UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | ☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018September 30, 2019
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to________
Commission file number 0-6658
SCIENTIFIC INDUSTRIES, INC.
(Exact Name of Registrant as specified in Its Charter)
Delaware | 04-2217279 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
80 Orville Drive, Suite 102, Bohemia, New York | 11716 |
(Address of principal executive offices) | (Zip Code) |
(631) 567-4700
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
☒Yes ☐No 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 ☒ ☒Yes ☐NoNo ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐(Do not check if a smaller reporting company) | Smaller reporting company ☒ |
| Emerging Growth company☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) | Yes☐ No ☒ | |
The number of shares outstanding of the registrant’s common stock, par value $.05 per share (“Common Stock”) as of February 4,October 31, 2019 is 1,494,1121,496,112 shares.
SCIENTIFIC INDUSTRIES, INC.
Table of Contents
PART I - Financial Information | |
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| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | |
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| Condensed Consolidated Balance Sheets | 12
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| Condensed Consolidated Statements of Operations | 23
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| Condensed Consolidated Statements of Comprehensive Income (Loss) | 34
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| Condensed Consolidated Statements of Changes in Shareholders' Equity | 5 |
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| Condensed Consolidated Statements of Cash Flows | 46 |
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| Notes to Unaudited Condensed Consolidated Financial Statements | 57 |
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 13 |
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| CONTROLS AND PROCEDURES | 15 |
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| EXHIBITS AND REPORTS ON FORM 8-K | 15 |
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| | 16 |
PART I – FINANCIAL INFORMATION
ItemItem 1. Financial StatementsSCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
| | | | |
Current assets: | | | | |
Cash and cash equivalents | $1,358,100 | $1,053,100 | $1,259,700 | $1,602,500 |
Investment securities | 307,800 | 314,700 | 333,600 | 330,900 |
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at December 31, 2018 and June 30, 2018 | 1,216,500 | 1,444,100 | |
Contract assets, current | 307,200 | 278,200 | |
Trade accounts receivable, less allowance for doubtful accounts of $11,600 at September 30, and $15,000 at June 30, 2019 | | 1,867,800 | 1,974,200 |
Inventories | 2,723,900 | 2,267,900 | 2,713,100 | 2,592,300 |
Prepaid expenses and other current assets | 101,400 | 33,500 | 93,500 | 91,200 |
Total current assets | 6,014,900 | 5,391,500 | 6,267,700 | 6,591,100 |
| | |
Property and equipment, net | 177,900 | 199,500 | 314,400 | 318,800 |
| | |
Intangible assets, net | 222,600 | 338,700 | 162,900 | 175,000 |
| | |
Goodwill | 705,300 | 705,300 |
| | |
Contract assets, less current portion | - | 245,400 | |
| | |
Other assets | 52,500 | 59,200 | 54,700 |
| | |
Deferred taxes | 385,500 | 392,600 | 450,600 | 431,100 |
| | |
Operating lease right-of-use assets | | 902,500 | - |
| | |
| $7,558,700 | $7,325,500 | $8,862,600 | $8,276,000 |
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities: | | |
Accounts payable | $570,700 | $428,000 | $457,200 | $569,000 |
Accrued expenses and taxes, current portion | 556,100 | 657,700 | |
Accrued expenses and taxes | | 437,700 | 608,300 |
Contract liabilities | 114,300 | 63,800 | 62,000 | - |
Contingent consideration, current portion | 118,000 | 268,000 |
| 2,500 | 5,800 | |
| | |
Bank overdraft | | 9,400 | 140,000 |
Current portion of operating lease liabilities | | 231,100 | - |
Total current liabilities | 1,361,600 | 1,273,300 | 1,465,400 | 1,585,300 |
| | |
Accrued expenses, less current portion | - | 60,000 | |
Contingent consideration payable, less current portion | 290,000 | 350,000 |
Operating lease liabilities, less current portion | | 738,000 | - |
| | |
| 1,651,600 | 1,623,300 | 2,553,400 | 1,935,300 |
Shareholders’ equity: | | |
Common stock, $.05 par value; authorized 7,000,000 shares; issued 1,513,914, outstanding 1,494,112 shares at December 31, 2018 and June 30, 2018 | 75,700 | |
Common stock, $.05 par value; authorized 7,000,000 shares; issued 1,515,914 shares and 1,513,914, outstanding 1,496,112 and 1,494,112 shares at September 30 and June 30, 2019 | | 75,800 | 75,700 |
Additional paid-in capital | 2,564,100 | 2,545,900 | 2,617,300 | 2,592,700 |
Accumulated other comprehensive gain (loss) | (19,800) | 1,200 | |
Retained earnings | 3,339,500 | 3,131,800 | 3,668,500 | 3,724,700 |
| 5,959,500 | 5,754,600 | 6,361,600 | 6,393,100 |
Less common stock held in treasury at cost, 19,802 shares | 52,400 | 52,400 |
| | |
Total shareholders’ equity | 5,907,100 | 5,702,200 | 6,309,200 | 6,340,700 |
| | |
Total liabilities and shareholders’ equity | $7,558,700 | $7,325,500 | $8,862,600 | $8,276,000 |
See notes to unaudited condensed consolidated financial statements.
