Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
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 in Its Charter)
Delaware 04-2217279
_______________________________ __________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 Orville Drive, Bohemia, New York 11716
________________________________________ __________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 567-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ _________________________________________
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
______________________________________
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [ x ]
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 [ x ] 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 (Section 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post
such files).
Yes [ ] No [ x ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer,"
"accelerated filer " and "smaller reporting company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ x ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act) Yes [ ] No [ x ]
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock,
as of August 20, 2010 is $2,429,900.
The number of shares outstanding of the registrant's common stock, par
value $.05 per share ("Common Stock") as of August 20, 2010 is 1,196,577
shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SCIENTIFIC INDUSTRIES, INC.
Table of Contents
PART I
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 8
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 13
ITEM 9A. CONTROLS AND PROCEDURES 13
ITEM 9B. OTHER INFORMATION 14
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 14
ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE 22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 23
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 24
SIGNATURES 28
EXHIBIT-31. CERTIFICATION 29
EXHIBIT-32. CERTIFICATION 31
Forward Looking Statements. The Company and its representatives
may from time to time make written or oral forward-looking statements with
respect to the Company's annual or long-term goals, including statements
contained in its filings with the Securities and Exchange Commission and
in its reports to stockholders.
The words or phrases "will likely result," "are expected to," "will
continue to," "is anticipated," "estimate," "project" or similar expressions
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. Readers are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
PART I
Item 1. Business.
General. Incorporated in 1954, Scientific Industries, Inc., a
Delaware corporation (which along with its subsidiaries, the "Company"),
is engaged in the design, manufacture, and marketing of standard benchtop
laboratory equipment ("Benchtop Laboratory Equipment") and since November
2006, upon the acquisition of the outstanding shares of Altamira
Instruments, Inc., a Delaware corporation ("Altamira") customized catalyst
research instruments ("Catalyst Research Instruments"). The Company's
products are used primarily for research purposes by universities,
hospitals, pharmaceutical companies, clinics, medical device
manufacturers, petrochemical companies and other related industries.
Operating Segments. The Company views its operations as two
segments: the manufacture and marketing of standard benchtop laboratory
equipment for research in university, hospital and industrial laboratories
sold primarily through laboratory equipment distributors (Benchtop
Laboratory Equipment Operations), and the manufacture and marketing of
custom-made catalyst research instruments for universities, government
laboratories, and chemical and petrochemical companies (Catalyst Research
Instruments Operations). For certain financial information regarding the
Company's operating segments, see Note 3 to the consolidated financial
statements included under Item 8.
Products.
Benchtop Laboratory Equipment. The Company's Benchtop Laboratory
Equipment products consist of mixers and shakers, rotators/rockers,
refrigerated and shaking incubators, and magnetic stirrers. Sales of
the Vortex-Genie(R) 2 Mixer, the Company's principal product, (excluding
accessories) represented approximately 41% and 44% of the Company's
total sales for the fiscal years ended June 30, 2010 ("fiscal 2010")
and June 30, 2009 ("fiscal 2009"), respectively, or 68% and 69%,
respectively, of the segment's sales for fiscal 2010 and fiscal 2009.
The vortex mixer is used to mix the contents of test tubes,
beakers, and other various containers by placing such containers on a
rotating cup or other attachments which cause the contents to be mixed
at varying speeds.
The Company's additional mixers and shakers include a high
speed touch mixer; a mixer with an integral timer, a patented cell
disruptor; microplate mixers, a vortex mixer incorporating digital
control and display; a large capacity multi-vessel vortex mixer and
shaker, and introduced in October 2009, the Orbital-Genie(TM), a
large capacity orbital shaker.
The Company also offers a patented benchtop multi-purpose
rotator/rocker, designed to rotate and rock a wide variety of
containers which are magnetically attached to the unit's magnetized
platform, a refrigerated incubator and an incubator shaker, both of
which are multi-functional benchtop environmental chambers designed
to perform various shaking and stirring functions under controlled
environmental conditions.
The line of magnetic stirrers include a patented high/low
programmable magnetic stirrer; a four-place high/low programmable
magnetic stirrer; a large volume magnetic stirrer available in
analog and digital versions; and a four-place general purpose
stirrer.
Catalyst Research Instruments. The Catalyst Research
Instrument products are offered through the Company's subsidiary,
Altamira. Its flagship product is the AMI-200(TM) which is used to
perform traditional catalyst characterization experiments on an
unattended basis. The product also features a stand-alone personal
computer to control the instrument and incorporates proprietary
LabVIEW -based software. In June 2009, the Company introduced the
AMI-300(TM) Catalyst Characterization Instrument which incorporates
a sophisticated data handling package and is designed to perform
dynamic temperature-programmed catalyst characterization experiments.
All AMI model instruments are designed or adapted to a customer's
individual requirements.
Other Catalyst Research Instrument products include reactor
systems, high throughput systems and micro-activity reactors,
including the Company's BenchCAT custom reactor systems. They are
available with single and multiple reactor paths and with reactor
temperatures up to 1200 degrees celsius. The systems feature multiple
gas flows, are available in gas and gas/liquid configurations, and
feature one or more stand-alone personal computers with the
LabVIEW(R)-based control software.
Product Development. The Company designs and develops
substantially all of its products. Company personnel formulate plans
and concepts for new products and improvements or modifications of
existing products. The Company engages outside consultants to augment
its capabilities in areas such as industrial and electronics design.
Major Customer. Sales principally of the Vortex-Genie 2 Mixer,
to one customer, which is one of the two major distributors of
laboratory equipment, represented less than 10% of total sales (14.5%
and 15% of Benchtop Laboratory Equipment product sales) for fiscal 2010
and fiscal 2009, respectively. Sales of Catalyst Research Instrument
products are generally pursuant to a few large orders amounting on
average to over $100,000 to a limited number of customers. In fiscal
2010, sales to three customers, each of which represented at least 10%
of that segment's sales, accounted for an aggregate of 45% of the
segment's sales (18% of total sales). In fiscal 2009, sales to three
different customers, each of which represented at least 10% of that
segment's sales, accounted for an aggregate of 36% of the segment's
total sales (13% of total sales).
Marketing.
Benchtop Laboratory Equipment. The Company's Benchtop Laboratory
Equipment products are generally distributed and marketed through an
established network of domestic and overseas laboratory equipment
distributors, who sell the Company's products through printed catalogs,
websites and sales force. See "Major Customer". The Company also
markets products through attendance at industry trade shows, trade
publication advertising, brochures and catalogs, the Company's website,
and commencing, in June 2009, through the efforts of its first sales
manager.
In general, due to the reliance on sales through the catalog
distribution system, it takes two to three years for a new benchtop
laboratory equipment product to begin generating meaningful sales.
Catalyst Research Instruments. The Company's Catalyst Research
Instruments are sold directly worldwide to universities, government
laboratories, and chemical and petrochemical companies through its
sales personnel and independent representatives engaged on a commission
basis. Its marketing efforts include attendance at various trade shows,
Altamira's website, outside sales representatives, and printed materials.
Assembly and Production. The Company has an operating facility in
Bohemia, New York from which its Benchtop Laboratory Equipment Operations
are conducted and another in Pittsburgh, Pennsylvania from which its
Catalyst Research Instruments Operations are conducted. The Company's
production operations principally involve assembly of components supplied
by various domestic and international independent suppliers. Through
fiscal 2009 a substantial portion of benchtop laboratory equipment
components were produced overseas and purchased from one vendor with
purchases through that U.S. vendor accounting for approximately 11% of
total material purchases and 16% of the segment's material purchases.
For fiscal 2010, purchases from or through the vendor accounted for less
than 2% of the total material purchases and 4% of the segment's material
purchases. See "Risk Factors - The Company is Heavily Dependent on
Outside Suppliers for the Components of Its Products".
Patents, Trademarks, Licenses and Franchises.
Patents. The Company holds several United States patents
relating to its products, including a patent which expires in September
2015 for the TurboMix(TM), an accessory to the Vortex-Genie 2 Mixer, a
patent which expires in July 2016 on the Roto-Shake Genie(R); a patent
which expires in November 2022 on the MagStir Genie(R), MultiMagStir
Genie(R), and Enviro-Genie(R), and a patent which expires in January
2023 on a biocompatible bag with integral sensors.
Trademarks. The Company has various proprietary marks,
including AMI(TM), BenchCAT(TM), Disruptor Beads(TM), Disruptor Genie(R),
Enviro-Genie(R), Genie(TM), MagStirGenie(R), MegaMag Genie(R), MicroPlate
Genie(R), MultiMagStir Genie(R), Multi-MicroPlate Genie(R), Orbital-
Genie(TM), QuadMag Genie(R), Roto-Shake Genie(R), TurboMix(TM), and
Vortex-Genie(R), each of which it considers important to the success
of the related product. The Company also has several trademark
applications pending. No representation can be made that any
application will be granted or as to the protection that any existing
or future trademark may provide.
Licenses. The Company has several licensing agreements for
technology and patents used in the Company's business. A non-exclusive
worldwide sublicense from Fluorometrix Corporation relates to the
development, production and marketing of incubator systems for vessels,
including bags in volumes ranging from 250 milliliters to 5 liters. The
Company also holds a license as to the technology related to its patent
for the Roto-Shake Genie, and a patent related to its TurboMix attachment
for the Vortex-Genie and Disruptor Genie. The license fees for fiscal
2010 and fiscal 2009 paid and payable by the Company aggregated $12,900
and $11,800, respectively.
Foreign Sales. The Company's sales to overseas customers,
including distributors, principally in Asia and Europe, accounted for
approximately 37% and 45% of the Company's net sales for fiscal 2010
and fiscal 2009, respectively. Such sales are paid in United States
dollars and are therefore not subject to risks of currency fluctuation,
foreign duties and customs.
Seasonality. The Company does not consider its business to be
seasonal.
Backlog. The backlog for Benchtop Laboratory Equipment products
is not significant because this line of products is comprised of
standard catalog items requiring lead times which usually are not
longer than two weeks. The backlog for Catalyst Research Instrument
products as of June 30, 2010 was $454,000, most of which is expected
to be filled by December 31, 2010, as compared to a backlog of
$1,216,600 as of June 30, 2009.
Competition. Most of the Company's competitors are
substantially larger and have greater financial, production and
marketing resources than the Company. Competition is generally based
upon technical specifications, price, and product recognition and
acceptance. The Company's main competition for its Benchtop
Laboratory Equipment products in the United States derives from
private label brand mixers offered by the two largest laboratory
equipment distributors in the United States, who dominate the end
user market. The Company believes its vortex mixer products and
trademarks are factors in that market around the world.
The Company's major competitors for its Benchtop Laboratory
Equipment are Henry Troemner, Inc. (a private label supplier to the
two largest laboratory equipment distributors in the U.S. and Europe),
Barnstead/Thermolyne Corporation, (an Apogent Technologies company
owned by Thermo Fisher Scientific, Inc.), IKA-Werke GmbH & Co.
KG, a German company, and Heidolph Instruments GmbH, a German
company.
The primary competition for the Company's Catalyst
Research Instrument products is in the form of instruments produced
internally by research laboratory staffs of potential customers.
Competitors in the United States include Quantachrome Instruments,
and Micromeritics Instrument Corporation, each a privately-held
company.
Research and Development. The Company incurred research and
development expenses, the majority of which relate to new Benchtop
Laboratory Equipment products, of $343,800 during fiscal 2010 compared
to $452,600 during fiscal 2009. The Company expects research and
development expenditures for each of its two operations in the fiscal
year ending June 30, 2011 to increase to the approximate level of
those for fiscal 2009.
Government and Environmental Regulation. The Company's
products and claims with respect thereto have not required approval
of the Food and Drug Administration or any other government approval.
