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, 2016
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.)
80 Orville Drive, Suite 102, 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. 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 (SS 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 [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (SS 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 September 2, 2016 is $2,768,300.
The number of shares outstanding of the registrant's common stock, par
value $.05 per share ("Common Stock") as of September 2, 2016 is
1,489,112 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
SCIENTIFIC INDUSTRIES, INC.
Table of Contents
PART I
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 8
ITEM 2. PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
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 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 14
ITEM 9A. CONTROLS AND PROCEDURES 14
ITEM 9B. OTHER INFORMATION 15
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 15
ITEM 11. EXECUTIVE COMPENSATION 17
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 22
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 24
SIGNATURES 31
EXHIBIT 31.0 CERTIFICATION 32
EXHIBIT 32.0 CERTIFICATION 34
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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," "will be,"
"will," "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"),
customized catalyst research instruments ("Catalyst Research Instruments"),
under its wholly-owned subsidiary, Altamira Instruments, Inc., ("Altamira")
and through its wholly-owned subsidiary, Scientific Bioprocessing, Inc.,
("SBI"), the design and development of bioprocessing systems and products
("Bioprocessing Systems"). The Company's products are used primarily
for research purposes by universities, pharmaceutical companies, pharmacies,
national laboratories, medical device manufacturers, petrochemical companies
and other industries performing laboratory-scale research.
Operating Segments. The Company views its operations as
three segments: the manufacture and marketing of standard Benchtop Laboratory
Equipment for research in university, pharmacy and industrial laboratories
sold primarily through laboratory equipment distributors and online; the
manufacture and marketing of custom-made Catalyst Research Instruments for
universities, government laboratories, and chemical and petrochemical
companies; and the development and sublicensing of bioprocessing systems
and products for research in university and industrial laboratories.
For certain financial information regarding the Company's operating
segments, see Note 2 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 sold
under the "Genie(TM)" brand, and pharmacy and laboratory balances, force
gauges, and moisture analyzers under the "Torbal(TM)" brand. Sales of
the Company's principal product, the Vortex-Genie(R) 2 Mixer, excluding
accessories, represented approximately 28% and 34% of the Company's
total net revenues for each of the fiscal years ended June 30, 2016
("fiscal 2016") and June 30, 2015 ("fiscal 2015"), and 50% of the
segment's sales for both fiscal years.
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, two vortex mixers incorporating digital
control and display; a large capacity multi-vessel vortex mixer and
orbital shakers.
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The Company also offers various benchtop multi-purpose
rotators and rockers, designed to rotate and rock a wide variety of
containers, and 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.
Its 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 also available
in analog and digital versions.
The Company's Torbal brand line of products include
pharmacy, laboratory, and industrial digital scales, mechanical balances,
moisture analyzers, and force gauges resulting from an acquisition in
February 2014.
Catalyst Research Instruments. The Catalyst Research
Instrument products are offered through the Company's subsidiary,
Altamira. Its flagship product is the AMI-300(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(R)-based software. The Company's AMI-300 Catalyst
Characterization Instrument 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.
Its other Catalyst Research Instrument products
include reactor systems, high throughput systems and micro-activity
reactors, including the Company's BenchCAT(TM) 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.
Bioprocessing Systems. The Company, through SBI, is
engaged in the design and development of bioprocessing products which
the Company began marketing during fiscal 2016, principally coaster
systems using disposable sensors for vessels with volumes ranging
from 250 milliliter to five liters. The Company expects to commence
production of these products in the fiscal year ending June 30, 2017.
In addition, the Company sublicenses the patents and technology it
holds relating to bioprocessing systems exclusively under a license
with the University of Maryland, Baltimore County, ("UMBC"), for which
it receives royalties.
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 Customers. Sales, principally of the Vortex-
Genie 2 Mixer, to two customers, represented for fiscal 2016 and fiscal
2015, 9% and 12% of total revenues, respectively, and 15% and 17% of
Benchtop Laboratory Equipment product sales, 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 2016, sales to one customer accounted for
61% of the segment's sales (26% of total revenues). In fiscal 2015,
sales to a different customer accounted for 12% of the segment's sales
(4% of total revenues).
Marketing.
Benchtop Laboratory Equipment. The Company's Benchtop
Laboratory Equipment products sold under the "Genie" brand 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.
The Company's "Torbal" brand products are primarily
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marketed and sold online , and primarily on a direct basis, with only a
few distributors. The Company also markets products through attendance
at industry trade shows, trade publication advertising, brochures and
catalogs, the Company's websites, one sales manager and one director of
marketing in the U.S., and a consultant in Europe.
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 Instrument products 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.
Bioprocessing Systems. The Company's Bioprocessing
Systems products, are currently under development and the Company
expects to begin production during the fiscal year ending June 30,
2017, although no assurances can be given, and will be offered both
directly and through distribution worldwide to university, industrial,
and government laboratories. The Company began marketing the products
during fiscal 2016 via its new website, trade shows, and online marketing.
Assembly and Production. The Company has an operating
facility in Bohemia, New York at which its Benchtop Laboratory Equipment
operations are conducted and one in Pittsburgh, Pennsylvania at which its
Catalyst Research Instruments operations are conducted. The Company also
has a small sales and marketing office in Oradell, New Jersey related to its
Torbal division. The Company's production operations principally involve
assembly of components supplied by various domestic and international
independent suppliers. The Company has not commenced production of
bioprocessing products, but anticipates that its current facilities will
be adequate for such purpose.
Patents, Trademarks, and Licenses.
The Company holds several United States patents relating
to its products, including a patent which expires in February 2018 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 2029 on a biocompatible bag with
integral sensors. The Company has several patent applications pending.
The Company does not anticipate any material adverse effect on its
operations following the expiration of the patents.
The Company has various proprietary trademarks, including
AMI(TM), BenchCAT(TM), Biocoaster(TM), BioGenie(R), Cellphase(R),
Cellstation(R), Disruptor Beads(TM), Disruptor Genie(R), Enviro-Genie(R),
Genie(TM), Incubator Genie(TM), MagStir Genie(R), MegaMag Genie(R),
MicroPlate Genie(R), MultiMagStir Genie(R), Multi-MicroPlate Genie(R),
Orbital-Genie(R), QuadMag Genie(R), Rotator Genie(R), SBI(R), Roto-Shake
Genie(R), Torbal(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.
The Company has several licensing agreements for
technology and patents used in the Company's business, including an
exclusive license from UMBC with respect to rights and know-how under
a patent held by UMBC related to disposable sensor technology, which
the Company further sublicenses on an exclusive basis to a German
company, and non-exclusive rights held by the Company as it relates to
the use of the technology with vessels of sizes ranging from 250
milliliters to 5 liters. The Company also holds a license to certain
technology related to its patent for the Roto-Shake Genie. Total
license fees paid by the Company under all its licenses for fiscal
2016 and fiscal 2015 amounted to $106,600 and $124,100, respectively.
6
Foreign Sales. The Company's sales to overseas
customers, principally in Asia and Europe, accounted for approximately
53% and 50% of the Company's net revenues for fiscal 2016 and fiscal
2015, respectively. Payments are 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. Backlog for Benchtop Laboratory
Equipment products is not a significant factor because this line of
products is comprised of standard catalog items requiring lead times
which usually are not longer than two weeks. There is no backlog for
Bioprocessing Systems. The backlog for Catalyst Research Instrument
products as of June 30, 2016 was $995,000, all of which is expected
to be filled by June 30, 2017, although no assurance can be given, as
compared to a backlog of $2,570,400 as of June 30, 2015, all of which
was filled in fiscal 2016.
Competition. Most of the Company's principal
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 derives from private label
brand mixers offered by laboratory equipment distributors in the
United States and Europe and products exported from China. However,
the Company believes that despite its small size, it is a major
market participant in the global vortex mixer market.
The Company's major competitors for its Genie brand
Benchtop Laboratory Equipment are Henry Troemner, Inc. (a private
label supplier to the two largest laboratory equipment distributors
in the U.S. and Europe), IKA-Werke GmbH & Co. KG, a German company,
Benchmark Scientific, Inc., (a United States importer of China-
produced products), and Heidolph Instruments GmbH, a German company.
The Company's main competitors for its Torbal brand products are
Ohaus Corporation, an American company, A&D Company Ltd., a Japanese
company, and Adam Equipment Co., Ltd., a British 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.
Major competitors in the United States include Quantachrome
Instruments (which is also a customer) and Micromeritics Instrument
Corporation, each a privately-held company. The Company sells
instruments to Quantachrome under an OEM agreement.
The potential major competitors for the Company's
Bioprocessing Systems are Applikon Biotechnology, B.V. (Netherlands),
DASGIP Technology GmbH (Germany), and PreSens - Precision
Sensing GmbH (Germany).
Research and Development. The Company incurred
research and development expenses, the majority of which related
to its Benchtop Laboratory Equipment products, of $349,000 during
fiscal 2016 compared to $392,200 during fiscal 2015. The Company
expects research and development expenditures in the fiscal year
ending June 30, 2017 will be at approximately the same level as
those in fiscal 2016.
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.
7
Employees. As of September 2, 2016, the
Company employed 34 persons (24 for the Benchtop Laboratory
Equipment operations and 10 for the Catalyst Research Instruments
Operations) of whom 30 were full-time, including its three
executive officers. All activities of the Bioprocessing Systems
Operations are being performed by employees of the other two
operations and consultants. None of the Company's employees
are represented by any union.
Available Information. The Company's Annual
Report to Stockholders for fiscal 2016, 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 2016 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
https://scientificindustries.com/sec-filings.
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 Major Customers
Although the Company does not depend on any
one single major customer, sales to two Benchtop Laboratory
Equipment Operations customers accounted for a combined aggregate
of 9% and 12% of its total revenues for fiscal 2016 and fiscal
2015, respectively. During fiscal 2016 one order from one
customer for catalyst research instruments accounted for 26% of
fiscal 2016 total revenues.
No representation can be made that the Company
will be successful in continuing to retain either or both
customers, or not suffer a material reduction in sales either
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 50% of Benchtop Laboratory
Equipment sales, for each of fiscal 2016 and fiscal 2015, and
28% and 34% of total revenues for fiscal 2016 and fiscal 2015,
respectively.
The Company is a Small Participant in Each of the Industries in
Which It Operates
The Benchtop Laboratory Equipment industry is a
highly competitive mature industry. Although the Vortex-Genie
2 Mixer has been widely accepted, the annual sales of the Benchtop
Laboratory Equipment products ($5,449,700 for fiscal 2016 and
$5,410,500 for fiscal 2015) 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.