1
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the Three Month Period Ended December 31, | For the Six Month Period Ended December 31, | |
| | | | | For the Three Month Period Ended September 30, 2019 | For the Three Month Period Ended September 30, 2018 |
| | |
Revenues | $2,163,200 | $1,892,400 | $4,201,800 | $3,173,300 | $2,004,200 | $2,038,600 |
| | |
Cost of revenues | 1,187,500 | 1,126,700 | 2,280,400 | 1,955,900 | 1,023,800 | 1,092,900 |
| | |
Gross profit | 975,700 | 765,700 | 1,921,400 | 1,217,400 | 980,400 | 945,700 |
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Operating expenses: | | |
General and administrative | 462,100 | 407,900 | 878,600 | 836,300 | 510,200 | 416,500 |
Selling | 248,200 | 214,600 | 484,300 | 415,600 | 309,100 | 236,100 |
| 109,400 | 132,900 | 226,700 | 262,000 | 236,600 | 117,400 |
| | |
| 819,700 | 755,400 | 1,589,600 | 1,513,900 | 1,055,900 | 770,000 |
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Income (loss) from operations | 156,000 | 10,300 | 331,800 | (296,500) | (75,500) | 175,700 |
| | |
Other income (expense): | | |
Interest income | 2,500 | 5,200 | 2,800 | 5,600 | |
Other income, net | (9,300) | 1,400 | (7,400) | 1,400 | |
Other income (expense), net | | (200) | 2,200 |
Interest expense | (400) | (500) | (800) | (600) | - | (400) |
| | |
Total other income (expense), net | (7,200) | 6,100 | (5,400) | 6,400 | (200) | 1,800 |
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Income (loss) before income tax expense | 148,800 | 16,400 | 326,400 | (290,100) | |
Income (loss) before income tax expense (benefit) | | (75,700) | 177,500 |
| | |
Income tax expense: | | |
Income tax expense (benefit): | | |
| 24,400 | 71,800 | 53,900 | 8,000 | - | 29,500 |
| 6,000 | 25,600 | 12,000 | 15,500 | (19,500) | 6,000 |
| | |
| 30,400 | 97,400 | 65,900 | 23,500 | |
Total income tax expense (benefit) | | (19,500) | 35,500 |
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Net income (loss) | $118,400 | $(81,000) | $260,500 | $(313,600) | $(56,200) | $142,000 |
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Basic earnings (loss) per common share | $.08 | $(.05) | $.17 | $(.21) | $(.04) | $.10 |
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Diluted earnings (loss) per common share | $.08 | $.(05) | $.17 | $(.21) | $(.04) | $.09 |
| | |
Cash dividends declared per common share | $.05 | $.00 | $.05 | $.00 | |
See notes to unaudited condensed consolidated financial statements.
2
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| For the Three Month Period Ended December 31, | For the Six Month Period Ended December 31, | |
| | | | | For the Three Month Period Ended September 30, 2019 | For the Three Month Period Ended September 30, 2018 |
| | |
Net income (loss) | $118,400 | $(81,000) | $260,500 | $(313,600) | $(56,200) | $142,000 |
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Other comprehensive income (loss): | | |
Unrealized holding gain (loss) | | |
Other comprehensive loss: | | |
Unrealized holding loss | | |
arising during period, | | |
net of tax | (2,900) | 1,600 | (21,000) | 4,200 | - | (18,100) |
| | |
Comprehensive Income (loss) | $115,500 | $(79,400) | $239,500 | $(309,400) | |
Comprehensive income (loss) | | $(56,200) | $123,900 |
See notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
| | | | | | |
| | | | | | |
Fiscal Year 2020 | | | | | | | | |
| | | | | | | | |
Balance, July 1, 2019 | 1,513,914 | $75,700 | $2,592,700 | $- | $3,724,700 | 19,802 | $52,400 | $6,340,700 |
| | | | | | | | |
Net loss | - | - | - | - | (56,200)
| - | - | (56,200) |
| | | | | | | | |
Stock options exercised | 2,000 | 100 | 6,900 | - | -
| -
| -
| 7,000
|
| | | | | | | | |
Stock-based compensation | - | - | 17,700 | - | - | - | - | 17,700 |
Balance, September 30, 2019
| 1,515,914 | $75,800 | $2,617,300 | $- | $3,668,500 | 19,802 | $52,400 | $6,309,200 |
| | | | | | |
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Fiscal Year 2019 | | | | | | | | |
| | | | | | | | |
Balance, July 1, 2018 | 1,513,914 | $75,700 | $2,545,900 | $1,200 | $3,131,800 | 19,802 | $52,400 | $5,702,200 |
| | | | | | | | |
Cumulative effect of the adoption of | - | - | - | -
| 22,000 | -
| -
| 22,000 |
ASU 2016-01 – Financial Instruments | | | | | | | | |
| | | | | | | | |
Net income | - | - | - | - | 142,000 | - | - | 142,000 |
| | | | | | | | |
Cash dividend declared, $.05 | - | - | - | - | (74,700) | - | - | (74,700) |
| | | | | | | | |
Unrealized holding loss on investment securities, net of tax | - | - | - | (18,100) | - | - | - | (18,100) |
| | | | | | | | |
Stock-based compensation | - | - | 8,700 | - | - | - | - | 8,700 |
Balance, September 30, 2018 | 1,513,914 | $75,700 | $2,554,600 | $(16,900) | $3,221,100 | 19,802 | $52,400 | $5,782,100 |
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the Six Month Period Ended December 31, | |
| | | For the Three Month Period Ended September 30, 2019 | For the Three Month Period Ended September 30, 2018 |
Operating activities: | | | |
| $260,500 | $(313,600) | $(56,200) | $142,000 |
Adjustments to reconcile net income (loss) provided by (used in) operating activities: | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | |
Depreciation and amortization | | 41,000 | 75,900 |
Deferred income taxes | | (19,500) | 6,000 |
Stock-based compensation | | 17,700 | 8,700 |
Loss on sale of investments | 5,000 | - | 800 | 5,000 |
Depreciation and amortization | 151,900 | 154,100 | |
Unrealized holding gain of investments | 3,300 | - | (2,300) | (6,400) |
Deferred income taxes | 7,100 | 16,500 | |
Income tax benefit of stock options exercised | - | 8,000 | |
Stock-based compensation | 18,200 | 12,400 | |
Changes in operating assets and liabilities: | | |
Trade accounts receivable | 227,600 | (184,000) | 106,400 | 254,100 |
Contract assets
| 216,400 | 133,100 | |
Contract assets, current | | - | 211,100 |
Right -of- use assets | | (902,500) | - |
Lease liability | | 969,100 | - |
Inventories | (456,000) | (431,400) | (120,800) | (33,100) |
Prepaid and other current assets | (67,900) | (66,300) | |
Prepaid and other assets | | (6,800) | (33,500) |
Accounts payable | 142,700 | 240,200 | (111,800) | (65,400) |
| 50,500 | 321,800 | 62,000 | 12,100 |
Accrued expenses and taxes | (162,000) | (24,500) | (301,200) | (115,800) |
| | |
| 136,800 | 179,900 | (267,900)
| 318,700 |
| | |
Net cash provided by (used in) operating activities | 397,300 | (133,700) | (324,100) | 460,700 |
| | |
Investing activities: | | |
Redemption of investment securities, available-for-sale | 2,700 | - | |
Purchase of investment securities, available-for- sale | (75,200) | (15,000) | |
Sale of investment securities, available-for-sale
| 72,400 | | |
Purchase of investment securities | | (25,000) | (75,200) |
Redemption of investment securities | | 23,800 | 72,500 |
Capital expenditures | (7,900) | (68,100) | (17,000) | (900) |
Purchase of other intangible assets | (6,300) | (1,500) | (7,500) | (1,300) |
| | |
Net cash used in investing activities | (14,300) | (84,600) | (25,700) | (4,900) |
| | |
Financing activities: | | |
Line of credit proceeds | - | 40,000 | |
Payments for contingent consideration | - | (142,700) | |
Cash dividend declared and paid | (74,700) | - | |
Proceeds from stock options exercised | | 7,000 | - |
Principal payments on notes payable | (3,300) | (3,400) | - | (1,600) |
| | |
Net cash used in financing activities | (78,000) | (106,100) | |
Net cash provided by (used in) financing activities | | 7,000 | (1,600) |
| | |
Net increase (decrease) in cash and cash equivalents | 305,000 | (324,400) | (342,800) | 454,200 |
| | |
Cash and cash equivalents, beginning of year | 1,053,100 | 1,025,100 | 1,602,500 | 1,053,100 |
| | |
Cash and cash equivalents, end of period | $1,358,100 | $700,700 | $1,259,700 | $1,507,300 |
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Supplemental disclosures: | | |
| | |
Cash paid during the period for: | | |
Income taxes | $39,700 | $16,000 | $40,900 | $500 |
Interest | 800 | 600 | - | 400 |
See notes to unaudited condensed consolidated financial statements.