The Company's manufacturing operations, like those of the industry
in general, are subject to numerous existing and proposed, if adopted,
federal, state, and local regulations to protect the environment,
establish occupational safety and health standards and cover other
matters. The Company believes that its operations are in compliance
with existing laws and regulations and the cost to comply is not
significant to the Company.
Employees. As of August 20, 2010, the Company employed 31
persons (19 for the Benchtop Laboratory Equipment Operations and 12
for the Catalyst Research Instruments Operations) of whom 26 were
full-time, including its three executive officers. None of the
Company's employees is represented by any union.
Available Information. The Company's Annual Report to
Stockholders for fiscal 2010, includes its Annual Report on Form 10-K.
The Annual Report will be mailed to security holders together with
the Company's proxy material and solicitation as it relates to the
Company's 2010 Annual Meeting of Stockholders. All the Company's
reports, including Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and other information filed
with, or furnished to, the Securities and Exchange Commission (the
"SEC" or the "Commission"), including amendments to such reports, are
available on the SEC's website that contains such reports, proxy and
information statements, and other information regarding companies that
file electronically with the Commission. This information is available
at www.sec.gov. In addition, all the Company's public filings can be
accessed through the Company's website at
http://scientificindustries.com/financial.html.
Item 1A. Risk Factors.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, important risk factors are
identified below that could affect the Company's financial performance
and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with
respect to such future periods in any current statements. The Company
undertakes no obligation to publicly revise any forward-looking
announcements to reflect future events or circumstances.
Dependence on a Major Customer
The laboratory equipment industry is dominated in the U.S. by
two major laboratory equipment distributors, one of which, is the
Company's largest customer for the Company's Benchtop Laboratory
Equipment products. Sales to this customer, although accounting for
less than 10% of total sales for each of fiscal 2010 and fiscal 2009,
accounted for 14.5% and 15%, respectively, of the sales of the
Benchtop Laboratory Equipment Operations. Commencing in January 2009
this distributor discontinued the inclusion of the Company's Benchtop
Laboratory Equipment products in its new catalog resulting in a
reduction in sales to this distributor; however, the Company's
products continue to be offered through the distributor's website,
and upon requests made directly to the distributor from customers
resulting in an increase in sales to this customer for fiscal 2010.
No representation can be made that the Company will be
successful in retaining this customer or further increasing sales to
or on behalf of this customer, the result of which could have an
adverse effect on future operating results of the Company.
One Benchtop Laboratory Equipment Product Accounts for a Substantial
Portion of Revenues
The Company has a limited number of Benchtop Laboratory
Equipment products with one product, the Vortex-Genie 2 Mixer,
accounting for approximately 68% and 69% of Benchtop Laboratory
Equipment sales, for fiscal 2010 and fiscal 2009, respectively,
and 41% and 44% of total sales for fiscal 2010 and fiscal 2009,
respectively.
The Company is A Small Participant in Each of the Two Industries in
Which It Operates
The Benchtop Laboratory Equipment industry is highly competitive.
Although the Vortex-Genie 2 Mixer has been widely accepted, the annual
sales of the Benchtop Laboratory Equipment products ($4,272,700 for
fiscal 2010 and $3,848,400 for fiscal 2009) are significantly lower
than the annual sales of many of its competitors in the industry. The
principal competitors are substantially larger with much greater
financial, production and marketing resources than the Company. In the
past few years, there have been several entrants into the vortex mixer
market, including the manufacturer of the private label mixers of the
two largest distributors.
The production and sale of Catalyst Research Instruments products
is highly competitive. Altamira's competitors include several companies
with greater resources and many laboratories which produce their own
instruments.
The Company's Ability to Grow and Compete Effectively Depends In Part on
Its Ability to Develop and Effectively Market New Products
Over the past ten years, the Company has continuously invested in
the development and marketing of new Benchtop Laboratory Equipment
products with a view to increasing revenues and reducing the Company's
dependence on the Vortex-Genie 2 Mixer. Gross revenues derived from new
Benchtop Laboratory Equipment products (those other than the Vortex-Genie
2 Mixer) increased to $1,389,400 for fiscal 2010 from $1,217,300, for
fiscal 2009. The segment's ability to compete will depend upon the
Company's success in developing and marketing new laboratory equipment
as to which no assurance can be given.
The Company relies primarily on distributors and their catalogs
to market its Benchtop Laboratory Equipment products. Accordingly,
sales of new products are heavily dependent on the distributors'
decision to include and retain a new product in the distributors'
catalogs and on their websites. It may be at least 24 to 36 months
between the completion of development of a product and the distribution
of the catalog in which it is first offered. In fiscal 2009, the
Company hired a new sales manager to bolster its sales efforts to
distributors and directly to end users.
No assurance can be given that the amounts allocated by the
Company for its new product development and sales and marketing programs
will be sufficient to develop additional commercially feasible products
or that distributors will include or retain any particular product in
their catalogs and websites.
In June 2006, the Company received a nonexclusive sublicense from
Fluorometrix Corporation to develop, produce and sell a line of
bioreactor vessels with integral sensors for pH and oxygen in volumes
of 250 milliliters up to 5 liters for laboratory systems. The Company's
efforts to develop products which incorporate the disposable sensor
technology commenced in fiscal 2009. No assurance can be given that
any commercially feasible product will be developed or that material
revenues, if any will result therefrom.
The Company's Catalyst Research Instruments line of products
consists of only a few products. The ability of the Company to compete
in this segment and expand the line will depend on its ability to make
engineering improvements to existing products and develop and add new
products incorporating more current technology. For this purpose, in
fiscal 2009, the Company hired a new software engineer and engaged
outside product design services to develop new catalyst research
products, one of which was introduced in fiscal 2009. No assurance
can be given that the Company's new product development and related
marketing efforts will enable the segment to be competitive or that
the Company will be successful in developing or improving products
which will be commercially feasible.
The Company May Be Subject to General Economic, Political, and Social
Factors
Orders for the Company's products, particularly its Catalyst
Research Instruments products, depend in part, on the customer's ability
to secure funds to finance purchases. Availability of funds can be
affected by budgetary constraints. Factors such as a general economic
recession, such as the one which commenced in fiscal 2009, or another
major terrorist attack could have a negative impact on the availability
of funding including grants to potential customers.
The Company's ability to secure new Catalyst Research Instruments
orders can also be affected by changes in domestic and international
policies pertaining to energy and the environment, which could affect
funding of potential customers.
The Company is Heavily Dependent on Outside Suppliers for the Components
of Its Products
During the past few years, the Company had relied on a single
supplier for certain of its Benchtop Laboratory Equipment products,
including the Vortex-Genie 2. Currently, that vendor supplied the
Company with an insignificant amount of components (less than 10% of
material purchases for the segment for fiscal 2010), as compared to 16%
of the segment's material purchases for fiscal 2009. Although in fiscal
2010 the Company did not rely on any single overseas vendor for a
significant amount of its material purchases for the Benchtop Laboratory
Equipment products, it does rely on several overseas vendors for various
components. Many of the Company's suppliers, including United States
vendors, produce the components directly or indirectly in overseas
factories, and orders are subject to long lead times and potential other
risks related to production in a foreign country. To minimize the risk
of supply shortages, the Company keeps more than normal quantities on
hand of the critical components that cannot easily and quickly be
procured or, where feasible and cost effective, purchases are made
from more than one supplier.
The Company's Ability to Compete Depends in Part on Its Ability To
Secure and Maintain Proprietary Rights to its Products
The Company has no patent protection for its principal product
the Vortex-Genie 2 Mixer and limited patent protection on a few other
Benchtop Laboratory Equipment products. There are several competitive
products available in the marketplace possessing similar technical
specifications and design. The Company does not have any patent
protection for any of its Catalyst Research Instruments products.
There can be no assurance that the Company will be successful in
obtaining additional patents, that any patent issued or licensed to
the Company provides or will provide the Company with competitive
advantages or will not be challenged by third parties. Furthermore,
there can be no assurance that others will not independently develop
similar products or design around the patents related to the Company's
products. Any of the foregoing activities could have a material
adverse effect on the Company. Moreover, the enforcement by the
Company of its patent rights may require substantial litigation costs.
The Company Has Limited Management Resources
The loss of the services of any of Ms. Helena Santos, the Company's
Chief Executive and Financial Officer and President, Mr. Robert Nichols,
the Company's Executive Vice President and Mr. Brookman March, President
of Altamira, or any material expansion of the Company's operations could
place a significant additional strain on the Company's limited
management resources and could be materially adverse to the Company's
operating results and financial condition.
The Common Stock of the Company is Thinly Traded and is Subject to
Volatility
As of August 20, 2010, there were only 1,196,577 shares of Common Stock
of the Company outstanding, of which 394,642 shares (33%) were held by the
directors and officers of the Company. The Common Stock of the Company
is traded on the Over-the-Counter Bulletin Board and, historically,
has been thinly traded. There have been a number of trading days during
fiscal 2010 on which no trades of the Company's Common Stock were
reported. Accordingly, the market price for the Common Stock is
subject to great volatility.
Item 2. Properties.
The Company's executive offices and principal manufacturing
facility for its Benchtop Laboratory Equipment Operations comprise
approximately 25,000 square feet, are located in Bohemia, New York
and held pursuant to a lease expiring in January 2015. The Company's
Catalyst Research Instruments Operations are conducted from an
approximately 6,600 square foot facility in Pittsburgh,
Pennsylvania held pursuant to a lease expiring in July 2011. See
Note 10 to the Financial Statements in Item 8. The leased facilities
are suitable and adequate for each of the Company's two operations.
In the opinion of management, all properties are adequately covered
by insurance.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 2010.
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common Stock is traded in the over-the-
counter market. The following table sets forth the low and high
bid quotations for each quarter of fiscal 2009 and fiscal 2010,
as reported by the National Association of Securities Dealers,
Inc. Electronic Bulletin Board. Such quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions:
For Fiscal Quarter Ended: Low Bid High Bid
_________________________ _______ ________
09/30/08 $2.75 $3.75
12/31/08 1.75 2.89
03/31/09 1.49 2.50
06/30/09 1.26 1.95
09/30/09 1.71 2.78
12/31/09 2.63 3.00
03/31/10 2.63 3.37
06/30/10 2.61 3.36
(a) As of August 20, 2010, there were 519 record holders of the
Company's Common Stock.
(b) On December 21, 2009, the Company paid a cash dividend of $.06
per share to stockholders of record on October 23, 2009. On January
15, 2009, the Company paid a cash dividend of $.08 per share to
stockholders of record on October 27, 2008. The Company is not
subject to any agreement which prohibits or restricts the Company
from paying dividends on its Common Stock.
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's income before income taxes increased
by $373,700 (93%) to $777,600 for fiscal 2010 compared to $403,900 for
fiscal 2009 due to increases in profits generated by both the Catalyst
Research Instruments Operation and the Benchtop Laboratory Equipment
Operations. The Catalyst Research Instruments Operations had incurred
a loss in the prior fiscal year. Both business segments benefitted
from increased sales and gross margins in fiscal 2010.
The slowdown in the nation's economy had an adverse effect on
the Company's Catalyst Research Instruments Operations for fiscal 2009,
and while the Company experienced increases in this segment's sales in
fiscal 2010, there is still uncertainty as to the future sales and the
availability and amount of research grants and project funding for large
purchases by the Company's customers.
Results of Operations. Net sales for fiscal 2010 increased by
$1,081,000 (18.0%) to $7,070,100 as compared with $5,989,100 for fiscal
2009. Net sales of the Benchtop Laboratory Equipment Operations
increased by $424,300 (11.0%) primarily due to increased sales to U.S.
customers.
