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, 2008
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 Smaller Reporting 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. $6,669,400
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
29, 2008 is $2,305,900.
The number of shares outstanding of the issuer's common stock, par value $.05
per share ("Common Stock") as of August 29, 2008 is 1,181,352 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.
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 principal product; sales of this product
(excluding accessories) represented approximately 39% and 51% of the
Company's total sales for the fiscal years ended June 30, 2008
("fiscal 2008") and June 30, 2007 ("fiscal 2007"), respectively, or
70% of the Company's Benchtop Laboratory Equipment sales for each of
the two years.
The vortex mixer is used to mix the contents of test tubes, beakers,
and other various containers by placing such containers on a rotating
cup or other attachments which cause the contents to be mixed at
varying speeds.
The Company's additional mixers and 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; the Digital Vortex-Genie 2, a vortex mixer incorporating
digital control and display; and introduced in July 2008, the Multi
Vortex-Genie, a large capacity multi vessel vortex mixer.
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; and the QuadMag Genie(TM) magnetic stirrer,
a four-place powerful general purpose stirrer.
Catalyst Research Instruments. The Catalyst Research Instruments are
offered through the Company's 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 from 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.
Sales of the Celero(TM) and the PID-MA Reference Reactor have been
insignificant to date.
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
areas such as industrial and electronics design.
Major Customer. Sales to one customer, and one of the two largest
distributors of laboratory equipment (principally of the Vortex-Genie 2
Mixer), represented approximately 11% and 16% of total sales for fiscal
2008 and fiscal 2007, 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 2008
or 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 Customer". 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 fiscal year, the Company has increased
direct-selling efforts, mainly through online ordering on the Company's
website. In general, due to the catalog distribution system it takes
two to three years for a new product to begin generating meaningful
sales in the industry.
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 direct 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 (Benchtop Laboratory Equipment) and,
since November 30, 2006, one in Pittsburgh, Pennsylvania (Catalyst
Research Instruments). The Company's production operations principally
involve assembly of components supplied by various domestic and
international independent suppliers. 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 24% and
17% for fiscal 2008 and fiscal 2007, 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, which include a patent for the TurboMix(TM),
an accessory to the Vortex-Genie 2 Mixer and Disruptor Genie, which
expires in September 2015; a patent on the Roto-Shake Genie which
expires in July 2016; and a patent on the MagStir Genie,
MultiMagStir Genie, and Enviro-Genie which 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 ranging
from 250 milliliters to 5 liters for laboratory incubator systems.
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 in Asia and Europe) accounted for
approximately 51% and 46% of the Company's total net sales for fiscal
2008 and fiscal 2007, respectively. Such sales are paid in United States
dollars and are therefore not subject to risks of currency fluctuation,
foreign duties and customs.
Seasonality. The Company does not consider its business to be seasonal.
Backlog. The 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, 2008 was $770,900, most of which is expected
to be fulfilled by the end of the second quarter of the fiscal year
ending June 30, 2009.
Competition. Most of the Company's competitors are substantially
larger and have greater financial, production and marketing resources
than the Company. Competition is generally based upon technical
specifications, price, and product recognition and acceptance. The
Company's main competition for its Benchtop Laboratory Equipment in the
United States derives from private label brand mixers offered by the two
largest laboratory equipment distributors in the United States, who
dominate the end user market. The Company believes 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 Henry Troemner, Inc. (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 staffs 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,
the majority of which relate to Benchtop Laboratory Equipment, of
$394,600 during fiscal 2008 compared to $302,100 during fiscal 2007.
The Company expects its expenditures in the fiscal year ending
June 30, 2009 for research and development will be approximately
20-30% higher compared to the current fiscal year, mostly as a result
of new product development for the Catalyst Research Instruments
Operations.
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 29, 2008, the Company employed 27 persons
(16 in Bohemia, New York and 11 in Pittsburgh, Pennsylvania) of whom
22 were full-time, including its three 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, one of which, is the Company's largest
customer. Sales to this customer accounted for approximately 11% and 16%
of total sales and 20% and 22% of Benchtop Laboratory Equipment sales
for fiscal 2008, and 2007, respectively. A material reduction in sales
to this customer could have an adverse effect on the operating results of
the Company.
ONE BENCHTOP LABORATORY EQUIPMENT PRODUCT ACCOUNTS FOR A SUBSTANTIAL
PORTION OF REVENUES
The Company has a limited number of Benchtop Laboratory Equipment
products with one product, the Vortex-Genie 2 Mixer, accounting for
approximately 70% of total Benchtop Laboratory Equipment sales, for
each of fiscal 2008 and fiscal 2007 and 39% and 51% of total sales for
fiscal 2008 and fiscal 2007, respectively.
THE COMPANY IS A SMALL PARTICIPANT IN EACH OF THE TWO FIELDS IN WHICH
IT OPERATES
The Benchtop Laboratory Equipment industry is highly competitive.
Although the Vortex-Genie 2 Mixer has been widely accepted, the Benchtop
Laboratory Equipment annual net sales ($3,770,500 for fiscal 2008 and
$3,558,100 for fiscal 2007) is 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 private label mixers of the
two largest distributors.
The production and sale of Catalyst Research Instruments is highly
competitive. The Company's competitors include 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
Over the past ten years, the Company has continuously invested in the
development and marketing of new Benchtop Laboratory Equipment products
with a view to increasing revenues of such products and reducing the
Company's dependence on the Vortex-Genie 2 Mixer. As a result, the
Company currently offers a more extensive line of Benchtop Laboratory
Equipment products. However, the Company still needs to continuously
develop and market 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) amounted to
$1,145,200 and $838,500, respectively, for fiscal 2008 and fiscal 2007.
The Company relies primarily on distributors and their catalogs to
market its Benchtop Laboratory Equipment products. Accordingly,
sales of new products are heavily dependent on the distributors'
decision to include and retain a new product in the distributors'
catalogs and on their websites. It may be at least 24 to 36 months
between the completion of development of a product and the distribution
of the catalog in which it is first offered.
No assurance can be given that the amounts allocated by the Company
for its new product development and marketing programs will be sufficient
or that distributors will include and retain 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 Catalyst Research Instruments line of products is limited
to a few products. The ability of the Company to compete will depend on its
ability to make engineering improvements to existing products and develop and
add new products incorporating more current technology in the catalyst
research area. No assurance can be given that the Company's planned new
product development and related marketing will be sufficient to remain
competitive or that such newly developed or improved products will be
successful.
THE COMPANY MAY BE SUBJECT TO GENERAL ECONOMIC, POLITICAL, AND
SOCIAL FACTORS
Orders for the Company's products, particularly 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 to potential customers.
The Company's ability to secure new orders can also be affected by
changes in domestic and international policies pertaining to energy
and the environment.