4
SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
General: | The accompanying unaudited interim condensed consolidated financial statements are prepared pursuant to the Securities and Exchange Commission’s rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States for complete financial statements are not included herein. The Company believes all adjustments necessary for a fair presentation of these interim statements have been included and that they are of a normal and recurring nature. These interim statements should be read in conjunction with the Company’s financial statements and notes thereto, included in its Annual Report on Form 10-K, for the fiscal year ended June 30, 2018.2019. The results for the three months and six months ended December 31, 2018,September 30, 2019, are not necessarily an indication of the results for the full fiscal year ending June 30, 2019.2020. |
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Scientific Industries, Inc., Altamira Instruments, Inc. (“Altamira”), a Delaware corporation and wholly-owned subsidiary, and Scientific Bioprocessing, Inc. (“SBI”), a Delaware corporation and wholly-owned subsidiary, and Scientific Packaging Industries, Inc., an inactive wholly-owned subsidiary (all collectively referred to as the “Company”). All material intercompany balances and transactions have been eliminated.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842). The FASB issued this update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.eliminated.
Adopted Accounting Pronouncements
In AprilFebruary 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 No. 2016-10,“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing(Topic 606)”. In March 2016,2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement", which is part of the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance ondisclosure framework project to improve the previously issued ASU 2014-09, “Revenue from Contracts with Customers”.effectiveness of disclosures in the notes to the financial statements. The amendments in ASU 2016-10 provide clarifyingthe new guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shippingremove, modify, and handling costs; and determining whether an entity’s promiseadd certain disclosure requirements related to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property.fair value measurements covered in Topic 820, "Fair Value Measurement". The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company adopted the provisions of these pronouncements on July 1, 2018, using the modified retrospective approach. Revenue from the Company’s sales continue to generally be recognized when products are shipped (i.e. point in time). As such, the adoption of ASU 2016-10 had no material impact to the Company’s financial position or results of operations; however, the Company has now presented the disclosures required by this new standard refer to Note 2.
5
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. This update provides guidance on how to record eight specific cash flow issues. This update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.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 a retrospective transition methodall other requirements applied retrospectively to each period should be presented. The adoption of this ASU had no impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The adoptionWe are currently evaluating the impact of adopting this ASU had no impact on the Company’s consolidated financial statements.guidance.
Reclassification
Trade accounts receivable, current of $307,200 and $278,200, and trade accounts receivable, long term of $245,400 for the year ended June 30, 2018 were reclassified to contract assets, current; and contract assets, less current portion, respectively, on the balance sheet as of December 31, and June 30, 2018. Customer advances were reclassified to contract liabilities as of December 31, and June 30, 2018.
2. Revenue
The Company’sCompany records revenues in accordance with Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers, as amended” (“ASC Topic 606”). In accordance with Topic 606, the Company accounts for a customer contract when both parties have approved the contract and are comprised of product sales (Benchtop Laboratory Equipment Operations) as well as productscommitted to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and related services such as installation and training asit is customary for its customersprobable that the Company will collect substantially all of the Catalyst Research Instruments Operations. In addition, the Company’s Bioprocessing Systems Operations’ revenues are comprised of royalty revenues. All revenueconsideration to which it is entitled. Revenue is recognized when, the Company satisfies itsor as, performance obligation(s) under the contract (either implicit or explicit)obligations are satisfied by transferring thecontrol of a promised product or service to a customer.
Nature of Products and Services
We generate revenues from the following sources: (1) Benchtop Laboratory Equipment, (2) Catalyst Research Instruments, and (3) Royalties.
The following table summarizes the Company’s disaggregation of revenues for the three months ended September 30, 2019 and 2018.
| Benchtop Laboratory Equipment | Catalyst Research Instruments | | |
September 30, 2019: | | | | |
Revenues | $1,576,200 | $138,700 | $289,300 | $2,004,200 |
Foreign Sales | 397,600 | 71,700 | - | 469,300 |
| | | | |
September 30, 2018: | | | | |
Revenues | $1,691,900 | $217,500 | $129,200 | $2,038,600 |
Foreign Sales | 635,700 | 142,300 | - | 778,000 |
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 either when (or as) itsto customer obtains controland 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 product or service. A performance obligation is a promise in a contractcontract. Due to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majoritythe size and nature of the Company’s contracts haveinstruments, 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 performance obligation, aslicensee and its sublicenses. The Company is then obligated to pay 50% of all royalties received to the promiseentity that licenses the intellectual property to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. For contracts with multiple performance obligations,Company. During the Company allocates the contract’s transaction price to each performance obligation usingyear, the Company’s management uses its best judgement to estimate of standalone selling price for each distinct product or service in the contract, which is generally based on an observable price.royalty revenues earned during the period.
