UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 2007
TRANSITION REPORT UNDER 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.
(Name of Small Business Issuer in Its Charter)
Delaware 04-2217279
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
70 Orville Drive, Bohemia, New York 11716
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (631) 567-4700
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.05 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B not contained in this form, and no
disclosure will be contained, to the best of registrant's knowledge,
in the definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year. $4,880,000
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such
stock, as of August 24, 2007 is $1,791,500.
The number of shares outstanding of the issuer's common stock, par
value $.05 per share ("Common Stock") as of August 24, 2007 is
1,145,352 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
Forward Looking Statements. The Company and its
representatives may from time to time make written or oral
forward-looking statements with respect to the Company's annual
or long-term goals, including statements contained in its
filings with the Securities and Exchange Commission and in its
reports to stockholders.
The words or phrases "will likely result," "are expected
to," "will continue to," "is anticipated," "estimate," "project"
or similar expressions identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. Readers
are cautioned not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
PART I
Item 1. Description of Business.
General. Scientific Industries, Inc., a Delaware corporation
(the "Company"), has been engaged (i) since its inception in 1954,
in the design manufacture and marketing of standard benchtop laboratory
equipment ("Benchtop Laboratory Equipment") and (ii) since the
acquisition of Altamira Instruments, Inc., a Delaware corporation
("Altamira") on November 30, 2006, in the manufacture and marketing
of customized catalyst research instruments ("Catalyst Research
Instruments"). The Company's products are used primarily for
research purposes by universities, hospitals, pharmaceutical
companies, clinics, medical device manufacturers, petrochemical
companies and other related industries.
The acquisition agreement and subsequent agreement with each Altamira
seller provided for the Company to pay $442,000 in cash, 125,000 shares
of the Company's Common Stock and to pay additional cash equal in the
aggregate to 5%, subject to adjustment, of Altamira's net sales for
each of the following periods - December 1, 2006 to June 30, 2007, each
of the 12 month periods ending respectively on June 30, 2008, June 30,
2009 and June 30, 2010; and July 1, 2010 to November 30, 2010. The
payment for the first period amounted to approximately $66,000.
Products.
Benchtop Laboratory Equipment. The Company's Benchtop
Laboratory Equipment consists of mixers and disruptors,
rotators/rockers, refrigerated incubators and magnetic stirrers.
The Vortex-Genie(R) 2 Mixer is the Company's primary product and sales
of this product (excluding accessories) represented approximately 70%
of the sales of the Company's Benchtop Laboratory Equipment, or 51% of
the total sales for the fiscal year ended June 30, 2007 ("fiscal 2007").
Sales of this product accounted for approximately 72% of the total
sales for the fiscal year ended June 30, 2006 ("fiscal 2006").
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.
Additional mixers and disruptors include the Vortex-Genie 1,
a high speed touch mixer; the Vortex-Genie 2T, a mixer with an
integral timer; the Disruptor Genie(R), a patented cell disruptor;
the MicroPlate Genie(R) and Multi-MicroPlate Genie(R) mixers, specialty
mixers designed to mix and vortex the contents of microplates; and
the Digital Vortex-Genie 2, a vortex mixer incorporating digital
control and display (launched during fiscal 2007).
The Company's Roto-Shake Genie(R), a patented benchtop
multi-purpose rotator/rocker was designed by the Company to
rotate and rock a wide variety of containers which are
magnetically attached to the unit's magnetized platform.
The Enviro-Genie(R) Refrigerated Incubator is a multi-functional
benchtop environmental chamber designed to perform various
functions under controlled environmental conditions of temperature.
The Benchtop Laboratory Equipment also includes a
complete line of magnetic stirrers including the MagStir Genie(R),
a patented high/low programmable magnetic stirrer; the MultiMagStir
Genie(R), a four-place high/low programmable magnetic stirrer; the
MegaMag Genie(tm), a large volume magnetic stirrer available in
analog and digital versions (both versions introduced in fiscal
2007); and the QuadMag Genie(tm) magnetic stirrer, a four-
place powerful general purpose stirrer (introduced in fiscal 2007).
Catalyst Research Instruments. The Catalyst Research
Instruments are offered through the Company's new subsidiary,
Altamira. The AMI-200(tm) is Altamira's flagship product.
The AMI-200 is used to perform traditional catalyst
characterization experiments on an unattended basis. The
instrument also features a stand-alone personal computer
to control the instrument and incorporates proprietary
LabVIEW(R)-based software. All AMI model instruments can be
customized to a customer's individual requirements.
The Catalyst Research Instruments also include reactor
systems, high throughput systems and micro-activity reactors.
The Company's BenchCAT(tm) custom reactor systems are available
with single and multiple reactor paths and with reactor
temperatures up to 1200 degrees celsius. These systems
feature multiple gas flows, and are also available in gas and
gas/liquid configurations. They also feature one or more stand-
alone personal computers with the LabVIEW(R)-based control software.
The Company also offers, under a license with Symyx
Corporation, the Celero(tm) high throughput system, designed to
provide high throughput screening in multiples of 8 channels.
This instrument is typically used to screen multiple catalysts,
under the same conditions of temperature, pressure, and
gas/liquid flows.
Under an exclusive distribution agreement covering North
and South America, with PID Eng. & Tech in Spain, the Company
markets the PID MA-Reference Reactor, which is a highly-automated,
micro-activity reactor featuring sophisticated microprocessor control
with touch-screen and TCP/IP Ethernet communications. This
product is used for catalyst activity, selectivity, optimization
and kinetics studies.
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 to existing products. The Company also engages
outside consultants to augment its capabilities in such areas
as industrial and electronics design.
Major Customers. Sales during fiscal 2007 to VWR
International, principally of the Company's Vortex-Genie 2 Mixer,
represented approximately 16% of total sales for the year, as
compared to sales representing approximately 20% of total sales
for fiscal 2006 to the Company's previous principal customer and
distributor, Thermo Fisher Scientific, Inc. ("Fisher"), which
discontinued any further purchases from the Company at the
conclusion of fiscal 2006. In addition, sales to
one additional customer of Benchtop Laboratory Equipment
aggregated approximately 7% and 10% of total sales for fiscal
2007 and fiscal 2006, respectively. Sales of Catalyst Research
Instruments are generally comprised of a few very large orders
amounting on average to over $100,000 to different customers,
with no single customer representing over 10% of total sales for
fiscal 2007.
Marketing.
Benchtop Laboratory Equipment. The Company's Benchtop
Laboratory Equipment products are generally distributed and
marketed through an established network of domestic and
overseas laboratory equipment distributors, who sell the Company's
products through printed catalogs, websites and sales force.
See "Major Customers". The Company also markets products through
attendance at industry trade shows, trade publication advertising,
brochures and catalogs, and through the Company's website. Over
the past year, the Company has increased direct-selling efforts,
mainly through online ordering on the Company's website. In
general it takes two to three years for a new product to begin
generating meaningful sales in the industry due to the catalog
distribution system.
Catalyst Research Instruments. The Company's Catalyst
Research Instruments are sold directly worldwide to universities,
government laboratories, and chemical and petrochemical companies.
The Company also uses outside sales representatives (on a
commission basis) to augment its internal sales activities. The
Company markets these products through sales calls, attendance
at various trade shows, Altamira's website, outside sales
representatives, and printed materials.
Assembly and Production Materials. The Company has an
operating facility in Bohemia, New York and, since November 30,
2006, one in Pittsburgh, Pennsylvania as a result of the recent
acquisition. The Company's production operations principally involve
assembly of components supplied by various domestic and international
independent suppliers. The Company historically did not have sole
suppliers, except as to a few components where it was not feasible to
have multiple suppliers and where alternative suppliers are available.
However, as of June 30, 2007, the Company is relying on only one
supplier for a major component for the Vortex-Genie products due to
poor quality and delivery times from a second source. While the
Company is seeking an additional source for the component, it has
maintained an abundant on-hand supply of this component. Over the
last two fiscal years, the Company has purchased a substantial
portion of components from overseas factories for its Benchtop
Laboratory Equipment operations, with a significant part
of such purchases effected through a U.S. vendor. (Purchases
from the vendor accounted for approximately 17% and 44% for fiscal
2007 and fiscal 2006, respectively, of the Company's total material
purchases.) See "Risk Factors - The Company is Heavily
Dependent on Outside Suppliers for the Components of Its Products".
Patents, Trademarks, Licenses and Franchises.
Patents. The Company holds several United States patents
relating to existing products. It licensed one of its patents, a
patent on a utilitarian feature of its Vortex-Genie 2 Mixer on a
non-exclusive, royalty-free basis to Henry Troemner, LLC, ("Troemner"),
under an agreement dated December 1, 1999 settling a lawsuit
instituted by the Company in April, 1999. The patent and license
expired on November 2, 2005; however, there has been no adverse
effect to date on the Company's revenues as a result of the
patent expiration. The Company's patent for the TurboMix, an
accessory to the existing Vortex-Genie 2 Mixer, expires in
September 2015. Its patent on the Roto-Shake Genie expires in
July 2016. A recent patent granted on a design feature of the
Company's MagStir Genie, MultiMagStir Genie, and Enviro-Genie
expires in November 2022.
Trademarks. The Company has various proprietary marks,
including AMI(tm), BenchCAT(tm), Celero(tm), Disruptor Beads(tm),
Disruptor Genie(R), Enviro-Genie(R), Genie(tm), MagStir Genie(R),
MegaMag Genie(tm), MicroPlate Genie(R), MultiMagStir Genie(R), Multi-
MicroPlate Genie(R), QuadMag Genie(tm), Roto-Shake Genie(R),
TurboMix(tm), and Vortex-Genie(R), each of which it considers
important to the success of the related product. The Company also
has several trademark applications pending. No representation
can be made that any application will be granted or as to the
protection that any existing or future trademark may provide.
Licenses. The Company has several licensing agreements
for technology and patents used in Company business.
A non-exclusive worldwide sublicense from Fluorometrix
Corporation relates to the development, production and marketing
of a line of bioreactor vessels, including culture bags with
integral sensors for pH and oxygen in volumes of 250 milliliters
up to 5 liters for laboratory incubator systems. Development of a
line of products under this sublicense has commenced. The Company
also licenses the technology related to its patent for the
Roto-Shake Genie from a local university, and licenses a patent
related to its TurboMix attachment for the Vortex-Genie and Disruptor
Genie from an independent inventor. Altamira has a license with
respect to technology related to the Celero line of products from
Symyx Corporation.
Foreign Sales. The Company's sales to overseas customers,
including distributors, (principally Asia and Europe) accounted for
approximately 46% of the Company's total net sales for fiscal 2007
and 44% for fiscal 2006. Such sales are paid in United States
dollars and are therefore not subject to risks of currency
fluctuation, foreign duties and customs.