THE COMPANY IS HEAVILY DEPENDENT ON OUTSIDE SUPPLIERS FOR THE
COMPONENTS OF ITS PRODUCTS
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. Due to the increased costs of components, purchases
through a United States vendor from one overseas supplier increased to
approximately 24% from 17% of the cost of total purchased materials
for fiscal 2008 and fiscal 2007, respectively, and to 40% from 22%
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 more than
normal quantities of the components on-hand, and has added several
alternate suppliers during the past few years. Furthermore, the
Company intends to continue purchasing components from overseas
factories directly or indirectly. Such reliance could increase the
risks for 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 has limited patent protection for its Benchtop
Laboratory Equipment products, including its principal product -
the Vortex Genie 2 Mixer. As a result, there are several
competitive products available in the marketplace possessing
similar technical specifications and design. The Company does
not have any patent protection for its Catalyst Research
Instruments, except a line of products known as Celero,
which is not a significant part of the business, under a
licensing agreement.
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, the enforcement by
the Company of its patent rights may result in substantial
litigation costs.
THE COMPANY HAS LIMITED MANAGEMENT RESOURCES
The loss of the services of any of Ms. Helena Santos, the Company's
Chief Executive and Financial Officer and President, Mr. Robert Nichols,
the Company's Executive Vice President and Mr. Brookman March, President
of the Company's wholly-owned subsidiary, Altamira Instruments, Inc.,
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.
THE COMMON STOCK OF THE COMPANY IS THINLY TRADED AND IS SUBJECT TO
VOLATILITY
As of August 29, 2008, there were only 1,181,352 shares of Common
Stock of the Company outstanding, of which 421,915 shares were held
by the directors and officers of the Company. The Common Stock of the
Company is traded on the Over-the-Counter Bulletin Board and,
historically, has been thinly traded. There have been a number of
trading days during fiscal 2008 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 for its Benchtop Laboratory Equipment operation comprising
approximately 25,000 square feet are located in Bohemia, New York and
are held pursuant to a lease expiring in January 2015. In addition,
the Company leases approximately 6,600 square feet of office,
assembly, and testing space in Pittsburgh, Pennsylvania for its Catalyst
Research Instruments operations, pursuant to a lease expiring in
July 2011. See Note 10 to the Financial Statements in Item 7. The
leased facilities are suitable and adequate for each of the Company's
two operations. In the opinion of management, all properties are
adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings.
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 2008.
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 2007 and fiscal 2008, 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
09/30/06 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
09/30/07 2.70 3.35
12/31/07 3.11 3.95
03/31/08 3.30 3.85
06/30/08 3.06 4.15
(a) As of August 29, 2008, there were 640 record holders of the
Company's Common Stock.
(b) On January 14, 2008, the Company paid a cash dividend of
$.07 per share to stockholders of record on October 18, 2007. The
Company is not subject to any agreement which prohibits or restricts
the Company from paying dividends on its Common Stock.
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. The Company's consolidated results of operation for
fiscal 2008 include a full twelve months results of Altamira compared
to seven months for fiscal 2007, as a result of the acquisition of
Altamira on November 30, 2006. In addition, the depreciation and
amortization expense related to the acquired assets at their fair market
value on date of acquisition is also included in the Company's results
from date of acquisition.
The acquisition of Altamira during fiscal 2007, has resulted in a
significant increase in revenues of the Company post-acquisition.
In addition, the Company has diversified its revenue base by increasing
its revenues from products other than Benchtop Laboratory Equipment
whereby for fiscal 2008 the revenues mix was 57% Benchtop Laboratory
Equipment and 43% Calalyst Research Instruments. The Benchtop Laboratory
Equipment business differs greatly from the Catalyst Research Instruments
particularly in that the latter relies on a small number of infrequent
large orders creating significant swings in its revenues and profits,
while the former relies mostly on a large number of recurring small
orders from its distributors which is typical for standard catalog
type items.
The Company's income before income taxes increased $109,400 (25%) to
$544,500 for fiscal 2008 from $435,100 for fiscal 2007, primarily as a
result of the income derived from sales of the Company's Catalyst
Research Instruments for a full year compared to a loss incurred by
that operation in the seven months included in fiscal 2007 results.
Results of Operations. Net sales for fiscal 2008 increased by
$1,789,400 (36.7%) to $6,669,400 as compared with $4,880,000 for fiscal
2007. The Company's Benchtop Laboratory Equipment net sales increased
by $212,400 (6.0%) primarily due to increased sales to overseas customers.
Net sales of Catalyst Research Instruments increased by $1,577,000
(119.3%) due to inclusion for the full twelve month versus seven
month comparison and increase of orders, especially for peripherals.
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. As of June 30, 2008, there was a backlog
of $770,900 for Catalyst Research Instruments compared with $560,000 as
of June 30, 2007.
The gross profit percentage for fiscal 2008 decreased to 36.0%
compared to 40.1% for fiscal 2007, mainly as a result of (i) increased
basic raw material costs for the Benchtop Laboratory Equipment operations,
which reflected a gross profit percentage of 45.3% for fiscal 2008
compared to 48.9% for fiscal 2007 and (ii) lower gross margins generated
by the Catalyst Research Instruments operations which had a higher
impact on the total gross margin in the current year due to the higher
sales volume (24.0% for fiscal 2008 compared to 16.3% for fiscal 2007).
General & administrative expenses for fiscal 2008 increased by $95,600
(10.9%) to $975,700 from $880,100 for fiscal 2007, principally the result of
(i) increased staffing costs of the Laboratory Equipment Operations, (ii)
costs pertaining to Sarbanes-Oxley Act compliance, (iii) increased directors
fees, and (iv) the inclusion of a full twelve months of expenses in the
current year for the Catalyst Research Instruments compared to only seven
months in the prior year.
Selling expenses for fiscal 2008 increased by $158,700 (40.3%) to $552,200
from $393,500 for fiscal 2007, primarily as a result of (i) higher selling
expenses for the Catalyst Research Instruments operations including
commissions, salaries and trade shows expense, partially offset by $46,000
lower marketing expenses of the Benchtop Laboratory Equipment operations,
and (ii) the inclusion of a full twelve months of expenses in fiscal 2008
for the Catalyst Research Instruments compared to only seven months in the
prior year.
Research and development expenses for fiscal 2008 were $394,600, an
increase of $92,500 (30.6%) from $302,100 for fiscal 2007, due mainly to
accelerated research and development activity for new Benchtop Laboratory
Equipment products, one of which was launched in July 2008.
Other income increased by $8,900 (16.2%) to $64,000 for fiscal 2008 from
$55,100 for fiscal 2007, primarily as a result of interest earned on customer
advances on orders for catalyst research instruments.
Total income tax expense for fiscal 2008 was $153,000 (28.1%) compared to
$123,100 (28.2%) for fiscal 2007 due to higher income in the current year.
As a result of the foregoing, net income for fiscal 2008 was $391,500, an
increase of $79,500 (25.5%) from $312,000 for fiscal 2007.
Liquidity and Capital Resources. Cash and cash equivalents increased by
$676,800 to $1,065,500 as of June 30, 2008 from $388,700 as of June 30, 2007.