There are constant new entrants into the vortex mixer market,
including those offering products imported from China, which the
Company is unable to compete with on price. The Torbal line of
products is also a small market participant in its industry with
significant competition from well known brands.
8
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 Bioprocessing Systems operation is a
participant in the fast-growing laboratory-scale sector of the
larger bioprocessing products industry, which is dominated by
several large companies with much greater resources than the
Company.
The Company's Ability to Grow and Compete Effectively Depends In
Part on Its Ability to Develop and Effectively Market New Products
The Company continuously invests in 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, including the acquisition of the Torbal
line of products in fiscal 2014. However, gross revenues derived
from such other Benchtop Laboratory Equipment products only amounted
to $2,718,300 for fiscal 2016 and $2,716,100, for fiscal 2015. The
segment's ability to compete will depend upon the Company's success
in continuing to develop and market new laboratory equipment
as to which no assurance can be given.
The Company relies heavily on distributors and their
catalogs to market the majority of its Benchtop Laboratory Equipment
products, as is customary in the industry. 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; furthermore, not all
distributors feature the Company's products in their catalogs.
The Company's line of Catalyst Research Instruments
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.
Over the last few years the Company has introduced two new catalyst
research products to increase its product offerings and has
continuously sought to expand its outside sales force.
The success of the Company's new Bioprocessing
Systems operation will be heavily dependent on its ability to
develop and produce new products. Such products are of a complex
nature and are taking longer to develop than previously anticipated.
In addition, they will be subject to beta testing by end users,
which could result in design and/or production changes which could
further delay development time. The sale and marketing of the
products, at least initially, will be through the Company's
attendance at trade shows, website, online marketing, and a few
select distributors.
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 which will be accepted
by the marketplace, or that any distributor will include or retain
any such products in its catalogs and websites.
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,
especially government funding. Availability of funds can be
affected by budgetary constraints. Factors including a general
economic recession, the European crisis, slowdown in Asian
economies, or a major terrorist attack may have a negative
impact on the availability of funding including government or
academic grants to potential customers.
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As discussed in Item 1, the Company has
significant sales to overseas customers. The rising dollar
against foreign currencies has a negative impact on sales,
because the Company's products, which are paid in dollars,
become more expensive.
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
The Company purchases all its components
from outside suppliers and relies on a few suppliers for some
Benchtop Laboratory Equipment components, mostly due
to cost considerations. Most 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 be procured
or, where feasible and cost effective, purchases are made from
more than one supplier.
However, a shortage of such components could
halt production and have a material negative effect on the
Company's operations.
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
Benchtop Laboratory Equipment product, the Vortex-Genie 2 Mixer,
the Torbal balances, or for its Catalyst Research Instruments
products 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.
As part of the asset purchase by SBI during fiscal
2012, the Company acquired the rights to various patents for
bioprocessing products which it licenses from UMBC.
There can be no assurance that any patent issued,
licensed or sublicensed 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. Any of the foregoing
activities could have a material adverse effect on the Company.
Moreover, the enforcement by the Company of its patent or license
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, Mr.
Brookman March, President of Altamira, and Mr. Karl Nowosielski,
Torbal Division President 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 September 2, 2016, there were 1,489,112 shares of
Common Stock of the Company outstanding, of which 364,223 shares
(25%) 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 2016 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.
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Item 2. Properties.
The Company's executive offices and principal
manufacturing facility for its Benchtop Laboratory Equipment
operations comprise approximately 19,000 square feet, are
located in Bohemia, New York and held pursuant to a lease
which expires in February 2025. The Company's Catalyst Research
Instruments operations are conducted from an approximately
9,000 square foot facility in Pittsburgh, Pennsylvania under
a lease expiring in November 2017. The Bioprocessing Systems
operation does not occupy a separate physical location. The
Company has a 1,200 square foot facility in Oradell, New Jersey
from where it conducts its sales and marketing functions,
primarily for the Torbal division of the Benchtop Laboratory
Equipment Operations. See Note 10 to the Financial Statements
in Item 8. The leased facilities are suitable and adequate
for each of the Company's 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 2016.
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 2015 and fiscal
2016, 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
_________________________ _______ ________
09/30/14 3.00 3.25
12/31/14 2.61 3.30
03/31/15 2.50 3.00
06/30/15 2.50 2.95
09/30/15 2.43 3.00
12/31/15 2.51 3.25
03/31/16 2.51 2.90
06/30/16 2.66 2.98
As of September 2, 2016, there were 317 record holders of
the Company's Common Stock.
11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-Looking statements. Certain statements
contained in this report are not based on historical facts, but
are forward-looking statements that are based upon various
assumptions about future conditions. Actual events in the
future could differ materially from those described in the
forward-looking information. Numerous unknown factors and
future events could cause such differences, including but not
limited to, product demand, market acceptance, success of
marketing strategy, success of expansion efforts, impact of
competition, adverse economic conditions, and other factors
affecting the Company's business that are beyond the Company's
control, which are discussed elsewhere in this report.
Consequently, no forward-looking statement can be guaranteed.
The Company undertakes no obligation to publicly update
forward-looking statements, whether as a result of new
information, future events or otherwise. This Management's
Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's
financial statements and the related notes included
elsewhere in this report.
Overview. The Company reflected income before
income tax expense of $218,900 for fiscal 2016 compared to a
loss before income tax benefit of $7,300 for fiscal 2015,
primarily due to the higher sales and profits from the Catalyst
Research Instruments operations and higher profits from the
Benchtop Laboratory Equipment operations, partially offset by
losses incurred by the Bioprocessing Systems operations. The
results reflected non-cash amounts for depreciation,
amortization, and impairment of intangible assets of $641,600
for fiscal 2016 and $434,800 for fiscal 2015.
Results of Operations. Net sales for fiscal
2016 increased $1,749,200 (22.3%) to $9,597,600 from $7,848,400
for fiscal 2015, reflecting increases of $1,716,900 (74.1%) in
net sales of catalyst research instruments, due to the large order
to an overseas customer and $39,200 (.7%) in benchtop laboratory
equipment sales, partially offset by a decrease of $6,900 (5.7%)
in the Bioprocessing Systems operations revenues. The benchtop
laboratory equipment sales reflected $1,175,800 of Torbal brand
product sales for fiscal 2016, compared to $1,120,500 in fiscal
2015. The Company's Bioprocessing Systems operations, which began
selling its new products expected to soon be fully marketable,
reflected sales of $22,000 of such new products.
Sales of catalyst research instruments are comprised of a
small number of large orders, historically averaging more than
$100,000 each, while the sales of benchtop laboratory equipment
comprise of a large number of small orders. As of June 30, 2016,
the order backlog for catalyst research instruments was $995,000,
all of which is expected to be shipped during fiscal year ending
June 30, 2017, compared to $2,570,400 as of June 30, 2015.
Revenues derived from the Bioprocessing Systems
Operations comprise primarily of net royalties received from
sublicensees. The Company expects to start launching new products
currently under development during the fiscal year ending June
30, 2017, although no assurance can be given.
The gross profit percentage for fiscal 2016 was
40.8% compared to 39.8% for fiscal 2015 due to higher margins on
sales of catalyst research instruments resulting from the
significant order in fiscal 2016, and higher margins on sales
of benchtop laboratory equipment due to lower overhead costs.
General and administrative expenses for fiscal
2016 decreased $5,700 (0.3%) to $1,695,200 compared to
$1,700,900 for fiscal 2015.
Selling expenses for fiscal 2016 increased
$370,100 (35.4%) to $1,415,400 from $1,045,300 from for fiscal
2015 due primarily to increased outside sales commissions for
the Catalyst Research Instruments operations related to a
large overseas order.
12
Research and development expenses decreased
by $43,200 (11.0%) to $349,000 for fiscal 2016 compared to
$392,200 for fiscal 2015, primarily due to decreased new
product development costs incurred by the Benchtop Laboratory
Equipment operations, partially offset by higher product
development costs incurred by the Bioprocessing Systems
operations.
Total other expense was $26,100 for fiscal
2016 compared to $9,500 income in fiscal 2015, due to the
interest expense related to the financing of a large
order for catalyst research instruments.
Income tax expense for fiscal 2016 was
$53,300 compared to a tax benefit of $16,000 for the prior
year due to the income for the current year.
As a result of the foregoing, the Company
recorded net income for fiscal 2016 of $165,600, compared
to net income of $8,700 for fiscal 2015.
Liquidity and Capital Resources. Cash
and cash equivalents increased by $763,000 to $1,245,000
as of June 30, 2016 from $482,000 as of June 30, 2015.
Net cash provided by operating activities
was $880,400 for fiscal 2016 compared to $147,400 for
fiscal 2015, primarily due to increased income, increased
accounts payable and accrued expenses amounts, and an
amount for impairment of intangible assets and a change
in fair value of contingent consideration.
Net cash provided by investing activities
was $194,400 for fiscal 2016 compared to net cash used of
$250,700 for fiscal 2015 primarily due to the release of
previously held restricted cash as collateral for the
Company's working capital line of credit with its bank.
The Company used $311,800 in financing activities in
fiscal 2016 compared to cash provided of $91,600 in
fiscal 2015, primarily due to the repayment of certain
notes payable. The Company borrowed $970,000 under
the export-import line of credit during fiscal 2016 to
finance a large order of catalyst research instruments
and repaid the debt at the end of fiscal 2016.
The Company's working capital increased
by $620,600 to $4,031,900 as of June 30, 2016 compared
to $3,411,300 as of June 30, 2015, mainly due to
improved operating results excluding depreciation and
amortization.
The Company has two lines of credit through
June 2017 with First National Bank of Pennsylvania - an
Export-Related Revolving Line of Credit which is guaranteed
by the Export-Import Bank of the United States which
provides for export-related borrowings of up to $200,000,
bearing interest at prime plus 1% and an annual
fee of 1.75% and a second one-year Demand Line of Credit
which provides for borrowings of up to $300,000 for regular
working capital needs, bearing interest at prime, currently
3.50%. Advances on both lines are secured by a pledge of
the Company's assets including inventory, accounts, chattel
paper, equipment and general intangibles of the Company.
As of June 30, 2016 no borrowings were outstanding under
either line.
13
Management believes that the Company will
be able to meet its cash flow needs during the 12
months ending June 30, 2017 from its available financial
resources including the lines of credit, its cash and
investment securities, and operations.
Capital Expenditures. During fiscal 2016,
the Company incurred $92,000 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, 2017.
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-F25.
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 Financial Officer of the
Company conducted an evaluation of the effectiveness of the Company's
internal controls over financial reporting as of June 30, 2016 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 Financial Officer of the Company, it was concluded
that as of June 30, 2016, 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.
14
Inherent Limitations on Effectiveness of Controls.