Seasonality. The Company does not consider its business to
be seasonal.
Backlog. The Company's backlog for its Benchtop Laboratory
Equipment products is not significant because this line of products
is comprised of standard catalog items. The typical lead time for
such orders is not more than two weeks. The Company's backlog for
Catalyst Research Instruments as of June 30, 2007 was $590,000,
which is expected to be fulfilled by the end of the second quarter
of the fiscal year ending June 30, 2008.
Competition. Most of the Company's competitors are
substantially larger and have greater financial, production and
marketing resources than the Company. Competition is generally
based upon technical specifications, price, and product recognition and
acceptance. The Company's main competition for its Benchtop
Laboratory Equipment in the United States derives from private label
brand mixers offered by the two largest laboratory equipment
distributors in the United States, who dominate the end user market,
one of which is Fisher (see "Major Customers"). The Company believes
the Company and its Benchtop Laboratory Equipment products are
factors in the vortex mixers market in the United States and widely
recognized in the international vortex mixers market as well.
In the general area of Benchtop Laboratory Equipment, the
Company's major competitors are Troemner (private label supplier
to the two largest laboratory equipment distributors in the U.S.
and Europe), Barnstead/Thermolyne Corporation, (an Apogent
Technologies company owned by Thermo Fisher Scientific, Inc.),
IKA-Werke GmbH & Co. KG, a German company, and Heidolph
Instruments GmbH, a German company.
The primary competition for the Company's Catalyst
Research Instruments is in the form of instruments produced
internally by research laboratory staff of potential customers.
Other competitors in the United States include Quantachrome
Instruments, and Micromeritics Instrument Corporation, each a
privately-held company.
Research and Development. In connection with the
development of new products, the Company incurred research and
development expenses, all of which relate to Benchtop Laboratory
Equipment, of $302,100 during fiscal 2007 compared to $316,500
during fiscal 2006. No research and development expenses were
incurred in connection with its Catalyst Research Instruments.
The Company expects its expenditures in the fiscal year ending
June 30, 2008 for research and development will not be materially
different from the current fiscal year.
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, to
establish occupational safety and health standards and to cover
other matters. The Company believes that all its operations
are in compliance with existing laws and regulations and the cost to
comply is not significant to the Company.
Employees. As of August 24, 2007, the Company employed
30 persons (21 in Bohemia, New York and 9 in Pittsburgh, Pennsylvania)
of whom 26 were full-time, including its two executive officers.
None of the Company's employees is represented by any union.
Risk Factors
In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, important risk
factors are identified below that could affect the Company's
financial performance and could cause the Company's actual
results for future periods to differ materially from any opinions or
statements expressed with respect to such future periods in any
current statements. The Company undertakes no obligation to
publicly revise any forward-looking announcements to reflect
future events or circumstances.
Dependence on a Major Customer
The laboratory equipment industry is dominated in the U.S. by
two major laboratory equipment distributors, Thermo Fisher Scientific,
Inc. ("Fisher") and VWR International. During the fourth quarter of
fiscal 2006, the Company was informed by Fisher that it would no
longer market the Company's products. As a result, there were no
sales of the Company's products to Fisher since the fourth quarter
of fiscal 2006. Sales to this former major customer, mostly the
Vortex-Genie 2 Mixer, represented approximately 20% of total net
sales for fiscal 2006. As a result of increased direct selling
efforts and increased distribution through the Company's other
existing distributors and new distributors, the Company for fiscal
2007 was able to generate sufficient additional revenues to enable it to
recoup the majority of the lost revenues. The Company's current
largest customer accounted for approximately 16% of the Company's total
net sales in fiscal 2007 (22% of Benchtop Laboratory Equipment sales)
and 17% in fiscal 2006. A material reduction in sales to this major
customer could have an adverse effect on the results of operations of the
Company.
The Company Offers a Limited Number of Products with Sales of One
Product Accounting for a Substantial Portion of its Revenues
The Company has a limited number of Benchtop Laboratory Equipment
products with one product, the Vortex-Genie 2 Mixer accounting for
approximately 70% and 72% of total Benchtop Laboratory Equipment sales,
for fiscal 2007, and fiscal 2006, respectively.
The Company is A Small Participant in A Highly Competitive
Laboratory Equipment Industry
The Benchtop Laboratory Equipment industry is highly
competitive. Although the Company's principal product, the
Vortex-Genie 2 Mixer, has been widely accepted, the Company's
annual net sales for these products ($3,558,100 for fiscal 2007
and $3,465,200 for fiscal 2006) are significantly less than the
annual revenues of many of its competitors in the industry.
Its principal competitors are substantially larger and have much
greater financial, production and marketing resources than the
Company. In the past few years, there have been continuous new
entrants into the vortex mixer market, including the manufacturer
of the industry's two largest distributors' private label mixers.
The production and sales of Catalyst Research Instruments
is highly competitive. The Company competes with many
laboratories which produce their own instruments and several
companies with greater resources.
The Company's Ability to Grow and Compete Effectively Is In
Part Dependent on Its Ability to Develop and Effectively
Market New Products
In the recent past, the Company began pursuing a
program to develop and market new laboratory equipment products
with a view to increasing revenues of such products and reducing
the Company's dependence on the Vortex-Genie 2 Mixer. As a result,
the Company now offers a more extensive line of Benchtop Laboratory
Equipment products. However, the Company still needs to
continuously develop and introduce new products in order to grow
this segment of the business.
Revenues derived from new Benchtop Laboratory Equipment
products (those other than the Vortex-Genie 2 Mixer, but excluding
accessories) amounted to $838,500 and $737,100, respectively, for
fiscal 2007 and fiscal 2006. The Company relies primarily on
distributors and their catalogs to market such products. Sales
of new products are heavily dependent on the distributors' decision
to include a new product in the distributors' catalogs and their
continued inclusion in the catalogs and on their websites, since
the majority of the end users purchase through distributors.
Accordingly, 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.
No assurance can be given that the amounts allocated by the
Company for its development and marketing programs will prove
beneficial or that distributors will include any particular product
in their catalogs and websites.
In June 2006, the Company received a nonexclusive sublicense
to develop, produce and sell a line of bioreactor vessels with
integral sensors for pH and oxygen in volumes of 250 milliliters up
to 5 liters for laboratory systems under a license from the
University of Maryland, Baltimore County, the patent holder.
The Company is engaged in the development of certain products which
incorporate the disposable sensor technology. No assurance can be
made that such development will be completed or that it will
result in material revenues.
The Company's new Catalyst Research Instruments line of
products is limited to a few products. In order to remain
competitive and grow this line of business, the Company needs to
make engineering improvements to existing products and develop and
add new products incorporating more current technology in the
catalyst research area.
The Company May Be Subject to General Economic, Political, and
Social Factors
Orders for the Company's products, particularly new
Catalyst Research Instruments, depend in part, on a customer's
ability to secure funds. Available funds can be affected by
budgetary constraints and the ability to obtain grants.
Factors such as a general economic recession or another major
terrorist attack could have a negative impact on corporate
funding and grants.
The Company's ability to secure new orders can also be
effected by changes in U.S. and international policies pertaining
to energy and the environment.
The Company is Heavily Dependent on Outside Suppliers for the
Components of its Products
Due to poor quality and delivery times from the Company's
former second supplier, the Company has only one supplier for a
major component of the Vortex-Genie products. While the Company
is seeking an additional supplier for this component, it has
maintained an abundant on-hand supply of this component; however,
there can be no assurance that the Company will be successful in
securing a second supplier of this component.
While the Company believes there are several suppliers
available for most of its components, it presently relies on one
supplier for several components relating to the Company's Benchtop
Laboratory Equipment. Purchases through a United States vendor
from one overseas supplier accounted for approximately 17% and 44%
of the cost of total purchased materials for fiscal 2007 and fiscal
2006, respectively, and 22% and 44% of the Benchtop Laboratory
Equipment purchases. While the Company believes there are other
sources for the components purchased from overseas readily available,
the disruption or termination of the operations of this source or
other sources could have an adverse effect, hopefully of short
duration, on the Company's results of operations. To diminish this
risk, the Company keeps higher than normal quantities on-hand of
such components, and has added several alternate suppliers during
the past two years. Furthermore, the Company intends to continue
purchasing components from overseas factories directly or indirectly.
Such reliance could increase the risks of the Company's operations
including those arising from government controls, foreign conditions,
custom duties, changes in both foreign and United States government
policies, and the reliability and financial condition of such suppliers.
The Company's Ability to Compete Depends in Part on Its Ability
To Secure and Maintain Proprietary Rights to its Products
The Company's ability to compete depends in part on its ability
to secure and maintain proprietary rights to its products. The
Company's design patent on a feature of its Vortex-Genie 2 Mixer,
its principal product, expired in November 2005; however, the
Company has not, to date, experienced any adverse effect from
the expiration of this patent. A new patent was granted to the
Company during fiscal 2006 for use in the MagStir Genie,
MultiMagStir Genie, and Enviro-Genie products. The Company's
ability to exploit a recently acquired sublicense with respect
to a line of bioreactor vessels, which the Company has commenced
developing, will be dependent on the validity of the licensor's patents.
The Company does not have any patent protection for its Catalyst
Research Instruments, except for a line of products known as Celero
under a licensing agreement, which is not a significant part of
the business.
There can be no assurance that the Company will be successful
in obtaining additional patents, that any patent issued or licensed
to the Company provides or will provide the Company with
competitive advantages or will not be challenged by third parties
or that the patents of others will not prevent the
commercialization of products developed by the Company.
Furthermore, there can be no assurance that others will not
independently develop similar products or design around the
patents related to the Company's products. Any of the
foregoing activities could have a material adverse effect on
the Company. Moreover, there is no assurance that the
enforcement by the Company of its patent rights will not
result in substantial litigation costs.
The Company Has Limited Management Resources
The loss of the services of Ms. Helena Santos, the
Company's Chief Executive and Financial Officer, and President,
or Mr. Robert Nichols, the Company's Executive Vice 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 results and financial condition. In addition, the loss of
Mr. Brookman March, Director of Marketing and Operations of the
Company's new wholly-owned subsidiary, Altamira Instruments, Inc.
could have a materially adverse impact on the Catalyst Research
Instruments operations.
The Common Stock of the Company is Thinly Traded and is Subject
to Volatility
The Common Stock of the Company is traded on the Over-the-Counter
Bulletin Board and, historically, has been thinly traded. As of
August 24, 2007, there were only 1,145,352 shares of Common Stock
of the Company outstanding, of which 427,865 shares were held by
the directors and officers of the Company. There have been a number
of trading days during fiscal 2007 on which no trades of the Company's
Common Stock were reported. Accordingly, the market price for the
Common Stock is subject to great volatility.
