /s/ Joseph G. Cremonese<br><br><br><br><br><br><br><br><br>Joseph<br>G. Cremonese | Laboratory Innovation Company, Ltd.<br><br><br><br><br><br>/s/ Joseph G. Cremonese<br><br><br>By:<br><br><br>Joseph G.<br>Cremonese |
|---|
Agreed:
Scientific Bioprocessing, Inc.
Scientific Industries, Inc.
/s/ John Moore /s/ Helena Santos
By:
By:
John Moore, President
Helena Santos, President and Chief Executive Officer
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