Revenue is measuredThe Company determines revenue recognition through the following steps:
| ● | Identification of the contract, or contracts, with a customer |
| ● | Identification of the performance obligations in the contract |
| ● | Determination of the transaction price |
| ● | Allocation of the transaction price to the performance obligations in the contract |
| ● | Recognition of revenue when, or as, a performance obligation is satisfied |
The Company has made the following accounting policy elections and elected to use certain practical expedients, as permitted by the amount of consideration the Company expects to receiveFASB, in exchange for transferring products or providing services. As such, revenue isapplying ASC Topic 606: 1) all revenues are recorded net of returns, allowances, customer discounts, and incentives. Revenueincentives; 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 Bioprocessing Systems OperationsCompany expenses costs to obtain a contract as they are recognized over time based on Management’s judgmentincurred if the expected period of benefit, and estimates.therefore the amortization period, is one year or less; 4) the Company accounts for shipping and handling activities that occur after control transfers to the customer as a fulfillment cost rather than an additional promised service and these fulfillment costs fall within selling expenses; 5) the Company is always considered the principal and never an agent, because it has full control and responsibility until title is transferred to the customer; 6) the Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer such as is the case with catalyst instruments.
3. Segment Information and Concentrations
The Company views its operations as three segments: the manufacture and marketing of standard benchtop laboratory equipment for research in university, hospital and industrial laboratories sold primarily through laboratory equipment distributors and laboratory and pharmacy balances and scales (“Benchtop Laboratory Equipment Operations”), the manufacture and marketing of custom-made catalyst research instruments for universities, government laboratories, and chemical and petrochemical companies sold on a direct basis (“Catalyst Research Instruments Operations”) and the design and marketing of bioprocessing systems and products and related royalty income (“Bioprocessing Systems”).
Segment information is reported as follows:
| Benchtop Laboratory Equipment | Catalyst Research Instruments | | | | Benchtop Laboratory Equipment | Catalyst Research Instruments | | | |
Three Months Ended December 31, 2018: | | |
Three Months Ended September 30, 2019: | | |
| | |
Revenues | $1,803,100 | $227,200 | $132,900 | $- | $2,163,200 | $1,576,200 | $138,700 | $289,300 | $- | $2,004,200 |
| | |
Foreign Sales | 743,600 | 222,900 | - | 966,500 | 397,600 | 71,700 | - | 469,300 |
| | |
Income (Loss) From Operations | 148,600 | (48,300) | 55,700 | - | 156,000 | 12,900 | (90,200) | 1,800 | - | (75,500) |
| | |
Assets | 4,762,000 | 1,376,100 | 727,300 | 693,300 | 7,558,700 | 5,589,400 | 1,400,900 | 1,088,100 | 784,200 | 8,862,600 |
| | |
Long-Lived Asset Expenditures | 10,800 | 1,200 | - | 12,000 | 7,800 | - | 16,700 | - | 24,500 |
| | |
Depreciation and Amortization | 66,400 | 200 | 9,400 | - | 76,000 | 30,500 | 400 | 10,100 | - | 41,000 |
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| Benchtop Laboratory Equipment | Catalyst Research Instruments | | | |
Three Months Ended September 30, 2018: | | | | | |
| | | | | |
Revenues | $1,691,900 | $217,500 | $129,200 | $- | $2,038,600 |
| | | | | |
Foreign Sales | 635,700 | 142,300 | - | - | 778,000 |
| | | | | |
Income (Loss) From Operations | 175,400 | (62,900) | 63,200 | - | 175,700 |
| | | | | |
Assets | 4,633,500 | 1,343,100 | 623,500 | 709,300 | 7,309,400 |
| | | | | |
Long-Lived Asset Expenditures | 2,200 | - | - | - | 2,200 |
| | | | | |
Depreciation and Amortization | 66,300 | 200 | 9,400 | - | 75,900 |
| Benchtop Laboratory Equipment | Catalyst Research Instruments | | | |
Three Months Ended December 31, 2017: | | | | | |
| | | | | |
Revenues | $1,686,200 | $153,500 | $52,700 | $- | $1,892,400 |
| | | | | |
Foreign Sales | 815,300 | 2,600 | - | - | 817,900 |
| | | | | |
Income (Loss) From Operations | 122,000 | (103,400) | (8,300) | - | 10,300 |
| | | | | |
Assets | 4,085,800 | 1,613,200 | 467,900 | 803,300 | 6,970,200 |
| | | | | |
Long-Lived Asset Expenditures | 33,000 | 1,900 | 2,500 | - | 37,400 |
| | | | | |
Depreciation and Amortization | 67,000 | 700 | 9,300 | - | 77,000 |
Approximately 51%36% and 53%49% of total benchtop laboratory equipmentnet sales (42% and 48% of total revenues)Benchtop Laboratory Equipment for the three month periods ended December 31,September 30, 2019 and 2018, and 2017, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
Approximately 25%33% and 21%25% of total benchtop laboratory equipmentBenchtop Laboratory Equipment sales (21% and 19% of total revenues) were derived from the Torbal Scales Division for the three months ended December 31,September 30, 2019 and 2018, and 2017, respectively.