Item 2. Description of Property.
The Company's executive offices and principal manufacturing
facilities comprising approximately 25,000 square feet are located
at 70 Orville Drive, Bohemia, New York 11716. They are held pursuant
to a lease which was amended in September 2004, principally to extend
the expiration date from December 31, 2004 to January 31, 2010, and to
reduce the minimum base annual rent. In addition, the recen tly
acquired Altamira subsidiary leases approximately 6,600 square feet of
office, assembly, and testing space at 149 Delta Drive, Pittsburgh,
Pennsylvania 15238, for its Catalyst Research Instruments operations,
pursuant to a lease expiring July 2011. This lease has an
early-termination clause that requires a 180 day notice in the event
of an early termination. See Note 10 to the Financial Statements
in Item 7 for further information on both leases. The leased
facilities are suitable and adequate for 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.
However, a financial advisor employed by the Company pursuant to
an engagement letter that was not extended by the Company beyond
its expiration date of March 31, 2002 asserted in April 2002 a
claim against the Company in the amount of $125,000 for alleged
services rendered to the Company that were alleged to be outside
the scope of the letter. The Company denies engaging the financial
advisor for any services outside the scope of the engagement
letter or that any amount is owing to the advisor. The Company's
counsel has advised the Company that based on its review of the
engagement letter and the Company's denial, it is unlikely that
the financial advisor will prevail if it institutes a legal
proceeding.
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 2007.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
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 2006 and fiscal 2007,
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
09/30/05 2.76 3.30
12/31/05 3.00 3.95
03/31/06 3.15 4.10
06/30/06 2.50 4.30
09/30/06 2.60 2.95
12/31/06 2.71 3.25
03/31/07 2.90 3.75
06/30/07 2.86 3.35
(a) As of August 24, 2007, there were 814 record holders
of the Company's Common Stock.
(b) On January 12, 2007, the Company paid a cash dividend
of $.07 per share to stockholders of record on October 30, 2006.
The Company is not subject to any agreement which prohibits or
restricts the Company from paying dividends on its Common Stock.
On September 20, 2007, the Board of Directors declared a cash
dividend of $.07 per share of Common Stock payable on January
14, 2008 to holders of record as of the close of business on
October 18, 2007.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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 our financial statements and the related notes
included elsewhere in this report.
Overview. As a result of the Company's acquisition on
November 30, 2006 of Altamira, the Company's consolidated results
for fiscal 2007 include the results of Altamira from the date of
the acquisition. In addition, the consolidated results reflect certain
adjustments related to the recording of the acquisition, including
one-time adjustments to inventory and property and equipment
to market values, newly purchased intangible assets and resulting
goodwill, and the depreciation and amortization for the newly acquired
assets.
Results of Operations. Net sales for fiscal 2007 increased
by $1,414,800 (40.8%) to $4,880,000 as compared with $3,465,200 for
fiscal 2006 as a result of the additional revenues from the newly
acquired Catalyst Research Instruments operations as of
November 30, 2006. Net sales related to the Company's Benchtop
Laboratory Equipment operations increased by $92,900 (2.7%) despite
the loss of a major customer at the end of fiscal 2006. Sales of
the Catalyst Research Instruments differ from those of the Benchtop
Laboratory Equipment in that sales of Catalyst Research Instruments are
comprised of a small number of larger orders, typically averaging
over $100,000 each. At the end of fiscal 2007, there was a backlog
of $590,000 for Catalyst Research Instruments.
The gross profit percentage for fiscal 2007 decreased to
40.1% compared to 49.0% for fiscal 2006, mainly as a result of the
lower gross profit percentage for the Catalyst Research Instruments
operations whose products typically yield a gross profit ranging from
30% to 35%. In addition, the gross profit percentage was negatively
affected because of a one-time acquisition related adjustment of
$171,300. At the date of acquisition, Altamira's work-in-progress
inventory was adjusted upwards to fair value so that the adjusted
value would allow for the Company's profit allowance upon completing
the manufacture of orders in process. All significant selling
efforts were performed by Altamira prior to acquisition. While
the revenues related to the work-in-progress were reported by the
Company subsequent to the acquisition, a significant portion of
the gross profit was attributed to prior to acquisition.
The gross profit percentage for the Benchtop Laboratory
Equipment operations for fiscal 2007 was virtually unchanged (48.9%
for fiscal 2007 and 49.0% for fiscal 2006).
General and administrative expenses for fiscal 2007
increased by $161,200 (22.4%) to $880,100 from $718,900 for fiscal
2006 mainly as a result of the general and administrative expenses
related to the newly-acquired Catalyst Research Instruments
operations and acquisition-related administrative costs.
Selling expenses for fiscal 2007 increased by $155,300
(65.2%) to $393,500 from $238,200 for fiscal 2006, primarily as a
result of the selling expenses related to the Catalyst Research
Instruments operations. Selling expenses for the Benchtop Laboratory
Equipment operations were approximately at the same level for both
fiscal years.
Research and development expenses for fiscal 2007
decreased by $14,400 (4.5%) from $316,500 for fiscal 2006 to
$302,100 for fiscal 2007, due to lower outside engineering service
costs. The Company's Catalyst Research Instruments operations did
not incur any research and development expenses.
Other income increased by $11,000 (24.9%) to $55,100
from $44,100 mostly as a result of higher returns on the Company's
investment securities.
Total income tax expense for fiscal 2007 was $123,100
(28.3%) compared to $147,300 (31.4%) for fiscal 2006 primarily
due to lower income in the current year and other minor
adjustments.
As a result of the foregoing, net income for fiscal
2007 was $312,000, a decrease of $9,700 (3.0%) from $321,700 for
fiscal 2006.
Liquidity and Capital Resources. Cash and cash
equivalents increased by $161,000 to $388,700 as of June 30,
2007 from $227,700 as of June 30, 2006. Net cash provided by
operating activities was $172,100 for fiscal 2007 compared to
$336,200 for fiscal 2006, primarily due to increases in accounts
receivable and customer advance balances. For fiscal 2007, net
cash provided by investing activities was $25,700 compared to net cash
used in investing activities of $216,800 for fiscal 2006, primarily
attributable to high redemptions of investment securities,
partially offset by the cash used for the acquisition. Net cash
used in financing activities for fiscal 2007 was $36,800 compared
to $75,600 for fiscal 2006, the decrease due to higher cash proceeds
from exercise of stock options and a lower cash dividend paid by the
Company in fiscal 2007.
The Company's working capital as of June 30, 2007
decreased $28,600 to $2,460,500 from $2,489,100 at June 30, 2006,
mainly due to the acquisition. The Company has available for its
working capital needs, a secured bank line of credit of $200,000 with
North Fork Bank with interest at prime, all of which was available
as of June 30, 2007. The Company has never borrowed under this
line of credit.
Capital Expenditures. During fiscal 2007, the Company
incurred $65,000 in capital expenditures, the approximate level
which the Company expects to incur during the fiscal year ending
June 30, 2008.
Management believes that the Company will be able to
meet its cash flow needs for its operations and capital
expenditures during the 12 months ending June 30, 2008 from its
available financial resources which include its cash and
investment securities.
Item 7. Financial Statements.
The Financial Statements required by this item are
attached hereto on pages F1-F23.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures.
As of the end of the period covered by this report,
based on an evaluation of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934), the Chief Executive
and Chief Financial Officer of the Company has concluded that
the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company
in its Exchange Act reports is recorded, processed, summarized
and reported within the applicable time periods specified by the
SEC's rules and forms. The Company also concluded that information
required to be disclosed in such reports is accumulated and
communicated to the Company's management, including its principal
executive and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
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.
Item 8B. Other Information.
Not applicable.
PART III
Item 9. Directors, Executive Officers; Compliance With
Section 16(a) of the Exchange Act.
Directors
The Company has the following six Directors:
Arthur M. Borden, Esq. (age 87), a Director since
1974, has been counsel to the law firm of Katten Muchin
Rosenman LLP (formerly Rosenman & Colin) during the past
five years. He is a director of Supreme Industries, Inc.,
a nationwide manufacturer of specialized truck bodies.
Joseph G. Cremonese (age 71), a Director since November
2002 and Chairman of the Board since February 2006, has been a
marketing consultant to the Company since 1996. Mr. Cremonese
has been since 1991, President of Laboratory Innovation Company,
Ltd., which is a vehicle for technology transfer and consulting
services for companies, including the Company, engaged in the
production and sale of products for science and biotechnology.
Since March 2003, Mr. Cremonese has been a director of and
consultant to Proteomics, Inc., a producer of recombinant
proteins for medical research. Prior to 1991, he had been
employed by Fisher Scientific, the largest U.S. distributor of
laboratory equipment.
Joseph I. Kesselman (age 82), a Director since 1961
and Chairman of the Board from August 2002 until his resignation
in February 2006, has been for more than five years a consultant
to various corporations. He is a director of Nuclear and Environmental
Protection Inc., Hopare Holding, S.A. (a Swiss company), and
Infranor Inc., a developer and manufacturer of servo systems.
Roger B. Knowles (age 82), a Director since 1965,
is retired. During the past five years he has been involved in
liquidating various real estate and manufacturing concerns.
Grace S. Morin (age 59 ), a Director since December 4,
2006, had been from December 2003 President, Director and
principal stockholder of Altamira Instruments, Inc. until its
acquisition by the Company on November 30, 2006. Ms. Morin has
been engaged by Altamira on a part-time basis to supervise the
administrative functions for the Catalyst Research Instruments
operations in the Pittsburgh, Pennsylvania facility. Prior to
December 2003, she was a general business consultant for two
years, and prior to that she was a member of senior management
of a designer of gas flow environmental engineered products
for approximately four years.
James S. Segasture (age 71), a Director since 1991,
has been a private investor since February 1990.
The Directors are elected to three-year staggered terms.
The current terms of the Directors expire at the annual meeting
of stockholders of the Company to be held at the next annual meeting
following: the fiscal year ended June 30, 2007 - two Directors (Mr.
Kesselman and Ms. Morin, Class B), the fiscal year ending June 30,
2008 - two Directors (Messrs. Cremonese and Knowles, Class C), and
the fiscal year ending June 30, 2009 - two Directors (Messrs. Borden
and Segasture, Class A).
Board Committees
Joseph I. Kesselman and James S. Segasture have been
appointed as the sole members of the Company's Stock Option
Committee to serve at the discretion of the Board and to administer
the Company's 2002 Stock Option Plan ("2002 Plan").
Grace S. Morin, Joseph I. Kesselman, and James S.
Segasture have been appointed as the members of the Company's
Compensation Committee to serve at the discretion of the Board and
to administer the Company's Compensation policies.
The Board of Directors acts as the Company's Audit
Committee.
