SCIENTIFIC INDUSTRIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes included in our Annual Report on Form 10-KT for the six month transition period beginning July 1, 2022 and ended December 31, 2022, filed on April 17, 2023. 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 statements. 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. Throughout this Quarterly Report on Form 10-Q, the terms the “Company,” ”Scientific,” “we,” “our” or “us,” refer to Scientific Industries, Inc. and its subsidiaries on a consolidated basis, unless stated or the context implies otherwise. Overview . Scientific Industries, Inc., a Delaware corporation (“SI” and along with its subsidiaries, the “Company”, “we”, “our”), is engaged in the design, manufacture, and marketing of standard benchtop laboratory equipment (“Benchtop Laboratory Equipment”), and through its wholly-owned subsidiary, Scientific Bioprocessing Holdings, Inc., a Delaware corporation (“SBHI”), the design, manufacture, and marketing of bioprocessing systems and products (“Bioprocessing Systems”). SBHI has two wholly-owned subsidiaries – Scientific Bioprocessing, Inc., a Delaware corporation (“SBI”), and aquila biolabs GmbH, a German corporation (“Aquila”). The Company’s products are used primarily for research purposes by universities, pharmaceutical companies, pharmacies, national laboratories, medical device manufacturers, and other industries performing laboratory-scale research. Until November 30, 2020, the Company was also engaged in the design, manufacture and marketing of customized catalyst research instruments through its wholly-owned subsidiary, Altamira Instruments, Inc, a Delaware corporation (“Altamira”). On November 30, 2020, the Company sold significantly all of Altamira’s assets and Altamira’s operations were discontinued. COVID-19 The challenges posed by the COVID-19 pandemic on the global economy affected the Company with minor or temporary disruptions to its operations. The Company took appropriate action and put plans in place to diminish the effects of COVID-19 on its operations, 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. In fiscal years ended June 30, 2020 and fiscal 2021, the Company received loans from the Paycheck Protection Program (the “PPP”) administered by the U.S. Small Business Administration, all of which were repaid or forgiven through the fiscal year ended June 30, 2022. 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. The Company experienced some delays from its supply chain which caused delayed delivery of some products, however this is deemed temporary and does not affect the Company’s major product, the Vortex-Genie 2. The extent to which the COVID-19 outbreak ultimately impacts the Company’s business, future revenues, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and actions to curtail the virus, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, the Company may experience a significant impact to its business as a result of the global economic impact of COVID-19, including any economic downturn or recession that has occurred or may occur in the future. As a result of the impact of COVID-19 on capital markets, the availability, amount, and type of financing available to the Company in the near future is uncertain and cannot be assured and is largely dependent upon evolving market conditions and other factors. The Company intends to continue to monitor the situation and may adjust its current business plans as more information and guidance become available. Results of Operations . Three months ended June 30, 2023 and 2022 The Company’s results reflect those of the Benchtop Laboratory Equipment Operations and the Bioprocessing Systems Operations. The Company realized a loss from continuing operations before income tax expense of $2,185,100 for the three months ended June 30, 2023 compared to a $6,583,500 loss from continuing operations before income tax expense for the three months ended June 30, 2022. Excluding the prior period goodwill impairment expense of $4,280,100, the Company realized a increase in net revenue and operating expenses in the current period compared to prior period, as discussed below. 17 Table of Contents Revenues Net revenues for the three months ended June 30, 2023 increased $205,500 (7.4%) to $2,982,500 from $2,777,000 for the three months ended June 30, 2022, due primarily by higher revenues of Bioprocessing Systems Operations of $106,600 and of the Benchtop Laboratory Equipment Operations of $98,900 due primarily by increased sales of the Torbal division. Sales of Torbal brand products amounted to approximately $943,000 for the three months ended June 30, 2023 compared to $638,500 in the prior period. Gross profit The gross profit percentage for the three months ended June 30, 2023 and 2022, were 45.3% and 45.7%, respectively. The 0.4% decrease is due primarily to increases in material, labor and overhead in the Benchtop Laboratory Equipment Operations. General and administrative expenses General and administrative expenses for the three months ended June 30, 2023 and 2022, were $1,299,900 and $1,374,300, respectively. The decrease of $74,400 (5.4%) is due primarily to decreased expenses due to the consolidation of operations in the Bioprocessing Systems Operations of the Pittsburgh, Pennsylvania and