Net cash provided by operating activities was $867,200 for fiscal 2008
compared to $172,100 for fiscal 2007, primarily due to decreases in accounts
receivable and higher customer advance balances partially offset by higher
inventories. (The customer advances as of June 30, 2008 was $379,300 as
compared with $147,600 as of June 30, 2007). Fiscal 2008 reflected net
cash used in investing activities of $173,100, which included additional
cash paid for the November 2006 acquisition, while the prior year's net
cash provided of $25,700 reflected significant redemptions of investment
securities used for the acquisition. Net cash used in financing activities
for fiscal 2008 was $17,300 compared to $36,800 for fiscal 2007, the
decrease due to an increase in cash proceeds from exercise of stock options.
The Company's working capital as of June 30, 2008 was $2,776,200, an
increase of $315,700 from the working capital of $2,460,500 at June 30,
2007, mostly as a result of higher income from operations and cash proceeds
from option exercises. The Company has available for its working capital
needs, a bank line of credit to be secured of $200,000 with Capital One Bank
with interest at prime, all of which was available as of June 30, 2008.
The Company has never borrowed under this line of credit. Management believes
that the Company will be able to meet its cash flow needs during the 12 months
ending June 30, 2009 from its available financial resources which include
its cash and investment securities.
Capital Expenditures. During fiscal 2008, the Company incurred $66,400 in
capital expenditures, the approximate level which the Company expects to incur
during the fiscal year ending June 30, 2009.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements required by this item are attached hereto on pages
F1-F22.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure 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.
Management's Annual Report on Internal Control Over Financial
Reporting. Management is responsible for establishing and maintaining
adequate internal control over the Company's financial reporting, as
such term is defined in Securities Exchange Act Rule 13a-15(f). The
Company's internal controls over financial reporting are designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.
The Chief Executive and Chief Financial Officer of the Company
conducted an evaluation of the effectiveness of the Company's internal
controls over financial reporting as of June 30, 2008 based on the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control - Integrated
Framework.
Based on the assessment of the Company's Chief Executive and
Chief Financial Officer of the Company, it was concluded that as of
June 30, 2008, the Company's internal controls over financial
reporting were effective based on these criteria.
Changes in Internal Control Over Financial Reporting. There
was no change in the Company's internal controls over financial
reporting that occurred during the most recent fiscal quarter that
materially affected or is reasonably likely to materially affect
the Company's internal controls over financial reporting.
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 88), 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 72), a Director since November 2002 and
Chairman of the Board since February 2006, has been a marketing consultant
to the Company since 1996. Mr. Cremonese has been since 1991, President of
Laboratory Innovation Company, Ltd., which is a vehicle for technology
transfer and consulting services for companies, including the Company,
engaged in the production and sale of products for science and biotechnology.
Since March 2003, he has been a director of and consultant to Proteomics,
Inc., a producer of recombinant proteins for medical research. Prior to
1991, he had been employed by Fisher Scientific, the largest U.S.
distributor of laboratory equipment.
Joseph I. Kesselman (age 83), a Director since 1961 and Chairman of the
Board from August 2002 until his resignation in February 2006, has been for
more than five years a consultant to various corporations including
Nuclear and Environmental Protection Inc. and Hopare Holding, S.A.
(a Swiss company), both companies of which he was previously a director.
Roger B. Knowles (age 83), 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 60), a Director since December 4, 2006, had been
President, Director and principal stockholder of Altamira Instruments, Inc.
from December 2003 until its acquisition by the Company. Ms. Morin has been
engaged by Altamira to supervise its administrative functions at 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 72), 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
ending June 30, 2008 - two Directors (Messrs. Cremonese and Knowles, Class C),
the fiscal year ending June 30, 2009 - two Directors (Messrs. Borden and
Segasture, Class A) and the fiscal year ending June 30, 2010 - two
Directors (Mr. Kesselman and Ms. Morin, Class B).
BOARD COMMITTEES
Joseph I. Kesselman and James S. Segasture have been 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
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 44), 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 47), 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.
Brookman P. March (age 63) has been Director of Sales and Marketing since
November 30, 2006 and President since July 2008 of Altamira, which conducts
the Catalyst Research Instruments operation. He had been Vice President
and a Director of Altamira from December 2003 until it was acquired by the
Company. Mr. March is the husband of Ms. Morin, a Director.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that, for the year ended June 30, 2008, its officers,
directors and 10% stockholders timely complied with all filing requirements of
Section 16(a) of the Securities Exchange Act of 1934, as amended.
CODE OF ETHICS
We have adopted a code of ethics that applies to our Executive Officers and
Directors. A copy of the code of ethics can be found on our website at
www.scientificindustries.com.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation paid by the Company to its
Chief Executive Officer ("CEO"), who is also its Chief Financial Officer
("CFO"), and President; and to its Executive Vice President and since
November 30, 2006, to its Director of Sales and Marketing of its Catalyst
Research Instruments subsidiary with respect to each of the two fiscal years
ended June 30, 2008 and 2007. No other executive officer earned in
excess of $100,000 in any of such fiscal periods.
The Compensation Committee along with the other members of the Board
reviews and determines the compensation payable to executives. In making a
determination, the Committee and the Board give material consideration to the
Company's results of operations and financial condition and competitive factors.
The compensation at times includes grants of options under its stock option
plan to the named executives, each subject to long-term employment agreements,
containing terms which the Board of Directors deemed reasonable. The Board is
cognizant that as a relatively small company, the Company has limited resources
and opportunities with respect to recruiting and retaining key executives.
Accordingly, the Company has relied upon long-term employment agreements
to retain qualified personnel.
SUMMARY COMPENSATION TABLE
_____________________________________________________________
Non-
Equity
Incentive
Name Plan
and Stock Option Comp-
Principal Fiscal Salary Bonus Awards Awards ensation
Position Year ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g)
_____________________________________________________________
Helena R. 2008 120,000 10,000 0 0 0
Santos, 2007 115,000 10,000 0 0 0
CEO,
President,
CFO
Robert P. 2008 115,000 10,000 0 0 0
Nichols, 2007 110,000 10,000 0 0 0
Exec.
V. P.
Brookman 2008 110,000 0 0 0 0
P. March, 2007 64,200 0 0 0 0
Director
of Market-
ing and
Sales of
Altamira(2)
_____________________________________________________________
SUMMARY COMPENSATION TABLE (CONTINUED)
_____________________________________________________________
Non-
Qualified
Deferred All
Name Comp- Other
and ensation Comp-
Principal Earnings ensation Total
Position ($) ($) ($)
(a) (h) (i) (j)
_____________________________________________________________
Helena R. 2008 2,600(1) 132,600
Santos, 2007 2,500(1) 127,500
CEO,
President,
CFO
Robert P. 2008 2,500(1) 127,500
Nichols, 2007 2,400(1) 122,400
Exec.
V. P.
Brookman 2008 4,400(1) 114,400
P. March, 2007 2,600(1) 66,800
Director
of Market-
ing and
Sales of
Altamira(2)
_____________________________________________________________
(1)Represents the Company's matching contribution under the
Company's 401(K) Plans.
(2)He was appointed President of Altamira in July 2008.