The Company does not have a financial expert on the Audit
Committee as defined by the Securities and Exchange Commission,
however, the Company believes that the members of the Audit Committee
have sufficient knowledge to properly evaluate and analyze the
Company's financial statements.
Executive Officers
Helena R. Santos, CPA (age 43), employed by the Company
since 1994, was appointed in August 2002 as President, Chief Executive
Officer and Treasurer. Previously she served as Vice President,
Controller from 1997 and 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.
Robert P. Nichols (age 46), employed by the Company since
February 1998, was appointed in August 2002 as Executive Vice President.
He had been Vice President, Engineering from May 2001. Prior to joining
the Company, Mr. Nichols was an Engineer Manager with Bay Side Motion
Group, a precision motion equipment manufacturer from
January 1996 to February 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company believes that, for the year ended June 30,
2007, its officers, directors and 10% stockholders timely complied
with all filing requirements of Section 16(a) of the Securities Exchange
Act of 1934, as amended.
Code of Ethics
We have adopted a code of ethics that applies to our Executive
Officers and Directors. A copy of the code of ethics can be found on our
website at www.scientificindustries.com and is attached as Exhibit 14 to
this Annual Report on Form 10-KSB.
Item 10. Executive Compensation.
The following table summarizes all compensation paid by the
Company to its then Chief Executive Officer ("CEO"), Chief Financial
Officer ("CFO"), and President; and Executive Vice President with
respect to each of the three fiscal years ended June 30, 2007, 2006
and 2005. No other executive officer earned in excess of $100,000 in
any of such fiscal periods.
The Compensation Committee along with the other members
of the Board reviews and determines the compensation payable to
executives. In making a determination, the Committee and the
Board give material consideration to the Company's results of
operations and financial conditions and competitive factors.
The compensation at times includes grants of options under its
stock option plan to the named executives, each subject to
long-term employment agreements, containing terms which the
Board of Directors deemed reasonable. The Board is cognizant
that as a relatively small company, the Company has limited
resources and opportunities with respect to recruiting and
retaining key executives. Accordingly, the Company has relied
upon long-term employment agreements to retain qualified personnel.
SUMMARY COMPENSATION TABLE
_____________________________________________________________
Non-
Equity
Incentive
Name Plan
and Stock Option Comp-
Principal Fiscal Salary Bonus Awards Awards ensation
Position Year ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g)
_____________________________________________________________
Helena R. 2007 115,000 10,000 0 0 0
Santos, 2006 112,100 0 0 0 0
CEO, 2005 108,200 0 0 0 0
President,
CFO
Robert P. 2007 110,000 10,000 0 0 0
Nichols, 2006 107,000 0 0 0 0
Exec. 2005 103,200 0 0 0 0
V. P.
_____________________________________________________________
SUMMARY COMPENSATION TABLE (CONTINUED)
_____________________________________________________________
Non-
Qualified
Deferred All
Name Comp- Other
and ensation Comp-
Principal Earnings ensation Total
Position ($) ($) ($)
(a) (h) (i) (j)
_____________________________________________________________
Helena R. 2007 2,500(1) 127,500
Santos, 2006 2,200(1) 114,300
CEO, 2005 2,200(1) 110,400
President,
CFO
Robert P. 2007 2,400(1) 122,400
Nichols, 2006 2,100(1) 109,100
Exec. 2005 2,100(1) 105,300
V. P.
_____________________________________________________________
(1)Represents the Company's matching contribution under the
Company's 401(K) Plans.
Pursuant to the Altamira acquisition, Altamira entered into
a long-term employment agreement on November 30, 2006
employing Mr. Brookman P. March as Director of Marketing and
Operations of Altamira at a salary in excess of $100,000 per
annum. Under the agreement, teh total compensation paid to
him during fiscal 2007 was $66,800, including a matching
contribution under Altamira's 401(k) Plan.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
_____________________________________________________________
Option Awards
_____________________________________________________________
Number
Number of
of Securities
Securities Under-
Under- lying
lying Unexercised Option
Exercised Options(#) Exercise Option
Options(#) Unexerci- Price Expiration
Name Exercisable sable ($) Date
(a) (b) (c) (e) (f)
_____________________________________________________________
Helena R. 5,000 0 .84 5/2009
Santos
Robert P. 25,000 0 1.45 (1)
Nichols
_____________________________________________________________
(1) 12,000 shares expire in March 2008; 8,000 shares expire
May 2009; and 5,000 shares expire October 2012.
Option Grants in Last Fiscal Year
There were no options granted to officers during fiscal 2007.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Shares of Securities Value of
Common Underlying Unexercised
Stock Unexercised in-the-money
Acquired Options Options
On Value at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable(1)
________________________________________________________________________
Helena R. Santos 10,000 16,500 5,000/0 12,530/0
(1) Calculated by multiplying the number of shares of Common Stock
subject to options by the difference between the market price and
exercise price, per share, on date of exercise, and June 30, 2007,
respectively.
Employment Agreements
On December 29, 2006, the Company entered into new
employment agreements with Ms. Helena R. Santos and Mr. Robert
P. Nichols replacing employment agreements that were entered into
in September 2004. The new agreements increased their base salaries by
$10,000 each - to $120,000 for Ms. Santos and $115,000 for Mr. Nichols.
The new agreements also extended their employment period to
December 31, 2008. They otherwise contain substantially the same
provisions as the replaced agreements, including annual bonuses at the
discretion of the Board and non-competition and confidentiality covenants.
The Board awarded a $10,000 bonus to each of Ms. Santos and Mr. Nichols
on December 4, 2006 which was paid on December 31, 2006.
In connection with the Altamira acquisition, Altamira entered
into a two-year employment agreement with Mr. Brookman March, who was
Altamira's Vice President and a director, employing him currently as
Director of Marketing and Operations. The employment agreement
provides for a two year term with Altamira having two one-year renewal
options, at a salary of $110,000 per annum during the initial two year
term to be increased by 2% during each renewal period plus adjustments
based on annual increases in the consumer price index. Mr. March is
the husband of Grace S. Morin, a Director of the Company and the former
principal stockholder of Altamira, who received on the date of
acquisition $361,440 in cash, 112,950 shares of the Common Stock of
the Company and the right to receive 90.36% of 5% as adjusted, of the
net sales of Altamira during five periods described under Item 1.
"Description of Business-General". In addition, Ms. Morin received an
additional $39,800 cash payment under a separate agreement related to
the acquisition (See Item 12).
Directors' Compensation
DIRECTORS' COMPENSATION
____________________________________________________________________
Non-
Equity
Fees Incentive
Earned Plan
or Paid Stock Option Comp-
in Cash Awards Awards ensation
Name ($) ($) ($) ($)
(a) (b) (c) (d) (e)
_____________________________________________________________________
Arthur M.
Borden 7,250 0 0 0
Joseph G.
Cremonese 17,000 0 10,100 0
Joseph I.
Kesselman 7,250 0 0 0
Roger B.
Knowles 7,250 0 0 0
Grace S.
Morin 0 0 0 0
James S.
Segasture 7,250 0 0 0
____________________________________________________________________
DIRECTORS' COMPENSATION (CONTINUED)
____________________________________________________________________
Non-
qualified
Deferred All
Comp- Other
ensation Comp-
Earnings ensation Total
Name ($) ($) ($)
(a) (f) (g) (h)
____________________________________________________________________
Arthur M. 0 0 7,250
Borden
Joseph G.
Cremonese 0 (1) 27,100(1)
Joseph I.
Kesselman 0 0 7,250
Roger B.
Knowles 0 0 7,250
Grace S.
Morin 0 (2) 0
James S.
Segasture 0 0 7,250
____________________________________________________________________
(1) Mr. Cremonese received additional compensation amounting to
$36,200 for fiscal 2007 under a separate agreement with the Company
for marketing consulting services as described
in Item 12.
(2) Ms. Morin, as an employee-director does not receive director
compensation; however, since November 30, 2006, she received
$41,000 in compensation as an employee of Altamira.
As of April 1, 2007, the Company increased its quarterly
fee from $750 to $1,500 and the fee for each meeting attended from
$500 to $1,000. In addition, the Company reimburses each Director
for out-of-pocket expenses incurred in connection with attendance
at board meetings in the amount of $50 or the Director's itemized
expenses, whichever is greater. Mr. Joseph I. Kesselman as Chairman
of the Board until February 2006 received $750 per month, and
Mr. Joseph G. Cremonese, as Chairman of the Board, since February
2006 received $750 per month until April when the monthly fee was
increased to $1,000. During fiscal 2007, the fees to non-employee
Directors aggregated $46,000.
Pursuant to the Company's 1992 Stock Option Plan
("1992 Plan") options to purchase 3,000 shares of Common Stock at
the then fair market value were granted to each non-employee director
who was on the Board of Directors on the first business day of each
March, in 1993, 1994, 1995, and 1996, namely Messrs. Borden, Kesselman,
Knowles and Segasture. In addition, in December 1997 and through
December 2002 the Board of Directors granted under the 1992 Plan
annually options to purchase 4,000 shares of Common Stock to each
of them exercisable at the fair market value on the date of grant.
Accordingly, as of June 30, 2007, the Company had granted under the
1992 Plan to the foregoing four non-employee Directors options to
purchase an aggregate of 128,000 shares of Common Stock, or options to
purchase 32,000 shares of Common Stock for each. The fair market
value per share of Common Stock on the dates of grant ranged from
$0.50 for options granted in 1993 to $2.40 in 2002. As of June 30,
2007, options under the 1992 Plan with respect to 68,000 shares had
been exercised by the Directors. In addition, they had exercised
options with respect to 48,000 shares granted to them prior to the
adoption of the 1992 Plan.
Under the Company's 2002 Plan, none of the Directors at
the time of the adoption by the Board of Directors of the 2002 Plan
(subsequently approved by stockholders) were eligible to receive
option grants. Mr. Joseph G. Cremonese who was elected Director at
the 2002 Annual Meeting of Stockholders, was granted on December 1,
2003 an option to purchase 5,000 shares of Common Stock at the fair
market value of $1.35 per share, and, on February 20, 2007 an option to
purchase 5,000 shares of Common Stock at the fair market value of
$3.10 per share was granted to him.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth, as of June 30, 2007,
the number of shares of Common Stock beneficially owned by (i)
the persons known to the Company to be the owners of more than 5%
of the 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 Common Stock owned by such individual. Each
person has sole voting and investment power with respect to the
shares shown, except as noted. Except for Mr. Kleiman, the address
for each of the following is c/o Scientific Industries, Inc.,
70 Orville Drive, Bohemia, New York 11716.
Amount and
Name Nature of Beneficial Ownership % of Class
____________________________________________________________________
Lowell A. Kleiman 139,581(1) 12.2%
16 Walnut Street
Glen Head, NY 11545
Arthur M. Borden 60,740(2) 5.2%
Joseph G. Cremonese 31,410(3) 2.7%
Joseph I. Kesselman 64,120(4) 5.5%
Roger B. Knowles 25,595(5) 2.2%
Grace S. Morin 112,950 9.9%
James S. Segasture 187,250(6) 16.3%
Helena R. Santos 18,000(7) 1.6%
Robert P. Nichols 27,800(8) 2.4%
All directors and
executive officers as
a group (8 persons) 527,865(9) 42.4%
(1) Based on information reported in his Schedule 13D filed with
the Securities and Exchange Commission on October 30, 2002.
