SCIENTIFIC INDUSTRIES INC 10-K

Item 7 . 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 a loss before income tax benefit of $1,139,900 for fiscal 2020 compared to income before income tax expense of $770,200 for fiscal 2019, primarily due to increased operating expenses as a result of the Company’s investment in its Bioprocessing Systems operations, decreased sales of catalyst research products, a non-recurring charge for the termination of a management employee, and other corporate expenses. Commencing in the last quarter of the Company’s fiscal year 2019, the Company began to invest heavily in its bioprocessing business by hiring a new President of SBI, engineering staff, application scientists, sales and marketing personnel, which is expected to continue at increased levels into fiscal 2021. In June 2020 the Company raised approximately $6 million through the sale of its Common Stock and warrants to purchase Common Stock to finance these efforts. The Company’s results also suffered from a material decrease in sales of Catalyst Research Instruments due mostly to the COVID-19 pandemic, and to a lesser extent, decreased sales of Benchtop Laboratory Equipment in the last quarter of fiscal 2020, also due to the pandemic. The results reflect total non-cash amounts for depreciation, amortization, and adjustments to contingent consideration liabilities of approximately $273,500 for fiscal 2020 and approximately $778,500 for fiscal 2019.              14           The challenges posed by the COVID-19 pandemic on the global economy began to take effect and impact the Company’s operations at the end of the third quarter of the year ended June 30, 2020.  At that time, the Company took appropriate action and put plans in place to diminish the effects of COVID-19 on its operations, enabling the Company to continue to operate with minor or temporary disruptions to its operations. The Company took immediate action as it pertains to COVID-19 preparedness by implementing the Center for Disease Control’s guidelines for employers in order to protect the Company’s employees’ health and safety, with actions such as implementing work from home, social distancing in the workplace, requiring self quarantine for any employee showing symptoms, wearing face coverings, and training employees on maintaining a healthy work environment. However, if an employee becomes infected in the future, and the Company is forced to shut down for a period of time, it could have a short-term negative impact on operations. At the beginning of the pandemic, the Catalyst Research Instruments and Bioprocessing Systems Operations were shut down due to state mandates, however, the impact on operations was immaterial, and the Company has been able to retain its employees without furloughs or layoffs, in part, due to the Company’ receipt of $563,800 loan under the Federal Government’s Paycheck Protection Program. The Company has not experienced and does not anticipate any material impact on its ability to collect its accounts receivable due to the nature of its customers, which are primarily distributors of laboratory equipment and supplies that have the ability to pay. However, there were some delays in receiving some accounts receivable due for catalyst research instruments due to customer shutdowns, and there was a material negative impact on the revenues of the Catalyst Research Instruments. The Company has not experienced and does not anticipate any material impairment to its tangible and intangible assets, system of internal controls, supply chain, or delivery and distribution of its products as a result of COVID-19, however the ultimate impact of COVID-19 on the Company’s business, results of operations, financial condition and cash flows is dependent on future developments, including the duration or worsening of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.     Results of Operations. Net revenues for fiscal 2020 decreased $1,629,500 (15.9%) to $8,570,300 from $10,199,800 for fiscal 2019, reflecting a decrease of $1,029,000 in net sales of Catalyst Research Instruments, due mostly to COVID-19; a decrease of $305,300 in royalties earned by the Bioprocessing Systems operations due to lack of royalties under a previous European patent, and a decrease of $295,200 in sales of Benchtop Laboratory Equipment due to COVID-19.           Sales of Catalyst Research Instruments are comprised of a small number of large orders, while sales of Benchtop Laboratory Equipment are comprised of a large number of small orders. As of June 30, 2020, the order backlog for Catalyst Research Instruments was $176,500, all of which is expected to be shipped during the fiscal year ending June 30, 2021, compared to $124,200 as of June 30, 2019.                