Pursuant to the Altamira acquisition agreement, Altamira
entered into a long-term employment agreement on November 30,
2006 employing Mr. Brookman P. March as Director of Marketing
and Sales. In July 2008, he was also appointment the President of
Altamira.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
_____________________________________________________________
Option Awards
_____________________________________________________________
Number Inactive
Number of Plan
of Securities Awards
Securities Under- Number of
Under- lying Securities
lying Un- Unexercised Underlying Option
exercised Options(#) Unexercised Exercise Option
Options(#) Unexerci- Unearned Price Expiration
Name Exercisable sable Options ($) Date
(a) (b) (c) (d) (e) (f)
______________________________________________________________________
Helena R. 5,000 0 0 .84 5/2009
Santos
Robert P. 8,000 0 0 .84 5/2009
Nichols 5,000 0 0 1.25 10/2012
Brookman
P. March 0 0 0 0 -
______________________________________________________________________
OPTION GRANTS IN LAST FISCAL YEAR
There were no options granted to officers during fiscal 2008.
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)
________________________________________________________________________
Robert P.
Nichols 12,000 22,300 13,000/0 37,700/0
________________________________________________________________________
(1) Calculated by multiplying the number of shares of Common Stock subject to
options by the difference between: (i) the market price on date of exercise,
and June 30, 2008, respectively, and (ii) the exercise price.
EMPLOYMENT AGREEMENTS
Ms. Helena R. Santos and Mr. Robert P. Nichols are employed pursuant
to two-year employment agreements dated December 29, 2006. The agreements
provide for annual base salaries of $120,000 for Ms. Santos and $115,000
for Mr. Nichols. They provide for annual bonuses at the discretion of the
Board and contain non-competition and confidentiality covenants. The Board
awarded a $10,000 bonus to each of Ms. Santos and Mr. Nichols paid in
January 2008. A $10,000 bonus was paid to each in December 2006.
In connection with the Altamira acquisition during fiscal 2007, Altamira
entered into a two-year employment agreement dated November 30, 2006 with
Mr. Brookman March, who had been Altamira's Vice President and a Director,
employing him currently as the subsidiary's Director of Sales and Marketing.
He was appointed in July 2008 President of the subsidiary. A new employment
agreement with Altamira is currently being negotiated. Mr. March is the
husband of Grace S. Morin, a Director of the Company and the former principal
stockholder of Altamira.
DIRECTORS' COMPENSATION
DIRECTORS' COMPENSATION
FOR THE YEAR ENDED JUNE 30, 2008
Non-
Equity
Fees Incentive
Earned Plan
or Paid Stock Option Comp-
in Cash Awards Awards ensation
Name ($) ($) ($) ($)
(a) (b) (c) (d) (e)
_____________________________________________________________________
Arthur M.
Borden 11,000 0 0 0
Joseph G.
Cremonese 23,000 0 0 0
Joseph I.
Kesselman 11,000 0 0 0
Roger B.
Knowles 11,000 0 0 0
Grace S.
Morin 0 0 0 0
James S.
Segasture 11,000 0 0 0
____________________________________________________________________
DIRECTORS' COMPENSATION (CONTINUED)
Changes
in
Pension
Value and
Non- Non-
qualified qualified
Deferred Deferred All
Compens- Comp- Other
ation ensation Comp-
Earnings Earnings ensation Total
Name ($) ($) ($) ($)
(a) (f) (g) (h) (i)
____________________________________________________________________
Arthur M. 0 0 11,000
Borden
Joseph G.
Cremonese 0 36,000(1) 59,000
Joseph I.
Kesselman 0 0 11,000
Roger B.
Knowles 0 0 11,000
Grace S.
Morin 0 59,700(2) 59,700
James S.
Segasture 0 0 11,000
____________________________________________________________________
(1) Represents amount paid to his affiliate pursuant to a marketing
consulting agreement (see Item 12).
(2) Represents compensation received for her administrative services on
behalf of Altamira.
The Company pays a quarterly retainer fee of $1,500 and $1,000 for
each meeting attended. In addition, the Company reimburses each Director
for out-of-pocket expenses incurred in connection with attendance at board
meetings in the amount of $50 or the Director's itemized expenses, whichever
is greater. Mr. Cremonese, as Chairman of the Board since February 2006,
receives an additional fee of $1,000 per month. During fiscal 2008, the
fees to non-employee Directors aggregated $103,000, including the consultant
fee paid to Mr. Cremonese's affiliate.
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, 2008, 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, 2008, options under the 1992 Plan with respect to 92,000
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 a five-year option
to purchase 5,000 shares of Common Stock at the fair market value of $1.35 per
share. On February 20, 2007, the Company granted him another five-year
option to purchase 5,000 shares of Common Stock at the fair market value of
$3.10 per share. The options had a fair value of $10,100 of which $3,000 was
recognized as expense in fiscal 2008. Both options have not been exercised.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of June 30, 2008, 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 as indicated in the table, the address for
each of the following is c/o Scientific Industries, Inc., 70 Orville Drive,
Bohemia, New York 11716.
Amount and
Name Nature of Beneficial Ownership % of Class
_______________________________ ______________________________ __________
Concentric Investment Mgmt. LLC 61,857(1) 5.2%
One International Place,
Suite 2401,
Boston, MA 02110
Lowell A. Kleiman 139,581(2) 11.8%
16 Walnut Street
Glen Head, NY 11545
Arthur M. Borden 60,740(3) 5.1%
Joseph G. Cremonese 41,597(4) 3.5%
Joseph I. Kesselman 64,120(5) 5.4%
Roger B. Knowles 6,258(6) .5%
Grace S. Morin 82,950 7.0%
James S. Segasture 187,250(7) 15.8%
Helena R. Santos 18,000(8) 1.5%
Robert P. Nichols 27,800(9) 2.1%
Brookman P. March 82,950(10) 7.0%
All directors and executive
officers as a group (8 persons) 485,915(11) 39.0%
(1) Based on information reported on Schedule 13G Filed with the Securities
and Exchange Commission on February 15, 2008.
(2) Based on information reported in his Schedule 13D filed with the
Securities and Exchange Commission on October 30, 2002.
(3) Includes 16,000 shares issuable upon exercise of options.
(4) 31,597 shares are owned jointly with his wife and 10,000 shares are
issuable upon exercise of options.
(5) Includes 12,000 shares issuable upon exercise of options and 735 shares of
Common Stock owned jointly with his wife and 8,000 shares owned by his wife.
(6) Includes 4,000 shares issuable upon exercise of options, and 2,258 shares
owned by his wife.
(7) Includes 4,000 shares issuable upon exercise of options and 493 shares
owned by his wife.
(8) Includes 5,000 shares issuable upon exercise of options.
(9) Includes 13,000 shares issuable upon exercise of options.
(10)Represents shares owned by his wife, Ms. Morin.
(11)Includes 64,000 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 64,001 1.60
Equity
Compensation
plans not approved
by security holders N/A N/A
_________________________________________________________________
Total 64,001 1.60
_________________________________________________________________
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 105,334
Equity
Compensation
plans not approved
by security holders N/A
_________________________________________________________________
Total 105,334
_________________________________________________________________
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 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 2008, the Company paid an aggregate of $36,000 for
the consulting services.