Net sales of the Catalyst Research Instruments
Operations increased by $656,700 (30.7%) due to an increase in large
orders from non-governmental customers. Sales of this segment's
products are comprised of a small number of large orders, typically
averaging more than $100,000 each. As of June 30, 2010, the order
backlog for Catalyst Research Instrument products was $454,000, all
of which the Company anticipates filling by December 31, 2010,
compared with $1,216,600 as of June 30, 2009.
The gross profit percentage for fiscal 2010 increased to
38.8% compared to 36.6% for fiscal 2009, due primarily to increased
sales and lower material costs for the Benchtop Laboratory Equipment
Operations and increased sales and lower labor and overhead costs for
the Catalyst Research Instruments Operations.
General and administrative expenses for fiscal 2010 increased
by $188,800 (20.8%) to $1,098,200 compared to $909,400 for fiscal
2009 due primarily to higher administrative staffing costs for the
Catalyst Research Instruments and higher salaries and increases in
various other expenses, principally insurance and payroll taxes for
the Benchtop Laboratory Equipment Operations.
Selling expenses for fiscal 2010 increased by $118,600
(27.2%) to $554,100 from $435,500 for fiscal 2009, primarily due to
the addition in June 2009 of a Sales Manager for the Benchtop
Laboratory Equipment Operations.
Research and development expenses decreased by $108,800
(24.0%) to $343,800 compared to $452,600 for fiscal 2009, primarily
the result of reduced new product development activity by the Catalyst
Research Instruments Operations and lower cost development projects
of the Benchtop Laboratory Equipment Operations.
Other income increased by $26,200 (340.3%) to $33,900 for
fiscal 2010 from $7,700 for fiscal 2009, primarily because fiscal
2009 included a write-off of an asset related to the Catalyst
Research Instruments Operations.
Income tax expense for fiscal 2010 was $237,900 compared
to $84,400 for fiscal 2009 due to higher income.
As a result of the foregoing, net income for fiscal 2010
was $539,700, an increase of $220,200 (68.9%) from $319,500 for
fiscal 2009.
Liquidity and Capital Resources. Cash and cash equivalents
decreased by $105,800 (14.3%) to $632,600 as of June 30, 2010 from
$738,400 as of June 30, 2009.
Net cash provided by operating activities was $115,300 for
fiscal 2010 as compared to net cash used in operating activities of
$47,800 for fiscal 2009, due mainly to the income for fiscal 2010 and
lower inventory and higher accounts payable balances, partially offset
by an increase in accounts receivable and less advances received from
customers of Altamira with respect to their orders. Cash used in
investing activities was $154,500 for fiscal 2010 compared to $188,100
for fiscal 2009, primarily the result of the smaller amount of
additional contingent consideration paid post-closing for the
acquisition of Altamira, and lower capital expenditures by the Catalyst
Instruments Operations.
Cash used in financing activities was $66,500 compared to
$91,200 for fiscal 2009 mainly due to the lower cash dividend in
fiscal 2010.
On September 21, 2010, the Board of Directors of the Company
declared a cash dividend of $.09 per share of Common Stock payable
on December 15, 2010 to holders of record as of the close of
business on October 18, 2010.
The Company's working capital of $3,512,700 as of June 30, 2010
increased by $529,600 (17.8%) from the working capital of $2,983,100
as of June 30, 2009, primarily the result of the increase in the
Company's profitability.
Pursuant to a promissory note with Capital One Bank, N.A.
which was restated in January 2010 and extended from November 1, 2009
to January 3, 2011, at the request of the Company, the Bank at its sole
discretion may extend to the Company advances not to exceed an aggregate
of $500,000. The advances are to be secured by the Company's assets
and bear interest at the Bank's prime rate.
Management believes that the Company will be able to meet its cash
flow needs for the next 12 months from its available financial
resources including the restated promissory note and investment
securities.
Management believes that the Company will be able to meet,
absent a material capital expenditure, its cash flow needs during the
12 months ending June 30, 2011 from its available financial resources
including its cash and investment securities, and operations.
Capital Expenditures. During fiscal 2010, the Company
incurred $27,900 in capital expenditures. The Company expects that
based on its current operations, its capital expenditures will not be
materially higher for the fiscal year ending June 30, 2011.
Off-Balance Sheet Arrangements. None.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements required by this item are attached
hereto on pages F1-F21.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. As of the
end of the period covered by this Annual Report on Form 10-K, 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.
Management's Annual Report on Internal Control Over Financial
Reporting. Management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as
such term is defined in Securities Exchange Act Rule 13a-15(f) and
15d-15(f). The Company's internal controls over financial reporting
are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles.
The Chief Executive and Chief Financial Officer of the Company
conducted an evaluation of the effectiveness of the Company's internal
controls over financial reporting as of June 30, 2010 based on the
criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Integrated
Framework.
Based on the assessment of the Company's Chief Executive and
Chief Financial Officer of the Company, it was concluded that as of
June 30, 2010, the Company's internal controls over financial reporting
were effective based on these criteria.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant
to the rules of the Securities and Exchange Commission that permit
the Company to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting. There was
no change in the Company's internal controls over financial reporting
that occurred during the most recent fiscal quarter that materially
affected or is reasonably likely to materially affect the Company's
internal controls over financial reporting.
Inherent Limitations on Effectiveness of Controls. The Company's
management, including its Chief Executive and Chief Financial Officer,
believes that its disclosure controls and procedures and internal
controls over financial reporting are designed to provide reasonable
assurance of achieving their objectives and are effective at the
reasonable assurance level. However, management does not expect that its
disclosure controls and procedures or its internal control over financial
reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can
occur because of a simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by collusion of
two or more people or by management override of the controls. The
design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with policies or procedures may deteriorate. Because of the
inherent limitations in a cost effective control system, misstatements
due to error or fraud may occur and not be detected.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Following the resignation in February 2010 of Mr. Arthur M.
Borden as a Director, the Board of Directors set six as the number of
Directors of the Company.
The Company has the following six Directors:
Joseph G. Cremonese (age 74), a Director since November 2002
and Chairman of the Board since February 2006, has been a marketing
consultant to the Company since 1996. Mr. Cremonese has been since 1991,
President of Laboratory Innovation Company, Ltd., which is a vehicle for
technology transfer and consulting services for companies, including
the Company, engaged in the production and sale of products for science
and biotechnology. Since March 2003, he has been a director of and
consultant to Proteomics, Inc., a producer of recombinant proteins for
medical research. Prior to 1991, he had been employed by Fisher
Scientific, the largest U.S. distributor of laboratory equipment.
Joseph I. Kesselman (age 85), a Director since 1961 and
Chairman of the Board from August 2002 until his resignation in February
2006, has been for more than five years a consultant to various
corporations, including Nuclear and Environmental Protection Inc., and
Perrot Duval Management, S.H. and its subsidiaries (a Swiss management
company). Mr. Kesselman had been a director of Nuclear and Environmental
Protection Inc.
Roger B. Knowles (age 85), a Director since 1965, is retired.
During the past five years he had been, although not currently, involved
in liquidating various real estate and manufacturing concerns.
Grace S. Morin (age 62), a Director since December 4, 2006, had
been President, Director and principal stockholder of Altamira Instruments,
Inc. from December 2003 until its acquisition in November 2006 by the
Company. Ms. Morin had been employed by Altamira to supervise its
administrative functions at the Pittsburgh, Pennsylvania facility as
a full-time employee through March 31, 2009 and since that date as a
part-time consultant. Prior to December 2003, she was a general business
consultant for two years, and prior to that a member of senior management
of a designer of gas flow environmental engineered products for
approximately four years.
Helena R. Santos (age 46), a Director since 2009, has been
employed by the Company since 1994, and has served since August 2002
as its President, Chief Executive Officer and Treasurer. She had
served as Vice President, Controller from 1997 and as Secretary from
May 2001. Ms. Santos was an internal auditor with a major defense
contractor from March 1991 to April 1994. She had been previously
employed in public accounting.
James S. Segasture (age 74), a Director since 1991, has been a
private investor since February 1990.
The Directors are elected to three-year staggered terms. The
current terms of the Directors expire at the annual meeting of
stockholders of the Company to be held at the annual meeting following:
the fiscal year ending June 30, 2010 - two Directors (Mr. Kesselman
and Ms. Morin, Class B), the fiscal year ending June 30, 2011 - two
Directors (Messrs. Cremonese and Knowles, Class C), and the fiscal
year ending June 30, 2012 - two Directors (Ms. Santos and Mr.
Segasture, Class A).
Board Committees
Joseph I. Kesselman and James S. Segasture have been the sole
members of the Company's Stock Option Committee, the members of which
serve at the discretion of the Board. The Committee administers the
Company's 2002 Stock Option Plan ("2002 Plan").
Grace S. Morin, Joseph I. Kesselman, and James S. Segasture
have been the members of the Company's Compensation Committee serving
at the discretion of the Board. The Committee administers the
Company's compensation policies.
The Board of Directors acts as the Company's Audit Committee.
The Company does not have a financial expert on the Audit
Committee as defined by the Securities and Exchange Commission,
however, the Company believes that the members of the Audit Committee
have sufficient knowledge to properly evaluate and analyze the
Company's financial statements.
Executive Officers
Helena R. Santos, CPA (age 46), employed by the Company since
1994, has served since August 2002 as President, Chief Executive
Officer and Treasurer. See "Directors for additional background
information.
Robert P. Nichols (age 49), employed by the Company since
February 1998, has served since August 2002 as Executive Vice President.
Previously, he had been since May 2001 Vice President, Engineering.
Prior to joining the Company, Mr. Nichols was an Engineer Manager with
Bay Side Motion Group, a precision motion equipment manufacturer from
January 1996 to February 1998.
Brookman P. March (age 65) has been Director of Sales and
Marketing since November 30, 2006 and President since July 2008 of
Altamira, which conducts the Catalyst Research Instruments operation.
He had been Vice President and a Director of Altamira from December
2003 until it was acquired by the Company. Mr. March is the husband
of Ms. Morin, a Director.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that, for the year ended June 30, 2010, its
officers, directors and 10% stockholders timely complied with all filing
requirements of Section 16(a) of the Securities Exchange Act of 1934,
as amended.
Code of Ethics
We have adopted a code of ethics that applies to our Executive
Officers and Directors. A copy of the code of ethics can be found on
our website at www.scientificindustries.com.
Item 11. Executive Compensation.
The following table summarizes all compensation paid by the
Company to each of its executive officers for the fiscal years ended
June 30, 2010 and 2009.
The Compensation Committee reviews and recommends to the Board of
Directors the compensation to be paid to each executive officer. In
making a determination, the Committee and the Board give material
consideration to the Company's results of operations and financial
condition, competitive factors and the Company's resources. The
compensation at times includes grants of options under its stock option
plan to the named executives. Each officer is employed pursuant to a
long-term employment agreement, containing terms proposed by the
Committee and approved as reasonable by the Board of Directors.
The Board is cognizant that as a relatively small company, the Company
has limited resources and opportunities with respect to recruiting and
retaining key executives. Accordingly, the Company has relied upon
long-term employment agreements to retain qualified personnel.
Increases in the annual compensation of each of its executive
officers provided by their employment agreements were based on the
foregoing factors and the increase in sales and income under their
management.
SUMMARY COMPENSATION TABLE
______________________________________________________________________
Non- Non-
Equity Qualified
Incentive Deferred
Name Plan Comp-
and Stock Option Comp- ensation
Principal Fiscal Salary Bonus Awards Awards ensation Earnings
Position Year ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
______________________________________________________________________
Helena R. 2010 131,500 5,000 0 0 0 0
Santos, 2009 125,000 0 0 0 0 0
CEO,
President,
CFO
______________________________________________________________________
Robert P. 2010 121,300 5,000 0 0 0 0
Nichols, 2009 117,500 0 0 0 0 0
Exec.