For the three months ended December 31,September 30, 2019 and 2018, and 2017, respectively, three customers accounted for approximately 21% and 22%23% (both periods) of net sales of the Benchtop Laboratory Equipment Operations (18% and 20%19% of the Company’s total revenues). Sales of catalyst research instrumentsCatalyst 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 two and one customercustomers during the three months ended December 31, 2018 and 2017,September 30, 2019 accounted for approximately 96%90% of the Catalyst Research Instruments Operations revenues and 74%6% of the Company’s total revenues. Sales to three customers during the three months ended September 30, 2018 accounted for approximately 83% of the Catalyst Research Instrument Operations’ revenues and 10% and 7%9% of the Company’s total revenues respectively..
| Benchtop Laboratory Equipment | Catalyst Research Instruments | | | |
Six Months Ended December 31, 2018: | | | | | |
| | | | | |
Revenues | $3,495,100 | $444,600 | $262,100 | $- | $4,201,800 |
| | | | | |
Foreign Sales | 1,379,300 | 365,200 | - | - | 1,744,500 |
| | | | | |
Income (Loss) From 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 Expenditures | 13,000 | 1,200 | - | - | 14,200 |
| | | | | |
Depreciation and Amortization | 132,700 | 400 | 18,800 | - | 151,900 |
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| Benchtop Laboratory Equipment | Catalyst Research Instruments | | | |
Six Months Ended December 31, 2017: | | | | | |
| | | | | |
Revenues | $2,885,600 | $182,300 | $105,400 | $- | $3,173,300 |
| | | | | |
Foreign Sales | 1,317,600 | 9,000 | - | - | 1,326,600 |
| | | | | |
Income (Loss) From Operations | 28,100 | (287,500) | (37,100) | - | (296,500) |
| | | | | |
Assets | 4,085,800 | 1,613,200 | 467,900 | 803,300 | 6,970,200 |
| | | | | |
Long-Lived Asset Expenditures | 65,200 | 1,900 | 2,500 | - | 69,600 |
| | | | | |
Depreciation and Amortization | 131,900 | 3,500 | 18,700 | - | 154,100 |
Approximately 50% total benchtop laboratory equipment sales (41% and 46% of total revenues) for both six month periods ended December 31, 2018 and 2017, respectively, were derived from the Company’s main product, the Vortex-Genie 2 mixer, excluding accessories.
Approximately 25% and 23% of total benchtop laboratory equipment sales (21% of total revenues) were derived from the Torbal Scales Division for both the six months ended December 31, 2018 and 2017, respectively. For the six months ended December 31, 2018 and 2017, respectively, three customers accountedy for approximately 22% of net sales of the Benchtop Laboratory Equipment Operations for both six month periods ended December 31, 2018 and 2017 (18% and 20% 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 five and one customer during the six months ended December 31, 2018 and 2017, accounted for approximately 90% and 64% of the Catalyst Research Instrument Operations’ revenues and 10% and 4% of the Company’s total revenues, respectively.
4. Fair Value of Financial Instruments
The FASB defines the fair value of financial instruments as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements do not include transaction costs.
The accounting guidance also expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels, which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are described below:
Level 1 - Inputs that are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 - Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3 - Prices or valuation that require inputs that are both significant to the fair value measurement and unobservable.
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company calculated the fair value of its Level 1 and 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. These calculations take into consideration the credit risk of both the Company and its counterparties. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
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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, 2018September 30, 2019 and June 30, 20182019 according to the valuation techniques the Company used to determine their fair values:
| | Fair Value Measurements Using Inputs Considered as
|
| Fair Value at September 30, 2019 | | | |
Assets: | | | | |
Cash and cash equivalents | $1,259,700 | $1,259,700 | $- | $- |
Investment securities | 333,600 | 333,600 | - | - |
| | | | |
Total | $1,593,300 | $1,593,300 | $- | $- |
| | | | |
Liabilities: | | | | |
Contingent consideration | $618,000 | $- | $- | $618,000 |
| | Fair Value Measurements Using Inputs Considered as |
| Fair Value at December 31, 2018 | | | |
| | | | |
Assets: | | | | |
| | | | |
Cash and cash equivalents | $1,358,100 | $1,358,100 | $- | $- |
Available for sale securities | 307,800 | 307,800 | - | - |
| | | | |
| $1,665,900 | $1,665,900 | $- | $- |
| | | | |
Liabilities: | | | | |
| | | | |
Contingent consideration | $408,000 | $- | $- | $408,000 |
| | Fair Value Measurements Using Inputs Considered as |
| Fair Value at June 30, 2018 | | | |
| | | | |
Assets: | | | | |
| | | | |
Cash and cash equivalents | $1,053,100 | $1,053,100 | $- | $- |
Available for sale securities | 314,700 | 314,700 | - | - |
| | | | |
| $1,367,800 | $1,367,800 | $- | $- |
| | | | |
Liabilities: | | | | |
| | | | |
Contingent consideration | $408,000 | $- | $- | $408,000 |
The following table sets forth an analysis of changes during the six months ended December 31, 2018 and 2017 in Level 3 financial liabilities of the Company:
| | |
Beginning balance | $408,000 | $297,000 |
Payments | - | (142,700) |
| | |
Ending balance | $408,000 | $154,300 |
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| | Fair Value Measurements Using Inputs Considered as |
| Fair Value at June 30, 2019 | | | |
Assets: | | | | |
Cash and cash equivalents | $1,602,500 | $1,602,500 | $- | $- |
Investment securities | 330,900 | 330,900 | - | - |
| | | | |
Total | $1,933,400 | $1,933,400 | $- | $- |
| | | | |
Liabilities: | | | | |
Contingent consideration | $618,000 | $- | $- | $618,000 |
Investments in marketable securities classified as available for saleavailable-for-sale by security type at December 31, 2018September 30, 2019 and June 30, 20182019 consisted of the following:
| | | Unrealized Holding Gain (Loss) | | | Unrealized Holding Gain (Loss) |
At December 31, 2018: | | |
Available for sale: | | |
At September 30, 2019: | | |
| $48,700 | $67,100 | $18,400 | $71,300 | $96,500 | $25,200 |
| 260,500 | 240,700 | (19,800) | 246,600 | 237,100 | (9,500) |
| | |
| $309,200 | $307,800 | $(1,400) | $317,900 | $333,600 | $15,700 |
| | | Unrealized Holding Gain (Loss) |
At June 30, 2019: | | | |
Equity securities | $47,100 | $72,000 | $24,900 |
Mutual funds | 292,300 | 258,900 | (33,400) |
| | | |
| $339,400 | $330,900 | $(8,500) |
| | | Unrealized Holding Gain (Loss) |
At June 30, 2018: | | | |
Available for sale: | | | |
Equity securities | $45,700 | $67,800 | $22,100 |
| 267,800 | 246,900 | (20,900) |
| | | |
| $313,500 | $314,700 | $1,200 |
5.5. 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.
| September 30, 2019 | June 30, 2019 |
Raw materials | $1,737,500 | $1,738,300 |
Work-in-process | 229,900 | 106,400 |
| 745,700 | 747,600 |
| $2,713,100 | $2,592,300 |
| | |
| | |
Raw materials | $1,554,000 | $1,488,000 |
Work-in-process | 555,300 | 352,700 |
Finished goods | 614,600 | 427,200 |
| | |
| $2,723,900 | $2,267,900 |
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6.6. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Company’s acquisitions. Goodwill amounted to $705,300 at December 31, 2018September 30, 2019 and June 30, 2018,2019, all of which is expected to be deductible for tax purposes.