(2) Includes 20,000 shares issuable upon exercise of options.
(3) 21,410 shares are owned jointly with his wife and 10,000
shares are issuable upon exercise of options.
(4) Includes 20,000 shares issuable upon exercise of options
and 735 shares of Common Stock owned jointly with his wife and
4,000 shares owned by his wife.
(5) Includes 20,000 shares issuable upon exercise of options,
4,258 shares owned by his wife, and 1,337 shares owned by a
trust of which he is a trustee, beneficial ownership of
which is disclaimed by him.
(6) Includes 4,000 shares issuable upon exercise of options
and 493 shares owned by his wife.
(7) Includes 5,000 shares issuable upon exercise of options.
(8) Includes 25,000 shares issuable upon exercise of options.
(9) includes 100,000 shares issuable upon exercise of options.
EQUITY COMPENSATION PLAN INFORMATION
_________________________________________________________________
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 104,001 1.62
Equity
Compensation
plans not approved
by security holders N/A N/A
Total 104,001 1.62
_________________________________________________________________
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 101,334
Equity
Compensation
plans not approved
by security holders N/A
Total 101,334
_________________________________________________________________
Item 12. Certain Relationships and Related Transactions.
Mr. Joseph G. Cremonese, who was first elected a Class
C Director at the Annual Meeting of Stockholders in November 2002
or his affiliate, Laboratory Innovation Company, Ltd., have been
providing independent marketing consulting services to the
Company for approximately nine years. The services have been
rendered since January 1, 2003 pursuant to a consulting agreement
which was amended and restated for a second time in March 2007.
The agreement as amended and restated provides that Mr. Cremonese
and his affiliate render, at the request of the Company, through
December 31, 2008 marketing consulting services of at least 60,
but not more than 96 days per year at the rate of $600 per day
with a monthly payment of $3,000, with the Company's obligation
reduced to the extent the consulting services are less than 60
days for the 12 month period. The agreement contains
confidentiality and non-competition covenants. During fiscal
2007, the Company paid an aggregate of $2,900 for the consulting
services.
The Company and sellers of the Altamira capital stock
(including Grace S. Morin who owned 90.36% of such capital stock
and is a director of the Company) to the Company have agreed to
the filing by the Company of an election under Section 338 of
the Internal Revenue Code ("Code") to treat the acquisition as a
purchase for tax purposes within the meaning of the Code.
Accordingly, the Company has agreed to reimburse these sellers
for any tax consequences resulting from such election.
Accordingly, in September 2007, the Company paid Ms. Morin, Mr.
Chandler and Ms. Haught $39,800, $1,100 and $1,100, respectively,
in reimbursement. In connection with the Altamira transaction, the
Company agreed to have Altamira continue to employ Ms. Morin, who
was founder and President of Altamira, for up to 90 days.
However, due to operational needs, she is currently employed on
a part-time basis since May 1, 2007 to supervise the on-site
administrative duties.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibits to this report are listed in the Exhibit
Index at the end of this report.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
three months ended June 30, 2007.
Item 14. Principal Accountant Fees and Services.
The Company incurred for the services of Nussbaum
Yates Berg Klein & Wolpow, LLP (formerly Nussbaum, Yates &
Wolpow, P.C.): audit fees (including for preparation of the
Company's corporate tax returns) of approximately $39,000 and
$28,500 in connection with the audit of the Company's financial
statements for fiscal 2007 and fiscal 2006, respectively;
$4,500 and $2,850 in connection with the quarterly reviews for
fiscal 2007 and fiscal 2006, respectively, and $39,900 in fiscal
2007 for additional services rendered in connection with the
acquisition of Altamira Instruments, Inc. There were no other
audit related fees or other fees paid to the firm.
The Board of Directors has reviewed and discussed the
audited financial statements with management. It discussed with
the independent auditors of the Company matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards
AU 380), as modified or supplemented and received the written
disclosures and the letter from the independent accountants required
by Independence Standards Board Standard No. 1 (Independence Standards
Board Standard No.1, Independence Discussions with Audit Committees),
as modified or supplemented. The Board discussed with the independent
accountant the independent accountant's independence.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SCIENTIFIC INDUSTRIES, INC.
(Registrant)
/s/ Helena R. Santos
_____________________
Helena R. Santos
President, Chief Executive Officer, Treasurer
Chief Financial and Principal Accounting Officer
Date: September 28, 2007
In accordance with the Exchange Act, 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/ Arthur M. Borden Director September 28, 2007
Arthur M. Borden
/s/ Joseph G. Cremonese Chairman of the Board September 28 2007
Joseph G. Cremonese
/s/ Joseph I. Kesselman Director September 28, 2007
Joseph I. Kesselman
/s/ Roger B. Knowles Director September 28, 2007
Roger B. Knowles
/s/ Grace S. Morin Director September 28, 2007
Grace S. Morin
/s/ James S. Segasture Director September 28, 2007
James S. Segasture
EXHIBIT INDEX
Exhibit Number Description
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
Form 8-K filed on January 6, 2003) and incorporated
by reference thereto.
4 Instruments defining the rights of security holders:
4(a) 2002 Stock Option Plan (Filed as Exhibit 99-1 to the
Company's Current Report on Form 8-K filed on November
25, 2002 and incorporated by reference thereto.
10 Material Contracts:
10(a) Lease between Registrant and AIP Associates, predecessor
-in-interest of current lessor, dated October, 1989 with
respect to Company's offices and facilities.
(Filed as Exhibit 10(a) to the Company's Form 10-KSB
filed on September 28, 2005 and incorporated by
reference thereto).
10(a)-1 Amendment to lease between Registrant and REP A10 LLC
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(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(c) Employment Agreement dated January 1, 2003, 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 January 22,
2003, and incorporated by reference thereto).
10(c)-1 Employment Agreement dated September 1, 2004, by and between
the Company and Mr. Nichols (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on September
1, 2004, and incorporated by reference thereto).
10(c)-2 Employment Agreement dated December 29, 2006, by and
between the Company and Mr. Nichols (Filed as Exhibit
10A-1 to the Company's Current Report on Form 8-K filed
on December 29, 2006, and incorporated by reference thereto).
10(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 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 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(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(j) Indemnity Agreement, dated as of April 13, 2007 by and
among the Company and Grace Morin, Heather H. Haught and
William D. Chandler.
10(k) Lease between Altamira Instruments, Inc. And Allegheny
Homes, LLC, with respect to the Company's Pittsburgh,
Pennsylvania facilities.
14 Code of Ethics
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York
corporation, is a wholly-owned inactive subsidiary of
the Company.
Altamira Instruments, Inc., a Delaware Corporation, is a
wholly-owned subsidiary of the Company since November
30, 2006.
31.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
____________________________________________________________________
SCIENTIFIC INDUSTRIES, INC.
AND SUBSIDIARIES
YEARS ENDED JUNE 30, 2007 AND 2006
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
YEARS ENDED JUNE 30, 2007 AND 2006
CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated financial statements:
Balance sheets F-2
Statements of income F-3
Statements of shareholders' equity F-4
Statements of cash flows F-5
Notes to financial statements F-6 - F-23
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Board of Directors and Shareholders
Scientific Industries, Inc. and Subsidiaries
Bohemia, New York
We have audited the consolidated balance sheets of Scientific
Industries, Inc. and subsidiaries as of June 30, 2007 and 2006,
and the related consolidated statements of income, shareholders'
equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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, 2007 and 2006, and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with United States generally accepted accounting
principles.