V.P.
______________________________________________________________________
Brookman 2010 116,900 0 0 8,100(2) 0 0
P. March, 2009 112,900 0 0 0 0 0
Director
of Sales
and
Marketing,
and
President of
Altamira
______________________________________________________________________
SUMMARY COMPENSATION TABLE (CONTINUED)
______________________________________________________________________
Changes
in
Pension
Value
and Non-
Qualified All
Name Deferred Other
and Comp- Comp-
Principal Fiscal ensation ensation Total
Position Year Earnings ($) ($)
(a) (b) (i) (j)
______________________________________________________________________
Helena R. 2010 0 2,600(1) 139,100
Santos, 2009 0 2,500(1) 127,500
CEO,
President,
CFO
______________________________________________________________________
Robert P. 2010 0 2,450(1) 128,700
Nichols, 2009 0 2,350(1) 119,850
Exec.
V.P.
______________________________________________________________________
Brookman 2010 0 4,700(1) 129,700
P. March, 2009 0 4,500(1) 117,400
Director
of Sales
and
Marketing,
and
President of
Altamira
______________________________________________________________________
(1) The amounts represent the Company's matching contribution under the
Company's 401(k) Plans.
(2) The amounts represent compensation expense recorded in fiscal 2010
for stock options granted in fiscal 2010 computed in accordance with
ASC No. 718 utilizing the Black-Scholes options pricing model,
disregarding estimates of forfeitures related to service-based vesting
considerations.
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED JUNE 30, 2010
_______________________________________________________________________
Estimated All Other All Other
Future Stock Option
Payouts Estimated Awards: Awards:
under Future Number Number
Non- Payment of Shares of
Equity Under of Securities
Grant Incentive Equity Stock Underlying
Name Date Plan Plan Units(#) Options (#)
(a) (b) Awards Awards (c) (d)
_______________________________________________________________________
Brookman 12/02/09 0 0 0 2,500
P. March 12/02/09 0 0 0 4,000
_______________________________________________________________________
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED JUNE 30, 2010 (CONTINUED)
_______________________________________________________________________
Grant
Date
Exercise Fair
or Base Value of
Price of Stock
Option and
Grant Awards Option
Name Date ($/Sh) Awards
(a) (b) (e) (f)
_______________________________________________________________________
Brookman 12/02/09 3.07 $7,675
P. March 12/02/09 3.07 $12,280
_______________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
_______________________________________________________________________
Option Awards
_______________________________________________________________________
Number Equity
Number of Incerntive
of Securities Plan Awards:
Securities Under- Number of
Under- lying Securities
lying Un- Unexercised Underlying Option
exercised Options(#) Unexercised Exercise Option
Options(#) Unexerci- Unearned Price Expiration
Name Exercisable sable Options(#) ($) Date
(a) (b) (c) (d) (e) (f)
______________________________________________________________________
Robert P.
Nichols 5,000 0 0 1.25 10/2012
______________________________________________________________________
Brookman P. 2,331 4,169 4,169 3.07 11/2014
March
_____________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END (CONTINUED)
______________________________________________________________________
Stock Awards
______________________________________________________________________
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market or
Awards: Payout
Number of Value of
Market Unearned Unearned
Number Value Shares, Shares,
of Shares of Shares Units or Units or
or Units or Units Other Other
of Stock of Stock Rights Rights
That That That That
Have not Have not Have not Have not
Vested Vested Vested Vested
Name (#) ($) (#) ($)
(a) (g) (h) (i) (j)
______________________________________________________________________
Robert P.
Nichols 0 0 0 0
______________________________________________________________________
Brookman P. 0 0 0 0
March
______________________________________________________________________
No executive officer exercised any options during the fiscal year
ended June 30, 2010.
Employment Agreements
In May 2010, The Company entered into new employment agreements
with Ms. Helena R. Santos and Robert P. Nichols related to their
employment in their current positions. The agreements extended the
terms of employment to June 30, 2011 and increased the annual base
salaries commencing January 1, 2010 to $135,000 from $130,000 for Ms.
Santos and to $123,600 from $120,000 for Mr. Nichols. Bonuses may be
awarded at the discretion of the Board of Directors, as to services
for the six months ending June 30, 2010 and for the fiscal year
ending June 30, 2011. Under the previous agreements, a bonus of
$5,000 was paid during the fiscal year ended June 30, 2010 to each
of Ms. Santos and Mr. Nichols.
Mr. Brookman P. March is employed by Altamira pursuant to a
24-month employment agreement through November 30, 2010 which may be
extended by mutual consent for an additional 12 month period but not
beyond November 30, 2012. The agreement provides for an annual base
salary of $115,000 for the first 12 month period, and $121,900 for
the second 12 month period, with Altamira having the option to pay the
$6,900 increase in base salary in stock options of the Company
(subject to Mr. March's consent). The agreement also provides for a
bonus in each of the two years at the discretion of Altamira's Board
of Directors. A bonus in the form of an option grant valued at
$4,100 using the Black-Scholes options pricing model in accordance
with ASC No. 718 was granted to Mr. March during the year ended June
30, 2010.
Mr. March is the husband of Grace S. Morin, a Director of
the Company and of Altamira and a former principal stockholder of
Altamira.
Each of the foregoing employment agreements contains
confidentiality and non-competition covenants. The employment
agreements for Ms. Santos and Mr. March contain termination provisions
stipulating that if the Company terminates during the term of the
agreement the employment of the employee other than for death,
disability, or cause (defined as (i) conviction of a felony or (ii)
gross neglect or gross misconduct (including conflict of interest) in
the carrying out of his or her duties under the agreement, the Company
shall pay severance payments equal to one year's salary at the rate
of the compensation at the time of termination, and continue to pay
his or her regular benefits provided by the Company for a period of
two years from termination.
Directors' Compensation and Options
DIRECTORS' COMPENSATION
FOR THE YEAR ENDED JUNE 30, 2010
Non-
Equity
Fees Incentive
Earned Plan
or Paid Stock Option Comp-
in Cash Awards Awards ensation
Name ($) ($) ($) ($)
(a) (b) (c) (d) (e)
_____________________________________________________________________
Arthur M.
Borden(1) 8,500 0 0 0
Joseph G.
Cremonese 23,000 0 8,300(2) 0
Joseph I.
Kesselman 11,000 0 0 0
Roger B.
Knowles 11,000 0 0 0
Grace S.
Morin 11,000 0 0 0
James S.
Segasture 11,000 0 0 0
____________________________________________________________________
DIRECTORS' COMPENSATION (CONTINUED)
Changes
in
Pension
Value and
Non- Non-
qualified qualified
Deferred Deferred All
Compens- Comp- Other
ation ensation Comp-
Earnings Earnings ensation Total
Name ($) ($) ($) ($)
(a) (f) (g) (h) (i)
____________________________________________________________________
Arthur M. 0 0 8,500
Borden(1)
Joseph G.
Cremonese 0 36,000(3) 67,300
Joseph I.
Kesselman 0 0 11,000
Roger B.
Knowles 0 0 11,000
Grace S.
Morin 0 32,700(4) 43,700
James S.
Segasture 0 0 11,000
____________________________________________________________________
(1) Mr. Borden resigned from the Board of Directors in February 2010.
(2) The amount represents consulting expense recorded in fiscal 2010
for stock options granted in fiscal 2010 computed in accordance with
ASC No. 718 utilizing the Black-Scholes options pricing model (see
Items 12 and 13).
(3) Represents amount paid to his affiliate pursuant to a marketing
consulting agreement (see Items 12 and 13).
(4) Represents compensation received for her administrative services
as a consultant for Altamira (See Items 12 and 13).
The Company pays each Director who is not an employee of the
Company or a subsidiary a quarterly retainer fee of $1,500 and $1,000
for each meeting attended. In addition, the Company reimburses each
Director for out-of-pocket expenses incurred in connection with
attendance at board meetings in the amount of $50 or the Director's
itemized expenses, whichever is greater. Mr. Cremonese, as Chairman
of the Board since February 2006, receives an additional fee of
$1,000 per month. During fiscal 2010, the fees to non-employee
Directors aggregated $152,500, including the consulting fees paid
to Mr. Cremonese's affiliate, and to Ms. Morin.
Pursuant to the Company's 1992 Stock Option Plan ("1992 Plan")
options to purchase 3,000 shares of Common Stock at the then fair
market value were granted to each non-employee director who was on
the Board of Directors on the first business day of each March, in
1993, 1994, 1995, and 1996, namely Messrs. Borden, Kesselman, Knowles
and Segasture. In addition, in December 1997 and through December
2001 the Board of Directors granted under the 1992 Plan annually
options to purchase 4,000 shares of Common Stock to each of them
exercisable at the fair market value on the date of grant. Accordingly,
as of June 30, 2010, the Company had granted under the 1992 Plan to
the foregoing four non-employee Directors options to purchase an
aggregate of 128,000 shares of Common Stock, or options to purchase
32,000 shares of Common Stock to each.
The fair market value per share of Common Stock on the dates of
grant ranged from $0.50 for options granted in 1993 to $2.40 in
2001. As of June 30, 2010, options under the 1992 Plan with
respect to 94,000 shares had been exercised by the Directors and
with respect to 22,000 shares had expired. In addition, they had
exercised options with respect to 48,000 shares granted to them
prior to the adoption of the 1992 Plan.
Under the Company's 2002 Plan, none of the Directors at the
time of the adoption by the Board of Directors of the 2002 Plan
(subsequently approved by stockholders) were eligible to receive
option grants thereunder. Mr. Joseph G. Cremonese who was elected a
Director at the 2002 Annual Meeting of Stockholders, was granted on
December 1, 2003 a ten-year option to purchase 5,000 shares of
Common Stock at the fair market value of $1.35 per share, on February
20, 2007 a ten-year option to purchase 5,000 shares of Common Stock at
the fair market value of $3.10 per share, and on September 17, 2009 a
five-year option to purchase 10,000 shares at the fair market value
of $1.88 per share. The $1.88 option had a total fair value (as
determined using the Black-Scholes option-pricing model) of $9,300 of
which $8,300 was recognized as consulting expense in fiscal 2010.
None of the options have been exercised to date.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The following table sets forth, as of June 30, 2010, the
number of shares of Common Stock beneficially owned by (i) each person
known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each named executive officer of the Company, and (iv) all
directors and executive officers as a group. Shares not outstanding
but deemed beneficially owned by virtue of the right of any individual
to acquire shares within 60 days are treated as outstanding only when
determining the amount of and percentage of outstanding shares of Common
Stock owned by such individual. Each person has sole voting and
investment power with respect to the shares shown, except as noted.
Except as indicated in the table, the address for each of the following
is c/o Scientific Industries, Inc., 70 Orville Drive, Bohemia, New York
11716.
Amount and
Name Nature of Beneficial Ownership % of Class
___________________________ ______________________________ __________
Spectrum Laboratories, Inc. 124,736 (1) 10.4%
18617 Broadwick Street
Rancho Dominquez, CA 90220
Lowell A. Kleiman 139,581 (2) 11.7%
16 Walnut Street
Glen Head, NY 11545
Joseph G. Cremonese 56,597 (3) 4.6%
Joseph I. Kesselman 64,120 (4) 5.3%
Roger B. Knowles 4,000 (5) .3%
Grace S. Morin 82,950 6.9%
James S. Segasture 186,750 (6) 15.6%
Helena R. Santos 15,779 1.3%
Robert P. Nichols 21,446 (7) 1.8%
Brookman P. March 89,450 (8) 6.9%
All directors and
executive officers as
a group (8 persons) 438,142 (9) 35.3%
(1) Based on information reported on Schedule 13G filed with the
Securities and Exchange Commission on June 15, 2009.