The Company's management, including its Chief Executive and 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
The Company has the following five Directors:
Joseph G. Cremonese (age 80), a Director since
November 2002 and Chairman of the Board since February 2006, has
been, through his affiliate, a marketing consultant to the
Company since 1996. Mr. Cremonese has been since 1991, President
of his affiliate, Laboratory Innovation Company, Ltd., which is
a vehicle for technology transfer and consulting services for
companies, engaged in the production and sale of products for
science and biotechnology. Since March 2003, he has been a
director of 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.
Roger B. Knowles (age 91), a Director since 1965,
has been retired for the last five years.
Grace S. Morin (age 68), 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 thereto a member of senior management of a
designer of gas flow environmental engineered products for
approximately four years.
Helena R. Santos (age 52), 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.
15
James S. Segasture (age 80), a Director since 1991,
has been retired for the last five years.
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 following: the fiscal year
ended June 30, 2016 - one director (Ms. Morin, Class B), the fiscal
year ending June 30, 2017 - two directors (Mr. Cremonese and Mr.
Knowles, Class C), and the fiscal year ending June 30, 2018 - two
directors (Ms. Santos and Mr. Segasture, Class A).
Board Committees
The Company's Stock Option Committee administers
the Company's 2012 Stock Option Plan. The members of the committee
are non-management Directors of the Company - James S. Segasture
and Joseph G. Cremonese. The members of the Committee serve at
the discretion of the Board. During fiscal 2016 the Stock Option
Committee did not hold any meetings.
Grace S. Morin and James S. Segasture are the
current members of the Company's Compensation Committee serving
at the discretion of the Board. The Committee administers the
Company's compensation policies. During fiscal 2016, the
Compensation Committee held one meeting.
The Board of Directors acts as the Company's
Audit Committee, which in its function as the Committee, held
four meetings during fiscal 2016. Ms. Santos, who is not
"independent" and Ms. Morin are "financial experts" as defined
by the Securities and Exchange Commission.
Executive Officers
See above for the employment history of Ms.
Santos.
Robert P. Nichols (age 55), 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
rom January 1996 to February 1998.
Brookman P. March (age 71) has been Director
of Sales and Marketing of Altamira, which has conducted the
Catalyst Research Instruments operations since November 30,
2006 and its President since July 2008. 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 of the Company.
Karl D. Nowosielski (age 37), is the
President of the Torbal division of the Benchtop Laboratory
Equipment Operations and Director of Marketing for the
Company. He had been until February 2014 Vice President
of Fulcrum, Inc. (the seller of the Torbal division assets)
since 2004.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that, for fiscal 2016,
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
The Company has adopted a code of ethics
that applies to the Executive Officers and Directors. A
copy of the code of ethics can be found on the Company's
website at www.scientificindustries.com.
16
Item 11. Executive Compensation.
Compensation Discussion and Analysis. The
Compensation Committee reviews and recommends to the Board
of Directors the compensation to be paid to each executive
officer. Executive compensation, in all instances except
for the compensation for the Chief Executive Officer ("CEO"),
is based on recommendations from the CEO. The CEO makes a
determination by comparing the performance of each executive
being reviewed with objectives established at the beginning
of each fiscal year and with objectives established during
the business year with regard to the success of the
achievement of such objectives and the successful execution
of management targets and goals.
With respect to the compensation of the CEO,
the Committee considers performance criteria, 50% of which
is related to the direction, by the CEO, of the reporting
executives, the establishment of executive objectives as
components for the successful achievement of Company goals
and the successful completion of programs leading to the
successful completion of the Business Plan for the Company
and 50% is based on the achievement by the Company of its
financial and personnel goals tempered by the amount of
the income or loss of the Company during the fiscal year.
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 and grants of stock
options to retain qualified personnel.
Compensation for each of its executive
officers provided by their employment agreements were
based on the foregoing factors and the operating and
financial results of the segments under their management.
The following table summarizes all
compensation paid by the Company to each of its executive
officers for the fiscal years ended June 30, 2016 and 2015.
17
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 ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h)
_____________________________________________________________________
Helena R. 2016 157,100 0 0 0 0 0
Santos, 2015 154,000 0 0 0 0 0
CEO,
President,
CFO
_____________________________________________________________________
Robert P. 2016 141,800 0 0 1,200(2) 0 0
Nichols, 2015 139,000 0 0 1,200(2) 0 0
Exec.
V.P.
_____________________________________________________________________
Brookman 2016 142,800 0 0 1,200(3) 0 0
P. March, 2015 140,000 0 0 2,800(3) 0 0
Director
of Sales
and
Marketing,
and
President of
Altamira
_____________________________________________________________________
Karl D. 2016 141,900 0 0 9,500(4) 0 0
Nowosielski2015 140,500 0 0 7,100(4) 0 0
President of
Torbal
Division
and Director
of Marketing
_____________________________________________________________________
SUMMARY COMPENSATION TABLE (CONTINUED)
_____________________________________________________________________
Changes
in
Pension
Value
and Non-
Qualified All
Name Deferred Other
and Comp- Comp-
Principal Fiscal ensation ensation Total
Position Year Earnings ($) ($)
(a) (b) (i) (j)
_____________________________________________________________________
Helena R. 2016 0 6,300(1) 163,400
Santos, 2015 0 6,200(1) 160,200
CEO,
President,
CFO
_____________________________________________________________________
Robert P. 2016 0 5,700(1) 148,700
Nichols, 2015 0 5,600(1) 145,800
Exec.
V.P.
_____________________________________________________________________
Brookman 2016 0 5,700(1) 149,700
P. March, 2015 0 5,600(1) 148,400
Director
of Sales
and
Marketing,
and
President of
Altamira
_____________________________________________________________________
Karl D. 2016 0 5,700(1) 157,100
Nowosielski 2015 0 5,600(1) 153,200
President of
Torbal
Divsion
and Director
of Marketing
_____________________________________________________________________
(1) The amounts represent the Company's matching contribution under
the Company's 401(k) Plans.
(2) The amount represents compensation expense for stock options
granted valued utilizing the Black-Scholes-Merton options pricing
model, disregarding estimates of forfeitures related to service-
based vesting considerations. The fiscal 2014 option was valued
at a total of $3,500 of which $1,200 was expensed as stock based
compensation in fiscal 2016 and 2015.
(3) The amounts represent compensation expense for the 2014 stock
options granted valued utilizing the Black-Scholes-Merton options
pricing model, disregarding estimates of forfeitures related to
service-based vesting considerations. The 2014 option was valued
at a total of $3,500 of which $1,200 was expensed in fiscal 2016
and 2015.
(4) The amounts represent compensation expense for the 2016 and
2015 stock options granted as part of his employment agreement,
valued utilizing the Black-Scholes-Merton options pricing model,
disregarding estimates of forfeitures related to service-based
vesting considerations. The options were valued at a total of
$9,500 and $7,100, respectively, all of which was expensed as
stock based compensation in the respective periods.
18
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED JUNE 30, 2016
All Other
Estimated Estimated Stock
Future Future Awards:
Payouts Payouts Number
Under Under Of
Non-Equity Equity Shares
Incentive Incentive Of Stock
Grant Plan Plan Or Units
Name Date $ $ (#)
(a) (b) (c) (d) (e)
________________________________________________________
Karl D. Nowosielski 02/26/16 0 0 0
________________________________________________________
GRANTS OF PLAN-BASED AWARDS IN FISCAL YEAR ENDED JUNE 30, 2016
(CONTINUED)
All Other
Option Grant
Awards: Date
Number Exercise Fair
Of Or Base Value of
Securities Price Stock
Underlying Of Option And
Options Awards Option
Name # ($/Sh) Awards
(a) (f) (g) (h)
_________________________________________________________
Karl D. Nowosielski 5,000 3.05 9,500
_________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
______________________________________________________________
Option Awards
______________________________________________________________
Number Equity
Number of Incentive
of Securities Plan Awards:
Securities Under- Number of
Under- lying Securities
lying Un- Unexercised Underlying Option
exercised Options(#) Unexercised Exercise Option
Options(#) Unexerci- Unearned Price Expiration
Name Exercisable sable Options(#) ($) Date
(a) (b) (c) (d) (e) (f)
_____________________________________________________________________
Brookman P. 6,334 666 0 3.50-3.71 11/2014-12/2023
March
Robert P.
Nichols 1,334 666 0 3.50 12/2023
Karl D.
Nowosielski 2,667 8,333 0 3.05-4.05 02/2024-02/2026
_____________________________________________________________________
Employment Agreements
In May 2016, The Company extended the existing employment
agreements with Ms. Helena R. Santos and Robert P. Nichols to June 30,
2017. The agreements provide for annual base salaries for the fiscal
years ending June 30, 2017, for Ms. Santos of $162,000 and $146,000 for
Mr. Nichols. Bonuses, if any, are to be awarded at the discretion of
the Board of Directors for each of the fiscal years. No bonuses
were awarded for fiscal 2016 or 2015.
In May 2016, the Company extended the existing employment
agreement with Mr. March through June 30, 2017. The agreement provides
for an annual base salary of $147,000. Bonuses, if any, may be awarded
at the discretion of the Board of Directors. No bonuses were awarded
for fiscal 2016 or 2015. Mr. March is the husband of Grace S. Morin, a
Director of the Company and of Altamira and a former principal stockholder
of Altamira.
19
In February 2014 in conjunction with the acquisition of
the Torbal division assets from Fulcrum, Inc., the Company entered into
an employment agreement with Mr. Nowosielski providing for his employment
through February 2017, which may be extended by mutual consent for another
two years. The agreement provided for an annual base salary of $140,000,
subject to increases commencing with the second year based on percentage
increases in the Consumer Price Index, plus discretionary bonuses.
The agreement also provided for the issuance of 2,000 stock options upon
commencement of employment and 4,000, 5,000, and 6,000 stock options in
February 2015, 2016, and 2017, respectively, subject to his continued
employment. No bonuses have been awarded under the agreement.
The employment agreements for Ms. Santos, Mr. Nichols,
Mr. March and Mr. Nowosielski contain confidentiality and non-competition
covenants. The employment agreements for Ms. Santos, Mr. March, and Mr.
Nowosielski contain termination provisions stipulating that if the
Company terminates the employment other than for death, disability, or
cause (defined as (i) conviction of a felony or (ii) gross neglect or
gross misconduct (including conflict of interest), the Company shall
pay severance payments equal to one year's salary at the rate of the
compensation at the time of termination, and continue to pay the
regular benefits provided by the Company for a period of two years
from termination.