/s/ Nussbaum Yates Berg Klein & Wolpow
______________________________________
Nussbaum Yates Berg Klein & Wolpow, LLP
Melville, New York
September 27, 2007
F-1
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2007 AND 2006
ASSETS
2007 2006
---------- ----------
Current assets:
Cash and cash equivalents $ 388,700 $ 227,700
Investment securities 718,000 1,168,200
Trade accounts receivable, less
allowance for doubtful accounts
of $11,600 in 2007 and 2006 750,800 313,900
Inventories 1,289,600 930,300
Prepaid and other current assets 61,200 103,900
Deferred taxes 25,600 25,500
---------- ----------
Total current assets 3,233,900 2,769,500
Property and equipment, net 247,300 122,100
Intangible assets, net 596,800 40,200
Goodwill 13,400 -
Other 45,700 38,700
---------- ----------
Total assets $4,137,100 $2,970,500
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 231,900 $ 68,100
Customer advances 147,600 -
Accrued expenses and taxes 393,900 212,300
---------- ----------
Total current liabilities 773,400 280,400
---------- ----------
Deferred taxes 7,600 3,200
---------- ----------
Commitments and contingencies
Shareholder's equity:
Common stock, $.05 par value;
authorized 7,000,000 shares; issued
1,165,154 and 1,020,154 shares in
2007 and 2006 58,200 51,000
Additional paid-in capital 1,428,900 1,010,500
Accumulated other comprehensive loss,
unrealized holding loss on investment
securities (9,900) (11,500)
Retained earnings 1,931,300 1,689,300
--------- ---------
3,408,500 2,739,300
Less common stock held in treasury
at cost, 19,802 shares 52,400 52,400
--------- ---------
Total shareholders' equity 3,356,100 2,686,900
--------- ---------
Total liabilities and
shareholders' equity $4,137,100 $2,970,500
========== ==========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
---------- ----------
Net sales $4,880,000 $3,465,200
Cost of sales 2,924,300 1,766,700
---------- ----------
Gross profit 1,955,700 1,698,500
---------- ----------
Operating expenses:
General and administrative 880,100 718,900
Selling 393,500 238,200
Research and development 302,100 316,500
---------- ----------
1,575,700 1,273,600
---------- ----------
Income from operations 380,000 424,900
---------- ----------
Other income:
Interest income 43,900 34,600
Other income, net 11,200 9,500
---------- ----------
55,100 44,100
---------- ----------
Income before income taxes 435,100 469,000
---------- ----------
Income tax expense:
Current 118,800 123,600
Deferred 4,300 23,700
---------- ----------
123,100 147,300
---------- ----------
Net income $ 312,000 $ 321,700
========== ==========
Basic earnings per common share $ .29 $ .32
========== ==========
Diluted earnings per common share $ .27 $ .30
========== ==========
Weighted average common shares
outstanding 1,075,878 991,809
========== ==========
Weighted average common shares
outstanding, assuming dilution 1,140,751 1,068,445
========== ==========
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2007 AND 2006
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Loss
_______ _______ ________ _____________
Balance, July 1, 2005 1,000,009 $50,000 $ 991,200 $ (7,600)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (6,400)
Less reclassification
adjustment for loss
included in net income - - - 2,500
Change in net unrealized
holding loss - - - -
Comprehensive income - - - -
Exercise of stock options
and warrant 20,145 1,000 12,500 -
Income tax benefit of
stock options exercised - - 6,800 -
Cash dividend paid, $.09
per share - - - -
_________ _______ __________ ___________
Balance, June 30, 2006 1,020,154 51,000 1,010,500 (11,500)
Net income - - - -
Other comprehensive loss:
Unrealized holding gain
arising during period - - - 1,800
Plus reclassification
adjustment for gain
included in net income - - - (200)
Change in net unrealized
holding loss - - - -
Comprehensive income - - - -
Exercise of stock options 20,000 1,000 32,200 -
Issuance of common stock
in connection with
acquisition 125,000 6,200 380,000 -
Stock-based compensation - - 5,100 -
Income tax benefit of
stock options exercised - - 1,100 -
Cash dividend paid, $.07
per share - - - -
_________ _______ __________ ___________
Balance, June 30, 2007 1,165,154 $58,200 $1,428,900 $ ( 9,900)
========= ======= ========== ===========
See notes to consolidated financial statements.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
________ ______ ______ ____________
Balance, July 1, 2005 $1,456,700 19,802 $52,400 $ 2,437,900
____________
Net income 321,700 - - 321,700
____________
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (6,400)
Less reclassification
adjustment for loss
included in net income - - - 2,500
____________
Change in net unrealized
holding gain - - - (3,900)
____________
Comprehensive income - - - 317,800
____________
Exercise of stock options - - - 13,500
and warrant
Income tax benefit of
stock options exercised - - - 6,800
Cash dividend paid, $.09
per share (89,100) - - (89,100)
___________ _______ _______ ____________
Balance, June 30, 2006 1,689,300 19,802 52,400 2,686,900
Net income 312,000 - - 312,000
___________
Other comprehensive loss:
Unrealized holding gain
arising during period - - - 1,800
Plus reclassification
adjustment for gain
included in net income - - - (200)
____________
Change in net unrealized
holding loss - - - 1,600
____________
Comprehensive income - - - 313,600
____________
Exercise of stock options - - - 33,200
Issuance of common stock
in connection with
acquisition - - - 386,200
Stock-based compensation - - - 5,100
Income tax benefit of stock
options exercised - - - 1,100
Cash dividend paid, $.07
per share (70,000) - - (70,000)
_________ _______ _______ __________
Balance, June 30, 2007 $1,931,300 19,802 $52,400 $3,356,100
========== ======= ======= ==========
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2007 AND 2006
2007 2006
--------- ---------
Operating activities:
Net income $ 312,000 $ 321,700
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
(Gain) loss on sale of investments (200) 2,500
Depreciation and amortization 150,100 78,100
Deferred income taxes 4,300 23,700
Income tax benefit of stock options
exercised 1,100 6,800
Stock-based compensation 5,100 -
Changes in assets and liabilities,
net of effect of acquisition:
Trade accounts receivable (319,600) 136,700
Inventories 24,900 (129,900)
Prepaid and other current assets 50,300 (46,100)
Other assets 18,100 1,300
Accounts payable (75,100) (14,300)
Customer advances (104,200) -
Accrued expenses and taxes 126,700 (24,900)
Deferred compensation (21,400) (19,400)
--------- ---------
Total adjustments (139,900) 14,500
--------- ---------
Net cash provided by operating
activities 172,100 336,200
--------- ---------
Investing activities, net of effect of acquisition:
Acquisition of Altamira Instruments, Inc.,
net of cash acquired (346,500) -
Purchase of investment securities,
available for sale (23,700) (344,500)
Redemption of investment securities,
available for sale 475,700 123,600
Redemption of investment securities,
held to maturity - 72,300
Capital expenditures (65,000) (38,000)
Purchase of intangible assets (14,800) (30,200)
--------- ---------
Net cash provided by (used in)
investing activities 25,700 (216,800)
--------- ---------
Financing activities:
Proceeds from exercise of stock options 33,200 13,500
Cash dividend paid (70,000) (89,100)
--------- ---------
Net cash used in financing
activities (36,800) (75,600)
--------- ---------
Net increase in cash and cash equivalents 161,000 43,800
Cash and cash equivalents, beginning of year 227,700 183,900
--------- ---------
Cash and cash equivalents, end of year $ 388,700 $ 227,700
========= ==========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 126,400 $ 75,100
========= ==========
Non-cash financing activity:
See Note 2 for stock issued in connection with 2007
acquisition and Note 12 for exercise of warrants in 2006
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies
__________________________________________
Nature of Operations
Scientific Industries, Inc. and its subsidiaries (the "Company") design,
manufacture, and market a variety of benchtop laboratory equipment and
catalyst research instruments. The Company is headquartered in Bohemia,
New York where it produces benchtop laboratory equipment for research and,
since November 30, 2006, has a location in Pittsburgh, Pennsylvania,
where it produces a variety of custom-made catalyst research instruments.
The equipment sold by the Company includes mixers, shakers, stirrers,
refrigerated incubators, catalyst characterization instruments, reactor
systems and high throughput systems.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Scientific Industries, Inc., Scientific Packaging
Industries, Inc., an inactive wholly-owned subsidiary and, since November
30, 2006 (date of acquisition), Altamira Instruments, Inc. ("Altamira")
a Delaware corporation and wholly-owned subsidiary (all collectively
referred to as the "Company"). All material intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenue is recognized when all the following criteria are met:
. Receipt of a written purchase order agreement which is binding
on the customer.
. Goods are shipped and title passes.
. Prices are fixed.
. Collectibility is reasonably assured.
. All material obligations under the agreement have been
substantially performed.
All orders are F.O.B. shipping point, all sales are final without right
of return or payment contingencies, and there are no special sales
arrangements or agreements with any customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
At certain times, the Company maintains balances in accounts in
excess of the $100,000 FDIC insurance coverage.
F-6
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies (Continued)
______________________________________________________
Accounts Receivable
In order to record the Company's accounts receivable at their net
realizable value, the Company must assess their collectibility. A
considerable amount of judgment is required in order to make this
assessment, including an analysis of historical bad debts and other
adjustments, a review of the aging of the Company's receivables, and the
current creditworthiness of the Company's customers. The Company has
recorded allowances for receivables which it considered uncollectible,
including amounts for the resolution of potential credit and other
collection issues such as disputed invoices, customer satisfaction claims and
pricing discrepancies. However, depending on how such potential issues are
resolved, or if the financial condition of any of the Company's customers was
to deteriorate and its ability to make required payments became impaired,
increases in these allowances may be required. The Company actively manages
its accounts receivable to minimize credit risk. The Company does not
obtain collateral for its accounts receivable.
Customer Advances
In the ordinary course of business, customers of Altamira may prepay
monies for purchase orders issued to the Company. Such amounts are
categorized as liabilities under the caption customer advances.
Investment Securities
Securities which the Company has the ability and positive intent
to hold to maturity are carried at amortized cost. Substantially all
held-to-maturity securities mature within one year. 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 (first in, first out) or
market value, and have been reduced by an allowance for excess and obsolete
inventories. The estimate is based on management's review of inventories on
hand compared to estimated future usage and sales. Cost of work-in-process
and finished goods inventories include material, labor and manufacturing
overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation of computer
equipment, machinery and equipment and furniture and fixtures is provided
for primarily by the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized by the straight-line
method over the term of the related lease or the estimated useful lives of
the assets, whichever is shorter.
F-7
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies (Continued)
______________________________________________________
Intangible Assets
Intangible assets consist of acquired technology, customer
relationships, non-compete agreements, patents, licenses, trademarks and
trade names. All intangible assets are amortized on a straight-line basis
over 5 years, except for customer relationships which are amortized on an
accelerated (declining-balance) basis over their estimated useful lives. The
Company continually evaluates the remaining estimated useful lives of
intangible assets that are being amortized to determine whether events or
circumstances warrant a revision to the remaining period of amortization.
Goodwill
Goodwill represents the excess purchase price over the fair value of
acquired net assets and in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," is
tested for impairment annually, or earlier, if indicators of impairment exist.
To the extent an indication exists that the goodwill may be impaired, the
Company must measure the impairment loss, if any. The Company performed an
assessment to determine whether goodwill was impaired at June 30, 2007 and
determined that there was no impairment to its goodwill balance.
Asset Impairment
The Company reviews its long-lived assets annually to determine
whether facts and circumstances exist which indicate that the carrying
amount of assets may not be recoverable or the useful life is shorter
than originally estimated. If the facts warrant a review, the Company
assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group
of assets over their remaining lives against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets. If assets are determined to
be recoverable, but the useful lives are shorter than originally estimated,
the net book value of the assets is depreciated over the newly determined
remaining useful lives. The Company has not recorded any impairment charges.
Income Taxes
The Company accounts for income taxes according to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under the liability method specified by SFAS 109, deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. Deferred income taxes result principally from the timing of the
deductibility of the rent accrual, deferred compensation paid, and the use
of accelerated methods of depreciation and amortization for tax purposes.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies (Continued)
______________________________________________________
Advertising
Advertising costs are expensed as incurred. Advertising expense
amounted to $36,200 and $39,100 for the years ended June 30, 2007 and 2006.
Stock Compensation Plan
During the year ended June 30, 2003, the Company established a
ten-year stock option plan (the "2002 Plan") which provides for the grant
of options to purchase up to 100,000 shares of the Company's Common Stock,
par value $.05 per share ("Common Stock"), plus to the extent that options
previously granted under the 1992 Stock Option Plan of the Company (the
"Prior Plan") expire or terminate for any reason without having been
exercised, then options exercisable for that same number of shares of
Common Stock, up to a maximum of one hundred sixty one thousand (161,000)
shares, may be granted pursuant to the 2002 Plan. The 2002 Plan provides
for the granting of incentive or non-incentive stock options as defined
in the 2002 Plan. Incentive stock options may be granted to employees
at an exercise price equal to 100% (or 110% if the optionee owns directly
or indirectly more than 10% of the outstanding voting stock) of the fair
market value of the shares of Common Stock on the date of the grant.