(2) Based on information reported in his Schedule 13D filed with
the Securities and Exchange Commission on October 30, 2002.
(3) 36,597 shares are owned jointly with his wife and 20,000
shares are issuable upon exercise of options.
(4) Includes 4,000 shares issuable upon exercise of options, 735
shares owned jointly with his wife, and 16,000 shares owned by his wife.
(5) Represents shares issuable upon exercise of options.
(6) Includes 4,000 shares issuable upon exercise of options and
493 shares owned by his wife.
(7) Includes 5,000 shares issuable upon exercise of options.
(8) Repesents1 82,950 shares owned by his wife, Ms. Morin, and
6,500 shares issuable upon exercise of options.
(9) Includes 43,500 shares issuable upon exercise of options.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to Company
options, warrants and rights as of June 30, 2010.
_________________________________________________________________
Number of Securities
to be Issued Upon Weighted-Average
Exercise of Exercise Price of
Outstanding Options, Outstanding Options,
Warrants and Rights Warrants and Rights ($)
Plan Category (a) (b)
_________________________________________________________________
Equity
Compensation
plans approved by
security holders 45,000 2.24
Equity
Compensation
plans not approved
by security holders N/A N/A
_________________________________________________________________
Total 45,000 2.24
_________________________________________________________________
EQUITY COMPENSATION PLAN INFORMATION (CONTINUED)
_________________________________________________________________
Number of Securities
Remaining Available
for
Future Issuance
Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a)
Plan Category (c)
_________________________________________________________________
Equity
Compensation
plans approved by
security holders 103,334
Equity
Compensation
plans not approved
by security holders N/A
_________________________________________________________________
Total 103,334
_________________________________________________________________
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Mr. Joseph G. Cremonese, who was elected a Director in
November 2002, through his affiliate, Laboratory Innovation Company,
Ltd., has been providing independent marketing consulting services to
the Company for approximately ten years. The services have been
rendered since January 1, 2003 pursuant to a consulting agreement
which was amended and restated in March 2007 and extended in September
2009 through December 31, 2010. The agreement as amended and restated
currently provides that Mr. Cremonese and his affiliate shall render,
at the request of the Company, marketing consulting services of at least
60, but not more than 96, days per year at the rate of $600 per day with
a monthly payment of $3,000, with the Company's obligation reduced to
the extent the consulting services are less than 60 days for the 12
month period. The agreement contains confidentiality and non-
competition covenants. The Company paid $36,000 for each of fiscal
2010 and fiscal 2009.
Ms. Grace S. Morin, was elected a Director in December 2006
upon the sale of her 90.36% ownership interest in Altamira to the
Company in November 2006. Under the purchase agreement Ms. Morin is
to receive (in addition to $361,000 in cash paid and an aggregate of
112,950 shares of the Company's Common Stock issued at the time of
acquisition) an amount equal to a 90.36% share of 5% of net sales of
Altamira for each of five designated periods, subject to possible
adjustment. The first period ran from December 1, 2006 through June
30, 2007, the second, third, and fourth periods are the 12 months ended
June 30, 2008, June 30, 2009, and June 30, 2010 and the fifth period
runs from July 1, 2010 to November 30, 2010. Accordingly, Ms. Morin
received contingent consideration of $59,700 for the first period,
$131,000 for the second period, $97,000 for the third period, and
$126,400 for the fourth period. She also received in fiscal 2008
$36,400 as reimbursement for the Company's treatment of the
transaction as a purchase of assets for tax purposes.
Up until March 31, 2009, Ms. Morin had been employed by
Altamira as an administrative employee. Since April 1, 2009, she
provides consulting services on a part-time basis pursuant to an
agreement expiring March 31, 2011 at the rate of $85 per hour. The
agreement contains confidentiality and non-competition covenants.
Altamira paid her $32,700 and $10,400, respectively, for the
consulting services for fiscal 2010 and fiscal 2009.
Item 14. Principal Accountant Fees and Services.
The Company incurred for the services of Nussbaum Yates
Berg Klein & Wolpow, LLP for fiscal 2010 and fiscal 2009: audit
fees of approximately $52,500 and $47,600, respectively, in
connection with the audit of the Company's annual financial
statements and quarterly reviews; and $5,000 and $4,000, respectively,
for the preparation of the Company's corporate tax returns. There
were no other audit related fees or other fees paid to the firm for
the two fiscal years.
In approving the engagement of the independent registered
public accounting firm to perform the audit and non-audit services,
the Board of Directors as the Company's audit committee evaluates
scope and cost of each of the services to be performed including a
determination that the performance of the non-audit services will
not affect the independence of the firm in the performance of the
audit services.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements and Financial Statement Schedules. The required
financial statements of the Company are attached hereto on pages F1-F21.
Exhibits. The following Exhibits are filed as part of this report
on Form 10-K:
Exhibit Number Exhibit
3 Articles of Incorporation and By-Laws:
3(a) Certificate of Incorporation of the Company as amended.
(Filed as Exhibit 1(a-1) to the Company's General Form
for Registration of Securities on Form 10 dated February
14, 1973 and incorporated by reference thereto.)
3(b) Certificate of Amendment of the Company's Certificate of
Incorporation, as filed on January 28, 1985. (Filed as
Exhibit 3(a) to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1985 and incorporated
by reference thereto.)
3(c) By-Laws of the Company, as restated and amended. (Filed as
Exhibit 3(ii) to the Company's Current Report on Form 8-K
filed on January 6, 2003 and Exhibit 3(ii) to the Company's
Current Report on Form 8-K filed on December 5, 2007 and
incorporated by reference thereto).
4 Instruments defining the rights of security holders:
4(a) 2002 Stock Option Plan (Filed as Exhibit 99-1 to the
Company's Current Report on Form 8-K filed on November 25,
2002 and incorporated by reference thereto.
10 Material Contracts:
10(a) Lease between Registrant and AIP Associates, predecessor-
in-interest of current lessor, dated October, 1989 with
respect to Company's offices and facilities in Bohemia,
New York. (Filed as Exhibit 10(a) to the Company's Form
10-KSB filed on September 28, 2005 and incorporated
by reference thereto).
10(a)-1 Amendment to lease between Registrant and REP A10 LLC,
successor in interest of AIP Associates, dated September 1,
2004 (Filed as Exhibit 10A-1 to the Company's Current Report
on Form 8-K filed on September 2, 2004, and incorporated by
reference thereto).
10(a)-2 Second amendment to lease between Registrant and REP A10 LLC
dated November 5, 2007. (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on November 8,
2007, and incorporated by reference thereto).
10(b) Employment Agreement dated January 1, 2003, by and between
the Company and Ms. Santos (Filed as Exhibit 10(a) to the
Company's Current Report on Form 8-K filed on January 22,
2003, and incorporated by reference thereto).
10(b)-1 Employment Agreement dated September 1, 2004, by and between
the Company and Ms. Santos (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on September 1,
2004, and incorporated by reference thereto).
10(b)-2 Employment Agreement dated December 29, 2006, by and between
the Company and Ms. Santos (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on December 29,
2006, and incorporated by reference thereto).
10(b)-3 Employment Agreement dated July 31, 2009 by and between the
Company and Ms. Santos (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on August 7,
2009, and incorporated by reference thereto).
10(b)-4 Employment Agreement dated May 14, 2010 by and between the
Company and Ms. Santos (filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on May 18, 2010,
and incorporated by reference thereto).
10(c) Employment Agreement dated January 1, 2003, by and between
the Company and Mr. Robert P. Nichols (Filed as Exhibit 10A-1
to the Company's Current Report on Form 8-K filed on January
22, 2003, and incorporated by reference thereto).
10(c)-1 Employment Agreement dated September 1, 2004, by and between
the Company and Mr. Nichols (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on September 1,
2004, and incorporated by reference thereto).
10(c)-2 Employment Agreement dated December 29, 2006, by and between
the Company and Mr. Nichols (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on December 29,
2006, and incorporated by reference thereto).
10(c)-3 Employment Agreement dated July 31, 2009 by and between the
Company and Mr. Nichols (filed as Exhibit 10A-2 to the
Company's Current Report on Form 8-K filed on August 7, 2009,
and incorporated by reference thereto).
10(c)-4 Employment Agreement dated May 14, 2010 by and between the
Company and Mr. Nichols (filed as Exhibit 10A-2 to the
Company's Current Report on Form 8-K filed on May 18, 2010,
and incorporated by reference thereto).
10(d) Consulting Agreement dated January 1, 2003 by and between
the Company and Mr. Cremonese and his affiliate, Laboratory
Innovation Company, Ltd., (Filed as Exhibit 10(b) to the
Company's Current Report on Form 8-K filed on January 6,
2003, and incorporated by reference thereto).
10(d)-1 Amended and Restated Consulting Agreement dated March 22,
2005, by and between the Company and Mr. Cremonese and
Laboratory Innovation Company, Ltd., (Filed as Exhibit
10A-1 to the Company's Current Report on Form 8-K filed on
March 23, 2005, and incorporated by reference thereto).
10(d)-2 Second Amended and Restated Consulting Agreement dated
March 15, 2007, by and between the Company and Mr.
Cremonese and Laboratory Innovation Company Ltd., (Filed
as Exhibit 10A-1 to the Company's Current Report on Form
8-K filed on March 16, 2007, and incorporated by
reference thereto).
10(d)-3 Third Amended and Restated Consulting Agreement dated
September 23, 2009, by and between the Company and Mr.
Cremonese and Laboratory Innovation Company, Ltd., (Filed
as exhibit 10 to the Company's Annual Report on Form 10-K
field on September 24, 2009, and incorporated by reference
thereto).
10(e) Sublicense from Fluorometrix Corporation (Filed as Exhibit
10(a)1 to the Company's Current Report on Form 8-K filed on
June 14, 2006, and incorporated by reference thereto).
10(f) Stock Purchase Agreement, dated as of November 30, 2006,
by and among the Company and Grace Morin, Heather H. Haught
and William D. Chandler (Filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on December 5,
2006, and incorporated by reference thereto).
10(g) Escrow Agreement, dated as of November 30, 2006, by and
among the Company and Grace Morin, Heather H. Haught and
William D. Chandler (filed as Exhibit 10(a) to the Company's
Current Report on Form 8-K filed on December 5, 2006, and
incorporated by reference thereto).
10(h) Registration Rights Agreement, dated as of November 30, 2006,
by and among the Company and Grace Morin, Heather H. Haught
and William D. Chandler (filed as Exhibit 10(b) to the
Company's Current Report on Form 8-K filed on December 5,
2006, and incorporated by reference thereto).
10(i) Employment Agreement, dated as of November 30, 2006,
between Altamira Instruments, Inc. and Brookman P. March
(Filed as Exhibit 10(c) to the Company's Current Report on
Form 8-K filed on December 5, 2006, and incorporated by
reference thereto).
10(i)-1 Employment Agreement, dated October 30, 2008, between
Altamira Instruments, Inc. and Brookman P. March (Filed
as Exhibit 10A-2 to the Company's Current Report on Form
8-K filed on October 30, 2008, and incorporated by
reference thereto).
10(j) Indemnity Agreement, dated as of April 13, 2007 by and
among the Company and Grace Morin, Heather H. Haught and
William D. Chandler (Filed as Exhibit 10(j) to the
Company's Form 10-KSB filed on September 28, 2007 and
incorporated by reference thereto).
10(k) Lease between Altamira Instruments, Inc. and Allegheny
Homes, LLC, with respect to the Company's Pittsburgh,
Pennsylvania facilities (Filed as Exhibit 10(k) to the
Company's Form 10-KSB filed on September 28, 2007 and
incorporated by reference thereto).