The components of other intangible assets are as follows:
| | | | | Useful Lives | | | |
At December 31, 2018: | | | |
| | | |
At September 30, 2019: | | | |
Technology, trademarks | 5/10 yrs. | $662,800 | $649,500 | $13,300 | 5/10 yrs. | $663,800 | $661,800 | $2,000 |
Trade names | 6 yrs. | 140,000 | 112,800 | 27,200 | 6 yrs. | 140,000 | 130,300 | 9,700 |
Websites | 5 yrs. | 210,000 | 203,000 | 7,000 | 5 yrs. | 210,000 | - |
Customer relationships | 9/10 yrs. | 357,000 | 301,400 | 55,600 | 9/10 yrs. | 357,000 | 311,400 | 45,600 |
Sublicense agreements | 10 yrs. | 294,000 | 209,500 | 84,500 | 10 yrs. | 294,000 | 231,500 | 62,500 |
Non-compete agreements | 5 yrs. | 384,000 | 375,000 | 9,000 | 5 yrs. | 384,000 | - |
IPR&D | 3 yrs. | 110,000 | - | 3 yrs. | 110,000 | - |
| 5 yrs. | 204,300 | 178,300 | 26,000 | 5 yrs. | 229,200 | 186,100 | 43,100 |
| | | | |
| | $2,362,100 | $2,139,500 | $222,600 | | $2,388,000 | $2,225,100 | $162,900 |
| | | | | Useful Lives | | | |
| | | |
At June 30, 2018: | | | |
| | | |
At June 30, 2019: | | | |
Technology, trademarks | 5/10 yrs. | $662,800 | $613,400 | $49,400 | 5/10 yrs. | $663,800 | $661,700 | $2,100 |
Trade names | 6 yrs. | 140,000 | 101,100 | 38,900 | 6 yrs. | 140,000 | 124,400 | 15,600 |
Websites | 5 yrs. | 210,000 | 182,000 | 28,000 | 5 yrs. | 210,000 | - |
Customer relationships | 9/10 yrs. | 357,000 | 294,800 | 62,200 | 9/10 yrs. | 357,000 | 308,100 | 48,900 |
Sublicense agreements | 10 yrs. | 294,000 | 194,800 | 99,200 | 10 yrs. | 294,000 | 224,100 | 69,900 |
Non-compete agreements | 5 yrs. | 384,000 | 348,000 | 36,000 | 5 yrs. | 384,000 | - |
IPR&D | 3 yrs. | 110,000 | - | 3 yrs. | 110,000 | - |
Other intangible assets | 5 yrs. | 198,100 | 173,100 | 25,000 | 5 yrs. | 221,700 | 183,200 | 38,500 |
| | | | |
| | $2,355,900 | $2,017,200 | $338,700 | | $2,380,500 | $2,205,500 | $175,000 |
Total amortization expense was $61,300$19,500 and $61,100$61,000 for the three months ended December 31,September 30, 2019 and 2018, and 2017, respectively and $122,300 and $122,200 for the six months ended December 31, 2018 and 2017, respectively. As of December 31, 2018,September 30, 2019, estimated future amortization expense related to intangible assets is $64,700$51,000 for the remainder of the fiscal year ending, June 30, 2019, $66,400 for fiscal 2020, $49,100$54,300 for fiscal 2021, $26,100$31,700 for fiscal 2022, $9,800$15,000 for fiscal 2023 and $6,500 thereafter.$10,900 for fiscal 2024.
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7. EarningsIncome (Loss) Per Common Share
Earnings (loss)Income (Loss) per common share data was computed as follows:
| For the Three Month Period Ended December 31, 2018 | For the Three Month Period Ended December 31, 2017 | For the Six Month Period Ended December 31, 2018 | For the Six Month Period Ended December 31, 2017 | |
| | For the Three Months Ended September 30, 2019 | For the Three Months Ended September 30, 2018 |
Net income (loss) | $118,400 | $(81,000) | $260,500 | $(313,600) | $(56,200) | $142,000 |
| | |
Weighted average common shares outstanding | 1,494,112 | 1,494,212 | 1,494,112 |
Effect of dilutive securities | 18,839 | - | 11,368 | - | - | 3,897 |
Weighted average dilutive common shares outstanding | 1,512,951 | - | 1,505,480 | - | 1,494,212 | 1,498,009 |
| | |
Basic earnings (loss) per common share | $.08 | $(.05) | $.17 | $(.21) | (.04) | $.10 |
Diluted earnings (loss) per common share | $.08 | $(.05) | $.17 | $(.21) | (.04)
| $.09
|
Approximately 82,00044,200 and 92,000 shares of the Company's common stock issuable upon the exercise of outstanding options were excluded from the calculation of diluted earnings per common share for the three months ended September 30, 2019 and six month periods ended December 31, 2017,2018, respectively, because the effect would be anti-dilutive.
12
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 February 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 November 2020. 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.
The Company determines whether an agreement contains a lease at inception based on the Company’s right to obtain substantially all of the economic benefits from the use of the identified asset and its right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the Right-Of-Use (“ROU”) assets represent the Company’s right to use the underlying assets for the respective lease terms. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. The ROU asset is further adjusted to account for previously recorded lease expenses such as deferred rent and other lease liabilities. As the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate of 5.0% as the discount rate to calculate the present value of future lease payments, which was the interest rate that its bank would charge for a similar loan.
The Company elected not to recognize a ROU asset and a lease liability for leases with an initial term of twelve months or less. In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses or payments based on an excess of a specified base. These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expenses in the period incurred. The Company’s lease agreements do not contain residual value guarantees.