Directors' Compensation and Options
DIRECTORS' COMPENSATION
For the Year Ended June 30, 2016
_________________________________________________________________
Non-
Equity
Fees Incentive
Earned Plan
or Paid Stock Option Comp-
in Cash Awards Awards ensation
Name ($) ($) ($) ($)
(a) (b) (c) (d) (e)
__________________________________________________________________
Joseph G.
Cremonese 30,000 0 0 0
Roger B.
Knowles 13,900 0 0 0
Grace S.
Morin 13,900 0 0 0
James S.
Segasture 13,900 0 0 0
___________________________________________________________________
DIRECTORS' COMPENSATION (CONTINUED)
Changes
in
Pension
Value and
Non- Non-
qualified qualified
Deferred Deferred All
Compens- Comp- Other
ation ensation Comp-
Earnings Earnings ensation Total
Name ($) ($) ($) ($)
(a) (f) (g) (h) (i)
____________________________________________________________________
Joseph G.
Cremonese 0 0 43,200(1) 73,200
Roger B.
Knowles 0 0 0 13,900
Grace S.
Morin 0 0 5,800(2) 19,700
James S.
Segasture 0 0 0 13,900
____________________________________________________________________
(1) Represents amount paid to his affiliate pursuant to a marketing
consulting agreement (see Items 12 and
13).
(2) 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
$2,000 and $1,500 for each meeting attended. In addition, the
Company reimburses each Director for out-of-pocket expenses
incurred in connection with attendance at board meetings. Mr.
Cremonese, as Chairman of the Board receives an additional fee of
$1,400 per month. During fiscal 2016, total director compensation
to non-employee Directors aggregated $120,700, including the
consulting fees paid to Mr. Cremonese's affiliate, and to Ms. Morin.
Since December 1, 2003, Mr. Joseph G. Cremonese,
has been awarded a total of 45,000 stock options under the Company's
2002 and 2012 Stock Option Plans of which 20,000 remain unexercised.
None of the other directors have options outstanding.
20
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The following table sets forth, as of June 30, 2016,
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., 80 Orville Drive, Bohemia, New York
11716.
Amount and
Name Nature of Beneficial Ownership % of Class
___________________________ ______________________________ ___________
Spectrum Laboratories, Inc. 127,986 (1) 8.6%
18617 Broadwick Street
Rancho Dominquez, CA 90220
Fulcrum, Inc. 126,449 (2) 8.5%
100 Delawanna Avenue
Clifton, NJ 07014
Lowell A. Kleiman 90,000 (3) 6.0%
16 Walnut Street
Glen Head, NY 11545
Joseph G. Cremonese 104,597 (4) 6.9%
Roger B. Knowles - -
Grace S. Morin 89,950 (5) 6.0%
James S. Segasture 162,500 (6) 10.9%
Helena R. Santos 15,779 1.1%
Robert P. Nichols 20,397 (7) 1.4%
Brookman P. March 89,950 (8) 6.0%
Karl D. Nowosielski 11,000 (9) 0.8%
All directors and executive
officers as a group (8 persons) 404,223 (10) 26.4%
(1) Based on information reported on Form 3 filed with the Securities
and Exchange Commission on June 27, 2011.
(2) Stock issued in connection with the acquisition of the Torbal division
assets from Fulcrum, Inc. on February 26, 2014.
(3) Based on information reported in his Schedule 13D filed with the
Securities and Exchange Commission on December 10, 2015.
(4) 77,597 shares are owned jointly with his wife, 7,000 shares are
owned by his wife, and 20,000 shares are issuable upon exercise of options.
(5) Includes 7,000 shares issuable upon exercise of options held by her
husband, Mr. March.
(6) Shares owned jointly with his wife.
(7) Includes 2,000 shares issuable upon exercise of options.
(8) Represents 82,950 shares owned by Ms. Morin, his wife and 7,000
shares issuable upon exercise of options.
(9) Represents shares issuable upon exercise of options.
(10) Includes 40,000 shares issuable upon exercise of options.
21
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to Company options,
warrants and rights as of June 30, 2016.
_________________________________________________________________
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 43,500 3.33
Equity
Compensation
plans not approved
by security holders N/A N/A
_________________________________________________________________
Total 43,500 3.33
_________________________________________________________________
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 79,500
Equity
Compensation
plans not approved
by security holders N/A
_________________________________________________________________
Total 79,500
_________________________________________________________________
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Mr. Joseph G. Cremonese, a Director since November
2002, through his affiliate, Laboratory Innovation Company, Ltd.,
has been providing independent marketing consulting services to the
Company since January 1, 2003 pursuant to a consulting agreement
expiring December 31, 2016. The agreement currently provides that
Mr. Cremonese and his affiliate shall render, at the request of
the Company, marketing consulting services for a monthly payment
of $3,600. The agreement contains confidentiality and non-
competition covenants. The Company paid fees of $43,200 pursuant
to the agreement for each of fiscal 2016 and 2015.
Ms. Grace S. Morin, was elected a Director in
December 2006 following the sale of her 90.36% ownership interest
in Altamira to the Company in November 2006. Up until March 31,
2009, Ms. Morin had been employed by Altamira as an administrative
employee. Since April 1, 2009, she has provided consulting
services on a part-time basis pursuant to an agreement expiring
December 31, 2016 at the rate of $85 per hour, resulting in
payments of $5,800 and $4,300 for fiscal 2016 and fiscal 2015,
respectively. The agreement contains confidentiality and non-
competition covenants.
Item 14. Principal Accountant Fees and Services.
The following is a description of the fees
incurred by the Company for services by the firm of Nussbaum
Yates Berg Klein & Wolpow, LLP (the "Firm") during fiscal 2016
and fiscal 2015.
The Company incurred for the services of the Firm
fees of approximately $67,000 and $65,000 for fiscal 2016 and 2015,
respectively, in connection with the audit of the Company's annual
financial statements and quarterly reviews; and $6,000 for each
fiscal year for the preparation of the Company's corporate tax
returns.
22
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 the 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.
23
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements. The required financial statements
of the Company are attached hereto on pages F1-F24.
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).
4(b) 2012 Stock Option Plan (filed as Exhibit
10 to the Company's Current Report on Form 8-K filed on January
23, 2012 and incorporated by reference thereto).
4(c) Amendment to the Company's 2012 Stock
Option Plan (Filed as Exhibit 4(c) to the Company's Quarterly
Report on Form 10-Q filed on May 12, 2016 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 Annual
Report on 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).
24
10(a)-3 Lease agreement dated August 8, 2014 by
and between the Company and 80 Orville Drive Associates LLC.
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(b)-5 Employment Agreement dated September 13, 2011
by and between the Company and Ms. Santos (filed as exhibit 10(b)-5
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2011, and incorporated by reference thereto).
10(b)-6 Amended Employment Agreement dated May 20,
2013 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 20, 2013, and
incorporated by reference thereto).
10(b)-7 Agreement extension dated June 9, 2015 to
amend employment agreement 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 June 9, 2015, and incorporated by reference thereto).
10(b)-8 Agreement extension dated May 25, 2016 to
amend employment agreement 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 31, 2016, 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).
25
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(c)-5 Employment Agreement dated September 13, 2011
by and between the Company and Mr. Nichols (filed as Exhibit 10(c)-5
to the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2011, and incorporated by reference thereto).
10(c)-6 Amended Employment Agreement dated May 20,
2013 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 20,
2013, and incorporated by reference thereto).
10(c)-7 Agreement extension dated June 9, 2015 to amend
employment agreement with Mr. Nichols (filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on June 9, 2015, and
incorporated by reference thereto).
10(c)-8 Agreement extension dated May 25, 2016 to
amend employment agreement with Mr. Nichols (filed as Exhibit 10A-1 to
the Company's Current Report on Form 8-K filed on May 31, 2016, 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(d)-4 Fourth Amended and Restated Consulting
Agreement dated January 7, 2011 (filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K (filed on January 18, 2011,
and incorporated by reference thereto).
10(d)-5 Fifth Amendment and Restated Consulting
Agreement dated January 20, 2012 (filed as Exhibit 10 to the
Company's Current Report on Form 8-K (filed on January 23, 2012,
and incorporated by reference thereto).
10(d)-6 Agreement extension dated November 29,
2012 to Amended and Restated Consulting Agreement (filed as
Exhibit 10 to the Company's Current Report on Form 8-K filed on
December 4, 2012, and incorporated by reference thereto).
26
10(d)-7 Agreement extension dated December 12,
2013 to Amended and Restated Consulting Agreement (filed as
Exhibit 10 to the Company's Current Report on Form 8-K filed
on December 12, 2013, and incorporated by reference thereto).
10(d)-8 Agreement extension dated January 14,
2015 to Amended and Restated Consulting Agreement by and
between the Company and Mr. Cremonese and affiliates (filed
as Exhibit 10A-1 to the Company's Current Report on Form 8-K
filed on January 15, 2015, and incorporated with reference
thereto).
10(d)-9 Agreement extension dated January 7,
2016 to Amended and Restated Consulting Agreement by and
between the Company and Mr. Cremonese and affiliates (filed
as Exhibit 10A-1 to the Company's Current Report on Form 8-K
filed on January 26, 2016, and incorporated with 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 as of 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(i)-2 Employment Agreement, dated as of October 1, 2010, between
Altamira Instruments, Inc., and Brookman P. March (filed as
Exhibit 10A-1 to the Company's Current Report on Form 8-K filed
on October 13, 2010, and incorporated by reference thereto).
10(i)-3 Employment Agreement, dated as of May 18,
2012 between Altamira Instruments, Inc. and Brookman P. March
(filed as Exhibit 10(i)-3 to the Company's Annual Report on Form
10-K filed on September 27, 2012, and incorporated by reference
thereto).
27
10(i)-4 Agreement Extension, dated as of May 21,
2014 between Altamira Instruments, Inc. and Brookman P. March
(filed as Exhibit 10 to the Company's Current Report on Form 8-K
filed on May 21, 2014, and incorporated by reference thereto).
10(i)-5 Agreement extension dated June 9, 2015
to amend employment agreement (filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on June 9, 2015, and
incorporated by reference thereto).
10(i)-6 Agreement extension dated May 25, 2016 to
amend employment agreement (filed as Exhibit 10A-1 to the Company's
Current Report on Form 8-K filed on May 31, 2016, 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
Annual Report on 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
Annual Report on Form 10-KSB filed on September 28, 2007 and
incorporated by reference thereto).
10(k)-1 Lease between Altamira Instruments, Inc.
and Allegheny Homes, LLC, with respect to the Company's Pittsburgh,
Pennsylvania facilities (filed as Exhibit 10(k)-1 to the Company's
Quarterly Report on Form 10-Q filed on February 14, 2013, 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(I)-2 Restated Promissory Note Agreement dated
January 5, 2011 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 6, 2011, 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).