Baesweiller, Germany facilities. Selling expenses Selling expenses for the three months ended June 30, 2023 and 2022, were $1,591,800 and $1,314,000, respectively. The increase of $277,800 (21.1%) is due primarily to the increased direct hire of sales and marketing employees in the Bioprocessing Systems Operations compared to prior period and to a lesser extent, increased marketing expenditures in the Benchtop Laboratory Equipment Operations as compared to prior period. Research and development expenses Research and development expenses for the three months ended June 30, 2023, and 2022, were $684,500 and $732,000, respectively. The decrease of $47,500 (6.5%) is, due to the normalization of hiring research and development employees in the Bioprocessing Systems Operations, partially offset by increased research and development expenditures related to the VIVID automated pill counter in the Benchtop Laboratory Equipment Operations as compared to prior period. Impairment of goodwill and intangible assets Impairment of goodwill and intangible assets for the three months ended June 30, 2023 and 2022, were $0 and $4,280,100, respectively. There was no impairment of goodwill and intangible assets for the three months ended June 2023. For the three months ended June 30, 2022, the Company recorded a $4,280,100 impairment of goodwill as a result of a goodwill impairment analysis, of which the Company determined the carrying value of the Bioprocessing Systems reporting unit exceeded its fair value and therefore the associated goodwill was impaired. Other income (expense), net Other income (expense), net, for the three months ended June 30, 2023 and 2022, were $41,100 and ($150,900), respectively. The increase is due primarily to the increased unrealized gain and interest income on investment securities, partially offset by the decrease in realized loss on investment securities during the current quarter period. 18 Table of Contents Income tax Income tax expense for the three months ended June 30, 2023, and 2022, was $108,800 and $3,449,400, respectively. The income tax expense for the three months ended June 30, 2023 of $108,800 is attributable to the finalization of a income tax receivable filing claim. In addition, the Company recorded a $691,600 income tax benefit which was offset against a full valuation allowance of $691,600 to the change of net deferred tax assets due to the uncertainty that the net deferred tax assets will not be fully realized in the future. The income tax expense for the three months ended June 30, 2022 reflects a full valuation allowance against the deferred tax asset of $3,449,400. In the future the Company changes the determination as to the amount of deferred tax assets that can be realized, the Company will adjust the valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. Six months ended June 30, 2023 and 2022 The Company’s results reflect those of the Benchtop Laboratory Equipment Operations and the Bioprocessing Systems Operations. The Company realized a loss from continuing operations before income tax benefit of $4,557,000 for the six months ended June 30, 2023 compared to a $8,428,100 loss from continuing operations before income tax expense for the six months ended June 30, 2022. Excluding the prior period goodwill impairment expense of $4,280,100, the Company realized a increase in net revenue and operating expenses in the current period compared to prior period, as discussed below. Revenue Net revenues for the six months ended June 30, 2023 increased $146,000 (2.6%) to $5,787,900 from $5,641,900 for the six months ended June 30, 2022, due primarily to an increase of $246,500 in revenues of the Benchtop Laboratory Equipment Operations due primarily by increased sales of Torbal digital scales, partially offset by lower revenues of Bioprocessing Systems Operations of $100,500, due to the absence of royalty revenue in the current period. Sales of Torbal brand products amounted to approximately $1,808,500 for the six months ended June 30, 2023 compared to $1,218,600 in the prior period. Gross profit The gross profit percentage for the six months ended June 30, 2023 and 2022, were 46.4% and 49.9%, respectively. The 3.5% decrease is due primarily to lower gross margin percentage for the Bioprocessing Systems Operations resulting from the absence of royalty revenue in the current year period, and to a lower extent, increases in material, labor and overhead in the Benchtop Laboratory Equipment Operations. General and administrative expenses General and administrative expenses for the six months ended June 30, 2023 and 2022, were $2,869,200 and $2,984,700, respectively. The decrease of $115,500 (3.9%) is due primarily to decreases expenses resulting from the consolidation of operations in the Bioprocessing Systems Operations of the Pittsburgh, Pennsylvania and Baesweiller, Germany facilities. Selling expenses Selling expenses for the six months ended June 30, 2023 and 2022, were $3,036,600 and $2,368,000, respectively. The increase of $668,600 (28.2%) is due primarily to the increased direct hire of sales and marketing employees in the Bioprocessing Systems Operations compared to prior period and increased marketing expenditures in the Benchtop Laboratory Equipment Operations as compared to prior period. Research and development expenses Research and development expenses for the six months ended June 30, 2023, and 2022, were $1,476,000 and $1,356,500, respectively. The increase of $119,500 (8.8%) is, due primarily to increased research and development expenditures related to the VIVID automated pill counter in the Benchtop Laboratory Equipment Operations, partially offset by the decreased direct hire of research and development employees in the Bioprocessing Systems Operations and as compared to prior period. 