10(l) Line of Credit Agreements dated October 30, 2008, by and
among the Company and Capital One, N.A. (Filed as Exhibits
10-A1(a) through (f) to the Company's Current Report on
Form 8-K filed on October 30, 2008, and incorporated by
reference thereto).
10(l)-1 Restated Promissory Note Agreement dated January 20, 2010
by and among the Company and Capital One N.A. (Filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed on January 20, 2010, and incorporated by reference
thereto).
10(m) Consulting Agreement dated April 1, 2009 by and between
the Company and Grace Morin (Filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on April 1,
2009, and incorporated by reference thereto).
14 Code of Ethics (Filed as Exhibit 14 to the Company's
Form 10-KSB filed on September 28, 2007 and incorporated
by reference thereto).
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York
corporation, is a wholly-owned inactive subsidiary of
the Company.
Altamira Instruments, Inc., a Delaware Corporation, is
a wholly-owned subsidiary of the Company since November
30, 2006.
31.01 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
32.01 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of Section13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCIENTIFIC INDUSTRIES, INC.
(Registrant)
/s/ Helena R. Santos
_____________________________________________
Helena R. Santos
President, Chief Executive Officer, Treasurer
Chief Financial and Principal Accounting Officer
Date: September 27, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Name Title Date
___________________ ___________________ __________________
/s/ Helena R. Santos
___________________
Helena R. Santos President and Treasurer (Chief September 27, 2010
Executive Officer and Financial
Officer) and Director
/s/ Joseph G. Cremonese
___________________
Joseph G. Cremonese Chairman of the Board September 27, 2010
/s/ Joseph I. Kesselman
___________________
Joseph I. Kesselman Director September 27, 2010
/s/ Roger B. Knowles
________________
Roger B. Knowles Director September 27, 2010
/s/ Grace S. Morin
______________
Grace S. Morin Director September 27, 2010
/s/ James S. Segasture
__________________
James S. Segasture Director September 27, 2010
________________________________________________________________________
SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
YEARS ENDED JUNE 30, 2010 AND 2009
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
YEARS ENDED JUNE 30, 2010 AND 2009
CONTENTS
Page
____
Report of independent registered public accounting firm F-1
Consolidated financial statements:
Balance sheets F-2
Statements of income F-3
Statements of shareholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-21
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Scientific Industries, Inc. and Subsidiaries
Bohemia, New York
We have audited the accompanying consolidated balance sheets of
Scientific Industries, Inc. and subsidiaries as of June 30, 2010 and
2009, and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor do the terms
of our engagement include, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Scientific Industries, Inc. and subsidiaries
as of June 30, 2010 and 2009, and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Nussbaum Yates Berg Klein & Wolpow, LLP
___________________________________________
Nussbaum Yates Berg Klein & Wolpow, LLP
Melville, New York
September 27, 2010
F-1
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2010 AND 2009
ASSETS
2010 2009
___________ ___________
Current assets
Cash and cash equivalents $ 632,700 $ 738,400
Investment securities 665,600 605,500
Trade accounts receivable, less allowance
for doubtful accounts of $11,600 in 2010
and 2009 1,494,500 806,700
Inventories 1,272,600 1,598,000
Prepaid and other current assets 87,200 91,600
Deferred taxes 73,800 63,400
____________ ___________
Total current assets 4,226,400 3,903,600
Property and equipment, net 193,400 241,200
Intangible assets, net 214,200 330,900
Goodwill 405,200 265,400
Other assets 25,700 25,700
Deferred taxes 100,100 64,200
____________ ___________
Total assets $ 5,165,000 $ 4,831,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 227,700 $ 137,400
Customer advances - 359,600
Accrued expenses and taxes 486,000 423,500
____________ ___________
Total current liabilities 713,700 920,500
____________ ___________
Shareholders' equity:
Common stock, $.05 par value; authorized
7,000,000 shares; issued 1,216,379 and
1,212,379 shares in 2010 and 2009 60,800 60,600
Additional paid-in capital 1,537,200 1,514,300
Accumulated other comprehensive loss,
unrealized holding loss on investment
securities (29,800) (79,600)
Retained earnings 2,935,500 2,467,600
____________ ___________
4,503,700 3,962,900
Less common stock held in treasury at
cost, 19,802 shares 52,400 52,400
____________ ___________
Total shareholders' equity 4,451,300 3,910,500
____________ ___________
Total liabilities and shareholders' equity $ 5,165,000 $ 4,831,000
============ ===========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2010 AND 2009
2010 2009
___________ ___________
Net sales $ 7,070,100 $ 5,989,100
Cost of sales 4,330,300 3,795,400
___________ ___________
Gross profit 2,739,800 2,193,700
___________ ___________
Operating expenses:
General and administrative 1,098,200 909,400
Selling 554,100 435,500
Research and development 343,800 452,600
___________ ___________
1,996,100 1,797,500
___________ ___________
Income from operations 743,700 396,200
___________ ___________
Other income:
Interest income 23,400 26,100
Other income (expense), net 10,500 (18,400)
___________ ___________
33,900 7,700
___________ ___________
Income before income taxes 777,600 403,900
___________ ___________
Income tax expense (benefit):
Current 280,100 141,100
Deferred (42,200) (56,700)
___________ ___________
237,900 84,400
___________ ___________
Net income $ 539,700 $ 319,500
=========== ===========
Basic earnings per common share $ .45 $ .27
====== ======
Diluted earnings per common share $ .45 $ .26
====== ======
Weighted average common shares
outstanding, basic 1,196,051 1,184,884
========= =========
Weighted average common shares outstanding,
assuming dilution 1,211,895 1,209,910
========= =========
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2010 AND 2009
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Loss
_______ _______ __________ _____________
Balance, July 1, 2008 1,201,154 $60,000 $1,507,000 $ (44,400)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
on investment securities,
net of tax - - - (35,200)
Comprehensive income - - - -
Exercise of stock options 11,225 600 2,700 -
Stock-based compensation - - 2,600 -
Income tax benefit of
stock options exercised - - 2,000 -
Cash dividend paid, $.08
per share - - - -
_________ _______ _________ ___________
Balance, June 30, 2009 1,212,379 60,600 1,514,300 (79,600)
Net income - - - -
Other comprehensive income:
Unrealized holding gain
on investment securities,
net of tax - - - 49,800
Comprehensive income - - - -
Exercise of stock options 4,000 200 5,100 -
Stock-based compensation - - 17,400 -
Income tax benefit of
stock options exercised - - 400 -
Cash dividend paid, $.06
per share - - - -
_________ _______ __________ ___________
1,216,379 $60,800 $1,537,200 $ (29,800)
========= ======= ========== ===========
See notes to consolidated financial statements.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
__________ ______ _______ ____________
Balance, July 1, 2008 $2,242,600 19,802 $52,400 $3,712,800
__________
Net income 319,500 - - 319,500
Other comprehensive loss:
Unrealized holding loss
on investment securities,
net of tax - - - ( 35,200)
____________
Comprehensive income - - - 284,300
____________
Exercise of stock options - - - 3,300
Stock-based compensation - - - 2,600
Income tax benefit of stock
options exercised - - - 2,000
Cash dividend paid, $.08
per share (94,500) - - (94,500)
__________ _______ _______ ___________
Balance, June 30, 2009 2,467,600 19,802 52,400 3,910,500
___________
Net income 539,700 - - 539,700
Other comprehensive income:
Unrealized holding gain
on investment securities,
net of tax - - - 49,800
___________
Comprehensive income - - - 589,500
___________
Exercise of stock options - - - 5,300
Stock-based compensation - - - 17,400
Income tax benefit of
stock options exercised - - - 400
Cash dividend paid, $.06
per share (71,800) - - (71,800)
__________ _______ ________ ___________
$2,935,500 19,802 $52,400 $4,451,300
========== ======= ======= ===========
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2010 AND 2009
2010 2009
__________ __________
Operating activities:
Net income $ 539,700 $ 319,500
Adjustments to reconcile net income to net __________ __________
cash provided by (used in) operating activities:
Depreciation and amortization 197,600 205,500
Deferred income tax benefit (42,200) (56,700)
Income tax benefit of stock options exercised 400 2,000
Stock-based compensation 17,400 2,600
Changes in operating assets and liabilities:
Trade accounts receivable (687,800) (351,900)
Inventories 325,400 (76,600)
Prepaid and other current assets 4,400 (6,900)
Other assets - 20,300
Accounts payable 90,300 (104,400)
Customer advances (359,600) (19,700)
Accrued expenses and taxes 29,700 18,500
___________ __________
Total adjustments (424,400) (367,300)
___________ __________
Net cash provided by (used in)
operating activities 115,300 (47,800)
___________ __________
Investing activities:
Additional consideration for acquisition of
Altamira Instruments, Inc. (107,000) (144,900)
Purchase of investment securities, available
for sale (14,500) (17,600)
Redemption of investment securities, available
for sale - 50,000
Capital expenditures (27,900) (66,600)
Purchase of intangible assets (5,100) (9,000)
___________ __________
Net cash used in investing activities (154,500) (188,100)
___________ __________
Financing activities:
Proceeds from exercise of stock options 5,300 3,300
Cash dividend paid (71,800) (94,500)
Proceeds from line of credit - 50,000
Repayments of line of credit - (50,000)
___________ __________
Net cash used in financing activities (66,500) (91,200)
___________ __________
Net decrease in cash and cash equivalents (105,700) (327,100)
Cash and cash equivalents, beginning of year 738,400 1,065,500
___________ __________
Cash and cash equivalents, end of year $ 632,700 $ 738,400
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 301,200 $ 125,000
========== ==========
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies
Nature of Operations
Scientific Industries, Inc. and its subsidiaries (the "Company") design,
manufacture, and market a variety of benchtop laboratory equipment and
catalyst research instruments. The Company is headquartered in Bohemia,
New York where it produces benchtop laboratory equipment for research
and has another location in Pittsburgh, Pennsylvania, where it produces
a variety of custom-made catalyst research instruments. The equipment
sold by the Company includes mixers, shakers, stirrers, refrigerated
incubators, catalyst characterization instruments, reactor systems and
high throughput systems.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Scientific Industries, Inc., Scientific Packaging Industries, Inc.,
an inactive wholly-owned subsidiary, and Altamira Instruments, Inc.
("Altamira"), a Delaware corporation and wholly-owned subsidiary (all
collectively referred to as the "Company"). All material intercompany
balances and transactions have been eliminated.
Revenue Recognition
Revenue is recognized when all the following criteria are met:
* Receipt of a written purchase order agreement which is binding on
the customer.
* Goods are shipped and title passes.
* Prices are fixed.
* Collectibility is reasonably assured.
* All material obligations under the agreement have been substantially
performed.
Substantially all orders are F.O.B. shipping point, all sales are final
without right of return or payment contingencies, and there are no special
sales arrangements or agreements with any customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of 90 days or less to be cash equivalents.
F-6
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies (Continued)
Accounts Receivable
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and
the current creditworthiness of the Company's customers. The Company
has recorded allowances for receivables which it considered uncollectible,
including amounts for the resolution of potential credit and other
collection issues such as disputed invoices, customer satisfaction claims
and pricing discrepancies. However, depending on how such potential
issues are resolved, or if the financial condition of any of the Company's
customers was to deteriorate and its ability to make required payments
became impaired, increases in these allowances may be required. The
Company actively manages its accounts receivable to minimize credit risk.
The Company does not obtain collateral for its accounts receivable.
Customer Advances
In the ordinary course of business, customers of Altamira may make
advance payments for purchase orders issued to Altamira. Such amounts
are categorized as liabilities under the caption customer advances.
Investment Securities
Securities available for sale are carried at fair value with unrealized
gains or losses reported in a separate component of shareholders' equity.
Realized gains or losses are determined based on the specific
identification method.