Ms. Grace S. Morin, was first elected a Class B Director in December
2006 in connection with the sale of her 90.36% ownership interest in
Altamira Instruments, Inc. to the Company in November 2006. Under the
purchase agreement the selling stockholders are to receive (in addition to
cash and stock) an amount equal to 5% of net sales of Altamira for each
of five designated periods, subject to possible adjustment. The first period
ran from December 1, 2006 through June 30, 2007, the second, third, and
fourth periods are the 12 months ended June 30, 2008, June 30, 2009, and
June 30, 2010, and the fifth period is from July 1, 2010 to November 30,
2010. Ms. Morin received $59,700 in contingent consideration for
the first period and $131,000 for the second period. She also received
$36,400 as an agreed upon reimbursement for the Company's treatment of the
transaction as a purchase of assets for tax purposes.
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, 2008.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The Company incurred for the services of Nussbaum Yates Berg Klein &
Wolpow, LLP for fiscal 2008 and fiscal 2007: audit fees of approximately
$37,000 and $35,000, respectively, in connection with the audit of the
Company's financial statements; $4,000 for each of fiscal 2008 and fiscal
2007 for the preparation of the Company's corporate tax returns;
$9,000 and $4,500 respectively, in connection with the quarterly reviews
for fiscal 2008 and fiscal 2007, respectively, and $12,600 and $39,900,
respectively, for additional services rendered primarily in connection
with the acquisition of Altamira Instruments, Inc. There were no other a
udit related fees or other fees paid to the firm.
In approving the engagement of the independent registered public
accounting firm to perform the audit and non-audit services, the Board
of Directors as the Company's audit committee evaluates scope and cost
of each of the services to be performed including a determination that
the performance of the non-audit services will not affect the
independence of the firm in the performance of the audit services.
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 29, 2008
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 29, 2008
Arthur M. Borden
/s/ Joseph G. Cremonese Chairman of the Board September 29, 2008
Joseph G. Cremonese
/s/ Joseph I. Kesselman Director September 29, 2008
Joseph I. Kesselman
/s/ Roger B. Knowles Director September 29, 2008
Roger B. Knowles
/s/ Grace S. Morin Director September 29, 2008
Grace S. Morin
/s/ James S. Segasture Director September 29, 2008
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 on Form 8-K filed
on January 6, 2003 and Exhibit 3(ii) to the Company's Current
Report on Form 8-K filed on December 5, 2007 and incorporated
by reference thereto).
4 Instruments defining the rights of security holders:
4(a) 2002 Stock Option Plan (Filed as Exhibit 99-1 to the Company's
Current Report on Form 8-K filed on November 25, 2002 and
incorporated by reference thereto.
10 Material Contracts:
10(a) Lease between Registrant and AIP Associates,
predecessor-in-interest of current lessor, dated October, 1989
with respect to Company's offices and facilities. (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(a)-2 Second amendment to lease between Registrant and REP A10 LLC
dated November 5, 2007. (Filed as Exhibit 10A-1 to the Company's
Current Report on Form 8-K filed on November 8, 2007, and
incorporated by reference thereto).
10(b) Employment Agreement dated January 1, 2003, by and between the
Company and Ms. Santos (Filed as Exhibit 10(a) to the Company's
Current Report on Form 8-K filed on January 22, 2003, and
incorporated by reference thereto).
10(b)-1 Employment Agreement dated September 1, 2004, by and
between the Company and Ms. Santos (Filed as Exhibit 10A-1 to the
Company's Current Report on Form 8-K filed on September 1, 2004,
and incorporated by reference thereto).
10(b)-2 Employment Agreement dated December 29, 2006, by and between the
Company and Ms. Santos (Filed as Exhibit 10A-1 to the Company's
Current Report on Form 8-K filed on December 29, 2006, and
incorporated by reference thereto).
10(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 10copyright) 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 (Filed as Exhibit 10(j) to the Company's
Form 10-KSB Filed on September 28, 2007 and incorporated
by reference thereto).
10(k) Lease between Altamira Instruments, Inc. and Allegheny
Homes, LLC, with respect to the Company's Pittsburgh,
Pennsylvania facilities (Filed as Exhibit 10(k) to the
Company's Form 10-KSB filed on September 28, 2007 and
incorporated by reference thereto).
14 Code of Ethics (Filed as Exhibit 14 to the Company's Form
10-KSB filed on September 28, 2007 and incorporated by
reference thereto).
21 Subsidiaries of the Registrant
Scientific Packaging Industries, Inc., a New York corporation,
is a wholly-owned inactive subsidiary of the Company.
Altamira Instruments, Inc., a Delaware Corporation, is a
wholly-owned subsidiary of the Company since November 30, 2006.
31.1 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, 2008 AND 2007
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
YEARS ENDED JUNE 30, 2008 AND 2007
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-22
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Scientific Industries, Inc. and Subsidiaries
Bohemia, New York
We have audited the accompanying consolidated balance sheets of
Scientific Industries, Inc. and subsidiaries as of June 30, 2008
and 2007, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Scientific Industries, Inc.
and subsidiaries as of June 30, 2008 and 2007, 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, LLP
___________________________________________
Nussbaum Yates Berg Klein & Wolpow, LLP
Melville, New York
September 29, 2008
F-1
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND 2007
ASSETS
2008 2007
---------- ----------
Current assets:
Cash and cash equivalents $1,065,500 $ 388,700
Investment securities 682,400 718,000
Trade accounts receivable, less
allowance for doubtful accounts
of $11,600 in 2008 and 2007 454,800 750,800
Inventories 1,521,400 1,289,600
Prepaid and other current assets 84,700 61,200
Deferred taxes 31,400 25,600
---------- ----------
Total current assets 3,840,200 3,233,900
Property and equipment, net 247,400 247,300
Intangible assets, net 454,600 596,800
Goodwill 158,400 13,400
Other 46,000 45,700
Deferred taxes 30,200 -
---------- ----------
Total assets $4,776,800 $4,137,100
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 241,800 $ 231,900
Customer advances 379,300 147,600
Accrued expenses and taxes 442,900 393,900
---------- ----------
Total current liabilities 1,064,000 773,400
---------- ----------
Deferred taxes - 7,600
---------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.05 par value;
authorized 7,000,000 shares; issued
1,201,154 and 1,165,154 shares in
2008 and 2007 60,000 58,200
Additional paid-in capital 1,507,000 1,428,900
Accumulated other comprehensive loss,
unrealized holding loss on investment
securities (44,400) ( 9,900)
Retained earnings 2,242,600 1,931,300
--------- ---------
3,765,200 3,408,500
Less common stock held in treasury
at cost, 19,802 shares 52,400 52,400
--------- ---------
Total shareholders' equity 3,712,800 3,356,100
--------- ---------
Total liabilities and
shareholders' equity $4,776,800 $4,137,100
========== ==========
See notes to consolidated financial statements.