10(m)-1 Agreement dated January 12, 2015 to extend
Consulting Agreement (filed as Exhibit 10A-2 to the Company's Current
Report on Form 8-K filed on January 15, 2015, and incorporated by
reference thereto).
10(m)-2 Agreement dated January 7, 2016 to extend
Consulting Agreement (filed as Exhibit 10A-2 to the Company's
Current Report on Form 8-K filed on January 26, 2016, and incorporated
by reference thereto).
28
10(n) Line of Credit Agreements dated June 14, 2011,
by and among the Company and JPMorgan Chase Bank, N.A. (filed as
Exhibits 99.1 through 99.3 to the Company's Current Report on Form
8-K filed on June 16, 2011, and incorporated by reference thereto).
10(n)-1 Promissory Note dated June 5, 2013 by and
among the Company and JP Morgan Chase Bank, N.A. (filed as Exhibit
99 to the Company's Current Report on Form 8-K filed on June 7, 2013,
and incorporated by reference thereto).
10(o) Purchase Agreement, dated as of November 14,
2011, by and among the Company, Scientific Bioprocessing, Inc., and
Fluorometrix Corporation (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on November 17, 2011, and
incorporated by reference thereto).
10(p) Escrow Agreement, dated as of November 14,
2011, by and among the Company, Scientific Bioprocessing, Inc., and
Fluorometrix Corporation (filed as Exhibit 10(A) to the Company's
Current Report on Form 8-K filed on November 17, 2011, and
incorporated by reference thereto).
10(q) Research and Development Agreement dated as
of November 14, 2011, by and between Scientific Bioprocessing, Inc.
and Biodox R&D Corporation (filed as Exhibit 10(B) to the Company's
Current Report on Form 8-K filed on November 17, 2011, and
incorporated by reference thereto).
10(q)-1 Notice of termination of Research and
Development Agreement dated June 12, 2013 (filed as Exhibit 99
to the Company's Current Report on Form 8-K filed on June 27, 2013,
and incorporated by reference thereto).
10(r) Non-Competition Agreement, dated as of
November 14, 2011, by and among the Company, Scientific
Bioprocessing, Inc., and Joseph E. Qualitz (filed as Exhibit 10(D)
to the Company's Current Report on Form 8-K filed on November 17,
2011, and incorporated by reference thereto).
10(s) Promissory Note, dated as of November
14, 2011, by and between the Company and the University of
Maryland, Baltimore County (filed as Exhibit 10(c) to the
Company's Current Report on Form 8-K filed on November 17, 2011,
and incorporated by reference thereto).
10(t) License Agreement, dated as of January
31, 2001 by and between University of Maryland, Baltimore
County and Fluorometrix Corporation (filed as Exhibit 10(E) to
the Company's Current Report on Form 8-K filed on November 21,
2011, and incorporated by reference thereto).
10(u) Line of Credit Agreements dated June
25, 2014, by and among the Company and Bank of America Merrill
Lynch (filed as Exhibits 99.1 through 99.2 (to the Company's
Current Report on Form 8-K filed on July 2, 2014, and
incorporated by reference thereto).
10(v) Asset Purchase Agreement, dated as of
February 26, 2014, by and among the Company and Fulcrum, Inc.
(filed as Exhibit 2.1 to the Company's Current Report on Form
8-K filed on February 28, 2014, and incorporated by reference
thereto).
10(v)-1 Escrow Agreement, dated as of February
26, 2014, by and among the Company, and Fulcrum, Inc. (filed as
Exhibit 10(e) to the Company's Current Report on Form 8-K filed
on February 28, 2014, and incorporated by reference thereto).
29
10(v)-2 Non-Competition Agreements, dated as
of February 26, 2014, by and among the Company, and James Maloy
and Karl Nowosielski (filed as Exhibits 10(b) and 10(c) to the
Company's Current Report on Form 8-K filed on February 28, 2014,
and incorporated by reference thereto).
10(v)-3 Registration Rights Agreement, dated
as of February 26, 2014, by and among the Company, and Fulcrum,
Inc. (filed as Exhibit 10(d) to the Company's Current Report
on Form 8-K filed on February 28, 2014, and incorporated by
reference thereto).
10(v)-4 Supply Agreement, dated as of February
20, 2014, by and among the Company, and Axis Sp 3.O.O. (filed
as Exhibit 10(g) to the Company's Current Report on Form 8-K
filed on February 28, 2014, and incorporated by reference
thereto).
10(w) Line of Credit Agreements dated June
26, 2015, by and among the Company and First National Bank of
Pennsylvania (filed as Exhibit 10.1 through 10.4 to the
Company's Current Report on Form 8-K filed on June 30, 2015,
and incorporated by reference thereto).
10(w)-1 Commercial Security Agreement dated
July 5, 2016 by and among the Company and First National
Bank of Pennsylvania.
10(y) Note Purchase Agreements with
James Maloy dated May 7, 2015 (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K filed on June 30,
2015, and incorporated by reference thereto).
10(z) Note Purchase Agreements with
Grace March dated May 19, 2015 (filed as Exhibit 10.6 to
the Company's Current Report on Form 8-K filed on June 30, 2015,
and incorporated by reference thereto).
14 Code of Ethics (filed as Exhibit 14
to the Company's Annual Report on Form 10-KSB filed on September
28, 2007 and incorporated by reference thereto).
21 Subsidiaries of the Registrant
Altamira Instruments, Inc., a Delaware Corporation, is a
wholly-owned subsidiary of the Company.
Scientific Bioprocessing, Inc., a Delaware Corporation, is
a wholly-owned subsidiary of the Company since November 2011.
Scientific Packaging Industries, Inc., a New York
corporation, is a wholly-owned inactive subsidiary of
the Company.
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.
30
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: October 11, 2016
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 President and Treasurer (Chief October 11, 2016
Helena R. Santos Executive Officer and Financial
Officer) and Director
/s/ Joseph G. Cremonese Chairman of the Board October 11, 2016
Joseph G. Cremonese
/s/ Roger B. Knowles Director October 11, 2016
Roger B. Knowles
/s/ Grace S. Morin Director October 11, 2016
Grace S. Morin
/s/ James S. Segasture Director October 11, 2016
James S. Segasture
31
___________________________________________________________________________
SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AS OF AND FOR THE
YEARS ENDED JUNE 30, 2016 AND 2015
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
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 comprehensive income F-4
Statements of shareholders' equity F-5
Statements of cash flows F-6 - F-7
Notes to financial statements F-8 - F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Scientific Industries, Inc.
Bohemia, New York
We have audited the accompanying consolidated balance sheets
of Scientific Industries, Inc. and subsidiaries (the "Company")
as of June 30, 2016 and 2015, and the related consolidated
statements of income, comprehensive income, shareholders'
equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated
financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our
audits 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 also includes examining,
on a test basis, evidence supporting the amounts and disclosures
in the consolidated 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, 2016 and 2015, and the
consolidated results of its operations and its 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
October 11, 2016
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2016 AND 2015
ASSETS
2016 2015
_________ _________
Current assets:
Cash and cash equivalents $1,245,000 $ 482,000
Restricted cash - 300,000
Investment securities 290,100 281,800
Trade accounts receivable, less
allowance for doubtful accounts
of $11,600 in 2016 and 2015 1,231,900 1,081,700
Inventories 2,412,100 2,213,700
Prepaid and other current assets 47,200 68,600
Deferred taxes 140,600 114,200
__________ __________
Total current assets 5,366,900 4,542,000
Property and equipment, net 251,100 235,200
Intangible assets, net 897,600 1,451,900
Goodwill 705,300 705,300
Other assets 52,500 52,500
Deferred taxes 275,900 154,500
__________ __________
Total assets $7,549,300 $7,141,400
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 342,400 $ 227,600
Customer advances - 76,400
Accrued expenses and taxes,
current portion 849,700 519,900
Contingent consideration,
current portion 136,500 106,800
Notes payable, current portion 6,400 200,000
__________ __________
Total current liabilities 1,335,000 1,130,700
Accrued expenses, less current portion 60,000 -
Notes payable, less current portion 12,500 -
Contingent consideration payable,
less current portion 209,800 260,300
__________ __________
Total liabilities 1,617,300 1,391,000
__________ __________
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares;
issued 1,508,914 shares in 2016
and 2015 75,400 75,400
Additional paid-in capital 2,498,500 2,486,700
Accumulated other comprehensive
income (loss) 900 (3,300)
Retained earnings 3,409,600 3,244,000
__________ __________
5,984,400 5,802,800
Less common stock held in treasury at
cost, 19,802 shares 52,400 52,400
__________ __________
Total shareholders' equity 5,932,000 5,750,400
__________ __________
Total liabilities and
shareholders' equity $7,549,300 $7,141,400
========== ==========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
2016 2015
__________ ____________
Revenues $9,597,600 $7,848,400
Cost of revenues 5,680,300 4,726,800
__________ __________
Gross profit 3,917,300 3,121,600
__________ __________
Operating expenses:
General and administrative 1,695,200 1,700,900
Selling 1,415,400 1,045,300
Research and development 349,000 392,200
Impairment of intangible assets 212,700 -
__________ __________
Total operating expenses 3,672,300 3,138,400
__________ __________
Income (loss) from operations 245,000 (16,800)
__________ __________
Other income (expense):
Interest income 6,000 4,300
Other income, net 1,800 9,400
Interest expense (33,900) (4,200)
__________ __________
Total other income (expense),
net (26,100) 9,500
__________ __________
Income (loss) before income tax
expense (benefit) 218,900 (7,300)
__________ __________
Income tax expense (benefit):
Current 202,500 18,700
Deferred (149,200) ( 34,700)
__________ __________
Total income tax expense
(benefit) 53,300 ( 16,000)
__________ __________
Net income $ 165,600 $ 8,700
========== ==========
Basic earnings per common share $ .11 $ .01
======= =======
Diluted earnings per common share $ .11 $ .01
======= =======
Weighted average common shares
outstanding, basic 1,489,112 1,478,126
========= =========
Weighted average common shares
outstanding, assuming dilution 1,489,387 1,479,882
========= =========
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
Net income $ 165,600 $ 8,700
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period,
net of tax 4,200 (4,400)
__________ _________
Comprehensive income $ 169,800 $ 4,300
========== =========
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Gain
(Loss)
_______ _______ __________ _____________
Balance, July 1, 2014 1,488,914 $74,400 $2,420,700 $ 1,100
Net income - - - -
Unrealized holding loss
on investment securities,
net of tax - - - ( 4,400)
Exercise of stock options 20,000 1,000 50,200 -
Stock-based compensation - - 10,900 -
Income tax benefit of
stock options exercised - - 4,900 -
_________ _______ __________ _________
Balance, June 30, 2015 1,508,914 75,400 2,486,700 (3,300)
Net income - - - -
Unrealized holding gain
on investment securities,
net of tax - - - 4,200
Stock-based compensation - - 11,800 -
_________ _______ __________ _________
Balance, June 30, 2016 1,508,914 $75,400 $2,498,500 $ 900
========= ======= ========== =========
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2016 AND 2015
Total
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
__________ ______ _______ ____________
Balance, July 1 , 2014 $3,235,300 19,802 $52,400 $5,679,100
Net income 8,700 - - 8,700
Unrealized holding loss
on investment securities,
net of tax - - - (4,400)
Exercise of stock options - - - 51,200
Stock-based compensation - - - 10,900
Income tax benefit of
stock options exercised - - - 4,900
__________ _______ ________ ___________
Balance, June 30, 2015 3,244,000 19,802 52,400 5,750,400
Net income 165,600 - - 165,600
Unrealized holding gain
on investment securities,
net of tax - - - 4,200
Stock-based compensation - - - 11,800
__________ _______ ________ ___________
Balance, June 30, 2016 $3,409,600 19,802 $52,400 $5,932,000
========== ======= ======== ===========
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
2016 2015
__________ __________
Operating activities:
Net income $ 165,600 $ 8,700
__________ __________
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 428,900 434,800
Impairment of intangible assets 212,700 -
Gain on sale of property and equipment ( 300) -
Deferred income tax benefit (149,200) (34,700)
Loss on sale of investment securities - 4,200
Income tax benefit of stock options
exercised - 4,900
Stock-based compensation 11,800 10,900
Change in fair value of
contingent consideration 110,000 -
Changes in operating assets and
liabilities:
Trade accounts receivable (150,200) (325,000)
Inventories (198,400) 95,500
Prepaid and other current assets 21,400 54,500
Other assets - ( 24,300)
Accounts payable 114,800 (146,100)
Customer advances (76,400) (13,100)
Accrued expenses and taxes 389,700 77,100
__________ __________
Total adjustments 714,800 138,700
__________ __________
Net cash provided by
operating activities 880,400 147,400
__________ __________
Investing activities:
(Increase) decrease in restricted cash 300,000 (300,000)
Proceeds from sale of property and equipment 3,000 -
Purchase of investment securities,
available for sale ( 2,700) ( 3,800)
Redemption of investment securities,
available for sale - 127,000
Capital expenditures (92,000) (67,300)
Purchase of other intangible assets (13,900) ( 6,600)
_________ _________
Net cash provided by
(used in) investing activities 194,400 (250,700)
_________ _________
Financing activities:
Proceeds from notes 20,000 200,000
Principal payments on note payable (201,000) (26,700)
Line of credit proceeds 970,000 250,000
Line of credit repayments (970,000) (250,000)
Payments of contingent consideration (130,800) (132,900)
Proceeds from exercise of stock options - 51,200
__________ _________
Net cash provided by (used in)
financing activities (311,800) 91,600
__________ _________
See notes to consolidated financial statements.