Inventories
Inventories are valued at the lower of cost (determined on first in, first
out basis) or market value, and have been reduced by an allowance for
excess and obsolete inventories. The estimate is based on management's
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided for primarily by the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
by the straight-line method over the term of the related lease or the
estimated useful lives of the assets, whichever is shorter.
F-7
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies (Continued)
Intangible Assets
Intangible assets consist of acquired technology, customer relationships,
non-compete agreements, patents, licenses, trademarks and trade names.
All intangible assets are amortized on a straight-line basis over 5
years, except for customer relationships which are amortized on an
accelerated (declining-balance) basis over their estimated useful lives.
The Company continually evaluates the remaining estimated useful lives
of intangible assets that are being amortized to determine whether
events or circumstances warrant a revision to the remaining period of
amortization.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value
of identifiable net assets of companies acquired. Goodwill and
long-lived intangible assets are tested for impairment at least
annually in accordance with the provisions of ACS No. 350,
"Intangibles-Goodwill and Other" ("ASC No. 350") (formerly Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets"). ASC No. 350 requires that goodwill be
tested for impairment at the reporting unit level (operating segment
or one level below an operating segment) on an annual basis and
between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit
below its carrying value. Application of the goodwill impairment
test requires judgment, including the identification of reporting
units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of the
fair value of each reporting unit. The Company tests goodwill
annually as of June 30, the last day of its fourth fiscal quarter,
of each year unless an event occurs that would cause the Company to
believe the value is impaired at an interim date.
Impairment of Long-Lived Assets
The Company follows the provisions of ASC No. 360-10, "Property, Plant
and Equipment - Impairment or Disposal of Long-Lived Assets ("ASC No.
360-10') (formerly SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets"). ASC No. 360-10 requires evaluation
of the need for an impairment charge relating to long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If an evaluation for
impairment is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying
amount to determine if a write down to a new depreciable basis is
required. If required, an impairment charge is recorded based on an
estimate of future discounted cash flows.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company accounts for income taxes according to the provisions of
ASC No. 740 "Income Taxes ("ASC No. 740") (formerly SFAS No. 109,
"Accounting for Income Taxes"). Under the liability method specified
by ASC No. 740, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis
of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense
is the result of changes in deferred tax assets and liabilities.
Deferred income taxes result principally from the timing of the
deductibility of the rent accrual, and the use of accelerated methods
of depreciation and amortization for tax purposes.
Advertising
Advertising costs are expensed as incurred. Advertising expense
amounted to $21,300 and $29,400 for the years ended June 30, 2010 and
2009.
Stock Compensation Plan
The Company has a ten-year stock option plan (the "2002 Plan")
which provides for the grant of options to purchase up to 100,000 shares
of the Company's Common Stock, par value $.05 per share ("Common Stock"),
plus to the extent that options previously granted under the 1992 Stock
Option Plan of the Company (the "Prior Plan") expire or terminate for
any reason without having been exercised, then options exercisable for
that same number of shares of Common Stock, up to a maximum of one
hundred sixty one thousand (161,000) shares, may be granted pursuant
to the 2002 Plan. The 2002 Plan provides for the granting of incentive
or non-incentive stock options as defined in the 2002 Plan and options
under the 2002 Plan may be granted until 2012. Incentive stock options
may be granted to employees at an exercise price equal to 100% (or
110% if the optionee owns directly or indirectly more than 10% of the
outstanding voting stock) of the fair market value of the shares of
Common Stock on the date of the grant. Non-incentive stock options are
to be granted at an exercise price not less than 85% of the fair market
value of the shares of Common Stock on the date of grant. The 2002
Plan also stipulates that none of the then members of the Board of
Directors shall be eligible to receive option grants under the
2002 Plan. The options expire at various dates through September 2018.
At June 30, 2010, 103,334 shares of Common Stock were available for
grant under the 2002 Plan and the Prior Plan.
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies (Continued)
Stock Compensation Plan (Continued)
Stock-based compensation is accounted for in accordance with ASC
No. 718 "Compensation-Stock Compensation" ("ASC No. 718) (formerly
SFAS No. 123R "Share-Based Payment") which requires compensation costs
related to stock-based payment transactions to be recognized. With
limited exceptions, the amount of compensation cost is measured based
on the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards are measured at each reporting
period. Compensation costs are recognized over the period that an
employee provides service in exchange for the award. During the years
ended June 30, 2010 and 2009, the Company granted 16,500 and 1,500
options that had a fair value of $20,500 and $2,500, respectively, to
employees and consultants. The fair value of the options granted during
fiscal years 2010 and 2009 were determined using the Black-Scholes-Merton
option-pricing model. The weighted average assumptions used for fiscal
2010 and 2009, respectively, were an expected life of 5 and 10 years;
risk free interest rate of 2.48% and 3.92%; volatility of 83% and 55%;
and dividend yield of 3.47% and 2.28%. The weighted-average value per
share of the options granted in 2010 and 2009 was $1.25 and $1.68,
respectively, and stock-based compensation costs were $17,400 and $2,600
for the years ended June 30, 2010 and 2009, respectively. Stock-based
compensation costs related to nonvested awards are $3,900 to be
recognized in the future.
The Company did not grant any options or warrants as compensation for
goods or services to non-employees, except to a director who was
granted 10,000 options that had a fair value of $9,300 during the
year ended June 30, 2010 for consulting services.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the amounts
reported in the financial statements and accompanying notes. The actual
results experienced by the Company may differ materially from
management's estimates.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by
the weighted-average number of shares outstanding. Diluted earnings
per common share includes the dilutive effect of stock options.
Subsequent Events
In preparing the accompanying Consolidated Financial Statements in
accordance with ASC No. 855, "Subsequent Events," the Company has
reviewed events that have occurred after June 30, 2010 through the
date of issuance of the financial statements. During this period,
the Company did not have any material subsequent events.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
1. Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
In July 2009, the FASB issued ASC No. 105, "Generally Accepted
Accounting Principles" (formerly Statement of Financial Standards
(SFAS) No. 168, "The Hierarchy of Generally Accepted Accounting
Principles"). This standard contains guidance which reduces the
GAAP hierarchy to two levels, one that is authoritative and one
that is not. This standard was effective September 15, 2009 and
did not have an impact on the Company's results of operations,
cash flows or financial condition.
In February 2010, and update was made to the "Subsequent Events Topic,"
ASC No. 855. Among other things, this update defines "revised financial
statements" as financial statements revised as a result of correction
of an error or retrospective application of GAAP and requires an entity
to update its evaluation of subsequent events through the date the
revised financial statements are issued or are available to be issued.
This update was effective upon issuance and therefore was effective for
the Company for the quarter ended March 31, 2010. The adoption of
these updates did not have a material impact on the Company's results
of operations, cash flows or financial condition.
ASC No. 820-10, "Fair Value Measurements and Disclosures" (formerly
SFAS No. 157, "Fair Values Measurements"), with respect to non-financial
assets and liabilities was adopted effective July 1, 2009. This standard
defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. This standard
did not have a financial impact to the consolidated financial statements.
Refer to Note 4, "Fair Value of Financial Instruments," for additional
information regarding the Company's fair value measurements for financial
assets and liabilities.
2. Acquisition
On November 30, 2006, the Company acquired all of the outstanding
capital stock of Altamira. The acquisition was pursuant to a Stock
Purchase Agreement (the "Agreement") whereby the Company paid or issued
to the sellers $400,000 in cash and 125,000 shares of the Company's
Common Stock and agreed to make additional cash payments equal to 5%,
subject to adjustment, of the net sales of Altamira for each of five
periods - December 1, 2006 to June 30, 2007, each of the fiscal years
ending June 30, 2008, 2009, and 2010, and July 1, 2010 to November
30, 2010.
Altamira's principal customers are universities, government laboratories,
and chemical and petrochemical companies. The instruments, which are
customizable to the customers' specifications, are sold on a direct basis.
In conjunction with the acquisition of Altamira, management of the
Company valued the tangible and intangible assets acquired, including
goodwill, customer relationships, non-compete agreements, and certain
technology, trade names and trademarks. The carrying amounts of
goodwill and other intangible assets are presented in Note 7, "Goodwill
and Other Intangible Assets" which represent the valuations determined
in conjunction with the acquisition. In addition, other fair market
value adjustments were made in conjunction with the acquisition,
primarily adjustments to property and equipment, and inventory.
F-11
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
2. Acquisition (Continued)
As of June 30, 2010 and 2009, the adjusted aggregate purchase price
was allocated to assets acquired and liabilities assumed as follows:
2010 2009
__________ __________
Current assets $ 734,000 $ 734,000
Property and equipment 140,300 140,300
Non-current assets 25,100 25,100
Goodwill 405,200 265,400
Other intangible assets 639,000* 639,000*
Current liabilities (561,900) (561,900)
___________ ___________
Net purchase price $1,381,700 $1,241,900
=========== ===========
*Of the $639,000 of other intangible assets, $237,000 was allocated to
customer relationships with an estimated useful life of 10 years,
$300,000 was allocated to technology including trade names and
trademarks with a useful life of 5 years, and $102,000 was allocated
to a non-compete agreement with an estimated useful life of 5 years.
The amount allocated to the customer relationships is being amortized
on an accelerated (declining balance) method and the other intangibles
are being amortized on a straight-line basis.
3. Segment Information and Concentrations
The Company views its operations as two segments: the manufacture and
marketing of standard benchtop laboratory equipment for research in
university, hospital and industrial laboratories sold primarily through
laboratory equipment distributors ("Benchtop Laboratory Equipment
Operations"), and 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").
Segment information is reported as follows:
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
June 30, 2010:
Net Sales $4,272,700 $2,797,400 $ - $7,070,100
Foreign Sales 2,381,000 201,600 - 2,582,600
Segment Profit 553,200 190,500 - 743,700
Segment Assets 2,091,800 1,828,500 1,244,700 5,165,000
Long-Lived Asset
Expenditures 27,900 - - 27,900
Depreciation and
Amortization 59,800 137,800 - 197,600
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
3. Segment Information and Concentrations (Continued)
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
June 30, 2009:
Net Sales $3,848,400 $2,140,700 $ - $5,989,100
Foreign Sales 2,229,000 463,900 - 2,692,900
Segment Profit(Loss) 429,900 ( 33,700) - 396,200
Segment Assets 2,199,700 1,632,800 998,500 4,831,000
Long-Lived Assets
Expenditures 41,100 25,500 - 66,600
Depreciation and
Amortization 58,700 146,800 - 205,500
Certain information relating to the Company's export sales follows:
2010 2009
___________ ___________
Export sales (principally Europe and Asia) $ 2,582,600 $ 2,692,900
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.