F-2
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2008 AND 2007
2008 2007
----------- -----------
Net sales $ 6,669,400 $ 4,880,000
Cost of sales 4,266,400 2,924,300
----------- -----------
Gross profit 2,403,000 1,955,700
----------- -----------
Operating expenses:
General and administrative 975,700 880,100
Selling 552,200 393,500
Research and development 394,600 302,100
----------- -----------
1,922,500 1,575,700
----------- -----------
Income from operations 480,500 380,000
----------- -----------
Other income:
Interest income 51,900 43,900
Other income, net 12,100 11,200
----------- -----------
64,000 55,100
----------- -----------
Income before income taxes 544,500 435,100
----------- -----------
Income tax expense (benefit):
Current 196,600 118,800
Deferred (43,600) 4,300
----------- -----------
153,000 123,100
----------- -----------
Net income $ 391,500 $ 312,000
=========== ===========
Basic earnings per common share $ .34 $ .29
=========== ===========
Diluted earnings per common share $ .32 $ .27
=========== ===========
Weighted average common shares
outstanding 1,159,494 1,075,878
=========== ===========
Weighted average common shares outstanding,
assuming dilution 1,206,236 1,140,751
=========== ===========
See notes to consolidated financial statements.
F-3
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2008 AND 2007
Common Stock Additional Accumulated
______________ Paid-in Other Compr-
Shares Amount Capital ehensive Loss
_______ _______ ________ _____________
Balance, July 1 , 2006 1,020,154 $51,000 $1,010,500 $ (11,500)
Net income - - - -
Other comprehensive income:
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)
Net income - - - -
Other comprehensive loss:
Unrealized holding loss
arising during period - - - (34,500)
Comprehensive income - - - -
Exercise of stock options 36,000 1,800 61,100 -
Stock-based compensation - - 3,000 -
Income tax benefit of
stock options exercised - - 14,000 -
Cash dividend paid, $.07
per share - - - -
_________ _______ __________ ___________
Balance, June 30, 2008 1,201,154 $60,000 $1,507,000 $ (44,400)
========= ======= ========== ===========
See notes to consolidated financial statements.
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
Retained Treasury Stock Shareholders'
______________
Earnings Shares Amount Equity
________ ______ ______ ____________
Balance, July 1, 2006 $1,689,300 19,802 $52,400 $ 2,686,900
____________
Net income 312,000 - - 312,000
____________
Other comprehensive income:
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
__________
Net income 391,500 - - 391,500
Other comprehensive loss:
Unrealized holding loss
arising during period - - - ( 34,500)
____________
Comprehensive income - - - 357,000
____________
Exercise of stock options - - - 62,900
Stock-based compensation - - - 3,000
Income tax benefit of stock
options exercised - - - 14,000
Cash dividend paid, $.07
per share (80,200) - - (80,200)
__________ _______ _______ __________
Balance, June 30, 2008 $2,242,600 19,802 $52,400 $3,712,800
========== ======= ======= ==========
See notes to consolidated financial statements.
F-4
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2008 AND 2007
2008 2007
--------- ---------
Operating activities:
Net income $ 391,500 $ 312,000
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of investments - (200)
Depreciation and amortization 213,500 150,100
Deferred income taxes (benefit) ( 43,600) 4,300
Income tax benefit of stock options
exercised 14,000 1,100
Stock-based compensation 3,000 5,100
Changes in assets and liabilities,
net of effect of acquisition in 2007:
Trade accounts receivable 296,000 (319,600)
Inventories (231,800) 24,900
Prepaid and other current assets ( 23,500) 50,300
Other assets ( 300) 18,100
Accounts payable 9,900 (75,100)
Customer advances 231,700 (104,200)
Accrued expenses and taxes 6,800 126,700
Deferred compensation - ( 21,400)
--------- ---------
Total adjustments 475,700 (139,900)
--------- ---------
Net cash provided by operating
activities 867,200 172,100
--------- ---------
Investing activities, net of effect of acquisition:
Acquisition of Altamira Instruments, Inc.,
net of cash acquired (102,800) (346,500)
Purchase of investment securities,
available for sale (23,800) ( 23,700)
Redemption of investment securities,
available for sale 25,000 475,700
Capital expenditures (66,400) (65,000)
Purchase of intangible assets ( 5,100) (14,800)
--------- ---------
Net cash provided by (used in)
investing activities (173,100) 25,700
--------- ---------
Financing activities:
Proceeds from exercise of stock options 62,900 33,200
Cash dividend paid (80,200) (70,000)
--------- ---------
Net cash used in financing
activities (17,300) (36,800)
--------- ---------
Net increase in cash and cash equivalents 676,800 161,000
Cash and cash equivalents, beginning of year 388,700 227,700
--------- ---------
Cash and cash equivalents, end of year $1,065,500 $ 388,700
========== ==========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 120,500 $ 126,400
========= ==========
Non-cash financing activity:
See Note 2 for stock issued in connection with 2007
acquisition and additional costs.
See notes to consolidated financial statements.
F-5
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
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.
Substantially all orders are F.O.B. shipping point, all sales are
final without right of return or payment contingencies, and there
are no special sales arrangements or agreements with any
customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of 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. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
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 for purchase orders issued to the Company. Such amounts are
categorized as liabilities under the caption customer advances.
Investment Securities
Securities available for sale are carried at fair value with
unrealized gains or losses reported in a separate component of
shareholders' equity. Realized gains or losses are determined
based on the specific identification method.
Inventories
Inventories are valued at the lower of cost (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. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
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, 2008 and determined that there was no impairment.
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,
and the use of accelerated methods of depreciation and amortization for
tax purposes.
F-8
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
1. Summary of Significant Accounting Policies (Continued)
Advertising
Advertising costs are expensed as incurred. Advertising expense
amounted to $21,100 and $36,200 for the years ended June 30, 2008
and 2007.
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 options expire at various dates through
February 2017. At June 30, 2008, 105,334 shares of Common Stock were
available for grant under the 2002 Plan and the Prior Plan.
Stock-based compensation is accounted for using SFAS No. 123R
"Share-Based Payment" which requires compensation costs related to
stock-based payment transactions to be recognized commencing with the
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
are measured each reporting period. Compensation costs are recognized
over the period that an employee provides service in exchange for the award.
There were no options granted during the year ended June 30, 2008. 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 granted during fiscal year 2007
was determined using the Black-Scholes-Merton option-pricing model. The
weighted average assumptions used were an expected life of 10 years; risk
free interest rate of 4.69%; volatility of 69%; and dividend yield of 6%.
The weighted-average value of the options granted in 2007 was $2.02 and
stock-based compensation costs were $3,000 and $5,100 for the year ended
June 30, 2008 and 2007, respectively. Stock-based compensation costs
related to nonvested awards are $2,000 to be recognized during the
next year.
The Company did not grant any options or warrants as compensation
for goods or services to non-employees for the years ended June 30, 2008
and 2007.
F-9
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
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.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS 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. In February 2008, the FASB issued FASB Staff Position No. FAS 157-1,
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurement for Purposes
of Lease Classification or Measurement under Statement 13 and FASB Staff
Position No. FAS 157-2, Effective Date of FASB Statement No. 157."