The Company elected available practical expedients for existing or expired contracts of lessees wherein the Company is not required to reassess whether such contracts contain leases, the lease classification or the initial direct costs. The Company is not utilizing the practical expedient which allows the use of hindsight by lessees and lessors in determining the lease term and in assessing impairment of its ROU assets. The Company utilized the transition method allowing entities to only apply the new lease standard in the year of adoption.
As of September 30, 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 $68,400, of which $68,300 was recorded as leases expense.
The Company’s approximate future minimum rental payments under all leases existing at September 30, 2019 through February 2025 are as follows:
Fiscal year ending June 30, | | |
Remainder of 2020 | $208,800 | |
2021 | 222,500 | |
2022 | 184,600 | |
2023 | 190,200 | |
2024 | 195,900 | |
2025 | 91,600 | |
Total future minimum payments | 1,093,600 | |
Less: Imputed interest | 124,500 | |
Total Present Value of Operating Lease Liabilities | 969,100 | |
(1) Operating lease payments exclude $76,400 of legally binding lease payments for real estate leases signed but not yet commenced. Operating leases that have been signed but not yet commenced are expected to commence in the second quarter of fiscal 2020, with a lease term of 3 years.
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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 incomea loss before income tax expense of $148,800$75,700 for the three months ended December 31, 2018September 30, 2019 compared to $16,400income before tax expense of $177,500 for the three months ended December 31, 2017,September 30, 2018, primarily from the result of decreased revenues and gross margins for the Benchtop Laboratory Equipment Operations resulting from reduced orders from Asia, primarily China, and increased component costs as a result of tariffs imposed. In addition, the Company’s Scientific Bioprocessing Operations also reflected decreased income from operations due to an increasethe substantial investment in earned royalties by the Bioprocessing Systems Operations and reduced losses by theits new product development efforts resulting in increased expenses. The Company’s Catalyst Research Instruments Operations. The Company reflected lower income before income tax of $326,400 for the six months ended December 31, 2018 compared to a loss before income tax of $290,100 for the six months ended December 31, 2017 due to increases in revenues and profits across all business segments as described further under “Results of Operations”.resulting from lower sales. The results reflected total non-cash amounts for depreciation and amortization of $76,000 $41,000and $151,900 for the three and six month periods ended December 31, 2018 compared to $77,000 and $154,100$75,900 for the corresponding three months ended September 30, 2019 and six month periods in 2017.2018, respectively.
Results of OperationsOperations..
The Three Months Ended December 31, 2018 Compared with The Three Months Ended December 31, 2017
Net revenues for the three months ended December 31, 2018 increased $270,800 (14.3%September 30, 2019 decreased $34,400 (1.7%) to $2,163,200$2,004,200 from $1,892,400$2,038,600 for the three months ended December 31, 2017,September 30, 2018, reflecting increased salesa decrease of benchtop laboratory equipment of $116,900 resulting primarily from sales of Torbal brand products, an increase of $73,700$115,700 (6.8%) decrease in net sales of catalyst research instrumentsBenchtop Laboratory Equipment primarily due to sales of customits Genie brand products and an increase in earned bioprocessing royalties of $80,200 due to higher royalties earned overseas.Asia, particularly China. The benchtop laboratory equipmentBenchtop Laboratory Equipment sales reflected $458,700$522,400 of Torbal brand product sales for the three months ended December 31, 2018,September 30, 2019, compared to $359,900$425,300 in the three months ended December 31, 2017.
September 30, 2018 as a result of continued growth in sales of the new force gauges product line. Sales of Catalyst Research Instruments decreased by $78,800 to $138,700 for the three months ended September 30, 2019 compared to $217,500 for the three months ended September 30, 2018 due to low order input during the period. As of December 31, 2018,September 30, 2019, the order backlog for catalyst research instrumentsCatalyst Research Instruments was $617,400, substantially$173,500, all of which is expected to be shipped during the fiscal year ending June 30, 2020, compared to $329,400 as of September 30, 2018. Revenues derived from the Bioprocessing Systems Operations which are comprised primarily of net royalties accrued from sublicenses increased by $160,100 (123.9%) to $289,300 for the three months ended September 30, 2019 compared to $752,500 as of December 31, 2017.$129,200 for the three months ended September 30, 2018 due to increased royalties on Europe sales.
The overallgross profit percentage on a combined basis was 48.9% for the three months ended September 30, 2019 compared to 46.4% for the three months ended September 30, 2018. However, gross margins for the Benchtop Laboratory Equipment Operations were affected by higher component costs impacted by tariffs and the gross profit percentage for the three months ended December 31, 2018 increased to 45.1% compared to 40.5% for the three months ended December 31, 2017 due to higher sales and lower labor and overhead costs by the Catalyst Research Instruments Operations.was lower due to decreased sales during the period and high overhead.
General and administrative expenses for the three months ended December 31, 2018September 30, 2019 increased by $54,200 (13.3%$93,700 (22.5%) to $462,100$510,200 compared to $407,900$416,500 for the three months ended December 31, 2017,September 30, 2018 mainly due to various small increasesthe ramp up in expenses by the Benchtop Laboratory EquipmentScientific Bioprocessing Operations, and the Catalyst Research Instruments Operations..various other corporate expenses.
Selling expenses for the three months ended December 31, 2018September 30, 2019 increased $33,600 (15.7%$73,000 (30.9%) to $248,200$309,100 from $214,600$236,100 for the three months ended December 31, 2017,September 30, 2018 primarily due to higher salesincreased market research and marketing related expenses foractivities by the Bioprocessing Systems Operations, and to a lesser extent increased marketing by the Benchtop Laboratory Equipment Operations.
Research and development expenses decreasedincreased by $23,500 (17.7%$119,200 (101.5%) to $109,400$236,600 for the three months ended December 31, 2018September 30, 2019 compared to $132,900$117,400 for the three months ended December 31, 2017, primarilySeptember 30, 2018, mainly due to decreased newthe ramp up in product development costs incurredactivities by the Benchtop Laboratory EquipmentBioprocessing Systems Operations related to the Torbal Scales Division’s new automated pill counter anticipated to be launched in autumn 2019.which included staffing and materials.