F-6
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
2016 2015
__________ __________
Net increase (decrease) in cash and
cash equivalents 763,000 ( 11,700)
Cash and cash equivalents, beginning
of year 482,000 493,700
_________ __________
Cash and cash equivalents, end of year $1,245,000 $ 482,000
========= ==========
Supplemental disclosures:
Cash paid during the period for:
Income taxes $ 34,500 $ 1,800
Interest 33,900 4,200
See notes to consolidated financial statements.
F-7
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
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, bioprocessing products 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 and designs bioprocessing products,
and an administrative facility in Oradell, New Jersey related to
benchtop laboratory equipment. The equipment sold by the Company
includes mixers, shakers, stirrers, refrigerated incubators, pharmacy
balances and scales, catalyst characterization instruments, reactor
systems and high throughput systems. The Company also sublicenses
certain patents and technology under a license with the University
of Maryland, Baltimore County, and receives royalty fees from the
sublicenses.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc., Scientific Packaging
Industries, Inc., an inactive wholly-owned subsidiary, Altamira
Instruments, Inc. ("Altamira"), a Delaware corporation and wholly-
owned subsidiary, and Scientific Bioprocessing, Inc. ("SBI"), 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 from product sales is recognized when all the following
criteria are met:
* Persuasive evidence of an arrangement exists, including
receipt of a written purchase order agreement which is binding
on the customer.
* Goods are shipped and title passes.
* Prices are fixed and determinable.
* Collectability is reasonably assured.
* All material obligations under the agreement have been
substantially performed.
Revenues are net of normal discounts. Shipping and handling fees
billed to customers are included in net revenues, while the
related costs are included in cost of revenues.
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.
Royalty revenue received under the Company's sublicenses is
recorded net of payments due to its licensors.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
1. Summary of Significant Accounting Policies (Continued)
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. At
times, cash balances may be in excess of the Federal Deposit
Insurance Corporation ("FDIC") insurance limit. As of June 30, 2016
and 2015, $497,200 and $50,000 respectively of cash balances were
in excess of such limit.
Accounts Receivable
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectability.
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 may make advance
payments for purchase orders. Such amounts, when received, 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
a 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.
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
1. Summary of Significant Accounting Policies (Continued)
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 remaining term of the related lease or
the estimated useful lives of the assets, whichever is
shorter.
Intangible Assets
Intangible assets consist primarily of acquired technology,
customer relationships, non-compete agreements, patents,
licenses, websites, intellectual property and research and
development ("IPR&D"), trademarks and trade names. All
intangible assets are amortized on a straight-line basis
over the estimated useful lives of the respective assets,
generally 3 to 10 years. 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 Long-Lived Assets
Goodwill represents the excess of purchase price over the
fair value of identifiable net assets acquired in a business
combination. Goodwill and long-lived intangible assets are
tested for impairment at least annually in accordance with
the provisions of ASC No. 350, "Intangibles-Goodwill and
Other" ("ASC No. 350"). 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 and long-lived assets annually
as of June 30, the last day of its fiscal year, unless an
event occurs that would cause the Company to believe the
value is impaired at an interim date. The Company concluded
as of June 30, 2016 and 2015 there was no impairment of
goodwill.
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"). ASC No. 360-10 which
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. For the year ended June 30,
2016, the Company determined that the intangible assets of
SBI were impaired, and accordingly an impairment charge of
$212,700 was recorded.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
1. Summary of Significant Accounting Policies
(Continued)
Income Taxes
The Company and its subsidiaries file a consolidated
U.S. federal income tax return. Income taxes are
accounted for under the asset and liability method.
The Company provides for federal, and state income
taxes currently payable, as well as for those deferred
due to timing differences between reporting income
and expenses for financial statement purposes versus
tax purposes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributed
to temporary differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted
income tax rates expected to apply to taxable income
in the years in which those temporary differences are
expected to be recovered or settled. The effect of a
change in income tax rates is recognized as income or
expense in the period that includes the enactment date.
The Company recognizes the effect of income tax positions
only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at
the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment
occurs.
Advertising
Advertising costs are expensed as incurred. Advertising
expense amounted to $79,800 and $79,400 for the years ended
June 30, 2016 and 2015, respectively.
Research and Development
Research and development costs consisting of expenses for
activities that are useful in developing and testing new
products, as well as expenses that may significantly improve
existing products, are expensed as incurred.
Stock Compensation Plan
The Company has a ten-year stock option plan (the "2012 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 57,000 shares under options
previously granted under the 2002 Stock Option Plan of the
Company (the "Prior Plan"). The 2012 Plan provides for the
granting of incentive or non-incentive stock options as
defined in the 2012 Plan and options under the 2012 Plan
may be granted until 2022. 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 shall be
granted at the fair market value of the shares of Common
Stock on the date of grant. At June 30, 2016 and 2015,
79,500 and 84,500 shares respectively, of Common Stock
were available for grant of options under the 2012 Plan.
F-11
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
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") 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, 2016 and 2015, the
Company granted 5,000 and 4,000 options, respectively,
to employees that had a fair value of $9,500 and $7,100,
respectively. The fair value of the options granted
during fiscal year 2016 and 2015 were determined using
the Black-Scholes-Merton option-pricing model. The
weighted average assumptions used for fiscal 2016 and
2015, was an expected life of 10 years; risk free
interest rate of 1.82% and 1.93%; volatility of 51%
and 52%, and dividend yield of 0% for both years. The
Company did not declare dividends during the years
ended June 30, 2016 and 2015. Therefore a zero value
for the expected dividend value factor was used to
determine the fair value of options granted. The
weighted-average value per share of the options
granted in 2016 and 2015 was $1.89 and $1.77, and
total stock-based compensation costs were $11,800
and $10,900 for the years ended June 30, 2016 and
2015, respectively. Stock-based compensation costs
related to nonvested awards expected to be recognized
in the future are $1,000 and $3,300 as of June 30,
2016 and 2015, respectively.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America and pursuant to the rules and
regulations of the U.S. Securities and Exchange
Commission requires management to make estimates and
judgments that affect the amounts reported in the
financial statements and accompanying notes. Estimates
are used for, but not limited to, the allowance for
doubtful accounts, slow-moving inventory reserves,
depreciation and amortization, assumptions made in
valuing equity instruments issued for services, and
the fair values of intangibles and goodwill. 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.
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
1. Summary of Significant Accounting Policies
(Continued)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
("FASB") issued Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers amending
revenue recognition requirements for multiple-deliverable
revenue arrangements. This update provides guidance on
how revenue is recognized to depict the transfer of
promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to
be entitled in exchange for the goods or services. This
determination is made in five steps: (i) identify the
contract with the customer; (ii) identify the performance
obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price
to the performance obligations in the contract; and
(v) recognize revenue when (or as) the entity satisfies
a performance obligation. In July 2015, the FASB deferred
the effective date to fiscal years beginning after
December 15, 2018 and early adoption of the standard is
permitted, but not before the original effective date of
December 15, 2017. The Company is evaluating the effect
this guidance will have on the consolidated financial
statements and related disclosures.
In June 2014, the FASB issued ASU 2014-12, Compensation -
Stock Compensation (Topic 718): Accounting for Share-
Based Payments When the Terms of an Award Provide that a
Performance Target Could be Achieved After the Requisite
Service Period. This update affects reporting entities
that grant their employee's targets that affects vesting
could be achieved after the requisite service period. The
new standard requires that a performance target that
affects vesting and that could be achieved after the
requisite services period be treated as a performance
condition. The new standard will be effective for the
Company beginning July 1, 2016. The Company does not
expect the adoption to have a material impact on its
financial condition, results of operations or cash flows.