Collectively, the Staff Positions defer the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008, for non financial assets
and non financial liabilities except for items recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of
SFAS 157. The Company is currently evaluating the effect, if any, of SFAS
157 on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date.
SFAS No. 159 is effective at the beginning of an entity's first fiscal year
that begins after November 15, 2007. The Company is currently evaluating the
effect, if any, of SFAS No. 159 on the Company's consolidated financial
statements.
F-10
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
2. Acquisition
On November 30, 2006, the Company acquired all of the outstanding
capital stock of Altamira. The acquisition was pursuant to a Stock
Purchase Agreement (the "Agreement") whereby the Company paid or issued to
the sellers $400,000 in cash and 125,000 shares of the Company's Common Stock
and agreed to make additional cash payments equal to 5%, subject to adjustment,
of the net sales of Altamira for each of five periods - December 1, 2006 to
June 30, 2007, each of the fiscal years ending June 30, 2008, 2009, and 2010,
and July 1, 2010 to November 30, 2010.
Altamira's principal customers are universities, government laboratories,
and chemical and petrochemical companies. The instruments, which are
customizable to the customers' specifications, are sold on a direct basis.
In conjunction with the acquisition of Altamira, management of the
Company valued the tangible and intangible assets acquired, including goodwill,
customer relationships, non-compete agreements, and certain technology, trade
names and trademarks. The carrying amounts of goodwill and other intangible
assets are presented in Note 7, "Goodwill and Other Intangible Assets" which
represent the valuations determined in conjunction with the acquisition. In
addition, other fair market value adjustments were made in conjunction with
the acquisition, primarily adjustments to property and equipment, and inventory.
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 that was
accrued as of June 30, 2007 and paid to the sellers in fiscal 2008 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).
As of June 30, 2008, the adjusted aggregate purchase price of $1,134,900
was allocated to assets acquired and liabilities assumed as follows:
Current assets $ 734,000
Property and equipment 140,300
Non-current assets 25,100
Goodwill 158,400
Other intangible assets 639,000*
Current liabilities (561,900)
-----------
Net purchase price $ 1,134,900
===========
*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-11
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
2. Acquisition (Continued)
Pro Forma Results
The unaudited pro forma condensed 2007 financial information in the
table below summarizes the results of operations of Scientific Industries,
Inc. and Altamira, on a pro forma basis, as though the companies had been
consolidated as of the beginning of the fiscal year ended June 30, 2007.
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
the fiscal year:
2007
___________
Net sales $ 5,905,300
Net income 388,400
Net income per share - basic $ .34
Net income per share - diluted .33
3. Segment Information and Concentrations
The Company views its operations as two segments: the manufacture
and marketing of standard benchtop laboratory equipment for research in
university, hospital and industrial laboratories sold primarily through
laboratory equipment distributors ("Benchtop Laboratory Equipment
Operations"), and the manufacture and marketing of custom-made catalyst
research instruments for universities, government laboratories, and
chemical and petrochemical companies sold on a direct basis ("Catalyst
Research Instruments Operations").
Segment information is reported as follows:
Benchtop Catalyst Corporate
Laboratory Research and
Equipment Instruments Other Consolidated
__________ ___________ _________ ____________
June 30, 2008:
Net Sales $3,770,500 $2,898,900 $ - $6,669,400
Foreign Sales 1,925,900 1,484,300 - 3,410,200
Segment Profit 350,600 193,900 - 544,500
Segment Assets 2,845,100 1,029,300 902,400 4,776,800
Long-Lived Assets
Expenditures 57,000 9,400 - 66,400
Depreciation and
Amortization 54,700 158,800 - 213,500
F-12
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
3. Segment Information and Concentrations (Continued)
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 57,200 7,800 - 65,000
Depreciation and
Amortization 51,300 98,800 - 150,100
Certain information relating to the Company's export sales and principal
customers is as follows:
2008 2007
___________ ___________
Export sales (principally Europe and Asia) $ 3,410,200 $ 2,242,200
Customers in excess of 10% of net sales:
Largest in 2008 and 2007 (a) 755,800 766,700
(a) Accounts receivable from this customer amounted to approximately
8% and 13% of total accounts receivable at June 30, 2008 and 2007.
The Company purchased approximately 24% and 17% of inventory from
one supplier for the years ended June 30, 2008 and 2007.
4. Investment Securities
Details as to investment securities are as follows:
Unrealized
Fair Holding Gain
Cost Value (Loss)
_____________ ________ ____________
At June 30, 2008:
Available for sale:
Equity securities $ 7,800 $ 10,200 $ 2,400
Mutual funds 669,000 622,200 (46,800)
Callable bonds 50,000 50,000 -
__________ _________ __________
$ 726,800 $ 682,400 $ (44,400)
========== ========= ==========
F-13
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
4. Investment Securities (Continued)
Unrealized
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)
========== ========= ==========
5. Inventories
2008 2007
__________ __________
Raw Materials $1,037,900 $ 904,200
Work-in-process 288,600 302,400
Finished goods 194,900 83,000
__________ __________
$1,521,400 $1,289,600
========== ==========
6. Property and Equipment
Useful Lives
(Years) 2008 2007
____________ __________ __________
Computer equipment 3-5 $ 134,100 $ 130,200
Machinery and equipment 3-7 472,600 439,300
Furniture and fixtures 4-10 163,500 172,300
Leasehold improvements 3-5 64,100 51,000
_________ _________
834,300 792,800
Less accumulated depreciation
and amortization 586,900 545,500
_________ _________
$ 247,400 $ 247,300
========= =========
F-14
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
7. Goodwill and Other Intangible Assets
In conjunction with the acquisition of Altamira, management of
the Company valued the tangible and intangible assets acquired, including
customer relationships, non-compete agreements and technology which
encompasses trade names, trademarks and licenses. The valuation resulted in
an initial negative goodwill of approximately $91,500 on the date of
acquisition which was subsequently adjusted to $158,400 and $13,400 at
June 30, 2008 and 2007, all of which is deductible for tax purposes. The
related agreement provides for contingent payments to the former
shareholders based on net sales of the Catalyst Research Instrument Operations
subject to certain limits, which are expected to be earned and paid.
Additional consideration amounted to approximately $145,000 and $66,000 for
the years ended June 30, 2008 and 2007, respectively.
The components of intangible assets are as follows:
Useful Accumulated
Lives Cost Amortization Net
______ ________ ____________ ____________
At June 30, 2008:
Technology 5 yrs. $300,000 $ 95,000 $ 205,000
Customer relationships 10 yrs. 237,000 90,600 146,400
Non-compete agreement 5 yrs. 102,000 32,300 69,700
Other intangible assets 5 yrs. 115,500 82,000 33,500
________ _________ _________
$754,500 $ 299,900 $ 454,600
======== ========= =========
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
======== ========= =========
Total amortization expense was $147,400 and $97,200 in 2008
and 2007.
F-15
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
7. Goodwill and Other Intangible Assets (Continued)
Estimated future intangible assets amortization expense, based
on current balances, as of June 30, 2008 is as follows:
Fiscal Years
____________
2009 $ 131,300
2010 119,600
2011 107,900
2012 51,000
2013 11,500
Thereafter 33,300
__________
$ 454,600
==========
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, 2008 and 2007. To support the line of credit, the Company
would be required to maintain 20% of the utilized credit line in average
monthly balances.