19 Table of Contents Impairment of goodwill and intangible assets Impairment of goodwill and intangible assets for the six months ended June 30, 2023 and 2022, were $0 and $4,280,100, respectively. There was no impairment of goodwill and intangible assets for the six months ended June 2023. For the six months ended June 30, 2022, the Company recorded a $4,280,100 impairment of goodwill as a result of a goodwill impairment analysis, of which the Company determined the carrying value of the Bioprocessing Systems reporting unit exceeded its fair value and therefore the associated goodwill was impaired. Other income (expense), net Other income (expense), net, for the six months ended June 30, 2023 and 2022, were $136,800 and ($253,200), respectively. The increase is due primarily to the increased unrealized gain and interest income on investment securities. Income tax Income tax expense for the six months ended June 30, 2023, and 2022, was $108,800 and $3,128,100, respectively. The income tax expense for the six months ended June 30, 2023 of $108,800 is attributable to the finalization of a income tax receivable filing claim. In addition, the Company recorded a $691,600 income tax benefit which was offset against a full valuation allowance of $691,600 to the change of net deferred tax assets due to the uncertainty that the net deferred tax assets will not be fully realized in the future. The income tax expense for the six months ended June 30, 2022 reflects a full valuation allowance against the deferred tax asset of $3,449,400 offset by a income tax benefit, net of $321,300. In the future the Company changes the determination as to the amount of deferred tax assets that can be realized, the Company will adjust the valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. Liquidity and Capital Resources . Our primary sources of liquidity are existing cash and cash equivalents, and cash generated from operating activities of the Benchtop Laboratory Equipment Operations. We assess our liquidity in terms of our ability to generate cash to fund our short and long-term cash requirements. We believe that our operating cash flows derived primarily from the Benchtop Laboratory Equipment Operations, our cash and investments on hand, and the availability of our line of credit, are not sufficient to fund our cash requirements for the next 12 months. The accompanying unaudited condensed financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management is in plans to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its operating expenses and seeking third party equity and/or debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 20 Table of Contents The following table discloses our cash flows for the periods presented: For the six months ended June 30, 2023 2022 Net cash used in operating activities $ (3,659,700 ) $ (3,259,200 ) Net cash provided by (used) in investing activities 2,372,600 (362,500 ) Net cash provided by financing activities - 2,470,100 Effect of changes in foreign currency exchange rates 4,500 (174,300 ) Decrease in cash and cash equivalents $ (1,282,600 ) $ (1,325,900 ) Net cash used in operating activities was $3,659,700 for the six months ended June 30, 2023 compared to $3,259,200 for the six months ended June 30, 2022. The net increase of $400,500 is primarily due to the increased operational costs from the Bioprocessing Systems operations and Corporate overhead operations in the current period. Net cash provided by investing activities was $2,372,600 for the six months ended June 30, 2023 compared to ($362,500) used in the six months ended June 30, 2022. The net increase of $2,735,100 is primarily due to the increase in net redemption of investments, partially offset by the decrease in purchase of investment securities, in the current period compared to prior period. Net cash provided by financing activities was $0 for the six months ended June 30, 2023 compared to $2,470,100 for the six months ended June 30, 2022. The net decrease of 2,470,100 is primarily due to issuance of common stock in the prior period compared to the current period. Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. “Note 2-Summary of significant accounting policies” to the Consolidated Financial Statements in our Annual Report on Form 10-KT for the six months transition period of July 1, 2022 through December 31, 2022 (“2022 Form 10-KT”) describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Our critical accounting estimates are identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2022 Form 10-KT. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the consolidated financial statements, and actual results could differ from our assumptions and estimates, and such differences could be material. 21 Table of Contents ITEM 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.