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
4. Fair Value of Financial Instruments (Continued)
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 June 30, 2010 and 2009 according to the valuation
techniques the Company used to determine their fair values:
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2010 Level 1 Level 2 Level 3
_____________ __________ _______ ________
Cash and cash equivalents $ 632,700 $ 632,700 $ - $ -
Available for sale securities 665,600 665,600 - -
---------- ---------- ------- --------
Total $1,298,300 $1,298,300 $ - $ -
========== ========== ======= ========
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2009 Level 1 Level 2 Level 3
_____________ __________ _______ ________
Cash and cash equivalents $ 738,400 $ 738,400 $ - $ -
Available for sale securities 605,500 605,500 - -
---------- ---------- ------- --------
Total $1,343,900 $1,343,900 $ - $ -
========== ========== ======= ========
Investments in marketable securities classified as available-for-sale by
security type at June 30, 2010 and 2009 consisted of the following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2010:
Available for sale:
Equity securities $ 7,800 $ 9,600 $ 1,800
Mutual funds 687,600 656,000 (31,600)
__________ _________ __________
$ 695,400 $ 665,600 $ (29,800)
========== ========= ==========
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2009:
Available for sale:
Equity securities $ 6,200 $ 8,900 $ 2,700
Mutual funds 678,900 596,600 (82,300)
__________ _________ __________
$ 685,100 $ 605,500 $ (79,600)
========== ========= ==========
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
5. Inventories
2010 2009
___________ ___________
Raw materials $ 896,400 $ 1,068,500
Work-in-process 201,400 321,000
Finished goods 174,800 208,500
___________ ___________
$ 1,272,600 $ 1,598,000
=========== ===========
6. Property and Equipment
Useful Lives
(Years) 2010 2009
____________ __________ __________
Automobiles 5 $ 21,000 $ 21,000
Computer equipment 3-5 118,400 119,100
Machinery and equipment 3-7 493,400 483,400
Furniture and fixtures 4-10 169,000 162,900
Leasehold improvements 3-5 64,100 64,100
_________ _________
865,900 850,500
Less accumulated depreciation
and amortization 672,500 609,300
_________ _________
$ 193,400 $ 241,200
========= =========
Depreciation expense was $75,800 and $72,900 for the years ended June 30,
2010 and 2009, respectively.
7. Goodwill and Other Intangible Assets
In conjunction with the acquisition of Altamira, management of the
Company valued the tangible and intangible assets acquired, including
customer relationships, non-compete agreements and technology which
encompasses trade names, trademarks and licenses. The valuation resulted
in an initial negative goodwill of approximately $91,500 on the date of
acquisition which was subsequently adjusted to positive goodwill of
$405,200 and $265,400 at June 30, 2010 and 2009, all of which is
deductible for tax purposes. The related agreement provides for
contingent payments to the former shareholders based on net sales of
the Catalyst Research Instrument Operations subject to certain limits,
which are expected to be earned and paid. Additional consideration
amounted to approximately $139,800 and $107,000 for the years ended
June 30, 2010 and 2009, respectively.
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
7. Goodwill and Other Intangible Assets (Continued)
The components of intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ____________
At June 30, 2010:
Technology 5 yrs. $300,000 $ 215,000 $ 85,000
Customer relationships 10 yrs. 237,000 157,000 80,000
Non-compete agreement 5 yrs. 102,000 73,100 28,900
Other intangible assets 5 yrs. 129,500 109,200 20,300
________ _________ _________
$768,500 $ 554,300 $ 214,200
======== ========= =========
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ____________
At June 30, 2009:
Technology 5 yrs. $300,000 $ 155,000 $ 145,000
Customer relationships 10 yrs. 237,000 129,200 107,800
Non-compete agreement 5 yrs. 102,000 52,700 49,300
Other intangible assets 5 yrs. 124,400 95,600 28,800
________ _________ _________
$763,400 $ 432,500 $ 330,900
======== ========= =========
Total amortization expense was $121,800 and $132,600 in 2010 and 2009.
Estimated future intangible assets amortization expense is as follows:
Fiscal Years
____________
2011 $ 110,500
2012 51,800
2013 13,500
2014 9,800
2015 6,500
Thereafter 22,100
_________
$ 214,200
=========
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
8. Bank Line of Credit
The Company has a line of credit with Capital One Bank, N.A. (the "Bank"),
which provides for maximum borrowings of up to $500,000 with advance
requests being at the bank's discretion. Interest is charged at the
Bank's prime rate. The Company did not utilize this line of credit
during the fiscal year ended June 30, 2010. The Company borrowed and
repaid $50,000 under this line of credit during the year ended June 30,
2009. The line of credit is collateralized by the Company's assets
to the extent borrowed and outstanding and any outstanding amounts are
due and payable on January 3, 2011.
9. Employee Benefit Plans
The Company has 401(k) profit sharing plans covering its employees,
which provide for voluntary employee salary contributions not to exceed
the statutory limitations provided by the Internal Revenue Code. One
plan provides for Company matching of 50% of each Benchtop Laboratory
Equipment Operations participant's salary deferral election, up to a
maximum amount for each participant of 2% of their compensation, while
the second plan provides for matching the Altamira employee
contributions up to 4% of their compensation. Total employer matching
contributions amounted to $44,300 and $29,300 for the years ended June
30, 2010 and 2009, respectively.
10. Commitments and Contingencies
The Company is obligated through January 2015 under a noncancelable
operating lease for its Bohemia, New York premises, which requires
minimum annual rental payments plus other expenses, including real
estate taxes and insurance. In accordance with generally accepted
accounting principles, the future minimum annual rental expense,
computed on a straight-line basis, is approximately $209,400 under
the terms of the lease. Rental expense for the Bohemia facility
amounted to approximately $229,100 in 2010 and $225,300 in 2009.
Accrued rent, payable in future years, amounted to $66,800 and
$58,400 at June 30, 2010 and 2009. Commencing August 2008, the
Company entered into a sublease agreement through August 2012 for
a portion of its warehouse space at an annual sublease income of
approximately $16,200.
The Company is also obligated under an operating lease for its
facility in Pittsburgh, Pennsylvania. The lease, which commenced
on August 1, 2006, has a term of five years through July 31, 2011,
subject to early termination upon 180 day notice. The lease requires
monthly minimum rental payments of $4,700 monthly with a Company
option to renew for an additional five years. Total rental expense
for the Pittsburgh facility was $56,000 in each of 2010 and 2009.
There are no other significant expenses related to this lease.
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
10. Commitments and Contingencies (Continued)
The Company's approximate future minimum rental payments under all leases
are as follows:
Bohemia
Facility (net
of sublease Pittsburgh
Fiscal Years income Facility Total
____________ _____________ __________ __________
2011 $ 191,900 $ 56,400 $ 248,300
2012 199,600 4,700 204,300
2013 222,900 - 222,900
2014 234,800 - 234,800
2015 140,100 - 140,100
__________ _________ __________
$ 989,300 $ 61,100 $1,050,400
========== ========= ==========
The Company has employment contracts with its President and Executive
Vice President through June 30, 2011, providing for annual base salaries
of $135,000 and $123,600, respectively. Each contract provided for a
performance bonus for the twelve month period ended December 31, 2009
of $5,000, which was paid during fiscal 2010. A bonus, if any, for the
six month period ended June 30, 2010 is to be determined by the Board of
Directors. No bonuses were paid during the fiscal year ended June 30,
2009.
The Company has an employment contract with the President of Altamira
for the two years ending November 30, 2010 which may be extended by
mutual consent for an additional year but not beyond November 30, 2012.
The contract provides for an annual base salary of $115,000 during the
first twelve month period, and $121,900 for the second twelve month
period, plus discretionary bonuses for each of the two years. The
Company has the option to pay, with the employee's consent, the increase
in base salary for the second twelve month period in cash or stock
options, which resulted in issuance of options to purchase 4,000
shares of the Company's Common Stock. A bonus was also paid in the
form of a stock option valued at $4,100 using the Black-Scholes option
pricing model.
The Company has a consulting agreement which expires on December 31, 2010
with an affiliate of the Chairman of the Board of Directors for marketing
consulting services. The agreement provides that the consultant be paid
a monthly fee of $3,000 for a certain number of consulting days as
defined in the agreement. Consulting expense related to this agreement
amounted to $36,000 for each of the years ended June 30, 2010 and 2009.
The Company has a consulting agreement which expires March 31, 2011 with
a different member of its Board of Directors for administrative services.
The agreement provides that the consultant will be paid at the rate of $85
per hour. Consulting expense related to this agreement amounted to
$32,700 and $10,400 for the fiscal years ended June 30, 2010 and 2009.
F-18
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
11. Income Taxes
Income taxes for 2010 and 2009 were different from the amounts computed by
applying the Federal income tax rate to the income before income taxes due
to the following:
2010 2009
__________________ _________________
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
_________ _______ _________ _______
Computed "expected" income tax $272,200 35.0% $141,400 35.0%
Research and development
credits ( 13,300) (1.7) (21,200) (5.2)
Other, net (21,000) (2.7) (35,800) (8.9)
_________ _______ __________ ______
Actual income taxes $237,900 30.6% $ 84,400 20.9%
========= ======= ========== ======
Deferred tax assets and liabilities consist of the following:
2010 2009
__________ __________
Deferred tax assets:
Amortization of intangibles $ 117,300 $ 99,000
Rent accrual 25,400 22,200
Other 73,800 63,400
_________ _________
216,500 184,600
Deferred tax liability:
Depreciation of property
and amortization of goodwill (42,600) (57,000)
__________ __________
Net deferred tax assets $ 173,900 $ 127,600
========== ==========
The breakdown between current and long-term deferred tax assets and
liabilities is as follows:
2010 2009
__________ __________
Current deferred tax assets $ 73,800 $ 63,400
_________ _________
Long-term deferred tax assets 142,700 121,200
Long-term deferred tax liabilities (42,600) (57,000)
__________ __________
Net long-term deferred tax asset 100,100 64,200
__________ __________
Net deferred tax assets $ 173,900 $ 127,600
========== ==========
F-19
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
11. Income Taxes (Continued)
ASC No. 740 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. ASC No. 740 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. The impact of the Company's
reassessment of its tax positions in accordance with ASC No. 740 did not
have an effect on the results of operations, financial condition or
liquidity. As of June 30, 2010 and 2009, the Company did not have any
unrecognized tax benefits related to various federal and state income
tax matters.
The Company's policy is to recognize interest and penalties on any
unrecognized tax benefits as a component of income tax expense. As of
the date of adoption of ASC No. 740, the Company did not have any
accrued interest or penalties associated with any unrecognized tax
benefits. The Company is subject to U.S. federal income tax, as well
as various state jurisdictions. The Company is currently open to audit
under the statute of limitations by the federal and state jurisdictions
for the years ending June 30, 2007 through 2009. The Company does not
anticipate any material amount of unrecognized tax benefits within the
next 12 months.
12. Stock Options
Option activity is summarized as follows:
Fiscal 2010 Fiscal 2009
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 44,501 $ 1.90 64,001 $ 1.60
Granted 16,500 2.35 1,500 3.27
Exercised ( 4,000) 1.33 (17,000) .84
Forfeited (12,000) 1.52 ( 4,000) 1.88
________ ________
Outstanding, end of year 45,001 2.24 44,501 1.90
________ _______ ________ ________
Options exercisable at year-end 34,831 $ 1.88 43,000 $ 1.88
________ _______ ________ ________
Weighted average fair value per
share of options granted
during fiscal 2010 and 2009 $ 1.25 $ 3.27
======= =======
F-20
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2010 AND 2009
12. Stock Options (Continued)
As of June 30, 2010 As of June 30, 2010
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$2.40-$3.27 25,000 3.65 $ 2.77 19,831 $ 2.68
$1.25-$1.88 20,001 3.54 1.59 15,000 1.49
________ ________
45,001 34,831
________ ________
As of June 30, 2009 As of June 30, 2009
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$2.40-$3.27 22,500 4.04 $ 2.61 21,000 $ 2.57
$.83-$1.33 22,001 2.40 1.22 22,000 1.22
________ ________
44,501 43,000
________ ________
13. Earnings Per Common Share
Earnings per common share data was computed as follows:
2010 2009
__________ __________
Net income $ 539,700 $ 319,500
__________ __________
Weighted average common shares
outstanding 1,196,051 1,184,884
Effect of dilutive securities 15,844 25,026
__________ __________
Weighted average dilutive common
shares outstanding 1,211,895 1,209,910
__________ __________
Basic earnings per common share $ .45 $ .27
========== ==========
Diluted earnings per common share $ .45 $ .26
========== ==========
Approximately 6,500 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 year ended June 30, 2009,
because the effect would be anti-dilutive as the exercise price for
such shares was greater than the average fair market value during the
year.
F-21