In July 2015, the FASB issued ASU No. 2015-11,
"Inventory: Simplifying the Measurement of Inventory",
that requires inventory not measured using either the
last in, first out (LIFO) or the retail inventory method
to be measured at the lower of cost and net realizable
value. Net realizable value is the estimated selling
prices in the ordinary course of business, less
reasonably predictable cost of completion, disposal
and transportation. The new standard will be effective
for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years,
and will be applied prospectively. Early adoption is
permitted. The Company does not expect the adoption
to have a material impact on its financial condition,
results of operations or cash flows.
In November 2015, the FASB issued new guidance
simplifying the balance sheet classification of
deferred taxes. The new guidance requires that
deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial
position. The current requirement that deferred tax
liabilities and assets of a tax-paying component of
an entity be offset and presented as a single amount
is not affected by the new guidance. The guidance
is effective for public companies for interim and
annual reporting periods beginning after December 15,
2016, with early adoption permitted as of the
beginning of an interim or annual reporting period.
The new guidance may be applied either prospectively
to all deferred tax liabilities and assets or
retrospectively to all periods presented. The
Company does not expect the adoption to have a
material impact on its financial condition, results
of operations or cash flows.
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
1. Summary of Significant Accounting Policies
(Continued)
Recent Accounting Pronouncements (Continued)
In February 2016, the FASB issued authoritative
guidance that requires lessees to account for
most leases on their balance sheets with the
liability being equal to the present value of
the lease payments. The right-of-use asset
will be based on the lease liability adjusted
for certain costs such as direct costs. Lease
expense will be recognized similar to current
accounting guidance with operating leases
resulting in a straight-line expense and
financing leases resulting in a front-loaded
expense similar to the current accounting for
capital leases. This guidance becomes effective
for the Company's fiscal 2020 first quarter,
with early adoption permitted. This guidance
must be adopted using a modified retrospective
transition approach for leases that exist or
are entered into after the beginning of the
earliest comparative period in the financial
statements, and provides for certain practical
expedients. The Company is currently evaluating
the timing, impact and method of applying this
guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
"Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment
Accounting" (ASU 2016-09). Areas for simplification
in this update involve several aspects of
accounting for share-based payment transactions,
including the income tax consequences,
classification of awards as either equity or
liabilities, and classification on the statement
of cash flows. ASU 2016-09 is effective for
interim and annual reporting periods beginning
after December 15, 2016, with early application
permitted. The Company is currently evaluating
the timing, impact and method of applying this
guidance on its consolidated financial statements.
2. Segment Information and Concentrations
The Company views its operations as three segments:
the manufacture and marketing of standard benchtop
laboratory equipment for research in university,
hospital and industrial laboratories sold primarily
through laboratory equipment distributors and
laboratory and pharmacy balances and scales
("Benchtop Laboratory Equipment Operations"), the
manufacture and marketing of custom-made catalyst
research instruments for universities, government
laboratories, and chemical and petrochemical companies
sold on a direct basis ("Catalyst Research Instruments
Operations") and the design and marketing of
bioprocessing systems and products and related royalty
income ("Bioprocessing Systems").
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
2. Segment Information and Concentrations (Continued)
Segment information is reported as follows:
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ __________
June 30, 2016:
Revenues $5,449,700 $4,032,800 $ 115,100 $ - $9,597,600
Foreign Sales 2,414,600 2,674,300 - - 5,088,900
Income (Loss)
From Operations 223,800 479,500 ( 458,300) - 245,000
Assets 4,120,700 2,292,100 429,900 706,600 7,549,300
Long-Lived Asset
Expenditures 92,500 4,000 9,400 - 105,900
Depreciation,
Amortization and
Impairment 299,000 31,900 310,700 - 641,600
Benchtop Catalyst Bio- Corporate
Laboratory Research processing and Conso-
Equipment Instruments Systems Other lidated
__________ ___________ __________ _________ __________
June 30, 2015:
Revenues $5,410,500 $2,315,900 $ 122,000 $ - $7,848,400
Foreign Sales 2,584,100 1,322,400 - - 3,906,500
Income (Loss)
From Operations 90,600 19,700 ( 127,100) - ( 16,800)
Assets 4,240,100 1,614,400 736,400 550,500 7,141,400
Long-Lived Asset
Expenditures 65,300 1,000 7,600 - 73,900
Depreciation and
Amortization 302,000 34,800 98,000 - 434,800
During the year ended June 30, 2016, one customer accounted for
approximately 26% of total revenues.
3. 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.
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
3. Fair Value of Financial Instruments (Continued)
The accounting guidance also expands the disclosure requirements
around fair value and establishes a fair value hierarchy for
valuation inputs. The hierarchy prioritizes the inputs into
three levels based on the extent to which inputs used in
measuring fair value are observable in the market. Each fair
value measurement is reported in one of the three levels, which
is determined by the lowest level input that is significant to
the fair value measurement in its entirety. These levels are
described below:
Level 1 Inputs that are based upon unadjusted quoted
prices for identical instruments traded in active markets.
Level 2 Quoted prices in markets that are not
considered to be active or financial instruments for which
all significant inputs are observable, either directly or
indirectly.
Level 3 Prices or valuation that require inputs
that are both significant to the fair value measurement and
unobservable.
In valuing assets and liabilities, the Company is required to
maximize the use of quoted market prices and minimize the use
of unobservable inputs. The Company calculated the fair value
of its Level 1 and 2 instruments based on the exchange traded
price of similar or identical instruments where available or
based on other observable instruments. These calculations take
into consideration the credit risk of both the Company and its
counterparties. The Company has not changed its valuation
techniques in measuring the fair value of any financial assets
and liabilities during the period.
The fair value of the contingent consideration obligations are
based on a probability weighted approach derived from the
estimates of earn-out criteria and the probability assessment
with respect to the likelihood of achieving those criteria.
The measurement is based on significant inputs that are not
observable in the market, therefore, the Company classifies
this liability as Level 3 in the table below:
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, 2016 and
2015 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, 2016 Level 1 Level 2 Level 3
______________ __________ _______ ________
Assets:
Cash and cash equivalents $1,245,000 $1,245,000 $ - $ -
Available for sale securities 290,100 290,100 - -
__________ __________ _______ ________
Total $1,535,100 $1,535,100 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 346,300 $ - $ - $346,300
========== ========== ======= ========
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
3. Fair Value of Financial Instruments (Continued)
Fair Value Measurements Using Inputs
Considered as
Fair Value at
June 30, 2015 Level 1 Level 2 Level 3
______________ __________ _______ ________
Assets:
Cash and cash equivalents $ 482,000 $ 482,000 $ - $ -
Restricted cash 300,000 300,000 - -
Available for sale securities 281,800 281,800 - -
__________ __________ _______ ________
Total $1,063,800 $1,063,800 $ - $ -
========== ========== ======= ========
Liabilities:
Contingent consideration $ 367,100 $ - $ - $367,100
========== ========== ======= ========
The following table sets forth an analysis of changes during fiscal years
2016 and 2015 in Level 3 financial liabilities of the Company:
2016 2015
___________ ___________
Beginning balance $ 367,100 $ 500,000
Increase in contingent consideration
liability 110,000 -
Payments (130,800) (132,900)
___________ ___________
Ending balance $ 346,300 $ 367,100
=========== ===========
The Company's contingent obligations require cash payments
to the sellers of certain acquired operations based on
royalty payments received or operating results achieved.
These contingent considerations are classified as liabilities
and the liabilities are remeasured to an estimated fair value
at each reporting date. During the year ended June 30, 2016,
the Company recorded an increase in the estimated fair value
of contingent liabilities of approximately $110,000 related to
its Bioprocessing Systems Operations segment.
Investments in marketable securities classified as available-
for-sale by security type at June 30, 2016 and 2015
consisted of the following:
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2016:
Available for sale:
Equity securities $ 29,300 $ 40,700 $ 11,400
Mutual funds 259,900 249,400 (10,500)
__________ _________ __________
$ 289,200 $ 290,100 $ 900
========== ========= ==========
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
3. Fair Value of Financial Instruments (Continued)
Unrealized
Fair Holding Gain
Cost Value (Loss)
____________ _________ ____________
At June 30, 2015:
Available for sale:
Equity securities $ 29,300 $ 35,800 $ 6,500
Mutual funds 255,800 246,000 ( 9,800)
__________ _________ __________
$ 285,100 $ 281,800 $ ( 3,300)
========== ========= ==========
4. Inventories
2016 2015
__________ __________
Raw materials $1,529,800 $1,420,800
Work-in-process 425,300 442,900
Finished goods 457,000 350,000
__________ __________
$2,412,100 $2,213,700
========== ==========
5. Property and Equipment
Useful Lives
(Years) 2016 2015
____________ __________ __________
Automobiles 5 $ 22,000 $ 14,900
Computer equipment 3-5 162,200 159,000
Machinery and equipment 3-7 803,300 741,600
Furniture and fixtures 4-10 205,900 205,900
Leasehold improvements 3-10 34,200 29,100
_________ _________
1,227,600 1,150,500
Less accumulated depreciation
and amortization 976,500 915,300
_________ _________
$ 251,100 $ 235,200
========= =========
Depreciation expense was $76,300 and $84,200 for the years ended June
30, 2016 and 2015, respectively.
F-18
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
6. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in connection with the Company's
acquisitions. Goodwill amounted to $705,300 at June 30, 2016 and
2015, all of which is expected to be deductible for tax purposes.
The components of other intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ _________
At June 30, 2016:
Technology, trademarks 5/10 yrs. $ 722,800 $ 468,800 $ 254,000
Trade names 6 yrs. 140,000 54,400 85,600
Websites 5 yrs. 210,000 98,000 112,000
Customer relationships 9/10 yrs. 357,000 261,600 95,400
Sublicense agreements 10 yrs. 294,000 136,000 158,000
Non-compete agreements 5 yrs. 384,000 239,100 144,900
IPR&D 3 yrs. 110,000 85,500 24,500
Other intangible assets 5 yrs. 177,900 154,700 23,200
__________ _________ _________
$2,395,700 $1,498,100 $ 897,600
========== ========= =========
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ _________
At June 30, 2015:
Technology, trademarks 5/10 yrs. $1,226,800 $ 624,200 $ 602,600
Trade names 6 yrs. 140,000 31,100 108,900
Websites 5 yrs. 210,000 56,000 154,000
Customer relationships 9/10 yrs. 357,000 236,200 120,800
Sublicense agreements 10 yrs. 294,000 106,600 187,400
Non-compete agreements 5 yrs. 384,000 182,700 201,300
IPR&D 3 yrs. 110,000 48,900 61,100
Other intangible assets 5 yrs. 164,000 148,200 15,800
__________ _________ _________
$2,885,800 $1,433,900 $1,451,900
========== ========= =========
Total amortization expense was $352,600 and $350,600 in 2016 and 2015,
respectively.