9. Employee Benefit Plans
The Company has 401(k) profit sharing plans covering its employees,
which provide for voluntary employee salary contributions not to exceed
the statutory limitations provided by the Internal Revenue Code. One plan
provides for company matching of 50% of each Benchtop Laboratory Equipment
Operations participant's salary deferral election, up to a maximum amount
for each participant of 2% of their compensation, while the second plan
provides for matching the Altamira employee contributions up to 4% of their
compensation. Total employer matching contributions amounted to $26,800
and $17,700 for the years ended June 30, 2008 and 2007, respectively.
F-16
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
10. Commitments and Contingencies
The Company is obligated through January 2015 under a noncancelable
operating lease for its Bohemia, New York premises, which requires
minimum annual rental payments plus other expenses, including real
estate taxes and insurance. The Company exercised its lease renewal
option during 2008. In accordance with generally accepted accounting
principles, the future minimum annual rental expense, computed on a
straight-line basis, is approximately $209,400 under the terms of the
lease. Rental expense for the Bohemia facility amounted to approximately
$208,600 in 2008 and $203,400 in 2007. Accrued rent, payable in future
years, amounted to $42,900 and $29,400 at June 30, 2008 and 2007.
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, subject to early termination
upon 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 $54,000
in 2008 and $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
are as follows:
Bohemia Pittsburgh
Fiscal Years Facility Facility Total
____________ ________ __________ __________
2009 $ 193,600 $ 56,200 $ 249,800
2010 201,400 56,400 257,800
2011 208,700 56,400 265,100
2012 217,100 4,700 221,800
2013 225,800 - 225,800
Thereafter 374,900 - 374,900
__________ __________ __________
$1,421,500 $173,700 $1,595,200
========== ========== ==========
F-17
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
10. Commitments and Contingencies (Continued)
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 bonus of
$10,000 was paid to each of the two executive officers during each of the
fiscal years presented.
In connection with the acquisition of Altamira during fiscal 2007,
Altamira entered into a two-year employment agreement with its former Vice
President and Director employing him currently as the subsidiary's Director
of Marketing and Sales and President. The employment agreement, which expires
November 30, 2008, 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 terms to be increased 2% during each renewal period plus
adjustments based on annual increases in the consumer price index. A new
employment agreement is currently being negotiated.
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, 2008.
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 $36,000
and $32,900 for the years ended June 30, 2008 and 2007.
F-18
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
11. Income Taxes
Income taxes for 2008 and 2007 were different from the amounts computed
by applying the Federal income tax rate to the income before income taxes due
to the following:
2008 2007
__________________ _________________
%of % of
Pre-tax Pre-tax
Amount Income Amount Income
_________ _______ _________ _______
Computed "expected" income tax $190,600 35.0% $152,300 35.0%
Research and development
credits ( 15,000) (2.8) (11,700) (2.7)
State income taxes, net of
Federal effect 12,500 2.3 10,700 2.5
Other, net (35,100) (6.4) (28,200) (6.5)
_________ _______ __________ ______
Actual income taxes $153,000 28.1% $123,100 28.3%
========= ======= ========== ======
Deferred tax assets and liabilities consist of the following:
2008 2007
__________ __________
Deferred tax assets:
Amortization of intangibles $ 73,000 $ 33,800
Rent accrual 16,300 10,000
Other 31,300 25,600
_________ _________
120,600 69,400
Deferred tax liability:
Depreciation of property
and amortization of goodwill (59,000) (51,400)
__________ __________
Net deferred tax assets $ 61,600 $ 18,000
========== ==========
The breakdown between current and long-term deferred tax assets and
liabilities is as follows:
2008 2007
__________ __________
Current deferred tax assets $ 31,400 $ 25,600
_________ _________
Long-term deferred tax assets 89,200 43,800
Long-term deferred tax liabilities (59,000) (51,400)
__________ __________
30,200 ( 7,600)
__________ __________
Net deferred tax assets $ 61,600 $ 18,000
========== ==========
F-19
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
11. Income Taxes (Continued)
Effective July 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48 ("FIN 48"). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB 109. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The cumulative effect, if any, of applying FIN 48
is to be reported as an adjustment to the opening balance of retained
earnings in the year of adoption. The impact of the Company's reassessment
of its tax positions in accordance with FIN 48 did not have an effect on
the results of operations, financial condition or liquidity. As of June
30, 2008, the Company does not have any unrecognized tax benefits related
to various federal and state income tax matters.
The Company is subject to U.S. federal income tax, as well as various
state jurisdictions. The Company is currently open to audit under the
statute of limitations by the federal and state jurisdictions for the
years ending June 30, 2005 through 2007. The Company does not anticipate
any material amount of unrecognized tax benefits within the next 12 months.
12. Stock Options
Option activity is summarized as follows:
Fiscal 2008 Fiscal 2007
_________________ __________________
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
_______ _______ _______ ________
Shares under option:
Outstanding, beginning of year 104,001 $ 1.62 119,001 $ 1.57
Granted - - 5,000 3.10
Exercised (36,000) 1.75 (20,000) 1.66
Forfeited ( 4,000) .84 - -
________ ________
Outstanding, end of year 64,001 1.60 104,001 1.62
________ _______ ________ ________
Options exercisable at year-end 62,501 $ 1.57 101,001 $ 1.58
________ _______ ________ ________
Weighted average fair value per
share of options granted
during fiscal 2008 and 2007 $ - $ 3.10
_______ ________
F-20
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
As of June 30, 2008 As of June 30, 2008
Options Outstanding Exercisable
_______________________________________________ ______________________
Weighted-
Average Weighted- Weighted-
Range Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
_________ ___________ ____________ _________ ___________ _________
$1.88-$3.10 25,000 4.00 $ 2.46 23,500 $ 2.41
$.83-$1.33 39,001 2.37 1.06 39,001 1.06
________ ________
64,001 62,501
________ ________
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
________ ________
13. Earnings Per Common Share
Earnings per common share data was computed as follows:
2008 2007
__________ __________
Net income $ 391,500 $ 312,000
__________ __________
Weighted average common shares
outstanding 1,159,494 1,075,878
Effect of dilutive securities 46,742 64,873
__________ __________
Weighted average dilutive common
shares outstanding 1,206,236 1,140,751
__________ __________
Basic earnings per common share $ .34 $ .29
========== ==========
Diluted earnings per common share $ .32 $ .27
========== ==========
F-21
SCIENTIFIC INDUSTRIES, INC. & SUBSIDIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2008 AND 2007
14. Fair Value of Financial Instruments
The financial statements include various estimated fair value
information as of June 30, 2008 and 2007, 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:
2008 2007
___________________ ___________________
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
________ _________ ________ _________
Assets:
Cash and cash equivalents $1,065,500 $1,065,500 $ 388,700 $ 388,700
Investment securities
(Note 3) $ 682,400 $ 682,400 $ 718,000 $ 718,000
F-22