The gross profit percentage for fiscal 2020 was 44.9% compared to 42.8% for fiscal 2019. The current year reflected higher gross profit margin percentage for the Bioprocessing Systems operations, a slightly lower gross margin percentage for the Benchtop Laboratory Equipment Operations due in part to higher material costs including tariffs and fixed overhead, and a negative gross profit margin percentage for the Catalyst Research Instruments due to materially lower sales.               General and administrative expenses for fiscal 2020 increased by approximately $489,500 (25.4%) to $2,413,900 compared to $1,924,400 for fiscal 2019 due primarily to non-recurring termination costs for a management employee, director fees, and increased administrative costs incurred by the Bioprocessing Systems operations.     Selling expenses for fiscal 2020 increased approximately $300,300 (26.4%) to $1,436,400 from $1,136,100 for fiscal 2019, primarily due to increased sales and marketing expenses incurred by the Bioprocessing Systems operations.     Research and development expenses amounted to $1,140,000 for fiscal 2020 compared to $530,500 for fiscal 2019, due to increased product development expenditures of both labor and materials by the Bioprocessing Systems operations. During the last quarter of fiscal 2019, the Company's Bioprocessing Systems operations began to expand its product development efforts with the hiring of several engineers.       15     Total other income (loss), net was $(3,600) for fiscal 2020 compared to $(5,900) in fiscal 2019.     The Company reflected income tax benefit of $436,600 for fiscal 2020 compared to income tax expense of $124,600 for fiscal 2019, primarily due to the loss incurred.     As a result of the foregoing, the Company recorded a net loss of $703,300 for fiscal 2020 compared to net income of $645,600 for fiscal 2019.   Liquidity and Capital Resources. Cash and cash equivalents increased by $5,957,200 to $7,559,700 as of June 30, 2020 from $1,602,500 as of June 30, 2019.     Net cash used in operating activities was 168,100 for fiscal 2020 compared to net cash provided by operating activities of $1,159,500 for fiscal 2019, primarily due to the net loss for the current year. Net cash used in investing activities was $84,100 for fiscal 2020 compared to $218,400 for fiscal 2019 due mainly to decreased capital expenditures in the current year. Net cash provided by financing activities was $6,209,400 for fiscal 2020 compared to $391,700 used by the Company during fiscal 2019 due mainly to the equity financing and the proceeds from the Payroll Protection Program loan.     The Company's working capital increased by $5,003,300 to $10,099,100 as of June 30, 2020 compared to $5,005,800, as of June 30, 2019, primarily due to the cash received from the equity financing.       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, currently 3.25% at June 30, 2020. Advances on the line are secured by a pledge of the Company’s assets including inventory, accounts receivable, chattel paper, equipment and general intangibles of the Company. As of June 30, 2020, no borrowings were outstanding under such line. On April 14, 2020 the Company received a loan, all of which is outstanding, under the Federal Government’s Paycheck Protection Program with its bank, First National Bank, amounting to $563,700 at an interest rate of 1% with a maturity date of April 17, 2022, a majority of which is expected to be forgiven under the program.            In June 2020, the Company raised $6,004,400 (net of issuance costs) through the sale of 1,349,850 shares of the Company’s common stock and 1,349,850 warrants to purchase Common Stock. The sale was made in a private placement transaction, pursuant to the exemption provided by Section 4(2) of the Securities Act and certain rules and regulations promulgated under that section and pursuant to exemptions under state securities laws, as a sale to “accredited investors” as defined in Rule 501(a) of the Securities Act. The Company intends to use the net proceeds from the sale of the securities for the development of the business of its Bioprocessing Systems operations.     Management believes that the Company will be able to meet its cash flow needs during the next 12 months from its available financial resources including the cash raised in June, cash from operations, its investments, and the line of credit. Commencing in the fourth quarter of fiscal 2019 the Company began committing significant resources to the Bioprocessing Systems operations for staffing, sales and marketing, and administration.             Capital Expenditures . During fiscal 2020, the Company incurred $50,900 in capital expenditures. The Company expects that based on its current operations, its capital expenditures will be approximately the same for the fiscal year ending June 30, 2021.     Off-Balance Sheet Arrangements . None.     16       Item 8. Financial Statements and Supplementary Data.   The consolidated Financial Statements required by this item are attached hereto on pages F1-F25.   Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.     Not applicable.