Estimated future amortization expense of intangible assets is as follows:
Fiscal Years
____________
2017 $ 297,300
2018 288,500
2019 210,600
2020 45,100
2021 43,500
Thereafter 12,600
_______________
$ 897,600
===============
F-19
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
7. Lines of Credit
The Company has two lines of credit with First National
Bank of Pennsylvania - an Export-Related Revolving Line
of Credit which is guaranteed by the Export-Import Bank
of the United States which provided for export-related
borrowings of up to $998,500 through June 2016 bearing
interest at prime plus 2% and an annual fee of 1.75%.
In June 2016, this line was amended to provide for
borrowings up to $200,000 through June 2017 bearing
interest at prime plus 1% and an annual fee of 1.75%.
The Company also has a Demand Line of Credit which
provides for borrowings of up to $300,000 for regular
working capital needs, bearing interest at prime,
currently 3.50% expiring June 2017. Through June 2016,
the Company was required to maintain a cash collateral
account of $300,000 to support the Demand Line of Credit.
The agreement contains a financial covenant requiring the
Company to maintain a minimum net worth and advances on
both lines are also secured by a pledge of the Company's
assets including inventory, accounts, chattel paper,
equipment and general intangibles of the Company. As of
June 30, 2016 and 2015, there were no borrowings
outstanding under either line.
8. Notes Payable
The Company has a $20,000 36-month auto loan through
April 2019, with its bank, with monthly payments of
$600 bearing interest at 4% for a vehicle used by the
Company's sales manager. The outstanding balance
remaining on this loan as of June 30, 2016 was $18,900
with principal payments of $6,400, $6,700 and $5,800 due
over the next three fiscal years.
In May 2015, the Company borrowed $200,000 under unsecured
notes from two shareholders, one of whom is a Director of
the Company, which were paid in June 2016, with interest
at 5%.
9. Employee Benefit Plans
The Company has a 401(k) profit sharing plan covering all its
employees, which provides for voluntary employee salary
contributions not to exceed the statutory limitations provided
by the Internal Revenue Code. The plan provides for Company
matching contribution equal to 100% of employee's deferral up
to 3% of pay, plus 50% of employee's deferral over 3% of pay
up to 5%. Previously, the Company had two separate plans. Total
matching contributions amounted to $69,500 and $66,400 for the
years ended June 30, 2016 and 2015, respectively.
10. Commitments and Contingencies
The Company entered into a lease in August 2014 for its new
Bohemia, New York premises through February 2025 which requires
minimum annual rental payments plus other expenses, including
real estate taxes and insurance. The future minimum annual rental
expense, computed on a straight-line basis, is approximately
$170,000 under the terms of the lease. Rental expense for the
Bohemia facility amounted to approximately $170,000 in 2016
and $199,400 in 2015. Accrued rent, payable in future years,
amounted to $48,800 and $46,700 at June 30, 2016 and 2015,
respectively.
F-20
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
10. Commitments and Contingencies (Continued)
The Company is also obligated under an operating lease for
its facility in Pittsburgh, Pennsylvania, which requires monthly
minimum rental payments through November 2017, plus common area
expenses. Total rent expense for the Pittsburgh facility was
$105,400 and $99,000 for the fiscal years ended June 30, 2016
and 2015, respectively.
In addition, the Company maintained an operating facility in
Clifton, New Jersey and as of mid-July 2014 moved to a
significantly smaller office facility in Oradell, New Jersey
from which it performs its sales and marketing functions. The
Company was obligated to pay $24,000 in fiscal 2015 for an early
lease termination fee for the Clifton facility. Total rent expense
for the New Jersey facilities, was $23,300 and $25,700 for the
years ended June 30, 2016 and 2015, respectively.
The Company's approximate future minimum rental payments
under all operating leases are as follows:
Fiscal Years
____________
2017 $ 260,200
2018 268,800
2019 205,000
2020 174,000
2021 179,300
Thereafter 841,600
___________
$ 1,928,900
===========
The Company has employment contracts with its President
providing for an annual base salary of $162,000 for the
fiscal year ending June 30, 2017 and with its Executive
Vice President providing for an annual base salary of
$146,000 for the fiscal year ending June 30, 2017. Both
contracts also provide for discretionary performance bonuses.
No bonuses were awarded for the fiscal years ended June 30,
2016 or 2015 to either executive.
The Company has an employment contract with the President
of Altamira through June 30, 2017, which may be extended
by mutual consent for an additional year. The contract
provides for an annual base salary of $147,000 for the
fiscal year ending June 30, 2017 plus discretionary bonuses.
No bonuses were awarded for the fiscal years ended June 30, 2016
or 2015.
The Company has an employment agreement dated February 2014
with the President of its Torbal Division which expires in
February 2017, which may be extended by mutual consent for
an additional two years. The contract provides for an annual
base salary of $140,000 subject to increases commencing with
the second year based on percentage increases in the Consumer
Price Index ("CPI") from the end of the immediately preceding
year's CPI plus discretionary bonuses. No bonuses were awarded
during the fiscal years ended June 30, 2016 or 2015, however
as part of the employment agreement, he was granted stock option
awards representing 5,000 and 4,000 shares during the years
ended June 30, 2016 and 2015 valued at $9,500 and $7,100 using
the Black-Scholes-Merton option pricing model, respectively. In
addition, he is to be granted, subject to his continued
employment in February 2017 options for 6,000 shares.
F-21
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
10. Commitments and Contingencies (Continued)
The Company has a consulting agreement which expires on
December 31, 2016 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 $3,600 for a certain number of consulting days as
defined in the agreement. Consulting expense related to this
agreement amounted to $43,200 for both years ended June 30,
2016 and 2015.
The Company has a consulting agreement which expires
December 31, 2016 with another member of its Board of
Directors for administrative services providing that
the consultant be paid at the rate of $85 per hour.
Consulting expense related to this agreement amounted
to $5,800 and $4,300 for the fiscal years ended June 30,
2016 and 2015, respectively.
In connection with a February 26, 2014 acquisition of a
privately owned company, as of June 30, 2016, the Company
remains obligated to make additional payments to the seller
based on a percentage of net sales of the business acquired
equal to 11% for the year ended June 30, 2017. Payments
related to this contingent consideration for each period
are due in September following the fiscal year. The
Company is also required to make payments of 30% of the
net royalties received from the license and sublicense
acquired in the SBI acquisition in fiscal 2012. Total
contingent consideration payments made for all acquisitions
amounted to $130,800 and $132,900 for the years ended June
30, 2016 and 2015, respectively.
The fair value of contingent consideration estimated to be
paid as of June 30, 2016 are as follows:
Year ended June 30, Amount
___________________ ____________
2017 $ 136,500
2018 158,800
2019 16,000
2020 13,000
2021 10,000
Thereafter 12,000
__________
$ 346,300
==========
F-22
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
11. Income Taxes
The reconciliation of the provision for income taxes at
the federal statutory rate of 35% to the actual tax
expense or benefit for the applicable fiscal year was
as follows:
2016 2015
__________________ _________________
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
_______ _______ ________ _______
Computed "expected" income
tax (benefit) $ 76,600 35.0% $( 2,600) ( 35.0%)
Research and development
credits (15,700) (7.2) (11,200) (153.4 )
Other, net (7,600) (3.5) (2,200) ( 30.7 )
_________ _______ _________ ______
Income tax expense (benefit) $ 53,300 24.3% $(16,000) (219.1%)
========= ======= ========= ========
Deferred tax assets and liabilities consist of the following:
2016 2015
__________ __________
Deferred tax assets:
Amortization of intangible assets $ 287,000 $ 183,000
Research and development credits - 24,800
Various accruals 132,800 60,800
Other 48,900 46,100
_________ _________
468,700 314,700
Deferred tax liability:
Depreciation of property
and amortization of goodwill (52,200) (46,000)
__________ __________
Net deferred tax assets $ 416,500 $ 268,700
========== ==========
The breakdown between current and long-term deferred tax assets and
liabilities is as follows:
2016 2015
__________ __________
Current deferred tax assets $ 140,600 $ 114,200
_________ _________
Long-term deferred tax assets 328,100 200,500
Long-term deferred tax liabilities (52,200) (46,000)
__________ __________
Net long-term deferred tax assets 275,900 154,500
__________ __________
Net deferred tax assets $ 416,500 $ 268,700
========== ==========
F-23
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
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.
As of June 30, 2016 and 2015, 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. The
Company does 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,
2013 and after. 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 2016 Fiscal 2015
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 38,500 $ 3.33 61,000 $ 3.11
Granted 5,000 3.05 4,000 2.80
Exercised - - (20,000) 2.56
Forfeited - - (6,500) 3.07
________ ________
Outstanding, end of year 43,500 3.33 38,500 3.37
________ _______ ________ _______
Options exercisable at year-end 32,200 $ 3.43 27,200 $ 3.10
________ _______ ________ _______
Weighted average fair value per
share of options granted
during the fiscal year $ 3.05 $ 2.80
_____ _____
F-24
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED JUNE 30, 2016 AND 2015
12. Stock Options (Continued)
As of June 30, 2016 As of June 30, 2016
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$3.50-4.05 20,000 7.13 $ 3.64 13,700 $ 3.65
$3.07-3.45 23,500 2.83 $ 3.25 18,500 $ 3.30
________ ________
43,500 32,200
________ ________
As of June 30, 2015 As of June 30, 2015
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$2.80-3.10 11,000 5.08 $ 2.99 7,000 $ 3.09
$3.27-3.71 27,500 5.21 $ 3.52 20,200 $ 3.52
________ ________
38,500 27,200
________ ________
13. Earnings Per Common Share
Earnings per common share data was computed as follows:
2016 2015
__________ __________
Net income $ 165,600 $ 8,700
__________ __________
Weighted average common shares
outstanding 1,489,112 1,478,126
Effect of dilutive securities 275 1,756
__________ __________
Weighted average dilutive common
shares outstanding 1,489,387 1,479,882
__________ __________
Basic earnings per common share $ .11 $ .01
========== ==========
Diluted earnings per common share $ .11 $ .01
========== ==========
Approximately 20,000 and 26,000 shares of the Company's common
stock issuable upon the exercise of outstanding options were
excluded from the calculation of diluted earnings per common share
for the years ended June 30, 2016 and 2015, because the effect would
be anti-dilutive.
F-25