Total other income (expense), net was ($7,200) for the three months ended December 31, 2018 compared to $6,100 for the three months ended December 31, 2017 due to realized holding losses on investment securities.
The Company reflected an income tax expense benefit of $30,400$19,500 for the three months ended December 31, 2018September 30, 2019 compared to an income tax expense of $97,400$35,500 for the three months ended December 31, 2017,September 30, 2018, primarily as a result ofdue to the expected lower corporate tax rate underloss generated during the Tax Cuts and jobs Act passed by the U.S. Congress and signed into law on
December 22, 2017.three months ended September 30, 2019.
As a result of the foregoing, the Company recorded a net income loss of $118,400$56,200 for the three months ended December 31, 2018September 30, 2019 compared to a net lossincome of ($81,000)$142,000 for the three months ended December 31, 2017.
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The Six Months Ended December 31, 2018 Compared with The Six Months Ended December 31, 2017
Net revenues for the six months ended December 31, 2018 increased $1,028,500 (32.4%) to $4,201,800 from $3,173,300 for the six months ended December 31, 2018, reflecting an increase of $609,500 in net sales of benchtop laboratory equipment resulting from increased orders for Genie and Torbal brand products, an increase of $262,300 in net sales of catalyst research instruments derived from custom products, and an increase ofSeptember 30, 2018. $156,700 in bioprocessing royalties. The benchtop laboratory equipment sales reflected $884,000 of Torbal brand product sales for the six months ended December 31, 2018, compared to $664,200 in the six months ended December 31, 2017.
The overall gross profit percentage for the six months ended December 31, 2018 was 45.7% compared to 38.4% for the six months ended December 31, 2017 as a result of the higher sales and fixed overhead of the Benchtop Laboratory Equipment Operations and improved gross margins by the Catalyst Research Instruments Operations.
General and administrative expenses for the six months ended December 31, 2018 increased $42,300 (5.1%) to $878,600 from $836,300 for the six months ended December 31, 2017 due to various increases in administrative expenses by the Benchtop Laboratory Equipment Operations and the Catalyst Research Instrument Operations.
Selling expenses for the six months ended December 31, 2018 increased $68,700 (16.5%) to $484,300 from $415,600 for the six months ended December 31, 2017, due to increased marketing efforts and sales commissions related to the Benchtop Laboratory Equipment Operations.
Research and development expenses decreased by $35,300 (13.5%) to $226,700 for the six months ended December 31, 2018 compared to $262,000 for the six months ended December 31, 2017, primarily due to decreased new product development activities by the Benchtop Laboratory Equipment Operations related to the Torbal Scales Division’s new automated pill counter anticipated to be launched in the autumn 2019.
Total other income (expense), net was $(5,400) for the three months ended December 31, 2018 compared to $6,400 for the three months ended December 31, 2017 principally due to realized losses on investment securities.
The Company reflected income tax expense of $65,900 for the six months ended December 31, 2018 compared to $23,500 for the six months ended December 31, 2017, primarily due to higher income.
As a result of the foregoing, the Company recorded net income of $260,500 for the six months ended December 31, 2018 compared to a net loss of ($313,600) for the six months ended December 31, 2017.
Liquidity and Capital Resources. Cash and cash equivalents increaseddecreased by $305,000$342,800 to $1,358,100$1,259,700 as of December 31, 2018September 30, 2019 from $1,053,100$1,602,500 as of June 30, 2018 primarily due to income during the period.2019.
Net cash used in operating activities was $324,100 for the three months ended September 30, 2019 compared to net cash provided by operating activities was $397,300of $460,700 during the three months ended September 30, 2018, primarily as a result of the loss incurred for the six months ended December 31, 2018 compared to $133,700 used during the six months ended December 31, 2017. The current period reflected higher income and accounts receivable balances. year period. Net cash used in investing activities was $14,300$25,700 for the sixthree months ended December 31, 2018September 30, 2019 compared to $84,600$4,900 used during the sixthree months ended December 31, 2017September 30, 2018 principally due to lowernew capital equipment purchasespurchased during the current year period by the Benchtop Laboratory Equipment Operations. Operations.The Company used $78,000received proceeds of $7,000 in financing activities in the sixthree months ended December 31, 2018September 30, 2019 compared to $106,100a loss of $1,600 in the sixthree months ended December 31, 2017 mainlySeptember 30, 2018 due to contingent consideration paymentsthe exercise of stock options in the prior year.current year.
The Company's working capital increaseddecreased by $535,100$203,500 to $4,653,300$4,802,300 as of December 31, 2018September 30, 2019 compared to $4,118,200,$5,005,800, as of June 30, 2018 mainly2019 due to the incomeloss generated during the period.
The Company has a Demand Line of Credit through December 2019 with First National Bank of Pennsylvania which provides for borrowings of up to $300,000 for regular working capital needs, bearing interest at prime, currently.currently 4.75%. 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, 2018September 30, 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, 2019September 30, 2020 from its available financial resources including the lines of credit, its cash and investment securities, and operations. Commencing in the fourth quarter of the fiscal year ended June 30, 2019, the Company began committing significant resources for the Bioprocessing Systems Operations for new engineering personnel, market research, materials, supplies, and administration, and expects to continue to grow this business segment which will require substantial cash outlays.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, based on an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), the Chief Executive and Chief Financial Officer of the Company has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its Exchange Act reports is recorded, processed, summarized and reported within the applicable time periods specified by the SEC's rules and forms. The Company also concluded that information required to be disclosed in such reports is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting.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 waswere no change in the Company'ssignificant changes to our internal controlscontrol over financial reporting that occurreddue 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 most recently completed fiscal quarterperiod covered by this Quarterly Report or in other factors that have materially affected, or isare reasonably likely to materially affect, the Company'sour 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
ItemItem 6. Exhibits and Reports on Form 8-K
Exhibit Number | | Description |
| | |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Reports on Form 8-K:
Report dated January 25, 2019 reporting under items 1.01, 5.02, 5.07, and 9.01None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 12,November 14, 2019 | SCIENTIFIC INDUSTRIES, INC. (Registrant) /s/ Helena R. Santos | |
| Helena R. Santos President, Chief Executive Officer, Treasurer
Chief Financial and Principal Accounting OfficerTreasurer
| |