Non-incentive stock options are to be granted at an exercise price not
less than 85% of the fair market value of the shares of Common Stock on
the date of grant. The 2002 Plan also stipulates that none of the then
members of the Board of Directors shall be eligible to receive option
grants under the 2002 Plan. The Prior Plan provided that each non-employee
member of the Board of Directors be granted, annually commencing March
1993, for a period of four years, a ten-year option to purchase 3,000
shares of Common Stock at the fair market value on the date of grant and
commencing annually in December 1997, for as long as director, a ten-year
option to purchase 4,000 shares of Common Stock at the fair market value
on the date of grant. No options have been granted to such directors
of the Company since December 2001. The options expire at various dates
through February 2017. At June 30, 2007, 101,334 shares of Common Stock
were available for grant under the 2002 Plan and the Prior Plan.
Through the year ended June 30, 2006, the Company had elected to
account for its employee stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense was recognized for options granted under fixed plans when the
option price was not less than the fair market value of the underlying
common stock on the date of grant. Pro forma information regarding
net income and earnings per share, however, was required under SFAS No.
123, "Accounting for Stock-Based Compensation," for entities continuing
to apply APB No. 25. For disclosure purposes, the Company has estimated
the fair value of its employee stock options on the date of grant using
the Black-Scholes option pricing model. There were no options granted
in 2006.
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies (Continued)
______________________________________________________
Stock Compensation Plan (Continued)
Had compensation cost been determined based upon the fair value
of the stock options at grant date for all awards, the Company's net
income and earnings per share for the year ended June 30, 2006 would
have been reduced to the pro forma amounts indicated below:
Net income:
As reported $ 321,700
Pro forma 320,600
Basic earnings per share:
As reported $ .32
Pro forma $ .32
Diluted earnings per share:
As reported $ .30
Pro forma $ .30
Stock-based employee compensation cost,
net of related tax effects, included
in the determination of net income
as reported $ -
Any stock-based compensation transaction subsequent to June 30, 2006
is accounted for using SFAS No. 123R, "Share-Based Payment". This
statement, issued on December 16, 2004 by the Financial Accounting
Standards Board, requires compensation costs related to stock-based
payment transactions to be recognized commencing with the first
reporting period in the Company's fiscal year ended June 30, 2007.
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 will be measured
each reporting period. Compensation costs are recognized over
the period that an employee provides service in exchange for the award.
Statement 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25.
During the year ended June 30, 2007, the Company granted 5,000 options
that had a fair value of $10,100 to a director who is affiliated with
a consultant to the Company. The fair value of the options was
determined using the Black-Scholes-Merton option-pricing model, which
was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. The
weighted-average assumptions used were an expected life of 10 years;
risk-free interest rate of 4.69%; volatility of 69%; and a dividend
yield of 6%. The weighted-average value of the options granted in 2007
was $2.02 and stock-based compensation costs were $5,100 for the
year ended June 30, 2007. Stock-based compensation costs related to
non-vested awards are $5,000 to be recognized over the next two years.
The Company did not grant any options or warrants as compensation for goods
or services to non-employees for the years ended June 30, 2007 and 2006.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
1. Summary of Significant Accounting Policies (Continued)
______________________________________________________
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the amounts reported
in the financial statements and accompanying notes. The accounting estimate
that requires management's most difficult and subjective judgment includes
the valuation of inventory. 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 and
warrants, if any.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements.
SFAS 157 will be applied prospectively and will be effective for periods
beginning after November 15, 2007. The Company is currently evaluating
the effect, if any, of SFAS 157 on the Company's consolidated financial
statements.
In June 2006, the FASB issued Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes - an Interpretation of
FASB Statement ("SFAS") No. 109." This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an entity's
financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." The interpretation describes a recognition threshold
and measurement attribute for the financial statement disclosure of
tax positions taken or expected to be taken. It also provides for
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. FIN No.
48 is effective for fiscal years beginning after December 15, 2006.
The Company is still evaluating the effect of adopting FIN 48 and does
not expect it to have a material effect on the Company's consolidated
financial statements.
2. Acquisition
___________
On November 30, 2006, the Company acquired all of the outstanding
capital stock of Altamira. The acquisition was pursuant to a Stock
Purchase Agreement dated as of November 30, 2006 (the "Agreement")
whereby the Company paid or issued to the sellers $400,000 in cash and
125,000 shares of the Company's Common Stock and agreed to make
additional cash payments equal to 5%, subject to possible adjustment,
of the net sales of Altamira for each of five periods - December 1, 2006
to June 30, 2007, each of the fiscal years ending June 30, 2008, 2009,
and 2010, and July 1, 2010 to November 30, 2010.
F-11
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
2. Acquisition (Continued)
_______________________
Altamira's principal customers are universities, government laboratories,
and chemical and petrochemical companies. The instruments, which are
customizable to the customers' specifications, are sold on a direct basis.
In conjunction with the acquisition of Altamira, management of the
Company, with the assistance of an independent valuation firm, valued
the tangible and intangible assets acquired, including goodwill, customer
relationships, non-compete agreements, and certain technology, trade names
and trademarks. The carrying amounts of goodwill and other intangible
assets are presented in Note 7, "Goodwill and Other Intangible Assets" which
represent the valuations performed in conjunction with the acquisition.
In addition, other fair market value adjustments were made in conjunction
with the acquisition, primarily adjustments to property and equipment, and
inventory. Under a separate agreement with the sellers, the Company made
an election to treat the acquisition of Altamira stock as a purchase of
assets for tax purposes, which resulted in approximately an additional
$42,000 to be paid to the sellers for their additional tax burden as a
result of this election which has been treated as part of the cost of the
acquisition (see Note 7).
The acquisition was recorded under the purchase method of accounting.
The net purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair market values at the date of the
acquisition. The allocation of the net purchase price as adjusted for
the items described above is as follows:
Current assets $ 734,000
Property and equipment 140,300
Non-current assets 25,100
Goodwill 13,400
Other intangible assets 639,000*
Current liabilities (561,900)
_____________
Net purchase price $ 989,900
=============
*Of the $639,000 of other intangible assets, $237,000 was allocated to
customer relationships with a weighted-average estimated useful life
of 10 years, $300,000 was allocated to technology including trade
names and trademarks with a useful life of 5 years, and $102,000 was
allocated to a non-compete agreement with a useful life of 5 years. The
amount allocated to the customer relationships is being amortized on an
accelerated (declining balance) method and the other intangibles are
being amortized on a straight-line basis.
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
2. Acquisition (Continued)
_______________________
Pro Forma Results
The unaudited pro forma condensed financial information in the table
below summarizes the results of operations of Scientific Industries,
Inc. ("Scientific") and Altamira, on a pro forma basis, as though the
companies had been consolidated as of the beginning of each of the
fiscal years presented. The unaudited pro forma condensed financial
information presented below is for informational purposes only and is
not intended to represent or be indicative of the consolidated results
of the operations that would have been achieved if the acquisition
had been completed as of the beginning of each fiscal year:
2007 2006
___________ ___________
Net sales $ 5,905,300 $ 4,944,400
Net income 388,400 218,100
Net income per share - basic $ .34 $ .20
Net income per share - diluted .33 .18
3. Segment Information and Concentrations
______________________________________
As a result of the acquisition of Altamira, the Company now views
its operations as two segments: the manufacture and marketing of
standard benchtop laboratory equipment for research in university,
hospital and industrial laboratories sold primarily through laboratory
equipment distributors ("benchtop laboratory equipment operations"),
and the manufacture and marketing of custom-made catalyst research
instruments for universities, government laboratories, and chemical
and petrochemical companies sold on a direct basis ("catalyst
research instruments operations"). Substantially all of the
management and employees of Altamira were retained following
the acquisition.
Segment information is reported as follows:
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
June 30, 2007:
Net Sales $3,558,100 $1,321,900 $ - $4,880,000
Foreign Sales 1,659,500 582,700 - 2,242,200
Segment Profit (Loss) 495,600 (60,500) - 435,100
Segment Assets 2,050,100 1,329,900 757,100 4,137,100
Long-Lived Assets
Expenditures 72,000 7,800 - 79,800
Depreciation and
Amortization 51,300 98,800 - 150,100
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
3. Segment Information and Concentrations (Continued)
__________________________________________________
There was only one reportable segment, the benchtop laboratory equipment
operations, for the year ended June 30, 2006.
Certain information relating to the Company's export sales and
principal customers is as follows:
2007 2006
___________ ___________
Export sales (principally Europe and Asia) $ 2,242,200 $ 1,514,400
Customers in excess of 10% of net sales:
Largest in 2007, second largest in 2006 766,700 586,700
Largest in 2006 - 703,000
Second largest in 2007, third largest in 2006 355,600 353,500
Accounts receivable from these customers amounted to approximately 13%
and 42% of total accounts receivable at June 30, 2007 and 2006.
During the fourth quarter of fiscal 2006, the Company's then principal
customer and distributor advised the Company that it would no longer
market and buy the Company's products. Sales to this customer
accounted for approximately 20% of net sales for fiscal 2006
and none for 2007.
The Company purchased approximately 17% and 44% of inventory from one
supplier for the years ended June 30, 2007 and 2006.
4. Investment Securities
_____________________
Details as to investment securities are as follows:
Gross Cost or Unrealized
Amortized Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2007:
Available for sale:
Equity securities $ 7,800 $ 12,500 $ 4,700
Mutual funds 645,100 630,500 (14,600)
Callable bonds 75,000 75,000 -
__________ _________ __________
$ 727,900 $ 718,000 $ ( 9,900)
========== ========= ==========
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
4. Investment Securities (Continued)
_________________________________
Gross Cost or Unrealized
Amortized Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2006:
Available for sale:
Equity securities $ 8,300 $ 11,300 $ 3,000
Mutual funds 621,400 606,900 (14,500)
Callable bonds 550,000 550,000 -
__________ __________ __________
$1,179,700 $1,168,200 $ (11,500)
__________ __________ __________
5. Inventories
___________
2007 2006
__________ __________
Raw materials $ 904,200 $ 806,700
Work-in-process 302,400 5,200
Finished goods 83,000 118,400
__________ __________
$1,289,600 $ 930,300
========== ==========
6. Property and Equipment
______________________
Useful Lives
(Years) 2007 2006
____________ __________ __________
Computer equipment 3-5 $ 130,200 $ 126,000
Machinery and equipment 3-7 439,300 365,400
Furniture and fixtures 4-10 172,300 88,000
Leasehold improvements 3-5 51,000 37,700
_________ _________
792,800 617,100
Less accumulated depreciation
and amortization 545,500 495,000
_________ _________
$ 247,300 $ 122,100
========= =========
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
7. Goodwill and Other Intangible Assets
____________________________________
In conjunction with the acquisition of Altamira, management of the
Company, with the assistance of an independent valuation firm, valued the
tangible and intangible assets acquired, including customer relationships,
non-compete agreements and technology which encompasses trade names,
trademarks and licenses. The valuation resulted in an initial negative
goodwill of approximately $91,500 on the date of acquisition which was
subsequently adjusted to goodwill of $13,400 at June 30, 2007. The Stock
Purchase Agreement provides for contingent future payments to the former
shareholders based on net sales of the catalyst research instrument
operations subject to certain limits, which are expected to be earned
and paid. Additional consideration earned based upon sales through
June 30, 2007 amounted to approximately $66,000.
The components of intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ____________
At June 30, 2007:
Technology 5 yrs. $300,000 $ 35,000 $ 265,000
Customer relationships 10 yrs. 237,000 37,200 199,800
Non-compete agreement 5 yrs. 102,000 11,900 90,100
Other intangible assets 5 yrs. 110,300 68,400 41,900
________ _________ _________
$749,300 $ 152,500 $ 596,800
======== ========= =========
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ____________
At June 30, 2006:
Other intangible assets 5 yrs. $114,400 $ 74,200 $ 40,200
======== ========= =========
Total amortization expense was $97,200 and $8,700 in 2007 and 2006.
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
7. Goodwill and Other Intangible Assets (Continued)
________________________________________________
Estimated future intangible assets amortization expense, based on current
balances, as of June 30, 2007 is as follows:
Fiscal Years
____________
2008 $ 138,900
2009 130,300
2010 118,600
2011 106,800
2012 49,900
Thereafter 52,300
_____________
$ 596,800
=============
8. Bank Line of Credit
___________________
The Company has an available $200,000 secured bank line of credit which
bears interest at prime collateralized by all the assets of the Company.
The Company did not utilize this credit line during the years ended June
30, 2007 and 2006. To support the line of credit, the Company would be
required to maintain 20% of the credit line in average monthly balances.
9. Employee Benefit Plan
_____________________
The Company has a 401(k) profit sharing plan covering the Benchtop
Laboratory Operations employees and as a result of the acquisition of
Altamira, a second 401(k) profit sharing plan covering the Altamira
employees. Both plans provide for voluntary employee salary
contributions not to exceed the statutory limitations provided by
the Internal Revenue Code. The first plan provides for company matching
of 50% of each participant's salary deferral election, up to a maximum
amount for each participant of 2% of their compensation, while the
Altamira plan provides for matching the employee contributions up to
4% of their compensation. Total employer matching contributions
amounted to $17,700 and $9,500 for the years ended June 30, 2007
and 2006, respectively.
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
10. Commitments and Contingencies
_____________________________
Leases
The Company is obligated through January 2010 under a noncancelable
operating lease for its Bohemia, New York premises, which requires
minimum annual rental payments plus other expenses, including real
estate taxes and insurance. In accordance with generally accepted
accounting principles, the future minimum annual rental expense,
computed on a straight-line basis, is approximately $182,800 under
the terms of the lease. Rental expense for the Bohemia facility
amounted to approximately $203,400 in 2007 and $199,500 in 2006.
Accrued rent, payable in future years, amounted to $29,400 and
$28,000 at June 30, 2007 and 2006.
The Company is also obligated under a lease for its facility in
Pittsburgh, Pennsylvania. The lease, which commenced on August 1, 2006,
has a term of five years through July 31, 2011, with an addendum provision
for early termination with 180 day notice after two years of occupancy
without penalty. The lease requires monthly minimum rental payments of
$4,500 for the first two years and $4,700 monthly thereafter, with an
option to renew for an additional five years. Total rental expense for
the Pittsburgh facility was $31,500 in 2007. There are no other
significant expenses related to this lease.
The Company's approximate future minimum rental payments under all
leases, assuming exercise of early termination of the Pittsburgh lease,
are as follows:
Fiscal Bohemia Pittsburgh
Years Facility Facility Total
____________ ________ __________ ________
2008 $186,100 $ 54,000 $240,100
2009 193,600 32,900 226,500
2010 115,800 - 115,800
________ __________ ________
$495,500 $ 86,900 $582,400
======== ========== ========
F-18
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
10. Commitments and Contingencies (Continued)
_________________________________________
Employment Contracts
Pursuant to an expired employment contract with its former President, the
former President chose that a portion of compensation earned in prior years
be deferred to future years. The deferred amounts were placed in a separate
investment account and all earnings and losses thereon were for his benefit.
As of June 30, 2006, $21,400 was segregated into such an account and was
included as an asset. The balance due to him was payable out of (but not
secured by) the account, in five equal annual installments as adjusted by
market fluctuations commencing after the termination of employment. For the
years ended June 30, 2007 and 2006, $22,000 and $21,000, respectively were
paid to the former President. There are no additional payments due.
The Company has employment contracts with its President and Executive
Vice President expiring on December 31, 2008, providing for annual base
salaries of $120,000 and $115,000, respectively. Each contract provides for
a performance bonus at the discretion of the Board of Directors. A cash
bonus of $10,000 was paid to each of the two executive officers on
December 31, 2006.
In connection with the acquisition of Altamira, the Company entered into
an employment agreement with its former Vice President and Director for
his services as Director of Marketing and Operations. The agreement
provides for a two-year term with the Company having two one-year renewal
options, at a salary of $110,000 per annum during the initial two-year term
to be increased by 2% during each of the two-year extension periods plus
adjustments based on annual increase in the consumer price index. The
employment agreement contains non-competition and non-solicitation
covenants.
Other
A financial advisor employed by the Company pursuant to an engagement
letter that was not extended by the Company beyond its expiration date of
March 31, 2002 asserted a claim against the Company in April 2002 in the
amount of $125,000 for alleged services rendered to the Company that were
alleged to be outside the scope of the letter. The Company denies engaging
the financial advisor for any services outside the scope of the engagement
letter or that any amounts are owing to the advisor. The Company's counsel
has advised the Company that based on its review of the engagement letter
and the Company's denial, it is unlikely that the financial advisor will
prevail if it institutes a legal proceeding. Accordingly, no provision
for loss has been recorded by the Company at June 30, 2007.
The Company has a consulting agreement expiring December 31, 2008
with an affiliate of a member of its Board of Directors for marketing
consulting services. The agreement provides that the consultant will be
paid a monthly fee of $3,000 for a certain number of consulting days
as defined in the agreement. Consulting expense related to this agreement
amounted to $32,900 and $35,400 for the years ended June 30, 2007 and 2006.
F-19
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
11. Income Taxes
____________
Income taxes for 2007 and 2006 were different from the amounts computed
by applying the Federal income tax rate to the income before income
taxes due to the following:
2007 2006
__________________ _________________
%of % of
Pre-tax Pre-tax
Amount Income Amount Income
_________ _______ _________ _______
Computed "expected" income tax $147,900 34.0% $159,500 34.0%
Research and development
credits ( 11,700) (2.7) (6,000) (1.3)
State income taxes, net of
Federal effect 10,700 2.5 11,600 2.5
Other, net (23,800) (5.5) (17,800) (3.8)
_________ _______ __________ ______
Actual income taxes $123,100 28.3% $147,300 31.4%
========= ======= ========== ======
Deferred tax assets and liabilities consist of the following:
2007 2006
__________ __________
Deferred tax assets:
Amortization of intangibles $ 33,800 $ 11,300
Deferred compensation - 7,100
Rent accrual 10,000 9,600
Other 25,600 21,900
_________ _________
69,400 49,900
Deferred tax liability:
Depreciation of property
and equipment (51,400) (27,600)
__________ __________
Net deferred tax assets $ 18,000 $ 22,300
========== ==========
The breakdown between current and long-term deferred tax assets and
liabilities is as follows:
2007 2006
__________ __________
Current deferred tax assets $ 25,600 $ 25,500
Long-term deferred tax assets 43,800 24,400
Long-term deferred tax liabilities (51,400) (27,600)
__________ __________
$ 18,000 $ 22,300
========== ==========
F-20
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
12. Stock Options and Warrant
_________________________
Option activity is summarized as follows:
Fiscal 2007 Fiscal 2006
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 119,001 $ 1.57 131,334 $ 1.54
Granted 5,000 3.10 - -
Exercised (20,000) 1.66 (10,666) 1.27
Forfeited - - (1,667) 1.20
________ _______ ________ ________
Outstanding, end of year 104,001 1.62 119,001 1.57
________ _______ ________ ________
Options exercisable at year-end 101,001 $ 1.58 119,001 $ 1.57
________ _______ ________ ________
Weighted average fair value per
share of options granted
during fiscal 2007 and 2006 $ 3.10 $ -
_______ ________
As of June 30, 2007 As of June 30, 2007
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$1.92-$3.10 63,000 3.32 $ 2.04 60,000 $ 1.99
$.82-$1.33 41,001 3.25 .98 41,001 .98
________ ________
104,001 101,001
________ ________
F-21
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
12. Stock Options and Warrant (Continued)
_____________________________________
As of June 30, 2006
Options Outstanding and Exercisable
___________________________________
Weighted-
Average Weighted-
Range Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life (Years) Price
_________ ___________ ____________ _________
$1.25-$2.40 90,000 3.45 $1.80
$.82-$.84 29,001 3.14 .84
_______
119,001
_______
During the year ended June 30, 2006 a stock purchase warrant for
17,390 shares of the Company's common stock issued during 2001 for
services was exercised at a price of $1.4375 per share. The exercise
was cashless and resulted in the Company issuing 9,479 shares.
13. Earnings Per Common Share
_________________________
Earnings per common share data was computed as follows:
2007 2006
__________ __________
Net income $ 312,000 $ 321,700
__________ __________
Weighted average common shares
outstanding 1,075,878 991,809
Effect of dilutive securities,
stock options (and warrant in 2006) 64,873 76,636
__________ __________
Weighted average dilutive common
shares outstanding 1,140,751 1,068,445
__________ __________
Basic earnings per common share $ .29 $ .32
========== ==========
Diluted earnings per common share $ .27 $ .30
========== ==========
F-22
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2007 AND 2006
14. Fair Value of Financial Instruments
___________________________________
The financial statements include various estimated fair value information
as of June 30, 2007 and 2006, as required by SFAS No. 107, "Disclosure
about Fair Value of Financial Instruments." Such information, which
pertains to the Company's financial instruments, is based on the requirements
set forth in that statement and does not purport to represent the aggregate
net fair value of the Company. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value.
The carrying value of cash and cash equivalents and investment securities
approximates fair market value because of the short maturity of
those instruments.
The following table provides summary information on the fair value of
significant financial instruments included in the financial statements:
2007 2006
___________________ ___________________
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
________ _________ ________ _________
Assets:
Cash and cash equivalents $ 388,700 $388,700 $ 227,700 $ 227,700
Investment securities
(Note 3) $ 718,000 $718,000 $1,168,200 $1,168,200
F-23